-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Tu8GBPFBdetlPIWklvL1INxKZ5ANLDhNrTuxyhj7pBAuGgWx3I1iH8cds+lC1nAn IVZt7YJnw4oOs8lq9aIHDg== 0000891554-99-000610.txt : 19990331 0000891554-99-000610.hdr.sgml : 19990331 ACCESSION NUMBER: 0000891554-99-000610 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 34 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MBIA INC CENTRAL INDEX KEY: 0000814585 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 061185706 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09583 FILM NUMBER: 99578359 BUSINESS ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9142734545 MAIL ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 10-K 1 ANNUAL REPORT 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 December 31, 1998. Commission file number 1-9583 MBIA INC. (Exact name of registrant as specified in its charter) Connecticut 06-1185706 (State of Incorporation) (I.R.S. Employer Identification No.) 113 King Street, Armonk, New York 10504 (Address of principal executive offices) (Zip Code) (914) 273-4545 (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, par value $1 per share New York Stock Exchange 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 __. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 25, 1999 was $ 5,885,163,919.00 As of March 25, 1999, 99,748,541 shares of Common Stock, par value $1 per share, were outstanding. Documents incorporated by reference. Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998 are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement of the Registrant, dated March 29, 1999 are incorporated by reference into Parts I and III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (SS 229.405 of this chapter) 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. [ ] PART I Item 1. Business MBIA Inc. (the "Company") is engaged in providing financial guarantee insurance and investment management and financial and consulting services to public finance clients and financial institutions on a global basis. Financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, and debt of high-quality financial institutions, both in the new issue and secondary markets, are provided through the Company's wholly-owned subsidiary, MBIA Insurance Corporation ("MBIA Corp."). MBIA Corp. is the successor to the business of the Municipal Bond Insurance Association (the "Association") which began writing financial guarantees for municipal bonds in 1974. In 1989, the Company purchased Bond Investors Guaranty Insurance Company ("BIG Ins."), another municipal bond insurance company. MBIA Corp. reinsured the net exposure on the municipal bond insurance policies previously issued by BIG Ins. (See "Business-Reinsurance" below) and changed the name of BIG Ins. to MBIA Insurance Corp. of Illinois ("MBIA Illinois"). In 1990, the Company formed a French company, MBIA Assurance S.A. ("MBIA Assurance"), to write financial guarantee insurance in the countries of the international community. MBIA Assurance, which is a wholly-owned subsidiary of MBIA Corp., writes policies insuring sovereign risk, public infrastructure financings, asset-backed transactions and certain obligations of corporations and financial institutions. In September 1995, MBIA Corp. entered into a joint venture agreement with Ambac Assurance Corporation for the purpose of jointly marketing financial guarantee insurance outside the United States. In February, 1998, the Company acquired CapMAC Holdings Inc. ("Holdings"), in a stock-for-stock merger. Holdings, through its wholly-owned subsidiary Capital Markets Assurance Corporation ("CapMAC"), insures structured asset-backed, corporate, municipal and other financial obligations in the U.S. and international capital markets. CapMAC also provides financial guarantee reinsurance for structured asset-backed, corporate, municipal and other financial obligations written by other major insurance companies. Generally, throughout the text references to MBIA Corp. include the activities of its subsidiaries, MBIA Illinois, MBIA Assurance and CapMAC. Financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of and interest on insured obligations when due. MBIA Corp.'s substantial capital base permits it to support a large portfolio of insured obligations and to write new business. MBIA Corp. primarily insures obligations which are sold in the new issue and secondary markets, or which are held in unit investment trusts ("UIT") and by mutual funds. It also provides surety bonds for debt service reserve funds. The principal economic value of financial guarantee insurance to the entity offering the obligations is the savings in interest costs resulting from the difference in the market yield between an insured obligation and the same obligation on an uninsured basis. In addition, for complex financings and for obligations of issuers that are not well-known by investors, insured obligations receive greater market acceptance than uninsured obligations. The financial guarantee industry is subject to the direct and indirect effects of governmental regulation, including changes in tax laws affecting the municipal and asset-backed debt markets. No assurance can be given that future legislative or regulatory changes might not adversely affect the results of operations and financial conditions of the Company. The Association was the first issuer of financial guarantees to receive both the AAA claims-paying rating from Standard and Poor's Corporation ("S&P"), which it received in 1974, and the Aaa claims-paying rating from Moody's Investors Service, Inc. ("Moody's"), which it received in 1984. Both rating agencies have continuously issued Triple-A claims-paying ratings for MBIA Corp. and Triple-A ratings to obligations guaranteed by MBIA Corp. Both rating agencies have also continued the Triple-A rating on MBIA Illinois and CapMAC guaranteed bond issues. In addition, in 1995 MBIA Corp. received a Triple-A claims-paying rating from Fitch IBCA, Inc. ("Fitch"). The Company also provides investment management products and financial and consulting services through a group of subsidiary companies. These services include cash management, municipal investment agreements, discretionary asset management, purchase and administrative services, tax discovery and compliance, tax audit, analysis and information services and bond administration services. MBIA Municipal Investors Service Corporation ("MBIA-MISC") provides cash management services and investment placement services to local governments and school districts, and provides those clients with fund administration services In 1996, MBIA-MISC acquired American Money Management Associates, Inc. ("AMMA") which offers investment and treasury management consulting services to municipal and quasi-municipal clients. 1 In 1997, MBIA MuniServices Company ("MuniServices"), formed to provide bond administration, revenue enhancement and other services to state and local governments, acquired (i) the Municipal Tax Bureau entities ("MTB"), which provide tax revenue compliance and collection services to the public sector and (ii) MBIA MuniFinancial to provide debt administration services to municipalities. Early in 1998, MuniServices acquired Municipal Resource Consultants which specializes in providing revenue enhancement and information services to municipalities. In 1996, MuniServices acquired an equity interest in Capital Asset Holdings, which purchases and services delinquent taxes for municipalities. In 1998, the Company increased its ownership in Capital Asset Holdings to 86% in order to control the future of that entity. MBIA Investment Management Corp. ("IMC") offers guaranteed investment agreements primarily for bond proceeds to states and municipalities. MBIA Capital Management Corp. ("CMC") performs investment management services for the Company, MBIA-MISC, IMC and selected external clients. In July of 1998, the Company merged with 1838 Investment Advisors, Inc. a provider of asset management services. Additionally in 1997, the Company formed MBIA & Associates Consulting, Inc. to provide strategic financial planning and management consulting to state and local governments, colleges and universities, and international entities. Through the acquisition of CapMAC, the Company is also providing advisory services to specialty finance companies, making equity investments in those companies, and creating synthetic investment products. MBIA Corp. Insured Portfolio At December 31, 1998, the net par amount outstanding on MBIA Corp.'s insured obligations (including insured obligations of MBIA Illinois, MBIA Assurance and CapMAC but excluding the guarantee of $3.5 billion of obligations of IMC (see "Operations-Miscellaneous")) was $359.5 billion, comprised of $316.9 billion in new issues and $42.6 billion in secondary market issues. Net insurance in force was $595.9 billion. MBIA Corp. guarantees to the holder of the underlying obligation the timely payment of the principal of and interest on such obligation in accordance with its original payment schedule. Accordingly, in the case of a default on an insured obligation, payments under the insurance policy cannot be accelerated by the holder. MBIA Corp. will be required to pay principal and interest only as originally scheduled payments come due. MBIA Corp. seeks to maintain a diversified insured portfolio designed to spread risk based on a variety of criteria including revenue source, issue size, type of bond and geographic area. As of December 31, 1998, MBIA Corp. had 34,566 policies outstanding. These policies are diversified among 9,276 "credits," which MBIA Corp. defines as any group of issues supported by the same revenue source. 2 The table below sets forth information with respect to the original par amount written per issue in MBIA Corp.'s portfolio as of December 31, 1998: MBIA Corp. Original Par Amount Per Issue as of December 31, 1998 (1)
% of Total Number of Number of Net Par % of Net Original Par Amount Issues Issues Amount Par Amount Written Per Issue Outstanding Outstanding Outstanding Outstanding (In billions) Less than $10 million 27,526 79.6% $ 46.7 13.0% $10-25 million 3,063 8.9 40.0 11.1 $25-50 million 1,744 5.1 47.3 13.2 $50-100 million 1,157 3.3 58.7 16.3 Greater than $100 million 1,076 3.1 166.8 46.4 ------ ------ ------ ------ Total 34,566 100.0% $359.5 100.0% ====== ====== ====== ======
- ---------- (1) Excludes IMC's $3.5 billion relating to municipal investment agreements guaranteed by MBIA Corp. MBIA Corp. underwrites financial guarantee insurance on the assumption that the insurance will remain in force until maturity of the insured obligations. MBIA Corp. estimates that the average life (as opposed to the stated maturity) of its insurance policies in force at December 31, 1998 was 11.0 years. The average life was determined by applying a weighted average calculation, using the remaining years to maturity of each insured obligation, and weighting them on the basis of the remaining debt service insured. No assumptions were made for any future refundings of insured issues. Average annual debt service on the portfolio at December 31, 1998 was $38.5 billion. 3 The table below shows the diversification of MBIA Corp.'s insured portfolio by bond type: MBIA Corp. Insured Portfolio by Bond Type as of December 31, 1998 (1) (In billions) Bond Type Number Net Par % of Net Of Issues Amount Par Amount Domestic Outstanding Outstanding Outstanding Municipal General obligation 12,694 $ 83.6 23.2% Utilities 4,895 45.0 12.5 Health care 2,241 38.5 10.7 Transportation 1,543 23.7 6.6 Special Revenue 1,787 23.4 6.5 Higher Education 1,498 14.8 4.1 Housing 2,161 10.7 3.0 ID & PCR 1,037 7.8 2.2 Other 75 3.3 0.9 ------ ------ ------ Total Municipal 27,931 250.8 69.7 ------ ------ ------ Structured Finance* 850 80.8 22.5 Other 5,462 10.8 3.0 ------ ------ ------ Total Domestic 34,243 342.4 95.2 ------ ------ ------ International Infrastructure 114 3.4 1.0 Structured Finance* 102 11.7 3.2 Other 107 2.0 0.6 ------ ------ ------ Total International 323 17.1 4.8 ------ ------ ------ Total 34,566 $359.5 100.0% ====== ====== ====== * Asset/mortgage-backed - ---------- (1) Excludes IMC's $3.5 billion relating to municipal investment agreements guaranteed by MBIA Corp. 4 As of December 31, 1998, of the $359.5 billion outstanding net par amount of obligations insured, $250.8 billion, or 70%, consisted of municipal bonds, $91.6 billion, or approximately 25%, consisted primarily of asset/mortgage-backed transactions and investor-owned utility obligations and $17.1 billion or approximately 5% consisted of transactions done in the international market. The table below shows the diversification by type of insurance written by MBIA Corp. in each of the last five years: MBIA Corp. Net Par Amount by Bond Type (1) Bond Type 1994 1995 1996 1997 1998 (In millions) Domestic Municipal General obligation $11,165 $10,226 $13,036 $13,798 $15,424 Health care 3,695 2,913 4,310 7,414 8,174 Utilities 4,880 5,098 6,749 6,877 6,458 Special Revenue 1,896 1,952 3,787 3,110 6,374 Higher Education 1,346 1,312 2,132 2,517 4,217 Transportation 1,767 2,624 3,153 6,059 4,175 Housing 886 1,962 1,802 1,791 2,093 Other 600 1,240 401 1,301 1,077 Industrial Development & Pollution Control Revenue 1,486 1,155 693 781 237 ------- ------- ------- ------- ------- Total Municipal 27,721 28,482 36,063 43,648 48,229 ------- ------- ------- ------- ------- Structured Finance* 10,135 14,053 24,451 32,563 35,781 Other 1,782 1,562 4,740 4,438 3,525 ------- ------- ------- ------- ------- Total Domestic $39,638 $44,097 $65,254 $80,649 $87,535 ------- ------- ------- ------- ------- International Structured Finance* 1,470 7,003 4,039 2,586 6,267 Infrastructure 262 626 839 1,080 778 Other 1,055 884 1,341 1,209 701 ------- ------- ------- ------- ------- Total International 2,787 8,513 6,219 4,875 7,746 ------- ------- ------- ------- ------- Total $42,425 $52,610 $71,473 $85,524 $95,281 ======= ======= ======= ======= ======= * Asset/mortgage-backed - ---------- (1) Par amount insured by year, net of reinsurance. 5 MBIA Corp. is licensed to write business in all 50 states, the District of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of Spain and the Republic of France. MBIA Assurance is licensed to write business in France. The following table sets forth by geographic location the areas in which MBIA Corp. has at least 2% of its total net par amount outstanding: MBIA Corp. Insured Portfolio By State as of December 31, 1998 (1) Number of Net Par % of Net Issues Amount Par Amount Outstanding Outstanding Outstanding State (In billions) California 3,681 $ 40.3 11.2% New York 5,310 38.3 10.7 Florida 1,589 19.8 5.5 Pennsylvania 2,278 14.0 3.9 New Jersey 1,884 13.5 3.8 Texas 2,131 13.5 3.8 Illinois 1,275 12.8 3.5 Massachusetts 1,107 10.1 2.8 Ohio 1,076 8.1 2.2 Michigan 1,066 8.0 2.2 ------ ------ ----- Sub-Total 21,397 178.4 49.6 All Other States 12,004 96.0 26.7 Nationally Diversified 842 68.0 18.9 ------ ------ ----- Total United States 34,243 342.4 95.2 International 323 17.1 4.8 ------ ------ ----- Total 34,566 $359.5 100.0% ====== ====== ===== - --------- (1) Excludes IMC's $3.5 billion relating to municipal investment agreements guaranteed by MBIA Corp. MBIA Corp. has underwriting guidelines that limit the net insurance in force for any one insured credit. MBIA Corp. has not exceeded any applicable regulatory single-risk limit with respect to any bond issue insured by it. As of December 31, 1998, MBIA Corp.'s net par amount outstanding for its ten largest insured municipal credits totaled $15.1 billion, representing 4.2% of MBIA Corp.'s total net par amount outstanding, and for its ten largest structured finance credits, the net par outstanding was $16.2 billion, or 4.5% of the total. 6 MBIA Corp. Insurance Programs MBIA Corp. offers financial guarantee insurance in both the new issue and secondary markets. At present, no new financial guarantee insurance is being offered by MBIA Illinois or CapMAC, but it is possible that either of those entities may insure transactions in the future. MBIA Corp. and MBIA Assurance offer financial guarantee insurance in Europe and other areas outside the United States. Transactions in the new issue market are sold either through negotiated offerings or competitive bidding. In the first case, either the issuer or the underwriter purchases the insurance policy directly from MBIA Corp. On competitive bid issues, the insurance is offered as an option to the underwriters bidding on the transaction. The successful bidder would then have the option to purchase the insurance. In the secondary market, MBIA Corp. provides insurance on whole and partial maturities in response to requests from bond traders and institutions who trade in the secondary market. MBIA Corp. also offers insurance to the unit investment trust market through ongoing arrangements with investment banks and financial service companies. Each issue in the trust is insured, in some cases until maturity, in others only while it is held in the trust. Lastly, insurance is offered in the mutual fund sector through ongoing arrangements with the fund sponsors. All fund issues are insured on a "while-in-trust" basis, but in some cases, MBIA Corp. is committed to offer insurance to maturity to the sponsor for an additional premium. The following table indicates the percentage of net par outstanding with respect to each type of insured program: MBIA Corp. Types of Insured Programs as of December 31, 1998 (1) Net Par Amount Type of Program Outstanding % Of Net Par (In billions) Amount Outstanding New Issue $316.9 88.1% Secondary market issues Unit investment trusts 9.1 2.5 Mutual funds 0.2 0.1 Other secondary market issues 33.3 9.3 ------ ----- Total $359.5 100.0% ====== ===== - ---------- (1) Excludes IMC's $3.5 billion relating to municipal investment agreements guaranteed by MBIA Corp. 7 Operations The insurance operations of MBIA Corp. are conducted through the Public Finance Division, the Structured Finance Division, the joint venture with Ambac (for all international transactions) and the Risk Management Group. The Public Finance Division has underwriting authority with respect to certain categories of business up to pre-determined par amounts based on a risk-ranking system. In order to ensure that the guidelines are followed, Risk Management monitors and periodically reviews underwriting decisions made by the Public Finance Division. With respect to larger, complex, or unique transactions, underwriting is performed by a committee consisting of senior representatives of Public Finance, Risk Management, Insured Portfolio Management, and the Company's Finance Department. For all transactions done by the Structured Finance Division or for international deals, MBIA Corp.'s review and approval procedure has two stages. The first stage consists of screening, credit review and structuring by the appropriate business unit, in consultation with Risk Management officers. The second stage, consisting of the final review and approval of credit and structure, is performed by a committee consisting of two Risk Management officers and the head of the applicable business unit. Certain transactions, based on size, complexity, or other factors, must also be approved by a division-level committee consisting of senior representatives of Structured Finance or the joint venture, Risk Management and Insured Portfolio Management. Premium rates for Public Finance transactions are established by the Market Research Department and Structured Finance premiums are set by analysts in the division, in conjunction with the Risk Management Group's quantitative analysis team. Pricing for international transactions is done by analysts working in the joint venture, in conjunction with the Market Research Department. Risk Management The Risk Management Group is responsible for adherence to MBIA Corp.'s underwriting guidelines and procedures which are designed to maintain an insured portfolio with low risk characteristics. MBIA Corp. maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. For Public Finance and international infrastructure transactions, these include economic and social trends, debt management, financial management, adequacy of anticipated cash flow, satisfactory legal structure and other security provisions, viable tax and economic bases, adequacy of loss coverage and project feasibility, including a satisfactory consulting engineer's report, if applicable. For Structured Finance and international structured finance transactions, MBIA Corp's underwriting guidelines, analysis and due diligence focus primarily on seller/servicer credit and operational quality, the quality and historical and projected performance of the asset pool, and the strength of the structure, including cash flow analysis, the size and source of first loss protection, and asset performance triggers and financial covenants. Such guidelines are subject to periodic review by an interdivisional committee which is responsible for establishing and maintaining underwriting standards and criteria for all insurance products. The financial institution and corporate analysis groups within Risk Management underwrite and monitor (in conjunction with Insured Portfolio Management) MBIA Corp.'s direct and indirect exposure to financial institutions and other corporate entities with respect to seller/servicer exposure, investment contracts, letters of credit and liquidity facilities supporting MBIA-insured issues, and recommends limits on such exposures. The department provides in-depth financial analyses of financial institutions for which there is existing or proposed exposure and gives advice on related contract terms, transfers of these instruments to new institutions and renewal dates and procedures. Insured Portfolio Management: The Insured Portfolio Management Group is responsible for monitoring outstanding issues insured by MBIA Corp. This group's first function is to detect any deterioration in credit quality or changes in the economic or political environment which could interrupt the timely payment of debt service on an insured issue. Once a problem is detected, the group then works with the issuer, trustee, bond counsel, underwriters and other interested parties to deal with the concern before it develops into a default. The Insured Portfolio Management Group works closely with Risk Management and New Business Departments to provide feedback on insured issue performance and credit risk parameters. Although MBIA Corp. has to date had only eighteen insured issues requiring claim payments for which it has not been fully reimbursed, there are eight additional insured issues for which case loss reserves have been established (see "Losses and Reserves" below). Other potential losses have been avoided through the early detection of problems and subsequent negotiations with the issuer and other parties involved. In a limited number of instances, the solution involved the restructuring of insured issues or underlying security arrangements. More often, MBIA Corp. utilizes a variety of other techniques to resolve problems, such as enforcement of covenants, assistance in resolving management problems and working with the issuer to develop potential political solutions. Issuers are under no obligation to restructure insured issues or underlying security arrangements in order to prevent losses. Moreover, MBIA Corp. is obligated to pay amounts equal to defaulted interest and principal payments on insured bonds on their 8 respective due dates even if the issuer or other parties involved refuse to restructure or renegotiate the terms of the insured bonds or related security arrangements. The Company's experience is that early detection and continued involvement by the Insured Portfolio Management Group are crucial in avoiding or minimizing claims on insurance policies. Once an obligation is insured, the issuer and the trustee are typically required to furnish financial information, including audited financial statements, annually to the Insured Portfolio Management Group for review. Potential problems uncovered through this review, such as low operating fund balances, covenant violations, trustee or servicer problems, tax certiorari proceedings or excessive litigation, could result in an immediate surveillance review and an evaluation of possible remedial actions. The Insured Portfolio Management Group also monitors state finances and budget developments and evaluates their impact on local issuers. The Company's computerized credit surveillance system records situations where follow-up is needed, such as letter of credit renewal, construction status and the receipt of additional data after the closing of a transaction. At underwriting, issues are given an internal credit rating. All credits are monitored according to a frequency of review schedule that is based on risk type and credit quality. Issues that experience financial difficulties, deteriorating economic conditions, excessive litigation or covenant violations are placed on the appropriate review list and are subject to surveillance reviews at intervals commensurate to the problem which has been detected. There are four departments in the Insured Portfolio Management Group. The Public Finance Portfolio Management Department handles the traditional types of domestic municipal issues such as general obligation, utility, special revenue and health care bonds. The Structured Finance Portfolio Management Department is responsible for domestic housing, asset backed and other structured transactions. The International Portfolio Management Department is responsible for all international transactions. The Financial Institutions and Corporate Department monitors direct exposure to financial institutions and corporate obligors across the entire insured portfolio and provides analytical support to the other three departments. The Public Finance Portfolio Management Department reviews and reports on the major credit quality factors of risks insured by the Company, evaluates the impact of new developments on insured weaker credits and carries out remedial activity. In addition, it performs analysis of financial statements and key operating data on a large scale basis and maintains various databases for research purposes. It responds to consent and waiver requests and monitors pool programs. This department is responsible for preparing special reports which include analyses of regional economic trends, proposed tax limitations, the impact of employment trends on local economies or legal developments affecting bond security. The Structured Finance Portfolio Management Department monitors insured structured finance programs, focusing on the adequacy of reserve balances and investment of earnings, the status of mortgage or loan delinquencies and underlying insurance coverage and the performance of the trustee for insured issues. Monitoring of issues typically involves review of records and statements, review of transaction documents with regard to compliance, analysis of cash flow adequacy and communication with trustees. Review of servicer performance is also conducted through site visits with management, review of servicer financial statements, review of servicer reports where available and contacts with program administrators and trustees. The department also carries out remedial activity on weaker credits. The International Portfolio Management Departments monitors insured international programs. This departments monitors all credit types, including sovereign, sub-sovereign issuers, single risk and structured finance transactions. The department applies similar policies and procedures as the Public Finance and Structured Finance Portfolio Management Departments. The department is responsible for remedial activities on weaker credits. Investment Management Services Over the last eight years, the Company's investment management businesses have expanded their services to the public sector and added new revenue sources. MBIA-MISC provides cash management services and fixed-rate investment placement services directly to local governments and school districts. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue. AMMA provides investment and treasury management consulting services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission registered investment advisers. MBIA-MISC/AMMA operates in 20 states and the Commonwealth of Puerto Rico. 9 IMC provides customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other public funds. At year-end 1998, principal and accrued interest outstanding on investment agreements was $3.5 billion compared with $3.2 billion at year-end 1997. In 1998, the Company merged with 1838 Investment Advisors, Inc. an asset management firm with over $7.0 billion in equity, fixed income and balanced portfolios. CMC provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA Corp.'s insurance related fixed-income investment portfolios, as well as third-party accounts. CMC assumed full management for MBIA Corp.'s insurance related fixed-income investment portfolios in 1996. CMC is also a registered investment advisor. Financial and Consulting Services MuniServices provides various financial, consulting and administrative services to municipal clients through a network of subsidiaries. MTB offers tax revenue enhancement, compliance and collection services to public clients. Municipal Resources Consultants, acquired in early 1998, provides revenue enhancement and related information services to public sector clients. MBIA MuniFinancial provides municipalities in California and other neighboring states with debt administration, disclosure, arbitrage rebate and related services. Capital Asset acquires delinquent tax liens and services them for the benefit of municipalities. The Company is continuing to examine its investment in Capital Asset and it is likely that the Company will sell its interest in that company. The Company cannot as yet assess the economic impact of that sale although it is anticipated that it will result in a modest write-off. MBIA & Associates Consulting, Inc. has begun to provide strategic planning and management consulting to public sector clients. Competition The financial guarantee insurance business is highly competitive. In 1998 MBIA Corp. was the largest insurer of new issue long-term municipal bonds, accounting for 36% of the par amount of such insured bonds. The other principal insurers in 1998 were Ambac Assurance Corporation, Financial Guaranty Insurance Company and Financial Security Assurance Inc., all of which, like MBIA Corp., have Aaa and AAA claims-paying ratings from Moody's and S&P, respectively. According to Asset Sales Report, in 1998 MBIA Corp. was the leading insurer of new issue asset/mortgage-backed securities. The two principal competitors in this area in 1998 were Financial Security Assurance and Ambac Assurance Corporation. Financial guarantee insurance also competes with other forms of credit enhancement, including over-collateralization, 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 or have been assigned the highest credit ratings awarded by one or more of the major rating 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 MBIA Corp. to guarantee short-term notes and bonds with a maturity of less than 10 years. To the extent that banks providing credit enhancement may begin to issue letters of credit with commitments longer than 10 years, the competitive position of financial guarantee insurers, such as MBIA Corp., could be adversely affected. Letters of credit also are frequently used to assure the liquidity of a short-term put option for a long-term bond issue. This assurance of liquidity effectively confers on such issues, for the short term, the credit standing of the financial institution providing the facility, thereby competing with MBIA Corp. and other financial guarantee insurers in providing interest cost savings on such issues. Financial guarantee insurance and other forms of credit enhancement also compete in nearly all instances with the issuer's alternative of foregoing credit enhancement and paying a higher interest rate. If the interest savings from insurance or another form of credit enhancement are not greater than the cost of such credit enhancement, the issuer will generally choose to issue bonds without enhancement. MBIA Corp. also competes in the international market with composite (multi-line) insurers. There are minimum capital requirements imposed on a financial guarantee insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under a New York law, multi-line insurers are prohibited from writing financial guarantee insurance in New York State. See "Business-Regulation." However, there can be no assurance that major multi-line insurers or other financial institutions will not participate in financial guarantee insurance in the future, either directly or through monoline subsidiaries. 10 Reinsurance State insurance laws and regulations, as well as Moody's and S&P, impose minimum capital requirements on financial guarantee companies, limiting the aggregate amount of insurance which may be written and the maximum size of any single risk exposure which may be assumed. MBIA Corp. increases its capacity to write new business by using treaty and facultative reinsurance to reduce its gross liabilities on an aggregate and single risk basis. From its reorganization in December 1986 through December 1987, MBIA Corp. reinsured a portion of each policy through quota and surplus share reinsurance treaties. Each treaty provides reinsurance protection with respect to policies written by MBIA Corp. during the term of the treaty, for the full term of the policy. Under its quota share treaty MBIA Corp. ceded a fixed percentage of each policy insured. Since 1988, MBIA Corp. has entered into only surplus share treaties under which a variable percentage of risk over a minimum size is ceded, subject to a maximum percentage specified in the treaty. Reinsurance ceded under the treaties is for the full term of the underlying policy. MBIA Corp. also enters into facultative reinsurance arrangements from time to time primarily in connection with issues which, because of their size, require additional capacity beyond MBIA Corp.'s retention and treaty limits. Under these facultative arrangements, portions of MBIA Corp.'s liabilities are ceded on an issue-by-issue basis. MBIA Corp. utilizes facultative arrangements as a means of managing its exposure to single issuers to comply with regulatory and rating agency requirements, as well as internal underwriting and portfolio management criteria. As a primary insurer, MBIA Corp. is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations to MBIA Corp. The financial position of all reinsurers is monitored by MBIA Corp. on a regular basis. As of December 31, 1998, MBIA Corp. retained approximately 85% of the gross debt service outstanding of all transactions insured by it, MBIA Assurance and MBIA Illinois, and ceded approximately 15% to treaty and facultative reinsurers. The principal reinsurers of MBIA Corp., CapMAC and MBIA Illinois are Capital Re Management Corporation, Enhance Reinsurance Company, AXA Re Finance, Munich Reinsurance Corp., and KRE Reinsurance, Ltd. The first four of these reinsurers, whose claims-paying ability is rated Triple-A by S&P, reinsured approximately 67% of the total ceded insurance in force at December 31, 1998. The other principal reinsurer is rated AA by S&P. All of the other reinsurers reinsured approximately 33% of the total ceded insurance in force at December 31, 1998 and are diversified geographically and by lines of insurance written. MBIA Corp.'s net retention on the policies it writes varies from time to time depending on its own business needs and the capacity available in the reinsurance market. The amounts of reinsurance ceded at December 31, 1998 and 1997 by bond type and by geographic location are set forth in Note 16 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. MBIA Corp. and MBIA Assurance have entered into a reinsurance agreement providing for MBIA Corp.'s reimbursement of the risks of MBIA Assurance and a net worth maintenance agreement in which MBIA Corp. agrees to maintain the net worth of MBIA Assurance, to remain its sole shareholder and not to pledge its shares. Under the reinsurance agreement MBIA Corp. agrees to reimburse MBIA Assurance on an excess of loss basis for losses incurred in each calendar year for net retained insurance liability, subject to certain contract limitations. Under the net worth maintenance agreement, MBIA Corp. agrees to maintain a minimum capital and surplus position in accordance with French and New York legal requirements. In connection with the BIG Ins. acquisition, MBIA Corp. and MBIA Illinois entered into a reinsurance agreement under which MBIA Corp. agreed to reinsure 100% of all business written by MBIA Illinois, net of cessions by MBIA Illinois to third party reinsurers, in exchange for MBIA Illinois' transfer of the assets underlying the related unearned premium and contingency reserves. Pursuant to such reinsurance agreement with MBIA Illinois, MBIA Corp. reinsured all of the net exposure of $30.9 billion, or approximately 68% of the gross debt service outstanding, of the municipal bond insurance portfolio of MBIA Illinois, the remaining 32% having been previously ceded to treaty and facultative reinsurers of MBIA Illinois. MBIA Corp. retroceded 3% and 1% of this portfolio to its treaty and facultative reinsurers in 1990 and 1991, respectively; additionally, in 1990, 10% of this portfolio was ceded back to MBIA Illinois to comply with regulatory requirements. Effective January 1, 1999, MBIA Corp. and MBIA Illinois entered into a replacement reinsurance agreement whereby MBIA Corp. agreed to accept as reinsurance from MBIA Illinois 100 % of the net liabilities and other obligations of MBIA Illinois, for losses paid on or after that date, thereby eliminating the 10% retrocession arrangement previously in place. 11 In connection with the CapMAC acquisition, MBIA Corp. and CapMAC entered into a reinsurance agreement, effective April 1, 1998, under which MBIA Corp. agreed to reinsure 100% of the net liability and other obligations of CapMAC in exchange for CapMAC's payment of a premium equal to the ceded reserves and contingency reserves. Pursuant to such reinsurance agreement with CapMAC, MBIA Corp. reinsured all of the net exposure of $31.6 billion, or approximately 78% of the gross debt service outstanding, the remaining 22% having been previously ceded to treaty and facultative reinsurers of CapMAC. Investments and Investment Policy The Finance Committee of the Board of Directors of the Company approves the general investment objectives and policies of the Company, and also reviews more specific investment guidelines. On January 1, 1996 CMC assumed full management of all of MBIA Corp.'s consolidated investment portfolios. Certain investments of the Company and MBIA Assurance related to non-U.S. insurance operations are managed by independent managers. To continue to provide strong capital resources and claims-paying capabilities for its insurance operations, the investment objectives and policies for insurance operations set quality and preservation of capital as the primary objective subject to an appropriate degree of liquidity. Maximization of after-tax investment income and investment returns are an important but secondary objective. Investment objectives, policies and guidelines related to the Company's municipal investment agreement business are also subject to review and approval by the Finance Committee of the Board of Directors. The primary investment objectives are to preserve capital, to achieve an investment duration that closely approximates the expected duration of related liabilities, and to maintain appropriate liquidity. The investment agreement assets are managed by CMC subject to an investment management agreement between IMC and CMC. 12 For 1998, approximately 68% of the Company's net income was derived from after-tax earnings on its investment portfolio (excluding the amounts earned on investment agreement assets which are recorded as a component of investment management services revenues). The following table sets forth investment income and related data for the years ended December 31, 1996, 1997 and 1998: Investment Income of the Company (1) 1996 1997 1998 (In thousands) Investment income before expenses (2) $268,280 $305,569 $337,565 Investment expenses 3,133 3,571 5,763 -------- -------- -------- Net investment income before income taxes 265,147 301,998 331,802 Net realized gains 9,936 16,903 29,962 -------- -------- -------- Total investment income before income taxes $275,083 $318,901 $361,764 ======== ======== ======== Total investment income after income taxes $232,975 $263,071 $296,232 ======== ======== ======== - ---------- (l) Excludes investment income and realized gains and losses from investment management services and municipal and financial services segments (2) Includes taxable and tax-exempt interest income. 13 The tables below set forth the composition of the Company's investment portfolios. The weighted average yields in the tables reflect the nominal yield on market value as of December 31, 1998, 1997 and 1996. Investment Portfolio by Security Type as of December 31, 1998
Investment Insurance Management Services Weighted Weighted Fair Value Average Fair Value Average Investment Category (in thousands) Yield (1) (in thousands) Yield (1) Fixed income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 487,132 6.15% $1,404,668 5.54% GNMAs 154,088 6.58 100,033 6.42 Other mortgage & asset backed securities 206,171 6.25 849,922 5.33 Corporate obligations 1,026,847 5.85 842,330 6.05 Foreign obligations(2) 136,416 5.45 292,979 6.46 ---------- ---- ---------- ---- Total 2,010,654 5.99 3,489,932 5.71 Tax-exempt bonds: State & municipal 3,873,399 7.15 -- -- ---------- ---- ---------- ---- Total long-term investments 5,884,053 6.76 3,489,932 5.71 Short-term investments(3) 423,194 4.94 188,297 5.03 ---------- ---- ---------- ---- Total fixed income investments 6,307,247 6.63% 3,678,229 5.68% Other investments(4) 94,975 -- -- -- ---------- ---------- Total investments $6,402,222 -- $3,678,229 -- ========== ==========
- ---------- (1) Prospective market yields as of December 31, 1998. Yield on tax-exempt bonds is presented on a taxable bond equivalent basis using a 35% federal income tax rate (2) Consists of U.S. denominated foreign government and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. 14
Investment Portfolio by Security Type as of December 31, 1997 Investment Insurance Management Services Weighted Weighted Fair Value Average Fair Value Average Investment Category (in thousands) Yield (1) (in thousands) Yield (1) Fixed income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 472,100 6.87% $1,106,396 6.08% GNMAs 148,065 7.15 105,865 6.91 Other mortgage & asset backed securities 189,904 6.60 726,126 6.03 Corporate obligations 836,334 6.38 691,252 6.49 Foreign obligations(2) 165,506 6.27 300,232 6.73 ---------- ---- ---------- ---- Total 1,811,909 6.58 2,929,871 6.26 Tax-exempt bonds: State & municipal 3,399,402 7.36 -- -- ---------- ---- ---------- ---- Total long-term investments 5,211,311 7.09 2,929,871 6.26 Short-term investments(3) 303,898 5.19 411,523 5.73 ---------- ---- ---------- ---- Total fixed income investments 5,515,209 6.99% 3,341,394 6.19% Other investments(4) 51,693 -- -- -- ---------- ---------- Total investments $5,566,902 -- $3,341,394 -- ========== ==========
- ---------- (1) Prospective market yields as of December 31, 1997. Yield on tax-exempt bonds is presented on a taxable bond equivalent basis using a 35% federal income tax rate. (2) Consists of U.S. denominated foreign government and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. 15
Investment Portfolio by Security Type as of December 31, 1996 Investment Insurance Management Services Weighted Weighted Fair Value Average Fair Value Average Investment Category (in thousands) Yield (1) (in thousands) Yield (1) Fixed income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 415,007 7.29% $1,121,511 6.32% GNMAs 107,217 7.56 71,315 7.35 Other mortgage & asset backed securities 136,913 7.13 767,271 5.92 Corporate obligations 469,823 6.78 706,574 6.82 Foreign obligations(2) 152,392 6.87 182,885 7.37 ---------- ---- ---------- ---- Total 1,281,352 7.06 2,849,556 6.43 Tax-exempt bonds: State & municipal 3,173,770 8.07 -- -- ---------- ---- ---------- ---- Total long-term investments 4,455,122 7.78 2,849,556 6.43 Short-term investments(3) 209,840 5.85 443,742 5.65 ---------- ---- ---------- ---- Total fixed income investments 4,664,962 7.70% 3,293,298 6.33% Other investments(4) 49,737 -- -- -- ---------- ---------- Total investments $4,714,699 -- $3,293,298 -- ========== ==========
- ---------- (1) Prospective market yields as of December 31, 1996. Yield on tax-exempt bonds is presented on a taxable bond equivalent basis using a 35% federal income tax rate. (2) Consists of U.S. denominated foreign government and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. 16 The average maturity of the insurance fixed income portfolio excluding short-term investments as of December 31, 1998 was 11.1 years. After allowing for estimated principal pre-payments on mortgage pass-through securities, the duration of the portfolio was 6.8 years. The table below sets forth the distribution by maturity of the Company's consolidated fixed income investments: Fixed Income Investments by Maturity as of December 31, 1998
Insurance Investment Management Services % of Total % of Total Fair Value Fixed Income Fair Value Fixed Income Maturity In thousands) Investments (In thousands) Investments Within 1 year $ 423,194 6.7% $ 188,297 5.1% Beyond 1 year but within 5 years 1,044,997 16.6 960,503 26.1 Beyond 5 years but within 10 years 1,749,798 27.7 834,206 22.7 Beyond 10 years but within 15 years 999,642 15.8 254,631 6.9 Beyond 15 years but within 20 years 1,020,534 16.2 603,252 16.4 Beyond 20 years 1,069,082 17.0 837,340 22.8 ---------- ----- ---------- ----- Total fixed income investments $6,307,247 100.0% $3,678,229 100.0% ========== ==========
The quality distribution of the Company's fixed income investments based on ratings of Moody's was as shown in the table below: Fixed Income Investments by Quality Rating (1) as of December 31, 1998
Investment Insurance Management Services % of Total % of Total Fair Value Fixed Income Fair Value Fixed Income Quality Rating (In thousands) Investments (In thousands) Investments Aaa $3,671,994 60.7% $2,675,396 72.7% Aa 1,262,103 20.9 314,972 8.6 A 1,053,863 17.4 687,861 18.7 Baa 56,948 1.0 -- -- ---------- ------ ---------- ----- $6,044,908 100.0% $3,678,229 100.0% ========== ==========
- ---------- (1) Excludes short-term investments with an original maturity of less than one year, but includes bonds having a remaining maturity of less than one year. 17 Regulation MBIA Corp. is licensed to do insurance business in, and is subject to insurance regulation and supervision by, the State of New York (its state of incorporation), the 49 other states, the District of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of Spain and the Republic of France. MBIA Assurance is licensed to do insurance business in France and is subject to regulation under the corporation and insurance laws of the Republic of France. The extent of state insurance regulation and supervision varies by jurisdiction but New York and most other jurisdictions have laws and regulations prescribing minimum standards of solvency, including minimum capital requirements, and business conduct which must be maintained by insurance companies. These laws prescribe permitted classes and concentrations of investments. In addition, some state laws and regulations require the approval or filing of policy forms and rates. MBIA Corp. is required to file detailed annual financial statements with the New York Insurance Department and similar supervisory agencies in each of the other jurisdictions in which it is licensed. The operations and accounts of MBIA Corp. are subject to examination by these regulatory agencies at regular intervals. MBIA Corp. is licensed to provide financial guarantee insurance under Article 69 of the New York Insurance Law. Article 69 defines financial guarantee insurance to include any guarantee under which loss is payable upon proof of occurrence of financial loss to an insured as a result of certain events. These events include the failure of any obligor on or any issuer of any debt instrument or other monetary obligation to pay principal, interest, premium, dividend or purchase price of or on such instrument or obligation, when due. Under Article 69, MBIA Corp. is licensed to transact financial guarantee insurance, surety insurance and credit insurance and such other kinds of business to the extent necessarily or properly incidental to the kinds of insurance which MBIA Corp. is authorized to transact. In addition, MBIA Corp. is empowered to assume or reinsure the kinds of insurance described above. As a financial guarantee insurer, MBIA Corp. is required by the laws of New York, California, Connecticut, Florida, Illinois, Iowa, New Jersey and Wisconsin to maintain contingency reserves on its municipal bond and other financial guarantee liabilities. Under New Jersey, Illinois and Wisconsin regulations, contributions by such an insurer to its contingency reserves are required to equal 50% of earned premiums on its municipal bond business. Under New York law, such an insurer is required to contribute to contingency reserves 50% of premiums as they are earned on policies written prior to July 1, 1989 (net of reinsurance) and, with respect to policies written on and after July 1, 1989, must make contributions over a period of 15 or 20 years (based on issue type), or until the contingency reserve for such insured issues equals the greater of 50% of premiums written for the relevant category of insurance or a percentage of the principal guaranteed, varying from 0.55% to 2.5%, depending upon the type of obligation guaranteed (net of reinsurance, refunding, refinancings and certain insured securities). California, Connecticut, Iowa and Florida law impose a generally similar requirement. In each of these states, MBIA Corp. may apply for release of portions of the contingency reserves in certain circumstances. The laws and regulations of these states also limit both the aggregate and individual municipal bond risks that MBIA Corp. may insure on a net basis. California, Connecticut, Florida, Illinois and New York, among other things, limit insured average annual debt service on insured municipal bonds with respect to a single entity and backed by a single revenue source (net of qualifying collateral and reinsurance) to 10% of policyholders' surplus and contingency reserves. In New Jersey, Virginia and Wisconsin, the average annual debt service on any single issue of municipal bonds (net of reinsurance) is limited to 10% of policyholders' surplus. Other states that do not explicitly regulate financial guarantee or municipal bond insurance do impose single risk limits which are similar in effect to the foregoing. California, Connecticut, Florida, Illinois and New York also limit the net insured unpaid principal issued by a single entity and backed by a single revenue source to 75% of policyholders' surplus and contingency reserves. Under New York, California, Connecticut, Florida, Illinois, New Jersey and Wisconsin law, aggregate insured unpaid principal and interest under policies insuring municipal bonds (in the case of New York, California, Connecticut, Florida and Illinois, net of reinsurance) are limited to certain multiples of policyholders' surplus and contingency reserves. New York, California, Connecticut, Florida, Illinois and other states impose a 300:1 limit for insured municipal bonds, although more restrictive limits on bonds of other types do exist. For example, New York, California, Connecticut and Florida impose a 100:1 limit for certain types of non-municipal bonds. The Company, MBIA Corp., MBIA Illinois and CapMAC are subject to regulation under the insurance holding company statutes of New York, Illinois and other jurisdictions in which MBIA Corp., MBIA Illinois and CapMAC are licensed to write insurance. The requirements of holding company statutes vary from jurisdiction to jurisdiction but generally require insurance holding companies, such as the Company, and their insurance subsidiaries, to register and file certain reports describing, among other information, their capital structure, ownership and financial condition. The holding company statutes also generally require prior approval of changes in control, of certain dividends and other intercorporate transfers of assets, and of transactions between insurance 18 companies, their parents and affiliates. The holding company statutes impose standards on certain transactions with related companies, which include, among other requirements, that all transactions be fair and reasonable and that those exceeding specified limits receive prior regulatory approval. Prior approval by the New York Insurance Department is required for any entity seeking to acquire "control" of the Company, MBIA Corp or CapMAC. Prior approval by the Illinois Department of Insurance is required for any entity seeking to acquire "control" of the Company, MBIA Corp., MBIA Illinois or CapMAC. In many states, including New York and Illinois, "control" is presumed to exist if 10% or more of the voting securities of the insurer are owned or controlled by an entity, although the supervisory agency may find that "control" in fact does or does not exist when an entity owns or controls either a lesser or greater amount of securities. The laws of New York regulate the payment of dividends by MBIA Corp. and provide that a New York domestic stock property/casualty insurance company (such as MBIA Corp.) may not declare or distribute dividends except out of statutory earned surplus. New York law provides that the sum of (i) the amount of dividends declared or distributed during the preceding 12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders' surplus, as shown by the most recent statutory financial statement on file with the New York Insurance Department, and (b) 100% of adjusted net investment income for such 12-month period (the net investment income for such 12-month period plus the excess, if any, of net investment income over dividends declared or distributed during the two-year period preceding such 12-month period), unless the New York Superintendent of Insurance approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations and writings. See Note 13 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The foregoing dividend limitations are determined in accordance with Statutory Accounting Practices ("SAP"), which generally produce statutory earnings in amounts less than earnings computed in accordance with Generally Accepted Accounting Principles ("GAAP"). Similarly, policyholders' surplus, computed on a SAP basis, will normally be less than net worth computed on a GAAP basis. See Note 5 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. MBIA Corp., MBIA Illinois and CapMAC are exempt from assessments by the insurance guarantee funds in the majority of the states in which they do business. Guarantee fund laws in most states require insurers transacting business in the state to participate in guarantee associations which pay claims of policyholders and third-party claimants against impaired or insolvent insurance companies doing business in the state. In most states, insurers licensed to write only municipal bond insurance, financial guarantee insurance and other forms of surety insurance are exempt from assessment by these funds and their policyholders are prohibited from making claims on these funds. Losses and Reserves The Company's policy is to provide for loss reserves to cover losses that may be reasonably estimated on its insured obligations over the lives of such obligations. The loss reserve, at any financial statement date, is the Company's estimate of the identified and unidentified losses on the obligations it has insured, including expected costs of settlement. Both MBIA Illinois and CapMAC are currently inactive and their insurance business is in run-off. MBIA Corp. has reinsured their respective net liabilities on financial guarantee insurance business and maintains required reserves in connection therewith. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of the expected payments, including costs of settlement, net of expected recoveries, is allocated within the total loss reserve as a case basis reserve. At December 31, 1998, $188.6 million of the $270.1 million reserve for loss and loss adjustment expense represents case basis reserves, of which $162.8 million and $20.3 million are attributable to two health care facilities in Pennsylvania. The remaining case basis reserves represent various housing financings and structured finance transactions, the largest of which is $3.6 million. The reserves for losses and loss adjustment expenses are based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. To the extent that actual case losses for any period are less than the unallocated portion of total loss reserve, there will be no impact on the Company's earnings for that period other than an addition to the reserve which results from applying the loss rate factor to new debt service insurance. To the extent that case losses, for any period, exceed the unallocated portion of the total loss reserve, the excess will be charged against the Company's earnings for that period. The Company periodically reviews the appropriateness of the loss reserves and loss rate factor and is currently conducting such an analysis. 19 SAP Ratios The financial statements in this Form 10-K are prepared on the basis of GAAP. For reporting to state regulatory authorities, SAP is used. See Note 5 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The SAP combined ratio is a traditional measure of underwriting profitability for insurance companies. The SAP loss ratio (which is losses incurred divided by premiums earned), SAP expense ratio (which is underwriting expenses divided by net premiums written) and SAP combined ratio (which is the sum of the loss and expense ratios) for MBIA Corp. and for the financial guarantee industry, which includes the monoline primary insurers (including MBIA Corp.) and monoline reinsurers, are shown in the table below: Years Ended December 31, 1995 1996 1997 1998 MBIA Corp. Loss ratio 0.4% 1.7% 1.2% 8.0% Expense ratio 27.2 22.8 21.2 16.8 Combined ratio 27.6 24.5 22.4 24.8 Financial guarantee industry (1) Loss ratio 5.3% 4.9% 8.3% * Expense ratio 32.7 31.6 28.1 * Combined ratio 38.0 36.5 36.4 * - ---------- (1) Industry statistics were taken from the 1997 Annual Report of the Association of Financial Guaranty Insurors. * Not Available. The SAP loss ratio differs from the GAAP loss ratio because the GAAP ratio recognizes a provision for unidentified losses. The SAP expense ratio varies from the GAAP expense ratio because the GAAP ratio recognizes the deferral of policy acquisition costs and includes the amortization of purchase accounting adjustments, principally goodwill. In addition, the SAP expense ratio is calculated using premiums written while the GAAP expense ratio uses premiums earned. Net insurance in force, qualified statutory capital (which is comprised of policyholders' surplus and the contingency reserve), and policyholders' leverage ratios for MBIA Corp. and for the financial guarantee industry are shown in the table below:
As of December 31, 1995 1996 1997 1998 (Dollars in millions) MBIA Corp. Net insurance in force $359,175 $ 434,417 $ 513,736 $595,895 Qualified statutory capital 2,257 2,620 3,140 3,741 Policyholders' leverage ratio 159:1 166:1 164:1 159:1 Financial guarantee industry(1) Net insurance in force $895,559 $1,076,821 $1,262,697 * Qualified statutory capital 6,495 7,350 8,851 * Policyholders' leverage ratio 138:1 147:1 143:1 *
- ---------- (1) Industry statistics were taken from the 1997 Annual Report of the Association of Financial Guaranty Insurors. * Not Available. 20 The policyholders' leverage ratio is the ratio of net insurance in force to qualified statutory capital. This test is sometimes focused on as a measure of a company's claims-paying capacity. The Company believes that the leverage ratio has significant limitations since it compares the total debt service (undiscounted) coming due over the next 30 years or so to a company's current capital base. It thereby fails to recognize future capital that will be generated during the period of risk being measured, arising from unearned premium reserve and future installment premium commitments. Further, the leverage ratio does not consider the underlying quality of the issuers whose debt service is insured and thereby does not differentiate among the risk characteristics of a financial guarantor's insured portfolio, nor does it give any benefit for third-party commitments such as standby lines of credit. MBIA Corp. Insurance Policies The insurance policies issued by MBIA Corp. provide an unconditional and irrevocable guarantee of the payment to a designated paying agent for the bondholders of an amount equal to the principal of and interest on insured bonds not paid when due. In the event of a default in payment of principal or interest by an issuer, MBIA Corp. promises to make funds available in the amount of the default on the next business day following notification. MBIA Corp. has a Fiscal Agency Agreement with State Street Bank and Trust Company, N.A. to provide for this payment upon receipt of proof of ownership of the bonds, as well as upon receipt of instruments appointing MBIA Corp. as agent for the bondholders and evidencing the assignment of bondholder rights with respect to the debt service payments made by MBIA Corp. Even if bondholders are permitted by the indenture securing the bonds to have the full amount of principal of the bonds, together with accrued interest, declared due and payable immediately in the event of a default, MBIA Corp. is required to pay only the principal and interest scheduled to be paid, but not in fact paid, on each original principal and interest payment date. MBIA Assurance writes policies that are substantially similar in coverage and manner of payment to the MBIA Corp. policies. The MBIA Illinois insurance policies provide for payments on default in substantially the same manner as the MBIA Corp. policies. Financial guaranty insurance written by CapMAC generally guarantees to the holder of the guaranteed obligation the timely payment of principal and interest in accordance with the obligation's original payment schedule. In the case of a default on the insured obligation, payment under the insurance policy generally may not be accelerated by the holder without the consent of CapMAC, even though the underlying obligation may be accelerated. Rating Agencies Moody's, S&P and Fitch perform periodic reviews of MBIA Corp. and other companies providing financial guarantee insurance. Their reviews focus on the insurer's underwriting policies and procedures and on the issues insured. Additionally, each rating agency has certain criteria as to exposure limits and capital requirements for financial guarantors. The rating agencies have reaffirmed their Triple-A claims-paying ratings assigned to MBIA Corp., CapMAC, MBIA Illinois and to MBIA Assurance. The ratings for MBIA Illinois and CapMAC are based in significant part on reinsurance agreements between MBIA Corp. and MBIA Illinois and MBIA Corp. and CapMAC, respectively. The rating of MBIA Assurance is based in significant part on the reinsurance agreement between MBIA Corp. and MBIA Assurance and the net worth maintenance agreement between the two parties. See "Business-Reinsurance." Although MBIA Corp. intends to comply with the requirements of the rating agencies, no assurance can be given that these requirements will not change or that, even if MBIA Corp. complies with these requirements, one or more rating agencies will not reduce or withdraw their rating. MBIA Corp.'s ability to attract new business and to compete with other financial guarantors, and its results of operations and financial condition would be materially adversely affected by any reduction in its ratings. Credit Agreement MBIA Corp. entered into a Credit Agreement, dated as of December 29, 1989, which has been amended from time to time (the "Credit Agreement") with Credit Suisse, New York Branch ("Credit Suisse") to provide MBIA Corp. with an unconditional, irrevocable line of credit. The Credit Agreement was amended and restated by the Second Amended and Restated Credit Agreement, dated as of October 1, 1997 among MBIA Corp., Credit Suisse, as Administrative Agent and a consortium of highly rated banks. The Credit Agreement was further amended as of October 1, 1998 to extend the expiration date and to replace the Administrative Agent, Credit Suisse, with Cooperatieve Centrale Raiffeissen-Boerenleenbank B.A. "Robobank Nederland." The line of credit is available to 21 be drawn upon by MBIA Corp., in an amount up to $825 million, after MBIA Corp. has incurred, during the period commencing October 1, 1997 and ending October 31, 2005, cumulative losses (net of any recoveries) in excess of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under the Credit Agreement is a limited recourse obligation of MBIA Corp. payable solely from, and secured by a pledge of, recoveries realized on defaulted insured obligations, from certain pledged installment premiums and other collateral. Borrowings under the Credit Agreement are repayable on the expiration date of the Credit Agreement. The current expiration date of the Credit Agreement is October 31, 2005, subject to annual extensions under certain circumstances. The Credit Agreement contains covenants that, among other things, restrict MBIA Corp.'s ability to encumber assets or merge or consolidate with another entity. Employees As of March 25, 1999, the Company had 939 employees. No employee is covered by a collective bargaining agreement. The Company considers its employee relations to be satisfactory. Forward-Looking Statements The Company through its management may from time to time make forward-looking statements. Important factors, including general market conditions and the competitive environment, could cause actual results to differ materially from those contained in any forward-looking statements. The Company undertakes no obligation to update any forward-looking statements to reflect changes in events or expectations or otherwise. Executive Officers The executive officers of the Company and their present ages and positions with the Company are set forth below. Name Age Position and Term of Office ----- ---- --------------------------- David H. Elliott 57 Chairman (officer since 1986) Joseph W. Brown, Jr. 50 Chief Executive Officer (officer since January 1999) Richard L. Weill 56 Vice Chairman (officer since 1989) Neil G. Budnick 44 Chief Financial Officer and Treasurer (officer since 1992) John B. Caouette 54 President, Structured Finance Division (officer since February, 1998) Gary C. Dunton 43 President, Public Finance Division and President, Investment Management and Financial Services Division (officer since January, 1998) Louis G. Lenzi 50 General Counsel and Secretary (officer since 1986) Kevin D. Silva 45 Senior Vice President (officer since 1995) Ruth M. Whaley 43 Chief Risk Officer (officer since January 1999) David H. Elliott is Chairman of the Company and of MBIA Corp. It is expected that he will step down as Chairman in May. From 1991 to 1998, he was also the Company's Chief Executive Officer and, from 1986 to 1991, he served as the President and Chief Operating Officer of the Company and MBIA Corp. He is a director of MBIA Corp. and was the President of the Association from 1976 to 1980 and from 1982 through 1986. Joseph W. Brown, Jr. is Chief Executive Officer of the Company (effective January 7, 1999) and a director of MBIA Corp. It is expected that Mr. Brown will be appointed Chairman in May. Prior to joining the Company in January 1999, Mr. Brown was Chairman of the Board of Talegen Holdings, Inc. Richard L. Weill is Vice Chairman of the Company, President of MBIA Corp. and a director of MBIA Corp. From 1989 through 1991, Mr. Weill was General Counsel and Corporate Secretary of the Company. Mr. Weill was previously a partner with the law firm of Kutak Rock, with which he had been associated from 1969 to 1989. Kevin D. Silva is Senior Vice President of the Company and MBIA Corp. and a director of MBIA Corp. He has been in charge of the Management Services Division of MBIA Corp. since joining the Company in late 1995. 22 Neil G. Budnick is Chief Financial Officer and Treasurer of the Company and MBIA Corp. and a director of MBIA Corp. Mr. Budnick has been primarily involved in the insurance operations area of MBIA Corp. since joining the Company in 1983. John B. Caouette is President, Structured Finance Division of the Company and MBIA Corp. and a director of MBIA Corp. Mr. Caouette was, until February of 1998, the Chairman and Chief Executive Officer of CapMAC Holdings Inc. Gary C. Dunton is President, Public Finance Division and President, Investment Management and Financial Services Division of the Company and MBIA Corp. and a director of MBIA Corp. Mr. Dunton was, prior to joining the Company as an officer, a director of the Company and President of the Family and Business Insurance Group, USF&G Insurance. Louis G. Lenzi is General Counsel and Secretary of the Company and MBIA Corp. He is also a director of MBIA Corp. Mr. Lenzi has held various legal positions within the Company and MBIA Corp. since 1984. Ruth M. Whaley is the Chief Risk Officer of the Company and MBIA Corp. and a director of MBIA Corp.. She was, until February of 1998, the Chief Underwriting Officer of CapMAC Holdings Inc. Item 2. Properties MBIA Corp. owns the 157,500 square foot office building on approximately 15.5 acres of property in Armonk, New York, in which the Company and MBIA Corp. have their headquarters. The Company is currently in the process of constructing a 105,000 square foot addition to the Armonk property at an estimated cost of $35.0 million. The Company also has rental space in New York, New York, San Francisco, California, Paris, France, Madrid, Spain and Sydney, Australia. The Company believes that these facilities are adequate and suitable for its current needs. Item 3. Legal Proceedings There are no material lawsuits pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a party. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 23 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information concerning the market for the Company's Common Stock and certain information concerning dividends appears under the heading "Shareholder Information" on the inside back cover of the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. As of March 25, 1999, there were 504 shareholders of record of the Company's Common Stock. The information concerning dividends on the Company's Common Stock is under "Business - Regulation" in this report. Item 6. Selected Financial Data The information under the heading "Selected Financial and Statistical Data" as set forth on pages 34-35 of the Company's 1998 Annual Report to Shareholders is incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" as set forth on pages 36-43 of the Company's 1998 Annual Report to Shareholders is incorporated by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements of the Company, the Report of Independent Accountants thereon by PricewaterhouseCoopers LLP and the unaudited "Quarterly Financial Information" are set forth on pages 44-64 of the Company's 1998 Annual Report to Shareholders and are incorporated by reference. Item 9. Disagreements on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information regarding directors is set forth under "Election of Directors" in the Company's Proxy Statement, dated March 29, 1999, which is incorporated by reference. Information regarding executive officers is set forth under Item 1, "Business - Executive Officers," in this report. Item 11. Executive Compensation Information regarding compensation of the Company's executive officers is set forth under "Compensation of Executive Officers" in the Company's Proxy Statement, dated March 29, 1999, which is incorporated by reference. 24 Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management is set forth under "Election of Directors" and "Security Ownership of Certain Beneficial Owners" in the Company's Proxy Statement, dated March 29, 1999, which is incorporated by reference. Item 13. Certain Relationships and Related Transactions Information regarding relationships and related transactions is set forth under "Certain Relationships and Related Transactions" in the Company's Proxy Statement dated March 29, 1999, which is incorporated by reference. PART IV Item 14. (a) Financial Statements and Financial Statement Schedules and Exhibits. 1. Financial Statements MBIA Inc. has incorporated by reference from the 1998 Annual Report to Shareholders the following consolidated financial statements of the Company: Annual Report to Shareholders Page(s) MBIA INC. AND SUBSIDIARIES Report of independent accountants. 44 Consolidated balance sheets as of December 31, 1998 and 45 1997. Consolidated statements of income for the years ended 46 December 31, 1998, 1997 and 1996. Consolidated statements of changes in shareholders' 47 Equity for the years ended December 31, 1998, 1997 and 1996. Consolidated statements of cash flows for the years 48 Ended December 31, 1998, 1997 and 1996. Notes to consolidated financial statements. 49-64 2. Financial Statement Schedules The following financial statement schedules are filed as part of this report. Schedule Title -------- ----- I Summary of investments, other than investments in related parties, as of December 31, 1998. II Condensed financial information of Registrant for December 31, 1998, 1997 and 1996. IV Reinsurance for the years ended December 31, 1998, 1997 and 1996. The report of the Registrant's independent accountants with respect to the above listed financial statement schedules is included with the schedules. All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 25 3. Exhibits (An exhibit index immediately preceding the Exhibits indicates the page number where each exhibit filed as part of this report can be found.) 3. Articles of Incorporation and By-Laws. 3.1. Restated Certificate of Incorporation, dated August 17, 1990, incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the "1990 10-K"). 3.2. By-Laws as Amended as of March 19, 1998. 10. Material Contracts 10.06. Amended and Restated Tax Allocation Agreement, dated as of January 1, 1990, between the Company and MBIA Corp., incorporated by reference to Exhibit 10.66 to the 1989 10-K. 10.07. Reinsurance Agreement, dated as of December 31, 1990, between MBIA Corp. and Bond Investors Guaranty Insurance Company, incorporated by reference to Exhibit 10.54 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File No. 1-9583) (the "1990 10-K"). 10.08. Revolving Credit Agreement, dated as of February 15, 1991, between the Company and Credit Suisse, New York Branch, incorporated by reference to Exhibit 10.76 to the 1991 10-K, as amended by the First Amendment to Revolving Credit Agreement, dated as of September 30, 1992, incorporated by reference to Exhibit 10.61 to the 1992 10-K, as further amended by the Second Amendment to Revolving Credit Agreement, dated as of September 30, 1994, incorporated by reference to Exhibit 10.48 to the 1994 10-K, as further amended by the Third Amendment to Revolving Credit Agreement, dated as of May 23, 1996, incorporated by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1996 (Comm. File No. 1-9583) (the "1996 10-K"). 10.09. Rights Agreement, dated as of December 12, 1991, between the Company and Mellon Bank, N.A., incorporated by reference to the Company's Current Report on Form 8-K, filed on December 31, 1991, incorporated by reference to Exhibit 10.62 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (Comm. File No. 1-9583) (the "1993 10-K"), as amended by Amendment to Rights Agreement, dated as of October 24, 1994, incorporated by reference to Exhibit 10.49 to the 1994 10-K. 10.10. Trust Agreement, dated as of December 31, 1991, between MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January 21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated as of April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (Comm. File No. 1-9583) (the "1995 10-K"), as amended by Fifth Amendment to Trust Agreement, dated as of November 1, 1995, as further amended by Sixth Amendment to Trust Agreement, dated as of January 1, 1996, incorporated by reference to Exhibit 10.46 to the 1996 10-K, further amended by Seventh Amendment to Trust Agreement, dated as of October 15, 1997, incorporated by reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Comm. File No. 1-9583) (the "1997 10-K") as further amended by the Eighth Amendment to Trust Agreement, dated as of January 1, 1998 and by the Ninth Amendment to Trust Agreement, dated as of March 1, 1999. 10.12. Indenture, dated as of August 1, 1990, between MBIA Inc. and The First National Bank of Chicago, Trustee, incorporated by reference to Exhibit 10.72 to the 1992 10-K. 10.13. First Restated Credit Agreement, dated as of October 1, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse, New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG, Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale, as amended by an Assignment and Assumption Agreement, dated as of December 31, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor and Deutsche Bank AG, 26 New York Branch, as further amended by a Modification Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a Joinder Agreement, dated December 31, 1993, among Credit Suisse, New York Branch, as Agent, Sudwestdeutsche Landesbank Girozentrale and MBIA Corp., incorporated by reference to Exhibit 10.78 to the 1993 10-K, as amended by the First Amendment to First Restated Credit Agreement, dated as of September 23, 1994, incorporated by reference to Exhibit 10.63 to the 1994 10-K, as further amended by the Second Amendment to the First Restated Credit Agreement, dated as of January 1, 1996, and as further amended by the Third Amendment to the First Restated Credit Agreement, dated as of October 1, 1996, incorporated by reference to Exhibit 10.57 to the 1996 10-K, as further amended and restated by the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, incorporated by reference to Exhibit 10.46 to the 1997 10-K, as further amended by the First Amendment to Second Amended and Restated Credit Agreement, dated as of October 1, 1998. 10.14. Net Worth Maintenance Agreement, dated as of November 1, 1991, between MBIA Corp. and MBIA Assurance S.A., as amended by Amendment to Net Worth Agreement, dated as of November 1, 1991, incorporated by reference to Exhibit 10.79 to 1993 10-K. 10.15. Reinsurance Agreement, dated as of January 1, 1993, between MBIA Assurance S.A. and MBIA Corp., incorporated by reference to Exhibit 10.80 to the 1993 10-K. 10.16. Credit Agreement, dated as of August 31, 1994, among Municipal Bond Investors Assurance Corporation, the Company, Wachovia Bank of Georgia, N.A., Banco Santander, The Sumitomo Bank, Ltd., New York Branch, The Chase Manhattan Bank, N.A., Commerzbank Aktiengesellschaft, The Industrial Bank of Japan, Limited New York Branch and NBD Bank, N.A., and as further amended by the First Amendment to Credit Agreement, dated as of October 14, 1994, incorporated by reference to Exhibit 10.66 to the 1994 10-K, as amended by the Second Amendment to Credit Agreement, dated as of October 31, 1995, incorporated by reference to Exhibit 10.61 to 1995 10-K. 10.17. Investment Services Agreement, effective as of April 28, 1995, between MBIA Insurance Corporation and MBIA Securities Corp., as amended by Amendment No. 1, dated as of December 29, 1995, incorporated by reference to Exhibit 10.65 to the 1995 10-K, as further amended by Amendment No. 2 to Investment Services Agreement, dated January 14, 1997, incorporated by reference to Exhibit 10.53 to the 1997 10-K. 10.18. Investment Services Agreement, effective January 2, 1996, between MBIA Insurance Corp. of Illinois and MBIA Securities Corp., incorporated by reference to Exhibit 10.66 to the 1995 10-K. 10.21. Agreement and Plan of Merger among the Company, CMA Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated as of November 13, 1997, incorporated by reference to the Company's Form S-4 (Reg. No. 333-41633) filed on December 5, 1997. 10.22. Amendment No. 1 to Agreement and Plan of Merger among the Company, CMA Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated January 16, 1998, incorporated by reference to the Company's Post Effective Amendment No. 1 to Form S-4 (Reg. No. 333-41633) filed on January 21, 1998. 10.30. Reinsurance Agreement, dated as of April 1, 1998, between CapMAC and MBIA Corp. 10.31. Reinsurance Agreement, dated as of January 1, 1999, between MBIA Illinois and MBIA Corp. 10.32. Agreement and Plan of Merger by and among the Company, MBIA Acquisition, Inc. and 1838 Investment Advisors, Inc., dated as of June 19, 1998. 27 10.33. Credit Agreement (364 day agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998. 10.34. Credit Agreement (5 year agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998 10.48. Ambac Assurance Corporation, AMBAC Insurance UK Limited, MBIA Insurance Corporation, and MBIA Assurance S.A. Agreement Regarding A Global Joint Venture, effective as of January 15, 1999. 10.49. Special Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and Muenchener Rueckversicherungs-Gesellshaft, effective September 1, 1998. 10.50. Second Special Per Occurrence Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and AXA Re Finance S.A., effective September 1, 1998. 10.51. Third Special Per Occurrence Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and Zurich Reinsurance (North America), Inc., effective September 15, 1998. Executive Compensation Plans and Arrangements The following Exhibits identify all existing executive compensation plans and arrangements: 10.01. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to Exhibit 10.13 to the 1987 S-1, as amended by the First Amendment to the MBIA Inc. 1987 Stock Option Plan, effective June 1, 1995, as further amended by the Second Amendment to the MBIA Inc. 1987 Stock Option Plan, effective as of January 7, 1999. 10.02. MBIA Inc. Deferred Compensation and Excess Benefit Plan, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (Comm. File No. 1-9583) (the "1988 10-K"), as amended as of July 22, 1992, incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Comm. File No. 1-9583) (the "1992 10-K"). 10.03. MBIA Inc. Employees Pension Plan, amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (Comm. File No. 1-9583) (the "1991 10-K"), as further amended and restated effective January 1, 1994, incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1994 (Comm. File No. 1-9583) (the "1994 10-K"). 10.04. MBIA Inc. Employees Profit Sharing Plan, as amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.29 to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated December 8, 1988, incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (Comm. File No. 1-9583) (the "1989 10-K"), as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.19 to the 1991 10-K, as further amended and restated as of May 7, 1992, incorporated by reference to Exhibit 10.17 to the 1992 10K, as further amended and restated effective January 1, 1994, incorporated by reference to Exhibit 10.17 to the 1994 10-K. 10.05. MBIA Corp. Split Dollar Life Insurance Plan, dated as of February 9, 1988, issued by Aetna Life Insurance and Annuity Company, incorporated by reference to Exhibit 10.23 to the 1989 10-K. 28 10.11. MBIA Inc. Employees Change of Control Benefits Plan, effective as of January 1, 1992, incorporated by reference to Exhibit 10.65 to the 1992 10-K. 10.19. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K. 10.20. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December 4, 1996, incorporated by reference to Exhibit 10.70 to the 1996 10-K. 10.23. Employment Agreement, dated as of June 25, 1992, between CapMAC Acquisition Corp. and John B. Caouette, incorporated by reference to Exhibit 10.7 of CapMAC's Registration Statement on Form S-1 (Reg. No. 33-982554), filed in 1992, as amended (the "CapMAC Form S-1"). 10.24. CapMAC Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.18 to the CapMAC Form S-1. 10.25. CapMAC Employee Stock Ownership Plan Trust Agreement, incorporated by reference to Exhibit 10.19 to the CapMAC Form S-1, as amended by Amendment No. 2 to the CapMAC Employee Stock Ownership Plan, executed December 22, 1998. 10.26. ESOP Loan Agreement by and between CapMAC and the ESOP Trust dated as of June 25, 1992, incorporated by reference to Exhibit 10.20 to the CapMAC Form S-1. 10.27. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between John B. Caouette and CapMAC, incorporated by reference to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the year ended December 31, 1995 (the "CapMAC 1995 10-K"). 10.28. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Joyce S. Richardson and CapMAC, incorporated by reference to Exhibit 10.35 of the CapMAC 1995 10-K. 10.29. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Ram D. Wertheim and CapMAC, incorporated by reference to Exhibit 10.35 of the CapMAC 1995 10-K. 10.35. Retirement and Consulting Agreement, between the Company and David H. Elliott, dated as of January 7, 1999 and Summary Retirement and Consulting Agreement, between the Company and David H. Elliott, dated as of January 7, 1999. 10.36. Terms of Employment letter between MBIA and Joseph W. Brown, Jr., dated January 7, 1999. 10.37. Stock Option Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 7, 1999. 10.38. Key Employee Employment Protection Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 20, 1999. 10.39. Key Employee Employment Protection Agreement between MBIA Inc. and Neil G. Budnick, dated January 25, 1999. 10.40. Key Employee Employment Protection Agreement between MBIA Inc. and W. Thacher Brown, dated January 25, 1999. 10.41. Key Employee Employment Protection Agreement between MBIA Inc. and John B. Caouette, dated January 25, 1999. 10.42. Key Employee Employment Protection Agreement between MBIA Inc. and Gary C. Dunton, dated January 25, 1999 29 10.43. Key Employee Employment Protection Agreement between MBIA Inc. and Louis G. Lenzi, dated January 25, 1999. 10.44. Key Employee Employment Protection Agreement between MBIA Inc. and Kevin D. Silva , dated January 25, 1999. 10.45. Key Employee Employment Protection Agreement between MBIA Inc. and Richard L. Weill, dated January 25, 1999. 10.46. Key Employee Employment Protection Agreement between MBIA Inc. and Ruth M. Whaley, dated January 25, 1999. 10.47. Key Employee Employment Protection Agreement between MBIA Inc. and Michael J. Maguire, dated March 19, 1999. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 1998. Such report is furnished for the information of the Commission only and, except for those portions thereof which are expressly incorporated by reference in this Annual Report on Form 10-K, is not to be deemed filed as part of this report. 21. List of Subsidiaries 23. Consent of PricewaterhouseCoopers LLP 24. Power of Attorney 27. Financial Data Schedule 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements (b) Reports on Form 8-K: The Company filed no report on Form 8-K in the fourth quarter of 1998. 30 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. MBIA Inc. (Registrant) Dated: March 29, 1999 By /s/ David H. Elliott -------------------------------- Name: David H. Elliott Title: Chairman Pursuant to the requirements of Instruction D to Form 10-K under the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ David H. Elliott Chairman and Director March 29, 1999 ----------------------------- David H. Elliott /s/ Elizabeth B. Sullivan Vice President and March 29, 1999 ----------------------------- Controller Elizabeth B. Sullivan /s/ Joseph W. Brown, Jr. * Director March 29, 1999 ----------------------------- Joseph W. Brown, Jr. /s/ David C. Clapp * Director March 29, 1999 ----------------------------- David C. Clapp /s/ Gary C. Dunton Director March 29, 1999 ----------------------------- Gary C. Dunton 31 /s/ Claire L. Gaudiani * Director March 29, 1999 ----------------------------- Claire L. Gaudiani /s/ William H. Gray, III * Director March 29, 1999 ----------------------------- William H. Gray, III /s/ Freda S. Johnson * Director March 29, 1999 ----------------------------- Freda S. Johnson /s/ Daniel P. Kearney * Director March 29, 1999 ----------------------------- Daniel P. Kearney /s/ James A. Lebenthal * Director March 29, 1999 ----------------------------- James A. Lebenthal /s/ Pierre-Henri Richard * Director March 29, 1999 ----------------------------- Pierre-Henri Richard /s/ John A. Rolls * Director March 29, 1999 ----------------------------- John A. Rolls /s/ Richard L. Weill Director March 29, 1999 ----------------------------- Richard L. Weill *By /s/ Louis G. Lenzi ----------------------------- Louis G. Lenzi Attorney-in Fact 32 Report of Independent Accountants on Financial Statement Schedules To the Board of Directors of MBIA Inc.: Our audits of the consolidated financial statements referred to in our report dated February 2, 1999 appearing on page 44 of the 1998 Annual Report to Shareholders of MBIA Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP New York, New York February 2, 1999 SCHEDULE I MBIA INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1998 (In thousands)
- ----------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D AMOUNT AT WHICH FAIR SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - ----------------------------------------------------------------------------------------- FIXED-MATURITIES Bonds: United States Treasury and Government agency obligations $ 443,130 $ 490,415 $ 490,415 State and municipal obligations 3,633,841 3,873,399 3,873,399 Corporate and other obligations 3,162,344 3,303,693 3,303,693 Mortgage-backed 1,679,525 1,706,478 1,706,478 ----------- ----------- ---------- Total fixed-maturities 8,918,840 9,373,985 9,373,985 SHORT-TERM INVESTMENTS 611,491 XXXXXXX 611,491 OTHER INVESTMENTS 99,393 XXXXXXX 94,975 ----------- ----------- ---------- Total investments $9,629,724 XXXXXXX $10,080,451 =========== =========== ===========
SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (Dollars in thousands, except per share amounts)
December 31, 1998 December 31, 1997 ----------------- ----------------- ASSETS Investments: Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $2,683,882 and $1,986,139) $2,737,874 $2,020,489 Short-term investments, at amortized cost (which approximates fair value) --- 2,300 ----------------- ----------------- Total investments 2,737,874 2,022,789 Cash and cash equivalents 5,177 3,891 Securities borrowed or purchased under agreements to resell 648,281 512,283 Investment in and amounts due from wholly-owned subsidiaries 4,542,945 3,906,852 Accrued investment income 24,900 22,389 Receivables for investments sold 15,439 11,272 Other assets 9,774 10,368 ----------------- ----------------- Total assets $7,984,390 $6,489,844 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Municipal investment agreements $2,055,225 $1,356,926 Municipal repurchase agreements 632,409 567,897 Long-term debt 673,996 473,878 Short-term debt --- 20,000 Securities loaned or sold under agreements to repurchase 683,352 645,583 Deferred income taxes 18,818 11,973 Payable for investments purchased 65,757 14,925 Dividends payable 19,897 17,449 Other liabilities 42,719 19,701 ----------------- ----------------- Total liabilities 4,192,173 3,128,332 ----------------- ----------------- Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares - 10,000,000; issued and outstanding shares - none --- --- Common stock, par value $1 per share; authorized shares - 200,000,000; issued shares - 99,569,625 and 98,754,487 99,570 98,754 Additional paid-in capital 1,169,192 1,133,950 Retained earnings 2,246,221 1,901,608 Accumulated other comprehensive income, net of deferred income taxes of $157,410 and $132,026 288,915 236,095 Unallocated ESOP shares (4,044) (4,083) Unearned compensation - restricted stock (6,807) (4,812) Treasury stock - 21,717 shares in 1998 (830) --- ----------------- ----------------- Total shareholders' equity 3,792,217 3,361,512 ----------------- ----------------- Total liabilities and shareholders' equity $7,984,390 $6,489,844 ================= =================
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (In thousands)
Years Ended December 31 ----------------------------------------------------- 1998 1997 1996 ------------------ -------------- ------------- Revenues: Net investment income $ (178) $ (909) $ 283 Investment management services income 4,553 4,469 2,806 Investment management services realized gains (losses) 4,253 202 (2,549) ------------------ -------------- ------------- Total revenues 8,628 3,762 540 ------------------ -------------- ------------- Expenses: Interest expense 38,875 34,762 32,705 Operating expenses 67,252 4,304 2,384 ------------------ -------------- ------------- Total expenses 106,127 39,066 35,089 ------------------ -------------- ------------- Loss before income taxes and equity in earnings of subsidiaries (97,499) (35,304) (34,549) Benefit for income taxes (13,888) (12,444) (10,911) ------------------ -------------- ------------- Loss before equity in earnings of subsidiaries (83,611) (22,860) (23,638) Equity in earnings of subsidiaries 516,339 428,470 371,374 ------------------ -------------- ------------- Net income $432,728 $405,610 $347,736 ================== ============== =============
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31 ------------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Cash flows from operating activities: Net income $ 432,728 $ 405,610 $ 347,736 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (516,339) (387,970) (342,374) Net realized (gains) losses on sales of investments (4,253) (202) 2,549 Benefit for deferred income taxes (30) --- --- Other, net 27,823 297 593 --------------- --------------- --------------- Total adjustments to net income (492,799) (387,875) (339,232) --------------- --------------- --------------- Net cash provided by operating activities (60,071) 17,735 8,504 --------------- --------------- --------------- Cash flows from investing activities: Purchase of fixed-maturity securities --- --- --- Sale of fixed-maturity securities --- --- --- Sale (purchase) of short-term investments 2,300 3,898 (6,198) Sale of other investments --- --- --- Purchases for municipal investment agreement portfolio, net of payable for investments purchased (2,351,385) (1,264,882) (1,189,132) Sales from municipal investment agreement portfolio, net of receivable for investments sold 1,707,407 845,365 464,593 Contributions to subsidiaries (17,616) (93,666) (11,301) Advances to subsidiaries, net (62,085) (96,597) (21,764) --------------- --------------- --------------- Net cash used by investing activities (721,379) (605,882) (763,802) --------------- --------------- --------------- Cash flows from financing activities: Net proceeds from issuance of common stock --- 127,775 54,880 Net proceeds from issuance of long-term debt 197,113 98,880 --- Net proceeds from issuance of short-term debt (20,000) (9,100) 11,100 Dividends paid (85,667) (76,743) (69,795) Proceeds from issuance of municipal investment and repurchase agreements 2,065,200 1,499,080 1,504,140 Payments for drawdowns of municipal investment agreements (1,306,389) (1,195,939) (786,938) Securities loaned or sold under agreements to repurchase, net (98,229) 133,300 --- Exercise of stock options 30,708 14,372 28,218 --------------- --------------- --------------- Net cash provided by financing activities 782,736 591,625 741,605 --------------- --------------- --------------- Net (decrease) increase in cash and cash equivalents 1,286 3,478 (13,693) Cash and cash equivalents -beginning of year 3,891 413 14,106 --------------- --------------- --------------- Cash and cash equivalents -end of year $ 5,177 $ 3,891 $ 413 =============== =============== =============== Supplemental cash flow disclosures: Income taxes paid $ 618 $ 1,568 $ 305 Interest paid: Long-term debt 39,499 32,953 32,850 Short-term debt 1,057 2,017 1,309
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. CONDENSED FINANCIAL STATEMENTS Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto. 2. SIGNIFICANT ACCOUNTING POLICIES The Parent company carries its investments in subsidiaries under the equity method. 3. DIVIDENDS FROM SUBSIDIARY No dividends were paid by MBIA Corp. to MBIA Inc. in 1998 and 1997. In 1996, MBIA Corp. declared and paid dividends of $29,000,000 to MBIA Inc. Also, in 1997 MBIA Investment Management Corp. declared and paid dividends of $40,500,000 to MBIA Inc. 4. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AND REPURCHASE AGREEMENTS The municipal investment and repurchase agreement business, as described in footnotes 2 and 15 to the consolidated financial statements of MBIA Inc. and Subsidiaries (which are incorporated by reference in the 10-K), is conducted by both the Registrant and its wholly owned subsidiary, MBIA Investment Management Corp. SCHEDULE IV MBIA INC. AND SUBSIDIARIES REINSURANCE for the Years Ended December 31, 1998, 1997 and 1996 (In thousands)
- -------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F Percentage Insurance Gross Ceded to Other Assumed from of Amount Premiums Written Amount Value Other Companies Net Amount Assumed to Net - -------------------------------------------------------------------------------------------------------------------------- 1998 $664,269 $156,064 $12,781 $520,986 2.5% ---- -------- -------- ------- -------- ---- 1997 $635,660 $116,526 $18,188 $537,322 3.4% ---- -------- -------- ------- -------- ---- 1996 $507,535 $69,956 $27,747 $465,326 6.0% ---- -------- -------- ------- -------- ----
Securities and Exchange Commission Washington, D.C. 20549 - -------------------------------------------------------------------------------- Exhibits to Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 Commission File No. 1-9583 - ------------------------------------------------------------------------------- MBIA Inc. Exhibit Index 3.2. By-Laws as Amended as of March 19, 1998. 10.01. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to Exhibit 10.13 to the 1987 S-1, as amended by the First Amendment to the MBIA Inc. 1987 Stock Option Plan, effective June 1, 1995, as further amended by the Second Amendment to the MBIA Inc. 1987 Stock Option Plan, effective as of January 7, 1999. 10.10. Trust Agreement, dated as of December 31, 1991, between MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January 21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated as of April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the 1995 10-K, as amended by Fifth Amendment to Trust Agreement, dated as of November 1, 1995, as further amended by Sixth Amendment to Trust Agreement, dated as of January 1, 1996, incorporated by reference to Exhibit 10.46 to the 1996 10-K, further amended by Seventh Amendment to Trust Agreement, dated as of October 15, 1997, incorporated by reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Comm. File No. 1-9583) (the "1997 10-K"), as further amended by the Eighth Amendment to Trust Agreement, dated as of January 1, 1998 and by the Ninth Amendment to Trust Agreement, dated as of March 1, 1999. 10.13. First Restated Credit Agreement, dated as of October 1, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse, New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG, Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale, as amended by an Assignment and Assumption Agreement, dated as of December 31, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor and Deutsche Bank AG, New York Branch, as further amended by a Modification Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a Joinder Agreement, dated December 31, 1993, among Credit Suisse, New York Branch, as Agent, Sudwestdeutsche Landesbank Girozentrale and MBIA Corp., incorporated by reference to Exhibit 10.78 to the 1993 10-K, as amended by the First Amendment to First Restated Credit Agreement, dated as of September 23, 1994, incorporated by reference to Exhibit 10.63 to the 1994 10-K, as further amended by the Second Amendment to the First Restated Credit Agreement, dated as of January 1, 1996, and as further amended by the Third Amendment to the First Restated Credit Agreement, dated as of October 1, 1996, incorporated by reference to Exhibit 10.57 to the 1996 10-K, as further amended and restated by the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, incorporated by reference to Exhibit 10.46 to the 1997 10-K, as further amended by the First Amendment to Second Amended and Restated Credit Agreement, dated as of October 1, 1998. 10.30. Reinsurance Agreement, dated as of April 1, 1998, between CapMAC and MBIA Corp. 10.31. Reinsurance Agreement, dated as of January 1, 1999, between MBIA Illinois and MBIA Corp. 10.32. Agreement and Plan of Merger by and among the Company, MBIA Acquisition, Inc. and 1838 Investment Advisors, Inc., dated as of June 19, 1998. 10.33. Credit Agreement (364 day agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998. 10.34. Credit Agreement (5 year agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998 10.35. Retirement and Consulting Agreement, between the Company and David H. Elliott, dated as of January 7, 1999 and Summary Retirement and Consulting Agreement, between the Company and David H. Elliott, dated as of January 7, 1999. 10.36. Terms of Employment letter between MBIA and Joseph W. Brown, Jr., dated January 7, 1999. 10.37. Stock Option Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 7, 1999. 10.38. Key Employee Employment Protection Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 20, 1999. 10.39. Key Employee Employment Protection Agreement between MBIA Inc. and Neil G. Budnick, dated January 25, 1999. 10.40. Key Employee Employment Protection Agreement between MBIA Inc. and W. Thacher Brown, dated January 25, 1999. 10.41. Key Employee Employment Protection Agreement between MBIA Inc. and John B. Caouette, dated January 25, 1999. 10.42. Key Employee Employment Protection Agreement between MBIA Inc. and Gary C. Dunton, dated January 25, 1999. 10.43. Key Employee Employment Protection Agreement between MBIA Inc. and Louis G. Lenzi, dated January 25, 1999. 10.44. Key Employee Employment Protection Agreement between MBIA Inc. and Kevin D. Silva , dated January 25, 1999. 10.45. Key Employee Employment Protection Agreement between MBIA Inc. and Richard L. Weill, dated January 25, 1999. 10.46. Key Employee Employment Protection Agreement between MBIA Inc. and Ruth M. Whaley, dated January 25, 1999. 10.47. Key Employee Employment Protection Agreement between MBIA Inc. and Michael J. Maguire, dated March 19, 1999. 10.48. Ambac Assurance Corporation, AMBAC Insurance UK Limited, MBIA Insurance Corporation, and MBIA Assurance S.A. Agreement Regarding A Global Joint Venture, effective as of January 15, 1999. 10.49. Special Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and Muenchener Rueckversicherungs-Gesellshaft, effective September 1, 1998. 10.50. Second Special Per Occurrence Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and AXA Re Finance S.A., effective September 1, 1998. 10.51. Third Special Per Occurrence Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and Zurich Reinsurance (North America), Inc., effective September 15, 1998. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 1998. Such report is furnished for the information of the Commission only and, except for those portions thereof which are expressly incorporated by reference in this Annual Report on Form 10-K, is not to be deemed filed as part of this report. 21. List of Subsidiaries 23. Consent of PricewaterhouseCoopers LLP 24. Power of Attorney 27. Financial Data Schedule 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements EX-3.2 2 BY-LAWS MBIA INC. BY-LAWS As Amended as of March 19, 1998 MBIA Inc. BY-LAWS TABLE OF CONTENTS Section Page - ------- ---- ARTICLE I SHAREHOLDERS 1.01 Annual Meetings .......................................... 1 1.02 Special Meetings ......................................... 1 1.03 Notice of Meetings; Waiver ............................... 1 1.04 Quorum ................................................... 2 1.05 Voting ................................................... 2 1.06 Adjournment .............................................. 2 1.07 Proxies .................................................. 3 1.08 Organization; Procedure .................................. 3 1.09 Order of Business ........................................ 3 ARTICLE II BOARD OF DIRECTORS 2.01 General Powers ........................................... 5 2.02 Number ................................................... 5 2.03 Qualifications of Directors .............................. 5 2.04 Election and Term of Directors ........................... 5 2.05 Regular Meetings ......................................... 6 2.06 Special Meetings; Notice.................................. 6 2.07 Quorum; Voting ........................................... 6 2.08 Adjournment .............................................. 7 2.09 Action Without a Meeting ................................. 7 2.10 Regulations; Manner of Acting ............................ 7 2.11 Resignations ............................................. 7 2.12 Removal of Directors ..................................... 7 2.13 Vacancies and Newly Created Directorships .......................................... 7 2.14 Compensation ............................................. 8 2.15 Action by Telephonic Communications ...................... 8 ARTICLE III EXECUTIVE COMMITTEE AND OTHER COMMITTEES 3.01 How Constituted .......................................... 8 3.02 Powers ................................................... 8 3.03 Proceedings .............................................. 9 3.04 Quorum and Manner of Acting .............................. 9 3.05 Resignations ............................................. 10 3.06 Removal .................................................. 10 3.07 Vacancies ................................................ 10 ARTICLE IV OFFICERS 4.01 Number ................................................... 10 4.02 Election ................................................. 10 4.03 Removal and Resignation; Vacancies ....................... 10 4.04 Authority and Duties of Officers ......................... 11 4.05 The Chairman ............................................. 11 4.06 The Secretary ............................................ 11 4.07 Additional Officers ...................................... 12 4.08 Security ................................................. 12 ARTICLE V CAPITAL STOCK 5.01 Certificates of Stock .................................... 12 5.02 Lost, Stolen or Destroyed Certificates ................... 13 5.03 Transfers of Stock; Registered Shareholders ........................................... 13 5.04 Record Date .............................................. 13 5.05 Transfer Agent and Registrar ............................. 14 ARTICLE VI OFFICES 6.01 Registered Office ........................................ 14 6.02 Other Offices ............................................ 14 ARTICLE VII GENERAL PROVISIONS 7.01 Dividends ................................................ 15 7.02 Reserves ................................................. 15 7.03 Execution of Instruments ................................. 15 7.04 Deposits ................................................. 15 7.05 Checks, Drafts, etc ...................................... 15 7.06 Sale, Transfer, etc. of Securities ....................... 15 7.07 Voting as Shareholder .................................... 16 7.08 Fiscal Year .............................................. 16 7.09 Seal ..................................................... 16 7.10 Books and Records; Inspection ............................ 16 ARTICLE VIII AMENDMENT OF BY-LAWS 8.01 Amendment ................................................ 16 BY-LAWS ARTICLE I SHAREHOLDERS Section 1.01. Annual Meetings. The Annual Meeting of the shareholders of the Corporation for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held on the first Thursday in May at 10:00 A.M. at such place, either within or without the State of Connecticut, or at such other date and hour as in may be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. Any previously scheduled Annual Meeting may be postponed by resolution of the Board of Directors upon notice given on or prior to the date previously scheduled for such Annual Meeting of the shareholders. [Section 33-695(a)(b).](1) Section 1.02. Special Meetings. Special Meetings of the shareholders may be called at any time by the Chairman, the Vice Chairman, the Secretary, or any two Directors. A Special Meeting shall be called by the Chairman or the Vice Chairman, immediately upon receipt of a written request therefor delivered to the Secretary of the Corporation by shareholders holding not less than 10% of the voting power of all shares entitled to vote at the meeting, which request shall state the purpose or purposes of such meeting. If the Chairman or the Vice Chairman shall fail to call such meeting within 15 days after receipt of such request, any shareholder executing such request may call such meeting. Such Special Meetings of the shareholders shall be held at such places, within or without the State of Connecticut, as shall be specified in the respective notices or waivers of notice thereof. At any Special Meeting of shareholders, only such business may be transacted as is related to the purposes set forth in the notice thereof. [Section 33696.] Section 1.03. Notice of Meetings: Waiver. A notice in writing of each meeting of shareholders shall be given by or at the direction of the Chairman or the Vice Chairman or Secretary or the officer or person calling the meeting to each shareholder of record entitled to vote at such meeting, by leaving such notice with the shareholder or at the shareholder's residence or usual place of business, or by mailing a copy thereof addressed to such shareholder at the last-known post-office address as last shown on the - -------------------------------------------------------------------------------- (1) Citations are to the Connecticut Business Corporation Act, and are inserted for reference only, and do not constitute a part of the By-Laws. 1 stock records of the Corporation, postage prepaid, not less than ten days nor more than 60 days before the date of the meeting. Each notice of a meeting of shareholders shall state the place, date and hour of the meeting. The general purpose or purposes for which a Special Meeting is called shall be stated in the notice thereof, and no other business shall be transacted at the meeting. No notice of any meeting of shareholders need be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders need be specified in a written waiver of notice. The Secretary of the Corporation shall cause any such waiver to be filed with the records of the meeting. The attendance of any shareholder, in person or by proxy, at a meeting of shareholders without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by such shareholder of notice of such meeting. Except as set forth in Section 1.06 of these By-Laws, notice of any adjourned meeting of the shareholders of the Corporation need not be given. [Sections 33-699, 33-700.] Section 1.04. Quorum. Except as otherwise required by law or by the Certificate of Incorporation, the presence in person or by proxy of the holders of a majority of the shares of stock entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business at such meeting. The shareholders present at a duly held meeting at which a quorum is present may continue to do business for the remainder of the meeting and any adjournment of it unless a new record date is or must be set for the adjourned meeting, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. [Section 33-709.] Section 1.05. Voting. Every holder of record of shares entitled to vote at a meeting of shareholders shall be entitled to one vote for each share standing in his or her name on the books of the Corporation on the record date fixed pursuant to Section 5.04 of these By-Laws. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the By-Laws of such corporation may provide, or in the absence of such provision, as the Board of Directors of such Corporation may determine. If a meeting of shareholders is duly held and if a quorum exists, action on a matter, other than the election of Directors, is approved by the shareholders if the votes cast by the shareholders favoring the action exceed the votes cast opposing the action, unless the Certificate of Incorporation, these By-laws or the law requires a greater number of affirmative votes. [Sections 33-705, 33-709.] Section 1.06. Adjournment. If a quorum is not present at any meeting of the shareholders, the shareholders present in person or by proxy shall have the power to adjourn any such meeting until a quorum is present, without notice other than 2 announcement at any such meeting of the place, date and hour to which such meeting is adjourned. However, if after the adjournment the Board of Directors fixes a new record date for the adjourned meeting pursuant to Section 5.04 of these By-Laws, a notice of the adjourned meeting, conforming to the requirements of Section 1.03 hereof, shall be given to each shareholder of record entitled to vote at such meeting. The holders of a majority of the voting power of the shares entitled to vote represented at a meeting may adjourn such meeting from time to time. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. [Section 33-699(e).] Section 1.07. Proxies. Every person entitled to vote or execute consents, waivers or releases in respect of shares may do so either in person or by one or more agents authorized by a written proxy executed by such person. No such proxy shall be voted or acted upon after the expiration of 11 months from the date of such proxy, unless it expressly specifies a longer length of time for which it is to continue in force or limits its use to a particular meeting not yet held. Every proxy shall be revocable at the will of the shareholder executing it, unless it states that it is irrevocable and the appointment of proxy is coupled with an interest. An appointment of a proxy is effective when received by the Secretary of the Corporation or other officer or agent authorized to tabulate votes. [Section 33-706.] Section 1.08. Organization; Procedure. At every meeting of shareholders the presiding officer shall be the Chairman or, in the event of his absence or disability, the Vice Chairman, or in the absence of such officers, a presiding officer chosen by a majority of the shareholders present in person or by proxy. The order of business and all other matters of procedure at every meeting of shareholders may be determined by such presiding officer. The Secretary, or, in his absence, an appointee of the presiding officer, shall act as Secretary of the meeting. Section 1.09. Order of Business. (a) At any Annual Meeting or Special Meeting of the shareholders, only such business shall be conducted as shall have been brought before the Annual Meeting or the Special Meeting (i) by or at the direction of the Board of Directors or (ii) by any shareholder who complies with the procedures set forth in this Section 1.09. (b) For business properly to be brought before an Annual Meeting or Special Meeting by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the Annual Meeting or Special Meeting; provided, 3 however, that in the event that less than 70 days' notice or prior public disclosure of the date of the Annual Meeting or Special Meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the Annual Meeting or Special Meeting was mailed or such public disclosure was made. To be in proper written form, a shareholder's notice to the Secretary shall set forth in writing as to each matter the shareholder proposes to bring before the Annual Meeting or Special Meeting: (i) a brief description of the business desired to be brought before the Annual Meeting or Special Meeting and the reasons for conducting such business at the Annual Meeting or Special Meeting; (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at an Annual Meeting or Special Meeting except in accordance with the procedures set forth in this Section 1.09. The chairman of an Annual Meeting or Special Meeting shall, if the facts warrant, determine and declare to the Meeting, that business was not properly brought before such Meeting in accordance with the provisions of this Section 1.09 and, if he or she should so determine, he or she shall so declare to such meeting and any such business not properly brought before such meeting shall not be transacted. (c) For a shareholder to nominate persons for election to the Board of Directors of the Corporation, the shareholder may nominate persons for election as Directors only if such intention to make such nomination is given by timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a shareholder's notice of nomination must be delivered to or mailed and received at the principal offices of the Corporation not less than 60 days nor more than 90 days prior to the Annual Meeting or Special Meeting at which Directors will be elected; provided however, that in the event that less than 70 days' notice or prior public disclosure of the date of such meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of such meeting was mailed or such public disclosure was made. To be in proper written form, a shareholder's notice to the Secretary shall set forth 4 in writing (a) as to each person whom the shareholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required under the rules and regulations of the Securities and Exchange Commission (including without limitation such, person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected) and (b) as to the shareholder giving the notice, (i) the name and address, as they appear on the Corporation's books, of such shareholder and, (ii) the class and number of shares of stock of the Corporation which are beneficially owned by such shareholder. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures of this Section 1.09 and, if the chairman of the meeting should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE II BOARD OF DIRECTORS Section 2.01. General Powers. All the powers of the Corporation shall be exercised by or under the authority of the Board of Directors, and except as may otherwise be provided by law, by the Certificate of Incorporation or by these By-Laws, the business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. [Section 33-735(b).] Section 2.02. Number. The number of Directors constituting the entire Board of Directors shall be not less than three and not more than 15, and the number of directorships at any time within such maximum and minimum shall be the number fixed by resolution of the shareholders or by resolution adopted by a 66-2/3% vote of the Board of Directors or, in the absence thereof, shall be the number of Directors elected at the preceding Annual Meeting of shareholders [Section 33-737.] Section 2.03. Qualifications of Directors. Directors need not be residents of the State of Connecticut or shareholders of the Corporation. [Section 33-736.] 5 Section 2.04. Election and Term of Directors. Except as otherwise provided in Section 2.14 of these By-Laws, the Directors shall be elected at each Annual Meeting of the shareholders to hold office until the next Annual Meeting of shareholders. Each Director shall hold office for the term for which he or she is elected and until such director's successor has been duly elected and qualified, or until a earlier death, resignation, removal or a court order stating that by reason of incompetency or any other lawful cause, he or she is no longer a Director in office. If the Annual Meeting for the election of Directors is not held on the date designated therefor, the Directors shall cause the meeting to be held as soon thereafter as convenient. At each meeting of the shareholders for the election of Directors, at which a quorum is present, the Directors shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in such election. [Sections 33-712, 33-737, 33-739] Section 2.05. Regular Meetings. The Board of Directors shall meet for the purpose of electing officers and appointing committees, if any, and for the transaction of such other business as may properly come before such meeting, immediately following adjournment of the Annual Meeting of the shareholders at the place of such Annual Meeting of the shareholders. Notice of such meeting of the Board of Directors need not be given. Additional regular meetings of the Directors may be held at such places, dates and times as shall be determined from time to time by resolution of the Directors. Notice of regular meetings need not be given, except that if the Board of Directors shall fix or change the time or place of any such regular meeting, notice of such action shall be mailed promptly, or sent by telegram or facsimile, to each Director who shall not have been present at the meeting at which such action was taken, addressed to such Director at his or her usual place of business, or shall be delivered personally. Notice of such action need not be given to any Director who attends the first regular meeting after such action is taken without protesting the lack of notice, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. [Sections 33-748, 33-750.] Section 2.06. Special Meetings, Notice. Special Meetings of the Board of Directors shall be held whenever called by the Chairman, the Vice Chairman, the Secretary or any two Directors, at such place (within or without the State of Connecticut), as may be specified in the respective notices or waivers of notice of such meetings. At least two days' written or oral notice of Special Meetings of the Board of Directors shall be given to each Director. A written waiver of notice signed by a Director entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. The Secretary of the Corporation shall cause any such waiver to be filed with the records of the meeting. The attendance of a Director at a meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by such Director of notice of such meeting. No notice need be given of any adjourned meeting, unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of this section shall be given to each Director. [Sections33-750,33-751.] 6 Section 2.07. Quorum; Voting. Except as provided in the Certificate of Incorporation of this Corporation, a majority of the number of directorships at the time shall constitute a quorum for the transaction of business. Except as otherwise provided herein, required by law or the Certificate of Incorporation of this Corporation, the vote of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. [Section 33-752.] Section 2.08. Adjournment. A majority of the Directors present, whether or not quorum is present, may adjourn any meeting of the Board of Directors to another time or place. Notice of the adjourned meeting shall be given to the extent required by Section 2.05 of these By-Laws. Section 2.09. Action Without a Meeting. If all the Directors severally or collectively consent in writing to any action taken or to be taken by the Corporation, and the number of such Directors constitutes a quorum for such action, such action shall be as valid corporate action as though it had been authorized at a meeting of the Board of Directors. The Secretary shall file such consents with the minutes of the meetings of the Board of Directors. [Section 33-749.] Section 2.10. Regulations; Manner of Acting. To the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws, the Board of Directors may adopt such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the affairs and business of the Corporation as the Board of Directors may deem appropriate. The Directors shall act only as a Board, and the individual Directors shall have no power as such. At every meeting of the Board of Directors, the presiding officer shall be the Chairman or, in the event of his or her absence or disability, a presiding officer chosen by a majority of the Directors present. Section 2.1 1. Resignations. Any Director may resign at any time by delivering a written notice of resignation, signed by such Director, to the Board of Directors. Such resignation shall be effective immediately upon receipt by the Corporation if no time is specified, or at such later time as the resigning Director may specify. [Section 33-741.] Section 2.12. Removal of Directors. Any Director or Directors my be removed either with or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a Special Meeting of the shareholders called for such purpose, which purpose must be set forth in the notice of the meeting. [Section 33-742.] Section 2.13. Vacancies and Newly Created Directorships. Subject to the provisions of Section 2.02 hereof, any newly created directorships resulting from any increase in the number of Directors and any vacancies occurring on the Board of 7 Directors for any other reason shall be filled for the unexpired term by a vote of 66-2/3 % of the Board of Directors (measuring the percentage of the directorships on the Board of Directors, in the case of any vacancy occurring by reason of an increase in the number of directorships, by the percentage prior to the vote on the increase). [Section 33-744.] Section 2.14. Compensation. The amount, if any, which each Director shall be entitled to receive as compensation for his or her services as such shall be approved from time to time by the Board of Directors. [Section 33-745.] Section 2.15. Action by Telephonic Communications. Members of the Board of Directors, or any Committee designated by the Board, may participate in a meeting of the Board of Directors or such Committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. [Section 33-748(b).] ARTICLE III EXECUTIVE COMMITTEE. AUDIT COMMITTEE AND OTHER COMMITTEES Section 3.01. How Constituted. The Board of Directors, by resolution or resolutions adopted by a vote of 66-2/3% of the Board of Directors, may designate two or more Directors to constitute an Executive Committee, an Audit Committee or other Committees. The Board may so designate one or more Directors as alternate member(s) of any Committee who may replace any absent or disqualified member(s) at any meeting of the Committee. Any such Committee may be abolished or redesignated from time to time by resolution or resolutions similarly adopted by the Board of Directors. Each such Committee shall serve at the pleasure of the Board of Directors. Each member of any such Committee shall hold office until a successor shall have been designated or until such member shall cease to be a Director, or until his or her earlier death, resignation or removal. [Section 33-753.] Section 3.02. Powers. During the intervals between the meetings of the Board of Directors, unless otherwise provided from time to time by resolutions adopted by a vote of 66-2/3% of the Board of Directors, the Executive Committee, if such a Committee shall have been established, shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation, subject to the limitations set forth below. No Committee, including the Executive Committee, shall have any power or authority in reference to the following matters: (a) the declaration of any distribution or dividend in respect of shares of stock of the Corporation; 8 (b) approving or proposing to shareholders any action as to which shareholder approval is required by law; (c) the filling of vacancies on the Board of Directors or on any Committee thereof; (d) the amendment of the Certificate of Incorporation pursuant to Section 33-796 of the Connecticut Business Corporation Act; (e) the amendment or repeal of the By-Laws, or the adoption of new By-Laws; (f) the approval of a plan of merger not requiring shareholder approval; (g) the authorization or approval of the reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; or (h) the authorizing or approving of the issuance or sale or contract for sale of shares, or the determination of the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a Committee or a senior executive officer of the Corporation to do so within limits specifically prescribed by the Board of Directors. Subject to the foregoing limitations, each other such Committee shall have and may exercise such powers of the Board as may be provided by resolution or resolutions similarly adopted. [Section 33-753(e)(f).] Section 3.03. Proceedings. Any such Committee may fix its own rules of procedure and may meet at such place (within or without the State of Connecticut), at such date and time and upon such notice, if any, as it shall determine from time to time. Such Committee shall keep a record of its proceedings and shall report any such proceedings to the Board of Directors at the first meeting of the Board of Directors following any such proceedings. Section 3.04. Quorum and Manner of Acting. Except as may be otherwise provided in the resolution designating any such Committee, at all meetings of any such Committee the presence of members constituting a majority of the total authorized membership of such Committee, but in no event less than two, shall constitute a quorum for the transaction of business; and the act of the majority of the members present at any meeting at which a quorum is present, but in no event less than two, shall be the act of such Committee. Any action required or permitted to be taken at any 9 meeting of any such Committee may be taken without a meeting, if all members of such Committee shall consent to such action in writing and such writing or writings are filed with the proceedings of the Committee. The members of any such Committee shall act only as a Committee, and the individual members of such Committee shall have no power as such. [Sections 33-749, 33-752, 33-753(d).] Section 3.03. Resignations. Any member of any Committee may resign at any time by delivering a written notice of resignation, signed by such member, to the Board of Directors. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 3.06. Removal. Any member of any such Committee may be removed at any time, with or without cause, by resolution adopted by a vote of 66-2/3% of the Board of Directors. Section 3.07. Vacancies. If any vacancy shall occur in any such Committee, by reason of disqualification, death, resignation, removal or otherwise, the remaining members shall continue to act, if they are at least two in number, and any such vacancy may be filled by resolution adopted by a vote of 66-2/3% of the Board of Directors. ARTICLE IV OFFICERS Section 4.01. Number. The officers of the Corporation shall be elected by the Board of Directors and shall include a Chairman, a Vice Chairman, a Secretary and such other officers as the Board may appoint from time to time. Any two or more offices may be held by the same person. No officer, except the Chairman, need be a Director of the Corporation. [Section 33-763.] Section 4.02. Election. Unless otherwise determined by the Board of Directors, the officers of the Corporation shall be elected by the Board of Directors at the first meeting of the Board of Directors following each annual meeting of the shareholders, and shall be elected to hold office until the first meeting of the Board following the next succeeding annual meeting of the shareholders. Each officer shall hold office until a successor has been elected and qualified, or until such officer's earlier death, resignation or removal. Section 4.03. Removal and Resignation; Vacancies. Any officer may be removed with or without cause at any time by the Board of Directors, but without 10 prejudice to such officer's contract rights, if any. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to the Board of Directors. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, shall be filled by the Board of Directors. [Section 33-766.] Section 4.04. Authority and Duties of Officers. The officers of the Corporation shall have such authority and shall exercise such powers and perform such duties as may be specified in these By-Laws, except that in any event each officer shall exercise such powers and perform such duties as may be required by law. Section 4.05. The Chairman. The Chairman shall have the following powers and duties: (a) He or she shall perform such duties, in addition to those specified below, as may be assigned by the Board of Directors. (b) He or she shall preside at all shareholders' meetings. (c) He or she shall preside at all meetings of the Board of Directors. Section 4.06. The Secretary. The Secretary shall have the following powers and duties: (a) He or she shall keep or cause to be kept a record of all the proceedings of the meetings of the shareholders and of the Board of Directors in books provided for that purpose. (b) He or she shall cause all notices to be duly given in accordance with the provisions of these By-Laws and as required by law. (c) Whenever any Committee shall be appointed pursuant to a resolution of the Board of Directors, he or she shall furnish a copy of such resolution to the members of such Committee. (d) He or she shall be the custodian of the records and of the seal of the Corporation and cause such seal (or a facsimile thereof) to be affixed to all certificates representing shares of the Corporation prior to the issuance thereof and to all instruments the execution of which on behalf of the Corporation under its seal shall have been duly authorized in accordance with these By-Laws, and when so affixed he or she may attest the same. 11 (e) He or she shall properly maintain and file all books, reports, statements, certificates and all other documents and records required by law, the Certificate of Incorporation or these By-Laws. (f) He or she shall have charge of the stock books and ledgers of the Corporation and shall cause the stock and transfer books to be kept in such manner as to show at any time the number of shares of stock of the Corporation of each class issued and outstanding, the names (alphabetically arranged) and the addresses of the holders of record of such shares, the number of shares held by each holder and the date as of which each became such holder of record. (g) He or she shall sign certificates representing shares of the stock of the Corporation the issuance of which shall have been authorized by the Board of Directors. (h) He or she shall perform, in general, all duties incident to the office of Secretary and such other duties as may be given to him or her by these By-Laws or as may be assigned to him or her from time to time by the Board of Directors, the Chairman or the Vice Chairman. Section 4.07. Additional Officers. The Board of Directors may elect such other officers and agents as it may deem appropriate, and such other officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as may be determined from time to time by the Board of Directors. Section 4.08. Security. The Board of Directors may require any officer or agent of the Corporation to provide security for the faithful performance of his or her duties, in such amount and of such character as may be determined from time to time by the Board of Directors. ARTICLE V CAPITAL STOCK Section 5.01. Certificates of Stock. Every holder of stock in the Corporation shall be entitled to a certificate or certificates certifying the number of shares owned by him or her in such Corporation. Share certificates may be under seal, or facsimile seal, of the Corporation and shall be signed by (1) the Chairman and by the Secretary or (2) by any two officers of the Corporation so authorized to sign by a resolution of the Board of Directors, except that such signatures may be facsimile if such certificate is signed by a transfer agent, transfer clerk acting on behalf of such corporation 12 or registrar. Each certificate representing shares shall set forth upon the face thereof as at the time of the issue: (1) The name of the Corporation; (2) a statement that the Corporation is organized under the laws of Connecticut; (3) the name of the person to whom issued, or that the same is issued to bearer; (4) the number, class and designation of series, if any, of shares which such certificate represents; and (5) the par value of each share represented by such certificate or a statement that the shares are without par value. The Board of Directors of the Corporation may provide by resolution that some or all of any or all classes and series of its shares shall be uncertificated shares, provided that such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Within a reasonable time after the issuance of uncertificated shares, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates. [Section 33-676.] Section 5.02. Lost, Stolen or Destroyed Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed, upon delivery to the Board of Directors of an affidavit of the owner or owners of such certificate, setting forth such allegation. The Board of Directors may require the owner of such lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. Section 5.03. Transfers of Stock; Registered Shareholders (a) Shares of stock of the Corporation shall be transferable only upon the books of the Corporation kept for such purpose upon surrender to the Corporation or its transfer agent or agents of a certificate (unless such shares shall be uncertificated shares) representing shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer. Within a reasonable time after the transfer of uncertificated shares, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates. (b) The Board of Directors, subject to these By-Laws, may make such rules, regulations and conditions as it may deem expedient concerning the subscription for, issue, transfer and registration of, shares of stock. Except as otherwise provided by law, the Corporation, prior to due presentment for registration of transfer, may treat the registered owner of shares as the person exclusively entitled to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. [Section 33-678.] 13 Section 5.04. Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, to demand a special meeting or entitled to receive payment of any distribution, or for any other proper purpose, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but such period shall not exceed, in any case, 70 days. If the stock transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 full days immediately preceding the date of such meeting. In lieu of closing the stock transfer books, the Board of Directors by resolution may fix a date as the record date for any such determination of shareholders, such date in any case to be not earlier than the date such action is taken by the Board of Directors and not more than 70 days, and, in case of a meeting of shareholders, not less than 10 full days, immediately preceding the date on which the particular event, requiring such determination of shareholders, is to occur. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided in this Section 5.04, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date for the adjourned meeting, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. [Section 33-701.] Section 5.05. Transfer Agent and Registrar. The Board of Directors may appoint one or more transfer agents and one or more registrars, and may require all certificates representing shares to bear the signature of any such transfer agents or registrars. The same person may act as transfer agent and registrar for the Corporation. ARTICLE VI OFFICES Section 6.01. Registered Office. The registered office of the Corporation in the State of Connecticut shall be located in the City of Hartford. [Section 33-660.] Section 6.02. Other Offices. The Corporation may maintain offices or places of business at such other locations within or without the State of Connecticut as the Board of Directors may from time to time determine or as the business of the Corporation may require. 14 ARTICLE VII GENERAL PROVISIONS Section 7.01. Dividends. Subject to any Applicable provisions of law and the Certificate of Incorporation, dividends or other distributions upon the outstanding shares of the Corporation may be declared by the Board of Directors at any regular or Special Meeting of the Board of Directors and any such dividend or distribution may be paid in case, property or the Corporation's own shares. [Section 33-674, 33-687.] Section 7.02. Reserves. There may be set apart from time to time out of any funds of the Corporation available for dividends such reserve or reserves as the Board of Directors may deem appropriate and the Board of Directors may similarly modify or abolish any such reserve. Section 7.03. Execution of Instruments. Subject to the approval of the Board of Directors, the Chairman, the Vice Chairman, the Secretary or any other officer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors may authorize any other officer or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or limited to specific contracts or instruments. Section 7.04. Deposits. Any funds of the Corporation may be deposited from time to time in such banks, trust companies or other depositories as may be determined by the Board of Directors or by such officers or agents as may be authorized by the Board of Directors to make such determination. Section 7.05. Checks, Drafts, etc. All notes, drafts, bills of exchange, acceptances, checks, endorsements and other evidences of indebtedness of the corporation, and its orders for the payment of money shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as the Board of Directors, the Chairman or the Vice Chairman from time to time may determine. Section 7.06. Sale, Transfer, etc. of Securities. To the extent authorized by the Board of Directors, the Chairman or the Vice Chairman together with the Secretary may sell, transfer, endorse, and assign any shares of stock, bonds or other securities owned by or held in the name of the Corporation, and may make, execute and deliver in the name of the Corporation, under its corporate seal, any instruments that may be appropriate to effect any such sale, transfer, endorsement or assignment. 15 Section 7.07. Voting as Shareholder. Unless otherwise determined by resolution of the Board of Directors, the Chairman or the Vice Chairman shall have full power and authority on behalf of the Corporation to attend any meeting of shareholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock; such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting; and the Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons. All acts, votes and exercises of other rights, powers and privileges incident to the ownership of stock in subsidiaries of the Corporation shall be carried out only pursuant to resolutions of the Board of Directors adopted in accordance with these By-Laws. Section 7.08. Fiscal Year. Unless otherwise determined by the Board of Directors, the fiscal year of the Corporation shall, in each calendar year, commence on the first day of January of each year and shall terminate on the last day of December. Section 7.09. Seal. The seal of the Corporation shall be circular in form and shall contain the name of the Corporation, the year of its incorporation and the words "INCORPORATED CONNECTICUT." The seal may be used by causing it or a facsimile thereof to be impressed, affixed or reproduced, or may be used in any other lawful manner. Section 7.10. Books and Records Inspection. Except to the extent otherwise required by law, the books and records of the Corporation shall be kept at such place or places within or without the State of Connecticut as may be determined from time to time by the Board of Directors. ARTICLE VIII AMENDMENT OF BY-LAWS Section 8.01. Amendment. All By-Laws of the Corporation, whether adopted by the Board of Directors or the shareholders, shall be subject to amendment, alteration or repeal: (a) by the affirmative vote of the holders of not less than 80% of the voting power of shares entitled to vote at any Annual or Special Meeting of shareholders, the notice of which shall have specified or 16 summarized the proposed amendment, alternation, repeal or new By-Laws, or (b) by the affirmative vote of Directors holding a majority of the Directorships at any Regular or Special Meeting of Directors the notice or waiver of notice of which, unless none is required hereunder, shall have specified or summarized the proposed amendment, alteration, repeal or new By-Laws, provided, however, that Section 1.02 (regarding special meetings of shareholders), Section 2.02 (regarding the number of Directors), Section 2.07 (regarding quorum and voting requirements for Directors), Section 2.12 (regarding removal of Directors), Section 2.13 (regarding vacancies and newly created Directorships), Sections 3.01, 3.02, 3.06 and 3.07 (regarding Committees and their members), and this Section 8.01 (regarding amendments) may be amended, altered, or repealed only by the affirmative vote of either (i) the holders of not less than 80% of the voting power of shares entitled to vote at any Annual or Special Meeting of shareholders, the notice of which shall have specified or summarized the proposed amendment, alteration or repeal, or (ii) by a vote of 66-2/3% of the Board of Directors at any Regular or Special Meeting of Directors the notice of which shall have specified the proposed amendment, alteration or repeal. The shareholders may at any time provide in the By-Laws that any other specified provision or provisions of the By-Laws may be amended, altered or repealed only in the manner specified in the foregoing clause (a) or in the foregoing proviso, in which event such provision or provisions shall be subject to amendment, alteration or repeal only in such manner. [Section 33-806.] 17 EX-10.01 3 FIRST AMENDMENT FIRST AMENDMENT TO THE MBIA INC. 1987 STOCK OPTION PLAN WHEREAS, MBIA Inc. (the "Company") maintains the MBIA Inc. 1987 Stock Option Plan (the "Plan"); WHEREAS, pursuant to Section 17 of the Plan, the Company has reserved the right to amend the Plan; and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan is amended effective as of June 1, 1995 as follows: 1. Section 3(a) of the Plan is amended to read as follows: Subject to adjustment as provided in Section 14 below, the aggregate number of shares of Common Stock to be delivered upon exercise of all Options granted under the Plan shall not exceed 4,753,011 shares. 2. Section 6(d) of the Plan is amended to delete the second sentence thereof, and to add a new second sentence thereof, to read as follows: There shall be no limitation on the number of shares of Common Stock which an Optionee may be granted to purchase, except that no Optionee may be granted an Option to purchase shares of Common Stock in excess of 500,000 shares within any 12 month period (subject to adjustment as provided in Section 14 below) or (ii) the number of shares remaining available for Option grants under the Plan. IN WITNESS WHEREOF, the Company has caused this amendment to be executed by its duly authorized officers this 15th day of August, 1997. ATTEST MBIA INC. By: /s/ Louis G. Lenzi By: /s/ Kevin D. Silva --------------------------- ---------------------------- Secretary SECOND AMENDMENT TO THE MBIA INC. 1987 STOCK OPTION PLAN WHEREAS, MBIA Inc. (the "Company") maintains the MBIA Inc. 1987 Stock Option Plan (the "Plan"); WHEREAS, pursuant to Section 17 of the Plan, the Company has reserved the right to amend the Plan; and WHEREAS, the Company desires to amend the Plan; NOW, THEREFORE, the Plan is amended effective as of January 7, 1999 as follows: 1. Section 6(c) is amended to delete the words "approved by the Board of Directors" from the last sentence thereof. 2. Section 8 is amended to delete the word "The" at the beginning thereof, and to insert in lieu thereof the following: Except as otherwise expressly provided in the Plan to the contrary, the 3. Section 10 of the Plan (including the heading thereof) is amended to delete such Section in its entirety and to add a new section 10 in lieu thereof, to read as follows: 10. Transferability of Options and SARs. Unless the Committee (or any person or person to whom the Committee shall delegate the authority to administer the transferability of Stock Options and/or SARs) shall permit (on such terms and conditions as it shall establish) an Option (other than an Incentive Stock Option) or SAR to be transferred to (i) a member of the Participant's immediate family as determined by the Committee or its delegate; (ii) to a trust, partnership, limited liability company or similar vehicle for the benefit of the Participant and such immediate family members; or (iii) to a charity which is exempt from taxation under Section 501(c)(3) of the Code or a private foundation exempt from taxation under Section 509 of the Code (collectively, the "Permitted Transferees"), no Option or SAR shall be assignable or transferable except by will or the laws of descent and distribution, and except to the extent required by law, no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant. All rights with respect to Options or SARs granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or, if applicable, the Permitted Transferees. The rights of a Permitted Transferee shall be limited to the rights conveyed to such Transferee, who shall be subject to and bound by the terms of the agreement or agreements between the Participant and the Company. 4. Section 14 of the Plan is amended to delete such Section in its entirety and a new section 14 is added in lieu thereof to read as follows: (a) Recapitalization, etc. In the event of a stock dividend, stock split or recapitalization or a corporate reorganization in which the Company is a surviving corporation, including without limitation a merger, consolidation, split-up or spin-off or a liquidation or distribution of securities or assets (other than cash dividends), the number or kinds of shares subject to the Plan, the maximum number of shares which may be awarded to any Optionee as provided in Section 6(d), or any Option or SAR previously granted and the Option Price may be adjusted by the Committee as it determines to be appropriate in its sole discretion. Any fractional shares resulting from such adjustment may be eliminated. (b) Special Transactions. Except as provided in this Section 14(b) or Section 14(c) below, in the event of a Change of Control (as defined below), each Option and SAR (whether on not then exercisable) shall be canceled in exchange for a payment in cash of an amount equal to the excess, if any, of the Change of Control Price over the exercise price for such Option or SAR, regardless of the exercise schedule otherwise applicable to such Option or SAR. Notwithstanding the immediately preceding sentence, if there shall occur a Change of Control and the common equity of the Company is still registered under Section 12 (g) of the 1934 Act, no Option or SAR can be canceled and settled in cash without the consent of the holder thereof. (c) Alternative Awards. Notwithstanding Section 14(b) and except as otherwise provided in any agreement, no cancellation, acceleration of exercisability, vesting, cash settlement or other payment shall occur with respect to any Option or SAR or any class of Options or SARs if the Committee reasonably determines in good faith prior to the occurrence of a Change of Control that such Option or SAR shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted awards hereinafter called an "Alternative Award"), by a Participant's employer (or the parent or a Subsidiary of such employers) immediately following the Change of Control, provided that any such Alternative Award must: 2 (1) be based on stock which is traded on an established securities market, or which will be so traded within 60 days of the Change of Control; (2) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under such Option or SAR including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; (1) have substantially equivalent economic value to such Option or SAR (determined at the time of the Change of Control); and (3) have terms and conditions which provide that in the event that the Participant's employment is involuntarily terminated or constructively terminated, any conditions on a Participant's rights under, or exercis-ability applicable to, each such Alternative Award shall be waived or shall lapse, as the case may be and the Participant shall have until the earlier of the expiration of the term of such Option or SAR or the ninetieth day following the date of such termination (or such longer period following such termination as shall be established in a written agreement between the Company and the Participant) to exercise such Option or SAR. For this purpose, a constructive termination shall mean a termination by a Participant following a material reduction in the Participant's base salary or a Participant's incentive compensation opportunity or a material reduction in the Participant's responsibilities, in either case without the Participant's written consent; provided that if the Participant is otherwise a party to an agreement with the Company regarding the continuation of his or her employment following a Change of Control, the provisions of that agreement shall govern the determination of whether a constructive termination shall have occurred. (d) Definitions. For the purposes of this Section 14, the following terms shall have the meanings set forth below: A "Change of Control" shall be deemed to have occurred if (i) any person, as such term is currently used is Section 13(d) or l4(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13 d-3, as 3 promulgated under 1934 Act) of 25% or more of the Voting Power of the Company, (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 14(d)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that, such a division or sale shall not be a Change of Control for purposes of this Plan to the extent that, following such Corporate Event; the participant continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. "Change of Control Price" means the highest price per share of Stock offered in conjunction with any transaction resulting in a Change of Control (as determined in good faith by the Committee if any part of the offered price is payable other than in cash) or, in the case of a Change of Control occurring solely by reason of a change in the composition of the Board, the highest Fair Market Value of the Stock on any of the 30 trading days immediately preceding the date on which a Change of Control occurs. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors. 4 IN WITNESS WHEREOF, the Company has caused this amendment to be executed by its duly authorized officers and to be effective as of the 7th day of January 1999. MBIA INC. By: /s/ Kevin D. Silva ----------------------------- Its: ATTEST By: /s/ Louis G. Lenzi -------------------------- Its: Secretary 5 EX-10.10 4 EIGHTH AMENDMENT TO TRUST AGREEMENT EIGHTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS EIGHTH AMENDMENT, dated as of the first day of January, 1998, by and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance Corporation (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated December 31, 1991, with regard to the MBIA Inc. Employees Pension Plan and 401 (k) Salary Deferral Plan (individually and collectively, the "Plan"); and WHEREAS, the Trustee and the Sponsor now desire to amend said Trust Agreement as provided for in Section 13 thereof; NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the Trust Agreement by: (1) Amending Schedule "B" by restating the "Annual Participant Fee" and Sponsor Stock Trustee Fee sections as follows: o Annual Participant Fee $15.00 per participant*, subject to a $5,000 per year minimum, billed and payable quarterly. o To the extent that assets are invested in Sponsor Stock, 0.10% of such assets in the Trust payable pro rata quarterly on the basis of such assets as of the calendar quarter's last valuation date, but no less than $10,000 nor more than $50,000 per year. (2) Amending the "Trustee Fees" section of Schedule "B" to eliminate the Mutual Fund Trustee Fee. (3) Amending Schedule "B" to eliminate the Plan Sponsor Workstation fee. (4) Amending Schedule "B" by adding a new "Note" section as follows. Note: These fees have been negotiated and accepted based on the following Plan characteristics: total current plan assets of $79.1 million, current participation of 429 participants, current MIP assets of $6.7 million, current stock assets of $20.2 million and total Fidelity managed Mutual Fund assets of $52.2 million. Fees will be subject to revision if these Plan characteristics change significantly by either falling below or exceeding current or projected levels. Fees also have been based on the use of up to 11 investment options, and such fees will be subject to revision if additional investment options are added. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Eighth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By /s/ [ILLEGIBLE] 12/15/97 By /s/ [ILLEGIBLE] 1/23/98 ------------------------- ------------------------------ Date Vice President Date Fidelity Institutional Retirement Services Company - -------------------------------------------------------------------------------- A division of Fidelity Investments Institutional Services Company, Inc. 300 Puritan Way, MM3H Marlborough, MA 01752-3078 January 29, 1998 Mr. Alan Perlman MBIA Inc. 113 King Street Armonk, NY 10504 Dear Mr. Pearlman: Enclosed please find one fully-executed original of the Eighth Amendment to the Trust Agreement for your files. Please call Michelle Maziarz with any questions regarding this document. She can be reached at (508) 357-5028. Sincerely, /s/ Dianne Candido Dianne A. Candido Contracts Administration Assistant /dc Enclosure cc: Erin Delaney, I41A Mary Drake, MM3C Ann Emerson, TS213 Kara Rose Hearns, MM3I Wendy Ennis, KN3C MBIA MBIA Insurance Corporation 113 King Street Armonk, NY 10504 914 765 3880 Fax: 914 755 3299 e-mail: avin.silva@mbia.com Kevin D. Silva Senior Vice President Director, Management Services Schedule "E" Ms. Jacqueline W. McCarthy Fidelity Investment Institutional Operations Company 82 Devonshire Street Boston, Massachusetts 02109 MBIA Inc. Employees Plan, MBIA Inc. Employees Profit Sharing and 401 (k) Salary Deferral Plan Dear Ms. McCarthy: This letter is sent to you in accordance with Section 7(c) of the Trust Agreement, dated as of January 1, 1992, between MBIA and Fidelity Management Trust Company. I hereby designate Neil G. Budnick, Alan Pearlman and myself, as the individuals who may provide directions upon which Fidelity Management Trust Company shall be fully protected in relying. Only one such individual need provide any direction. The signature of each designated individual is set forth below and certified to be such. You may rely upon each designation and certification set forth in this letter until I deliver to you written notice of the termination of authority of a designated individual. Very truly yours Date: 3/10/99 /s/ Kevin D. Silva ----------------------------- Kevin D. Silva Senior Vice President Director, Management Services Designated Individuals: /s/ Neil G. Budnick - ------------------------------------- Neil G. Budnick President and Chief Financial Officer /s/ Kevin D. Silva - ------------------------------------- Kevin D. Silva Senior Vice President Director, Management Services /s/ Alan Pearlman - ------------------------------------- Alan Pearlman Vice President, Manager Compensation and Benefits NINTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMTANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS NINTH AMENDMENT, dated as of the first day of March, 1999, by and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance Corporation (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated December 31, 1991, with regard to the MBIA Inc. Employees Pension Plan and 401 (k) Salary Deferral Plan (individually and collectively, the "Plan"); and WHEREAS, the Trustee and the Sponsor now desire to amend said Trust Agreement as provided for in Section 13 thereof, NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the Trust Agreement by: (1) Amending Section 4(b), Available Investment Options, by redefining "Mutual Funds" as follows: (i) securities issued by investment companies advised by Fidelity Management & Research Company ("Fidelity Mutual Funds") and certain securities issued by registered investment companies not advised by Fidelity Management & Research Company ("Non-Fidelity Mutual Funds") (collectively referred to as "Mutual Funds"). (2) Amending Section 4(d), Mutual Funds, by inserting the following sentence before the first sentence: All transactions involving Non-Fidelity Mutual Funds shall be done in accordance with the Operational Guidelines for Non-Fidelity Mutual Funds attached hereto as Schedule "H". (3) Amending the "investment options" section of Schedules "A" and "C" by adding the following: -1838 Fixed Income Fund -1838 International Equity Fund -1838 Small Cap Equity Fund (4) Amending Schedule "B" by adding "Non-Fidelity Mutual Funds" as follows: Non-Fidelity Mutual Funds: No additional fee for the 1838 Funds. (5) Adding Schedule "H", Operational Guidelines for Non-Fidelity Mutual Funds, as attached. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Eighth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By /s/ [ILLEGIBLE] 3/11/99 By ------------------------- ------------------------- Date Vice President Date Schedule "H" OPERATIONAL GUIDELINES FOR NON-FIDELITY MUTUAL FUNDS Pricing By 7:00 p.m. Eastern Time ("ET") each Business Day, the Non-Fidelity Mutual Fund Vendor (Fund Vendor) will input the following information ("Price Information") into the Fidelity Participant Recordkeeping System ("FPRS") via the remote access price screen that Fidelity Investments Institutional Operations Company, Inc. ("FIIOC"), an affiliate of the Trustee, has provided to the Fund Vendor: (1) the net asset value for each Fund at the Close of Trading, (2) the change in each Fund's net asset value from the Close of Trading on the prior Business Day, and (3) in the case of an income fund or funds, the daily accrual for interest rate factor ("mil rate"). FIIOC must receive Price Information each Business Day (a "Business Day" is any day the New York Stock Exchange is open). If on any Business Day the Fund Vendor does not provide such Price Information to FIIOC, FIIOC shall pend all associated transaction activity in the Fidelity Participant Recordkeeping System ("FPRS") until the relevant Price Information is made available by Fund Vendor. Trade Activity and Wire Transfers By 7:00 a.m. ET each Business Day following Trade Date ("Trade Date plus One"), FIIOC will provide, via facsimile, to the Fund Vendor a consolidated report of net purchase or net redemption activity that occurred in each of the Funds up to 4:00 p.m. ET on the prior Business Day. The report will reflect the dollar amount of assets and shares to be invested or withdrawn for each Fund. FIIOC will transmit this report to the Fund Vendor each Business Day, regardless of processing activity. In the event that data contained in the 7:00 a.m. ET facsimile transmission represents estimated trade activity, FIIOC shall provide a final facsimile to the Fund Vendor by no later than 9:00 a.m. ET. Any resulting adjustments shall be processed by the Fund Vendor at the net asset value for the prior Business Day. The Fund Vendor shall send via regular mail to FIIOC transaction confirms for all daily activity in each of the Funds. The Fund Vendor shall also send via regular mail to FIIOC, by no later than the fifth Business Day following calendar month close, a monthly statement for each Fund. FIIOC agrees to notify the Fund Vendor of any balance discrepancies within twenty (20) Business Days of receipt of the monthly statement. For purposes of wire transfers, FIIOC shall transmit a daily wire for aggregate purchase activity and the Fund Vendor shall transmit a daily wire for aggregate redemption activity, in each case including all activity across all Funds occurring on the same day. Participant Communications The Fund Vendor shall provide internally-prepared fund descriptive information approved by the Funds' legal counsel for use by FIIOC in its written participant communication materials. FHOC shall utilize historical performance data obtained from third-party vendors (currently Morningstar, Inc., FACTSET Research Systems and Lipper Analytical Services) in telephone conversations with plan participants and in quarterly participant statements. The Sponsor hereby consents to FIIOC's use of such materials and acknowledges that FHOC is not responsible for the accuracy of such third-party information. FIIOC shall seek the approval of the Fund Vendor prior to retaining any other third-party vendor to render such data or materials under this Agreement. Compensation FIIOC shall be entitled to fees as set forth in a separate agreement with the Fund Vendor. EX-10.13 5 AMENDED AND RESTATED CREDIT AGREEMENT EXECUTION COPY ================================================================================ FIRST AMENDMENT to SECOND AMENDED AND RESTATED CREDIT AGREEMENT among MBIA INSURANCE CORPORATION (MBIA) THE BANKS SIGNATORY HERETO RABOBANK NEDERLAND New York Branch as Administrative Agent and DEUTSCHE BANK AG New York Branch as Documentation Agent ---------- Dated as of October 1, 1998 ---------- ================================================================================ FIRST AMENDMENT THIS FIRST AMENDMENT, dated as of October 1, 1998 (this "Amendment"), between MBIA INSURANCE CORPORATION, a New York stock insurance corporation ("MBIA"), the financial institutions which have executed this Amendment below as Banks (as defined below), COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK NEDERLAND", New York Branch ("Rabobank"), as Administrative Agent for the Banks (in such capacity, the "Administrative Agent") and individually as a Bank, and DEUTSCHE BANK AG, New York Branch, as Documentation Agent for the Banks (in such capacity, together with the Administrative Agent, the "Agents"); WHEREAS, the parties hereto are parties to the Second Amended and Restated Credit Agreement, dated as of October 1, 1997 (the "Credit Agreement"); WHEREAS, Credit Suisse First Boston, New York Branch, desires to resign as Administrative Agent for the Banks; the Majority Banks, with the consent of MBIA, desire to appoint Rabobank as successor Administrative Agent pursuant to the terms of the Credit Agreement, and Rabobank is willing to accept such appointment; and WHEREAS, the parties hereto desire, upon the terms and subject to the conditions hereinafter set forth, to extend the Expiration Date (as defined below) and to otherwise modify the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1 MODIFICATIONS TO LOAN DOCUMENTS Section 1.1. Defined Terms. Except as otherwise specified herein, terms used in this Amendment and defined in Exhibit A of the Credit Agreement shall have the meanings provided in such Exhibit A. Section 1.2. Amendments. (a) Section 3.3 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 3.3 Extension of Commitments. The Expiration Date may be extended from time to time with the consent of the Administrative Agent and all Banks (other than Nonextending Banks whose Commitments have been terminated), each in their sole discretion, as provided in this Section 3.3. Not later than August 1, 1999, and not later than each August 1 thereafter in respect of succeeding one-year extension periods provided for below, or such later date to which the Administrative Agent and the Majority Banks may consent in writing, MBIA may notify the Administrative Agent if MBIA desires to have the Expiration Date extended for a period of one year from the date on which it is then scheduled to occur. The Administrative Agent shall promptly give the Banks notice of its receipt of any such request and shall request each Bank to consent to such extension, unless the Administrative Agent has determined to withhold its consent to such extension. Such notice and request from the Administrative Agent to the Banks may be given by the Administrative Agent subject to a reservation by the Administrative Agent of its right to withhold consent to such extension at a later date. Each Bank which elects to give its consent to such extension shall deliver such consent to the Administrative Agent and MBIA prior to the later to occur of (a) 90 days following the date of MBIA'S request and (b) the August 1 of the year which is six years prior to then scheduled Expiration Date (or in each case such later date to which the Administrative Agent and MBIA have consented). Any Bank which has not given its consent within such period shall be deemed to be a "Nonextending Bank", and MBIA shall have the right at any time thereafter to elect to terminate the Commitment of such Nonextending Bank by not less than five Business Days' prior notice to such Nonextending Bank and the Administrative Agent unless, prior to the effectiveness of such termination, (i) any Loan has been made or (ii) any Default or Event of Default has occurred and is continuing. Any such termination shall be effective on the date specified in such notice." (b) The following definitions contained in Exhibit A to the Credit Agreement are hereby amended and restated to read in its entireties as follows: "'Base Rate' shall mean the higher of (i) the rate of interest announced by Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank Nederland", New York Branch, in New York City from time to time as its base rate, each change in such fluctuating interest rate to take effect simultaneously with the corresponding change in such base rate, but in no event in excess of the maximum interest rate permitted by applicable law and (ii) 1/2 of 1% per annum above the Bank's Federal Funds Rate (as defined below) for overnight funds. For such purpose, the 'Federal Funds Rate' shall mean, for any day, the fluctuating interest rate per annum at which said branch, as a branch of a foreign bank, in its sole discretion, can acquire federal funds in the New York City interbank term (or overnight, as the case may be) federal funds market or other funding sources available to said branch, through brokers of recognized standing, for a period and in an amount comparable to the period and amount requested by MBIA." "'Commitment Period' shall mean initially the period commencing on October 1, 1998 and ending on October 31, 2005 (or, if such day is not a Business Day, on the next preceding Business Day) and, from and after the date of any extension of the Expiration Date pursuant to Section 3.3 to a date later than October 31, 2005), shall mean the period commencing on the first day of November which immediately follows the 31st day of October which is seven years prior to the Expiration Date, and ending on the Expiration Date (or, if such day is not a Business Day, on the next preceding Business Day)." -3- "'Expiration Date' shall mean the date on which the right to obtain Loans terminates, initially October 31, 2005, as such date may be extended pursuant to Section 3.3." Section 1.3 Commitments. (a) The respective Commitments of the Banks are hereby amended so that, from and after October 7, 1998 until the termination or further modification thereof as provided in the Credit Agreement, such Commitments shall be as set forth on Schedule 1 to this Amendment. (b) The parties acknowledge that, after giving effect to certain notices of changes of address delivered on or prior to the date hereof, the respective addresses of the Banks for purposes of Section 10.7 of the Credit Agreement are as set forth on Schedule 1 to this Amendment. Section 1.4. Succession of Administrative Agent (a) Credit Suisse First Boston, New York Branch, hereby confirms that it has resigned as Administrative Agent, effective as of October 7, 1998. The Banks hereby waive notice of such resignation and hereby appoint Rabobank as successor Administrative Agent effective as of October 7, 1998, and MBIA hereby waives notice of such resignation and consents to such appointment, in each case pursuant to Section 8.7 of the Credit Agreement. The parties acknowledge that Rabobank, in its capacity as successor Administrative Agent, automatically and without further action of the parties becomes the successor Collateral Agent under the Security Agreement. The parties further acknowledge and hereby confirm that, as provided in Section 8.7 of the Credit Agreement, the provisions of Sections 8.2 through 8.5 of the Credit Agreement shall continue to inure to the benefit Credit Suisse First Boston, New York Branch, and its successors and assigns, in respect of any action taken or omitted to be taken by it in its capacity as Agent while it was an Agent under the Credit Agreement or any Loan Document, notwithstanding its resignation as an Agent thereunder. (b) From and after October 7, 1998, (i) the address of the Administrative Agent and the Collateral Agent for purposes of the Credit Agreement and Security Agreement shall be: 245 Park Avenue New York, New York 10167-0062 Attention: Angela Reilly Telecopy: (212) 309-5139 or as the Administrative Agent may direct by written notice to all other parties to the Credit Agreement; (ii) the Payment Office of the Administrative Agent shall be 245 Park Avenue, New York, New York 10167-0062, or such other office as the Administrative Agent may from time to time designate by notice to MBIA; and -4- (iii) each Note and Fronting Bank Note shall be payable at the office of the Administrative Agent at 245 Park Avenue, New York, New York 10167-0062, or such other office as the Administrative Agent may from time to time designate by notice to MBIA and the holder of such Note. (c) From and after October 7, 1998, each reference in the Credit Agreement (including in the exhibits thereto), the Notes, the Security Agreement, each Fronting Bank Supplement and the other Loan Documents to the name or address of the Administrative Agent shall be deemed to be (and, to the extent required, is hereby amended to be) a reference to the name or address, as the case may be, of Rabobank as set forth herein. (d) Each Bank hereby agrees to attach a copy of this Amendment to each Note and Fronting Bank Note held by it prior to any assignment or other transfer thereof or of any interest therein by such Bank, unless such Note or Fronting Bank Note has been issued or reissued by MBIA on or after the date of this Amendment and specifies the place of payment described in Section 1.4(b)(iii) above. (e) MBIA and Credit Suisse First Boston, New York Branch, hereby agree that the Agent Fee Letter, dated October 7, 1997, between them is hereby terminated effective as of appointment of Rabobank as successor Administrative Agent hereunder. (f) MBIA hereby agrees to deliver to the Rabobank, as Administrative Agent, promptly after the effectiveness of its appointment as Administrative Agent hereunder, a true and complete copy of Exhibit E to the Credit Agreement (list of insured obligations excluded from the Covered Portfolio), as most recently updated pursuant to the definition of "Covered Portfolio" contained in Exhibit A to the Credit Agreement. ARTICLE 2 CONDITIONS PRECEDENT Section 2. 1. Conditions Precedent to Amendment Effective Date. The provisions of Article I hereof shall become effective as of October 7, 1998 when this Amendment shall have been executed and delivered by MBIA, Rabobank, Credit Suisse First Boston, New York Branch, Deutsche Bank AG, New York Branch, as Documentation Agent, and each Bank and, except in the case of the provisions of Section 1.4, when the following conditions have been fulfilled to the reasonable satisfaction of the Agents. If such conditions shall not have been satisfied on or prior to October 13, 1998, this provisions of Article 1 (other than Section 1.4 thereof) shall not be given effect unless otherwise consented to by the Agents and the Majority Banks, but otherwise this Amendment shall remain in full force and effect. (a) There shall exist no Default or Event of Default, and all representations and warranties made by MBIA herein or in any of the Loan Documents shall be true and correct with the same effect as though such representations and warranties had been made at and as of such time. -5- (b) The Administrative Agent shall have received each of the following, in form and substance satisfactory to the Administrative Agent: (i) a certificate of any two of the President, any Vice President or the Treasurer of MBIA to the effect that the conditions set forth in Section 2.1(a) hereof have been satisfied and that no governmental filings, consents and approvals are necessary to be secured by MBIA in order to permit the borrowing under the Credit Agreement, as modified hereby, the grant of the Lien under the Security Agreement and the execution, delivery and performance in accordance with their respective terms of this Amendment and the other Loan Documents and the consummation of the transactions contemplated hereby and thereby, each of which shall be in full force and effect; (ii) copies of the duly adopted resolutions of the Board of Directors of MBIA, or an authorized committee thereof, authorizing the execution, delivery and performance in accordance with their respective terms of this Amendment and the other documents to be executed and delivered by MBIA described herein (collectively, the "Amendment Documents"), accompanied by a certificate of the Secretary or an Assistant Secretary of MBIA stating as to (A) the effect that such resolutions are in full force and effect, (B) the incumbency and signatures of the officers signing the Amendment Documents on behalf of MBIA, and (C) the effect that, from and after October 7, 1997, there has been no amendment, modification or revocation of the articles of incorporation or by-laws of MBIA; (iii) opinions of the General Counsel of MBIA and Kutak Rock, MBIA's counsel, each dated October 7, 1998, which are substantially to the effect set forth in the forms attached hereto as, respectively, Exhibits A and B; and (iv) such other documents, instruments, approvals (and, if reasonably requested by the Administrative Agent or the Majority Banks, duplicates or executed copies thereof certified by an appropriate governmental official or an authorized officer of MBIA) or opinions as the Administrative Agent or the Majority Banks may reasonably request. (c) The Administrative Agent shall have received reasonably satisfactory evidence that long-term obligations insured by MBIA are publicly assigned a rating of Aaa, by Moody's and AAA by S&P by reason of such insurance. (d) The Bank Fee Letter shall have been modified in a manner satisfactory to MBIA and the Agents and consented to by all of the Banks. (e) MBIA shall have entered into a replacement Agent Fee Letter with Rabobank, as Administrative Agent, in form and substance satisfactory to Rabobank. (f) Each Bank which is becoming a party to the Credit Agreement or which is increasing its Commitment shall have received a Note or an additional Note dated as of October 7, 1998, in a principal amount equal to the amount of its Commitment or of the increase in its Commitment, as applicable. -6- (g) The currently effective Fronting Bank Supplements and related Fronting Bank Notes, and fee letters shall have been modified in a manner satisfactory to MBIA, the Administrative Agent and each Fronting Bank affected by such modifications. (h) Credit Suisse First Boston, New York Branch, as resigning Collateral Agent, shall have executed and delivered to Rabobank, as Collateral Agent, assignments of each effective financing statement with respect to the Security Agreement. (i) Termination letters shall be executed by each of the Banks terminating its Commitment. (j) All corporate and legal proceedings and all instruments in connection with the transactions contemplated by this Amendment and the Loan Documents shall be satisfactory in form and substance to the Administrative Agent and its counsel. Section 2.2. Certificate as to Effective Date. A certificate of the Agents delivered to MBIA stating that the provisions of Article 1 shall have become effective shall be conclusive evidence thereof and shall be binding on MBIA, each Agent and each Bank. In delivering such certificate, and without limiting the general application of Section 8.8 or other provisions of Article 8 of the Credit Agreement to the actions of the Agents hereunder, the Agents shall be entitled to rely conclusively on the certificate of officers of MBIA delivered pursuant to Section 2.1(b)(i) as to the satisfaction of the conditions set forth in Section 2.1 (a). ARTICLE 3 REPRESENTATIONS AND WARRANTIES In order to induce the Agents and the Banks to enter into this Amendment and proceed with the transaction contemplated hereby, MBIA makes the following representations and warranties to the Agents and the Banks, which shall survive the execution and delivery of this Amendment and the making of any Loans: Section 3.1. Due Authorization. Etc. The execution, delivery and performance by MBIA of the Amendment Documents and the Loan Documents as amended thereby are within its corporate powers, have been duly authorized by all necessary corporate action and do not and will not (i) violate any provision of any law, rule, regulation (including, without limitation, the New York Insurance Law, the Investment Company Act of 1940, as amended, or Regulations T, U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the corporate charter or by-laws of MBIA, (ii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected, or (iii) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA (other than as contemplated by the Loan Documents), other than, in the case of clauses (ii) and (iii), breaches, defaults or Liens which could not materially and adversely affect the business, assets, -7- operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any Loan Document. Section 3.2. Approvals. No consent, approval or other action by, or any notice to or filing with any court or administrative or governmental body is or will be necessary for the valid execution, delivery or performance by MBIA of the Amendment Documents or the Loan Documents as amended thereby. Section 3.3. Enforceability. Each Amendment Document and each Loan Document as amended thereby constitutes a legal, valid and binding obligation of MBIA, enforceable against MBIA in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, whether such matter is heard in a court of law or a court of equity. Section 3.4. Financial Statements, etc. (i) MBIA has heretofore furnished to the Agents (i) the audited consolidated and unaudited consolidating balance sheets of MBIA Inc. and its subsidiaries at December 31, 1997, the related audited consolidated statements of income, changes in stockholders' equity and financial position or cash flows, as the case may be, and unaudited consolidating statements of income for the year ended December 31, 1997, and (ii) the unaudited consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries as of March 31 and June 30, 1998, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 1998, the six months ended June 30, 1998. Such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and present fairly the consolidated financial position and consolidated results of operations and cash flows of MBIA Inc. and its subsidiaries and the financial position and results of operations and cash flows of MBIA at the dates and for the periods indicated therein. There has been no material adverse change in the consolidated financial position or consolidated results of operations or cash flows of MBIA Inc. and its subsidiaries taken as a whole or of MBIA since June 30, 1998. (ii) MBIA has heretofore furnished to the Agents its annual statements and its financial statements as filed with the Department for the year ended December 31, 1997 and its quarterly statements and financial statements as filed with the Department for the periods ended March 31, 1998 and June 30, 1998. Such annual and quarterly statements and financial statements were prepared in accordance with the statutory accounting principles set forth in the New York Insurance Law, all of the assets described therein were the absolute property of MBIA at the dates set forth therein, free and clear of any liens or claims thereon, except as therein stated, and each such Annual Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of MBIA as of such dates and of its income and deductions therefrom for the year or quarter ended on such dates. (iii) MBIA has heretofore furnished to the Agents a copy of the annual report on Form 10-K of MBIA Inc. for the fiscal year ended December 31, 1997, its quarterly reports on Form 10-Q of MBIA Inc. for each of the quarters ended March 31, 1998 and June 30, 1998 and each current report on Form 8-K filed by MBIA Inc. on or after January 1, 1998, each as filed with the Securities and Exchange Commission. Such annual, quarterly and current reports were prepared in -8- accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 3.5. Covered Portfolio. Substantially all of the Insured Obligations in the Covered Portfolio are insured by MBIA under Insurance Contracts in the form or forms heretofore supplied to the Agents in accordance with MBIA's underwriting criteria as heretofore disclosed to the Agents, and in MBIA's reasonable judgment such Insured Obligations represent an overall risk of loss (based on all factors including without limitation investment quality and geographical and market diversification) which is not materially greater than the risk of loss represented by all of MBIA's Insured Obligations as of the date hereof MBIA has heretofore supplied to Rabobank copies of each such form which was earlier supplied to Credit Suisse First Boston, New York Branch, as Administrative Agent, or to the Documentation Agent and has heretofore disclosed to Rabobank the underwriting criteria which was earlier disclosed to Credit Suisse First Boston, New York Branch, as Administrative Agent, or to the Documentation Agent. Section 3.6. Confirmation of Representations and Warranties. MBIA hereby confirms that its representations and warranties set forth in the Credit Agreement (including without limitation those set forth in Article 5 of the Restated Credit Agreement) are true and correct as of the date hereof. Section 3.7. Disclosure. There is no fact known to MBIA which materially adversely affects the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any Amendment Document or any Loan Document as amended thereby which has not been set forth in this Amendment, in the financial statements or reports required to be delivered pursuant to Section 3.4 hereof. ARTICLE 4 MISCELLANEOUS Section 4.1. Credit Agreement. Except as expressly modified as contemplated hereby, the Credit Agreement and the other Loan Documents are hereby confirmed to be in full force and effect in accordance with their respective terms. This Amendment is intended by the parties to constitute an amendment and modification to, and otherwise to constitute a continuation of, the Credit Agreement and the Loan Documents, and is not intended by any party and shall not be construed to constitute a novation thereof or of any Debt of MBIA hereunder. Section 4.2. Survival. All covenants, agreements, representations and warranties made herein or in any Loan Document or in any certificate, document or instrument delivered pursuant hereto or thereto shall survive the effective date hereof, the making of any Loan and the occurrence of the Expiration Date and shall continue in full force and effect so long as principal of or interest on any Loan, Note or Fronting Bank Note remains outstanding or unpaid, any other amount payable by MBIA under the Credit Agreement as amended hereby, any Note, Fronting Bank Note or any other Loan Document remains unpaid or any other obligation of MBIA to perform any other act hereunder or under the Credit Agreement as amended hereby, any Note, Fronting Bank -9- Note or any other Loan Document remains unsatisfied or the Banks have any obligation to make a Loan or any other advance of moneys to MBIA under the Credit Agreement as amended hereby. Section 4.3. Severabilily. Any provision of this Amendment which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 4.4. Successors and Assigns. This Amendment is a continuing obligation and binds, and the benefits hereof shall inure to, the parties hereto and their respective successors and assigns; provided that MBIA may not transfer or assign any or all, of its rights or obligations hereunder except as permitted by Section 10.8 of the Credit Agreement. Section 4.5. Amendments. No provision of this Amendment shall be waived, amended or supplemented except as provided in Section 10.12 of the Credit Agreement. Section 4.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK Section 4.7. Headings. Section headings in this Amendment are included herein for convenience or reference only and shall not constitute a part of this Amendment for any other purpose. Section 4.8. Counterparts. This Amendment may be executed in several counterparts, each of which shall be regarded as the original and all of which shall constitute one and the same Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. MBIA, INSURANCE CORPORATION By /s/ Julliette S. Tehrani ---------------------------------------- Name: Julliette S. Tehrani Title: Executive Vice President CFO & Treasurer -10- COOPERATIEVE CENTRALE RAIFFEISEN BOERENLEENBANK B.A. "RABOBANK NEDERLAND", New York Branch, as successor Administrative Agent and as a Bank By /s/ [ILLEGIBLE] ---------------------------------------- Name: [INITIALED] Title: By /s/ Dana W. Hemenway ---------------------------------------- Name: Dana W. Hemenway Title: Vice President -11- DEUTSCHE BANK, AG, New York Branch, as Documentation Agent and as a Bank By /s/ John S. McGill ---------------------------------------- Name: John S. McGill Title: Vice President By /s/ Gayma Z. Shivriarain ---------------------------------------- Name: Gayma Z. Shivriarain Title: Vice President -12- CREDIT SUISSE FIRST BOSTON, New York Branch, as resigning Administrative Agent and as a Bank By /s/ Jay Chall ---------------------------------------- Name: Jay Chall Title: Director By /s/ Andrea E. Shkane ---------------------------------------- Name: Andrea E. Shkane Title: Vice President -13- CAISSE DES DEPOTS ET CONSIGNATIONS, as a credit facility provider By /s/ D.L. Askren ---------------------------------------- Name: D.L. Askren Title: Authorized Signer By /s/ [ILLEGIBLE] ---------------------------------------- Name: [ILLEGIBLE] Title: Authorized Signer -14- BAYERISCHE LANDESBANK GIROZENTRALE, New York Branch, as a Bank By /s/ Scott Allison ---------------------------------------- Name: Scott Allison Title: First Vice President By /s/ Alexander Kohnert ---------------------------------------- Name: Alexander Kohnert Title: Vice President -15- LANDESBANK HESSEN-THURINGEN GIROZENTRALE, New York Branch, as a Bank By /s/ Lisa S. Pent ---------------------------------------- Name: Lisa S. Pent Title: Senior Vice President Manager By /s/ John A. Sarno ---------------------------------------- Name: John A. Sarno Title: President & Portfolio Manager -16- LLOYDS BANK PLC By /s/ Amy Vespasiano ---------------------------------------- Name: AMY VESPASIANO Title: VICE PRESIDENT STRUCTURED FINANCE V024 By /s/ Louise Miller ---------------------------------------- Name: Louise Miller Title: Assistant Vice President Structured Finance M256 -17- WESTDEUTSCHE LANDESBANK GIROZENTRALE, New York Branch, as a Bank By /s/ Lillian Tung Lum ---------------------------------------- Name: Lillian Tung Lum Title: Vice President By /s/ Anne T. McKenna ---------------------------------------- Name: Anne T. McKenna Title: Associate -18- FLEET NATIONAL BANK, as a Bank By /s/ E.B. Shelley ---------------------------------------- Name: E.B. Shelley Title: Vice President -19- THE CHASE MANHATTAN BANK, as a Bank By /s/ Helen L. Newcomb ---------------------------------------- Name: Helen L. Newcomb Title: Vice President -20- DEUTSCHE GIROZENTRALE DEUTSCHE KOMMUNALBANK, as a Bank By /s/ Dr. N. Hasslinger ---------------------------------------- Name: Dr. N. Hasslinger Title: Senior Vice President By /s/ St. Wagner ---------------------------------------- Name: St. Wagner Title: Vice President -21- BANCO SANTANDER, S.A., New York Branch, as a Bank By /s/ Edward M. O'Loghien ---------------------------------------- Name: Edward M. O'Loghien Title: Vice President Asset Backed Finance Group By /s/ John Hennessy ---------------------------------------- Name: JOHN HENNESSY Title: MANAGER ASSET BACKED FINANCE GROUP -22- KBC BANK, N.V., as a Bank By /s/ Robert Snauffer ---------------------------------------- Name: ROBERT SNAUFFER Title: FIRST VICE PRESIDENT By /s/ Marcel Claes ---------------------------------------- Name: MARCEL CLAES Title: DEPUTY GENERAL MANAGER -23- NORDDEUTSCHE LANDESBANK GIROZENTRALE, New York Branch, as a Bank By /s/ Stephanie Finnen ---------------------------------------- Name: Stephanie Finnen Title: VP By /s/ Stephen K. Hunter ---------------------------------------- Name: Stephen K. Hunter Title: SVP -24- CREDIT LOCAL DE FRANCE, New York Agency, as a Bank By /s/ David Weinstein ---------------------------------------- Name: DAVID WEINSTEIN Title: VICE PRESIDENT By /s/ James R. Miller ---------------------------------------- Name: JAMES R. MILLER Title: GENERAL MANAGER CLF NY AGENCY -25- THE FIRST NATIONAL BANK OF CHICAGO, as a Bank By /s/ Louis DiFranco ---------------------------------------- Name: LOUIS DIFRANCO Title: VICE PRESIDENT -26- EXHIBIT A TO FIRST AMENDMENT Form of Opinion of General Counsel of MBIA [date] Each of the Banks which are parties to the Credit Agreement referred to herein c/o Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch, as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Deutsche Bank AG, New York Branch, as Documentation Agent 31 West 52nd Street New York, NY 10019 Re: First Amendment, dated as of October 1, 1998, to Second Amended and Restated Credit Agreement dated as of October 1, 1997, with MBIA Insurance Corporation Ladies and Gentlemen: I am General Counsel of MBIA Insurance Corporation, a New York stock insurance corporation ("MBIA"). This opinion is being given in connection with First Amendment, dated as of October 1, 1998 (the "Amendment"), to the Second Amended and Restated Credit Agreement dated as of October 1, 1997 (as amended by the Amendment, the "Credit Agreement") among MBIA, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland), New York Branch, as a Bank and as Administrative Agent, Deutsche Bank AG, New York Branch, as a Bank and as Documentation Agent, and the other Banks signatory thereto. All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. As General Counsel to MBIA, I am familiar with its Restated Charter and its By-Laws, as amended to date, and I have responsibility for supervision of MBIA's insurance regulatory compliance. I have examined such certificates of public officials, such certificates of officers of MBIA and copies A-1 certified to my satisfaction of such corporate documents and records of MBIA and of such other papers as I have deemed relevant and necessary for the opinions set forth below. In all such examinations, I have assumed the genuineness of all signatures, the authority to sign and the authenticity of all documents submitted to me as originals. I have also assumed the conformity with the originals of all documents submitted to me as copies. I have relied upon certificates of public officials and of officers of MBIA with respect to the accuracy of factual matters contained therein which were not independently established. Based upon the foregoing, it is my opinion that: (a) MBIA is a stock insurance corporation duly incorporated and validly existing in good standing under the laws of the State of New York and has the corporate power and all requisite licenses and franchises required to carry on its insurance and other business, as now being conducted in the State of New York and in each other jurisdiction where the nature of the business transacted by it makes such qualification necessary, except any jurisdiction other than the State of New York where failure to so qualify would not have a material adverse effect on the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under the Amendment, the Credit Agreement, the additional Notes dated October 7, 1998 being issued to certain parties, the amended and restated Bank Fee Letter dated as of October 7, 1998 and the replacement Agent Fee Letter dated as of October 7, 1998 (the "Transaction Documents"). (b) The execution, delivery and performance of the Transaction Documents are within the corporate powers of MBIA, have been duly authorized by all necessary corporate action and do not (i) violate any provision of the Restated Charter of By-Laws of MBIA, (ii) violate any provision of law, rule, regulation (including without limitation, the New York Insurance Law, the Investment Company Act of 1940, as amended, or Regulations T, U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA the violation of which would affect the validity or enforceability of any of the Transaction Documents or the ability of MBIA to perform its obligations under the Transaction Documents, (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected or (iv) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA (other than as contemplated by the Loan Documents), other than, in the case of clauses (iii) and (iv), breaches, defaults or Liens which could not materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under the Transaction Documents. (c) To the best of my knowledge, no consent, approval or other action by, or any notice to or filing with, any court or administrative or governmental body is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. (d) To the best of my knowledge, there is no action, suit, proceeding or investigation before or by any court, arbitrator or administrative or governmental body pending or threatened against MBIA, wherein an adverse decision, ruling or finding would materially and adversely affect (i) the business, assets, operations or financial condition of MBIA, (ii) the transactions contemplated by the Credit Agreement or (iii) the validity or enforceability of the Transaction Documents. A-2 (e) To the best of my knowledge, MBIA is not in violation of any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the Restated Charter or By-Laws of MBIA, or in default under any material indenture, agreement, lease or instrument to which it is a party or by which it or any of its properties may be subject or bound, where such violation or default may result in a material adverse effect on the business, assets, operations or financial condition of MBIA or on its ability to perform its obligations under the Transaction Documents. (f) To the best of my knowledge, MBIA is in compliance with the New York Insurance Law and the regulations of the Department thereunder and with all other applicable federal state and other laws, rules and regulations relating to its insurance and other business, except with respect to failures, if any, to comply which singly or in the aggregate do not have a material adverse effect on the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any of the Transaction Documents. (g) All of the issued and outstanding capital stock of MBIA is owned beneficially and of record by MBIA Inc., subject to no Liens. There are no options or similar rights of any Person to acquire any such capital stock or any other capital stock of MBIA. This opinion is being furnished to you and your participants in connection with the execution of the Credit Agreement, and it is not to be used, circulated, quoted or otherwise referred to for any purpose without my express written consent. Very truly yours, [General Counsel] A-3 EXHIBIT B TO FIRST AMENDMENT Form of Opinion of Kutak, Rack [date] Each of the Banks which are parties to the Credit Agreement referred to herein c/o Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch, as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Deutsche Bank AG, New York Branch, as Documentation Agent 31 West 52nd Street New York, NY 100 1 9 Re: First Amendment, dated as of October 1, 1998, to Second Amended and Restated Credit Agreement dated as of October 1, 1997, with MBIA Insurance Corporation Ladies and Gentlemen: This opinion is furnished to you in connection with the First Amendment, dated as of October 1, 1998 (the "Amendment"), to the Second Amended and Restated Credit Agreement dated as of October 1, 1997 (as amended by the Amendment, the "Credit Agreement") among MBIA, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland), New York Branch, as a Bank and as Administrative Agent, Deutsche Bank AG, New York Branch, as a Bank and as Documentation Agent, and the other Banks signatory thereto. All capitalized terms used herein and not otherwise defined have the meanings assigned thereto in the Credit Agreement. As used herein, "Transaction Documents" means the Amendment, the Credit Agreement, the additional Notes dated October 7, 1998 being issued to certain parties, the amended and restated Bank Fee Letter dated as of October 7, 1998 and the replacement Agent Fee Letter dated as of October 7, 1998. B-1 We have acted as special counsel to MBIA in connection with the execution and delivery of the Transaction Documents. In this connection, we have examined the Transaction Documents and such certificates of public officials, such certificates of officers of MBIA, and copies certified to our satisfaction of such corporate documents and records of MBIA, and such other documents as we have deemed necessary or appropriate for the opinions set forth below. We have relied upon such certificates of public officials and of officers of MBIA with respect to the accuracy of factual matters contained therein which were not independently established. We have also assumed (i) the due execution and delivery, pursuant to due authorization, of each document referred to in the immediately preceding paragraph by all parties other than MBIA to such document, (ii) the authenticity of all such documents submitted to us as originals, (iii) the genuineness of all signatures and (iv) the conformity to the originals of all such documents submitted to us as copies. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that: 1. MBIA is a stock insurance corporation, duly incorporated and validly existing under the laws of the State of New York, and is licensed and authorized to carry on its business under the laws of the State of New York. 2. Each Transaction Document has been duly executed and is a valid and binding obligation of MBIA enforceable in accordance with its terms, except that such enforceability may be limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors' rights generally and by general principles of equity and the enforceability as to rights to indemnity thereunder as may be subject to limitations of public policy. 3. The execution, delivery and performance of the Transaction Documents do not (a) violate any provision of the Restated Charter or Bylaws of MBIA or (b) violate any provision of law (including without limitation the New York Insurance Law or the Investment Company Act of 1940, as amended) or, to the best of our knowledge, any rule or regulation (including without limitation Regulation T, U or X of the Board of Governors of the Federal Reserve System) presently in effect having applicability to MBIA the violation of which would (i) affect the validity or enforceability of any Transaction Document or the ability of MBIA to perform its obligations thereunder, (ii) adversely affect the Banks or their rights under any Transaction Document or (iii) materially adversely affect the business, assets, operations or financial condition of MBIA. 4. To the best of our knowledge, no consent, approval or other action by or any notice to or filing with any court or administrative or governmental body is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. No consent, approval or other action by or any notice to or filing with the Department is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. 5. Except with respect to MBIA's obligations to pay the principal of and interest on the Loans, the obligations of MBIA under the Transaction Documents will rank, under the New York Insurance Law, at least pari passu in priority of payment with all other unsecured obligations of MBIA, including without limitation MBIA's obligation to pay claims under Insurance Contracts B-2 under the New York Insurance Law, subject, however, to statutory priorities granted to certain claims under Sections 7426 and 7435 of the New York Insurance Law. 6. The effectiveness of the Transaction Documents does not adversely affect the opinions set forth in paragraphs 6 and 7 of our opinion dated November 30, 1993, delivered in connection with the first restatement of the Credit Agreement, dated as of such date, with respect to the Security Interest (as defined in such opinion) and the collateral assignment of Collateral referred to therein. No filings under the UCC are required to perfect or to continue the perfection of the Security Interest (subject to the matters described in the paragraph following paragraph 7 of such opinion) in favor of the Collateral Agent for the benefit of the Banks in all of MBIA's right, title and interest in and to the Collateral, to the extent that the Security Interest can be perfected by the filing of financing statements under the UCC. We note that the filing of an assignment of filed financing statements by the predecessor Collateral Agent to the successor Collateral Agent pursuant to Section 9-405 of the UCC may be required for the successor Collateral Agent to exercise certain rights of a secured party of record with respect to such financing statements. In rendering the opinions expressed herein, we express no opinion as to the laws of any jurisdiction other than the State of New York and the federal laws of the United States of America. This opinion is being famished to you and your participants solely in connection with the execution of the Amendment, and it is not to be used, circulated, quoted or otherwise referred to for any purpose without our express written consent. Very truly yours, B-3 SCHEDULE 1 TO FIRST AMENDMENT BANKS ADDRESSES AND COMMITMENTS Rabo Deutsche order of comm./alpha Name and Notice Address of Bank Commitment - ------------------------------- ---------- Cooperative Centrale Raiffeisen- $100,000,000 Boerenleenbank B.A. "Rabobank Nederland", New York Branch 245 Park Avenue New York, NY 10167 Attn: Angela R. Reilly Deutsche Bank AG, New York Branch $165,000,000 31 West 52nd Street New York, NY 10019 Attn: Clinton W. Johnson, Director Caisse des Depots et Consignations $100,000,000 CDC North America, Inc. 9 West 57th Street - 36th Floor New York, NY 10019 Attn: David L. Askren, Senior Vice President Credit Suisse First Boston, $100,000,000 Eleven Madison Avenue New York, NY 10010-3629 Attn: James Lee Bayerische Landesbank Girozentrale, $50,000,000 New York Branch 560 Lexington Avenue New York, NY 10022 Attn: Scott Allison Landesbank Hessen-Thuringen Girozentrale, $50,000,000 New York Branch 420 Fifth Avenue New York, NY 10018 Attn: Lisa Pent Lloyds Bank Plc, $50,000,000 New York Branch 575 Fifth Avenue, 18th Floor New York, NY 10017 Attn: Louise Miller Westdeutsche Landesbank Girozentrale, $50,000,000 New York Branch 1211 Avenue of the Americas New York, NY 10036 Attn: Lillian Tung Lum Fleet National Bank $30,000,000 777 Main Street, CT-MO 0250 Hartford, CT 06115 Attn: Elizabeth Shelley The Chase Manhattan Bank $25,000,000 270 Park Avenue - 20th Floor New York, NY 10017 Attn: Helen Newcomb Deutsche Girozentrale Deutsche $25,000,000 Kommunalbank Taunusanlage 10 Postfach 11 0542 D-60040 Frankfurt Am Main 11 GERMANY Attn: Stephen Wagner Banco Santander, S.A., $20,000,000 New York Branch 45 East 53rd Street New York, NY 10022 Attn: Greta Greathouse -2- KBC Bank, N.V. $20,000,000 125 West 55th Street New York, NY 1001 9 Attn: Kate McCarthy Eric Raskin Norddeutsche Landesbank Girozentrale, $20,000,000 New York Branch 1270 Avenue of the Americas New York, NY 10020 Attn: Jens Beerman Credit Local de France, $10,000,000 New York Agency 450 Park Avenue, 3rd Floor New York, NY 10022 Attn: Ben Hollaster The First National Bank of Chicago $10,000,000 153 West 51st Street New York, NY 10019 Attn: Louis Defranco TOTAL: $825,000,000 -3- EX-10.25 6 EMPLOYEE STOCK OWNERSHIP AGREEMENT AMENDMENT NO. 2 TO THE CapMAC Employee Stock Ownership Plan WHEREAS, CapMAC Holdings ("the Company"), a Delaware corporation has maintained the CapMAC Employee Stock Ownership (the Plan) for the Employees of CapMAC Services, Inc.; and WHEREAS, is a stock for stock exchange the Company has merged its assets and operations with those of MBIA ("the Employer"), effective February 17, 1998; and WHEREAS, the Employer wishes to amend the Plan formula used to allocate shares that are released from the suspense account each year; and WHEREAS, the Employer wishes to allocate a limited number of shares under the CapMAC ESOP for the short period January 1, 1998 through February 17, 1998 for those Participants who were formerly employed by CapMAC and who were in active service on February 17, 1998 based on amounts paid on the ESOP loan through such date; and WHEREAS, Section 15.03 of the Plan allows the Employer to amend the Plan at any time; and NOW, THEREFORE, the Plan amended as follows: 1. Effective February 17, 1998, Section 6.01(a) of the Plan shall be redesignated Section 6.01(a)(i) and a new paragraph (a)(ii) shall be added to 6.01(a) to read as follows: 6.01 Allocation of Contributions (a)(ii) Notwithstanding anything herein to the contrary, the Account maintained for each Participant will be credited of February 17, 1998 with Participant's allocable share of (i) Shares purchased by the Trust Fund using cash contributed by or on behalf of the Participating Company employing such Participant (or contributed directly to the Trust Fund) and (ii) Shares released from the Suspense Subfund pursuant to Section 63 (a)(ii) and allocable to the contribution made by or on behalf of such Participating Company pursuant to Section 6.4. The Allocation of contributions of each Participating Company during the period January I through February 17, 1998 shall be made only to the Accounts of those Participants who were Employees of a Participating Company as of February 17, 1998. Shares shall be allocated for this period in accordance with Section 6.1 (b) except that Compensation as defined in Section 6.1 (b), shall be limited to Compensation earned from January 1, 1998 through February 17, 1998. For the period from February 18, 1998 through December 31, 1998 and subsequent Plan years shares shall be allocated in accordance with 6.1(a)(i) except that Compensation as defined in 6.l(b) shall be limited to Compensation earning from February 18, 1998 through December 31, 1998 and 6.l(b). 2. Effective January 1, 1998, section 6.3(a) shall be redesignated as section 6.3(a)(i) and an additional paragraphs (a)(ii) and (a)(iii) shall be added thereto to read as follows: (a)(ii) Notwithstanding anything herein to the contrary, for the period beginning January 1 through February 17, 1998 the number of shares released from the Suspense Subfund shall equal the number of unreleased Shares attributable to such Exempt Loan immediately before such release multiplies by the Special Release Fraction. For purposes of this Section 6.3 (a)(ii) the term "Special Release Fraction" shall mean a fraction, the numerator of which is the amount of principal and interest paid on the Exempt Loan for the period January 1, 1998 to February 17, 1998 and the denominator of which is the sum of the numerator plus the principal and interest to be paid on such Exempt Loan for the remainder of the 1998 year and all future years during the term of such Exempt Loan (determined without reference to any possible extensions or renewals thereof). For purposes of computing the denominator of the Release Fraction under this Section 6.3(a)(ii), if the interest rate on the Exempt Loan is variable, the interest rate to be paid subsequently to February 17, 1998 shall be calculated by assuming that the interest rate in effect as of February 17, 1998 will be the interest rate in effect for the remainder of the term of the Exempt Loan. Notwithstanding the foregoing, in the event such Exempt Loan shall be repaid with the proceeds of a subsequent Exempt Loan (the "Substitute Loan"), such repayment shall not operate to release all such Shares in the Suspense Subfund, but, rather such release shall be effected pursuant to the foregoing provisions of this Section on the basis of payments of principal and interest on such Substitute Loan. (iii) For the period February 18, 1998 through December 31, 1998 and Plan years thereafter, the provisions of Section 6.3(a)(i) shall apply. IN WITNESS THEREOF this amendment No.2 has been executed this 22nd day of December, 1998. MBIA By: /s/ Kevin D. Silva ---------------------------------- Name: Kevin D. Silva Title: S.V.P. Management Services EX-10.30 7 REINSURANCE AGREEMENT REINSURANCE AGREEMENT This Agreement is dated as of the 1st day of April, 1998, between Capital Markets Assurance Corporation (hereinafter referred to as the "Ceding Company") and MBIA Insurance Corporation (hereinafter referred to as the "Reinsurer"). W I T N E S S E T H: WHEREAS, the Ceding Company and the Reinsurer are both stock insurance corporations and domiciled in New York; and WHEREAS, the Ceding Company has written financial guaranty insurance; and WHEREAS, the Ceding Company and the Reinsurer are members of the same holding company system; and WHEREAS, the Ceding Company presently intends to cease writing such insurance, except to honor outstanding commitments; and WHEREAS, the Ceding Company desires to code and the Reinsurer desires to reinsure the Ceding Company's net liability on all insurance of the Ceding Company now in force and hereafter written by the Ceding Company to honor outstanding commitments on the terms hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and understandings contained herein and upon the terms and conditions set forth below, the parties hereto agree as follows: ARTICLE 1 Cover: 1.1 The Ceding Company hereby cedes as reinsurance to the Reinsurer, and the Reinsurer hereby accepts as reinsurance from the Ceding Company, one hundred percent (100%) of the net liability and other obligations of the Ceding Company under all Covered Business, as defined in Article 2, including extra contractual obligations relating thereto to the extent that such obligations are reinsurable under the Insurance Law of the State of New York. ARTICLE 2 Covered Business: 2.1 Covered Business shall mean all of the Ceding Company's net retention on its financial guaranty insurance business, whether written on a direct basis or assumed from other insurers, and shall include the Ceding Company's interest in any contingent commissions due or which become due to the Ceding Company from other reinsurers ("third party reinsurers"). In determining said net retention, amounts paid or payable to the Ceding Company by its third party reinsurers shall be excluded, except where such payable amounts are more than ten (IO) days overdue. Any recovery of such overdue amounts from a third party reinsurer which occurs subsequent to payment by the Reinsurer hereunder shall be credited pursuant to Article 9. ARTICLE 3 Definitions: 3.1 As used in this Agreement: (a) "Effective Letter of Credit" shall mean, as of any date, an Eligible Letter of Credit delivered to the Ceding Company and having an expiration date at least one month after such date. (b) "Eligible Letter of Credit" shall mean a clean irrevocable letter of credit in favor of the Ceding Company issued by a bank chosen by the Reinsurer, complying with the requirements of applicable law to allow the Ceding Company to claim reserve credit for liabilities ceded hereunder and complying with requirements of the Insurance Department of the State of New York. (c) "Effective Security" shall mean, as of any date, the full amount of Effective Letters of Credit. (d) "Ceded Reserves" shall mean, as of any date, the aggregate. of the unearned premium reserve and the loss reserve, if any, required to be carried by the Ceding Company for the liabilities ceded hereunder in accordance with statutory accounting practices, before giving effect to any reserve credit for the cession made hereby (but after giving effect to the cessions and assumptions referred to in Article 2 regardless of whether the Ceding Company is permitted to claim reserve credit for the cessions referred to in Article 2). (e) "Contingency Reserve" shall mean contingency reserve as defined in Section 6903 (a) of the New York Insurance Law. 2 ARTICLE 4 Period: 4.1 This Reinsurance Agreement shall be effective as of 11:59 P.M., Eastern Standard Time, April 1, 1998 (the "Effective Time"). This Reinsurance Agreement will be terminated or amended in accordance with Section 6906(a) of the New York Insurance Law. ARTICLE 5 Reinsurance Premium and Accounts: 5.1 The Ceding Company shall pay to the Reinsurer as of the Effective Time a reinsurance premium equal to the Ceded Reserves and the Contingency Reserve as of the Effective Time. An estimated payment of such initial reinsurance premium shall be made not later than the Effective Time. As soon as practicable but no later than 60 days thereafter, the Ceding Company will provide the Reinsurer with a portfolio representing the Ceded Reserves and the Contingency Reserve as of the Effective Time and if the Ceded Reserves and the Contingency Reserve differ from the estimated payment made pursuant to the preceding sentence, an appropriate adjusting payment between the parties shall be made. Such portfolio shall also set forth the Contingency Reserve required to be established as of the Effective Time. 5.2 Within 20 days following the end of each month, the Ceding Company will render or cause to be rendered a net account to the Reinsurer for the month showing the Ceding Company's interest in the following: (a) Net written premium accounted for during the month (being the gross written premium less returns and cancellations and net of reinsurance ceded by the Ceding Company to third-party reinsurers). (b) Any contingent commission paid to the Ceding Company by third-party reinsurers during the month. (c) Any loss or loss expense paid during the month on losses occurring during the term of this Agreement. (d) Subrogations, salvage or other recoveries made during the month on losses occurring during the term of the Agreement. 5.3 Within 15 days after receipt of the account, the Reinsurer shall send confirmation of the account or relevant objections to the Ceding Company. 3 (a) The Ceding Company shall remit any net balance payable to the Reinsurer at the same time as the account is rendered. (b) The Reinsurer shall remit any net balance payable to the Ceding Company at the same time as the account is confirmed, but at the latest within 15 days following receipt of the account. (c) Even if the Reinsurer has objections in regard to the account, the uncontested balance shall be immediately remitted. Following the immediate clarification of the questions which have arisen, the difference in amount shall be settled at once by the party in debt. 5.4 Within 30 days following the end of each calendar quarter, the Ceding Company shall furnish a report as to reserves, together with any other information which the Reinsurer may require for its accounting records and which may be reasonably available to the Ceding Company. 5.5 Within 45 days following the end of each calendar year, the Ceding Company shall furnish to the Reinsurer for the calendar year a summary account split up per underwriting year for 100% of the business ceded hereunder, together with any other information which the Reinsurer may require for its accounting records and which may be reasonably available to the Ceding Company. 5.6 No ceding commission shall be payable in respect of this Reinsurance Agreement. 5.7 All settlements of account under this Agreement between the Ceding Company and the Reinsurer shall be made in cash or its equivalent. ARTICLE 6 Security: 6.1 When a governing body of any jurisdiction in which the Ceding Company legally operates or to which it submits requires as a condition to credit for the reinsurance provided by this Agreement that the Reinsurer post a Letter of Credit for the benefit of the Ceding Company, establish a Trust Account for the benefit of the Ceding Company or deposit funds under the control of the Ceding Company, the Reinsurer shall post and maintain such a Letter of Credit, establish such a Trust Account, or deposit such funds in the form and amount necessary to permit the Ceding Company to avoid on any statutory financial statement filed by the Ceding Company the penalty to surplus which would result from the loss of credit for the reinsurance. 6.2 Notwithstanding any other provisions of this Agreement, it is agreed that any Letter of Credit provided under section 6.1 of this Article 6 shall be drawn upon 4 and utilized by the Ceding Company or its successors in interest only for one or more of the following purposes: (a) to reimburse the Ceding Company for losses and loss expenses paid by the Ceding Company under this Agreement; (b) to fund an account with the Ceding Company in an amount at least equal to the deduction allowed for the reinsurance provided by this agreement, from the Ceding Company's liabilities for Policies ceded under the agreement, such amount to include, if applicable, but not be limited to, amounts for contingency reserves, loss reserves for paid, reported and incurred but not reported ("IBNR") losses, loss expense reserves and unearned premium reserves; or (c) to pay any other amounts the Ceding Company claims are due under the Agreement. All of the foregoing should be applied without diminution because of insolvency on the part of the Ceding Company or Reinsurer. 6.3 If the Reinsurer elects to provide a Letter of Credit under section 6.1 of this Article, the Reinsurer shall cause the Letter of Credit to be issued, in place and effective no later than the "as of date" of the first quarterly filing prepared by the Ceding Company for the appropriate regulatory authority after the effective date of this Agreement. ARTICLE 7 Service of Covered Business: 7.1 The Ceding Company shall service the Covered Business with respect to collection and payment of premium, notice, service of process and investigation, settlement, defense and payment of claims on all Covered Business and with respect to all reinsurance ceded by the Ceding Company to third-party reinsurers. The Ceding Company will remit all premiums collected to the Reinsurer and third-party reinsurers in accordance with their respective interests. ARTICLE 8 Claims: 8.1 The Ceding Company shall settle or defend claims. The Reinsurer shall, within one hour of receiving written or telephonic notice of any claim, (any telephonic notice to be subsequently confirmed in writing) pay the Reinsurer's share of all losses and loss expenses, excluding unallocated loss expenses. 5 ARTICLE 9 Salvage: 9.1 The Ceding Company will credit the Reinsurer with its proportionate share of any recoveries, salvages or reimbursements on account of claims and settlements involving reinsurance hereunder. 9.2 In the event there are any recoveries, salvages or reimbursements recovered subsequent to a loss settlement, it is agreed that, if the expenses incurred in obtaining salvage or other recoveries are less than the amount recovered, such expenses shall be borne by each party in the proportion that each party benefits from the recoveries, otherwise, the amount recovered shall first be applied to the reimbursement of the expense of recovery and the remaining expense shall be borne by the Ceding Company and the Reinsurer in proportion to the liability of each party for the loss before such recovery had been obtained. Expenses hereunder shall exclude all office expenses and salaries of officers and employees of the Ceding Company. ARTICLE 10 Access to Records: 10.1 The Reinsurer shall, at all reasonable times during the term of this Agreement and thereafter, have the right to inspect the books, records and documents of the Ceding Company with respect to the Covered Business. ARTICLE 11 Reserves: 11.1 The Reinsurer agrees to maintain proper unearned premium, loss and loss expense reserves upon the liabilities ceded hereunder in accordance with accounting practices prescribed or permitted by each of the Insurance Departments of the States of New York and California. The Reinsurer shall also establish as of the Effective Time a statutory contingency reserve in an amount equal to the statutory contingency reserve required to be carried by the Ceding Company immediately prior to the Effective Time. ARTICLE 12 Original Conditions: 12.1 All insurances and reinsurances falling under this Agreement shall be subject to the same terms, rates, conditions and waivers, and to the same modifications, alterations and cancellations, as the respective policies constituting the Covered Business. 6 ARTICLE 13 Follow the Fortunes: 13.1 This Agreement shall be construed as an honorable undertaking between the parties hereto and shall not be defeated by technical legal construction, it being the intention of this Agreement that the fortunes of the Reinsurer shall follow the fortunes of the Ceding Company. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Agreement. ARTICLE 14 Errors and Omissions: 14.1 Any inadvertent error, omission or delay in connection with this Agreement shall not affect the liability which otherwise would have attached to either party, provided such error, omission or delay is rectified as soon as possible after discovery. ARTICLE 15 Offset: 15.1 Each party hereto shall have, and may exercise at any time and from time to time, the right to offset any balance or balances, whether on account of premiums or on account of losses or otherwise, due from such party to the other (or, if more than one, any other) party hereto under this Agreement, and may offset the same against any balance or balances due or to become due to the former from the latter under the same. The party asserting the right of offset shall have and may exercise such right whether the balance or balances due or to become due to such party from the other are on account of premiums or on account of losses or otherwise and regardless of the capacity, whether as assuming reinsurer or as ceding company, in which each party acted under the agreement or, if more than one, the different agreements involved. In the event of the insolvency of a party hereto, offsets shall be allowed only in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. ARTICLE 16 Insolvency: 16.1 In the event of the insolvency of the Ceding Company or its successor in interest this reinsurance shall be payable directly to the Ceding Company, or directly to its liquidator, receiver, conservator or statutory successor, on the basis of the liability of the Ceding Company without diminution because of the insolvency of the 7 Ceding Company or because the liquidator, receiver, conservator or statutory successor of the Ceding Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Ceding Company shall give written notice to the Reinsurer of the pendency of the claim against the Ceding Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Ceding Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Ceding Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Ceding Company solely as a result of the defense undertaken by the Reinsurer. 16.2 The Reinsurance shall be payable by the Reinsurer to the Ceding Company or to its liquidator, receiver, conservator or statutory successor, except as provided by section 4118 (a) of the New York Insurance Law or except (a) where the policy specifically provided another payee of such reinsurance in the event of the insolvency of the Ceding Company and (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Ceding Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Ceding Company to such payees. ARTICLE 17 Miscellaneous: 17.1 This Agreement shall be governed by the laws of the State of New York. 17.2 The parties hereto agree to execute and deliver such farther instruments and do such farther acts as may be necessary and proper to carry out the purposes of this Reinsurance Agreement. 17.3 If any provision of this Reinsurance Agreement or the applicability thereto to any person or circumstance is held invalid, the remainder of this Reinsurance Agreement, including the remainder of the section in which such provision appears, or the applicability of such provision to other persons or circumstances, shall not be affected thereby. 17.4 This Reinsurance Agreement contains the entire understanding of the parties with respect to the subject matter hereto. There are no restrictions, promises, warranties, covenants or undertakings with respect to such subject matter, other than 8 those expressly set forth herein. This Reinsurance Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. This Reinsurance Agreement is binding on and shall inure to the benefit of the parties hereto, their successors and assigns. At Armonk, Capital Markets Assurance Corporation New York By: /s/ [ILLEGIBLE] ------------------------ President At Armonk, MBIA Insurance Corporation New York By: /s/ Richard Weill ------------------------ President 9 EX-10.31 8 REINSURANCE AGREEMENT REINSURANCE AGREEMENT This Agreement dated as of the lst day of January, 1999, between MBIA Insurance Corp. of Illinois, (formerly known as Bond Investors Guaranty Insurance Company), an Illinois corporation (hereinafter referred to as the "Ceding Company"), and MBIA Insurance Corporation, (formerly known as Municipal Bond Investors Assurance Corporation), a New York stock insurance company (hereinafter referred to as the "Reinsurer"). WITNESSETH: WHEREAS, the Ceding Company is an Illinois corporation; and WHEREAS, the Ceding Company has written municipal bond and municipal note guaranty insurance; and WHEREAS, the Ceding Company has ceased writing such insurance, except to honor outstanding commitments, and has entered into a Reinsurance Agreement dated December 31, 1990 with the Reinsurer (the "Prior Agreement"); and WHEREAS, the parties hereto now desire to terminate the Prior Agreement on a cutoff basis as of the Effective Date hereof, and to replace the Prior Agreement with this Agreement in connection with any losses paid on and after the Effective Date hereof; and WHEREAS, the Ceding Company desires to cede and the Reinsurer desires to reinsure the Ceding Company's liability on all insurance of the Ceding Company now in force and hereafter written by the Ceding Company to honor outstanding commitments on the terms hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and understandings contained herein and upon the terms and conditions set forth below, the parties hereto agree as follows: ARTICLE I Cover: 1.1 The Ceding Company hereby cedes as reinsurance to the Reinsurer, and the Reinsurer hereby accepts as reinsurance from the Ceding Company, one hundred percent (100%) of the net liability and other obligations of the Ceding Company under all Covered Business, as defined in Article 2, including extra contractual obligations relating thereto. In no event shall coverage be provided to the extent that such coverage is not permitted under New York law. ARTICLE 2 Covered Business: 2.1 Covered Business shall mean all of the Ceding Company's net retention on business written by the Ceding Company. Such net retention: (a) is net of cessions by the Ceding Company to other reinsurers (the "third party reinsurers"); (b) includes all liabilities assumed by the Ceding Company; (c) includes the Ceding Company's interest in any contingent commissions due or which become due to the Ceding Company from third-party reinsurers. ARTICLE 3 Definitions: 3.1 As used in this Agreement: (a) "Effective Letter of Credit" shall mean, as of any date, an Eligible Letter of Credit delivered to the Ceding Company and having an expiration date at least one month after such date. (b) "Eligible Letter of Credit" shall mean a clean irrevocable letter of credit in favor of the Ceding Company issued by a bank chosen by the Reinsurer, complying with the requirements of applicable law to allow the Ceding Company to claim reserve credit for liabilities ceded hereunder and complying with requirements of the Insurance Department of the State of New York and the Illinois Department of Insurance. (c) "Effective Security" shall mean, as of any date, the full amount of Effective Letters of Credit. (d) "Ceded Reserves" shall mean, as of any date, the aggregate of the unearned premium reserve and the loss reserve, if any, required to be carried by the Ceding Company for the liabilities ceded hereunder in accordance with statutory accounting practices, before giving effect to any reserve credit for the cession made hereby (but after giving effect to the cessions and assumptions referred to in Article 2 regardless of whether the Ceding Company is permitted to claim reserve credit for the cessions referred to in Article 2). (e) "Contingency Reserve" shall mean contingency reserve as defined in Section 6903(a) of the New York Insurance Law. 2 ARTICLE 4 Period: 4.1. This Reinsurance Agreement shall be effective as of 12:01 A.M., Eastern Standard Time, January 1, 1999 (the "Effective Time"). This Reinsurance Agreement will be terminated or amended in accordance with Section 6906(a) of the New York Insurance Law. Cancellation will be at year end after first giving 90 days notice. ARTICLE 5 Reinsurance Premium and Accounts: 5.1. The Ceding Company shall pay to the Reinsurer as of the Effective Time a reinsurance premium equal to the Ceded Reserves and the Contingency Reserve as of the Effective Time. An estimated payment of such initial reinsurance premium shall be made not later than the Effective Time. As soon as practicable but no later than 60 days thereafter, the Ceding Company will provide the Reinsurer with a portfolio representing the Ceded Reserves and the Contingency Reserve as of the Effective Time and if the Ceded Reserves and the Contingency Reserve differ from the estimated payment made pursuant to the preceding sentence, an appropriate adjusting payment between the parties shall be made. Such portfolio shall also set forth the contingency reserve required to be established as of the Effective Time. 5.2 Within 20 days following the end of each month, the Ceding Company will render or cause to be rendered a net account to the Reinsurer for the month showing the Ceding Company's interest in the following: (a) Net written premium accounted for during the month (being the gross written premium less returns and cancellations and net of reinsurance ceded by the Ceding Company to third-party reinsurers). (b) Any contingent commission paid to the Ceding Company by third-party reinsurers during the month. (c) Any loss or loss expense paid during the month on losses occurring during the term of this Agreement. (d) Subrogations, salvage or other recoveries made during the month on losses occurring during the term of the Agreement. 3 5.3 Within 15 days after receipt of the account, the Reinsurer shall send confirmation of the account or relevant objections to the Ceding Company. (a) The Ceding Company shall remit any net balance payable to the Reinsurer at the same time as the account is rendered. (b) The Reinsurer shall remit any net balance payable to the Ceding Company at the same time as the account is confirmed, but at the latest within 15 days following receipt of the account. (c) Even if the Reinsurer has objections in regard to the account, the uncontested balance shall be immediately remitted. Following the immediate clarification of the questions which have arisen, the difference in amount shall be settled at once by the party in debt. 5.4 Within 30 days following the end of each calendar quarter, the Ceding Company shall furnish a report as to reserves, together with any other information which the Reinsurer may require for its accounting records and which may be reasonably available to the Ceding Company. 5.5 Within 45 days following the end of each calendar year, the Ceding Company shall furnish to the Reinsurer for the calendar year a summary account split up per underwriting year for 100% of the business ceded hereunder, together with any other information which the Reinsurer may require for its accounting records and which may be reasonably available to the Ceding Company. 5.6 No ceding commission shall be payable in respect of this Reinsurance Agreement. 5.7 All settlements of account under this Agreement between the Ceding Company and the Reinsurer shall be made in cash or its equivalent. ARTICLE 6 Security: 6.1 When a governing body of any jurisdiction in which the Ceding Company legally operates or to which it submits requires as a condition to credit for the reinsurance provided by this Agreement that the Reinsurer post a Letter of Credit for the benefit of the Ceding Company, establish a Trust Account for the benefit of the Ceding Company or deposit funds under the control of the Ceding Company, the Reinsurer shall post and maintain such a Letter of Credit, establish such a Trust Account, or deposit such funds in the form and amount necessary to permit the Ceding Company to avoid on any statutory financial statement filed by the Ceding Company the penalty to surplus which would result from the loss of credit for the reinsurance. 4 6.2 Notwithstanding any other provisions of this Agreement, it is agreed that any Letter of Credit provided under section 6.1 of this Article 6 shall be drawn upon and utilized by the Ceding Company or its successors in interest only for one or more of the following purposes: (a) to reimburse the Ceding Company for losses and loss expenses paid by the Ceding Company under this Agreement; (b) to fund an account with the Ceding Company in an amount at least equal to the deduction allowed for the reinsurance provided by this Agreement, from the Ceding Company's liabilities for Policies ceded under the Agreement, such amount to include, if applicable, but not be limited to, amounts for contingency reserves, loss reserves for paid, reported and incurred but not reported ("IBNR") losses, loss expense reserves and unearned premium reserves; or (c) to pay any other amounts the Ceding Company claims are due under the Agreement. All of the foregoing should be applied without diminution because of insolvency on the part of the Ceding Company or Reinsurer. 6.3 If the Reinsurer elects to provide a Letter of Credit under section 6.1 of this Article, the Reinsurer shall cause the Letter of Credit to be issued, in place and effective no later than the "as of date" of the first quarterly filing prepared by the Ceding Company for the appropriate regulatory authority after the effective date of this Agreement. ARTICLE 7 Service of Covered Business: 7.1 The Ceding Company shall service the Covered Business with respect to collection and payment of premium, notice, service of process and investigation, settlement, defense and payment of claims on all Covered Business and with respect to all reinsurance ceded by the Ceding Company to third-party reinsurers. The Ceding Company will remit all premiums collected to the Reinsurer and third-party reinsurers in accordance with their respective interests. ARTICLE 8 Claims: 8.1 The Ceding Company shall settle or defend claims. The Reinsurer shall, within one hour of receiving written or telephonic notice of any claim, (any telephonic notice to be subsequently confirmed in writing) pay the Reinsurer's share of all losses and loss expense, excluding unallocated loss expense. 5 ARTICLE 9 Salvage: 9.1 The Ceding Company will credit the Reinsurer with its proportionate share of any recoveries, salvages or reimbursements on account of claims and settlements involving reinsurance hereunder. 9.2 In the event there are any recoveries, salvages or reimbursements recovered subsequent to a loss settlement, it is agreed that, if the expenses incurred in obtaining salvage or other recoveries are less than the amount recovered, such expenses shall be borne by each party in the proportion that each party benefits from the recoveries, otherwise, the amount recovered shall first be applied to the reimbursement of the expense of recovery and the remaining expense shall be borne by the Ceding Company and the Reinsurer in proportion to the liability of each party for the loss before such recovery had been obtained. Expenses hereunder shall exclude all office expenses and salaries of officers and employees of the Ceding Company. ARTICLE 10 Access to Records: 10.1 The Reinsurer shall, at all reasonable times during the term of this Agreement and thereafter, have the right to inspect the books, records and documents of the Ceding Company with respect to the Covered Business. ARTICLE 11 Reserves: 11.1 The Reinsurer agrees to maintain proper unearned premium, loss and loss expense reserves upon the liabilities ceded hereunder in accordance with accounting practices prescribed or permitted by each of the Insurance Departments of the States of New York and California. The Reinsurer shall also establish as of the Effective Time a statutory contingency reserve in an amount equal to the statutory contingency reserve required to be carried by the Ceding Company immediately prior to the Effective Time. ARTICLE 12 Original Conditions: 12.1 All insurances and reinsurances falling under this Agreement shall be subject to the same terms, rates, conditions and waivers, and to the same modifications, alterations and cancellations, as the respective policies constituting the Covered Business. 6 ARTICLE 13 Follow the Fortunes: 13.1 This Agreement shall be construed as an honorable undertaking between the parties hereto and shall not be defeated by technical legal construction, it being the intention of this Agreement that the fortunes of the Reinsurer shall follow the fortunes of the Ceding Company. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Agreement. ARTICLE 14 Errors and Omissions: 14.1 Any inadvertent error, omission or delay in connection with this Agreement shall not affect the liability which otherwise would have attached to either party, provided such error, omission or delay is rectified as soon as possible after discovery. ARTICLE 15 Offset: 15.1 Each party hereto shall have, and may exercise at any time and from time to time, the right to offset any balance or balances, whether on account of premiums or on account of losses or otherwise, due from such party to the other (or, if more than one, any other) party hereto under this Agreement, and may offset the same against any balance or balances due or to become due to the former from the latter under the same. The party asserting the right of offset shall have and may exercise such right whether the balance or balances due or to become due to such party from the other are on account of premiums or on account of losses or otherwise and regardless of the capacity, whether as assuming reinsurer or as ceding company, in which each party acted under the agreement or, if more than one, the different agreements involved. In the event of the insolvency of a party hereto, offsets shall be allowed only in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. 7 ARTICLE 16 Insolvency: 16.1 In the event of the insolvency of the Ceding Company or its successor in interest this reinsurance shall be payable directly to the Ceding Company, or directly to its liquidator, receiver, conservator or statutory successor, on the basis of the liability of the Ceding Company without diminution because of the insolvency of the Ceding Company or because the liquidator, receiver, conservator or statutory successor of the Ceding Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Ceding Company shall give written notice to the Reinsurer of the pendency of the claim against the Ceding Company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Ceding Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Ceding Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Ceding Company solely as a result of the defense undertaken by the Reinsurer. 16.2 The Reinsurance shall be payable by the Reinsurer to the Ceding Company or to its liquidator, receiver, conservator or statutory successor, except as provided by section 4118 (a) of the New York Insurance Law or except (a) where the policy specifically provided another payee of such reinsurance in the event of the insolvency of the Ceding Company and (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Ceding Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Ceding Company to such payees. ARTICLE 17 Effective Date: Termination of Prior Agreement 17.1 This Agreement shall take effect as of January 1, 1999 (the "Effective Date") and shall apply to all losses paid by the Ceding Company on or after that date and during the term hereof. 17.2 The parties agree that the Prior Agreement shall be terminated as of said Effective Date, and the Reinsurer shall not be liable under the Prior Agreement for losses on or after the Effective Date, which shall be covered by this Agreement. 8 17.3 The Ceding Company shall transfer to the Reinsurer all Ceded Reserves and Contingency Reserves held by it as of the Effective Date of this Agreement in connection with Covered Business subject to the Prior Agreement. ARTICLE 18 Miscellaneous: 18.1 This Agreement shall be governed by the laws of the State of New York. 18.2 The parties hereto agree to execute and deliver such further instruments and do such further acts as may be necessary and proper to carry out the purposes of this Reinsurance Agreement. 18.3 If any provision of this Reinsurance Agreement or the applicability thereto to any person or circumstance is held invalid, the remainder of this Reinsurance Agreement, including the remainder of the section in which such provision appears, or the applicability of such provision to other persons or circumstances, shall not be affected thereby. 18.4 This Reinsurance Agreement contains the entire understanding of the parties with respect to the subject matter hereto. There are no restrictions, promises, warranties, covenants or undertakings with respect to such subject matter, other than those expressly set forth herein. This Reinsurance Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. This Reinsurance Agreement is binding on and shall inure to the benefit of the parties hereto, their successors and assigns. At Armonk, MBIA INSURANCE CORP. OF ILLINOIS New York By: /s/ David H. Elliott ------------------------------ President David H. Elliott At Armonk, MBIA INSURANCE CORPORATION New York By: /s/ Richard L. Weill ------------------------------ President Richard L. Weill 9 EX-10.32 9 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER BY AND AMONG MBIA INC., MBIA ACQUISITION, INC. and 1838 INVESTMENT ADVISORS, INC. Dated as of June 19, 1998 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS ............................................................ 1 ARTICLE II THE MERGER Section 2.01. The Merger .............................................. 6 Section 2.02. Effective Time of Merger ................................ 6 Section 2.03. Certificate of Incorporation of Surviving Corporation ... 6 Section 2.04. Bylaws of Surviving Corporation ......................... 7 Section 2.05. Directors and Officers of Surviving Corporation ......... 7 Section 2.06. The Closing ............................................. 7 Section 2.07. Conversion of Acquisition Common Stock .................. 7 Section 2.08. Conversion of 1838 Common Stock ......................... 7 Section 2.09. Exchange of 1838 Certificates ........................... 7 Section 2.10. Stock Transfer Books .................................... 8 Section 2.11. Reorganization .......................................... 8 Section 2.12. Nonsolicitation ......................................... 8 ARTICLE III OTHER AGREEMENTS Section 3.01. Disclosure Schedule ..................................... 9 Section 3.02. Legal Conditions to Merger .............................. 9 Section 3.03. Public Announcements .................................... 9 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF 1838 Section 4.01. Ownership of Stock ...................................... 10 Section 4.02. Ownership of 1838, L.P .................................. 10 Section 4.03. Existence, Good Standing and Authority .................. 10 Section 4.04. Capital Stock ........................................... 10 Section 4.05. Subsidiaries and Investments ............................ 11 Section 4.06. No Violation or Conflict ................................ 11 Section 4.07. Litigation .............................................. 11 Section 4.08. Financial Statements .................................... 11 Section 4.09. Title to Properties and Assets .......................... 11 Section 4.10. Existing Contracts ...................................... 12 Section 4.11. Contractual Defaults .................................... 12 Section 4.12. Reserved ................................................ 12 Section 4.13. Insurance Policies ...................................... 12 Section 4.14. Employee Benefit Plans .................................. 12 Section 4.15. Status .................................................. 14 Section 4.16. Taxes ................................................... 14 Section 4.17. Employee Matters ........................................ 16 Section 4.18. Credit Agreements ....................................... 16 Section 4.19. Record Books ............................................ 16 Section 4.20. MPCM Loan/Stockholder Distribution Obligations .......... 16 Section 4.21. Accounts Receivable/Working Capital ..................... 16 Section 4.22. Customer Contracts ...................................... 16 Section 4.23. Affiliate and Insider Transactions ...................... 17 Section 4.24. Compliance With Laws .................................... 17 Section 4.25. Absence of Certain Developments ......................... 18 Section 4.26. Material Adverse Change ................................. 19 Section 4.27. Bank Accounts and Powers of Attorney .................... 19 Section 4.28. Broker's or Finder's Fees ............................... 19 Section 4.29. Business Activities of 1838 ............................. 19 Section 4.30. Regulatory Documents .................................... 19 Section 4.31. Ineligible Persons ...................................... 20 Section 4.32. Funds ................................................... 20 Section 4.33. Investment Company Contracts ............................ 20 Section 4.34. Technology and Intellectual Property .................... 21 Section 4.35. Year 2000 ............................................... 21 Section 4.36. Redemption Agreement .................................... 21 Section 4.37. Former Stockholders ..................................... 21 Section 4.38. Disclosure .............................................. 22 ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF MBIA AND ACQUISITION Section 5.01. Organization ............................................ 22 Section 5.02. Authorization; Enforceability ........................... 22 Section 5.03. No Violation or Conflict ................................ 22 Section 5.04. Litigation .............................................. 22 Section 5.05. Brokers ................................................. 23 Section 5.06. SEC Reports and Financial Statements .................... 23 Section 5.07. Material Adverse Change ................................. 23 Section 5.08. MBIA Stock .............................................. 23 Section 5.09. Capitalization .......................................... 23 Section 5.10. Certain Tax-Related Matters ............................. 23 ii ARTICLE VI COVENANTS OF 1838 Section 6.01. Conduct of Business of 1838 ............................. 24 Section 6.02. Approval by Investment Company Contract Clients ......... 25 Section 6.03. Approval by Investment Advisory Contract Clients ........ 26 Section 6.04. Insurance ............................................... 26 Section 6.05. Maintenance of Records .................................. 26 Section 6.06. Full Access ............................................. 26 Section 6.07. Exclusivity ............................................. 26 Section 6.08. Accounting Matters ...................................... 27 ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MBIA AND ACQUISITION Section 7.01. No Material Adverse Change .............................. 27 Section 7.02. Compliance with Agreement ............................... 27 Section 7.03. Hart Scott Rodino, Act .................................. 27 Section 7.04. Pooling Opinion ......................................... 27 Section 7.05. 1838 Stockholder Approval ............................... 27 Section 7.06. 1838 Opinion Letter ..................................... 27 Section 7.07. Approval by 1838, L.P.'s Clients ........................ 27 Section 7.08. No Litigation ........................................... 28 Section 7.09. Representations and Warranties Accurate ................. 28 Section 7.10. Officer's Certificate ................................... 28 Section 7.11. Employment of Key Employees ............................. 28 Section 7.12. No Adverse Claims ....................................... 28 Section 7.13. Additional Documentation ................................ 28 Section 7.14. Approval by Board ....................................... 28 Section 7.15. Joint Advisory Agreement ................................ 28 Section 7.16. Purchase of Minority Interest ........................... 28 Section 7.17. MBIA Common Stock Price ................................. 28 Section 7.18. Final Disclosure Schedule ............................... 29 ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF 1838 AND THE 1838 STOCKHOLDERS Section 8.01. Compliance With Agreement ............................... 29 Section 8.02. Proceedings and Instruments Satisfactory ................ 29 Section 8.03. No Litigation ........................................... 29 Section 8.04. Representations and Warranties of MBIA and Acquisition .. 29 Section 8.05. MBIA Opinion Letter ..................................... 29 iii Section 8.06. Approvals ............................................... 29 Section 8.07. No Material Adverse Change .............................. 29 Section 8.08. MBIA Common Stock Price ................................. 30 Section 8.09. Hart-Scott-Rodino ....................................... 30 Section 8.1O. Stockholder Approval .................................... 30 ARTICLE IX INDEMNIFICATION Section 9.01. Indemnification by 1838 Stockholders .................... 30 Section 9.02. Limitation of Indemnification ........................... 30 Section 9.03. Procedure for Indemnification-Third Parties ............. 31 Section 9.04. Procedures for Claims by Indemnified Parties ............ 32 Section 9.05. Indemnification by MBIA ................................. 32 Section 9.06. Exclusive Remedies ...................................... 33 ARTICLE X MISCELLANEOUS Section 10.01. Survival of Representations, Warranties and Covenants ... 33 Section 10.02. Entire Agreement; Amendment ............................. 34 Section 10.03. Expenses ................................................ 34 Section 10.04. Governing Law ........................................... 34 Section 10.05. Assignment .............................................. 34 Section 10.06. Notices ................................................. 34 Section 10.07. Counterparts; Headings .................................. 35 Section 10.08. Interpretation .......................................... 35 Section 10.09. Severability ............................................ 35 Section 10.10. Further Assurances ...................................... 35 Section 10.11. Waivers ................................................. 35 Section 10.12. Successors In Interest .................................. 36 Section 10.13. ACKNOWLEDGEMENT BY 1838 STOCKHOLDERS .................... 36 iv AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER is made as of this day of June 19th, 1998 by and among MBIA INC. ("MBIA"), 1838 INVESTMENT ADVISORS, INC. ("1838") and MBIA ACQUISITION, INC. ("Acquisition"). RECITALS WHEREAS, 1838 is a Delaware corporation whose sole business activity is the management and holding of its partnership interest in 1838 Investment Advisors, L.P. ("1838, L.P."); and WHEREAS, 1838, L.P. is a Delaware limited partnership engaged in the business of providing investment advice and related services (the "Business Activities"); and WHEREAS, the stockholders of 1838 (the "1838 Stockholders") own 558,200 shares of common stock of 1838 (the "1838 Common Stock"); and WHEREAS, it is the intention of the parties hereto that, upon effectuation of the Merger contemplated by this Agreement, that MBIA shall own all of the outstanding shares of the 1838 Common Stock; and WHEREAS, the respective Boards of Directors of MBIA, 1838 and Acquisition have (a) determined that the merger of Acquisition with and into 1838 (the "Merger") pursuant to, and subject to all of the terms and conditions of, this Agreement is advisable, fair and in the best interests of MBIA, 1838 and Acquisition and their respective stockholders and (b) approved the Merger, this Agreement and the transactions contemplated by this Agreement; and WHEREAS, the respective Board of Directors of 1838 and Acquisition have resolved that this Agreement and the Merger be submitted to their respective stockholders for approval; and WHEREAS, all of the 1838 Stockholders have approved by execution and delivery of the Selling Stockholder Letter and MBIA as the sole stockholder of Acquisition (the "Acquisition Stockholder") has approved, by written consent, the terms of the Merger as set forth herein; and NOW, THEREFORE, in consideration of the Recitals and of the mutual covenants, conditions and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed that: ARTICLE I DEFINITIONS When used in this Agreement, the following terms shall have the meanings specified: "Acquisition" shall mean MBIA Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of MBIA. "Acquisition Stockholder" shall mean MBIA. "Advisers Act" shall mean the Investment Advisers Act of 1940, as amended, and the rules and regulations issued by the SEC thereunder. "Agreement" shall mean this Agreement and Plan of Merger, together with the Exhibits attached hereto and together with the Disclosure Schedule "Articles of Merger" shall mean Articles of Merger in a form approved for filing with the Delaware Department of State which shall have the executed Plan of Merger attached thereto. "Brown" shall mean W. Thacher Brown as the President/Chief Executive Officer of 1838 and as the representative of the 1838 Stockholders. "Business Activities" shall have the meaning set forth in the Recitals hereto. "Closing Date" shall mean July 31, 1998 or such other date as may be mutually agreed upon by the parties. "Code" shall mean the Internal Revenue Code of 1986, as the same may be in effect from time to time. "Customer Contracts" shall have the meaning set forth in Section 4.22 hereof, "Disclosure Schedule" shall mean the Disclosure Schedule, a form of which is attached to this Agreement which shall be delivered to MBIA in accordance with the terms of Section 3.01 of this Agreement. "Effective Time of Merger" shall have the meaning set forth in Section 2.02 hereof. "1838" shall mean 1838 Investment Advisors, Inc., a Delaware corporation. "1838 Common Stock" or "Stock" shall mean all of the issued and outstanding shares of common stock of 1838. "1838 Counsel Opinion" shall mean an opinion of counsel to 1838 in form and substance reasonably acceptable to N4BIA. "1838, L.P." shall mean 1838 Investment Advisors, L.P., a Delaware limited partnership. "1838, L.P. EBITDA" shall mean the 1838, L.P. earnings before interest, taxes, depreciation and amortization. "1838, L.P. Material Adverse Effect" shall mean any event, condition or fact which is, or reasonably may be expected to be, materially adverse to the financial condition, properties, 2 business or results of operations of 1838, L.P. when considered in their entirety; provided, however, that the foregoing shall not include general economic or market conditions. "1838, L.P. Partnership Interests" shall mean all of 1838's right, title and interest in 1838, L.P. "1838 Stockholders" shall mean all of the holders of 1838 Common Stock on the Closing Date, as set forth on Exhibit A. "Employee Benefit Plans" shall mean any pension plan, profit-sharing plan, bonus plan, incentive compensation plan, stock ownership plan, stock purchase plan, stock option plan, stock appreciation plan, employee benefit plan, employee benefit policy, retirement plan, fringe benefit program, insurance plan, severance plan, disability plan, health care plan, sick leave plan, death benefit plan or any other plan or program to provide retirement income, fringe benefits or other benefits to former or current employees of 1838, L.P. "Environmental Laws" shall mean any federal, state or local statute, law, rule, regulation, ordinance, code, permit or policy relating to Hazardous Materials, environmental matters or the protection of public health and safety. "ERISA' shall mean the Employee Retirement Income Security Act of 1974, as the same may be in effect from time to time, and all rules and regulations issued pursuant thereto. "Excess Working Capital" shall mean the amount by which the current assets of 1838, L.P. exceed its current liabilities as those amounts are determined in accordance with GAAP; provided, however, current liabilities shall not be deemed to include any portion of the MPCM Loan or the Stockholder Distribution Obligations, regardless of its classification under GAAP. "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended. "Fiscal Year" shall mean 1838's fiscal year, which is the calendar year. "Fund" shall mean a registered investment company or series thereof to which 1838, L.P. provides advisory or subadvisory services. "GAAP" shall mean generally accepted accounting principles consistently applied. "Hazardous Materials" means any substance that (a) requires investigation, removal or remediation under any Environmental Law, (b) is defined or identified as a "hazardous waste" or "hazardous substance" under any Environmental Law or (c) is toxic, explosive, corrosive, flammable, carcinogenic or otherwise hazardous. "Investment Advisory Contract" shall mean any investment advisory agreement entered into by 1838, L.P. for the purpose of providing investment advisory services to a client which is not a registered investment company or series thereof. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended and the rules and regulations of the SEC thereunder. 3 "Investment Company Contract" shall mean an investment advisory agreement entered into by 1838, L.P. for the purpose of providing investment advisory or subadvisory services to a registered investment company or series thereof "Joint Advisory Agreement" shall mean the Joint Advisory and Marketing Agreement by and among 1838, 1838, L.P. and MPCM and dated September 30, 1994. "Key Employees" shall mean W. Thacher Brown, John Springrose and George W. Gephart. "Knowledge of 1838" shall mean the actual knowledge of Brown, John J. McElroy HI or George W. Gephart, Jr. "Knowledge of MBIA" shall mean the actual knowledge of Gary Dunton, Peggy Garfunkel, James O'Keefe, Clifford Corso, Robert Ohanesian, Jeffrey Kostiw, Richard Walz and Pauline Cullen. "Law" shall mean any common law and federal, state, local or other law, rule, regulation or governmental requirement of any kind, and the rules, regulations and orders promulgated thereunder by any regulatory agencies or other Persons. "Lien" shall mean, with respect to any asset: (a) any mortgage, pledge, lien, charge, claim, restriction, reservation, condition, easement, covenant, lease, encroachment, title defect, imposition, security interest or other encumbrance of any kind; and (b) the interest of a vendor or lessor under any conditional sale agreement, financing lease or other title retention agreement relating to such asset. "Limited Partnership Agreement" shall mean the Agreement of Limited Partnership of 1838, L.P. as amended and restated as of September 30, 1994 and as further amended through May 15,1998. "MBIA" shall mean MBIA Inc. "MBIA Common Stock" shall mean shares of the common stock, $1.00 par value, of MBIA Inc. to be exchanged for 1838 Common Stock pursuant to Section 2.08 hereof. "MBIA Counsel Opinion" shall mean an opinion of counsel to MBIA. in form and substance reasonably acceptable to 1 83 8. "MBIA Material Adverse Effect" shall mean any event, condition or fact which is, or reasonably may be expected to be, materially adverse to the financial condition, properties, business or results of operations of MBIA when considered in their entirety; provided, however, that the foregoing shall not include general economic or market conditions. "Merger" shall mean the merger of Acquisition with and into 1838 pursuant to this Agreement. "MPCM" shall mean MeesPierson Capital Management, Inc. 4 "MPCM Loan" shall mean an obligation of 1838, L.P. in the original principal amount of $12,000,000, the proceeds of which were used to acquire the 1838, L.P. partnership interests of MPCM. "Multiemployer Plan" has the meaning given in ERISA Section 3(37)(A). "Organizational Documents" means (a) Certificate of Incorporation, bylaws and stockholders agreements of a corporation; (b) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (c) any charter or similar document adopted or filed in connection with the creation, formation or organization of any entity; and (d) any amendment to any of the foregoing. "PBGC' shall mean the Pension Benefit Guaranty Corporation, or any successor thereto. "Pension Plan" has the meaning in ERISA Section 3(2)(A). "Permits" shall mean all material licenses, pen-nits, approvals, franchises, qualifications, certificates of convenience and necessity, permissions, agreements, rate and other orders and governmental authorizations required for the conduct of the business of 1838. "Person" shall mean a natural person, corporation, trust, partnership, governmental entity, agency or branch or department thereof, or any other legal entity. "Plan of Merger" shall mean the Plan of Merger between 1838 and Acquisition in substantially the form of Exhibit D attached to this Agreement. "Redemption Agreement" shall mean the 1838 Investment Advisors, L.P. Redemption and Amendment Agreement dated as of May 15, 1998 among 1838,1838, L.P. and MPCM. "Regulatory Documents" shall mean all reports, registration statements and other documents, together with amendments, required by any governmental agency or authority. "SEC' shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Securities Laws" shall mean all applicable federal and state securities laws and the rules and regulations issued thereunder. "Selling Stockholder Letter" shall mean the letter to be delivered by the 1838 Stockholders in the form of Exhibit G hereto. "Stockholder Distribution Obligation" shall mean, collectively, any declared obligation of 1838, L.P. to distribute partnership earnings to 1838 and any declared obligation of 1838 to dividend corporate income to the 1838 Stockholders. "Stockholders' Agreement" shall mean the Stockholders' Agreement dated September 30, 1994 by and among 1838 and the stockholders named therein, including all amendments thereto. 5 "Tax" shall mean any federal and Commonwealth of Pennsylvania (including its local governments) income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code ss. 59A), customs duties, capital stock, franchise, profits, withholding, social security (other similar), unemployment disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. "Tax Return" shall mean any return, declaration, report, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto and including any amendment thereof. "Welfare Plan" shall have the meaning set forth in ERISA Section 3(l). ARTICLE II THE MERGER Section 2.01. The Merger. This Agreement provides for the merger of Acquisition with and into 1838, whereby each outstanding share of 1838 Common Stock will be converted into shares of MBIA Common Stock as described in this Agreement. As of the Effective Time of Merger, Acquisition will be merged with and into 1838, which shall be the surviving corporation in the Merger (the "Surviving Corporation") and shall continue to be governed by the Laws of the State of Delaware as a wholly-owned subsidiary of MBIA, and the separate existence of Acquisition shall thereupon cease. The Merger shall be pursuant to the provisions of, and shall be with the effects provided in, the Delaware General Corporation Law and any other applicable law. Section 2.02. Effective Time of Merger. The consummation of the Merger shall be effected on the Closing Date or as soon thereafter as all of the conditions to the Merger have been satisfied or waived. The Merger shall become effective as of the close of business on the date of the filing of the Articles of Merger with the Delaware Department of State. The date and time on which the Merger shall become effective is referred to in this Agreement as the "Effective Time of Merger." Section 2.03. Certificate of Incorporation of Surviving Corporation. The Certificate of Incorporation of Acquisition as in effect immediately prior to the Effective Time of Merger shall be the Certificate of Incorporation of the Surviving Corporation until amended in accordance with Law. Section 2.04. Bylaws of Surviving Corporation. The Bylaws of 183 8 as in effect immediately prior to the Effective Time of Merger as amended at the Effective Time of Merger (the "Amended Bylaws") shall be the Bylaws of the Surviving Corporation until amended in accordance with Law. Section 2.05. Directors and Officers of Surviving Corporation. The duly qualified and acting directors and officers of Acquisition immediately prior to the Effective Time of Merger 6 shall be the directors and officers of the Surviving Corporation, to hold office as provided in the Bylaws of the Surviving Corporation until replaced in accordance with the Amended Bylaws. Section 2.06. The Closing. Immediately prior to the filings referred to by Section 2.02 hereof, a closing of the transactions contemplated by this Agreement shall take place at the offices of Drinker, Biddle & Reath, Suite 300, 1000 Westlakes Drive, Berwyn, Pennsylvania at 10:00 a.m. local time on the Closing Date for the purpose of confirming the satisfaction of or, if permissible, waiver of the conditions set forth in Sections 7 and 8. Section 2.07. Conversion of Acquisition Common Stock. At the Effective Time of Merger, and without any action on the part of the holders thereof, each share of common stock of Acquisition issued and outstanding at the Effective Time of Merger shall be converted into one share of 1838 Common Stock. Section 2.08. Conversion of 1838 Common Stock. (a) Conversion. At the Effective Time of Merger, and without any action on the part of the holders thereof, each share of 1838 Common Stock issued and outstanding at the Effective Time of Merger shall be converted into 2.134 shares of MBIA Common Stock (the "Exchange Ratio") on the terms and conditions set forth in this Agreement. (b) Fractional Interests. No fractional interests in MBIA Common Stock shall be issued in connection with the Merger. If the Exchange Ratio results in a fractional share of MBIA Common Stock due to an 1838 Stockholder, then such stockholder shall receive, in lieu of such fractional interests, cash (without interest) in an amount equal to the product of such fractional part of a share of MBIA Common Stock multiplied by the market price of MBIA Common Stock at the end of the second trading day prior to the Closing Date as reported by the New York Stock Exchange, rounded down to the nearest cent. (c) Notwithstanding the foregoing, if between the date of this Agreement and the Effective Time the outstanding shares of 1838 Common Stock or MBIA Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Exchange Ratio shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, split, combination or exchange of shares. Section 2.09. Exchange of 1838 Certificates (a) Exchange Agent. As of the Effective Time of Merger, MBIA shall act as exchange agent, or shall designate a bank or trust company to act as exchange agent (in either case, the "Exchange Agent") for the benefit of the 1838 Stockholders. MBIA shall make available to the Exchange Agent, immediately prior to the Effective Time, certificates representing the shares of MBIA Common Stock issuable in exchange for the 1838 Common Stock. 7 (b) Exchange of Shares. On the Effective Time of Merger, the 1838 Stockholders shall surrender to the Exchange Agent the certificates which, immediately prior to the Effective Time of Merger, represented outstanding shares of 1838 Common Stock (the "1838 Certificates"), Upon surrender of an 1838 Certificate for cancellation to the Exchange Agent, together with such other documents as the Exchange Agent may reasonably require, the holder of such 1838 Certificate shall receive in exchange therefor a certificate representing that number of whole shares of MBIA Common Stock and any payment for fractional interests to which such holder is entitled in respect of such 1838 Certificate pursuant to the provisions of Section 2.08 above and the 1838 Certificate so surrendered shall forthwith be canceled. (c) No Further Rights in 1838 Common Stock. All shares of MBIA Common Stock issued upon conversion of the 1838 Common Stock in accordance with the terms of this Agreement shall be deemed to have been issued in full satisfaction of all rights pertaining to the 1838 Common Stock. Section 2. 1 0. Stock Transfer Books. From and after the Effective Time of Merger, the holders of 1838 Certificates outstanding immediately prior to the Effective Time of Merger shall cease to have any rights with respect to such shares of 1838 Common Stock except as otherwise provided in this Agreement or by Law. Section 2.1 1. Reorganization. The parties intend that this Agreement be a plan of reorganization within the meaning of Section 368(a) of the Code and that the Merger be a tax-free reorganization under Section 368(a) of the Code. The 1838 Stockholders shall obtain such opinions and approvals from their tax advisors as they deem appropriate regarding the compliance of the terms of the Merger with Section 368(a) of the Code. Section 2.12. Nonsolicitation. As an inducement to MBIA to enter into this Agreement, the 1838 Stockholders set forth on Exhibit A-1 hereto (the "Nonsoliciting Stockholders") agree to abide by the provisions of the nonsolicitation agreement set forth in subsection (a) for a period of two (2) years after the Closing Date. (a) Covenants. Each Nonsoliciting Stockholder agrees that he/she will not (i) contact any person who was a client or who was employed by a client of 1838 or 1838, L.P. regarding his/her ability to perform investment, management and financial services for them except on behalf of 1838 or 1838, L.P. or (ii) enter into contracts with a client of 1838 or 1838, L.P. to provide services similar to those performed by the Nonsoliciting Stockholder on behalf of 1838 and/or 1838, L.P., regardless of whether the Nonsoliciting Stockholder solicited the business of such client. (b) Penalties. In the event that a Nonsoliciting Stockholder violates the terms of the covenant set out in subsection (a), any one or more of the following penalties shall be enforced against him or her: (i) Disgorgement. If a Nonsoliciting Stockholder violates the covenant, then 1838 and/or 1838, L.P. is entitled to an accounting and payment of all profits which the stockholder has realized as a result of such violation(s); and 8 (ii) Any remedies available at law and equity including, without limitation, injunctive relief ARTICLE III OTHER AGREEMENTS Section 3.01. Disclosure Schedule. Not less than one (1) business day prior to its execution of this Agreement, 1838 shall deliver to MBIA a preliminary Disclosure Schedule in the form attached hereto. Not less than three (3) Business Days prior to the Closing Date, 1838 will deliver to M13IA a final Disclosure Schedule and shall deliver, on the Closing Date, a certificate dated as of the Closing Date and signed by Brown as President and Chief Executive Officer of 1838 stating that, except as set forth in the Certificate, the final Disclosure Schedule is true and accurate as of the Closing Date. Section 3.02. Legal Conditions to Merger. Each party to this Agreement will (a) take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on it with respect to the Merger; (b) promptly cooperate with and furnish information to the other parties in connection with any such requirements imposed upon any of them in connection with the Merger; and (c) take all reasonable actions necessary to obtain (and will cooperate with the other parties in obtaining) any consent, authorization, order or approval of, or any exemption by, any governmental entity or other public or private Person, required to be obtained or made by the parties to this Agreement in connection with the Merger or the taking of any action contemplated thereby or by this Agreement. Section 3.03. Public Announcements. Subject to each party's disclosure obligations imposed by Law, 1838, the 1838 Stockholders, Acquisition and MBIA will cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement or any of the transactions contemplated hereby and, except as may be required by law, shall not issue any public announcement or statement with respect thereto prior to consultation with the other parties. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF 1838 1838 and the 1838 Stockholders make the following representations and warranties to MBIA, all of which shall be true as of the date of this Agreement and the Closing Date: Section 4.01. Ownership of Stock The 1838 Stockholders are the lawful owners of the Stock which constitutes 100% of the outstanding common stock of 1838, free and clear of all liens, encumbrances, restrictions and claims of every kind (except for the Stockholders Agreement). The schedule of the 1838 Stockholders and the percentage of Stock owned by each of them set forth on Exhibit A hereto is complete and accurate in all respects. All of the issued and outstanding shares have been duly authorized and are validly issued, fully paid and nonassessable. There are no outstanding or authorized option, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that 9 could require 1838 to issue, sell or otherwise cause to become outstanding any of the Stock. There are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to 1838. There are no liens, encumbrances or other restrictions, contractual or otherwise, which could serve to restrict the transfer or acquisition of the Stock. Section 4.02. Ownership of 1838, L.P. 1838 owns 99.33 percent of the 1838, L.P. partnership interests and all of the partnership interests of 1838, L.P. are held by 1838 and W. Thacher Brown. The 1838 Stockholders have no right, title, interest or claim in or against the 1838, L.P. partnership interests or any of the assets of 1838, L.P. Except as set forth on the Disclosure Schedule, the 1838, L.P. Partnership Interests are free and clear of all liens, encumbrances, restrictions and claims of any kind and 1838 has not entered into any agreements, written or oral, regarding the sale or encumbrance of the 1838, L.P. Partnership Interests. Except as set forth in the Stockholders' Agreement and the Disclosure Schedule, neither the 1838 Stockholders nor 1838 is a party to any agreement the terms of which prohibit the 1838 Stockholders from conveying the Stock and the 1838, L.P. Partnership Interests to MBIA, or which would cause an acceleration of any obligations of 1838 or 1838, L.P. Section 4.03. Existence, Good Standing and Authority. 1838 is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 1838 has the power to own its property and to carry on its business as now being conducted. 1838 is duly qualified to do business in Pennsylvania, which is the only jurisdiction in which the character or location of the properties owned or leased by 1838 makes such qualification necessary. The execution, delivery and performance of this Agreement by 1838 and all of the documents and instruments required by this Agreement to be executed by 1838 are within the corporate power of 1838 and have been duly authorized by the Board of Directors. 1838, L.P. is a Delaware limited partnership, governed by the provisions of the Delaware Revised Uniform Limited Partnership Act and has the power to own its property and carry on its business as now being conducted. To the extent required by applicable law, 1838, L.P. is qualified to do business in Pennsylvania. The Limited Partnership Agreement remains in full force and effect and has not been amended or modified. 1838 and W. Thacher Brown are the only partner's in 1838, L.P. Section 4.04. Capital Stock 1838 has an authorized capitalization consisting of 1,000,000 shares of common stock of which 558,200 shares are issued and outstanding. Such outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable. There are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements of any character providing for the purchase, issuance or sale of any shares of the capital stock of 1838, other than as contemplated by this Agreement and as set forth in the Stockholders Agreement. Section 4.05. Subsidiaries and Investments. Except with respect to the 1838, L.P. Partnership Interests, 1838 does not own directly or indirectly, any capital stock or other equity or proprietary interest in other corporations, partnerships, associations, trust, joint ventures or other entities. 1838, L.P. does not own, directly or indirectly, any capital stock or other equity or proprietary interest in any corporation, partnership, association, trust, joint venture or other entity except as set forth on the Disclosure Schedule. 10 Section 4.06. No Violation or Conflict. Except as disclosed on the Disclosure Schedule, the execution, delivery and performance of this Agreement by 1838 Stockholders does not and will not conflict with or violate any Law, the Organizational Documents or any contract, agreement or lease of 1838 or 1838, L.P. Section 4.07. Litigation. Except as disclosed on the Disclosure Schedule, to the knowledge of 1838 there is no pending or threatened litigation or proceeding against or affecting 1838 or 1838, L.P. before any court, arbitrator or governmental department, board, agency or instrumentality; and there currently is no judgment, decree, order, writ, or injunction of any court, arbitrator or governmental department, board, agency or instrumentality pending against the 1838 or 1838, L.P. Section 4.08. Financial Statements. The financial statements for 1838 and 1838, L.P. listed on the Disclosure Schedule, each of which has previously been provided to MBIA (collectively referred to as the "Financial Statements"), have been prepared in accordance with generally accepted accounting principles ("GAAP"), in a manner consistently applied and present fairly the financial condition of 1838 and 1838, L.P. as of the date indicated, except as described in the Disclosure Schedule. Except as disclosed on the Disclosure Schedule, neither 1838 nor 1838, L.P. had any liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, and whether due or to become due, which would, individually or in the aggregate, have an 1838, L.P. Material Adverse Effect, and which are not reflected or reserved against in the Financial Statements as of the date of each of the Financial Statements. Neither 1838 nor 1838, L.P. have any liabilities or obligations of any nature, whether absolute, accrued, contingent or otherwise, whether due or to become due, as of the Closing Date, except as disclosed on the Disclosure Schedule. Section 4.09. Title to Properties and Assets. Neither 1838 nor 1838, L.P. have ever owned or controlled any real property other than leased office space. 1838 and 1838, L.P. have good and marketable title to all of their personal property reflected on the Financial Statements and which is material to the business of 1838 and 1838, L.P., free and clear of all Liens or rights of third parties and all such property is in good and useable condition and complies in all material respects with all applicable laws, ordinances, codes, rules and regulations. All property and assets held by 1838 and 1838, L.P. under leases are held under-valid and enforceable leases, neither 1838 nor 1838, L.P. are in default under any such lease, each lease will continue in full force and effect immediately after the consummation of the transactions contemplated by this Agreement, and there is no material dispute between 1838 and/or 1838, L.P. and other parties to such leases or the owners of the leased property. Each item of furniture, fixtures and equipment with a book value in excess of $1,000 or lease payments in excess of $1,000 per month which are owned or leased by 1838 or 1838, L.P. on the Closing Date are set forth on the Disclosure Schedule. Section 4.10. Existing Contracts. Except as disclosed on the Disclosure Schedule, neither 1838 nor 1838, L.P. is a party to or bound by any written or oral (i) contract with any labor union, (ii) employment, agency, consulting or similar contract, (iii) lease, whether as lessor or lessee, with respect to any real or personal property that cannot be canceled by it without material cost or penalty upon six months' or less notice and involving a rent of more than $1,000 a month, (iv) material contract or commitment extending beyond six months from the date of this 11 Agreement (other than investment advisory agreements with clients), (v) contract or commitment involving more than $1,000 a month for other than the purchase of merchandise and supplies in the ordinary course of business (other than investment advisory agreements with clients), (vi) guaranty, suretyship, indemnification or contribution agreement, other than obligations, if any, of 1838 to indemnify its officers and directors in accordance with its Organizational Documents (vii) any agreement by 1838 or 1838, L.P. not to compete in any business or geographical area or (viii) other material contract not made in the ordinary course of business. Section 4.11. Contractual Defaults. Except as disclosed on the Disclosure Schedule, neither 183.8 nor 1838, L.P. is in default, and no event has occurred which, with the passage of time or the giving of notice, or both, will constitute a default on the part of 1838 or 1838, L.P., under any agreement, indenture, loan agreement or other instrument to which it is a party or by which it or any of its assets is bound or to which any of its assets is subject, except where such default would not have an 1838, L.P. Material Adverse Effect. All parties with whom 1838 and/or 1838, L.P. have material leases, agreements or contracts or who owe material obligations to 1838 and 1838, L.P. are in compliance therewith in all material respects. Section 4.12. Reserved. Section 4.13. Insurance Policies. The Disclosure Schedule sets forth a list of all of the insurance policies and bonds carried by or on behalf of 1838 and 1838, L.P. as of the Closing Date, all of which are currently in fall force and effect. To the knowledge of 1838, no application filed for such insurance policies and bonds contains any material misstatement of fact or fails to state any material fact which may adversely affect the insurance coverage provided. To the knowledge of 1838 after due inquiry of appropriate 1838, L.P. personnel, 1838 and 1838, L.P. have properly and adequately notified all such insurance carriers of any and all claims known to 1838 and 1838, L.P. with respect to the employees, operations and properties of 1838 and 1838, L.P. for which 1838 and 1838, L.P. are insured (and all such pending claims are set forth on the Disclosure Schedule) and has complied with all other material requirements and conditions of such policies and bonds. Section 4.14. Employee Benefit Plans. Except as set forth in the Disclosure Schedule: (i) The Disclosure Schedule lists each Employee Benefit Plan that 1838 and/or 1838, L,P. maintains or to which 1838 and/or 1838, L.P. contributes. (A) Each such Employee Benefit Plan (and each related trust, insurance contract or fund) complies in form and in operation in all respects with the applicable requirements of ERISA, the Code and other applicable laws. (B) All required reports and descriptions (including Form 5500 Annual Reports, Summary Annual Reports, PBGCls and Summary Plan Descriptions) have been filed or distributed appropriately with respect to each such Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and of Code ss. 12 4980B have been met with respect to each such Employee Benefit Plan which is a Welfare Plan. (C) All contributions (including all employer contributions and employee salary reduction contributions) which are due have been paid to each such Employee Benefit Plan which is a Pension Plan. All premiums or other payments for all periods ending on or before the Closing Date have been paid with respect to each such Employee Benefit Plan which is a Welfare Plan. (D) Each such Employee Benefit Plan which is a Pension Plan meets the requirements of a "qualified plan" under Code ss. 401(a) and has received, within the last two years, a favorable determination letter from the Internal Revenue Service. (E) The market value of assets under each such Employee Benefit Plan which is a Pension Plan equals or exceeds the present value of all vested and nonvested liabilities thereunder determined in accordance with PBGC methods, factors and assumptions applicable to a Pension Plan terminating on the date for determination. (F) 1838 Stockholders has delivered to M131A correct and complete copies of the plan documents and summary plan descriptions, the most recent determination letter received from the Internal Revenue Service, the most recent Form 5500 Annual Report and all related trust agreements, insurance contracts, and other funding agreements which implement each such Employee Benefit Plan. (ii) With respect to each Employee Benefit Plan that 1838 and/or 1838, L.P. maintains or ever has maintained or to which any of them contributes, ever has contributed or ever has been required to contribute: (A) No such Employee Benefit Plan which is a Pension Plan has been completely or partially terminated or been the subject of a "reportable event" as defined in ERISA Section 4043 as to which notices would be required to be filed with the PBGC. No proceeding by the PBGC to terminate any such Pension Plan has been instituted or, to the best knowledge of the 1838 Stockholders, threatened. (B) There have been no "prohibited transactions" under Code ss. 4975(c) nor ERISA ss. 406 with respect to any such Employee Benefit Plan. No person or entity administering such Employee Benefit Plan has any liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any such Employee Benefit Plan. No action, suit, proceeding, hearing or investigation with respect to the administration or the investment of the assets of any such Employee Benefit Plan (other 13 than routine claims for benefits) is pending or, to the best knowledge of the 1838 Stockholders, threatened. The 1838 Stockholders have no knowledge of any basis for any such action, suit, proceeding, hearing or investigation. (C) Neither 1838 nor 1838, L.P. has incurred, and 1838 Stockholders have no reason to expect that 1838 or 1838, L.P. will incur any liability to the PBGC (other than PBGC premium payments) or otherwise under Title IV of ERISA (including any withdrawal liability) or under the Code with respect to any such Employee Benefit Plan which is a Pension Plan. (iii) Neither 1838 nor 1838, L.P. contributed to or ever has been required to contribute to any Multiemployer Plan or has any liability (including withdrawal liability) under any Multiemployer Plan. (iv) Neither 1838 nor 1838, L.P. maintains nor ever have maintained and neither 1838 nor 1838, L.P. have ever contributed to, or ever has been required to contribute to, any Welfare Plan providing medical, health or life or other welfare-type benefits for current or future retired or terminated employees, their spouses or their dependents, Section 4.15. Status. Except as disclosed on the Disclosure Schedule, to the knowledge of 1838, no act or default on the part of 1838 or 1838, L.P. has occurred which could result in the assessment of civil money penalties against 1838 or 1838, L.P., or which violates any federal or state law or regulation, and neither 1838 nor 1838, L.P. is currently subject to any regulatory order or agreement, or other regulatory action. 1838 and 1838, L.P. have filed all applications, reports, returns and filing information data with federal and state authorities and regulatory agencies as are required by federal or state law or regulations. Section 4.16. Taxes. (i) 1838 and 1838, L.P. have timely filed all federal Tax Returns that they were required to file and have filed all Tax Returns required by the Commonwealth of Pennsylvania and its local governments. All such Tax Returns were correct and complete in all respects. All Taxes owed by 1838 and 1838, L.P. (whether or not shown on any Tax Return) have been timely paid, Neither 1838 nor 1838, L.P. is currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where 1838 and 1838, L.P. do not file Tax Returns that the income of either 1838 or 1838, L.P. is subject to taxation by that jurisdiction. There are no security interests on any of the assets of 1838 or 1838, L.P. that arose in connection with any failure (or alleged failure) to pay any Tax. (ii) 1838 and 1838, L.P. have withheld and paid all Taxes required to have been withheld and paid in correction with amounts paid or 14 owing to any employee, independent contractor, creditor, stockholder or other third party. (iii) Neither 1838 nor 1838, L.P. expect any authority to assess any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax liability of 1838 or 1838, L.P. either (A) claimed or raised by any authority in writing or (B) as to which 1838 Stockholders have knowledge based upon personal contact with any agent of such authority. The Disclosure Schedule lists all federal, state, local and foreign income Tax Returns filed with respect to 1838 and 1838, L.P. for taxable periods ended on or after December 31, 1996, and indicates if any of those Tax Returns that have been audited or currently are the subject of audit. Neither 1838 nor 1838, L.P. have waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a tax assessment or deficiency. (iv) 1838 has not filed a consent under Code ss. 341(f) concerning collapsible corporation. 1838 has not made any payment, is not obligated to make any payments and is not a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Code ss. 280G. 1838 has not been a United States real property holding corporation within the meaning of Code ss. 897(c)(2) during the applicable period specified in Code ss. 897(c)(1)(A)(ii). 1838 is not a party to any Tax allocation or sharing agreement. 1838 (A) has not been a member of an affiliated group filing a consolidated federal income Tax Return and (B) has no liability for the Taxes of any other person or entity under Reg. ss. 1.1502-6 (or any similar provision of state, local or foreign law) as a transferee or successor, by contract or otherwise. (v) The Disclosure Schedule sets forth, as of the most recent practicable date, the basis of 1838 and 1838, L.P. in their assets and the amount of any net operating loss, net capital loss, unused tax credits or excess charitable contribution. (vi) Since its inception, 1838, L.P. has been properly treated as a partnership for tax purposes and no tax authority has ever asserted that it should not so be treated. Since its inception, the only partners of 1838, L.P. have been 1838, W. Thacher Brown, MPCM and Lambert Brussels Advisory Corporation. Since its inception, 1838 has been properly treated as an S-Corp. pursuant to a timely filed election and consent of stockholders, no taxing authority has ever asserted that it should not be so treated. Since its inception, 1838's only stockholders have been the 1838 Stockholders and the former stockholders set forth on Exhibit A. Section 4.17. Employee Matters. 1838 has no employees and has never had an employee. Except as disclosed on the Disclosure Schedule, to the knowledge of 1838 after due inquiry of appropriate 1838, L.P. personnel, there is no present or former employee of 1838, L.P. who has any claim against 1838 or 1838, L.P. (whether under Law or under any employee 15 agreement, whether oral, written or implied) for any reason including, without limitation, on account of or for (i) overtime pay, other than overtime pay for the current payroll period; (h) wages or salaries, other than wages or salaries for the current payroll period; (iii) vacations, sick leave, time off or pay in lieu of vacation, sick leave or time off, other than vacation, sick leave or time off (or pay in lieu thereof) earned in the 12-month period immediately preceding the date of this Agreement, (iv) harassment or discrimination or (v) the Merger. Section 4.18. Credit Agreements. Except as disclosed on the Disclosure Statement and except for the MPCM Loan, n6ither 1838 nor 1838, L.P. is a party to or bound by any written or oral long-term debt agreement, credit agreement, sale-lease back agreement, revolving credit agreement, financing agreement or mortgage on real property, in which 1838 or 1838, L.P. is named the lender or the debtor (or mortgagor). Section 4.19. Record Books. Except as set forth in the Disclosure Schedule, the minute book and stock record book of 1838 are complete and correct in all material respects and record all material transactions required to be recorded under any and all applicable state and federal laws or regulations. Section 4.20. MPCM Loan/Stockholder Distribution Obligations. On the Closing Date, the sum of (i) the unpaid principal balance and accrued interest on the MPCM Loan and (ii) the Stockholder Distribution Obligations, shall not exceed fifteen million, seven hundred fifty-eight thousand four hundred forty-two dollars (SI 5,758,442) Section 4.21. Accounts Receivable/Working Capital. All accounts receivable - -as reflected on 1838, L.P.'s books (the "Accounts Receivable") and records have been generated in the ordinary course of 1838, L.P.'s business. Not more than $250,000 of the Accounts Receivable are more than 90 days past due. No offset, claim of offset or claim of material liability on the part of 1838, L.P. has been asserted by any obligor with respect to the Accounts Receivable. As of the Closing Date, the Excess Working Capital for 1838, L.P. will not be less than three million dollars ($3,000,000). Section 4.22. Customer Contracts. As of the Closing Date, 1838, L.P. had in place the agreements with institutional clients set forth on the Disclosure Schedule (the "Customer Contracts"). 1838, L.P. has not received notice of intent to terminate (or materially reduce the scope of) any of the Customer Contracts, nor has 1838, L.P. sent notice to terminate (or materially reduce the scope of) any of the Customer Contracts, except as set forth on the Disclosure Schedule. Section 4.23. Affiliate and Insider Transactions. Except as disclosed in the Disclosure Schedule, neither the 1838 Stockholders nor any member of the immediate family of the 1838 Stockholders or any entity in which the 1838 Stockholders owns any beneficial interest (other than a publicly-held corporation) has any loan agreement, note or borrowing arrangement or, to the knowledge of 1838, any other agreement with 1938 or 1838, L.P. or any interest in any property, real, personal or mixed, tangible or intangible, used in or pertaining to the business of 1838 or 1838, L.P. For purposes of the preceding sentence, the members of the immediate family of the 1838 Stockholders will consist of the spouse, parents, children, siblings, and mothers-and fathers-in-law of such persons. 16 Section 4.24. Compliance With Laws. (a) Except as disclosed on the Disclosure Schedule, to the knowledge of 1838, 1838 and 1838, L.P. have complied in all material respects with all applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof which affect the business or any owned or leased properties of 1838 or 1838, L.P. and to which 1838 or 1838, L.P. may be subject (including without limitation Environmental Laws and the Occupational Safety and Health Act of 1970, or any other state or federal acts, including rules and regulations thereunder, regulating, or otherwise affecting employee health and safety or the environment); and there are no currently pending claims or notices by any such governments or agencies against 1838 or 1838, L.P. alleging a violation of any such law or regulation where such violation would have an 1838, L.P. Material Adverse Effect. (b) Except as disclosed in the Disclosure Schedule, to the knowledge of 1838, 1838 and 1838, L.P. each hold, and has at all times held, all Permits necessary for the lawful ownership and use of 1838, L.P.'s properties and assets and the conduct of their businesses under and pursuant to every, and has complied in all material respects with each, and is not default in any material respect under any applicable law relating to 1838, L.P. or any of its assets, properties or operations where such default would have an 1838, L.P. Material Adverse Effect. Neither 1838 nor 1838, L.P. knows of any outstanding violations by it of any of the above nor has received notice asserting any such violation by it. All Permits are valid and in good standing and are not subject to any suspension, modification or revocation or proceedings related thereto. (c) Except as disclosed in the Disclosure Schedule and except for normal examinations conducted by any governmental authority in the regular course of the business of 1838 or 1838, L.P., to the knowledge of 1838, no governmental authority has initiated any administrative proceeding or investigation into the business or operations of 1838, L.P. There is no unresolved violation or exception by any governmental authority with respect to any report or statement by any governmental authority relating to any examination of 1838 or 1838, L.P. (d) 1838 and 1838, L.P. have at all times maintained records which accurately reflect transactions in reasonable detail and accounting controls, policies and procedures sufficient to ensure that such transactions are recorded in a manner which permits the preparation of financial statements in accordance with GAAP and applicable regulatory accounting requirements. (e) All proxy statements to be prepared for use by the Funds in connection with the transactions contemplated by this Agreement (other than any information provided or to be provided by MBIA in writing relating to MBIA and its affiliates expressly for use in the proxy statements) will be accurate and complete and will not contain, at the times such proxy materials are furnished to the stockholders, or at the time of the meetings thereof, any untrue statements of a material fact, or omit to state any material fact required to make the statements therein, in light of the circumstances under which they were made, not misleading. 17 Section 4.25. Absence of Certain Developments. Except as set forth on the Disclosure Schedule or the Financial Statements, neither 1838 nor 1838, L.P. have since December 31, 1997: a. issued or sold any of its Stock, securities convertible into or exchangeable for Stock, warrants, options or other rights to acquire Stock, or any of its bonds or other securities other than the issuance of 27,200 additional shares of Stock as of January 1, 1998; b. redeemed or purchased, directly or indirectly, any shares of its Stock or declared or paid any dividends or distributions with respect to any shares of Stock; c. borrowed any amount or incurred or become subject to any material liability, except accounts payable incurred in the ordinary course of business and the MPCM Loan; d. discharged or satisfied any material lien or encumbrance on its properties or assets or paid any material liability, other than in the ordinary course of business; e. mortgaged, pledged or subjected to any lien or other encumbrance, any of its assets except in the ordinary course of business, liens and encumbrances for current property taxes not yet due and payable, liens and encumbrances which do not materially affect the value of, or interfere with the current use or ability to convey, the property subject hereto or affected thereby; f. sold, assigned or transferred (including without limitation transfers to any employees, stockholders or affiliates of 1838, L.P.) any assets, except in the ordinary course of business; g. canceled any material debts or claims or waived any rights of material value, except in the ordinary course of business; h. except as previously disclosed to MBIA in writing, made or granted any bonus or any wage, salary or compensation increase to any director, officer or employee except as disclosed on the Disclosure Schedule; i. made or granted any increase in any Employee Benefit Plan or arrangement or amended or terminated any existing Employee Benefit Plan or arrangement or adopted any new Employee Benefit Plan or arrangement, except as required by law; j. made capital expenditures or commitments therefor in excess of $200,000 in the aggregate; k. suffered any theft, damage, destruction or loss of or to any property or properties owned or used by 1838, L.P., whether or not covered by insurance, which would individually or in the aggregate have an 1838, L.P. Material Adverse Effect; or 18 l. taken any other action or entered into any other material transaction or contract other than in the ordinary course of business. Section 4.26. Material Adverse Change. There has been no 183 8, L.P. Material Adverse Effect since December 31, 1997. Section 4.27. Bank Accounts and Powers of Attorney. Except as set forth in the Disclosure Schedule, 1838 (a) has no bank account or safe deposit box and (b) has given no power of attorney to any person. Section 4.28. Broker's or Finder's Fees. No agent, broker, person or firm acting on behalf of the 1838 Stockholders, 1838 or 1838, L.P. is, or will be, entitled to any commission or broker's or finder's fees from any of the parties hereto, or from any person controlling, controlled by or under common control with any of the parties hereto, in connection with any of the transactions contemplated herein. Section 4.29. Business Activities of 1838. Since its inception, 1838 has not engaged in any business activities other than its participation in 1838, L.P. Section 4.30. Regulatory Documents. Except as set forth in the Disclosure Schedule: (a) Since January 1, 1996, 1838 and 1838, L.P. have timely filed all reports, registration statements and other documents, together with any amendments required to be made with respect thereto, that were required to be filed with any governmental authority, including the SEC, and has paid all fees and assessments due and payable in connection therewith. (b) As of their respective dates, the Regulatory Documents of 1838 complied in all material respects with the requirements of applicable laws and none of 1838's or 1838, L.P.'s Regulatory Documents, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 1838 has previously delivered or made available to MBIA a complete copy of each 1838's and 1838, L.P.'s Regulatory Documents filed with the SEC after January 1, 1996 and prior to the date hereof (including a Form ADV as in effect on the date hereof) and will deliver to MBIA promptly after the filing thereof a complete copy of each Regulatory Document filed with the SEC after the date hereof and prior to the Closing Date. Section 4.31. Ineligible Persons. Neither 1838 nor any "affiliated person" (as defined in the Investment Company Act) thereof, is ineligible pursuant to Section 9(a) or 9(b) of the Investment Company Act to serve as an investment advisor (or in any other capacity contemplated by the Investment Company Act) to a registered investment company. Neither 1838 nor any "associated person" (as defined in the Advisers Act) thereof, is ineligible pursuant to Section 203 of the Advisers Act to serve as an investment adviser or as an associated person to a registered investment adviser. Neither 1838 nor any "associated person" (as defined in the Exchange Act) thereof, is ineligible pursuant to Section 15(b) of the Exchange Act to serve as a broker-dealer or as an associated person to a registered broker-dealer. 19 Section 4.32. Funds. (a) The Disclosure Schedule sets forth a true, complete and correct list, as of the date hereof, of each Fund for which 1838, L.P. acts as investment advisor or subadvisor. Each Fund that is an entity is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the requisite corporate, trust or partnership power and authority to own its properties and to carry on its business as it is now conducted, and is qualified to do business in each jurisdiction where it is required to do so under applicable law, except where the failure to have such power, authority or qualification is not reasonably expected to have an 1838, L.P. Material Adverse Effect. Each Fund is, and at all times has been registered with the SEC as an Investment Company in accordance with the requirements of the Investment Company Act. In addition, shares of each Fund have been registered under the Securities Act of 1933, as amended, as required by that act and the rules and regulations issued by the SEC thereunder. Except with respect to the first sentence of this Section 4.32(a), the foregoing representations shall not be deemed applicable to any Funds for which 1838, L.P. acts as an investment subadvisor. (b) Except as set forth in the Disclosure Schedule, (i) the shares of each Fund have been duly and validly issued and are fully paid and nonassessable and the shares of each Fund are qualified for public offering and sale in each jurisdiction where offers are made to the extent required under applicable law; and (ii) to the extent within the control of 1838, L.P., each Fund has been operated since its organization and is currently operating in compliance in all material respects with applicable law. Section 4.33. Investment Company Contracts. Each Investment Company Contract subject to Section 15 of the Investment Company Act has been duly approved at all times in compliance in all material respects with Section 15 of the Investment Company Act and all other applicable laws. 1838, L.P. has performed its duties and obligations under each Investment Company Contract in accordance with the Investment Company Act and all other applicable laws, except for such failures of performance which, individually or in the aggregate, are not reasonably expected to have an 1838, L.P. Material Adverse Effect. Section 4.34. Technology and Intellectual Property (a) The Disclosure Schedule lists any (i) domestic and foreign registered trademarks and service marks, registered copyrights and patents, (ii) applications for registration of any of the foregoing and (iii) unregistered trademarks, service marks, trade names, logos and assumed names owned by 1838, L.P. and necessary to conduct the business of 1838, L.P.. The items, together with all other material trademarks, service marks, trade names, logos, assumed names, patents, copyrights, trade secrets, computer software, formulae, designs and inventions currently used in or necessary to conduct the business of 1838, L.P. constitute the "Intellectual Property." (b) 1838, L.P. owns all right, title and interest in and to the Intellectual Property listed on the Disclosure Schedule. 20 (c) The Intellectual Property listed in the Disclosure Schedule, does not infringe any patent, copyright or trade secret of any third party and such Intellectual Property has not been forfeited to the public domain. (d) No claims have been asserted by any person or entity against 1838, L.P. that the use of the Intellectual Property listed on the Disclosure Schedule infringes upon the Intellectual Property rights of such person or entity and 1838 is not aware of any valid basis for such claim. Section 4.35. Year 2000. 1838 has caused 1838, L.P. to complete a thorough assessment of all of its operating and technology systems, including all software products and services utilized by 1838, L.P., for any risk that the Year 2000 will cause business disruption or operational failure. 1838 has set forth on the Disclosure Schedule any Year 2000 risks identified in that assessment and any remediation plans in place or contemplated to be put in place. To the knowledge of 1838 after due inquiry of appropriate 1838, L.P. personnel, all software owned by or licensed to 1838, L.P. is designed to be used prior to, during and after the calendar year 2000 A.D. Section 4.36. Redemption Agreement. The Redemption Agreement has been duly executed by all parties thereto and was effective to convey all right, title and interest of NTCM in the 1838 Partnership Interests to 1838. All amounts due to MPCM under the Redemption Agreement have been fully paid and all other material obligations of 1838 and 1838, L.P. thereunder have been performed. There are no amounts due to MPCM by 1838, L.P. and MPCM has been paid, or has released its rights with respect to, all past and future income of 1838, L.P. Section 4.37. Former Stockholders. Except as set forth in the Disclosure Schedule, there are no pending or, to the knowledge of 1838, threatened claims against 1838 or 1838, L.P. by former 1838 Stockholders. Section 4.38. Disclosure. The representations and warranties set forth in this Article IV do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Article IV not misleading. ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF MBIA AND ACQUISITION MBIA and Acquisition hereby represent, warrant and covenant to the 1838 Stockholders that: Section 5.01. Organization. (a) Organization. Each of MBIA and Acquisition is a corporation duly and validly organized and existing in good standing under the Laws of the state of its incorporation. 21 (b) Corporate Power and Authority. Each of MBIA and Acquisition has full corporate power and authority and all Permits necessary to carry on its business as it is now conducted and to own, lease and operate its assets and properties. Section 5.02. Authorization; Enforceability. The execution, delivery and performance of this Agreement by MBIA and Acquisition and all of the documents and instruments required by this Agreement to be executed and delivered by MBIA and Acquisition (a) are within the corporate power of MBIA and Acquisition, (b) have been duly authorized by all necessary corporate action by MBIA and Acquisition and (c) do not require any approval of the stockholders of MBIA. This Agreement is, and the other documents and instruments required by this Agreement to be executed and delivered by MBIA and Acquisition will be, when executed and delivered by MBIA and Acquisition, the valid and binding obligations of MBIA and Acquisition, enforceable against MBIA and Acquisition in accordance with their respective terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws generally affecting the rights of creditors and subject to general equity principles. The MBIA Common Stock to be issued pursuant to this Agreement will be, when issued, duly authorized, validly issued and fully paid. Section 5.03. No Violation or Conflict. The execution, delivery and performance of this Agreement by MBIA and Acquisition do not and will not conflict with or violate any Law, the Organizational Documents of MBIA,. the Organizational Documents of Acquisition or any material contract or agreement to which MBIA or Acquisition is a party or by which either of them is bound. Section 5.04. Litigation. To the knowledge of MBIA, there are no actions, suits or proceedings against MBIA or Acquisition, or both, by any Person which question the validity, legality or propriety of the transactions contemplated by this Agreement. Section 5.05. Brokers. No agent, broker, person or firm acting on behalf of MBIA or Acquisition will be entitled to any brokers,' finders' or any similar fee in connection with the transactions contemplated by this Agreement except Berkshire Capital Corporation and Morgan Keegan & Co., Inc., the fees of whom shall be paid by MBIA. Section 5.06. SEC Reports and Financial Statements. MBIA has properly and timely filed with the SEC and has -made available to 1838, 1838, L.P. and the 1838 Stockholders true and complete copies of all forms, reports, schedules, statements and other documents required to be filed by it and its subsidiaries since January 1, 1997 (hereinafter referred to collectively, with all amendments, exhibits and schedules thereto, as the "MBIA SEC Documents"). As of their respective dates or, if amended, as of the date of the last such amendment, the MBIA SEC Documents (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied as to form in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. Each of the consolidated financial statements (including any related notes and schedules) included in the MBIA SEC Documents complies as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, has 22 been prepared in accordance with GAAP (except as may be indicated in the notes thereto and except, in the case of unaudited interim financial statements, as permitted by Form 10-Q of the SEC) and fairly presents in all material respects the consolidated financial position and the consolidated results of operations and cash flows (and changes in financial position, if any) of MBIA and its consolidated subsidiaries as at the dated thereof or for the periods presented therein (subject, in the case of unaudited interim financial statements, to normal year-end adjustments). All material agreements, contracts and other documents required to be filed as exhibits to any of the MBIA SEC Documents have been so filed. Section 5.07. Material Adverse Change. There has been no MBIA Material Adverse Effect since December 31, 1997. Section 5.08. MBIA Stock The MBIA Common Stock to be issued pursuant to this Agreement will be, when issued, duly authorized, validly issued and fully paid. Section 5.09. Capitalization The authorized capital stock of MBIA consists of 200,000,000 shares of MBIA Common Stock and 10,000,000 shares of preferred stock, par value $1.00 per share. As of April 30, 1998 (i) 97,618,497 shares of MBIA Common Stock were issued and outstanding, (ii) no shares of MBIA Common Stock were held in the treasury of MBIA, (iii) options to acquire an aggregate of 3,909,798 shares of MBIA Common Stock were outstanding pursuant to MBIA's stock option plans and (iv) no shares of preferred stock were issued and outstanding. There have been no material changes to the capitalization of MBIA from April 30, 1998 through the date of this Agreement. Section 5.10. Certain Tax-Related Matters. (a) MBIA has no plan or intention to have or permit 1838 to issue additional shares of its stock after the Merger. (b) MBIA has no plan or intention to reacquire any of the shares of MBIA Common Stock issued in the Merger. (c) MBIA has no plan or intention to liquidate 1838; to merge 1838 with or into another corporation (aside from Acquisition); to sell or otherwise dispose of the stock of 1838 except for transfers of stock to corporations controlled by MBIA within the meaning of Code ss. 368(c); or to cause 1838 to sell or otherwise dispose of any of its assets, except for disposition made in the ordinary course of business or transfers of assets to a corporation controlled by 1838 within the meaning of Code ss. 368(c). (d) Following the Merger, MBIA shall cause 1838 to continue at least one significant historic business line of 1838, or use a significant portion of its historic business assets in a business, in each case within the meaning of Reg. ss. 1.368-1(d) of the Code. ARTICLE VI COVENANTS OF 1838 23 Section 6.01. Conduct of Business of 1838. During the period from the date of this Agreement and continuing through the Closing Date, except as expressly contemplated or permitted by this Agreement or with the prior written consent of MBIA, 1838 shall (a) carry on its and 1838, L.P.'s business in the ordinary course consistent with prudent business practice; (b) use its best efforts to preserve its present business organization and relationships; (c) use its best efforts to keep available the present services of 1838, L.P.'s employees and (d) use its best efforts to preserve its rights, franchises, goodwill and relations with 1838, L.P.'s customers and others with whom it conducts business. Without limiting the generality of the foregoing, except as expressly permitted by this Agreement or consented to in writing by MBIA, 1838 shall not: (i) create, renew, amend, terminate or cancel, or take any other action that may result in the creation, renewal, amendment, termination or cancellation of, any lease relating to furniture, fixtures and equipment or contracts to which it or 1838, L.P. is a party except in the ordinary course of business; (ii) take any action impairing its or 1838, L.P.'s rights in any contract or purchased asset other than in the ordinary course of business; (iii) purchase or lease or cause 1838, L.P. to purchase or lease any assets from, or sell or lease any assets to, any affiliate or seller, (iv) adopt, amend, renew or terminate any employee program, agreement, arrangement or policy between 1838, L.P. and one or more of its employees; (v) commit any act or omission which constitutes a breach or default under any contract or license to which it or 1838, L.P. is a party or by which it or any of its properties is bound the effect of which could reasonably be expected to cause an 1838, L.P. Material Adverse Effect; (vi) commit any act or omission which would materially violate any applicable law, statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to 1838 or 1838, L.P. or any of their properties, contracts or assets; (vii) on its own or 1838, L.P.'s behalf, waive any right or modify or amend any commitment, or incur an material debt or obligation, in each case other than in the ordinary course of business; (viii) guarantee or cause 1838, L.P. to guarantee any material debt or obligation of any Person; (ix) voluntarily divest 1838, L.P. of the management of any mutual fund or other assets currently under management; (x) cause 1838, L.P. to enter into any new line of business; 24 (xi) cause 1838, L.P. to increase salary or compensation of any 1838, L.P, employees; (xii) acquire or agree to acquire in any manner, including by way of merger, consolidation, purchase of an equity interest or assets, any business or any corporation, partnership, association or other business organization or division thereof or cause 1838, L.P. to do the same; or (xiii) make or declare any distributions of 1838, L.P. or 1838 assets except that 1838, L.P. may distribute accumulated earnings to 1838, 1838 may dividend such amounts to the 1838 Stockholders and 1838, L.P. and 1838 may declare Stockholder Distribution Obligations provided, however, such distributions and/or declarations shall not cause the Excess Working Capital to be less than three million dollars ($3,000,000) on the Closing Date or cause a breach of Section 4.20 hereof Section 6.02. Approval by Investment Company Contract Clients. (a) 1838, L.P. will use its best efforts to obtain, as promptly as practicable, the approval of the Board of Directors and stockholders of each Fund, pursuant to the provisions of Section 15 of the Investment Company Act applicable thereto, of new Investment Company Contract reflecting MBIA's ownership of 1838 which provide for substantially identical services, at comparable costs, to the Funds to those in effect immediately prior to the Closing Date. (b) 1838, L.P. shall use its best efforts to assure, prior to the Closing Date, the satisfaction of the conditions set forth in Section 15(f) of the Investment Company Act with respect to each Fund. Section 6.03. Approval by Investment Advisory Contract Clients. The parties understand that the Merger will constitute an assignment, within the meaning of the Advisers Act of the Investment Advisory Contracts. 1838 agrees to cause 1838, L.P. to inform its advisory clients of the transactions contemplated by this Agreement and to use its best efforts to obtain the consent of its clients to the assignment of their advisory contracts. Pursuant to such efforts, 1838 will notify advisory clients of the Merger and the resulting assignment of their contracts and request that such clients furnish their written consent to the assignments. It is agreed that where clients fail to furnish written consent prior to the Effective Time of Merger, such non-responding clients will continue to receive advisory services in accordance with the terms of their respective contracts and that such non-responding clients will be deemed by the parties to have consented to the assignment where such client continues to accept such advisory services for at least 15 days after the Effective Time of Merger. Clients will be advised by 1838 of the foregoing treatment of their accounts in the event that they do not provide a response to the consent request. Where a client advisory contract prohibits an assignment or provides for termination of the contract upon assignments, 1838 agrees to use its best efforts to convince clients to enter into new advisory contract with 1838, L.P. prior to the Effective Time of Merger. 25 Section 6.04. Insurance. 1838 will ensure that 1838, L.P. maintains in effect until the Closing Date all casualty and public liability policies maintained by 1838, L.P. on the date hereof, the purchased assets and the assumed liabilities, or will procure comparable replacement policies and maintain such replacement policies in effect until the Closing Date. Section 6.05. Maintenance of Records. Through the Closing Date, 1838, L.P. will maintain the records in the same manner and with the same care that the records have been maintained prior to the execution of this Agreement. Section 6.06. Full Access. 1838 will permit, and cause 1838, L.P. to permit representatives of MBIA to have fall access to all premises, properties, personnel, books, records (including tax and licensing records), contracts and documents of or pertaining to the 1838, L.P. Section 6.07. Exclusivity. Unless this Agreement shall be terminated by mutual consent of the parties hereto, neither 1838 nor the 1838 Stockholders will solicit, initiate or encourage the submission of any proposal or offer from any Person relating to the acquisition of the 1838 Common Stock or any substantial portion of the assets of 1838, L.P. (including any acquisition structured as a merger, consolidation or share exchange) or participate in any discussions or negotiations regarding any of the foregoing. Section 6.08. Accounting Matters. 1838 will use its best efforts to obtain a letter from Coopers & Lybrand LLP to the effect that 1838 is eligible to be acquired in a transaction to be accounted for using "pooling of interests" accounting treatment and will use its best efforts to avoid taking any action (other than actions contemplated by this Agreement) that would prevent MBIA from accounting for the business combination to be effected by the Merger as a pooling of interests. ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MBIA AND ACQUISITION All of the agreements and obligations of MBIA under this Agreement are subject to the fulfillment, on or prior to the Closing Date, of the following conditions precedent, any or all of which may be waived in whole or in part in writing by MBIA: Section 7.01. No Material Adverse Change. No 1838, L.P. Material Adverse Effect shall have occurred. Section 7.02. Compliance with Agreement. 1838, 1838, L.P. and the 1838 Stockholders shall have performed and complied with all of the agreements, covenants and conditions required by this Agreement to be performed or complied with by them on or prior to the Closing Date, All documentation relating to the Merger shall be in form and substance acceptable to MBIA and, if applicable, MBIA's rating agencies. Section 7.03. Hart Scott Rodino Act. All necessary requirements of the Hart Scott Rodino Act shall have been complied with and any "waiting periods" applicable to the Merger and to the transactions described in this Agreement which are imposed by the Hart Scott Rodino 26 Act shall have expired prior to the Closing Date or shall have been terminated by the appropriate agency. Section 7.04. Pooling Opinion. MBIA shall have received a letter from Coopers & Lybrand LLP to the effect that no conditions exist that would preclude accounting for the Merger as a "pooling of interests" if consummated in accordance with this Agreement and such letter shall not have been withdrawn. Section 7.05. 1838 Stockholder Approval. All of the 1838 Stockholders shall have delivered a Selling Stockholder Letter and executed this Agreement. Section 7.06. 1838 Opinion Letter. MBIA shall have received the 1838 Counsel Opinion dated the Closing Date. Section 7.07. Approval by 1838, L.P. Is Clients. At least three (3) days prior to the Closing Date, 1838 must deliver documentation satisfactory to MBIA certifying that clients representing no more than fifteen percent (15%) of 1838, L.P.'s revenues as of March 31, 1998, shall have delivered notices of termination of their advisory contracts as a result of notices of the acquisition contemplated by this Agreement. Section 7.08. No Litigation. No court or governmental authority of competent jurisdiction shall have issued a permanent order restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement, and no person, firm, corporation or governmental agency which is not a party to this Agreement shall have instituted an action or proceeding seeking to restrain, enjoin or prohibit the consummation of the transactions contemplated by this Agreement. Section 7.09. Representations and Warranties Accurate. Subject to the final Disclosure Schedule and the certificate required by Section 3.01 above, the representations and warranties contained in this Agreement and the information in the Schedules and Exhibits hereto shall be true and accurate in all material respects, both on the date hereof and as of the Closing Date. Section 7.10. Officer's Certificate. 1838 shall have delivered to MBIA an officer's certificate on behalf of 1838 executed by Brown as President of 1838 certifying to the matters set forth in Section 7.09 above. Section 7.11. Employment of Key Employees. An employment agreement in form and substance acceptable to MBIA between 1838 (or MBIA Asset Management Corporation) and each of the Key Employees must be in full force and effect. Section 7.12. No Adverse Claims. There must not have been made or threatened by any entity or person any claim that such person or entity is the holder, beneficial holder or pledgee of any of the 1838 Stock or the 1838, L.P. Partnership Interests. Section 7.13. Additional Documentation. 1838 shall have delivered such additional documentation as may be reasonably requested by MBIA within a reasonable timeframe to further effectuate and/or evidence the transactions contemplated herein and compliance by 1838 and the 1838 Stockholders of their representations, warranties and obligations hereunder. 27 Section 7.14. Approval by Board. Any material amendments or modifications of the terms of the Merger as contemplated by this Agreement must have been approved by the MBIA board of directors. Section 7.15. Joint Advisory Agreement. Except as set forth on the Disclosure Schedule, the Joint Advisory Agreement shall have been terminated with no remaining obligations of 1838 or 1838, L.P. to any party thereto. Section 7.16. Purchase of Minority Interest. 1838, MBIA or MBIA's designee shall have purchased, simultaneous with the Merger, all of the partnership interests of 1838, L.P. owned by Brown. Section 7.17. MBIA Common Stock Price. As of the end of the business day immediately preceding the Closing Date, the market price of MBIA Common Stock as reported by the New York Stock Exchange shall not be greater than $83.00 per share or less than $65.00 per share. Section 7.18. Final Disclosure Schedule. The final disclosure schedule and the officer's certificate delivered by 1838 pursuant to Section 3.01 hereof shall not contain any material additional liabilities or potential liabilities of 1838 or 1838, L.P. ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF 1838 AND THE 1838 STOCKHOLDERS Each and every obligation of 1838 and the 1838 Stockholders to be performed on the Closing Date shall be subject to the satisfaction prior to or on the Closing Date of the following express conditions precedent: Section 8.01. Compliance With Agreement. MBIA and Acquisition shall have performed and complied in all material respects with all of their obligations under this Agreement which are to be performed or complied with by them prior to or on the Closing Date. Section 8.02. Proceedings and Instruments Satisfactory. All proceedings, corporate or other, to be taken in connection with the transactions contemplated by this Agreement, and all documents incident thereto, shall be reasonably satisfactory in form and substance to the 1838 Stockholders, and MBIA and Acquisition shall have made available to the 1838 Stockholders for examination the originals or true and correct copies of all documents which the 1838 Stockholders may reasonably request in connection with the transactions contemplated by this Agreement. Section 8.03. No Litigation. No suit, action or other proceeding shall be pending before any court seeking an injunction or other restraint against the consummation of the transactions contemplated by this Agreement or seeking material damages or other material payments as a result of the consummation of the Merger. 28 Section 8.04. Representations and Warranties of MBIA and Acquisition. The representations and warranties made by MBIA and Acquisition in this Agreement shall be true and correct in all material respects, both on the date hereof and as of the Closing Date. Section 8.05. MBIA Opinion Letter. MBIA shall have delivered to the 1838 Stockholders the MBIA Counsel Opinion dated the Closing Date. Section 8.06. Approvals. UBIA shall have obtained all approvals for the Merger as are required by its Organizational Documents and by applicable law. Section 8.07. No Material Adverse Change. No MBIA Material Adverse Effect shall have occurred. Section 8.08. MBIA Common Stock Price. As of the business day immediately preceding the Closing Date, the market price of MBIA Common Stock as reported by the New York Stock Exchange shall not be greater than $83.00 per share nor less than $65.00 per share. Section 8.09. Hart-Scott-Rodino. All necessary requirements of the Hart-Scott-Rodino Act shall have been complied with any "waiting periods" applicable to the Merger and the transactions described in this Agreement which are imposed by the Hart-Scott-Rodino Act shall have expired prior to the Closing Date or shall have been terminated by the appropriate agency. Section 8.10. Stockholder Approval. 1838 Stockholders not holding less than the percentage of 1838 Common Stock required under the Delaware General Corporation Law for approval of a merger shall have duly approved the terms of the Merger. ARTICLE IX INDEMNIFICATION Section 9.01. Indemnification by 1838 Stockholders. Each of the 1838 Stockholders (the "Indemnifying Parties") severally agrees to indemnify, defend and hold harmless MBIA, Acquisition, 1838 and 1838, L.P. (the "Indemnified Parties") for any loss, liability, claim, obligation, damage (including incidental and consequential damages), expense (including interest, penalties, reasonable attorneys' fees and the costs and disbursements thereof) or diminution in value (collectively, the "Damages"), arising from or in connection with: (a) any breach of any representation or warranty concerning 1838, 1838, L.P. and/or such 1838 Stockholder in this Agreement (including all Schedules and Exhibits hereto) or in any certificate or document delivered by 183 8 pursuant to this Agreement; (b) any breach or nonfulfillment of any covenant or obligation of 1838 and/or such 1838 Stockholder under this Agreement; (c) any misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to MBIA concerning 1838, 1838, L.P. or such 1838 Stockholder hereunder; 29 (d) any claims by MPCM against the Indemnified Parties arising from or relating to the Joint Advisory Agreement, the Limited Partnership Agreement or arising from or related to the redemption by MPCM of its 1838, L.P. Partnership Interests in 1838, L.P. pursuant to the Redemption Agreement. Section 9.02. Limitation of Indemnification. The Indemnifying Parties as a whole shall have no liability to the Indemnified Parties with respect to the matters described in subsections 9.01(a) through (d) above or any other provisions of this Agreement until the total of all Damages under those subsections exceeds three hundred thousand dollars ($300,000) and then only for the amount by which those Damages exceed three hundred thousand dollars ($300,000). The liability of each Indemnifying Party for Damages for which all Indemnifying Parties are liable shall be a pro rata share of the Damages determined by such Indemnifying Party's ownership of 1838 Common Stock on the Closing Date as set forth on Exhibit A hereto. The maximum liability under any circumstances for each Indemnifying Party shall be limited to an amount determined as the number of shares of MBIA Common Stock received by such Indemnifying Party in the Merger times thirty-seven dollars ($37.00). Section 9.03. Procedure for Indemnification-Third Parties. (a) In the case of any claim, other than a claim asserted by a third party, as to which indemnity may be sought by an Indemnified Party, notice shall be given by the Indemnified Party to the Indemnifying Parties. (b) Promptly after receipt by an Indemnified Party of any notice of the commencement of any claim, proceeding or action (a "Proceeding") by a third party to recover damages which would, if such action is successful, result in Indemnification Obligations under this Article IX, such Indemnified Party shall provide notice to the Indemnifying Parties of such Proceeding. The Indemnified Party shall permit the Indemnifying Party (at the expense of such Indemnifying Party) to assume the defense of any claim or any litigation resulting therefrom, provided that (i) the Indemnifying Party shall make such election within ten (10) days after receipt of the notice of claim from the Indemnified Party, (ii) the counsel for the Indemnifying Party who shall conduct the defense of such claim or litigation shall be reasonably satisfactory to the Indemnified Party, (iii) the Indemnified Party may participate in such defense at such Indemnified Party's expense, and (iv) the omission by any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its indemnification obligation under this Agreement except to the extent that such omission has a material adverse effect on the Indemnifying Party's ability to defend against such claim. (c) Except with the prior written consent of the Indemnified parties, the Indemnifying Parties, in the defense of any such claim or litigation, shall not consent to entry of any judgment or enter into any settlement that provides for injunctive or other nonmonetary relief affecting the Indemnified Party or that does not include as an unconditional term thereof the giving by each claimant or plaintiff to such Indemnified Party of a release from all liability with respect to such claim or litigation. In the event that the Indemnifying Party does not accept the defense of any matter as above provided, (A) the Indemnified Party shall have the MI right to defend against any such claim or 30 demand and shall be entitled to settle or agree to pay in full such claim or demand after fifteen (15) days prior written notice to the Indemnifying Parties; and (B) all legal and other expenses reasonably incurred by the Indemnified Party shall be home by the Indemnifying Party. Notwithstanding any other provision of this Section 9.03, in the event that the Indemnified Party shall in good faith determine that the Indemnified Party may have available to it one or more defenses or counterclaims that are inconsistent with one or more of those that may be available to the Indemnifying Party in respect of such claim or any litigation relating thereto, the Indemnified Party shall have the right at all times to take over and assume control over the defense, settlement, negotiations or litigation relating to any such claim at the sole cost of the Indemnified Party, provided that if the Indemnified Party does so take over and assume control, the Indemnified Party shall not settle such claim or litigation without the written consent of the Indemnifying Party, such consent not to be unreasonably withheld. In any event, the Indemnified Parties and the Indemnifying Parties shall cooperate in the defense of any claim or litigation subject to this Section 9.03 and the records of each shall be available to the other with respect to such defense. (d) The Indemnifying Parties hereby appoint Brown as their agent for all notices, consultations and agreements required or permitted under this Article IX until such time as the Indemnified Parties shall be informed otherwise in writing, and agree to be bound by his actions and agreements as agent hereunder. (e) The Indemnified Parties hereby appoint MBIA as their agent for all notices, consultations and agreements required or permitted under this Article IX until such time as the Indemnifying Parties shall be informed otherwise in writing, and agree to be bound by MBIA's actions and agreements as agent hereunder. (f) The Indemnified Parties shall not be entitled to bring any new claim for Damages arising. from a breach of a representation or warranty, whether under this Article IX or otherwise, after the survival period with respect to the representation and warranty giving rise to the claim for Damages shall have expired as set forth in Section 10.01 hereof. Section 9.04. Procedures for Claims by Indemnified Parties. Any of the Indemnified Parties may assert a claim for payment or reimbursement of Damages by sending notice thereof to the Indemnifying Parties in accordance with Sections 9.03 and 10.06 hereof The Indemnifying Parties shall have 30 days after the date any such notice is sent (the "Notice Period") to notify the Indemnified Parties of any defenses asserted by the Indemnifying Parties to such claim for Damages. If the notice to the Indemnifying Parties so states, failure by the Indemnifying Parties to respond within the Notice Period shall be deemed an admission of liability by the Indemnifying Parties with respect to the claim for Damages and they shall thereafter be barred from raising any defense or denial of liability relating thereto. Section 9.05. Indemnification by MBIA. (a) M13IA agrees to indemnify each 1838 Stockholder for all Damages incurred by such 1838 Stockholder arising from or in connection with: 31 (i) any breach of any representation or warranty made by MBIA in this Agreement or any certificate or document delivered by MBIA pursuant to this Agreement; and (ii) any breach or nonfulfillment of any covenant or obligation of MBIA under this Agreement. (b) The 1838 Stockholders may assert a claim for payment or reimbursement for Damages by sending notice thereof to MBIA and MBIA shall have thirty (30) days after the date of such notice to notify the 1838 Stockholders of any defenses asserted by MBIA to the 1838 Stockholders' claim for Damages. If the notice to MBIA so states, failure by MBIA to respond within such thirty (30) day period shall be deemed an admission of liability of MBIA with respect to the Damages and it shall thereafter be barred from raising any defense or denial of liability relating thereto. (c) The 1838 Stockholders shall not be entitled to bring any new claim for Damages arising from a breach of a representation or warranty, whether under this Article IX or otherwise, after the survival period with respect to the representation and warranty giving rise to the claim for Damages shall have expired as set forth in Section 10.01 hereof. (d) The maximum liability of MBIA to each 1838 Stockholder under this Section 9.05 shall be limited to an amount determined as the number of shares of M131A Common Stock received by such 1838 Stockholder in the Merger' multiplied by thirty seven dollars ($37.00). Section 9.06. Exclusive Remedies. The indemnification rights set forth in this Article IX shall be the sole and exclusive remedy for the matters set forth in Sections 9.01 and 9.05 hereof, provided, however, that nothing in this Article IX shall limit the remedies available to the Indemnified Parties or the 1838 Stockholders with respect to (i) claims of alleged fraud or deceit with respect to the Merger, (ii) actions seeking specific performance of this Agreement or any provision hereof, (iii) remedies available to the Indemnified Parties or the 1838 Stockholders to enforce their right to indemnification and (iv) remedies available to the 1838 Stockholders under any applicable Securities Laws. ARTICLE X MISCELLANEOUS Section 10.01. Survival of Representations, Warranties and Covenants. The representations and warranties of 1838, the 1838 Stockholders, MBIA and Acquisition contained in or made pursuant to this Agreement will survive the Closing Date for a period of the lesser of (i) twelve (12) months or (ii) the date of issuance of the first audited financial statements of MBIA following the Merger regardless of any investigation made by or on behalf of the parties hereto or the results of any such investigation, and the participation of either party in such investigation will not constitute a waiver of any representation or warranty of any other party. MBIA and 1838 shall each deliver to the other party, on the Closing Date, a certificate stating 32 that, as of the Closing Date, such party has no knowledge of any breach of the other party's representations and warranties herein or, if such party has knowledge of a breach, specifying any such breaches to which the party has knowledge. The respective covenants and agreements of the 1838 Stockholders and MBIA set forth in this Agreement (including, without limitation, Section 2.12 and all provisions of Article IX) shall survive the consummation of the transactions contemplated by this Agreement. Section 10.02. Entire Agreement; Amendment. This Agreement and the documents referred to in this Agreement and required to be delivered pursuant to this Agreement constitute the entire agreement among the parties pertaining to the subject matter of this Agreement, and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions of the parties, whether oral or written, and there are no warranties, representations or other agreements between the parties in connection with the subject matter of this Agreement, except as specifically set forth in this Agreement. No amendment, supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. At any time prior to the Effective Time of Merger, the Boards of Directors of the constituent corporations to the Merger may amend this Agreement, provided that any amendment made subsequent to the adoption of this Agreement by the 1838 Stockholders shall not (1) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of 1838 Common Stock, (2) alter or change any term of the certificate of incorporation of the Surviving Corporation to be effected by the Merger, or (3) alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any class of such constituent corporation. Section 10.03. Expenses. MBIA, Acquisition, 1838 and the 1838 Stockholders shall each pay their respective expenses incurred in connection with the negotiation and preparation of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, their respective legal fees, expenses, commissions and filing fees regardless of whether such transactions are consummated. MBIA shall pay all fees associated with the Hart-Scott-Rodino filing and up to ten thousand dollars ($10,000) of 1838's accounting fees incurred in connection with the Merger. Section 10.04. Governing Law. This Agreement shall be construed and interpreted according to the Laws of the State of Delaware except that the provisions of Section 2.12 hereof shall be governed by the laws of the Commonwealth of Pennsylvania. Section 10.05. Assignment. Neither MBIA nor 1838 may assign any of their rights, liabilities or obligations under this Agreement without the prior written consent of the other parties hereto, except that MBIA may assign its rights to any entity or person affiliated with it. Section 10.06. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when personally 33 delivered or deposited in the United States Mail, mailed first class, certified and return receipt requested, addressed as follows: If to MBIA or Acquisition: MBIA Inc. 113 King Street Armonk, NY 10504 Attention: Peggy D. Garfunkel with a copy to: MBIA Inc. 113 King Street Armonk, NY 10504 Attention: General Counsel If to 1838, 1838 Stockholders 1838 Investment Advisors, Inc. or the Indemnifying Parties: Radnor Corporate Center, Suite 320 Radnor, PA 19087 Attention: W. Thacher Brown with a copy to: Drinker, Biddle & Reath Suite 300 1000 Westlakes Drive Berwyn, PA 19312 Attention: Thomas E. Wood, Esq. Section 10.07. Counterparts, Headings. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same Agreement. The table of contents and article and section headings in this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. Section 10.08. Interpretation. Unless the context requires otherwise, all words used in this Agreement in the singular number shall extend to and include the plural, all words in the plural number shall extend to and include the singular, and all words in any gender shall extend to and include all genders. The language used in this Agreement shall be deemed to be language chosen by the parties to this Agreement to express their mutual intent. In the event an ambiguity or question of intent or interpretation arises concerning the language of this Agreement, this Agreement shall be construed as if drafted jointly by the parties to this Agreement and no presumption or burden of proof will arise favoring or disfavoring any party to this Agreement by virtue of the authorship of any of the provisions of this Agreement. Section 10.09. Severability. If any provision, clause or part of this Agreement, or the application thereof under certain circumstances, is held invalid, the remainder of this Agreement, or the application of such provision, clause or part under other circumstances, shall not be affected thereby unless such invalidity materially impairs the ability of the parties to consummate the transactions contemplated by this Agreement. 34 Section 10.10. Further Assurances. If, at any time after the Closing Date, any farther action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, properties, rights, privileges, powers and franchises of either Acquisition or 1838, the officers of the Surviving Corporation are fully authorized to take any such action in the name of Acquisition or 1838. Section 10.11. Waivers. No failure or delay on the part of any party in exercising any right, power or remedy hereunder will operate as a waiver thereof, nor will any single or partial exercise of any right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. Section 10.12. Successors In Interest. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and permitted assigns. Section 10.13. ACKNOWLEDGEMENT BY 1838 STOCKHOLDERS. BY THEIR EXECUTION OF THE SELLING STOCKHOLDER LETTER, EACH OF THE 1838 STOCKHOLDERS (1) APPROVES THE TERMS OF THE MERGER AS SET OUT HEREIN, (11) ACKNOWLEDGES AND AGREES TO THE REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE 1838 STOCKHOLDERS SET OUT HEREIN AND (III) AGREES TO BE BOUND BY THE NONSOLICITATION PROVISIONS IN SECTION 2.10 (IF APPLICABLE) AND THE INDEMNIFICATION PROVISIONS OF ARTICLE IX HEREOF. THE 1838 STOCKHOLDERS FURTHER ACKNOWLEDGE THAT THIS AGREEMENT IS A LEGALLY BINDING DOCUMENT AND THAT THEY HAVE CONSULTED WITH LEGAL COUNSEL REGARDING THIS AGREEMENT TO THE EXTENT THEY DEEM APPROPRIATE. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS] 35 IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of Reorganization to be duly executed as of the day and year first above written. MBIA INC. Attest: By: /s/[ILLEGIBLE] By: /s/ Louis G. Lenzi ---------------------------- --------------------------- Secretary MBIA ACQUISITION, INC. Attest: By: /s/ Margaret D. Garfunkel By: /s/ Louis G. Lenzi ---------------------------- --------------------------- Title: Vice President Secretary -------------------------- 1838 INVESTMENT ADVISORS, INC. Attest: By: By: /s/ [ILLEGIBLE] ----------------------------- ----------------------------- Title: /s/ [ILLEGIBLE] -------------------------- Certificate of the Secretary of MBIA Acquisition, Inc. I, the undersigned, as Secretary of MBIA Acquisition Inc. ("Acquisition"), hereby certify that the Agreement and Plan of Merger dated as of June 18, 1998 (the "Agreement") between MBIA Inc., 1838 Investment Advisors, Inc. and Acquisition has been adopted by Acquisition, pursuant to Section 251(f) of the Delaware General Corporation Law. I certify further that no shares of Acquisition were outstanding prior to the adoption of the resolution, dated as of June 19, 1998, approving the Agreement by the Board of Directors of Acquisition. DATED as of this, 19th day of June, 1998. /s/ Louis G. Lenzi -------------------------------- Louis G. Lenzi, Secretary The 1838 Stockholders hereby acknowledge their nonsolicitation (if applicable) and indemnification obligations under Section 2.12 and Article 9, respectively of this Agreement, and agree to be bound by the terms thereof. /s/ W. Thacher Brown -------------------------- W. Thacher Brown /s/ John Springrose -------------------------- John Springrose /s/ George W. Gephart, JR -------------------------- George W. Gephart, JR /s/ Cynthia R. Axelrod -------------------------- Axelrod, Cynthia R. /s/ Anna M. Bencrowsky -------------------------- Bencrowsky, Anna M. /s/ Michael F. Biemer -------------------------- Biemer, Michael F. /s/ J. Barron Clancy -------------------------- Clancy, J. Barron /s/ Thomas A. Considine -------------------------- Considine, Thomas A. /s/ Frederic N. Dittman -------------------------- Dittmann, Frederic N. /s/ John H. Donaldson -------------------------- Donaldson, John H. /s/ Joseph T. Doyle, Jr. -------------------------- Doyle, Jr. Joseph T. /s/ Kenneth A. Egan -------------------------- Egan, Kenneth A. /s/ Robert W. Herz -------------------------- Herz, Robert W. /s/ Stephen D. Kepes -------------------------- Kepes, Stephen D. /s/ Amy B. Lieb -------------------------- Lieb, Amy B. /s/ John J. McElroy -------------------------- McElroy, John J. /s/ Rhonda McNavish -------------------------- McNavish, Rhonda /s/ James E. Moore, III -------------------------- Moore, III, James E. /s/ Patricia J. Myers -------------------------- Myers, Patricia J. /s/ Edward Powell -------------------------- Powell, Edward /s/ Nancy W. Tetley -------------------------- Tetley, Nancy W. /s/ Hnas Van Den Berg -------------------------- Van Den Berg, Hans 2 /s/ Denise E. White -------------------------- White, Denise E. /s/ Marcia Zercoe -------------------------- Zercoe, Marcia 3 EXHIBITS AND SCHEDULES Disclosure Schedule Exhibit A 1838 Shareholder List (Current and Former) Exhibit A-1 Nonsoliciting Shareholder List Exhibit 13 Plan of Merger Exhibit C Furniture, Fixtures and Equipment Exhibit D Customer Contracts Exhibit E Selling Stockholder Letter PRELIMINARY DISCLOSURE SCHEDULE 6/19/98 This Disclosure Statement is made and given pursuant to the Agreement and Plan of Merger dated June 19, 1998 by and among MBIA Inc.. MBIA Acquisition, Inc. and 1838 Investment Advisors. Inc. (the "Agreement"). The section numbers in this Disclosure Schedule correspond to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other schedule number under the Agreement where such disclosure would be appropriate. Any term defined in the Agreement shall have the same meaning when used in this Disclosure Schedule as when used in the Agreement unless the context otherwise requires. 4.02 1838 Inc, had to accelerate our payments to Jim Balog in order to do deal with MBIA. 4.05 1938 LP owns shares in the 1838 International Fund. 4.06 Stockholders' Agreement 4.07 Edward Shute, a former employee of 1838 who was terminated in 1993 has periodically threatened legal action for wrongful termination and inadequate reimbursement for his stock. 4.08 1997 Financial Statements were provided to MBIA. As indicated in Sec. 4.1.0 the MPCM loan and stockholder (partner) distribution obligations total $15,758,442. 4.09 See Schedule 4.09 1838 leased additional space contagious to its current office space on June 1, 1998. As part of the lease, 1839 has a building allowance of $5 per square foot. There is no provision on the balance sheet for build out expenses or furniture. 4.10 See Schedule 4.10. 1838 LP is restricted from solicitation activities in the Netherlands. 1838 LP has a verbal agreement with Ken Egan, a retired employee, to pay finders fees on certain accounts so long as they remain with 1838 LP. 4.11 1838 LP may be in default with respect to the One Meridian Bank lease. Total liability was less than $75,000 in 1991 dollars. 4.13 See Schedule 4.13 4.14 See Schedule 4.14 4.16 (iii) List of Tax Returns - 1838 LP: Federal - 1065 US Partnership Return of Income State - PA-65 Commonwealth of PA Partnership Information Return Local - Radnor Business Privilege Tax (Gross Receipts) 1838 Inc, Federal 1120S - US Income Tax S-Corp State - RCT-101 PA Corp Tax Report (Capital Stock Tax) State - Delaware Annual Franchise Tax Report (v) The 12/31/97 basis of 1838 LP's assets are: Invested = IV $563,123, Investment in International Fund $121,142. The 12/31/97 basis of 1838 Inc. is investment in 1838 LP of $4,731,354. 4-17 Edward Shute has asserted various claims against 1838 Inc. (see 4.07) One current and one former employee have complained of verbal harrassment from their supervisor. The matter was resolved and the current employee cliams the situation has not recurred. 4.19 The minutes book may not be complete, particularly prior to the 1991 office fire 4.22 See schedule 4,22. American College of Cardiology will be reducing assets by approximately 35%. 4.23 Several family members of 1838 employees are investment advisory clients of 1839 LP. 4.25 1838 has hired three summer employees. In addition, 1938 is searching to fill two vacant clerical positions and one equity analyst position. 4.27 See Schedule 4.27 4.32 1838 acts as advisor to the following funds: 1838 Investment Advisors Fund 1838 Bond Debenture Trading Fund 1838 acts as sub-advisor to the following funds: Market Street Fund SEI Small Cap Value Fund 4.32 (b) Rodney Square, administrator to the 1838 Funds failed to timely comply with blue sky regulations in various states. 4.35 With regard to year 2000 compliance, 1838 Investment Advisors in-house systems are recently developed and have taken year 2000 into consideration. Conversion to Access 8 from Access 2 brings these applications into compliance. Over the past two years our equipment and infrastructure (including telecommunications and voice mail) have been either upgraded or newly purchased addressing year 2000 issues in the process. The Novell server 3.1.2 will be certified Y2K compliant by Novell, with patches. However, we are moving to an NT environment prior to Y2K, which Microsoft states is "compliant or compliant with minor issues." The latest release of GIM2 (5.3.0.14), the firm's portfolio accounting system, brings the application to full compliance. We are in the process of installing and testing the application. We anticipate this will be completed by July 15. We are in contact and working with our data providers and institutional interfaces (DTC), to ensure compliance with these systems. 1838 LP has not assessed operating and technology systems used by vendors to or clients of 1838, i.e. brokers, custodians. DTC, etc. We are contracting with JVC Consulting for a Y2K audit to be completed by the end of July. The purpose of the audit will be to certify our findings or identify any exposure we may have missed. 4.37 Edward Shute is the only shareholder who has threatened claims against 1838. Shareholder sales since 1993 are detailed on exhibit 4.37. Other former stockholders include Edward Shute, Robert Vitale and Joan Echevarria. 7.15 1938 LP remains party to a continuing investment management agreement with Fortis, Inc., successor to MPCM. Depreciation for 1838 on MeesPierson Assets for 1998
Date of Original Cost Life Service January February March April May MeesPierson Computer Equipment Printer 1,299.00 5 11/93 21.65 21.65 21.65 21.65 21.65 Model & 486 DX2 2,087.85 5 7/94 34.80 34.80 34.80 34.80 34.80 Total 3,385.85 56.45 56.45 56.45 56.45 56.45 MeesPierson Software General Ledger Software 18,698.30 5 7/93 311.64 311.64 311.64 311.64 311.64 Software 608.54 3 5/94 Custom Report Software 600.00 3 3/94 Software Upgrade 742.70 3 9/94 Network Upgrade 1,908.00 5 1/95 31.80 31.80 31.80 31.80 31.80 Total 22,557.54 343.44 343.44 343.44 343.44 343.44 MeesPierson Office Furn & Equip Chair 1,203.10 7 1/91 14.32 Bookcase 543.00 7 2/91 6.46 6.46 Side Chair 782.00 7 2/91 9.31 9.31 Chairs 450.25 7 5/91 5.36 5.36 5.36 5.36 5.36 English & 473.36 7 2/92 5.64 5.64 5.64 5.64 5.64 Desk 66 x 1,447.71 7 4/92 17.23 17.23 17.23 17.23 17.23 Modular T 348.76 7 4/92 4.15 4.15 4.15 4.15 4.15 Wing Chair 1,519.41 7 4/92 18.09 18.09 18.09 18.09 18.09 Arm Chair 1,348.22 7 4/92 16.05 16.05 16.05 16.05 16.05 Bookcase 524.30 7 4/92 6.24 6.24 6.24 6.24 6.24 Copier 10,265.50 5 5/92 Fax Machine 2,200.00 5 5/92 Fax Machine 535.00 5 7/92 Credenza & other att - 2 7,195.75 7 9/93 85.66 85.66 85.66 85.66 85.66 Credenza & other att - 2 4,626.50 7 11/93 55.08 55.08 55.08 55.08 55.08 Custom 3 1,678.57 1 1/95 Total 35,141.43 243.59 229.27 213.50 213.50 213.50 June July August September October November December Printer 21.65 21.65 21.65 21.65 21.65 Model & 486 DX2 34.80 34.80 34.80 34.80 34.80 34.80 34.80 Total 56.45 56.45 56.45 56.45 56.45 34.80 34.80 MeesPierson Software General Ledger Software 311.64 Software Custom Report Software Software Upgrade Network Upgrade 31.80 31.80 31.80 31.80 31.80 31.80 31.80 Total 343.44 31.80 31.80 31.80 31.80 31.80 31.80 MeesPierson Office Furn & Equip Chair Bookcase Side Chair Chairs English & 5.64 5.64 5.64 5.64 5.64 5.64 5.64 Desk 66 x 17.23 17.23 17.23 17.23 17.23 17.23 17.23 Modular T 4.15 4.15 4.15 4.15 4.15 4.15 4.15 Wing Chair 18.09 18.09 18.09 18.09 18.09 18.09 18.09 Arm Chair 16.05 16.05 16.05 16.05 16.05 16.05 16.05 Bookcase 6.24 6.24 6.24 6.24 6.24 6.24 6.24 Copier Fax Machine Fax Machine Credenza & other att - 2 85.66 85.66 85.66 85.66 85.66 85.66 85.66 Credenza & other att - 2 55.08 55.08 55.08 55.08 55.08 55.08 55.08 Custom 3 Total 208.14 208.14 208.14 208.14 208.14 208.14 208.14
SMH/Deprec98/MPCM/6/11/98 New Computer Software-1998 105-5101 Deprec. Exp of 100-1517 Accum Deprec. On New Computer Software
Date of Original Cost Life Service January February March April May New Computer Software Integrated Decision Systems 139,542.00 5 08/94 2,325.70 2,325.70 2,325.70 2,325.70 2,325.70 Reflects 25% Discount $20,130 is for Informix JVC-Software to connt Unix S 738.03 5 06/94 12.30 12.30 12.30 12.30 12.30 IDS Star 5.02 (Software) 1,960.00 3 07/94 IDS NET (DOS) 4.10DDB (S 1,995.00 3 07/94 JVC-Palindrome UG 2.06 757.00 3 12/94 Novell GRP Win Upgrade 2,890.99 3 03/95 60.31 60.31 Mobius Group M-Search Up 4,750.00 3 6/95 131.94 131.94 131.94 131.94 131.94 Zonics System Management 1,531.70 3 6/95 42.55 42.55 42.55 42.55 42.55 Zonics System Management 7,072.85 3 7/95 196.47 196.47 196.47 196.47 196.47 Zonics System Management 8,379.30 3 7/95 232.76 232.76 232.76 232.76 232.76 Zonics System Management 6,667.40 3 7/95 185.21 185.21 185.21 185.21 185.21 Zonics System Management 8,379.30 3 7/95 232.76 232.76 232.76 232.76 232.76 Great Plains Version 8 Upgr 1,515.27 3 6/95 46.60 46.60 46.60 46.60 46.60 IDS Globalized Data Conver 1,875.00 3 8/95 52.08 52.08 52.08 52.08 52.08 IDS Rating Analysis and Mar 2,812.50 3 8/95 78.13 78.13 78.13 78.13 78.13 Zonics System Management 5,360.95 3 9/95 148.92 148.92 148.92 148.92 148.92 IDS Asset Alloc. Block Spec 837.50 3 9/95 26.04 26.04 26.04 26.04 26.04 Decision Systems Compsoft 22,500.00 3 7/95 625.00 625.00 625.00 625.00 625.00 IDS Custom Trans. Ledger 2,250.00 3 10/95 62.50 62.50 62.50 62.50 62.50 IDS Portfolio Changes Repor 3,187.50 3 10/95 88.54 88.54 88.54 88.54 88.54 IDS DTC, Autotasking, Swe 662.50 3 10/95 23.96 23.96 23.96 23.96 23.96 IDS Globalize Data Conversi 625.00 3 10/95 17.36 17.36 17.36 17.36 17.36 Informix Runtime Intel Windo 3,556.94 3 11/95 98.80 98.80 98.80 98.80 98.80 JVC Tech Microsoft Win for 495.99 3 6/96 13.76 13.76 13.76 13.76 13.76 IDS Users 33-64 Upgrade 24,059.30 3 6/96 668.31 668.31 668.31 668.31 668.31 Integrated Decision Systems 19,000.00 3 6/97 528.00 528.00 528.00 528.00 528.00 Financial Models-Auto Reco 25,000.00 3 8/97 694.00 694.00 694.00 694.00 694.00 JVC Tech Novell Netware V 2,281.12 3 12/97 63.36 63.36 63.36 63.36 63.36 Capital Mgmt-CMS BondEdg 2,509.00 3 12/97 69.70 69.70 69.70 69.70 69.70 Informix 27,044.76 3 1/98 751.36 751.36 751.36 751.24 SQL 4.20.UC1 License Sun Microsystems SN #AAC#J269824 Online 5.10.UC1 Development/User Lic SN #AAC#R269825 Star TCP/IP 5.10.UC1 Dev/User Lic SN #AAC#N269826 Monthly Total 330,536.30 4,419.36 5,170.72 5,090.29 5,090.29 5,090.29 June July August September October November December Integrated Decision Systems 2,325.70 2,325.70 2,325.70 2,325.70 2,325.70 2,325.70 2,325.70 Reflects 25% Discount $20,130 is for Informix JVC-Software to connt Unix S 12.30 12.30 12.30 12.30 12.30 12.30 12.30 IDS Star 5.02 (Software) IDS NET (DOS) 4.10DDB (S JVC-Palindrome UG 2.06 Novell GRP Win Upgrade Mobius Group M-Search Up Zonics System Management Zonics System Management 196.47 Zonics System Management 232.76 Zonics System Management 185.21 Zonics System Management 232.76 Great Plains Version 8 Upgr IDS Globalized Data Conver 52.08 52.08 IDS Rating Analysis and Mar 78.13 78.13 Zonics System Management 148.92 148.92 148.92 IDS Asset Alloc. Block Spec 26.04 26.04 26.04 Decision Systems Compsoft 625.00 IDS Custom Trans. Ledger 62.50 62.50 62.50 62.50 IDS Portfolio Changes Repor 88.54 88.54 88.54 88.54 IDS DTC, Autotasking, Swe 23.96 23.96 23.96 23.96 IDS Globalize Data Conversi 17.36 17.36 17.36 17.36 Informix Runtime Intel Windo 98.80 98.80 98.80 98.80 98.80 JVC Tech Microsoft Win for 13.76 13.76 13.76 13.76 13.76 13.76 13.76 IDS Users 33-64 Upgrade 668.31 668.31 668.31 668.31 668.31 668.31 668.31 Integrated Decision Systems 528.00 528.00 528.00 528.00 528.00 528.00 528.00 Financial Models-Auto Reco 694.00 694.00 694.00 694.00 694.00 694.00 694.00 JVC Tech Novell Netware V 63.36 63.36 63.36 63.36 63.36 63.36 63.36 Capital Mgmt-CMS BondEdg 69.70 69.70 69.70 69.70 69.70 69.70 69.70 Informix 751.24 751.24 751.24 751.24 751.24 751.24 751.24 SQL 4.20.UC1 License Sun Microsystems SN #AAC#J269824 Online 5.10.UC1 Development/User Lic SN #AAC#R269825 Star TCP/PIP 5.10.UC1 Dev/User Lic SN #AAC#269826 Monthly Total 4,869.20 3,397.00 3,266.79 3,091.83 2,699.47 2,800.67 2,800.67
SMH/Deprec98/Software/6/11/98 Furniture/Fixtures Small Cap - 1998 400-1515 Accum. Dep. F/F Small Cap 400-5100 Deprec. Exp F/F Small Cap
Date of Original Cost Life Service January February March April May Furniture/Fixture JRC Furniture 874.15 5 11/94 14.57 14.57 14.57 14.57 14.57 Computer Equip Vircom HP Lase 1,797.99 3 2/98 49.74 49.95 49.95 SMH/Deprec98/Small cap/6/11/98 June July August September October November December Furniture/Fixture JRC Furniture 14.57 14.57 14.57 14.57 14.57 14.57 14.57 Computer Equip Vircom HP Lase 49.95 49.95 49.95 49.95 49.95 49.95 49.95
SMH/Deprec98/Small cap/6/11/98 Furniture/Fixtures Marketing - 1998 1515-300 Accum. Dep. F/F Marketing 5100-300 Deprec. Exp F/F Marketing
Date of Original Cost Life Service January February March April May Furniture/Fixture J. Rothbard Conf Table & Base 749.98 5 7/96 50.00 12.50 J. Rothbard Pedestal File JHS 640.88 5 10/96 42.72 10.68 Total 1,390.74 62.72 23.18 Computer Equipment Depreciation-Marketing 1998 300-1515 Accum. Dep. Computers 300-5101 Depreciation Exp. Computers Gateway 2000 3,427.49 5 11/96 57.12 57.12 57.12 57.12 57.12 Gateway Solo 9100 S5 Portable 5,132.00 3 10/97 144.50 142.50 142.50 142.50 142.50 Gateway -1 GP6 300 System 3,638.00 3 10/97 103.00 101.00 101.00 101.00 101.00 Gateway - GP6 300 System 3,257.00 3 1/98 90.55 90.47 90.47 90.47 Total 15,454.49 304.62 391.17 391.09 391.09 391.09 June July August September October November December Furniture/Fixture J. Rothbard Conf Table & Base 12.50 12.50 12.50 12.50 12.50 12.50 12.50 J. Rothbard Pedestal File JHS 10.68 10.68 10.68 10.68 10.68 10.68 10.68 Total 23.18 23.18 23.18 23.18 23.18 23.18 23.18 Computer Equipment Depreciation-Marketing 1998 300-1515 Accum. Dep. Computers 300-5101 Depreciation Exp. Computers Gateway 2000 57.12 57.12 57.12 57.12 57.12 57.12 57.12 Gateway Solo 9100 S5 Portable 142.50 142.50 142.50 142.50 142.50 142.50 142.50 Gateway -1 GP6 300 System 101.00 101.00 101.00 101.00 101.00 101.00 101.00 Gateway - GP6 300 System 90.47 90.47 90.47 90.47 90.47 90.47 90.47 Total 391.09 391.09 391.09 391.09 391.09 391.09 391.09
SMH/Deprec98/Mktg/6/11/98 Leasehold Improvements Depreciation 1998 100-1525 Accumulated Amort. Leasehold 100-5102 Amort. Exp. Leasehold
Date of Original Cost Life Service January February March April May Leasehold Improvements Wiring - JVC 17,606.64 120.00 12/91 146.72 146.72 146.72 146.72 146.72 Build Out for MeesPierson 3,660.00 84.00 12/94 43.57 43.57 43.57 43.57 43.57 G. Erickson & Sons Construction-Deposit 12,437.00 66.00 6/96 193.23 193.23 193.23 193.23 193.23 G. Erickson & Sons Construction-Final Payment 18,342.61 66.00 6/96 300.51 300.51 300.51 300.51 300.51 Monthly Total 52,046.25 684.03 684.03 684.03 684.03 684.03 June July August September October November December Leasehold Improvements Wiring - JVC 146.72 146.72 146.72 146.72 146.72 146.72 146.72 Build Out for MeesPierson 43.57 43.57 43.57 43.57 43.57 43.57 43.57 G. Erickson & Sons Construction-Deposit 193.23 193.23 193.23 193.23 193.23 193.23 193.23 G. Erickson & Sons Construction-Final Payment 300.51 300.51 300.51 300.51 300.51 300.51 300.51 Monthly Total 684.03 684.03 684.03 684.03 684.03 684.03 684.03
SMH/Deprec98/Leasehold/6/11/98 IS Computer Equipment Depreciation - 1998 100-5101 Depreciation Exp. Computers 100-1516 Accum. Deprec. Computers IS
Date of Original Cost Life Service January February March April May IS Computer Equipment Micro Computer Industries 42,634.00 5 06/94 710.57 710.57 710.57 710.57 710.57 Micro Computer Industries (TAX) 2,558.04 5 07/94 42.63 42.63 42.63 42.63 42.63 JVC- Exabyte ext 4200C 2-4GB 1,253.00 3 12/94 JVC- 3COM Etherlink-Card Server 1,854.27 3 12/94 Cartel System CPU Fan, Motherboard 10,176.00 5 1/95 169.60 169.60 169.60 169.60 169.60 Cartel System Motherboard Qty 5 10,176.00 5 2/95 169.60 169.60 169.60 169.60 169.60 JVC Kalpana EPS Ether SW Sport 2,336.24 5 7/95 38.93 38.93 38.93 38.93 38.93 Cartel Sys. 486 DX2-66 Comp. 10,176.00 5 3/95 169.60 169.60 169.60 169.60 169.60 Intersolv Conversion DB Tool Kit 5,678.26 5 6/95 94.64 94.64 94.64 94.64 94.64 Cartel System 4,070.40 5 10/95 67.64 67.64 67.64 67.64 67.64 Dell Direct CUS-HD Qty 1 821.50 5 10/95 13.69 13.69 13.69 13.69 13.69 Surestore 2000E 2GB Tape Dr.SN#P 1,114.70 3 2/97 30.96 30.96 30.96 30.96 30.96 MovinColl Portable AC Unit 2,326.70 3 11/97 63.95 63.95 63.95 63.95 63.95 Peripheral Ultra 2 Model 300 Series 22,967.38 5 1/98 382.18 382.18 382.18 382.18 Peripheral Tape Drive, Monitor 4,784.84 5 1/98 79.59 79.75 79.75 79.75 Cleo 3780 Plus Interface w/Sync Cabl 2,114.70 3 2/98 58.75 58.75 58.75 Ethernet Switch 3,402.50 3 3/98 95.00 94.50 Sun 9gb Disk Drive 2,141.13 3 4/98 59.33 Cisco 2516 Router 2,149.50 3 4/98 59.65 4 Baystack 350T StandAlone/Rackm 6,955.45 3 4/98 248.76 Monthly Total 141,690.61 1,572.01 2,033.78 2,093.01 2,188.31 2,555.85 June July August September October November December IS Computer Equipment Micro Computer Industries 710.57 710.57 710.57 710.57 710.57 710.57 710.57 Micro Computer Industries (TAX) 42.63 42.63 42.63 42.63 42.63 42.63 42.63 JVC- Exabyte ext 4200C 2-4GB JVC- 3COM Etherlink-Card Server Cartel System CPU Fan, Motherboard 169.60 169.60 169.60 169.60 169.60 169.60 169.60 Cartel System Motherboard Qty 5 169.60 169.60 169.60 169.60 169.60 169.60 169.60 JVC Kalpana EPS Ether SW Sport 38.93 38.93 38.93 38.93 38.93 38.93 38.93 Cartel Sys. 486 DX2-66 Comp. 169.60 169.60 169.60 169.60 169.60 169.60 169.60 Intersolv Conversion DB Tool Kit 94.64 94.64 94.64 94.64 94.64 94.64 94.64 Cartel System 67.64 67.64 67.64 67.64 67.64 67.64 67.64 Dell Direct CUS-HD Qty 1 13.69 13.69 13.69 13.69 13.69 13.69 13.69 Surestore 2000E 2GB Tape Dr.SN#P 30.96 30.96 30.96 30.96 30.96 30.96 30.96 MovinColl Portable AC Unit 63.95 63.95 63.95 63.95 63.95 63.95 63.95 Peripheral Ultra 2 Model 300 Series 382.18 382.18 382.18 382.18 382.18 382.18 382.18 Peripheral Tape Drive, Monitor 79.75 79.75 79.75 79.75 79.75 79.75 79.75 Cleo 3780 Plus Interface w/Sync Cabl 58.75 58.75 58.75 58.75 58.75 58.75 58.75 Ethernet Switch 94.50 94.50 94.50 94.50 94.50 94.50 94.50 Sun 9gb Disk Drive 59.48 59.48 59.48 59.48 59.48 59.48 59.48 Cisco 2516 Router 59.71 59.71 59.71 59.71 59.71 59.71 59.71 4 Baystack 350T StandAlone/Rackm 248.85 248.85 248.85 248.85 248.85 248.85 248.85 Monthly Total 2,555.85 2,555.85 2,555.85 2,555.85 2,555.85 2,555.85 2,555.85
SMH/Deprec98/IS/6/11/98 Computer Equipment Depreciation - 1998 5101-100 Depreciation Exp. Computers 1515-100 Accumulated Dep. Computers
Date of Original Cost Life Service January February March April May Computer Equipment Time Stamp Machine - ATR Systems 450.50 5 09/91 Cabinet, Lotus - JVC 7,164.51 5 12/91 Intel Netport - JVC 1,023.96 5 01/92 Intel Netport - JVC 624.27 5 02/92 Companion Switches, boxes for 1,752.00 5 03/92 comp. Monitor - JVC 5 Ethernet Interface, Hardware for 583.50 5 4/92 printer - JVC MicroAge of Exton 560.31 5 06/92 Harvard Graphics Upgrade JVC Physical Installation 1,120.00 5 03/93 16.67 16.67 16.67 JVC New Server & Equipment 5,892.06 5 09/93 98.21 98.21 98.21 98.21 98.21 Haverford Sys - NEC 27" VGA Scan Montr 3,164.10 5 01/94 52.74 52.74 52.74 52.74 52.74 Tektronic Phaser Color Printer - JVC 10,600.00 5 05/94 176.67 176.67 176.67 176.67 176.67 JVC-Concenter Board 1,814.67 5 06/94 30.24 30.24 30.24 30.24 30.24 UCI-486DX's w/monitor @2/1900 4,028.00 5 06/94 67.13 67.13 67.13 67.13 67.13 UCI-486DX w/monitor @1/1934.50 1,934.50 5 06/94 32.24 32.24 32.24 32.24 32.24 UCI-486DX w/420 meg. @2/1450 +tax 3,074.00 3 10/94 JVC- HP Laserjet 4MP @ 2139 +tax 2,311.75 3 10/94 CompUSA-Laptop comptr (3yr parts) 3,497.95 3 10/94 UCI-486DX w/monitor @1/1700 +tax 1,602.00 3 10/94 Cartel System -Pentium Qty 3 8,199.10 5 6/95 136.65 136.65 136.65 136.65 136.65 MicroCenter Laser Jet Printer 3,782.08 5 7/95 63.03 63.03 63.03 63.03 63.03 JVC Cybex PC Companion-VGA 1,583.51 5 6/95 26.39 26.39 26.39 26.39 26.39 Mice, Connectors, Modems, Serial Boards 744.68 5 7/95 12.41 12.41 12.41 12.41 12.41 JVC Networth 24 Port and 4 Patch Cable 1,791.40 5 7/95 29.86 29.86 29.86 29.86 29.86 Arch Assoc. HP Laserjet 4SI 3,683.50 5 8/95 61.39 61.39 61.39 61.39 61.39 JVC HP Vectra VLS 2,660.60 5 11/95 44.34 44.34 44.34 44.34 44.34 JVC HP Vectra VL 2,416.80 5 12/95 40.28 40.28 40.28 40.28 40.28 JVC HP Vectra VL3, Pentium 60 5,676.63 5 12/95 94.61 94.61 94.61 94.61 94.61 JVC HP Vectra VL3, Pentium 90 3,340.96 5 12/95 55.68 55.68 55.68 55.68 55.68 Dell Direct Sales L.P. Hard Drive 781.96 5 1/96 4.70 4.70 4.70 4.70 4.70 JVC HP Vectra VL4 P120 16 Megs 3,332.34 5 396 55.54 55.54 55.54 55.54 55.54 JVC HP P/133, 16 Megs Qty 2 6,797.14 5 3/96 113.29 113.29 113.29 113.29 113.29 JVC HP Laserjet Printer 2,648.64 5 4/96 47.48 47.48 47.48 47.48 47.48 MicroCenter US Fax Modem 639.84 5 4/96 10.66 10.66 10.66 10.66 10.66 MicroCenter 5,063.52 5 4/96 84.39 84.39 84.39 84.39 84.39 JVC Tech Minitowers and Adapters 18,519.90 5 5/96 325.33 325.33 325.33 325.33 325.33 Printer for Trading Amer. Exp. 1,852.88 5 5/96 216.16 216.16 216.16 216.16 216.16 Gateway 2000 17,137.20 5 11/96 285.62 285.62 285.62 285.62 285.62 Winbook Corp. 5,260.94 5 12/96 67.68 67.68 67.68 67.68 67.68 MicroCenter Laser Jet printer 886.00 5 12/96 14.77 14.77 14.77 14.77 14.77 Gateway GDBPPRO200PIA-3 Computers 10,101.00 5 1/97 168.35 168.35 168.35 168.35 168.35 Gateway GDBPPRO200PIA-5 Computers 15,885.00 5 2/97 264.75 264.75 264.75 264.75 264.75 Gateway GDPPPRO200PIA-2 Computers 7,522.00 5 2/97 125.37 125.37 125.37 125.37 125.37 Micro Ctr-Memory additions 1,398.56 5 3/97 23.31 23.31 23.31 23.31 23.31 JVC-LAN Tape Backup Drive-SS# P01360 1,405.67 5 3/97 23.43 23.43 23.43 23.43 23.43 SSI-Phaser 350 Color Printer, 24mb, 600x3 5,367.00 5 3/97 69.78 69.78 69.78 69.78 69.78 June July August September October November December Computer Equipment Time Stamp Machine - ATR Systems Cabinet, Lotus - JVC Intel Netport - JVC Intel Netport - JVC Companion Switches, boxes for comp. Monitor - JVC Ethernet Interface, Hardware for printer - JVC MicroAge of Exton Harvard Graphics Upgrade JVC Physical Installation JVC New Server & Equipment 98.21 98.21 98.21 98.21 Haverford Sys - NEC 27" VGA Scan Montr 52.74 52.74 52.74 52.74 52.74 52.74 52.74 Tektronic Phaser Color Printer - JVC 176.67 176.67 176.67 176.67 176.67 176.67 176.67 JVC-Concenter Board 30.24 30.24 30.24 30.24 30.24 30.24 30.24 UCI-486DX's w/monitor @2/1900 67.13 67.13 67.13 67.13 67.13 67.13 67.13 UCI-486DX w/monitor @1/1934.50 32.24 32.24 32.24 32.24 32.24 32.24 32.24 UCI-486DX w/420 meg. @2/1450 +tax JVC- HP Laserjet 4MP @ 2139 +tax CompUSA-Laptop comptr (3yr parts) UCI-486DX w/monitor @1/1700 +tax Cartel System -Pentium Qty 3 136.65 136.65 136.65 136.65 136.65 136.65 136.65 MicroCenter Laser Jet Printer 63.03 63.03 63.03 63.03 63.03 63.03 63.03 JVC Cybex PC Companion-VGA 26.39 26.39 26.39 26.39 26.39 26.39 26.39 Mice, Connectors, Modems, Serial Boards 12.41 12.41 12.41 12.41 12.41 12.41 12.41 JVC Networth 24 Port and 4 Patch Cable 29.86 29.86 29.86 29.86 29.86 29.86 29.86 Arch Assoc. HP Laserjet 4SI 61.39 61.39 61.39 61.39 61.39 61.39 61.39 JVC HP Vectra VLS 44.34 44.34 44.34 44.34 44.34 44.34 44.34 JVC HP Vectra VL 40.28 40.28 40.28 40.28 40.28 40.28 40.28 JVC HP Vectra VL3, Pentium 60 94.61 94.61 94.61 94.61 94.61 94.61 94.61 JVC HP Vectra VL3, Pentium 90 55.68 55.68 55.68 55.68 55.68 55.68 55.68 Dell Direct Sales L.P. Hard Drive 4.70 4.70 4.70 4.70 4.70 4.70 4.70 JVC HP Vectra VL4 P120 16 Megs 55.54 55.54 55.54 55.54 55.54 55.54 55.54 JVC HP P/133, 16 Megs Qty 2 113.29 113.29 113.29 113.29 113.29 113.29 113.29 JVC HP Laserjet Printer 47.48 47.48 47.48 47.48 47.48 47.48 47.48 MicroCenter US Fax Modem 10.66 10.66 10.66 10.66 10.66 10.66 10.66 MicroCenter 84.39 84.39 84.39 84.39 84.39 84.39 84.39 JVC Tech Minitowers and Adapters 325.33 325.33 325.33 325.33 325.33 325.33 325.33 Printer for Trading Amer. Exp. 216.16 216.16 216.16 216.16 216.16 216.16 216.16 Gateway 2000 285.62 285.62 285.62 285.62 285.62 285.62 285.62 Winbook Corp. 67.68 67.68 67.68 67.68 67.68 67.68 67.68 MicroCenter Laser Jet printer 14.77 14.77 14.77 14.77 14.77 14.77 14.77 Gateway GDBPPRO200PIA-3 Computers 168.35 168.35 168.35 168.35 168.35 168.35 168.35 Gateway GDBPPRO200PIA-5 Computers 264.75 264.75 264.75 264.75 264.75 264.75 264.75 Gateway GDPPPRO200PIA-2 Computers 125.37 125.37 125.37 125.37 125.37 125.37 125.37 Micro Ctr-Memory additions 23.31 23.31 23.31 23.31 23.31 23.31 23.31 JVC-LAN Tape Backup Drive-SS# P01360 23.43 23.43 23.43 23.43 23.43 23.43 23.43 SSI-Phaser 350 Color Printer, 24mb, 600x3 69.78 69.78 69.78 69.78 69.78 69.78 69.78
SMH/Deprec98/Comp Equip/6/11/98 Computer Equipment Depreciation - 1998 5101-100 Depreciation Exp. Computers 1515-100 Accumulated Dep. Computers
Date of Original Cost Life Service January February March April May Computer Equipment Networking Plus-Bay Networks 4,221.00 5 3/97 70.35 70.35 70.35 70.35 70.35 Gateway 3 Computers-T. Brown SN 00068 10,077.00 5 4/97 167.95 167.95 167.95 167.95 167.95 Networking Plus-Computer Room Cable In 1,000.00 5 4/97 16.67 16.67 16.67 16.67 16.67 Peak Comp Svcs - P166 Barebones Sys/18 1,124.66 5 5/97 16.74 16.74 16.74 16.74 16.74 American Communications 8,000.00 5 7/97 153.00 133.00 133.00 133.00 133.00 ACS-Telephone System 24,035.00 5 7/97 435.00 400.00 400.00 400.00 400.00 RCI, Inc.-Telephone System 14,052.00 5 7/97 234.20 234.20 234.20 234.20 234.20 American Communications-Telephone Syst 41,696.38 5 7/97 691.38 695.00 695.00 695.00 695.00 ITS Mailing System 2,722.60 5 6/97 45.38 45.38 45.38 45.38 45.38 ITS Mailing Systems 2,704.60 5 6/97 45.08 45.08 45.08 45.08 45.08 Peak Comp Svcs - P168 Barebones, 32Mg 1,418.28 5 6/97 23.64 23.64 23.64 23.64 23.64 ACS-Telephone System 16,000.00 5 7/97 70.00 270.00 270.00 270.00 270.00 Networking Plus-Phone System Fax Svc 4,183.05 5 7/97 70.75 69.70 69.70 69.70 69.70 Peak Comp Svcs - P166 Barebones Sys/18 905.24 3 7/97 24.99 25.15 25.15 25.15 25.15 Networking Plus-HP Vectra P166, 128MB 3,166.96 5 8/97 52.78 52.78 52.78 52.78 52.78 Thacher: Winbook S/E #3346707631 4,416.99 5 9/97 73.60 73.60 73.60 73.60 73.60 JVC-Compaq Proliant 2500 6/200 512 IS/N 10,095.18 5 12/97 168.43 168.43 168.43 168.43 168.43 Amex-Computer Projector 3,174.70 3 10/97 94.70 89.00 89.00 89.00 89.00 Staples-HP Laser Jet5se Printer 1,113.00 3 10/97 28.00 31.00 31.00 31.00 31.00 ACS-Telephone System 4,000.00 5 7/97 66.47 66.67 66.67 66.67 Gateway 2 GP6-300 Systems 6,794.00 3 1/98 188.80 188.72 188.72 188.72 Gateway GP6-300 Systems 3,307.00 3 1/98 91.90 91.86 91.86 91.86 Vircom HP Laserjet 4000N S/N #USEF069 1,720.38 3 2/98 47.37 47.80 47.80 GP6-333 System 3,688.00 3 3/98 102.25 102.45 2 GP6-333 Systems 5,926.00 3 3/98 165.00 164.60 3 GP6-333 Systems 9,411.00 3 4/98 261.65 2 Solo 5100 Best Buy Laptops 7,648.00 3 4/98 212.60 GP6-333 System 3,399.00 3 4/98 94.30 Monthly Total 390,598.05 5,465.79 5,956.69 6,004.44 6,253.45 6,621.80 June July August September October November December Computer Equipment Networking Plus-Bay Networks 70.35 70.35 70.35 70.35 70.35 70.35 70.35 Gateway 3 Computers-T. Brown SN 00068 167.95 167.95 167.95 167.95 167.95 167.95 167.95 Networking Plus-Computer Room Cable In 16.67 16.67 16.67 16.67 16.67 16.67 16.67 Peak Comp Svcs - P166 Barebones Sys/18 16.74 16.74 16.74 16.74 16.74 16.74 16.74 American Communications 133.00 133.00 133.00 133.00 133.00 133.00 133.00 ACS-Telephone System 400.00 400.00 400.00 400.00 400.00 400.00 400.00 RCI, Inc.-Telephone System 234.20 234.20 234.20 234.20 234.20 234.20 234.20 American Communications-Telephone Syst 695.00 695.00 695.00 695.00 695.00 695.00 695.00 ITS Mailing System 45.38 45.38 45.38 45.38 45.38 45.38 45.38 ITS Mailing Systems 45.08 45.08 45.08 45.08 45.08 45.08 45.08 Peak Comp Svcs - P168 Barebones, 32Mg 23.64 23.64 23.64 23.64 23.64 23.64 23.64 ACS-Telephone System 270.00 270.00 270.00 270.00 270.00 270.00 270.00 Networking Plus-Phone System Fax Svc 69.70 69.70 69.70 69.70 69.70 69.70 69.70 Peak Comp Svcs - P166 Barebones Sys/18 25.15 25.15 25.15 25.15 25.15 25.15 25.15 Networking Plus-HP Vectra P166, 128MB 52.78 52.78 52.78 52.78 52.78 52.78 52.78 Thacher: Winbook S/E #3346707631 73.60 73.60 73.60 73.60 73.60 73.60 73.60 JVC-Compaq Proliant 2500 6/200 512 IS/N 168.43 168.43 168.43 168.43 168.43 168.43 168.43 Amex-Computer Projector 89.00 89.00 89.00 89.00 89.00 89.00 89.00 Staples-HP Laser Jet5se Printer 31.00 31.00 31.00 31.00 31.00 31.00 31.00 ACS-Telephone System 66.67 66.67 66.67 66.67 66.67 66.67 66.67 Gateway 2 GP6-300 Systems 188.72 188.72 188.72 188.72 188.72 188.72 188.72 Gateway GP6-300 Systems 91.86 91.86 91.86 91.86 91.86 91.86 91.86 Vircom HP Laserjet 4000N S/N #USEF069 47.80 47.80 47.80 47.80 47.80 47.80 47.80 GP6-333 System 102.45 102.45 102.45 102.45 102.45 102.45 102.45 2 GP6-333 Systems 164.60 164.60 164.60 164.60 164.60 164.60 164.60 3 GP6-333 Systems 261.41 261.41 261.41 261.41 261.41 261.41 261.41 2 Solo 5100 Best Buy Laptops 212.44 212.44 212.44 212.44 212.44 212.44 212.44 GP6-333 System 94.42 94.42 94.42 94.42 94.42 94.42 94.42 Monthly Total 6,621.52 6,621.52 6,621.52 6,621.52 6,723.31 6,723.31 6,723.31
SMH/Deprec98/Comp Equip/6/11/98 Furniture/Fixture Depreciation 1998 1505-100 Accumulated Depreciation Furniture/Fixtures 5100-100 Depreciation Expense Furniture/Fixtures
Date of Original Cost Life Service January February March April May Furn/Fixtures Refrigerator, White -SILO 634.78 5 03/91 Monroe bond tradrs (4) 5,072.10 5 04/91 Binding machine-GBC 1,373.61 5 04/91 Duplifax Fax Machine 4,448.70 5 04/91 Oriental rugs - DENA Int'l 18,000.00 10 09/97 150.00 150.00 150.00 150.00 150.00 Wood Superior 32,268.20 10 10/91 268.90 268.90 268.90 268.90 268.90 Hurlbutt 6,674.40 10 10/91 55.62 55.62 55.62 55.62 55.62 J. Rothard 107,774.56 10 10/91 1,564.79 1,564.79 1,564.79 1,564.79 1,564.79 Hurlbutt 3,305.08 10 11/91 27.54 27.54 27.54 27.54 27.54 Adelphia-Door sign 1,662.86 10 11/91 13.86 13.86 13.86 13.86 13.86 WSI Wood Finish 259.70 10 12/91 2.16 2.16 2.16 2.16 2.16 Kerschner - Chairs 3,222.84 10 12/91 26.65 26.65 26.65 26.65 26.65 WSI Keyboard/Credenza 243.80 10 12/91 2.03 2.03 2.03 2.03 2.03 Hall runner-DENA Int'l 2,968.00 10 12/91 24.73 24.73 24.73 24.73 24.73 J. Rothbard Additional 256.61 10 01/92 2.97 2.97 2.97 2.97 2.97 expense to orig invoice #156 Hurlbutt 48.00 10 01/92 0.40 0.40 0.40 0.40 0.40 2 braided pillows, WTB American Express 1,420.34 10 01/92 11.64 11.64 11.64 11.64 11.64 TV/VCR Mahogoney Conference room chairs 12,164.00 7 02/92 145.05 145.05 145.05 145.05 145.05 Rolltop Desks (file retrieval) 34,200.00 7 02/92 407.14 407.14 407.14 407.14 407.14 Rosewood Conference Room Table 2,542.00 7 02/92 30.26 30.26 30.26 30.26 30.26 Wood Superior 2,986.10 10 02/92 24.68 24.68 24.68 24.68 24.68 Recept credenza (1/1860) FI printing unit (1/825) Wood Superior 4,881.66 10 02/92 40.68 40.68 40.68 40.68 40.68 Shelves-Lunch, Mrkt, Comp 9 mahog keybds, 9 cherry keybds Hurlbutt 2,144.59 10 02/92 17.87 17.87 17.87 17.87 17.87 23 board rm chairs reupholstered extra material J. Rothbard 2,116.60 10 02/92 17.66 17.66 17.66 17.66 17.66 trdg box file (2/297.50) trdg box file (2/314) trdg keybd drawer (2/149) extra lat file (1/287) J. Rothbard 3,558.82 10 03/92 29.66 29.66 29.66 29.66 29.66 client chairs (6/445) Comp. Stools (2/298) Wood Superior 1,047.00 10 03/92 8.73 8.73 8.73 8.73 8.73 Repair 7 rolltops Wood Superior 3,494.02 10 03/92 28.14 29.14 29.14 29.14 29.14 Additional Projects Refininshing by Vincent 1,050.00 10 03/92 9.75 9.75 9.75 9.75 9.75 9 rolltops refinished Malson Jacques 541.00 5 04/92 recept desk supplies Refininshing by Vincent 1,000.00 10 04/92 8.33 8.33 8.33 8.33 8.33 2 desks repaired, finished June July August September October November December Furn/Fixtures Refrigerator, White -SILO Monroe bond tradrs (4) Binding machine-GBC Duplifax Fax Machine Oriental rugs - DENA Int'l 150.00 150.00 150.00 150.00 150.00 150.00 150.00 Wood Superior 268.90 268.90 268.90 268.90 268.90 268.90 268.90 Hurlbutt 55.62 55.62 55.62 55.62 55.62 55.62 55.62 J. Rothard 1,564.79 1,564.79 1,564.79 1,564.79 1,564.79 1,564.79 1,564.79 Hurlbutt 27.54 27.54 27.54 27.54 27.54 27.54 27.54 Adelphia-Door sign 13.86 13.86 13.86 13.86 13.86 13.86 13.86 WSI Wood Finish 2.16 2.16 2.16 2.16 2.16 2.16 2.16 Kerschner - Chairs 26.65 26.65 26.65 26.65 26.65 26.65 26.65 WSI Keyboard/Credenza 2.03 2.03 2.03 2.03 2.03 2.03 2.03 Hall runner-DENA Int'l 24.73 24.73 24.73 24.73 24.73 24.73 24.73 J. Rothbard Additional 2.97 2.97 2.97 2.97 2.97 2.97 2.97 expense to orig invoice #156 Hurlbutt 0.40 0.40 0.40 0.40 0.40 0.40 0.40 2 braided pillows, WTB American Express 11.64 11.64 11.64 11.64 11.64 11.64 11.64 TV/VCR Mahogoney Conference room chairs 145.05 145.05 145.05 145.05 145.05 145.05 145.05 Rolltop Desks (File retrieval) 407.14 407.14 407.14 407.14 407.14 407.14 407.14 Rosewood Conference Room Table 30.26 30.26 30.26 30.26 30.26 30.26 30.26 Wood Superior 24.68 24.68 24.68 24.68 24.68 24.68 24.68 Recept credenza (1/1860) FI printing unit (1/825) Wood Superior 40.68 40.68 40.68 40.68 40.68 40.68 40.68 Shelves-Lunch, Mrkt, Comp 9 mahog keybds, 9 cherry keybds Hurlbutt 17.87 17.87 17.87 17.87 17.87 17.87 17.87 23 board rm chairs reupholstered extra material J. Rothbard 17.66 17.66 17.66 17.66 17.66 17.66 17.66 trdg box file (2/297.50) trdg box file (2/314) trdg keybd drawer (2/149) extra lat file (1/287) J. Rothbard 29.66 29.66 29.66 29.66 29.66 29.66 29.66 client chairs (6/445) Comp. Stools (2/298) Wood Superior 8.73 8.73 8.73 8.73 8.73 8.73 8.73 Repair 7 rolltops Wood Superior 29.14 29.14 29.14 29.14 29.14 29.14 29.14 Additional Projects Refininshing by Vincent 9.75 9.75 9.75 9.75 9.75 9.75 9.75 9 rolltops refinished Malson Jacques recept desk supplies Refininshing by Vincent 8.33 8.33 8.33 8.33 8.33 8.33 8.33 2 desks repaired, finished
SMH/Deprec98/Furn-Fix/6/11/98 Furniture/Fixture Depreciation 1998 1505-100 Accumulated Depreciation Furniture/Fixtures 5100-100 Depreciation Expense Furniture/Fixtures
Date of Original Cost Life Service January February March April May Furn/Fixtures Refininshing by Vincent 600.00 10 04/92 5.00 repair, pick up & delivery J. Rothbard MIS workstations 3,257.11 10 04/92 27.14 27.14 27.14 27.14 27.14 acoust panel (4x337.58), connector (2x76.13) shelving unit (1x746.2) deliery & installation (450) Sofa/side table, J. McElroy 730.34 10 05/92 6.09 6.09 6.09 6.09 6.09 Xtec-Ricoh FT6750 copier 17,770.90 5 05/92 Wood Superior 1,612.00 5 07/92 Credenza 72lg 20dp 30hi J. Rothbard Console PJM 1,147.04 5 08/92 Roundtable PJM 459.03 5 08/92 Walnut desk MAT 1,492.65 5 08/92 Bookcase MAT 1,606.30 5 08/92 J. Rothbard Desk Extension Mrkting 1,217.16 5 02/93 20.29 J. Rothbard High-boy Bookcase-Mktg 2,270.54 10 03/93 18.92 18.92 18.92 18.92 18.92 Wood Superior Counter top w/cherry trim-Mktg 903.30 5 04/93 15.06 15.06 15.06 J. Rothbard Open Bookcase, Mahogany-P. Acctg 1,608.30 10 04/93 15.07 15.07 15.07 15.07 15.07 J. Rothbard Furniture-Marketing 6,342.15 5 12/94 105.70 105.70 105.70 105.70 105.70 Furniture-MIS 18,694.10 5 12/94 311.57 311.57 311.57 311.57 311.57 Furniture-Equity 315.60 5 12/94 5.26 5.26 5.26 5.26 5.26 Joseph Rothbard Shelving Xerox Room 2,048.41 5 5/96 34.14 34.14 34.14 34.14 34.14 Joseph Rothbard 11,490.73 5 6/96 191.51 191.51 191.51 191.51 191.51 C. Erickson Marketing countertop 1,125.00 5 9/96 18.75 18.75 18.75 18.75 18.75 J. Rothbard-Bookcases 5,682.98 5 10/96 94.72 94.72 94.72 94.72 94.72 Wrightline-Racks in Computer Room 6,213.29 5 3/97 103.55 103.55 103.55 103.55 103.55 Carl's Upholster 1,826.60 5 6/97 30.48 30.48 30.48 30.48 30.48 Tan Shelving and Back Braces 1,887.17 5 5/95 31.46 31.46 31.46 31.46 31.46 J. Rothbard 5 chairs 2,447.30 5 6/96 40.79 40.79 40.79 40.79 40.79 J. Rothbard Bookcases/Lateral Files 6,465.48 5 11/97 107.75 107.75 107.75 107.75 107.75 Conference Rm Table & 8 Chairs 1,700.00 3 3/98 47.30 47.22 Total 442,799.75 4,103.09 4,082.81 4,082.81 4,115.05 4,114.97 June July August September October November December Furn/Fixtures Refininshing by Vincent repair, pick up & delivery J. Rothbard MIS workstations 27.14 27.14 27.14 27.14 27.14 27.14 27.14 acoust panel (4x337.58), connector (2x76.13) shelving unit (1x746.2) deliery & installation (450) Sofa/side table, J. McElroy 6.09 6.09 6.09 6.09 6.09 6.09 6.09 Xtec-Ricoh FT6750 copier Wood Superior Credenza 72lg 20dp 30hi J. Rothbard Console PJM Roundtable PJM Walnut desk MAT Bookcase MAT J. Rothbard Desk Extension Mrkting J. Rothbard High-boy Bookcase-Mktg 18.92 18.92 18.92 18.92 18.92 18.92 18.92 Wood Superior Counter top w/cherry trim-Mktg J. Rothbard Open Bookcase, Mahogany-P. Acctg 15.07 15.07 15.07 15.07 15.07 15.07 15.07 J. Rothbard Furniture-Marketing 105.70 105.70 105.70 105.70 105.70 105.70 105.70 Furniture-MIS 311.57 311.57 311.57 311.57 311.57 311.57 311.57 Furniture-Equity 5.26 5.26 5.26 5.26 5.26 5.26 5.26 Joseph Rothbard Shelving Xerox Room 34.14 34.14 34.14 34.14 34.14 34.14 34.14 Joseph Rothbard 191.51 191.51 191.51 191.51 191.51 191.51 191.51 C. Erickson Marketing countertop 18.75 18.75 18.75 18.75 18.75 18.75 18.75 J. Rothbard-Bookcases 94.72 94.72 94.72 94.72 94.72 94.72 94.72 Wrightline-Racks in Computer Room 103.55 103.55 103.55 103.55 103.55 103.55 103.55 Carl's Upholster 30.48 30.48 30.48 30.48 30.48 30.48 30.48 Tan Shelving and Back Braces 31.46 31.46 31.46 31.46 31.46 31.46 31.46 J. Rothbard 5 chairs 40.79 40.79 40.79 40.79 40.79 40.79 40.79 J. Rothbard Bookcases/Lateral Files 107.75 107.75 107.75 107.75 107.75 107.75 107.75 Conference Rm Table & 8 Chairs 47.22 47.22 47.22 47.22 47.22 47.22 47.22 Total 4,114.97 4,114.97 4,114.97 4,114.97 4,114.97 4,114.97 4,114.97
SMH/Deprec98/Furn-Fix/6/11/98 Computer Equipment Depreciation - Wrap 1998 200-1515 Accum. Dep. Computers Wrap 200-5101 Depreciation Exp. Computers Wrap
Date of Original Cost Life Service January February March April May Computer Equipment-Wrap JVC-HP Laserjet IV 5,009.80 5 1/97 83.50 83.50 83.50 83.50 83.50 Computer City Desk Jet 660C 349.11 5 9/95 5.81 5.81 5.81 5.81 5.81 J & R Sound Computer (B. Cla 4,818.36 5 10/95 80.31 80.31 80.31 80.31 80.31 Dell Direct Sales 13,450.34 5 1/95 224.17 224.17 224.17 224.17 224.17 Winbook computer Corp. 4,860.94 5 12/96 81.02 81.02 81.02 81.02 81.02 Winbook FX P150-SN#JT158 5,409.99 5 1/97 90.17 90.17 90.17 90.17 90.17 Peak Comp Svcs-P166 Bare 863.00 5 5/97 14.38 14.38 14.38 14.38 14.38 Peak Comp Svcs-P166 Bare 733.52 5 6/97 12.23 12.23 12.23 12.23 12.23 Winbook computer Corp. 4,911.99 3 7/97 136.50 136.50 136.50 136.50 136.50 Gateway-3 GP6 300 Systems 10,914.00 3 10/97 1,212.67 303.05 303.17 303.17 Staples/NSSS999-12936 69007 5,953.74 3 11/97 164.70 164.70 164.70 164.70 164.70 Gateway-GP6 300 System 3,397.00 3 1/98 94.40 94.36 94.36 94.36 Gateway-GP6 300 System 3,307.00 3 1/98 91.90 91.86 91.86 91.86 Gateway-GP6 300 Dual Prem/ 5,341.00 3 4/98 148.40 Monthly Total 69,319.79 892.79 2,291.76 1,382.06 1,382.18 1,530.58 Furniture/Fixtures Wrap-1997 200-5100 Deprec. Exp. F/F Wrap 200-1505 Accum Dep F/F Wrap Lamination Machine-Advance 3,633.68 3 04/94 Wood Superior-Wrap Tradin 8,128.00 3 12/94 J. Rothbard 12 Files 7,746.48 3 12/94 3 Chairs 1,030.32 3 12/94 J. Rothbard Lateral File 1,996.83 3 11/97 32.13 56.85 56.84 56.84 56.84 Monthly Total 22,535.31 32.13 56.85 56.84 56.84 56.84 Computer Software-Wrap 200-5101 200-1517 The McGrell Group 11,720.00 3 11/96 325.56 325.56 325.56 325.56 325.56 The McGrell Group-Hrs Progr 12,060.15 3 3/97 307.23 307.23 307.23 307.23 307.23 The McGrell Group-US Robot 1,957.29 3 4/97 54.37 54.37 54.37 54.37 54.37 Month Total 25,737.44 687.16 687.16 687.16 687.16 687.16 June July August September October November December Computer Equipment-Wrap JVC-HP Laserjet IV 83.50 83.50 83.50 83.50 83.50 83.50 83.50 Computer City Desk Jet 660C 5.81 5.81 5.81 5.81 5.81 5.81 5.81 J & R Sound Computer (B. Cla 80.31 80.31 80.31 80.31 80.31 80.31 80.31 Dell Direct Sales 224.17 224.17 224.17 224.17 224.17 224.17 224.17 Winbook Computer Corp. 81.02 81.02 81.02 81.02 81.02 81.02 81.02 Winbook FX P150-SN#JT158 90.17 90.17 90.17 90.17 90.17 90.17 90.17 Peak Comp Svcs-P166 Bare 14.38 14.38 14.38 14.38 14.38 14.38 14.38 Peak Comp Svcs-P166 Bare 12.23 12.23 12.23 12.23 12.23 12.23 12.23 Winbook Computer Corp. 136.50 136.50 136.50 136.50 136.50 136.50 136.50 Gateway-3 GP6 300 Systems 303.17 303.17 303.17 303.17 303.17 303.17 303.17 Staples/NSSS999-12936 69007 164.70 164.70 164.70 164.70 164.70 164.70 164.70 Gateway-GP6 300 System 94.36 94.36 94.36 94.36 94.36 94.36 94.36 Gateway-GP6 300 System 91.86 91.86 91.86 91.86 91.86 91.86 91.86 Gateway-GP6 300 Dual Prem/ 148.36 148.36 148.36 148.36 148.36 148.36 148.36 Monthly Total 1,530.54 1,530.54 1,530.54 1,530.54 1,530.54 1,530.54 1,530.54 Furniture/Fixtures Wrap-1997 200-5100 Deprec. Exp. F/F Wrap 200-1505 Accum Dep F/F Wrap Lamination Machine-Advance Wood Superior-Wrap Tradin J. Rothbard 12 Files 3 Chairs J. Rothbard Lateral File 56.84 56.84 56.84 56.84 56.84 56.84 56.84 Monthly Total 56.84 56.84 56.84 56.84 56.84 56.84 56.84 Computer Software-Wrap 200-5101 200-1517 The McGrell Group 325.56 325.56 325.56 325.56 325.56 325.56 325.56 The McGrell Group-Hrs Progr 307.23 307.23 307.23 307.23 307.23 307.23 307.23 The McGrell Group-US Robot 54.37 54.37 54.37 54.37 54.37 54.37 54.37 Month Total 687.16 687.16 687.16 687.16 687.16 687.16 687.16
SMH/Deprec98/WRAP/6/11/98 Schedule of Contracts - Annual Obligation more than $12,000 Compustat Autex Baseline Bloomberg Computer Direction Advisors Dow Jones First Call ILX Plexus IBES Northfield Research Direct Telerate Capital Mgmt Science ADP -Proxy edge Global Investment Manager BBN Corp Boothby Informix Independence Blue Cross US Healthcare Educators Mutual Life Trans-General Life Ins Security APL Ricoh Radnor Center Assoc 1838 INVESTMENT ADVISORS L.P. ----------------------------- The following policies are handled through our Broker: Thomas Inglesby Kistler Tiffany Companies 500 E. Swedesford Road Suite 300 Wayne, PA 19087-1697 (610 971-2800 Independence Blue Cross/Blue Shield Policy No. A29133D Personal Choice Plan 1901 Market Street Philadelphia, Pa 19103-1480 (215)241-3030 (610)238-6551 Aetna/U.S. Healthcare Policy No. 009231-0001 1425 Union Meeting Road Blue Bell, PA 19422 (215)283-6820 Educator Mutual Life Insurance Policy No. 5292 202 N. Prince Street P.O. Box 83149 Lancaster, Pa 17608-3149 (717)397-2751 (This policy is for $10,000 of life insurance on each employee as well as dental insurance). TransGeneral Life Insurance Company Policy No. 906196 1 Commercial Plaza 15th Floor 280 Trumball Street Hartford, CT 06103 (203)550-6000 This policy is for balance of life insurance as well as Long Term disability. 1838 INVESTMENT ADVISORS L.P. ----------------------------- The following policies are handled through our Broker: Michael Bove Boothby & Associates One Logan Square - 30th Floor Philadelphia, PA 19103 (215)864-7410 Investment Advisor ERISA Insurance Company: Hartford Policy: CBBLC5252 Asset Protection Bond Company: Chubb Policy: 81247712-H ERISA Bond Insurance Company: Chubb Policy: 81470586-A Errors & Omission Company: Chubb Policy: 7022-72-61 (B) Property/General Liability Company: Chubb Policies: Various Workers' Compensation Company: Chubb Policy: (97)761-70-99 - -------------------------------------------------------------------------------- PROGRAM OVERVIEW - -------------------------------------------------------------------------------- ================================================================================ Policy Effective Date Company Limit Premium ================================================================================ Invest. Advisor ERISA 3/7/97-07/20/98 Hartford $26,950,000 $16,122 - -------------------------------------------------------------------------------- Asset Protection Bond 7/20/97-7/20/98 Chubb $ 600,000 $ 3,050 - -------------------------------------------------------------------------------- Property 7/20/97-7/20/98 Chubb Various $ 5,346 - -------------------------------------------------------------------------------- General Liability 7/20/97-7/20/98 Chubb $ 1,000,000 Include. Above - -------------------------------------------------------------------------------- Non-Owned Auto 7/20/97-7/20/98 Chubb $ 1,000,000 $ 280 - -------------------------------------------------------------------------------- Wokers' Compensation 7/20/97-7/20/98 Chubb Statutory $ 7,917 - -------------------------------------------------------------------------------- Umbrella Liability 7/20/97-7/20/98 Chubb $ 5,000,000 $ 3,145 - -------------------------------------------------------------------------------- ERISA Bond 7/20/97-7/20/98 Chubb $ 600,000 $ 540 - -------------------------------------------------------------------------------- Professional Liability 9/1/97-7/20/98 Chubb $ 1,000,000 $17,146 - -------------------------------------------------------------------------------- Surety Bonds Oregon 10/22/97-98 Chubb $ 10,000 $ 100 South Carolina 06/17/97-09 Chubb $ 10,000 98 South Carolina 10/20/97-98 Chubb $ 50,000 $ 388 New Hampshire 08/27/97-98 Chubb $ 25,000 $ 238 Hawaii 06/16/97-98 Chubb $ 50,000 $ 500 Alaska 10/12/97-98 Chubb $ 5,000 $ 50 North Dakota 10/12/97-98 Chubb $ 25,000 $ 250 Massachusetts 01/30/97-98 Chubb $ 10,000 $ 143 Idaho 10/12/97-98 Chubb $ 25,000 $ 238 Totals $ 210,000 $ 2,105 - -------------------------------------------------------------------------------- Risk Management Fee 7/20/97-98 Boothby $ 7,500 - -------------------------------------------------------------------------------- Total cost $63,151 ================================================================================ BOOTHBY & ASSOCIATES - -------------------------------------------------------------------------------- EMPLOYEE BENEFITS Medical Insurance Dental Insurance Life Insurance Short Term Disability Long Term Disabiltiy 401 (k) Plan } 1838 Investment Advisors L.P. Employees Savings Plan Profit Sharing Plan } Vacation Package Personal Days Paid Holidays Sick Days Maternity Leave Family and Medical Leave Act Tuition Reimbursement 1838 Investment Advisors, L.P. A/R Analysis
6/27/98 8/18/98 MGR Custodian ------- ------- ----------- Total A/R O/S over 60 days 182,250.00 51,827.06 Fred's Accounts LOA's Expired Cristol, Elise 914.93 914.83 6/15 faxed to K. Mandelbaum Cristol, Elise TUD 1,892.48 1,892.48 6/15 faxed to K. Mandelbaum Dorothy Lansing 2,992.38 ML Murthra, Rita 559.29 ML Goodridge, Moriale 5,578.05 ML Griffith, Mary 5,285.28 ML Hayward, Malcolm 4,772.01 ML Lane, Mary 6,010.60 DUMMY (ML) Mathey, MacDonald 419.82 ML O'Neill, Paul 7,238.23 7,283.23 waiting for lo ML Thayer, anne 3,407.57 ML Wood, Julia 3,757.67 ML All waiting for new LOA's Jane Glick 3,234.54 Katherine Glick 857.76 857.76 waiting for loa Sarah Glick 916.19 916.19 waiting for loa Peter Schwartz 1,454.59 --------- ----------- Total Fred 49,291.59 11,819.59 --------- ----------- Other 2nd Notices Given NY Eye & Ear 3rd Note 4,837.01 4,837l.01 John S Good Samaritan 9,636.04 7,380.73 5/12 rerouted to client: was billed to SB - 6/18 per ICAH - ck in mail 6/15 5/12 rerouted to client; was billed to SB George Mackie ("Check is in the mail.") 7,047.27 7,047.27 6/11 Reduced rate; mailed 5th letter. Baldwin School (waiting for LOA) 7,335.37 PJM ML PPD 6,896.55 Wm. & Sheila Joiner 973.05 6/16 Rerouted to broker Advest 776.58 776.58 6/6 Faxed to Dan Ragnoni (new contract) Baker, Peter 576.44 SSC Chestnut Hill Academy 8,093.68 8,093.68 6/12 Faxed to SB; per Bill O'Toole SB will pay Dain Rauscher 224.63 224.63 6/8 Left message; no reply Kathryn Donaldson 939.73 939.73 BTB 6/15 Lynn Hofler @ Paragon Advisors said cannot be paid th Graduate Cardrothoracic (rerouted to broker) 5,207.17 2,541.98 Lewis, Maxine 19,358.50 JJM Miami Children's a/c's 27,524.74 MZM,RLM Legg Mason 734.46 James Mackie (ck returned; no signature) 5,077.99 JJM Geoffrey Mendelsohn 988.76 988.76 BTB 6/15 2nd letter mailed ROBOR 1,500.00 1,500.00 HV Aileen Roberts 2,368.02 2,368.02 GWG,BLK 6/12 2nd letter mailed to Corestates Ellis Schullst 4,455.97 PMI SB Wrap reversed closed a/c's $1,351.36 2,476.70 Vandergast 164.80 6/12 Rerouted to Mellon Bank Jeanie Chol FBO Kettering 439.03 6/16 Rerouted to C H Dean & Assoc Bridgeport Radiology 521.51 6/12 per Bill O'Toole SB will send ck Vector Security (closed; per Jay reverse invoice) 1,281.02 1,281.02 Assets held temporarily for one mo. NY Eye & Ear Infirmary Pension 2 6,349.75 MGB Univ. Surgical Grp. 938.70 938.70 Misc 8,124.63 ----------- ----------- Action taken on this total 98,997.48 41,016.50 =========== ===========
==================================================================================================================================== 1838 Investment Advisors L.P. ==================================================================================================================================== ACCOUNTS RECEIVABLE AGED INVOICE REPORT Only Invoices 60 Days Past Due - AGED AS OF: 06/18/98 - ------------------------------------------------------------------------------------------------------------------------------------ INVOICE DISCOUNT DISCOUNT DAYS RATE INVOICE NO DUE DATE DUE DATE AMOUNT BALANCE CURRENT 30 DAYS 60 DAYS 90 DAYS 120 DAYS DELQ - ---- ---------- -------- -------- -------- -------- ------- ------- ------- ------- -------- ---- ADV Advest, Inc. CONTACT PHONE CREDIT LMT: .00 0/31/98 0000083 - IN 01/31/98 .00 776.58 776.58 138 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER ADV TOTALS: .00 776.58 .00 .00 .00 .00 776.58 ISC Brinker Small Cap CONTACT PHONE CREDIT LMT: .00 3/27/98 94A - IN 03/27/98 .00 0.30 .30 83 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER BSC TOTALS: .00 0.30 .00 .00 .30 .00 .00 34564 CHESTNUT HILL ACADEMY CONTACT PHONE CREDIT LMT: .00 1/31/98 0002819 - IN 01/31/98 .00 8,093.68 8,093.68 138 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0034564 TOTALS: .00 8,093.68 .00 .00 .00 .00 8,093.68 90970 CRISTOL, ELISE H. T/V/D 11/20 CONTACT PHONE CREDIT LMT: .00 2/28/98 0002885 - IN 02/28/98 .00 914.93 914.93 110 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0090970 TOTALS: .00 914.93 .00 .00 .00 914.93 .00 297966 CRISTOL, ELISE H. CONTACT PHONE CREDIT LMT: .00 2/28/98 002916 - IN 02/28/98 .00 1,892.48 1,892.48 110 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0097966 TOTALS: .00 1,892.48 .00 .00 .00 1,892.48 .00 DAIN Dain, Rauscher CONTACT PHONE CREDIT LMT: .00 1/31/98 0000089 - IN 01/31/98 .00 224.63 224.63 138 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER DAIN TOTALS: .00 224.63 .00 .00 .00 .00 224.63 91225 GLICK, KATHERINE A TRUST CONTACT PHONE CREDIT LMT: .00 1/31/98 00002747 - IN 01/31/98 .00 857.76 857.76 138 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0091225 TOTALS: .00 857.76 .00 .00 .00 .00 857.76 91223 GLICK, SARAH TRUST CONTACT PHONE CREDIT LMT: .00 015 0002740 - IN 01/31/98 .00 916.19 916.19 138 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0091223 TOTALS: .00 916.19 .00 .00 .00 .00 916.19 13883 Good Samaritan Charitable Trst CONTACT PHONE CREDIT LMT: .00 11/31/98 0002311 - IN 01/31/98 .00 7,380.73 7,380.73 138 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0013883 TOTALS: .00 7,380.73 .00 .00 .00 .00 7,380.73 13307 GRADUATE C #2 CONTACT PHONE CREDIT LMT: .00 12/25/98 0001736 - IN 02/25/98 .00 1,661.09 1,661.09 113 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0013307 TOTALS: .00 1,661.09 .00 .00 .00 1,661.09 .00 13305 Graduate Cardrothoracic Assoc. CONTACT PHONE CREDIT LMT: .00 12/25/98 0001735 - IN 02/25/98 .00 880.89 880.89 113 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0013305 TOTALS: .00 880.89 .00 .00 .00 880.89 .00 13306 HARGETT, WM G. & SUSAN P. CONTACT PHONE CREDIT LMT: .00 12/25/98 0002860 - IN 02/28/98 .00 1,011.31 1,011.31 110 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0021476 TOTALS: .00 1,011.31 .00 .00 .00 1,011.31 .00 94476 HAYWARD, MALCOLM L. CONTACT PHONE CREDIT LMT: .00 2/9/98 2279A - PP 02/09/98 .00 1,496.30 1,496.30 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0094476 TOTALS: .00 1,496.30 .00 .00 .00 .00 1,496.30 77030 HERMANN, DEBORAH K. IRA CONTACT PHONE CREDIT LMT: .00 3/17/98 0002911 - PP 03/17/98 .00 16.15- 16.15- ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0097030 TOTALS: .00 16.15- .00 .00 .00 16.15- .00 10188 JOYNER, W. & SHEILA CONTACT PHONE CREDIT LMT: .00 2/28/98 0002847 - IN 02/28/98 .00 973.05 973.05 110 ------- -------- ---- ----- --------- ---------- ------------ --- CUSTOMER 0010188 TOTALS: .00 973.05 .00 .00 .00 973.05 .00
- -------------------------------------------------------------------------------- System Date: 06/17/98 / 12:25pm Page: 1 Duplication Date: 06/18/98 User: SMH / Susan Huffington
==================================================================================================================================== 1838 Investment Advisors L.P. ==================================================================================================================================== ACCOUNTS RECEIVABLE AGED INVOICE REPORT Only Invoices 60 Days Past Due - AGED AS OF: 06/18/98 - ------------------------------------------------------------------------------------------------------------------------------------ INVOICE DISCOUNT DISCOUNT DAYS RATE INVOICE NO DUE DATE DUE DATE AMOUNT BALANCE CURRENT 30 DAYS 60 DAYS 90 DAYS 120 DAYS DELQ - ---- ---------- -------- -------- -------- -------- ------- ------- ------- ------- -------- ---- 81504 Kathryn J. Donaldson CONTACT: Lynn Holler PHONE CREDIT LMT: .00 3/31/98 0003012 - IN 03/31/98 .00 939.73 939.73 79 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0081504 TOTALS: .00 939.73 .00 .00 939.73 .00 .00 18600 LANE, MARY AND CARL TTEE CARL CONTACT PHONE CREDIT LMT: .00 3/26/98 94A - IN 03/26/98 .00 1,501.03- 1,501.03- -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0018600 TOTALS: .00 1,501.03- .00 .00 1,501.03- .00 .00 10177 LOECHTE, BONITA L. CONTACT PHONE CREDIT LMT: .00 12/28/98 0002819 - IN 02/28/98 .00 792.84 792.84 110 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0010177 TOTALS: .00 792.84 .00 .00 .00 792.84 .00 50045 MACKIE, GEORGE CONTACT PHONE CREDIT LMT: .00 7/31/97 0002885 - IN 07/31/97 .00 1,633.35 1,633.35 322 10/31/97 0001911 - IN 10/31/97 .00 1,648.59 1,648.50 230 1/31/98 002606 - IN 01/31/98 .00 1,660.70 1,660.70 138 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0050045 TOTALS: .00 4,942.64 .00 .00 .00 .00 4,942.64 50050 MACKIE, GEORGE JR. TTEE GEN S CONTACT PHONE CREDIT LMT: .00 7/31/97 0002916 - IN 07/31/97 .00 680.10 680.10 322 10/31/97 0001915 - IN 10/31/97 .00 674.78 674.78 230 1/31/98 0002610 - IN 01/31/98 .00 749.75 749.75 138 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0050050 TOTALS: .00 2,104.63 .00 .00 .00 .00 2,104.63 19269 MENDELSOHN, GEOFFREY IRA ROLL CONTACT PHONE CREDIT LMT: .00 1/31/98 24478 - IN 01/31/98 .00 988.76 988.76 138 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 19269 TOTALS: .00 988.76 .00 .00 .00 .00 988.76 27615 NY Eye & Ear Infirmary-Perm Ed CONTACT PHONE CREDIT LMT: .00 1/31/97 00000130 - IN 01/31/97 .00 3,732.71 3,732.71 503 1/31/97 0000441 01/31/97 .00 1,104.30 1,104.30 503 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0027615 TOTALS: .00 4,837.01 .00 .00 .00 .00 4,837.01 93770 O'NEILL, W. PAUL CONTACT PHONE CREDIT LMT: .00 03/31/98 0002990 - IN 03/31/98 .00 7,238.23 7,283.23 79 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 93770 TOTALS: .00 7,238.23 .00 .00 7,283.23 .00 .00 70496 ROBERTS, AILEEN CONTACT PHONE CREDIT LMT: .00 1/31/98 0002392 - IN 01/31/98 .00 779.10 779.10 138 2/28/98 0002849 - IN 02/28/98 .00 1,588.92 1,588.92 .00 110 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0070496 TOTALS: .00 2,368.02 .00 .00 .00 1,588.92 779.10 BOR ROBOR CONTACT PHONE CREDIT LMT: .00 1/31/98 IQ98 - IN 03/31/98 .00 1,500.00 1,500.00 79 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER ROBOR TOTALS: .00 1,500.00 .00 .00 1,500.00 .00 .00 W Smith Barney Wrap CONTACT PHONE CREDIT LMT: .00 1/31/98 000086 - IN 01/31/98 .00 603.83 603.83 138 1/31/98 0002847 - IN 01/31/98 .00 521.51 521.51 138 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER SBW TOTALS: .00 1,125.34 .00 .00 .00 .00 1,125.34 87953 UNIVERSITY SURGICAL GRP OF CIN CONTACT PHONE CREDIT LMT: .00 3/26/98 0002884 - IN 03/26/98 .00 938.70 938.70 84 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0087953 TOTALS: .00 938.70 .00 .00 938.70 .00 .00 10576 VECTOR SECURITY CONTACT PHONE CREDIT LMT: .00 1/31/98 0002393 - IN 01/31/98 .00 1,281.02 1,281.02 138 -------- --------- ---- ----- --- -------- ---------- --------- ---- CUSTOMER 0010576 TOTALS: .00 1,281.02 .00 .00 00 .00 1,281.02 -------- --------- ---- ----- --- -------- ---------- --------- ---- REPORT TOTALS: .00 51,627.06 .00 .00 9,115.93 9,699.36 32,811.77 NUMBER OF CUSTOMERS: 28 ======== ========= ==== ===== === ======== ========== ========= ====
- -------------------------------------------------------------------------------- System Date: 06/17/98 / 12:25pm Page: 1 Duplication Date: 06/18/98 User: SMH / Susan Huffington 1838 Institutional Accounts by Market Value 08-Jun-98 Page 1
3/31/98 Market Value Client ID Client Name Manager 289,249,071.95 60005 PENNSYLVANIA MEDICA JOHN DONALDSON 272,483,609.20 00002 PECO ENERGY COMPANY JAY MCELROY 161,584,565.47 00010 SEI FINANCIAL CORP ED POWELL 143,445,351.53 93313 PHILADELPHIA CONTRIB JAY MCELROY 138,014,996.42 35606 TEAMSTERS LOCAL 282 P PJM-Block Accounts 85,457,265.51 22900 DREXEL UNIVERSITY POO MELYSA GONZALEZ 85,285,902.08 06911 NATIONAL BOARD OF ME GWG-Block Accounts 83,450,932.25 97665 1838 BOND-DEBENTURE T JOHN DONALDSON 78,796,560.69 06765 GIRARD RESIDUARY FUN MELYSA GONZALEZ 74,952,595.04 10172 DP AMERICA GROWTH FU ED POWELL 64,479,645.69 94856 ROTHSCHILD GUERNSEY JTD-Block Accounts 63,952,501.66 38414 TEAMSTERS LOCAL 830 P PJM-Block Accounts 60,217,734.31 94746 STAFFORD SAVINGS BAN PJM-Individuals 59,947,606.01 HM60005 PENNSYLVANIA MEDICA JOHN DONALDSON 59,852,522.80 02101 INDEPENDENCE FOUNDA MELYSA GONZALEZ 59,831,813.59 93144 AMERICAN PHILOSOPHIC MELYSA GONZALEZ 59,583,502.97 10180 CHRISTIAN BROTHERS IN ED POWELL 55,159,645.50 93315 PHILADELPHIA CONTRIB GWG-Block Accounts 54,490,571.55 06497 1838 FIXED INCOME FUND MARCIA ZERCOE 50,276,248.26 66001 MIAMI CHILDREN'S HOSPI MARCIA ZERCOE 49,592,202.78 61000 PHYSICIANS LIABILITY IN JOHN DONALDSON 49,535,546.59 23456 EASTON HOSPITAL PENSI JTD-Block Accounts 48,026,863.56 51456 LOCAL 584 PENSION TRUS MELYSA GONZALEZ 47,782,888.94 32400 AMERICAN COLLEGE OF GWG-Block Accounts 46,073,919.28 07481 EMPLOYEES RETIREMENT MARCIA ZERCOE 45,501,448.44 60008 AMERICAN BOARD OF IN GWG-Block Accounts 41,520,013.56 94809 SAN FRANCISCO CULINA MELYSA GONZALEZ 40,795,926.20 94127 BALA PRESBYTERIAN HO THACHER BROWN 38,763,672.06 28941 ECFMG LONG-TERM FUN PJM-Block Accounts 38,725,092.01 18014 CORE VALUE EQUITY FU MELYSA GONZALEZ 38,630,261.48 36607 1838 SMALL CAP EQUITY ED POWELL 38,352,543.50 86157 EDGCOMB METALS CO PJM-Block Accounts 35,721,858.28 23150 GOULD ELECTRONICS, IN JTD-Block Accounts 35,067,090.76 41113 JOINT PLUMBING INDUST MFB-Block Accounts 31,761,493.19 16150 PHYSICIANS PLUS MEDIC ED POWELL-SMITH B 30,991,812.50 10196 GIST-BROCADES MELYSA GONZALEZ 30,762,416.67 60005EQ PENNSYLVANIA MEDICA MELYSA GONZALEZ 30,496,450.39 00011 SEI SMALL CAP FUND ED POWELL 30,186,529.47 00003 PECO ENERGY COMPANY JAY MCELROY 30,122,264.57 92344 WEST LAUREL HILL CEME GWG-Block Accounts
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3/31/98 Market Value Client ID Client Name Manager 29,654,505.82 09750 THE BHUTAN TRUST FUN MELYSA GONZALEZ 27,851,742.83 18034 FRIENDS HOSPITAL PENSI GWG-Block Accounts 27,537,881.47 68406 CITY OF AURORA, ILLINO MARCIA ZERCOE 27,343,277.68 10175 CINCINNATI BELL - 1838 I ED POWELL 25,482,662.08 10020 PROVIDENT MUTUAL DIV ED POWELL 25,106,275.62 60006 INDEPENDENCE SEAPORT GWG-Block Accounts 24,610,162.55 09630 INTERNATIONAL UNION PJM-Block Accounts 24,470,640.34 06995 INDEPENDENCE BLUE CR MELYSA GONZALEZ 23,230,034.38 33333 KENDAL-CROSSLANDS C MELYSA GONZALEZ 23,166.785.93 36016 VICTAULIC COMPANY OF JTD-Block Accounts 22,141,008.37 95031 NEWTON CONTRIBUTORY MFB-Block Accounts 22,010,163.88 25707 COPIC INSURANCE COMP JOHN DONALDSON 20,697,067.59 11192 EMPLOYEES RETIREMENT MELYSA GONZALEZ 20,528,098.75 50000 TEAMSTERS LOCAL #500- MFB-Block Accounts 20,408,604.58 84330 SERVICE EMPLOYEES LO ED POWELL 20,397,775.71 40100 KIMBALL RETIREMENT P ED POWELL-KIMBALL 20,275,592.98 01020 HMS SCHOOL GWG-Block Accounts 19,693,766.59 02103 INDEPENDENCE FOUNDA GWG Short Term of Fixe 19,539,693.38 94984 TOWN OF BRAINTREE RE MFB-Block Accounts 18,967,167.67 29051 ASPLUNDH TREE EXPERT MARCIA ZERCOE 18,840,157.61 94798 ANNE T. STARR TRUSTREE GWG Individual / Directe 18,561,470.00 07990 ANALYTIC SERVICE INC GWG-Block Accounts 17,736,899.72 63901 HEALTH SCIENCES FOUN MELYSA GONZALEZ 17,029,648.85 51292 STICHTING PENSIOENFON HANS van den BERG 16,574,621.06 00008 AMPEX RETIREMENT MA JOE DOYLE 16,090,015.19 17700 NECA-IBEW LOCAL 177 P MELYSA GONZALEZ 16,083,093.39 20201 NATIONAL MANUFACTUR MELYSA GONZALEZ 15,806,529.81 38560 PENNSYLVANIA MEDICA JTD-Block Accounts 15,615,806.51 20050 GIRARD SMALL CAPITAL ED POWELL 15,501,062.76 27678 THE NEW YORK EYE AND MELYSA GONZALEZ 15,024,053.30 94723 SILO INC PENSION FUND RHONDA MCNAVISH 14,817,287.53 15002 ALPAHARMA INC. MFB-Block Accounts 14,701,566.73 60009 AMERICAN BOARD OF IN MARCIA ZERCOE 14,100,742.37 93879 WILLIAM S. LOEB T/U/W A FRED DITTMANN 13,880,198.75 95055 LITTLE LEAGUE BASEBAL GWG-Block Accounts 13,142,988.53 08660 AMERICAN PUBLIC POWE JTD-Block Accounts 12,387,122.95 94371 TEXTILE PROCESSORS, SE PJM-Block Accounts 12,043,622.01 05401 DELAWARE COMMUNITY BERNIE BLAIS 11,987,676.81 98009 CITY OF BETHLEHEM MELYSA GONZALEZ 11,603,824.68 93316 GERMANTOWN INSURAN JOHN DONALDSON
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3/31/98 Market Value Client ID Client Name Manager 11,367,647.16 36622 MENNINGER FUND - 1838 I ED POWELL-SMITH B 11,245,371.40 95005 LOUIS N CASSETT FOUND GWG-Block Accounts 11,196,449.31 89311 TORRANCE MEMORIAL M ED POWELL-SMITH B 10,952,149.50 29379 HORIZON HEALTH SYSTE MELYSA GONZALEZ 10,501,416.80 47946 FAIRMOUNT PARK ASSOC JTD-Block Accounts 10,374,731.98 70941 DATRON INC RETIREMEN JTD-Block Accounts 10,348,929.52 96240 METHODIST HOSPITAL DI MARCIA ZERCOE 10,308,158.21 94366 BRUNSCHWIG & FILS INC JTD-Block Accounts 10,167,337.83 32300 AMERICAN COLLEGE OF GWG-Block Accounts 10,124,424.15 47756 PROVIDENT MUTUAL CO MELYSA GONZALEZ 9,767,448.14 25802 RORER PROVIDENT TRUS JAY MCELROY 9,661,076.76 19000 EDNA G. KYNETT MEMOR MFB-Block Accounts 8,895,625.78 53062 BENILDE RELIGIOUS & CH ED POWELL 8,538,776.03 29053 ASPLUNDH TREE EXPERT JAY MCELROY 8,510,859.93 06912 NBME RESEARCH FUND GWG-Block Accounts 8,414,807.09 82227 CHESTNUT HILL HOSPITA MARCIA ZERCOE 8,106,121.15 22564 PINE MANOR COLLEGE GWG-Block Accounts 8,069,247.69 24326 AMERICAN BOARD OF SU GWG-Block Accounts 7,806,658.50 94367 BRUNSCHWIG & FILS INC JTD-Block Accounts 7,800,767.49 05825 UNITED WAY OF DADE C MELYSA GONZALEZ 7,743,347.94 95102 SHELTER LANE CORPORA BERNIE BLAIS 7,711,620.45 26701 COPIC TRUST JOHN DONALDSON 7,704,904.22 14093 CATHOLIC FOUNDATION PRUDENTIAL WRAP-P 7,603,697.26 13883 GOOD SAMARITAN CHARI ED POWELL-SMITH B 7,297,369.23 95054 LITTLE LEAGUE FOUNDA GWG-Block Accounts 7,244,502.82 47243 THE COMMON FUND GEN MELYSA GONZALEZ 6,972,340.22 01893 BINSWANGER CORP PROF GWG-Block Accounts 6,859,121.35 93352 ESTATE OF GENEVRA LIE JAY MCELROY 6,768,575.96 32200 AMERICAN COLLEGE OF RHONDA MCNAVISH 6,615,844.03 02690 SUPERIOR GROUP, INC. M PJM-Special Equity 6,555,140.73 30586 NEW YORK EYE & EAR IN MELYSA GONZALEZ 6,447,461.35 15252 STOCKTON RUSH BARTOL PJM-Block Accounts 6,402,805.68 93314 PHILADEPHIA CONTRIB GWG-Block Accounts 6,395,377.30 10021 EDWARD C LEVY, CO. MA ED POWELL 6,196,221.25 49142 BENEFICIAL MUTUAL SA MFB-Block Accounts 6,124,542.46 13388 GROUP HEALTH PLAN INC MELYSA GONZALEZ 6,052,595.96 12400 NAVISTAR RETIREE SUPP ED POWELL-SMITH B 5,979,212.28 34576 MEDICAL MALPRACTICE I ED POWELL 5,908,287.08 56053 KENDAL AT HANOVER IN MELYSA GONZALEZ 5,871,179.68 92381 WINGATE LLOYD AND H. FRED DITTMANN
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3/31/98 Market Value Client ID Client Name Manager 5,844,706.18 93366 BALDWIN SCHOOL INVES PJM-Block Accounts 5,844,688.42 94803 EDWARD STARR, JR. TRUS GWG Individual / Directe 5,583,215.18 35010 RALPH AND SUZANNE RO GWG-Block Accounts 5,574,817.05 81052 THE EPISCOPAL ACADEM GWG-Block Accounts 5,535,101.64 94799 EDWARD STARR, JR TRUS GWG Individual / Directe 5,146,527.13 30967 KENDAL AT OBERLIN-OP MFB-Block Accounts 5,141,816.76 37308 COTTEY COLLEGE SMITH BARNEY SC W 5,058,653.76 92378 T/U/W OF H.G. LLOYD FOR FRED DITTMANN 4,980,443.55 08865 HARVEL PENSION PLAN JTD-Block Accounts 4,849,668.56 05820 PHILADELPHIA CITY INST MFB-Block Accounts 4,730,330.61 35070 COMMONWEALTH TRANS RHONDA MCNAVISH 4,524,182.42 92377 T/U/D 12/7/64 OF DOROTH FRED DITTMANN 4,407,150.42 34619 TANRIDGE LIMITED HANS van den BERG 4,404,800.61 11513 HUDSON COUNTY DISTRI MELYSA GONZALEZ 4,397,626.16 34564 CHESTNUT HILL ACADEM MELYSA GONZALEZ 4,383,798.11 06910 NATIONAL BOARD OF ME GWG Short Term or Fixe 4,344,310.21 50067 THE UNION LEAGUE OF P JOE DOYLE 4,178,008.60 38499 PENNSYLVANIA MEDICA JTD-Block Accounts 4,093,625.32 10291 MEESPIERSON UMBRELLA MELYSA GONZALEZ 4,064,056.68 04048 SOCIETY CATHOLIC MEDI PJM-Block Accounts 4,027,954.45 13001 COMMUNICATIONS WOR MFB-Block Accounts 3,952,670.24 95048 ELLEN D. L. BROWNING T BERNIE BLAIS 3,866,709.39 94293 RESIDUARY TRUST UNDE JAY MCELROY 3,827,673.75 08900 AMERICAN COLLEGE OF JTD-Block Accounts 3,656,933.92 27615 NEW YORK EYE & EAR IN MELYSA GONZALEZ 3,592,382.66 14580 UPLAND COUNTRY DAY S MFB-Block Accounts 3,429,767.81 92232 STEPHENSON FOUNDATIO FRED DITTMANN 3,415,124.04 38500 PENNSYLVANIA MEDICA JTD-Block Accounts 3,150,819.92 02383 PLANNED PARENTHOOD DEAN WITTER BALAN 3,136,660.81 94869 STANTON N. SMULLENS, FRED DITTMANN 3,117,514.62 93511 T/U/D 12/2/68 FOR EMMALI FRED DITTMANN 2,990,557.53 50053 TRUSTEE UA DTD 08/22/75 JAY MCELROY 2,982,810.77 11363 POTTSTOWN MEDICAL SP BERNIE BLAIS 2,896,449.85 47757 UPPER DARBY POLICE SM GWG Individual / Directe 2,857,879.41 49106 ACOUSTICAL SOCIETY OF BERNIE BLAIS 2,778,865.70 13000 COMMUNICATIONS WOR MFB-Block Accounts 2,770,871.79 10022 ROBERT A. LEVY REVOCA SMALL CAP QUASI W 2,767,082.49 08949 AMERICAN COLLEGE OF JTD-Block Accounts 2,749,592.83 43729 VINCENT GIORDANO COR BERNIE BLAIS 2,705,842.68 78012 KENDAL@HANOVER-NE MICHAEL BIEMER
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3/31/98 Market Value Client ID Client Name Manager 2,698,878.19 92237 T/U/D FRANCES H. DITM FRED DITTMANN 2,689,956.76 11380 POTTSTOWN MEDICAL SP BERNIE BLAIS 2,669,932.06 94687 T/U/D DATED 2/15/66 FOR JAY MCELROY 2,665,009.00 04035 KONO FOUNDATION FRED DITTMANN 2,618,491.36 92597 CHESTNUT HILL HOSPITA MFB-Block Accounts 2,596,894.13 93519 T/U/D 10/1/68 JULIAN F. GO FRED DITTMAN 2,576,613.86 03638 FRANK L NEWBURGER JR FRED DITTMAN 2,455,951.27 06485 MILK INDUSTRY OFFICE P JAY MCELROY 2,405,440.43 16667 EATMOR MARKETS EMPL BERNIE BLAIS 2,361,102.40 20958 NEW YORK EYE AND EAR LOUIS J ROSATO 2,310,034.78 95041 PEARL S. BUCK FOUNDAT MFB-Block Accounts 2,281,436.69 01894 BINSWANGER CORP MON GWG-Block Accounts 2,257,547.12 14412 DADE COMMUNITY FOUN LOUIS J ROSATO 2,246,000.64 56897 UNITED WAY OF DADE C JTD-Block Accounts 2,215,331.28 64802 1838 401K EQUITY MELYSA GONZALES 2,158,206.14 94533 RESIDUARY TRUST U/W F JAY MCELROY 2,143,087,16 38778 AMERICAN BOARD OF AL JTD-Block Accounts 2,142,918.25 06551 RADNOR TOWNSHIP POLI LOUIS J ROSATO 2,088,419.73 08662 AMERICAN PUBLIC POWE JOE DOYLE 2,081,761.79 02101MU INDEPENDENCE FOUNDA GWG Individual / Directe 1,981,186.68 66003 MIAMI CHILDREN'S HOSPI RHONDA MCNAVISH 1,939,710.39 17173 MALCOLM B. JACOBSON GWG Individual / Directe 1,776,336.31 28942 THE COMMISSION FOR FO PATRICIA J. MYERS 1,772,145.47 42992 KENDAL AT HANOVER-W RHONDA MCNAVISH 1,738,453.85 47521 BALL FOUNDATION SMALL CAP QUASI W 1,690,167.09 63728 GEORGE H. STEPHENSON FRED DITTMANN 1,689,653.31 01895 BINSWANGER FOUNDATI GWG-Block Accounts 1,687,879.76 06382 PLANNED PARENTHOOD DEAN WITTER BALAN 1,686,738.09 72261 GEORGE A. HORMEL II TT SMALL CAP QUASI W 1,560,905.11 80551 DREWRY R. FOX LIVING T BERNIE BLAIS 1,551,704.47 67600 TEAMSTERS LOCAL 676 A MICHAEL BIEMER 1,521,249.74 50051 JAMES W MACKIE TTEE D JAY MCELROY 1,505,779.46 97468 T/U/W ROSE H. WOLF F/B/ FRED DITTMANN 1,486,977.61 45052 CAROLINE C. KRESSLY TR FRED DITTMANN 1,483,605.58 04140 WILLIAM B. KESSLER ME LOUIS J ROSATO 1,442,369.47 10227 MARTIN'S RUN LIFE CARE PJM-Block Accounts 1,432,647.51 50048 KATHLEEN G LAKE IRREV JAY MCELROY 1,424,862.45 18600 MARY AND CARL H. LANE FRED DITTMANN 1,413,096.74 94917 ELIZABETH G. HERMELEE FRED DITTMANN 1,390,453.95 97450 T/U/W MORRIS WOLF F/B/ FRED DITTMANN
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3/31/98 Market Value Client ID Client Name Manager 1,386,747.60 29052 ASPLUNDH FOUNDATION MARCIA ZERCOE 1,369,147.89 66589 PALISANDER FINANCE & BERNIE BLAIS 1,363,176.88 97788 H. GATES LLOYD III & JOH FRED DITTMANN 1,348,357.46 58700 TRUST U/W OF EDGAR L. F BERNIE BLAIS 1,335,635.39 89265 ESTHER & THOMAS CARP BERNIE BLAIS 1,335,625.41 93292 TRUST UNDER WILL FOR FRED DITTMANN 1,327,154.47 18559 JA SCOTT INVESTMENTS, TAX SMART - GROUP 1,317,595.28 50050 GEORGE C MACKIE JR TT JAY MCELROY 1,301,832.16 93406 JAMES N BRODERICK AN JAY MCELROY 1,269,356.51 10150 WILLIAM VAN ALAN CLA FRED DITTMANN 1,263,894.46 50052 TRUSTEE US DTD 08/22/75 JAY MCELROY 1,256,970.88 50069 THE UNION LEAGUE OF P JOE DOYLE 1,247,025.94 30959 KENDAL AT OBERLIN-OP RHONDA MCNAVISH 1,236,892.69 93244 T/U/W JOHN HAMPTON BA FRED DITTMANN 1,235,508.98 08129 1838 I/A SALARIED SAVIN PJM-Special Equity 1,201,297.55 94918 JANE GELLER & MONROE FRED DITTMANN 1,113,647.89 07333 AMERICAN SOCIETY OF N GWG Short Term of Fixe 1,094,810.57 08726 1838 INVESTMENT ADVIS HANS van den BERG 1,094,164.01 59639 KENDAL AT HANOVER LI RHONDA MCNAVISH 1,069,384.23 40210 BETTIE SIEGEL FAMILY T LOUIS J ROSATO 1,050,244.80 06552 RANDNOR TOWNSHIP CIVI LOUIS J ROSATO 1,023,108.06 59407 KENDAL AT HANOVER-C LOUIS J ROSATO 980,401.41 25771 RORER PROVIDENT TRUS JAY MCELROY 943,240.59 44067 CHURCH OF THE EPIPHAN BERNIE BLAIS 929.663.03 51524 FRANKFORD LEATHER CO BERNIE BLAIS 902,229.76 90220 MARIO V. MASSIMINI LIVI BERNIE BLAIS 902,093.95 90212 ELIZABETH C. MASSIMINI BERNIE BLAIS 899,490.21 02218 ST. ANDREW'S SOCIETY M JAY MCELROY 893,121.46 92412 STEPHEN DITTMANN, FRE FRED DITTMANN 878,255.78 02254 ST. ANDREW'S SOCIETY G JAY MCELROY 840,753.76 94672 JAMES DONNELLY MARIT TAX SMART-GROUP 840,229.73 02192 ST. ANDREW'S SOCIETY F JAY MCELROY 811,763.59 75003 RUTH R. SCOTT AND EAR FRED DITTMANN 780,488.26 35327 VICKI GREEN & DAVID SN BERNIE BLAIS 751,624.95 11250 LITTLETON FIRE OLD HIR SMALL CAP QUASI W 727,149.56 94603 TRUST U/D OF FRANCIS LI JAY MCELROY 710,296.72 03633 WILLIAM D. BERGER INSU FRED DITTMANN 691,432.97 40074 COPELAND SURVEYING P/ BERNIE BLAIS 668,482.39 97966 TRUST UNDER DEED 11/20 FRED DITTMANN 646,202.67 94878 CAROLINE KRESSLY CUS FRED DITTMANN
1838 Institutional Accounts by Market Value 08-Jun-98 Page 7
3/31/98 Market Value Client ID Client Name Manager 637,633.26 02263 ST. ANDREW'S SOCIETY S JAY MCELROY 628,187.50 29112 N.A.B.E.T. LOCAL #11 MARCIA ZERCOE 616,400.65 32057 NEW YORK EYE AND EAR LOUIS J ROSATO 594,404.76 92391 THE TRUST UNDER DEED FRED DITTMANN 591,900.24 91223 JOHN H. GLICK, TTEE SAR FRED DITTMANN 585,934.39 10496 AILEEN K. AND BRIAN L. GWG-Block Accounts 582,703.76 94873 MATTHEW C. KRESSLY C FRED DITTMANN 581,713.24 98332 MARTIAL TRUST FOR ELI FRED DITTMANN 579,280.21 81504 KATHRYN J. DONALDSON BERNIE BLAIS 561,902.72 94874 AMANDA E. KRESSLY CU FRED DITTMANN 558,058.43 91225 JOHN H. GLICK, TTEE KAT FRED DITTMANN 555,588.03 02209 ST. ANDREW'S SOCIETY M JAY MCELROY 548,331.30 20460 EASTMAN SAVINGS AND SMITH BARNEY LC W 500,398.50 84451 U/A DTD 12/27/76 FOR HEL FRED DITTMANN 497,535.08 84125 ST. MARY'S CHURCH - ST FRED DITTMANN 497,108.19 04169 WILLIAM B. KESSLER ME LOUIS J ROSATO 472,242.98 14710 NELLE W CARLSMITH TR FRED DITTMANN 456,626.70 45054 CAROLINE C. KRESSLY SU FRED DITTMANN 455,438.86 38418 TEAMSTERS LOCAL 830 M MARCIA ZERCOE 431,105.02 84443 MARGARET AIMEE KEUL FRED DITTMANN 429,566.32 84824 PATHOLOGY CONSULTAN BERNIE BLAIS 411,292.40 50049 KGR FOUNDATION, INC JAY MCELROY 407,268.05 14711 DONN W. CARLSMITH TR FRED DITTMANN 396.888.64 84124 ST. MARY'S CHURCH - RE FRED DITTMANN 395,915.98 94607 EDITH M. CARLSMITH TR FRED DITTMANN 378,301.73 98331 FAMILY TRUST FOR ELISE FRED DITTMANN 365,014.16 94911 CAROLINE KRESSLY TRU FRED DITTMANN 327,374.17 30900 KENDAL AT OBERLIN-BO RHONDA MCNAVISH 314,009.19 66002 MIAMI CHILDREN'S HOSPI RHONDA MCNAVISH 299,121.14 83919 U/A DTD 12/19/79 FOR AND FRED DITTMANN 290,129.96 44042 CHURCH OF THE EPIPHAN BERNIE BLAIS 289,460.76 85750 U/A DTD 12/30/89 FOR MO FRED DITTMANN 266,758.76 83952 E.C. STYBERG DEFINED B LOUIS J ROSATO 266,209.43 96247 METHODIST HOSPITAL DI RHONDA MCNAVISH 249,441.83 96243 METHODIST HOSPITAL DI MARCIA ZERCOE 248,670.98 17461 KAELEMAKULE TRUST FRED DITTMANN 242,298.51 84832 PATHOLOGY CONSULTAN BERNIE BLAIS 241,052.25 72004 EARL S. SCOTT TRUST DA FRED DITTMANN 221,137.72 95038 JOAN S. STEELE REVOCA FRED DITTMANN 215,940.76 97135 MARGARET Y K ODA, TRU FRED DITTMANN
1838 Institutional Accounts by Market Value 08-Jun-98 Page 8
3/31/98 Market Value Client ID Client Name Manager 215,802.36 97130 HAROLD T. KURISU, TRUS FRED DITTMANN 215,801.41 97134 GEORGE I. KURISU TRUST FRED DITTMANN 215,791.41 97133 HARUKO K. YOSHINA, TR FRED DITTMANN 215,782.58 97131 ALBERT G. KURISU, TRUS FRED DITTMANN 215,767.80 97132 HATSUKO K. TANAKA TR FRED DITTMANN 202,761.64 01415 CBWC&I PROFIT SHARING FRED DITTMANN 199,684.00 72003 THE ESTATE OF DR. EARL FRED DITTMANN 199,586.48 92990 T/U/D DATED 2/6/59 FOR W JAY MCELROY 197,833.60 50066 THE UNION LEAGUE OF P JOE DOYLE 173,882.65 95037 RICHARD STEELE REVOC FRED DITTMANN 114,314.35 96242 METHODIST HOSPITAL FO RHONDA MCNAVISH 69,836.83 06349 1838 INVESTMENT ADVIS MARCIA ZERCOE 8,572.24 96244 METHODIST HOSPITAL DI RHONDA MCNAVISH 3,231.52 30926 KENDAL AT OBERLIN-CO RHONDA MCNAVISH 02227 ST. ANDREW'S SOCIETY JAY MCELROY 07368 RIVERSIDE MEDICAL CEN ED POWELL 12002 PROVIDENT MUTUAL LIF ED POWELL 14039 T/U/W JOHN J. SERRELL N PATRICIA J. MYERS 14040 NON QTTP FAMILY T/U/W J PATRICAI J. MYERS 21061 ELLIOT COOPERMAN PRO JOHN LISLE 21062 MIRIAM COOPERMAN PR JOHN LISLE 21074 ALAN LEAVITT TRUST #2 SMALL CAP QUASI W 21075 DAVID LEAVITT TRUST #2 SMALL CAP QUASI W 26529 MARKET STREET FUND N ED POWELL 31176 LANA ROSEN FIELD TRUS SMALL CAP QUASI W 35334 RIVERSIDE FOUNDATION CINDY AXELROD 35533 RIVERSIDE FOUNDATION CINDY AXELROD 35536 OAKSIDE CORPORATION CINDY AXELROD 60005ST PA MEDICAL SOCIETY LIA JOHN DONALDSON 71198 CAPITAL GROUWTH PORTF LOUIS J ROSATO 94747 STAFFORD SAVINS BAN JOHN DONALDSON 99183 ALLIANCE LAUNDRY SYS ED POWELL 99246 JAY D. ZINGG LIVING TRU SMALL CAP QUASI W - ----------------- $4,173,252,508.58 =================
BANK ACCOUNTS 1838 Investment Advisors, L.P. First Union Bank Checking Account No. 0105-2312 Contact - Mary Albanese (215) 973-8174 First Union Bank Custody Account No. 06349-00-J Contact - Steve Fluta (215) 973-1449 1838 Investment Advisors, Inc. Merrill Lynch CMA Account No. 64M-07N92 Contact - Donna Schuck (215) 587-4726 1838 INVESTMENT ADVISORS
12/31/93 1/1/94 12/31/94 1/1/95 12/31/95 1/1/96 SHARES REDIST SHARES REDIST SHARES REDIST BROWN, W. Thacher 210300 -1000 209300 -1000 208300 MCELROY, John J. 103000 -4000 99000 -8000 91000 -800 BALOG, James 66000 -12000 54000 -54000 0 Retired on 12/31/94 GEPHART, George W. 24000 1000 25000 15000 40000 SPRINGROSE, John 23500 1500 25000 15000 40000 3000 MYERS, Patrica J. 20500 2000 22500 11000 33500 DOYLE, Joseph T., Jr. 15000 2000 17000 8000 25000 BEIMER, Michael F. 16000 16000 16000 2000 DITTMANN, Frederic N. 7000 2000 9000 2000 11000 DONALDSON, John H. 10500 10500 2500 13000 TYRE, Steve 13000 2000 15000 5000 20000 -20000 BARRY, Kevin 17000 1500 18500 18500 ZERCOE, Marcia 0 0 7000 VAN DEN BERG, Hans 0 0 3000 POWELL, Edward 0 2000 2000 2000 HERZ, Robert 1000 1000 1000 2000 1000 AXELROD, Cynthia R. 0 0 1000 LIEB, Amy B. 2000 2000 2000 1000 EGAN, Kenneth A. 2000 2000 1000 3000 TETLEY, Nancy 2700 27000 2700 KEPES, Stephen D. 0 0 500 CLANCY, J. Barron 0 0 GUTHRIE, Holly 500 500 300 BENCROWSKY, Anna Marie 1500 1500 1500 CONSIDINE, Tom 0 0 MOORE, James E., III 0 0 WHITE, Denise E. 0 0 MCNAVISH, Rhonda 0 0 530000 0 530000 0 53000 0 Shares Purchased 17000 62000 28000 Price per share 33.17 28.17 31.93 6/30/96 12/31/96 1/1/97 3/31/97 12/31/97 1/1/98 3/31/98 SALE SHARES REDIST SALE SHARES RESDIST SHARES BROWN, W. Thacher 280300 208,300 0 208,300 MCELROY, John J. 90200 -10000 80,200 0 80,200 BALOG, James 0 GEPHART, George W. 40000 10000 50,000 5,000 55,000 SPRINGROSE, John 43000 4000 47,000 5,000 52,000 MYERS, Patrica J. 33500 4000 37,500 3,000 40,500 DOYLE, Joseph T., Jr. 25000 25,000 3,000 28,000 BEIMER, Michael F. 18000 -2000 16,000 0 16,000 DITTMANN, Frederic N. 11000 2000 13,000 1,000 14,000 DONALDSON, John H. 13000 13,000 500 13,500 TYRE, Steve 0 Resigned on 1/1/96 BARRY, Kevin 18500 -18500 Resigned on 3/31/97 ZERCOE, Marcia 7000 2000 9,000 -2,000 7,000 VAN DEN BERG, Hans 3000 3000 6,000 3,000 9,000 POWELL, Edward 4000 1000 5,000 1,000 6,000 HERZ, Robert 3000 1000 4,000 1,000 5,000 AXELROD, Cynthia R. 1000 1500 2,500 1,000 3,500 LIEB, Amy B. 3000 3,000 0 3,000 EGAN, Kenneth A. 3000 3,000 0 3,000 TETLEY, Nancy 2700 2,700 0 2,700 KEPES, Stephen D. 500 1000 1,500 1,500 3,000 CLANCY, J. Barron 0 1000 1,000 2,000 3,000 GUTHRIE, Holly 800 0 Resigned on 6/30/96 BENCROWSKY, Anna Marie 1500 300 1,800 200 2,000 CONSIDINE, Tom 0 1000 1,000 500 1,500 MOORE, James E., III 0 500 500 500 1,000 WHITE, Denise E. 0 0 500 500 MCNAVISH, Rhonda 0 0 500 500 800 529200 20300 -18500 531,000 27,200 558,200 Shares Purchased 32300 29,200 Price per share 36.25 43.41
01/07/98 EXHIBIT A 1838 INVESTMENT ADVISORS, INC. Current Shareholder List Dated as of June 12, 1998 ================================================================================ Name Number of Shares Percentage ================================================================================ Axelrod, Cynthia R. 3,500 .63% Bencrowsky, Anna M. 2,000 .36% Biemer, Michael F. 16,000 2.87% Brown, W. Thacher 208,300 37.32% Clancy, J. Barron 3,000 .54% Considine, Thomas A. 1,500 .27% Dittmann, Frederic N. 14,000 2.51% Donaldson, John H. 13,500 2.42% Doyle, Jr. Joseph T. 28,000 5.02% Egan, Kenneth A. 3,000 .54% Gephart, Jr. George W. 55,000 9.85% Herz, Robert W. 5,000 .90% Kepes, Stephen D. 3,000 .54% Lieb, Amy B. 3,000 .54% McElroy, John J. 80,200 14.37% McNavish, Rhonda 500 .09% Moore, III, James E. 1,000 .18% Myers, Patricia J. 40,500 7.26% Powell, Edwin P. 6,000 1.07% Springrose, John H. 52,000 9.32% Tetley, Nancy W. 2,700 .48% Van Den Berg, Hans 9,000 1.61% White, Denise E. 500 .09% Zercoe, Marcia 7,000 1.25% - -------------------------------------------------------------------------------- Former Shareholders ================================================================================ Name Number of Shares ================================================================================ Guthrie, Holly 800 Vitale, Robert J. 45,000 Shute, Edward L. 16,000 Echevarria, Joan 2,500 Barry, Kevin 18,500 Tyre, Steve 20,000 Balog, James 70,000 - -------------------------------------------------------------------------------- EXHIBIT A-1 1838 INVESTMENT ADVISORS, INC. Nonsoliciting Shareholder List W. Thacher Brown John J. McElroy George W. Gephart John Springrose Patricia J. Myers Joseph T. Doyle, Jr. Michael F. Biemer Frederick N. Dittmann John H. Donaldson Hans Van Den Berg Edward Powell EXHIBIT B PLAN OF MERGER [TO BE FILED WITH THE DELWARE SECRETARY OF STATE, AFTER CLOSING] CERTIFICATE OF MERGER In accordance with Section 251 of the Delaware General Corporation Law, this Certificate of Merger, dated as of [_____________], 1998 is executed by 1838 Investment Advisors, Inc., a Delaware corporation and MBIA Acquisition, Inc. a Delaware corporation. 1. MBIA Acquisition, Inc., (the "Merging Corporation") and 1838 Investment Advisors, Inc. have, in accordance with Section 251 of the Delaware General Corporation Law, approved, adopted, certified, executed and acknowledged an agreement and plan of merger dated as of June 19, 1998 (the "Agreement"), pursuant to which 1838 Investment Advisors, Inc., (hereinafter the "Surviving Corporation") is the surviving corporation. 2. The certificate of incorporation of 1838 Investment Advisors, Inc. shall be the certificate of incorporation of the Surviving Corporation. 3. The Agreement is on file at the Surviving Corporation's principal place of business which is located at Radnor Corporate Center, Suite 320, Radnor, PA 19807. 4. The Surviving Corporation will furnish, free of charge, to any stockholder of the Surviving Corporation or of the Merging Corporation a copy of the executed agreement and plan of merger. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. 1838 INVESTMENT ADVISORS, INC. By ________________________________ Its ______________________________ MBIA ACQUISITION, INC. By ________________________________ Its ______________________________ EXHIBIT C FURNITURE, FIXTURES AND EQUIPMENT Please see Disclosure Schedule. EXHIBIT D CUSTOMER CONTRACTS Please see Disclosure Schedule. EXHIBIT E SELLING STOCKHOLDER LETTER _____________, 19___ ____________________ Name of Stockholder MBIA Inc. 113 King Street Armonk, NY 10504 Ladies and Gentlemen: I am a stockholder of 1838 Investment Advisors, Inc. ("1838"). Pursuant to the terms of the Agreement and Plan of Merger dated as of June ____, 1998 (the "Merger Agreement") among 1838, MBIA Inc ("MBIA") and MBIA Acquisition, Inc. ("Acquisition"), Acquisition will be merged with and into 1838 in a transaction (the "Merger") in which I will receive shares of $1.00 par value common stock of MBIA (the "Shares") pursuant to the terms of the Merger Agreement. In connection with the Merger, I represent and warrant to, and agree with, MBIA that: 1. I have carefully read this Selling Stockholder Letter and discussed its requirements and other applicable limitations upon the sale, transfer or other disposition of the Shares, to the extent I felt necessary, with my counsel or counsel for 1838. 2. I have carefully read the Merger Agreement relating to the Merger and discussed its requirements and its impact upon my ability to sell, transfer or otherwise dispose of the shares, to the extent I felt necessary, with my counsel or counsel for 1838. 3. I have been informed by MBIA that the distribution by me of the Shares has not been registered under the Act and that the Shares must be held by me indefinitely unless (i) such distribution of the Shares has been registered under the Securities Act of 1933 (the "Act"), (ii) a sale of the Shares is made in conformity with the volume and other limitations of Rule 145 promulgated by the Securities and Exchange Commission (the "Commission") under the Act (and otherwise in accordance with Rule 144 under the Act if I am an affiliate of MBIA and if so required at the time) or (iii) some other exemption from registration is available with respect to any such proposed sale, transfer or other disposition of the Shares. I agree that I will not make any sale, transfer or other disposition of the Shares in violation of the Act or the rules and regulations of the Commission thereunder. 4. I understand that MBIA is under no obligation to register the sale, transfer or other disposition of the Shares by me or on my behalf or to take any other action necessary in order to make compliance with an exemption from registration available, except for MBIA's 1 customary procedures in connection with sales of its stock in conformity with Rule 145. By accepting this Selling Stockholder Letter, MBIA agrees to exert its best efforts to timely file with the Commission all of the reports it is required to file under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). 5. I also understand that, unless a transfer of Shares is a sale made in conformity with the provisions of Rule 145, or is made pursuant to a registration statement under the Act, stop transfer instructions will be given to MBIA's transfer agent(s) with respect to the Shares and that there will be placed on the certificate for the Shares, or any substitutions therefore, a legend stating in substance: "The Shares represented by this certificate were issued in a transaction to which Rule 145 promulgated under the Securities Act of 1933, as amended (the "Act"), applies and may be sold or otherwise transferred only in compliance with the limitations of such Rule 145, or pursuant to an effective registration statement or exemption from registration under the Act" 6. I have not, within the 30 days prior to the date hereof, sold, transferred or otherwise disposed of, or reduced my relative risk to, any shares of 1838 or MBIA capital stock beneficially owned by me and, notwithstanding the other provisions hereof, I will not sell, transfer, or otherwise dispose of, or reduce my risk relative to, any Shares received by me in the Merger or any other shares of MBIA capital stock which I may beneficially own until after such time as financial results covering at least 30 days of post-Merger combined operations of MBIA and 1838 have been published by MBIA, in the form of a quarterly earnings report, an effective registration statement filed with the Commission, a report to be Commission on Form 10-K, 10-Q or 8-K or other public filing or announcement which includes the combined financial results of operations. I understand that, until such time, MBIA may refuse to register such transfer and that stop transfer instructions will be given to MBIA's transfer agent(s) with respect to the Shares or such other shares of MBIA capital stock. 9. I hereby waive any and all transfer restrictions set out in Article 7 of the Stockholders' Agreement (as defined in the Merger Agreement) including, without limitation, rights of first refusal and consent to the participation in the Merger of the other 1838 stockholders. It is understood and agreed that this Selling Stockholder Letter shall terminate and be of no further force and effect and the legend set forth in paragraph 5 above shall be removed by delivery of substitute certificates without such legend if the period of time specified in paragraph 7 above has passed and MBIA shall have received a letter form the staff of the Commission, or an opinion of counsel acceptable to MBIA, to the effect that the stock transfer instructions and the legend are not required for purposes of the Securities Act. Very truly yours, 2 Accepted as of the ____ day of _______________, 19 ______ MBIA Inc. By _______________________ 3 EX-10.33 10 CREDIT AGREEMENT EXECUTION COPY ================================================================================ CREDIT AGREEMENT among MBIA INC., MBIA INSURANCE CORPORATION, VARIOUS DESIGNATED BORROWERS, VARIOUS LENDING INSTITUTIONS, DEUTSCHE BANK AG, NEW YORK BRANCH, AS ADMINISTRATIVE AGENT, THE FIRST NATIONAL BANK OF CHICAGO, AS SYNDICATION AGENT and FLEET NATIONAL BANK, AS DOCUMENTATION AGENT Dated as of August 28, 1998 $200,000,000 ================================================================================ TABLE OF CONTENTS Page SECTION 1. Amount and Terms of Credit............................... 1 1.01 Commitment............................................... 1 1.02 Minimum Borrowing Amounts, etc........................... 1 1.03 Notice of Borrowing of Revolving Loans................... 2 1.04 Competitive Bid Borrowings............................... 2 1.05 Disbursement of Funds.................................... 4 1.06 Notes ............................................... 5 1.07 Conversions.............................................. 5 1.08 Pro Rata Borrowings, etc................................. 5 1.09 Interest ............................................... 6 1.10 Interest Periods......................................... 7 1.11 Increased Costs, Illegality, etc......................... 8 1.12 Compensation............................................. 10 1.13 Change of Lending Office................................. 10 1.14 Replacement of Lenders................................... 10 1.15 Recommitment; Replacement of Non-Continuing Lender ...... 11 1.16 Additional Commitments .................................. 12 1.17 Designated Borrowers .................................... 12 1.18 Retroactivity ........................................... 13 SECTION 2. Fees; Commitments ....................................... 13 2.01 Fees - .................................................. 13 2.02 Voluntary Reduction of Commitments ...................... 14 2.03 Mandatory Reduction of Commitments ...................... 14 SECTION 3. Payments ................................................ 14 3.01 Voluntary Prepayments ................................... 14 3.02 Mandatory Prepayments ................................... 14 3.03 Method and Place of Payment ............................. 15 3.04 Net Payments ............................................ 15 SECTION 4. Conditions Precedent .................................... 18 4.01 Conditions Precedent to Effective Date .................. 18 4.02 Conditions Precedent to Loans ........................... 19 SECTION 5. Representations, Warranties and Agreements .............. 20 5.01 Corporate Existence and Power 20 5.02 Corporate and Governmental Authorization; No Contravention ....................................... 20 (i) 5.03 Binding Effect .......................................... 20 5.04 Financial Information ................................... 20 5.05 Litigation .............................................. 21 5.06 Compliance with ERISA ................................... 21 5.07 Taxes ................................................... 21 5.08 Subsidiaries ............................................ 21 5.09 Not an Investment Company ............................... 21 5.10 Public Utility Holding Company Act ...................... 22 5.11 Ownership of Property; Liens ............................ 22 5.12 No Default .............................................. 22 5.13 Full Disclosure ......................................... 22 5.14 Compliance with Laws .................................... 22 5.15 Capital Stock .......................................... 22 5.16 Margin Stock ........................................... 22 5.17 Insolvency ............................................. 22 SECTION 6. Affirmative Covenants ................................... 23 6.01 Information Covenants .................................. 23 6.02 Books, Records and Inspections .......................... 24 6.03 Maintenance of Existence ................................ 25 6.04 Compliance with Laws; Payment of Taxes .................. 25 6.05 Insurance ............................................... 25 6.06 Maintenance of Property ................................. 25 SECTION 7. Negative Covenants ...................................... 25 7.01 Liens ................................................... 25 7.02 Dissolution ............................................. 26 7.03 Consolidations, Mergers and Sales of Assets ............. 26 7.04 Use of Proceeds ........................................ 26 7.05 Change in Fiscal Year .................................. 26 7.06 Transactions with Affiliates ........................... 26 7.07 Leverage Ratio ......................................... 26 7.08 Minimum Net Worth ...................................... 26 SECTION 8. Defaults ................................................ 27 8.01 Events of Default ....................................... 27 8.02 Notice of Default ....................................... 29 SECTION 9. Definitions ............................................. 29 SECTION 10. Agents, etc ............................................ 38 10.01 Appointment ............................................ 38 10.02 Nature of Duties ....................................... 38 10.03 Lack of Reliance on the Agents ......................... 39 (ii) 10.04 Certain Rights of the Agents ........................... 39 10.05 Reliance ............................................... 39 10.06 Indemnification ........................................ 39 10.07 The Agents in Their Individual Capacities .............. 40 10.08 Holders ................................................ 40 10.09 Resignation by an Agent ................................ 40 10.10 Documentation Agent .................................... 41 SECTION 11. Miscellaneous .......................................... 41 11.01 Payment of Expenses, etc ............................... 41 11.02 Lender Enforceability Opinions ......................... 41 11.03 Notices ................................................ 42 11.04 Benefit of Agreement ................................... 42 11.05 No Waiver; Remedies Cumulative ......................... 43 11.06 Payments Pro Rata ...................................... 43 11.07 Calculations; Computations ............................. 44 11.08 Governing Law; Submission to Jurisdiction-, Venue; Waiver of Jury Trial ........................... 44 11.09 Counterparts ........................................... 45 11.10 Headings Descriptive ................................... 45 11.11 Amendment or Waiver ................................... 45 11.12 Survival ............................................... 46 11.13 Domicile of Loans ...................................... 46 11.14 Confidentiality ........................................ 46 11.15 Lender Register ........................................ 46 ANNEX I -- Commitments ANNEX II -- Lender Addresses ANNEX III -- Subsidiaries EXHIBIT A-1 -- Form of Notice of Borrowing EXHIBIT A-2 -- Form of Notice of Competitive Bid Borrowing EXHIBIT B-1 -- Form of Revolving Note EXHIBIT B-2 -- Form of Competitive Bid Note EXHIBIT C -- Form of Section 3.04 Certificate EXHIBIT D -- Form of Opinion of General Counsel to Borrowers EXHIBIT E -- Form of Officers' Certificate EXHIBIT F -- Form of Financial Guaranty Insurance Policy EXHIBIT G -- Form of Assignment Agreement EXHIBIT H -- Form of Commitment Assumption Agreement EXHIBIT I -- Form of DB Assumption Agreement EXHIBIT J -- Form of Lender's Opinions EXHIBIT K -- Form of Opinion of Designated Borrower's Counsel EXHIBIT L -- Form of Opinion of Counsel to Corp. (iii) CREDIT AGREEMENT, dated as of August 28, 1998, among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp."), a New York stock insurance corporation, one or more Designated Borrowers (as hereinafter defined) from time to time party hereto, the lenders from time to time party hereto (each, a "Lender" and, collectively, the "Lenders"), DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent, THE FIRST NATIONAL BANK OF CHICAGO, as Syndication Agent and FLEET NATIONAL BANK, as Documentation Agent. Unless otherwise defined herein, all capitalized terms used herein and defined in Section 9 are used herein as so defined. WITNESSETH: WHEREAS, subject to and upon the terms and conditions herein set forth, the Lenders are willing to make available to the Borrowers the credit facilities provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. 1.01 Commitment. (a) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees, at any time and from time to time on and after the Effective Date and prior to the Final Maturity Date, to make a loan or loans (each, a "Revolving Loan" and, collectively, the "Revolving Loans") to one or more of the Borrowers (on a several basis), which Revolving Loans (i) may be repaid and reborrowed in accordance with the provisions hereof, (ii) except as hereinafter provided, may, at the option of any Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all Revolving Loans made as part of the same Borrowing shall, unless otherwise specified herein, consist of Revolving Loans of the same Type; and (iii) shall not exceed that aggregate Principal Amount which, when added to the aggregate Principal Amount of all other Revolving Loans then outstanding and the aggregate Principal Amount of all Competitive Bid Loans then outstanding, equals the Total Commitment at such time. (b) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees that one or more Borrowers may (on a several basis) incur a loan or loans (each, a "Competitive Bid Loan" and, collectively, the "Competitive Bid Loans") from one or more Bidder Lenders pursuant to a Competitive Bid Borrowing at any time and from time to time on and after the Effective Date and prior to the date which is the third Business Day preceding the date which is seven days prior to the Final Maturity Date, provided that after giving effect to any Competitive Bid Borrowing and the use of the proceeds thereof, the aggregate outstanding Principal Amount of Competitive Bid Loans, when combined with the then aggregate outstanding Principal Amount of all Revolving Loans, shall not exceed the Total Commitment at such time. 1.02 Minimum Borrowing Amounts, etc. The aggregate Principal Amount of each Borrowing shall not be less than the Minimum Borrowing Amount. More than one Borrowing may be incurred on any day, provided that at no time shall there be outstanding more than four Borrowings of Eurodollar Loans. 1.03 Notice of Borrowing of Revolving Loans. (a) Whenever a Borrower desires to incur Revolving Loans, it shall give the Administrative Agent at its Notice Office, (x) prior to I 1:00 A.M. (New York time) at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Eurodollar Loans and (y) written notice (or telephonic notice promptly confirmed in writing) prior to 1 1:00 A.M. (New York time) on the date of each Borrowing of Base Rate Loans. Each such notice (each, a "Notice of Borrowing") shall be in the form of Exhibit A-1 and shall be irrevocable and shall specify (i) the identity of the applicable Borrower, (ii) the aggregate principal amount of the Revolving Loans to be made pursuant to such Borrowing, (iii) the date of Borrowing (which shall be a Business Day), (iv) whether the respective Borrowing shall consist of Base Rate Loans or Eurodollar Loans, (V) if Eurodollar Loans, the Interest Period to be initially applicable thereto and (vi) if DB Loans, the DB Loan Maturity Date to be applicable thereto. The Administrative Agent shall promptly give each Lender written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing, of the portion thereof to be funded by such Lender and of the other matters covered by the Notice of Borrowing. (b) Without in any way limiting the obligation of any Borrower to confirm in writing any telephonic notice permitted to be given hereunder, the Administrative Agent may prior to receipt of written confirmation act without liability upon the basis of such telephonic notice, believed by it in good faith to be from an Authorized Officer of such Borrower. In each such case, each Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice absent manifest error. 1.04 Competitive Bid Borrowings. (a) Whenever any Borrower desires to incur a Competitive Bid Borrowing, it shall deliver to the Administrative Agent, prior to 11:00 A.M. (New York time) (x) at least four Business Days prior to the date of such proposed Competitive Bid Borrowing, in the case of a Spread Borrowing, and (y) at least one Business Day prior to the date of such proposed Competitive Bid Borrowing, in the case of an Absolute Rate Borrowing, a written notice substantially in the form of Exhibit A-2 hereto (a "Notice of Competitive Bid Borrowing"), which notice shall specify in each case (i) the identity of the applicable Borrower, (ii) the date (which shall be a Business Day) and the aggregate amount of the proposed Competitive Bid Borrowing, (iii) the maturity date for repayment of each and every Competitive Bid Loan to be made as part of such Competitive Bid Borrowing (which maturity date may be (A) up to six months after the date of such Competitive Bid Borrowing in the case of a Spread Borrowing and (B) no fewer than seven days and no more than 180 days after the date of such Competitive Bid Borrowing in the case of an Absolute Rate Borrowing, provided that in no event shall the maturity date of any Competitive Bid Borrowing be later than the third Business Day preceding the Final Maturity Date), (iv) the interest payment date or dates relating thereto, (v) whether the proposed Competitive Bid Borrowing is to be an Absolute Rate Borrowing or a Spread Borrowing, and (vi) any other terms to be applicable to such Competitive Bid Borrowing. The Administrative Agent shall promptly notify each Bidder Lender by telephone or facsimile of each such request for a Competitive Bid Borrowing received by it from a Borrower and of the contents of the related Notice of Competitive Bid Borrowing. (b) Each Bidder Lender shall, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Loans to the applicable Borrower as part of -2- such proposed Competitive Bid Borrowing at a rate or rates of interest specified by such Bidder Lender in its sole discretion and determined by such Bidder Lender independently of each other Bidder Lender, by notifying the Administrative Agent (which shall give prompt notice thereof to such Borrower by facsimile), before 9:30 A.M. (New York time) on the date (the "Reply Date") which is (x) in the case of an Absolute Rate Borrowing, the date of such proposed Competitive Bid Borrowing and (y) in the case of a Spread Borrowing, three Business Days before the date of such proposed Competitive Bid Borrowing, of the minimum amount and maximum amount of each Competitive Bid Loan which such Bidder Lender would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso contained in Section 1.01(b), exceed such Bidder Lender's Commitment), the rate or rates of interest therefor and such Bidder Lender's lending office with respect to such Competitive Bid Loan; provided that if the Administrative Agent in its capacity as a Bidder Lender shall, in its sole discretion, elect to make any such offer, it shall notify the respective Borrower of such offer before 9:15 A.M. (New York time) on the Reply Date. If any Bidder Lender shall elect not to make such an offer, such Bidder Lender shall so notify the Administrative Agent, before 9:30 A.M. (New York time) on the Reply Date, and such Bidder Lender shall not be obligated to, and shall not, make any Competitive Bid Loan as part of such Competitive Bid Borrowing; provided that the failure by any Bidder Lender to give such notice shall not cause such Bidder Lender to be obligated to make any Competitive Bid Loan as part of such proposed Competitive Bid Borrowing. (c) The applicable Borrower shall, in turn, before 10:30 A.M. (New York time) on the Reply Date, either: (i) cancel such Competitive Bid Borrowing by giving the Administrative Agent notice to such effect (it being understood and agreed that if such Borrower gives no such notice of cancellation and no notice of acceptance pursuant to clause (ii) below, then such Borrower shall be deemed to have canceled such Competitive Bid Borrowing), or (ii) accept one or more of the offers made by any Bidder Lender or Bidder Lenders pursuant to clause (b) above by giving notice (in writing or by telephone confirmed in writing) to the Administrative Agent of the amount of each Competitive Bid Loan (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the applicable Borrower by the Administrative Agent on behalf of such Bidder Lender for such Competitive Bid Borrowing pursuant to clause (b) above) to be made by each Bidder Lender as part of such Competitive Bid Borrowing, and reject any remaining offers made by Bidder Lenders pursuant to clause (b) above by giving the Administrative Agent notice to that effect; provided that the acceptance of offers may only be made on the basis of ascending Absolute Rates (in the case of an Absolute Rate Borrowing) or Spreads (in the case of a Spread Borrowing), in each case commencing with the lowest rate so offered; provided further, however, that if offers are made by two or more Bidder Lenders at the same rate and acceptance of all such equal offers would result in a greater principal amount of Competitive Bid Loans being accepted than the aggregate principal amount requested by the applicable Borrower, if such Borrower elects to accept any such offers such Borrower shall accept such offers P o rata from such Bidder Lenders (on the basis of the maximum amounts of such offers) unless any such Bidder Lender's pro rata share would be less than the minimum amount specified -3- by such Bidder Lender in its offer, in which case such Borrower shall have the right to accept one or more such equal offers in their entirety and reject the other equal offer or offers or to allocate acceptance among all such equal offers (but giving effect to the minimum and maximum amounts specified for each such offer pursuant to clause (b) above), as such Borrower may elect in its sole discretion. (d) If the applicable Borrower notifies the Administrative Agent that such Competitive Bid Borrowing is deemed canceled, pursuant to clause (c)(i) above, the Administrative Agent shall give prompt notice thereof to the Bidder Lenders and such Competitive Bid Borrowing shall not be made. (e) If the applicable Borrower accepts one or more of the offers made by any Bidder Lender or Bidder Lenders pursuant to clause (c) (ii) above, the Administrative Agent shall in turn promptly notify (x) each Bidder Lender that has made an offer as described in clause (b) above, of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Bidder Lender pursuant-to clause (b) above have been accepted by the Borrower and (y) each Bidder Lender that is to make a Competitive Bid Loan as part of such Competitive Bid Borrowing, of the amount of each Competitive Bid Loan to be made by such Bidder Lender as part of such Competitive Bid Borrowing. 1.05 Disbursement of Funds. (a) No later than 12:00 Noon (New York time) (or 3:00 P.M. (New York time) in the case of (x) a Borrowing of Base Rate Loans for which a Notice of Borrowing was given on the date of such Borrowing and (y) a Competitive Bid Borrowing) on the date specified in each Notice of Borrowing or Notice of Competitive Bid Borrowing, each Lender will make available its pro rata share, if any, of such Borrowing requested to be made on such date. All such amounts shall be made available to the Administrative Agent in Dollars, and immediately available funds at the Payment Office and the Administrative Agent promptly will make available to the applicable Borrower by depositing to the account designated by such Borrower, which account shall be at an institution in the same city as the respective Payment Office, the aggregate of the amounts so made available in the type of funds received. Unless the Administrative Agent shall have been notified by any Lender participating in a Borrowing prior to the date of such Borrowing that such Lender does not intend to make available to the Administrative Agent its portion of the Borrowing or Borrowings to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date of Borrowing, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the applicable Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender and the Administrative Agent has made available same to the applicable Borrower, the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the applicable Borrower, and such Borrower shall pay such corresponding amount to the Administrative Agent within three Business Days of receipt of such notice unless previously paid by such Lender. The Administrative Agent shall also be entitled to recover on demand from such Lender or such Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such -4- corresponding amount was made available by the Administrative Agent to such Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (x) if paid by such Lender, the overnight Federal Funds Effective Rate or (y) if paid by such Borrower, the then applicable rate of interest, calculated in accordance with Section 1.09, for the respective Loans. (b) Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights which any Borrower may have against any Lender as a result of any default by such Lender hereunder. 1.06 Notes. (a) Each Borrower's obligation to pay the principal of, and interest on, the Loans made to it by each Lender shall be evidenced (i) if Revolving Loans, by a promissory note substantially in the form of Exhibit B-1 with blanks appropriately completed (each, a "Revolving Note" and, collectively, the "Revolving Notes") and (ii) if Competitive Bid Loans, by a promissory note substantially in the form of Exhibit B-2 with blanks appropriately completed (each a "Competitive Bid Note" and, collectively, the "Competitive Bid Notes"). (b) Each Lender will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will, prior to any transfer of any of its Notes, endorse on the reverse side thereof the outstanding Principal Amount of Loans evidenced thereby. Failure to make any such notation shall not affect a Borrower's obligations in respect of such Loans. 1.07 Conversions. Each Borrower shall have the option to convert on any Business Day all or a portion at least equal to the applicable Minimum Borrowing Amount of its Revolving Loans constituting Base Rate Loans or Eurodollar Loans into a Borrowing or Borrowings of Revolving Loans constituting Eurodollar Loans or Base Rate Loans, respectively, provided that (i) no partial conversion shall reduce the outstanding principal amount of the Eurodollar Loans made pursuant to a Borrowing to less than the Minimum Borrowing Amount applicable thereto, (ii) Base Rate Loans may not be converted into Eurodollar Loans when a Default or Event of Default is then in existence if the Administrative Agent or the Required Lenders shall have determined in its or their sole discretion not to permit such conversion and (iii) Borrowings of Eurodollar Loans resulting from this Section 1.07 shall be limited in number as provided in Section 1.02. Each such conversion shall be effected by the respective Borrower giving the Administrative Agent at the Notice Office, prior to 12:00 Noon (New York time), at least three Business Days' (or one Business Day in the case of a conversion into Base Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of Conversion") specifying the Revolving Loans to be so converted, the Type of Loans (as to interest option) to be converted into and, if to be converted into a Borrowing of Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall give each Lender prompt notice of any such proposed conversion affecting any of its Loans. 1.08 Pro Rata Borrowings, etc. All Revolving Loans incurred pursuant to a Borrowing shall be made by the Lenders pro rata on the basis of their respective Commitments. it is understood that no Lender shall be responsible for any default by any other Lender in its obligation to make Revolving Loans hereunder, and that each Lender shall be obligated to make -5- the Revolving Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder and regardless of whether such Lender has made any Competitive Bid Loans hereunder. 1.09 Interest. (a) The unpaid principal amount of each Base Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) or conversion at a rate per annum which shall at all times be the Base Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) or conversion at a rate per annum which shall at all times during each Interest Period applicable thereto be LIBOR for such Interest Period plus a margin of 0.18%. (c) The unpaid principal amount of each Competitive Bid Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate or rates per annum specified by a Bidder Lender or Bidder Lenders, as the case may be, pursuant to Section 1.04(b) and accepted by the respective Borrower pursuant to Section 1.04(c). (d) All overdue principal and, to the extent permitted by law, overdue interest in respect of any Loans shall bear interest at the Base Rate in effect from time to time plus 2%, provided that principal in respect of Eurodollar Loans and Competitive Bid Loans shall bear interest from the date same becomes due (whether by acceleration or other-wise) until the end of the Interest Period applicable thereto at a rate per annum equal to 2% plus the rate of interest applicable on the due date therefor. (e) Interest shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof, and in the case of DB Loans, compounded as described below, and shall be payable (i) in respect of each Base Rate Loan (other than a DB Loan), quarterly in arrears on the last Business Day of each March, June, September and December, (ii) in respect of each Eurodollar Loan (other than a DB Loan), on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period, (iii) in respect of each DB Loan, on the applicable DB Loan Maturity Date, (iv) in respect of each Competitive Bid Loan, at such times as specified in the Notice of Competitive Bid Borrowing relating thereto, and (v) in respect of each Loan, on any prepayment or conversion (other than the prepayment or conversion of any Base Rate Loan) (on the amount prepaid or converted), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. Notwithstanding anything to the contrary contained in this Agreement, although interest in respect of each DB Loan shall be payable only on the DB Loan Maturity Date for such DB Loan as provided in clause (iii) of the immediately preceding sentence, interest on each DB Loan shall compound on each date on which interest thereon would have been payable pursuant to clause (i) or (ii) of such sentence if such Loan were not a DB Loan and such compounded interest shall thereafter bear interest hereunder at the same rate per annum as the principal of the DB Loan to which such compounded interest relates. -6- (f) All computations of interest hereunder shall be made in accordance with Section 11.07(b). (g) The Administrative Agent, upon determining the interest rate for any Borrowing for any Interest Period, shall promptly notify the applicable Borrower and the Lenders thereof. 1.10 Interest Periods. (a) At the time a Borrower gives a Notice of Borrowing or a Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 12:00 Noon (New York Time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect by giving the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) of the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of such Borrower, be a one, two, three or six month period or such other period available to all Lenders. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing shall commence on the date of such Borrowing (including, where relevant, the date of any conversion from a Borrowing of Base Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) if any Interest Period begins on (x) the last Business Day of a month, it shall end on the last Business Day of the month in which it is to end and (y) a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) no Interest Period may be elected that would extend beyond the Final Maturity Date; (v) no Interest Period in respect of a DB Loan may be elected that would extend beyond the DB Loan Maturity Date for such DB Loan; (vi) no Interest Period may be elected at any time when a Default or an Event of Default is then in existence if the Administrative Agent or the Required Lenders shall have determined in its or their sole discretion not to permit such election; and (vii) all Eurodollar Loans comprising a Borrowing shall at all times have the same Interest Period. -7- (b) If upon the expiration of any Interest Period, the applicable Borrower has failed to (or may not) elect a new Interest Period to be applicable to the Revolving Loans subject to the expiring Interest Period as provided above, such Borrower shall be deemed to have elected, in the case of Eurodollar Loans, to convert such Borrowing into a Borrowing of Base Rate Loans effective as of the expiration date of such current Interest Period. 1.11 Increased Costs, Illegality, etc. (a) In the event that (x) in the case of clause (i) below, the Administrative Agent or (y) in the case of clause (ii) or (iii) below, any Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining LIBOR for any Interest Period that, by reason of any changes arising after the date of this Agreement affecting the relevant interbank market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of LIBOR; or (ii) at any time, that such Lender shall actually incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans or Competitive Bid Loans (other than any increased cost or reduction in the amount received or receivable resulting from the imposition of or a change in the rate of taxes or similar charges) because of (x) any change since the Effective Date (or, in the case of any Competitive Bid Loan, since the making of such Competitive Bid Loan) in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline or order) (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding amounts payable pursuant to Section 1.11(c)) and/or (y) other circumstances occurring since the Effective Date affecting the relevant interbank market; or (iii) at any time, that the making or continuance of any Eurodollar Loans or Competitive Bid Loans has become unlawful by compliance by such Lender in good faith with any law, governmental rule, regulation or guideline, or has become impracticable as a result of a contingency occurring after the Effective Date which materially and adversely affects the relevant interbank market; then, and in any such event, such Lender (or the Administrative Agent in the case of clause (i) above) shall (x) on such date and (y) within ten Business Days of the date on which such event no longer exists give notice (by telephone confirmed in writing) to the respective Borrower and, except in the case of clause (i) above, to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Lenders). Thereafter and for so long as the applicable circumstance continues to exist (w) in the case of clause (i) above, Eurodollar Loans (and Competitive Bid Loans constituting a Spread Borrowing) shall no longer be available until such time as the Administrative Agent notifies the respective Borrower and the Lenders that the circumstances giving rise to such notice by the Administrative Agent no longer exist in accordance with clause (y) of the preceding sentence, and any Notice of Borrowing, Notice of Competitive Bid Borrowing or Notice of Conversion given by a Borrower -8- with respect to such Loans which have not yet been incurred shall be deemed rescinded by the relevant Borrower, (x) in the case of clause (ii) above, the applicable Borrower shall pay to such Lender, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as shall be required to compensate such Lender for such increased costs or reductions in amounts receivable hereunder (a written notice as to the additional amounts owed to such Lender, showing the basis for the calculation thereof in reasonable detail, submitted to the applicable Borrower by such Lender shall, absent manifest error, be final and conclusive and binding upon all parties hereto) and (y) in the case of clause (iii) above, the applicable Borrower shall take one of the actions specified in Section 1.11(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time when any Eurodollar Loan or Competitive Bid Loan is affected by the circumstances described in Section 1.11(a)(ii) or (iii), the applicable Borrower may (and in the case of a Eurodollar Loan or Competitive Bid Loan affected pursuant to Section 1.11(a)(iii), the applicable Borrower shall) either (i) if the affected Eurodollar Loan or Competitive Bid Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Administrative Agent telephonic notice (confirmed promptly in writing) thereof on the same date that the respective Borrower was notified by a Lender pursuant to Section 1.11(a)(ii) or (iii), or (ii) if the affected Eurodollar Loan or Competitive Bid Loan is then outstanding, upon at least three Business Days' notice to the Administrative Agent, (A) in the case of a Eurodollar Loan, require the affected Lender to convert each such Eurodollar Loan into a Base Rate Loan, and (B) in the case of a Competitive Bid Loan, repay all such Competitive Bid Loans in full, provided that if more than one Lender is affected at any time, then all affected Lenders must be treated the same pursuant to this Section 1.11(b). (c) If any Lender shall have determined that after the Effective Date, the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or such corporation's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender or such other corporation could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's or such other corporation's policies with respect to capital adequacy), then from time to time, within 15 days after written demand by such Lender (with a copy to the Administrative Agent), the Borrowers jointly and severally agree to pay to such Lender such additional amount or amounts as will compensate such Lender or such other corporation for such reduction. In determining such additional amounts, each Lender will act reasonably and in good faith and will use averaging and attribution methods that are reasonable. Each Lender, upon so determining that any additional amounts will be payable pursuant to this Section 1.11(c), will give prompt written notice thereof to the Borrowers, which notice shall set forth in reasonable detail the basis of the calculation of such additional amounts, although the -9- failure to give any such notice shall not release or diminish any Borrower's obligations to pay additional amounts pursuant to this Section 1.11(c) upon the subsequent receipt of such notice. 1.12 Compensation. Each Borrower shall compensate each Lender, upon its written request (which request shall set forth the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund any Eurodollar Loans or Competitive Bid Loans made, or to be made, by it to such Borrower but excluding in any event the loss of anticipated profits) which such Lender may actually sustain: (i) if for any reason (other than a default by such Lender or the Administrative Agent) a Borrowing of Eurodollar Loans or Competitive Bid Loans does not occur on a date specified therefor in a Notice of Borrowing, a Notice of Competitive Bid Borrowing or a Notice of Conversion, given by such Borrower (whether or not withdrawn by such Borrower or deemed withdrawn pursuant to Section 1.11(a)); (ii) if any prepayment, repayment or conversion of any such Eurodollar Loans or Competitive Bid Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any such Eurodollar Loans or Competitive Bid Loans is not made on any date specified in a notice of prepayment given by such Borrower; (iv) if such Lender is required pursuant to Section 1.14 to assign any such Eurodollar Loans or Competitive Bid Loans as of a date which is not the last day of an Interest Period applicable thereto; or (v) as a consequence of (x) any other default by such Borrower to repay its Eurodollar Loans or Competitive Bid Loans when required by the terms of this Agreement or (y) an election made pursuant to Section 1.11(b). 1.13 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 1.11(a)(ii) or (iii), 1.11(c) or 3.04 with respect to such Lender, it will, if requested by the applicable Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans or Commitments affected by such event, provided that such designation is made on such terms that such Lender and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding or materially mitigating the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 1.13 shall affect or postpone any of the obligations of any Borrower or the right of any Lender provided in Section 1.11or 3.04. 1.14 Replacement of Lenders. (a) Upon the occurrence of any event giving rise to the operation of Section 1.11(a)(ii) or (iii), Section 1.11(c) or Section 3.04 with respect to any Lender which results in such Lender charging to any Borrower increased costs in excess of those being generally charged by the other Lenders, (b) if a Lender becomes a Defaulting Lender, (c) if a Lender becomes a Non-Continuing Lender, (d) if a Lender fails to maintain a long-term debt rating of at least BBB- as determined by Standard & Poor's Corporation and at least Baa3 as determined by Moody's Investors Service, Inc., (e) if a Lender fails to deliver the opinion or opinions as required pursuant to Section 11.02 and/or (f) in the case of a refusal by a Lender to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Required Lenders, Parent and Corp. shall have the right, if no Default or Event of Default then exists, to replace such Lender (the "Replaced Lender"), upon prior written notice to the Administrative Agent and such Replaced Lender, with one or more Person or Persons, none of whom shall constitute a Defaulting Lender at the time of such -10- replacement (collectively, the "Replacement Lender") reasonably acceptable to the Administrative Agent, provided that (i) at the time of any replacement pursuant to this Section 1.14, the Replacement Lender and the Replaced Lender shall enter into one or more Assignment Agreements pursuant to Section 11.04(b) (and with all fees payable pursuant to said Section 11.04(b) to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the Commitments and outstanding Loans of the Replaced Lender and, in connection therewith, shall pay to the Replaced Lender in respect thereof an amount equal to the sum of (A) an amount equal to the principal amount of, and all accrued but unpaid interest on, all outstanding Loans of the Replaced Lender and (B) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Lender pursuant to Section 2.01, and (ii) all obligations of the Borrowers under the Credit Documents owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid), including without limitation all amounts owing to the Replaced Lender under Section 1.12 as a result of the assignment of its Loans under clause (i) above, shall be paid in full to such Replaced Lender concurrently with such replacement. Upon the execution of the respective Assignment Agreements, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Lender, delivery to the Replacement Lender of the appropriate Note or Notes executed by the relevant Borrowers, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder, except with respect to indemnification provisions applicable to the Replaced Lender under this Agreement, which shall survive as to such Replaced Lender. 1.15 Recommitment; Replacement of Non-Continuing Lender. Parent and Corp. may, prior to (but not less than 60 days nor more than 120 days prior to) the Final Maturity Date then in effect (each such Final Maturity Date, a "Recommitment Deadline"), by written notice to the Administrative Agent (which notice the Administrative Agent shall promptly transmit to each Lender), request that the Final Maturity Date then in effect be extended. Such request shall be accompanied by a certificate of an Authorized Officer of Parent stating that no Default or Event of Default has occurred and is continuing. Each Lender shall respond to such request, as promptly as practicable, by written notice to Parent, Corp. and the Administrative Agent, with the failure of any Lender to respond prior to the Recommitment Deadline being deemed to be a negative response. In the event each Lender shall consent to such request of Parent and Corp., on such Recommitment Deadline, the Final Maturity Date shall be automatically extended to the date occurring 364 days following the Final Maturity Date then in effect. If any Lender shall fail to consent to such recommitment (any such Lender, a "Non-Continuing Lender"), Parent and Corp. shall be entitled at any time prior to the Recommitment Deadline with respect to such request to replace such Lender in accordance with the requirements of Section 1.14, and in the event that the Replacement Lender with respect to each such Non-Continuing Lender shall consent to such recommitment prior to such Recommitment Deadline, such recommitment shall be effective as described in the immediately preceding sentence as if each Lender had originally consented to such request. No Lender shall be obligated to grant any recommitments pursuant to this Section 1.15 and any such recommitment shall be in the sole discretion of each such Lender. The Administrative Agent shall notify Parent, Corp. and each Lender as to the effectiveness of any such recommitment. -11- 1.16 Additional Commitments. At any time and from time to time on and after the Effective Date and prior to the Final Maturity Date, Parent and Corp. may request one or more Lenders or other lending institutions to increase its Commitment (in the case of an existing Lender) or assume a Commitment (in the case of any other lending institution) and, in the sole discretion of each such Lender or other institution, any such Lender or other institution may agree to so commit; provided that (i) no Default or Event of Default then exists, (ii) the increase in the Total Commitment pursuant to any such request shall be in an aggregate amount of at least $9,000,000 and (iii) the aggregate increase in the Total Commitment pursuant to this Section 1.16 shall not exceed $75,000,000. Parent, Corp. and each such Lender or other lending institution (each, an "Assuming Lender") which agrees to increase its existing, or assume, a Commitment shall execute and deliver to the Administrative Agent a Commitment Assumption Agreement substantially in the form of Exhibit H (with the increase in, or in the case of a new Assuming Lender, assumption of, such Lender's Commitment to be effective on the Business Day following delivery of such Commitment Assumption Agreement to the Administrative Agent). The Administrative Agent shall promptly notify each Lender as to the occurrence of each Commitment Assumption Date. On each Commitment Assumption Date, (x) Annex I shall be deemed modified to reflect the revised Commitments of the Lenders, (y) Parent and Corp. shall pay to each such Assuming Lender such up front fee (if any) as may have been agreed between Parent, Corp. and such Assuming Lender and (z) the Borrowers will issue new Notes to the Assuming Lenders in conformity with the requirements of Section 1.06. Notwithstanding anything to the contrary contained in this Agreement, in connection with any increase in the Total Commitment pursuant to this Section 1.16, each Borrower shall, in coordination with the Administrative Agent and the Lenders, repay outstanding Revolving Loans of certain Lenders and, if necessary, incur additional Revolving Loans from other Lenders, in each case so that such Lenders participate in each Borrowing of such Revolving Loans pro rata on the basis of their Commitments (after giving effect to any increase thereof). It is hereby agreed that any breakage costs of the type described in Section 1.12 incurred by the Lenders in connection with the repayment of Revolving Loans contemplated by this Section 1.16 shall be for the account of the respective Borrowers. 1.17 Designated Borrowers. Parent or Corp. may from time to time designate one or more Persons as a Designated Borrower (each, a "Designated Borrower" and, collectively, the "Designated Borrowers"), subject to the following terms and conditions: (a) each such Person shall be a special purpose entity organized under the laws of the United States of America, a state thereof or the District of Columbia; (b) each such Person shall enter into an appropriately completed DB Assumption Agreement in the form of Exhibit I hereto on or prior to the date of designation; (c) each such Person shall furnish to each Lender its most recent historic or pro forma financial statements (which financial statements may be summary in nature and unaudited) on or prior to the date of designation; -12- (d) at the time of such designation, such Person shall not be subject to any bankruptcy or insolvency proceeding of the type referred to in Section 8.01(h) or (i) and shall not be subject to any material litigation; (d) on or prior to the date of designation, such Person shall execute and deliver to each Lender a Revolving Note and a Competitive Bid Note to evidence the DB Loans incurred by such Person; (e) on or prior to the date of designation, the Administrative Agent shall have received from such Person a certificate, signed by an Authorized Officer of such Person in the form of Exhibit E with appropriate insertions or deletions, together with (x) copies of its certificate of incorporation, by-laws or other organizational documents and (y) the resolutions relating to the Credit Documents which shall be satisfactory to the Administrative Agent; and (f) on or prior to the date of designation, the Administrative Agent shall have received an opinion, addressed to each Agent and each of the Lenders and dated the date of designation, from counsel to such Person which opinion shall be substantially in the form of Exhibit K hereto. 1.18 Retroactivity. Notwithstanding anything in this Agreement to the contrary, to the extent any notice required by Section 1.11 or 3.04 is given by any Lender more than 90 days after such Lender obtained knowledge of the occurrence of the event giving rise to the additional costs of the type described in such Section, such Lender shall not be entitled to compensation under Section 1.11 or 3.04 for any amounts incurred or accruing prior to the 90th day preceding the giving of such notice to the respective Borrower. SECTION 2. Fees, Commitments. 2.01 Fees. (a) Parent and Corp. jointly and severally agree to pay to the Administrative Agent a facility fee (the "Facility Fee") for the account of the Lenders pro rata on the basis of their respective Commitments for the period from and including the Effective Date to but excluding the date the Total Commitment has been terminated computed at a rate per annum equal to 0.07% of the Total Commitment as in effect from time to time. Accrued Facility Fees shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, on the Final Maturity Date or upon such earlier date as the Total Commitment shall be terminated and, with respect to any Facility Fee owing to any Lender whose Commitment is terminated pursuant to Section 1.14, on the date on which such Lender's Commitment is terminated. (b) Parent and Corp. jointly and severally agree to pay to the Administrative Agent, for the account of the Administrative Agent, when and as due, such fees as have been, or are from time to time, separately agreed upon. (c) All computations of Fees shall be made in accordance with Section 11.07(b). -13- 2.02 Voluntary Reduction of Commitments. Upon at least three Business Days' prior written notice (or telephonic notice confirmed in writing) to the Administrative Agent at the Notice Office (which notice shall be deemed to be given on a certain day only if given before 12:00 Noon (New York time) on such day and shall be promptly transmitted by the Administrative Agent to each of the Lenders), Parent and/or Corp. shall have the right, without premium or penalty, to terminate or partially reduce the Total Unutilized Commitment, provided that (x) any such termination shall apply to proportionately and permanently reduce the Commitment of each Lender and (y) any partial reduction pursuant to this Section 2.02 shall be in the amount of at least $10,000,000. 2.03 Mandatory Reduction of Commitments. (a) The Total Commitment shall terminate in its entirety on September 30, 1998 unless the Effective Date has occurred on or before such date. (b) The Total Commitment shall terminate in its entirety on the Final Maturity Date. SECTION 3. Payments. 3.01 Voluntary Prepayments. Each Borrower shall have the right to prepay Revolving Loans made to it in whole or in part, without premium or penalty, from time to time on the following terms and conditions: (i) such Borrower shall give the Administrative Agent at the Payment Office written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay the Revolving Loans, the amount of such prepayment and the specific Borrowing(s) pursuant to which such Revolving Loans were made, which notice shall be given by such Borrower at least three Business Days prior to the date of such prepayment and which notice shall promptly be transmitted by the Administrative Agent to each of the Lenders; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $1,000,000, provided that no partial prepayment of Revolving Loans made pursuant to a Borrowing shall reduce the aggregate principal amount of the Revolving Loans outstanding pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto; (iii) each prepayment in respect of any Revolving Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans; and (iv) prepayments of Eurodollar Loans made pursuant to this Section 3.01 may only be made on the last day of an Interest Period applicable thereto unless concurrently with such prepayment any payments required to be made pursuant to Section 1.12 as a result of such prepayment are made. No Borrower shall have the right under this Section 3.01 to prepay any principal amount of any Competitive Bid Loans. 3.02 Mandatory Prepayments. (a) If on any date the sum of the aggregate outstanding Principal Amount of Revolving Loans and Competitive Bid Loans (all the foregoing, collectively, the "Aggregate Loan Outstandings") exceeds the Total Commitment as then in effect, the Borrowers, jointly and severally, shall repay no later than the next following Business Day the principal amount of Revolving Loans (but excluding DB Loans to the extent the respective DB Loan Maturity Date has not occurred) in an aggregate Principal Amount equal to such excess. If, after giving effect to the prepayment of all outstanding Revolving Loans as set forth above, the remaining Aggregate Loan Outstandings exceed the Total Commitment, the -14- Borrowers, jointly and severally, shall repay on such date the principal of Competitive Bid Loans in an aggregate amount equal to such excess. (b) On the maturity date specified pursuant to Section 1.04(a) with respect to each Competitive Bid Loan, the applicable Borrower shall repay such Competitive Bid Loan to the applicable Bidder Lender or Bidder Lenders. (c) On each DB Loan Maturity Date, the respective Designated Borrower shall repay the respective DB Loans in full. (d) Notwithstanding anything to the contrary contained elsewhere in this Agreement, all outstanding Revolving Loans and Competitive Bid Loans shall be repaid in full on the Final Maturity Date, (e) With respect to each prepayment of Revolving Loans required by Section 3.02(a), the applicable Borrower may designate the Types of Revolving Loans which are to be prepaid and the specific Borrowing(s) pursuant to which made, provided that (i) if any prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for such Borrowing, then all Revolving Loans outstanding pursuant to such Borrowing shall be immediately converted into Base Rate Loans and (ii) each prepayment of any Revolving Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans. In the absence of a designation by a Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.12. 3.03 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement shall be made to the Administrative Agent for the ratable (based on its pro rata share) account of the Lenders entitled thereto, not later than 12:00 Noon (New York Time) on the date when due and shall be made in immediately available funds at the Payment Office in Dollars, it being understood that written notice by a Borrower to the Administrative Agent to make a payment from the funds in such Borrower's account at the Payment Office shall constitute the making of such payment to the extent of such funds held in such account. Any payments under this Agreement which are made later than 12:00 Noon (New York Time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. The Administrative Agent will promptly make available to each Lender its pro rata share (if any) of each payment so received by the Administrative Agent in the funds so received. 3.04 Net Payments. (a) All payments made by each Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 3.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges -15- of whatever nature now or hereafter imposed by any jurisdiction (or by any political subdivision or taxing authority thereof or therein) with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax levy, impost, duty, fee, assessment or other governmental charge imposed on or measured by the net income or net profits of a Lender (including, without limitation, any franchise tax imposed on or measured by net income or net profits and any branch profits taxes) pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Lender is located (or any subdivision or taxing authority thereof or therein)) and all interest, penalties or similar liabilities with respect to such non-excluded taxes, levies, imposts, duties, fees, assessments or other governmental charges (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other governmental charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the relevant Borrower shall pay the full amount of such Taxes to the relevant taxing authority in accordance with applicable law and shall pay to the relevant Lender such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the relevant Borrower agrees to reimburse each Lender lending to such Borrower, upon the written request of such Lender, for taxes imposed on or measured by the net income or net profits of such Lender (including, without limitation, any franchise tax imposed on or measured by net income or net profits and any branch profits taxes imposed by the United States of America or similar taxes imposed by any political subdivision thereof) pursuant to the laws of the jurisdiction in which such Lender is organized or in which the principal office or applicable lending office of such Lender is located (or of any subdivision or taxing authority therein or thereof) and for any withholding of taxes as such Lender shall determine are payable by, or withheld from, such Lender in respect of such amounts so paid to or on behalf of such Lender pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Lender pursuant to this sentence. Each Borrower will furnish to the Administrative Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts, if any, issued by such taxing authority or other evidence reasonably acceptable to the Administrative Agent evidencing such payment by such Borrower (or, if such Borrower has not received such certified copies of tax receipts within such time period, then such Borrower shall furnish such certified copies of tax receipts to the Administrative Agent within 15 days after such Borrower has received such certified copies of tax receipts). Each Borrower agrees to indemnify and hold harmless each Lender, and reimburse such Lender upon its written request, for the amount of any Taxes so levied or imposed and paid by such Lender. Such indemnification shall be made within 30 days after the date upon which such Lender makes written demand therefor, which demand shall identify the nature and the amount of Taxes for which indemnification is sought and shall include a copy of any written assessment thereof. (b) Each Lender that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes agrees to deliver to the Borrowers and the Administrative Agent on or prior to the Effective Date, or in the 6ase of a Lender that assumes an interest or is an assignee or transferee of an interest under this Agreement pursuant to Section 1.14, 1.16 or 11.04 (unless the respective Lender was already a Lender -16- hereunder immediately prior to such assumption, assignment or transfer), on the date of such assumption, assignment or transfer to such Lender, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments to be made by the Borrowers under this Agreement and under any Note or (ii) if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit C (any such certificate, a "Section 3.04 Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made by the Borrowers under this Agreement and under any Note. In addition, each such Lender agrees that, from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrowers and the Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 3.04 Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments made by the Borrowers under this Agreement and any Note, or, if legally unable to deliver such forms, it shall immediately notify the Borrowers and the Administrative Agent of its inability to deliver any such Form or Certificate in which case such Lender shall not be required to deliver any such Form or Certificate pursuant to this Section 3.04(b). Notwithstanding anything to the contrary contained in Section 3.04(a), but subject to Section 11.04(b) and the immediately succeeding sentence, (x) each Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority hereof or therein) from interest, fees or other amounts payable hereunder by such Borrower for the account of any Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes to the extent that such Lender has not provided to the Borrowers Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding and (y) the Borrowers shall not be obligated pursuant to Section 3.04(a) hereof to gross-up payments to be made to any such Lender in respect of income or similar taxes imposed by the United States if (I) such Lender has not provided to the Borrowers the Internal Revenue Service Forms required to be provided to the Borrowers pursuant to this Section 3.04(b) or (II) in the case of a payment, other than interest, to a Lender described in clause (ii) of the first sentence of this Section 3.04(b) above, to the extent that such Forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 3.04 and except as set forth in Section 11.04(b), the Borrowers agree to pay additional amounts and to indemnify each Lender in the manner set forth in Section 3.04(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. -17- (c) If a Borrower pays any additional amount under this Section 3.04 to a Lender and such Lender determines in its sole discretion that it has actually received or realized in connection therewith any refund or any reduction of, or credit against, its Tax liabilities in or with respect to the taxable year in which the additional amount is paid, such Lender shall pay to the Borrower an amount that such Lender shall, in its sole discretion, determine is equal to the net benefit, after tax, which was obtained by the Lender in such year as a consequence of such refund, reduction or credit. Such amount shall be paid as soon as practicable after receipt or realization by such Lender of such refund, reduction or credit. Nothing in this Section 3.04(c) shall require any Lender to disclose or detail the basis of its calculation of the amount of any refund or reduction of, or credit against, its tax liabilities or any other information to any Borrower or any other Person. (d) Each Lender shall use reasonable efforts (consistent with legal and regulatory restrictions and subject to overall policy considerations of such Lender) to file any certificate or document or to furnish any information as reasonably requested by a Borrower pursuant to any applicable treaty, law or regulation, if the making of such filing or the furnishing of such information would avoid the need for or reduce the amount of any amounts payable by a Borrower under Section 3.04(a) and would not, in the reasonable judgment of such Lender, be disadvantageous to such Lender. SECTION 4. Conditions Precedent. 4.01 Conditions Precedent to Effective Date. This Agreement shall become effective on the date (the "Effective Date") on which each of the following conditions shall be satisfied: (a) Execution of Agreement; Notes. (i) Each of Parent, Corp., each Agent and each of the Lenders shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Administrative Agent at its Notice Office or, in the case of the Lenders and the Agents, shall have given to the Administrative Agent telephonic (confirmed in writing), written or facsimile transmission notice (actually received) at such office that the same has been signed and mailed to it; and (ii) there shall have been delivered to the Administrative Agent for the account of each Lender the appropriate Notes executed by Parent and Corp., as applicable, in each case in the amount, maturity and as otherwise provided herein. (b) Opinion of Counsel. The Administrative Agent shall have received an opinion, addressed to each Agent and each of the Lenders and dated the Effective Date, from Louis G. Lenzi, General Counsel of Parent and Corp., which opinion shall be substantially in the form of Exhibit D hereto. (c) Corporate Proceedings. (i) The Administrative Agent shall have received from each of Parent and Corp. a certificate, dated the Effective Date, signed by an Authorized Officer thereof in the form of Exhibit E with appropriate insertions and deletions, together with (x) copies of its certificate of incorporation, by-laws or other organizational documents and (y) the resolutions relating to the Credit Documents which shall be satisfactory to the Administrative Agent. -18- (ii) All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received all information and copies of all certificates, documents and papers, including good standing certificates and any other records of corporate proceedings and governmental approvals, if any, which the Administrative Agent may have requested in connection therewith, such documents and papers, where appropriate, to be certified by proper corporate or governmental authorities. (d) Existing Credit Agreements. All Indebtedness and other obligations under the Existing Credit Agreements shall have been paid in full and all commitments thereunder shall have been terminated. (e) Fees. The Borrowers shall have paid to the Administrative Agent and the Lenders all fees and expenses (including, without limitation, legal fees and expenses) agreed upon by such parties to be paid on or prior to such date. The occurrence of the Effective Date shall constitute a representation and warranty by each Borrower to the Agents and each of the Lenders that all the conditions specified in Section 4.01 exist as of that time. All the Notes, certificates, legal opinions and other documents and papers referred to in this Section 4.01, unless otherwise specified, shall be delivered to the Administrative Agent at the Administrative Agent's Notice Office for the account of each of the Lenders and, except for the Notes, in sufficient counterparts for each of the Lenders and shall be satisfactory in form and substance to the Lenders. The Administrative Agent shall give Parent, Corp. and each Lender written notice that the Effective Date has occurred. 4.02 Conditions Precedent to Loans. The obligation of each Lender to make any Loans is subject, at the time of each such Loan, to the satisfaction of the following conditions: (a) Effective Date. The Effective Date shall have occurred. (b) Notice of Borrowing. The Administrative Agent shall have received a Notice of Borrowing meeting the requirements of Section 1.03(a) with respect to each incurrence of Revolving Loans and a Notice of Competitive Bid Borrowing meeting the requirements of Section 1.04(a) with respect to each incurrence of Competitive Bid Loans. (c) No Default; Representations and Warranties. At the time of the incurrence of each Loan and also after giving effect thereto, (i) there shall exist no Default or Event of Default and (ii) all representations and warranties made by any Borrower contained herein or 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 date of such Loan. (d) Financial Guaranty Insurance Policy. In the case of each DB Loan, Corp. shall have issued a financial guaranty insurance policy in the form of Exhibit F attached hereto (as appropriately completed, a "Financial Guaranty Insurance Policy"), in support of the principal of -19- and interest on such DB Loan, and such Financial Guaranty Insurance Policy shall be in full force and effect. (e) Opinion of Counsel. In the case of each DB Loan, the Administrative Agent shall have received an opinion, addressed to each Agent and each of the Lenders and dated the date of the incurrence of such DB Loan, from counsel to Corp., which opinion shall be substantially in the form of Exhibit L hereto. The acceptance of the benefits of each Loan shall constitute a representation and warranty by the respective Borrower to the Agents and each of the Lenders that all of the applicable conditions specified in Section 4.02 exist as of that time. SECTION 5. Representations, Warranties and Agreements. In order to induce the Lenders to. enter into this Agreement and to make the Loans provided for herein, each of Parent and Corp. makes the following representations and warranties to, and agreements with, the Lenders, all of which shall survive the execution and delivery of this Agreement and the making of the Loans: 5.01 Corporate Existence and Power. Parent and Corp. are corporations duly organized, validly existing and in good standing under the laws of the jurisdiction of their incorporation, are duly qualified to transact business in every jurisdiction where, by the nature of their businesses, such qualification is necessary, and have all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on their businesses as now conducted. 5.02 Corporate and Governmental Authorization: No Contravention. The execution, delivery and performance by the Borrowers of this Agreement and the other Credit Documents (i) are within each of the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of each of the Borrowers or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrowers or any of their Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of the Borrowers or any of their Subsidiaries. 5.03 Binding Effect. This Agreement constitutes a valid and binding agreement of each of the Borrowers enforceable in accordance with its terms, and the other Credit Documents, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of each of the Borrowers enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. 5.04 Financial Information. (a) The consolidated balance sheet of Parent and its Consolidated Subsidiaries as of December 31, 1997 and the related consolidated statements of income, shareholders' equity and cash flows for the Fiscal Year then ended, reported on by -20- Coopers & Lybrand, copies of which have been delivered to each of the Lenders, and the unaudited consolidated financial statements of Parent and Corp. for the interim period ended June 30, 1998, copies of which have been delivered to each of the Lenders, fairly present, in conformity with GAAP or Statutory Accounting Principles, as applicable consistently applied, the consolidated financial position of Parent and its Consolidated Subsidiaries as of such dates and their consolidated results of operations and cash flows for such periods stated. (b) Since December 31, 1997, there has been no event, act, condition or occurrence having a Material Adverse Effect. 5.05 Litigation. There is no action, suit or proceeding pending, or to the knowledge of the Borrowers threatened, against or affecting the Borrowers or any of their Subsidiaries before any court or arbitrator or any governmental body, agency or official which could have a Material Adverse Effect or which in any manner draws into question the validity or enforceability of, or could impair the ability of the Borrowers to perform their obligations under, this Agreement or any of the other Credit Documents. 5.06 Compliance with ERISA. (a) Parent, Corp. and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. (b) Neither Parent nor Corp. nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. 5.07 Taxes. There have been filed on behalf of Parent and its Subsidiaries all Federal, state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due pursuant to such returns or pursuant to any assessment received by or on behalf of Parent or any Subsidiary have been paid. The charges, accruals and reserves on the books of each of Parent and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of each of Parent and Corp., adequate. United States income tax returns of Parent and its Subsidiaries have been examined and closed through the Fiscal Year ended December 31, 1991. 5.08 Subsidiaries. Each of Parent's Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Parent has no Subsidiaries except those Subsidiaries listed on Annex III, which accurately sets forth each such Subsidiary's complete name and jurisdiction of incorporation. 5.09 Not an Investment Company. No Borrower is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. -21- 5.10 Public Utility Holding Company Act. No Borrower nor any of their Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 5.11 Ownership of Property: Liens. Parent and its Consolidated Subsidiaries have title of their proper-ties sufficient for the conduct of their respective businesses and none of such property is subject to any Lien except as permitted in Section 7.01. 5.12 No Default. No Default or Event of Default has occurred and is continuing. 5.13 Full Disclosure. All information heretofore furnished by the Borrowers to the Administrative Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrowers to the Administrative Agent or any Lender will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. The Borrowers have disclosed to the Lenders in writing any and all facts which could have or cause a Material Adverse Effect. 5.14 Compliance with Laws. Parent and each of its Subsidiaries is in compliance with all applicable laws, except -where any failure to comply with any such laws would not, alone or in the aggregate, have a Material Adverse Effect. 5.15 Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of each of Parent and its Subsidiaries presently issued and outstanding are validly and properly issued in accordance with all applicable laws, including, but not limited to, the "Blue Sky" laws of all applicable states and the federal securities laws. The issued shares of Capital Stock of each of Parent's and Corp.'s Wholly-Owned Subsidiaries are owned by Parent or Corp. free and clear of any Lien or adverse claim. At least a majority of the issued shares of Capital Stock of each of Parent's and Corp.'s other Subsidiaries (other than Wholly-Owned Subsidiaries) is owned by Parent or Corp. free and clear of any Lien or adverse claim. 5.16 Margin Stock. No Borrower nor any of their Subsidiaries are engaged principally, or as one of their important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Loan will be used to purchase or carry any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation U or X. 5.17 Insolvency. After giving effect to the execution and delivery of the Credit Documents and the making of the Loans under this Agreement, no Borrower will be "insolvent," within the meaning of such term as defined in ss. 101 of Title 11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. -22- SECTION 6. Affirmative Covenants. The Borrowers hereby covenant and agree that on the Effective Date and thereafter until the Commitments have terminated, no Notes are outstanding and the Loans, together with interest, Fees and all other obligations (other than any indemnities described in Section 11.12 which are not then owing) incurred hereunder, are paid in full: 6.01 Information Covenants. Parent and Corp. will furnish to each Lender: (a) as soon as available and in any event within 60 days after the end of each of the first three quarterly fiscal periods in each Fiscal Year of Parent and Corp., consolidated balance sheets of each of Parent and its Subsidiaries and Corp. and its Subsidiaries as at the end of such period and the related consolidated statements of income, changes in stockholders' equity and cash flows of each of Parent and its Subsidiaries and Corp. and its Subsidiaries for such period and (in the case of the second and third quarterly periods) for the period from the beginning of the current Fiscal Year to the end of such quarterly period, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the previous Fiscal Year, all in reasonable detail and certified by an Authorized Officer of each of Parent and Corp. as presenting fairly, in accordance with GAAP (except as specifically set forth therein; provided any exceptions or qualifications thereto must be acceptable to the Required Lenders) on a basis consistent with such prior fiscal periods, the information contained therein, subject to changes resulting from normal year-end audit adjustments; (b) as soon as available and in any event within 120 days after the end of each Fiscal Year of Parent and Corp., consolidated balance sheets of each of Parent and its Subsidiaries and Corp. and its Subsidiaries as at the end of such year and the related consolidated statements of income, operations, changes in stockholders' equity and cash flows of each of Parent and its Subsidiaries and Corp. and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by a report thereon of Price Waterhouse Coopers LLP or other independent public accountants of recognized national standing selected by Parent, which report shall state that such consolidated financial statements present fairly the consolidated financial position of each of Parent and its Subsidiaries and Corp. and its Subsidiaries as at the dates indicated and the consolidated results of their operations and cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise specified in such report; provided any exceptions or qualifications thereto must be acceptable to the Required Lenders) and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (c) within five Business Days after any Borrower becomes aware of the occurrence of any Default, a certificate of an Authorized Officer of each of the Borrowers setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto; -23- (d) promptly upon the mailing thereof to the security holders of the Borrowers generally, copies of all financial statements, reports and proxy statements so mailed; (e) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly reports which the Borrowers shall have filed with the Securities and Exchange Commission or any national securities exchange; (f) if and when Parent, Corp. or any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; (g) promptly after any Borrower knows of the commencement thereof, notice, of any litigation, dispute or proceeding involving a claim against any of the Borrowers and/or any Subsidiary for $10,000,000 or more in excess of amounts covered in full by applicable insurance; (h) from time to time such additional information regarding the financial position or business of the Borrowers and their Subsidiaries as the Administrative Agent, at the request of any Lender, may reasonably request; (i) at the request of any Lender, promptly after the filing thereof, a copy of the annual statements for each calendar year and quarterly statements for each calendar quarter as filed with the New York Insurance Department or other then comparable agency of other jurisdictions and the financial statements of Corp. for each calendar year or quarter prepared in accordance with Statutory Accounting Principles accompanied by a report thereon of the independent public accountants of Parent referred to in paragraph (b) above; and (j) at the request of any Lender, at any time when a DB Loan is outstanding, quarterly and annual summary financial statements of the applicable Designated Borrower as promptly as possible after the end of each fiscal quarter and fiscal year of such Designated Borrower. 6.02 Books, Records and Inspections. The Borrowers will (i) keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP or Statutory Accounting Principles, as applicable, shall be made of all dealings and transactions in relation to its business and activities; and (ii) permit, and will cause each Subsidiary to permit, representatives of any Lender at such Lender's expense prior to the occurrence of an Event of Default and at the Borrowers' expense after the occurrence of an -24- Event of Default to visit and inspect any of their respective properties, to examine their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The Borrowers agree to cooperate and assist in such visits and inspections, in each case at such reasonable times and as often as may reasonably be desired. 6.03 Maintenance of Existence. Each of the Borrowers shall maintain its existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained. 6.04 Compliance with Laws, Payment of Taxes. The Borrowers will, and will cause each of their Subsidiaries and each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to the PBGC), except where (i) the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued; and (ii) any failure to comply with any such laws would not, alone or in the aggregate, have a Material Adverse Effect. The Borrowers will, and will cause each of their Subsidiaries to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a lien against the property of the Borrowers or any Subsidiary, except liabilities being contested in good faith by appropriate proceedings diligently pursued. 6.05 Insurance. The Borrowers will maintain, and will cause each of their Subsidiaries to maintain (either in the name of the Borrowers or in such Subsidiary's own name), with financially sound and reputable insurance companies, insurance on all their property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or similar businesses. 6.06 Maintenance of Property. The Borrowers shall, and shall cause each Subsidiary to, maintain all of their properties and assets in good condition, repair and working order, ordinary wear and tear excepted. SECTION 7. Negative Covenants. The Borrowers hereby covenant and agree that on the Effective Date and thereafter until the Commitments have terminated, no Notes are outstanding and the Loans, together with interest, Fees and all other obligations (other than any indemnities described in Section I 1. 12 which are not then owing) incurred hereunder, are paid in full: 7.01 Liens. Neither Parent nor any of its Consolidated Subsidiaries will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (i) Liens securing any loan to be made under the Credit Agreement among Corp., the banks signatory thereto and Credit Suisse First Boston, New York Branch, originally dated as of December 29, 1989, as amended and restated on October 1, 1997 and as may be amended thereafter from time to time; -25- (ii) Liens created on certain insurance premiums by a Trust Agreement effective December 31, 1989 between Municipal Bond Investors Assurance Corporation, MBIA Insurance Corp. of Illinois and the trustee thereunder, as amended on February 28, 1995 and as may be amended from time to time thereafter; (iii) as to Corp., Liens (in addition to Liens permitted under Section 7.01(i), (iv) and (v)) in an aggregate principal amount of up to $10,000,000; (iv) Liens not securing Debt which are incurred in the ordinary course of business; and (v) Liens securing repurchase agreements constituting a borrowing of funds by Parent or any Subsidiary of Parent in the ordinary course of business for liquidity purposes and in no event for a period exceeding 90 days in each case. 7.02 Dissolution. No Borrower shall suffer or permit dissolution or liquidation either in whole or in part or redeem or retire any shares of their own stock, except through corporate reorganization to the extent permitted by Section 7.03. 7.03 Consolidations, Mergers and Sales of Assets. The Borrowers will not consolidate or merge with or into, or sell, lease or other-wise transfer all or any substantial part of their assets to, any other Person, provided that (a) any Borrower (other than any Designated Borrower) may merge with another Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) one of the Borrowers is the corporation surviving such merger and (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing, and (b) Subsidiaries of the Borrowers may merge with one another. 7.04 Use of Proceeds. No portion of the proceeds of the Loans will be used by the Borrowers or any Subsidiary (i) directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, or (ii) for any purpose in violation of any applicable law or regulation. 7.05 Change in Fiscal Year. Neither Parent nor Corp. shall change its Fiscal Year without the consent of the Required Lenders. 7.06 Transactions with Affiliates. Neither Parent nor any of its Subsidiaries shall enter into, or be a party to, any transaction with any Affiliate of Parent or such Subsidiary (which Affiliate is not one of the Borrowers or a Subsidiary), except as permitted by law and in the ordinary course of business and pursuant to reasonable terms. 7.07 Leverage Ratio. Parent and Corp. will not permit the ratio of Consolidated Total Debt to Consolidated Total Capitalization at any time to exceed 0.25: 1.00. 7.08 Minimum Net Worth. Parent and Corp. will not permit Consolidated Net Worth to be less than $2,000,000,000 at any time. -26- SECTION 8. Defaults. 8.01 Events of Default. Upon the occurrence of any of the following specified events (each, an "Event of Default"): (a) any Borrower shall fail to pay when due any principal of any Loan, or shall fail to pay any interest on any Loan within three Business Days after such interest shall become due, or shall fail to pay any fee or other amount payable hereunder within five Business Days after such fee or other amount becomes due; or (b) any Borrower shall fail to observe or perform any covenant contained in Sections 6.01(c), 6.02(ii), 6.03, 6.06, 7.02, 7.03, 7.04, 7.07 or 7.08; or (c) any Borrower shall fail to observe or perform any covenant contained in Section 7.01 for five days after the earlier of (i) the first day on which any Borrower has knowledge of such failure or (ii) written notice thereof has been given to any Borrower by the Administrative Agent at the request of any Lender; or (d) any Borrower shall fail to observe or perform any covenant or agreement contained herein (other than those covered by clause (a), (b) or (c) above) for 30 days after the earlier of (i) the first day on which any Borrower has knowledge of such failure or (ii) written notice thereof has been given to any Borrower by the Administrative Agent at the request of any Lender; or (e) any representation, warranty, certification or statement made or deemed made by any Borrower in Section 5 of this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect or misleading in any material respect when made (or deemed made); or (f) Parent or any Subsidiary shall fail to make any payment in respect of Debt outstanding in an aggregate principal amount equal to or in excess of $10,000,000 (other than the Notes) when due at final stated maturity (after giving effect to any applicable grace period); or (g) any event or condition shall occur which results in the acceleration of the maturity of Debt outstanding in an aggregate amount equal to or in excess of $10,000,000 of Parent or any Subsidiary or the mandatory prepayment or purchase of such Debt by Parent (or its designee) or such Subsidiary (or its designee) prior to the scheduled maturity thereof; or (h) Parent or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to themselves or their debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of them or any substantial part of their property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against them, or shall make a general -27- assignment for the benefit of creditors, or shall fail generally, or shall admit in writing their inability, to pay their debts as they become due, or shall take any corporate action to authorize any of the foregoing, or shall become or be declared by a court of competent jurisdiction to be insolvent; or (i) an involuntary case or other proceeding shall be commenced against Parent or any Subsidiary seeking liquidation, reorganization or other relief with respect to them or their debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of them or any substantial part of their property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against Parent or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (j) Parent, Corp. or any member of the Controlled Group shall fail to pay when due any material amount which they shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or (k) one or more judgments or orders for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against Parent or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (1) a federal tax lien shall be filed against Parent or any Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be filed against any Parent or any Subsidiary under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of 25 days after the date of filing; or (m) (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act) of 40% or more of the outstanding shares of the voting stock of Parent; or (ii) as of any date a majority of the Board of Directors of Parent consists of individuals who were not either (A) directors of Parent as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of Parent of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of Parent of which a majority consisted of individuals described in clause (A) and individuals described in clause (B); or -28- (n) Parent shall at any time or times and for any reason cease to own (either directly or indirectly through a wholly-owned intermediate Subsidiary) all of the Capital Stock or other ownership interests (except for director's qualifying shares) of Corp. or (o) Corp. shall fail to maintain an insurer claims paying rating of AA or better as determined by Standard and Poor's Corporation and Aa2 or better as determined by Moody's Investors Service, Inc.; or (p) Parent shall fail to maintain a long term debt rating of A or better as determined by Standard and Poor's Corporation and A2 or better as determined by Moody's Investors Service, Inc.; or (q) at any time when any DB Loan is outstanding, the respective Financial Guaranty Insurance Policy or any material provision thereof shall cease to be in full force or effect or Corp. shall deny or disaffirm its obligations under such Financial Guaranty Insurance Policy; then, and in every such event, the Administrative Agent shall (i) if requested by the Required Lenders, by notice to Parent and Corp. terminate the Commitments and they shall thereupon terminate, and (ii) if requested by the Required Lenders, by notice to Parent and Corp. declare the Notes (together with accrued interest thereon) and all other amounts payable hereunder and under the other Credit Documents to be, and the Notes (together with all accrued interest thereon) and all other amounts payable hereunder and under the other Credit Documents shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers; provided that if any Event of Default specified in clause (h) or (i) above occurs with respect to Parent or Corp., without any notice to Parent or Corp. or any other act by the Administrative Agent or the Lenders, the Total Commitment shall thereupon automatically terminate and the Notes (together with accrued interest thereon) and all other amounts payable hereunder and under the other Credit Documents shall automatically become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers; provided, further' that, except in the case of an Event of Default under Section 8.01(q), the principal of and interest on DB Loans shall not become due and payable pursuant to this Section 8.01 prior to their respective DB Loan Maturity Date. Notwithstanding the foregoing, the Administrative Agent shall have available to it all other remedies at law or equity, and shall exercise any one or all of them at the request of the Required Lenders. 8.02 Notice of Default. The Administrative Agent shall give notice to the Borrowers of any Default under Sections 8.01(c) or 8.01(d) promptly upon being requested to do so by any Lender and shall thereupon notify all the Lenders thereof. SECTION 9. Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: -29- "Absolute Rate" shall mean an interest rate (rounded to the nearest .0001) expressed as a decimal. "Absolute Rate Borrowing" shall mean a Competitive Bid Borrowing with respect to which a Borrower has requested that the Bidder Lenders offer to make Competitive Bid Loans at Absolute Rates. "Administrative Agent" shall mean Deutsche Bank and shall include any successor to the Administrative Agent appointed pursuant to Section 10.09. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Agents" shall mean the Administrative Agent, the Syndication Agent and the Documentation Agent. "Aggregate Loan Outstandings" shall have the meaning provided in Section 3.02(a). "Agreement" shall mean this Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. "Assignment Agreement" shall mean the Assignment Agreement in the form of Exhibit G (appropriately completed). "Assuming Lender" shall have the meaning provided in Section 1.16. "Authorized Officer" shall mean any senior officer of any Borrower designated as such in writing to the Administrative Agent by such Borrower. "Base Rate" shall mean, at any time, the higher of (i) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate and (ii) the Prime Lending Rate. "Base Rate Loan" shall mean each Revolving Loan that is not a Eurodollar Loan. "Bidder Lender" shall mean each Lender that has notified in writing (and has not withdrawn such notice) the Administrative Agent that it desires to participate generally in the bidding arrangements relating to Competitive Bid Borrowings, "Borrowers" shall mean Parent, Corp. and each Designated Borrower, if any. -30- "Borrowing" shall mean (i) the incurrence by a single Borrower of Revolving Loans that are Base Rate Loans on a pro rata basis from all Lenders; (ii) the incurrence by a single Borrower of Revolving Loans that are Eurodollar Loans on a P o rata basis from all Lenders, on a given date (or resulting from conversions on a given date), having the same Interest Period, provided that Base Rate Loans incurred pursuant to Section 1. II (b) shall be considered part of any related Borrowing of Eurodollar Loans; and (iii) a Competitive Bid Borrowing. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close, (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans and Competitive Bid Loans made pursuant to a Spread Borrowing, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in the London interbank Eurodollar market. "Capital Stock" means any nonredeemable capital stock of Parent or any Consolidated Subsidiary (to the extent issued to a Person other than the Borrowers), whether common or preferred. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated and the rulings issued thereunder. Section references to the Code are to the Code, as in effect on the Effective Date and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Commitment" shall mean, with respect to each Lender, at any time, the amount set forth opposite such Lender's name on Annex I, as the same may be increased pursuant to Section 1.16 and/or reduced pursuant to Sections 2.02, 2.03 or 8.0 1. "Commitment Assumption Agreement" shall mean each Commitment Assumption Agreement in the form of Exhibit H attached hereto executed in accordance with Section 1.16. "Commitment Assumption Date" shall mean the Business Day following the date on which each Commitment Assumption Agreement is delivered to the Administrative Agent pursuant to Section 1.16. "Competitive Bid Borrowing" shall mean a Borrowing by a single Borrower of Competitive Bid Loans pursuant to Section 1.04. "Competitive Bid Loan" shall have the meaning specified in Section 1.01(b). "Competitive Bid Note" shall have the meaning provided in Section 1.06(a). "Consolidated Net Worth" shall mean the Net Worth of Parent and its Subsidiaries determined on a consolidated basis. -31- "Consolidated Subsidiary" shall mean at any date any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of Parent in its consolidated financial statements as of such date. "Consolidated Total Capitalization" shall mean, as of any date of determination, the sum of (i) Consolidated Total Debt and (ii) Consolidated Net Worth. "Consolidated Total Debt" shall mean, as of any date of determination, all Debt of Parent and its Subsidiaries on such date determined on a consolidated basis. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with either Parent or Corp., are treated as a single employer under Section 414 of the Code. "Credit Documents" shall mean this Agreement, the Notes and each Financial Guaranty Insurance Policy delivered pursuant to Section 4.02(d), "DB Assumption Agreement" shall mean an Assumption Agreement in the form of Exhibit I attached hereto executed in accordance with Section 1.17. "DB Loan Maturity Date" shall mean (a) with respect to each DB Loan constituting a Revolving Loan, the maturity date selected by the respective Designated Borrower in accordance with Section 1.03(a) as being applicable to such DB Loan, which maturity date shall not be more than 180 days after the date of incurrence of such DB Loan (and in no event later than the Final Maturity Date) and (b) with respect to each DB Loan constituting a Competitive Bid Loan, the maturity of such Competitive Bid Loan selected in accordance with Section 1.04(a). "DB Loans" shall mean any Loans incurred by a Designated Borrower. "Debt" of any Person shall mean at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, (vi) all Redeemable Preferred Stock of such Person (in the event such Person is a corporation), (vii) all obligations (absolute or contingent) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (ix) all Debt of others Guaranteed by such Person, provided that in the case of Corp. the calculation of Debt shall not include Debt of others guaranteed by Corp. in the ordinary course of its business. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. -32- "Defaulting Lender" shall mean any Lender with respect to which a Lender Default is in effect. "Designated Borrower" shall mean each Person designated as a Designated Borrower in accordance with Section 1. 17. "Documentation Agent" shall mean Fleet National Bank, "Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States. "Effective Date" shall have the meaning provided in Section 4.01. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect as of the Effective Date and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "Eurodollar Loan" shall mean each Revolving Loan that at the election of any Borrower is bearing interest by reference to LIBOR. "Event of Default" shall have the meaning specified in Section 8.01. "Exchange Act" shall mean the U.S. Securities Exchange Act of 1934, as amended. "Existing Credit Agreements" shall mean (i) the Credit Agreement, dated as of August 31, 1994, among Parent, Municipal Bond Investors Assurance Corporation, various lending institutions and Wachovia Bank of Georgia, N.A., as Agent, (ii) the Loan Agreement, dated as of July 13, 1990, between Parent and Credit Suisse First Boston, New York Branch and (iii) the Credit Agreement, dated as of June 25, 1992, among Capital Markets Assurance Corporation, various lending institutions and Bank of Montreal, as Agent. "Facility Fees" shall have the meaning specified in Section 2.01(a). "Federal Funds Effective Rate" shall mean, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 3.01. -33- "Final Maturity Date" shall mean the date occurring 364 days after the Effective Date, or such later date to which the Final Maturity Date shall have been extended pursuant to Section 1.15. "Financial Guaranty Insurance Policy" shall have the meaning specified in Section 4.02(d). "Fiscal Year" means any fiscal year of the Borrowers. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect on the date of this Agreement. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to secure, purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to provide collateral security, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include: (i) endorsements for collection or deposit in the ordinary course of business; and (ii) in the case of Corp., Debt of others guaranteed by Corp. in the ordinary course of its business. The term "Guarantee" used as a verb has a corresponding meaning. "Interest Period" shall mean (a) with respect to any Eurodollar Loan, the interest period applicable thereto, as determined pursuant to Section 1.10 and (b) with respect to any Competitive Bid Loan, the period beginning on the date of incurrence thereof and ending on the stated maturity date thereof. "Interest Rate Basis" shall mean LIBOR and/or such other basis for determining an interest rate as the Borrowers and the Administrative Agent may agree upon from time to time. "Lender" or "Lenders" shall have the meaning provided in the first paragraph of this Agreement. "Lender Default" shall mean (i) the refusal (which has not been retracted) of a Lender to make available its portion of any incurrence of Revolving Loans or (ii) a Lender having notified the Administrative Agent and/or any Borrower that it does not intend to comply with its obligations under Section 1.01, in the case of either clause (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority. "Lender Register" shall have the meaning provided in Section 11.15. -34- "LIBOR" shall mean for each Interest Period applicable to a Loan (other than a Base Rate Loan), the rate per annum that appears on page 3750 of the Dow Jones Telerate Screen (or any successor page) for Dollar deposits with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period or, if such a rate does not appear on page 3750 of the Dow Jones Telerate Screen (or any successor page), the offered quotations to first-class banks in the London interbank market by Deutsche Bank for Dollar deposits of amounts in same day funds comparable to the outstanding principal amount of such Dollar-denominated Loan with maturities comparable to such Interest Period determined as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period. "Lien" shall mean, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement which has the practical effect of constituting a security interest or encumbrance, servitude or encumbrance of any kind in respect of such asset to secure or assure payment of a Debt or a Guarantee, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. For the purposes of this Agreement, Parent or any Subsidiary shall be deemed to own subject to a Lien any asset which they have acquired or hold subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" shall mean each Revolving Loan and each Competitive Bid Loan. "Margin Stock" shall have the meaning provided in Regulation U. "Material Adverse Effect" shall mean, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, a material adverse change in, or a material adverse effect upon, any of (a) the rights and remedies of the Administrative Agent or the Lenders under the Credit Documents, or the ability of each Borrower to perform its obligations under the Credit Documents to which it is a party, as applicable, or (b) the legality, validity or enforceability of any Credit Document. "Minimum Borrowing Amount" shall mean (i) for any Revolving Loans $2,500,000, and (ii) for any Competitive Bid Loans, $1,000,000. "Multiemployer Plan" shall mean a plan within the meaning of Section 4001(a)(3) of ERISA. "Net Worth" shall mean, as to any Person, the sum of its capital stock, capital in excess of par or stated value of shares of its capital stock, retained earnings and any other account which, in accordance with GAAP, constitutes stockholders equity, excluding any treasury stock. "Non-Continuing Lender" shall have the meaning specified in Section 1.15. "Non-Defaulting Lender" shall mean each Lender other than a Defaulting Lender. -35- "Note" shall mean each Revolving Note and each Competitive Bid Note. "Notice of Borrowing" shall have the meaning provided in Section 1.03(a). "Notice of Competitive Bid Borrowing" shall have the meaning provided in Section 1.04(a). "Notice of Conversion" shall have the meaning provided in Section 1.07. "Notice Office" shall mean the office of the Administrative Agent at 31 West 52nd Street, New York, NY 10019 or such other office as the Administrative Agent may designate to the Borrowers from time to time. "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to any Agent or any Lender pursuant to the terms of this Agreement or any other Credit Document. "Payment Office" shall mean the office of the Administrative Agent at 31 West 52nd Street, New York, NY 10019 or such other office or offices as the Administrative Agent may designate to the Borrowers from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Person" shall mean any individual, partnership, limited liability company, joint venture, firm, corporation, association, trust or other enterprise or business entity or any government or political subdivision or any agency, department or instrumentality thereof "Plan" shall mean at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of any member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding 5 plan years made contributions. "Prime Lending Rate" shall mean the rate which Deutsche Bank announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Deutsche Bank may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Principal Amount" shall mean the stated principal amount of each Loan. "Recommitment Deadline" shall have the meaning specified in Section 1.15. -36- "Redeemable Preferred Stock" of any Person shall mean any preferred stock issued by such Person which is at any time prior to the Final Maturity Date either (i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or (ii) redeemable at the option of the holder thereof. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Replaced Lender" shall have the meaning provided in Section 1.14. "Replacement Lender" shall have the meaning provided in Section 1.14. "Required Lenders" shall mean at any time Non-Defaulting Lenders having at least a majority of the aggregate Commitments of all Non-Defaulting Lenders-, provided that if the Total Commitment has been terminated, then the Required Lenders shall mean Lenders whose outstanding Loans equal or exceed a majority of the aggregate outstanding Loans at such time. "Revolving Loan" shall have the meaning specified in Section 1.01(a). "Revolving Note" shall have the meaning provided in Section 1.06(a). "Section 3.04 Certificate" shall have the meaning provided in Section 3.04(b)(ii). "Spread" shall mean a percentage per annum in excess of, or less than, an Interest Rate Basis. "Spread Borrowing" shall mean a Competitive Bid Borrowing with respect to which a Borrower has requested the Bidder Lenders to make Competitive Bid Loans at a Spread over or under a specified Interest Rate Basis. "Statutory Accounting Principles" shall mean statutory accounting principles prescribed by the National Association of Insurance Commissioners that are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries, has more than a 50% equity interest at the -37- time. Unless other-wise expressly provided, all references herein to "Subsidiary" shall mean a Subsidiary of Parent. "Syndication Agent" shall mean The First National Bank of Chicago. "Taxes" shall have the meaning provided in Section 3.04(a). "Total Commitment" shall mean, at any time, the sum of the Commitments of each of the Lenders at such time. "Total Unutilized Commitment" shall mean, at any time, (i) the Total Commitment at such time less (ii) the sum of the aggregate Principal Amount of all outstanding Loans at such time. "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto. "UCC" shall mean the Uniform Commercial Code. "Wholly-Owned Subsidiary" of any Person shall mean any other Person to the extent all of the capital stock or other ownership interests in such other Person, other than directors' qualifying shares, is owned directly or indirectly by such first Person. "Written" or "in writing" shall mean any form of written communication or a communication by means of facsimile transmission, telegraph or cable. SECTION 10. Agents, etc. 10.01 Appointment. The Lenders hereby designate Deutsche Bank as Administrative Agent, The First National Bank of Chicago as Syndication Agent and Fleet National Bank as Documentation Agent to act as specified herein and in the other Credit Documents. Each Lender hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, each Agent to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of such Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agents may per-form any of their duties hereunder by or through their respective officers, directors, agents, employees or affiliates. 10.02 Nature of Duties. No Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Credit Documents. No Agent or any of its respective officers, directors, agents, employees or affiliates shall be liable for any action taken or omitted by them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by their gross negligence or willful misconduct. The duties of each Agent shall be mechanical and administrative in nature; no Agent shall have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Lender or the -38- holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon either Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein with respect to such Agent, 10.03 Lack of Reliance on the Agents. Independently and without reliance upon any Agent, each Lender and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Borrowers and their Subsidiaries in connection with the making and the continuance of the Loans and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Borrowers and their Subsidiaries and, except as expressly provided in this Agreement, no Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Lender or the holder of any Note with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. No Agent shall be responsible to any Lender or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of the Borrowers and their Subsidiaries or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of the Borrowers and their Subsidiaries or the existence or possible existence of any Default or Event of Default. 10.04 Certain Rights of the Agents. If any Agent shall request instructions from the Required Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, such Agent shall be entitled to refrain from such act or taking such action unless and until such Agent shall have received instructions from the Required Lenders; and no Agent shall incur liability to any Person by reason of so refraining. Without limiting the foregoing, neither any Lender nor the holder of any Note shall have any right of action whatsoever against an Agent as a result of such Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Required Lenders. 10.05 Reliance. Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype, facsimile or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any Person that such Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by such Agent. 10.06 Indemnification. To the extent an Agent is not reimbursed and indemnified by the Borrowers, the Lenders will reimburse and indemnify such Agent, in proportion to their respective "percentages" as used in determining the Required Lenders, for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or -39- incurred by such Agent in performing its respective duties hereunder or under any other Credit Document, in any way relating to or arising out of this Agreement or any other Credit Document provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of such Agent. 10.07 The Agents in Their Individual Capacities. With respect to its obligation to make Loans under this Agreement, each Agent shall have the rights and powers specified herein for a "Lender" and may exercise the same rights and powers as though it were not performing the duties specified herein; and the term "Lenders," "Required Lenders," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Agents in their individual capacities. Each Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with any Borrower or any Affiliate of any Borrower as if they were not performing the duties specified herein, and may accept fees and other consideration from any Borrower for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. 10.08 Holders. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment, transfer or endorsement thereof, as the case may be, shall have been filed with the Administrative Agent. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. 10.09 Resignation by an Agent. (a) The Administrative Agent may resign from the performance of all its functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days' prior written notice to the Borrowers and the Lenders. Such resignation shall take effect upon the appointment of a successor Administrative Agent pursuant to clauses (b) and (c) below or as otherwise provided below. Upon the effectiveness of such resignation, the resigning Administrative Agent shall return to Parent and/or Corp. a prorated portion of any administrative fee that has been paid in advance for the period following the effectiveness of its resignation. (b) Upon any such notice of resignation, the Required Lenders shall appoint a successor Administrative Agent hereunder who shall be a Lender, commercial bank or trust company reasonably acceptable to Parent and Corp. (c) If a successor Administrative Agent shall not have been so appointed within such 15 Business Day period, the Administrative Agent, with the consent of Parent and Corp., shall then appoint a successor Administrative Agent who shall serve as Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided above. (d) Each of the Documentation Agent and the Syndication Agent may resign from the performance of all of its functions and duties hereunder and/or under the other Credit -40- Documents in such capacity at any time by giving five Business Days' prior written notice to the Lenders. Such resignation shall take effect at the end of such five Business Days. 10.10 Documentation Agent, Syndication Agent. Nothing this Agreement shall impose on the Documentation Agent or the Syndication Agent, in their capacity as such, any duties or obligations. SECTION 11. Miscellaneous. 11.01 Payment of Expenses, etc. The Borrowers jointly and severally agree to: (i) pay all reasonable out-of-pocket costs and expenses (1) of the Administrative Agent in connection with the negotiation, syndication, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of White & Case LLP) and (2) of the Agents and each of the Lenders in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for each Agent and for each of the Lenders); (ii) pay and hold each of the Agents and Lenders harmless from and against any and all present and future stamp, VAT and other similar taxes with respect to the foregoing matters and/or fees and save each of the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes; and (iii) indemnify each Lender (including in its capacity as an Agent), its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, an investigation, litigation or other proceeding (whether or not an Agent or any Lender is a party thereto and whether or not any such investigation, litigation or other proceeding is between or among an Agent, any Lender, or any third Person or otherwise) related to the entering into and/or performance of any Credit Document or the use of the proceeds of any Loans hereunder or the consummation of any transactions contemplated in any Credit Document, and in each case, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 11.02 Lender Enforceability Opinions. Within 45 days following the Effective Date, each Lender agrees to deliver to Parent and Corp. an opinion or opinions (as applicable) of counsel to such Lender (which opinion or opinions may be from internal counsel to such Lender) substantially in the form of Exhibit J or in such other form as is reasonably acceptable to Parent and Corp. relating to the enforceability of such Lender's obligations under the Credit Documents. Upon a Lender first becoming a party hereunder pursuant to Section 1.14, 1.16 or 11.04, such Lender agrees to deliver to Parent and Corp. an opinion or opinions (as applicable) of counsel to such Lender (which opinion or opinions may be from internal counsel to such Lender) substantially in the form of Exhibit J or in such other form as is reasonably acceptable to Parent and Corp. relating to the enforceability of such Lender's obligations under the Credit Documents. Notwithstanding the foregoing, the failure by a Lender to provide the opinion or opinions referred -41- to in this Section 11.02 shall not affect any of the obligations of the Borrowers hereunder or under the other Credit Documents. 11.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telecopier or facsimile) and mailed, telecopied, fixed or delivered, if to a Borrower, at the address specified opposite its signature below or in the other relevant Credit Documents, as the case may be; if to any Lender or the Administrative Agent, at its address specified for such Lender or the Administrative Agent on Annex II hereto; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telecopied or sent by overnight courier, and shall be effective when received. 11.04 Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that no Borrower may assign or transfer any of its rights or obligations hereunder without the prior written consent of the Lenders. Each Lender may at any time grant participations in any of its rights hereunder or under any of the Notes to any Person, provided that (x) in the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrowers hereunder shall be determined as if such Lender had not sold such participation, except that the participant shall be entitled to the benefits of Sections 1.11 and 3.04 of this Agreement to the extent that such Lender would be entitled to such benefits if the participation had not been entered into or sold and (y) no Lender shall transfer, grant or assign any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would extend the final scheduled maturity of any Loan or Note in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of the applicability of any post-default increase in interest rates), or reduce the principal amount thereof, or increase such participant's participating interest in any Commitment over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment, or a mandatory prepayment, shall not constitute a change in the terms of any Commitment). (b) Notwithstanding the foregoing, (x) any Lender may assign all or a portion of its Commitment and its rights and obligations hereunder to another Lender (or an Affiliate of such assigning Lender), and (y) with the consent of the Administrative Agent and, so long as no Default under Section 8.01(a) or 8.01(h) or Event of Default exists, Parent (which consent shall not be unreasonably withheld), any Lender may assign all or a portion of its Commitment and its rights and obligations hereunder to one or more Persons. No assignment pursuant to the immediately preceding sentence by a Lender (or by Lenders which are Affiliates of each other) shall to the extent such assignment represents an assignment to an institution other than one or more Lenders hereunder (or to an Affiliate of an assigning Lender), be in an aggregate amount less than $10,000,000 unless the entire Commitment of the assigning Lender (or group of Lenders which are Affiliates) is so assigned. If any Lender so sells or assigns all or a part of its rights -42- hereunder or under the Notes, any reference in this Agreement or the Notes to such assigning Lender shall thereafter refer to such Lender and to the respective assignee to the extent of their respective interests and the respective assignee shall have to the extent of such assignment (unless otherwise provided therein), the same rights and benefits as it would if it were such assigning Lender. Each assignment pursuant to this Section 11.04(b) shall be effected by the assigning Lender and the assignee Lender executing an Assignment Agreement (appropriately completed). At the time of any such assignment, (i) either the assigning or the assignee Lender shall pay to the Administrative Agent a nonrefundable assignment fee of $3,500, (ii) Annex I shall be deemed to be amended to reflect the Commitment of the respective assignee (which shall result in a direct reduction to the Commitment of the assigning Lender) and of the other Lenders, and (iii) the Borrowers at such. time will issue new Notes to the respective assignee and to the assigning Lender in conformity with the requirements of Section 1.06. To the extent any assignment pursuant to this Section 11.04(b) is to a Person which is not already a Lender hereunder and which is not a United States Person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective assignee Lender shall provide to Parent and the Administrative Agent the appropriate Internal Revenue Service Forms (and, if applicable, a Section 3.04 Certificate) described in Section 3.04(b), To the extent that an assignment of all or any portion of a Lender's Commitments and related outstanding obligations pursuant to this Section 11.04(b) would, at the time of such assignment, result in increased costs under Section 1.11 or 3.04 from those being charged by the respective assigning bank prior to such assignment, then the Borrowers shall not be obligated to pay such increased costs (although the Borrowers shall be obligated to pay any other increased costs of the type described above resulting from changes specified in said Section 1.11 or 3.04 occurring after the date of the respective assignment). Each Lender and the Borrowers agree to execute such documents (including without limitation amendments to this Agreement and the other Credit Documents) as shall be necessary to effect the foregoing. Nothing in this clause (b) shall prevent or prohibit any Lender from pledging its Notes or Loans to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. (c) Notwithstanding any other provisions of this Section 11.04, no transfer or assignment of the interests or obligations of any Lender hereunder or any grant of participation therein shall be permitted if such transfer, assignment or grant would require any Borrower to file a registration statement with the Securities and Exchange Commission or to qualify the Loans under the "Blue Sky" laws of any State. 11.05 No Waiver, Remedies Cumulative. No failure or delay on the part of any Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which any Agent or any Lender would otherwise have. 11.06 Payments Pro Rata. (a) The Administrative Agent agrees that promptly after its receipt of each payment from or on behalf of any Borrower in respect of any Obligations of such Borrower hereunder, it shall distribute such payment to the Lenders (other than any -43- Lender that has expressly waived its right to receive its pro rata share thereof) pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans or Fees, of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total of such Obligation then owed and due to such Lender bears to the total of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the respective Borrower to such Lenders in such amount as shall result in a proportional participation by all of the Lenders in such amount, provided that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. (c) Notwithstanding anything to the contrary contained herein, the provisions of the preceding Sections 11.06(a) and (b) shall be subject to the express provisions of this Agreement which require, or permit, differing payments to be made to Non-Defaulting Lenders as opposed to Defaulting Lenders. 11.07 Calculations: Computations. (a) The financial statements to be furnished to the Lenders pursuant hereto shall be made and prepared in conformity with GAAP or Statutory Accounting Principles, as the case may be, consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrowers to the Lenders and with respect to any interim financial statements, subject to changes resulting from audit and normal year-end audit adjustments), provided that (x) except as otherwise specifically provided herein, all computations determining compliance with Sections 7.07 and 7.08, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the December 31, 1997 financial statements delivered to the Lenders pursuant to Section 5.04(a) and (y) if at any time the computations determining compliance with Sections 7.07 and 7.08 utilize accounting principles different from those utilized in the financial statements furnished to the Lenders, such financial statements shall be accompanied by reconciliation work-sheets. (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days (365-366 days for interest on Base Rate Loans when the Base Rate is based on the Prime Lending Rate). 11.08 Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this -44- Agreement or any other Credit Document 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 Agreement, each Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Borrower further 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 it, to the extent located outside New York City, or by hand, to the extent located within New York City, at its address for notices pursuant to Section 11.03, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of any Agent or any Lender to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any Borrower in any other jurisdiction. (b) Each Borrower each 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 Agreement or any other Credit Document 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. (c) Each of the parties to this Agreement hereby irrevocably waives all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement, the other Credit Documents or the transactions contemplated hereby or thereby. 11.09 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with Parent, Corp. and the Administrative Agent. 11.10 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 11.11 Amendment or Waiver. Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Borrowers and the Required Lenders, provided that no such change, waiver, discharge or termination shall, without the consent of each Lender (other than a Defaulting Lender) directly affected thereby, (i) extend the Final Maturity Date or reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) or Fees or other amounts payable hereunder, or reduce the principal amount thereof, or increase the Commitment of any Lender over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment shall not constitute a change in the terms of any Commitment of any Lender), (ii) amend, modify or waive any provision of this Section 11.11 or of Section 4.02(d), (iii) reduce the percentage specified in, or (except to give effect to any additional facilities hereunder) otherwise modify, the definition of -45- Required Lenders, or (iv) consent to the assignment or transfer by any Borrower of any of its rights and obligations under this Agreement. 11.12 Survival. All indemnities set forth herein including, without limitation, in Section 1.11, 1.12 or 3.04 shall survive the execution and delivery of this Agreement and the making and repayment of the Loans. 11.13 Domicile of Loans. Each Lender may transfer and carry its Loans at, to or for the account of any branch office, Subsidiary or affiliate of such Lender, provided that the Borrowers shall not be responsible for costs arising under Section 1.11 or 3.04 resulting from any such transfer (other than a transfer pursuant to Section 1.13 or 1.14) to the extent not otherwise applicable to such Lender prior to such transfer. 11.14 Confidentiality. Subject to Section 11.04, the Lenders shall hold all non-public information obtained pursuant to the requirements of this Agreement in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure to its Affiliates, employees, auditors, advisors or counsel or as reasonably required by any bona fide transferee or participant in connection with the contemplated transfer of any Loans or participation therein (so long as such transferee or participant agrees to be bound by the provisions of this Section 11.14) or as required or requested by any governmental agency or representative thereof or pursuant to legal process, provided that, unless specifically prohibited by applicable law or court order, each Lender shall notify Parent of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information, and provided further that in no event shall any Lender be obligated or required to return any materials furnished by Parent or any of its Subsidiaries. 11.15 Lender Register. Each Borrower hereby designates the Administrative Agent to serve as its agent, solely for purposes of this Section 11.15, to maintain a register (the "Lender Register") on which it will record the Commitments from time to time of each of the Lenders, the Loans made by each of the Lenders and each repayment in respect of the principal amount of the Loans of each Lender. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrowers' obligations in respect of such Loans. With respect to any Lender, the transfer of the Commitments of such Lender and the rights to the principal of, and interest on, any Loan made pursuant to such Commitments shall not be effective until such transfer is recorded on the Lender Register maintained by the Administrative Agent with respect to ownership of such Commitments and Loans and prior to such recordation all amounts owing to the transferor with respect to such Commitments and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitments and Loans shall be recorded by the Administrative Agent on the Lender Register only upon the acceptance by the Administrative Agent of a properly executed and delivered Assignment Agreement pursuant to Section 11.04(b). The Borrowers jointly and severally agree to indemnify the Administrative Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Administrative Agent in performing -46- its duties under this Section 11.15 other than those resulting from the Administrative Agent's willful misconduct or gross negligence. * * * -47- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. MBIA Inc. MBIA INC., 113 King Street as a Borrower Armonk, NY 10504 Tel: (914) 765-3020 Fax: (914) 765-3163 Attention: Julliette S. Tehrani By /s/ Julliette S. Tehrani --------------------------------- with a copy to: Name: Julliette S. Tehrani Title: Executive Vice President, 885 Third Avenue Chief Financial Officer and New York, NY 10022 Treasurer Tel: (212) 415-6816 Fax: (212) 755-5462 Attention: Robert L. Nevin, Jr. MBIA Insurance Corporation MBIA INSURANCE CORPORATION, 113 King Street as a Borrower Armonk, New York 10504 Tel: (914) 765-33020 Fax: (914) 765-3163 Attention: Julliette S. Tehrani By /s/ Julliette S. Tehrani --------------------------------- with a copy to: Name: Julliette S. Tehrani Title: Executive Vice President, 885 Third Avenue Chief Financial Officer and New York, New York 10022 Treasurer Tel: (212) 415-6916 Fax: (212) 755-5462 Attention: Robert L. Nevin, Jr. DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By /s/ John S. McGill --------------------------------- Name: John S. McGill Title: Vice President By /s/ Gayma Z. Shivnarain --------------------------------- Name: Gayma Z. Shivnarain Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Syndication Agent By: /s/ T. Luisa Pashinian --------------------------------- Name: T. Luisa Pashinian Title: Corporate Banking Officer FLEET NATIONAL BANK, Individually and as Documentation Agent BY: /s/ E. B. Shelley ------------------------------- Name: E. B. Shelley Title: Vice President BANCA MONTE DEI PASCHI DI SIENA SPA, as Lender By: /s/ G. Natalicchi ------------------------------- Name: G. Natalicchi Title: S.V.P. & General Manager By: /s/ Brian R. Landy ------------------------------- Name: Brian R. Landy Title: Vice President BANK OF MONTREAL, as Lender By: /s/ R.J. McClorey ------------------------------- Name: R.J. McClorey Title: Director CHASE MANHATTAN BANK, as Lender By: /s/ Helen L. Newcomb ------------------------------- Name: HELEN L. NEWCOMB Title: VICE PRESIDENT BANK OF AMERICA, NATIONAL TRUST & SAVINGS ASSOCIATION, as Lender By: /s/ ELIZABETH W.F. BISHOP ------------------------------- Name: ELIZABETH W.F. BISHOP Title: Vice President BANCA COMMERCIALE ITALIANA, NEW YORK BRANCH, as Lender By: /s/ Karen Purelis ------------------------------- Name: Karen Purelis, VP Title: By: /s/ Charles Dougherty, ------------------------------- Name: C. Dougherty, VP Title: BANCO SANTANDER S.A., NEW YORK BRANCH, as Lender By:/s/ Edward W O'Loghlen ------------------------------- Name: Edward W O'Loghlen Title: Vice President Asset Backed Finance Group By:/s/ JOHN HENNESSY ------------------------------- Name: JOHN HENNESSY Title: VICE PRESIDENT STRUCTURE COMMERZBANK AG, NEW YORK BRANCH, as Lender By:/s/ Edward J. McDonnell ------------------------------- Name: Edward J. McDonnell III,C.F.A. Title: Vice President By: /s/ Tom Ausfahl ------------------------------- Name: TOM AUSFAHL Title: VICE PRESIDENT NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH ACN004044937 as Lender By:/s/ Tom Kilfoyle ------------------------------- Name: Tom Kilfoyle Title Vice President NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK BRANCH and/or CAYMAN ISLANDS BRANCH, as Lender By: /s/ Stephanie Finnen ------------------------------- Name: Stephanie Finnen Title: VP By: /s/ Stephen K. Hunter ------------------------------- Name: Stephen K. Hunter Title: SVP II. $200 MILLION CREDIT AGREEMENT A. OPERATIVE DOCUMENTS: 1. Credit Agreement ANNEX I Commitments ANNEX II Lenders' Addresses ANNEX III Subsidiaries EXHIBIT A-1 Form of Notice of Borrowing EXHIBIT A-2 Form of Notice of Competitive Bid Borrowing EXHIBIT B-l Form of Revolving Note EXHIBIT B-2 Form of Competitive Bid Note EXHIBIT C Form of Section 3.04 Certificate EXHIBIT D Form of Opinion of General Counsel to Borrowers EXHIBIT E Form of Officers' Certificate EXHIBIT F Form of Guarantee Insurance Policy EXHIBIT G Form of Assignment Agreement EXHIBIT H Form of Commitment Assumption Agreement EXHIBIT I Form of DB Assumption Agreement EXHIBIT J Form of Lender's Opinion EXHIBIT K Form of Opinion of Designated Borrower's Counsel EXHIBIT L Form of Opinion of Counsel to Corp. ANNEX I COMMITMENTS Lender Commitment ------ ---------- Deutsche Bank AG, New York Branch $30,200,000 The First National Bank of Chicago $28,300,000 Fleet National Bank $28,300,000 Banca Monte Dei Paschi Di Siena Spa $25,000,000 Bank of Montreal $16,700,000 Chase Manhattan Bank $16,700,000 Bank of America National Trust & Savings Association $13,300,000 Banca Commerciale Italiana $8,300,000 Banco Santander S.A., New York Branch $8,300,000 Commerzbank AG, New York Branch $8,300,000 National Australia Bank Limited, New York Branch ACN 004044937 $8,300,000 Norddeutsche Landesbank Girozentrale, New York Branch and/or Cayman Islands Branch $8,300,000 Total: $200,000,000 (i) ANNEX II LENDER ADDRESSES Deutsche Bank AG, 31 West 52nd Street, 23rd Floor New York Branch New York, NY 10019 Attn.: John S. McGill Tel: (212) 469-8666 Fax: (212) 469-8366 The First National Bank of Chicago 153 West 51st Street New York, NY 10019 Attn: Luisa Pashinan Tel: (212) 373-1169 Fax: (212) 373-1439 Fleet National Bank 777 Main Street CTMO 0250 Hartford, CT 06115-2001 Attn: Elizabeth B. Shelley Tel: (860) 986-3127 Fax: (960) 986-1264 Banca Commerciale Italiana, One William Street New York, NY 10004 New York Branch Attn: Karen Purelis Tel: (212) 607-3868 Fax: (212) 809-2124 Banca Monte Dei Paschi Di Siena Spa 55 East 59th Street New York, NY 10022 Attn: Nick Kamaris Tel: (212) 891-3655 Fax: (212) 891-3661 Banco Santander S.A., New York Branch 45 East 53rd Street New York, NY 10022 Attn: Ligia Castro Tel: (212) 350-3640 Fax: (212) 350-3690 (i) Bank of America, National Trust 231 South LaSalle Street & Savings Association Chicago, IL 60697 Attn: Elizabeth Bishop Tel: (312) 828-6550 Fax: (312) 987-0889 Bank of Montreal 115 South LaSalle Street Floor 12 Chicago, IL 60603 Attn: Charles W. Reed Tel: (312) 750-5912 Fax: (312) 845-2199 Chase Manhattan Bank 270 Park Avenue New York, NY 10017 Attn: Helen Newcomb Tel: (212) 270-6260 Fax: (212) 270-0670 Commerzbank AG, New York Branch 2 World Financial Center New York, NY 10281-1050 Attn: Edward McDonnell III Tel: (212) 266-7607 Fax: (212) 266-7629 National Australia Bank Limited, 200 Park Avenue, Floor 34 New York New York, NY 10166 Branch ACN 00404937 Attn: Thomas F. Kilfoyle Tel: (212) 916-9510 Fax: (212) 983-1969 Norddeutsche Landesbank 1270 Avenue of the Americas Girozentrale, New York New York, NY 10020 Branch and/or Cayman Islands Branch Attn: Stephanie Finnen Tel: (212) 332-8606 Fax: (212) 332-8660 (ii) ANNEX III SUBSIDIARIES MBIA INSURANCE CORPORATION (NEW YORK) MUNICIPAL ISSUERS SERVICE CORPORATION (NEW YORK) MBIA & ASSOCIATES CONSULTING, INC. (DELAWARE) MBIA MUNISERVICES COMPANY (DELAWARE) MUNI RESOURCES, LLC (DELAWARE) MBIA INVESTMENT MANAGEMENT CORP. (DELAWARE) MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (DELAWARE) MBIA CAPITAL MANAGEMENT CORP. (DELAWARE) MBIA CAPITAL CORP. (DELAWARE) MBIA-AMBAC INTERNATIONAL MARKETING SERVICES, PTY., LIMITED (AUSTRALIA) CAPMAC HOLDINGS INC. (DELAWARE) MBIA ASSET MANAGEMENT CORPORATION (DELAWARE) 1838 INVESTMENT ADVISORS, INC. (DELAWARE) (i) EXHIBIT A-1 NOTICE OF BORROWING [Date] Deutsche Bank AG, New York Branch, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below 31 West 52nd Street New York, New York 10019 Attention: Gentlemen: The undersigned, [Name of Borrower], refers to the Credit Agreement, dated as of August 28, 1998 (as amended from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), among the undersigned, the other Borrowers, certain Lenders parties thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and you, as Administrative Agent for such Lenders, and hereby gives you notice, irrevocably, pursuant to Section 1.03 of the Credit Agreement, that the undersigned hereby requests a Borrowing of Revolving Loans under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 1.03 of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is ___________ , 19__ . (ii) The aggregate principal amount of the Proposed Borrowing is [___________________] (iii) The Proposed Borrowing is to consist of [Base Rate Loans] [Eurodollar Loans]. [(iv) The initial Interest Period for the Proposed Borrowing is ____ [months] [days]](1) - ---------- (1) To be included for a Proposed Borrowing of Eurodollar Loans. EXHIBIT A-1 Page 2 [(v) The DB Loan Maturity Date is ______________________________](2) The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 5 of the Credit Agreement are true and correct in all material respects, before and after giving effect to the Proposed Borrowing and to the application of the proceeds thereof, as though made on and as of such date; and (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof. Very truly yours, [NAME OF BORROWER] By_______________________________ Title: - ---------- (2) To be included for a Proposed Borrowing of DB Loans. EXHIBIT A-2 NOTICE OF COMPETITIVE BID BORROWING [Date] Deutsche Bank AG, New York Branch, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below 31 West 52nd Street New York, New York 10019 Attention: Gentlemen: The undersigned, [Name of Borrower], refers to the Credit Agreement, dated as of August 28, 1998 (as amended from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), among the undersigned, the other Borrowers, certain Lenders parties thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and you, as Administrative Agent for such Lenders, and hereby gives you notice, pursuant to Section 1.04 of the Credit Agreement, that the undersigned hereby requests a Borrowing of Competitive Bid Loans under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 1.04 of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is _______________ , 19___ . (ii) The aggregate principal amount of the Proposed Borrowing is $_______________. (iii) The maturity date for repayment of the Proposed Borrowing is_______________, 19____. (iv) The interest payment date[s] of the Proposed Borrowing is [are] _______________. (v) The Proposed Borrowing is to consist of a [Absolute Rate Borrowings] [Spread Borrowings]. EXHIBIT A-2 Page 2 [(vi) The Interest Rate Basis for the Proposed Borrowing is_____ .](1) [(vi) [Other applicable terms]](2) The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 5 of the Credit Agreement are true and correct in all material respects, before and after giving effect to the Proposed Borrowing and to the application of the proceeds thereof, as result from such Proposed Borrowing made on and as of such date; and (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof. - ---------- (1) To be included for a Spread Borrowing. (2) To be included, as needed. EXHIBIT A-2 Page 3 Very truly yours, [NAME OF BORROWER] By__________________________________________ Title: EXHIBIT B-1 FORM OF REVOLVING NOTE New York, New York _____________ , 1998 FOR VALUE RECEIVED, [NAME OF BORROWER], a corporation organized and existing under the laws of the State of [____________________] (the "Borrower"), hereby promises to pay to ____________ or its registered assigns (the "Lender"), in lawful money of the United States of America in immediately available funds, at the office of DEUTSCHE BANK AG, NEW YORK BRANCH (the "Administrative Agent") located at 31 West 52nd Street, New York, New York 10019 on the Final Maturity Date (as defined in the Agreement referred to below) the unpaid principal amount of all Revolving Loans (as defined in the Agreement) made by the Lender to the Borrower pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount of each Revolving Loan incurred by the Borrower in like money at said office from the date such Revolving Loan is made until paid at the rates and at the times provided in the Agreement. This Note is one of the Revolving Notes referred to in the Credit Agreement, dated as of August 28, 1998, among the Borrower, [MBIA Inc.] [MBIA Insurance Corporation], various Designated Borrowers, the Lender, the other financial institutions party thereto, Fleet National Bank, as Documentation Bank, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (as from time to time in effect, the "Agreement") and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to voluntary and mandatory prepayment, in whole or in part, and Revolving Loans may be converted in accordance with Section 1.07 of the Agreement. In case an Event of Default [under Section 8.01(q)](1) (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. This note shall be construed in accordance with and be governed by the law of the State of New York. - ---------- (1) Include in Revolving Notes executed by Designated Borrowers only. EXHIBIT B-1 Page 2 [NAME OF BORROWER] By__________________________ Title: EXHIBIT B-2 FORM OF COMPETITIVE BID NOTE New York, New York _________________ , 1998 FOR VALUE RECEIVED, [NAME OF BORROWER], a corporation organized and existing under the laws of the State of [ ] (the "Borrower"), hereby promises to pay to ______________ or its registered assigns (the "Lender"), in lawful money of the United States of America in immediately available funds, at the office of DEUTSCHE BANK AG, NEW YORK BRANCH (the "Administrative Agent") located at 31 West 52nd Street, New York, New York 10019 on the Final Maturity Date (as defined in the Agreement referred to below), the unpaid principal amount of all Competitive Bid Loans (as defined in the Agreement) made by the Lender to the Borrower pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount of each Competitive Bid Loan incurred by the Borrower in like money at said office from the date such Competitive Bid Loan is made until paid at the rates and at the times provided in the Agreement. This Note is one of the Competitive Bid Notes referred to in the Credit Agreement, dated as of August 28, 1998, among the Borrower, [MBIA Inc.] [MBIA Insurance Corporation], various Designated Borrowers, the Lender, the other financial institutions party thereto, Fleet National Bank, as Documentation Bank, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (as from time to time in effect, the "Agreement") and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to mandatory prepayment, in whole or in part. In case an Event of Default [under Section 5.01(q)](1) (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. This Note shall be construed in accordance with and be governed by the law of the State of New York. - ---------- (1) Include in Competitive Bid Notes executed by Designated Borrowers only. EXHIBIT B-2 Page 2 [NAME OF BORROWER] By__________________________________________ Title: EXHIBIT C FORM OF SECTION 3.04 CERTIFICATE Reference is hereby made to the Credit Agreement, dated as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time, the financial institutions from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Pursuant to the provisions of Section 3.04 of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" as such term is used in Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended. [NAME OF BANK] By__________________________________________ Title: Date: _______________, _____ EXHIBIT D [FORM OF OPINION OF GENERAL COUNSEL TO BORROWERS] [Date] To the Lenders and the Administrative Agent Referred to Below c/o Deutsche Bank AG, New York Branch as Administrative Agent 31 West 52nd Street New York, NY 10019 Re: $200,000,000 Credit Agreement dated as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto ______________________________________________ Ladies and Gentlemen: I am General Counsel of MBIA Inc., a Connecticut corporation ("MBIA") and MBIA Insurance Corporation, a New York stock insurance corporation ("MBIA Corp."). This opinion is being given in connection with the Credit Agreement, dated as of August 28, 1998 (the "Credit Agreement"), among MBIA, MBIA Corp., various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto. All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. In this connection, I have examined the Credit Agreement, the Notes and such certificates of public officials, such certificates of officers of MBIA and MBIA Corp., and copies certified to my satisfaction of such corporate documents and records of MBIA and MBIA Corp. and of such other papers as I have deemed relevant and necessary or appropriate for the opinions set forth below. I have relied upon certificates of public officials and of officers of MBIA and MBIA Corp. with respect to the accuracy of factual matters contained therein which were not independently established. I have also assumed (i) the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Administrative Agent and the Lenders, (ii) the authenticity of all such documents submitted to me as originals, (iii) the genuineness of all signatures, and (iv) the conformity of all such documents submitted to me as copies. Based upon the foregoing, it is my opinion that: EXHIBIT D Page 2 (1) MBIA is a corporation duly organized and validly existing and in good standing under the laws of the State of Connecticut, MBIA Corp. is a stock insurance corporation duly incorporated and validly existing in good standing under the laws of the State of New York and each has the corporate power required to carry on their businesses as now being conducted. (2) The execution, delivery and performance by MBIA and MBIA Corp. of the Credit Agreement and the Notes (i) are within the corporate powers of MBIA and MBIA Corp., (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not (A) contravene, or constitute a default under, any provision of applicable law or regulation or of any agreement, judgment, injunction, order, decree or other instrument which to my knowledge is binding upon MBIA and MBIA Corp., or (B) in the case of MBIA, violate any provision of its Amended and Restated Certificate of Incorporation or By-laws, and in the case of MBIA Corp., violate any provision of its Restated Charter or By-laws, and (v) to the best of my knowledge, do not result in the creation or imposition of any Lien on any asset of MBIA, MBIA Corp. or any of their Subsidiaries. (3) The Credit Agreement and the Notes are valid and binding obligations of MBIA and MBIA Corp., enforceable in accordance with their respective terms, except that such enforceability may be limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors rights generally and by general principles of equity, and the enforceability as to rights to indemnity thereunder may be subject to limitations of public policy. (4) To the best of my knowledge, there is no action, suit or proceeding before or by any court, arbitrator or any governmental body, agency or official pending or threatened against MBIA or MBIA Corp. or their Consolidated Subsidiaries wherein an adverse decision, ruling or finding would (i) materially and adversely affect the business, consolidated financial position or consolidated results of operations of MBIA, MBIA Corp. and their Consolidated Subsidiaries, considered as a whole, or (ii) affect the validity or enforceability of the Credit Agreement and the Notes. (5) Each Subsidiary of MBIA and MBIA Corp. is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. (6) Neither MBIA nor MBIA Corp. is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (7) Neither MBIA, MBIA Corp. nor any of their Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. EXHIBIT D Page 3 (8) To the best of my knowledge, no governmental consents, approvals, authorizations, registrations, declarations or filings are required for the execution and delivery of the Credit Agreement and the Notes on behalf of MBIA or MBIA Corp. or the consummation of the transaction as provided in the Credit Agreement and the Notes. This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you or any assignee under the Credit Agreement, and may not be circulated, quoted or otherwise referred to except in connection with the transactions referenced above without my prior written consent. Very truly yours, Louis G. Lenzi General Counsel EXHIBIT E [NAME OF BORROWER) Officers' Certificate I, the undersigned, [President/Vice-President] of [NAME OF BORROWER], a corporation organized and existing under the laws of the State of [__________________ ] (the "Borrower"), DO HEREBY CERTIFY that: 1. This Certificate is furnished pursuant to Section 4.01(c) of the Credit Agreement, dated as of August 28, 1998 among the Borrower, [MBIA Inc.] [MBIA Insurance Corporation], the Lenders party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (such Credit Agreement, as in effect on the date of this Certificate, being herein called the "Credit Agreement"). Unless otherwise defined herein capitalized terms used in this Certificate have the meanings assigned to those terms in the Credit Agreement. 2. The persons named below have been duty elected, have duly qualified as and at all times since ____________ __, 19__(1) (to and including and date hereto have been officers of the Borrower, holding the respective offices below set opposite their names, and the signatures below set opposite their names are their genuine signatures. Name(2) Office Signature _________________ _________________ _________________ _________________ _________________ _________________ _________________ _________________ _________________ 3. Attached hereto as Exhibit A is a copy of the Certificate of Incorporation of the Borrower as filed in the office of the Secretary of State of [_______] on __________ __, 19__, together with all amendments thereto adopted through the date hereof. - ---------- (1) Insert a date prior to the time of any corporate action relating to the Credit Agreement. (2) Include name, office and signature of each officer who will sign any Credit Document, including the officer who will sign the certification at the end of this Certificate. EXHIBIT E Page 2 4. Attached hereto as Exhibit B is a true and correct copy of the By-Laws of the Borrower as in effect on ____________ __, 19__ (3) together with all amendments thereto adopted through the date hereof. 5. Attached hereto as Exhibit C is a true and correct copy of resolutions duly adopted by [the unanimous written consent of] the Board of Directors of the Borrower [at a meeting on __________ __, 19__, at which a quorum was present and acting throughout], which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect. Except as attached hereto as Exhibit C, no resolutions have been adopted by the Board of Directors of the Borrower which deal with the execution, delivery or performance of any of the Credit Documents. 6. On the date hereof, the representations and warranties contained in Section 5 of the Credit Agreement are true and correct in all material respects. 7. On the date hereof, no Default or Event of Default has occurred and is continuing. 8. I know of no proceeding for the dissolution or liquidation of the Borrower or threatening its existence. IN WITNESS WHEREOF, I have hereunto set my hand this day of _________________, 19__. [NAME OF BORROWER] By _______________________ Name: Title: - ---------- (3) Insert same date as in paragraph 2 of this certificate. EXHIBIT E Page 3 I, the undersigned, [Secretary/Assistant Secretary] of the Borrower, DO HEREBY CERTIFY that: 1. [Insert name of Person making the above certifications] is the duly elected and qualified of the Borrower and the signature above is his genuine signature. 2. The certifications made by [name] in items 2, 3, 4 and 5 above are true and correct. 3. I know of no proceeding for the dissolution or liquidation of the Borrower or threatening its existence. IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of _______________ 19__. [NAME OF BORROWER] By______________________________ Name: Title: EXHIBIT F FINANCIAL GUARANTY INSURANCE POLICY MBIA Insurance Corporation Armonk, New York, 10504 Policy No.________ MBIA Insurance Corporation (the "Insurer"), for consideration received and subject to the terms of this Policy, hereby unconditionally and irrevocably guarantees to Deutsche Bank AG, New York Branch, as Administrative Agent (in such capacity and together with its successors and assigns, the "Administrative Agent") for the benefit of the financial institutions (the "Lenders") which are parties from time to time to the Credit Agreement, dated as of August 28, 1998 among MBIA Inc., the Insurer, various designated borrowers from time to time parties thereto, the Lenders, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and the Administrative Agent (as amended, modified or supplemented from time to time, the "Credit Agreement") the full and complete payment required to be made by [Designated Borrower] (the "Obligor") of an amount equal to (i) amounts due for payment from the Obligor under the Credit Agreement as such payments shall become due but shall not be so paid; and (ii) the reimbursement of any such payment which is subsequently recovered from the Administrative Agent or the Lenders pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts." Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Administrative Agent that the payment of an Insured Amount which is then due has not been made, the Insurer by 2:00 p.m., New York Time, on the second Business Day after receipt of notice of such nonpayment, will make a deposit of immediately available funds in the currency or currencies in which such Insured Amount is payable, in an account with the Administrative Agent sufficient for the payment of any such Insured Amounts which are then due. All notices, presentations and other communications made by the Administrative Agent to the Insurer shall be made to the Insurer pursuant to Section 1 1.03 of the Credit Agreement. The Insurer shall be subrogated to the rights of the Administrative Agent or the Lenders to receive payment from the Obligor under the Credit Agreement to the extent of any payment by the Insurer hereunder. The Insurer's obligation to make any payment required pursuant to this Policy shall be made without the prior assertion of any defenses to payment (including fraud in inducement or fact). EXHIBIT F Page 2 The Insurer may not, in respect of a payment to be made hereunder, be released from its obligations in any circumstance other than the full and complete receipt by the Administrative Agent of the full amount payable hereunder. The Insurer hereby waives and agrees not to assert any and all rights to require the Administrative Agent to make demand on or to proceed against any person, party or security prior to demanding payment under this Policy. Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, NY 10504 and such service of process shall be valid and binding. This policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. This policy is non-cancelable for any reason. "Business Day" means any day which is not a Saturday or Sunday or a day on which commercial banks in the State of New York or the Administrative Agent are authorized to or required by law to be closed. This Policy is to be governed by, and construed in accordance with, the laws of the State of New York. EXHIBIT F Page 3 IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed in facsimile on its behalf by its duly authorized officers, this ___ day of _________________, ______. MBIA INSURANCE CORPORATION ______________________________ President Attest: ______________________________ Assistant Secretary EXHIBIT G FORM OF ASSIGNMENT AGREEMENT [DATE] Reference is made to the Credit Agreement described in Item 2 of Annex I annexed hereto (as such Credit Agreement may hereafter be amended, supplemented or otherwise modified from time to time, the "Credit Agreement"). Unless defined in Annex I attached hereto, terms defined in the Credit Agreement are used herein as therein defined. _______________ (the "Assignor") and _________ (the "Assignee") hereby agree as follows: 1. The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty (other than as expressly provided herein), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement which represents the percentage interest specified in Item 4 of Annex I (the "Assigned Share") of the Total Commitment under the Credit Agreement, including, without limitation, all rights and obligations with respect to the Assigned Share of all outstanding Revolving Loans. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the outstanding Revolving Loans owing to the Assignee will be as set forth in Item 4 of Annex I. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the other Credit Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Parent or any of its Subsidiaries or any Borrower or the performance or observance by the Borrowers, of any of their obligations under the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, 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 Assignment Agreement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender 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 Credit Agreement; (iii) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such EXHIBIT G Page 2 powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender. 4. Following the execution of this Assignment Agreement by the Assignor and the Assignee, an executed original hereof (together with all attachments) will be delivered to the Administrative Agent and Parent. The effective date of this Assignment Agreement shall be the date of execution hereof by the Assignor and the Assignee, the receipt of the consent of Parent and the Administrative Agent and receipt by the Administrative Agent of the administrative fee referred to in Section 11.04(b) of the Credit Agreement, the receipt of Internal Revenue Service Form 1001 or 4224 (as applicable) pursuant to Section 3.04(b)(i) of the Credit Agreement and the opinion or opinions (as applicable) referred to in Section 11.02 of the Credit Agreement, or such later date as specified in Item 5 of Annex I hereto (the "Settlement Date"). 5. Upon the delivery of a fully executed original hereof to the Administrative Agent, as of the Settlement Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment Agreement, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment Agreement, relinquish its rights and be released from its obligations under the Credit Agreement, 6. It is agreed that the Assignee shall be entitled to (x) all interest on the Assigned Share of the Revolving Loans at the rates specified in Item 6 of Annex I, and (y) all Facility Fees on the Assigned Share of the Commitment at the rate specified in Item 7 of Annex I; which, in each case, accrue on and after the Settlement Date, such interest and, if applicable, Facility Fees to be paid by the Administrative Agent directly to the Assignee. It is further agreed that all payments of principal made on the Assigned Share of the Revolving Loans which occur on and after the Settlement Date will be paid directly by the Administrative Agent to the Assignee. Upon the Settlement Date, the Assignee shall pay to the Assignor an amount specified by the Assignor in writing which represents the Assigned Share of the principal amount of the Revolving Loans made by the Assignor pursuant to the Credit Agreement which are outstanding on the Settlement Date, net of any closing costs, and which are being assigned hereunder. The Assignor and the Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Settlement Date directly between themselves on the Settlement Date. 7. THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EXHIBIT G Page 3 IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution also being made on Annex I hereto. Accepted this ___ day [NAME OF ASSIGNOR], of ___________ ,___ as Assignor By____________________________ Title: [NAME OF ASSIGNEE], as Assignee By____________________________ Title: Acknowledged and Agreed: MBIA INC. By____________________________ Title: MBIA INSURANCE CORPORATION By____________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent By____________________________ Title: EXHIBIT G Page 4 By____________________________ Title: ANNEX I ANNEX FOR ASSIGNMENT AGREEMENT 1. Borrowers: MBIA Inc. ("Parent"), MBIA Insurance Corporation ("Corp.") and various Designated Borrowers from time to time. 2. Name and Date of Credit Agreement: Credit Agreement, dated as of August 28, 1998 among Parent, Corp., various Designated Borrowers, the Lenders from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent. 3. Date of Assignment Agreement: 4. Amounts (as of date of item #3 above): Outstanding Commitment Principal of ---------- Revolving Loans --------------- a. Aggregate Amount for all Lenders $ ----------- $ ----------- b. Assigned Share ----------- % ----------- % c. Amount of Assigned Share $ ----------- $ ----------- 5. Settlement Date: ANNEX I Page 2 6. Rate of Interest to As set forth in Section 1.09 of the the Assignee: Credit Agreement (unless otherwise agreed to by the Assignor and the Assignee)(1) 7. Facility Fee As set forth in Section 2.01(a) of the Credit Agreement (unless otherwise agreed to by the Assignor and the Assignee)(2) 8. Notice: ASSIGNOR: --------------- --------------- --------------- --------------- Attention: Telephone: Telecopier: Reference: ASSIGNEE: --------------- --------------- --------------- --------------- Attention: Telephone: Telecopier: Reference: - ---------- (1) The Borrowers and the Administrative Agent shall direct the entire amount of the interest to the Assignee at the rate set forth in Section 1.09 of the Credit Agreement, with the Assignor and Assignee effecting any agreed upon sharing of interest through payments by the Assignee to the Assignor. (2) The Borrowers and the Administrative Agent shall direct the entire amount of the Facility Fee to the Assignee at the rate set forth in Section 2.01(a) of the Credit Agreement, with the Assignor and Assignee effecting any agreed upon sharing of Facility Fees through payments by the Assignee to the Assignor. ANNEX I Page 3 Payment Instructions: ASSIGNOR: --------------- --------------- --------------- --------------- --------------- Attention: Reference: ASSIGNEE: --------------- --------------- --------------- --------------- --------------- Attention: Reference: Accepted and Agreed: [NAME OF ASSIGNEE] [NAME OF ASSIGNOR] By By ------------------------- ------------------------- ------------------------- ------------------------- (Print Name and Title) (Print Name and Title) EXHIBIT H FORM OF COMMITMENT ASSUMPTION AGREEMENT [Letterhead of Lender] [DATE] MBIA Inc. MBIA Insurance Corporation 885 Third Avenue New York, New York 10022 Deutsche Bank AG, New York Branch, as Administrative Agent 31 West 52nd Street New York, New York 10019 re Additional Commitment ---------------------------- Ladies and Gentlemen: Reference is hereby made to the Credit Agreement, dated as of August 28, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among MBIA Inc. ("Parent"), MBIA Insurance Corporation ("Corp."), various Designated Borrowers from time to time, various lending institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, and Deutsche Bank AG, New York Branch, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. [We hereby agree to assume a Commitment under the Credit Agreement of $___________.] [We hereby agree to increase our Commitment under the Credit Agreement from EXHIBIT H Page 2 $____________ to $ ___________.](1) This [assumption of] [increase in] our Commitment shall be effective on the date this letter is accepted by you as provided below. [We (i) confirm that we have received a copy of the Credit Agreement and the other Credit Documents, together with copies of the financial statements referred to therein and such other documents and information as we have deemed appropriate to make our own credit analysis and decision to enter into this Commitment Assumption Agreement; (ii) agree that we will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as we shall deem appropriate at the time, continue to make our own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoint and authorize the Administrative Agent to take such action as agent on our behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agree that we will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by us as a Lender. Upon the delivery of a fully executed original hereof to the Administrative Agent, we shall be a party to the Credit Agreement and, to the extent provided in this Commitment Assumption Agreement, have the rights and obligations of a Lender thereunder and under the other Credit Documents. ](2) You may accept this letter by signing the enclosed copies in the space provided below, and returning one copy of same to us and delivering one copy of same to the Administrative Agent before the close of business on ______________, ______. If you do not so accept this letter, our Commitment shall be deemed cancelled. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND MAY BE MODIFIED ONLY IN WRITING. Very truly yours, [NAME OF LENDER] By:__________________ Title: - ---------- (1) Insert the first sentence in the case of the assumption of a Commitment by an institution not previously a Lender under the Credit Agreement. Insert the second sentence in the case of an increase in the Commitment of a Lender under the Credit Agreement. (2) Insert bracketed language if the lending institution is not already a Lender. EXHIBIT H Page 3 Agreed and Accepted this __ day of ______________, ____: MBIA INC. By:__________________ Title: MBIA INSURANCE CORPORATION By:__________________ Title: EXHIBIT I FORM OF DB ASSUMPTION AGREEMENT DB ASSUMPTION AGREEMENT (the "Agreement") dated as of _________________, ____, by _______________, a _____________ [corporation] (the "Company"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. WITNESSETH: WHEREAS, MBIA Inc. ("Parent"), MBIA Insurance Corporation ("Corp."), various Designated Borrowers from time to time, various lending institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent, have entered into a Credit Agreement dated as of August 28, 1998 (as amended through the date hereof, the "Credit Agreement"); WHEREAS, pursuant to Section 1.17 of the Credit Agreement, Parent or Corp. may designate one or more Persons as a Designated Borrower from time to time; and WHEREAS, [Parent] [Corp.] desires to designate the Company as a Designated Borrower for purposes of the Credit Agreement; WHEREAS, the Company desires to execute and deliver this Agreement in order to become a party to the Credit Agreement as a Designated Borrower; NOW, THEREFORE, IT IS AGREED: 1. Assumption. By executing and delivering this Agreement, the Company hereby becomes a party to the Credit Agreement as a "Designated Borrower" thereunder, and hereby expressly assumes all obligations and liabilities of a "Designated Borrower" thereunder. 2. Representations, Warranties and Agreements. In order to induce the Lenders to make Loans to the Company as provided in the Credit Agreement, the Company hereby makes the following representations and warranties to, and agreements with, the Lenders, all of which shall survive the execution and delivery of this Agreement and the making of Loans to the Company: (a) The Company is a special purpose entity duly organized, validly existing and in good standing under the laws of the State of _________________, is duly qualified to transact business in every jurisdiction where, by the nature of its businesses, such qualification is EXHIBIT I Page 2 necessary, and has all powers and all governmental licenses, authorizations, consents and approvals required to carry on its businesses as now conducted. (b) The execution, delivery and performance by the Company of this Agreement and the other Credit Documents (i) are within the Company's corporate powers, (ii) have been duly authorized by all necessary corporate or other action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws or other organizational documents of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. (c) This Agreement and the other Credit Documents constitute valid and binding agreements of the Company enforceable in accordance with their terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. (d) There is no action, suit or proceeding pending, or to the knowledge of the Company threatened, against or affecting the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which is material in the context of the Company's business or which in any manner draws into question the validity or enforceability of, or could impair the ability of the Company to perform its obligations under, this Agreement or any of the other Credit Documents. (e) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (f) Neither the Company nor any of its Subsidiaries is a "holding company", or a subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (g) All information heretofore furnished by the Company to the Administrative Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Company to the Administrative Agent or any Lender will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. (h) Neither the Company nor any of its Subsidiaries are engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Loan will be used to purchase or carrying any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation U or X. EXHIBIT I Page 3 (i) After giving effect to the execution and delivery of the Credit Documents and the malting of the Loans under the Credit Agreement, the Company will not be "insolvent," within the meaning of such term as used in O.C.G.A. ss. 18-2-22 or as defined in ss. 101 of Title 11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. (j) The Company is not subject to any bankruptcy or insolvency proceeding of the type referred to in Section 8.0 1 (h) or (i) of the Credit Agreement. 2. Notes. The Company agrees to execute and deliver to the Administrative Agent for the account of each Lender a Revolving Note and a Competitive Bid Note. 3. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 4. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXHIBIT I Page 4 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. [DESIGNATED BORROWER] By__________________ Title: ACKNOWLEDGED: [MBIA INC.] [MBIA INSURANCE CORPORATION] By_________________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH as Administrative Agent By_________________________________ Title: By_________________________________ Title: EXHIBIT J [DOMESTIC BANK COUNSEL OPINION] [DATE] MBIA Insurance Corporation 113 King Street Armonk, NY 10504 MBIA Inc. 113 King Street Armonk, NY 10504 Re: $400,000,000 Credit Agreement date as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and other Lenders signatory thereto _____________________________________ Ladies and Gentlemen: We are counsel for ____________________ (the "Lender") and, as such, are familiar with its Articles of Association and Bylaws. We are familiar with the corporate action on the part of the Lender in connection with the execution and delivery by the Lender of the above referenced Credit Agreement dated as of August 28, 1998. In connection with this opinion we have examined the Credit Agreement. Furthermore, we have examined originals, or copies certified to our satisfaction, of such agreements, documents, certificates and other statements of government officials and officers of the Lender and other papers as deemed relevant and necessary as a basis for such opinions. In such examination, we have assumed the capacity of natural persons, the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity with the originals of all documents submitted to us as copies. Based upon the examination described above, we are of the following opinions: EXHIBIT J Page 2 (1) The Lender is a [National Banking Association] organized and in good standing under the laws of the United States of America. (2) The Lender has full corporate power and authority to enter into the Credit Agreement and to perform and observe its obligations thereunder. (3) No consent, approval, or authorization of, filing or registration with, or notification of or other action with respect to, any governmental authority of the [STATE] or of the United States is required in connection with the execution, delivery, or performance of the Credit Agreement by the Lender. (4) The Credit Agreement has been duly authorized, executed and delivered by the Lender and is a valid and binding obligation of the Lender, enforceable against the Lender in accordance with its terms except that enforceability may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally, as such laws would apply in the event of the bankruptcy, insolvency, reorganization or liquidation of, or other similar occurrence with respect to the Lender or the event of any moratorium or similar occurrence affecting the Lender. Yours very truly, EXHIBIT J Page 3 [FOREIGN BANK'S U.S. BRANCH U.S. COUNSEL OPINION] [DATE] MBIA Insurance Corporation 113 King Street Armonk, NY 10504 MBIA Inc. 113 King Street Armonk, NY 10504 Re: $400,000,000 Credit Agreement date as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and other Lenders signatory thereto _____________________________________ Ladies and Gentlemen: We have acted as counsel to [LENDER], a banking corporation organized under the laws of [COUNTRY], acting through its [STATE] Branch [or Agency] in connection with its execution and delivery of the above-referenced Credit Agreement (the "Credit Agreement") dated as of August 28, 1998. In connection with the opinions herein set forth, we have reviewed and relied upon the opinion of [FOREIGN COUNSEL TO LENDER] dated [________________, 1998] with respect to the matters set forth therein. Furthermore, we have examined agreements, certificates, documents and statements of government officials and officers of [LENDER] as we have deemed relevant and necessary in order to render the opinions set forth below. In our examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and conformity to original documents of all documents submitted to us as certified or photostatic copies. As to various questions of fact material in our opinions, we have relied upon certificates of officers and representatives of [LENDER], except that we have made such EXHIBIT J Page 4 independent investigations as in our judgment are necessary or appropriate to enable us to render the opinions expressed below. Based on the foregoing, it is our opinion that: 1. [LENDER] is authorized to operate as a [BRANCH/AGENCY] of a foreign banking corporation under the laws of [STATE] or [UNITED STATES]. 2. [LENDER] has the corporate power and authority to enter into the Credit Agreement and to undertake the obligations set forth therein. 3. The Credit Agreement has been duly authorized, executed and delivered by [LENDER] and constitutes the legal, valid and binding obligation of [LENDER] enforceable against [LENDER] in accordance with its terms, except only as such enforceability may be limited (a) by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws affecting the enforcement of creditors' rights in general as such laws would apply in the event of any insolvency, reorganization, liquidation, moratorium or similar occurrence affecting [LENDER] or (b) by equitable principles affecting [LENDER]. We are not admitted to practice law in [COUNTRY] and the foregoing opinion is limited to the laws of the State of [STATE] and to applicable federal laws of the United States of America. Very truly yours, EXHIBIT J Page 5 [FOREIGN BANK'S FOREIGN COUNSEL OPINION] [DATE] MBIA Insurance Corporation 113 King Street Armonk, NY 10504 MBIA Inc. 113 King Street Armonk, NY 10504 Re: $400,000,000 Credit Agreement date as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and other Lenders signatory thereto _____________________________________ Ladies and Gentlemen: We have acted as [COUNTRY] counsel to [LENDER] (the "Lender") in connection with the execution and delivery through its [STATE] Branch/Agency of the above-referenced Credit Agreement dated as of August 28, 1998 (the "Credit Agreement"). Capitalized terms used in this opinion and not defined herein shall have the meanings assigned in the Credit Agreement. In connection with the opinions set forth herein, we have examined a copy of the Credit Agreement. In addition, we have examined and relied on originals, or copies certified or otherwise identified to our satisfaction, of such corporate records of the Lender and such other instruments, agreements, documents and other certificates of government officials, officers and representatives of the Lender and such other persons, and we have made such investigation of law and fact as we have deemed appropriate as a basis for the opinions expressed below. In such examination we have assumed that the signatures on all documents that we have examined are genuine. We express no opinion herein as to the laws of any jurisdiction other than to the laws of [COUNTRY]. EXHIBIT J Page 6 Based upon and subject to the foregoing, we are of the opinion that: (1) The Lender is a banking corporation duly organized and existing under the laws of the [COUNTRY], and has full power and authority to execute and deliver the Credit Agreement through its [STATE] Branch/Agency and to perform all of its obligations thereunder. (2) The execution of the Credit Agreement by the Lender through its [STATE] Branch has been duly authorized by all necessary corporate action of the Lender in accordance with the laws of [COUNTRY] and, assuming due execution and delivery, will constitute a legal, valid and binding obligation of the Lender, enforceable under the laws of the [COUNTRY] against the Lender in accordance with its terms, except as limited by (i) applicable bankruptcy, insolvency, reorganization, liquidation, readjustment of debt, moratorium and similar laws affecting creditors rights against the Lender from time to time in effect, as the same may be applied in the event of bankruptcy, insolvency, reorganization, liquidation, readjustment of debt or similar situation of the Lender or a moratorium applicable to the Lender and (ii) general principles of equity (regardless of whether enforcement in sought is a proceeding in equity or at law). (3) As of the date hereof, each of the following officers of the Lender's [STATE] Branch/Agency are authorized to execute and deliver the Credit Agreement for, in the name and on behalf of the Lender: ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ (4) The issuance, execution and delivery of the Credit Agreement do not conflict with, or constitute a breach of or a default under, the [Articles, Charter or Bylaws] of the Lender or any administrative regulation or decree of or in [COUNTRY] to which the Lender is subject. (5) With the exception of the approvals obtained or made as of the date hereof, no approval, authorization, consent or other order of any governmental or administrative agency or body is required under the laws of [COUNTRY] in connection with the issuance, execution and delivery of the Credit Agreement, or for the performance by the Lender of its obligations thereunder. (6) The choice of laws of the State of ___________________ to govern the Credit Agreement is valid under the laws of [COUNTRY), provided that the application of such laws of the State of [STATE] does not violate public order or good morals in [COUNTRY]. We have no reason to believe that the application of the laws of the State of [STATE] to the Credit Agreement violates such public order or good morals in [COUNTRY]. (7) A final and conclusive judgment rendered by the courts of the State of [STATE] or the United States of America having jurisdiction over the Lender (including the [STATE] Branch/Agency), which is not subject to appeal and is enforceable in the United States of EXHIBIT J Page 7 America, with respect to the obligations of the Lender under the Credit Agreement, may be enforced against the Lender without a review of the merits, provided that the following requirements of the [COUNTRY] Code of Civil Procedure, which we consider to be material, are satisfied: (i) service of complaint filed with the courts of the United States of America having jurisdiction over the Lender (including the [STATE] Branch/Agency) was properly effected on the Lender other than by means of public notice; (ii) reciprocity continues to exist with respect to the recognition of final judgments of the courts of [COUNTRY] by the courts of the State of [STATE] or the respective federal court; and (iii) such final and conclusive judgment in the United States of America is not contrary to the public order or good morals in [COUNTRY]. We see no reason at present why a judgment based on the obligations of the Lender set forth in the Credit Agreement would be contrary to the public order or good morals in [COUNTRY]. (8) Under [COUNTRY] law, a Borrower under the Credit Agreement would have the right to commence a direct action against the Lender in any court having jurisdiction in [COUNTRY]. Very truly yours, EXHIBIT K [FORM OF OPINION OF COUNSEL TO DESIGNATED BORROWER] [Date] To the Lenders and the Administrative Agent Referred to Below c/o Deutsche Bank AG, New York Branch as Administrative Agent 31 West 52nd Street New York, NY 10019 Re: $200,000,000 Credit Agreement dated as of August 28, 1998 among MBIA Inc. ("MBIA"), MBIA Insurance Corporation ("MBIA Corp."), various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto __________________________________________ Ladies and Gentlemen: I am Counsel to [_____________], a ____________ [corporation] (the "Designated Borrower"). This opinion is being given in connection with the Credit Agreement, dated as of August 28, 1998 (the "Credit Agreement"), among MBIA, MBIA Corp., various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto. All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. In this connection, I have examined the Credit Agreement, the Notes and such certificates of public officials, such certificates of officers of the Designated Borrower, and copies certified to my satisfaction of such corporate documents and records of the Designated Borrower and of such other papers as I have deemed relevant and necessary or appropriate for the opinions set forth below. I have relied upon certificates of public officials and of officers of the Designated Borrower with respect to the accuracy of factual matters contained therein which were not independently established. I have also assumed (i) the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Administrative Agent and the Lenders, (ii) the authenticity of all such documents submitted to me as originals, (iii) the genuineness of all signatures, and (iv) the conformity of all such documents submitted to me as copies. Based upon the foregoing, it is my opinion that: EXHIBIT K Page 2 (1) The Designated Borrower is a [corporation] duly organized and validly existing and in good standing under the laws of the State of [_____________], and has the corporate power required to carry on its business as now being conducted. (2) The execution, delivery and performance by the Designated Borrower of the Credit Agreement and the Notes (i) are within the corporate powers of the Designated Borrower, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not (A) contravene, or constitute a default under, any provision of applicable law or regulation or of any agreement, judgment, injunction, order, decree or other instrument which to my knowledge is binding upon the Designated Borrower, or (B) violate any provision of the Designated Borrower's Certificate of Incorporation or By-laws or other constitutive document, as amended from time to time, and (v) to the best of my knowledge, do not result in the creation or imposition of any Lien on any asset of the Designated Borrower or any of its Subsidiaries. (3) The Credit Agreement and the Notes are valid and binding obligations of the Designated Borrower, enforceable in accordance with their respective terms, except that such enforceability may be limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors rights generally and by general principles of equity, and the enforceability as to rights to indemnity thereunder may be subject to limitations of public policy. (4) To the best of my knowledge, there is no action, suit or proceeding before or by any court, arbitrator or any governmental body, agency or official pending or threatened against the Designated Borrower or its Consolidated Subsidiaries wherein an adverse decision, ruling or finding would (i) materially and adversely affect the business, consolidated financial position or consolidated results of operations of the Designated Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) affect the validity or enforceability of the Credit Agreement and the Notes. (5) The Designated Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (6) Neither the Designated Borrower nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (7) To the best of my knowledge, no governmental consents, approvals, authorizations, registrations, declarations or filings are required for the execution and delivery of the Credit Agreement and the Notes on behalf of the Designated Borrower or the consummation of the transaction as provided in the Credit Agreement and the Notes. EXHIBIT K Page 3 This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you or any assignee under the Credit Agreement, and may not be circulated, quoted or otherwise referred to except in connection with the transactions referenced above without my prior written consent. Very truly yours, EXHIBIT L [FORM OF OPINION OF MBIA INSURANCE CORPORATION] _________, ____ [ADDRESSEE] Ladies and Gentlemen: I am Assistant General Counsel of MBIA Insurance Corporation (the "Corporation") and have acted on behalf of the Corporation in connection with the issuance of Financial Guaranty Insurance Policy No.__ (the "Policy) relating to the obligations of _____________ under the ______________. I am familiar with and have examined a copy of the Policy and such other relevant documents as I have deemed necessary. Based on the foregoing, I am of the following opinion: 1. The Corporation is a stock insurance corporation, duly incorporated and validly existing under the laws of the State of New York and is licensed and authorized to issue the Policy under the laws of the State of New York. 2. The Policy has been duly executed and is a valid and binding obligation of the Corporation enforceable in accordance with its terms except that the enforcement of the Policy may be limited by laws relating to the bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Very truly yours, Generale Bank Additional $17 Million Commitment New York Branch September 3, 1998 MBIA Inc. MBIA Insurance Corporation 885 Third Avenue New York, NY 10022 Deutsche Bank AG, New York Branch As Administrative Agent 31 West 52nd St. New York, NY 10019 Re: Additional Commitment Ladies and Gentlemen: Reference is hereby made to the Credit Agreement, dated as of August 28, 1998 as amended, modified or supplemented from time to time, the "Credit Agreement"), among MBIA Inc. ("Parent"), MBIA Insurance Corporation ("Corp."), various Designated Borrowers from time to time, various lending institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, and Deutsche Bank AG, New York Branch, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein, capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. We hereby agree to assume a Commitment under the Credit Agreement of $17,000,000. This assumption of our Commitment shall be effective on the date this letter is accepted by you as provided below. We (i) confirm that we have received a copy of the Credit Agreement and the other Credit Documents, together with copies of the financial statements referred to therein and such other documents and information as we have deemed appropriate to make our own credit analysis and decision to enter into this Commitment Assumption Agreement; (ii) agree that we will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as we shall deem appropriate at the time, continue to make our own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoint and authorize the Administrative Agent to take such action as agent on our behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agree that we will perform in accordance with their terms all of the Generale Bank - New York Branch 520 Madison Avenue, New York, N.Y. 10022 - Tel.: (212) 838-3301 Telex - 408955 GBNYC Generale Bank New York Branch obligations which by the terms of the Credit Agreement are required to be performed by us as a Lender. Upon the delivery of a fully executed original hereof to the Administrative Agent, we shall be a party to the Credit Agreement and, to the extent provided in this Commitment Assumption Agreement, have the rights and obligations of Lender thereunder and under the other Credit Documents. You may accept this letter by signing the enclosed copies in the space provided below, and returning one copy of same to us and delivering one copy of same to the Administrative Agent before the close of business on September 11, 1998. If you do not so accept this letter, our Commitment shall be deemed cancelled. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND MAY BE MODIFIED ONLY IN WRITING. Very truly yours, Generale Bank, New York Branch By: /s/ E. Matthews /s/ Hans Neukomm -------------------------------------- --------------------------- Eddie Matthews Hans Neukomm Senior Vice President General Manager Agreed and Accepted this 10th day of September,1998. MBIA Inc. By: /s/ [ILLEGIBLE] -------------------------------------- Title: Managing Director & Controller MBIA Insurance Corporation By: /s/ [ILLEGIBLE] -------------------------------------- Title: Managing Director & Controller Generale Bank - New York Branch 520 Madison Avenue, New York, N.Y. 10022 o Tel.: (212) 838-3301 Telex o 408955 GBNYC EX-10.34 11 CREDIT AGREEMENT EXECUTION COPY ================================================================================ CREDIT AGREEMENT among MBIA INC., MBIA INSURANCE CORPORATION, VARIOUS DESIGNATED BORROWERS, VARIOUS LENDING INSTITUTIONS, DEUTSCHE BANK AG, NEW YORK BRANCH, AS ADMINISTRATIVE AGENT, THE FIRST NATIONAL BANK OF CHICAGO, AS SYNDICATION AGENT and FLEET NATIONAL BANK, AS DOCUMENTATION AGENT ---------- Dated as of August 28, 1998 ---------- $400,000,000 ================================================================================ TABLE OF CONTENTS
Page ---- SECTION 1. Amount and Terms of Credit.............................................................. 1 1.01 Commitment......................................................................... 1 1.02 Minimum Borrowing Amounts, etc..................................................... 2 1.03 Notice of Borrowing of Revolving Loans............................................. 2 1.04 Competitive Bid Borrowings......................................................... 2 1.05 Disbursement of Funds.............................................................. 4 1.06 Notes.............................................................................. 5 1.07 Conversions........................................................................ 5 1.08 Pro Rata Borrowings, etc........................................................... 6 1.09 Interest .......................................................................... 6 1.10 Interest Periods................................................................... 7 1.11 Increased Costs, Illegality, etc................................................... 8 1.12 Compensation....................................................................... 10 1.13 Change of Lending Office........................................................... 11 1.14 Replacement of Lenders............................................................. 11 1.15 Extension of Final Maturity Date; Replacement of Non-Continuing Lender ............ 12 1.16 Additional Commitments ............................................................ 12 1.17 Designated Borrowers .............................................................. 13 1.18 Retroactivity ..................................................................... 14 SECTION 2. Fees; Commitments ...................................................................... 14 2.01 Fees .............................................................................. 14 2.02 Voluntary Reduction of Commitments ................................................ 14 2.03 Mandatory Reduction of Commitments ................................................ 14 SECTION 3. Payments ............................................................................... 15 3.01 Voluntary Prepayments ............................................................. 15 3.02 Mandatory Prepayments ............................................................. 15 3.03 Method and Place of Payment ....................................................... 16 3.04 Net Payments ...................................................................... 16 SECTION 4. Conditions Precedent ................................................................... 19 4.01 Conditions Precedent to Effective Date ............................................ 19 4.02 Conditions Precedent to Loans ..................................................... 20 SECTION 5. Representations, Warranties and Agreements ............................................. 21 5.01 Corporate Existence and Power ..................................................... 21 5.02 Corporate and Governmental Authorization; No Contravention ........................ 21
(i) Page ---- 5.03 Binding Effect .................................................................... 21 5.04 Financial Information ............................................................. 21 5.05 Litigation ........................................................................ 22 5.06 Compliance with ERISA ............................................................. 22 5.07 Taxes ............................................................................. 22 5.08 Subsidiaries ...................................................................... 22 5.09 Not an Investment Company ......................................................... 22 5.10 Public Utility Holding Company Act ................................................ 22 5.11 Ownership of Property; Liens ...................................................... 23 5.12 No Default ........................................................................ 23 5.13 Full Disclosure ................................................................... 23 5.14 Compliance with Laws .............................................................. 23 5.15 Capital Stock ..................................................................... 23 5.16 Margin Stock ...................................................................... 23 5.17 Insolvency ........................................................................ 23 SECTION 6. Affirmative Covenants ................................................................... 23 6.01 Information Covenants ............................................................. 24 6.02 Books, Records and Inspections .................................................... 25 6.03 Maintenance of Existence .......................................................... 26 6.04 Compliance with Laws; Payment of Taxes ............................................ 26 6.05 Insurance ......................................................................... 26 6.06 Maintenance of Property ........................................................... 26 SECTION 7. Negative Covenants ...................................................................... 26 7.01 Liens ............................................................................. 26 7.02 Dissolution ....................................................................... 27 7.03 Consolidations, Mergers and Sales of Assets ....................................... 27 7.04 Use of Proceeds ................................................................... 27 7.05 Change in Fiscal Year ............................................................. 27 7.06 Transactions with Affiliates ...................................................... 27 7.07 Leverage Ratio .................................................................... 27 7.08 Minimum Net Worth ................................................................. 27 SECTION 8. Defaults ................................................................................ 28 8.01 Events of Default ................................................................. 28 8.02 Notice of Default ................................................................. 30 SECTION 9. Definitions ............................................................................. 30 SECTION 10. Agents, etc. ........................................................................... 43 10.01 Appointment ....................................................................... 43 10.02 Nature of Duties .................................................................. 43 10.03 Lack of Reliance on the Agents .................................................... 44
(ii)
Page ---- 10.04 Certain Rights of the Agents ...................................................... 44 10.05 Reliance .......................................................................... 44 10.06 Indemnification ................................................................... 44 10.07 The Agents in Their Individual Capacities ......................................... 45 10.08 Holders ........................................................................... 45 10.09 Resignation by an Agent ........................................................... 45 10.10 Documentation Agent ............................................................... 45 SECTION 11. Miscellaneous .......................................................................... 46 11.01 Payment of Expenses, etc .......................................................... 46 11.02 Lender Enforceability Opinions .................................................... 46 11.03 Notices ........................................................................... 46 11.04 Benefit of Agreement .............................................................. 47 11.05 No Waiver; Remedies Cumulative .................................................... 48 11.06 Payments Pro Rata ................................................................. 48 11.07 Calculations; Computations ........................................................ 49 11.08 Governing Law; Submission to Jurisdiction-, Venue; Waiver of Jury Trial ........... 49 11.09 Counterparts ...................................................................... 50 11.10 Headings Descriptive .............................................................. 50 11.11 Amendment or Waiver ............................................................... 50 11.12 Survival .......................................................................... 51 11.13 Domicile of Loans ................................................................. 51 11.14 Confidentiality ................................................................... 51 11.15 Lender Register ................................................................... 51 11.16 Judgment Currency ................................................................. 52 11.17 Euro .............................................................................. 52 ANNEX I -- Commitments ANNEX II -- Lender Addresses ANNEX III -- Subsidiaries EXHIBIT A-1 -- Form of Notice of Borrowing EXHIBIT A-2 -- Form of Notice of Competitive Bid Borrowing EXHIBIT B-1 -- Form of Revolving Note EXHIBIT B-2 -- Form of Competitive Bid Note EXHIBIT C -- Form of Section 3.04 Certificate EXHIBIT D -- Form of Opinion of General Counsel to Borrowers EXHIBIT E -- Form of Officer's Certificate EXHIBIT F -- Form of Financial Guaranty Insurance Policy EXHIBIT G -- Form of Assignment Agreement EXHIBIT H -- Form of Commitment Assumption Agreement EXHIBIT I -- Form of DB Assumption Agreement EXHIBIT J -- Form of Lender's Opinions EXHIBIT K -- Form of Opinion of Designated Borrower's Counsel EXHIBIT L -- Form of Opinion of Counsel to Corp.
(iii) CREDIT AGREEMENT, dated as of August 28, 1998, among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp."), a New York stock insurance corporation, one or more Designated Borrowers (as hereinafter defined) from time to time party hereto, the lenders from time to time party hereto (each, a "Lender" and, collectively, the "Lenders"), DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent, THE FIRST NATIONAL BANK OF CHICAGO, as Syndication Agent and FLEET NATIONAL BANK, as Documentation Agent. Unless otherwise defined herein, all capitalized terms used herein and defined in Section 9 are used herein as so defined. WITNESSETH: WHEREAS, subject to and upon the terms and conditions herein set forth, the Lenders are willing to make available to the Borrowers the credit facilities provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. 1.01 Commitment. (a) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees, at any time and from time to time on and after the Effective Date and prior to the Final Maturity Date, to make a loan or loans (each, a "Revolving Loan" and, collectively, the "Revolving Loans") to one or more of the Borrowers (on a several basis), which Revolving Loans (i) may be made and maintained in such Approved Currency as is requested by the applicable Borrower (except in the case of Base Rate Loans, which shall only be Dollardenominated); (ii) may be repaid and reborrowed in accordance with the provisions hereof, (iii) except as hereinafter provided, may, at the option of any Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all Revolving Loans made as part of the same Borrowing shall, unless otherwise specified herein, consist of Revolving Loans of the same Type; (iv) shall not, in the case of Revolving Loans denominated in Primary Alternate Currencies, exceed $200,000,000 in aggregate Principal Amount at any time outstanding for all such Revolving Loans; and (v) shall not exceed that aggregate Principal Amount which, when added to the aggregate Principal Amount of all other Revolving Loans then outstanding and the aggregate Principal Amount of all Competitive Bid Loans then outstanding, equals the Total Commitment at such time. (b) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees that one or more Borrowers may (on a several basis) incur a loan or loans (each, a "Competitive Bid Loan" and, collectively, the "Competitive Bid Loans") from one or more Bidder Lenders pursuant to a Competitive Bid Borrowing at any time and from time to time on and after the Effective Date and prior to the date which is the third Business Day preceding the date which is seven days prior to the Final Maturity Date, provided that after giving effect to any Competitive Bid Borrowing and the use of the proceeds thereof, the aggregate outstanding Principal Amount of Competitive Bid Loans, when combined with the then aggregate outstanding Principal Amount of all Revolving Loans, shall not exceed the Total Commitment at such time. 1.02 Minimum Borrowing Amounts, etc. The aggregate Principal Amount of each Borrowing shall not be less than the Minimum Borrowing Amount. More than one Borrowing may be incurred on any day, provided that at no time shall there be outstanding more than six Borrowings of Eurodollar Loans. 1.03 Notice of Borrowing of Revolving Loans. (a) Whenever a Borrower desires to incur Revolving Loans, it shall give the Administrative Agent at its Notice Office, (x) prior to I 1:00 A.M. (New York time) at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Eurodollar Loans in Dollars, (y) prior to 1:00 P.M. (New York time) at least four Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Eurodollar Loans constituting Alternate Currency Loans and (z) written notice (or telephonic notice promptly confirmed in writing) prior to I 1:00 A.M. (New York time) on the date of each Borrowing of Base Rate Loans. Each such notice (each, a "Notice of Borrowing") shall be in the form of Exhibit A-1 and shall be irrevocable and shall specify (i) the identity of the applicable Borrower, (ii) in the case of Alternate Currency Loans, the Approved Currency for such Loans, (iii) the aggregate principal amount of the Revolving Loans to be made pursuant to such Borrowing (stated in the applicable Approved Currency), (iv) the date of Borrowing (which shall be a Business Day), (v) whether the respective Borrowing shall consist of Base Rate Loans or Eurodollar Loans, (vi) if Eurodollar Loans, the Interest Period to be initially applicable thereto and (vii) if DB Loans, the DB Loan Maturity Date to be applicable thereto. The Administrative Agent shall promptly give each Lender written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing, of the portion thereof to be funded by such Lender and of the other matters covered by the Notice of Borrowing. (b) Without in any way limiting the obligation of any Borrower to confirm in writing any telephonic notice permitted to be given hereunder, the Administrative Agent may prior to receipt of written confirmation act without liability upon the basis of such telephonic notice, believed by it in good faith to be from an Authorized Officer of such Borrower. In each such case, each Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice absent manifest error. 1.04 Competitive Bid Borrowings. (a) Whenever any Borrower desires to incur a Competitive Bid Borrowing, it shall deliver to the Administrative Agent, prior to 11:00 AM (New York time) (x) at least four Business Days prior to the date of such proposed Competitive Bid Borrowing, in the case of a Spread Borrowing, and (y) at least one Business Day prior to the date of such proposed Competitive Bid Borrowing, in the case of an Absolute Rate Borrowing which is Dollar-denominated, and at least three Business Days prior to the date of such proposed Competitive Bid Borrowing, in the case of an Absolute Rate Borrowing which is an Alternate 'Currency Loan, a written notice substantially in the form of Exhibit A-2 hereto (a "Notice of Competitive Bid Borrowing"), which notice shall specify in each case (i) the identity of the applicable Borrower, (ii) the date (which shall be a Business Day) and the aggregate amount of the proposed Competitive Bid Borrowing, (iii) the maturity date for repayment of each and every Competitive Bid Loan to be made as part of such Competitive Bid Borrowing (which maturity date may be (A) up to six months after the date of such Competitive Bid Borrowing in the case of a Spread Borrowing and (B) no fewer than seven days and no more than 180 days after the date -2- of such Competitive Bid Borrowing in the case of an Absolute Rate Borrowing, provided that in no event shall the maturity date of any Competitive Bid Borrowing be later than the third Business Day preceding the Final Maturity Date), (iv) the interest payment date or dates relating thereto, (v) whether the proposed Competitive Bid Borrowing is to be an Absolute Rate Borrowing or a Spread Borrowing, (vi) in the case of an Alternate Currency Loan, the Alternate Currency for such Competitive Did Borrowing, and (vii) any other terms to be applicable to such Competitive Bid Borrowing. The Administrative Agent shall promptly notify each Bidder Lender by telephone or facsimile of each such request for a Competitive Bid Borrowing received by it from a Borrower and of the contents of the related Notice of Competitive Bid Borrowing. (b) Each Bidder Lender shall, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Loans to the applicable Borrower as part of such proposed Competitive Bid Borrowing at a rate or rates of interest specified by such Bidder Lender in its sole discretion and determined by such Bidder Lender independently of each other Bidder Lender, by notifying the Administrative Agent (which shall give prompt notice thereof to such Borrower by facsimile), before 9:30 A.M. (New York time) on the date (the "Reply Date") which is (x) in the case of an Absolute Rate Borrowing which is Dollar-denominated, the date of such proposed Competitive Bid Borrowing and in the case of an Absolute Rate Borrowing which is an Alternate Currency Loan, two Business Days before the date of such Competitive Bid Borrowing and (y) in the case of a Spread Borrowing, three Business Days before the date of such proposed Competitive Bid Borrowing, of the minimum amount and maximum amount of each Competitive Bid Loan which such Bidder Lender would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso contained in Section 1.01(b), exceed such Bidder Lender's Commitment), the rate or rates of interest therefor and such Bidder Lender's lending office with respect to such Competitive Bid Loan; provided that if the Administrative Agent in its capacity as a Bidder Lender shall, in its sole discretion, elect to make any such offer, it shall notify the respective Borrower of such offer before 9:15 A.M. (New York time) on the Reply Date. If any Bidder Lender shall elect not to make such an offer, such Bidder Lender shall so notify the Administrative Agent, before 9:30 A.M. (New York time) on the Reply Date, and such Bidder Lender shall not be obligated to, and shall not, make any Competitive Bid Loan as part of such Competitive Bid Borrowing; provided that the failure by any Bidder Lender to give such notice shall not cause such Bidder Lender to be obligated to make any Competitive Bid Loan as part of such proposed Competitive Bid Borrowing. (c) The applicable Borrower shall, in turn, before 10:30 A.M. (New York time) on the Reply Date, either: (i) cancel such Competitive Bid Borrowing by giving the Administrative Agent notice to such effect (it being understood and agreed that if such Borrower gives no such notice of cancellation and no notice of acceptance pursuant to clause (ii) below, then such Borrower shall be deemed to have canceled such Competitive Bid Borrowing), or (ii) accept one or more of the offers made by any Bidder Lender or Bidder Lenders pursuant to clause (b) above by giving notice (in writing or by telephone confirmed in writing) to the Administrative Agent of the amount of each Competitive Bid Loan (which amount shall be equal to or greater than the minimum amount, and equal to -3- or less than the maximum amount, notified to the applicable Borrower by the Administrative Agent on behalf of such Bidder Lender for such Competitive Bid Borrowing pursuant to clause (b) above) to be made by each Bidder Lender as part of such Competitive Bid Borrowing, and reject any remaining offers made by Bidder Lenders pursuant to clause (b) above by giving the Administrative Agent notice to that effect; provided that the acceptance of offers may only be made on the basis of ascending Absolute Rates (in the case of an Absolute Rate Borrowing) or Spreads (in the case of a Spread Borrowing), in each case commencing with the lowest rate so offered; provided further however, that if offers are made by two or more Bidder Lenders at the same rate and acceptance of all such equal offers would result in a greater principal amount of Competitive Bid Loans being accepted than the aggregate principal amount requested by the applicable Borrower, if such Borrower elects to accept any such offers such Borrower shall accept such offers pro rata from such Bidder Lenders (on the basis of the maximum amounts of such offers) unless any such Bidder Lender's pro rata share would be less than the minimum amount specified by such Bidder Lender in its offer, in which case such Borrower shall have the fight to accept one or more such equal offers in their entirety and reject the other equal offer or offers or to allocate acceptance among all such equal offers (but giving effect to the minimum and maximum amounts specified for each such offer pursuant to clause (b) above), as such Borrower may elect in its sole discretion. (d) If the applicable Borrower notifies the Administrative Agent that such Competitive Bid Borrowing is deemed canceled, pursuant to clause (c)(i) above, the Administrative Agent shall give prompt notice thereof to the Bidder Lenders and such Competitive Bid Borrowing shall not be made. (e) If the applicable Borrower accepts one or more of the offers made by any Bidder Lender or Bidder Lenders pursuant to clause (c) (ii) above, the Administrative Agent shall in turn promptly notify (x) each Bidder Lender that has made an offer as described in clause (b) above, of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Bidder Lender pursuant to clause (b) above have been accepted by the Borrower And (y) each Bidder Lender that is to make a Competitive Bid Loan as part of such Competitive Bid Borrowing, of the amount of each Competitive Bid Loan to be made by such Bidder Lender as part of such Competitive Bid Borrowing. 1.05 Disbursement of Funds. (a) No later than 12:00 Noon (New York time) (or 3:00 P.M. (New York time) in the case of (x) a Borrowing of Base Rate Loans for which a Notice of Borrowing was given on the date of such Borrowing and (y) a Competitive Bid Borrowing) on the date specified in each Notice of Borrowing or Notice of Competitive Bid Borrowing, each Lender will make available its pro rata. share, if any, of such Borrowing requested to be made on such date. All such amounts shall be made available to the Administrative Agent in the relevant Approved Currency or Other Alternate Currency, as the case may be, and immediately available funds at the Payment Office and the Administrative Agent promptly will make available to the applicable Borrower by depositing to the account designated by such Borrower, which account shall be at an institution in the same city as the respective Payment Office, the aggregate of the amounts so made available in the type of funds received. Unless the Administrative Agent shall have been notified by any Lender participating in a -4- Borrowing prior to the date of such Borrowing that such Lender does not intend to make available to the Administrative Agent its portion of the Borrowing or Borrowings to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date of Borrowing, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the applicable Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender and the Administrative Agent has made available same to the applicable Borrower, the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the applicable Borrower, and such Borrower shall pay such corresponding amount to the Administrative Agent within three Business Days of receipt of such notice unless previously paid by such Lender. The Administrative Agent shall also be entitled to recover on demand from such Lender or such Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to such Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (x) if paid by such Lender, the overnight Federal Funds Effective Rate or (y) if paid by such Borrower, the then applicable rate of interest, calculated in accordance with Section 1.09, for the respective Loans. (b) Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights which any Borrower may have against any Lender as a result of any default by such Lender hereunder. 1.06 Notes. (a) Each Borrower's obligation to pay the principal of, and interest on, the Loans made to it by each Lender shall be evidenced (i) if Revolving Loans, by a promissory note substantially in the form of Exhibit B-I with blanks appropriately completed (each, a "Revolving Note" and, collectively, the "Revolving Notes") and (ii) if Competitive Bid Loans, by a promissory note substantially in the form of Exhibit B-2 with blanks appropriately completed (each a "Competitive Bid Note" and, collectively, the "Competitive Bid Notes"). (b) Each Lender will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will, prior to any transfer of any of its Notes, endorse on the reverse side thereof the outstanding Principal Amount of Loans evidenced thereby. Failure to make any such notation shall not affect a Borrower's obligations in respect of such Loans. 1.07 Conversions. Each Borrower shall have the option to convert on any Business Day all or a portion at least equal to the applicable Minimum Borrowing Amount of its Revolving Loans denominated in a single Approved Currency and constituting Base Rate Loans or Eurodollar Loans into a Borrowing or Borrowings of Revolving Loans denominated in such Approved Currency and constituting Eurodollar Loans or Base Rate Loans, respectively, provided that (i) Eurodollar Loans denominated in a currency other than Dollars may not be converted into Base Rate Loans, (ii) no partial conversion shall reduce the outstanding principal amount of the Eurodollar Loans made pursuant to a Borrowing to less than the Minimum -5- Borrowing Amount applicable thereto, (iii) Base Rate Loans may not be converted into Eurodollar Loans when a Default or Event of Default is then in existence if the Administrative Agent or the Required Lenders shall have determined in its or their sole discretion not to permit such conversion and (iv) Borrowings of Eurodollar Loans resulting from this Section 1.07 shall be limited in number as provided in Section 1.02. Each such conversion shall be effected by the respective Borrower giving the Administrative Agent at the Notice Office, prior to 12:00 Noon (New York time), at least three Business Days' (or one Business Day in the case of a conversion into Base Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of Conversion") specifying the Revolving Loans to be so converted, the Type of Loans (as to interest option) to be converted into and, if to be converted into a Borrowing of Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall give each Lender prompt notice of any such proposed conversion affecting any of its Loans. 1.08 Pro Rata Borrowings, etc. All Revolving Loans incurred pursuant to a Borrowing shall be made by the Lenders pro rata on the basis of their respective Commitments. It is understood that no Lender shall be responsible for any default by any other Lender in its obligation to make Revolving Loans hereunder, and that each Lender shall be obligated to make the Revolving Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder and regardless of whether such Lender has made any Competitive Bid Loans hereunder. 1.09 Interest. (a) The unpaid principal amount of each Base Rate Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) or conversion at a rate per annum which shall at all times be the Base Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) or conversion at a rate per annum which shall at all times during each Interest Period applicable thereto be the relevant LIBOR for such Interest Period plus a margin of 0.13%. (c) The unpaid principal amount of each Competitive Bid Loan shall bear interest from the date of the Borrowing thereof until maturity (whether by acceleration or otherwise) at a rate or rates per annum specified by a Bidder Lender or Bidder Lenders, as the case may be, pursuant to Section 1.04(b) and accepted by the respective Borrower pursuant to Section 1.04(c). (d) All overdue principal and, to the extent permitted by law, overdue interest in respect of any Loans shall bear interest at the Base Rate in effect from time to time plus 2%, provided that principal in respect of Eurodollar Loans and Competitive Bid Loans shall bear interest from the date same becomes due (whether by acceleration or otherwise) until the end of the Interest Period applicable thereto at a rate per annum equal to 2% plus the rate of interest applicable on the due date therefor. (e) Interest shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof, and in the case of DB Loans, compounded as described below, and shall be payable (i) in respect of each Base Rate Loan (other than a DB -6- Loan), quarterly in arrears on the last Business Day of each March, June, September and December, (ii) in respect of each Eurodollar Loan (other than a DB Loan), on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period, (iii) in respect of each DB Loan, on the applicable DB Loan Maturity Date, (iv) in respect of each Competitive Bid Loan, at such times as specified in the Notice of Competitive Bid Borrowing relating thereto, and (v) in respect of each Loan, on any prepayment or conversion (other than the prepayment or conversion of any Base Rate Loan) (on the amount prepaid or converted), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. Notwithstanding anything to the contrary contained in this Agreement, although interest in respect of each DB Loan shall be payable only on the DB Loan Maturity Date for such DB Loan as provided in clause (iii) of the immediately preceding sentence, interest on each DB Loan shall compound on each date on which interest thereon would have been payable pursuant to clause (i) or (ii) of such sentence if such Loan were not a DB Loan and such compounded interest shall thereafter bear interest hereunder at the same rate per annum as the principal of the DB Loan to which such compounded interest relates. (f) All computations of interest hereunder shall be made in accordance with Section 11.07(b). (g) The Administrative Agent, upon determining the interest rate for any Borrowing for any Interest Period, shall promptly notify the applicable Borrower and the Lenders thereof 1.10 Interest Periods. (a) At the time a Borrower gives a Notice of Borrowing or a Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 12:00 Noon (New York Time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect by giving the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) of the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of such Borrower, be a one, two, three or six month period or such other period available to all Lenders. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing shall commence on the date of such Borrowing (including, where relevant, the date of any conversion from a Borrowing of Base Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) if any Interest Period begins on (x) the last Business Day of a month, it shall end on the last Business Day of the month in which it is to end and (y) a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; -7- (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) no Interest Period may be elected that would extend beyond the Final Maturity Date; (v) no Interest Period in respect of a DB Loan may be elected that would extend beyond the DB Loan Maturity Date for such DB Loan; (vi) no Interest Period may be elected at any time when a Default or an Event of Default is then in existence if the Administrative Agent or the Required Lenders shall have Determined in its or their sole discretion not to permit such election; and (vi) all Eurodollar Loans comprising a Borrowing shall at all times have the same Interest Period. (b) If upon the expiration of any Interest Period, the applicable Borrower has failed to (or may not) elect a new Interest Period to be applicable to the Revolving Loans subject to the expiring Interest Period as provided above, such Borrower shall be deemed to have elected, in the case of Eurodollar Loans, to convert such Borrowing into a Borrowing of Base Rate Loans effective as of the expiration date of such current Interest Period, provided that if such Eurodollar Loans are denominated in a currency other than Dollars, then such Eurodollar Loans shall not convert to Base Rate Loans but shall instead be prepaid by the applicable Borrower on the last day of such Interest Period. 1.11 Increased Costs, Illegality, etc. (a) In the event that (x) in the case of clause (i) or (iv) below, the Administrative Agent or (y) in the case of clause (ii) or (iii) below, any Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining any LIBOR for any Interest Period that, by reason of any changes arising after the date of this Agreement affecting the relevant interbank market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of the respective LIBOR; or (ii) at any time, that such Lender shall actually incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans or Competitive Bid Loans (other than any increased cost or reduction in the amount received or receivable resulting from the imposition of or a change in the rate of taxes or similar charges) because of (x) any change since the Effective Date (or, in the case of any Competitive Bid Loan, since the making of such Competitive Bid Loan) in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, -8- regulation, guideline or order) (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding amounts payable pursuant to Section 1.11(c) and those included in determining any Associated Costs Rate) and/or (y) other circumstances occurring since the Effective Date affecting the relevant interbank market; or (iii) at any time, that the making or continuance of any Eurodollar Loans or Competitive Bid Loans has become unlawful by compliance by such Lender in good faith with any law, governmental rule, regulation or guideline, or has become impracticable as a result of a contingency occurring after the Effective Date which materially and adversely affects the relevant interbank market; or (iv) at any time that any Alternate Currency is not available in sufficient amounts, as determined in good faith by the Administrative Agent, to fund any Borrowing of Loans denominated in such Alternate Currency; then, and in any such event, such Lender (or the Administrative Agent in the case of clause (i) or (iv) above) shall (x) on such date and (y) within ten Business Days of the date on which such event no longer exists give notice (by telephone confirmed in writing) to the respective Borrower and, except in the case of clause (i) or (iv) above, to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Lenders). Thereafter and for so long as the applicable circumstance continues to exist (w) in the case of clause (i) above, Eurodollar Loans priced in respect of the affected LIBOR (and Competitive Bid Loans constituting a Spread Borrowing priced by reference to such LIBOR) shall no longer be available until such time as the Administrative Agent notifies the respective Borrower and the Lenders that the circumstances giving rise to such notice by the Administrative Agent no longer exist in accordance with clause (y) of the preceding sentence, and any Notice of Borrowing, Notice of Competitive Bid Borrowing or Notice of Conversion given by a Borrower with respect to such Loans which have not yet been incurred shall be deemed rescinded by the relevant Borrower, (x) in the case of clause (ii) above, the applicable Borrower shall pay to such Lender, upon written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as shall be required to compensate such Lender for such increased costs or reductions in amounts receivable hereunder (a written notice as to the additional amounts owed to such Lender, showing the basis for the calculation thereof in reasonable detail, submitted to the applicable Borrower by such Lender shall, absent manifest error, be final and conclusive and binding upon all parties hereto), (y) in the case of clause (iii) above, the applicable Borrower shall take one of the actions specified in Section 1.11(b) as promptly as possible and, in any event, within the time period required by law and (z) in the case of clause (iv) above, Loans in the affected Alternate Currency shall no longer be available until such time as the Administrative Agent notifies the respective Borrower and the Lenders that the circumstances giving rise to such notice by the Administrative Agent no longer exist in accordance with clause (y) of the preceding sentence, and any Notice of Borrowing, Notice of Competitive Bid Borrowing or Notice of Conversion given by a Borrower with respect to such Alternate Currency Loans which have not yet been incurred shall be deemed rescinded by such Borrower. -9- (b) At any time when any Eurodollar Loan or Competitive Bid Loan is affected by the circumstances described in Section 1.11(a)(ii) or (iii), the applicable Borrower may (and in the case of a Eurodollar Loan or Competitive Bid Loan affected pursuant to Section 1.11(a)(iii), the applicable Borrower shall) either (i) if the affected Eurodollar Loan or Competitive Bid Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Administrative Agent telephonic notice (confirmed promptly in writing) thereof on the same date that the respective Borrower was notified by a Lender pursuant to Section 1.11(a)(ii) or (iii), or (ii) if the affected Eurodollar Loan or Competitive Bid Loan is then outstanding, upon at least three Business Days' notice to the Administrative Agent, (A) in the case of a Eurodollar Loan denominated in Dollars, require the affected Lender to convert each such Eurodollar Loan into a Base Rate Loan, and (B) in the case of a Eurodollar Loan denominated in a Primary Alternate Currency and in the case of a Competitive Bid Loan, repay all such Eurodollar Loans or Competitive Bid Loans in full, provided that if more than one Lender is affected at any time, then all affected Lenders must be treated the same pursuant to this Section 1.11(b). (c) If any Lender shall have determined that after the Effective Date, the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or such corporation's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender or such other corporation could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's or such other corporation's policies with respect to capital adequacy), then from time to time, within 15 days after written demand by such Lender (with a copy to the Administrative Agent), the Borrowers jointly and severally agree to pay to such Lender such additional amount or amounts as will compensate such Lender or such other corporation for such reduction. In determining such additional amounts, each Lender will act reasonably and in good faith and will use averaging and attribution methods that are reasonable. Each Lender, upon so determining that any additional amounts will be payable pursuant to this Section 1.11(c), will give prompt written notice thereof to the Borrowers, which notice shall set forth in reasonable detail the basis of the calculation of such additional amounts, although the failure to give any such notice shall not release or diminish any Borrower's obligations to pay additional amounts pursuant to this Section 1.11(c) upon the subsequent receipt of such notice. 1.12 Compensation. Each Borrower shall compensate each Lender, upon its written request (which request shall set forth the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund any Eurodollar Loans or Competitive Bid Loans made, or to be made, by it to such Borrower but excluding in any event the loss of anticipated profits) which such Lender may actually sustain: (i) if for any reason (other than a default by such Lender or the Administrative Agent) a Borrowing of Eurodollar Loans or Competitive Bid Loans does not occur on a date specified therefor in a Notice of Borrowing, a Notice of Competitive Bid -10- Borrowing or a Notice of Conversion, given by such Borrower (whether or not withdrawn by such Borrower or deemed withdrawn pursuant to Section 1.11(a)); (ii) if any prepayment, repayment or conversion of any such Eurodollar Loans or Competitive Bid Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any such Eurodollar Loans or Competitive Bid Loans is not made on any date specified in a notice of prepayment given by such Borrower; (iv) if such Lender is required pursuant to Section 1.14 to assign any such Eurodollar Loans or Competitive Bid Loans as of a date which is not the last day of an Interest Period applicable thereto; or (v) as a consequence of (x) any other default by such Borrower to repay its Eurodollar Loans or Competitive Bid Loans when required by the terms of this Agreement or (y) an election made pursuant to Section 1.11(b). 1.13 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 1.11(a)(ii) or (iii), 1.11(c) or 3.04 with respect to such Lender, it will, if requested by the applicable Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans or Commitments affected by such event, provided that such designation is made on such terms that such Lender and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding or materially mitigating the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 1.13 shall affect or postpone any of the obligations of any Borrower or the right of any Lender provided in Section 1.11 or 3.04. 1.14 Replacement of Lenders. (a) Upon the occurrence of any event giving rise to the operation of Section 1.11(a)(ii) or (iii), Section 1.11(c) or Section 3.04 with respect to any Lender which results in such Lender charging to any Borrower increased costs in excess of those being generally charged by the other Lenders, (b) if a Lender becomes a Defaulting Lender, (c) if a Lender becomes a Non-Continuing Lender, (d) if a Lender fails to maintain a long-term debt rating of at least BBB-as determined by Standard & Poor's Corporation and at least Baa3 as determined by Moody's Investors Service, Inc., (e) if a Lender fails to deliver the opinion or opinions as required pursuant to Section 11.02 and/or (f) in the case of a refusal by a Lender to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Required Lenders, Parent and Corp. shall have the right, if no Default or Event of Default then exists, to replace such Lender (the "Replaced Lender"), upon prior written notice to the Administrative Agent and such Replaced Lender, with one or more Person or Persons, none of whom shall constitute a Defaulting Lender at the time of such replacement (collectively, the "Replacement Lender") reasonably acceptable to the Administrative Agent, provided that (i) at the time of any replacement pursuant to this Section 1.14, the Replacement Lender and the Replaced Lender shall enter into one or more Assignment Agreements pursuant to Section 11.04(b) (and with all fees payable pursuant to said Section 11.04(b) to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the Commitments and outstanding Loans of the Replaced Lender and, in connection therewith, shall pay to the Replaced Lender in respect thereof an amount equal to the sum of (A) an amount equal to the principal amount of, and all accrued but unpaid interest on, all outstanding Loans of the Replaced Lender and (B) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Lender pursuant to Section 2.01, and (ii) all obligations of the Borrowers under the Credit Documents owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has -11- been, or is concurrently being, paid), including without limitation all amounts owing to the Replaced Lender under Section 1.12 as a result of the assignment of its Loans under clause (i) above, shall be paid in full to such Replaced Lender concurrently with such replacement. Upon the execution of the respective Assignment Agreements, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Lender, delivery to the Replacement Lender of the appropriate Note or Notes executed by the relevant Borrowers, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder, except with respect to indemnification provisions applicable to the Replaced Lender under this Agreement, which shall survive as to such Replaced Lender. 1.15 Extension of Final Maturity Date, Replacement of Non-Continuing Lender. Parent and Corp. may, prior to (but not less than 60 days nor more than 120 days prior to) each anniversary of the Effective Date (each such anniversary, an "Extension Deadline"), by written notice to the Administrative Agent (which notice the Administrative Agent shall promptly transmit to each Lender), request that the Final Maturity Date then in effect be extended by a period of one year. Such request shall be accompanied by a certificate of an Authorized Officer of Parent stating that no Default or Event of Default has occurred and is continuing. Each Lender shall respond to such request, as promptly as practicable, by written notice to Parent, Corp. and the Administrative Agent, with the failure of any Lender to respond prior to the Extension Deadline being deemed to be a negative response. In the event each Lender shall consent to such request of Parent and Corp., on such Extension Deadline, the Final Maturity Date shall be automatically extended to the date occurring one year following the Final Maturity Date then in effect. If any Lender shall fail to consent to such extension (any such Lender, a "Non-Continuing Lender"), Parent and Corp. shall be entitled at any time prior to the Extension Deadline with respect to such request to replace such Lender in accordance with the requirements of Section 1.14, and in the event that the Replacement Lender with respect to each such Non-Continuing Lender shall consent to such extension prior to such Extension Deadline, such extension shall be effective as described in the immediately preceding sentence as if each Lender had originally consented to such request. No Lender shall be obligated to grant any extensions pursuant to this Section 1.15 and any such extension shall be in the sole discretion of each such Lender. The Administrative Agent shall notify Parent, Corp. and each Lender as to the effectiveness of any such extension. 1.16 Additional Commitments. At any time and from time to time on and after the Effective Date and prior to the Final Maturity Date, Parent and Corp. may request one or more Lenders or other lending institutions to increase its Commitment (in the case of an existing Lender) or assume a Commitment (in the case of any other lending institution) and, in the sole discretion of each such Lender or other institution, any such Lender or other institution may agree to so commit; provided that (i) no Default or Event of Default then exists, (ii) the increase in the Total Commitment pursuant to any such request shall be in an aggregate amount of at least $16,000,000 and (iii) the aggregate increase in the Total Commitment pursuant to this Section 1.16 shall not exceed $175,000,000. Parent, Corp. and each such Lender or other lending institution (each, an "Assuming Lender") which agrees to increase its existing, or assume, a Commitment shall execute and deliver to the Administrative Agent a Commitment Assumption Agreement substantially in the form of Exhibit H (with the increase in, or in the case of a new Assuming Lender, assumption of, such Lender's Commitment to be effective on the Business Day following delivery of such Commitment Assumption Agreement to the Administrative Agent). -12- The Administrative Agent shall promptly notify each Lender as to the occurrence of each Commitment Assumption Date. On each Commitment Assumption Date, (x) Annex I shall be deemed modified to reflect the revised Commitments of the Lenders, (y) Parent and Corp. shall pay to each such Assuming Lender such up front fee (if any) as may have been agreed between Parent, Corp. and such Assuming Lender and (z) the Borrowers will issue new Notes to the Assuming Lenders in conformity with the requirements of Section 1.06. Notwithstanding anything to the contrary contained in this Agreement, in connection with any increase in the Total Commitment pursuant to this Section 1.16, each Borrower shall, in coordination with the Administrative Agent and the Lenders, repay outstanding Revolving Loans of certain Lenders and, if necessary, incur additional Revolving Loans from other Lenders, in each case so that such Lenders participate in each Borrowing of such Revolving Loans Pro rata on the basis of their Commitments (after giving effect to any increase thereof). It is hereby agreed that any breakage costs of the type described in Section 1.12 incurred by the Lenders in connection with the repayment of Revolving Loans contemplated by this Section 1.16 shall be for the account of the respective Borrowers. 1.17 Designated Borrowers. Parent or Corp. may from time to time designate one or more Persons as a Designated Borrower (each, a "Designated Borrower" and, collectively, the "Designated Borrowers"), subject to the following terms and conditions: (a) each such Person shall be a special purpose entity organized under the laws of the United States of America, a state thereof or the District of Columbia; (b) each such Person shall enter into an appropriately completed DB Assumption Agreement in the form of Exhibit I hereto on or prior to the date of designation; (c) each such Person shall furnish to each Lender its most recent historic or pro forma financial statements (which financial statements may be summary in nature and unaudited) on or prior to the date of designation; (d) at the time of such designation, such Person shall not be subject to any bankruptcy or insolvency proceeding of the type referred to in Section 8.01(h) or (i) and shall not be subject to any material litigation; (d) on or prior to the date of designation, such Person shall execute and deliver to each Lender a Revolving Note and a Competitive Bid Note to evidence the DB Loans incurred by such Person; (e) on or prior to the date of designation, the Administrative Agent shall have received from such Person a certificate, signed by an Authorized Officer of such Person in the form of Exhibit E with appropriate insertions or deletions, together with (x) copies of its certificate of incorporation, by-laws or other organizational documents and (y) the resolutions relating to the Credit Documents which shall be satisfactory to the Administrative Agent; and -13- (f) on or prior to the date of designation, the Administrative Agent shall have received an opinion, addressed to each Agent and each of the Lenders and dated the date of designation, from counsel to such Person which opinion shall be substantially in the form of Exhibit K hereto. 1.18 Retroactivity. Notwithstanding anything in this Agreement to the contrary, to the extent any notice required by Section 1.11 or 3.04 is given by any Lender more than 90 days after such Lender obtained knowledge of the occurrence of the event giving rise to the additional costs of the type described in such Section, such Lender shall not be entitled to compensation under Section 1.11 or 3.04 for any amounts incurred or accruing prior to the 90th day preceding the giving of such notice to the respective Borrower. SECTION 2. Fees; Commitments. 2.01 Fees. (a) Parent and Corp. jointly and severally agree to pay to the Administrative Agent a facility fee (the "Facility Fee") for the account of the Lenders pro rata on the basis of their respective Commitments for the period from and including the Effective Date to but excluding the date the Total Commitment has been terminated computed at a rate per annum equal to 0.12% of the Total Commitment as in effect from time to time. Accrued Facility Fees shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, on the Final Maturity Date or upon such earlier date as the Total Commitment shall be terminated and, with respect to any Facility Fee owing to any Lender whose Commitment is terminated pursuant to Section 1.14, on the date on which such Lender's Commitment is terminated. (b) Parent and Corp. jointly and severally agree to pay to the Administrative Agent, for the account of the Administrative Agent, when and as due, such fees as have been, or are from time to time, separately agreed upon. (c) All computations of Fees shall be made in accordance with Section 11.07(b). 2.02 Voluntary Reduction of Commitments. Upon at least three Business Days' prior written notice (or telephonic notice confirmed in writing) to the Administrative Agent at the Notice Office (which notice shall be deemed to be given on a certain day only if given before 12:00 Noon (New York time) on such day and shall be promptly transmitted by the Administrative Agent to each of the Lenders), Parent and/or Corp. shall have the right, without premium or penalty, to terminate or partially reduce the Total Unutilized Commitment, provided that (x) any such termination shall apply to proportionately and permanently reduce the Commitment of each Lender and (y) any partial reduction pursuant to this Section 2.02 shall be in the amount of at least $10,000,000. 2.03 Mandatory Reduction of Commitments. (a) The Total Commitment shall terminate in its entirety on September 30, 1998 unless the Effective Date has occurred on or before such date. -14- (b) The Total Commitment shall terminate in its entirety on the Final Maturity Date. SECTION 3. Payments. 3.01 Voluntary Prepayments. Each Borrower shall have the right to prepay Revolving Loans made to it in whole or in part, without premium or penalty, from time to time on the following terms and conditions: (i) such Borrower shall give the Administrative Agent at the Payment Office written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay the Revolving Loans, the amount of such prepayment, the currency in which such Revolving Loans are denominated and the specific Borrowing(s) pursuant to which such Revolving Loans were made, which notice shall be given by such Borrower at least three Business Days prior to the date of such prepayment and which notice shall promptly be transmitted by the Administrative Agent to each of the Lenders; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $1,000,000 (or the Dollar Equivalent thereof), provided that no partial prepayment of Revolving Loans made pursuant to a Borrowing shall reduce the aggregate principal amount of the Revolving Loans outstanding pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto; (iii) each prepayment in respect of any Revolving Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans; and (iv) prepayments of Eurodollar Loans made pursuant to this Section 3.01 may only be made on the last day of an Interest Period applicable thereto unless concurrently with such prepayment any payments required to be made pursuant to Section 1. 12 as a result of such prepayment are made. No Borrower shall have the right under this Section 3.01 to prepay any principal amount of any Competitive Bid Loans. 3.02 Mandatory Prepayments. (a) If on any date the sum of the aggregate outstanding Principal Amount of Revolving Loans and Competitive Bid Loans (all the foregoing, collectively, the "Aggregate Loan Outstandings") exceeds the Total Commitment as then in effect, the Borrowers, jointly and severally, shall repay no later than the next following Business Day the principal amount of Revolving Loans (but excluding DB Loans to the extent the respective DB Loan Maturity Date has not occurred) in an aggregate Principal Amount equal to such excess. If, after giving effect to the prepayment of all outstanding Revolving Loans as set forth above, the remaining Aggregate Loan Outstandings exceed the Total Commitment, the Borrowers, jointly and severally, shall repay on such date the principal of Competitive Bid Loans in an aggregate amount equal to such excess. (b) If on any date on which Dollar Equivalents are determined, pursuant to Section 11.07(c), the sum of the aggregate outstanding Principal Amount of Revolving Loans constituting Alternate Currency Loans exceeds $200,000,000, the Borrowers, jointly and severally, shall repay no later than the next following Business Day the principal amount of Revolving Loans (but excluding DB Loans to the extent the respective DB Loan Maturity Date has not occurred) in an aggregate Principal Amount equal to such excess. (c) On the maturity date specified pursuant to Section 1.04(a) with respect to each Competitive Bid Loan, the applicable Borrower shall repay such Competitive Bid Loan to the applicable Bidder Lender or Bidder Lenders. -15- (d) On each DB Loan Maturity Date, the respective Designated Borrower shall repay the respective DB Loans in full. (e) Notwithstanding anything to the contrary contained elsewhere in this Agreement, all outstanding Revolving Loans and Competitive Bid Loans shall be repaid in full on the Final Maturity Date. (f) With respect to each prepayment of Revolving Loans required by Section 3.02(a) or (b), the applicable Borrower may designate the Types of Revolving Loans which are to be prepaid and the specific Borrowing(s) pursuant to which made, provided that (i) if any prepayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for such Borrowing, then all Revolving Loans outstanding pursuant to such Borrowing shall be immediately converted into Base Rate Loans and (ii) each prepayment of any Revolving Loans made pursuant to a Borrowing shall be applied Pro rata among such Revolving Loans. In the absence of a designation by a Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.12. 3.03 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement shall be made to the Administrative Agent for the ratable (based on its pro rata share) account of the Lenders entitled thereto, not later than 12:00 Noon (New York Time) on the date when due and shall be made in immediately available funds at the Payment Office in: (x) Dollars, if such payment is made in respect of any obligation of the Borrowers under this Agreement except as otherwise provided in the immediately succeeding clause (y); and (y) the appropriate Alternate Currency, if such payment is made in respect of principal of or interest on Alternate Currency Loans, it being understood that written notice by a Borrower to the Administrative Agent to make a payment from the funds in such Borrower's account at the Payment Office shall constitute the making of such payment to the extent of such funds held in such account. Any payments under this Agreement which are made later than 12:00 Noon (New York Time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. The Administrative Agent will promptly make available to each Lender its pro rata share (if any) of each payment so received by the Administrative Agent in the funds and currency so received. 3.04 Net Payments. (a) All payments made by each Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 3.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (or by any political subdivision or taxing authority thereof or therein) with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax levy, impost, duty, fee, assessment or other governmental charge imposed on or measured by the net income or net profits of a Lender -16- (including, without limitation, any franchise tax imposed on or measured by net income or net profits and any branch profits taxes) pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Lender is located (or any subdivision or taxing authority thereof or therein)) and all interest, penalties or similar liabilities with respect to such non-excluded taxes, levies, imposts, duties, fees, assessments or other governmental charges (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other governmental charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the relevant Borrower shall pay the full amount of such Taxes to the relevant taxing authority in accordance with applicable law and shall pay to the relevant Lender such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the relevant Borrower agrees to reimburse each Lender lending to such Borrower, upon the written request of such Lender, for taxes imposed on or measured by the net income or net profits of such Lender (including, without limitation, any franchise tax imposed on or measured by net income or net profits and any branch profits taxes imposed by the United States of America or similar taxes imposed by any political subdivision thereof) pursuant to the laws of the jurisdiction in which such Lender is organized or in which the principal office or applicable lending office of such Lender is located (or of any subdivision or taxing authority therein or thereof) and for any withholding of taxes as such Lender shall determine are payable by, or withheld from, such Lender in respect of such amounts so paid to or on behalf of such Lender pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Lender pursuant to this sentence, Each Borrower will furnish to the Administrative Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts, if any, issued by such taxing authority or other evidence reasonably acceptable to the Administrative Agent evidencing such payment by such Borrower (or, if such Borrower has not received such certified copies of tax receipts within such time period, then such Borrower shall furnish such certified copies of tax receipts to the Administrative Agent within 15 days after such Borrower has received such certified copies of tax receipts). Each Borrower agrees to indemnify and hold harmless each Lender, and reimburse such Lender upon its written request, for the amount of any Taxes so levied or imposed and paid by such Lender. Such indemnification shall be made within 30 days after the date upon which such Lender makes written demand therefor, which demand shall identify the nature and the amount of Taxes for which indemnification is sought and shall include a copy of any written assessment thereof (b) Each Lender that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes agrees to deliver to the Borrowers and the Administrative Agent on or prior to the Effective Date, or in the case of a Lender that assumes an interest or is an assignee or transferee of an interest under this Agreement pursuant to Section 1.14, 1.16 or 11.04 (unless the respective Lender was already a Lender hereunder immediately prior to such assumption, assignment or transfer), on the date of such assumption, assignment or transfer to such Lender, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to -17- payments to be made by the Borrowers under this Agreement and under any Note or (ii) if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit C (any such certificate, a "Section 3.04 Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Lender's entitlement to a complete exemption from United States withholding tax With respect to payments of interest to be made by the Borrowers under this Agreement and under any Note. In addition, each such Lender agrees that, from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrowers and the Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 3.04 Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments made by the Borrowers under this Agreement and any Note, or, if legally unable to deliver such forms, it shall immediately notify the Borrowers and the Administrative Agent of its inability to deliver any such Form or Certificate in which case such Lender shall not be required to deliver any such Form or Certificate pursuant to this Section 3.04(b). Notwithstanding anything to the contrary contained in Section 3.04(a), but subject to Section 11.04(b) and the immediately succeeding sentence, (x) each Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority hereof or therein) from interest, fees or other amounts payable hereunder by such Borrower for the account of any Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes to the extent that such Lender has not provided to the Borrowers Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding and (y) the Borrowers shall not be obligated pursuant to Section 3.04(a) hereof to gross-up payments to be made to any such Lender in respect of income or similar taxes imposed by the United States if (I) such Lender has not provided to the Borrowers the Internal Revenue Service Forms required to be provided to the Borrowers pursuant to this Section 3.04(b) or (II) in the case of a payment, other than interest, to a Lender described in clause (ii) of the first sentence of this Section 3.04(b) above, to the extent that such Forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 3.04 and except as set forth in Section 11.04(b), the Borrowers agree to pay additional amounts and to indemnify each Lender in the manner set forth in Section 3.04(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. (c) If a Borrower pays any additional amount under this Section 3.04 to a Lender and such Lender determines in its sole discretion that it has actually received or realized in connection therewith any refund or any reduction of, or credit against, its Tax liabilities in or with respect to the taxable year in which the additional amount is paid, such Lender shall pay to the -18- Borrower an amount that such Lender shall, in its sole discretion, determine is equal to the net benefit, after tax, which was obtained by the Lender in such year as a consequence of such refund, reduction or credit. Such amount shall be paid as soon as practicable after receipt or realization by such Lender of such refund, reduction or credit. Nothing in this Section 3.04(c) shall require any Lender to disclose or detail the basis of its calculation of the amount of any refund or reduction of, or credit against, its tax liabilities or any other information to any Borrower or any other Person. (d) Each Lender shall use reasonable efforts (consistent with legal and regulatory restrictions and subject to overall policy considerations of such Lender) to file any certificate or document or to furnish any information as reasonably requested by a Borrower pursuant to any applicable treaty, law or regulation, if the making of such filing or the furnishing of such information would avoid the need for or reduce the amount of any amounts payable by a Borrower under Section 3.04(a) and would not, in the reasonable judgment of such Lender, be disadvantageous to such Lender. SECTION 4. Conditions Precedent. 4.01 Conditions Precedent to Effective Date. This Agreement shall become effective on the date (the "Effective Date") on which each of the following conditions shall be satisfied: (a) Execution of Agreement, Notes. (i) Each of Parent, Corp., each Agent and each of the Lenders shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Administrative Agent at its Notice Office or, in the case of the Lenders and the Agents, shall have given to the Administrative Agent telephonic (confirmed in writing), written or facsimile transmission notice (actually received) at such office that the same has been signed and mailed to it; and (ii) there shall have been delivered to the Administrative Agent for the account of each Lender the appropriate Notes executed by Parent and Corp., as applicable, in each case in the amount, maturity and as otherwise provided herein. (b) Opinion of Counsel. The Administrative Agent shall have received an opinion, addressed to each Agent and each of the Lenders and dated the Effective Date, from Louis G. Lenzi, General Counsel of Parent and Corp., which opinion shall be substantially in the form of Exhibit D hereto. (c) Corporate Proceedings. (i) The Administrative Agent shall have received from each of Parent and Corp. a certificate, dated the Effective Date, signed by an Authorized Officer thereof in the form of Exhibit E with appropriate insertions and deletions, together with (x) copies of its certificate of incorporation, by-laws or other organizational documents and (y) the resolutions relating to the Credit Documents which shall be satisfactory to the Administrative Agent. (ii) All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be satisfactory in form and substance to the Administrative Agent, and the Administrative -19- Agent shall have received all information and copies of all certificates, documents and papers, including good standing certificates and any other records of corporate proceedings and governmental approvals, if any, which the Administrative Agent may have requested in connection therewith, such documents and papers, where appropriate, to be certified by proper corporate or governmental authorities. (d) Existing Credit Agreements. All Indebtedness and other obligations under the Existing Credit Agreements shall have been paid in full and all commitments thereunder shall have been terminated. (e) Fees. The Borrowers shall have paid to the Administrative Agent and the Lenders all fees and expenses (including, without limitation, legal fees and expenses) agreed upon by such parties to be paid on or prior to such date. The occurrence of the Effective Date shall constitute a representation and warranty by each Borrower to the Agents and each of the Lenders that all the conditions specified in Section 4.01 exist as of that time. All the Notes, certificates, legal opinions and other documents and papers referred to in this Section 4,01, unless otherwise specified, shall be delivered to the Administrative Agent at the Administrative Agent's Notice Office for the account of each of the Lenders and, except for the Notes, in sufficient counterparts for each of the Lenders and shall be satisfactory in form and substance to the Lenders. The Administrative Agent shall give Parent, Corp. and each Lender written notice that the Effective Date has occurred. 4.02 Conditions Precedent to Loans. The obligation of each Lender to make any Loans is subject, at the time of each such Loan, to the satisfaction of the following conditions: (a) Effective Date. The Effective Date shall have occurred. (b) Notice of Borrowing. The Administrative Agent shall have received a Notice of Borrowing meeting the requirements of Section 1.03(a) with respect to each incurrence of Revolving Loans and a Notice of Competitive Bid Borrowing meeting the requirements of Section 1.04(a) with respect to each incurrence of Competitive Bid Loans. (c) No Default, Representations and Warranties. At the time of the incurrence of each Loan and also after giving effect thereto, (i) there shall exist no Default or Event of Default and (ii) all representations and warranties made by any Borrower contained herein or 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 date of such Loan. (d) Financial Guaranty Insurance Policy. In the case of each DB Loan, Corp. shall have issued a financial guaranty insurance policy in the form of Exhibit F attached hereto (as appropriately completed, a "Financial Guaranty Insurance Policy"), in support of the principal of and interest on such DB Loan, and such Financial Guaranty Insurance Policy shall be in full force and effect. In addition, in the case of a DB Loan which is an Alternate Currency Loan, Corp. shall be permitted to Guarantee such DB Loan under the respective Alternate Currency under applicable law. -20- (e) Opinion of Counsel. In the case of each DB Loan, the Administrative Agent shall have received an opinion, addressed to each Agent and each of the Lenders and dated the date of the incurrence of such DB Loan, from counsel to Corp., which opinion shall be substantially in the form of Exhibit L hereto. The acceptance of the benefits of each Loan shall constitute a representation and warranty by the respective Borrower to the Agents and each of the Lenders that all of the applicable conditions specified in Section 4.02 exist as of that time. SECTION 5. Representations, Warranties and Agreements. In order to induce the Lenders to enter into this Agreement and to make the Loans provided for herein, each of Parent and Corp. makes the following representations and warranties to, and agreements with, the Lenders, all of which shall survive the execution and delivery of this Agreement and the making of the Loans: 5.01 Corporate Existence and Power. Parent and Corp. are corporations duly organized, validly existing and in good standing under the laws of the jurisdiction of their incorporation, are duly qualified to transact business in every jurisdiction where, by the nature of their businesses, such qualification is necessary, and have all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on their businesses as now conducted. 5.02 Corporate and Governmental Authorization, No Contravention. The execution, delivery and performance by the Borrowers of this Agreement and the other Credit Documents (i) are within each of the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of each of the Borrowers or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrowers or any of their Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of the Borrowers or any of their Subsidiaries. 5.03 Binding Effect. This Agreement constitutes a valid and binding agreement of each of the Borrowers enforceable in accordance with its terms, and the other Credit Documents, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of each of the Borrowers enforceable in accordance with their respective terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. 5.04 Financial Information. (a) The consolidated balance sheet of Parent and its Consolidated Subsidiaries as of December 31, 1997 and the related consolidated statements of income, shareholders' equity and cash flows for the Fiscal Year then ended, reported on by Coopers & Lybrand, copies of which have been delivered to each of the Lenders, and the unaudited consolidated financial statements of Parent and Corp. for the interim period ended June 30, 1998, copies of which have been delivered to each of the Lenders, fairly present, in -21- conformity with GAAP or Statutory Accounting Principles, as applicable consistently applied, the consolidated financial position of Parent and its Consolidated Subsidiaries as of such dates and their consolidated results of operations and cash flows for such periods stated. (b) Since December 31, 1997, there has been no event, act, condition or occurrence having a Material Adverse Effect. 5.05 Litigation. There is no action, suit or proceeding pending, or to the knowledge of the Borrowers threatened, against or affecting the Borrowers or any of their Subsidiaries before any court or arbitrator or any governmental body, agency or official which could have a Material Adverse Effect or which in any manner draws into question the validity or enforceability of, or could impair the ability of the Borrowers to perform their obligations under, this Agreement or any of the other Credit Documents. 5.06 Compliance with ERISA. (a) Parent, Corp. and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. (b) Neither Parent nor Corp. nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. 5.07 Taxes. There have been filed on behalf of Parent and its Subsidiaries all Federal, state and local income, excise, property and other tax returns which are required to be filed by them and all taxes due pursuant to such returns or pursuant to any assessment received by or on behalf of Parent or any Subsidiary have been paid. The charges, accruals and reserves on the books of each of Parent and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of each of Parent and Corp., adequate. United States income tax returns of Parent and its Subsidiaries have been examined and closed through the Fiscal Year ended December 31, 1991. 5.08 Subsidiaries. Each of Parent's Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Parent has no Subsidiaries except those Subsidiaries listed on Annex III, which accurately sets forth each such Subsidiary's complete name and jurisdiction of incorporation. 5.09 Not an Investment Company. No Borrower is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.10 Public Utility Holding Company Act. No Borrower nor any of their Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an -22- "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 5.11 Ownership of Property, Liens. Parent and its Consolidated Subsidiaries have title of their properties sufficient for the conduct of their respective businesses and none of such property is subject to any Lien except as permitted in Section 7.01. 5.12 No Default. No Default or Event of Default has occurred and is continuing. 5.13 Full Disclosure. All information heretofore furnished by the Borrowers to the Administrative Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrowers to the Administrative Agent or any Lender will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. The Borrowers have disclosed to the Lenders in writing any and all facts which could have or cause a Material Adverse Effect. 5.14 Compliance with Laws. Parent and each of its Subsidiaries is in compliance with all applicable laws, except where any failure to comply with any such laws would not, alone or in the aggregate, have a Material Adverse Effect. 5.15 Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of each of Parent and its Subsidiaries presently issued and outstanding are validly and properly issued in accordance with all applicable laws, including, but not limited to, the "Blue Sky" laws of all applicable states and the federal securities laws. The issued shares of Capital Stock of each of Parent's and Corp.'s Wholly-Owned Subsidiaries are owned by Parent or Corp. free and clear of any Lien or adverse claim. At least a majority of the issued shares of Capital Stock of each of Parent's and Corp.'s other Subsidiaries (other than Wholly-Owned Subsidiaries) is owned by Parent or Corp. free and clear of any Lien or adverse claim. 5.16 Margin Stock. No Borrower nor any of their Subsidiaries are engaged principally, or as one of their important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Loan will be used to purchase or carry any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation U or X. 5.17 Insolvency. After giving effect to the execution and delivery of the Credit Documents and the making of the Loans under this Agreement, no Borrower will be "insolvent," within the meaning of such term as defined in ss. 101 of Title II of the United States Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. SECTION 6. Affirmative Covenants. The Borrowers hereby covenant and agree that on the Effective Date and thereafter until the Commitments have terminated, no Notes are -23- outstanding and the Loans, together with interest, Fees and all other obligations (other than any indemnities described in Section 11.12 which are not then owing) incurred hereunder, are paid in full: 6.01 Information Covenants. Parent and Corp. will furnish to each Lender: (a) as soon as available and in any event within 60 days after the end of each of the first three quarterly fiscal periods in each Fiscal Year of Parent and Corp., consolidated balance sheets of each of Parent and its Subsidiaries and Corp. and its Subsidiaries as at the end of such period and the related consolidated statements of income, changes in stockholders' equity and cash flows of each of Parent and its Subsidiaries and Corp. and its Subsidiaries for such period and (in the case of the second and third quarterly periods) for the period from the beginning of the current Fiscal Year to the end of such quarterly period, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the previous Fiscal Year, all in reasonable detail and certified by an Authorized Officer of each of Parent and Corp. as presenting fairly, in accordance with GAAP (except as specifically set forth therein; provided any exceptions or qualifications thereto must be acceptable to the Required Lenders) on a basis consistent with such prior fiscal periods, the information contained therein, subject to changes resulting from normal year-end audit adjustments; (b) as soon as available and in any event within 120 days after the end of each Fiscal Year of Parent and Corp., consolidated balance sheets of each of Parent and its Subsidiaries and Corp. and its Subsidiaries as at the end of such year and the related consolidated statements of income, operations, changes in stockholders' equity and cash flows of each of Parent and its Subsidiaries and Corp. and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by a report thereon of Price Waterhouse Coopers LLP or other independent public accountants of recognized national standing selected by Parent, which report shall state that such consolidated financial statements present fairly the consolidated financial position of each of Parent and its Subsidiaries and Corp. and its Subsidiaries as at the dates indicated and the consolidated results of their operations and cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise specified in such report; provided any exceptions or qualifications thereto must be acceptable to the Required Lenders) and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards, (c) within five Business Days after any Borrower becomes aware of the occurrence of any Default, a certificate of an Authorized Officer of each of the Borrowers setting forth the details thereof and the action which the Borrowers are taking or propose to take with respect thereto; (d) promptly upon the mailing thereof to the security holders of the Borrowers generally, copies of all financial statements, reports and proxy statements so mailed; -24- (e) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly reports which the Borrowers shall have filed with the Securities and Exchange Commission or any national securities exchange; (f) if and when Parent, Corp. or any member of the Controlled Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; (g) promptly after any Borrower knows of the commencement thereof, notice, of any litigation, dispute or proceeding involving a claim against any of the Borrowers and/or any Subsidiary for $10,000,000 or more in excess of amounts covered in full by applicable insurance; (h) from time to time such additional information regarding the financial position or business of the Borrowers and their Subsidiaries as the Administrative Agent, at the request of any Lender, may reasonably request; (i) at the request of any Lender, promptly after the filing thereof a copy of the annual statements for each calendar year and quarterly statements for each calendar quarter as filed with the New York Insurance Department or other then comparable agency of other jurisdictions and the financial statements of Corp. for each calendar year or quarter prepared in accordance with Statutory Accounting Principles accompanied by a report thereon of the independent public accountants of Parent referred to in paragraph (b) above; and (j) at the request of any Lender, at any time when a DB Loan is outstanding, quarterly and annual summary financial statements of the applicable Designated Borrower as promptly as possible after the end of each fiscal quarter and fiscal year of such Designated Borrower. 6.02 Books, Records and Inspections. The Borrowers will (i) keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP or Statutory Accounting Principles, as applicable, shall be made of all dealings and transactions in relation to its business and activities; and (ii) permit, and will cause each Subsidiary to permit, representatives of any Lender at such Lender's expense prior to the occurrence of an Event of Default and at the Borrowers' expense after the occurrence of an Event of Default to visit and inspect any of their respective properties, to examine their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The Borrowers agree to -25- cooperate and assist in such visits and inspections, in each case at such reasonable times and as often as may reasonably be desired. 6.03 Maintenance of Existence. Each of the Borrowers shall maintain its existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained. 6.04 Compliance with Laws, Payment of Taxes. The Borrowers will, and will cause each of their Subsidiaries and each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and similar requirements of governmental authorities (including but not limited to the PBGC), except where (i) the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued; and (ii) any failure to comply with any such laws would not, alone or in the aggregate, have a Material Adverse Effect. The Borrowers will, and will cause each of their Subsidiaries to, pay promptly when due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become a lien against the property of the Borrowers or any Subsidiary, except liabilities being contested in good faith by appropriate proceedings diligently pursued. 6.05 Insurance. The Borrowers will maintain, and will cause each of their Subsidiaries to maintain (either in the name of the Borrowers or in such Subsidiary's own name), with financially sound and reputable insurance companies, insurance on all their property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or similar businesses. 6.06 Maintenance of Property. The Borrowers shall, and shall cause each Subsidiary to, maintain all of their properties and assets in good condition, repair and working order, ordinary wear and tear excepted. SECTION 7. Negative Covenants. The Borrowers hereby covenant and agree that on the Effective Date and thereafter until the Commitments have terminated, no Notes are outstanding and the Loans, together with interest, Fees and all other obligations (other than any indemnities described in Section I 1. 12 which are not then owing) incurred hereunder, are paid in full: 7.01 Liens. Neither Parent nor any of its Consolidated Subsidiaries will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (i) Liens securing any loan to be made under the Credit Agreement among Corp., the banks signatory thereto and Credit Suisse First Boston, New York Branch, originally dated as of December 29, 1989, as amended and restated on October 1, 1997 and as may be amended thereafter from time to time; (ii) Liens created on certain insurance premiums by a Trust Agreement effective December 31, 1989 between Municipal Bond Investors Assurance Corporation, MBIA -26- Insurance Corp. of Illinois and the trustee thereunder, as amended on February 28, 1995 and as may be amended from time to time thereafter; (iii) as to Corp., Liens (in addition to Liens permitted under Section 7.01(i), (iv) and (v)) in an aggregate principal amount of up to $ 10,000,000; (iv) Liens not securing Debt which are incurred in the ordinary course of business; and (v) Liens securing repurchase agreements constituting a borrowing of funds by Parent or any Subsidiary of Parent in the ordinary course of business for liquidity purposes and in no event for a period exceeding 90 days in each case. 7.02 Dissolution. No Borrower shall suffer or permit dissolution or liquidation either in whole or in part or redeem or retire any shares of their own stock, except through corporate reorganization to the extent permitted by Section 7.03. 7.03 Consolidations, Mergers and Sales of Assets. The Borrowers will not consolidate or merge with or into, or sell, lease or otherwise transfer all or any substantial part of their assets to, any other Person, provided that (a) any Borrower (other than any Designated Borrower) may merge with another Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) one of the Borrowers is the corporation surviving such merger and (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing, and (b) Subsidiaries of the Borrowers may merge with one another. 7.04 Use of Proceeds. No portion of the proceeds of the Loans will be used by the Borrowers or any Subsidiary (i) directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, or (ii) for any purpose in violation of any applicable law or regulation, 7.05 Change in Fiscal Year. Neither Parent nor Corp. shall change its Fiscal Year without the consent of the Required Lenders. 7.06 Transactions with Affiliates.- Neither Parent nor any of its Subsidiaries shall enter into, or be a party to, any transaction with any Affiliate of Parent or such Subsidiary (which Affiliate is not one of the Borrowers or a Subsidiary), except as permitted by law and in the ordinary course of business and pursuant to reasonable terms. 7.07 Leverage Ratio. Parent and Corp. will not permit the ratio of Consolidated Total Debt to Consolidated Total Capitalization at any time to exceed 0.25:1.00. 7.08 Minimum Net Worth. Parent and Corp. will not permit Consolidated Net Worth to be less than $2,000,000,000 \at any time. -27- SECTION 8. Defaults. 8.01 Events of Default. Upon the occurrence of any of the following specified events (each, an "Event of Default"): (a) any Borrower shall fail to pay when due any principal of any Loan, or shall fail to pay any interest on any Loan within three Business Days after such interest shall become due, or shall fail to pay any fee or other amount payable hereunder within five Business Days after such fee or other amount becomes due; or (b) any Borrower shall fail to observe or perform any covenant contained in Sections 6.01(c), 6.02(ii), 6.03, 6.06, 7.02, 7.03, 7.04, 7.07 or 7.08; or (c) any Borrower shall fail to observe or perform any covenant contained in Section 7.01 for five days after the earlier of (i) the first day on which any Borrower has knowledge of such failure or (ii) written notice thereof has been given to any Borrower by the Administrative Agent at the request of any Lender; or (d) any Borrower shall fail to observe or perform any covenant or agreement contained herein (other than those covered by clause (a), (b) or (c) above) for 30 days after the earlier of (i) the first day on which any Borrower has knowledge of such failure or (H) written notice thereof has been given to any Borrower by the Administrative Agent at the request of any Lender; or (e) any representation, warranty, certification or statement made or deemed made by any Borrower in Section 5 of this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect or misleading in any material respect when made (or deemed made); or (f) Parent or any Subsidiary shall fail to make any payment in respect of Debt outstanding in an aggregate principal amount equal to or in excess of $10,000,000 (other than the Notes) when due at final stated maturity (after giving effect to any applicable grace period); or (g) any event or condition shall occur which results in the acceleration of the maturity of Debt outstanding in an aggregate amount equal to or in excess of $10,000,000 of Parent or any Subsidiary or the mandatory prepayment or purchase of such Debt by Parent (or its designee) or such Subsidiary (or its designee) prior to the scheduled maturity thereof; or (h) Parent or any Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to themselves or their debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of them or any substantial part of their property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against them, or shall make a general -28- assignment for the benefit of creditors, or shall fail generally, or shall admit in writing their inability, to pay their debts as they become due, or shall take any corporate action to authorize any of the foregoing, or shall become or be declared by a court of competent jurisdiction to be insolvent; or (i) an involuntary case or other proceeding shall be commenced against Parent or any Subsidiary seeking liquidation, reorganization or other relief with respect to them or their debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of them or any substantial part of their property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against Parent or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (j) Parent, Corp. or any member of the Controlled Group shall fail to pay when due any material amount which they shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or (k) one or more judgments or orders for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against Parent or any Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (1) a federal tax lien shall be filed against Parent or any Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be filed against any Parent or any Subsidiary under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of 25 days after the date of filing; or (m) (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Exchange Act) of 40% or more of the outstanding shares of the voting stock of Parent; or (ii) as of any date a majority of the Board of Directors of Parent consists of individuals who were not either (A) directors of Parent as of the corresponding date of the previous year, (B) selected or nominated to become directors by the Board of Directors of Parent of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of Parent of which a majority consisted of individuals described in clause (A) and individuals described in clause (B); or -29- (n) Parent shall at any time or times and for any reason cease to own (either directly or indirectly through a wholly-owned intermediate Subsidiary) all of the Capital Stock or other ownership interests (except for director's qualifying shares) of Corp.; or (o) Corp. shall fail to maintain an insurer claims paying rating of AA or better as determined by Standard and Poor's Corporation and Aa2 or better as determined by Moody's Investors Service, Inc.; or (p) Parent shall fail to maintain a long term debt rating of A or better as determined by Standard and Poor's Corporation and A2 or better as determined by Moody's Investors Service, Inc.; or (q) at any time when any DB Loan is outstanding, the respective Financial Guaranty Insurance Policy or any material provision thereof shall cease to be in full force or effect or Corp. shall deny or disaffirm its obligations under such Financial Guaranty Insurance Policy; then, and in every such event, the Administrative Agent shall (i) if requested by the Required Lenders, by notice to Parent and Corp. terminate the Commitments and they shall thereupon terminate, and (ii) if requested by the Required Lenders, by notice to Parent and Corp. declare the Notes (together with accrued interest thereon) and all other amounts payable hereunder and under the other Credit Documents to be, and the Notes (together with all accrued interest thereon) and all other amounts payable hereunder and under the other Credit Documents shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers; provided that if any Event of Default specified in clause (h) or (i) above occurs with respect to Parent or Corp., without any notice to Parent or Corp. or any other act by the Administrative Agent or the Lenders, the Total Commitment shall thereupon automatically terminate and the Notes (together with accrued interest thereon) and all other amounts payable hereunder and under the other Credit Documents shall automatically become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers; provided, further, that, except in the case of an Event of Default under Section 8.01(q), the principal of and interest on DB Loans shall not become due and payable pursuant to this Section 8.01 prior to their respective DB Loan Maturity Date. Notwithstanding the foregoing, the Administrative Agent shall have available to it all other remedies at law or equity, and shall exercise any one or all of them at the request of the Required Lenders. 8.02 Notice of Default. The Administrative Agent shall give notice to the Borrowers of any Default under Sections 8.01(c) or 8.01(d) promptly upon being requested to do so by any Lender and shall thereupon notify all the Lenders thereof SECTION 9. Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: -30- "Absolute Rate" shall mean an interest rate (rounded to the nearest .0001) expressed as a decimal. "Absolute Rate Borrowing" shall mean a Competitive Bid Borrowing with respect to which a Borrower has requested that the Bidder Lenders offer to make Competitive Bid Loans at Absolute Rates. "Administrative Agent" shall mean Deutsche Bank and shall include any successor to the Administrative Agent appointed pursuant to Section 10.09. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or other-wise. "Agents" shall mean the Administrative Agent, the Syndication Agent and the Documentation Agent. "Aggregate Loan Outstandings" shall have the meaning provided in Section 3.02(a). "Agreement" shall mean this Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. "Alternate Currency" shall mean each Primary Alternate Currency and each Other Alternate Currency. "Alternate Currency Loan" shall mean any Loan denominated in an Alternate Currency. "Approved Currency" shall mean each of Dollars and each Primary Alternate Currency. "Assignment Agreement" shall mean the Assignment Agreement in the form of Exhibit G (appropriately completed). "Associated Cost Rate" shall mean, with respect to each Interest Period for Pounds Sterling-denominated Loans, the costs (expressed as a percentage rounded up to the nearest four decimal places and as determined on the first day of such Interest Period and any three month anniversary thereof by the Administrative Agent) of compliance with then existing requirements of the Bank of England in respect of Loans denominated in Pounds Sterling. "Assuming Lender" shall have the meaning provided in Section 1.16. -31- "Authorized Officer" shall mean any senior officer of any Borrower designated as such in writing to the Administrative Agent by such Borrower. "Base Rate" shall mean, at any time, the higher of (i) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate and (ii) the Prime Lending Rate. "Base Rate Loan" shall mean each Revolving Loan that is not a Eurodollar Loan. "Bidder Lender" shall mean each Lender that has notified in writing (and has not withdrawn such notice) the Administrative Agent that it desires to participate generally in the bidding arrangements relating to Competitive Bid Borrowings. "Borrowers" shall mean Parent, Corp. and each Designated Borrower, if any. "Borrowing" shall mean (i) the incurrence by a single Borrower of Revolving Loans denominated in Dollars that are Base Rate Loans on a pro rata basis from all Lenders; (ii) the incurrence by a single Borrower of Revolving Loans of a single Approved Currency that are Eurodollar Loans on a pro rata basis from all Lenders, on a given date (or resulting from conversions on a given date), having the same Interest Period, provided that Base Rate Loans incurred pursuant to Section 1.11(b) shall be considered part of any related Borrowing of Eurodollar Loans; and (iii) a Competitive Bid Borrowing. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close, (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans and Competitive Bid Loans made pursuant to a Spread Borrowing, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in the London interbank Eurodollar market and, with respect to any notices or determinations in respect of Euros, which is customarily a "Business Day" for such notices or determinations. "Capital Stock" means any nonredeemable capital stock of Parent or any Consolidated Subsidiary (to the extent issued to a Person other than the Borrowers), whether common or preferred. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated and the rulings issued thereunder. Section references to the Code are to the Code, as in effect on the Effective Date and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Commitment" shall mean, with respect to each Lender, at any time, the amount set forth opposite such Lender's name on Annex I, as the same may be increased pursuant to Section 1. 16 and/or reduced pursuant to Sections 2.02, 2.03 or 8.01. "Commitment AssumptionAgreement" shall mean each Commitment Assumption Agreement in the form of Exhibit H attached hereto executed in accordance with Section 1.16. -32- "Commitment Assumption Date" shall mean the Business Day following the date on which each Commitment Assumption Agreement is delivered to the Administrative Agent pursuant to Section 1.16. "Competitive Bid Borrowing" shall mean a Borrowing by a single Borrower of Competitive Bid Loans pursuant to Section 1.04. "Competitive Bid Loan" shall have the meaning specified in Section 1.01(b). "Competitive Bid Note" shall have the meaning provided in Section 1.06(a). "Consolidated Net Worth" shall mean the Net Worth of Parent and its Subsidiaries determined on a consolidated basis. "Consolidated Subsidiary" shall mean at any date any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of Parent in its consolidated financial statements as of such date. "Consolidated Total Capitalization" shall mean, as of any date of determination, the sum of (i) Consolidated Total Debt and (ii) Consolidated Net Worth. "Consolidated Total Debt" shall mean, as of any date of determination, all Debt of Parent and its Subsidiaries on such date determined on a consolidated basis. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with either Parent or Corp., are treated as a single employer under Section 414 of the Code. "Credit Documents" shall mean this Agreement, the Notes and each Financial Guaranty Insurance Policy delivered pursuant to Section 4.02(d), "DB Assumption Agreement" shall mean an Assumption Agreement in the form of Exhibit I attached hereto executed in accordance with Section 1.17. "DB Loan Maturity Date" shall mean (a) with respect to each DB Loan constituting a Revolving Loan, the maturity date selected by the respective Designated Borrower in accordance with Section 1.03(a) as being applicable to such DB Loan, which maturity date shall not be more than 180 days after the date of incurrence of such DB Loan (and in no event later than the Final Maturity Date) and (b) with respect to each DB Loan constituting a Competitive Bid Loan, the maturity of such Competitive Bid Loan selected in accordance with Section 1.04(a). "DB Loans" shall mean any Loans incurred by a Designated Borrower. "Debt" of any Person shall mean at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the -33- deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person to reimburse any bank or other Person in respect of amounts payable under a banker's acceptance, (vi) all Redeemable Preferred Stock of such Person (in the event such Person is a corporation), (vii) all obligations (absolute or contingent) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (viii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (ix) all Debt of others Guaranteed by such Person, provided that in the case of Corp. the calculation of Debt shall not include Debt of others guaranteed by Corp. in the ordinary course of its business. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" shall mean any Lender with respect to which a Lender Default is in effect. "Designated Borrower" shall mean each Person designated as a Designated Borrower in accordance with Section 1.17. "Deutsche Bank" shall mean Deutsche Bank AG, New York Branch. "Deutsche Mark Equivalent" shall mean, at any time for the determination thereof, the amount of Deutsche Marks which could be purchased with the amount of Dollars involved in such computation at the spot exchange rate therefor as quoted by Deutsche Bank as of 11:00 A.M. (London time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "Deutsche Mark LIBOR" shall mean, for each Interest Period applicable to any Loan denominated in Deutsche Marks, the rate per annum that appears on page 3750 (or other appropriate page if such currency does not appear on such page) of the Dow Jones Telerate Screen (or any successor page) for Deutsche Mark deposits with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period or, if such a rate does not appear on page 3750 (or such other appropriate page) of the Dow Jones Telerate Screen (or any successor page), the offered quotations to first-class banks in the London interbank market by Deutsche Bank for Deutsche Mark deposits of amounts in same day funds comparable to the outstanding principal amount of such Loan with maturities comparable to such Interest Period determined as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period. Deutsche Marks" shall mean freely transferable lawful money of Germany. "Documentation Agent" shall mean Fleet National Bank. "Dollar Equivalent" shall mean, at any time for the determination thereof, the amount of Dollars which could be purchased with the amount of the relevant Alternate Currency -34- involved in such computation at the spot exchange rate therefor as quoted by the Administrative Agent as of 11:00 A.M. (London time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States. "Effective Date" shall have the meaning provided in Section 4.01. "EMU Legislation" shall mean the legislative measures of the European Council for the introduction of, changeover to or operation of a single or unified European currency. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect as of the Effective Date and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "Euro" shall mean the single currency of participating member states of the European Union. "Euro Equivalent" shall mean, at any time for the determination thereof, the amount of Euros which could be purchased with the amount of Dollars involved in such computation at the spot exchange rate therefor as quoted by Deutsche Bank as of 11:00 A.M. (London time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "Euro LIBOR" shall mean, for each Interest Period applicable to any Loan denominated in Euros, the rate per annum that appears on page 3750 (or other appropriate page if such currency does not appear on such page) of the Dow Jones Telerate Screen (or any successor page) for Euro deposits with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period or, if such a rate does not appear on the Dow Jones Telerate Screen (or any successor page), the offered quotations to first-class banks in the London interbank market by Deutsche Bank for Euro deposits of amounts in same day funds comparable to the outstanding principal amount of such Loan with maturities comparable to such Interest Period determined as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period. "Eurodollar Loan" shall mean each Revolving Loan that at the election of any Borrower is bearing interest by reference to LIBOR. "Event of Default" shall have the meaning specified in Section 8.01. "Exchange Act" shall mean the U.S. Securities Exchange Act of 1934, as amended. -35- "Existing Credit Agreements" shall mean (i) the Credit Agreement, dated as of August 31, 1994, among Parent, Municipal Bond Investors Assurance Corporation, various lending institutions and Wachovia Bank of Georgia, N.A., as Agent, (ii) the Loan Agreement, dated as of July 13, 1990, between Parent and Credit Suisse First Boston, New York Branch and (iii) the Credit Agreement, dated as of June 25, 1992, among Capital Markets Assurance Corporation, various lending institutions and Bank of Montreal, as Agent. "Extension Deadline" shall have the meaning specified in Section 1.15. "Facility Fees" shall have the meaning specified in Section 2.01(a). "Federal Funds Effective Rate" shall mean, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 3.01. "Final Maturity Date" shall mean the fifth anniversary of the Effective Date, or such later date to which the Final Maturity Date shall have been extended pursuant to Section 1.15. "Financial Guaranty Insurance Policy" shall have the meaning specified in Section 4.02(d). "Fiscal Year" means any fiscal year of the Borrowers. "French Franc Equivalent" shall mean, at any time for the determination thereof, the amount of French Francs which could be purchased with the amount of Dollars involved in such computation at the spot exchange rate therefor as quoted by Deutsche Bank as of 11:00 A.M. (London time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "French Franc LIBOR" shall mean, for each Interest Period applicable to any Loan denominated in French Francs, the rate per annum that appears on page 3750 (or other appropriate page if such currency does not appear on such page) of the Dow Jones Telerate Screen (or any successor page) for French Franc deposits with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period or, if such a rate does not appear on page 3750 (or such other appropriate page) of the Dow Jones Telerate Screen (or any successor page), the offered quotations to first-class banks in the London interbank market by Deutsche Bank for French Franc deposits of amounts in same day funds comparable to the outstanding principal amount of such Loan with maturities comparable to such Interest Period as of 11:00 A.M. -36- (London time) on the date which is two Business Days prior to the commencement of such Interest Period. "French Francs" shall mean freely transferable lawful money of France. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect on the date of this Agreement. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to secure, purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to provide collateral security, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include: (i) endorsements for collection or deposit in the ordinary course of business; and (ii) in the case of Corp., Debt of others guaranteed by Corp. in the ordinary course of its business. The term "Guarantee" used as a verb has a corresponding meaning. "Interest Period" shall mean (a) with respect to any Eurodollar Loan, the interest period applicable thereto, as determined pursuant to Section 1.10 and (b) with respect to any Competitive Bid Loan, the period beginning on the date of incurrence thereof and ending on the stated maturity date thereof. "Interest Rate Basis" shall mean LIBOR and/or such other basis for determining an interest rate as the Borrowers and the Administrative Agent may agree upon from time to time. "Japanese Yen" shall mean freely transferable lawful money of Japan. "Japanese Yen Equivalent" shall mean, at any time for the determination thereof, the amount of Japanese Yen which could be purchased with the amount of Dollars involved in such computation at the spot exchange rate therefor as quoted by Deutsche Bank as of 11:00 A.M. (London time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "Japanese Yen LIBOR" shall mean, for each Interest Period applicable to any Loan denominated in Japanese Yen, the rate per annum that appears on page 3750 (or other appropriate page if such currency does not appear on such page) of the Dow Jones Telerate Screen (or any successor page) for Japanese Yen deposits with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period or, if such a rate does not appear on page 3750 (or such other appropriate page) of the Dow Jones Telerate Screen (or any successor page), the offered quotations to first-class banks in the London interbank market by Deutsche Bank for -37- Japanese Yen deposits of amounts in same day funds comparable to the outstanding principal amount of such Loan with maturities comparable to such Interest Period determined as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period. "Judgment Currency" shall have the meaning provided in Section 11.16(a). "Judgment Currency Conversion Date" shall have the meaning provided in Section 11.16(a). "Lender" or "Lenders" shall have the meaning provided in the first paragraph of this Agreement. "Lender Default" shall mean (i) the refusal (which has not been retracted) of a Lender to make available its portion of any incurrence of Revolving Loans or (ii) a Lender having notified the Administrative Agent and/or any Borrower that it does not intend to comply with its obligations under Section 1.01, in the case of either clause (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority. "Lender Register" shall have the meaning provided in Section 11.15. "LIBOR" shall mean (i) with respect to any Borrowing of Loans of an Approved Currency, the relevant interest rate, i.e., U.S. LIBOR, Deutsche Mark LIBOR, Euro LIBOR, Sterling LIBOR, French Franc LIBOR, Japanese Yen LIBOR or Swiss Franc LIBOR, and (ii) with respect to any Borrowing of Competitive Bid Loans of an Other Alternate Currency, such rate per annum as may be agreed upon by the respective Borrower and the respective Bidder Lender. "Lien" shall mean, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, preferential arrangement which has the practical effect of constituting a security interest or encumbrance, servitude or encumbrance of any kind in respect of such asset to secure or assure payment of a Debt or a Guarantee, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. For the purposes of this Agreement, Parent or any Subsidiary shall be deemed to own subject to a Lien any asset which they have acquired or hold subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" shall mean each Revolving Loan and each Competitive Bid Loan. "Margin Stock" shall have the meaning provided in Regulation U. "Material Adverse Effect" shall mean, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not -38- related, a material adverse change in, or a material adverse effect upon, any of (a) the rights and remedies of the Administrative Agent or the Lenders under the Credit Documents, or the ability of each Borrower to perform its obligations under the Credit Documents to which it is a party, as applicable, or (b) the legality, validity or enforceability of any Credit Document. "Minimum Borrowing Amount" shall mean (i) for any Revolving Loans that are Dollar denominated, $2,500,000, (ii) for any Revolving Loans that are Alternate Currency Loans, an amount in the respective Approved Currency having a Dollar Equivalent (determined at the time a Notice of Borrowing is received or a prepayment made) of $2,500,000, (iii) for any Competitive Bid Loans that are Dollar denominated, $1,000,000 and (iv) for any Competitive Bid Loans that are Alternate Currency Loans, an amount in the respective Alternate Currency having a Dollar Equivalent (determined at the time a Notice of Competitive Bid Borrowing is received or a prepayment made) of $1,000,000. "Multiemployer Plan" shall mean a plan within the meaning of Section 4001(a)(3) of ERISA. "Net Worth" shall mean, as to any Person, the sum of its capital stock, capital in excess of par or stated value of shares of its capital stock, retained earnings and any other account which, in accordance with GAAP, constitutes stockholders equity, excluding any treasury stock. "Non-Continuing Lender" shall have the meaning specified in Section 1.15. "Non-Defaulting Lender" shall mean each Lender other than a Defaulting Lender. "Note" shall mean each Revolving Note and each Competitive Bid Note. "Notice of Borrowing" shall have the meaning provided in Section 1.03(a). "Notice of Competitive Bid Borrowing" shall have the meaning provided in Section 1.04(a). "Notice of Conversion" shall have the meaning provided in Section 1.07. "Notice Office" shall mean the office of the Administrative Agent at 31 West 52nd Street, New York, NY 10019 or such other office as the Administrative Agent may designate to the Borrowers from time to time. "Obligation Currency" shall have the meaning provided in Section 11.16(a). "Obligation" shall mean all amounts, direct or indirect, contingent Or absolute, of every type or description, and at any time existing, owing to any Agent or any Lender pursuant to the terms of this Agreement or any other Credit Document. "Other Alternate Currency" shall mean any freely transferable currency other than any Approved Currency. -39- "Payment Office" shall mean the office of the Administrative Agent at 31 West 52nd Street, New York, NY 10019 or such other office or offices as the Administrative Agent may designate to the Borrowers from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Person" shall mean any individual, partnership, limited liability company, joint venture, firm, corporation, association, trust or other enterprise or business entity or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of any member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding 5 plan years made contributions. "Pounds Sterling" shall mean freely transferable lawful money of the United Kingdom. "Primary Alternate Currency" shall mean each of Deutsche Marks, French Francs, Japanese Yen, Pounds Sterling, Swiss Francs and Euros. "Prime Lending Rate" shall mean the rate which Deutsche Bank announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Deutsche Bank may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Principal Amount" shall mean (i) the stated principal amount of each Loan denominated in Dollars, and/or (ii) the Dollar Equivalent of the stated principal amount of each Alternate Currency Loan, as the context may require. "Redeemable Preferred Stock" of any Person shall mean any preferred stock issued by such Person which is at any time prior to the Final Maturity Date either (i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or (ii) redeemable at the option of the holder thereof. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. -40- "Relevant Currency Equivalent" shall mean the Dollar Equivalent, the Deutsche Mark Equivalent, the Euro Equivalent, the Pounds Equivalent, the French Franc Equivalent, the Japanese Yen Equivalent or the Swiss Franc Equivalent or the comparable equivalent of any Other Alternate Currency, as the case may be. "Replaced Lender" shall have the meaning provided in Section 1.14. "Replacement Lender" shall have the meaning provided in Section 1.14. "Required Lenders" shall mean at any time Non-Defaulting Lenders having at least a majority of the aggregate Commitments of all Non-Defaulting Lenders; provided that if the Total Commitment has been terminated, then the Required Lenders shall mean Lenders whose outstanding Loans equal or exceed a majority of the aggregate outstanding Loans at such time. "Revolving Loan" shall have the meaning specified in Section 1.01(a). "Revolving Note" shall have the meaning provided in Section 1.06(a). "Section 3.04 Certificate" shall have the meaning provided in Section 3.04(b)(ii). "Spread" shall mean a percentage per annum in excess of, or less than, an Interest Rate Basis. "Spread Borrowing" shall mean a Competitive Bid Borrowing with respect to which a Borrower has requested the Bidder Lenders to make Competitive Bid Loans at a Spread over or under a specified Interest Rate Basis. "Statutory Accounting Principles" shall mean statutory accounting principles prescribed by the National Association of Insurance Commissioners that are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Sterling Equivalent" shall mean, at any time for the determination thereof, the amount of Pounds Sterling which could be purchased with the amount of Dollars involved in such computation at the spot exchange rate therefor as quoted by Deutsche Bank as of 11:00 A.M. (London time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "Sterling LIBOR" shall mean, with respect to each Interest Period for any Loan denominated in Pounds Sterling, (I) the rate per annum that appears on page 3750 (or other appropriate page if such currency does not appear on such page) of the Dow Jones Telerate Screen (or any successive page) with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is the commencement date of such Interest Period or, if such a rate does not appear on page 3750 (or such other appropriate page) of the Dow Jones Telerate Screen (or any successor page) the offered quotations to first-class banks in the London interbank Eurodollar market by Deutsche Bank for Pounds Sterling deposits of amounts in same day funds comparable to the outstanding principal amount of such Loans with maturities comparable to such Interest Period determined as of 11:00 A.M. (London time) on the date which -41- is the commencement of such Interest Period plus (II) the Associated Cost Rate for such Loans for such Interest Period. "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries, has more than a 50% equity interest at the time. Unless otherwise expressly provided, all references herein to "Subsidiary" shall mean a Subsidiary of Parent. "Swiss Franc Equivalent" shall mean, at any time for the determination thereof, the amount of Swiss Francs which could be purchased with the amount of Dollars involved in such computation at the spot exchange rate therefor as quoted by Deutsche Bank as of 11:00 A.M. (London time) on the date two Business Days prior to the date of any determination thereof for purchase on such date. "Swiss Franc LIBOR" shall mean, for each Interest Period applicable to any Loan denominated in Swiss Francs, the rate per annum that appears on page 3750 (or other appropriate page if such currency does not appear on such page) of the Dow Jones Telerate Screen (or any successor page) for Swiss Franc deposits with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period or, if such a rate does not appear on page 3750 (or such other appropriate page) of the Dow Jones Telerate Screen (or any successor page), the offered quotations to first-class banks in the London interbank market by Deutsche Bank for Swiss Franc deposits of amounts in same day funds comparable to the outstanding principal amount of such Loan with maturities comparable to such Interest Period determined as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period. "Swiss Francs" shall mean freely transferable lawful money of Switzerland. "Syndication Agent" shall mean The First National Bank of Chicago. "Taxes" shall have the meaning provided in Section 3.04(a). "Total Commitment" shall mean, at any time, the sum of the Commitments of each of the Lenders at such time. "Total Unutilized Commitment" shall mean, at any time, (i) the Total Commitment at such time less (ii) the sum of the aggregate Principal Amount of all outstanding Loans at such time. "Type" shall mean any type of Loan determined with respect to currency and the interest option applicable thereto. -42- "UCC" shall mean the Uniform Commercial Code. "US LIBOR" shall mean for each Interest Period applicable to a Loan denominated in Dollars (other than a Base Rate Loan), the rate per annum that appears on page 3750 of the Dow Jones Telerate Screen (or any successor page) for Dollar deposits with maturities comparable to such Interest Period as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period or, if such a rate does not appear on page 3750 of the Dow Jones Telerate Screen (or any successor page), the offered quotations to first-class banks in the London interbank market by Deutsche Bank for Dollar deposits of amounts in same day funds comparable to the outstanding principal amount of such Dollar denominated Loan with maturities comparable to such Interest Period determined as of 11:00 A.M. (London time) on the date which is two Business Days prior to the commencement of such Interest Period. "Wholly-Owned Subsidiary" of any Person shall mean any other Person to the extent all of the capital stock or other ownership interests in such other Person, other than directors' qualifying shares, is owned directly or indirectly by such first Person. "Written" or "in writing" shall mean any form of written communication or a communication by means of facsimile transmission, telegraph or cable. SECTION 10. Agents, etc. 10.01 Appointment. The Lenders hereby designate Deutsche Bank as Administrative Agent, The First National Bank of Chicago as Syndication Agent and Fleet National Bank as Documentation Agent to act as specified herein and in the other Credit Documents. Each Lender hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, each Agent to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of such Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agents may perform any of their duties hereunder by or through their respective officers, directors, agents, employees or affiliates. 10.02 Nature of Duties. No Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Credit Documents. No Agent or any of its respective officers, directors, agents, employees or affiliates shall be liable for any action taken or omitted by them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by their gross negligence or willful misconduct. The duties of each Agent shall be mechanical and administrative in nature; no Agent shall have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Lender or the holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon either Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein with respect to such Agent. -43- 10.03 Lack of Reliance on the Agents. Independently and without reliance upon any Agent, each Lender and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Borrowers and their Subsidiaries in connection with the making and the continuance of the Loans and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Borrowers and their Subsidiaries and, except as expressly provided in this Agreement, no Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Lender or the holder of any Note with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. No Agent shall be responsible to any Lender or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of the Borrowers and their Subsidiaries or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of the Borrowers and their Subsidiaries or the existence or possible existence of any Default or Event of Default. 10.04 Certain Rights of the Agents. If any Agent shall request instructions from the Required Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, such Agent shall be entitled to refrain from such act or taking such action unless and until such Agent shall have received instructions from the Required Lenders; and no Agent shall incur liability to any Person by reason of so refraining. Without limiting the foregoing, neither any Lender nor the holder of any Note shall have any right of action whatsoever against an Agent as a result of such Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Required Lenders. 10.05 Reliance. Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype, facsimile or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any Person that such Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by such Agent. 10.06 Indemnification. To the extent an Agent is not reimbursed and indemnified by the Borrowers, the Lenders will reimburse and indemnify such Agent, in proportion to their respective "percentages" as used in determining the Required Lenders, for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by such Agent in performing its respective duties hereunder or under any other Credit Document, in any way relating to or arising out of this Agreement or any other Credit Document provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of such Agent. -44- 10.07 The Agents in Their Individual Capacities. With respect to its obligation to make Loans under this Agreement, each Agent shall have the rights and powers specified herein for a "Lender" and may exercise the same rights and powers as though it were not performing the duties specified herein; and the term "Lenders," "Required Lenders," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Agents in their individual capacities. Each Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with any Borrower or any Affiliate of any Borrower as if they were not performing the duties specified herein, and may accept fees and other consideration from any Borrower for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. 10.08 Holders. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment, transfer or endorsement thereof, as the case may be, shall have been filed with the Administrative Agent. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. 10.09 Resignation by an Agent. (a) The Administrative Agent may resign from the performance of all its functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days' prior written notice to the Borrowers and the Lenders. Such resignation shall take effect upon the appointment of a successor Administrative Agent pursuant to clauses (b) and (c) below or as otherwise provided below. Upon the effectiveness of such resignation, the resigning Administrative Agent shall return to Parent and/or Corp. a prorated portion of any administrative fee that has been paid in advance for the period following the effectiveness of its resignation. (b) Upon any such notice of resignation, the Required Lenders shall appoint a successor Administrative Agent hereunder who shall be a Lender, commercial bank or trust company reasonably acceptable to Parent and Corp. (c) If a successor Administrative Agent shall not have been so appointed within such 15 Business Day period, the Administrative Agent, with the consent of Parent and Corp., shall then appoint a successor Administrative Agent who shall serve as Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided above. (d) Each of the Documentation Agent and the Syndication Agent may resign from the performance of all of its functions and duties hereunder and/or under the other Credit Documents in such capacity at any time by giving five Business Days' prior written notice to the Lenders. Such resignation shall take effect at the end of such five Business Days. 10.10 Documentation Agent, Syndication Agent. Nothing this Agreement shall impose on the Documentation Agent or the Syndication Agent, in their capacity as such, any duties or obligations. -45- SECTION 11. Miscellaneous. 11.01 Payment of Expenses, etc. The Borrowers jointly and severally agree to: (i) pay all reasonable out-of-pocket costs and expenses (1) of the Administrative Agent in connection with the negotiation, syndication, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of White & Case LLP) and (2) of the Agents and each of the Lenders in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for each Agent and for each of the Lenders); (ii) pay and hold each of the Agents and Lenders harmless from and against any and all present and future stamp, VAT and other similar taxes with respect to the foregoing matters and/or fees and save each of the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes; and (iii) indemnify each Lender (including in its capacity as an Agent), its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, an investigation, litigation or other proceeding (whether or not an Agent or any Lender is a party thereto and whether or not any such investigation, litigation or other proceeding is between or among an Agent, any Lender, or any third Person or otherwise) related to the entering into and/or performance of any Credit Document or the use of the proceeds of any Loans hereunder or the consummation of any transactions contemplated in any Credit Document, and in each case, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). 11.02 Lender Enforceability Opinions. Within 45 days following the Effective Date, each Lender agrees to deliver to Parent and Corp. an opinion or opinions (as applicable) of counsel to such Lender (which opinion or opinions may be from internal counsel to such Lender) substantially in the form of Exhibit J or in such other form as is reasonably acceptable to Parent and Corp. relating to the enforceability of such Lender's obligations under the Credit Documents. Upon a Lender first becoming a party hereunder pursuant to Section 1.14, 1.16 or 11.04, such Lender agrees to deliver to Parent and Corp. an opinion or opinions (as applicable) of counsel to such Lender (which opinion or opinions may be from internal counsel to such Lender) substantially in the form of Exhibit J or in such other form as is reasonably acceptable to Parent and Corp. relating to the enforceability of such Lender's obligations under the Credit Documents. Notwithstanding the foregoing, the failure by a Lender to provide the opinion or opinions referred to in this Section 11.02 shall not affect any of the obligations of the Borrowers hereunder or under the other Credit Documents. 11.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telecopier or facsimile) and mailed, telecopied, faxed or delivered, if to a Borrower, at the address specified opposite its signature below or in the other relevant Credit Documents, as the case may be; if to -46- any Lender or the Administrative Agent, at its address specified for such Lender or the Administrative Agent on Annex II hereto; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telecopied or sent by overnight courier, and shall be effective when received. 11.04 Benefit of Agreement. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that no Borrower may assign or transfer any of its rights or obligations hereunder without the prior written consent of the Lenders. Each Lender may at any time grant participations in any of its rights hereunder or under any of the Notes to any Person, provided that (X) in the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrowers hereunder shall be determined as if such Lender had not sold such participation, except that the participant shall be entitled to the benefits of Sections 1.11 and 3.04 of this Agreement to the extent that such Lender would be entitled to such benefits if the participation had not been entered into or sold and (Y) no Lender shall transfer, grant or assign any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would extend the final scheduled maturity of any Loan or Note in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of the applicability of any post-default increase in interest rates), or reduce the principal amount thereof, or increase such participant's participating interest in any Commitment over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment, or a mandatory prepayment, shall not constitute a change in the terms of any Commitment). (b) Notwithstanding the foregoing, (x) any Lender may assign all or a portion of its Commitment and its rights and obligations hereunder to another Lender (or an Affiliate of such assigning Lender), and (y) with the consent of the Administrative Agent and, so long as no Default under Section 8.01(a) or 8.01(h) or Event of Default exists, Parent (which consent shall not be unreasonably withheld), any Lender may assign all or a portion of its Commitment and its rights and obligations hereunder to one or more Persons. No assignment pursuant to the immediately preceding sentence by a Lender (or by Lenders which are Affiliates of each other) shall to the extent such assignment represents an assignment to an institution other than one or more Lenders hereunder (or to an Affiliate of an assigning Lender), be in an aggregate amount less than $ 10,000,000 unless the entire Commitment of the assigning Lender (or group of Lenders which are Affiliates) is so assigned. If any Lender so sells or assigns all or a part of its rights hereunder or under the Notes, any reference in this Agreement or the Notes to such assigning Lender shall thereafter refer to such Lender and to the respective assignee to the extent of their respective interests and the respective assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights and benefits as it would if it were such assigning Lender. Each assignment pursuant to this Section 11.04(b) shall be effected by the assigning Lender and the assignee Lender executing an Assignment Agreement (appropriately completed). At the time of any such assignment, (i) either the assigning or the assignee Lender shall pay to the -47- Administrative Agent a nonrefundable assignment fee of $3,500, (ii) Annex I shall be deemed to be amended to reflect the Commitment of the respective assignee (which shall result in a direct reduction to the Commitment of the assigning Lender) and of the other Lenders, and (iii) the Borrowers at such time will issue new Notes to the respective assignee and to the assigning Lender in conformity with the requirements of Section 1.06. To the extent any assignment pursuant to this Section 11.04(b) is to a Person which is not already a Lender hereunder and which is not a United States Person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective assignee Lender shall provide to Parent and the Administrative Agent the appropriate Internal Revenue Service Forms (and, if applicable, a Section 3.04 Certificate) described in Section 3.04(b). To the extent that an assignment of all or any portion of a Lender's Commitments and related outstanding obligations pursuant to this Section 11.04(b) would, at the time of such assignment, result in increased costs under Section 1.11 or 3.04 from those being charged by the respective assigning bank prior to such assignment, then the Borrowers shall not be obligated to pay such increased costs (although the Borrowers shall be obligated to pay any other increased costs of the type described above resulting from changes specified in said Section 1.11 or 3.04 occurring after the date of the respective assignment). Each Lender and the Borrowers agree to execute such documents (including without limitation amendments to this Agreement and the other Credit Documents) as shall be necessary to effect the foregoing. Nothing in this clause (b) shall prevent or prohibit any Lender from pledging its Notes or Loans to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. (c) Notwithstanding any other provisions of this Section 11.04, no transfer or assignment of the interests or obligations of any Lender hereunder or any grant of participation therein shall be permitted if such transfer, assignment or grant would require any Borrower to file a registration statement with the Securities and Exchange Commission or to qualify the Loans under the "Blue Sky" laws of any State. 11.05 No Waiver; Remedies Cumulative, No failure or delay on the part of any Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which any Agent or any Lender would otherwise have. 11.06 Payments Pro Rata. (a) The Administrative Agent agrees that promptly after its receipt of each payment from or on behalf of any Borrower in respect of any Obligations of such Borrower hereunder, it shall distribute such payment to the Lenders (other than any Lender that has expressly waived its right to receive its pro rata share thereof) Pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit -48- Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans or Fees, of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total of such Obligation then owed and due to such Lender bears to the total of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the respective Borrower to such Lenders in such amount as shall result in a proportional participation by all of the Lenders in such amount, provided that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. (c) Notwithstanding anything to the contrary contained herein, the provisions of the preceding Sections 11.06(a) and (b) shall be subject to the express provisions of this Agreement which require, or permit, differing payments to be made to Non-Defaulting Lenders as opposed to Defaulting Lenders. 11.07 Calculations: Computations. (a) The financial statements to be furnished to the Lenders pursuant hereto shall be made and prepared in conformity with GAAP or Statutory Accounting Principles, as the case may be, consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrowers to the Lenders and with respect to any interim financial statements, subject to changes resulting from audit and normal year-end audit adjustments), provided that (x) except as otherwise specifically provided herein, all computations determining compliance with Sections 7.07 and 7.08, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the December 31, 1997 financial statements delivered to the Lenders pursuant to Section 5.04(a) and (y) if at any time the computations determining compliance with Sections 7.07 and 7.08 utilize accounting principles different from those utilized in the financial statements furnished to the Lenders, such financial statements shall be accompanied by reconciliation work-sheets. (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days (365-366 days for interest on Base Rate Loans when the Base Rate is based on the Prime Lending Rate). (c) For purposes of this Agreement, the Dollar Equivalent of each Loan that is an Alternate Currency Loan shall be calculated on the date when any such Loan is made, on the second Business Day of each month and at such other times as designated by the Administrative Agent at any time when a Default or an Event of Default exists. Such Dollar Equivalent shall remain in effect until the same is recalculated by the Administrative Agent as provided above and notice of such recalculation is received by the Borrowers, it being understood that until such notice is received, the Dollar Equivalent shall be that Dollar Equivalent as last reported to the Borrowers by the Administrative Agent. The Administrative Agent shall promptly notify the Borrowers and the Lenders of each such determination of the Dollar Equivalent. 11.08 Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE -49- RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Agreement or any other Credit Document 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 Agreement, each Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Borrower further 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 it, to the extent located outside New York City, or by hand, to the extent located within New York City, at its address for notices pursuant to Section 11.03, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of any Agent or any Lender to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any Borrower in any other jurisdiction. (b) Each Borrower each 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 Agreement or any other Credit Document 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. (c) Each of the parties to this Agreement hereby irrevocably waives all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement, the other Credit Documents or the transactions contemplated hereby or thereby. 11.09 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with Parent, Corp. and the Administrative Agent. 11.10 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 11.11 Amendment or Waiver. Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Borrowers and the Required Lenders, provided that no such change, waiver, discharge or termination shall, without the consent of each Lender (other than a Defaulting Lender) directly affected thereby, (i) extend the Final Maturity Date or reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) or Fees or other amounts payable hereunder, or reduce the principal amount thereof, or increase the Commitment of any Lender over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment shall not -50- constitute a change in the terms of any Commitment of any Lender), (ii) amend, modify or waive any provision of this Section 11.11 or of Section 4.02(d), (iii) reduce the percentage specified in, or (except to give effect to any additional facilities hereunder) otherwise modify, the definition of Required Lenders, or (iv) consent to the assignment or transfer by any Borrower of any of its rights and obligations under this Agreement. 11.12 Survival. All indemnities set forth herein including, without limitation, in Section 1.11, 1.12 or 3.04 shall survive the execution and delivery of this Agreement and the making and repayment of the Loans. 11.13 Domicile of Loans. Each Lender may transfer and carry its Loans at, to or for the account of any branch office, Subsidiary or affiliate of such Lender, provided that the Borrowers shall not be responsible for costs arising under Section 1.11 or 3.04 resulting from any such transfer (other than a transfer pursuant to Section 1.13 or 1.14) to the extent not otherwise applicable to such Lender prior to such transfer. 11.14 Confidentiality. Subject to Section 11.04, the Lenders shall hold all non-public information obtained pursuant to the requirements of this Agreement in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure to its Affiliates, employees, auditors, advisors or counsel or as reasonably required by any bona fide transferee or participant in connection with the contemplated transfer of any Loans or participation therein (so long as such transferee or participant agrees to be bound by the provisions of this Section 11.14) or as required or requested by any governmental agency or representative thereof or pursuant to legal process, provided that, unless specifically prohibited by applicable law or court order, each Lender shall notify Parent of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information, and provided further that in no event shall any Lender be obligated or required to return any materials furnished by Parent or any of its Subsidiaries. 11.15 Lender Register. Each Borrower hereby designates the Administrative Agent to serve as its agent, solely for purposes of this Section 11.15, to maintain a register (the "Lender Register") on which it will record the Commitments from time to time of each of the Lenders, the Loans made by each of the Lenders and each repayment in respect of the principal amount of the Loans of each Lender. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrowers' obligations in respect of such Loans. With respect to any Lender, the transfer of the Commitments of such Lender and the rights to the principal of, and interest on, any Loan made pursuant to such Commitments shall not be effective until such transfer is recorded on the Lender Register maintained by the Administrative Agent with respect to ownership of such Commitments and Loans and prior to such recordation all amounts owing to the transferor with respect to such Commitments and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitments and Loans shall be recorded by the Administrative Agent on the Lender Register only upon the acceptance by the Administrative Agent of a properly executed and delivered Assignment Agreement pursuant to -51- Section 11.04(b). The Borrowers jointly and severally agree to indemnify the Administrative Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Administrative Agent in performing its duties under this Section 11.15 other than those resulting from the Administrative Agent's willful misconduct or gross negligence. 11.16 Judgment Currency. (a) The Borrowers' obligations hereunder and under the other Credit Documents to make payments in the applicable Approved Currency or Other Alternate Currency (the "Obligation Currency") shall not be discharged or satisfied by any tender or recovery pursuant to any judgment expressed in or converted into any currency other than the Obligation Currency, except to the extent that such tender or recovery results in the effective receipt by the Administrative Agent or the respective Lender of the full amount of the Obligation Currency expressed to be payable to the Administrative Agent or such Lender under this Agreement or the other Credit Documents. If, for the purpose of obtaining or enforcing judgment against any Borrowers in any court or in any jurisdiction, it becomes necessary to convert into or from any currency other than the Obligation Currency (such other currency being hereinafter referred to as the "Judgment Currency") an amount due in the Obligation Currency, the conversion shall be made at the Relevant Currency Equivalent, and, in the case of other currencies, the rate of exchange (as quoted by the Administrative Agent or if the Administrative Agent does not quote a rate of exchange on such currency, by a known dealer in such currency designated by the Administrative Agent) determined, in each case, as of the Business Day immediately preceding the day on which the judgment is given (such Business Day being hereinafter referred to as the "Judgment Currency Conversion Date"). (b) If there is a change in the rate of exchange prevailing between the Judgment Currency Conversion Date and the date of actual payment of the amount due, the Borrowers covenant and agree to pay, or cause to be paid, such additional amounts, if any (but in any event not a lesser amount) as may be necessary to ensure that the amount paid in the Judgment Currency, when converted at the rate of exchange prevailing on the date of payment, will produce the amount of the Obligation Currency which could have been purchased with the amount of Judgment Currency stipulated in the judgment or judicial award at the rate of exchange prevailing on the Judgment Currency Conversion Date. (c) For purposes of determining the Relevant Currency Equivalent or any other rate of exchange for this Section, such amounts shall include any premium and costs payable in connection with the purchase of the Obligation Currency. 11.17 Euro. (a) If at any time that an Alternate Currency Loan is outstanding, the relevant Alternate Currency is fully replaced as the lawful currency of the country that issued such Alternate Currency (the "Issuing Country") by the Euro so that all payments are to be made in the Issuing Country in Euros and not in the Alternate Currency previously the lawful currency of such country, then such Alternate Currency Loan shall be automatically converted into a Loan denominated in Euros in a principal amount equal to the amount of Euros into which the principal amount of such Alternate Currency Loan would be converted pursuant to the EMU Legislation and thereafter no further Loans will be available in such Alternate Currency, with the basis of accrual of interest, notices requirements and payment offices with respect to such converted -52- Loans to be that consistent with the convention and practices in the London interbank market for Euro denominated Loans. (b) The applicable Borrowers shall from time to time, at the request of any Lender, pay to such Lender the amount of any losses, damages, liabilities, claims, reduction in yield, additional expense, increased cost, reduction in any amount payable, reduction in the effective return of its capital, the decrease or delay in the payment of interest or any other return forgone by such Lender or its affiliates as a result of the tax or currency exchange resulting from the introduction, changeover to or operation of the Euro in any applicable nation or eurocurrency market. * * * -53- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. MBIA Inc. MBIA INC., 113 King Street as a Borrower Armonk, NY 10504 Tel: (914) 765-3020 Fax: (914) 765-3163 Attention: Julliette S. Tehrani By /s/ JULLIETTE S. TEHRANI --------------------------------- with a copy to: Name: Julliette S. Tehrani Title: Executive Vice President, 885 Third Avenue Chief Financial Officer and New York, NY 10022 Treasurer Tel: (212) 415-6816 Fax: (212) 755-5462 Attention: Robert L. Nevin, Jr. MBIA Insurance Corporation MBIA INSURANCE CORPORATION, 113 King Street as a Borrower Armonk, New York 10504 Tel: (914) 765-33020 Fax: (914) 765-3163 Attention: Julliette S. Tehrani By /s/ JULLIETTE S. TEHRANI --------------------------------- with a copy to: Name: Julliette S. Tehrani Title: Executive Vice President, 885 Third Avenue Chief Financial Officer and New York, New York 10022 Treasurer Tel: (212) 415-6916 Fax: (212) 755-5462 Attention: Robert L. Nevin, Jr. DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By /s/ JOHN S. MCGILL ------------------------------------- Name: John S. McGill Title: Vice President By /s/ GAYMA Z. SHIVNARAIN ------------------------------------- Name: Gayma Z. Shivnarain Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Syndication Agent By: /s/ T. LUISA PASHINIAN ---------------------------------- Name: T. Luisa Pashinian Title: Corporate Banking Officer FLEET NATIONAL BANK, Individually and as Documentation Agent BY: /s/ E.B. SHELLEY ---------------------------------- Name: E.B. Shelley Title: Vice President BANCA MONTE DEI PASCHI DI SIENA SPA, as Lender By: /s/ G. NATALICCHI ---------------------------------- Name: G. Natalicchi Title: S.V.P. & General Manager By: /s/ BRIAN R. LANDY ---------------------------------- Name: Brian R. Landy Title: Vice President BANK OF MONTREAL, as Lender By: /s/ R.J. MCCLOREY ------------------------------ Name: R.J. McClorey Title: Director CHASE MANHATTAN BANK, as Lender By: /s/ HELEN L. NEWCOMB --------------------------------- Name: Helen L. Newcomb Title: Vice President BANK OF AMERICA, NATIONAL TRUST & SAVINGS ASSOCIATION, as Lender By: /s/ ELIZABETH W.F. BISHOP --------------------------------- Name: ELIZABETH W.F. BISHOP Title: Vice President BANCA COMMERCIALE ITALIANA, NEW YORK BRANCH, as Lender By: /s/ Karen Purelis ------------------------------ Name: Karen Purelis Title: VP By: /s/ Charles DOUGHERTY ------------------------------ Name: C. Dougherty Title: VP BANCO SANTANDER S.A., NEW YORK BRANCH, as Lender By: /s/ EDWARD W O'LOGHLEN --------------------------------- Name: Edward W O'Loghlen Title: Vice President Asset Backed Finance Group By: /s/ JOHN HENNESSY --------------------------------- Name: JOHN HENNESSY Title: VICE PRESIDENT STRUCTURED FINANCE COMMERZBANK AG, NEW YORK BRANCH, as Lender By: /s/ EDWARD J. MCDONNELL III --------------------------------------- Name: Edward J. McDonnell III,C.F.A. Title: Vice President By: /s/ TOM AUSFAHL --------------------------------------- Name: TOM AUSFAHL Title: VICE PRESIDENT NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH ACN004044937 as Lender By: /s/ TOM KILFOYLE --------------------------------- Name: Tom Kilfoyle Title: Vice President NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK BRANCH and/or CAYMAN ISLANDS BRANCH, as Lender By: /s/ STEPHANIE FINNEN --------------------------------- Name: Stephanie Finnen Title: VP By: /s/ STEPHEN K. HUNTER --------------------------------- Name: Stephen K. Hunter Title: SVP I. $400 MILLION CREDIT AGREEMENT A. OPERATIVE DOCUMENTS: 1. Credit Agreement ANNEX I Commitments ANNEX II Lenders' Addresses ANNEX III Subsidiaries EXHIBIT A-1 Form of Notice of Borrowing EXHIBIT A-2 Form of Notice of Competitive Bid Borrowing EXHIBIT B-l Form of Revolving Note EXHIBIT B-2 Form of Competitive Bid Note EXHIBIT C Form of Section 3.04 Certificate EXHIBIT D Form of Opinion of General Counsel to Borrowers EXHIBIT E Form of Officers' Certificate EXHIBIT F Form of Guarantee Insurance Policy EXHIBIT G Form of Assignment Agreement EXHIBIT H Form of Commitment Assumption Agreement EXHIBIT I Form of DB Assumption Agreement EXHIBIT J Form of Lender's Opinion EXHIBIT K Form of Opinion of Designated Borrower's Counsel EXHIBIT L Form of Opinion of Counsel to Corp. ANNEX I COMMITMENTS Lender Commitment ------ ---------- Deutsche Bank AG, New York Branch $59,800,000 The First National Bank of Chicago $56,700,000 Fleet National Bank $56,700,000 Banca Monte Dei Paschi Di Siena Spa $50,000,000 Bank of Montreal $33,300,000 Chase Manhattan Bank $33,300,000 Bank of America National Trust & Savings Association $26,700,000 Banca Commerciale Italiana $16,700,000 Banco Santander S.A., New York Branch $16,700,000 Commerzbank AG, New York Branch $16,700,000 National Australia Bank Limited, New York Branch ACN 004044937 $16,700,000 Norddeutsche Landesbank Girozentrale, New York Branch and/or Cayman Islands Branch $16,700,000 Total: $400,000,000 (i) ANNEX II LENDER ADDRESSES Deutsche Bank AG, 31 West 52nd Street, 23rd Floor New York Branch New York, NY 10019 Attn.: John S. McGill Tel: (212) 469-8666 Fax: (212) 469-8366 The First National Bank of Chicago 153 West 51st Street New York, NY 10019 Attn: Luisa Pashinan Tel: (212) 373-1169 Fax: (212) 373-1439 Fleet National Bank 777 Main Street CTMO 0250 Hartford, CT 06115-2001 Attn: Elizabeth B. Shelley Tel: (860) 986-3127 Fax: (960) 986-1264 Banca Commerciale Italiana, New York Branch One William Street New York, NY 10004 Attn: Karen Purelis Tel: (212) 607-3868 Fax: (212) 809-2124 Banca Monte Dei Paschi Di Siena Spa 55 East 59th Street New York, NY 10022 Attn: Brian Landy Tel: (212) 891-3655 Fax: (212) 891-3661 Banco Santander S.A., New York Branch 45 East 53rd Street New York, NY 10022 Attn: Ligia Castro Tel: (212) 350-3640 Fax: (212) 350-3690 (i) Bank of America, National Trust & Savings 231 South LaSalle Street Association Chicago, IL 60697 Attn: Elizabeth Bishop Tel: (312) 828-6550 Fax: (312) 987-0889 Bank of Montreal 115 South LaSalle Street Floor 12 Chicago, IL 60603 Attn: Charles W. Reed Tel: (312) 750-5912 Fax: (312) 845-2199 Chase Manhattan Bank 270 Park Avenue New York, NY 10017 Attn: Helen Newcomb Tel: (212) 270-6260 Fax: (212) 270-0670 Commerzbank AG, New York Branch 2 World Financial Center New York, NY 10281-1050 Attn: Edward McDonnell III Tel: (212) 266-7607 Fax: (212) 266-7629 National Australia Bank Limited, New York 200 Park Avenue, Floor 34 Branch ACN 004044937 New York, NY 10166 Attn: Thomas F. Kilfoyle Tel: (212) 916-9510 Fax: (212) 983-1969 Norddeutsche Landesbank 1270 Avenue of the Americas Girozentrale, New York New York, NY 10020 Branch and/or Cayman Islands Branch Attn: Stephanie Finnen Tel: (212) 332-8606 Fax: (212) 332-8660 (ii) ANNEX III SUBSIDIARIES MBIA INSURANCE CORPORATION (NEW YORK) MUNICIPAL ISSUERS SERVICE CORPORATION (NEW YORK) MBIA & ASSOCIATES CONSULTING, INC. (DELAWARE) MBIA MUNISERVICES COMPANY (DELAWARE) MUNI RESOURCES, LLC (DELAWARE) MBIA INVESTMENT MANAGEMENT CORP. (DELAWARE) MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (DELAWARE) MBIA CAPITAL MANAGEMENT CORP. (DELAWARE) MBIA CAPITAL CORP. (DELAWARE) MBIA-AMBAC INTERNATIONAL MARKETING SERVICES, PTY., LIMITED (AUSTRALIA) CAPMAC HOLDINGS INC. (DELAWARE) MBIA ASSET MANAGEMENT CORPORATION (DELAWARE) 1838 INVESTMENT ADVISORS, INC. (DELAWARE) (i) EXHIBIT A-1 NOTICE OF BORROWING [Date] Deutsche Bank AG, New York Branch, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below 31 West 52nd Street New York, New York 10019 Attention: Gentlemen: The undersigned, [Name of Borrower], refers to the Credit Agreement, dated as of August 28, 1998 (as amended from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), among the undersigned, the other Borrowers, certain Lenders parties thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and you, as Administrative Agent for such Lenders, and hereby gives you notice, irrevocably, pursuant to Section 1.03 of the Credit Agreement, that the undersigned hereby requests a Borrowing of Revolving Loans under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 1.03 of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is ______________, 19__. (ii) The aggregate principal amount of the Proposed Borrowing is [______________________](1) (iii) The Proposed Borrowing is to consist of [Base Rate Loans] [Eurodollar Loans]. [(iv) The initial Interest Period for the Proposed Borrowing is _____ [months] [days]](2) - ---------- (1) Such amount to be stated in the applicable Approved Currency (provided that in all cases, Base Rate Loans shall be Dollar-denominated). EXHIBIT A-1 Page 2 [(iv) The initial Interest Period for the Proposed Borrowing is __ [months] [days]]2 [(v) The Approved Currency is _______________________](3) [(vi) The DB Loan Maturity Date is _________________](4) The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 5 of the Credit Agreement are true and correct in all material respects, before and after giving effect to the Proposed Borrowing and to the application of the proceeds thereof, as though made on and as of such date; and (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof. Very truly yours, [NAME OF BORROWER] - ---------- (2) To be included for a Proposed Borrowing of Eurodollar Loans. (3) To be included for a Proposed Borrowing of Alternate Currency Loans in the case of Eurodollar Loans only. (4) To be included for a Proposed Borrowing of DB Loans. EXHIBIT A-1 Page 3 By __________________________________ Title: EXHIBIT A-2 NOTICE OF COMPETITIVE BID BORROWING [Date] Deutsche Bank AG, New York Branch, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below 31 West 52nd Street New York, New York 10019 Attention: Gentlemen: The undersigned, [Name of Borrower], refers to the Credit Agreement, dated as of August 28, 1998 (as amended from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), among the undersigned, the other Borrowers, certain Lenders parties thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and you, as Administrative Agent for such Lenders, and hereby gives you notice, pursuant to Section 1.04 of the Credit Agreement, that the undersigned hereby requests a Borrowing of Competitive Bid Loans under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 1.04 of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is ________________,19__. (ii) The aggregate principal amount of the Proposed Borrowing is $_________________. (iii) The maturity date for repayment of the Proposed Borrowing is ______________, 19__. (iv) The interest payment date[s] of the Proposed Borrowing is [are] (v) The Proposed Borrowing is to consist of a [Absolute Rate Borrowings] [Spread Borrowings]. EXHIBIT A-2 Page 2 [(vi) The Interest Rate Basis for the Proposed Borrowing is ___________.](1) [(vi)] The Alternate Currency is _________.](2) [(vi) [Other applicable terms]](3) The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 5 of the Credit Agreement are true and correct in all material respects, before and after giving effect to the Proposed Borrowing and to the application of the proceeds thereof, as result from such Proposed Borrowing made on and as of such date; and (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof. - ---------- (1) To be included for a Spread Borrowing. (2) To be included for Alternate Currency Loan. (3) To be included, as needed. EXHIBIT A-2 Page 3 Very truly yours, [NAME OF BORROWER] By __________________________ Title: EXHIBIT B-1 FORM OF REVOLVING NOTE New York, New York __________ __,1998 FOR VALUE RECEIVED, [NAME OF BORROWER], a corporation organized and existing under the laws of the State of [______________________] (the "Borrower"), hereby promises to pay to ________________ or its registered assigns (the "Lender"), in lawful money of the United States of America or the respective Approved Currency (as defined in the Agreement referred to below), as the case may be, in immediately available funds, at the office of DEUTSCHE BANK AG, NEW YORK BRANCH (the "Administrative Agent") located at 31 West 52nd Street, New York, New York 10019 on the Final Maturity Date (as defined in the Agreement) the unpaid principal amount of all Revolving Loans (as defined in the Agreement) made by the Lender to the Borrower pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount of each Revolving Loan incurred by the Borrower in like money at said office from the date such Revolving Loan is made until paid at the rates and at the times provided in the Agreement. This Note is one of the Revolving Notes referred to in the Credit Agreement, dated as of August 28, 1998, among the Borrower, [MBIA Inc.] [MBIA Insurance Corporation], various Designated Borrowers, the Lender, the other financial. institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (as from time to time in effect, the "Agreement") and is entitled to the benefits thereof As provided in the Agreement, this Note is subject to voluntary and mandatory prepayment, in whole or in part, and Revolving Loans may be converted in accordance with Section 1.07 of the Agreement. In case an Event of Default [under Section 8.01(q)](1) (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. - ---------- (1) Include in Revolving Notes executed by Designated Borrowers only. EXHIBIT B-1 Page 2 This Note shall be construed in accordance with and be governed by the law of the State of New York, [NAME OF BORROWER] By ___________________________ Title: EXHIBIT B-2 FORM OF COMPETITIVE BID NOTE New York, New York ______________ __,1998 FOR VALUE RECEIVED, [NAME OF BORROWER], a corporation organized and existing under the laws of the State of [________________] (the "Borrower"), hereby promises to pay to _____________________ or its registered assigns (the "Lender"), in lawful money of the United States of America or the respective Alternate Currency (as defined in the Agreement referred to below), as the case may be, in immediately available funds, at the office of DEUTSCHE BANK AG, NEW YORK BRANCH (the "Administrative Agent") located at 31 West 52nd Street, New York, New York 10019 on the Final Maturity Date (as defined in the Agreement), the unpaid principal amount of all Competitive Bid Loans (as defined in the Agreement) made by the Lender to the Borrower pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount of each Competitive Bid Loan incurred by the Borrower in like money at said office from the date such Competitive Bid Loan is made until paid at the rates and at the times provided in the Agreement. This Note is one of the Competitive Bid Notes referred to in the Credit Agreement, dated as of August 28, 1998, among the Borrower, [MBIA Inc.] [MBIA Insurance Corporation], various Designated Borrowers, the Lender, the other financial institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (as from time to time in effect, the "Agreement") and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to mandatory prepayment, in whole or in part. In case an Event of Default [under Section 8.01 (q)](1) (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. This Note shall be construed in accordance with and be governed by the law of the State of New York. - ---------- (1) Include in Competitive Bid Notes executed by Designated Borrowers only. EXHIBIT B-2 Page 2 [NAME OF BORROWER] By _________________________________ Title: EXHIBIT C FORM OF SECTION 3.04 CERTIFICATE Reference is hereby made to the Credit Agreement, dated as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time, the financial institutions from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Pursuant to the provisions of Section 3.04 of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" as such term is used in Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended. [NAME OF BANK] By ______________________________ Title: Date: _______________, ____ EXHIBIT D [FORM OF OPINION OF GENERAL COUNSEL TO BORROWERS] [Date] To the Lenders and the Administrative Agent Referred to Below c/o Deutsche Bank AG, New York Branch as Administrative Agent 31 West 52nd Street New York, NY 10019 Re: $400,000,000 Credit Agreement dated as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto Ladies and Gentlemen: I am General Counsel of MBIA Inc., a Connecticut corporation ("MBIA") and MBIA Insurance Corporation, a New York stock insurance corporation ("MBIA Corp."). This opinion is being given in connection with the Credit Agreement, dated as of August 28, 1998 (the "Credit Agreement"), among MBIA, MBIA Corp., various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto. All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. In this connection, I have examined the Credit Agreement, the Notes and such certificates of public officials, such certificates of officers of MBIA and MBIA Corp., and copies certified to my satisfaction of such corporate documents and records of MBIA and MBIA Corp. and of such other papers as I have deemed relevant and necessary or appropriate for the opinions set forth below. I have relied upon certificates of public officials and of officers of MBIA and MBIA Corp. with respect to the accuracy of factual matters contained therein which were not independently established. I have also assumed (i) the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Administrative Agent and the Lenders, (ii) the authenticity of all such documents submitted to me as originals, (iii) the genuineness of all signatures, and (iv) the conformity of all such documents submitted to me as copies. Based upon the foregoing, it is my opinion that: EXHIBIT D Page 2 (1) MBIA is a corporation duly organized and validly existing and in good standing under the laws of the State of Connecticut, MBIA Corp. is a stock insurance corporation duly incorporated and validly existing in good standing under the laws of the State of New York and each has the corporate power required to carry on their businesses as now being conducted. (2) The execution, delivery and performance by MBIA and MBIA Corp. of the Credit Agreement and the Notes (i) are within the corporate powers of MBIA and MBIA Corp., (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not (A) contravene, or constitute a default under, any provision of applicable law or regulation or of any agreement, judgment, injunction, order, decree or other instrument which to my knowledge is binding upon MBIA and MBIA Corp., or (B) in the case of MBIA, violate any provision of its Amended and Restated Certificate of Incorporation or By-laws, and in the case of MBIA Corp., violate any provision of its Restated Charter or By-laws, and (v) to the best of my knowledge, do not result in the creation or imposition of any Lien on any asset of MBIA, MBIA Corp. or any of their Subsidiaries. (3) The Credit Agreement and the Notes are valid and binding obligations of MBIA and MBIA Corp., enforceable in accordance with their respective terms, except that such enforceability may be limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors rights generally and by general principles of equity, and the enforceability as to rights to indemnity thereunder may be subject to limitations of public policy. (4) To the best of my knowledge, there is no action, suit or proceeding before or by any court, arbitrator or any governmental body, agency or official pending or threatened against MBIA or MBIA Corp. or their Consolidated Subsidiaries wherein an adverse decision, ruling or finding would (i) materially and adversely affect the business, consolidated financial position or consolidated results of operations of MBIA, MBIA Corp. and their Consolidated Subsidiaries, considered as a whole, or (ii) affect the validity or enforceability of the Credit Agreement and the Notes. (5) Each Subsidiary of MBIA and MBIA Corp. is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. (6) Neither MBIA nor MBIA Corp. is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (7) Neither MBIA, MBIA Corp. nor any of their Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. EXHIBIT D Page 3 (8) To the best of my knowledge, no governmental consents, approvals, authorizations, registrations, declarations or filings are required for the execution and delivery of the Credit Agreement and the Notes on behalf of MBIA or MBIA Corp. or the consummation of the transaction as provided in the Credit Agreement and the Notes. This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you or any assignee under the Credit Agreement, and may not be circulated, quoted or otherwise referred to except in connection with the transactions referenced above without my prior written consent. Very truly yours, Louis G. Lenzi General Counsel EXHIBIT E [NAME OF BORROWER] Officers' Certificate I, the undersigned, [President/Vice-President] of [NAME OF BORROWER], a corporation organized and existing under the laws of the State of [______________] (the "Borrower"), DO HEREBY CERTIFY that: 1. This Certificate is furnished pursuant to Section 4.01(c) of the Credit Agreement, dated as of August 28, 1998 among the Borrower, [MBIA Inc.] [MBIA Insurance Corporation], the Lenders party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent (such Credit Agreement, as in effect on the date of this Certificate, being herein called the "Credit Agreement"). Unless otherwise defined herein capitalized terms used in this Certificate have the meanings assigned to those terms in the Credit Agreement. 2. The persons named below have been duty elected, have duly qualified as and at all times since , 19_(1) (to and including and date hereto have been officers of the Borrower, holding the respective offices below set opposite their names, and the signatures below set opposite their names are their genuine signatures. Name(2) Office Signature ------------------ ------------------ -------------------- ------------------ ------------------ -------------------- ------------------ ------------------ -------------------- 3. Attached hereto as Exhibit A is a copy of the Certificate of Incorporation of the Borrower as filed in the office of the Secretary of State of [___________] on ,19__, together with all amendments thereto adopted through the date hereof. - ---------- (1) Insert a date prior to the time of any corporate action relating to the Credit Agreement. (2) Include name, office and signature of each officer who will sign any Credit Document, including the officer who will sign the certification at the end of this Certificate. EXHIBIT E Page 2 4. Attached hereto as Exhibit B is a true and correct copy of the By-Laws of the Borrower as in effect on ______________ __, 19__(3) together with all amendments thereto adopted through the date hereof. 5. Attached hereto as Exhibit C is a true and correct copy of resolutions duly adopted by [the unanimous written consent of] the Board of Directors of the Borrower [at a meeting on __________________ __, 19_ , at which a quorum was present and acting throughout], which resolutions have not been revoked, modified, amended or rescinded and are still in full force and effect. Except as attached hereto as Exhibit C, no resolutions have been adopted by the Board of Directors of the Borrower which deal with the execution, delivery or performance of any of the Credit Documents. 6. On the date hereof, the representations and warranties contained in Section 5 of the Credit Agreement are true and correct in all material respects. 7. On the date hereof, no Default or Event of Default has occurred and is continuing. 8. I know of no proceeding for the dissolution or liquidation of the Borrower or threatening its existence. IN WITNESS WHEREOF, I have hereunto set my hand this day of __________, 19__. [NAME OF BORROWER] By ___________________________________ Name: Title: - ---------- (3) Insert same date as in paragraph 2 of this certificate. EXHIBIT E Page 2 I, the undersigned, [Secretary/Assistant Secretary] of the Borrower, DO HEREBY CERTIFY that: 1. [Insert name of Person making the above certifications] is the duly elected and qualified of the Borrower and the signature above is his genuine signature. 2. The certifications made by [name] in items 2, 3, 4 and 5 above are true and correct. 3. I know of no proceeding for the dissolution or liquidation of the Borrower or threatening its existence. IN WITNESS WHEREOF, I have hereunto set my hand this _____ day of 19__. [NAME OF BORROWER] By ______________________________ Name: Title: EXHIBIT F FINANCIAL GUARANTY INSURANCE POLICY MBIA Insurance Corporation Armonk, New York, 10504 Policy No. _______ MBIA Insurance Corporation (the "Insurer"), for consideration received and subject to the terms of this Policy, hereby unconditionally and irrevocably guarantees to Deutsche Bank AG, New York Branch, as Administrative Agent (in such capacity and together with its successors and assigns, the "Administrative Agent") for the benefit of the financial institutions (the "Lenders") which are parties from time to time to the Credit Agreement, dated as of August 28_, 1998 among MBIA Inc., the Insurer, various designated borrowers from time to time parties thereto, the Lenders, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and the Administrative Agent (as amended, modified or supplemented from time to time, the "Credit Agreement") the full and complete payment required to be made by [Designated Borrower] (the "Obligor") of an amount equal to (i) amounts due for payment from the Obligor under the Credit Agreement as such payments shall become due but shall not be so paid; and (ii) the reimbursement of any such payment which is subsequently recovered from the Administrative Agent or the Lenders pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts." Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by the Insurer from the Administrative Agent that the payment of an Insured Amount which is then due has not been made, the Insurer by 2:00 p.m., New York Time, on the second Business Day after receipt of notice of such nonpayment, will make a deposit of immediately available funds in the currency or currencies in which such Insured Amount is payable, in an account with the Administrative Agent sufficient for the payment of any such Insured Amounts which are then due. All notices, presentations and other communications made by the Administrative Agent to the Insurer shall be made to the Insurer pursuant to Section 1 1.03 of the Credit Agreement. The Insurer shall be subrogated to the rights of the Administrative Agent or the Lenders to receive payment from the Obligor under the Credit Agreement to the extent of any payment by the Insurer hereunder. The Insurer's obligation to make any payment required pursuant to this Policy shall be made without the prior assertion of any defenses to payment (including fraud in inducement or fact). EXHIBIT F Page 2 The Insurer may not, in respect of a payment to be made hereunder, be released from its obligations in any circumstance other than the full and complete receipt by the Administrative Agent of the full amount payable hereunder. The Insurer hereby waives and agrees not to assert any and all rights to require the Administrative Agent to make demand on or to proceed against any person, party or security prior to demanding payment under this Policy. Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, NY 10504 and such service of process shall be valid and binding. This policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. This policy is non-cancelable for any reason. "Business Day" means any day which is not a Saturday or Sunday or a day on which commercial banks in the State of New York or the Administrative Agent are authorized to or required by law to be closed. This Policy is to be governed by, and construed in accordance with, the laws of the State of New York. EXHIBIT F Page 3 IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed in facsimile on its behalf by its duly authorized officers, this ____ day of _____________, _________. MBIA INSURANCE CORPORATION ________________________________ President Attest: ________________________________ Assistant Secretary EXHIBIT G FORM OF ASSIGNMENT AGREEMENT [DATE] Reference is made to the Credit Agreement described in Item 2 of Annex I annexed hereto (as such Credit Agreement may hereafter be amended, supplemented or otherwise modified from time to time, the "Credit Agreement"). Unless defined in Annex I attached hereto, terms defined in the Credit Agreement are used herein as therein defined. _____________ (the "Assignor") and _____________ (the "Assignee") hereby agree as follows: 1. The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty (other than as expressly provided herein), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement which represents the percentage interest specified in Item 4 of Annex I (the "Assigned Share") of the Total Commitment under the Credit Agreement, including, without limitation, all rights and obligations with respect to the Assigned Share of all outstanding Revolving Loans. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the outstanding Revolving Loans owing to the Assignee will be as set forth in Item 4 of Annex I. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the other Credit Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of Parent or any of its Subsidiaries or any Borrower or the performance or observance by the Borrowers, of any of their obligations under the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, 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 Assignment Agreement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender 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 Credit Agreement; (iii) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such EXHIBIT G Page 2 powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender. 4. Following the execution of this Assignment Agreement by the Assignor and the Assignee, an executed original hereof (together with all attachments) will be delivered to the Administrative Agent and Parent. The effective date of this Assignment Agreement shall be the date of execution hereof by the Assignor and the Assignee, the receipt of the consent of Parent and the Administrative Agent and receipt by the Administrative Agent of the administrative fee referred to in Section 11.04(b) of the Credit Agreement, the receipt of Internal Revenue Service Form 1001 or 4224 (as applicable) pursuant to Section 3.04(b)(i) of the Credit Agreement and the opinion or opinions (as applicable) referred to in Section 11.02 of the Credit Agreement, or such later date as specified in Item 5 of Annex I hereto (the "Settlement Date"). 5. Upon the delivery of a fully executed original hereof to the Administrative Agent, as of the Settlement Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment Agreement, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment Agreement, relinquish its rights and be released from its obligations under the Credit Agreement, 6. It is agreed that the Assignee shall be entitled to (x) all interest on the Assigned Share of the Revolving Loans at the rates specified in Item 6 of Annex I, and (y) all Facility Fees on the Assigned Share of the Commitment at the rate specified in Item 7 of Annex I; which, in each case, accrue on and after the Settlement Date, such interest and, if applicable, Facility Fees to be paid by the Administrative Agent directly to the Assignee. It is further agreed that all payments of principal made on the Assigned Share of the Revolving Loans which occur on and after the Settlement Date will be paid directly by the Administrative Agent to the Assignee. Upon the Settlement Date, the Assignee shall pay to the Assignor an amount specified by the Assignor in writing which represents the Assigned Share of the principal amount of the Revolving Loans made by the Assignor pursuant to the Credit Agreement which are outstanding on the Settlement Date, net of any closing costs, and which are being assigned hereunder. The Assignor and the Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Settlement Date directly between themselves on the Settlement Date. 7. THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. EXHIBIT G Page 3 IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution also being made on Annex I hereto. Accepted this ________ day [NAME OF ASSIGNOR], of___________,___________ as Assignor By ______________________________ Title: [NAME OF ASSIGNEE], as Assignee By ______________________________ Title: Acknowledged and Agreed: MBIA INC. By______________________________ Title: MBIA INSURANCE CORPORATION By______________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent By______________________________ Title: EXHIBIT G Page 4 By______________________________ Title: EXHIBIT H FORM OF COMMITMENT ASSUMPTION AGREEMENT [Letterhead of Lender] [DATE] MBIA Inc. MBIA Insurance Corporation 885 Third Avenue New York, New York 10022 Deutsche Bank AG, New York Branch, as Administrative Agent 31 West 52nd Street New York, New York 10019 re Additional Commitment Ladies and Gentlemen: Reference is hereby made to the Credit Agreement, dated as of August 28, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among MBIA Inc. ("Parent"), MBIA Insurance Corporation ("Corp."), various Designated Borrowers from time to time, various lending institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, and Deutsche Bank AG, New York Branch, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. [We hereby agree to assume a Commitment under the Credit Agreement of $___________ .] [We hereby agree to increase our Commitment under the Credit Agreement from EXHIBIT H Page 2 $___________ to $___________ .](1) This [assumption of] [increase in] our Commitment shall be effective on the date this letter is accepted by you as provided below. [We (i) confirm that we have received a copy of the Credit Agreement and the other Credit Documents, together with copies of the financial statements referred to therein and such other documents and information as we have deemed appropriate to make our own credit analysis and decision to enter into this Commitment Assumption Agreement; (ii) agree that we will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as we shall deem appropriate at the time, continue to make our own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoint and authorize the Administrative Agent to take such action as agent on our behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agree that we will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by us as a Lender. Upon the delivery of a fully executed original hereof to the Administrative Agent, we shall be a party to the Credit Agreement and, to the extent provided in this Commitment Assumption Agreement, have the rights and obligations of a Lender thereunder and under the other Credit Documents.](2) You may accept this letter by signing the enclosed copies in the space provided below, and returning one copy of same to us and delivering one copy of same to the Administrative Agent before the close of business on ___________,___. If you do not so accept this letter, our Commitment shall be deemed cancelled. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND MAY BE MODIFIED ONLY IN WRITING. Very truly yours, [NAME OF LENDER] By:______________________ Title: - ---------- (1) Insert the first sentence in the case of the assumption of a Commitment by an institution not previously a Lender under the Credit Agreement. Insert the second sentence in the case of an increase in the Commitment of a Lender under the Credit Agreement. (2) Insert bracketed language if the lending institution is not already a Lender. EXHIBIT H Page 3 Agreed and Accepted this ____ day of___________,___________: MBIA INC. By:______________________________ Title: MBIA INSURANCE CORPORATION By:______________________________ Title: EXHIBIT I FORM OF DB ASSUMPTION AGREEMENT DB ASSUMPTION AGREEMENT (the "Agreement") dated as of ___________ ,___________ , by ___________ ,a ___________ [corporation] (the "Company"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. WITNESSETH: WHEREAS, MBIA Inc. ("Parent"), MBIA Insurance Corporation ("Corp."), various Designated Borrowers from time to time, various lending institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent and Deutsche Bank AG, New York Branch, as Administrative Agent, have entered into a Credit Agreement dated as of August 28, 1998 (as amended through the date hereof, the "Credit Agreement"); WHEREAS, pursuant to Section 1.17 of the Credit Agreement, Parent or Corp. may designate one or more Persons as a Designated Borrower from time to time; and WHEREAS, [Parent] [Corp.] desires to designate the Company as a Designated Borrower for purposes of the Credit Agreement; WHEREAS, the Company desires to execute and deliver this Agreement in order to become a party to the Credit Agreement as a Designated Borrower; NOW, THEREFORE, IT IS AGREED: 1. Assumption. By executing and delivering this Agreement, the Company hereby becomes a party to the Credit Agreement as a "Designated Borrower" thereunder, and hereby expressly assumes all obligations and liabilities of a "Designated Borrower" thereunder. 2. Representations, Warranties and Agreements. In order to induce the Lenders to make Loans to the Company as provided in the Credit Agreement, the Company hereby makes the following representations and warranties to, and agreements with, the Lenders, all of which shall survive the execution and delivery of this Agreement and the making of Loans to the Company: (a) The Company is a special purpose entity duly organized, validly existing and in good standing under the laws of the State of _____ , is duly qualified to transact business in every jurisdiction where, by the nature of its businesses, such qualification is EXHIBIT I Page 2 necessary, and has all powers and all governmental licenses, authorizations, consents and approvals required to carry on its businesses as now conducted. (b) The execution, delivery and performance by the Company of this Agreement and the other Credit Documents (i) are within the Company's corporate powers, (ii) have been duly authorized by all necessary corporate or other action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws or other organizational documents of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries, and (v) do not result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. (c) This Agreement and the other Credit Documents constitute valid and binding agreements of the Company enforceable in accordance with their terms, provided that the enforceability hereof and thereof is subject in each case to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. (d) There is no action, suit or proceeding pending, or to the knowledge of the Company threatened, against or affecting the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which is material in the context of the Company's business or which in any manner draws into question the validity or enforceability of, or could impair the ability of the Company to perform its obligations under, this Agreement or any of the other Credit Documents. (e) The Company is not an "investment company" within the meaning of the Investment Company Act of I 940, as amended. (O Neither the Company nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (g) All information heretofore furnished by the Company to the Administrative Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Company to the Administrative Agent or any Lender will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. (h) Neither the Company nor any of its Subsidiaries are engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of any Loan will be used to purchase or carrying any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation U or X. EXHIBIT I Page 3 (i) After giving effect to the execution and delivery of the Credit Documents and the making of the Loans under the Credit Agreement, the Company will not be "insolvent," within the meaning of such term as used in O.C.G.A. ss. 18-2-22 or as defined in ss. 101 of Title 11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as each may be amended from time to time, or be unable to pay its debts generally as such debts become due or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. j) The Company is not subject to any bankruptcy or insolvency proceeding of the type referred to in Section 8.01(h) or (i) of the Credit Agreement. 2. Notes. The Company agrees to execute and deliver to the Administrative Agent for the account of each Lender a Revolving Note and a Competitive Bid Note. 3. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 4. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXHIBIT I Page 4 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. [DESIGNATED BORROWER] By______________________ Title: ACKNOWLEDGED: [MBIA INC.] [MBIA INSURANCE CORPORATION] By______________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH as Administrative Agent By______________________ Title: By______________________ Title: EXHIBIT J [DOMESTIC BANK COUNSEL OPINION] [DATE] MBIA Insurance Corporation 113 King Street Armonk, NY 10504 MBIA Inc. 113 King Street Armonk, NY 10504 Re: $400,000,000 Credit Agreement date as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and other Lenders signatory thereto Ladies and Gentlemen: We are counsel for______________________(the "Lender") and, as such, are familiar with its Articles of Association and Bylaws. We are familiar with the corporate action on the part of the Lender in connection with the execution and delivery by the Lender of the above referenced Credit Agreement dated as of August 28, 1998. In connection with this opinion we have examined the Credit Agreement. Furthermore, we have examined originals, or copies certified to our satisfaction, of such agreements, documents, certificates and other statements of government officials and officers of the Lender and other papers as deemed relevant and necessary as a basis for such opinions. In such examination, we have assumed the capacity of natural persons, the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity with the originals of all documents submitted to us as copies. Based upon the examination described above, we are of the following opinions: EXHIBIT J Page 2 (1) The Lender is a [National Banking Association] organized and in good standing under the laws of the United States of America. (2) The Lender has full corporate power and authority to enter into the Credit Agreement and to perform and observe its obligations thereunder. (3) No consent, approval, or authorization of, filing or registration with, or notification of or other action with respect to, any governmental authority of the [STATE] or of the United States is required in connection with the execution, delivery, or performance of the Credit Agreement by the Lender. (4) The Credit Agreement has been duly authorized, executed and delivered by the Lender and is a valid and binding obligation of the Lender, enforceable against the Lender in accordance with its terms except that enforceability may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally, as such laws would apply in the event of the bankruptcy, insolvency, reorganization or liquidation of, or other similar occurrence with respect to the Lender or the event of any moratorium or similar occurrence affecting the Lender. Yours very truly, EXHIBIT J Page 3 [FOREIGN BANK'S U.S. BRANCH U.S. COUNSEL OPINION] [DATE] MBIA Insurance Corporation 113 King Street Armonk, NY 10504 MBIA Inc. 113 King Street Armonk, NY 10504 Re: $400,000,000 Credit Agreement date as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and other Lenders signatory thereto Ladies and Gentlemen: We have acted as counsel to [LENDER], a banking corporation organized under the laws of [COUNTRY], acting through its [STATE] Branch [or Agency] in connection with its execution and delivery of the above-referenced Credit Agreement (the "Credit Agreement") dated as of August 28, 1998. In connection with the opinions herein set forth, we have reviewed and relied upon the opinion of [FOREIGN COUNSEL TO LENDER] dated [___________ , 1998] with respect to the matters set forth therein. Furthermore, we have examined agreements, certificates, documents and statements of government officials and officers of [LENDER] as we have deemed relevant and necessary in order to render the opinions set forth below. In our examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and conformity to original documents of all documents submitted to us as certified or photostatic copies. As to various questions of fact material in our opinions, we have relied upon certificates of officers and representatives of [LENDER], except that we have made such EXHIBIT J Page 4 independent investigations as in our judgment are necessary or appropriate to enable us to render the opinions expressed below. Based on the foregoing, it is our opinion that: 1. [LENDER] is authorized to operate as a [BRANCH/AGENCY] of a foreign banking corporation under the laws of [STATE] or [UNITED STATES]. 2. [LENDER] has the corporate power and authority to enter into the Credit Agreement and to undertake the obligations set forth therein. 3. The Credit Agreement has been duly authorized, executed and delivered by [LENDER] and constitutes the legal, valid and binding obligation of [LENDER] enforceable against [LENDER] in accordance with its terms, except only as such enforceability may be limited (a) by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws affecting the enforcement of creditors' rights in general as such laws would apply in the event of any insolvency, reorganization, liquidation, moratorium or similar occurrence affecting [LENDER] or (b) by equitable principles affecting [LENDER]. We are not admitted to practice law in [COUNTRY] and the foregoing opinion is limited to the laws of the State of [STATE] and to applicable federal laws of the United States of America. Very truly yours, EXHIBIT J Page 5 [FOREIGN BANK'S FOREIGN COUNSEL OPINION] [DATE] MBIA Insurance Corporation 113 King Street Armonk, NY 10504 MBIA Inc. 113 King Street Armonk, NY 10504 Re: $400,000,000 Credit Agreement date as of August 28, 1998, among MBIA Inc., MBIA Insurance Corporation, various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and other Lenders signatory thereto Ladies and Gentlemen: We have acted as [COUNTRY] counsel to [LENDER] (the "Lender") in connection with the execution and delivery through its [STATE] Branch/Agency of the above-referenced Credit Agreement dated as of August 28, 1998 (the "Credit Agreement"). Capitalized terms used in this opinion and not defined herein shall have the meanings assigned in the Credit Agreement. In connection with the opinions set forth herein, we have examined a copy of the Credit Agreement. In addition, we have examined and relied on originals, or copies certified or otherwise identified to our satisfaction, of such corporate records of the Lender and such other instruments, agreements, documents and other certificates of government officials, officers and representatives of the Lender and such other persons, and we have made such investigation of law and fact as we have deemed appropriate as a basis for the opinions expressed below. In such examination we have assumed that the signatures on all documents that we have examined are genuine. We express no opinion herein as to the laws of any jurisdiction other than to the laws of [COUNTRY]. EXHIBIT J Page 6 Based upon and subject to the foregoing, we are of the opinion that: (1) The Lender is a banking corporation duly organized and existing under the laws of the [COUNTRY], and has full power and authority to execute and deliver the Credit Agreement through its [STATE] Branch/Agency and to perform all of its obligations thereunder. (2) The execution of the Credit Agreement by the Lender through its [STATE] Branch has been duly authorized by all necessary corporate action of the Lender in accordance with the laws of [COUNTRY] and, assuming due execution and delivery, will constitute a legal, valid and binding obligation of the Lender, enforceable under the laws of the [COUNTRY] against the Lender in accordance with its terms, except as limited by (i) applicable bankruptcy, insolvency, reorganization, liquidation, readjustment of debt, moratorium and similar laws affecting creditors rights against the Lender from time to time in effect, as the same may be applied in the event of bankruptcy, insolvency, reorganization, liquidation, readjustment of debt or similar situation of the Lender or a moratorium applicable to the Lender and (ii) general principles of equity (regardless of whether enforcement in sought is a proceeding in equity or at law). (3) As of the date hereof, each of the following officers of the Lender's [STATE] Branch/Agency are authorized to execute and deliver the Credit Agreement for, in the name and on behalf of the Lender: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (4) The issuance, execution and delivery of the Credit Agreement do not conflict with, or constitute a breach of or a default under, the [Articles, Charter or Bylaws] of the Lender or any administrative regulation or decree of or in [COUNTRY] to which the Lender is subject. (5) With the exception of the approvals obtained or made as of the date hereof, no approval, authorization, consent or other order of any governmental or administrative agency or body is required under the laws of [COUNTRY] in connection with the issuance, execution and delivery of the Credit Agreement, or for the performance by the Lender of its obligations thereunder. (6) The choice of laws of the State of to govern the Credit Agreement is valid under the laws of [COUNTRY], provided that the application of such laws of the State of [STATE] does not violate public order or good morals in [COUNTRY]. We have no reason to believe that the application of the laws of the State of [STATE] to the Credit Agreement violates such public order or good morals in [COUNTRY]. (7) A final and conclusive judgment rendered by the courts of the State of [STATE] or the United States of America having jurisdiction over the Lender (including the [STATE] Branch/Agency), which is not subject to appeal and is enforceable in the United States of EXHIBIT J Page 7 America, with respect to the obligations of the Lender under the Credit Agreement, may be enforced against the Lender without a review of the merits, provided that the following requirements of the [COUNTRY] Code of Civil Procedure, which we consider to be material, are satisfied: (i) service of complaint filed with the courts of the United States of America having jurisdiction over the Lender (including the [STATE] Branch/Agency) was properly effected on the Lender other than by means of public notice; (ii) reciprocity continues to exist with respect to the recognition of final judgments of the courts of [COUNTRY] by the courts of the State of [STATE] or the respective federal court; and (iii) such final and conclusive judgment in the United States of America is not contrary to the public order or good morals in [COUNTRY]. We see no reason at present why a judgment based on the obligations of the Lender set forth in the Credit Agreement would be contrary to the public order or good morals in [COUNTRY]. (8) Under [COUNTRY] law, a Borrower under the Credit Agreement would have the right to commence a direct action against the Lender in any court having jurisdiction in [COUNTRY]. Very truly yours, EXHIBIT K [FORM OF OPINION OF COUNSEL TO DESIGNATED BORROWER] [Date] To the Lenders and the Administrative Agent Referred to Below c/o Deutsche Bank AG, New York Branch as Administrative Agent 31 West 52nd Street New York, NY 10019 Re: $400,000,000 Credit Agreement dated as of August 28, 1998 among MBIA Inc. ("MBIA"), MBIA Insurance Corporation ("MBIA Corp."), various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto Ladies and Gentlemen: I am Counsel to [___________ ], a___________ [corporation] (the "Designated Borrower"). This opinion is being given in connection with the Credit Agreement, dated as of August 28, 1998 (the "Credit Agreement"), among MBIA, MBIA Corp., various Designated Borrowers from time to time party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, Deutsche Bank AG, New York Branch, as Administrative Agent and the other Lenders signatory thereto. All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. In this connection, I have examined the Credit Agreement, the Notes and such certificates of public officials, such certificates of officers of the Designated Borrower, and copies certified to my satisfaction of such corporate documents and records of the Designated Borrower and of such other papers as I have deemed relevant and necessary or appropriate for the opinions set forth below. I have relied upon certificates of public officials and of officers of the Designated Borrower with respect to the accuracy of factual matters contained therein which were not independently established. I have also assumed (i) the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Administrative Agent and the Lenders, (ii) the authenticity of all such documents submitted to me as originals, (iii) the genuineness of all signatures, and (iv) the conformity of all such documents submitted to me as copies. Based upon the foregoing, it is my opinion that: EXHIBIT K Page 2 (1) The Designated Borrower is a [corporation] duly organized and validly existing and in good standing under the laws of the State of [_____], and has the corporate power required to carry on its business as now being conducted. (2) The execution, delivery and performance by the Designated Borrower of the Credit Agreement and the Notes (i) are within the corporate powers of the Designated Borrower, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not (A) contravene, or constitute a default under, any provision of applicable law or regulation or of any agreement, judgment, injunction, order, decree or other instrument which to my knowledge is binding upon the Designated Borrower, or (B) violate any provision of the Designated Borrower's Certificate of Incorporation or By-laws or other constitutive document, as amended from time to time, and (v) to the best of my knowledge, do not result in the creation or imposition of any Lien on any asset of the Designated Borrower or any of its Subsidiaries. (3) The Credit Agreement and the Notes are valid and binding obligations of the Designated Borrower, enforceable in accordance with their respective terms, except that such enforceability may be limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors rights generally and by general principles of equity, and the enforceability as to rights to indemnity thereunder may be subject to limitations of public policy. (4) To the best of my knowledge, there is no action, suit or proceeding before or by any court, arbitrator or any governmental body, agency or official pending or threatened against the Designated Borrower or its Consolidated Subsidiaries wherein an adverse decision, ruling or finding would (i) materially and adversely affect the business, consolidated financial position or consolidated results of operations of the Designated Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) affect the validity or enforceability of the Credit Agreement and the Notes. (5) The Designated Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (6) Neither the Designated Borrower nor any of its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (7) To the best of my knowledge, no governmental consents, approvals, authorizations, registrations, declarations or filings are required for the execution and delivery of the Credit Agreement and the Notes on behalf of the Designated Borrower or the consummation of the transaction as provided in the Credit Agreement and the Notes. This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you or any assignee under the Credit Agreement, and may EXHIBIT K Page 3 not be circulated, quoted or otherwise referred to except in connection with the transactions referenced above without my prior written consent. Very truly yours, EXHIBIT L [FORM OF OPINION OF MBIA INSURANCE CORPORATION] ___________,_____ [ADDRESSEE] Ladies and Gentlemen: I am Assistant General Counsel of MBIA Insurance Corporation (the "Corporation") and have acted on behalf of the Corporation in connection with the issuance of Financial Guaranty Insurance Policy No._ (the "Policy) relating to the obligations of___________ under the___________ . I am familiar with and have examined a copy of the Policy and such other relevant documents as I have deemed necessary. Based on the foregoing, I am of the following opinion: 1. The Corporation is a stock insurance corporation, duly incorporated and validly existing under the laws of the State of New York and is licensed and authorized to issue the Policy under the laws of the State of New York. 2. The Policy has been duly executed and is a valid and binding obligation of the Corporation enforceable in accordance with its terms except that the enforcement of the Policy may be limited by laws relating to the bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Very truly yours, Generale Bank Additional $33 Million Commitment New York Branch September 3, 1998 MBIA Inc. MBIA Insurance Corporation 885 Third Avenue New York, NY 10022 Deutsche Bank AG, New York Branch As Administrative Agent 31 West 52nd St. New York, NY 10019 Re: Additional Commitment Ladies and Gentlemen: Reference is hereby made to the Credit Agreement, dated as of August 28, 1998 as amended, modified or supplemented from time to time, the "Credit Agreement"), among MBIA Inc. ("Parent"), MBIA Insurance Corporation ("Corp."), various Designated Borrowers from time to time, various lending institutions party thereto, Fleet National Bank, as Documentation Agent, The First National Bank of Chicago, as Syndication Agent, and Deutsche Bank AG, New York Branch, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein, capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. We hereby agree to assume a Commitment under the Credit Agreement of $33,000,000. This assumption of our Commitment shall be effective on the date this letter is accepted by you as provided below. We (i) confirm that we have received a copy of the Credit Agreement and the other Credit Documents, together with copies of the financial statements referred to therein and such other documents and information as we have deemed appropriate to make our own credit analysis and decision to enter into this Commitment Assumption Agreement; (ii) agree that we will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as we shall deem appropriate at the time, continue to make our own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoint and authorize the Administrative Agent to take such action as agent on our behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (iv) agree that we will perform in accordance with their terms all of the Generale Bank New York Branch obligations which by the terms of the Credit Agreement are required to be performed by us as a Lender. Upon the delivery of a fully executed original hereof to the Administrative Agent, we shall be a party to the Credit Agreement and, to the extent provided in this Commitment Assumption Agreement, have the rights and obligations of Lender thereunder and under the other Credit Documents. You may accept this letter by signing the enclosed copies in the space provided below, and returning one copy of same to us and delivering one copy of same to the Administrative Agent before the close of business on September 11, 1998. If you do not so accept this letter, our Commitment shall be deemed cancelled. THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND MAY BE MODIFIED ONLY IN WRITING. Very truly yours, Generale Bank, New York Branch By: /s/ E. Matthews /s/ Hans Neukomm -------------------------------- ---------------- Eddie Matthews Hans Neukomm Senior Vice President General Manager Agreed and Accepted this 10th day of September,1998. MBIA Inc. By: /s/ [ILLEGIBLE] -------------------------------- Title: Managing Director & Controller MBIA Insurance Corporation By: /s/ [ILLEGIBLE] -------------------------------- Title: Managing Director & Controller EX-10.35 12 RETIREMENT AND CONSULTING AGREEMENT RETIREMENT AND CONSULTING AGREEMENT RETIREMENT AND CONSULTING AGREEMENT, dated as of January 7, 1999, by and between MBIA INC., a Connecticut corporation (the "Company"), and David H. Elliott ("Executive"). WHEREAS, Executive is currently serving as the Chairman of the Board of Directors ("Chairman") and Chief Executive Officer of the Company; WHEREAS, Executive has expressed his intention to retire from employment with the Company; WHEREAS, Executive has provided loyal and valuable service to the Company and the Company recognizes Executive's significant contribution to the Company and its shareholders; WHEREAS, the Company believes that it is in its best interest to retain access to the services of Executive; and WHEREAS, Executive is willing to continue to provide services to the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of their mutual promises, the Company and Executive agree as follows: 1. Resignation; Continuing Board Membership. Effective as of the date hereof, Executive hereby resigns as Chief Executive Officer of the Company. Executive shall remain as Chairman of the Board of Directors and an employee of the Company ("Chairman") until the annual meeting of shareholders in 1999 (the "Chairman Service Period"), and, effective at such time, he hereby resigns (i) as Chairman, (ii) from employment with the Company and each of its subsidiaries and affiliates and (iii) from each other officer or executive position held with the Company and each directorship or officer or executive position held with each of the Company's subsidiaries or affiliates. Subject to his continued election by shareholders, Executive shall serve in the capacity as Chairman of the Executive Committee, and as a member of the Board until the end of the Consulting Period (as defined in Section 2 below) without compensation in addition to that set forth herein. 2. Consulting Services. During the period beginning on the first day following the Chairman Service Period and continuing until the second anniversary thereof (the "Consulting Period"), Executive shall provide to the Company consulting services commensurate with his status and experience with respect to such matters as shall be reasonably requested from time to time including, without limitation, such assistance as the Board shall request in writing with respect to the transition of authority to his successor as Chief Executive Officer. Executive shall not, solely by virtue of the consulting services provided hereunder, be considered to be an officer or employee of the Company during the Consulting Period, and shall not have the power or authority to contract in the name of or bind the Company, except as may be expressly stated in a written delegation of such authority from the Board. 3. Compensation. Except to the extent expressly otherwise provided herein, during the Chairman Service Period, Executive shall continue to be compensated on the same terms and conditions as in effect immediately prior to the date hereof. During the Consulting Period, the Company shall pay Executive an annual fee equal to the annual rate of base salary payable to Executive as of January 1, 1999. Such fees shall be paid to Executive at the same time or times and in the same number of installments as base salary is payable to the Company's senior officers. In addition to the fees described in the immediately preceding sentence, Executive shall be entitled to receive a bonus payment in respect of each of calendar years 1999 and 2000, in an amount to be determined by the Compensation and Organization Committee of the Board, but which shall in no event be less with respect to either year than the total bonus earned by Executive in respect of calendar year 1998 (as determined prior to any stock discount factor). Any such bonus amount shall be paid to Executive at the same time and subject to the same conditions upon which annual bonuses are payable to the senior officers of the Company, except the entire bonus amount shall be paid to Executive in cash with no portion payable or issuable in stock. The Company shall also reimburse Executive for such reasonable travel, lodging and other appropriate expenses incurred by Executive in the course or on account of rendering any services during either the Chairman Service Period or the Consulting Period upon submission of itemized reports consistent with good business practices. Nothing in this Agreement shall be construed to preclude Executive from receiving, in addition to the amounts payable hereunder, any other fees or compensation to which he may be entitled as a non-employee member of the Board. 4. Employee Programs. (a) Benefits Generally. Effective as of the end of the Chairman Service Period, Executive's employment with the Company shall voluntarily terminate. Except as otherwise expressly provided below, Executive's continued participation in, or rights to receive compensation or other benefits under, any of the Company's employee benefit plans, programs or arrangements (including those 2 plans, programs or arrangements available solely for the benefit of senior executive officers) shall be governed by the terms and conditions of the applicable plan, program or arrangement. Notwithstanding the immediately preceding sentence, during the Consulting Period, Executive shall be eligible to participate in the Company's medical and dental plans on the same terms and conditions as though Executive had continued to be an employee of the Company throughout such period. In the event that the Company cannot provide such medical and dental coverage under the terms and conditions of any such plan, the Company shall provide substantially the same coverage from another source, including by providing such benefits on a self-insured basis. Following the end of the Consulting Period, Executive shall receive the same medical and dental coverage as is available under the Company's generally applicable retiree medical and dental benefit programs. (b) Stock Options. Notwithstanding anything else to the contrary contained in this Agreement or any agreement issued under the 1987 Stock Option Plan (the "1987 Plan"), to the extent that Executive holds any options granted pursuant to the terms of the 1987 Plan that are not exercisable as of the date hereof, each such option shall become exercisable at the same time and subject to the same conditions as though Executive had continued in the employ of the Company during the period over which any such option otherwise would have become exercisable; provided that, all of Executive's options shall become fully exercisable without any further action on the part of Executive or the Company on the last day of a period of ten consecutive days on which a Share has traded at at least $90 at any point during each such day (an "Acceleration Event"). Any options currently held by Executive may, to the extent currently exercisable or to the extent they become exercisable hereafter in accordance with the immediately preceding sentence, be exercised until the earlier of December 31, 2005 (or, if a Change of Control (as defined in the 1987 Plan) occurs during the Consulting Period, until the fifth anniversary of the end of the Consulting Period) or the expiration of the option; provided that, if an Acceleration Event occurs (and regardless of whether it has the effect of accelerating the exercisability of any of Executive's options), none of Executive's options may be exercised after the second anniversary of the Acceleration Event. To the extent any option is not exercised within the times set forth above, any such unexercised options shall be forfeited. Except as otherwise expressly provided in this Section 4(b), all of the terms and conditions of the 1987 Plan and the grants made thereunder to Executive (including, without limitation, the expiration date of such options) shall continue to be applicable. Executive will not be eligible for any new option grants after December 31, 1998. (c) Restricted Shares. Except as otherwise provided herein, any restricted shares awarded to Executive shall become vested at the same time and subject to the same conditions as though Executive had continued in the employ of the Company 3 during the period over which any such restricted shares would otherwise have become vested. At the end of the Consulting Period, any restricted shares that have not previously become vested shall be fully and immediately vested without any further action by any person. Except as otherwise expressly provided in this Section 4(c), all of the terms and conditions of the such restricted stock grants made to Executive shall continue to be applicable. Executive will not be eligible for any new restricted stock grants after December 31, 1998. (d) Book Value Awards. The long-term incentive award based on adjusted book value (an "ABV Award") made to Executive in 1997 shall be payable in accordance with its terms as at the same time and subject to the same conditions as though Executive had continued in the employ of the Company during the period over which award would otherwise have been earned. The ABV Award made to Executive in 1998 shall be payable on a pro-rated basis as soon as practicable after the end of the Consulting Period based on the Company's adjusted book value as determined by the Company in good faith based on performance through April 30, 200 1. Except as otherwise expressly provided in this Section 4(d), all of the terms and conditions of the such ABV Awards made to Executive shall continue to be applicable. Executive will not be eligible for any new ABV Awards after December 31, 1998. 5. Confidential Information. Without the prior written consent of the Board, and except to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency, Executive shall not disclose to any third person any trade secrets, customer lists, product development, marketing plans, sales plans, management organization, operating policies and manuals, business plans, financial records, any information related to any of the foregoing or other financial, commercial, business or technical information related to the Company or any of its subsidiaries unless such information has been previously disclosed to the public by the Company or has become public knowledge other than by Executive's breach of this Agreement. 6. Indemnity. The Company shall indemnify Executive for any claim arising out of or in connection with Executive's service as a member of the Board, as an officer or employee of the Company, as an officer or director of any of the Company's subsidiaries or as a consultant pursuant to the terms of this Agreement in the same manner and to the same extent as the Company or such subsidiary, as the case may be, indemnifies its then current directors, officers or employees, as the case may be. 7. Death of Executive. If Executive dies prior to the end of the Consulting Period, the Company shall pay to Executive's legal representatives or benefici- 4 aries designated by the Executive in writing, as a death benefit (which shall be in addition to any life insurance or other death benefits otherwise available to Executive), such amounts or such benefits as would have been paid or provided by the Company to Executive under this Agreement (including the payouts described above with respect to ABV Awards) had Executive continued to provide such services for the term of this Agreement. Notwithstanding the foregoing, with respect to (i) any stock options outstanding at the date of Executive's death the provisions of the 1987 Stock Option Plan and any agreement thereunder shall determine the rights of Executive and his beneficiaries thereunder and (ii) any shares of restricted stock outstanding at the date of Executive's death, all such shares shall vest immediately upon Executive's death. 8. Noncompetition. Executive agrees that, during the Chairman Service Period and the Consulting Period, without the prior written consent of the Company and/or its affiliates, (a) Executive will not be an owner, director, employee, officer, consultant, broker, financier, or serve in any capacity whatsoever in or for an entity that competes with the Company and (b) Executive shall not either directly or indirectly direct business away from the Company. 9. Nonsolicitation. Executive agrees that, during the Chairman Service Period and the Consulting Period, Executive will not hire or seek to hire (whether on his own behalf or on behalf of some other person or entity) any person who is at that time an employee of the Company and/or its affiliates. Executive will not, directly or indirectly, induce or encourage any employee of the Company and/or its affiliates to leave the Company and/or its affiliates' employ. 10. Miscellaneous. This Agreement may only be amended by a written instrument signed by the Company and Executive. This Agreement shall constitute the entire agreement between the Company and Executive with respect to the subject matter hereof. The obligations of the Company to Executive and the covenants of Executive in favor of the Company shall survive the termination of Executive's employment. All cash payments to be made under this Agreement shall be made net of all applicable income and employment taxes required to be withheld from such payments. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Any notices to be given and any payments to be made hereunder shall be delivered in hand or sent by registered mail, return receipt requested, to the respective party at the Company's headquarters or the address noted for Executive on the Company's books and records or to such other address as either such party shall direct by written notice given in accordance with this Section 10. 5 11. Governing Law. This Agreement shall be governed by the laws of the State of New York, without reference to the principles of conflicts of law. IN WITNESS, WHEREOF, the parties have executed this Agreement effective as of the day first written above. MBIA INC. By:/s/ Kevin D. Silva ------------------------------- Title: S.V.P. Management Services Witness: - --------------------------------- /s/ David H. Elliott ------------------------------ DAVID H. ELLIOTT Witness: - ---------------------------------- 6 SUMMARY RETIREMENT AND CONSULTING AGREEMENT FOR DAVID H. ELLIOTT o Mr. Elliott will resign as Chief Executive Officer and step down as Chairman following the annual meeting of shareholders in 1999. o Thereafter, in addition to his duties as Chairman of the Executive Committee of the Board, Mr. Elliott will provide consulting services to the Board for a period of two years, commencing May 1999, on matters suitable for his attention. o For his consulting services, he will receive base salary on a payroll cycle basis for the 24 month consulting period at the annual rate effective on May 1, 1999. o A performance bonus will be paid at year end in year 1999 and 2000 in the form of 100% cash at an amount subject to the Compensation and Organization Committee's discretion but no less than the total bonus (cash plus stock) earned in 1998 prior to any stock discount treatment. o These consulting fees will be in addition to the compensation to which Mr. Elliott is otherwise entitled for his service on the Board. o Restricted shares issued in 1996 will become fully vested and payable on December 31, 1999, in accordance with the grants three year natural vesting schedule. Restricted shares issued in 1997 and 1998 will become fully vested and payable upon the completion of the consulting period, prior to the grants' four year vesting schedule. o The adjusted book value per share (ABV) long-term incentive awarded in 1997 will be paid out in the usual course of business in early 2001. The adjusted book value per share (ABV) long-term incentive awarded in 1998 will be prorated and paid out as cash in May 2001, based on the adjusted book value on April 30, 2001. o All stock options granted to Mr. Elliott, including the 1998 grant, will continue to vest in accordance with the five year vesting schedule provided under the stock option plan. All outstanding stock options must be exercised by December 31, 2005, which is 24 months after the date that the 1998 grant becomes fully vested. Options that naturally expire at the end of the ten year option term will not be extended. All outstanding stock options will be forfeited after December 31, 2005. o All outstanding options will immediately vest if during a period of ten consecutive trading days, a share has traded at least $90.00 at any point during each such trading day. Upon such an event, all outstanding options must be exercised within 24 months from the last day of the ten consecutive trading days. All outstanding stock options will be forfeited after the 24 month period. o There will be no new restricted stock, stock option or ABV grants to Mr. Elliott after December 31, 1998. o The terms and conditions of the Company's benefit programs, based upon his voluntary termination status will govern participation in such benefit plans. Notwithstanding the preceding sentence, during the consulting period, Mr. Elliott shall be eligible to participate in the Company's medical and dental plans on the same terms and conditions as though he had continued to be an employee of the Company throughout the period. A summary of MBIA benefit programs and participation opportunity during and after consulting period follows:
- ------------------------------------------------------------------------------------------------------------- Benefit Program Consulting Period (May 1999-May 2001) Post-Consulting - ------------------------------------------------------------------------------------------------------------- Medical & Dental Participation as an employee under current Participate in plans cost sharing arrangements as a retiree under MBIA retiree program - ------------------------------------------------------------------------------------------------------------- Group Life Participation will cease under group plan, No benefit under may convert group policy to individual group plan policy - ------------------------------------------------------------------------------------------------------------- Split Dollar Life MBIA premium contributions will continue (Same as Consulting Period) until you reach age 65 (policy becomes paid-up), at which time company contributions will cease and company premiums paid (YTD) to policy are returned to MBIA. You may then surrender or retain your policy. - ------------------------------------------------------------------------------------------------------------- Group Long- term Participation will cease as of May 1999 No benefit Disability - ------------------------------------------------------------------------------------------------------------- Executive Long-term Participation will cease as of May 1999 No benefit Disability - ------------------------------------------------------------------------------------------------------------- Health Care New contributions will cease; 90 days to No benefit Reimbursement Account submit reimbursements - ------------------------------------------------------------------------------------------------------------- 401(k) and Accounts may be kept under MBIA (Same as Consulting Period) Pension Plans program but no employee or company contribution permitted (only interest income on investments and transfer of assets among funds) 1998 Pension The pension contribution for 1998 will be No further pension Contribution credited to you in 1999 when the annual contributions contribution is made company-wide. - -------------------------------------------------------------------------------------------------------------
MBIA INC. /s/ David H. Elliott ------------------------------ DAVID H. ELLIOTT Witness: /s/ [ILLEGIBLE] - ----------------------------- 02/10/99 EX-10.36 13 BROWN EMPLOYMENT LETTER MBIA MBIA Insurance Corporation 113 King Street Armonk, NY 10504 914 765 3333 Fax: 914 765 3177 e-mail: david.elliott@mbia.com David H. Elliott Chairman January 7, 1999 Joseph W. Brown, Jr. 2054 Evergreen Point Road Bellevue, WA 98004 Dear Jay: I am excited by the prospect of your joining MBIA and leading the senior executive team and MBIA in the future. The members of the Board of Directors and I are unanimous in our belief that you possess the skills, experience and leadership characteristics required to help MBIA build our business. As such, I am pleased to extend to you an offer of employment under the terms and conditions outlined below: I. Title, Department and Reporting Relationship - As Chief Executive Officer of MBIA Inc. you will report directly to me, in my capacity as Chairman, as long as I am Chairman, and thereafter will report solely and directly to the Board. It is our mutual intention, and the intention of the Board, that you will be appointed Chairman, in my place, no later than May 31, 1999. II. Compensation - We have tailored a compensation program to reflect both your responsibilities as CEO and our expectation of your future leadership of MBIA. Your compensation package will include a base salary, performance bonus and long-term incentive award, as well as the special one-time stock option grant described below. a) Base Salary - $62,500 monthly, which is an annualized base salary of $750,000, not scheduled to be reviewed until December 31, 2003. Beginning in 2003, salary reviews for an increase will be conducted annually in accordance with the policies of MBIA, with increases, if any, effective on January 1 of the following year. Increases in your base salary will be a function of personal performance in your position, MBIA's financial and operational performance and other related factors as considered by the Compensation and Organization Committee of the Board of Directors. b) Performance Bonus Awards - Awards under this program are made in December of each year. Bonus awards are made at MBIA's discretion; will be based foremost upon MBIA's financial performance and upon performance factors that will be established once per year; and will be paid to you, at your election, in the form of restricted stock. You can expect your bonus for 1999 to be generally in line with current CEO and competitive pay practices, with performance-based adjustments as approved by the Compensation and Organization Committee of the Board of Directors. MBIA 2 c) Long-Term Incentive Program - Given the responsibility that you will assume and the contribution that we expect you to make to MBIA, you will be eligible to participate in the MBIA Inc. Long-Term Incentive program. The Program has three objectives: (i) to pay a long-term incentive award based on your performance and on corporate performance and to closely align management's and shareholders' interests; (ii) to link compensation to both stock performance and financial results; and (iii) to reflect performance over an extended period of time to recognize the long-term nature of MBIA's businesses. The Long-Term Incentive Program divides the long-term incentive award equally into two elements: market value stock options and a plan that is tied to the compound growth in MBIA's adjusted book value ("ABV") (1) Growth in adjusted book value is viewed as the primary long-term driver of MBIA's stock performance and will reward participants for positive results even if the stock market does not fully reflect this performance during a particular measurement period. Awards under the Long-Term Incentive Program are based upon a formula that is intended to create a future payout value. One half of the award is comprised of stock options which are awarded annually and have a five-year vesting period while the other one half is based upon adjusted book value and vests in three years. The ABV award is also awarded annually. Grants under the Plan are recommended to the Compensation and Organization Committee of the Board of Directors annually and awarded in December of each year for performance in the previous calendar year. You will be eligible to participate in the Plan for the first time at the conclusion of the 1999 calendar year. You can expect your long-term incentive award for 1999 to be generally in line with current CEO and competitive pay practices, with performance-based adjustments as approved by the Compensation and Organization Committee of the MBIA Inc. Board of Directors. d) One-Time Stock Option Grant - Given your senior executive role at MBIA, you have agreed to purchase 160,000 shares of MBIA common stock no later than February 8, 1999, either (i) from MBIA at a price equal to the closing market price on January 6, 1999 or (ii) in the open market. Recognizing your current ownership of 40,000 shares of common stock, excluding the 8,000 share units held under MBIA's directors' plans, the purchase of the additional shares will bring your total stock ownership level to 200,000 shares. In respect of such level of ownership, you will receive a one-time special grant of 800,000 stock options (four stock options for each of the 200,000 common shares - -------------------------- (1) Adjusted Book Value is defined as reported shareholders' equity plus the unearned premium reserve, the present value of installment premiums and the future earnings (discounted) from non-insurance business, less related expenses and taxes. MBIA 3 owned), in accordance with the stock option agreement attached hereto as Exhibit A (the "Stock Option Agreement"). The exercise price with respect to each share subject to this special option will be the closing market price of a share of common stock on January 6, 1999 ($67.875). This special one-time grant will expire at 11:59 p.m. on January 7, 2009 (or earlier in the event of termination of your employment in certain circumstances) and will be exercisable, in whole or in part, and from time to time, on or after the earlier to occur of (i) January 7, 2008 or (ii) the later to occur of (1) January 7, 2002 and (2) the last day of a period of ten consecutive Trading Days on which a Share has traded at least $90 at any point during each such Trading Day, subject to exercise at an earlier date in the event of certain terminations of employment, as provided in Section 5 of the Stock Option Agreement. However, the special option shall not become exercisable, and shall be forfeited, unless you beneficially own (within the meaning of both Rule 13d-3 and Rule 16a-1 as currently promulgated by the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended) not later than the close of business on February 8, 1999, two hundred thousand (200,000) shares of MBIA common stock and continuously own at least such number of shares until the earlier to occur of a Change of Control (as defined in the Stock Option Agreement) and January 7, 2004. Prior to the occurrence of a Change of Control and on or after January 7, 2004, the special option shall cease to be exercisable as to any shares as to which it has not previously been exercised on the first date, if any, as of which you cease to beneficially own at least the number of shares determined pursuant to the following schedule: - -------------------------------------------------------------------------------- On or after January 7, 2004 and 150,000 shares prior to July 7, 2005 - -------------------------------------------------------------------------------- On or after July 7, 2005 and 100,000 shares prior to January 7, 2007 - -------------------------------------------------------------------------------- On or after January 7, 2007 50,000 shares - -------------------------------------------------------------------------------- Upon the occurrence of a Change of Control or any termination of your employment with MBIA due to death, disability, retirement or termination by MBIA without cause (constructively or otherwise, all as defined in the Stock Option Agreement), there shall be no requirement that you continue to hold either any shares of MBIA or the securities of any successor in interest to MBIA. Your special option will also become exercisable in full upon the occurrence of a Change of Control, except that, if the Change of Control occurs prior to January 7, 2000 and unless the Compensation & Organization Committee of the Board of Directors otherwise determines, only 50% of the shares subject to the special option grant (i.e., 400,000 shares) will become exercisable upon the occurrence of a Change of Control. Any outstanding portion of this special option will also become exercisable in full immediately upon your death or termination of employment due to disability, or MBIA 4 termination by MBIA without cause (constructively or otherwise, all as defined in the Stock Option Agreement). This Option will be exercisable upon your retirement with respect to the sum of (1) that number of Shares with respect to which it could have been exercised on the date of your Retirement and (2) the Pro-Rata Percentage of any Shares as to which it is not then exercisable. "Retirement" shall mean your voluntary termination of employment after having completed at least five years of service and having attained age 55. The "Pro Rata Percentage" is the percentage determined by dividing (x) the number of months during the period of your actual employment by (y) 108. Your special option grant will be transferable by you, in whole or in part, to any of your immediate family members (your parents, spouse, or the descendants of any of the foregoing, including descendants by adoption) or to a trust, partnership, limited liability company or other entity, the only beneficial owners of which are you and/or one or more of such family members, The option may also be transferred to a charity which is exempt from taxation under Section 501(c) of the Internal Revenue Code or a private foundation exempt from taxation under Section 509 of the Code, so long as the charity or the foundation agrees to any reasonable conditions MBIA may impose in order assure compliance with its obligations under the Federal securities laws. I have attached the Stock Option Agreement, which details the provisions governing this grant. The terms set forth in such Stock Option Agreement shall control in the event of any inconsistency between such agreement and this letter. III. Mission & Values - Provided for your review is MBIA's statement of mission and values. Please familiarize yourself with MBIA's mission and values as they should serve as a guide in accomplishing the goals of your job going forward. IV. Benefits - You will receive benefits as outlined on the summary attached as Exhibit B at a level, and on terms and conditions, no less favorable to you than those applying to any other senior executive of MBIA. I have also attached a model of potential benefits available to you, which you can customize to fit your needs as outlined in the plan descriptions. You will be entitled to four weeks vacation per year; prompt reimbursement of all properly documented business expenses and of legal and consulting expenses incurred in connection with entering into these arrangements, V. Change of Control Protection - The Stock Option Agreement contains a provision designed to hold you harmless, on an after tax basis, from any excise tax you incur in connection with your employment under Section 4999 of the Code. You will also be given a Key Employee Employment Protection Agreement that will provide you with termination benefits in the event of Change of Control of MBIA, including, without limitation, the payment of additional amounts to fully compensate you for the effect of any excise tax that may be imposed upon any of the benefits you receive under that MBIA 5 agreement, the Stock Option Agreement or otherwise in connection with the Change of Control. VI. Indemnification - If you are made a party, or are threatened to be made a party, to any threatened or actual action, suit or proceeding, whether civil, criminal, administrative, investigative, appellate or otherwise (a "Proceeding") by reason of the fact that you are or were a director, officer, employee, agent, manager, consultant or representative of MBIA or are or were serving at the request of MBIA as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, or if any claim, demand, request, investigation, dispute, controversy, threat, discovery request or request for testimony or information (a "Claim") is made, or threatened to be made, that arises out of or relates to your service in any of the foregoing capacities, then you shall promptly be indemnified and held harmless by MBIA to the fullest extent legally permitted or authorized by MBIA's certificate of incorporation, bylaws or Board resolutions or, if greater, by the laws of the State of Connecticut, against any and all costs, expenses, liabilities and losses (including, without limitation, attorneys' fees, judgments, interest, expenses of investigation, penalties, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) incurred or suffered by you in connection therewith, and such indemnification shall continue as to you even if you shall have ceased to be a director, member, employee, agent, manager, consultant or representative of MBIA or other entity and shall inure to the benefit of your heirs, executors and administrators. MBIA shall advance to you all costs and expenses incurred by you in connection with any such Proceeding or Claim within 15 days after receiving written notice requesting such an advance. Such notice shall include an undertaking by you to repay the amount advanced if you are ultimately determined not to be entitled to indemnification against such costs and expenses. In the event you request indemnification or advancement of costs and expenses as provided in the preceding paragraph of this Section VI, a determination as to your entitlement to indemnification shall be made in good faith pursuant to the procedures set forth in Section 33-775 of the General Statutes of Connecticut as in effect on the date hereof. Such determination shall be made promptly in order to permit timely indemnification pursuant to this Section VI including, without limitation, the advancement of costs and expenses. Neither the failure of MBIA (including the Board, independent legal counsel or stockholders) to have made a determination in connection with any request for indemnification or advancement that you have satisfied any applicable standard of conduct, nor a determination by MBIA (including the Board, independent legal counsel or stockholders) that you have not met any applicable standard of conduct, shall create a presumption that you have not met an applicable standard of conduct. MBIA 6 During your employment with MBIA and for a period of six years thereafter, to the extent that MBIA shall keep in place a directors and officers' liability insurance policy (or policies) providing comprehensive coverage to any other active or retired senior executive or director, it shall also maintain such coverage in effect for you. VII. Conditions - This offer of employment is not contingent upon the completion of satisfactory professional and personal reference checks. This offer is contingent upon the negative results of a drug screening. A Human Resources representative will be in touch with you to schedule this screening. VIII. Relocation Benefits - You will be provided with a comprehensive relocation package that includes reimbursement of all reasonable expenses associated with your move, temporary housing, house hunting trips, home sale/purchase assistance and other relocation benefits as outlined in the summary attached as Exhibit C. IX. Starting Date - January 7, 1999. The terms and conditions of his offer are subject to the approval of the Compensation and Organization Committee of the Board of Directors who will meet on January 7, 1999, to review and approve this offer. We agree to obtain all necessary approvals with respect to the matters described in this letter and in the Stock Option Agreement and to amend MBIA's 1987 Stock Option Plan to the extent necessary to permit the grant of options contemplated hereunder and in the Stock Option Agreement, prior to your Starting Date. Again, I am delighted at the prospect of your joining MBIA as our CEO and, ultimately, Chairman, as well. Please confirm your acceptance of this offer by signing and returning one of the two executed originals of this letter to me. Sincerely, Witnessed: /s/ David H. Elliot /s/ Kevin D. Silva - -------------------------------- ------------------------------- David H. Elliott Kevin D. Silva Chairman and CEO Senior Vice President, Director Management Services Division Accept: /s/ Joseph W. Brown, Jr. Date: 1/20/99 ------------------------- Joseph W. Brown, Jr. EXECUTIVE BENEFITS SUMMARY Retirement Plans MBIA Inc. Employees Pension Plan Employees are eligible on first entry date following the completion of six months of employment. Entry dates are January 1 and July 1. The plan provides a company contribution equal to 10 percent of total cash compensation. Funds are subject to the following vesting schedule: three years of service, 60 percent; four years of service, 80 percent; five years of service, 100 percent. MBIA Inc. Employees Profit Sharing 401(k) Plan Employees are eligible on first entry date following the completion of six months of employment. Entry dates are January 1, April 1, July 1 and October 1. The plan allows employees pre-tax salary and bonus deferrals of up to 10 percent. The Company matches employee deferrals, dollar for dollar, up to 5 percent. Employee deferrals are 100 percent vested. The Company match is subject to the same vesting schedule as the Pension Plan. MBIA Inc. Deferred Compensation and Excess Benefit Plan Excess employee deferrals and Company contributions, as defined by the IRS, will be credited to this non-qualified plan. The plan is unfunded and the benefit obligation to employees remains an MBIA liability subject to the full faith and credit of the company. Group Insurance Life Insurance and AD&D The plan provides a benefit equal to one times salary up to a maximum of $250,000 at no cost to the employee. The employee may purchase supplemental coverage for employee, spouse and children. Employees are eligible after 30 days of employment. Split Dollar Life Insurance The plan provides supplemental life insurance with a death benefit equal to three times your base salary and a cash value build-up within the policy on a tax deferred basis. The life insurance benefit is funded through individual universal life insurance policies. The premium is split between MBIA and the executive. Health Care MBIA offers the choice of two medical plans, depending on the employee's location. These plans provide comprehensive coverage to protect you and your family against the financial burden of major illnesses and injuries. Dental insurance is also offered. The premium cost is shared between the employee and the Company. Eligible after 30 days of employment. Reimbursement Accounts Two Reimbursement Accounts are available: Health Care and Dependent Care. Both plans provide employees with tax savings through voluntary pre-tax salary deductions. Participation may begin upon employment. Short-Term Disability/Workers Compensation The Company's salary continuation plan provides income ranging from 75 percent or 100 percent of salary, based upon length of service, up to a maximum of 26 weeks. Employees are eligible for salary continuation after one year of employment. The New York State benefit prevails if employee is not eligible for salary continuation. Base and Supplemental Executive Long-Term Disability The plan provides income protection after short-term disability period of up to 70 percent of total cash compensation. The plan includes supplemental long-term disability benefits for executives to allow highly compensated employees to maintain level of benefit. Long-Term Incentive Plan A long-term incentive based on a percentage of your total compensation is divided approximately equally into grants of stock options for MBIA Inc. and an adjusted book value (ABV) performance based award. Long-term incentives are awarded annually under the discretion of the Compensation and Organization Committee of the Board of Directors of MBIA Inc. Holidays/Vacation/Sick/Personal Days Holidays Employees are awarded ten company-paid holidays plus 1 discretionary day. The holiday schedule for 1999 is attached. Vacation You will be entitled to the maximum 20 vacation days per year. Unused accrued vacation days may be carried over into following calendar year, but must be used by June 30. Sick Leave/Personal Time You will be eligible for ten sick days per year. Three personal days per year are permitted and are deducted from the annual sick leave credit. Other Benefits Work/Family Benefits and Referral Service Employee Assistance Program Tuition Reimbursement Adoption Policy Matching Gifts to Education Wellness Program and Fitness Room Employee Stock Purchase Plan Summary of MBIA Relocation Policy MBIA offers competitive Relocation Benefits to eligible new hires as part of a comprehensive compensation package. The following Executive relocation benefits are listed to provide you with an overview of some of the available services. This list is not intended as a policy document nor does it constitute a contract of employment. MBIA reserves the right to amend any of the provisions of the Relocation policy. I Homefinding Assistance o Counseling will be provided by the MBIA designated Relocation Company to aid you and your family with selecting the new community, neighborhood and home in the most efficient manner best suited to your family needs. o Referrals to experienced Real Estate Agents. o Househunting assistance including: o Up to 2 trips with spouse for a total of 7 days/6 nights o Reimbursement of airfare, lodging, rental car o Per them of $50 per adult for meals and incidentals o Up to $50 per day for child care II Home Purchase Assistance o Reimbursement of reasonable and customary closing costs (i.e. attorney fees, appraisal, title insurance, survey, and inspections). o Reimbursement of up to a two- percent mortgage fee discount. o Interest-free (up to 90 days) loan against the equity in your current home (up to 90%) for purchase of new home is available based upon demonstration of need. III Homesale Assistance o Marketing assistance including: o Realtor selection o Market analysis o Listing and Marketing recommendations o Guaranteed Offer in which the Relocation Company will appraise your home and make an offer to purchase it on behalf of MBIA. This will enable you and your family to relocate to your new destination, free of the worry of being responsible for two homes. IV Moving Assistance o Transportation of household goods. o Transportation of up to two automobiles for move distance greater than 500 miles or reimbursement of mileage and tolls for move distance 500 miles or less. o Packing and unpacking of goods. o Appliance hookups. o Insurance coverage up to $250,000. o Storage of goods up to 60 days. o Reimbursement of moving family including one-way airfare, mileage, tolls, train, lodging, and per them of $50 per adult, $35 per child for meals and incidentals. o Temporary living expense reimbursement for employee and family up to 60 days including lodging at an approved hotel, rental car, and per diem of $50 per adult, $35 per child for meals and incidentals. o Reimbursement of up to two round trips for employee to visit family (if family does not accompany employee). V Miscellaneous Expense Allowance o A lump sum in the amount of one month's base salary up to a maximum of $15,000 less withholdings and deductions, will be provided to cover miscellaneous expenses associated with your relocation. VI Tax Assistance o MBIA will provide you with tax assistance (gross-up) for non-deductible relocation expenses as outlined above. MBIA 1999 Holiday Schedule MBIA provides paid time off for scheduled holidays based on the New York Stock Exchange's schedule of holidays as follows: New Year's Day .........................January 1 (Friday) Martin Luther King, Jr. Day ............January 18 (Monday) Washington's Birthday ..................February 15 (Monday) Good Friday ............................April 2 (Friday) Memorial Day ...........................May 31 (Monday) Independence Day .......................July 5 (Monday) Labor Day ..............................September 6 (Monday) Thanksgiving Day .......................November 25 (Thursday) *Post Thanksgiving Day .................November 26 (Friday) Christmas Day ..........................December 24 (Friday) *This day is not based on the New York Stock Exchange's schedule of holidays In addition to the above paid holidays, each employee may take one additional day per year as a discretionary holiday. This day must be taken during the calendar year and will not be reimbursed to the employee if it is not taken. The holiday schedule for some MBIA subsidiaries may differ from the above due to business needs. However, in no case will the number of paid holidays plus discretionary holidays exceed 11. MBIA Statement of Mission and Values =============================== Mission =========================== To promote growth and prosperity around the world by providing financial products and services of enduring quality. Values =========================== Values are the principles by which we navigate the company. They guide our decisions and behavior, and influence the actions we take. As the foundation of a vibrant and healthy culture, they are critical to our continued success. We will strive to incorporate them into everything we do. 1. Customer Service o Deliver quality financial products and services o Differentiate the MBIA brand and ourselves through service and added value o Exceed expectations consistently 2. Performance Excellence o Provide quality expertise o Present innovative solutions o Assume individual responsibility and accountability o Assess, reward and recognize performance 3. Integrity o Emphasize honesty and respect for others o Respect individual backgrounds o Keep an open mind to other points of view o Demonstrate maturity, empathy, fairness and principled behavior 4. Cooperation o Commit to a common purpose o Promote candid, respectful communication o Build an environment of trust and loyalty that stimulates teamwork o Value and support each other as individuals 5. Responsible Citizenship o Support our communities and their organizations that serve humanitarian needs o Conduct ourselves lawfully and ethically, and with concern for employees, their families and society EX-10.37 14 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT AGREEMENT made and entered into as of this 7th day of January, 1999 between MBIA Inc., a Connecticut corporation (the "Company"), and Joseph W. Brown, Jr. (the "Optionee"). WITNESSETH: WHEREAS, the Company has established the MBIA Inc. 1987 Stock Option Plan, as amended (the "Plan") providing for the granting of options to purchase shares ("Stock Options") of Common Stock par value $1 per share, of the Company ("Shares") to key employees of the Company and certain wholly-owned subsidiaries of the Company; and WHEREAS, the Company has employed the Optionee pursuant to an offer letter dated January 7, 1999 ("Offer Letter"), under which the Optionee has agreed to become Chief Executive Officer of the Company on the terms and conditions set forth therein; WHEREAS, the Company is hiring the Optionee as a key employee of the Company and has determined it to be in the interest of the Company and its shareholders for the Optionee to be granted a stock option (the "Option") under the Plan as an inducement for him to agree to serve the Company and as an incentive for continuing effort during such service; and WHEREAS, the Compensation and Organization Committee (the "Committee") of the Board of Directors of the Company has determined to grant to the Optionee this Option, subject to the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and the Optionee (together, the "Parties") do hereby agree as follows: 1. Grant. Pursuant to the terms and provisions of the Plan, and the action of the Committee, the Company hereby grants to the Optionee the right and option to purchase, on the terms and conditions hereinafter set forth, Eight Hundred Thousand (800,000) Shares. 2. Option Price. The purchase price of each of the Shares subject to the Option (the "Option Price") is $67.875 per share, which is the Market Price (as defined in Section 20) of a Share on January 6, 1999. 3. Term of Option Subject to the terms and provisions of the Plan and this Stock Option Agreement (the "Agreement"), this Option may be exercised during the periods set forth in Sections 4 and 5 below but no later than 11:59 p.m. on January 7, 2009 (the "Option Period"). The Optionee's rights during the Option Period shall be subject to limitations as hereinafter provided and shall be subject to sooner termination as provided in Section 5. 4. Exercisability. (a) General Rule. Subject to the additional conditions set forth in Section 4(b) below, 100% of the Shares subject to the Option may be exercised, in whole or in part, and from time to time, on or after the earlier to occur of (i) January 7, 2008 or (ii) the later to occur of (1) January 7, 2002 and (2) the last day of a period of ten consecutive Trading Days on which a Share has traded at least $90 at any point during each such Trading Day, subject to exercise at an earlier date in the event of certain terminations of the Optionee's employment, as provided in Section 5. Upon the Option's becoming exercisable under this Agreement, it shall, except as expressly provided herein, be treated as fully vested and nonforfeitable in all respects. (b) Share Ownership Requirements. Notwithstanding anything else in this Agreement to the contrary, none of this Option shall become exercisable with respect to any Shares and shall be forfeited unless the Optionee shall "beneficially own" (within the meaning of both Rule 13d-3 and Rule 16a-1 as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and as currently in effect) not later than February 8, 1999 Two Hundred Thousand (200,000) Shares and shall continuously own at least that number of Shares until the earliest to occur of (i) a Change of Control, (ii) the termination of the Optionee's employment for any of the reasons described in Section 5(a), (b), (c) or (d) and (iii) January 7, 2004. On and after January 7, 2004 and prior to the occurrence of a Change of Control or the termination of the Optionee's employment for any of the reasons described in Section 5(a), (b), (c) or (d), this Option shall cease to be exercisable as to any Shares as to which the Option has not previously been exercised (and the Option shall be forfeited with respect to such number of Shares) on the first date, if any, as of which the Optionee ceases to "beneficially owe' (as defined in the previous sentence) at least the number of Shares determined pursuant to the following schedule: - -------------------------------------------------------------------------------- Date Number of Shares Required to be Owned - -------------------------------------------------------------------------------- On and after January 7, 2004 and prior to July 7, 2005 150,000 Shares - -------------------------------------------------------------------------------- On or after July 7, 2005 and prior to January 7, 2007 100,000 Shares - -------------------------------------------------------------------------------- On or after January 7, 2007 50,000 Shares - -------------------------------------------------------------------------------- 2 Upon and after the occurrence of a Change of Control or the termination of the Optionee's employment for any of the reasons described in Section 5(a), (b), (c) or (d), there shall be no requirement under this Agreement or other-wise that the Optionee continue to hold any Shares or any securities of the Company or any successor in interest to the Company. (c) Change of Control. Notwithstanding anything herein to the contrary, including, without limitation, Sections 4(a), 4(b) and 5, this Option shall upon any Change of Control (as defined in Section 20) immediately become fully exercisable; provided that, if the Change of Control occurs prior to January 7, 2000 and unless the Compensation & Organization Committee of the Board of Directors otherwise determines, only fifty percent (50%) of the Shares subject to this Option grant (i.e., 400,000 shares) will become exercisable upon the occurrence of a Change of Control. If in any transaction constituting a Change of Control, shareholders may exchange or sell their Shares for cash, securities or other property, this Option shall become exercisable to the extent provided in the immediately preceding sentence immediately prior to the occurrence of such Change of Control (but only after all material conditions to the consummation of such transaction have been satisfied) and the Optionee shall be afforded the opportunity to exercise this Option, in whole or in part, prior to such occurrence so that he may receive in respect of his Option Shares the same consideration received by such other shareholders. 5. Termination of Employment. (a) Death. In the event that the Optionee dies while employed by the Company, this Option shall immediately become fully exercisable and the estate or other legal representative of the Optionee, or his successors and assigns as permitted under this Agreement, as the case may be, shall be entitled, during the period ending on the earlier of (i) the third anniversary of the Optionee's death and (ii) January 7, 2009, to exercise this Option with respect to all of the Shares then subject to this Option. To the extent any portion of this Option is not exercised on or before such earlier date, such unexercised portion of this Option shall expire. Notwithstanding any other provision of this Section 5, in the event the Optionee dies subsequent to the termination of his employment with the Company, but at a time at which all or a portion of this Option is exercisable pursuant to the provisions of this Section 5, the estate or other legal representative of the Optionee, or his successors and assigns as permitted under this Agreement, as the case may be, shall be entitled to exercise the portion of this Option that is exercisable at the date of the Optionee's death for the period otherwise specified in this Section 5 or, if longer, until the earlier of the first anniversary of the Optionee's death or January 7, 2009. (b) Disability. In the that event the Optionee's employment with the Company is terminated by either Party due to Disability (as defined in Section 20), this Option shall immediately become fully exercisable and the Optionee shall be entitled, during the period ending on the earlier of (i) the third anniversary of the date of Ms termination of 3 employment due to Disability and (ii) January 7, 2009, to exercise this Option with respect to all of the Shares then subject to this Option. To the extent any portion of this Option is not exercised on or before such earlier date, such unexercised portion of this Option shall expire. (c) Retirement. In the event that the Optionee's employment with the Company is terminated by his Retirement, the Optionee shall be entitled, during the period ending on the earlier of (i) the third anniversary of the date of his termination of employment due to Retirement and (ii) January 7, 2009, to exercise the Option with respect to the sum of (1) that number of Shares with respect to which the Optionee could have exercised the Option on the date of his Retirement, determined in accordance with Section 4 above, and (2) his Pro-Rata Percentage of any Shares as to which this Option is not exercisable at the date of his Retirement. To the extent any portion of this Option is not exercised on or before such earlier date, such unexercised portion of this Option shall expire. For this purpose, "Retirement" shall mean termination of the Optionee's employment, other than a termination by the Company for Cause or a termination to which Section 5(a), 5(b) or 5(d) applies after having completed at least five years of service as an employee of the Company and having attained age 55; and "Pro Rata Percentage" shall mean the percentage determined by dividing (i) the number of whole and partial months of the Optionee's employment from January 7, 1999 to the date of his Retirement by (ii) 108. (d) Termination Without Cause. In the event that the Optionee's employment is terminated (i) by the Company for any reason other than due to death or Disability or for Cause (as each such term is defined in Section 20) or (ii) by the Optionee through a Constructive Termination Without Cause (as defined in Section 20), this Option shall immediately become fully exercisable and the Optionee shall be entitled, during the period ending on the earlier of (x) the fifth anniversary of the date of his termination of employment and (y) January 7, 2009, to exercise this Option with respect to all of the Shares then subject to this Option. To the extent any portion of this Option is not exercised on or before such earlier date, such unexercised portion of this Option shall expire. (e) Voluntary Termination. In the event that the Optionee terminates his employment with the Company voluntarily and none of Sections 5(a) through 5(d) apply, then the Optionee shall be entitled during the period ending on the earlier of (i) the first anniversary of his termination of employment and (H) January 7, 2009, to exercise the Option with respect to the number of Shares as to which the Option was exercisable by the Optionee at the date of such termination of employment. To the extent any portion of this Option is not exercised on or before such earlier date, such unexercised portion of this Option shall expire. (f) Termination following a Change of Control. Notwithstanding the preceding provisions of this Section 5, if the Optionee's employment terminates following or as a result of a Change of Control and this Option continues in effect after such a Change of 4 Control, the Optionee shall be entitled to exercise the Option until January 7, 2009 with respect to the number of Shares as to which the Option was exercisable by the Optionee at the date of such termination of employment and, if the Change of Control occurs prior to January 7, 2000, such additional number of Shares, if any, as to which the Option becomes exercisable by reason of the provisions of Section 5(a), 5(b), 5(c) or 5(d). (g) Other Termination. In the event the Optionee's employment with the Company is terminated for any reason other than those described in subsection (a), (b), (c), (d), (e) and (f) above, then the Optionee shall be entitled during the period ending on the earlier of (i) the three month anniversary of his termination of employment and (ii) January 7, 2009, to exercise the Option with respect to the number of Shares as to which the Option was exercisable by the Optionee at the date of such termination of employment. To the extent any portion of this Option is not exercised on or before such earlier date, such unexercised portion of this Option shall expire. (h) Committee Discretion. Without limiting the generality of the foregoing, the Committee shall have the authority in its discretion to provide terms and conditions with respect to the exercisability of the Option before or after termination of employment that are more favorable to the Optionee than those set forth in Section 4 or Section 5. 6. No Rights of Shareholder or Continued Employment. The Optionee shall not, by virtue hereof, be entitled to any rights of a shareholder of the Company, either at law or in equity. Neither the grant of this Option nor the exercise of such Option shall be construed as granting to the Optionee any right of continued employment, and the right of the Company to terminate the Optionee's employment at any time at will (whether by dismissal, discharge or otherwise) is specifically reserved. 7. Exercise of Option. (a) Method of Exercise. In order to exercise this Option, in whole or in part, the Optionee (or any other person entitled to exercise this Option in accordance with the terms hereof) shall submit to the Company an instrument in writing (which shall be substantially in the form of Exhibit A hereto or in another form which shall contain the data required by such form) specifying the whole number of Shares in respect of which the Option is being exercised and accompanied by payment in full (or an arrangement for payment in full in accordance with Section 7(b)) of the aggregate Option Price for the Shares in respect of which the Option is being exercised. The number of Shares for which the Option has thus been exercised shall then promptly be issued by the Company (the "Option Shares") and a certificate promptly delivered to the Optionee (or such other person as shall be exercising this Option); provided, however, that the Company shall not be obligated to issue any Option Shares hereunder if the issuance of such Option Shares would violate any provisions of any applicable law or regulation of any governmental authority. 5 (b) Method of Payment. Payment of the aggregate Option Price for Option Shares may be made (i) by delivery to the Company of cash or a check to the order of the Company in an amount equal to the aggregate Option Price of such Shares; (ii) by delivery to the Company of Shares then owned by the Optionee having an aggregate Market Price on the date of delivery equal to the aggregate Option Price of the Shares for which the Option is being exercised; (iii) through reasonable cashless exercise procedures that are from time to time established by the Company (which procedures the Company agrees to establish if requested by the Optionee) and that afford the Optionee the opportunity to sell immediately some or all of the Shares underlying the exercised portion of the Option in order to generate sufficient cash to pay the aggregate Option Price of such Shares or (iv) by any combination of (i), (ii) or (iii). (c) Delivery of Shares in Payment of Option Price. Payment by delivery of Shares may be effected by delivering one or more stock certificates or otherwise by delivering Shares to the Company's reasonable satisfaction (including, without limitation, through an "attestation" procedure that is reasonably acceptable to the Company) in each case accompanied by such endorsements, stock powers, signature guarantees or other documents or assurances as may reasonably be required by the Company. If a certificate or certificates or other documentation representing Shares in excess of the amount required are delivered, a certificate (or other satisfactory evidence of ownership) representing the excess number of Shares shall be returned by the Company. The Company need not accept fractional Shares. (d) Additional Company Obligations. The Company shall, upon and to the extent of any written request from the Optionee, use its reasonable commercial best efforts to assure that all Option Shares shall be, and shall remain, (i) fully registered (at the Company's expense) for issuance under the Securities Act of 1933, as amended; (ii) fully registered or qualified (at the Company's request) under such state securities laws as the Optionee may reasonably request, both for issuance and resale, (iii) listed on a national securities exchange or eligible for sale on the NASDAQ National Market; and (iv) validly issued, fully paid and nonassessable. The Company shall at all times reserve and keep available sufficient Shares to satisfy the requirements of this Agreement and shall pay all original issue taxes with respect to the issuance of Option Shares and all other fees and expenses incurred in connection therewith. 8. Excise Tax. In the event that any payment or benefit made or provided to or for the benefit of the Optionee under this Agreement, or under any plan, agreement, program or arrangement of the Company or any of its affiliates (a, "Payment") is determined to be subject to any excise tax ("Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any successor section to such Section), the Company shall pay to the Optionee at or prior to the time any Excise Tax is payable with respect to such Payment (through withholding or otherwise), an additional amount which, after the imposition of all income, employment, excise and other taxes payable by the Optionee thereon, is equal to the sum of (i) the Excise Tax on 6 such Payment plus (ii) any penalty and interest assessments associated with such Excise Tax. The determination of whether any Payment is subject to the Excise Tax and, if so, the amount to be paid by the Company to the Optionee and the time of payment pursuant to this Section 8 shall be made by an independent, nationally recognized United States public accounting firm (the "Auditor") jointly selected by the Parties and paid by the Company. If the Parties cannot agree on the firm to serve as the Auditor, then the Parties shall each select one nationally recognized United States accounting firm and those two firms shall jointly select the accounting firm to serve as the Auditor, which firm shall not have acted in any way on behalf of the Company during the two years preceding its selection. The Parties shall cooperate with each other in connection with any proceeding or claim relating to the existence or amount of any liability for any Excise Tax. All expenses relating to any such proceeding or claim (including any attorneys' fees and other expenses associated therewith) shall be paid by the Company promptly upon demand by the Optionee, and any such payment shall be subject to gross up in the event that the Optionee is subject to any income tax, employment tax or Excise Tax on it. In the event that the Optionee is entitled to a gross-up from the Company under the provisions of this Agreement and any other agreement or arrangement with the Company, the payment, if any, to be made in respect of any Excise Tax under this Section 8 shall not be in addition to or duplicative of any such other payment. 9. Adjustments for Changes in Structure and Special Transactions. In the event of any merger, consolidation, reorganization, recapitalization, spin-off, split-up, combination, share exchange, liquidation, dissolution, stock split, extraordinary cash dividend, stock dividend, distribution of stock or other property in respect of the Shares or other securities of the Company, or other change in corporate structure or capitalization affecting the Shares, appropriate adjustment(s) will be made in the number and kind of equity securities subject to this Option, the Market Price specified in Section 4(a)(i)(2), the number of Shares specified in Section 4(b) and/or in the Option Price or other terms and conditions of this Option and/or appropriate provision shall be made for supplemental payments of cash or other property, so as to avoid dilution or enlargement of the rights of the Optionee and of the economic opportunity and value represented by this Option. The Company will use its reasonable commercial best efforts to obtain the agreement of any successor in interest to provide the opportunity for the Optionee to receive options for its common equity in substitution for this Option, but shall not have any obligation to take any action that would be detrimental to the interests of the Company's shareholders. 10. Deferral of Option Gains. The Optionee shall have the right, by furnishing written notice to the Company at least six months prior to any exercise of this Option, to elect to defer any gains realized upon such exercise. Any such deferral, including the manner of exercise of this Option in connection with such deferral, shall be made in such manner as may reasonably be required by the Company, including such requirements as may apply in order to defer such gains for Federal income tax purposes as the independent public accountants for the Company reasonably advise are necessary in 7 order that such gains not result in a charge against the earnings of the Company. At the time the Optionee elects to defer such gains, such gains shall be deferred into any nonqualified deferral plan of the Company that accepts such deferrals on terms and conditions that satisfy the requirements of the preceding sentence. If no such plan is available, the Optionee may make an irrevocable written election to defer such gains into Share Units (with each Share Unit representing a Share, including the right to be credited with any dividends or other distributions that may be declared or made thereon during the period of the deferral). Amounts deferred under this Section 10 shall be paid out under the terms of the Optionee's election to defer. 11. Relationship of this Agreement to the Plan and to the Letter Agreement. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the Plan shall be deemed amended insofar as is necessary to conform the Plan to the provisions of this Agreement, and the provisions of this Agreement shall control. In the event of any inconsistency between the provisions of the Offer Letter and the provisions of this Agreement, the provisions of this Agreement shall control. 12. Nonassignability of Option. This Option is personal and no rights granted hereunder may be transferred, assigned, pledged, hypothecated in any way (whether by operation of law or otherwise) nor shall any such rights be subject to execution, attachment or similar process, except that this Option may be transferred, in whole or in part, (i) by will or the laws of descent and distribution; (ii) to any organization that is exempt from Federal income taxation pursuant to Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code") or any private foundation that is exempt for Federal income taxation under Section 509 of the Code, provided that such organization or foundation agrees to be bound by the terms of this Agreement and any reasonable conditions that the Company may impose in order to assure compliance with its obligations under the Federal securities laws; and (iii) to any Immediate Family Member or to any trust, the sole beneficiaries of which are the Optionee and/or his Immediate Family Members, or to any entity (including, without limitation, any corporation, partnership or limited liability company) in which the Optionee, his Immediate Family Members or trusts, solely for the benefits of such persons hold all the beneficial interests, provided that such Immediate Family Members and/or trusts and/or other entities (and upon distribution their beneficiaries) are bound by the provisions of this Agreement. For purposes of this Agreement, the term "Immediate Family Member" shall mean the Optionee's parents and spouse and any of the lineal descendants of the Optionee, his spouse or either of his parents (including, without limitation, descendants by adoption). Any person or entity to whom this Option has been transferred in whole or in part in part in accordance with this Section 12 shall to the extent of the transfer, succeed to the rights of the Optionee under Sections 3, 4(a), 4(c), 5, 7, 8, 9, 17 and 18. 13. Restrictions on Transfer of Option Shares. Neither Option Shares acquired on exercise of the Option, nor any interest in such Option Shares may be sold, assigned, 8 pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with the terms, conditions and restrictions as set forth in the Certificate of Incorporation or By-Laws of the Company, applicable federal and state securities laws or any other applicable laws or regulations, and the terms and conditions hereof. 14. Withholding. The Optionee agrees to make appropriate arrangements with the Company for satisfaction of any applicable tax withholding requirements ("tax obligations") arising out of this Agreement. Such tax obligations may be satisfied in any of the manners provided in Section 7(b) for payment of the purchase price of the Option Shares or, at the election of the Optionee, by authorizing the Company to withhold up to the greatest number of whole Shares that would otherwise would be delivered to the Optionee and that have an aggregate Market Price on the date of exercise equal to the amount of taxes required to be withheld. 15. Amendment or Waiver. No provision of this Agreement may be amended unless such amendment is set forth in a writing signed by the Parties. No Waiver by any person of any breach of any condition or provision contained in this Agreement shall be deemed a waiver of any similar or dissimilar condition or provision at the same or any prior or any subsequent time. To be effective, any waiver must be in writing signed by the waiving person. 16. References and Headings. References herein to rights and obligations of the Optionee shall apply, where appropriate, to the estate or other legal representative of the Optionee or his successors and assigns as permitted under this Agreement, as the case may be, without regard to whether specific reference to such estate or other legal representative or his successors and assigns is contained in a particular provision of this Agreement. The headings of Sections contained in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. 17. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given (i) when delivered directly to the person concerned or (ii) three business days after being sent by postage-prepaid certified or registered mail or by nationally recognized overnight carrier, return receipt requested, duty addressed to the person concerned at the location indicated below (or to such changed address as such party may subsequently by similar process give notice of): If to the Company, at the Company's headquarters and to the attention of the Office of the Secretary. If to the Optionee, at the Company's headquarters and to the attention of the Optionee. If to a transferee permitted under Section 12, to the address (if any) supplied by the Optionee to the Company. 18. Resolution of Disputes. Any dispute or controversy arising out of or relating to this Agreement, the Optionee's employment with the Company, or the termination thereof, shall be resolved by binding confidential arbitration, to be held in New York City 9 before three arbitrators in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Each of the Parties shall be entitled to appoint one of the three arbitrators and the third arbitrator shall be appointed by the arbitrators appointed by the Parties. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof The Company shall promptly pay all costs and expenses, including without limitation reasonable attorneys' fees, incurred by the Optionee (or his permitted successors and assigns) in resolving any claim raised in such an arbitration, other than any claim brought by the Optionee (or the Optionee's permitted successors and assigns) that the arbitrator(s) determine to have been brought (i) in bad faith or (ii) without any reasonable basis. In the event that there is a dispute regarding the Optionee's rights under this Agreement, the Optionee shall have the right at any time and from time to time to deliver to the Company a written conditional exercise and sales notice with respect to all or any portion of this Option, the effect of which shall be to establish the Optionee's damages in the event that any proceeding is resolved in his favor assuming that he would have exercised the Option to the extent provided in such notice on the date of such notice and immediately sold the Option Shares related to such deemed exercise on such date at the Market Price. In the event that any such proceeding is resolved favorably to the Company and against the Optionee, any such conditional exercise and sales notice shall be deemed void and without effect, but the period during which the Option shall remain exercisable as otherwise specified in Section 5 shall in no event expire earlier than the earlier of (i) January 7, 2009 and (ii) 30 days after the arbitrator's decision is rendered in writing in favor of the Company. 19. The Company's Representations. The Company represents and warrants that (i) sufficient shares are available under the Plan for the grant of the Option hereunder; (ii) it is fully authorized by action of the Board and of the Committee (and of any other person or body whose action is required) to enter into this Agreement and to perform its obligations hereunder; (iii) the grant of this Option and this Agreement have been approved in accordance with Rule 16b-3(d)(1) promulgated under the 1934 Act; (iv) the execution, delivery and performance of this Agreement by the Company does not violate any applicable law, regulation, order, judgment or decree or any agreement, plan or corporate governance document of the Company; and (v) upon the execution and delivery of this Agreement by the Company and the Optionee, this Agreement shall be the valid and binding obligation of the Company, enforceable in accordance with its terms, except to the extent enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. 20. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) "Change of Control" shall mean the occurrence of any of the following events: 10 (i) any "person", as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under the 1934 Act) of 25% or more of the Voting Power of the Company; (ii) a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board on the date hereof, provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 20(a)(ii); (iii) the Board adopts any plan of liquidation providing for the distribution of all or substantially all of the Company's assets; (iv) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the "Company Shareholders") shall not hold, directly or indirectly, immediately following such Corporate Event a majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that, such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) "Cause" shall mean: (i) the Optionee is convicted of a felony involving moral turpitude or (ii) the Optionee engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his duties for the Company, resulting, in either case, in material economic harm to the Company, unless the Optionee believed in good faith that such conduct was in, or not opposed to, the best interests of the Company. Notwithstanding the immediately preceding sentence, Cause shall not exist for purposes of this Agreement unless the following procedural requirements have been complied with. The Optionee shall be given written notice by the Board of its intention to terminate his employment for Cause, which notice shall state in detail the particular circumstances that constitute the grounds on which the proposed termination for Cause is based. The Optionee shall have the right to have a timely hearing before the Board, and to present evidence to the Board in defense of such proposed termination and to be represented and assisted by counsel at such hearing. A determination that Cause exists may only be made 11 upon a vote of two-thirds of the members of the Board (excluding the Optionee) after such hearing and only on the basis of the grounds set forth in the notice initially sent to the Optionee regarding such action. (c) "Constructive Termination Without Cause" shall mean a termination by the Optionee of his employment with the Company on written notice given to the Company within 60 days following the occurrence, without Es prior written consent, of any of the following events: (i) the failure to elect or reelect the Optionee as Chief Executive Officer of the Company, as a member of the Board and, beginning on or after May 31, 1999, Chairman of the Board, or the removal of him from any such position other than in connection with an actual termination of employment by the Company for Cause in accordance with the provisions hereof; (ii) any material diminution in his duties or responsibilities, any change in the reporting structure so that the Optionee reports to someone other than the Board or (prior to June 1, 1999) its Chairman, or the assignment to him of duties that materially impair his ability to perform the duties normally assigned to a chief executive officer (and, beginning as of May 31, 1999, a chairman of the board) of a publicly traded company of the same size and nature as the Company; (iii) any material breach of this Agreement by the Company or any other breach of this Agreement which is not cured by the Company within 10 business days of receipt by the Company of written notice thereof setting forth in reasonable detail the grounds on which such breach is alleged. (d) "Disability" shall mean the Optionee's inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities as Chief Executive Officer of the Company for a period of 180 consecutive days as determined by an approved medical doctor. For this purpose, an approved medical doctor shall mean a medical doctor selected by the Parties. If the Parties cannot agree on a medical doctor, each Party shall select a medical doctor and the two doctors shall select a third who shall be the approved medical doctor for this purpose. (e) "Market Price", when used with respect to the price of Shares on a particular day, shall mean the closing price for which a Share is purchased that day (or, if such day is not a Trading Day, on the most recent preceding Trading Day on which such a purchase occurred) on the principal national securities exchange or national market system on which Shares are then listed or eligible for sale (or, if Shares are not listed or eligible for sale on any such exchange or market system, the price as determined by agreement between the Parties or, in the absence of such agreement, the price as determined in accordance with Section 18). 12 (f) "Person", when used in the definition of a Change of Control, shall have the meaning ascribed to such term in Section 3(a)(9) of the 1934 Act, as supplemented by Section 13(d)(3) of the 1934 Act; provided, however, that Person shall not include (i) the Company or any subsidiary of the Company or (ii) any employee benefit plan sponsored by the Company or any subsidiary of the Company. (g) "Trading Day" shall mean a day on which the principal national securities exchange or national market system on which Shares are then listed or eligible for sale is open for buying and selling Shares (or, if Shares are not listed or eligible for sale on any such exchange or market system, any day that is not a Saturday, a Sunday, or a legal holiday in New York City). (h) When used in the definition of a Change of Control, a specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors. 21. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Connecticut without regard to the principles of conflict of laws. 22. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which, when taken together, shall constitute one document. 23. Survival. The provisions of Sections 8, 10, 17, 18 and 19 shall survive the exercise or expiration of this Option. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. MBIA INC. /s/ David H. Elliott --------------------------- OPTIONEE /s/ [ILLEGIBLE] --------------------------- 13 EXHIBIT A MBIA INC. 1987 STOCK OPTION PLAN OPTION EXERCISE FORM Name: ____________________________________________________ Address: _________________________________________________ __________________________________________________________ Social Security Number: _____________________ Office Telephone Number: ___________________ Pursuant to the terms of the MBIA Inc. 1987 Stock Option Plan and the Stock Option Agreement entered into as of January 7, 1999, between MBIA, Inc. and Joseph W. Brown, Jr. (the "Agreement"), I hereby exercise the Option granted pursuant to the Agreement for the number of shares listed below: 1. Number of shares as to which the option is being exercised: ________ 2. Per share exercise price: ________ 3. Method of payment: _________________________________________________ 4. If a cashless exercise, to be executed by: ( ) Smith Barney Shearson - White Plains, NY ( ) Other I understand that the amount by which the aggregate fair market value of the shares that I am purchasing exceeds the aggregate exercise price is subject to applicable income and employment tax withholding, I agree that the Company shall calculate the amount required by law to be withheld. The amount required to be withheld shall be satisfied as follows: ________________________________ Date: _____________________ Signed: ____________________________ DO NOT WRITE BELOW THIS LINE _________________________________________________ Date Received: _________________ Fair Market Value: _____________________ RETURN TO THE SECRETARY OF MBIA INC. EX-10.38 15 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Joseph W. Brown (the "Executive"), dated as of this 20th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section I (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote His full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is other-wise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property; By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees. The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof. (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality, and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11 (a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ David H. Elliott -------------------------- By: Title: Chairman EXECUTIVE: /s/ [ILLEGIBLE] -------------------------- 18 EX-10.39 16 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Neil Budnick (the "Executive"), dated as of this 25th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security, WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section 1 (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof), and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote his full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death. Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability: Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi ------------------------------ By: Louis G. Lenzi Title: General Counsel EXECUTIVE: /s/ Neil G. Budnick ------------------------------ 18 EX-10.40 17 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Thacher Brown (the "Executive"), dated as of this 25th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security, WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section I (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote His full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is other-wise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death. Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages -with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment -with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: At the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability: Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi ---------------------------------- By: Louis G. Lenzi Title: General Counsel EXECUTIVE: ---------------------------------- /s/ W. Thacher Brown 18 EX-10.41 18 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and John B. Caouette (the "Executive"), dated as of this 25th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section I (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote His full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is other-wise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death. Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages -with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment -with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof. (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability: Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi ----------------------------------- By: Louis G. Lenzi Title: General [ILLEGIBLE] Secretary EXECUTIVE: /s/ John B. Caouette ----------------------------------- 18 EX-10.42 19 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Gary C. Dunton (the "Executive"), dated as of this 25 th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section I (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote His full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages -with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment -with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information; Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees. The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof. (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be -governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ [ILLEGIBLE] -------------------------------- By: Louis G. Lenzi Title: General Counsel EXECUTIVE: /s/ [ILLEGIBLE] ------------------------------- 18 EX-10.43 20 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Louis G. Lenzi (the "Executive"), dated as of this 25th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security, WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section I (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 3 0 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote His full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is other-wise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death. Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages -with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability: Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi ------------------------------- By: Louis G. Lenzi Title: General Counsel EXECUTIVE: /s/ Louis G. Lenzi ------------------------------- 18 EX-10.44 21 EMPLOYMENT AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Kevin D. Silva (the "Executive"), dated as of this 25th day of January, 1999. W I T N E S S E T H : WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section 1(b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof) and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote his full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death. Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability: Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi --------------------------- By: Louis G. Lenzi Title: General Counsel EXECUTIVE: /s/ Kevin D. Silva --------------------------- 18 EX-10.45 22 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Richard L. Weill (the "Executive"), dated as of this 25th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section I (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote His full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is other-wise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death. Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages -with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment -with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof. (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be -governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi ------------------------------- By: Louis G. Lenzi Title: General Counsel EXECUTIVE: /s/ Richard Weill ------------------------------- 18 EX-10.46 23 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Ruth M. Whaley (the "Executive"), dated as of this 25th day of January, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security, WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section 1(b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof) and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote his full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death, Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi --------------------------------- By: Louis G. Lenzi Title: General Counsel EXECUTIVE: /s/ Ruth M. Whaley --------------------------------- 18 EX-10.47 24 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Michael J. Maguire (the "Executive"), dated as of this 19th day of March, 1999. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important position with the Company; WHEREAS, the Company believes that, in the event it is confronted with a situation that could result in a change in ownership or control of the Company, continuity of management will be essential to its ability to evaluate and respond to such a situation in the best interests of shareholders; WHEREAS, the Company understands that any such situation will present significant concerns for the Executive with respect to his financial and job security; WHEREAS, the Company desires to assure itself of the Executives services during the period in which it is confronting such a situation, and to provide the Executive certain financial assurances to enable the Executive to perform the responsibilities of his position without undue distraction and to exercise his judgment without bias due to his personal circumstances; WHEREAS, to achieve these objectives, the Company and the Executive desire to enter into an agreement providing the Company and the Executive with certain rights and obligations upon the occurrence of a Change of Control or Potential Change of Control (as defined in Section 2); NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is hereby agreed by and between the Company and the Executive as follows: 1. Operation of Agreement. (a) Effective Date. The effective date of this Agreement shall be the date on which a Change of Control occurs (the "Effective Date"), provided that, except as provided in Section 1 (b), if the Executive is not employed by the Company on the Effective Date, this Agreement shall be void and without effect. (b) Termination of Employment Following a Potential Change of Control. Notwithstanding Section l(a), if (i) the Executive's employment is terminated by the Company Without Cause (as defined in Section 6(c)) after the occurrence of a Potential Change of Control and prior to the occurrence of a Change of Control and prior to the time at which the Board of Directors of the Company (the Board) has adopted a Nullification Resolution (as defined in Section 2(b) hereof) with respect to such Potential Change of Control or (ii) a Change of Control (as defined in Section 2(a) hereof). and (ii) a Change of Control occurs within two years of such termination, the Executive shall be deemed, solely for purposes of determining his rights under this Agreement, to have remained employed until the date such Change of Control occurs and to have been terminated by the Company Without Cause immediately after this Agreement becomes effective, with any amounts payable hereunder reduced by the amount of any other severance benefits provided to him in connection with such termination. 2. Definitions. (a) Change of Control. For the purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if: (i) any person, as such term is currently used is Section 13(d) or 14(d) of the 1934 Act, other than the Company, its majority owned subsidiaries, or any employee benefit plan of the Company or any of its majority-owned subsidiaries, becomes a "beneficial owner" (as such term is currently used in Rule 13d-3, as promulgated under 1934 Act) of 25% or more of the Voting Power of the Company; (ii) on any date, a majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board who were serving on the Board at beginning of any 24-month period ending with such date (or another date specified by the Committee), provided that any individual who becomes a director subsequent to that date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director for purposes of this subsection 2(a)(ii); (iii) the stockholders of the Company approve a merger, consolidation, share exchange, division, sale or other disposition of substantially all of the assets of the Company (a "Corporate Event"), as a result of which the shareholders of the Company immediately prior to such Corporate Event (the Company Shareholders) shall not hold, directly or indirectly, immediately following such Corporate Event a 2 majority of the Voting Power of (x) in the case of a merger or consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (z) in the case of a division or a sale or other disposition of substantially all of the Company's assets, each surviving, resulting or acquiring corporation; provided that such a division or sale shall not be a Change of Control for purposes of this Agreement to the extent that, following such Corporate Event, the Executive continues to be employed by a surviving, resulting or acquiring entity with respect to which the Company Shareholders hold, directly or indirectly, a majority of the Voting Power immediately following such Corporate Event. (b) Potential Change of Control. For the purposes of this Agreement, a Potential Change of Control shall be deemed to have occurred if: (i) a Person commences a tender offer (with adequate financing) for securities representing at least 15% of the Voting Power of the Company's securities; (ii) the Company enters into an agreement the consummation of which would constitute a Change of Control; (iii) proxies for the election of directors of the Company are solicited by anyone other than the Company; or (iv) any other event occurs which is deemed to be a Potential Change of Control by the Board. Notwithstanding the foregoing, if, after a Potential Change of Control and before a Change of Control, the Board makes a good faith determination that such Potential Change of Control will not result in a Change of Control, the Board may nullify the effect of the Potential Change of Control (a "Nullification") by resolution (a "Nullification Resolution"), in which case the Executive shall have no further rights and obligations under this Agreement by reason of such Potential Change of Control; provided, however, that if the Executive shall have delivered a Notice of Termination (within the meaning of Section 6(f) hereof) prior to the date of the Nullification Resolution, such Resolution shall not effect the Executive's rights hereunder. If a Nullification Resolution has been adopted and the Executive has not delivered a Notice of Termination prior thereto, the Effective Date for purposes of this Agreement shall be the date, if any, during the term hereof on which another Potential Change of Control or any actual Change of Control occurs. 3 (c) Voting Power Defined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors and "Voting Securities" shall mean all securities of a company entitling the, holders thereof to vote in an annual election of directors. 3. Employment Period. Subject to Section 6 of this Agreement, the Company agrees to continue the Executive in its employ, and the Executive agrees to remain in the employ of the Company, for the period (the "Employment Period") commencing on the Effective Date and ending on the third anniversary of the Effective Date. Notwithstanding the foregoing, if, prior to the Effective Date, the Executive is demoted to a lower position than the position held on the date first set forth above, the Board may declare that this Agreement shall be without force and effect by written notice delivered to the Executive (i) within 30 days following such demotion and (ii) prior to the occurrence of a Potential Change of Control or a Change of Control. 4. Position and Duties. (a) No Reduction in Position. During the Employment Period, the Executive's position (including titles), authority and responsibilities shall be at least commensurate with those held, exercised and assigned immediately prior to the Effective Date. It is understood that, for purposes of this Agreement, such position, authority and responsibilities shall not be regarded as not commensurate merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Company as contemplated by Section 12(b) of this Agreement. The Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date. (b) Business Time. From and after the Effective Date, the Executive agrees to devote His full attention during normal business hours to the business and affairs of the Company and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities, except for (i) time spent in managing his personal, financial and legal affairs and serving on corporate, civic or charitable boards or committees, in each case only if and to the extent not substantially interfering with the performance of such responsibilities, and (ii) periods of vacation and sick leave to which he is entitled. It is expressly understood and agreed that the Executive's continuing to serve on any boards and committees on which he is serving or with which he is other-wise associated immediately preceding the Effective Date shall not be deemed to interfere with the performance of the Executive's services to the Company. 5. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary at a monthly rate at least equal to the monthly 4 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Date. The base salary shall be reviewed at least once each year after the Effective Date, and may be increased (but not decreased) at any time and from time to time by action of the Board or any committee thereof or any individual having authority to take such action in accordance with the Company's regular practices. The Executive's base salary, as it may be increased from time to time, shall hereafter be referred to as "Base Salary". Neither the Base Salary nor any increase in Base Salary after the Effective Date shall serve to limit or reduce any other obligation of the Company hereunder. (b) Annual Bonus. During the Employment Period, in addition to the Base Salary, for each fiscal year of the Company ending during the Employment Period, the Executive shall be afforded the opportunity to receive an annual bonus on terms and conditions no less favorable to the Executive (taking into account reasonable changes in the Company's goals and objectives and taking into account actual performance) than the annual bonus opportunity that had been made available to the Executive for the fiscal year ended immediately prior to the Effective Date (the "Annual Bonus Opportunity"). Any amount payable in respect of the Annual Bonus Opportunity shall be paid as soon as practicable following the year for which the amount (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Company may make available to the Executive. (c) Long-term Incentive Compensation Programs. During the Employment Period, the Executive shall participate in all long-term incentive compensation programs for key executives at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (d) Benefit Plans. During the Employment Period, the Executive (and, to the extent applicable, his dependents) shall be entitled to participate in or be covered under all pension, retirement, deferred compensation, savings, medical, dental, health, disability, group life and accidental death insurance plans and programs of the Company and its affiliated companies at a level that is commensurate with the Executive's participation in such plans immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available to the Executive or other similarly situated officers at any time thereafter. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 immediately prior to the Effective Date. Notwithstanding the foregoing, the Company may apply the policies and procedures in effect after the Effective Date to the Executive, if such policies and procedures are not less favorable to the Executive than those in effect immediately prior to the Effective Date. (f) Vacation and Fringe Benefits. During the Employment Period, the Executive shall be entitled to paid vacation and fringe benefits at a level that is commensurate with the paid vacation and fringe benefits available to the Executive immediately prior to the Effective Date, or, if more favorable to the Executive, at the level made available from time to time to the Executive or other similarly situated officers at any time thereafter. (g) Indemnification. During and after the Employment Period, the Company shall indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and By-Laws (the "Governing Documents"), provided that in no event shall the protection afforded to the Executive hereunder be less than that afforded under the Governing Documents as in effect immediately prior to the Effective Date. (h) Office and Support Staff. The Executive shall be entitled to an office with furnishings and other appointments, and to secretarial and other assistance, at a level that is at least commensurate with the foregoing provided to other similarly situated officers. 6. Termination. (a) Death. Disability or Retirement. Subject to the provisions of Section 1 hereof, this Agreement shall terminate automatically upon the Executive's death, termination due to "Disability" (as defined below) or voluntary retirement under any of the Company's retirement plans as in effect from time to time. For purposes of this Agreement, Disability shall mean the Executive has met the conditions to qualify for long-term disability benefits under the Company's policies, as in effect immediately prior to the Effective Date. (b) Voluntary Termination. Notwithstanding anything in this Agreement to the contrary, following a Change of Control the Executive may, upon not less than 60 days' written notice to the Company, voluntarily terminate employment for any reason (including early retirement under the terms of any of the Company's retirement plans as in effect from time to time), provided that any termination by the Executive 6 pursuant to Section 6(d) on account of Good Reason (as defined therein) shall not be treated as a voluntary termination under this Section 6(b). (c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) the Executive's conviction or plea of nolo contendere to a felony; (ii) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Executive of his obligations under Section 4 of this Agreement, which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Company's business or reputation. (d) Good Reason. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change of Control: (i) the assignment to the Executive of any duties inconsistent in any material adverse respect with the Executive's position, authority or responsibilities as contemplated by Section 4 of this Agreement, or any other material adverse change in such position, including titles, authority or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 5 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location more than 50 miles (or such other distance as shall be set forth in the Company's relocation policy as in effect at the Effective Time) from that location at which he performed his services specified under the provisions of Section 4 immediately prior to the Change of Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (iv) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 12(b). In no event shall the mere occurrence of a Change of Control, absent any further impact on the Executive, be deemed to constitute Good Reason. 7 (e) Special Window Period. The Executive shall also have the right to terminate his employment at any time and for any reason during the 30-day period commencing on the first anniversary of the date on which a Change of Control occurs (the "Special Window Period"). (f) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(e). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within 10 business days of the Company's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Good Reason, within 90 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (g) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be, and (ii) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. 7. Obligations of the Company upon Termination. (a) Death or Disability. If the Executive's employment is terminated during the Employment Period by reason of the Executive's death or Disability, this Agreement shall terminate without further obligations to the Executive or the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the Date of Termination, and the Company shall pay to the Executive (or his beneficiary or estate) (i) the Executive's full Base Salary through the Date of Termination (the "Earned Salary"), (ii) any vested amounts or benefits owing to the Executive under the Company's otherwise applicable employee benefit plans and programs, including any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (the "Accrued Obligations"), and (iii) any other benefits payable due to the Executive's death or Disability under the Company's plans, policies or programs (the "Additional Benefits"). 8 Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. Accrued Obligations and Additional Benefits shall be paid in accordance with the terms of the applicable plan, program or arrangement. (b) Cause and Voluntary Termination. If, during the Employment Period, the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Good Reason following a Change of Control), the Company shall pay the Executive (i) the Earned Salary in cash in a single lump sum as soon as practicable, but in no event more than 10 days, following the Date of Termination, and (ii) the Accrued Obligations in accordance with the terms of the applicable plan, program or arrangement. (c) Termination by the Company other than for Cause and Termination by the Executive for Good Reason or in the Special Window Period. If (x) the Company terminates the Executive's employment other than for Cause during the Employment Period, (y) the Executive terminates his employment at any time during the Employment Period for Good Reason or (z) the Executive terminates his employment with or without Good Reason during the Special Window Period, the Company shall provide the Executive with the following benefits: (i) Severance and Other Termination Payments. The Company shall pay the Executive the following: (A) the Executive's Earned Salary; and (B) an amount (the Pro-Rated Annual Incentive) equal to the average of the annual bonuses payable to the Executive for the two fiscal years of the Company ended prior to the Effective Date for which bonuses have been determined (the "Average Annual Bonus") multiplied by a fraction, the numerator of which is the number of months in such fiscal year which have elapsed on or before (and including) the last day of the month in which the Date of Termination occurs and the denominator of which is 12; and (C) an aggregate amount (the Book Value Award Amount) equal to the sum of the amounts payable to the Executive in respect of each outstanding incentive award related to the Company's adjusted book value, determined as of the end of the month in which the Date of Termination occurs; and 9 (D) the Accrued Obligations; and (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Base Salary; (2) an amount equal to the Average Annual Bonus; The Earned Salary, Pro-Rated Annual Incentive and Severance Amount shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days (or at such earlier date required by law), following the Date of Termination. The Book Value Award Amounts shall be paid in cash as soon as practicable after the amount of each such payment can be determined. Accrued Obligations shall be paid in accordance with the terms of the applicable plan, program or arrangement. (ii) Continuation of Benefits. If, during the Employment Period, the Company terminates the Executive's employment other than for Cause or the Executive terminates his employment for Good Reason, the Executive (and, to the extent applicable, his dependents) shall be entitled, after the Date of Termination until the earlier of (1) the third anniversary of the Date of Termination (the "End Date") and (2) the date the Executive becomes eligible for comparable benefits under a similar plan, policy or program of a subsequent employer, to continue participation in all of the Company's group health and group life employee benefits plans (the "Group Benefit Plans"). To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets. The Executive's participation in the Group Benefit Plans will be on the same terms and conditions (including, without limitation, any condition that the Executive make contributions toward the cost of such coverage on the same terms and conditions generally applicable to similarly situated employees) that would have applied had the Executive continued to be employed by the Company through the End Date. (iii) Restricted Stock. Any and all awards of restricted stock held by the Executive at the Date of Termination shall immediately become fully vested. (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 10 in the event that Executive is entitled to receive the severance benefits described above pursuant to the terms of this Agreement, all of his outstanding Options and SARs awarded under such 1997 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on anyone's part and the Executive shall have the right to exercise any such Option or SAR until the earlier to occur of the expiration of the term of such Option or SAR and the fifth anniversary of the Date of Termination. (v) Retirement Contribution Credits. The Executive shall receive credits to the Company's nonqualified excess benefits plan with respect to the amounts that would otherwise have been contributed on his behalf under the Company's Money Purchase Pension Plan and Profit Sharing Plan had the Executive continued in the company's employ for three years following the Date of Termination. (vi) Outplacement Services. The Executive shall be provided at the Company's expense with outplacement services customary for executives at his level (including, without limitation, office space and telephone support services) provided by a qualified and experienced third party provider selected by the Company. (d) Discharge of the Company's Obligations. Except as expressly provided in the last sentence of this Section 7(d), the amounts payable to the Executive pursuant to this Section 7 following termination of his employment shall be in fun and complete satisfaction of the Executive's rights under this Agreement and any other claims he may have in respect of his employment by the Company or any of its Subsidiaries. Such amounts shall constitute liquidated damages -with respect to any and all such rights and claims and, upon the Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to the Executive in connection with this Agreement or otherwise in connection with the Executive's employment with the Company and its Subsidiaries. Nothing in this Section 7(d) shall be construed to release the Company from its commitment to indemnify the Executive and hold the Executive harmless from and against any claim, loss or cause of action arising from or out of the Executive's performance as an officer, director or employee of the Company or any of its Subsidiaries or in any other capacity, including any fiduciary capacity, in which the Executive served at the request of the Company to the maximum extent permitted by applicable law and the Governing Documents. (e) Certain Further Payments by the Company. 11 (i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 7(e)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 7(e), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. (ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Change of Control Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: 12 (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. (iv) In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Company .shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (v) The Tax Reimbursement Payment (or portion thereof) provided for in Section 7(e)(i) above shall be paid to the Executive not later than 10 business 13 days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. Non-exclusivity of Rights. Except as expressly provided herein, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such lights as the Executive may have under any other agreements with the Company or any of its affiliated companies, including employment agreements or stock option agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 9. No Offset. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. 10. Legal Fees and Expenses. If the Executive asserts any claim in any contest (whether initiated by the Executive or by the Company) as to the validity, enforceability or interpretation of any provision of this Agreement, the Company shall pay the Executive's legal expenses (or cause such expenses to be paid) including, without limitation, his reasonable attorney's fees, on a quarterly basis, upon presentation of proof of such expenses in a form acceptable to the Company, provided that the Executive shall reimburse the Company for such amounts, plus simple interest thereon at the 90-day United States Treasury Bill rate as in effect from time to time, compounded annually, if 14 the arbitrator referred to in Section 13(b) or a court of competent jurisdiction shall find that the Executive did not have a good faith and reasonable basis to believe that he would prevail as to at least one material issue presented to such arbitrator or court. 11. Confidential Information, Company Property. By and in consideration of the salary and benefits to be provided by the Company hereunder, including the severance arrangements set forth herein, the Executive agrees that: (a) Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, (i) obtained by the Executive during his employment by the Company or any of its affiliated companies and (ii) not otherwise public knowledge (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) Nonsolicitation of Employees, The Executive agrees that for two years after the Date of Termination, he will not attempt, directly or indirectly, to induce any employee of the Company, or any subsidiary or any affiliate thereof to be employed or perform services elsewhere or otherwise to cease providing services to the Company, or any subsidiary or affiliate thereof (c) Company Property. Except as expressly provided herein, promptly following the Executive's termination of employment, the Executive shall return to the Company all property of the Company and all copies thereof in the Executive's possession or under his control. (d) Injunctive Relief and Other Remedies with Respect to Covenants. The Executive acknowledges and agrees that the covenants and obligations of the Executive with respect to confidentiality and Company property relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at law, Therefore, the Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 11 These remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity. In no event shall 15 an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. 13. Miscellaneous. (a) Applicable Law. This Agreement shall be -governed by and construed in accordance with the laws of the States of New York, applied without reference to principles of conflict of laws. (b) Arbitration. Except to the extent provided in Section 11(c), any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. The arbitration shall be held in the city of White Plains, New York and, except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration (or such other rules as the parties may agree to in writing), and otherwise in accordance with principles which would be applied by a court of law or equity. The arbitrator shall be acceptable to both the Company and the Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall be heard by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement relating to the terms of the Executive's employment by the Company, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. There are no promises, representations, 16 inducements or statements between the parties other than those that are expressly contained herein. The Executive acknowledges that he is entering into t1ris Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (e) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the home address of the Executive noted on the records of the Company If to the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Attn.: Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (f) Tax Withholding. The Company shall withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of any of Section 11(a) are not enforceable in accordance with its terms, the Executive and the Company agree that such Section shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. 17 (i) Survival. The provisions of Section 7(c)(iii) (and so much of Section 7(d) as provides a benefit identical to that payable under such Section 7(c)(iii)) shall survive the termination of the Employment Period hereunder and shall be binding upon and enforceable against the Company in accordance with its terms. In the event, that any dispute arises with respect to the Executive's entitlement to such enhanced retirement benefits, the dispute resolutions provisions contained in Section 13(b) and the legal fees provision contained in Section 10 shall also survive the end of the Employment Period and shall be applied as though the dispute arose within the Employment Period. (j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (k) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written. MBIA Inc. /s/ Louis G. Lenzi ------------------------------- By: Louis G. Lenzi Title: General Counsel & Secretary EXECUTIVE: /s/ Michael J. Maguire ------------------------------- 18 EX-10.48 25 AGREEMENT REGARDING A GLOBAL JOINT VENTURE AMBAC ASSURANCE CORPORATION, AMBAC INSURANCE UK LIMITED, MBIA INSURANCE CORPORATION, AND MBIA ASSURANCE, S.A. AGREEMENT REGARDING A GLOBAL JOINT VENTURE This Agreement (the "Agreement") shall respecify the terms of the joint venture (the "Venture") established by the Agreement Regarding the Formation of a European Joint Venture dated as of September 11, 1995 and amended as of August 1, 1998 (the "September 11, 1995 Agreement"), shall supersede the September 11, 1995 Agreement, and shall become effective as of January 15, 1999. The parties to the Venture shall be Ambac Assurance Corporation and AMBAC Insurance UK Limited (collectively "Ambac") on the one hand and MBIA Insurance Corporation and MBIA Assurance, S.A. (collectively "MBIA," and together with Ambac, the "Parties") on the other. The Parties may handle through the Venture, as further specified in Guidelines that the Parties may promulgate, types of transactions (1) that generally require an assessment of a non-trivial and bona-fide foreign risk exposure or in which the credit enhancement is sold to a foreign purchaser, and (2) on which collaboration by the Parties conforms to all applicable laws, rules, and regulations ("Global business"). The Parties intend to accomplish through the Venture the following purposes, among others: (1) increase the quantity and quality of the output and availability of financial guaranty insurance, other types of credit and guaranty insurance, or other forms of credit enhancement, (2) reduce the cost, and increase the availability, of capital financing, and (3) increase the demand for credit enhancement and capital financing throughout the world. The Parties have concluded that combining their resources through the Venture will achieve efficiencies, expand their insurance offerings, and assist in overcoming significant difficulties that each Party experienced in its separate activities outside the United States. The Venture permits the Parties to increase their capacities for covering risks that would be difficult to cover individually because of their scale, rarity, or novelty and provides a structure through which the Parties can harmonize their incentives to integrate their resources and share their goodwill. The Venture also allows the Parties to compete with banking, governmental funding, and alternative forms of credit enhancement and structured financing. The Venture thereby permits the Parties to offer consumers durable access to additional forms and sources of financing. The Parties expect that the Venture will enable them to develop expanded geographic coverage outside the United States and to promote more effectively established and innovative uses of various forms of credit enhancement in foreign countries and territories. The improvements and progress that will be accomplished through the Venture will allow the Parties to diversify and increase their product offerings and will directly benefit issuers of financial obligations, investors, others in the international financial community, and consumers throughout the world. The Parties anticipate acting mainly (though not exclusively) as primary insurer and reinsurer, respectively, in jointly serving clients through the Venture. In addition and without limitation, the Parties may act jointly through the Venture as and when stated above with respect to, among others, the following activities and activities related thereto: CONFIDENTIAL (a) conduct research regarding new business opportunities for the provision of financial guaranty insurance and other forms of credit enhancement; (b) market all forms of credit enhancement by, among other things, informing clients of the increased capacity, expanded expertise, extended geographic coverage, and improved service that the Parties will offer as a result of their collaboration under this Agreement and by promoting and conducting seminars and conferences on credit enhancement and the Parties' activities through the Venture; (c) analyze credit risks, select business opportunities that will be pursued as part of the Venture, and, in some cases, seek to obtain reinsurance for those opportunities; (d) compile proposals for the offering of financial guaranty insurance, other types of credit and guaranty insurance, or other forms of credit enhancement in which the Parties will act mainly as primary insurer and reinsurer, respectively (though the Parties may also act as co-insurers or co- reinsurers); (e) present and execute such offerings and obtain reinsurance for such offerings; and (f) settle claims or risks insured by the Parties through the Venture. While the Parties are reviewing or pursuing a business opportunity jointly through the Venture, neither Party shall pursue that opportunity independently or unilaterally in competition with the Venture, provided, however, that each Party retains the discretion to terminate unilaterally its consideration of a business opportunity through the Venture and to pursue that opportunity independently. Each Party's participation in any particular Venture activity shall be determined independently by that Party. In addition, with respect to any particular Venture activity, each Party shall act only in such capacity (that is, as primary insurer, reinsurer, or in any other capacity) as is permitted by applicable law. If any Party requires any authorization to undertake the business contemplated by this Agreement, that Party shall obtain such authorization and refrain from conducting such business in the absence of such authorization. Each Party shall be responsible for its own compliance with the applicable laws, rules, and regulations related to its participation in this Agreement. Each Party shall retain the discretion to act independently and unilaterally if it so chooses or if a prospective client wishes to deal with either Party on such a basis, even if the Parties have begun to review or pursue the opportunity jointly through the Venture. Accordingly, neither Party shall be required to bring all risks relating to Global business to the Venture. When either Party acts independently and unilaterally with respect to any Global business matter, the acting Party shall do so without coordination or cooperation with the other Party after the acting Party decides to proceed independently and unilaterally. Each Party shall advise each client in connection with any Global business matter whether it is acting jointly or separately with respect to that matter. The Parties shall not engage in joint conduct through the Venture in connection with types of transactions that do not constitute Global business ("Non-Venture business"). The Venture formed by this Agreement shall have no effect on Ambac's or MBIA's respective Non-Venture business, and each Party shall continue to act independently and unilaterally with respect to its Non-Venture business. In -2- CONFIDENTIAL addition, each Party shall not disclose competitively sensitive information regarding its Non-Venture business or regarding other domestic activities to the other Party. The Parties shall use "MBIA-Ambac International" as the logo for the Venture. Each Party shall permit the other Party to use, on a non-exclusive basis and in conjunction only with Venture business, the trademarks and tradenames listed in Appendix A to this Agreement in accordance with the terms of Appendix A. Each Party represents to the other Party that it is authorized to enter into this Agreement and to exercise all rights and meet all obligations set forth in this Agreement. This Agreement shall continue in force for five years from the effective date of this Agreement; provided, however, that this Agreement may be terminated 30 days following the transmission (by facsimile and registered mail) of written notification by one Party to the other Party that the notifying Party wishes to withdraw from the Agreement. This Agreement constitutes the entire agreement between the Parties regarding the Venture and can be amended only in writing. This Agreement may be executed in counterparts that, when taken together, shall constitute a fully executed original of this Agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement on the dates set forth below. Ambac Assurance Corporation MBIA Insurance Corporation By: /s/ Phillip B. Lassiter By: /s/ Joseph W. Brown. Jr. ----------------------------- ---------------------------- Name: Phillip B. Lassiter Name: Joseph W. Brown. Jr. Title: Chairman, President, Title: Chief Executive Officer and Chief Executive Officer Date: 1/29/99 Date: -------------------------- AMBAC Insurance UK Limited MBIA Assurance S.A. By: /s/ John W. Uhlein III By: /s/ Michael J. Maguire --------------------------- ---------------------------- Name: John W. Uhlein III Name: Michael J. Maguire Title: Managing Director Title: President Date: 1/29/99 Date: --------------------------- -3- APPENDIX A Each Party shall permit the other Party, on a non-exclusive basis and only during the term of this Agreement, to use its trademarks and tradenames that are listed on the following pages in conjunction with the other Party's trademarks and tradenames that are listed on the following pages solely in connection with business conducted through the Venture under this Agreement. Each Party shall retain the right, to be exercised reasonably, to prohibit the use of its trademark or tradename in connection with any specific instance of Venture business if the use of such trademark or tradename would violate the standards that such Party has set for the use of its trademark or tradename in the ordinary course of its business. Each Party represents to the other Party that it owns free of any adverse claim the trademarks and tradenames attributed to it on the following pages. MBIA INSURANCE CORPORATION MBIA ASSURANCE, S.A. [LOGO] AMBAC ASSURANCE CORPORATION AMBAC INSURANCE UK LIMITED [LOGO] Joint Venture Logo [LOGO] EX-10.49 26 SPECIAL EXCESS OF LOSS REINSURANCE AGREEMENT SPECIAL EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") made and entered into by and between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S. A., Paris, France; and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement (hereinafter referred to as the "Company"), and MUENCHENER RUECKVERSICHERUNGS-GESELLSHAFT (hereinafter referred to as the "Reinsurer'). In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE 1 ACQUISITION In the event that, following the execution of this Agreement, the Company notifies the Reinsurer of a proposed acquisition by the Company of an insurance company (a "Target") and provides the Reinsurer with such due diligence information as the Reinsurer may reasonably request with respect to such Target (including without limitation information relating to the effect on this Agreement of the inclusion of the Target as a reinsured hereunder) (the "Information"), the Reinsurer shall use its best efforts to provide, within 30 days following receipt of the Information, a written notice to the Company which notice shall state whether or not the Reinsurer will consent to the inclusion of such Target as a reinsured hereunder upon consummation of the acquisition of such Target by the Company. If the Reinsurer consents to the inclusion of a Target as a reinsured hereunder, such Target shall be included in the term "Company" from and after the date on which the Company's acquisition of the Target is consummated, and the Company shall prepare and deliver to the Reinsurer an addendum to this Agreement that revises Exhibit #1 to include the name of such Target thereon. The 30-day period referred to above shall not commence until all of the Information reasonably requested by the Reinsurer has been received by the Reinsurer. Effective: September 1, 1998 1 of 14 ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from 12:01 a.m. Standard Time, September 1, 1998 (the "Effective Date") through 12:01 a.m., Standard Time, September 1, 2004 (the "Termination Date"). "Standard Time" shall mean the time as described in the Policies. This Agreement shall not terminate until all of the obligations by both parties to the Agreement have been fulfilled. ARTICLE 3 BUSINESS AND TERRITORY COVERED This Agreement shall cover all Policies attaching on or after the Effective Date that provide insurance against financial loss by reason of nonpayment or regularly scheduled principal and interest obligations arising under Issues sold by Issuers domiciled anywhere in the world. The liability of the Reinsurer shall be subject in all respects to all the general and specific stipulations, clauses, waivers, extensions, modifications and endorsements of any of the Policies of the Company's liability, subject to the exclusions set forth in the Exclusions Article and the other terms and conditions of this Agreement as set forth herein. ARTICLE 4 EXCLUSIONS The exclusions shall be as per the original Policies. ARTICLE 5 REINSURANCE CLAUSE Subject to the Aggregate Limit, the Reinsurer shall pay up to $50,000,000 Ultimate Net Loss in excess of $0 Ultimate Net Loss each and every Occurrence Incurred during the term of this Agreement. The Reinsurer shall pay to the Company as Ultimate Net Loss recoverable hereunder is Incurred. The Aggregate Limit of this Agreement is $50,000,000. ARTICLE 6 DEFINITIONS A. "Allocated Loss Adjustment Expenses" as used in this Agreement means all court costs, interest upon judgments, and mitigation, investigation, adjustment, and legal expenses Effective: September 1, 1998 2 of 14 chargeable to: (i) the mitigation, investigation, negotiation, settlement of or defense against a Loss, (ii) loss prevention, mitigation or investigation in respect of Policies as to which the Company has posted a loss reserve, (iii) the investigation and workout of a potential Loss, or (iv) the protection, perfection and exercise of any subrogation or salvage or reimbursement rights or security interests with respect to a Policy. Allocated Loss Adjustment Expenses shall exclude all office expenses and salaries of officials and employees of the Company. B. "Incurred Loss" as used in this Agreement means the date and time of the Loss recorded on the books and records of the Company with respect to the estimated amount of default of the Issuer's obligation to pay principal or interest pursuant to the terms of a bond, note, or other instrument insured by a Policy. C. "Issue" as used in this Agreement means all obligations of one Issuer sold simultaneously, secured by a single revenue source (with essentially the same structure) or, in the case of structured finance or asset-backed securities, secured by a common pool of assets and, in either case, covered by a Policy. The Company shall be the sole judge of what constitutes one Issue. D. "Issuer" as used in this Agreement means, with respect to an Issue, the entity issuing the bonds, notes, or other instruments comprising the Issue. The Company shall be the sole judge of what constitutes one Issuer. E. "Loss" as used in this Agreement means the actual or, in the Company's best judgment, anticipated amounts of principal and interest for which the Company is liable with respect to all claims under all Policies. F. "Occurrence" as used in this Agreement means an actual or, in the Company's best judgment, anticipated default by an individual Issuer. G. "Ultimate Net Loss" as used herein shall mean the Company's initial estimate of the sum of Loss and Allocated Loss Adjustment Expense Incurred by the Company less inuring reinsurance, if any, plus any upward adjustments in such estimates. The Reinsurer agrees that any downward adjustments in the Company's Loss and Allocated Loss Adjustment Expense shall be disregarded when calculating Ultimate Net Loss hereunder. The following shall apply with respect to Ultimate Net Loss herein: I. Nothing in this Definition shall be construed as meaning the Reinsurer shall not pay the amount of reinsurance recoverable hereunder until the actual Ultimate Net Loss has been determined. II. The Company shall make quarterly adjustments to the estimates of Ultimate Net Loss beginning in the third quarter of 1998. The final adjustment to any estimates of Ultimate Net Loss Incurred during the Term of this Agreement shall be made seven years after the Company sets its initial Ultimate Net Loss estimate for each Effective: September 1, 1998 3 of 14 Occurrence hereunder (or by mutual agreement at some other time). Such final calculation of Ultimate Net Loss shall be based upon the Company's estimate of Ultimate Net Loss as entered on the Company's books at that time. III. At each adjustment of Ultimate Net Loss, the amount of reinsurance recoverable hereunder shall be recalculated based on such calculation of Ultimate Net Loss. All amounts due the Company shall be payable in accordance with the Accounts, Reports and Payments and the Retention and Limits Articles hereunder. ARTICLE 7 PREMIUM The Company shall pay to the Reinsurer a flat premium equal to $2,000,000, payable no later than 30 days after binding coverage with the Reinsurer. ARTICLE 8 ACCOUNTS, REPORTS AND PAYMENTS A. The Company shall furnish to the Reinsurer quarterly accounts of business ceded hereunder within 25 days after the close of each calendar year quarter, showing: the sums of Incurred Loss, Allocated Loss Adjustment Expense and Ultimate Net Loss hereunder, as well as adjustments to the amount of reinsurance recoverable hereunder. B. The amount of reinsurance recoverable hereunder shall be calculated by taking the Ultimate Net Loss and deducting $0 of Ultimate Net Loss each and every Occurrence but shall never exceed the Aggregate Limit of $5O,OOO,OOO. C. To the extent that the amount of reinsurance recoverable hereunder increases, the Reinsurer shall owe the Company such increase in amount of reinsurance recoverable hereunder over that recoverable under the prior account. D. Such net balance shown shall be payable within 10 days of the Reinsurer's receipt of the account. ARTICLE 9 DUE DILIGENCE Prior to ceding any business to the Reinsurer hereunder, the Company agrees to provide the Reinsurer with sufficient information for the Reinsurer to complete an underwriting due diligence of the Company. Such "sufficient information" shall be comprised of a presentation by the Company reviewing the Company's underwriting process for each segment of business Effective: September 1, 1998 4 of 14 contemplated being ceded to the Reinsurer hereunder and sufficient access to underwriting files in each of those segments to ensure that such underwriting processes are in fact being observed within the Company's underwriting of its business. In the event that such due diligence conducted by the Reinsurer results in a determination not to proceed with the Agreement, the Reinsurer reserves the right to terminate this Agreement upon written notice to the Company. Such determination to terminate this Agreement shall be advised within two business days of completion of said due diligence. ARTICLE 10 CLAIMS AND LOSSES (1) The Company shall have complete and sole control of and direction of all efforts to: (i) mitigate, investigate, negotiate, settle or defend a Loss, (ii) prevent, mitigate, or investigate a probable Loss under Policies as to which the Company has posted a loss reserve, (iii) investigate and work out a potential Loss, and (iv) to protect, perfect and exercise any subrogation, salvage or reimbursement rights or security interests with respect to any Policy, and may take any action as it may deem advisable with respect thereto. All Loss settlements by the Company, all salvage and subrogation settlements, and all settlements with an Issuer (or with an underlying obligor of that Issuer), shall be final, conclusive and unconditionally binding upon the Reinsurer. (2) The Reinsurer shall pay to the Company the Reinsurer's Proportionate Share of any loss within ten business days following receipt of notice from the Company that the Company has made payment of the Loss. The Reinsurer shall effect payment by wire transfer of federal funds to the party designated by the Company in the notice. Details of the Loss will be provided to the Reinsurer by the Company promptly by mail, or by such other means as requested by the Reinsurer. (3) The Reinsurer shall pay to the Company the Reinsurer's Proportionate Share of any Allocated Loss Adjustment Expenses paid by the Company at the times and in the manner specified in the Accounts, Reports and Payments Article. ARTICLE 11 REINSURANCE FOLLOWS ORIGINAL POLICIES This Agreement shall be construed as an honorable undertaking between the parties hereto and shall not be defeated by technical legal construction, it being the intention of this Agreement that the fortunes of the Reinsurer shall follow the fortunes of the Company. Nothing herein shall in Effective: September 1, 1998 5 of 14 any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Reinsurance Agreement. ARTICLE 12 REINSURANCE TAX In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory in the United States of America or to the District of Columbia. ARTICLE 13 FEDERAL EXCISE TAX (This Article applies only to those reinsurers domiciled outside of the United States of America who are not exempt from the Federal Excise Tax.) The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the percentage specified by United States law of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder, the Reinsurer will deduct the percentage specified by United States law from the amount of the return and the Company or its agent should take steps to recover the Tax from the United States Government. ARTICLE 14 ACCESS TO RECORDS The Reinsurer shall have the right to inspect at all reasonable times during the currency of the Agreement and thereafter, the books, records and documents of the Company with respect to its participation in the insurance or reinsurance provided by the Company. ARTICLE 15 CURRENCY Where the word "dollars" and/or the sign "$" appear in this Agreement, they shall mean United States dollars, except in those cases where the original policy is issued by the Company in Canadian dollars, in which case they shall mean Canadian dollars. Effective: September 1, 1998 6 of 14 For purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States or Canadian currency, such premiums or losses shall be converted into United States dollars at the actual rates of exchange at which these premiums or losses are entered in the Company's books. ARTICLE 16 SERVICE OF SUIT (This Article shall apply only if the Reinsurer is domiciled outside of the United States of America or if the Reinsurer is not authorized in the State of New York.) (1) In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States of America. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States of America, to remove an action to a district court of the United States of America, or to seek a transfer of a case to another court as permitted by the laws of the United States of America or of any State in the United States of America. It is further agreed that service of process on the Reinsurer in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 (or other agent previously designated by the Reinsurer which designation has been previously notified to the Company), and that in any suit instituted against the Reinsurer, the Reinsurer will abide by the final decision of such court or, in the case of an appeal, the appellate court. (2) The above-named firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give written undertaking to the Company that such firm will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. (3) Further, pursuant to any statute of any state, territory or district of the United States of America which makes provision therefor, the Reinsurer hereon hereby designates the superintendent, commissioner or director of insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement, and hereby designates the above named as the person to whom the said officer is authorized to mail such process or a true copy thereof. Effective: September 1, 1998 7 of 14 ARTICLE 17 ARBITRATION (1) As a condition precedent to any right of action hereunder, any dispute arising out of or related to this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in Armonk, New York, unless otherwise agreed. (2) The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, the umpire shall be selected by the regional director of the American Arbitration Association in New York, New York, or the regional director's delegate. (3) The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant shall submit a reply brief within 10 days after receipt of the respondent's brief. (4) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. (5) If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting the one party provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers under the terms of this Agreement from several to joint. (6) Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. (7) Unless prohibited by applicable law, an arbitral award hereunder and any judgment thereon shall bear interest from the date the arbitral award was rendered at the rate equal from time to time to the rate publicly announced by Citibank, N. A., as its base rate plus 2%. Effective: September 1, 1998 8 of 14 (8) The parties consent to the jurisdiction of the Supreme Court of the State of New York, County of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with such arbitration, including without limitation any application to compel arbitration or to confirm an arbitration award. The parties consent that any process or notice of motion or other application to either of said Courts, and any paper in connection with arbitration, may be served by certified mail, return receipt requested, or by personal service or in such other manner as may be permissible under the rules of the applicable court or panel provided a reasonable time for appearances is allowed. Service upon the Company shall be directed to the Company, in care of the Company's General Counsel. Service upon the Reinsurer shall be directed to the Reinsurer in care of its President. ARTICLE 18 INDEMNIFICATION AND ERRORS AND OMISSIONS Any recitals in this Agreement to the terms and provisions of any original insurance or reinsurance are merely descriptive. The Reinsurer is reinsuring, to the amount herein provided, the obligations of the Company under any original insurance or reinsurance. The Company shall be the sole judge as to: (a) what shall constitute a claim or loss covered under any original insurance or reinsurance written by the Company; (b) the Company's liability thereunder; and (c) the amount or amounts which it shall be proper for the Company to pay thereunder. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any original insurance or reinsurance. Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 19 INSOLVENCY (1) In the event of the insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under the Policies ceded without diminution because of the insolvency of the Company or because its liquidator, receiver, conservator or statutory successor (hereinafter referred to as the Effective: September 1, 1998 9 of 14 "Liquidator") has failed to pay all or a portion of any claim. The Liquidator shall give written notice to the Reinsurer of the pendency of a claim against the Company under any Policy ceded to Reinsurers and covered by this Agreement within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership. During the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or the Liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a Proportionate Share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. (2) Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense has been incurred by the Company. (3) The reinsurance provided by this Agreement shall be payable by the Reinsurer to the Company or to the Liquidator, except (a) where the Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured(s) has assumed the obligations of the Company under the Policies as the direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. ARTICLE 20 SECURITY (l) When a governing body of any jurisdiction in which the Company legally operates or to which it submits, requires as a condition to credit for the reinsurance provided by this Agreement that the Reinsurer post a Letter of Credit for the benefit of the Company, establish a Trust Account for the benefit of the Company or deposit funds under the control of the Company, the Reinsurer shall post and maintain such a Letter of Credit, establish such a Trust Account, or deposit such funds in the form and amount necessary to permit the Company to avoid on any statutory financial statement filed by the Company the penalty to surplus which would result from the loss of credit for the reinsurance. (2) Notwithstanding any other provisions of this Agreement, it is agreed that any Letter of Credit provided under section (1) of this Article, shall be drawn upon and utilized by the Company or its successors in interest only for one or more of the following purposes: (a) to reimburse the Company for the Reinsurer's Proportionate Share of Losses and Allocated Loss Adjustment Expenses paid by the Company under this Agreement; Effective: September 1, 1998 10 of 14 (b) to reimburse the Company for the Reinsurer's Proportionate Share of Refunding Debits; (c) if this Agreement has been terminated pursuant to the Commencement and Termination Article, to reimburse the Company for unearned premium due to the Company; (d) to fund an account with the Company in an amount at least equal to the deduction allowed for the reinsurance provided by this Agreement, from the Company's liabilities for Policies ceded under the Agreement, such amount to include, if applicable, but not be limited to, amounts for contingency reserves, loss reserves for paid, reported and incurred but not reported ("IBNR") losses, allocated loss adjustment expense reserves and unearned premium reserves; or (e) to pay any other amounts the Company claims are due under the Agreement. All of the foregoing should be applied without diminution because of insolvency on the part of the Company or Reinsurer. (3) If the Reinsurer elects to provide a Letter of Credit under section (1) of this Article, the Reinsurer shall cause the Letter of Credit to be issued, in place and effective no later than the "as of date" of the first quarterly filing prepared by the Company for the appropriate regulatory authority after the effective date of this Agreement. ARTICLE 21 CONFIDENTIALITY The Reinsurer and its affiliated companies agree that they will maintain the confidentiality of the all infor nation (the "Information") presented as a result of this Agreement including, but not limited to the bonds, the basic agreements, the reinsurance undertaken with respect to the bonds, all underlying transactions and underlying obligations, and all certificates, reports, agreements, notices, and communications of any sort relating to any of the foregoing in its communications with third parties, except to the extent required by law, regulation, or order, and except as may be made to the Reinsurer's legal counsel, auditors, and accountants, to Standard & Poor's Corporation, Moody's Investor Services, Inc., Duff & Phelps Corporation, or any other rating agency in connection with their rating of the Reinsurer and except as may be necessary or appropriate in connection with any retrocession. The Reinsurer shall require its retrocessionaires to maintain the confidentiality of the Information. The Reinsurer and its legal counsel, auditors, and accountants will have no obligation of confidentiality in respect or any information that may be available to the public or become available to the public through no fault of such person. Effective: September 1, 1998 11 of 14 ARTICLE 22 OFFSET Each party hereto shall have, and may exercise at any time and from time to time, the right to offset balance or balances, whether on account of premiums or on account of Losses or otherwise, due from such party to the other party hereto under this Agreement or under any other reinsurance heretofore or hereafter entered into by and between them, and may offset the same against any balance or balances due or to become due to the former from the latter under the same or any other reinsurance agreement between them. The party asserting the right of offset shall have and may exercise such right whether the balance(s) due or to become due to such party from the other are on account of premiums or on account of Losses or otherwise and regardless of the capacity, whether as assuming reinsurer or as ceding company, in which each party acted under the agreement or, if more than one, the different agreements involved. In the event of the insolvency of a party hereto, offsets shall be allowed only in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. ARTICLE 23 GOVERNING LAW This Agreement shall be governed by the laws of the State of New York. ARTICLE 24 INTERMEDIARY Guy Carpenter & Company, Inc., Two World Trade Center, New York, New York, 10048, is hereby recognized as the Intermediary by which this Agreement was negotiated and through which all communications relating hereto including, but not limited to, notices, statements, premiums, return premiums, commissions, taxes, Losses, Allocated Loss Adjustment Expenses, salvage and Loss settlements, shall be transmitted to both parties, except as may be otherwise specified in respect of a wire transfer payment of a Loss (section (2) of the Claims and Losses Article). It is understood, as regards remittances due either party hereunder, that payment by the Company to the Intermediary shall constitute payment to the Reinsurer, but payment by the Reinsurer to the Intermediary shall constitute payment to the Company only to the extent such payments are actually received by the Company. Effective: September 1, 1998 12 of 14 ARTICLE 25 PARTICIPATION The Reinsurer's Percentage Share of the Interests and Liabilities set out in this Agreement is 100% of up to $50,000,000. IN WITNESS WHEREOF the parties hereto, by their respective duly authorized officers, have executed this SPECIAL EXCESS OF LOSS REINSURANCE AGREEMENT, in triplicate, as of the dates recorded below: ACCEPTED: At: Armonk, New York this 30th day of December, 1998. MBIA INSURANCE CORPORATION MBIA Assurance, S. A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement /s/ Julliette S. Tehrani - ------------------------------------------- and at: Munich this 23rd day of December, 1998 MUENCHENER RUECKVERSICHERUNGS-GESELLSHAFT /s/ I.V. [ILLEGIBLE] - ------------------------------------------- Effective: September 1, 1998 13 of 14 EXHIBIT NO. 1 Insurance and/or Reinsurance Company Subsidiaries Included within the Definition of Company hereunder MBIA Assurance S. A. MBIA Insurance Corporation MBIA Insurance Corp. of Illinois Capital Markets Assurance Corporation Effective: September 1, 1998 14 of 14 EX-10.50 27 REINSURANCE AGREEMENT SECOND SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") made and entered into by and between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S. A., Paris, France; and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement (hereinafter referred to as the "Company"), and AXA RE FINANCE S.A. (hereinafter referred to as the "Reinsurer"). In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE 1 ACQUISITION In the event that, following the execution of this Agreement, the Company notifies the Reinsurer of a proposed acquisition by the Company of an insurance company (a "Target") and provides the Reinsurer with such due diligence information as the Reinsurer may reasonably request with respect to such Target (including without limitation information relating to the effect on this Agreement of the inclusion of the Target as a reinsured hereunder) (the "Information"), the Reinsurer shall use its best efforts to provide, within 30 days following receipt of the Information, a written notice to the Company which notice shall state whether or not the Reinsurer will consent to the inclusion of such Target as a reinsured hereunder upon consummation of the acquisition of such Target by the Company. If the Reinsurer consents to the inclusion of a Target as a reinsured hereunder, such Target shall be included in the term "Company" from and after the date on which the Company's acquisition of the Target is consummated, and the Company shall prepare and deliver to the Reinsurer an addendum to this Agreement that revises Exhibit #1 to include the name of such Target thereon. The 30-day period referred to above shall not commence until all of the Information reasonably requested by the Reinsurer has been received by the Reinsurer. Effective: September 1, 1998 1 of 16 ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from 12:01 a.m. Standard Time, September 1, 1998 (the "Effective Date") through 12:01 a.m., Standard Time, September 1, 2004 (the "Termination Date"). "Standard Time" shall mean the time as described in the Policies. This Agreement shall not terminate until all of the obligations by both parties to the Agreement have been fulfilled. ARTICLE 3 BUSINESS AND TERRITORY COVERED This Agreement shall cover all Policies attaching on or after the Effective Date that: (A) provide insurance against financial loss by reason of nonpayment of regularly scheduled principal and interest obligations arising under Issues sold by Issuers domiciled anywhere in the world provided the debt instruments or any other monetary obligations are denominated or payable in the currency of (i) an Organization of Economic Cooperation and Development ("OECD") country or (ii) such other country whose sovereign rating is investment grade; provided, however, with respect to (ii) above, that any such debt instrument or other monetary obligation that is denominated in a currency other than the Issuer's domestic currency shall either be (x) investment grade or (y) the Company shall have entered into a currency swap with respect to such instrument or obligation that (I) eliminates all exchange risk thereunder or (II) exchanges the currency risk thereunder for the risk of an OECD currency that enables the transaction to be of investment grade quality, and (B) are classified by the Company as corporate utility debt guarantee insurance, debt service reserve fund surety bonds, investment grade asset-backed securities guarantee insurance, investment grade corporate debt guarantee insurance, investment grade structured finance guarantee insurance, municipal bond guarantee insurance, or municipal note guarantee insurance. The liability of the Reinsurer shall be subject in all respects to all the general and specific stipulations, clauses, waivers, extensions, modifications and endorsements of any of the Policies of the Company's liability, subject to the exclusions set forth in the Exclusions Article and the other terms and conditions of this Agreement as set forth herein. Effective: September 1, 1998 2 of 16 ARTICLE 4 EXCLUSIONS The following general exclusions shall apply in respect of all business ceded to the Reinsurer under this Agreement: A. Assumed reinsurance. However, not to exclude intercompany reinsurance with other subsidiaries of MBIA Inc. and/or business structured as reinsurance which would otherwise be written as insurance; this exception does not require the Company to cede business covered hereunder that has already been ceded to another applicable reinsurance cover. B. Business written by the Company not described in the Business and Territory Article. C. All liability of the Company arising by agreement, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund, or other arrangement, howsoever denominated, established or governed, which provides for any assessment of, or payment, or assumption by the Company of part of any claim, debt, charge, fee, or other obligation of an insurer, or its successors, or assigns which has been declared by any competent authority to be insolvent or which otherwise is deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. ARTICLE 5 REINSURANCE CLAUSE The Reinsurer shall pay up to $50,000,000 Ultimate Net Loss excess of the sum of $60,000,000 Ultimate Net Loss each and every Occurrence, plus the remaining limit under the Company's First Special Excess of Loss Program at the time that a Loss is Incurred (it being understood and agreed that the First Special Excess of Loss Program shall have an aggregate limit of $50,000,000). The Reinsurer shall pay the Company as Ultimate Net Loss recoverable hereunder is Incurred. The aggregate limit of this Agreement shall never exceed $50,000,000 over the term of this Agreement. ARTICLE 6 DEFINITIONS A. "Allocated Loss Adjustment Expenses" as used in this Agreement means all court costs, interest upon judgments, and mitigation, investigation, adjustment, and legal expenses chargeable to: (i) the mitigation, investigation, negotiation, settlement of or defense against a Loss, (ii) loss prevention, mitigation or investigation in respect of Policies as to which the Company has posted a loss reserve, (iii) the investigation and workout of a potential Loss, Effective: September 1, 1998 3 of 16 or (iv) the protection, perfection and exercise of any subrogation or salvage or reimbursement rights or security interests with respect to a Policy. Allocated Loss Adjustment Expenses shall exclude all office expenses and salaries of officials and employees of the Company. B. "Incurred" as used in this Agreement in respect of a Loss means the date and time of Loss recorded on the books and records of the Company with respect to the estimated amount of default of the Issuer's obligation to pay principal or interest pursuant to the terms of a bond, note, or other instrument insured by a Policy. C. "Issue" as used in this Agreement means all obligations of one Issuer sold simultaneously, secured by a single revenue source (with essentially the same structure) or, in the case of structured finance or asset-backed securities, secured by a common pool of assets and, in either case, covered by a Policy. The Company shall be the sole judge of what constitutes one Issue. D. "Issuer" as used in this Agreement means, with respect to an Issue, the entity issuing the bonds, notes, or other instruments comprising the Issue. The Company shall be the sole judge of what constitutes one Issuer. E. "Loss" as used in this Agreement means the actual or, in the Company's best judgment, anticipated amounts of principal and interest for which the Company is liable with respect to all claims under all Policies. F. "Occurrence" as used in this Agreement means an actual or, in the Company's best judgment, anticipated default by an individual Issuer. G. "Ultimate Net Loss" as used herein shall mean the Company's initial estimate of the sum of Loss and Loss Adjustment Expense Incurred by the Company less inuring reinsurance, if any, less any salvage or subrogation as appearing on the Company's books at the time of all interim and/or final adjustment to the Ultimate Net Loss hereunder. For the purposes of determining Ultimate Net Loss and the amount of reinsurance recoverable hereunder prior to the final maturity of any Issue, the Company's actual estimate Loss and Loss Adjustment Expense shall be used. The following shall apply with respect to Ultimate Net Loss herein: I. Nothing in this Definition shall be construed as meaning the Reinsurer shall not pay the amount of reinsurance recoverable hereunder until the actual Ultimate Net Loss has been determined. II. The Company shall make quarterly adjustments to the estimates of Ultimate Net Loss beginning in the third quarter of 1998. The final adjustment to any of Ultimate Net Loss hereunder shall be made seven years after the Company sets its initial Ultimate Net Loss estimate for each Occurrence hereunder (or by mutual agreement at some Effective: September 1, 1998 4 of 16 other time). Such final calculation of Ultimate Net Loss shall be based upon the Company's estimate of Ultimate Net Loss as entered on the Company's books at that time. III. At each adjustment of Ultimate Net Loss, the amount of reinsurance recoverable hereunder shall be recalculated based on such calculation of Ultimate Net Loss. All amounts due the Company shall be payable in accordance with the Accounts, Reports and Payments and the Retention and Limits Articles hereunder. ARTICLE 7 PREMIUM The Company shall pay to the Reinsurer a flat premium equal to $1,500,000, payable no later than 90 days after binding coverage with the Reinsurer. In the event that the final amount of reinsurance recoverable under this Agreement is $0 and if the Agreement is terminated on a cut-off basis, the Reinsurer agrees to pay the Company a bonus equal to 50% of the Premium hereunder (i.e., $750,000 being 50% of $1,500,000). If such a bonus is due the Company, the Reinsurer shall pay the Company such amount as soon as practicable after termination of the Agreement, but no later than 90 days after the Agreement's termination. ARTICLE 8 ACCOUNTS, REPORTS AND PAYMENTS A. The Company shall furnish to the Reinsurer quarterly accounts of business ceded hereunder within 25 days after the close of each calendar year quarter, showing: the sums of Loss, Loss Adjustment Expense, salvage and subrogation, and Ultimate Net Loss hereunder on paid and Incurred bases, as well as adjustments to the amount of reinsurance recoverable hereunder. The amount of reinsurance recoverable hereunder shall be calculated by taking the Ultimate Net Loss and deducting $60,000,000 of Ultimate Net Loss each and every Occurrence as well as the remaining limit under the Company's First Special Excess of Loss Program at the time such Occurrence is Incurred, but shall never exceed an aggregate limit of $50,000,000. To the extent that the amount of reinsurance recoverable hereunder increases, the Reinsurer shall owe the Company such increase in the amount of reinsurance recoverable hereunder over that recoverable under the prior account; to the extent that the Company's amount of reinsurance recoverable hereunder decreases, the Company shall owe the Reinsurer such decrease in amount of reinsurance recoverable hereunder below that recoverable under the prior account. Effective: September 1, 1998 5 of 16 Such net balance shown shall be payable by the debtor party at the time the account is rendered, if the Company is the debtor party, and within 10 days of the Reinsurer's receipt of the account, if the Reinsurer is the debtor party. B. On a quarterly basis, the Company shall provide the Reinsurer with a listing of all Occurrences with Incurred Ultimate Net Loss in excess of $25,000,000. C. Annually, the Company shall provide the Reinsurer with the following additional information: the top 50 Issuers per bond type (including their Standard & Poor's, Moody's and MBIA ratings, their risk type, the gross and net par, and gross and net debt service), and any relevant information on any Issuers that MBIA puts on its so-called "watch-list." ARTICLE 9 CLAIMS AND LOSSES (1) The Company shall have complete and sole control of and direction of all efforts to: (i) mitigate, investigate, negotiate, settle or defend a Loss, (ii) prevent, mitigate, or investigate a probable Loss under Policies as to which the Company has posted a loss reserve, (iii) investigate and work out a potential Loss, and (iv) to protect, perfect and exercise any subrogation, salvage or reimbursement rights or security interests with respect to any Policy, and may take any action as it may deem advisable with respect thereto. All Loss settlements by the Company, all salvage and subrogation settlements, and all settlements with an Issuer (or with an underlying obligor of that Issuer), shall be final, conclusive and unconditionally binding upon the Reinsurer. (2) The Reinsurer shall pay to the Company the Reinsurer's Proportionate Share of any loss within one business day following receipt of notice from the Company that the Company has made payment of the Loss. The Reinsurer shall effect payment by wire transfer of federal funds to the party designated by the Company in the notice. Details of the Loss will be provided to the Reinsurer by the Company promptly by mail, or by such other means as requested by the Reinsurer. (3) The Reinsurer shall pay to the Company the Reinsurer's Proportionate Share of any Allocated Loss Adjustment Expenses paid by the Company at the times and in the manner specified in the Accounts, Reports and Payments Article. ARTICLE 10 NET RETAINED LINES (1) This Agreement applies only to that portion of any insurance or reinsurance which the Company retains net for its own account and in calculating the amount of any loss Effective: September 1, 1998 6 of 16 hereunder and also in computing the amount or amounts in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurance or reinsurance which the Company retains net for its own account shall be included. (2) The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurers, whether specific or general, any amounts which may become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. (3) Reinsurances or pooling agreements effected or entered into by the Company with any of its affiliated companies under common management or common ownership which reduce the individual retained line of the Company shall be disregarded for the purposes of this Agreement. ARTICLE 11 SALVAGE AND SUBROGATION (1) The Company shall pay the Reinsurer the Reinsurer's Proportionate Share of any Recovery in respect of any Loss covered by the Reinsurer under this Agreement at the times and in the manner specified in the Accounts, Reports and Payments Article. (2) "Recovery", as used in this Agreement means any amount received by the Company in respect of any Loss covered by the Reinsurer under this Agreement whether by subrogation, salvage, or reimbursement from the Issuer (or from an underlying obligor of that Issuer). ARTICLE 12 REINSURANCE FOLLOWS ORIGINAL POLICIES This Agreement shall be construed as an honorable undertaking between the parties hereto and shall not be defeated by technical legal construction, it being the intention of this Agreement that the fortunes of the Reinsurer shall follow the fortunes of the Company. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Reinsurance Agreement. ARTICLE 13 REINSURANCE TAX In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when Effective: September 1, 1998 7 of 16 making tax returns, other than Income or Profits Tax returns, to any state or territory in the United States of America or to the District of Columbia. ARTICLE 14 FEDERAL EXCISE TAX (This Article applies only to those reinsurers domiciled outside of the United States of America who are not exempt from the Federal Excise Tax.) The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the percentage specified by United States law of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder, the Reinsurer will deduct the percentage specified by United States law from the amount of the return and the Company or its agent should take steps to recover the Tax from the United States Government. ARTICLE 15 ACCESS TO RECORDS The Reinsurer shall have the right to inspect at all reasonable times during the currency of the Agreement and thereafter, the books, records and documents of the Company with respect to its participation in the insurance or reinsurance provided by the Company. ARTICLE 16 CURRENCY Where the word "dollars" and/or the sign "$" appear in this Agreement, they shall mean United States dollars, except in those cases where the original policy is issued by the Company in Canadian dollars, in which case they shall mean Canadian dollars. For purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States or Canadian currency, such premiums or losses shall be converted into United States dollars at the actual rates of exchange at which these premiums or losses are entered in the Company's books. Effective: September 1, 1998 8 of 16 ARTICLE 17 SERVICE OF SUIT (This Article shall apply only if the Reinsurer is domiciled outside of the United States of America or if the Reinsurer is not authorized in the State of New York.) (1) In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States of America. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States of America, to remove an action to a district court of the United States of America, or to seek a transfer of a case to another court as permitted by the laws of the United States of America or of any State in the United States of America. It is further agreed that service of process on the Reinsurer in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 (or other agent previously designated by the Reinsurer which designation has been previously notified to the Company), and that in any suit instituted against the Reinsurer, the Reinsurer will abide by the final decision of such court or, in the case of an appeal, the appellate court. (2) The above-named firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give written undertaking to the Company that such firm will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. (3) Further, pursuant to any statute of any state, territory or district of the United States of America which makes provision therefor, the Reinsurer hereon hereby designates the superintendent, commissioner or director of insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement, and hereby designates the above named as the person to whom the said officer is authorized to mail such process or a true copy thereof. ARTICLE 18 ARBITRATION (1) As a condition precedent to any right of action hereunder, any dispute arising out of or related to this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in Armonk, New York, unless otherwise agreed. Effective: September 1, 1998 9 of 16 (2) The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, the umpire shall be selected by the regional director of the American Arbitration Association in New York, New York, or the regional director's delegate. (3) The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant shall submit a reply brief within 10 days after receipt of the respondent's brief. (4) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. (5) If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting the one party provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers under the terms of this Agreement from several to joint. (6) Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. (7) Unless prohibited by applicable law, an arbitral award hereunder and any judgment thereon shall bear interest from the date the arbitral award was rendered at the rate equal from time to time to the rate publicly announced by Citibank, N. A., as its base rate plus 2%. (8) The parties consent to the jurisdiction of the Supreme Court of the State of New York, County of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with such arbitration, including without limitation any application to compel arbitration or to confirm an arbitration award. The parties consent that any process or notice of motion or other application to either of said Courts, and any paper in connection with arbitration, may be served by certified mail, return receipt requested, or by personal service or in such other manner as may be permissible under the rules of the applicable court or panel provided a reasonable time for appearances Effective: September 1, 1998 10 of 16 is allowed. Service upon the Company shall be directed to the Company, in care of the Company's General Counsel. Service upon the Reinsurer shall be directed to the Reinsurer in care of its President. ARTICLE 19 INDEMNIFICATION AND ERRORS AND OMISSIONS Any recitals in this Agreement to the terms and provisions of any original insurance or reinsurance are merely descriptive. The Reinsurer is reinsuring, to the amount herein provided, the obligations of the Company under any original insurance or reinsurance. The Company shall be the sole judge as to: (a) what shall constitute a claim or loss covered under any original insurance or reinsurance written by the Company; (b) the Company's liability thereunder; and (c) the amount or amounts which it shall be proper for the Company to pay thereunder. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any original insurance or reinsurance. Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 20 INSOLVENCY (1) In the event of the insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under the Policies ceded without diminution because of the insolvency of the Company or because its liquidator, receiver, conservator or statutory successor (hereinafter referred to as the "Liquidator") has failed to pay all or a portion of any claim. The Liquidator shall give written notice to the Reinsurer of the pendency of a claim against the Company under any Policy ceded to Reinsurers and covered by this Agreement within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership. During the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or the Liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against Effective: September 1, 1998 11 of 16 the Company as part of the expense of conservation or liquidation to the extent of a Proportionate Share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. (2) Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense has been incurred by the Company. (3) The reinsurance provided by this Agreement shall be payable by the Reinsurer to the Company or to the Liquidator, except (a) where the Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured(s) has assumed the obligations of the Company under the Policies as the direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. ARTICLE 21 SECURITY (l) When a governing body of any jurisdiction in which the Company legally operates or to which it submits, requires as a condition to credit for the reinsurance provided by this Agreement that the Reinsurer post a Letter of Credit for the benefit of the Company, establish a Trust Account for the benefit of the Company or deposit funds under the control of the Company, the Reinsurer shall post and maintain such a Letter of Credit, establish such a Trust Account, or deposit such funds in the form and amount necessary to permit the Company to avoid on any statutory financial statement filed by the Company the penalty to surplus which would result from the loss of credit for the reinsurance. (2) Notwithstanding any other provisions of this Agreement, it is agreed that any Letter of Credit provided under section (1) of this Article, shall be drawn upon and utilized by the Company or its successors in interest only for one or more of the following purposes: (a) to reimburse the Company for the Reinsurer's Proportionate Share of Losses and Allocated Loss Adjustment Expenses paid by the Company under this Agreement; (b) to reimburse the Company for the Reinsurer's Proportionate Share of Refunding Debits; (c) if this Agreement has been terminated pursuant to the Commencement and Termination Article, to reimburse the Company for unearned premium due to the Company; (d) to fund an account with the Company in an amount at least equal to the deduction allowed for the reinsurance provided by this Agreement, from the Company's liabilities for Policies ceded under the Agreement, such amount to include, Effective: September 1, 1998 12 of 16 if applicable, but not be limited to, amounts for contingency reserves, loss reserves for paid, reported and incurred but not reported ("IBNR") losses, allocated loss adjustment expense reserves and unearned premium reserves; or (e) to pay any other amounts the Company claims are due under the Agreement. All of the foregoing should be applied without diminution because of insolvency on the part of the Company or Reinsurer. (3) If the Reinsurer elects to provide a Letter of Credit under section (1) of this Article, the Reinsurer shall cause the Letter of Credit to be issued, in place and effective no later than the "as of date" of the first quarterly filing prepared by the Company for the appropriate regulatory authority after the effective date of this Agreement. ARTICLE 22 CONFIDENTIALITY The Reinsurer agrees that it will maintain the confidentiality of the all information presented as a result of this Agreement including, but not limited to the bonds, the basic agreements, the reinsurance undertaken with respect to the bonds, all underlying transactions and underlying obligations, and all certificates, reports, agreements, notices, and communications of any sort relating to any of the foregoing in its communications with third parties, except to the extent required by law, regulation, or order, and except as may be made to the Reinsurer's legal counsel, auditors, and accountants, to Standard & Poor's Corporation, Moody's Investor Services, Inc., Duff & Phelps Corporation, or any other rating agency in connection with their rating of the Reinsurer and except as may be necessary or appropriate in connection with any retrocession, subject to the receipt of a written confidentiality commitment from the proposed retrocessional reinsurer. The Reinsurer and its legal counsel, auditors, and accountants will have no obligation of confidentiality in respect or any information that may be available to the public or become available to the public through no fault of such person. ARTICLE 23 OFFSET Each party hereto shall have, and may exercise at any time and from time to time, the right to offset balance or balances, whether on account of premiums or on account of Losses or otherwise, due from such party to the other party hereto under this Agreement or under any other reinsurance agreement heretofore or hereafter entered into by and between them, and may offset the same against any balance or balances due or to become due to the former from the latter under the same or any other reinsurance agreement between them. The party asserting the right of offset shall have and may exercise such right whether the balance(s) due or to become due to such party from the other are on account of premiums or on account of Losses or otherwise and Effective: September 1, 1998 13 of 16 regardless of the capacity, whether as assuming reinsurer or as ceding company, in which each party acted under the agreement or, if more than one, the different agreements involved. In the event of the insolvency of a party hereto, offsets shall be allowed only in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. ARTICLE 24 GOVERNING LAW This Agreement shall be governed by the laws of the State of New York. ARTICLE 25 INTERMEDIARY Guy Carpenter & Company, Inc., Two World Trade Center, New York, New York, 10048, is hereby recognized as the Intermediary by which this Agreement was negotiated and through which all communications relating hereto including, but not limited to, notices, statements, premiums, return premiums, commissions, taxes, Losses, Allocated Loss Adjustment Expenses, salvage and Loss settlements, shall be transmitted to both parties, except as may be otherwise specified in respect of a wire transfer payment of a Loss (section (2) of the Claims and Losses Article). It is understood, as regards remittances due either party hereunder, that payment by the Company to the Intermediary shall constitute payment to the Reinsurer, but payment by the Reinsurer to the Intermediary shall constitute payment to the Company only to the extent such payments are actually received by the Company. ARTICLE 26 PARTICIPATION The Reinsurer's Percentage Share of the Interests and Liabilities set out in this Agreement is 100% of up to $50,000,000. Effective: September 1, 1998 14 of 16 IN WITNESS WHEREOF the parties hereto, by their respective duly authorized officers, have executed this SECOND SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT, in triplicate, as of the dates recorded below: ACCEPTED: At: Armonk, New York this 30th day of December , 1998. MBIA INSURANCE CORPORATION MBIA Assurance, S. A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement /s/ Julliette S. Tehrani - ------------------------------------------ and at: Funchal Madeira this 22nd day of December , 1998. AXA RE FINANCE S.A. /s/ Christophe Renia - ------------------------------------------ Senior Vice President [STAMP] 15 of 16 Effective: September l, 1998 15 of 16 EXHIBIT NO. 1 Insurance and/or Reinsurance Company Subsidiaries Included within the Definition of Company hereunder MBIA Assurance S. A. MBIA Insurance Corporation MBIA Insurance Corp. of Illinois Capital Markets Assurance Corporation 16 of 16 Effective: September 1, 1998 16 of 16 EX-10.51 28 REINSURANCE AGREEMENT THIRD SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") made and entered into by and between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S. A., Paris, France; and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement (hereinafter referred to as the"Company"), and ZURICH REINSURANCE (NORTH AMERICA), INC. (hereinafter referred to as the "Reinsurer"). In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE 1 ACQUISITION In the event that, following the execution of this Agreement, the Company notifies the Reinsurer of a proposed acquisition by the Company of an insurance company (a "Target") and provides the Reinsurer with such due diligence information as the Reinsurer may reasonably request with respect to such Target (including without limitation information relating to the effect on this Agreement of the inclusion of the Target as a reinsured hereunder) (the "Information"), the Reinsurer shall use its best efforts to provide, within 30 days following receipt of the Information, a written notice to the Company which notice shall state whether or not the Reinsurer will consent to the inclusion of such Target as a reinsured hereunder upon consummation of the acquisition of such Target by the Company. If the Reinsurer consents to the inclusion of a Target as a reinsured hereunder, such Target shall be included in the term "Company" from and after the date on which the Company's acquisition of the Target is consummated, and the Company shall prepare and deliver to the Reinsurer an addendum to this Agreement that revises Exhibit #1 to include the name of such Target thereon. The 30-day period referred to above shall not commence until all of the Information reasonably requested by the Reinsurer has been received by the Reinsurer. Effective: September 15, 1998 1 of 12 ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from September 15, 1998 (the "Effective Date") through December 31, 1998 (the "Termination Date"), both days inclusive. "Standard Time" shall mean the time as described in the Policies. Notwithstanding the termination of this Agreement as herein provided, the provisions of this Agreement shall continue to apply to all unfinished business hereunder to the end that all obligations and liabilities assumed by a party hereunder prior to such termination shall be fully performed and discharged. ARTICLE 3 BUSINESS AND TERRITORY COVERED This Agreement shall cover all Policies in force and attaching on or after the Effective Date that: (A) provide insurance against financial loss by reason of nonpayment of regularly scheduled principal and interest obligations arising under Issues sold by Issuers domiciled anywhere in the world provided the debt instruments or any other monetary obligations are denominated or payable in the currency of (i) an Organization of Economic Cooperation and Development ("OECD") country or (ii) such other country whose sovereign rating is investment grade; provided, however, with respect to (ii) above, that any such debt instrument or other monetary obligation that is denominated in a currency other than the Issuer's domestic currency shall either be (x) investment grade or (y) the Company shall have entered into a currency swap with respect to such instrument or obligation that (I) eliminates all exchange risk thereunder or (II) exchanges the currency risk thereunder for the risk of an OECD currency that enables the transaction to be of investment grade quality, and (B) are classified by the Company as corporate utility debt guarantee insurance, debt service reserve fund surety bonds, investment grade asset-backed securities guarantee insurance, investment grade corporate debt guarantee insurance, investment grade structured finance guarantee insurance, municipal bond guarantee insurance, or municipal note guarantee insurance. The liability of the Reinsurer shall be subject in all respects to all the general and specific stipulations, clauses, waivers, extensions, modifications and endorsements of any of the Company's Policies, subject to the exclusions set forth in the Exclusions Article and the other terms and conditions of this Agreement as set forth herein. Effective: September 15, 1998 2 of 12 ARTICLE 4 EXCLUSIONS The following general exclusions shall apply in respect of all business ceded to the Reinsurer under this Agreement: A. Assumed reinsurance. However, not to exclude intercompany reinsurance with other subsidiaries of MBIA Inc. and/or business structured as reinsurance which would otherwise be written as insurance; this exception does not require the Company to cede business covered hereunder that has already been ceded to another applicable reinsurance cover. B. Business written by the Company not described in the Business and Territory Article. C. All liability of the Company arising by agreement, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund, or other arrangement, howsoever denominated, established or governed which provides for any assessment of, or payment, or assumption by the Company of part of any claim, debt, charge, fee, or other obligation of an insurer, or its successors, or assigns which has been declared by any competent authority to be insolvent or which otherwise is deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. ARTICLE 5 REINSURANCE CLAUSE The Reinsurer shall pay up to $70,000,000 Ultimate Net Loss each and every Occurrence excess of $0 Ultimate Net Loss each and every Occurrence. The Reinsurer shall pay the Company as Ultimate Net Loss recoverable hereunder is Incurred. The aggregate limit of this Agreement shall never exceed $70,000,000 over the term of this Agreement. ARTICLE 6 DEFINITIONS A. "Allocated Loss Adjustment Expenses" as used in this Agreement means all court costs, interest upon judgments, and mitigation, investigation, adjustment, and legal expenses chargeable to: (i) the mitigation, investigation, negotiation, settlement of or defense against a Loss, (ii) loss prevention, mitigation or investigation in respect of Policies as to which the Company has posted a loss reserve, (iii) the investigation and workout of a potential Loss, or (iv) the protection, perfection and exercise of any subrogation or salvage or reimbursement rights or security interests with respect to a Policy. Allocated Loss Effective: September 15, 1998 3 of 12 Adjustment Expenses shall exclude all office expenses and salaries of officials and employees of the Company. B. "Incurred" as used in this Agreement in respect of the Company's Loss and Allocated Loss Adjustment Expenses means the date and time such Loss and Allocated Loss Adjustment Expense is recorded on the books and records of the Company with respect to the estimated amount of default of the Issuer's obligation to pay principal or interest pursuant to the terms of a bond, note, or other instrument insured by a Policy. C. "Issue" as used in this Agreement means all obligations of one Issuer sold simultaneously, secured by a single revenue source (with essentially the same structure) or, in the case of structured finance or asset-backed securities, secured by a common pool of assets and, in either case, covered by a Policy. The Company shall be the sole judge of what constitutes one Issue. D. "Issuer" as used in this Agreement means, with respect to an Issue, the entity issuing the bonds, notes, or other instruments comprising the Issue. The Company shall be the sole judge of what constitutes one Issuer. E. "Loss" as used in this Agreement means the actual or, in the Company's best judgment, anticipated amounts of principal and interest for which the Company is liable with respect to all claims under all Policies. F. "Occurrence" as used in this Agreement means an: actual or, in the Company's best judgment, anticipated default by an individual Issuer. G. "Policy" as used in this Agreement means each binder, policy, surety bond or contract of insurance or amendment or endorsement thereto issued by the Company and constituting business covered as defined in the Business and Territory Covered Article. H. "Ultimate Net Loss" as used herein shall mean the Company's estimate of the sum of Loss and Allocated Loss Adjustment Expense Incurred by the Company from all Issues of an Issuer less reinsurance recoveries which inure to the benefit of this Agreement, if any, which shall include the remaining limits on the Company's First and Second Special Per Occurrence Excess of Loss Programs, less any salvage or subrogation recoveries as appearing on the Company's books at the time of all interim and/or final adjustment to the Ultimate Net Loss hereunder. For the purposes of determining Ultimate Net Loss and the amount of reinsurance recoverable hereunder prior to the final maturity of any Issue, the Company's estimated Loss and Allocated Loss Adjustment Expense shall be determined based on the Company's annual or quarterly statements, as the case may be. Effective: September 15, 1998 4 of 12 The following shall apply with respect to Ultimate Net Loss herein: I. Nothing in this Definition shall be construed as meaning the Reinsurer shall not pay the amount of reinsurance recoverable hereunder until the actual Ultimate Net Loss has been determined. II. The Company shall make quarterly adjustments to its estimates of Ultimate Net Loss beginning in the third and fourth quarters of 1998. The final adjustment to any Ultimate Net Loss hereunder shall be made seven years after the Termination Date of this Agreement (or by mutual agreement at some other time). Such final adjustment of Ultimate Net Loss shall be based upon the Company's estimate of Ultimate Net Loss as entered on the Company's books at such time. ARTICLE 7 PREMIUM The Company shall pay to the Reinsurer a flat premium equal to $350,000, payable upon execution of this Agreement. ARTICLE 8 ACCOUNTS, REPORTS AND PAYMENTS A. The Company shall furnish to the Reinsurer quarterly accounts of business ceded hereunder within 25 days after the close of each calendar year quarter, showing: the sums of Loss, Allocated Loss Adjustment Expenses, salvage and subrogation, and Ultimate Net Loss hereunder on paid and Incurred bases, as well as adjustments thereto. To the extent that the amount of reinsurance recoverable hereunder increases, the Reinsurer shall owe the Company such increase in the amount of reinsurance recoverable hereunder over that recoverable under the prior account; but in no event shall the Reinsurer's liability over the term of this Agreement exceed $70,000,000; to the extent that the Company's amount of reinsurance recoverable hereunder decreases, the Company shall owe the Reinsurer such decrease in the amount of reinsurance recoverable hereunder below that recoverable under the prior account. Such net balance shown shall be payable by the debtor party at the time the account is rendered, if the Company is the debtor party, and within 45 days of the Reinsurer's receipt of the account, if the Reinsurer is the debtor party. Effective: September 15, 1998 5 of 12 B. On a quarterly basis, the Company shall provide the Reinsurer with a listing of all Occurrences with Incurred Ultimate Net Loss in excess of $25,000,000. ARTICLE 9 CLAIMS AND LOSSES The Company shall have complete and sole control of and direction of all efforts to: (i) mitigate, investigate, negotiate, settle or defend a Loss, (ii) prevent, mitigate, or investigate a probable Loss under Policies as to which the Company has posted a loss reserve, (iii) investigate and workout a potential Loss, and (iv) to protect, perfect and exercise any subrogation, salvage or reimbursement rights or security interests with respect to any Loss under a Policy, and shall take any action as it may deem advisable with respect thereto. All Loss settlements by the Company, all salvage and subrogation settlements, and all settlements with an Issuer (or with an underlying obligor of that Issuer), shall be final, conclusive and unconditionally binding upon the Reinsurer. ARTICLE 10 SALVAGE AND SUBROGATION (1) The Company shall pay the Reinsurer the Reinsurer's proportionate share of any Recovery in respect of any Loss covered by a Policy covered under this Agreement at the times and in the manner specified in the Accounts, Reports and Payments Article. (2) "Recovery" as used in this Article means any amount received by the Company in respect of any Loss covered by a Policy covered under this Agreement whether by subrogation, salvage, or reimbursement from the Issuer (or from an underlying obligor of that Issuer). ARTICLE 11 REINSURANCE FOLLOWS ORIGINAL POLICIES This Agreement shall be construed as an honorable undertaking between the parties hereto and shall not be defeated by technical legal construction, it being the intention of this Agreement that the fortunes of the Reinsurer shall follow the fortunes of the Company. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Agreement. Effective: September 15, 1998 6 of 12 ARTICLE 12 TAXES In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory in the United States of America or to the District of Columbia. ARTICLE 13 ACCESS TO RECORDS The Reinsurer shall have the right to inspect at all reasonable times during the currency of the Agreement and thereafter, the books, records and documents of the Company with respect to this Agreement. ARTICLE 14 CURRENCY Where the word "dollars" and/or the sign "$" appear in this Agreement, they shall mean United States dollars. For purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States currency, such premiums or losses shall be converted into United States dollars at the actual rates of exchange at which these premiums or losses are entered in the Company's books. ARTICLE 15 ARBITRATION (1) As a condition precedent to any right of action hereunder, any dispute arising out of or related to this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in Armonk, New York, unless otherwise agreed. (2) The members of the board of arbitration shall be active or former and disinterested officials of insurance or reinsurance companies. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the Effective: September 15, 1998 7 of 12 appointment of an umpire within four weeks after their nominations, the umpire shall be selected within four weeks by the regional director of the American Arbitration Association in New York, New York, or the regional director's delegate. (3) The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant shall submit a reply brief within 10 days after receipt of the respondent's brief. (4) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. (5) Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. (6) Unless prohibited by applicable law, an arbitral award hereunder and any Judgment thereon shall bear interest from the date the arbitral award was rendered at the rate equal from time to time to the rate publicly announced by Citibank, N. A., as its base rate plus 2%. (7) The parties consent to the jurisdiction of the Supreme Court of the State of New York, County of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with such arbitration, including without limitation any application to compel arbitration or to confirm an arbitration award. The parties consent that any process or notice of motion or other application to either of said Courts, and any paper in connection with arbitration, may be served by certified mail, return receipt requested, or by personal service or in such other manner as may be permissible under the rules of the applicable court or panel provided a reasonable time for appearances is allowed. Service upon the Company shall be directed to the Company, in care of the Company's General Counsel. Service upon the Reinsurer shall be directed to the Reinsurer in care of its President. ARTICLE 16 INDEMNIFICATION AND ERRORS AND OMISSIONS Any recitals in this Agreement to the terms and provisions of any original insurance or reinsurance are merely descriptive. The Reinsurer is reinsuring, to the amount herein provided, Effective: September 15, 1998 8 of 12 the obligations of the Company under any original insurance or reinsurance. The Company shall be the sole judge as to: (a) what shall constitute a claim or loss covered under any original insurance or reinsurance written by the Company; (b) the Company's liability thereunder; and (c) the amount or amounts which it shall be proper for the Company to pay thereunder. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any original insurance or reinsurance. Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 17 INSOLVENCY (1) In the event of the insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under the Policies ceded without diminution because of the insolvency of the Company or because its liquidator, receiver, conservator or statutory successor (hereinafter referred to as the "Liquidator") has failed to pay all or a portion of any claim. The Liquidator shall give written notice to the Reinsurer of the pendency of a claim against the Company under any Policy ceded to Reinsurers and covered by this Agreement within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership. During the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or the Liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. (2) The reinsurance provided by this Agreement shall be payable by the Reinsurer to the Company or to the Liquidator, except as provided by Section 4118(A)(l)(a) (relating to Fidelity and Surety Risks) of the Insurance Law of New York or except (a) where the Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured(s) has assumed the obligations of the Company under the Policies as the direct Effective: September 15, 1998 9 of 12 obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. ARTICLE 18 CONFIDENTIALITY The Reinsurer agrees that it will maintain the confidentiality of the all information presented as a result of this Agreement including, but not limited to the bonds, the basic agreements, the reinsurance undertaken with respect to the bonds, all underlying transactions and underlying obligations, and all certificates, reports, agreements, notices, and communications of any sort relating to any of the foregoing in its communications with third parties, except to the extent required by law, regulation, or order, and except as may be made to the Reinsurer's legal counsel, auditors, and accountants, to Standard & Poor's Corporation, Moody's Investor Services, Inc., Duff & Phelps Corporation, or any other rating agency in connection with their rating of the Reinsurer and except as may be necessary or appropriate in connection with any retrocession, subject to the receipt of a written confidentiality commitment from the proposed retrocessional reinsurer. The Reinsurer and its legal counsel, auditors, and accountants will have no obligation of confidentiality in respect or any information that may be available to the public or become available to the public through no fault of such person. ARTICLE 19 GOVERNING LAW This Agreement shall be governed by the laws of the State of New York. ARTICLE 20 INTERMEDIARY Guy Carpenter & Company, Inc., Two World Trade Center, New York, New York, 10048, is hereby recognized as the Intermediary by which this Agreement was negotiated and through which all communications relating hereto including, but not limited to, notices, statements, premiums, return premiums, commissions, taxes, Losses, Allocated Loss Adjustment Expenses, salvage and Loss settlements, shall be transmitted to both parties. It is understood, as regards remittances due either party hereunder, that payment by the Company to the Intermediary shall constitute payment to the Reinsurer, but payment by the Reinsurer to the Intermediary shall constitute payment to the Company only to the extent such payments are actually received by the Company. Effective September 15, 1998 10 of 12 ARTICLE 21 PARTICIPATION The Reinsurer's Percentage Share of the Interests and Liabilities set out in this Agreement is 100% of up to $70,000,000. IN WITNESS WHEREOF the parties hereto, by their respective duly authorized officers, have executed this THIRD SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT, in triplicate, as of the dates recorded below: ACCEPTED: At: Armonk, New York this 31st day of December, 1998. MBIA INSURANCE CORPORATION MBIA Assurance, S. A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement /s/ Julliette S. Tehrani - ------------------------------------------ and at: this 30th day of December ,1998. ZURICH REINSURANCE (NORTH AMERICA), INC. /s/ [ILLEGIBLE] - ------------------------------------------ Effective: September 15, 1998 11 of 12 EXHIBIT NO. 1 Insurance and/or Reinsurance Company Subsidiaries Included within the Definition of Company hereunder MBIA Assurance S. A. MBIA Insurance Corporation MBIA Insurance Corp. of Illinois Capital Markets Assurance Corporation Effective: September 15, 1998 12 of 12 EX-13 29 MBIA INC. 1998 ANNUAL REPORT SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries
Dollars in millions except per share amounts 1998 1997 1996 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 677 $ 654 $ 535 $ 406 $ 405 $ 504 $ 377 $ 269 Premiums earned 425 351 294 244 241 249 169 132 Advisory fees 26 17 11 7 5 1 1 -- Net investment income 332 302 265 233 204 189 155 132 Net realized gains 30 17 10 13 10 11 10 3 Insurance operating income 643 530 453 385 360 353 260 207 Investment management operating income (loss) 29 17 18 11 5 (1) (1) (2) Income before income taxes 565 525 448 375 347 339 249 190 NET INCOME 433 406 348 290 270 268 193 145 NET INCOME PER COMMON SHARE BASIC 4.37 4.18 3.68 3.21 3.00 3.00 2.24 1.89 DILUTED 4.32 4.12 3.62 3.15 2.96 2.95 2.20 1.87 - --------------------------------------------------------------------------------------------------------------------------- GAAP SUMMARY BALANCE SHEET DATA: Investments 10,080 8,908 8,008 6,937 5,069 3,735 2,701 1,961 Total assets 11,797 10,385 9,031 7,670 5,711 4,320 3,234 2,438 Deferred premium revenue 2,251 2,090 1,854 1,662 1,538 1,413 1,202 1,019 Loss reserves 270 103 70 49 45 37 28 21 Municipal investment and repurchase agreements 3,485 3,151 3,259 2,642 1,526 493 -- -- Long-term debt 689 489 389 389 314 314 314 199 Shareholders' equity 3,792 3,362 2,761 2,497 1,881 1,761 1,533 1,063 Book value per share 38.15 34.09 28.98 27.02 20.92 19.77 17.19 13.79 Dividends declared per common share 0.790 0.770 0.725 0.655 0.570 0.470 0.380 0.310 - --------------------------------------------------------------------------------------------------------------------------- STATUTORY DATA: Net income 510 404 335 287 229 263 194 149 Capital and surplus 2,290 1,952 1,661 1,469 1,250 1,124 1,044 647 Contingency reserve 1,451 1,188 959 788 652 561 419 316 - --------------------------------------------------------------------------------------------------------------------------- Qualified statutory capital 3,741 3,140 2,620 2,257 1,902 1,685 1,463 963 Unearned premium reserve 2,324 2,193 1,971 1,768 1,640 1,484 1,248 1,044 Loss reserves 188 15 10 7 22 8 14 12 - --------------------------------------------------------------------------------------------------------------------------- Total policyholders' reserves 6,253 5,348 4,601 4,032 3,564 3,177 2,725 2,019 Present value of installment premiums 644 537 443 347 249 234 211 151 Standby line of credit & stop loss 900 900 775 700 650 625 550 500 - --------------------------------------------------------------------------------------------------------------------------- TOTAL CLAIMS-PAYING RESOURCES 7,797 6,785 5,819 5,079 4,463 4,036 3,486 2,670 - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS: GAAP Loss ratio 8.2% 9.1% 6.9% 5.6% 3.9% 3.5% 3.6% 13.0% Underwriting expense ratio 24.7 31.0 32.9 35.2 32.9 31.2 34.6 30.1 Combined ratio 32.9 40.1 39.8 40.8 36.8 34.7 38.2 43.1 Statutory Loss ratio 8.0 1.2 1.7 0.4 8.7 (3.3) 2.3 12.7 Underwriting expense ratio 16.8 21.2 22.8 27.2 28.3 22.0 20.7 20.4 Combined ratio 24.8 22.4 24.5 27.6 37.0 18.7 23.0 33.1 NET DEBT SERVICE OUTSTANDING $595,895 $513,736 $434,417 $359,175 $315,340 $273,630 $225,220 $184,604 NET PAR AMOUNT OUTSTANDING $359,472 $303,803 $252,896 $201,326 $173,760 $147,326 $114,317 $ 90,043 - --------------------------------------------------------------------------------------------------------------------------- Dollars in millions except per share amounts 1990 1989 - ------------------------------------------------------- GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 211 $ 159 Premiums earned 107 91 Advisory fees -- -- Net investment income 115 80 Net realized gains -- -- Insurance operating income 181 136 Investment management operating income (loss) -- -- Income before income taxes 165 135 NET INCOME 127 102 NET INCOME PER COMMON SHARE BASIC 1.68 1.39 DILUTED 1.66 1.37 - ------------------------------------------------------- GAAP SUMMARY BALANCE SHEET DATA: Investments 1,724 1,501 Total assets 2,159 1,904 Deferred premium revenue 902 811 Loss reserves 5 -- Municipal investment and repurchase agreements -- -- Long-term debt 200 195 Shareholders' equity 932 777 Book value per share 12.17 10.54 Dividends declared per common share 0.240 0.205 - ------------------------------------------------------- STATUTORY DATA: Net income 127 84 Capital and surplus 579 485 Contingency reserve 261 216 - ------------------------------------------------------- Qualified statutory capital 840 701 Unearned premium reserve 926 828 Loss reserves -- -- - ------------------------------------------------------- Total policyholders' reserves 1,766 1,529 Present value of installment premiums 134 90 Standby line of credit & stop loss 500 325 - ------------------------------------------------------- TOTAL CLAIMS-PAYING RESOURCES 2,400 1,944 - ------------------------------------------------------- FINANCIAL RATIOS: GAAP Loss ratio 4.7% 0.0% Underwriting expense ratio 33.7 38.5 Combined ratio 38.4 38.5 Statutory Loss ratio 0.0 0.0 Underwriting expense ratio 23.4 31.6 Combined ratio 23.4 31.6 NET DEBT SERVICE OUTSTANDING $157,707 $137,221 NET PAR AMOUNT OUTSTANDING $ 75,979 $ 65,290 - 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(34 & 35) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries INTRODUCTION - ------------ 1998 was a rewarding but challenging year for MBIA. We posted strong operating results in our insurance and investment management segments, increasing shareholder value while preserving and strengthening our Triple-A rating. In 1998 we merged with and successfully completed the integration of CapMAC Holdings Inc. (CapMAC), a leading insurer of structured finance transactions, and 1838 Investment Advisors, Inc. (1838), a full-service asset management firm. These mergers established strong foundations for growth in both our core insurance and asset management segments, and have already achieved combined results that exceed the sum of the individual parts. On the other hand, the year also produced two significant disappointments. The first--the bankruptcy of a large issuer whose debt was insured by MBIA--was mitigated by our general loss reserving policy and our prudent reinsurance program. The second--unacceptable returns in our municipal services segment--was addressed through reorganization and consolidation. All in all, 1998's strong financial results continued to strengthen our balance sheet and Triple-A ratings. RESULTS OF OPERATIONS - --------------------- SUMMARY MBIA continued to report strong operating results in 1998. The following chart presents highlights of our consolidated financial results for 1998, 1997 and 1996. All of the numbers shown below and all of the data contained in this report have been restated to reflect the mergers, which have been accounted for as "pooling of interests." Percent Change -------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Net income (in millions): As reported $433 $406 $348 7% 17% Excluding one- time charges $482 $406 $348 19% 17% - ---------------------------------------------------------------------------- Per share data:* Net income: As reported $4.32 $4.12 $3.62 5% 14% Excluding one- time charges $4.81 $4.12 $3.62 17% 14% Operating earnings $4.58 $3.99 $3.53 15% 13% Core earnings $4.19 $3.69 $3.26 14% 13% Book value $38.15 $34.09 $28.98 12% 18% Adjusted book value $53.28 $48.19 $42.16 11% 14% - ---------------------------------------------------------------------------- * All earnings per share are diluted and all per share results have been retroactively adjusted to include the effect of a two-for-one stock split effective October 1, 1997. Core earnings, which exclude the effects of refundings and calls on our insured issues, realized capital gains and losses on our investment portfolio and nonrecurring charges, provide the most indicative measure of our underlying profit. Core earnings per share at $4.19 for 1998 grew by 14% over 1997, following a 13% increase in 1997. This continues our unbroken streak of double-digit increases since we became a public company in 1987. In 1998, for the first time, investment management services contributed significantly to core earnings growth. The investment management services' contribution to core earnings increased by 70% over 1997, reflecting both the impact of the 1838 merger as well as the foundation set by our other investment management businesses. Insurance operations continued their consistent support of core earnings growth with a 17% increase for both years. Our 1998 net income grew 19% excluding one-time charges, or by 17% on a per share basis. In 1997 net income increased by 17%, which translated to a 14% per share increase. For both years the difference in growth rates between income and per share data reflects the equity capital we raised in 1997. Including the one-time charges, net income increased by 7% for 1998 over 1997. Operating earnings per share, which exclude the impact of realized gains and losses and one-time charges, increased by 15% and 13% for 1998 and 1997, respectively. Our book value at year-end 1998 was $38.15 per share, up from $34.09 at year-end 1997 and $28.98 at year-end 1996. As with core earnings, a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of net deferred premium revenue, net of deferred acquisition costs, the present value of unrecorded future installment premiums, and the unrealized gains or losses on investment contract liabilities. The following table presents the components of our adjusted book value per share: Percent Change -------------- 1998 1997 vs. vs. 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Book value $38.15 $34.09 $28.98 12 % 18 % After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 10.91 10.45 9.70 4 % 8 % Present value of future installment premiums* 4.21 3.54 3.02 19 % 17 % Unrealized gain on investment contract liabilities** 0.01 0.11 0.46 (91)% (76)% - ---------------------------------------------------------------------------- Adjusted book value $53.28 $48.19 $42.16 11 % 14 % - ---------------------------------------------------------------------------- * The discount rate used to present value future installment premiums was 9%. ** The unrealized gain on investment contract liabilities is offset by a corresponding gain on the market value of the assets. (36) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. Our adjusted book value per share was $53.28 at year-end 1998, an 11% increase from year-end 1997 following 14% growth in the preceding year. The increases in both years reflect consistently strong operating results and the growth in new businesses. The 1997 growth was especially impacted by the increase in the fair value of our fixed-income investment portfolios. Compared to the sharp decline in interest rates in 1997, 1998's interest rate movement was relatively flat. FINANCIAL GUARANTEE INSURANCE Business was strong in 1998 and 1997, fueled by a robust economy and record demand for insurance. Par insured across all business lines was up 24%. The credit quality of new business insured improved significantly over that insured in prior years, reflecting the health of the nation's economy, the strength of municipal issuers and a conscious effort on MBIA's part. Adjusted gross premiums written (AGP) totaled $832 million in 1998. At 12%, our AGP growth rate has been consistently high over the past two years. AGP includes our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. Gross premiums written (GPW), as reported in our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment policies originated in the period. MBIA's premium production in terms of AGP and GPW for the last three years is presented in the following table: Percent Change -------------- 1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Premiums written: AGP $832 $741 $664 12% 12% GPW $677 $654 $535 4% 22% - ---------------------------------------------------------------------------- We estimate the present value of our total future installment premium stream on outstanding policies to be $644 million at year-end 1998, compared with $537 million at year-end 1997 and $443 million at year-end 1996. MUNICIPAL MARKET New issue volume in 1998 was the second largest in history--second only to 1993. The market has followed a consistent growth pattern that we predicted several years ago. While volume in any year can fluctuate, we believe the municipal market will continue to be a growing one. In addition, insured penetration continued at record levels, resulting in the highest ever insured volume in 1998. Municipal rating upgrades have outnumbered downgrades, and the credit quality of business MBIA is insuring remains very strong. Again in 1998, we maintained our market leadership in the growing new issue municipal market. MBIA's domestic municipal AGP and GPW were down versus 1997 levels. The decline reflects a shift in the book towards lower-risk sectors and stronger credit quality. It also reflects the differences in opportunities presented each year. In 1997 we closed several large one-off deals that were not replicated in 1998. Domestic new issue municipal market information and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table: Percent Change -------------- 1998 1997 vs. vs. Domestic Municipal 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Total new issue market:* Par value (in billions) $255 $194 $162 32 % 20% Insured penetration 55% 54% 52% MBIA market share 36% 42% 40% MBIA insured: Par value (in billions) $58 $48 $40 21 % 20% Premiums (in millions): AGP $416 $440 $366 (5)% 20% GPW $405 $435 $368 (7)% 18% - ---------------------------------------------------------------------------- * Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue. STRUCTURED FINANCE MARKET The integration of MBIA's and CapMAC's operations is virtually complete. By all measures, the merger with CapMAC was an extremely positive move for MBIA with improved portfolio diversity and financial performance. We are excited about the many and varied opportunities for growth that we now have in structured finance. Furthermore, we were determined not to let productivity slip in the merger year, and we were successful beyond our expectations in that objective. During 1998 we saw AGP increase and improvement in return margins and average credit quality of the business written. Most notable, but perhaps less visible, MBIA's participation in private and commercial paper asset-backed markets increased significantly, with over one half of AGP generated outside the public market. New issuance in the public asset-backed market was down from last year's record levels, primarily due to market turmoil in the third and fourth quarters. Insurance penetration in the U.S. asset-backed market was nominally higher during 1998. MBIA had a 44% share of the public asset-backed market in 1998, up from 41% in 1997. Private and (37) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries commercial paper asset-backed markets--not reflected in volume or market share statistics--represent significant and growing segments of MBIA's structured finance business. 1998 demonstrated that MBIA is well positioned to participate in this segment as a result of our merger with CapMAC. Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below: Percent Change -------------- 1998 1997 Domestic vs. vs. Structured Finance 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Total asset-backed market:* Par value (in billions) $167 $175 $152 (5)% 15% MBIA insured: Par value (in billions) $46 $38 $27 21 % 41% Premiums (in millions): AGP $191 $166 $158 15 % 5% GPW $126 $102 $83 24 % 23% - ----------------------------------------------------------------------------- * Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET In late 1995, we formed a joint venture with Ambac Assurance Corporation (another leading Triple-A-rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business as evidenced by the growth in premium writings over the past two years. Although a couple of transactions are experiencing stress, all of our international deals, including our Asian deals and emerging-market CBO transactions, are performing satisfactorily, and we do not expect losses. We are monitoring developments in the currency markets in Asia and Latin America very closely to determine the impact on our international book. Korea has recently been upgraded by Fitch, Moody's and S&P to investment grade. The MBIA-AMBAC International joint venture announced an alliance in 1998 in Japan with Yasuda Fire and Marine Insurance Co. Ltd. and Mitsui Marine and Fire Insurance Co. Ltd. With respect to Europe, at this time it is too early to measure the impact of the Euro on our business, although we expect it to stimulate debt issuance and insurance. The advent of the Euro eliminates currency risk between member countries from transactions originating in one of the member countries. The remaining risk is credit risk, which is the risk covered by our guarantee. Insurance is expected to be a popular feature of cross-border transactions. Our company's municipal and structured finance international business volume in the new issue and secondary markets for the last three years is illustrated as follows: Percent Change --------------- 1998 1997 vs. vs. International 1998 1997 1996 1997 1996 - ----------------------------------------------------------------------------- Par value (in billions) $11 $5 $8 120% (38)% Premiums (in millions): AGP $189 $105 $108 79% (3)% GPW $112 $91 $60 23% 52 % - ----------------------------------------------------------------------------- REINSURANCE Premiums ceded to reinsurers from all insurance operations were $156 million, $117 million and $70 million in 1998, 1997 and 1996, respectively. Cessions as a percentage of GPW increased to 23% in 1998 from 13% in 1996 (with 1997 midway at 18%). The increase in our cession rate was largely driven by portfolio shaping, as we focused on reducing larger single risks across the portfolio. This is consistent with our emphasis on a strong balance sheet. In addition, we are freeing up capacity to write additional business in the mortgage/home equity sector. Going forward we expect our cession rate to run between 15% and 20% of new writings. Most of our reinsurers are rated Double-A or higher by S&P, or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we are confident that we will recover the reinsured portion of any losses, should they occur. PREMIUMS EARNED Premiums are recognized over the life of the bonds we insure. The slow premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. In 1998 and 1997, premiums earned from scheduled amortization increased by 19% and 20%, respectively. These strong increases reflect the additive effect of new premiums written, especially from international and structured finance installment business. Refunded premiums also generated high revenues in 1998. When an MBIA-insured bond issue is refunded or retired early, the related deferred premium revenue is earned immediately. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below: Percent Change -------------- 1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Premiums earned: Scheduled $357 $300 $250 19% 20% Refunded 68 51 44 33% 16% - ---------------------------------------------------------------------------- Total $425 $351 $294 21% 19% (38) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. INVESTMENT INCOME Our insurance-related investment income (exclusive of capital gains) increased to $332 million in 1998, up from $302 million in 1997 and $265 million in 1996. These increases were primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. Insurance-related net realized capital gains were $30 million in 1998, $17 million in 1997 and $10 million in 1996. These realized gains were generated as a result of ongoing management of the investment portfolio. ADVISORY FEES The company collects fee revenues in conjunction with certain structured finance transactions. In 1998 and 1997, advisory fee revenues increased by 53% and 59%, respectively, reflecting the company's increased structured finance activity. Certain fees are deferred and earned over the life of the related transactions. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. The total reserve is calculated by applying a risk factor based on a study of bond defaults to net debt service written. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, is allocated within the total loss reserve as case-specific reserves. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the end of the last three years, as well as our loss provision for the last three years: Percent Change -------------- 1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Reserves: Case-specific $189 $25 $20 656% 25% Unallocated 81 78 50 4% 56% - ---------------------------------------------------------------------------- Total $270 $103 $70 162% 47% Provision $35 $32 $20 9% 60% - --------------------------------------------------------------------------- As mentioned previously, the bankruptcy of a large issuer -- specifically a Pennsylvania hospital group--was a significant disappointment in 1998. The large increase in the case-specific reserve reflects our current estimate of anticipated losses arising from this group. At this time our outstanding reserve for this claim, net of reinsurance, totals $163 million. To date we have received $170 million in reinsurance recoveries and have paid $18 million for debt service and loss adjustment expenses. After reinsurance, the amount incurred by MBIA for this loss totaled $11 million in 1998. Over the three-year period from 1996 through 1998, our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve. OPERATING EXPENSES In addition to premium volume, the success of the merger with CapMAC and our ability to optimize the synergies inherent in the combination was strongly evident in the area of insurance expenses. The merger-related cost cutting and restructurings of 1998 should continue to improve our expense ratios in 1999 and thereafter. Those expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total insurance operating expenses, as well as related expense measures, are shown below: Percent Change -------------- 1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Policy acquisition costs, net $35 $35 $30 -- 17% Operating 70 74 67 (5)% 10% - ---------------------------------------------------------------------------- Total insurance operating expenses $105 $109 $97 (4)% 12% Expense ratio: GAAP 24.7% 31.0% 32.9% Statutory 16.8% 21.2% 22.8% - ---------------------------------------------------------------------------- For 1998, policy acquisition costs net of deferrals remained even with 1997 at $35 million following a 17% increase in 1997. The ratio of policy acquisition (39) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries costs net of deferrals to earned premiums has declined from 10% in 1997 and 1996 to 8% in 1998. This decline reflects the positive impact of increases in both installment premium revenues and ceding commission income. Operating expenses decreased by 5% in 1998 following a 10% increase in 1997. The 1998 decline resulted from the synergies of the CapMAC merger. Financial guarantee insurance companies also use the statutory expense ratio (expenses before deferrals as a function of net premiums written) as a measure of expense management. Our company's 1998 statutory and GAAP expense ratios have improved over both 1997 and 1996, again reflecting the success of the merger. INSURANCE INCOME MBIA's insurance income reached $673 million in 1998, up 23% over 1997. This growth was the product not only of strong revenue growth but also of our disciplined expense management. INVESTMENT MANAGEMENT SERVICES In 1998 after our merger with 1838, we formed a holding company, MBIA Asset Management Corporation, to consolidate the resources and capabilities of our four investment management services. The success of our merger with 1838 showed immediate operating benefits, and all of our investment management franchises had record performances in 1998. Of special note was the 30% increase in operating revenues achieved while investment management expenses held the line at only a 9% growth rate. The table below summarizes our consolidated investment management results over the last three years: Percent Change -------------- 1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 - ---------------------------------------------------------------------------- Revenues $65 $50 $47 30% 6 % Expenses 36 33 29 9% 12 % - ---------------------------------------------------------------------------- Operating income 29 17 18 70% (4)% Realized gains 14 3 2 315% 33 % - ---------------------------------------------------------------------------- Income $43 $20 $20 111% -- - ---------------------------------------------------------------------------- MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal Investors Services Corp. (MBIA-MISC), MBIA Investment Management Corp. (IMC) and MBIA Capital Management Corp. (CMC). The following provides a summary of each of these businesses: 1838 is a full-service asset management firm with a strong institutional focus. It manages over $7 billion in equity, fixed-income and balanced portfolios for a client base comprised of municipalities, endowments, foundations, corporate employee benefit plans and high-net-worth individuals. 1838 recorded superior performance during the year in its large-cap equity fund, which was up 41% for the year, compared to the S&P 500, which was up 28%. MBIA-MISC provides cash management, investment fund administration and fixed-rate investment placement services directly to local governments and school districts. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public-sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission (SEC)-registered investment advisers and at year-end had $6.2 billion in assets under management, up 43% over 1997's $4.3 billion. IMC provides state and local governments with tailored investment agreements for bond proceeds and other public funds, such as construction, loan origination, capitalized interest and debt service reserve funds. At year-end 1998, principal and accrued interest outstanding on investment and repurchasing agreements was $3.5 billion, compared with $3.2 billion at year-end 1997. At amortized cost, the assets supporting IMC's investment agreement were also at $3.5 billion and $3.2 billion at year-end 1998 and 1997. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC from time-to-time uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At year-end 1998, our exposure to derivative financial instruments was not material. CMC is an SEC-registered investment adviser and National Association of Securities Dealers member firm. CMC specializes in fixed-income management for institutional funds and provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios. By year-end 1998, CMC's assets under management increased by 31% over year-end 1997. MUNICIPAL AND FINANCIAL SERVICES MBIA MuniServices Company (MBIA MuniServices)(formerly known as Strategic Services, Inc.) was established in 1996 to provide bond administration, revenue (40) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. enhancement and other services to state and local governments. In 1996, MBIA MuniServices acquired an equity interest in Capital Asset Holdings, Inc. (Capital Asset), a purchaser and servicer of delinquent tax certificates. Capital Asset also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. In December 1998, MBIA MuniServices acquired Capital Asset's founder's equity interest. In January 1997, MBIA MuniServices acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public entities. In July 1997, MBIA MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was also acquired. In 1998 the municipal and financial services operations lost $20 million, including a realized loss of $9 million on our investment in Capital Asset. This compared to operating income of $4 million in 1997 and $1 million in 1996. During the fourth quarter of 1998, MBIA began reorganizing the operations of two subsidiaries, MTB and MRC, into MBIA MuniServices to form a nationwide provider of revenue enhancement services to the public sector. CORPORATE INTEREST EXPENSE In 1998, 1997 and 1996, respectively, we incurred $45 million, $39 million and $35 million of interest expense. The increases in interest expense reflect our long-term debt financings of $50 million in November 1998, $150 million in September 1998 and $100 million in July 1997. OTHER EXPENSES The large increase in other expenses in 1998 is due primarily to the inclusion of the $75 million of one-time charges related to our mergers with CapMAC and 1838 and the reorganization of our Municipal and Financial Services Division. The merger-related charges totaled $49 million and consisted of severance of $22 million, professional services such as legal, consulting and auditing of $15 million, stay bonuses of $8 million, and expenses related to the elimination of duplicate operations of $4 million. Of these amounts, $15 million, $14 million and $4 million relating to severance, professional services and elimination of duplicate operations, respectively, were paid as of year-end 1998. The merger-related severance charge of $22 million represents the estimated cost of terminating approximately 150 employees of MBIA, CapMAC and 1838 whose positions were determined to be duplicative at the time of the respective mergers. As of December 31, 1998, virtually all of these identified employees had been terminated. The reorganization of our Municipal Services Division involved the closing of some operations in our tax discovery and collection unit as well as the integration of the profitable operations of our revenue enhancement unit into MBIA MuniServices. The reorganization-related charges totaled $26 million and related to the write-off of goodwill and other asset impairments (such as accounts receivable). The goodwill was being amortized over a fifteen-year period and the amortization was not material to the results of operations of the company. The amount written off was determined in conjunction with our reorganization and consolidation of the Municipal Services Division, after a thorough analysis of the recoverability of these assets in accordance with Statement of Financial Accounting Standards 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In 1996 and 1997, other corporate expenses were composed primarily of non-insurance goodwill amortization and general corporate overhead. In 1997 and 1998, other expenses also include the breakeven activities of MBIA & Associates Consulting, Inc. It was established in 1997 to provide assistance to state and local governments, colleges and universities, and international public- and private-sector clients seeking to strengthen their strategic financial planning and management capabilities. TAXES Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, we will see our tax rate fluctuate from time-to-time as we manage our investment portfolio on a total return basis. Our effective tax rate has increased marginally over the past three years--to 23.4% in 1998 from 22.8% in 1997 and 22.5% in 1996. This reflects the gradual shift in our investment portfolio to a higher proportion of taxable securities. CAPITAL RESOURCES - ----------------- We carefully manage our capital resources to optimize our cost of capital while maintaining appropriate claims-paying resources to sustain our Triple-A claims-paying ratings. At year-end 1998, our total shareholders' equity was $3.8 billion, with total long-term borrowings at $689 million. We use debt financing (41) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our long-term debt and ratios we use to measure it: 1998 1997 1996 - --------------------------------------------------------------------------- Long-term debt (in millions) $689 $489 $389 Long-term debt to total capital 15% 13% 12% Ratio of earnings to fixed charges 13.1x 14.1x 13.5x - --------------------------------------------------------------------------- In addition, our insurance company has an $825 million irrevocable standby line of credit facility with a group of major Triple-A rated banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term, which expires on October 31, 2005, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. Our insurance company also maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. From time to time we access the capital markets to support the growth of our businesses. In July 1997, to provide us with additional capital for growth, we raised $126 million of equity and issued $100 million of 30-year debentures. In September 1998, we issued $150 million of 30-year debentures, and, in November 1998, we issued $50 million of 40-year notes. As of year-end 1998, total claims-paying resources for our insurance company stood at $7.8 billion, a 15% increase over 1997. LIQUIDITY - --------- Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company, which generates substantial cash flow from premium writings and investment income. In 1998, operating cash flow was $682 million, a 24% increase from $549 million in 1997. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In 1998 our insurance company paid no dividends and at year-end 1998 had dividend capacity in excess of $228 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 1998, cash equivalents and short-term investments totaled $444 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $650 million with a group of worldwide banks. At year-end 1998, there were no balances outstanding under these lines. Our investment portfolio provides a high degree of liquidity since it is comprised of readily marketable high-quality fixed-income securities and short-term investments. At year-end 1998, the fair value of our consolidated investment portfolio increased 13% to $10.1 billion, as shown below: Percent Change -------------- In millions 1998 1997 1998 vs. 1997 - ---------------------------------------------------------------------------- Insurance operations: Amortized cost $6,083 $5,292 15% Unrealized gain 319 275 16% - ---------------------------------------------------------------------------- Fair value $6,402 $5,567 15% - ---------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $3,542 $3,242 9% Unrealized gain 136 99 37% - ---------------------------------------------------------------------------- Fair value $3,678 $3,341 10% - ---------------------------------------------------------------------------- Total portfolio at fair value $10,080 $8,908 13% - ---------------------------------------------------------------------------- The growth of our insurance-related investments in 1998 was the result of positive cash flows and proceeds from our financing activities, as well as an increase in unrealized gains caused by lower interest rates at year-end. The fair value of investments related to our municipal investment agreement business increased 10% to $3.7 billion at year-end 1998. Our investment portfolios are considered to be available-for-sale, and the differences between their fair value and amortized cost, net of applicable taxes, are reflected as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception. Since we generally intend to hold most of our investments to maturity as part of our risk management strategy, we expect to realize a value substantially equal to amortized cost. (42) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. MARKET RISK - ----------- The fair values of some of our company's reported financial instruments are subject to change as a result of potential interest rate movements. This interest rate sensitivity can be estimated by projecting a hypothetical increase in interest rates of 1.0%. Based on asset maturities and interest rates as of year-end 1998, this hypothetical increase in interest rates would result in an after-tax decrease in net fair value of our company's financial instruments of $203 million. This projected change in fair value is primarily a result of our company's "fixed-maturity securities" asset portfolio, which loses value with increases in interest rates. Since our company is able and primarily expects to hold the securities to maturity, it does not expect to recognize any adverse impact to income or cash flows under the above scenario. Our company's investment portfolio holdings are primarily U.S. dollar-denominated fixed-income securities including municipal bonds, U.S. government bonds, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and asset-backed securities. In modeling sensitivity to interest rates for the taxable securities, U.S. treasury rates are changed instantaneously by 1.0%, and the option-adjusted spreads of the securities are held constant. Tax-exempt securities are subjected to a change in the Municipal Triple-A General Obligation curve that would be equivalent to a 1.0% taxable interest rate change based on year-end taxable/tax-exempt ratios. Simulation for tax-exempts is performed treating securities on a duration-to-worst-case basis. For the liabilities evaluation, where appropriate, the assumed discount rates used to estimate the present value of future cash flows are increased by 1.0%. YEAR 2000 - ---------- With the new millennium approaching, MBIA is actively managing a high-priority Year 2000 (Y2K) program addressing the issue of whether its computer systems can correctly distinguish between the years 1900 and 2000. The company has established an independent Y2K testing lab in its Armonk office, with a committee of business unit managers overseeing the project. MBIA has a budget of $1.13 million for its 1998-2000 Y2K efforts. Expenditures are proceeding as anticipated, and we do not expect the project budget to materially exceed this amount. As of December 31, 1998, we have spent $326 thousand on the project. Since the mid-1990s, MBIA has completed the re-engineering or installation of three internally designed "mission-critical" computer systems at a cost of approximately $11 million. The three systems are: MBIA Information Deal Analysis System (MIDAS), which provides analysis and accounting for MBIA's financial guarantee business; Sales Trading and Accounting Records System (STARS), which provides administrative and client support for MBIA's municipal pooled investment business; and Municipal Agreement Record System (MARS), which provides analytical and accounting support for MBIA's investment agreement business. These systems were designed as Y2K-compliant. These expenditures are not reflected in our Y2K budget. MBIA has initiated a comprehensive Y2K plan which includes the following phases: assessment--completed in the second quarter of 1998; remediation--completed in the fourth quarter of 1998; testing--completed for STARS in the third quarter of 1998, MARS in the fourth quarter of 1998 and MIDAS with the initial phase completed in the fourth quarter of 1998 (final testing completion expected by the end of the first quarter of 1999); and contingency planning--to be completed in the first quarter of 1999. This plan covers "mission-critical" internally developed systems, vendor software, hardware and certain third-party entities through which we conduct our business. Testing to date indicates that functions critical to the financial guarantee business, both domestic and international (MIDAS), were Y2K-ready as of December 31, 1998. Additional testing will continue throughout 1999. In addition, MBIA's subsidiary companies are actively managing their own Y2K efforts and are expected to meet varying readiness deadlines before yearend. It is not possible at this time to determine whether a subsidiary's Y2K failure would have a material impact on MBIA. Additionally, MBIA is reviewing all ancillary support functions. Evaluation, testing and re-testing will continue throughout 1999. An area of risk to MBIA's financial guarantee business is the potential inability of an issuer, or its trustee or paying agent, to make payments on an MBIA-insured transaction because of failure to be Y2K-ready. To mitigate this risk, we are surveying trustees, paying agents and selected high-volume issuers to determine their readiness. While the survey is not complete, results to date indicate that all respondents are either ready or planning to be ready by late 1999. If MBIA is asked to pay a claim in situations where the issuer's system fails, we will do so and would expect to recover such payment in a short time period. While it is not possible to predict the extent of such payments, we believe that MBIA has adequate sources of liquidity to cover these payments. (43) REPORT ON MANAGEMENT'S RESPONSIBILITY AND REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITY - ------------------------------------- Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. PricewaterhouseCoopers LLP, independent accountants, is retained to audit the company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The board of directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. /s/David H. Elliott - ------------------- David H. Elliott Chairman /s/ Neil G. Budnick - ------------------- Neil G. Budnick Chief Financial Officer and Treasurer REPORT OF INDEPENDENT ACCOUNTANTS - --------------------------------- To the Board of Directors and Shareholders of MBIA Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of MBIA Inc. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP - ------------------------------ New York, New York February 2, 1999 (44) CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 1998 December 31, 1997 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,565,060 and $4,936,760) $5,884,053 $5,211,311 Short-term investments, at amortized cost (which approximates fair value) 423,194 303,898 Other investments 94,975 51,693 - --------------------------------------------------------------------------------------------------------------------------------- 6,402,222 5,566,902 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,542,077 and $3,241,703) 3,678,229 3,341,394 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS 10,080,451 8,908,296 - --------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 20,757 26,296 Securities borrowed or purchased under agreements to resell 538,281 472,963 Accrued investment income 126,990 121,090 Deferred acquisition costs 230,085 216,165 Prepaid reinsurance premiums 352,699 289,508 Goodwill (less accumulated amortization of $62,423 and $55,788) 120,681 121,642 Property and equipment, at cost (less accumulated depreciation of $39,934 and $31,882) 81,457 66,709 Receivable for investments sold 49,497 13,435 Other assets 195,666 148,887 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $11,796,564 $10,384,991 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $2,251,211 $2,090,460 Loss and loss adjustment expense reserves 270,114 103,061 Municipal investment agreements 2,587,339 1,974,165 Municipal repurchase agreements 897,718 1,177,022 Long-term debt 688,996 488,878 Short-term debt --- 20,000 Securities loaned or sold under agreements to repurchase 573,352 606,263 Deferred income taxes 343,896 298,498 Deferred fee revenue 42,964 48,126 Payable for investments purchased 95,598 44,007 Other liabilities 253,159 172,999 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 8,004,347 7,023,479 - --------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares-- 10,000,000; issued and outstanding--none --- --- Common stock, par value $1 per share; authorized shares-- 200,000,000; issued shares--99,569,625 and 98,754,487 99,570 98,754 Additional paid-in capital 1,169,192 1,133,950 Retained earnings 2,246,221 1,901,608 Accumulated other comprehensive income, net of deferred income taxes of $157,410 and $132,026 288,915 236,095 Unallocated ESOP shares (4,044) (4,083) Unearned compensation--restricted stock (6,807) (4,812) Treasury stock--21,717 shares in 1998 (830) --- - --------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 3,792,217 3,361,512 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,796,564 $10,384,991 - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended December 31 --------------------------------------------------- Dollars in thousands except per share amounts 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- INSURANCE Revenues: Gross premiums written $677,050 $653,848 $535,282 Ceded premiums (156,064) (116,526) (69,956) - --------------------------------------------------------------------------------------------------------------------------- Net premiums written 520,986 537,322 465,326 Increase in deferred premium revenue (96,436) (185,827) (171,288) - --------------------------------------------------------------------------------------------------------------------------- Premiums earned (net of ceded premiums of $92,873, $62,353 and $48,679) 424,550 351,495 294,038 Net investment income 331,802 301,998 265,147 Net realized gains 29,962 16,903 9,936 Advisory fees 26,130 17,110 10,786 - --------------------------------------------------------------------------------------------------------------------------- Total insurance revenues 812,444 687,506 579,907 Expenses: Losses and loss adjustment 34,683 31,877 20,149 Policy acquisition costs, net 34,613 34,897 30,016 Operating 70,330 74,075 66,720 - --------------------------------------------------------------------------------------------------------------------------- Total insurance expenses 139,626 140,849 116,885 - --------------------------------------------------------------------------------------------------------------------------- Insurance income 672,818 546,657 463,022 - --------------------------------------------------------------------------------------------------------------------------- INVESTMENT MANAGEMENT SERVICES Revenues 65,032 49,999 47,115 Expenses 36,012 32,958 29,328 - --------------------------------------------------------------------------------------------------------------------------- Operating income 29,020 17,041 17,787 Net realized gains 14,179 3,416 2,572 - --------------------------------------------------------------------------------------------------------------------------- Investment management services income 43,199 20,457 20,359 - --------------------------------------------------------------------------------------------------------------------------- MUNICIPAL AND FINANCIAL SERVICES Revenues 29,392 25,189 1,399 Expenses 40,682 20,694 274 - --------------------------------------------------------------------------------------------------------------------------- Operating (loss) income (11,290) 4,495 1,125 Net realized losses (9,165) --- --- - --------------------------------------------------------------------------------------------------------------------------- Municipal and financial services (loss) income (20,455) 4,495 1,125 - --------------------------------------------------------------------------------------------------------------------------- CORPORATE Interest expense 44,620 38,645 34,665 Other expenses 85,904 7,712 1,426 - --------------------------------------------------------------------------------------------------------------------------- Corporate expenses (130,524) (46,357) (36,091) - --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 565,038 525,252 448,415 Provision for income taxes 132,310 119,642 100,679 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $432,728 $405,610 $347,736 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: BASIC $4.37 $4.18 $3.68 DILUTED $4.32 $4.12 $3.62 - --------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding: Basic 98,978,641 96,937,314 94,368,038 Diluted 100,163,014 98,344,163 96,159,066 - ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Additional Other --------------------- Paid-in Retained Comprehensive In thousands except per share amounts Shares Amount Capital Earnings Income - -------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1996 92,810 $92,810 $906,182 $1,296,311 $212,924 - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 347,736 -- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $50,874 -- -- -- -- (93,738) Change in foreign currency translation -- -- -- -- (3,889) Other comprehensive income Total comprehensive income Net proceeds from issuance of shares 1,690 1,690 53,190 -- -- Allocation of ESOP shares -- -- -- -- -- Unearned compensation - restricted stock -- -- -- -- -- Exercise of stock options 958 958 24,931 (1,757) -- Dividends (declared per common share $0.725, paid per common share $0.708) -- -- -- (69,644) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 95,458 95,458 984,303 1,572,646 115,297 - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 405,610 -- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(69,337) -- -- -- -- 128,782 Change in foreign currency translation -- -- -- -- (7,984) Other comprehensive income Total comprehensive income Net proceeds from issuance of shares 2,679 2,679 125,096 -- -- Allocation of ESOP shares -- -- -- -- -- Unearned compensation - restricted stock 67 67 3,729 -- -- Stock issued for acquisition 120 120 6,880 -- -- Exercise of stock options 430 430 13,942 -- -- Dividends (declared per common share $0.770, paid per common share $0.765) -- -- -- (76,648) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 98,754 98,754 1,133,950 1,901,608 236,095 - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 432,728 -- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(25,384) -- -- -- -- 48,042 Change in foreign currency translation -- -- -- -- 4,778 Other comprehensive income Total comprehensive income Treasury shares acquired -- -- 830 -- -- Allocation of ESOP shares -- -- -- -- -- Unearned compensation - restricted stock 71 71 4,449 -- -- Exercise of stock options 745 745 29,963 -- -- Dividends (declared per common share $0.790, paid per common share $0.785) -- -- -- (88,115) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 99,570 $99,570 $1,169,192 $2,246,221 $288,915 - -------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Con't) For the years ended December 31, 1998, 1997 and 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Unearned Unallocated Compensation Treasury Stock Total ESOP Restricted --------------------- Shareholders' In thousands except per share amounts Shares Stock Shares Amount Equity - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, JANUARY 1, 1996 $(6,497) $(426) $(148) $(4,086) $2,497,218 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income -- -- -- -- 347,736 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $50,874 -- -- -- -- (93,738) Change in foreign currency translation -- -- -- -- (3,889) ------------ Other comprehensive income (97,627) ------------ Total comprehensive income 250,109 ------------ Net proceeds from issuance of shares -- -- -- -- 54,880 Allocation of ESOP shares 1,067 -- -- -- 1,067 Unearned compensation - restricted stock -- (625) -- -- (625) Exercise of stock options -- -- 148 4,086 28,218 Dividends (declared per common share $0.725, paid per common share $0.708) -- -- -- -- (69,644) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 (5,430) (1,051) -- -- 2,761,223 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income -- -- -- -- 405,610 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(69,337) -- -- -- -- 128,782 Change in foreign currency translation -- -- -- -- (7,984) ------------ Other comprehensive income 120,798 ------------ Total comprehensive income 526,408 ------------ Net proceeds from issuance of shares -- -- -- -- 127,775 Allocation of ESOP shares 1,347 -- -- -- 1,347 Unearned compensation - restricted stock -- (3,761) -- -- 35 Stock issued for acquisition -- -- -- -- 7,000 Exercise of stock options -- -- -- -- 14,372 Dividends (declared per common share $0.770, paid per common share $0.765) -- -- -- -- (76,648) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 (4,083) (4,812) -- -- 3,361,512 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income -- -- -- -- 432,728 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(25,384) -- -- -- -- 48,042 Change in foreign currency translation -- -- -- -- 4,778 ------------ Other comprehensive income 52,820 ------------ Total comprehensive income 485,548 ------------ Treasury shares acquired -- -- (22) (830) -- Allocation of ESOP shares 39 -- -- -- 39 Unearned compensation - restricted stock -- (1,995) -- -- 2,525 Exercise of stock options -- -- -- -- 30,708 Dividends (declared per common share $0.790, paid per common share $0.785) -- -- -- -- (88,115) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1998 $(4,044) $(6,807) (22) $(830) $3,792,217 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
DISCLOSURE OF RECLASSIFICATION AMOUNT: 1996 1997 1998 - --------------------------------------------------------------------------------------------------- Unrealized appreciation of investments arising during the period, net of taxes $(85,451) $141,747 $78,142 Reclassification of adjustment, net of taxes (8,287) (12,965) (30,100) -------- -------- ------- Net unrealized appreciation, net of taxes $(93,738) $128,782 $48,042 - ---------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 Dollars in thousands 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $432,728 $405,610 $347,736 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (5,900) (12,501) (18,420) Increase in deferred acquisition costs (13,920) (19,276) (20,088) Increase in prepaid reinsurance premiums (63,191) (54,173) (21,277) Increase in deferred premium revenue 159,627 240,000 192,565 Increase in loss and loss adjustment expense reserves 167,053 32,762 21,246 Depreciation 8,174 6,284 4,949 Amortization of goodwill 9,051 7,751 6,380 Amortization of bond discount, net (22,699) (20,191) (20,933) Net realized gains on sale of investments (34,976) (20,319) (12,508) Deferred income taxes 19,943 13,191 9,521 Other, net 26,155 (30,606) 338 - ---------------------------------------------------------------------------------------------------------------- Total adjustments to net income 249,317 142,922 141,773 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 682,045 548,532 489,509 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (2,479,245) (2,296,490) (1,743,180) Sale of fixed-maturity securities, net of receivable for investments sold 1,102,460 1,336,458 931,033 Redemption of fixed-maturity securities, net of receivable for investments redeemed 745,515 251,793 281,860 Purchase of short-term investments (97,177) (15,022) (5,705) Purchase of other investments (51,769) (559) (394) Sale of other investments 1,785 1,223 862 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (2,456,265) (1,447,004) (1,861,126) Sales from municipal investment agreement portfolio, net of receivable for investments sold 2,218,342 1,487,437 1,264,033 Capital expenditures, net of disposals (22,909) (17,369) (10,150) Other, net (8,098) (14,554) (2,445) - ---------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,047,361) (714,087) (1,145,212) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock -- 127,775 54,880 Net proceeds from issuance of long-term debt 197,113 98,880 --- Net (repayment) proceeds from (retirement) issuance of short-term debt (20,000) (9,100) 11,100 Dividends paid (85,667) (76,743) (69,795) Proceeds from issuance of municipal 2,352,908 1,823,422 2,242,872 investment and repurchase agreements Payments for drawdowns of municipal investment (2,017,056) (1,930,321) (1,628,310) investment and repurchase agreements Securities loaned or sold under agreements to (98,229) 133,300 --- to repurchase, net Exercise of stock options 30,708 14,372 28,218 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 359,777 181,585 638,965 - ---------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (5,539) 16,030 (16,738) Cash and cash equivalents - beginning of year 26,296 10,266 27,004 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $20,757 $26,296 $10,266 - ---------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Income tax paid $108,297 $103,065 $79,671 Interest paid: Municipal investment and repurchase agreements $202,502 $195,344 $172,237 Long-term debt 39,499 32,953 32,850 Short-term debt 1,057 2,017 1,309 - ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 1: BUSINESS AND ORGANIZATION - --------------------------------- MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. The company operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). Effective December 31, 1989, the company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been accounted for as a purchase, and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In 1990, the company formed MBIA Assurance, S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Services Corporation (MBIA-MISC) was formed as a wholly owned subsidiary of the company. MBIA-MISC operates cooperative cash management programs for school districts and municipalities. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for the company, its municipal cash management service businesses and public pension funds. In 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public-sector clients. In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc., which was subsequently renamed MBIA MuniServices Company (MBIA MuniServices). Also in 1996, MBIA MuniServices acquired an interest in Capital Asset Holdings, Inc. (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. In December 1998, MBIA MuniServices acquired Capital Asset's founder's equity interest. In January 1997, MBIA MuniServices acquired a 95 percent interest in the Municipal Tax Bureau (MTB) of Philadelphia, a provider of tax compliance services to state and local governments. In July 1997, MBIA MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was acquired. On February 17, 1998, MBIA Inc. consummated a merger with CapMAC Holdings Inc. (CapMAC). CapMAC operated its insurance business primarily through its wholly owned subsidiary, Capital Markets Assurance Corporation (CMAC). On July 31, 1998, MBIA Inc. completed a merger of its investment management business with 1838 Investment Advisors (1838). See Note 3 for details on these two mergers. In June 1998, MBIA Asset Management Corporation (MBIA-AMC) was formed as a wholly owned subsidiary of the company to consolidate the resources and capabilities of our investment management services. In July 1998, the company contributed the common stock of MBIA-MISC, IMC, CMC and 1838 to MBIA-AMC. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------- The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of the company and its significant subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS The company's entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholders' equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds, the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixed-maturity securities--other than those held in the municipal investment agreement portfolio--with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. (49) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services revenues. Municipal investment agreement portfolio accrued interest income, receivables for investments sold, and payables for investments purchased are included in the respective consolidated accounts. Other investments include the company's interest in a limited partnership, a mutual fund that invests principally in marketable equity securities and other equity investments. The company records dividends from these investments as a component of investment income. In addition, the company records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Upfront premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Installment premiums are earned over each installment period--generally one year or less. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue is earned at that time, since there is no longer risk to the company. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. ADVISORY FEE REVENUE RECOGNITION The company collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of all other subsidiaries is amortized by the straight-line method over 15 years. PROPERTY AND EQUIPMENT Property and equipment consist of the company's headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated by the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expense as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses (LAE) reserves are established in an amount equal to the company's estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries under salvage and subrogation rights. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of bond defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management of the company periodically reevaluates its estimates for losses and LAE, and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims; however, because the reserves are based on estimates, there can be no assurance that the ultimate liability will not exceed such estimates. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet at the time such agreements are executed. The liabilities for municipal investment and repurchase agreements are carried at the face value of the agreement plus accrued interest, whereas the related assets are recorded at fair value. Investment management services revenues include investment income on the assets underlying the municipal investment agreement portfolio, net of interest expense at rates specified in the agreements, computed daily based upon the outstanding balances. (50) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries DERIVATIVES The company's policies with respect to the use of derivative financial instruments include limitations with respect to the amount, type and concentration of such instruments. The company uses interest rate swaps for hedging purposes as part of its overall risk management strategy. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in current period income. At year-end 1998, the company's exposure to derivative financial instruments was not material. INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services revenues are comprised of the net investment income and operating revenues of MBIA-MISC, IMC, CMC and 1838. The operating expenses of MBIA-MISC, IMC, CMC and 1838 are reported in investment management services expenses. MUNICIPAL AND FINANCIAL SERVICES OPERATIONS Municipal and financial services revenues are comprised of the net investment income and operating revenues of MTB, MuniFinancial, MRC and Capital Asset. The operating expenses of MTB, MuniFinancial, MRC and Capital Asset are reported in municipal and financial services expenses. CORPORATE EXPENSES Corporate expenses consist of interest expenses, non-insurance goodwill amortization, general corporate overhead expenses and non-recurring charges. INCOME TAXES Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest-bearing U.S. Government tax and loss bonds. The company records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time the company may present the tax and loss bonds for redemption to satisfy the additional tax liability. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholders' equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. NOTE 3: MERGERS WITH CAPMAC AND 1838 - ------------------------------------- On February 17, 1998, the company consummated a merger with CapMAC by exchanging 8.1 million shares of its common stock for all of the common stock of CapMAC. Each share of CapMAC was exchanged for 0.4675 of one share of MBIA Inc. common stock. On July 31, 1998, the company completed a merger of its investment management business with 1838 through the issuance of 1.1 million shares of common stock. Each share of 1838 was exchanged for 2.134 shares of MBIA Inc. The mergers constituted tax-free reorganizations and have been accounted for as pooling of interests under Accounting Principles Board (APB) Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of CapMAC and 1838 as though they had always been a part of MBIA Inc. There were no transactions between MBIA Inc., CapMAC and/or 1838 prior to the combinations, and immaterial adjustments were recorded to conform CapMAC's and 1838's accounting policies. Certain reclassifications were made to the CapMAC and 1838 financial statements to conform to the company's presentations. The results of operations for the separate companies and the combined amounts for 1997 and 1996 presented in the consolidated financial statements follow: Years ended December 31 - ------------------------------------------------------------------ In thousands 1997 1996 - ------------------------------------------------------------------ Premiums earned MBIA $299,335 $253,481 CapMAC 52,160 40,557 - ------------------------------------------------------------------ Combined $351,495 $294,038 - ------------------------------------------------------------------ Net income MBIA $374,176 $322,163 CapMAC 23,989 19,679 1838 7,445 5,894 - ------------------------------------------------------------------ Combined $405,610 $347,736 - ------------------------------------------------------------------ For the six-month period ended June 30, 1998, 1838's revenues and net income were $12.6 million and $4.6 million, respectively. Effective April 1, 1998, CMAC ceded its portfolio of net insured obligations in exchange for cash and investments equal to its statutory unearned premium and contingency reserves of $176 million to MBIA Corp. Subsequent to this cession, the company contributed the common stock of CMAC to MBIA Corp. (51) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In March 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Statement requires that entities capitalize certain internal-use software costs once certain criteria are met. The statement is effective for fiscal years beginning after December 15, 1998. The company will adopt SOP 98-1 in 1999. Adoption of SOP 98-1 is not expected to have a material impact on the consolidated financial statements. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for fiscal years beginning after June 15, 1999. The company will adopt SFAS 133 by January 1, 2000. Adoption of SFAS 133 is not expected to have a material impact on the consolidated financial statements. NOTE 5: STATUTORY ACCOUNTING PRACTICES - --------------------------------------- The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established at present value for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on the company's reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. The following is a reconciliation of consolidated shareholders' equity presented on a GAAP basis for the company and its consolidated subsidiaries to statutory capital and surplus for MBIA Corp. and its subsidiaries: As of December 31 - ---------------------------------------------------------- In thousands 1998 1997 - ---------------------------------------------------------- Company's GAAP shareholders' equity $3,792,217 $3,361,512 Contributions to MBIA Corp. 485,738 459,567 Premium revenue recognition (448,250) (413,729) Deferral of acquisition costs (230,085) (216,165) Unrealized gains (450,587) (377,161) Contingency reserve (1,450,413) (1,187,882) Loss and LAE reserves 81,489 77,816 Deferred income taxes 348,534 298,498 Tax and loss bonds 162,523 130,055 Goodwill (90,950) (95,829) Other 89,753 (85,172) - ---------------------------------------------------------- Statutory capital and surplus $2,289,969 $1,951,510 - ---------------------------------------------------------- Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 1998, 1997 and 1996 was $509.9 million, $404.4 million and $335.3 million, respectively. NOTE 6: PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - ------------------------------------------------------- Premiums earned include $68.4 million, $50.9 million and $44.4 million for 1998, 1997 and 1996, respectively, related to refunded and called bonds. NOTE 7: INVESTMENTS - -------------------- The company's investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. The company's investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of high-quality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of the company, as of December 31, 1998 and 1997. (52) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------ December 31, 1998 Taxable bonds United States Treasury and Government Agency $ 517,015 $ 47,637 $ (351) $ 564,301 Corporate and other obligations 3,555,858 145,224 (3,875) 3,697,207 Mortgage-backed 1,684,081 27,918 (965) 1,711,034 Tax-exempt bonds State and municipal obligations 3,773,377 241,200 (1,643) 4,012,934 - ------------------------------------------------------------------------------ Total $9,530,331 $461,979 $(6,834) $9,985,476 - ------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------ December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 547,206 $ 30,668 $ (4) $ 577,870 Corporate and other obligations 3,156,676 96,520 (1,114) 3,252,082 Mortgage-backed 1,495,667 30,579 (1,054) 1,525,192 Tax-exempt bonds State and municipal obligations 3,282,812 219,613 (966) 3,501,459 - ------------------------------------------------------------------------------- Total $8,482,361 $377,380 $(3,138) $8,856,603 - ------------------------------------------------------------------------------ Fixed-maturity investments carried at fair value of $12.0 million as of December 31, 1998 and 1997 were on deposit with various regulatory authorities to comply with insurance laws. A portion of the obligations under municipal investment and repurchase agreements require the company to pledge securities as collateral. As of December 31, 1998 and 1997, the fair value of securities pledged as collateral with respect to these obligations approximated $1.9 billion and $1.8 billion, respectively. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1998. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Fair In thousands Cost Value - ----------------------------------------------------------------------- Within 1 year $ 609,214 $ 609,214 Beyond 1 yr but within 5 yrs 1,611,852 1,659,022 Beyond 5 yrs but within 10 yrs 1,803,020 1,913,486 Beyond 10 yrs but within 15 yrs 1,040,833 1,137,264 Beyond 15 yrs but within 20 yrs 1,203,057 1,286,931 Beyond 20 yrs 1,578,274 1,668,525 - ----------------------------------------------------------------------- 7,846,250 8,274,442 Mortgage-backed 1,684,081 1,711,034 - ----------------------------------------------------------------------- Total fixed-maturities and short-term investments $9,530,331 $9,985,476 - ----------------------------------------------------------------------- NOTE 8: INVESTMENT INCOME AND GAINS AND LOSSES - ----------------------------------------------- Investment income consists of: Years ended December 31 - ------------------------------------------------------------------------- In thousands 1998 1997 1996 - ------------------------------------------------------------------------- Fixed-maturities $331,857 $299,069 $261,200 Short-term investments 5,692 8,042 7,463 Other investments 16 (1,542) (383) - ------------------------------------------------------------------------- Gross investment income 337,565 305,569 268,280 Investment expenses 5,763 3,571 3,133 Net investment income 331,802 301,998 265,147 - ------------------------------------------------------------------------- Net realized gains (losses): Fixed-maturities Gains 32,211 25,963 17,532 Losses (3,149) (5,877) (5,889) - ------------------------------------------------------------------------- Net 29,062 20,086 11,643 - ------------------------------------------------------------------------- Other investments Gains 901 564 333 Losses (1) (3,747) (2,040) - ------------------------------------------------------------------------- Net 900 (3,183) (1,707) - ------------------------------------------------------------------------- Total net realized gains 29,962 16,903 9,936 - ------------------------------------------------------------------------- Total investment income $361,764 $318,901 $275,083 - ------------------------------------------------------------------------- Total investment income excludes investment income and realized gains and losses from our investment management and municipal and financial services segments. Net unrealized gains consist of: (53) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries As of December 31 - --------------------------------------------------------- In thousands 1998 1997 - --------------------------------------------------------- Fixed-maturities: Gains $461,979 $377,380 Losses (6,834) (3,138) - --------------------------------------------------------- Net 455,145 374,242 - --------------------------------------------------------- Other investments: Gains 2,936 2,976 Losses (7,494) (57) - --------------------------------------------------------- Net (4,558) 2,919 - --------------------------------------------------------- Total 450,587 377,161 Deferred income taxes 157,410 132,026 - --------------------------------------------------------- Unrealized gains, net $293,177 $245,135 - --------------------------------------------------------- The deferred income taxes relate primarily to unrealized gains and losses on the company's fixed-maturity investments, which are reflected in shareholders' equity. The change in net unrealized gains (losses) consists of: Years ended December 31 - ------------------------------------------------------------- In thousands 1998 1997 1996 - ------------------------------------------------------------- Fixed-maturities $80,903 $196,042 $(146,050) Other investments (7,477) 2,077 1,438 - ------------------------------------------------------------- Total 73,426 198,119 (144,612) Deferred income taxes 25,384 69,337 (50,874) - ------------------------------------------------------------- Unrealized gains (losses), net $48,042 $128,782 $ (93,738) - ------------------------------------------------------------- NOTE 9: INCOME TAXES - --------------------- The company files a consolidated tax return that includes all of its U.S. subsidiaries. The provision for income taxes is composed of: Years ended December 31 - ------------------------------------------------------------- In thousands 1998 1997 1996 - ------------------------------------------------------------- Current $112,367 $106,452 $ 91,158 Deferred 19,943 13,190 9,521 - ------------------------------------------------------------- Total $132,310 $119,642 $100,679 - ------------------------------------------------------------- The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, the company's effective income tax rate differs from the statutory rate on ordinary income. The reasons for the company's lower effective tax rates are as follows: Years ended December 31 - --------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------- Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (10.8) (10.6) (12.1) Amortization of goodwill 0.4 0.3 0.4 Other (1.2) (1.9) (0.8) - --------------------------------------------------------------- Provision for income taxes 23.4% 22.8% 22.5% - --------------------------------------------------------------- The company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1998 and 1997 are presented below: In thousands 1998 1997 - ------------------------------------------------------------------ Deferred tax assets: Tax and loss bonds $160,064 $130,080 Alternative minimum tax credit carryforward 54,722 62,279 Loss and loss adjustment expense reserves 26,458 23,762 Other 53,745 92,099 - ------------------------------------------------------------------ Total gross deferred tax assets 294,989 308,220 - ------------------------------------------------------------------ Deferred tax liabilities: Contingency reserve 280,203 229,389 Deferred premium revenue 106,555 154,240 Deferred acquisition costs 77,953 73,081 Unrealized gains 157,410 132,026 Contingent commissions 408 408 Other 16,356 17,574 - ------------------------------------------------------------------ Total gross deferred tax liabilities 638,885 606,718 - ------------------------------------------------------------------ Net deferred tax liability $343,896 $298,498 - ------------------------------------------------------------------ The company believes that a valuation allowance is unnecessary in connection with the deferred tax assets. NOTE 10: NET INCOME PER COMMON SHARE - ------------------------------------- In February 1997, the FASB issued SFAS 128, "Earnings per Share," effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 established standards for computing and presenting earnings per share (EPS). Under the new standard, basic EPS is computed by dividing income applicable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the additional dilution that could occur from employee stock options and other items that could potentially result in the issuance of common stock. The company has adopted this Statement and, as required, has restated all prior-period EPS data presented. The following table provides a reconciliation of the denominator of the basic EPS computation to the denominator of the diluted EPS computation: (54) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Years ended December 31 - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Net income (in thousands) $432,728 $405,610 $347,736 Basic weighted average shares 98,978,641 96,937,314 94,368,038 Effect of stock options 1,184,373 1,406,849 1,791,028 - ------------------------------------------------------------------------------- Diluted weighted average shares 100,163,014 98,344,163 96,159,066 - ------------------------------------------------------------------------------- Basic EPS $4.37 $4.18 $3.68 Diluted EPS $4.32 $4.12 $3.62 - ------------------------------------------------------------------------------- Options to purchase 621,244, 292,100 and 256,028 shares of common stock during 1998, 1997 and 1996, respectively, were not included in the computation of diluted EPS because the options exercise price was greater than the average market price of common shares during the respective years. NOTE 11: BUSINESS SEGMENTS - --------------------------- MBIA Inc., through its subsidiaries, is a leading provider of financial guarantee and specialized financial services. MBIA provides innovative and cost-effective products and services that meet the credit enhancement, financial and investment needs of its public- and private-sector clients, domestically and internationally. MBIA Inc. has three principal businesses: financial guarantee, investment management services, and municipal & financial services. Each of these is a business segment, with its respective financial performance detailed in this report. Financial guarantee business provides an unconditional and irrevocable guarantee of the payment of principal and interest on insured obligations when due. Investment management services business provides an array of products and services to the public and not-for-profit sectors. These include local government investment pools, investment agreements, and discretionary and non-discretionary portfolio management services. Municipal and financial services business purchases and services municipal real estate tax lien certificates and provides tax compliance services to public sector entities. Business segment results are presented gross of intersegment transactions, which are not material to each segment. The following provides each business segment's revenues, operating income, income (loss) and assets: Year ended December 31, 1998 - -------------------------------------------------------------------------------- Investment Municipal & Financial Management Financial In thousands Guarantee Services Services Total - ------------------------------------------------------------------------------- Operating revenues $ 782,482 $ 65,032 $ 29,392 $ 876,906 Expenses (139,626) (36,012) (40,682) (216,320) - -------------------------------------------------------------------------------- Operating income 642,856 29,020 (11,290) 660,586 Realized gains (losses) 29,962 14,179 (9,165) 34,976 - -------------------------------------------------------------------------------- Income (loss) from segments $ 672,818 $ 43,199 $(20,455) 695,562 - -------------------------------------------------------------------------------- Corporate expenses (130,524) - -------------------------------------------------------------------------------- Pretax income $ 565,038 - -------------------------------------------------------------------------------- Segment assets $7,133,425 $4,497,333 $165,806 $11,796,564 - -------------------------------------------------------------------------------- Year ended December 31, 1997 - -------------------------------------------------------------------------------- Investment Municipal & Financial Management Financial In thousands Guarantee Services Services Total - ------------------------------------------------------------------------------- Operating revenues $ 670,603 $ 49,999 $ 25,189 $ 745,791 Expenses (140,849) (32,958) (20,694) (194,501) - ------------------------------------------------------------------------------- Operating income 529,754 17,041 4,495 551,290 Realized gains 16,903 3,416 --- 20,319 - ------------------------------------------------------------------------------- Income from segments $ 546,657 $ 20,457 $ 4,495 571,609 - ------------------------------------------------------------------------------- Corporate expenses (46,357) - ------------------------------------------------------------------------------- Pretax income $ 525,252 - ------------------------------------------------------------------------------- Segment assets $6,200,516 $4,082,446 $102,029 $10,384,991 - ------------------------------------------------------------------------------- (55) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Year ended December 31, 1996 - -------------------------------------------------------------------------------- Investment Municipal & Financial Management Financial In thousands Guarantee Services Services Total - ------------------------------------------------------------------------------- Operating revenues $ 569,971 $ 47,115 $ 1,399 $ 618,485 Expenses (116,885) (29,328) (274) (146,487) - -------------------------------------------------------------------------------- Operating income 453,086 17,787 1,125 471,998 Realized gains 9,936 2,572 --- 12,508 - -------------------------------------------------------------------------------- Income from segments $ 463,022 $ 20,359 $ 1,125 484,506 - -------------------------------------------------------------------------------- Corporate expenses (36,091) - -------------------------------------------------------------------------------- Pretax income $ 448,415 - -------------------------------------------------------------------------------- Segment assets $5,319,809 $3,679,974 $31,094 $9,030,877 - -------------------------------------------------------------------------------- NOTE 12: STOCK SPLIT - --------------------- On September 17, 1997, the board of directors approved a two-for-one stock split, to be effected in the form of a 100% stock dividend payable on October 29, 1997 to shareholders of record as of October 1, 1997. An amount equal to the par value of common shares issued was transferred from additional paid-in capital to the common stock account. This transfer has been reflected in the Consolidated Statements of Changes in Shareholders' Equity at January 1, 1996. All references to the number of common shares, except shares authorized, and to per share information in the consolidated financial statements and related notes, have been adjusted to reflect the stock split on a retroactive basis. NOTE 13: DIVIDENDS AND CAPITAL REQUIREMENTS - -------------------------------------------- Under New York state insurance law, MBIA Corp. may pay dividends only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory basis financial statements or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. In accordance with such restrictions on the amount of dividends that can be paid in any 12-month period, MBIA Corp. had in excess of $228 million available for the payment of dividends to the company as of December 31, 1998. In 1998 and 1997, no dividends were paid by MBIA Corp. to the company due to cash available from financing activities. In 1996, MBIA Corp. declared and paid dividends of $29 million to the company. The insurance departments of New York state and certain other statutory insurance regulatory authorities, and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries, have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1998. NOTE 14: LONG-TERM DEBT AND LINES OF CREDIT - -------------------------------------------- Long-term debt consists of: As of December 31 - --------------------------------------------------- In thousands 1998 1997 - --------------------------------------------------- 7.520% Notes due 1999-2002 $ 15,000 $ 15,000 9.000% Notes due 2001 100,000 100,000 9.375% Notes due 2011 100,000 100,000 8.200% Debentures due 2022 100,000 100,000 7.000% Debentures due 2025 75,000 75,000 7.150% Debentures due 2027 100,000 100,000 6.625% Debentures due 2028 150,000 --- 6.950% Notes due 2038 50,000 --- - --------------------------------------------------- 690,000 490,000 Less unamortized discount 1,004 1,122 - --------------------------------------------------- Total $688,996 $488,878 - --------------------------------------------------- The company's long-term debt is subject to certain covenants, none of which significantly restrict the company's operating activities or dividend-paying ability. MBIA Corp. has a standby line of credit commitment in the amount of $825 million with a group of major Triple-A-rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from October 7, 1998 in excess of the greater of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on October 31, 2005, and contains an annual renewal provision subject to approval by the bank group. CMAC maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. The company and MBIA Corp. maintain bank liquidity facilities totaling $650 million. During 1998, these facilities replaced existing facilities aggregating $450 million. At December 31, 1997, $20 million was outstanding under those facilities. The company has outstanding letters of credit for MBIA-MISC that are intended to support the net asset value of certain investment pools managed by MBIA-MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. (56) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 15: OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS - -------------------------------------------------------------------------------- Obligations under municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet based upon proceeds received plus unpaid accrued interest from that date. Upon the occurrence of certain contractually agreed-upon events, some of these funds may be withdrawn at various times prior to maturity at the option of the investor. As of December 31, 1998, the interest rates on these agreements ranged from 2.5% to 8.02%. Principal payments due under these investment agreements in each of the next five years ending December 31 and thereafter, based upon expected withdrawal dates, were as follows: In thousands Principal Amount - ---------------------------------------------------- Expected withdrawal date: 1999 $1,170,515 2000 702,480 2001 284,307 2002 131,305 2003 49,329 Thereafter 1,112,543 - ---------------------------------------------------- Total $3,450,479 - ---------------------------------------------------- IMC also provides agreements obligating it to purchase designated securities in a bond reserve fund at par value upon the occurrence of certain contractually agreed-upon events. The opportunities and risks in these agreements are analogous to those of municipal investment agreements and municipal repurchase agreements. The total par value of securities subject to these agreements was $43 million at December 31, 1998. NOTE 16: NET INSURANCE IN FORCE - -------------------------------- MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. As of December 31, 1998, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-41 years. The distribution of net insurance in force by geographic location, excluding $3.5 billion and $3.2 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 1998 and 1997, respectively, is set forth in the following table:
As of December 31 - ------------------------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------- --------------------------------- Net Number % of Net Net Number % of Net $ in billions Insurance of Issues Insurance Insurance of Issues Insurance Geographic Location In Force Outstanding In Force In Force Outstanding In Force - ----------------------------------------------------------------- --------------------------------- Domestic: California $ 76.3 3,681 12.8% $ 68.8 3,455 13.4% New York 61.6 5,310 10.3 38.2 5,057 7.4 Florida 36.1 1,589 6.1 33.1 1,578 6.5 New Jersey 26.2 1,884 4.4 24.7 1,885 4.8 Texas 25.3 2,131 4.2 24.7 2,099 4.8 Pennsylvania 24.7 2,278 4.1 23.0 2,262 4.5 Illinois 23.7 1,275 4.0 20.3 1,236 4.0 Massachusetts 18.4 1,107 3.1 15.5 1,089 3.0 Michigan 14.6 1,066 2.5 11.2 1,032 2.2 Ohio 13.8 1,076 2.3 12.5 1,014 2.4 Subtotal 320.7 21,397 53.8 272.0 20,707 53.0 Nationally diversified 81.7 842 13.7 75.3 746 14.6 Other states 169.0 12,004 28.4 148.3 11,532 28.9 - ------------------------------------------------------------------------------------------------------- Total domestic 571.4 34,243 95.9 495.6 32,985 96.5 International 24.5 323 4.1 18.1 279 3.5 - ------------------------------------------------------------------------------------------------------- Total $595.9 34,566 100.0% $513.7 33,264 100.0% - -------------------------------------------------------------------------------------------------------
(57) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance, and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. Under certain MBIA Corp.'s structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under its insurance contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA Corp.'s primary risk from such insurance contracts is the impairment of cash flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore evaluates all the factors affecting past and future asset performance by studying historical data on losses, delinquencies and recoveries of the underlying assets. Each transaction is reviewed to ensure that an appropriate legal structure is used to protect against the bankruptcy risk of the originator of the assets. Along with the legal structure, an additional level of first-loss protection is also created to protect against losses due to credit or dilution. This first level of loss protection is usually available from reserve funds, excess cash flows, overcollateralization or recourse to a third party. The level of first-loss protection depends upon the historical losses and dilution of the underlying assets, but is typically several times the normal historical loss experience for the underlying type of assets. The distribution of net insurance in force by type of bond is set forth in the table below:
As of December 31 - --------------------------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------- --------------------------------- Net Number % of Net Net Number % of Net $ in billions Insurance of Issues Insurance Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force - ------------------------------------------------------------- --------------------------------- Domestic: Municipal: General obligation $140.7 12,694 23.6% $119.5 12,096 23.3% Utilities 80.9 4,895 13.6 75.4 4,775 14.7 Health care 70.9 2,241 11.9 62.2 2,248 12.1 Transportation 46.2 1,543 7.7 40.6 1,503 7.9 Special revenue 42.8 1,787 7.2 34.2 1,653 6.7 Higher education 26.7 1,498 4.5 20.6 1,366 4.0 Housing 22.3 2,161 3.7 18.9 1,896 3.7 Industrial development and pollution control revenue 19.4 1,037 3.3 19.6 943 3.8 Other 5.6 75 0.9 12.5 543 2.4 - ------------------------------------------------------------- --------------------------------- Total municipal 455.5 27,931 76.4 403.5 27,023 78.6 - ------------------------------------------------------------- --------------------------------- Structured finance* 97.1 850 16.3 74.8 709 14.5 - ------------------------------------------------------------- --------------------------------- Other: Investor-owned utilities 13.0 5,068 2.2 11.0 4,872 2.2 Financial institution 5.4 381 0.9 5.8 366 1.1 Corporate direct 0.4 13 0.1 0.5 15 0.1 - ------------------------------------------------------------- --------------------------------- Total other 18.8 5,462 3.2 17.3 5,253 3.4 - ------------------------------------------------------------- --------------------------------- Total domestic 571.4 34,243 95.9 495.6 32,985 96.5 - ------------------------------------------------------------- --------------------------------- International Infrastructure: Sovereign 1.6 32 0.3 1.9 35 0.4 Transportation 1.4 12 0.2 0.8 5 0.1 Sub-sovereign 1.2 44 0.2 1.4 53 0.3 Higher education 0.9 13 0.1 0.6 1 0.1 Housing 0.6 3 0.1 0.3 2 0.1 Health care 0.4 6 0.1 0.2 6 -- Utilities 0.4 4 0.1 0.8 60 0.2 - ------------------------------------------------------------- --------------------------------- Total infrastructure 6.5 114 1.1 6.0 162 1.2 - ------------------------------------------------------------- --------------------------------- Structured finance* 14.8 102 2.5 9.3 76 1.8 Other: Investor-owned utilities 1.8 72 0.3 0.6 7 0.1 Financial institution 1.0 29 0.1 1.9 25 0.4 Corporate direct 0.4 6 0.1 0.3 9 -- - ------------------------------------------------------------- --------------------------------- Total other 3.2 107 0.5 2.8 41 0.5 - ------------------------------------------------------------- --------------------------------- Total international 24.5 323 4.1 18.1 279 3.5 - ------------------------------------------------------------- --------------------------------- Total $595.9 34,566 100.0% $513.7 33,264 100.0% - ------------------------------------------------------------- --------------------------------- *Asset-/mortgage-backed
(58) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 17: REINSURANCE - --------------------- MBIA Corp. reinsures exposure with other insurance companies under various treaty and facultative reinsurance contracts, both on a pro rata and excess of loss basis. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $108.2 billion and $76.6 billion at December 31, 1998 and 1997, respectively. The distribution of ceded insurance in force by type of bond and geographic location is set forth in the following tables: As of December 31 ------------------------------------------------ 1998 1997 ----------------------- ----------------------- % of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - --------------------------------------------- ----------------------- Domestic Municipal: Utilities $ 15.5 14.3% $11.6 15.1% General obligation 15.4 14.2 12.3 16.1 Health care 13.4 12.4 8.0 10.5 Transportation 10.6 9.8 9.6 12.5 Special revenue 5.8 5.3 5.0 6.5 Industrial development and pollution control revenue 3.8 3.5 3.3 4.3 Housing 2.3 2.1 1.7 2.2 Higher education 1.7 1.6 1.3 1.7 Other 1.2 1.1 2.7 3.5 - --------------------------------------------- ---------------------- Total municipal 69.7 64.3 55.5 72.4 Structured finance* 19.5 18.0 8.4 11.0 - --------------------------------------------- ---------------------- Other: Investor-owned utilities 1.3 1.2 0.5 0.6 Financial inst. 0.9 0.8 1.3 1.7 Corporate direct 0.1 0.1 0.2 0.3 - --------------------------------------------- ---------------------- Total other 2.3 2.1 2.0 2.6 - --------------------------------------------- ---------------------- Total domestic 91.5 84.4 65.9 86.0 - --------------------------------------------- ---------------------- International Infrastructure: Transportation 1.3 1.2 0.4 0.5 Higher education 1.0 0.9 0.7 0.9 Sovereign 0.8 0.7 1.0 1.3 Sub-sovereign 0.4 0.4 0.6 0.8 Utilities 0.4 0.4 -- -- Health care 0.2 0.2 0.2 0.3 Housing 0.1 0.1 -- -- - --------------------------------------------- ---------------------- Total infrastructure 4.2 3.9 2.9 3.8 - --------------------------------------------- ---------------------- Structured finance* 11.1 10.3 6.6 8.6 - --------------------------------------------- ---------------------- Other: Financial inst 0.5 0.5 1.0 1.3 Corporate direct 0.5 0.5 -- -- Investor-owned utilities 0.4 0.4 0.2 0.3 - --------------------------------------------- ---------------------- Total other 1.4 1.4 1.2 1.6 - --------------------------------------------- ---------------------- Total int'l 16.7 15.6 10.7 14.0 - --------------------------------------------- ---------------------- Total $108.2 100.0% $76.6 100.0% - --------------------------------------------- ---------------------- * Asset-/mortgage-backed As of December 31 ------------------------------------------------ 1998 1997 ----------------------- ----------------------- % of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - --------------------------------------------- ----------------------- Domestic: California $ 12.4 11.5% $10.4 13.6% New York 10.7 9.9 6.1 8.0 New Jersey 5.4 5.0 3.7 4.9 Texas 5.3 4.9 4.0 5.2 Pennsylvania 3.8 3.5 3.0 3.9 Massachusetts 3.7 3.4 3.0 3.9 Illinois 3.4 3.1 2.7 3.5 Florida 3.2 3.0 2.6 3.4 Puerto Rico 3.1 2.9 2.4 3.1 Colorado 2.3 2.1 2.4 3.1 - --------------------------------------------- ----------------------- Subtotal 53.3 49.3 40.3 52.6 Nationally diversified 14.6 13.5 8.3 10.8 Other states 23.6 21.8 17.3 22.6 - --------------------------------------------- ----------------------- Total domestic 91.5 84.6 65.9 86.0 International 16.7 15.4 10.7 14.0 - --------------------------------------------- ----------------------- Total $108.2 100.0% $76.6 100.0% - --------------------------------------------- ----------------------- As part of the company's portfolio shaping activity in 1998, the company has entered into facultative share reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS 113. Ceding commissions received from reinsurers before deferrals were $37.2 million, $20.8 million and $13.7 million in 1998, 1997 and 1996, respectively. In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group. NOTE 18: PENSION AND PROFIT SHARING PLANS - ------------------------------------------ The company has a non-contributory, defined contribution pension plan to which the company contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1998, 1997 and 1996 was $7.3 million, $4.6 million and $3.9 million, respectively. The company also has a profit-sharing/401(k) plan that allows eligible employees to contribute up to 10% of eligible compensation. The company matches employee contributions up to the first 5% of total compensation. Company contributions to the profit-sharing/401(k) plan aggregated $2.9 million, $1.9 million and $1.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. The profit-sharing/401(k) plan company match amounts are invested in common stock of the company. Amounts relating to the above plans that exceed limitations established by federal regulations are contributed to a non-qualified deferred compensation plan. In 1998 former CapMAC and 1838 employees were covered under the company's pension and profit-sharing plans. (59) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 19: LONG-TERM INCENTIVE PLANS - ----------------------------------- On March 2, 1987, the company adopted a plan for key employees of the company and its subsidiaries to enable those employees to acquire shares of common stock of the company or to benefit from appreciation in the price of the common stock of the company. Options granted will either be Incentive Stock Options (ISOs), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options (NQSOs). ISOs and NQSOs may be granted at a price not less than 100% of the fair value of the company's common stock as determined on the date granted. Options will be exercisable as specified at the time of grant and expire ten years from the date of grant (or shorter if specified or following termination of employment). The board of directors of the company has authorized a maximum of 9,311,122 shares of the company's common stock to be granted as options. As of December 31, 1998, 6,925,872 options had been granted, net of expirations and cancellations, leaving the total number available for future grants at 2,385,250. Options granted through 1990 are exercisable in equal annual installments on each of the first three anniversaries of the grant at 100% of the market price at the date of grant. The options granted from 1991 through 1994 are exercisable in five equal annual installments commencing one year after the date of grant. On all options granted from 1991 through 1994, accelerated vesting and exercisability of those options is possible if the company's return on equity for the year is at least equal to the threshold return on equity specified in the annual financial plan and if earnings per share are at least 2.5% greater than plan earnings per share. In December 1995, the MBIA Inc. Board of Directors approved the "MBIA Long-Term Incentive Program." The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of the company's stock. Awards under the long-term program are divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor for the December 1995 award only) to be paid in cash or shares of company stock. Target levels for the option/incentive award are established as a percentage of total salary and bonus, based upon the recipient's position. Awards under the long-term program typically will be granted from the vice president level up to and including the chairman and chief executive officer. The ABV portion of the long-term incentive program may be awarded every year. The 1998 award will cover growth in ABV from December 31, 1998 through December 31, 2001; the 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000; and the 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12% on all awards. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth, with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 2002 for the 1998 award, in early 2001 for the 1997 award and early 1999 for the 1995 award in the form of cash or shares of the company's common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1998, 1997 and 1996, $5.5 million, $3.7 million and $2.9 million, respectively, were recorded as a charge related to the 1998, 1997 and 1995 ABV awards. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair value (closing price) of the stock on the date of the grant. Each option vests over five years and has a ten-year term. Prior option grants are not taken into account in determining the number of options granted in any year. In December 1998, 575,430 options were awarded. In December 1995, the company adopted a restricted stock program whereby key executive officers are granted restricted shares of the company's stock. These stock awards may only be sold three or four years from the date of grant, at which time the awards fully vest. In 1998 and 1997, respectively, 52,776 and 73,608 restricted shares (net of cancelled shares) of the company's stock were granted to certain officers of the company. The fair value of the shares awarded in 1998 and 1997 determined on the grant date was $3.4 million and $4.4 million, respectively, and has been recorded as "Unearned compensation restricted stock" and is shown as a separate component of shareholders' equity. Unearned compensation is amortized to expense over the appropriate three- to four-year vesting period. Compensation expense related to the restricted stock was $1.3 million, $0.9 million and $1.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. In 1992, CapMAC adopted an Employee Stock Ownership Plan (ESOP) to provide its employees the opportunity to obtain beneficial interests in the stock of CapMAC through a trust (the ESOP Trust). The ESOP Trust purchased 350,625 shares of the company's stock. The ESOP Trust financed its purchase of common stock with a loan from the company in the amount of $10 million. The ESOP loan is evidenced by a promissory note delivered to the company. An amount representing unearned employee compensation, equivalent in value to the unpaid balance of the ESOP loan, is recorded as "Unallocated ESOP shares" and is shown as a separate component of shareholders' equity. The company is required to make contributions to the ESOP Trust, which enables the ESOP Trust to service its loan to the company. The ESOP expense is calculated using the shares allocated method. Shares are released for allocation to the participants and held in trust for the employees based upon the ratio of the current year's principal and interest payment to the sum of principal and (60) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries interest payments estimated over the life of the loan. As of December 31, 1998 and 1997, 208,789 and 207,570 shares, respectively, were allocated to the participants. Compensation expense related to the ESOP was $1.3 million and $2.4 million for the years ended December 31, 1997 and 1996, respectively. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required the company to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. SFAS 123 explicitly provides that employers may continue to account for their employee stock-based compensation plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the company's financial position or results of operations. As the table below shows, had compensation cost for the company's stock option program been recognized based on the fair value at the grant date, consistent with the recognition provisions of SFAS 123, the impact on the company's net income and earnings per share would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1998 are not likely to be representative of the effects on reported net income and earnings per share for future years. Years ended December 31 ------------------------------------------- 1998 1997 1996 ------------------------------------------- Net income (in thousands): Reported $432,728 $405,610 $347,736 Pro-forma 430,224 404,180 347,046 Basic earnings per share: Reported $4.37 $4.18 $3.68 Pro-forma 4.35 4.17 3.68 Diluted earnings per share: Reported $4.32 $4.12 $3.62 Pro-forma 4.30 4.11 3.61 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively; exercise price of $63.8152, $64.7661 and $48.8219; dividend yield of 1.254%, 1.220% and 1.492%; expected volatility of .2392, .2070 and .2110; risk-free interest rate of 4.63%, 5.80% and 5.96%; and expected option term of 5.86, 5.72 and 5.52 years. A summary of the company's stock option plan as of December 31, 1998, 1997 and 1996, and changes during the years ending on those dates, is presented below: 1998 --------------------------- Weighted Number Avg. Price Options of Shares per Share - --------------------------------------------------------------------- Outstanding at beginning of year 4,033,930 $37.0004 Granted 575,430 63.8152 Exercised 744,670 69.6068 Expired or canceled 187,968 60.9160 - --------------------------------------------------------------------- Outstanding at year end 3,676,722 $42.2626 - --------------------------------------------------------------------- Exercisable at year end 2,093,075 $29.3722 Weighted-average fair value per share of options granted during the year $18.1565 - --------------------------------------------------------------------- 1997 --------------------------- Weighted Number Avg. Price Options of Shares per Share - --------------------------------------------------------------------- Outstanding at beginning of year 4,049,879 $31.7892 Granted 449,274 64.7661 Exercised 430,314 57.3585 Expired or canceled 34,909 34.5547 - --------------------------------------------------------------------- Outstanding at year end 4,033,930 $37.0004 - --------------------------------------------------------------------- Exercisable at year end 2,450,080 $26.9218 - --------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $18.3756 - --------------------------------------------------------------------- 1996 --------------------------- Weighted Number Avg. Price Options of Shares per Share - --------------------------------------------------------------------- Outstanding at beginning of year 4,529,632 $24.0847 Granted 672,481 48.8219 Exercised 1,105,561 41.1025 Expired or canceled 46,673 29.6053 - --------------------------------------------------------------------- Outstanding at year end 4,049,879 $31.7892 - --------------------------------------------------------------------- Exercisable at year end 2,512,278 $24.9806 - --------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $14.0875 - --------------------------------------------------------------------- (61) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The following table summarizes information about the plan's stock options at December 31, 1998:
Weighted-Average Number Remaining Number Range of Average Outstanding Contractual Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/98 Life in Years Exercise Price 12/31/98 Exercise Price - ------------------------------------------------------------------------------------------------------- $12.1880 to $30.0630 1,699,955 3.95 $25.1981 1,533,355 $24.9781 $34.500 to $52.4050 820,907 6.45 43.3264 549,902 40.8650 $56.9510 to $72.7260 1,155,860 9.23 66.6041 9,818 71.9240 - ------------------------------------------------------------------------------------------------------- Total 3,676,722 6.17 $42.2626 2,093,075 $29.3722 - -------------------------------------------------------------------------------------------------------
NOTE 20: SHAREHOLDERS' RIGHTS PLAN - ----------------------------------- In December 1991, the board of directors of the company declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of the company's common stock. Each Right entitles its holder to purchase from the company one one-hundredth of a share of the company's Junior Participating Cumulative Preferred Shares at a price of $160, subject to certain adjustments. Initially, the Rights are attached to the common stock and will not be transferable separately nor become exercisable until the earlier to occur of (i) ten business days following the date of the public announcement by the company (the Shares Acquisition Date) that a person or group of persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the outstanding shares of the company's common stock and (ii) ten business days (or later as may be determined by the board of directors) after the announcement or commencement of a tender offer or exchange offer which, if successful, would result in the bidder owning 10% or more of the outstanding shares of the company's common stock. However, no person shall be deemed to have acquired or obtained the right to acquire the beneficial ownership of 10% or more of the outstanding shares of the company's common stock if the board of directors determines that such acquisition is inadvertent, and such person promptly divests itself of a sufficient number of shares to be below the 10% ownership threshold. If the acquiring person or group acquires beneficial ownership of 10% or more of the company's common stock (except pursuant to a tender or exchange offer for all outstanding common stock of the company, determined by the company's independent directors to be at a fair price and in the best interests of the company and its shareholders), each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the company having a fair value of $320. Similarly, if after an acquiring person or group so acquires 10% or more of the company's common stock, the company is acquired in a merger or other business combination and is not the surviving entity, or its common stock is changed or exchanged in whole or in part, or 50% or more of the company's assets, cash flow or earning power is sold, each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the acquiring company having a fair value of $320. The board of directors may redeem the Rights in whole at $.01 per Right at any time prior to ten business days following the Shares Acquisition Date. Further, at any time after a person or group acquires 10% or more, but less than 50%, of the company's common stock, the board of directors of the company may exchange the Rights (other than those held by the acquirer) in whole or in part, at an exchange ratio of one share of common stock per Right. The board of directors may also amend the Rights at any time prior to the Shares Acquisition Date. The Rights will expire on December 12, 2001, unless earlier redeemed or exchanged. NOTE 21: RELATED PARTY TRANSACTIONS - ------------------------------------ Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association which had their S&P claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent. The aggregate outstanding exposure on these surety bonds as of December 31, 1998 is $340 million. MBIA MuniServices provides financing to Capital Asset under various borrowing arrangements. The net balance outstanding under these agreements at December 31, 1998 and 1997 was $86.8 million and $49.7 million, respectively, including accrued interest, and is included in other assets on the company's consolidated balance sheet. Net interest earned under these agreements during 1998 and 1997 was $8.1 million and $7.0 million, respectively. (62) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 22: PUBLIC OFFERINGS OF COMMON STOCK - ----------------------------------------- In July 1997, the company completed a public offering of 2,300,000 new shares of the company's common stock. The company realized $126 million in new capital from the offering. In February 1996, the company completed a public offering of 7,780,000 shares of the company's common stock. Of the shares offered, 6,240,000 were sold by an existing shareholder and 1,540,000 were new shares offered by the company. The company realized $55 million in new capital from the offering. In June 1992, the company granted 1,042,537 warrants to non-employee stockholders to purchase common stock. The warrants expire in June 1999. During 1996, 257,775 warrants were exercised. The exercise of the warrants being cashless resulted in the issuance of 150,422 shares of common stock. During 1997, the company exercised its right to purchase all outstanding warrants for its common stock. As a result, 44,314 warrants were exercised for cash resulting in the issuance of 44,314 shares of common stock, and 740,448 warrants were exercised on a cashless basis resulting in the issuance of 378,848 shares of common stock. NOTE 23: FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------- The estimated fair value amounts of financial instruments shown in the following table have been determined by the company using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment has been necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES--The fair value of fixed-maturity securities is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS--Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS--Other investments include the company's interest in a limited partnership and a mutual fund that invests principally in marketable equity securities and other equity investments. The fair value of these investments is based on quoted market prices. MUNICIPAL INVESTMENT AGREEMENT PORTFOLIO--The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments. Its fair value equals the quoted market prices, if available, of its fixed-maturities plus the amortized cost of its short-term investments which, because of their short duration, is a reasonable estimate of fair value. If a quoted market price is not available for a fixed-maturity security, fair value is estimated using quoted market prices for similar securities. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD, SHORT-TERM DEBT, AND PAYABLE FOR INVESTMENTS PURCHASED--The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL--The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS--The fair value of the company's prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third-party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE--The fair value of the company's deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third-party reinsurers under current market conditions. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES--The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unidentified claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. LONG-TERM DEBT--The fair value is estimated based on the quoted market prices for the same or similar securities. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS--The fair values of municipal investment agreements and municipal repurchase agreements are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements with maturities consistent with those remaining for the agreements being valued. SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE--The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS--The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%. (63) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
As of December 31, 1998 As of December 31, 1997 --------------------------------------------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------- ASSETS: Fixed-maturity securities $5,884,053 $5,884,053 $5,211,311 $5,211,311 Short-term investments 423,194 423,194 303,898 303,898 Other investments 94,975 94,975 51,693 51,693 Municipal investment agreement portfolio 3,678,229 3,678,229 3,341,394 3,341,394 Cash and cash equivalents 20,757 20,757 26,296 26,296 Securities borrowed or purchased under agreements to resell 538,281 540,864 472,963 473,841 Prepaid reinsurance premiums 352,699 297,238 289,508 245,613 Receivable for investments sold 49,497 49,497 13,435 13,435 LIABILITIES: Deferred premium revenue 2,251,211 1,939,971 2,090,460 1,795,890 Loss and loss adjustment expense reserves 270,114 270,114 103,061 103,061 Municipal investment agreements 2,587,339 2,665,069 1,974,165 2,024,230 Municipal repurchase agreements 897,718 939,860 1,177,022 1,214,641 Long-term debt 688,996 735,443 488,878 536,871 Short-term debt -- -- 20,000 20,000 Securities loaned or sold under agreements to repurchase 573,352 585,872 606,263 607,304 Payable for investments purchased 95,598 95,598 44,007 44,007 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums -- 644,132 -- 536,929
NOTE 24: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - -------------------------------------------------------- A summary of selected quarterly income statement information follows: In thousands except per share amounts 1998 First Second Third Fourth Year - -------------------------------------------------------------------------------- Gross premiums written $121,387 $199,040 $167,872 $188,751 $677,050 Net premiums written 107,054 171,760 140,374 101,798 520,986 Premiums earned 99,642 104,613 106,159 114,136 424,550 Investment income and realized gains and losses 94,942 89,046 97,583 85,207 366,778 All other revenues 29,849 30,959 31,518 28,228 120,554 Income before income taxes 130,078 159,062 143,580 132,318 565,038 Net income $102,105 $119,029 $108,243 $103,351 $432,728 Net income per common share:* Basic $ 1.03 $ 1.20 $ 1.09 $ 1.04 $ 4.37 Diluted $ 1.02 $ 1.19 $ 1.08 $ 1.03 $ 4.32 - -------------------------------------------------------------------------------- 1997 First Second Third Fourth Year - -------------------------------------------------------------------------------- Gross premiums written $109,301 $184,539 $147,428 $212,580 $653,848 Net premiums written 98,973 155,433 123,796 159,120 537,322 Premiums earned 83,874 85,948 88,174 93,499 351,495 Investment income and realized gains and losses 76,159 75,750 83,639 86,769 322,317 All other revenues 18,631 19,057 23,970 30,640 92,298 Income before income taxes 124,358 126,224 137,194 137,476 525,252 Net income $ 98,474 $ 98,175 $106,552 $102,409 $405,610 Net income per common share:* Basic $ 1.03 $ 1.02 $ 1.09 $ 1.04 $ 4.18 Diluted $ 1.01 $ 1.01 $ 1.07 $ 1.03 $ 4.12 - -------------------------------------------------------------------------------- *Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. (64) EX-21 30 SUBSIDIARIES OF MBIA INC. SUBSIDIARIES OF MBIA INC. NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- MBIA Insurance Corporation New York Municipal Issuers Service Corporation New York MBIA Asset Management Corporation Delaware MBIA Municipal Investors Service Corporation Delaware MBIA Investment Management Corp. Delaware MBIA Capital Management Corp. Delaware 1838 Investment Advisors, Inc. Delaware MBIA Capital Corp. Delaware MBIA Services Company Delaware MBIA MuniServices Company Delaware MBIA-AMBAC International Marketing Services, Pty. Limited Australia MBIA Assurance S.A. France MBIA Insurance Corp. of Illinois Illinois American Money Management Associates, Inc. Colorado Municipal Tax Collection Bureau, Inc. Pennsylvania MBIA MuniFinancial California John T. Austin, Inc. California Allen W. Charkow, Inc. California Municipal Resource Consultants California Muni Resources, LLC Delaware Capital Asset Holdings GP, Inc. Florida CapMAC Holdings Inc. Delaware Capital Markets Assurance Corporation New York CapMAC Financial Services, Inc. Delaware CapMAC Financial Services (Europe) Ltd. United Kingdom CapMAC Asia Ltd. Bermuda EX-23 31 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of MBIA Inc. and Subsidiaries on the forms S-3 (No. 333-15003 and 333-60039 and 333-62961) and S-8 (Nos. 33-22441 and 33-46062 and 333-34101) of: (1) Our report dated February 2, 1999, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is incorporated by reference in this Annual Report on Form 10-K for fiscal year ended December 31, 1998; (2) Our report dated February 2, 1999 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this Annual Report on Form 10-K for the fiscal year ended December 31, 1998; and (3) Our report dated February 2, 1999 on our audits of the consolidated financial statements of MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which is included in exhibit 99 to this Annual Report on Form 10-K for the fiscal year ended December 31, 1998. /s/ PricewaterhouseCoopers LLP New York, New York March 30, 1999 EX-24 32 POWER OF ATTORNEY POWER OF ATTORNEY The undersigned hereby constitutes and appoints each of Richard L. Weill and Louis G. Lenzi as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1998, and any or all amendments thereto, and to file the same, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand this 18th day of March, 1999. /s/ David C. Clapp /s/ Freda S. Johnson ----------------------------- ----------------------------- David C. Clapp Freda S. Johnson /s/ Claire L. Gaudiani /s/ Daniel P. Kearney ----------------------------- ----------------------------- Claire L. Gaudiani Daniel P. Kearney /s/ James A. Lebenthal /s/ William H. Gray, III ----------------------------- ----------------------------- James A. Lebenthal William H. Gray, III /s/ John A. Rolls /s/ Pierre-Henri Richard ----------------------------- ----------------------------- John A. Rolls Pierre-Henri Richard EX-27 33 FDS -- 1998 MBIA 10K
7 (Replace this text with the legend) 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,884,053 0 0 0 0 0 5,884,053 20,757 0 230,085 11,796,564 270,114 2,251,211 0 0 688,996 0 0 99,570 3,692,647 11,796,564 424,550 331,802 29,962 125,568 34,683 34,613 70,330 565,038 132,310 432,728 0 0 0 432,728 4.37 4.32 0 0 0 0 0 0 0
EX-99 34 1998 MBIA CORP. GAAP MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF MBIA INSURANCE CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholder's equity and cash flows present fairly, in all material respects, the financial position of MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. /s/ PricewaterhouseCoopers - -------------------------- PricewaterhouseCoopers LLP New York, New York February 2, 1999 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------- -------------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,565,060 and $4,600,528) $5,884,053 $4,867,254 Short-term investments, at amortized cost (which approximates fair value) 423,188 242,730 Other investments 17,850 16,802 --------------- ---------------- TOTAL INVESTMENTS 6,325,091 5,126,786 Cash and cash equivalents 6,546 3,983 Securities purchased under agreements to resell 187,500 182,820 Accrued investment income 91,239 78,601 Deferred acquisition costs 230,085 154,100 Prepaid reinsurance premiums 352,699 252,893 Goodwill (less accumulated amortization of $52,031 and $47,152) 90,950 95,829 Property and equipment, at cost (less accumulated depreciation of $23,840 and $18,256) 71,952 53,484 Receivable for investments sold 33,880 1,616 Other assets 97,970 37,437 --------------- ---------------- TOTAL ASSETS $7,487,912 $5,987,549 =============== ================ LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Deferred premium revenue $ 2,251,211 $ 1,984,104 Loss and loss adjustment expense reserves 270,114 78,872 Securities sold under agreements to repurchase 187,500 182,820 Deferred income taxes 303,407 251,134 Deferred fee revenue 33,785 --- Payable for investments purchased 29,523 23,020 Other liabilities 135,027 103,740 --------------- ---------------- TOTAL LIABILITIES 3,210,567 2,623,690 --------------- ---------------- Shareholder's Equity: Common stock, par value $150 per share; authorized, issued and outstanding - 100,000 shares 15,000 15,000 Additional paid-in capital 1,491,033 1,139,949 Retained earnings 2,566,222 2,042,323 Accumulated other comprehensive income, net of deferred income tax provision of of $112,283 and $94,416 205,090 166,587 --------------- ---------------- TOTAL SHAREHOLDER'S EQUITY 4,277,345 3,363,859 --------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,487,912 $5,987,549 =============== ================
The accompanying notes are an integral part of the consolidated financial statements. (2) MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ----------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- Revenues: Gross premiums written $725,269 $544,974 $462,444 Ceded premiums (149,280) (79,781) (54,852) -------------- -------------- -------------- Net premiums written 575,989 465,193 407,592 Increase in deferred premium revenue (166,182) (165,858) (154,111) -------------- -------------- -------------- Premiums earned (net of ceded premiums of $49,474, $43,734 and $38,893) 409,807 299,335 253,481 Net investment income 326,391 282,460 247,286 Net realized gains 29,891 17,478 11,740 Advisory fees 23,964 --- --- Other 713 1,201 3,163 -------------- -------------- -------------- Total revenues 790,766 600,474 515,670 -------------- -------------- -------------- Expenses: Losses and loss adjustment 33,661 18,673 15,334 Policy acquisition costs, net 33,168 27,873 24,660 Operating 65,445 50,016 46,654 -------------- -------------- -------------- Total expenses 132,274 96,562 86,648 -------------- -------------- -------------- Income before income taxes 658,492 503,912 429,022 Provision for income taxes 134,593 112,904 90,562 -------------- -------------- -------------- Net income $523,899 $391,008 $338,460 ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. (3) MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1998, 1997 and 1996 (In thousands except per share amounts)
Accumulated Common Stock Additional Other Total ----------------- Paid-in Retained Comprehensive Shareholder's Shares Amount Capital Earnings Adjustment Equity --------- --------- ------------ ---------- ------------- -------------- Balance, January 1, 1996 100,000 $15,000 $1,021,584 $1,341,855 $147,433 $2,525,872 --------- --------- ------------ ---------- ---------- ----------- Comprehensive income: Net income --- --- --- 338,460 --- 338,460 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $26,197 --- --- --- --- (47,861) (47,861) Change in foreign currency translation --- --- --- --- (3,892) (3,892) ---------- Other comprehensive income (51,753) ---------- Total comprehensive income 286,707 ---------- Dividends declared (per common share $290.00) --- --- --- (29,000) --- (29,000) Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 20,292 --- --- 20,292 -------- --------- ------------ ---------- ---------- ----------- Balance, December 31, 1996 100,000 15,000 1,041,876 1,651,315 95,680 2,803,871 -------- --------- ------------ ---------- ---------- ----------- Comprehensive income: Net income --- --- --- 391,008 --- 391,008 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(42,241) --- --- --- --- 78,418 78,418 Change in foreign currency translation --- --- --- --- (7,511) (7,511) ---------- Other comprehensive income 70,907 ---------- Total comprehensive income 461,915 ---------- Capital contribution from MBIA Inc. --- --- 80,000 --- --- 80,000 Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 18,073 --- --- 18,073 -------- --------- ------------ ---------- ---------- ----------- Balance, December 31, 1997 100,000 15,000 1,139,949 2,042,323 166,587 3,363,859 -------- --------- ------------ ---------- ---------- ----------- Comprehensive income: Net income --- --- --- 523,899 --- 523,899 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $17,867 --- --- --- --- 34,084 34,084 Change in foreign currency translation --- --- --- --- 4,419 4,419 ---------- Other comprehensive income 38,503 ---------- Comprehensive income 562,402 ---------- Capital contribution from MBIA Inc. --- --- 324,915 --- --- 324,915 Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 26,169 --- --- 26,169 -------- --------- ------------ ---------- ---------- ----------- Balance, December 31, 1998 100,000 $15,000 $1,491,033 $2,566,222 $205,090 $4,277,345 ======== ========= ============ ========== ========== ===========
1998 1997 1996 ------- ------- -------- Disclosure of reclassification amount: Unrealized appreciation of investments arising during the period, net of taxes $53,415 $89,536 $(40,074) Reclassification of adjustment, net of taxes (19,331) (11,118) (7,787) ------- ------- -------- Net unrealized appreciation, net of taxes $34,084 $78,418 $(47,861) ======= ======= ========
The accompany notes are an integral part of the consolidated financial statements. (4) MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 ------------------------------------------------------ 1998 1997 1996 ------------------- ------------------ ------------- Cash flows from operating activities: Net income $ 523,899 $ 391,008 $ 338,460 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (12,638) (13,407) (4,947) Increase in deferred acquisition costs (75,985) (6,350) (7,402) Increase in prepaid reinsurance premiums (99,806) (36,047) (15,959) Increase in deferred premium revenue 265,983 201,905 170,070 Increase in loss and loss adjustment expense reserves 191,242 19,558 16,809 Depreciation 5,626 3,934 2,952 Amortization of goodwill 4,879 4,889 4,896 Amortization of bond (discount) premium, net (15,831) (10,830) (7,526) Net realized gains on sale of investments (29,891) (17,478) (11,740) Deferred income taxes 21,856 13,382 8,982 Other, net 43,593 50,258 26,687 ----------------- ------------------ ------------------ Total adjustments to net income 299,028 209,814 182,822 ----------------- ------------------ ------------------ Net cash provided by operating activities 822,927 600,822 521,282 ----------------- ------------------ ------------------ Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (2,800,008) (2,090,236) (1,519,213) Sale of fixed-maturity securities, net of receivable for investments sold 1,086,973 1,247,860 873,823 Redemption of fixed-maturity securities, net of receivable for investments redeemed 745,516 190,803 158,087 Sale (purchase) of short-term investments, net (158,339) (18,922) 4,676 Sale (purchase) of other investments, net (527) 664 468 Capital expenditures, net of disposals (18,894) (10,296) (8,970) ----------------- ------------------ ------------------ Net cash used by investing activities (1,145,279) (680,127) (491,129) ----------------- ------------------ ------------------ Cash flows from financing activities: Capital contribution from MBIA Inc. 324,915 80,000 --- Dividends paid --- --- (29,000) ----------------- ------------------ ------------------ Net cash used by financing activities 324,915 80,000 (29,000) ----------------- ------------------ ------------------ Net increase in cash and cash equivalents 2,563 695 1,153 Cash and cash equivalents - beginning of year 3,983 3,288 2,135 ----------------- ------------------ ------------------ Cash and cash equivalents - end of year $ 6,546 $ 3,983 $ 3,288 ================= ================== ================== Supplemental cash flow disclosures: Income taxes paid $ 105,451 $ 82,125 $ 63,018
The accompanying notes are an integral part of the consolidated financial statements. (5) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION - ----------------------------- MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). In January 1990, MBIA Illinois ceded its portfolio of net insured obligations to MBIA Corp. in exchange for cash and investments equal to its unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc. contributed the common stock of BIG to MBIA Corp. resulting in additional paid-in capital of $200 million. The insured portfolio acquired from BIG Ins. consists of municipal obligations with risk characteristics similar to those insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois. Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6 million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities. In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for MBIA Inc., its municipal cash management service businesses and public pension funds. In 1995, portfolio management for a portion of MBIA Corp.'s insurance related investment portfolio was transferred to CMC; the management of the balance of this portfolio was transferred in January 1996. (6) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a merger. Under the terms of the merger, CapMAC shareholders received 0.4675 of a share of MBIA Inc. common stock for each CapMAC share, for a total of 8,102,255 newly issued shares of MBIA Inc. common stock, the value of which was $536 million. On April 1, 1998, the company assumed the net insured obligations of Capital Markets Assurance Corporation (CMAC) in exchange for investments equal to $176.1 million. The cession of the deferred premium revenue (net of prepaid reinsurance premiums) in the amount of $68.2 million has been reflected as a component of gross premium written in the second quarter of 1998. Subsequent to the cession MBIA Inc. contributed the common stock of CMAC to the company resulting in additional paid-in capital of $324.9 million. 2. SIGNIFICANT ACCOUNTING POLICIES - ----------------------------------- The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of MBIA Corp. and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS MBIA Corp.'s entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholder's equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixed-maturity securities with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. (7) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from these investments as a component of investment income. In addition, MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholder's equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is MBIA Corp.'s policy to take possession of securities purchased under agreements to resell. MBIA Corp. minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with MBIA Corp. when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Upfront premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Installment premiums are earned over each installment period - generally one year or less. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where MBIA Corp. insures the refunding issue, is earned at that time, since there is no longer risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. (8) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ADVISORY FEE REVENUE RECOGNITION MBIA Corp. collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. PROPERTY AND EQUIPMENT Property and equipment consists of MBIA Corp.'s headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expenses as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expense (LAE) reserves are established in an amount equal to MBIA Corp.'s estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries, under salvage and subrogation rights. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of bond defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management of MBIA Corp. periodically evaluates its estimates for losses and LAE and any resulting adjustments are reflected in current earnings. Management believes that the reserves 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. (9) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax provision for MBIA Corp. for financial reporting purposes is determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time MBIA Corp. may present the tax and loss bonds for redemption to satisfy the additional tax liability. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholder's equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. 3. RECENT ACCOUNTING PRONOUNCEMENTS - ------------------------------------ In March 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The statement requires that entities capitalize certain internal-use software costs once certain criteria are met. The statement is effective for fiscal years beginning after December 15, 1998. The company will adopt SOP 98-1 in 1999. Adoption of SOP 98-1 is not expected to have a material impact on the consolidated financial statements. (10) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. STATUTORY ACCOUNTING PRACTICES - ---------------------------------- The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements, and reserves for case basis losses and LAE are established, at present value, for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on MBIA Corp.'s reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. (11) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following is a reconciliation of consolidated shareholder's equity presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and its subsidiaries: As of December 31 ------------------------------------------ In thousands 1998 1997 ----------------------------------------------------------------------------- GAAP shareholder's equity $4,277,345 $3,363,859 Premium revenue recognition (448,250) (408,654) Deferral of acquisition costs (230,085) (154,100) Unrealized (gains) losses (321,653) (269,702) Contingency reserve (1,450,413) (1,094,117) Loss and loss adjustment expense reserves 81,489 53,938 Deferred income taxes 303,407 251,134 Tax and loss bonds 162,523 129,508 Goodwill (90,950) (95,829) Other 6,556 (15,839) ----------------------------------------------------------------------------- Statutory capital and surplus $2,289,969 $1,760,198 ----------------------------------------------------------------------------- Aggregate net income of MBIA Corp. and its subsidiaries determined in accordance with statutory accounting practices for the years ended December 31, 1998, 1997 and 1996 was $498.2 million, $377.1 million and $316.6 million, respectively. 5. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - -------------------------------------------------- Premiums earned include $68.4 million, $50.9 million and $44.4 million for 1998, 1997 and 1996, respectively, related to refunded and called bonds. 6. INVESTMENTS - --------------- MBIA Corp.'s investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. MBIA Corp.'s investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of high-quality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of MBIA Corp. as of December 31, 1998 and 1997: (12) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------- December 31, 1998 Taxable bonds United States Treasury and Government Agency $ 38,984 $ 770 $ (174) $ 39,580 Corporate and other obligations 1,543,654 60,867 (1,950) 1,602,571 Mortgage-backed 632,232 20,614 (690) 652,156 Tax-exempt bonds State and municipal obligations 3,773,378 241,200 (1,644) 4,012,934 - ------------------------------------------------------------------------------------------------------------- Total $5,988,248 $323,451 $(4,458) $6,307,241 - -------------------------------------------------------------------------------------------------------------
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------- December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 6,451 $ 191 $ --- $ 6,642 Corporate and other obligations 1,193,321 36,106 (472) 1,228,955 Mortgage-backed 541,898 18,659 (732) 559,825 Tax-exempt bonds State and municipal obligations 3,101,588 213,551 (577) 3,314,562 - --------------------------------------------------------------------------------------------------------------- Total $ 4,843,258 $268,507 $(1,781) $5,109,984 - ---------------------------------------------------------------------------------------------------------------
(13) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fixed-maturity investments carried at fair value of $12.0 million and $7.7 million as of December 31, 1998 and 1997, respectively, were on deposit with various regulatory authorities to comply with insurance laws. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1998. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Fair In thousands Cost Value --------------------------------------------------------------------------- Maturity Within 1 year $ 423,188 $ 423,188 Beyond 1 year but within 5 years 751,065 790,907 Beyond 5 years but within 10 years 1,392,855 1,488,916 Beyond 10 years but within 15 years 906,424 987,981 Beyond 15 years but within 20 years 921,647 978,708 Beyond 20 years 960,837 985,385 --------------------------------------------------------------------------- Mortgage-backed 632,232 652,156 --------------------------------------------------------------------------- Total fixed-maturities and short-term investments $5,988,248 $6,307,241 --------------------------------------------------------------------------- (14) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. INVESTMENT INCOME AND GAINS AND LOSSES - ----------------------------------------- Investment income consists of: Years ended December 31 -------------------------------------- In thousands 1998 1997 1996 - --------------------------------------------------------------------- Fixed-maturities $326,820 $279,900 $245,109 Short-term investments 5,311 5,676 4,961 Other investments 16 (4) 61 - --------------------------------------------------------------------- Gross investment income 332,147 285,572 250,131 Investment expenses 5,756 3,112 2,845 - --------------------------------------------------------------------- Net investment income 326,391 282,460 247,286 Net realized gains (losses): Fixed-maturities: Gains 32,211 22,791 16,760 Losses (3,149) (5,877) (5,353) - --------------------------------------------------------------------- Net 29,062 16,914 11,407 - --------------------------------------------------------------------- Other investments: Gains 829 564 333 Losses --- --- --- - --------------------------------------------------------------------- Net 829 564 333 - --------------------------------------------------------------------- Total net realized gains 29,891 17,478 11,740 - --------------------------------------------------------------------- Total investment income $356,282 $299,938 $259,026 - --------------------------------------------------------------------- Net unrealized gains consist of: As of December 31 ------------------------------- In thousands 1998 1997 - ------------------------------------------------------------ Fixed-maturities: Gains $323,451 $268,507 Losses (4,458) (1,781) - ------------------------------------------------------------ Net 318,993 266,726 - ------------------------------------------------------------ Other investments: Gains 2,660 3,033 Losses --- (57) - ------------------------------------------------------------ Net 2,660 2,976 - ------------------------------------------------------------ Total 321,653 269,702 Deferred income taxes 112,283 94,416 - ------------------------------------------------------------ Unrealized gains, net $209,370 $175,286 - ------------------------------------------------------------ (15) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The change in net unrealized gains (losses) consists of:
Years ended December 31 ------------------------------------------------- In thousands 1998 1997 1996 - ------------------------------------------------------------------------------------ Fixed-maturities $52,267 $118,588 $(75,497) Other investments (316) 2,071 1,439 - ------------------------------------------------------------------------------------ Total 51,951 120,659 (74,058) Deferred income taxes 17,867 42,241 (26,197) - ------------------------------------------------------------------------------------ Unrealized gains (losses), net $34,084 $78,418 $(47,861) - ------------------------------------------------------------------------------------
8. Income Taxes The provision for income taxes is composed of: Years ended December 31 ----------------------------------------------------- In thousands 1998 1997 1996 - --------------------------------------------------------------------------- Current $112,737 $ 99,522 $ 81,580 Deferred 21,856 13,382 8,982 - --------------------------------------------------------------------------- Total $134,593 $112,904 $ 90,562 - --------------------------------------------------------------------------- The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, MBIA Corp.'s effective income tax rate differs from the statutory rate on ordinary income. The reasons for MBIA Corp.'s lower effective tax rates are as follows: Years ended December 31 ---------------------------- 1998 1997 1996 - ----------------------------------------------------------------------- Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (9.1) (10.6) (12.0) Amortization of goodwill 0.3 0.3 0.4 Other (5.8) (2.3) (2.3) - ----------------------------------------------------------------------- Provision for income taxes 20.4% 22.4% 21.1% - ----------------------------------------------------------------------- (16) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MBIA Corp. recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1998 and 1997 are presented below:
In thousands 1998 1997 - ----------------------------------------------------------------------------------- Deferred tax assets Tax and loss bonds $160,064 $130,080 Alternative minimum tax credit carryforward 54,722 62,279 Loss and loss adjustment expense reserves 26,458 18,878 Other 46,516 7,444 - ----------------------------------------------------------------------------------- Total gross deferred tax assets 287,760 218,681 - ----------------------------------------------------------------------------------- Deferred tax liabilities Contingency reserve 280,203 234,904 Deferred premium revenue 106,555 77,150 Deferred acquisition costs 77,753 53,935 Unrealized gains 112,283 94,416 Contingent commissions 408 408 Other 13,965 9,002 - ----------------------------------------------------------------------------------- Total gross deferred tax liabilities 591,167 469,815 - ----------------------------------------------------------------------------------- Net deferred tax liability $303,407 $251,134 - -----------------------------------------------------------------------------------
MBIA Corp. believes that no valuation allowance is necessary in connection with the deferred tax assets. 9. DIVIDENDS AND CAPITAL REQUIREMENTS - -------------------------------------- Under New York state insurance law, MBIA Corp. may pay dividends only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements, or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. (17) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Corp. had $228 million available for the payment of dividends as of December 31, 1998. In 1998 and 1997 no dividends were paid by MBIA Corp. due to cash available from financing activities. In 1996, MBIA Corp. declared and paid $29 million to MBIA Inc. Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned surplus, and the dividends in any 12-month period may not exceed the greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without prior approval of the Illinois State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Illinois had $14.9 million available for the payment of dividends as of December 31, 1998. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1998. 10. LINES OF CREDIT - -------------------- MBIA Corp. has a standby line of credit commitment in the amount of $825 million with a group of major Triple-A rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from October 7, 1998 in excess of the greater of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums (18) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and other collateral. This commitment has a seven-year term expiring on October 31, 2005, and contains an annual renewal provision subject to approval by the bank group. CMAC maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities totaling $650 million. During 1998, these facilities replaced existing facilities aggregating $450 million. At December 31, 1997, $20 million was outstanding under these facilities. 11. NET INSURANCE IN FORCE - --------------------------- MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. As of December 31, 1998, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-41 years. The distribution of net insurance in force by geographic location and type of bond, including $3.5 billion and $3.2 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1998 and 1997, respectively, is set forth in the following table:
As of December 31 - ------------------------------------------------------------------------------------------------------------------------------- $ in billions 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Net Number % of Net Net Number % of Net Geographic Insurance of Issues Insurance Insurance of Issues Insurance Location In Force Outstanding In Force In Force Outstanding In Force - ------------------------------------------------------------------------------------------------------------------------------- Domestic California $ 76.3 3,681 12.7% $ 68.4 3,441 14.1% New York 65.1 5,684 10.9 40.4 5,265 8.3 Florida 36.1 1,589 6.0 33.0 1,577 6.8 New Jersey 26.2 1,884 4.4 24.6 2,086 5.1 Texas 25.3 2,131 4.2 24.5 1,859 5.0 Pennsylvania 24.7 2,278 4.1 22.7 2,209 4.7 Illinois 23.7 1,275 4.0 20.0 1,191 4.1 Massachusetts 18.4 1,107 3.1 15.5 1,085 3.2 Michigan 14.6 1,066 2.4 12.4 1,005 2.5 Ohio 13.8 1,076 2.3 11.1 1,016 2.3 - ------------------------------------------------------------------------------------------------------------------------------- Subtotal 324.2 21,771 54.1 272.6 20,734 56.1 Nationally diversified 81.7 842 13.6 55.8 502 11.5 Other states 169.0 12,004 28.2 147.3 11,429 30.3 - ------------------------------------------------------------------------------------------------------------------------------- Total domestic 574.9 34,617 95.9 475.7 32,665 97.9 International 24.5 323 4.1 10.1 207 2.1 - ------------------------------------------------------------------------------------------------------------------------------- Total $599.4 34,940 100.0% $485.8 32,872 100.0% - -------------------------------------------------------------------------------------------------------------------------------
(19) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. Under certain MBIA Corp.'s structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under its insurance contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA Corp.'s primary risk from such insurance contracts is the impairment of cash flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore evaluates all the factors affecting past and future asset performance by studying historical data on losses, delinquencies and recoveries of the underlying assets. Each transaction is reviewed to ensure that an appropriate legal structure is used to protect against the bankruptcy risk of the originator of the assets. Along with the legal structure, an additional level of first-loss protection is also created to protect against losses due to credit or dilution. This first level of loss protection is usually available from reserve funds, excess cash flows, overcollateralization or recourse to a third party. The level of first-loss protection depends upon the historical losses and dilution of the underlying assets, but is typically several times the normal historical loss experience for the underlying type of assets. The distribution of net insurance in force by type of bond is set forth in the table below: (20) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 - --------------------------------------------------------------------------------------------------------------------------------- $ in billions 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Net Number % of Net Net Number % of Net Insurance of Issues Insurance Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force - --------------------------------------------------------------------------------------------------------------------------------- Domestic Municipal: General obligation $140.7 12,694 23.6% $118.8 12,016 24.5% Utilities 80.9 4,895 13.5 75.1 4,739 15.5 Health care 70.9 2,241 11.8 62.2 2,246 12.8 Transportation 46.2 1,543 7.7 40.5 1,487 8.3 Special revenue 42.8 1,787 7.1 34.0 1,641 7.0 Higher education 26.7 1,498 4.5 20.4 1,359 4.2 Housing 22.3 2,161 3.7 18.9 1,891 3.9 Industrial development and pollution control revenue 19.4 1,037 3.2 19.6 943 4.0 Other 5.6 75 0.9 11.4 539 2.4 - --------------------------------------------------------------------------------------------------------------------------------- Total municipal 455.5 27,931 76.0 400.9 26,861 82.6 - --------------------------------------------------------------------------------------------------------------------------------- Structured finance* 97.1 850 16.2 56.1 510 11.5 - --------------------------------------------------------------------------------------------------------------------------------- Other: Investor owned utility 13.0 5,068 2.2 9.4 4,610 1.9 Financial institution 5.4 381 0.9 5.8 366 1.2 Corporate direct 3.9 387 0.6 3.5 318 0.7 - --------------------------------------------------------------------------------------------------------------------------------- Total other 22.3 5,836 3.7 18.7 5,294 3.8 - --------------------------------------------------------------------------------------------------------------------------------- Total domestic 574.9 34,617 95.9 475.7 32,665 97.9 - --------------------------------------------------------------------------------------------------------------------------------- International Infrastructure: Sovereign 1.6 32 0.3 1.3 21 0.3 Transportation 1.4 12 0.2 0.8 5 0.2 Sub-sovereign 1.2 44 0.2 1.4 53 0.3 Higher education 0.9 13 0.1 0.6 1 0.1 Housing 0.6 3 0.1 0.3 2 0.1 Health care 0.4 6 0.1 0.2 6 --- Utilities 0.4 4 0.1 0.8 60 0.2 - --------------------------------------------------------------------------------------------------------------------------------- Total infrastructure 6.5 114 1.1 5.4 148 1.2 - --------------------------------------------------------------------------------------------------------------------------------- Structured finance* 14.8 102 2.5 2.6 32 0.5 - --------------------------------------------------------------------------------------------------------------------------------- Other: Investor owned utility 1.8 72 0.3 0.2 3 --- Financial institution 1.0 29 0.1 1.9 24 0.4 Corporate direct 0.4 6 0.1 --- --- --- - --------------------------------------------------------------------------------------------------------------------------------- Total other 3.2 107 0.5 2.1 27 0.4 - --------------------------------------------------------------------------------------------------------------------------------- Total international 24.5 323 4.1 10.1 207 2.1 - --------------------------------------------------------------------------------------------------------------------------------- Total $599.4 34,940 100.0% $485.8 32,872 100.0% - ---------------------------------------------------------------------------------------------------------------------------------
* Asset-/mortgage-backed (21) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. REINSURANCE - ---------------- MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $108.2 billion and $67.0 billion, at December 31, 1998 and 1997, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables:
As of December 31 - ------------------------------------------------------------------------------------------------------ In billions 1998 1997 - ------------------------------------------------------------------------------------------------------ % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - ------------------------------------------------------------------------------------------------------ Domestic California $ 12.4 11.5% $10.4 15.5% New York 10.7 9.9 5.8 8.7 New Jersey 5.4 5.0 3.7 5.5 Texas 5.3 4.9 4.0 6.0 Pennsylvania 3.8 3.5 2.9 4.3 Massachusetts 3.7 3.4 3.0 4.5 Illinois 3.4 3.1 2.7 4.0 Florida 3.2 3.0 2.6 3.9 Puerto Rico 3.1 2.9 2.3 3.4 Colorado 2.3 2.1 2.4 3.6 - ----------------------------------------------------------------------------------------------------- Subtotal 53.3 49.3 39.8 59.4 Nationally diversified 14.6 13.5 3.4 5.0 Other states 23.6 21.8 19.1 28.6 - ----------------------------------------------------------------------------------------------------- Total domestic 91.5 84.6 62.3 93.0 International 16.7 15.4 4.7 7.0 - ----------------------------------------------------------------------------------------------------- Total $108.2 100.0% $67.0 100.0% - -----------------------------------------------------------------------------------------------------
(22) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 - -------------------------------------------------------------------------------- In billions 1998 1997 - -------------------------------------------------------------------------------- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance nsurance Type of Bond In Force In Force In Force In Force - -------------------------------------------------------------------------------- Domestic Municipal: Utilities $15.5 14.3% $11.5 17.2% General obligation 15.4 14.2 12.1 18.1 Health care 13.4 12.4 8.0 12.0 Transportation 10.6 9.8 9.6 14.3 Special revenue 5.8 5.3 5.0 7.5 Industrial development and pollution control revenue 3.8 3.5 3.2 4.7 Housing 2.3 2.1 1.7 2.5 Higher education 1.7 1.6 1.3 1.9 Other 1.2 1.1 2.7 4.0 - -------------------------------------------------------------------------------- Total municipal 69.7 64.3 55.1 82.2 - -------------------------------------------------------------------------------- Structured finance* 19.5 18.0 5.6 8.3 - -------------------------------------------------------------------------------- Other: Investor-owned utility 1.3 1.2 0.1 0.3 Financial institution 0.9 0.8 1.3 1.9 Corporate direct 0.1 0.1 0.2 0.3 - -------------------------------------------------------------------------------- Total other 2.3 2.1 1.6 2.5 - -------------------------------------------------------------------------------- Total domestic 91.5 84.4 62.3 93.0 - -------------------------------------------------------------------------------- International Infrastructure: Transportation 1.3 1.2 0.4 0.6 Higher education 1.0 0.9 0.6 0.9 Sovereign 0.8 0.7 0.7 1.1 Sub-sovereign 0.4 0.4 0.6 0.9 Utilities 0.4 0.4 0.1 0.1 Health care 0.2 0.2 0.2 0.3 Housing 0.1 0.1 --- --- - -------------------------------------------------------------------------------- Total infrastructure 4.2 3.9 2.6 3.9 - -------------------------------------------------------------------------------- Structured finance* 11.1 10.3 1.3 1.9 - -------------------------------------------------------------------------------- Other: Financial institution 0.5 0.5 0.8 1.2 Corporate direct 0.5 0.5 --- --- Investor-owned utilities 0.4 0.4 --- --- - -------------------------------------------------------------------------------- Total other 1.4 1.4 0.8 1.2 - -------------------------------------------------------------------------------- Total international 16.7 15.6 4.7 7.0 - -------------------------------------------------------------------------------- Total $108.2 100.0% $67.0 100.0% - --------------------------------------------------------------------------------
* Asset-/mortgage-backed (23) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As part of the MBIA Corp's portfolio shaping activity in 1998, the company has entered into facultative share reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS 113. Ceding commissions received from reinsurers before deferrals were $37.2 million, $20.8 million and $13.7 million in 1998, 1997 and 1996, respectively. In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group. 13. EMPLOYEE BENEFITS - ---------------------- MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all employees. The pension plan is a defined contribution plan and MBIA Corp. contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1998, 1997 and 1996 was $5.9 million, $3.9 million and $3.4 million, respectively. MBIA Corp. also has a profit sharing/401(k) plan which allows eligible employees to contribute up to 10% of eligible compensation. MBIA Corp. matches employee contributions up to the first 5% of total compensation. MBIA Corp. contributions to the profit sharing plan aggregated $2.6 million, $1.6 million and $1.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. The 401(k) plan amounts are invested in common stock of MBIA Inc. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. In 1998, former CMAC employees were covered under MBIA Inc.'s pension and profit sharing plans. Of the above amounts for the pension and profit sharing plans, $5.3 million, $3.4 million and $3.0 million for the years ended December 31, 1998, 1997 and 1996, respectively, were included in policy acquisition costs. MBIA Corp. also participates in the "MBIA Long-Term Incentive Program". The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of MBIA Inc.'s stock. Awards under the long-term program are divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor for the December 1995 award only) paid in cash or shares of MBIA Inc.'s stock. Target levels for the option/incentive award are established as a percentage of total salary and (24) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) bonus, based upon the recipient's position. The awards under the long-term program typically will be granted from the vice president level up to and including the chairman and chief executive officer. The ABV portion of the long-term incentive program may be awarded every year. The 1998 award will cover growth in ABV from December 31, 1998 through December 31, 2001; the 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000; and the 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12% on all awards. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 2002 for the 1998 award, in early 2001 for the 1997 award and early 1999 for the 1995 award in the form of cash or shares of MBIA Inc.'s common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1998, 1997 and 1996, $4.8 million, $3.2 million and $2.6 million, respectively, were recorded as a charge related to the 1998, 1997 and 1995 ABV awards. Of these amounts, $3.0 million, $2.0 million and $1.6 million were included in policy acquisition costs for the same respective periods. MBIA Corp. also participates in MBIA Inc.'s restricted stock program, adopted in December 1995, whereby key executive officers of MBIA Corp. are granted restricted shares of MBIA Inc. common stock. These stock awards may only be sold three or four years from the date of grant, at which time the awards fully vest. Compensation expense related to the restricted stock was $0.9 million, $0.5 million and $0.2 million for the years ended December 31, 1998, 1997 and 1996, respectively, of which $0.5 million, $0.3 million and $0.1 million were included in policy acquisition costs. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required MBIA Inc. to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective (25) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) January 1, 1996 and continues to account for its employee stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no impact on MBIA Corp.'s financial position or results of operations. Had compensation cost for the MBIA Inc. stock option program been recognized based on the fair value at the grant date consistent with the recognition provisions of SFAS 123, the impact on MBIA Corp.'s net income would not have been material. 14. RELATED PARTY TRANSACTIONS - ------------------------------- Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association who had their Standard & Poor's Corporation claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent. The aggregate outstanding exposure on these surety bonds as of December 31, 1998 is $340 million. Included in other assets at December 31, 1998 is a $45.4 million net receivable from MBIA Inc. and other subsidiaries. As of December 31, 1997, included in other liabilities is a $27.1 million net payable to MBIA Inc. and other subsidiaries. MBIA Corp. entered into an agreement with MBIA Inc. and IMC whereby MBIA Corp. held securities subject to agreements to resell of $187.5 million and $182.8 million as of December 31, 1998 and 1997, respectively, and transferred securities subject to agreements to repurchase of $187.5 million and $182.8 million as of December 31, 1998 and 1997. These agreements have a term of less than one year. The interest expense relating to these agreements was $11.1 million and $8.3 million, respectively, for the years ended December 31, 1998 and 1997. The interest income relating to these agreements was $11.6 million and $8.4 million, respectively, for the years ended December 31, 1998 and 1997. (26) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS - ---------------------------------------- The estimated fair value amounts of financial instruments shown in the following table have been determined by MBIA Corp. using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount MBIA Corp. could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities is based upon quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund that invests principally in marketable equity securities. The fair value of these investments is based on quoted market prices. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions. (27) MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unallocated claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS - The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1998 As of December 31, 1997 - ----------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------------------------- ASSETS: Fixed-maturity securities $5,884,053 $5,884,053 $4,867,254 $4,867,254 Short-term investments 423,188 423,188 242,730 242,730 Other investments 17,850 17,850 16,802 16,802 Cash and cash equivalents 6,546 6,546 3,983 3,983 Securities purchased under agreements to resell 187,500 299,412 182,820 203,333 Prepaid reinsurance premiums 352,699 297,238 252,893 218,571 Receivable for investments sold 33,880 33,880 1,616 1,616 LIABILITIES: Deferred premium revenue 2,251,211 1,939,971 1,984,104 1,716,477 Loss and loss adjustment expense reserves 270,114 270,114 78,872 78,872 Securities sold under agreements to repurchase 187,500 194,491 182,820 191,932 Payable for investments purchased 29,523 29,523 23,020 23,020 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums --- 644,132 --- 349,619
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