-----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, EnpCm2sUPDik6F88Nr0VUGwx9OqXVGzquMn+GOri2o1L7AlDt9lPPX/L053f2Hi7 qxGF/C6UNYvOj9Hoa7MCRg== 0000950123-01-002909.txt : 20010402 0000950123-01-002909.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950123-01-002909 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 1585665 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 y46810e10-k.txt MBIA INC. 1 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, 2000. 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 15, 2001 was $7,595,925,423.00. As of March 15, 2001, 98,815,213 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, 2000 are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement of the Registrant, which will be filed on or before April 9, 2001 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. [ ] 2 PART I ITEM 1. BUSINESS MBIA Inc. (the "Company") is engaged in providing financial guarantee insurance and investment management and financial services to public finance clients and financial institutions on a global basis. Financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The Company conducts its financial guarantee business through its 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. MBIA Corp. is the parent of MBIA Insurance Corp. of Illinois ("MBIA Illinois") and Capital Markets Assurance Corporation ("CapMAC"), both financial guarantee companies that were acquired by MBIA Corp. MBIA Corp. also owns MBIA Assurance S.A. ("MBIA Assurance"), a French insurance company, which writes financial guarantee insurance in the countries of the European Community. Generally, throughout the text, references to MBIA Corp. include the activities of its subsidiaries, MBIA Illinois, MBIA Assurance and CapMAC. 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. On March 21, 2000, the two companies restructured the joint venture. Under the restructuring, the companies agreed to begin marketing and originating financial guarantee insurance outside the United States independently, and also to continue to maintain certain reciprocal reinsurance arrangements for international business until at least the end of 2001. The Company believes that the restructuring of the joint venture with Ambac will not result in any reduction in premiums written from international business, although no assurances can be given that such a reduction will not occur. Additionally, during the third quarter of 2000, the Company and Ambac dissolved the four-way joint venture in Japan with Mitsui Marine and Fire Insurance Co Ltd. and the Yasuda Fire and Marine Insurance Co. Ltd. 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 financial guarantees for debt service reserve funds. As a result of the triple-A ratings assigned to insured obligations, the principal economic value of financial guarantee insurance to the entity issuing the obligations is the savings in interest costs 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. MBIA Corp. issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds issued by highly rated sovereign and sub-sovereign entities and collateralized obligations of corporations and financial institutions, both in the new issue and secondary markets The municipal obligations that MBIA Corp. insures include tax-exempt and taxable indebtedness of states, counties, cities, utility districts and other political subdivisions, as well as airports, higher education and health care facilities and similar authorities. The asset-backed or structured finance obligations insured by MBIA Corp. typically consist of securities that are payable from or which are tied to the performance of a specified pool of assets that have a defined cash flow, such as residential and commercial mortgages, a variety of consumer loans, corporate loans and bonds, trade and export receivables, equipment and real property leases and infrastructure projects. MBIA Corp. has a Triple-A financial strength rating from Standard and Poor's Corporation ("S&P"), which it received in 1974; from Moody's Investors Service, Inc. ("Moody's"), which it received in 1984; from Fitch IBCA, Duff & Phelps ("Fitch"), which it received in 1995; and from Rating and Investment Information, Inc. ("RII"), which it received in 1998. Obligations which are guaranteed by MBIA Corp. are rated Triple-A primarily based on these claims-paying ratings of MBIA Corp. Both S&P and Moody's have also continued the Triple-A rating on MBIA Assurance, MBIA Illinois and CapMAC guaranteed bond issues. The Triple-A ratings are important to the operation of the Company's business and any reduction in these ratings could have a material adverse effect on MBIA Corp.'s ability to compete and could have a material adverse effect on the business, operations and financial results of the Company. The Company also provides investment management products and financial services through a group of subsidiary companies, all of which are owned by our wholly-owned subsidiary, MBIA Asset Management Corporation. These services include cash management, the issuance of municipal investment agreements, discretionary asset management, purchase and administrative services, and municipal revenue enhancement services. MBIA Municipal Investors Service Corporation ("MBIA-MISC") provides cash management and investment placement services to local governments, school districts and other institutional clients, providing those clients with fund administration services. MBIA Investment Management Corp. ("IMC") offers guaranteed investment agreements primarily for bond proceeds to states and municipalities. MBIA Capital Management Corp. ("CMC") performs fixed income investment management services for the investment portfolios of the Company, MBIA Corp., MBIA-MISC, IMC and selected 3 external clients. In 1998, the Company acquired what is now 1838 Investment Advisors, LLC ("1838"), an investment advisor to equity mutual funds and to third party clients. MBIA MuniServices Company ("MuniServices") provides revenue enhancement services and products (discovery, audit, collections/recovery, enforcement and information services) to state and local governments. The Company continues to own a majority interest in Capital Asset Holdings GP and certain affiliated entities (collectively, "Capital Asset"). Capital Asset was in the business of acquiring and servicing tax liens. The Company became a majority owner in December, 1998 when it acquired the interest of Capital Asset's founder. In 1999, the Company announced that it was exiting the tax lien business. Capital Asset's primary activity today is servicing the three securitizations of tax liens that are insured by MBIA Corp. Statements included in this Form 10-K which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the private Securities Litigation Reform Act of 1998. The words "believe," "anticipate," "project," "plan," "expect," "intend," "will likely result," or "will continue," and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of their respective dates. The following are some of the factors that could cause actual results to differ materially from estimates contained in or underlying the Company's forward-looking statements: (1) fluctuations in the economic, credit or interest rate environment in the United States or abroad; (2) level of activity within the national and international credit markets; (3) competitive conditions and pricing levels; (4) legislative or regulatory developments; (5) technological developments; (6) changes in tax laws; (7) the effects of mergers, acquisitions and divestitures; and (8) uncertainties that have not been identified at this time. The Company undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such result is not likely to be achieved. MBIA CORP. INSURED PORTFOLIO At December 31, 2000, 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 $5.3 billion of investment management transactions) was $418.4 billion, comprised of $349.8 billion in new issues and $68.6 billion in secondary market issues. Net insurance in force was $680.9 billion. Since generally MBIA Corp. guarantees to the holder of the underlying obligation the timely payment of amounts due on such obligation in accordance with its original payment schedule, in the case of a default on an insured obligation, payments under the insurance policy cannot be accelerated unless MBIA Corp. consents to the acceleration. Otherwise, MBIA Corp. is required to pay principal, interest or other amounts only as originally scheduled payments come due. MBIA Corp. seeks to maintain a diversified insured portfolio designed to manage and diversify risk based on a variety of criteria including revenue source, issue size, type of asset, industry concentrations, type of bond and geographic area. As of December 31, 2000, MBIA Corp. had 35,154 policies outstanding. These policies are diversified among 10,105 "credits," which MBIA Corp. defines as any group of issues supported by the same revenue source. 2 4 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, 2000: MBIA CORP. ORIGINAL PAR AMOUNT PER ISSUE AS OF DECEMBER 31, 2000 (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 27,193 77.4% $50.8 12.2% $10-25 million 3,299 9.4 42.8 10.2 $25-50 million 1,938 5.5 51.0 12.2 $50-100 million 1,334 3.8 64.5 15.4 Greater than $100 million 1,390 3.9 209.3 50.0 ----------------- ----------------- -------------- --------------- Total 35,154 100.0% $418.4 100.0% ================= ================= ============== ===============
- ------------------------------ (1) Excludes $5.3 billion relating to investment management transactions guaranteed by MBIA Corp. 3 5 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, 2000 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, 2000 was $51.7 billion. MBIA Corp. had, until the early-1990's, written only financial guarantees for municipal issuers in the United States. Municipal bonds consist of both taxable and tax-exempt bonds and notes that are issued by states, cities, political subdivisions, utility districts, airports, health care institutions, higher educational facilities, housing authorities and other similar agencies. These types of obligations are supported by taxes, assessments, fees related to use of projects, lease payments, etc. By the mid-1990's, MBIA Corp. had begun to write guarantees for the structured finance and asset-backed market. In general, structured finance and asset-backed obligations are secured by or payable from a specific pool of assets having an ascertainable cash flow. These obligations are either "pass-through" obligations, which represent interests in the related assets, or "pay-through" obligations, which generally are debt obligations collateralized by the related assets. MBIA Corp. also insures payments due under credit derivatives, including termination payments, that may become due upon the occurrence of certain events. These types of obligations also generally have the benefit of over-collateralization, excess cash flow or one or more forms of credit enhancement to cover credit risks associated with the related assets. Structured finance and asset-backed obligations contain certain risks: asset risk, which relates to the amount and quality of asset coverage; and structural risk, which relates to the extent to which the transaction structure protects the interests of the investors. In general, the asset risk is addressed by sizing the asset pool based on the historical performance of the assets. The ability of the servicer (the entity which is responsible for collecting the cash flow from the asset pool) to properly service and collect on the underlying assets is also a factor in determining future asset performance. Structural risks include bankruptcy and tax risks. Structured and asset-backed securities are usually designed to protect the investors from the bankruptcy or insolvency of the entity that originated the underlying assets as well as from the bankruptcy or insolvency of the servicer. These issues concern whether the sale of the assets by the originator to the issuer would be upheld in the event of the bankruptcy or insolvency of the originator and whether the servicer of the assets may be required to delay the remittance of any cash collections held by it or received by it after the time it becomes subject to bankruptcy or insolvency proceedings. In addition, servicer risk, the risk that problems at the servicer level could result in a decline in the collection of cash payments, may also be present in the transaction. These issues are addressed through MBIA Corp.'s underwriting guidelines and procedures. Outside of the United States, sovereign and sub-sovereign, structured and asset-backed, utilities and other issuers are increasingly using financial guarantee insurance. Ongoing privatization efforts have shifted the burden from the government to public and private capital markets, where investors may seek the security of financial guarantee insurance. There is also growing interest in asset-backed securitization. While the principles of securitization have been increasingly applied in overseas markets, development in particular countries has varied due to the sophistication of the local capital markets and the impact of financial regulatory requirements, accounting standards and legal systems. It is expected that securitization will continue to expand internationally, at varying rates in each country. MBIA Corp. insures both asset-backed and structured transactions, sovereign and sub-sovereign debt issues, utilities, project financings and other obligations in selected international markets. MBIA Corp. believes that the risk profile of the international business it insures is generally the same as in the United States, but recognizes that there are particular risks related to each country and region. These risks include the legal and political situation, the capital markets and currency exchange risks. MBIA Corp. monitors these risks carefully. 4 6 MBIA CORP. INSURED PORTFOLIO BY BOND TYPE AS OF DECEMBER 31, 2000 (IN BILLIONS)
BOND TYPE NET PAR % OF NET AMOUNT PAR AMOUNT OUTSTANDING OUTSTANDING Domestic Public Finance General Obligation $ 91.6 21.9% Utilities 44.6 10.6 Health Care 37.9 9.1 Special Revenue 33.2 7.9 Transportation 25.0 6.0 Higher Education 16.0 3.8 Investor Owned Utilities 15.4 3.7 Housing 12.3 2.9 ---------------------------------- Total Public Finance 276.0 65.9 ---------------------------------- Structured Finance Mortgage Backed: Home Equity 28.4 6.8 Other 14.2 3.4 First Mortgage 8.8 2.1 Asset Backed: Other 18.2 4.4 Auto 13.2 3.1 Leasing 4.5 1.1 Pooled Corp. Obligations & Other 12.6 3.0 Financial Risk 5.1 1.2 ---------------------------------- Total Structured Finance 105.0 25.1 ---------------------------------- ---------------------------------- Total Domestic 381.0 91.0 ---------------------------------- International Structured Finance* 31.9 7.7 Infrastructure 5.5 1.3 ---------------------------------- Total International 37.4 9.0 ---------------------------------- TOTAL $418.4 100.0% ==================================
*Asset/mortgage-backed, Pooled Corporate Obligations and Financial Risk - ----------------------------- (1) Excludes $5.3 billion relating to investment management transactions guaranteed by MBIA Corp. 5 7 As of December 31, 2000, of the $418.4 billion outstanding net par amount of obligations insured, $276.0 billion, or 66%, consisted of municipal bonds, $105.0 billion, or approximately 25%, consisted primarily of asset/mortgage-backed transactions and investor-owned utility obligations and $37.4 billion or approximately 9% 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 1996 1997 1998 1999 2000 (IN MILLIONS) Domestic Public Finance General Obligation $12,010 $14,068 $15,468 $ 9,981 $ 9,829 Special Revenue 4,140 4,384 7,369 4,627 5,746 Utilities 6,535 6,944 6,475 2,440 2,747 Transportation 3,040 6,097 4,174 709 2,637 Investor Owned Utilities 1,655 1,548 1,477 1,340 2,523 Higher Education 2,017 2,537 4,072 1,434 1,645 Housing 1,743 1,817 2,093 1,872 1,294 Health Care 4,235 7,523 8,174 3,529 1,276 ------------ ------------ ------------ ----------- ------------ Total Public Finance 35,375 44,918 49,302 25,932 27,697 Structured Finance Asset Backed: Other 2,952 3,493 5,639 3,993 10,676 Auto 2,158 3,452 3,424 5,872 10,400 Leasing 929 3,883 1,044 1,726 1,408 Mortgage Backed: Home Equity 14,319 17,895 16,041 10,191 4,656 First Mortgage 4,009 2,536 2,434 5,205 2,171 Other 1,196 911 2,145 10,098 1,893 Pooled Corp. Obligations & Other 331 223 5,065 3,179 7,593 Financial Risk 3,985 3,338 2,441 1,409 1,905 ------------ ------------ ------------ ----------- ------------ Total Structured Finance 29,879 35,731 38,233 41,673 40,702 Total Domestic 65,254 80,649 87,535 67,605 68,399 ------------ ------------ ------------ ----------- ------------ International Structured Finance* 5,189 3,852 6,708 5,061 15,424 Infrastructure 1,030 1,023 1,038 692 1,437 ------------ ------------ ------------ ----------- ------------ Total International 6,219 4,875 7,746 5,753 16,861 ------------ ------------ ------------ ----------- ------------ TOTAL $71,473 $85,524 $95,281 $73,358 $85,260 ============ ============ ============ =========== ============
*Asset/mortgage-backed, Pooled Corporate Obligations and Financial Risk - ----------------------------- (1) Par amount insured by year, net of reinsurance. 6 8 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 LOCATION AS OF DECEMBER 31, 2000 (1)
NET PAR % OF NET AMOUNT PAR AMOUNT OUTSTANDING OUTSTANDING (IN BILLIONS) DOMESTIC New York $44.7 10.7% California 43.2 10.3 Florida 19.9 4.7 Texas 14.4 3.4 New Jersey 14.2 3.4 Pennsylvania 14.0 3.3 Illinois 12.2 2.9 Massachusetts 11.6 2.8 Michigan 8.2 2.0 Ohio 8.0 1.9 ------------- ------------- Sub-Total 190.4 45.4 All Other States 102.0 24.4 Nationally Diversified 88.6 21.2 ------------- ------------- Total United States 381.0 91.0 INTERNATIONAL Regional Specific 19.3 4.7 Internationally Diversified 18.1 4.3 ------------- ------------- Total International 37.4 9.0 ------------- ------------- Total $418.4 100.0% ============= =============
- ----------------------------- (1) Excludes $5.3 billion relating to investment management transactions guaranteed by MBIA Corp. MBIA Corp. has underwriting guidelines that limit the net insurance in force for any one insured credit and is subject to both rating agency and regulatory single-risk limits with respect to any bond issue insured by it. As of December 31, 2000, MBIA Corp.'s net par amount outstanding for its ten largest insured municipal credits totaled $19.0 billion, representing 4.6% of MBIA Corp.'s total net par amount outstanding, and for its ten largest structured finance credits (without aggregating common issuers), the net par outstanding was $18.3 billion, representing 4.4% of the total. 7 9 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, Asia, Latin America and other areas outside the United States. 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. On March 21, 2000, the two companies restructured the joint venture. Under the restructuring, the companies agreed to begin marketing and originating financial guarantee insurance outside the United States independently, and also to continue to maintain certain reciprocal reinsurance arrangements for international business until at least the end of 2001. The Company believes that the restructuring of the joint venture with Ambac will not result in any reduction in premiums written from international business, although no assurances can be given that such a reduction will not occur. Late in 2000, the companies dissolved a four-way joint venture in Japan. In the first quarter of 2001, the Company entered into a memorandum of understanding with Mitsui Marine and Fire Insurance Co. Ltd. relating to financial guarantee insurance in Japan, including certain reciprocal reinsurance arrangements. 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. For municipal bond issues involving competitive bidding, 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, 2000 (1)
NET PAR AMOUNT % OF NET PAR TYPE OF PROGRAM OUTSTANDING AMOUNT OUTSTANDING (IN BILLIONS) New Issue $349.8 83.6% Secondary market issues Unit investment trusts 28.1 6.7 Other secondary market issues 40.5 9.7 --------------- ----------------- Total $418.4 100.0% =============== =================
- ----------------------------- (1) Excludes $5.3 billion relating to investment management transactions guaranteed by MBIA Corp. 8 10 OPERATIONS The insurance operations of MBIA Corp. are conducted through the Public Finance Division, the Structured Finance Division, the International Division, and the Risk Management Group. Due to the restructuring of the joint venture with Ambac, effective March 21, 2000, all marketing and origination of international transactions will be conducted through MBIA Corp.'s International Division, with the help of the other Divisions. 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 the head of the applicable business unit, one officer from Risk Management and a third officer from either Risk Management or Insured Portfolio Management. 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, Risk Management, Insured Portfolio Management, Legal and the Company's Finance Department. Premium rates for all groups within the insurance operations enterprise are established by a Pricing Committee with representation from the Business Analysis Group (pricing and quantitative analysis) and the relevant insurance operations group. 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, structural finance and international finance 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 legal segregation of the assets, 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 senior committees which are responsible for establishing and maintaining underwriting standards and criteria for all insurance products. The Financial Institution and Corporate Analysis Group within Risk Management underwrites and monitors 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, swaps, liquidity and other 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 direct or indirect exposure. 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, servicers, underwriters, and other interested parties to deal with the concern in order to try to avoid 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. To-date, MBIA Corp. has had 31 insured issues requiring claim payments. There are currently 5 additional insured issues for which case loss reserves have been established but claims have not yet been paid (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 payments on insured obligations on their respective due dates even if the issuer or other parties involved 9 11 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. There can be no assurance, however, that there will be no material losses in the future in respect of any issues guaranteed by MBIA Corp., MBIA Illinois or CapMAC. Once an obligation is insured, the issuer and the trustee are typically required to furnish financial and asset related information, including audited financial statements, periodically to the Insured Portfolio Management Group for review. Potential problems uncovered through this review, such as poor financial results, low fund balances, covenant violations, trustee or servicer problems, 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. During the underwriting process, 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 three departments in the Insured Portfolio Management Group. The Global Public Finance Group handles all types of domestic and international municipal issues such as general obligation, utility and special revenue bonds. It also follows project financings, future flow and collateralized debt obligation issues. The Global Structured Finance Group is responsible for domestic and international asset backed and other structured transactions. The Enterprise Group is responsible for all health care, housing and student loan transactions. Each of the three groups is responsible for processing waiver and consent requests and other deal modifications within their areas. The Global Public Finance Group 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. 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 Global Structured Finance Group 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 Enterprise Group, which monitors insured health care, student loan and single and multi-family housing transactions as well as all pool programs, performs similar functions to, and applies the same policies and procedures as, the Global Public Finance and Global Structured Finance Groups. In addition, it is responsible for remedial activities on weaker credits. INVESTMENT MANAGEMENT SERVICES Over the last nine years, the Company's investment management businesses have expanded their services to the public sector and added new revenue sources. MBIA Asset Management, LLC is the holding company under which the resources and capabilities of our four investment management subsidiaries have been consolidated. MBIA-MISC provides cooperative cash management services directly to local governments and school districts. It also provides investment and treasury management consulting services for municipal and quasi-public sector clients. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue. MBIA-MISC is a Securities and Exchange Commission registered investment adviser. MBIA-MISC operates in 20 states and the Commonwealth of Puerto Rico. 10 12 IMC provides customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other public funds. At year-end 2000, principal and accrued interest outstanding on investment and repurchase agreements was $4.8 billion compared with $4.5 billion at year-end 1999. IMC may use derivative contracts in the course of providing its investment agreements as a protection against interest rate risks. While these derivatives are designed to help manage interest rate risk, they may involve amounts at risk in excess of those reflected in the financial statements. In 1998, the Company acquired 1838, a full-service asset management firm with a strong institutional focus. 1838 currently has over $14.3 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 an NASD member and both CMC and 1838 are registered investment advisers. MUNICIPAL FINANCIAL SERVICES MuniServices MuniServices provides revenue enhancement services and products (discovery, audit, collections/recovery, enforcement and information services) to municipal clients through a single national enterprise. MuniServices uses a consultative marketing strategy to focus clients on its unique capability to identify and recover revenues across the full range of tax sources under performance-based, self-funding business contracts. Capital Asset Through its interest in Capital Asset Holdings GP, Inc. and its affiliates (collectively, "Capital Asset"), between May, 1996 and December 1998, the Company was involved in the business of acquiring and servicing delinquent real estate tax liens from municipalities. In December, 1998, the Company became a majority owner of Capital Asset. During the first two quarters of 1999, the company attempted to sell its interest in Capital Asset. At the end of the second quarter of 1999, the Company ceased these efforts and decided to limit the activities of Capital Asset primarily to the servicing of the portfolios then being serviced by Capital Asset. In the second quarter of 1999, the Company completed an internal evaluation of Capital Asset's tax lien portfolio, as a result of which the Company determined that it was necessary to write down its investment in Capital Asset by $102 million. In the third quarter of 1999, Capital Asset engaged a specialty servicer of residential mortgages to help manage its business and operations and to assist in administering the tax lien portfolios serviced by Capital Asset. In the third quarter of 1999, Capital Asset also completed the refinancing of substantially all of its remaining tax liens. These liens were originally financed through a commercial paper warehouse facility that matured at the end of the third quarter, and which was guaranteed by the Company. The refinancing was accomplished through a securitization transaction in which the tax liens were sold to a special purpose vehicle which in turn issued notes secured by those liens. The proceeds of the securitization were used primarily to extinguish the warehouse facility. This was Capital Asset's third securitization of tax liens. MBIA Corp. has insured all of the notes issued by these securitizations. The first transaction, done in 1997, had an original net par insured of $328 million and at year-end 2000 had $90 million net par insured outstanding; the second transaction, executed in 1998, had an original net par insured of $132 million, with the year-end 2000 net par insured outstanding at $63 million; the 1999 transaction was issued at $196 million net par insured outstanding and at year-end 2000 had $165 million net par insured outstanding (these net par insured outstanding amounts give no effect to the value of collateral). MBIA Corp. has established case basis loss reserves related to these policies, but there can be no assurance that such reserves will be sufficient to cover potential losses under such policies. Capital Asset continues to have certain contingent liabilities outstanding, including various individual and class action lawsuits. The claims giving rise to these lawsuits are a result of Capital Asset's business activities that took place primarily before the Company assumed majority ownership and Capital Asset is defending these lawsuits. The Company has no reason to believe that it has financial liability for these lawsuits. COMPETITION The financial guarantee insurance business is highly competitive. In 2000, MBIA Corp. was the largest insurer of new issue long-term municipal bonds, accounting for 28% of the par amount of such insured bonds. The other principal insurers in 2000 were Ambac Assurance Corporation, Financial Guaranty Insurance Company and Financial Security Assurance Inc., all of which, like 11 13 MBIA Corp., have Aaa and AAA claims-paying ratings from Moody's and S&P, respectively. The two principal competitors in the new issue asset/mortgage-backed securities market in 2000 were Financial Security Assurance and Ambac Assurance Corporation. Financial guarantee insurance also competes with other forms of credit enhancement, including senior-subordinated structures, 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. 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 and the maximum size of any single risk exposure which may be written. 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 primarily 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, 2000, MBIA Corp. retained approximately 83% of the gross debt service outstanding of all transactions insured by it, MBIA Assurance, CapMAC and MBIA Illinois, and ceded approximately 17% to treaty and facultative reinsurers. The principal reinsurers of MBIA Corp., MBIA Assurance, CapMAC and MBIA Illinois are Enhance Reinsurance Company, ACE Guaranty Re Incorporated, AXA Re Finance, Ambac Assurance Corporation and Munich Reinsurance Corp. These reinsurers, whose claims-paying ability is rated Triple-A by S&P, reinsured approximately 77% of the total ceded insurance in force at December 31, 2000. All of the other reinsurers reinsured approximately 23% of the total ceded insurance in force at December 31, 2000 and are diversified geographically and by lines of insurance written. MBIA Corp.'s net retention on the policies it writes varies from time to 12 14 time depending on its own business needs and the capacity available in the reinsurance market. The amounts of reinsurance ceded at December 31, 2000 and 1999 by bond type and by geographic location are set forth in Note 19 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The downgrade or default of one or more of the Company's reinsurers could have an adverse impact on the Company's results of operations. MBIA Corp. and MBIA Assurance have entered into a reinsurance agreement providing for MBIA Corp.'s reinsurance of policies issued by 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 State legal requirements. MBIA Corp. and MBIA Illinois entered into a reinsurance agreement under which MBIA Corp. reinsured 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, 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. 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. MBIA Corp. and CapMAC have 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 is 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. 13 15 For 2000, approximately 64% of the Company's net income was derived from after-tax earnings on its investment portfolio (excluding the amounts 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, 1998, 1999, and 2000. INVESTMENT INCOME OF THE COMPANY (1)
1998 1999 2000 (IN THOUSANDS) Investment income before expenses (2) $337,565 $365,823 $400,754 Investment expenses 5,763 6,367 6,769 ------------- ------------- ------------ Net investment income before income taxes 331,802 359,456 393,985 Net realized gains 34,976 25,160 32,884 ------------- ------------- ------------ Total investment income before income taxes $366,778 $384,616 $426,869 ============= ============= ============ Total investment income after income taxes $299,491 $312,200 $335,435 ============= ============= ============
- ----------------------------- (l) Excludes investment income from investment management services and municipal services segments. (2) Includes taxable and tax-exempt interest income. 14 16 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, 2000, 1999 and 1998. INVESTMENT PORTFOLIO BY SECURITY TYPE AS OF DECEMBER 31, 2000
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 $ 841,683 6.34% $ 443,581 6.09% GNMAs 156,284 7.04 149,989 6.49 Other mortgage & asset backed securities 317,964 6.64 2,954,242 6.20 Corporate obligations 1,388,535 6.87 919,547 7.15 Foreign obligations (2) 235,378 6.28 282,278 7.07 -------------- ------------ -------------- ---------- Total 2,939,844 6.66 4,749,637 6.43 Tax-exempt bonds: State & municipal 3,800,283 7.62 -- -- -------------- ------------ -------------- ---------- Total long-term investments 6,740,127 7.20 4,749,637 6.43 Short-term investments (3) 376,604 6.57 246,971 6.05 -------------- ------------ -------------- ---------- Total fixed income investments 7,116,731 7.17% 4,996,608 6.42% Other investments (4) 119,591 -- -- -- -------------- -------------- Total investments $7,236,322 -- $4,996,608 -- ============== ==============
- ----------------------------- (1) Prospective market yields as of December 31, 2000. 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 17 INVESTMENT PORTFOLIO BY SECURITY TYPE AS OF DECEMBER 31, 1999
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 $ 600,350 7.45% $1,237,005 6.67% GNMAs 146,976 7.68 67,950 7.16 Other mortgage & asset backed securities 267,531 7.94 1,880,944 6.94 Corporate obligations 1,148,565 7.50 766,180 7.61 Foreign obligations (2) 158,938 7.21 317,755 7.66 ------------- ------------ ------------ -------- Total 2,322,360 7.53 4,269,834 7.04 Tax-exempt bonds: State & municipal 3,461,619 8.72 -- -- ------------- ------------ ------------ -------- Total long-term investments 5,783,979 8.24 4,269,834 7.04 Short-term investments (3) 274,022 5.92 219,717 6.17 ------------- ------------ ------------ -------- Total fixed income investments 6,058,001 8.14% 4,489,551 7.00% Other investments (4) 146,038 -- -- -- ------------- ------------ Total investments $6,204,039 -- $4,489,551 -- ============= ============
- ----------------------------- (1) Prospective market yields as of December 31, 1999. 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 18 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. 17 19 The average maturity of the insurance fixed income portfolio excluding short-term investments as of December 31, 2000 was 12.9 years. After allowing for estimated principal pre-payments on mortgage pass-through securities, the duration of the portfolio was 7.2 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, 2000
INVESTMENT INSURANCE MANAGEMENT SERVICES FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL (IN FIXED INCOME (IN FIXED INCOME MATURITY THOUSANDS) INVESTMENTS THOUSANDS) INVESTMENTS Within 1 year $ 376,604 5.3% $ 246,971 4.9% Beyond 1 year but within 5 years 1,042,342 14.7 1,872,702 37.5 Beyond 5 years but within 10 years 1,547,315 21.7 783,325 15.7 Beyond 10 years but within 15 years 1,203,493 16.9 448,697 9.0 Beyond 15 years but within 20 years 1,318,206 18.5 678,787 13.6 Beyond 20 years 1,628,771 22.9 966,126 19.3 ----------- ------------ ------------ ---------- Total fixed income investments $7,116,731 100.0% $4,996,608 100.0% =========== =========== ============ ==========
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, 2000
INVESTMENT INSURANCE MANAGEMENT SERVICES FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL (IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME QUALITY RATING INVESTMENTS INVESTMENTS Aaa $4,469,758 65.0% $4,112,345 82.3% Aa 1,481,489 21.5 325,652 6.5 A 892,398 13.0 547,704 11.0 Baa 31,092 0.5 10,907 0.2 -------------- --------------- -------------- ------------ $6,874,737 100.0% $4,996,608 100.0% ============== =============== ============== ============
- ----------------------------- (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. 18 20 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. MBIA Assurance has used the provisions of the Third Non-life Insurance Directive to operate in the United Kingdom both on a services and branch basis and is to a limited extent subject to supervision by the Financial Services Authority. The extent of state insurance regulation and supervision varies by jurisdiction, but New York, Illinois 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, asset-backed securities 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 laws 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 single municipal bond and asset-backed securities 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. California, Connecticut, Florida, Illinois and New York also limit the net insured unpaid principal on a municipal bond issued by a single entity and backed by a single revenue source to 75% of policyholders' surplus and contingency reserves. California, Connecticut, and New York, among other things, require for each issue of asset-backed securities issued by a single entity and for each pool of consumer debt obligations, the lesser of: (1) the insured average debt service or (2) the insured unpaid principal (reduced by the extent to which unpaid principal of the supporting assets exceeds the insured unpaid principal) divided by nine. Each issue of asset-backed securities issued by a single entity and each pool of consumer debt obligations shall not exceed 10% of the aggregate of the insurer's policyholders' surplus and contingency reserves, provided that no asset in the pool supporting the asset-backed securities exceeds single risk limits. Florida limits insured unpaid principal for any one risk 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. 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. Under New York, California, Connecticut, Florida, and New Jersey law, aggregate insured unpaid principal and 19 21 interest under policies insuring asset-backed securities (again, in the case of New York, California, Connecticut, and Florida, net of reinsurance) are limited to certain multiples of policyholders' surplus and contingency reserves. New York, California, Connecticut, Florida, and other states impose a 150:1 limit for insured investment grade asset-backed securities, although more restrictive limits on asset-backed securities of other types exist. For example, New York, California, Connecticut, and Florida impose a 50:1 limit for non-investment grade asset-backed securities. The Company, MBIA Corp., MBIA Illinois, and CapMAC also are subject to regulation under 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 inter-corporate transfers of assets, and of transactions between insurance 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, or (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 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 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 (I) specific, identified loss reserves to cover estimated losses on policies for which the Company has determined that it is likely to incur losses ("case basis reserves"), and (II) general, unallocated loss reserves to cover losses that may be reasonably estimated to occur on its insured obligations over the lives of such obligations. The aggregate loss reserves, at any financial statement date, are the Company's best estimate of the reserves needed to cover both types of losses, including expected costs of settlement. 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 reserves. 20 22 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. At December 31, 2000, $209.2 million of the $467.9 million reserve for loss and loss adjustment expenses represents case basis reserves, of which $183.9 million is attributable to a health care facility in Pennsylvania. The remaining case basis reserves represent various housing financings and structured finance transactions, the largest of which is $9.9 million. 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. 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 the total loss reserve, it is not likely that there will be an 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 insured or if the Company decides to make a one-time adjustment to the reserves in the event of a loss that materially reduces the unallocated portion of the reserve. 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. In 2000 and 1999, the Company reviewed its loss reserving methodology. The reviews included an analysis of loss-reserve factors and the historical default and recovery experience of certain sectors of the fixed-income market. The 1999 review resulted in an increase in the Company's loss reserve factors. 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 7 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, 1996 1997 1998 1999 2000 MBIA Corp. Loss ratio 1.7% 1.2% 8.0% 12.3% 6.2% Expense ratio 22.8 21.2 16.8 23.6 22.1 Combined ratio 24.5 22.4 24.8 35.9 28.3 Financial guarantee industry (1) Loss ratio 4.9% 8.3% 22.8% 4.2% * Expense ratio 31.6 28.1 22.7 24.1 * Combined ratio 36.5 36.4 45.5 28.3 *
- ----------------------------- (1) Industry statistics were taken from the 1999 Industry Financial Results of the Association of Financial Guaranty Insurors. * Not available. 21 23 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, 1996 1997 1998 1999 2000 (DOLLARS IN MILLIONS) MBIA Corp. Net insurance in force $ 434,417 $ 513,736 $ 595,895 $ 635,883 $680,878 Qualified statutory capital 2,620 3,140 3,741 4,152 4,505 Policyholders' leverage ratio 166:1 164:1 159:1 153:1 151:1 Financial guarantee industry (1) Net insurance in force $1,076,821 $1,262,697 $1,416,433 $1,616,226 * Qualified statutory capital 7,350 8,851 9,833 11,139 * Policyholders' leverage ratio 147:1 143:1 144:1 145:1 *
- ----------------------------- (1) Industry statistics were taken from the 1999 Industry Financial Results of the Association of Financial Guaranty Insurors. * Not available. 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 nor does it take into account the Company's "soft" capital facilities (see "Business -- Credit Agreement"). 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 Virtually all of the insurance policies issued by MBIA Corp. provide an unconditional and irrevocable guarantee of the payment to a designated paying agent for the holders of the insured obligations of an amount equal to the principal of and interest or other amounts due on the insured obligations that have not been paid. In the event of a default in payment of principal, interest or other insured amounts 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. which provides for this payment upon receipt of proof of ownership of the obligations due, as well as upon receipt of instruments appointing MBIA Corp. as agent for the holders and evidencing the assignment of the rights of the holders with respect to the payments made by MBIA Corp. Even if the holders are permitted by the terms of the insured obligations to have the full amount of principal, accrued interest or other amounts due declared due and payable immediately in the event of a default, MBIA Corp. is required to pay only the amounts scheduled to be paid, but not in fact paid, on each originally scheduled 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. 22 24 RATING AGENCIES Moody's, S&P, Fitch and RII perform periodic reviews of MBIA Corp. and other companies providing financial guarantee insurance. Their reviews focus on the insurer's operations, financial condition, 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. INVESTMENT CONSIDERATIONS Claims-Paying Ability Rating ---------------------------- MBIA Corp.'s ability to attract new business and to compete with other triple-A rated financial guarantors is largely dependent on the Triple-A claims paying ratings assigned to it by the major rating agencies. Although MBIA Corp. intends to comply with the requirements of the rating agencies to maintain such ratings, no assurance can be given that these requirements will not change or that, even if MBIA Corp. complies with these requirements, one or more of such rating agencies will not reduce or withdraw their claims-paying ability ratings of MBIA Corp. in the future. MBIA Corp.'s ability to attract new business and to compete with other triple-A rated financial guarantors, and its results of operations and financial condition, would be materially adversely affected by any reduction in its ratings. See "Business - Rating Agencies". Competition ----------- The businesses engaged in by MBIA Corp. are highly competitive. MBIA Corp. faces competition from other financial guaranty insurance companies, other providers of third-party credit enhancement, such as multi line insurance companies and banks, and alternative executions which do not employ third-party credit enhancement. To the extent that there is no increase in the dollar volume of obligations that require guaranties, increased competition, either in terms of price or new providers of credit enhancement, would likely have an adverse effect on MBIA Corp.'s business. See "Business - Competition". Market and Other Factors ------------------------ The demand for financial guaranty insurance depends upon many factors, some of which are beyond the control of MBIA Corp. While all the major financial guaranty insurers have triple-A claims-paying ability ratings from the major rating agencies, investors may from time to time distinguish among financial guarantors on the basis of various factors, including size, insured portfolio concentration and financial performance. These distinctions may result in differentials in trading levels for securities insured by particular financial guarantors which, in turn, may provide a competitive advantage to those financial guarantors with better trading characteristics. Conversely, various investors may, due to regulatory or internal guidelines, lack additional capacity to purchase securities insured by certain financial guarantors, which may provide a competitive advantage to guarantors with fewer insured obligations outstanding. Prevailing interest rate levels affect demand for financial guaranty insurance to the extent that lower interest rates are accompanied by narrower spreads between insured and uninsured obligations. The purchase of insurance during periods of relatively 23 25 narrower interest rate spreads will generally provide lower cost savings to the issuer than during periods of relatively wider spreads. These lower cost savings generally are accompanied by a corresponding decrease in demand for financial guaranty insurance. The perceived financial strength of financial guaranty insurers also affects demand for financial guaranty insurance. Should a major financial guaranty insurer, or the industry generally, have its claims-paying ability rating lowered, or suffer for some other reason deterioration in investors' confidence, demand for financial guaranty insurance may be reduced significantly. Premium rates are affected by factors such as the insurer's appraisal of the insured credit, the spread between interest rates prevailing on insured and uninsured obligations and capital charges associated with these exposures as determined by the rating agencies and regulators, as well as competition for such business among financial guaranty insurance providers and other forms of credit enhancement. Lower interest rates generally result in lower premium amounts to the extent that premium amounts are based on the total dollar amount of principal interest and other amounts insured. Regulation ---------- The financial guaranty insurance industry has historically been and will continue to be subject to the direct and indirect effects of governmental regulation, including changes in tax laws and legal precedents affecting asset-backed and municipal obligations. No assurance can be given that future legislative regulatory or judicial changes will not adversely affect MBIA Corp.'s business. See "Business - Regulation" for a description of current insurance regulations affecting MBIA Corp. Adequacy of Loss Reserves ------------------------- The financial guaranties issued by MBIA Corp. insure the financial performance of the obligations guaranteed over an extended period of time, in some cases over 30 years, under policies that MBIA Corp. cannot cancel. As a result of the lack of statistical loss data due to the low level of losses in MBIA Corp.'s financial guaranty business and in the financial guaranty industry in general, particularly in the structured asset-backed area, MBIA Corp. does not use traditional actuarial approaches to determine its loss reserves. Instead, a general loss reserve is established in an amount deemed adequate to cover the expected levels of losses and loss adjustment expense on MBIA's overall portfolio. The size of the general loss reserve is determined by a formula, the components of which are reviewed regularly. Management believes that the current level of general loss reserves is adequate to cover the estimated liability for claims and the related adjustment expenses with respect to financial guaranties issued by MBIA Corp. The establishment of the appropriate level of loss reserves is an inherently uncertain process involving numerous estimates and subjective judgments by management, and therefore there can be no assurance that losses in MBIA Corp.'s insured portfolio will not exceed the loss reserves. Losses from future defaults, depending on their magnitude, could have a material adverse effect on the results of operations and financial condition of MBIA Corp. See "Business - Losses and Reserves". Realization of Installment Premiums ----------------------------------- Due to the annuity nature of a significant percentage of its premium income, MBIA Corp. has an embedded future revenue stream. The amount of installment premiums actually realized by MBIA Corp. could be reduced in the future due to factors such as accelerated prepayments of underlying obligations. Although increases in installment premium due to renewals of existing insurance contracts historically have been greater than reductions, there can be no assurance that future circumstances might not cause a net reduction overall, resulting in lower revenues. 24 26 Reinsurance ___________ MBIA Corp.'s ability to maintain reinsurance capacity is important to its business. In order to comply with regulatory, rating agency or internal single risk retention limits for transactions of significant size, MBIA Corp. needs access to sufficient reinsurance capacity to underwrite large transactions. If MBIA Corp. were to become unable to obtain sufficient reinsurance, this could have an adverse impact on its ability to issue policies for large transactions. See "Business - Reinsurance". MBIA Corp. remains liable for insurance ceded to reinsurers to the extent such reinsurers are unable to meet their obligations. Anti-Takeover Provisions ________________________ The Company's Charter and Bylaws contain special notice and other provisions the effect of which could be to discourage non-negotiated takeover attempts, which takeovers some stockholders might otherwise deem to be in their interests. In addition, the Company has a Rights Plan in place that would also deter non-negotiated takeovers. Given the importance of MBIA Corp.'s triple-A ratings to the Company's business, as a practical matter, a change of control would require confirmation in advance from the rating agencies that such transaction would not result in a downgrading of the claims-paying ability rating assigned to MBIA Corp. The insurance laws of New York provide that no person, other than an authorized insurer, may acquire control of the Company and thus indirect control of MBIA Corp., or any other New York-domiciled insurance subsidiary of the Company, unless it has given prior written notice to MBIA Corp. and any such subsidiary and received the prior approval of the Superintendent of Insurance of the State of New York. Furthermore, any purchaser of 10% or more of the outstanding shares of the Company's Common Stock would be presumed to have acquired such control unless the Superintendent of Insurance determined otherwise. Therefore, any takeover of the Company effectively requires regulatory approval. This regulatory restriction may effectively reduce the probability of a takeover without the cooperation of management. Investment Management Services Businesses _________________________________________ The Company's Investment Management Services businesses have grown as a proportion of its overall business (see "Investment Management Businesses"). As their contribution continues to grow, events that negatively affect the performance of the Investment Management Services businesses could affect the overall performance of the Company. 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"), to provide MBIA Corp. with an unconditional, irrevocable line of credit. The line of credit is available to be drawn upon by MBIA Corp., in an amount up to $900 million, after MBIA Corp. has incurred, during the period commencing October 27, 2000 and ending October 31, 2007, cumulative losses (net of any recoveries) in excess of $900 million or 5.6% 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, 2007, 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 15, 2001, the Company had 745 employees. No employee is covered by a collective bargaining agreement. The Company considers its employee relations to be satisfactory. EXECUTIVE OFFICERS The executive officers of the Company and their present ages and positions with the Company are set forth below. All these individuals are also directors of MBIA Corp. 25 27
NAME AGE POSITION AND TERM OF OFFICE ---- --- --------------------------- Joseph W. Brown 52 Chairman and Chief Executive Officer (officer since January 1999) Gary C. Dunton 45 President and Chief Operating Officer (officer since January, 1998) Richard L. Weill 58 Vice President and Secretary (officer since 1989) Neil G. Budnick 46 Vice President and Chief Financial Officer (officer since 1992) John B. Caouette 56 Vice President (officer since February, 1998) Ram D. Wertheim 46 Vice President and General Counsel (officer since January, 2000) Kevin D. Silva 47 Vice President and Chief Administrative Officer (officer since 1995) Ruth M. Whaley 45 Vice President and Chief Risk Officer (officer since 1999) Robert T. Wheeler 58 Vice President and Chief Technology Officer (officer since May, 2000) John S. Pizzarelli 45 Vice President (officer since November, 2000) Mark S. Zucker 52 Vice President (officer since November, 2000)
Joseph W. Brown is Chairman and Chief Executive Officer of the Company (effective January 7, 1999) and a director of the Company. Prior to joining the Company in January 1999, Mr. Brown was Chairman of the Board of Talegen Holdings, Inc. Gary C. Dunton is President and Chief Operating Officer of the Company and a director of the Company. 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. Richard L. Weill is Vice President and Secretary of the Company. From 1989 through 1991, Mr. Weill was General Counsel and Corporate Secretary of the Company. Neil G. Budnick is Vice President and Chief Financial Officer of the Company. Mr. Budnick has been primarily involved in the insurance operations area of MBIA Corp. since joining the Company in 1983. John B. Caouette is Vice President of the Company. Mr. Caouette was, until February of 1998, the Chairman and Chief Executive Officer of CapMAC Holdings Inc. Ram D. Wertheim is Vice President and General Counsel of the Company. From February of 1998 until January, 2000, he served in various capacities in the Structured Finance Division. Mr. Wertheim was, until February of 1998, the General Counsel of CapMAC Holdings Inc. Kevin D. Silva is Vice President and Chief Administrative Officer of the Company. He has been in charge of the Management Services Division of MBIA Corp. since joining the Company in late 1995. Ruth M. Whaley is Vice President and Chief Risk Officer of the Company. She was, until February of 1998, the Chief Underwriting Officer of CapMAC Holdings Inc. Robert T. Wheeler is Vice President and Chief Technology Officer of the Company. From 1985 until April of 2000, he was the Managing Director and Chief Information Officer of US Fire Insurance Company. John S. Pizzarelli is Vice President of the Company and head of the Public Finance Division of MBIA Corp. Since joining MBIA Corp. in 1985, he has been primarily involved in the public finance area. Mark D. Zucker is Vice President of the Company and head of the Structured Finance Division of MBIA Corp. Prior to joining the Company he was Chief Credit Officer of Investment Banking for Rabobank International. ITEM 2. PROPERTIES MBIA Corp. owns the 265,000 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 also has rental space in New York, New York, San Francisco, California, Paris, France, Madrid, Spain, Sydney, Australia and London, England. The Company believes that these facilities are adequate and suitable for its current needs. 26 28 ITEM 3. LEGAL PROCEEDINGS In the normal course of operating its businesses, the Company may be involved in various 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; however, Capital Asset continues to have certain contingent liabilities outstanding, including various individual and class action lawsuits, which they are defending. The Company has no reason to believe that it has financial liability for these lawsuits. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 27 29 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 page 65 of the Company's 2000 Annual Report to Shareholders and is incorporated herein by reference. As of March 15, 2001, there were 945 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 2000 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 36-42 of the Company's 2000 Annual Report to Shareholders is incorporated by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See the information under the heading "Market Risk" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as set forth on page 42 of the Company's 2000 Annual Report to Shareholders which 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 43-62 of the Company's 2000 Annual Report to Shareholders and are incorporated by reference. Subsequent Event - Stock Split (Unaudited) On March 15, 2001 the Company's Board of Directors approved a 3 for 2 stock split by means of a stock dividend. The 3-for-2 stock split will be accomplished through a stock dividend which will be distributed on April 20, 2001 to shareholders of record as of April 2, 2001. The pro-forma per share amounts on a post-split basis for the years ended December 31, 2000, 1999 and 1998 would be as follows:
2000 1999 1998 Net income per common share: Basic $ 3.58 $ 2.15 $ 2.91 Diluted $ 3.56 $ 2.13 $ 2.88 Book value per share $ 28.59 $ 23.56 $ 25.43
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 30 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, which will be filed on or before April 9, 2001, 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, which will be filed on or before April 9, 2001, which is incorporated by reference. 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, which will be filed on or before April 9, 2001, 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 which will be filed on or before April 9, 2001, which is incorporated by reference. 29 31 PART IV ITEM 14. (a) Financial Statements and Financial Statement Schedules and Exhibits. 1. Financial Statements MBIA Inc. has incorporated by reference from the 2000 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. 43 Consolidated balance sheets as of December 31, 2000 and 44 1999. Consolidated statements of income for the years ended 45 December 31, 2000, 1999 and 1998. Consolidated statements of changes in shareholders' 46 equity for the years ended December 31, 2000, 1999 and 1998. Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998. 47 Notes to consolidated financial statements. 48-62
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, 2000. II Condensed financial information of Registrant for December 31, 2000, 1999 and 1998. IV Reinsurance for the years ended December 31, 2000, 1999 and 1998.
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. 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 to 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"), as amended December 20, 1995. 3.2. By-Laws as Amended as of March 19, 1998, incorporated by reference to Exhibit 3.2 of the 1998 10-K. 30 32 4. Instruments Defining the Rights of Security Holders, including Indentures. 4.1 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. 4.2 Bond Purchase and Paying Agent Agreement between MBIA Inc. and various banks, entered into as of December 12, 2000 in connection with CHF 175,000,000 4.5% Bonds, due June 15, 2010. 10. Material Contracts 10.01. 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, as supplemented by the Amended and Restated Tax Allocation Agreement Supplement No. 1, dated as of August 31, 1999, incorporated by reference to Exhibit 10.06 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,1999 (Comm. File No. 1-9583) (the "1999 10-K"). 10.02. 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. 10.03. 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, incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (Comm. File No. 1-9583) (the "1998 10-K"). 10.04. 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, incorporated by reference to Exhibit 10.13 to the 1998 10-K, as further amended and restated by the Second Amendment to the Second Amended and Restated Credit Agreement, dated as of October 29, 1999, incorporated by reference to Exhibit 10.13 to the 1999 10-K, as further amended and restated by the Third Amendment to the Second Amendment and Restated Credit Agreement, dated as of October 27, 2000. 31 33 10.05. 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. 10.06. 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. 10.07. 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. 10.08. 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. 10.09. 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. 10.10. 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. 10.11. Reinsurance Agreement, dated as of April 1, 1998, between CapMAC and MBIA Corp., incorporated by reference to Exhibit 10.30 to the 1998 10-K. 10.12. Reinsurance Agreement, dated as of January 1, 1999, between MBIA Illinois and MBIA Corp., incorporated by reference to Exhibit 10.31 to the 1998 10-K. 10.13. Agreement and Plan of Merger by and among the Company, MBIA Acquisition, Inc. and 1838 Investment Advisors, Inc., dated as of June 19, 1998, incorporated by reference to Exhibit 10.32 to the 1998 10-K. 10.14. 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, incorporated by reference to Exhibit 10.33 to the 1998 10-K, incorporated by reference to Exhibit 10.33 to the 1999 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000. 10.15. 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, incorporated by reference to Exhibit 10.34 to the 1998 10-K, incorporated by reference to Exhibit 10.34 to the 1999 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000. 10.16. 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, incorporated by reference to Exhibit 10.48 to the 1998 10-K. 10.17. 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, incorporated by reference to Exhibit 10.49 to the 1998 10-K. 10.18. 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, incorporated by reference to Exhibit 10.50 to the 1998 10-K. 32 34 10.19. ISDA Master Agreement, dated May 2, 2000, between Deutsche Bank AG and MBIA Inc., as supplemented by the Schedule to the ISDA Master Agreement and the Credit Support Annex. Executive Compensation Plans and Arrangements The following Exhibits identify all existing executive compensation plans and arrangements: 10.20. MBIA Inc. 2000 Stock Option Plan, effective May 11, 2000. 10.21. 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"). 10.22. 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"). 10.23. 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. 10.24. 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. 10.25. 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. 10.26. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K. 10.27. 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. 10.28. CapMAC Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.18 to the CapMAC Form S-1, as Amended and Restated, effective January 1, 1999. 10.29. 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, incorporated by reference to Exhibit 10.25 to the 1998 10-K. 10.30. ESOP Loan Agreement by and between MBIA Inc. and the CapMAC Employee Stock Ownership Plan Trust, dated June 30, 1999. 10.31. 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"). 33 35 10.32. 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. 10.33. 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, incorporated by reference to Exhibit 10.35 to the 1998 10-K. 10.34. Terms of Employment letter between MBIA and Joseph W. Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.36 to the 1998 10-K. 10.35. Stock Option Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.37 to the 1998 10-K. 10.36. Key Employee Employment Protection Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 20, 1999, incorporated by reference to Exhibit 10.38 to the 1998 10-K. 10.37. Key Employee Employment Protection Agreement between MBIA Inc. and Neil G. Budnick, dated January 25, 1999, incorporated by reference to Exhibit 10.39 to the 1998 10-K. 10.38. Key Employee Employment Protection Agreement between MBIA Inc. and W. Thacher Brown, dated January 25, 1999, incorporated by reference to Exhibit 10.40 to the 1998 10-K. 10.39. Key Employee Employment Protection Agreement between MBIA Inc. and John B. Caouette, dated January 25, 1999, incorporated by reference to Exhibit 10.41 to the 1998 10-K. 10.40. Key Employee Employment Protection Agreement between MBIA Inc. and Gary C. Dunton, dated January 25, 1999, incorporated by reference to Exhibit 10.42 to the 1998 10-K. 10.41. Key Employee Employment Protection Agreement between MBIA Inc. and Louis G. Lenzi, dated January 25, 1999, incorporated by reference to Exhibit 10.43 to the 1998 10-K. 10.42. Key Employee Employment Protection Agreement between MBIA Inc. and Kevin D. Silva , dated January 25, 1999, incorporated by reference to Exhibit 10.44 to the 1998 10-K. 10.43. Key Employee Employment Protection Agreement between MBIA Inc. and Richard L. Weill, dated January 25, 1999, incorporated by reference to Exhibit 10.45 to the 1998 10-K. 10.44. Key Employee Employment Protection Agreement between MBIA Inc. and Ruth M. Whaley, dated January 25, 1999, incorporated by reference to Exhibit 10.46 to the 1998 10-K. 10.45. Key Employee Employment Protection Agreement between MBIA Inc. and Michael J. Maguire, dated March 19, 1999, incorporated by reference to Exhibit 10.47 to the 1998 10-K. 10.46. Key Employee Employment Protection Agreement between MBIA Inc. and John S. Pizzarelli, dated March 14, 2000. 10.47. Key Employee Employment Protection Agreement between MBIA Inc. and Ram D. Wertheim, dated January 24, 2000. 10.48. Key Employee Employment Protection Agreement between MBIA Inc. and Robert T. Wheeler, dated April 17, 2000. 10.49. Key Employee Employment Protection Agreement between MBIA Inc. and Mark S. Zucker, dated March 14, 2000. 34 36 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 2000. 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 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 2000. 35 37 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 30, 2001 By /s/ Joseph W. Brown ------------------------------------ Name: Joseph W. Brown 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/ Joseph W. Brown Chairman and Director March 30, 2001 - ------------------------------------------ Joseph W. Brown /s/ Douglas C. Hamilton Vice President and March 30, 2001 - ------------------------------------------ Controller Douglas C. Hamilton /s/ David H. Elliott Director March 30, 2001 - ------------------------------------------ David H. Elliott /s/ David C. Clapp Director March 30, 2001 - ------------------------------------------ David C. Clapp /s/ Gary C. Dunton Director March 30, 2001 - ------------------------------------------ Gary C. Dunton /s/ Claire L. Gaudiani Director March 30, 2001 - ------------------------------------------ Claire L. Gaudiani
36 38 /s/ William H. Gray, III Director March 30, 2001 - ------------------------------------------ William H. Gray, III /s/ Freda S. Johnson Director March 30, 2001 - ------------------------------------------ Freda S. Johnson /s/ Daniel P. Kearney Director March 30, 2001 - ------------------------------------------ Daniel P. Kearney /s/ James A. Lebenthal Director March 30, 2001 - ------------------------------------------ James A. Lebenthal /s/ John A. Rolls Director March 30, 2001 - ------------------------------------------ John A. Rolls
37 39 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, 2001 appearing in the 2000 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 ------------------------------ PricewaterhouseCoopers LLP New York, New York February 2, 2001 40 SCHEDULE I MBIA INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2000 (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 $ 630,694 $ 664,713 $ 664,713 State and municipal obligations 3,684,653 3,800,284 3,800,284 Corporate and other obligations 5,126,890 5,131,748 5,131,748 Mortgage-backed 1,870,943 1,893,019 1,893,019 --------------- --------------- ---------------- Total fixed-maturities 11,313,180 11,489,764 11,489,764 SHORT-TERM INVESTMENTS 623,575 XXXXXXXXXX 623,575 OTHER INVESTMENTS 132,646 XXXXXXXXXX 119,591 --------------- --------------- ---------------- Total investments $12,069,401 XXXXXXXXXX $12,232,930 =============== =============== ================
41 SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (Dollars in thousands, except per share amounts)
DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------- ----------------- ASSETS Investments: Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $4,452,992 and $3,917,335) $4,474,647 $3,832,370 Fixed maturity securities held as available-for-sale at fair value (amortized cost $72,607) 74,594 --- Short-term investments, at amortized cost (which approximates fair value) 106,001 --- ---------------- --------------- Total investments 4,655,242 3,832,370 Cash and cash equivalents 30,684 21,289 Securities borrowed or purchased under agreements to resell 559,624 385,171 Investment in and amounts due from wholly-owned subsidiaries 4,809,122 4,284,732 Accrued investment income 43,299 33,514 Receivables for investments sold 11,275 21,915 Other assets 26,776 41,819 ---------------- --------------- Total assets $10,136,022 $8,620,810 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Municipal investment agreements $3,461,095 $3,063,050 Municipal repurchase agreements 757,643 811,288 Long-term debt 783,802 674,114 Short-term debt 99,992 --- Securities loaned or sold under agreements to repurchase 734,624 412,749 Deferred income taxes 8,376 --- Payable for investments purchased 5,566 83,602 Dividends payable 20,205 20,406 Other liabilities 41,306 42,500 ---------------- --------------- Total liabilities 5,912,609 5,107,709 ---------------- --------------- 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 - 100,773,295 and 100,072,846 100,773 100,073 Additional paid-in capital 1,219,587 1,191,108 Retained earnings 2,934,608 2,486,478 Accumulated other comprehensive income (loss), net of deferred income tax provision (benefit) of $57,141 and $(112,920) 85,707 (224,511) Unallocated ESOP shares (2,950) (4,363) Unearned compensation - restricted stock (10,659) (9,986) Treasury stock - 2,209,358 in 2000 and 520,722 shares in 1999 (103,653) (25,698) ---------------- --------------- Total shareholders' equity 4,223,413 3,513,101 ---------------- --------------- Total liabilities and shareholders' equity $10,136,022 $8,620,810 ================ ===============
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. 42 SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (In thousands)
YEARS ENDED DECEMBER 31 --------------------------------------------------------------- 2000 1999 1998 ------------------ ----------------- ----------------- Revenues: Net investment income $223,575 $188,826 $ (178) Net realized gains (losses) 8,386 (8,639) --- Investment management services income 23,088 12,733 4,553 Investment management services realized gains (loss) (1,820) 1,185 4,253 ------------------ ----------------- ----------------- Total revenues 253,229 194,105 8,628 ------------------ ----------------- ----------------- Expenses: Interest expense 54,460 52,857 38,875 Operating expenses 19,452 135,737 67,252 ------------------ ----------------- ----------------- Total expenses 73,912 188,594 106,127 ------------------ ----------------- ----------------- Gain (loss) before income taxes and equity in earnings of subsidiaries 179,317 5,511 (97,499) Benefit for income taxes (16,742) (17,617) (13,888) ------------------ ----------------- ----------------- Gain (loss) before equity in earnings of subsidiaries 196,059 23,128 (83,611) Equity in earnings of subsidiaries 332,578 297,402 516,339 ------------------ ----------------- ----------------- Net income $528,637 $320,530 $432,728 ================== ================= =================
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. 43 SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
YEARS ENDED DECEMBER 31 --------------------------------------------------- 2000 1999 1998 -------------- --------------- --------------- Cash flows from operating activities: Net income $ 528,637 $ 320,530 $ 432,728 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (332,578) (297,402) (516,339) Net realized (gains) losses on sales of investments (6,566) 7,454 (4,253) Benefit for deferred income taxes (118) (52) (30) Other, net (11,421) 1,364 27,823 -------------- --------------- --------------- Total adjustments to net income (350,683) (288,636) (492,799) -------------- --------------- --------------- Net cash provided (used) by operating activities 177,954 31,894 (60,071) -------------- --------------- --------------- Cash flows from investing activities: Purchase of fixed-maturity securities (4,433,020) (4,776,543) --- Sale of fixed-maturity securities 4,360,435 4,767,905 --- (Purchase) sale of short-term investments (106,001) --- 2,300 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (5,346,474) (2,541,312) (2,351,385) Sales from municipal investment agreement portfolio, net of receivable for investments sold 4,754,985 1,324,531 1,707,407 Contributions to subsidiaries (130) (3,178) (17,616) Advances to subsidiaries, net 56,310 135,690 (62,085) -------------- --------------- --------------- Net cash used by investing activities (713,895) (1,092,907) (721,379) -------------- --------------- --------------- Cash flows from financing activities: Net proceeds from issuance of long-term debt 196,108 --- 197,113 Net repayment from retirement of short-term debt --- --- (20,000) Dividends paid (80,708) (79,764) (85,667) Purchase of treasury stock (77,955) (24,698) --- Proceeds from issuance of municipal investment and repurchase agreements 2,478,519 2,547,714 2,065,200 Payments for drawdowns of municipal investment agreements (2,141,733) (1,373,250) (1,306,389) Securities loaned or sold under agreements to repurchase, net 147,422 (7,493) (98,229) Exercise of stock options 23,683 14,616 30,708 -------------- --------------- --------------- Net cash provided by financing activities 545,336 1,077,125 782,736 -------------- --------------- --------------- Net increase in cash and cash equivalents 9,395 16,112 1,286 Cash and cash equivalents - beginning of year 21,289 5,177 3,891 -------------- --------------- --------------- Cash and cash equivalents - end of year $ 30,684 $ 21,289 $ 5,177 ============== =============== =============== Supplemental cash flow disclosures: Income taxes paid $ 1,411 $ 149 $ 618 Interest paid: Long-term debt 52,388 52,338 39,499 Short-term debt --- --- 1,057
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. 44 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 SUBSIDIARIES During 2000 and 1999, MBIA Corp. declared and paid dividends of $197.3 million and $180.0 million to MBIA Inc. In addition, MBIA Asset Management Corp. declared and paid dividends of $25.0 million and $9.0 million to MBIA Inc. during 2000 and 1999, respectively. No dividends were paid by MBIA Corp. to MBIA Inc. in 1998. 4. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AND REPURCHASE AGREEMENTS The municipal investment and repurchase agreement business, as described in footnotes 2 and 17 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. 45 SCHEDULE IV MBIA INC. AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (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 - ------------------------------------------------------------------------------------------------------------------- 2000 $641,452 $189,316 $45,956 $498,092 9.2% ---- -------- -------- ------- -------- ---- 1999 $590,597 $171,256 $34,274 $453,615 7.6% ---- -------- -------- ------- -------- ---- 1998 $664,269 $156,064 $12,781 $520,986 2.5% ---- -------- -------- ------- -------- ----
46 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, 2000 COMMISSION FILE NO. 1-9583 - -------------------------------------------------------------------------------- MBIA INC. 47 EXHIBIT INDEX 3.1. Restated Certificate of Incorporation, dated August 17, 1990, incorporated by reference to Exhibit 3.1 to 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"), as amended December 20, 1995. 4.2 Bond Purchase and Paying Agent Agreement between MBIA Inc. and various banks, entered into as of December 12, 2000 in connection with CHF 175,000,000 4.5% Bonds, due June 15, 2010. 10.04. 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, incorporated by reference to Exhibit 10.13 to the 1998 10-K, as further amended and restated by the Second Amendment to the Second Amended and Restated Credit Agreement, dated as of October 29, 1999, incorporated by reference to Exhibit 10.13 to the 1999 10-K, as further amended and restated by the Third Amendment to the Second Amendment and Restated Credit Agreement, dated as of October 27, 2000. 10.14. 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, incorporated by reference to Exhibit 10.33 to the 1998 10-K, incorporated by reference to Exhibit 10.33 to the 1999 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000. 10.15. 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, incorporated by reference to Exhibit 10.34 to the 1998 10-K, incorporated by reference to Exhibit 10.34 to the 1999 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000. 10.19. ISDA Master Agreement, dated May 2, 2000, between Deutsche Bank AG and MBIA Inc., as supplemented by the Schedule to the ISDA Master Agreement and the Credit Support Annex. 10.20. MBIA Inc. 2000 Stock Option Plan, effective May 11, 2000. 10.28. CapMAC Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.18 to the CapMAC Form S-1, as Amended and Restated, effective January 1, 1999. 10.30. ESOP Loan Agreement by and between MBIA Inc. and the CapMAC Employee Stock Ownership Plan Trust, dated June 30, 1999. 10.46. Key Employee Employment Protection Agreement between MBIA Inc. and John S. Pizzarelli, dated March 14, 2000. 48 10.47. Key Employee Employment Protection Agreement between MBIA Inc. and Ram D. Wertheim, dated January 24, 2000. 10.48. Key Employee Employment Protection Agreement between MBIA Inc. and Robert T. Wheeler, dated April 17, 2000. 10.49. Key Employee Employment Protection Agreement between MBIA Inc. and Mark S. Zucker, dated March 14, 2000. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 2000. 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 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements EX-3.1 2 y46810ex3-1.txt RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 MBIA INC. (Stock Corporation) ---------------------------- RESTATED CERTIFICATE OF INCORPORATION ---------------------------- 1. The name of the Corporation is MBIA Inc. 2. The future of the business to be transacted, or the purposes to be promoted or carried out by the corporation, are as follows: The Corporation shall have the power to engage in any lawful act or activity for which corporations nay to formed under the Stock Corporation Act of the State of Connecticut. 3 The designation of each class of shares, the authorized number of shares of each such class, and the par value (if any) of each such share thereof, are as follows: The total number of shares of capital stock that the Corporation shall have authority to issue is One Hundred Ten Million (110,000,000) shares, of which One Hundred Million (100,000,000) shares shall be common stock, par value $1.00 per share, and of which Ten Million (10,000,000) shares shall be preferred stock, par value $1.00 per share. Immediately following the effectiveness of the Amended and Restated Certificate of incorporation filed with the Secretary of the State of the State of Connecticut on May 21, 1987, there shall be a 736-for-1 stock split applicable to each share of common stock of the Corporation issued and outstanding immediately prior to such time, so that each share of common stock of the Corporation issued arid outstanding immediately prior to such tine shall be changed into 736 shares of such common stock. 4. The terms, limitations and- relative rights arid preferences of each class of shares and series thereof (if any), or an express grant of authority to the Board of Directors pursuant to Section 33-341 of the Stock Corporation Act of the State of Connecticut, Connecticut General Statutes Section 33-341, are as follows: 2 -2- Each share of common stock share have pane vote on all matters on which shareholders are entitled to vote by this Amended and Restated Certificate of Incorporation, the By-Laws of the Corporation, or the statutes of Connecticut. Each share of common stock share participate equally in any dividend distribution and upon liquidation or dissolution. Authority is hereby expressly vested in the Board of Directors of the Corporation pursuant to the Stock Corporation Act of the State of Connecticut to adopt from time to time resolutions and amendments to this Amended and Restated Certificate of Incorporation providing for the issuance of the Corporation's authorized and unissued shares of preferred stock, fixing and determining the terms, limitations, and relative rights and preferences of the preferred stock, establishing series and fixing and determining the variations as among particular series of the preferred stock. The resolution or resolutions providing for the issue of shares of a particular series shall fix, subject to applicable laws, the designation, rights, preferences and limitations of the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the number of shares constituting such series, including the authority to increase or decrease such number, and the distinctive designation sub series; (b) the dividend rate of the shares of such series, whether the dividends shall be cumulative and, if so, the date from which they shall be cumulative and the relative rights of priority, if any, of payment of dividends on shares of such series; (c) the right, if any, of the Corporation to redeem shares of such series and the terms and conditions of such redemption, including the redemption price; (d) the rights of the shares in case of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of such series; 3 -3- (e) the voting rights, if any, of the shares of such series and the terms and conditions under which such voting rights may be exercised; (f) the obligation, if any, of the Corporation provide a retirement or sinking fund or funds of a similar nature and the terms and conditions of such obligation; (g) the terms and conditions, if any, upon which shares of such series shall be convertible into or exchangeable for shares of stock of any other class or classes or of any other series of preferred stock, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; and (h) any other terms, rights, preferences or limitations of the shares of such series as may be permitted by law. The Board of Directors may not make any change in the designations, terms, limitations or relative rights or preferences of shares of preferred stock after their issuance, except upon compliance with any applicable provisions of the applicable law, of the By-Laws of the Corporation and of such designations, terms, limitations and relative rights and preferences. 5. The minimum amount of stated capital with which the Corporation shall commence business is Five Hundred Thousand Dollars ($500,000) and Five Hundred Thousand Dollars ($500,000) in capital surplus. 6. Upon the offering or sale by the Corporation of its shares or securities convertible into shares (including warrants, rights to subscribe and options to acquire shares), no shareholder shall have the preemptive right to purchase any such shares or securities. 7. The Corporation has expressly elected not to be governed by Sections 33-374a to 33-374c, inclusive, of the Stock Corporation Act Of the State of Connecticut, Connecticut General Statutes Sections 33-374a to 33-374c, inclusive, pursuant to the authority granted by Section 33-3740 (d)(B) thereof. 8. The Board of Directors of the Corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of 4 -4- the Corporation, (b) merge or consolidate the Corporation into or with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation as a whole, be authorized to give due consideration to such factors as the Board of Directors determines to be relevant, including, without limitation: (i) the interests of the Corporation's shareholders; (ii) whether the proposed transaction might violate federal or state laws; (iii) the form and amount of consideration being offered in the proposed, transaction, not only in relation to the then current market price for the outstanding capital stock of the Corporation, but also in relation to (1) the market price for the capital stock of the Corporation over a period of years, (2) the estimated price that might be achieved in a freely negotiated sale of the Corporation as a whole or in part or through orderly liquidation, (3) the premiums over market price paid for the securities of other corporations in similar transactions, (4) current political, economic and other factors bearing on securities prices, and (5) the Corporation's then current value (including its financial condition and the unrealized value of its properties and assets determined over a period of years), its long-term plans and its future prospects as an independent going concern; and (iv) the social, legal, environmental and economic effects on (1) policy holders, employees, clients, suppliers and other affected persons, firms and corporations, (2) the communities and economic regions in which the Corporation and its subsidiaries operate or are located and (3) any of the businesses and properties of the Corporation or of any of its subsidiaries. In connection with such evaluation, the Board of Directors is authorized to conduct such investigations and to engage in such legal proceedings as the Board of Directors may determine. 5 -5- Notwithstanding anything to the contrary contained in this Amended and Restated Certificate of Incorporation, the By-Laws of the Corporation or otherwise (and notwithstanding the fact that a lesser percentage may be specified by law, this Amended and Restated Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of at least 80% of the voting power of all of the shares of the Corporation then entitled to vote generally in the election of Directors shall be required to amend or repeal, or adopt any provision inconsistent with, this Section 8. Section 9. No person who is or was a director of the corporation shall he personally liable to the Corporation or its shareholders for monetary damages for breach of duty as a director in an amount that exceeds the compensation received by the director for serving the Corporation during the year of the violation if such breach did not (a) involve a knowing and culpable violation of law by the director, (b) enable the director or an associate, as defined in subdivision (3) of section 33-374d of the Connecticut Stock Corporation Act as in effect on the effective date hereof and as it may be amended, from time to time, to receive an improper personal economic gain, (c) show a lack of good faith and a conscious disregard for the duty of the director to the Corporation under circumstances in which the director was aware that such conduct or omission created an unjustifiable risk of serious injury to the corporation, (d) constitute a sustained and unexcused pattern of inattention that amounted to an abdication of the director's duty to the Corporation, or (e) create liability under Section 33-321 of the Connecticut Stock Corporation Act as in effect on the effective date hereof and as it may be amended from time to time. This Section 9 shall not limit or preclude the liability of a person who is or was a director for any act or omission occurring prior to the effective date hereof. Any lawful repeal or modification of this Section 9 or the adoption of any provision inconsistent herewith by the Board of Directors and the shareholders of the Corporation shall not, with respect to a person who is or was a director, adversely affect any limitation of liability, right or protection of such person existing hereunder with respect to any breach of duty occurring prior to the effective date of such repeal, modification or adoption of a provision inconsistent herewith. 6 EXHIBIT A RESOLVED, that the Board of Directors declares it advisable to amend the Company's Restated Certificate of Incorporation by amending Section 3 to read as follows: 3. The designation of each class of shares, the authorized number of shares of each such class, and the par value (if any) of each such share thereof, are as follows: The total number of shares of capital stock that the corporation hall have authority to issue is Two Hundred Ten Million (210,000,000) shares, of which two Hundred Million (200,000,000) shares shall be common stock, par value $1.00 per share, and of which Ten Million (10,000,000) shares shall be preferred stock, par value share. Immediately following the effectiveness of the Amended and Restated Certificate of Incorporation filed with the Secretary of the State of the State of Connecticut on May 21, 1987, there shall be a 736-for-1 stock split applicable to each share of common stock of the Corporation issued and outstanding immediately prior to such time, so that each share of common stock of the Corporation outstanding immediately prior to such time shall be changed into 736 shares of such common stock. FILING #0001578603 PG 03 OF 03 VOL B-00041 FILED 12/21/1995 10:52 AM PAGE 02876 SECRETARY OF THE STATE CONNECTICUT SECRETARY OF THE STATE 7 UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION AUGUST 7, 1998 _________________________________________________ In the Matter of MBIA INC. Issuer(s) 113 King Street ORDER DECLARING THE Arwak, New York 10504 REGISTRATION STATEMENT EFFECTIVE PURSUANT TO SECTION 8(a) OF THE SECURITIES ACT OF 1933, File No(s) 333-60039 AS AMENDED _________________________________________________ Request having been made that registration statement refereed to in the caption hereof be made effective pursuant to Section 8(a) of the Securities Act of 1933. IT IS ORDERED that the sold statement Is hereby declared effective at 10:30 AM EDST AUGUST 7, 1998. For the Commission, by the Division of Corporation Finance, pursuant to delegated authority. /s/ Jonathon G. Katz Jonathon G. Katz Secretary EX-4.2 3 y46810ex4-2.txt BOND PURCHASE AND PAYING AGENT AGREEMENT 1 Exhibit 4.2 BOND PURCHASE AND PAYING AGENCY AGREEMENT MBIA Inc. Armonk, New York, U.S.A. CHF 175,000,000 4.50 % Bonds 2000 - 2010 (with reopening clause) Lead-Manager: Deutsche Bank Aktiengesellschaft Frankfurt a.M., Zurich Branch HOMBURGER RECHTSANWALTE ZURICH, SWITZERLAND 2 TABLE OF CONTENTS PAGE Parties 3 I. Subject 5 II. Annexes 5 III. Selling Restrictions IV. Banking Syndicate 9 V. Commission and Expenses 9 VI. Representations and Warranties 10 VII. Payment to the Issuer 12 VIII. Closing Documentation 12 IX. Prospectus, Listing and Reporting Obligations 13 X. Global Bond Certificate and Printing of the Bonds 15 XI. Paying Agency and Servicing of the Bonds 17 XII. Covenants 19 XIII. Right of Termination 19 XIV. Communications 20 XV. Currency indemnity 20 XVI. Reopening of the Issue 20 XVII. Applicable Law and Jurisdiction 21 XVIII. Counterparts 21 Annex A Terms of the Bonds 22 Annex B Global Bond Certificate 37 Annex C-1 Individual Bond (Face) 39 Annex C-2 Interest Coupon (Face) 40 Annex C-3 Specimen Signature Form 41 Annex D Certificate of No Material Adverse Change 42 3 -3- Entered into as of December 12, 2000 between MBIA Inc. 113 King Street, Armonk, New York 10504, U.S.A. (hereinafter called the "issuer") of the first part and DEUTSCHE BANK AKTIENGESELLSCHAFT Frankfurt a.M., acting through its registered Zurich branch at Bahnhofquai 9/11, 3023 Zurich, Switzerland (hereinafter called "DBZH") and BANCA DEL GOTTARDO Viale Stefano Franscini 8, 6901 Lugano, Switzerland and CREDIT SUISSE FIRST BOSTON Uetlibergstrasse 231, 8045 Zurich, Switzerland and UBS AG acting through its business group UBS Warburg Bahnhofstrasse 45, 8098 Zurich, Switzerland and BANK JULIUS BAER & CO. LTD. Bahnhofstrasse 36, 8001 Zurich, Switzerland and BANK VONTOBEL AG Bahnhofstrasse 3, 8001 Zurich, Switzerland and BNP PARIBAS (SUISSE) SA 2, place de Hollande, 1204 Geneva, Switzerland 4 -4- and UNION BANCAIRE PRIVEE Rue du Rh6ne 96-98,1211 Geneva, Switzerland (each a "Manager" and hereinafter collectively with DBZH called the "Managers") of the second part 5 -5- I. SUBJECT 1. Subject to the terms and conditions hereof, the Issuer agrees to issue and sell to the Managers at, a price of 100.925 % of the principal amount (the "Issue Price"), and the Managers agree to purchase severally but not jointly 4.50 % Bonds 2000 - 2010, due June 15, 2010, in the principal amount of CHF 175,000,000 (one hundred seventy-five million Swiss Francs) (the "Bonds") subject to reopening as provided in the Terms of the Bonds. 2. The issuance of the Bonds has been authorized by the Board of Directors of the Issuer by resolution passed on November 9, 2000. 3. The net proceeds of the issue of the Bonds will be applied by the Issuer for general corporate purposes and for the repayment of the Issuer's $100 million 9% notes maturing February 15, 2001. None of the Managers shall have any responsibility for or be obliged to concern itself with the application of the net proceeds of the issue of the Bonds. 4. DBZH shall represent the Managers toward the Issuer in all matters concerning the entering into and execution of this Agreement and represents to the lssuer that it has been authorized by each of the Managers so to act. DBZH further represents that it has been duly authorized by and holds valid powers of attorney of the Managers which it represents at the signing of this Agreement. II. ANNEXES The content of each of the Annexes attached hereto, i.e Annex A: Terms of the Bonds Annex B: Global Bond Certificate Annex C: Individual Bond (Face) (C-1) Interest Coupon (Face) (C-2) Specimen Signature Form (C-3) Annex D: Certificate of No material Adverse Change shall constitute an integral part of this Bond Purchase and Paying Agency Agreement (hereinafter referred to as the "Agreement"). III. SELLING RESTRICTIONS United States of America Each of the Managers represents and covenants that it has observed and covenants that it will observe the following restrictions in offers and sales of the Bonds and the distribution of documents relating to the Bonds. 6 -6- A. For the purpose of this Article III, "United States," "U.S. person" and "Restricted Period" have the meanings set forth in Section E below. B. Each Manager understands that the Bonds have not been and will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act") and each Manager understands that the Bonds are intended to be obligations that are not required to be in registered form for the purposes of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder. C. Each Manager represents that it has not offered or sold, and agrees that it will not, during the Restricted Period, offer or sell, directly or indirectly, in the United States or to or for the account or benefit of any U.S. person any Bonds no matter how acquired. In connection with the sale of a Bond during the Restricted Period, each Manager agrees that it has not delivered and will not deliver such Bond in definitive form within the United States. Each Manager which is a U.S. person (disregarding the exclusion for Distributors set forth in the definition of "U.S. person") represents and agrees that it is buying the Bonds for the purpose of resale in connection with the original issuance thereof, and, with respect to any Bonds that it retains for its own account, that it will do so only in compliance with the requirements of United States Treasury Regulation Section 1.163-5(c)(2)(i)(D)(6), including providing a certificate within a reasonable period of time stating that it agrees to com ply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Code, and the regulations thereunder. D. Each Manager understands that an offer or sale would be considered to be made in the United States if, among other factors, such Manager who is the offeror or seller of such Bonds has an address within the United States for the offeror or seller of such Bonds with respect to such offer or sale. E. Each Manager further agrees to deliver (at prior to the confirmation of sale thereof) to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases from it any of the Bonds during the Restricted Period, a confirmation or other notice stating substantially the following: "The Securities referred to in the accompanying confirmation (the "Securities") have not been registered under United' States Securities Act of 1933, as amended (the "Securities Act"). By your purchase of the Securities, you represent and agree that you have not offered or sold and will not, during the Restricted Period, offer, sell or deliver, directly or indirectly, in the United States or to or for the account or benefit of any U.S. person any of such Securities, no matter how acquired. As used herein, "United States" means the United States of America (including the States and District of Columbia), its territories and its possessions; the term "U.S. person" means (a) a citizen or resident of the United States, (b) a corporation, partnership or other entity created or organized in or under the laws of the United States (or any of its political subdivi- 7 -7- sions), (c) an estate or trust 'the income of which is subject to United States federal income taxation regardless of its source or (d) any other person or entity included in the definition of U.S. person under Regulation S under the Securities Act; provided, however, that the term "U.S. person" shall not include the Managers named in the Bond Purchase and Paying Agency Agreement dated as of December 12, 2000, relating to the Securities or any other person that is both a distributor within the meaning of Rule 902(d) under the Securities Act and an exempt distributor within the meaning of Treasury Regulations Section 1.163-5(c)(2)(i)(D)(5) (each a "Distributor"). "Restricted Period" means the period which begins on the earlier of the Payment Date ("December 15, 2000") or the first date on which the Securities are offered to persons other than the Distributors, and which ends 40 days after the Payment Date, provided that with respect to a Security held as part of an unsold allotment or subscription, any offer or sale of such Security by the Issuer or a Distributor shall be deemed to be made during the Restricted Period." F. Each Manager represents and agrees that if it enters into any contractual agreement for the distribution or delivery of the Bonds (other than this Agreement) such arrangement will contain the selling restrictions set forth in this Article III. G. Each Manager acting on its own behalf and on behalf of its affiliates and any person acting on its behalf represents that any payment of interest or principal with respect to any Bond made as Paying Agent, as such term is defined in Article XI, shall be made within Switzerland. H. Each Manager represents and agrees that the issuance of the Bonds is subject to guidelines or restrictions imposed by governmental, banking or securities authorities in the Confederation of Switzerland. I. Each of the Mangers (acting on its behalf and on behalf of its affiliates and any person acting on its behalf) represents and agrees that; (A) the Bonds will be offered and sold in accordance with the practices and documentation customary in the Confederation of Switzerland; (B) it will use reasonable efforts to sell the Bonds within the Confederation of Switzerland; (C) neither DBZH nor any of the other Managers has applied, nor will any of them apply, for listing of the Bonds on any exchange outside the Confederation of Switzerland; and (D) more than 80% by value of the Bonds included in this offering are or will be offered and sold to persons who are not distributors (as defined in United States Treasury Regulation Section 1.163-5(c)(2)(i)(D)(4)) by distributors (as so defined) maintaining an office located in the Confederation of Switzerland. J. Each Manager represents and agrees that neither it nor any of its affiliates nor any person acting on its behalf has undertaken, or will undertake any directed selling efforts (as defined in Regulation S under the Securities Act) with respect to the Bonds in the United States, including without limitation, any activity for 8 -8- the purpose of, or that could reasonably be expected to have the effect of, conditioning the market for the Bonds in the United States, and that it will have in effect, in connection with the offer and sale of the Bonds during the Restricted Period, Procedures reasonably designed to ensure that its employees or agents who are directly engaged in selling Bonds are aware that the Bonds may not be offered or sold during the Restricted Period to a U.S. person or within the United States and each Manager, its affiliates and any person acting on its behalf have complied with or will comply with the offering restriction requirements of Regulation S under the Securities Act. K. With respect to each affiliate (as defined in United States Treasury Regulation Section 1.163-5(c)(2)(i)(D)(4)) of a Manager and person that acquires Bonds from a Manager for the purpose of offering or selling such Bonds during the Restricted Period pursuant to a written agreement with such Manager, such Manager repeats and confirms the representations and agreements contained in 'this Article 111. L. With the exception of this Agreement, each Manager represents and agrees that it has not entered into and will not enter into any contractual arrangements with respect to the distribution and delivery of the Bonds, except with I affiliates or with 'the prior written consent of the Issuer. M. The Global Bond Certificate, Bonds and Coupons shall bear a statement on their face to the effect that any U.S. person who holds such obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Code. N. Each Manager has been advised by the Issuer and acknowledges and confirms that it is aware (a) that a violation or breach of any of the terms and conditions of Article III of 'this Agreement could directly cause the Issuer to become subject to damages and liabilities (including, but not limited to, excise taxes, a loss of the interest deduction and assumption of withholding taxes) under various United States securities and tax laws, and (b) that, as a consequence, such Manager could be held liable under Swiss law for damages and liabilities, in the event it violated or breached such terms and conditions. United Kingdom Each Manager listed on the front page of this Prospectus has represented and agreed that: (i) it has not offered or sold and prior to the expiry of six months from the Closing Date (December 15, 2000) will not offer or sell any Bonds to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Bonds in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Bonds to a 9 -9- person who is of a kind described in article 11(3) of the Financial Services Act 1986 (investment Advertisements) (Exemptions) Order 1996, as amended by the Financial Services Act 1986 (investment Advertisements (Exemptions) Order 1997, or is a person to whom such document may otherwise lawfully be issued or passed on. IV. BANKING SYNDICATE The Issuer agrees to issue to the Managers, and the Managers agree to subscribe severally but not jointly for, the Bonds in the aggregate principal amount of CHF 175,000,000 (one hundred seventy-five million Swiss Francs) in the denominations of CHF 10,000 or multiples thereof according to the following quotas: Quota CHF Lead-Manager: Deutsche Bank Aktiengesellschaft, Zurich Branch 151,000,000 Co-Lead-Managers: Banca del Gottardo 5,000,000 Credit Suisse First Boston 5,000,000 UBS AG 5,000,000 Bank Julius Baer & Co. Ltd. 3,000,000 Bank Vontobel AG 2,000,000 BNP PARIBAS (SUISSE) SA 2,000,000 Union Bancaire Privee 2,000,000 Total 175,000,000 V. COMMISSION AND EXPENSES 1. The Issuer will pay on December 15., 2000 (hereinafter called "the Closing Date") to DBZH for account of the Managers: (a) an underwriting commission and management fee of 1.30 % to be calculated on the CHF 175,000,000 principal amount, and (b) a fixed amount of CHF 500,000 which represents a lump sum for the full and complete reimbursement for all out-of-pocket expenses incurred by DBZH. The payment by the Issuer of (a) and (b) above shall be set off against the payment on the Closing Date by the Managers to the Issuer of the Issue Price pursuant to Article I above, resulting in the net proceeds as per Article VII, so that there shall be no actual transfer of funds required to be made by the Issuer. 2. The Issuer shall further bear, when ascertainable and due: 10 -10- (a) all costs and expenses, including legal or other fees incurred by the Issuer in connection with the preparation of the documents required by Article VIII; (b) all present or future taxes, duties or other charges levied by or within the United States of America in connection with the execution and delivery of this Agreement, (c) the commissions and expenses for the servicing of the Bonds as per Article XI; and (d) the expenses incurred in connection with the publication of all notices relating to the Bonds pursuant to the Terms of the Bonds. 3. The Issuer will reimburse the Managers on first demand for customary bank charges, legal fees and other costs and expenses incurred or to be incurred by the Managers in case of or in connection with a reorganization, merger or restructuring which necessitates any material amendment to the documentation relating to the Bonds or a default, actual or threatened, of the issuer as well as in connection with the preservation and enforcement of any rights under this Agreement, the Global Bond Certificate, the Bonds or the Coupons (if printed). VI. REPRESENTATIONS AND WARRANTIES 1. The Issuer represents and warrants to the Managers that : 1.1 Status: it is a corporation duly incorporated and validly existing under the laws of the State of Connecticut, United Skates of America, capable of suing and being sued and has the power and authority to own its assets and to conduct 'he business which it presently conducts and to conclude the transactions contemplated by this Agreement; 1.2 Powers: it has the power to enter into, to exercise its rights and perform and comply with its obligations under, this Agreement; 1.3 Authorization and Consents: all actions, conditions and things (if any) required by the laws of the State of Connecticut and the United States of America have been taken, fulfilled and done (including the obtaining of any necessary consent) in order: (a) to enable it lawfully to enter into, and exercise its rights and perform and comply with its obligations under, this Agreement, the Bonds and the Coupons; and (b) to ensure that those obligations are legally valid and binding and enforceable in accordance with their terms; 1.4 Non-Violation of Laws, etc.: its entry into, and exercise of its rights and/or performance of or compliance with its obligations under this Agreement, the Global 11 -11- Bond Certificate, the Bonds and the Coupons does not violate in any material way: (a) any law to which it is subject; or (b) its constituent documents; or (c) any agreement or undertaking to which it is a party or which is binding on it or any of its assets, nor results in the creation of, or obliges it to increase any security over those assets; 1.5 Obligations Binding: its obligations under this Agreement, the Global Bond Certificate, the Bonds and the Coupons are valid, binding and enforceable in accordance with its terms, subject to any laws from time to time in effect relating to bankruptcy, insolvency, reorganization, moratorium or liquidation and any other laws or procedures of general applicability relating to or affecting creditors' rights; 1.6 Prospectus: the Issuer has taken all reasonable care to ensure that the information contained in the Prospectus (as defined in Article IX.1) is accurate in all here are no other material facts the omission of which would, in the context of the issue of the Bonds, make any statement therein misleading; 1.7 Accounts: the financial statements contained in the Prospectus present a true and fair view of the results and financial position of the issuer for the periods and as of the dates thereof in all material respects, all in conformity with generally accepted accounting principles in the United States of America; 1.8 No Material Adverse Change: save as disclosed in the Prospectus, there has been no material adverse change in the consolidated financial condition or operations of the Issuer since December 31, 1999, which would materially affect its ability to carry out its obligations hereunder or under the Global Bond Certificate, the Bonds and Coupons; 1.9 Litigation: except as disclosed in the Prospectus, with regard to itself, and its subsidiaries, no litigation, arbitration, governmental or administrative proceeding is current or pending or, so far as is aware, threatened: (a) to restrain its entry into, exercise of its rights under, or performance of or compliance with the obligations of the Issuer under this Agreement, the Global Bond Certificate or the Bonds or Coupons; or (b) which has or could have a material adverse effect on the financial position or operations of the Issuer and its subsidiaries taken as a whole; 1.10 No Default: none of the events described in Sections 9 and 10 of the Terms of the Bonds has occurred and is continuing. 1.11 Listing Rules: it will comply with the reporting requirements of the SWX Swiss Exchange as described in Article IX hereof and submit to the procedure and 12 -12- the decision. of the Admission Board, the Disciplinary Commission and the Arbitration Panel of the SWX Swiss Exchange pursuant to Articles 81-83a of the Listing Rules. 2. Since the commitment of the Managers to subscribe and pay for the Bonds is made on the basis of the aforesaid warranties, the Issuer hereby undertake with the Managers that it will hold the Managers indemnified against all losses, liabilities, costs, charges and expenses, which they may incur as a result of or in relation to any material misrepresentation or any material breach of the above warranties. As long as any of the Bonds are outstanding,. the Issuer shall give prompt notice to DBZH of any claim, action or proceeding which might give rise to a claim under this Subsection 2. VII. PAYMENT TO THE ISSUER Subject to the receipt by DBZH of the documents listed in Article VIII, on December 15, 2000, DBZH, on behalf of the Managers will pay to the Issuer the net proceeds of the Bonds (Issue Price minus the commission and expenses mentioned in Article V) of CHF 173,843,750 in same day funds against delivery of the Global Bond Certificate to DBZH pursuant to Article VIII. Subject to any Swiss National Bank or other regulations which may be in force on the Closing Date, such net proceeds will be at the free disposal of the Issuer and shall not entitle the Issuer to any interest thereon. The respective instruction(s) - also containing the transfer details - signed by a duly authorized person of the Issuer, shall be received by DBZH, Zurich at the latest at 09:00 a.m. (Zurich time) two business days in Zurich prior to the Closing Date in order to ensure their execution with the value being the Closing Date. VIII. CLOSING DOCUMENTATION DBZH hall have received from the Issuer not later than three business days in Zurich prior to the Closing Date, or with the consent of DBZH thereafter, but on or prior to file Closing Date, the following documents (unless otherwise specified, one original or copy certified as a true copy by the Issuer shall be submitted): 1. Power of Attorney (if necessary) of the Issuer conferring the necessary authority upon the person(s) signing any document(s) and lists of specimen signatures, such documents being: - this Agreement, - the Prospectus, - the Global Bond Certificate.(as per Annex B), - the Individual Bond (as per Annex C-1), - the Specimen Signature Form (as per Annex C-3), - the Certificate of No Material Adverse Change (as per Annex D): 13 -13- 2. A copy of the Resolution of the Board of the Issuer of November 9, 2000 authorizing (i) the execution and the performance of the obligations under this Agreement and (ii) the issue, sale and delivery of the Global Bond Certificate and the Bonds, certified by the Issuer's Secretary; 3. A certificate of good standing issued by the Secretary of State of Connecticut and two certified copies of the Articles of Incorporation and of the By-Laws of the Issuer; 4. Three copies of the Consolidated Financial Statements of the Issuer for each the year 1998 and '11999; 5. All quarters or semi-annual financial statements of the issuer published during the current financial year; 6. Certificate of No Material Adverse Change (in the form of Annex D), signed by the authorized person(s) of the Issuer; 7. Original Legal and Tax Opinion by the legal and tax advisers to the Issuer on the laws of the United States of America and, with respect to the Legal Opinion only, the State of Connecticut and with respect to the Issuer's corporate status and its ability to issue the Global Bond Certificate and the Bonds and in respect of taxes imposed by the United States of America, dated as of the Closing Date; 8. Global Bond Certificate (in the form of Annex B), signed by authorized person(s) of the issuer; 9. Specimen Signature Form (in the form of Annex C-3), signed by the authorized person(s); 10. Five copies of the Prospectus signed by the authorized persons of the Issuer, uncertified; and 11. Comfort Letter of the Issuer's independent accounts. All documents shall be in English. Documents 6 to 8 and 11 shall be dated the Closing Date, and documents 7 and 11 shall be substantially as agreed between the Issuer and DBZH. All such documents shall be prepared or procured by the Issuer, except for the Global Bond Certificate and the Prospectus which shall be prepared by DBZH for signing by the Issuer. IX. PROSPECTUS, LISTING AND REPORTING OBLIGATIONS 1. Prospectus DBZH shall receive from the Issuer on behalf of the Managers in due time all necessary material, information and documentation with respect to the Issuer required for the preparation by DBZH of the prospectus (the "Prospectus") in 14 -14- accordance with the listing rules of the SWX Swiss Exchange (the "Listing Rules"). The Prospectus shall be reviewed, and approved by signing it, by the Issuer. 2. Listing DBZH shall take all necessary actions for the purpose of obtaining and maintaining the admission and quotation of the Bonds during their whole life on the SWX Swiss Exchange. DBZH will prepare the listing advertisements in German and French and will arrange for its publication in Swiss newspapers. 3. Reporting Obligations The Issuer will use its best efforts in strictly adhering to the rules and regulations of the SWX Swiss Exchange in order to maintain the listing during the entire term of the Bonds. The Issuer shall adhere to the conditions for maintaining the listing as set forth in the Listing Rules, including, without limitation: 3.1. Periodic Publication of Annual Reports The Issuer shall publish its business reports including the auditors' reports. The business report shall include the annual report, the balance sheet, the profit and loss account and, if required, the cash flow account. These documents must be published within six months after the end of every fiscal year and handed in to the Admissions Board of the SWX Swiss Exchange not later than on the date of their publication. In addition, the business reports must be freely obtainable at the office of the Issuer. 3.2 Ad hoc-Publicity Subject to and in accordance with Article 72 of the Listing Rules, the Issuer shall inform the Admissions Board of the SWX Swiss Exchange and the market of any price sensitive facts which have arisen in its sphere of activity and are not public knowledge. Price sensitive facts mean new facts which because of their considerable effect on the Issuer's assets and liabilities or financial position or on the general course of business are likely to result in substantial movements in the price of the Bonds. The Issuer may postpone the disclosure of such information if the new facts are based on a plan or decision of the Issuer, and its dissemination is likely to prejudice the legitimate interest of the Issuer. 3.3 Disclosure of changes in the right attached to the Bonds The Issuer must inform the public immediately upon any change in a right attached to the Bonds. 15 -15- 3.4 Further disclosure obligations of the Issuer The Issuer must provide the Admissions Board of the SWX Swiss Exchange with all the information necessary to protect investors and insure the smooth operation of the market. 4. Sanctions and means of legal redress The Issuer confirms that it is aware of the conduct deserving of sanctions according to Article 81 of the Listing Rules and of the sanctions that may be imposed in accordance with Article 82 of the Listing Rules, and it undertakes to use any means to avoid such conduct deserving of sanctions. If, as a result of the Issuer's conduct, sanctions should be imposed, the Issuer shall take on the obligations and bear any costs resulting from such sanctions and shall further indemnify DBZH for any damages. The Issuer as well as DBZH shall have the right to make appeals in accordance with Article 83 and Article 83a of the Listing Rules. 5. Annual Reports As long as any of the Bonds is outstanding, the Issuer shall send four copies of their Annual Reports to: SWX Swiss Exchange Admissions Board Selnaustrasse 32 P.O. Box CH-8021 Zurich/Switzerland X. GLOBAL BOND CERTIFICATE AND PRINTING OF BONDS 1. Form and Denomination This issue of Bonds is represented by a global bond certificate in the form of Annex B hereto (the "Global Bond Certificate") and is divided into co-ownership quotas of CHF 10,000 or multiples thereof entitling to payment of interest (the "Coupons") and allocated to the co-owners (the "Bondholders" and the "Coupons holders"), respectively, The Global Bond Certificate will be deposited by DBZH with SIS SEGAINTERSETTLE AG, The Swiss Securities Services Corporation ("SIS"), in Olten, Switzerland, or any other securities clearing system approved by the Admission Board of the SWX Swiss Exchange (the "Depositories"). Except as provided in this Article X and Section 1 of the Terms of the Bonds, individual bonds shall not be printed or delivered. 16 -16- 2. Printing of the Bonds DBZH shall arrange for the printing of definitive Bonds at its cost and arrange for delivery of definitive Bonds to SIS for distribution to the Bondholders (i) if definitive Bonds are required to be printed by applicable law, (ii) upon the request of any Bondholder or (iii) in case of an Event of Default as provided for in Section 9 of the Terms of the Bonds. However, the Bonds and Coupons may not be exchanged against the Global Bond Certificate earlier than the 41st day following completion of the distribution of the Bonds. If printed, the Bonds and Coupons will be printed in accordance with the rules and regulations of the SWX Swiss Exchange and shall be substantially in the form of Annex C-1 and C-2 hereto, with the Terms of the Bonds on the back of (as per Annex A), and shall be dated December 15, 2000. The Bonds and Coupons so printed shall be exchanged against the Global Bond Certificate by DBZH which shall cancel the Global Bond Certificate and surrender it to the order of the Issuer. The Issuer irrevocably authorizes DBZH to use the specimen signatures deposited with DBZH in accordance with Article VIII. 9 for the printing of the Bonds and Coupons with the same binding effect upon the Issuer as if the Bonds had been issued and signed by the Issuer on the Closing Date. Until individual Bonds and Coupons have been issued, the expressions "Bonds" and "Coupons" herein shall mean and include the Global Bond Certificate, and the expressions "Bondholders" and "Couponholders" shall mean and include the bearer of the Global Bond Certificate and the persons entitled to co-ownership rights therein. 3. Servicing of the Printed Bonds and Coupons. If and when the Bonds are printed, DBZH shall destroy them after their redemption, from time to time, and submit to the issuer lists containing the serial numbers of the Bonds redeemed and destroyed. If and when the Coupons are printed together with the definitive Bonds, DBZH shall destroy them after payment in respect thereof has been made, from time to time, submitting to the Issuer a statement of the number of Coupons destroyed, classified according to due dates, without, however, keeping or submitting to the Issuer lists containing the serial numbers of the Coupons destroyed. DBZH reserves the right to record cashed Coupons as well as redeemed or replaced Bonds on microfilm or other data carriers and to store them in this way instead of keeping them physically during the period prescribed by law and to destroy them subsequently. This reproduction of Coupons and Bonds will remain in safekeeping at DBZH during the statutory limitation. * If Bonds and Coupons have not been printed, DBZH shall cancel the Global Bond Certificate and return it to the Issuer upon receipt from the Issuer of all payments due and payable under the Terms of the Bonds and the Agreement. 17 -17- XI. PAYING AGENCY AND SERVICING OF THE BONDS 1. Paying Agents The Issuer appoints DBZH as principal paying agent (the "Principal Paying Agent") and the other financial institutions mentioned in Section 6 of the Terms of the Bonds as paying agents (the "Paying Agents"). All Paying Agents (including any additional paying agents appointed by the issuer as described below) shall act in such capacity only through their offices located in Switzerland. Each Paying Agent shall be a person that, for U.S. tax purposes, is a non-U.S. corporation that is not a controlled foreign corporation and that has not in any 3-year period preceding any year in which it acts as Paying Agent derived income that is effectively connected with a U.S. business in an amount equal to 50% or more of its gross income for such period. By agreeing to act as Paying Agent, each person appointed as such represents and agrees that it will so act only for so long as it is not disqualified by the foregoing. Without the consent of DBZH, the Issuer shall not appoint any additional paying agents other than DBZH and the other financial institutions mentioned in Section 6 of the Terms of the Bonds (if any) and shall not pay any commissions or remuneration for the collection of Coupons and/or Bonds to others than the Principal Paying Agent and the Paying Agents. If, at any time during the life of the Bonds, DBZH shall resign or become incapable of acting as Principal Paying Agent or as agent of the Bondholders as contemplated by the Terms of the Bonds or shall be adjudged bankrupt or insolvent, DBZH may be substituted as Principal Paying Agent by a major Swiss bank chosen by the Issuer. In case of its resignation, DBZH shall give the issuer due notification thereof and sufficient time to appoint a Substitute Principal Paying Agent. In the event of any replacement of DBZH as Principal Paying Agent, all references to DBZH shall be deemed to refer to such replacement. Notice of appointment of any substitute Principal Paying Agent shall be published in accordance with Section 13 of the Terms of the Bonds. If any Paying Agent resigns or becomes incapable of acting as such or shall be adjudged bankrupt or insolvent, the agency relationship between the Issuer and that Paying Agent shall terminate and the issuer may appoint a successor Paying Agent upon approval of DBZH which will not be unreasonably withheld. Notice to the Bondholders of the appointment of any successor Paying Agent shall be made in accordance with the provisions of Section 13 of the Terms of the Bonds. Payments on the Bonds by the Issuer or any Paying Agent will, if made by mail, be made only to an address that is within Switzerland or, if made by wire or similar transfer, be made only to an account maintained by the holder in Switzerland. 18 -18- 2. Transfer of Funds The Issuer will effect transfer of the funds required to make any payment of principal and interest on the Bonds to DBZH as Principal Paying Agent on behalf of all Paying Agents, for value the respective due date provided that, if such due date does not fall on a Business Day, the Issuer shall be obliged to effect transfer of such payments for value the Business Day immediately preceding such due date. DBZH is entitled to charge default interest at the higher of (i) the interest rate for one day funds in Swiss Francs prevailing on the respective date, (ii) the annual interest rate of the Bonds, or (iii) the interest rate generally available under Article 104 of the Swiss Code of Obligations, as amended from time to time, for any payment not received on the due date if DBZH advances funds payable by the Issuer. Except as required by law, any such transfer by the Issuer shall be made in accordance with Sections 5 and 6 of the Terms of the Bonds, in freely disposable Swiss Francs, irrespective of any present or future transfer restrictions and notwithstanding any bilateral or multilateral payment or clearing agreement which, may be applicable at the time of such transfer. Any set-off by the issuer of its payment obligations against any claim of the Issuer against DBZH shall not be valid payment, unless expressly agreed by DBZH. Not later than five Business Days before each due date, DBZH will supply the issuer with any necessary information, including reference numbers and the name of a contact person for the receipt of funds. Not later than four Business Days before each due date the issuer will telex or telefax to such contact person transfer information including the name, address, telephone and telex number of the Manager effecting the transfer as well as a confirmation by the issuer that it has effected the irrevocable paying instruction to that Manager, DBZH shall credit the funds received to separate non-interest bearing accounts to be opened in the name of the Issuer with DBZH for each Coupon due date and/or redemption date. The receipt by DBZH of the funds shall release the issuer from its obligations under the Global Bond Certificate or the Bonds and Coupons (if printed) for the interest and principal, to the extent of such payment. Any funds held by DBZH which will not be used as a consequence of Coupons and Bonds not having been collected within the relevant period described by the Statute of Limitations shall be held by DBZH at the disposal of the Issuer. DBZH shall promptly after the expiry of the relevant period inform the Issuer about the respective amount. "Business Day" means a day on which SIS SEGAINTERSETTLE AG, The Swiss Securities Services Corporation ("SIS") is open for business and 19 -19- commercial banks are open in Zurich and New York for business and foreign exchange (including dealings in Swiss Francs). 3. Commissions and Expenses The Issuer will pay to DBZH for the servicing of the Bonds a commission of: - 0.100% on the principal amount of Coupons to be paid, and - 0.010% on the principal amount of Bonds to be redeemed. Such commissions shall be distributed among the Paying Agents according to a separate agreement. XII. COVENANTS 1. As long as any of the Bonds remain outstanding, the Issuer shall: 1.1 send to DBZH as soon as practicable after release ten copies of the Issuer's annual report on Form 10-K as filed with the SEC (which shall include or be accompanied by the report of the Issuer's independent auditors) non-consolidated and/or consolidated (if available); and 1.2 send to DBZH as :soon as practicable after release any interim financial statements, in particular its quarterly reports on Form 10-Q; and 1.3 send to DBZH as soon as practicable after release any of its reports on Form 8-K; and 1.4 give notice in writing to DBZH of (i) any change in its constituent documents which is relevant to the Bonds and (ii) of any event described under Sections 9 and 10 of the Terms of the Bonds forthwith upon becoming aware thereof and without waiting for DBZH to take any of the actions mentioned herein. 2. The Issuer shall provide the said documents in English. DBIZH will hold the documents available for inspection by investors. XIII. RIGHT OF TERMINATION The Managers, jointly but not severally, reserve the right to withdraw from this Agreement if, prior to December 15, 2000, Zurich-time (i.e. prior to the Closing Date), there occurs in the United State of America, in Switzerland or elsewhere in the world a change in political; economic, financial or monetary conditions which, in the reasonable opinion of the Managers, would be such as to jeopardize materially the success of the placement of the Bonds. Any such decision of withdrawal by the Managers shall be final and binding upon the Issuer. Should the Managers decide to withdraw from this Agreement, DBZH, on behalf of the Managers, shall notify the Issuer forthwith by fax, followed by registered letter. In the event of such withdrawal in circumstances when the Managers are entitled to withdraw, each party hereto shall pay the expenses incurred by it in connection with this issue and no party shall have any claim against the others with respect to such withdrawal. 20 -20- XIV. COMMUNICATIONS All communications among the Managers and the Issuer regarding the Bonds shall be made in the English language, by fax, followed by registered letter, and shall be transmitted by the Issuer to: Deutsche Bank Aktiengesellschaft- Frankfurt a.M., Zurich Branch- Bahnhofquai 9/11- 8023 Zurich- Switzerland- Attn: CHF-Debt Capital Markets- Telefax: 0041-1-224-52-70 by the Bank to: MBIA Inc.- 113 King Street- Armonk, NY 10504- United States of America- Attn: Treasurer- Telefax: 001-914-765-3080 A notice or other communication hereunder given by fax shall be deemed to be served when it would be received in the ordinary course of transmission. XV. CURRENCY INDEMNITY If any payment obligation of the Issuer in favor of the Managers according to this Agreement has to be changed from Swiss Francs into a currency other than Swiss Francs (to obtain a judgment, execution, or for any other reason), the Issuer undertakes as a separate and independent obligation to indemnify the Managers for any shortfall caused by fluctuations of the exchange rates applied for such conversions. The rates of exchange to be applied in calculating such shortfall shall be Principal Paying Agent's spot rates of exchange prevailing between Swiss and the currency other than Swiss Francs on the date on which such conversions are necessary. XVI. REOPENING OF THE ISSUE The Issuer reserves the right to reopen the issue (a "Reopening") at any time without the consent of the holders of Bonds through the issuance of additional bonds which will be fungible with the Bonds (i.e., identical especially in respect of the Terms of the Bonds, remaining duration, final maturity, interest rate and security number). The term "Bonds" shall, in the case of such issue, also comprise such additionally issued Bonds. 21 -21- XVII. APPLICABLE LAW AND JURISDICTION This Agreement shall be governed by Swiss law. Any dispute which might arise between the Managers on the one hand and the Issuer on the other hand regarding this Agreement shall fall within the jurisdiction of the ordinary Courts of Justice of the Canton of Zurich, the place of venue being the City of Zurich, with the right of appeal to the Swiss Federal Court of Justice in Lausanne where the law permits. Solely for such purpose and for the purpose of execution of this Agreement, the Global Bond Certificate, the Bonds and the Coupons in Switzerland, the Issuer, so long as the Bonds are outstanding, elects legal and special domicile at DBZH, Zurich, and appoints DBZH as its agent for service of process, and DBZH shall send to the Issuer as soon as possible any documents received in this connection. The Managers shall also be at liberty to enforce their rights and to take legal action against the Issuer before the competent courts in the United States of America, in which case Swiss law shall be applicable with respect to this Agreement. XVIII. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 22 -22- THUS DONE AND SIGNED in 10 originals as of December 12, 2000 MBIA INC. /s/ Joseph Sevely DEUTSCHE BANK AKTIENGESELLSCHAFT Frankfurt a.M., Zurich Branch /s/ illegible /s/ illegible BANCA DEL GOTTARDO CREDIT SUISSE FIRST BOSTON UBS AG BANK JULIUS BAER & CO. LTD. BANK VONTOBEL AG BNP PARIBAS (SUISSE) SA UNION BANCAIRE PRIVEE /s/ illegible (Managers duly represented with power of attorney by Deutsche Bank Aktiengesellschaft, Zurich Branch,) 23 -23- Annex A TERMS OF THE BONDS The Terms of the 4.50 % Bonds 2000 - 2010, in the principal amount of CHF 175,000,000 (the "Bonds") issued by MBIA Inc. (the "Issuer") under and in accordance with a Bond Purchase and Paying Agency Agreement of December 12, 2000, between the Issuer, Deutsche Bank Aktiengesellschaft, Frankfurt a.M., Zurich Branch and several other Managers, are the following: 1. Form and Denomination, Reopening The Bonds and Coupons, if printed, shall be evidenced in bearer form and title thereto shall pass by delivery. The Bonds have not been and will not be registered under the United States Securities Act of 1933, as amended, and may not be converted into registered Bonds. This issue of Bonds is represented by a global bond certificate (the "Global Bond Certificate") and is divided into co-ownership quotas of CHF 10,000 or multiples thereof, rendering the entitlement to payment of interest (the "Coupons"). The persons rendered co-ownership quotas and the persons entitlements to payment of interest will be herein referred to as the "Bondholders" and the "Couponholders" respectively. The Global Bond Certificate will be deposited by Deutsche Bank Aktiengesellschaft, Frankfurt a.M., Zurich Branch ("DBZH") with SIS SEGAINTERSETTLE AG, the SwissSecurities Corporation ("SIS") in Olten, Switzeriand, or any other securities clearing system approved by the Admission Board of the SWX Swiss Exchange (the "Depositories"). DBZH shall arrange for the printing of definitive Bonds at its cost and arrange for delivery of definitive Bonds to SIS for distribution to the Bondholders (i) if definitive Bonds are required to be printed by applicable law, (ii) upon the request. of any Bondholder or (iii) in case of an Event of Default as provided for in Section 9 of the Terms of the Bonds. However, the Bonds and coupons may not be exchanged against the Global Bond Certificate earlier than the 41st day following completion of the distribution of the Bonds. So long as no individual Bonds and Coupons have been. issued, the expressions "Bonds" and "Coupons" herein shall mean and include the Global Bond Certificate, and "Bondholder" and "Couponholder" herein shall mean and include the persons entitled to co-ownership quotas and the bearer of the Global Bond Certificate therein. If printed, Bonds, Coupon-sheets or Coupons which are mutilated, lost or destroyed may be replaced at the office of DBZH in Zurich against payment by the holder of the respective Bonds, Coupon-sheets or Coupons at such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Issuer and DBZH may require and, in the case of mutilation, upon surrender of the Bonds, Coupon-sheets or Coupons. The issuer reserves the right to reopen this issue at any time without the consent of the Bondholders through the issuance of additional bonds which will be fungible with the Bonds (i.e. identical especially in respect of the Terms of the Bonds, remaining duration, security number, final maturity and interest rate), The term "Bonds" shall, in the case of such issue, also comprise such additionally issued Bonds. 24 -24- 2. Use of Net Proceeds The net proceeds of the issue of the Bonds will be applied by the Issuer for general corporate purposes and for the repayment of the Issuer's $100 million 9% notes maturing February 15, 2001. 3. Interest As from December 15, 2000, the Bonds shall bear interest at a rate of 4.50% per annum, payable annually in arrears on June 15 of each year (the "Interest Payment Date"). For this purpose, the Bonds are furnished with annual Coupons. The first Coupon will become due and payable on June 15, 2001 (short first Coupon). Interest is computed on the basis of twelve 30-day months of a 360-day year. Bonds repaid (as per Subsection 4.1) or redeemed (as per Subsection 4.22) shall cease to carry interest from the beginning of the day on which they become due for redemption or repayment, 4. Redemption 4.1 Final Repayment Unless previously redeemed (as per Subsection 4.2), the Issuer shall repay all outstanding Bonds at 100% of their principal amount (hereinafter called "Final Redemption Value") without further notice on June 15, 2010. 4.2 Redemption. for Tax Reasons Should the Issuer at any time present evidence reasonably satisfactory to DBZH, or should DBZH become aware, that there is a material possibility that the Issuer has been required or, on the occasion of the next payment due in respect of the Bonds, would be required (i) to pay Additional Amounts pursuant to the provisions referred to in Section 7, or (ii) to report or account to any taxing authority with respect to any amounts (other than any tax withheld or deducted from interest payable on the Bonds) calculated by reference to any amount payable in respect of the Bonds, then the Issuer may redeem all, but not some only, of the Bonds prior the final maturity at par, plus in each case, the interest accrued until the date of redemption. In case of such early redemption the Bonds cease to bear interest from the date of redemption, The Issuer shall notify DBZH of its intention to redeem all outstanding Bonds not less than 30 nor more than 60 days prior to the date fixed for redemption. The notice of such early redemption will be published by DBZH in the newspapers mentioned in Section 13, as soon as possible after receipt. 25 -25- 5. Transfer of Funds by the Issuer The amounts required for the servicing of the Bonds or Coupons will be made available in good time on each due date in freely disposable Swiss Francs which will be placed at the free disposal of DBZH, Zurich, as Principal Paying Agent, on behalf of the Bondholders and/or Couponholders, irrespective of any present or future transfer restrictions and notwithstanding any bilateral or multilateral payment or clearing agreement which may be applicable at the time of such payments. If the due date for any payment by the Issuer does not fall on Business Day (as defined below), the Issuer undertakes to effect payment for value on the Business Day immediately preceding such due date. "Business Day" means a day on which SIS is open for business and commercial banks are open in Zurich and New York for business and foreign exchange (including dealings in Swiss Francs). Upon receipt of the funds and under the same conditions as received, DBZH will arrange payment to the Bondholders and Couponholders. The Issuer shall pay, without costs for the Bondholders or Couponholders, under all circumstances and notwithstanding any future transfer restrictions, irrespective of nationality or domicile of the Bondholders or Couponholders and without requiring any affidavit or the fulfillment of any other formality, except as required by law, any sums due pursuant to the Terms of the Bonds in freely disposable Swiss Francs, outside of any bilateral or multilateral payment or clearing agreement which may exist on the due dates between the United States of America and Switzerland, to DBZH which shall act for this purpose as representative of the Bondholders or Couponholders. The receipt by DBZH of the funds shall release the Issuer, from its obligations under the Bonds and Coupons for the payment of interest and principal plus premium, if any, to the extent of such payment. 6. Payments of Funds to the Bondholders and Couponholders Interest and principal will be paid against surrender of the Bonds and Coupons, as the case may be, in the lawful money of the Confederation of Switzerland without any charges solely at the offices in Switzerland of any of the following Managers (the "Paying Agents"): Deutsche Bank Aktiengesellschaft, Zurich Branch (the "Principal Paying Agent") Banca del Gottardo Credit Suisse First Boston and Credit Suisse UBS AG Bank Julius Baer & Co. Ltd. Bank Vontobel AG BNP PARIBAS (SUISSE) SA Union Bancaire Privee 26 -26- If printed, definitive Bonds must be presented and surrendered for payment at one of the above offices with all unmatured Coupons attached, if any. The total value of unmatured missing Coupons shall be deducted from the principal amount of the Bonds payable, but such Coupons shall be paid on presentation until such time as they become time-barred by virtue of the Statute of Limitations in accordance with Swiss law. Payments on the Bonds by the Issuer or any Paying Agent will, if made by mail, be made only to an address that is within Switzerland or, if made by wire or similar transfer, be made only to an account maintained by the holder in Switzerland. 7. Taxation All payments of interest and principal to any Bondholder that is a United States Alien shall be made without deduction of any taxes, imposts, penalties, duties, assessments or governmental charges of any kind or nature at source (hereinafter referred to as "Taxes" or, individually, as a "Tax") present or future, which are required to be withheld including, without limitation, back-up withholding) by the Issuer or any Paying Agent as such), and which are levied or imposed or to be levied or imposed in the United States of America or any political subdivision or taxing authority thereof (the "Taxing Jurisdiction"). In the event that any such Taxes should at any time be required by any such Taxing Jurisdiction to be deducted by the Issuer (or any Paying Agent as such) from any payments, the Issuer shall (subject to Subsection 4.2 and the limitations set forth below) remit to DBZH as the Principal Paying Agent such additional amounts ("Additional Amounts") as may be necessary to ensure that after deduction of any such Taxes of the Taxing Jurisdiction, but before any deduction made in pursuance of Swiss law, every net payment of the principal amount and interest on a Bond to any Bondholder that is a United States Alien will not be less than the amount provided for in such Bond or Coupon to be then due and payable. However, the Issuer will not be required to make any payment of Additional Amounts to any such Bondholder for or on account of: (a) any such Tax which would not have been so imposed but for (i) the existence of any present or former connection between such Bondholder (or between a fiduciary, settlor, beneficiary, member or shareholder of, or possessor of a power over such Bondholder, if such Bondholder is an estate, a trust, a partnership or a corporation) and the United States, including without limitation, such Bondholder (or such fiduciary, settlor, beneficiary, member, shareholder or possessor) being or having been a citizen or resident thereof or being, or having been, engaged in a trade or business or present therein or having, or having had, a permanent establishment therein, or (ii) the presentation by the holder of any such Bond or Coupon for payment on a date more than 15 days after 'the date on which such payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later; 27 -27- (b) any estate, inheritance, gift, sales, transfer or personal property tax or any similar Tax: (c) any Tax imposed by reason of such Bondholder's past or present status as a personal holding company, foreign personal holding company, controlled foreign corporation related to the Issuer through stock ownership, private foundation or other tax-exempt organization, in each case with respect to the United States, or as a corporation which accumulates earnings to avoid United States federal income tax; (d) any Tax which is payable otherwise than by withholding from payments on or in respect of any Bond or Coupon; (e) any Tax required to be withheld by any Paying Agent from any payment of principal of or interest on any Bond, if such payment can be made without such withholding by any other Paying Agent in Switzerland; (f) any Tax imposed by reason of such Bondholder's past or present status the actual or constructive owner of 10% or more of the total combined voting power of all classes of stock of the Issuer entitled to vote; or (g) any combinations of items (a), (b), (c), (d), (e), or (f); nor shall Additional Amounts be paid with respect to any payment in respect of a Bond or Coupon to United States Alien Bondholder (i) that is a fiduciary or partnership or other than the sole beneficial owner of such Bond or Coupon to the extent that a beneficiary or settlor with respect to such fiduciary or a member of such partnership or a beneficial owner would not have been entitled to such Additional Amounts had such beneficiary, settlor, member or beneficial owner been the Bondholder, or (ii) if such payment could be made without backup withholding if certification were provided to the effect that the beneficial owner of such Bond or Coupon is a United States Alien (but without any requirement that the nationality, residence or identity of such beneficial owner be disclosed to the Issuer or Paying Agent or any governmental authority). The term "United States Alien" means any person who, for United states federal income tax purposes, is a foreign corporation, a non-resident alien individual, a non-resident alien fiduciary of a foreign estate or trust, or a foreign partnership to the extent one or more of the members is, as to the United States, a foreign corporation, a non-resident alien individual or a non-resident alien fiduciary of a foreign estate or trust. The interest on the Bonds is, in accordance with Swiss law at present in force, not subject to any Swiss withholding tax. 28 -28- 8. Status and Limitations on Liens and Disposition of Stock of Restricted Securities 8.1 Status The Bonds and related interest constitute direct, general, unconditional, unsecured and unsubordinated obligations of the Issuer and rank pari passu and equally with all other present or future unsecured and unsubordinated obligations of the Issuer. 8.2 Limitations on Liens So long as Bonds are outstanding, the Issuer will not, and will not permit any Subsidiary (as defined in Subsection 3.4) to, directly or indirectly, create, issue, assume, incur or guarantee any indebtedness for borrowed money which is secured by a Mortgage (as defined in Subsection 8.4) of any nature on any of the present or future capital stock of any Restricted Subsidiary (as defined in Subsection 8.4) (or any company, other than the Issuer, having direct or indirect control of any Restricted Subsidiary) unless the Bonds then outstanding and, if the Issuer so elects, any other indebtedness of the Issuer ranking at least pari passu with the Bonds, shall be secured equally and ratably with, or prior to, such other secured debt so long as it is outstanding 8.3 Limitations on Disposition of Stock of Restricted Subsidiaries So long as Bonds are outstanding, the Issuer will not, and will not permit any Subsidiary (as defined in Subsection 8.4) to, sell transfer or otherwise dispose of any shares of capital stock of any Restricted Subsidiary (as defined in Subsection 8.4) except for: (a) a sale, transfer or other disposition of any capital stock of any Restricted Subsidiary to a wholly-owned Subsidiary of the Issuer or such Subsidiary: (b) a sale, transfer or other disposition of the entire capital stock of any Restricted Subsidiary for at least fair value (as determined by the board of directors of the Issuer acting in good faith); or (c) a sale, transfer or other disposition of the capital stock of any Restricted Subsidiary for at least fair value (as determined by the Board of Directors of the Issuer acting in good faith) if, after giving effect thereto, the Issuer and its Subsidiaries would own more than 80% of the issued and outstanding Voting Stock (as defined in Subsection 8.4) of such Restricted Subsidiary. 8.4 Definitions For the purposes of this Section 8: "Mortgage" means any mortgage, pledge, lien, security interest or other encumbrance. 29 -29- "Restricted Subsidiary" means MBIA Insurance Corporation, a New York corporation, and any successor to all or substantially all of its business; provided that such successor is a Subsidiary. "Subsidiary" means a corporation more than 50% of the outstanding Voting Stock of which is owned, directly or indirectly, by the Issuer or by one or more other Subsidiaries, or by the Issuer and one or more other Subsidiaries, "Voting Stock" means, with respect to any Subsidiary, stock of any class or classes (or equivalent interests), if the holders of the stock of such class or classes (or equivalent interests) are ordinarily, in the absence of contingencies, entitled to vote for the election of the directors (or persons performing similar functions) of such Subsidiary, even though the right so to vote has been suspended by the happening of such a contingency. 9. Events of Default DBZH has the right but not the obligation to declare on behalf the holders of Bonds and Coupons all outstanding Bonds plus accrued interest to be immediately due and repayable at their Final Redemption Value, if: (a) The Issuer is in default in making payment of principal when due and payable; or (b) The Issuer is in default for a continuous period of 30 days in making any interest payment under the Bonds after the same shall become due and payable; or (c) The Issuer defaults in performance, or breach, of any covenant or warranty of the Issuer in respect of the Bonds (other than a covenant or warranty in respect of the Bonds a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given to the Issuer by DBZH a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) the Issuer fails to make any payment at maturity, including any applicable grace period, in respect of indebtedness, which term as used herein means obligations (other than the Bonds or non-recourse obligations) of, or guaranteed or assumed by, the Issuer for borrowed money or evidenced by bonds, debentures, notes or other similar instruments ("Indebtedness"), in an amount in excess of U.S.$10,000,000 or the equivalent thereof in any other currency or composite currency and such failure shall have continued for a period of 10 days after written notice thereof shall have been given to the Issuer by DBZH and stating that such notice is a "Notice of Default" hereunder; or (e) the Issuer defaults with respect to any Indebtedness, which default results in the acceleration of Indebtedness in an amount in excess of 30 -30- U.S.$10,000,000 or the equivalent thereof in any other currency or composite currency without such Indebtedness having been discharged or such acceleration having been cured, waived, rescinded or annulled for a period of 10 days after written notice thereof shall have been given to the issuer by DBZH and stating that such notice is a "Notice of Default" hereunder; or (f) a court having jurisdiction in the premises enters a decree or order for relief in respect of the Issuer or any Restricted Subsidiary (as defined in Subsection 8.4) in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law if not dismissed within 30 days; or (g) the Issuer or any Restricted Subsidiary (as defined in Subsection 3.4) commences a voluntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law. 10. Covenant Not to Merge, Consolidate, Sell or Convey Property Except Under Certain Conditions So long as Bonds are outstanding, the Issuer shall not consolidate with or merge with or into any other corporation or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any person, unless: (a) The corporation formed by such consolidation or with or into which the Issuer is merged or which purchases or acquires by conveyance or transfer, or which leases, the properties and assets of the Issuer as an entirety or substantially as an entirety, shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District' of Columbia; (b) upon any such consolidation, merger, sale, lease or conveyance, the due and punctual payment of the principal of, premium, if any, and interest on all the Bonds, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Terms and Conditions of the Bonds to be performed or observed by the Issuer, shall be expressly assumed, executed and delivered to DBZH, by the corporation formed by such consolidation, or into which the Issuer shall have been merged, or which shall have acquired such property; and (c) immediately after giving effect to such transaction, no event of default, and no event which, after notice or lapse of time or both, would become an event of default pursuant to Section 9 shall have occurred and be continuing. In case of any such consolidation, merger, sale or conveyance, and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the issuer, with the same effect as if it had, been named herein. 31 -31- Such successor corporation may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Bonds issuable hereunder which theretofore shall not have been signed by the Issuer and delivered to DBZH; and, upon the order of such successor corporation, instead of the Issuer, and subject to all the terms, conditions and limitations prescribed herein, DBZH shall authenticate and shall deliver any Bonds which previously shall have been signed and delivered by the officers of the Issuer to DBZH for authentication, and any Bonds which such successor corporation thereafter shall cause to be signed and delivered to DBZH for that purpose. All of the Bonds so issued shall in all respects have the same legal rank and benefit as the Bonds 'theretofore or thereafter issued in accordance with these Terms and Conditions as though all of such Bonds had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance such changes in phraseology and form (but not in substance), may be made in the Bonds thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor corporation which shall theretofore have become such in the manner described in this Section shall be discharged from all obligations and covenants under these Terms and Conditions and the bonds and may be liquidated and dissolved. DBZH, subject to the provisions, of this Section may receive an opinion of counsel as conclusive evidence that any such consolidation, merger, sale, lease or conveyance, and any such assumption, an any such liquidation or dissolution, complies with the applicable provisions of these Terms and Conditions. 11. Listing Application will be made by DBZH for the admission and listing of the Bonds on the SWX Swiss Exchange. 12. Prescription Claims for payment of principal and interest, respectively, cease to be enforceable by legal action in accordance with the applicable Statute of Limitations (presently after 10 years (in the case of principal) and 5 years (in the case of interest) from their relevant due dates). 13. Notices All notices regarding the Bonds shall be published by DBZH in a newspaper regularly appearing in Zurich. All notices to the Issuer by any Bondholder or Couponholder shall be transmitted through DBZH exclusively. 32 -32- 14. Application of Law and Jurisdiction The Bonds and Coupons are governed by Swiss law. Any dispute which might arise between the holders of the Bonds or Coupons on the one hand and the Issuer on the other hand regarding the Bonds or the Coupons shall fall within the jurisdiction of the ordinary Courts of Justice of the Canton of Zurich, place of venue being the City of Zurich, with the right to appeal to the Swiss Federal Court of Justice in Lausanne where the law permits. Solely for that purpose and for the purpose of execution of the Bonds or Coupons in Switzerland, the Issuer, so long as the Bonds are outstanding, elects legal and special domicile at DBZH, Zurich, and appoints DBZH as its agent for service of process, and DBZH shall send to the Issuer as soon as possible any documents received in this connection. The above-mentioned jurisdiction is also valid for the declaration of cancellation of Bonds and Couponssheets and their subsequent replacement. The Issuer shall be discharged by and to the extent of any payment made to a holder recognized as creditor by an enforceable judgment of a Swiss court. The holders of Bonds or Coupons are also at liberty to enforce their rights and to take legal action against the Issuer before the competent courts in the United States of America, in which case Swiss law shall be applicable with respect to the Bonds or Coupons. 15. Currency Indemnity If any payment obligation of the Issuer in favor of the Bondholders or Couponholders has to be changed from Swiss Francs into a currency other than Swiss Francs (to obtain a judgment, execution or for any other reason), the issuer undertakes as a separate and independent obligation to indemnify the Bondholders or Couponholders for any shortfall caused by fluctuations of the exchange rates applied for such conversions. The rate of exchange to be applied in calculating such shortfall shall be the Principal Paving Agent's spot rates of exchange prevailing between Swiss Francs and the currency other than Swiss Francs on the date on which such conversions are necessary. 16. Bondholders' Meeting 16.1 DBZH or the Issuer may at any time convene a meeting of the Bondholders (a "Bondholders' Meeting"). In case of any event mentioned in Sections 9 and 10 above and as long as DBZH has not exercised its rights thereunder, holders of Bonds who wish that a Bondholders' Meeting should be convened and who represent at least 10% (ten percent) of the aggregate principal amount then outstanding and who are entitled to vote in accordance with Subsections 16.5 and 16.7 below may at any time require DBZH to convene a Bondholders' Meeting, which shall convene such a meeting as soon as practicably possible upon receipt of such request. 33 -33- 16.2 A Bondholders' Meeting may consider any matter affecting the interests of the holders of Bonds (other than matters on which DBZH has previously exercised its rights contained in Sections 9 and 10 above and Section 17 below), including any modification of or arrangement in respect of the terms and conditions of the Bonds and Coupons. 16.3 Notice convening a Bondholders' Meeting shall be given at least 45 days prior to the proposed date thereof. Such notice shall be given by way of one announcement in accordance with Section 13 above, at the expense of the Issuer. It shall state generally the nature of the business to be transacted at such meeting. If an Extraordinary Resolution (as defined below) is being proposed, the wording of the proposed resolution or resolutions shall be indicated. The notice shall specify the day, hour and place of the meeting and also the formal requirements referred to in Subsection 16.5 below. The Issuer and the Paying Agents will each make a copy of such notice available for inspection of the holders of Bonds during normal business hours at each of their respective head offices, Notice of any resolution passed at a Bondholders' Meeting will be published by DBILH. on behalf in compliance with Section 13 above not less than 10 days after the date of the meeting. Non-publication of such notice shall not invalidate such resolution. 16.4 All Bondholders' Meetings shall be held in Zurich. A chairman (the "Chairman") and a deputy chairman (the "Deputy Chairman") shall be nominated by DBZH in writing. If no person has been so nominated or if the nominated person shall not be present at the Bondholders' Meeting within 30 minutes after the time fixed for holding the meeting, the holders of Bonds present shall choose one of their number to be the Chairman and Deputy Chairman. The Chairman shall lead and preside over the Bondholders' Meeting, Among others, it shall be his duty to determine the presence persons entitled to vote and to inquire if the necessary quorum (as set forth below) is present. He shall instruct the holders of Bonds as to the procedure of the Bondholders' Meeting and the resolutions to be considered. The Chairman shall sign the minutes referred to in Subsection 16.11 below. In the case of any equality of votes, the Chairman shall have a casting vote. A declaration by the Chairman that a resolution has been carried or carried by a particular majority or rejected or not carried by a particular majority shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution. 16.5 Each person who produces a Bond or a certificate by a Manager in respect of such Bond relating to that Bondholders' Meeting is entitled to attend and to vote on the resolutions proposed at such Bondholders' Meeting. Holders of Coupons are not entitled to attend or vote at Bondholders' meetings. Said certificate shall be dated before the date of the Bondholders' Meeting and confirm that the Bond is deposited with the Manager and will remain deposited with it until and 34 -34- including the date of the Bondholders' Meeting and that it has not issued any other such certificate with respect to such Bond. 16.6 The quorum necessary in order to vote on resolutions proposed at a Bondholders' Meeting shall be persons entitled under Subsections 16.5 above and 16.7 below holding or representing in the aggregate percentages (or more) of the aggregate principal amount of all outstanding Bonds: each Ordinary Resolution: 25% each Extraordinary Resolution: 66% The terms "Ordinary Resolution" and "Extraordinary Resolution" will be defined below. If within thirty minutes after the time appointed for any Bondholders' Meeting a sufficient quorum is not present, the Meeting shall be dissolved. 16.7 Voting rights shall be determined according to the principal amount of outstanding Bonds held. Each CHF 10,000 principal amount gives right to one vote. Bonds held by or on behalf of the Issuer or any other natural person or legal entity (aa) which directly or indirectly owns or controls more than 50% of the equity share capital of the issuer, or (bb) of which in the case of a legal entity more than 50% of the equity share capital is controlled by the Issuer directly or indirectly, or (cc) where the Issuer is in a position to exercise, directly or indirectly, control over the decisions or actions of such natural person or legal entity or representative thereof, irrespective of whether or not the latter is affiliated to the Issuer, shall not be entitled to vote at such Bondholders' Meeting. 16.8 A resolution shall be validly passed if approved by the following percentages (or more) of votes cast at a duly convened Bondholders' Meeting held in accordance with this Section 16: each Ordinary Resolution: 51% each Extraordinary Resolution: 66% Every proposal submitted to a Bondholders' Meeting shall be decided upon by a poll. 16.9 Any resolution which is not an Extraordinary Resolution (as defined in the following Subsection) shall be deemed to be an Ordinary Resolution (an "Ordinary "Resolution"). 16.10 An Extraordinary Resolution (an "Extraordinary Resolution") shall be necessary 'to decide on the following matters at a Bondholders' Meeting: - to postpone the maturity beyond the stated maturity of the principal of any Bond, or 35 -35- to reduce the amount of principal or premium (if any) payable on any Bond, or to change the date of interest payment of any Bond, or to change the rate of interest or the method of computation of interest of any Bond, or to change any provision for payment contained in the Terms of the Bonds or the place or the currency of repayment of the principal or payment of premium (if any) of any Bond or interest on any Bond, or to amend or modify or waive the whole or any parts of Sections 3, 7, 9 or 10 above or Subsections 16.7 through 16,10, or to create unequal treatment between holders of Bonds of the same class of an issue, or to convert the Bonds into equity, or to change the choice of law and the jurisdiction clause contained in Section 14 above. The above-mentioned list of issues for which an Extraordinary Resolution shall be necessary is exclusive. 16.11 Any resolution approved at a Bondholders' Meeting held in accordance with this Section 16 shall be conclusive and binding on all present or future holders of Bonds whether present or not, and on all holders of the Coupons. Minutes of all resolutions and proceedings at a Bondholders' Meeting shall be prepared and signed by the Chairman pursuant to Section 16.4 above. 16.12 If no holder of a Bond or an insufficient number of holders of Bonds shall attend a Bondholders' Meeting, the right to decide on an early repayment of the Bonds or any other measures to protect the interests of the holders of Bonds shall revert to the absolute discretion of DBZH, Any such decision of DBZH shall be final and binding upon the Issuer and the holders of Bonds and Coupons. Notice of any such decision shall be published in accordance with Section 13 above. 17. Amendment to the Terms of the Bonds The Terms of the Bonds may be amended from time to time by the agreement between the Issuer and DBZH on behalf of the holders of Bonds and Coupons, provided that in the sole opinion of DBZH such amendment is of a formal, minor or technical nature, is made to correct a manifest error or is not materially prejudicial to the interests of the holders of Bonds and Coupons. Notice of any such amendment shall be transmitted as per Section 13 above. 36 -36- Any such amendment shall be binding on the holders of Bonds and Coupons in accordance with its terms. 18. Severability If at any time any one or more of the provisions of the Terms of the Bonds is or becomes unlawful, invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions shall not be in any way affected or impaired thereby. 37 -37- Annex B GLOBAL BOND CERTIFICATE ANY "UNITED STATES PERSON" WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE INCOME TAX LAWS OF THE UNITED STATES OF AMERICA INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165 (j) AND 1287 (a) OF THE INTERNAL REVENUE CODE OF 1986 OF THE UNITED STATES OF AMERICA, AS AMENDED. MBIA Inc. Armonk, New York, U.S.A. CHF 175,000,000 4.50% Bonds 2000 - 2010 due June 15, 2010 This Global Bond Certificate has not been and will not be registered under the Securities Act of 1933, as amended, of the United States of America. MBIA Inc., a corporation incorporated under the laws of the State of Connecticut, promises to Pay to the holder of this Global Bond Certificate, upon its surrender, the amount of CHF 175,000,000 (one hundred seventy-five million Swiss Francs) and interest at 4.50% per annum, payable each year on June 15, in accordance with the Terms of the Bonds set forth in the Bond Purchase and Paying Agency Agreement dated as of December 12, 2000, between MBIA Inc. on the one part, and Deutsche Bank Aktiengesellschaft, Frankfurt a.M., Zurich Branch as principal paying agent and the other Managers named therein on the other part (the "Agreement"). This Global Bond Certificate will be deposited in favor of the Bondholder with SIS SEGAINTERSETTLE AG, The Swiss Securities Services Corporation ("SIS") in Olten, Switzerland, or with any other securities clearing system approved by the Admission Board of the SWX Swiss Exchange until final redemption of the Bonds, or if earlier until such time as this Global Bond Certificate will be exchanged for printed Bonds as provided for in the Terms of the Bonds. Each Bondholder retains a co-ownership quota in this Global Bond Certificate to the extent of his holding of Bonds. This Global Bond Certificate, which is issued without coupons for interest, is a substitute for Bearer Bonds in the denomination of Swiss francs 10,000 or multiples thereof each with annual Coupons (the "Bonds"), the form of which is set forth in Annex C-1 to the Agreement. This Global Bond Certificate is exchangeable against the Bonds free of charge in accordance with Section 1 of the Terms of the Bonds and Article X. of the Agreement. The Bonds become due and payable without further notice on June 15, 2010 at 100% of their principal amount, unless previously redeemed for tax reasons pursuant to Section 4.2 of the Terms of the Bonds. December 15, 2000 MBIA INC. 38 -38- This Global Bond Certificate becomes valid only if countersigned by two officials of Deutsche Bank Aktiengesellschaft, Frankfurt a.M., Zurich Branch. DEUTSCHE BANK AKTIENGESELLSCHAFT Frankfurt a.M., Zurich Branch Swiss Security Number: 1155166 ISIN Code: CH0011551667 EC/CCC: 012074654 39 -39- Annex C-1 Individual Bond (Face) ANY "UNITED STATES PERSON" WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE INCOME TAX LAWS OF THE UNITED STATES OF AMERICA INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165 (j) AND 1287 (a) OF THE INTERNAL REVENUE CODE OF 1986 OF THE UNITED STATES OF AMERICA, AS AMENDED. MBIA Inc. Armonk, New York, U.S.A. 4.50% Bonds 2000 - 2010 due June 15, 2010 Bond of CHF 10,000 MBIA Inc, will pay to the holder of this Bond upon surrender the amount of ten thousand Swiss Francs and upon surrender of the relevant interest coupon an amount of interest at 4.50% per annum from December 15, 2000, payable annually on June 15 of each year, in accordance with the conditions printed on the back hereof. December 15, 2000 MBIA Inc. By:____ Swiss Security Number: 1155166 ISIN Code: CH0011551667 EC/CCC: 012074654 40 -40- Annex C-2 Interest Coupon (Face) ANY "UNITED STATES PERSON" WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE INCOME TAX LAWS OF THE UNITED STATES OF AMERICA INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165 (j) AND 1287 (a) OF THE INTERNAL REVENUE CODE OF 1986 OF THE UNITED STATES OF AMERICA, AS AMENDED. MBIA Inc. Armonk, New York, U.S.A. 4.50 % Bonds 2000 - 2010 No.[ ] BOND OF CHF 10,000 Annual interest due June 15, [2001 - 2010] CHF 450 (BACK) Paying Agents. Deutsche Bank Aktiengesellschaft, Frankfurt a,M., Zurich Branch, Banca del Gottardo, Credit Suisse First Boston and Credit Suisse, UBS AG, Bank Julius Baer & Co. Ltd., Bank Vontobel AG., BNP PARIBAS (SUISSE) SA, Union Bancaire Privee 41 -41- Annex C-3 SPECIMEN SIGNATURE FORM MBIA Inc. Armonk, New York, U.S.A. CHF 175,000,000 4.50% Bonds 2000 - 2010 due 2010 Specimen signatures for use for the individual Bonds according to Article X.2 of the Bond Purchase and Paying Agency Agreement. Name Title: Name. Title: 42 -42- Annex D [Letterhead MBIA Inc.] Dated: December 15, 2000 To: Deutsche Bank Aktiengesellschaft, Frankfurt a.M., Zurich Branch for itself and on behalf of the Managers referred to in the "Agreement" referred to below Care of: Deutsche Bank Aktiengesellschaft, Frankfurt a.M., Zurich Branch, Bahnhofquai 9/11, P.O.Box 7381, CH-8023 Zurich Gentlemen, RE: MBIA Inc. (the "Issuer") Armonk, New York, U.S.A. 4.50% Bonds 2000 - 2010 in the aggregate principal amount of CHF 175,000,000 (the "Bonds") Certificate of No Material Adverse Change Pursuant to the Bond Purchase and Paying Agency Agreement dated as of December 12. 2000 (the "Agreement"), between the Issuer, Deutsche Bank Aktiengesellschaft, Frankfurt a.M., Zurich Branch, and the other Managers named therein covering the issue of the Bonds by the Issuer, I: .................. ., being [ ] of MBIA Inc, HEREBY CERTIFY on behalf of the Issuer that as of the date hereof: a) except as disclosed in the Prospectus, since December 31, 1999 there has been no material adverse change in the financial condition of the issuer which is material in the context of the issue of the Bonds, and b) no event has occurred rendering untrue or incorrect to an extent which is material as aforesaid any of the representations and warranties set forth in Article VI of the Agreement, and c) no event has occurred which constitutes or which with the giving of notice or lapse of time would constitute one of the events referred to in Sections 9 and 10 of the Terms of the Bonds. Yours truly, MBIA Inc. [Title] EX-10.04 4 y46810ex10-04.txt FIRST RESTATED CREDIT AGREEMENT 1 Exhibit 10.04 THIRD 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 27, 2000 2 THIRD AMENDMENT THIS THIRD AMENDMENT, dated as of October 27, 2000 (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-BOERENLEEN BANK 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") and individually as a Bank; WHEREAS, the parties hereto are parties to the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, as amended by the First Amendment thereto dated as of October 1, 1998, the Second Amendment thereto dated as of October 29, 1999 and as further modified by certain Assignment and Assumption Agreements (as defined therein) (as so amended and modified, the "Credit Agreement"); 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. Amendment (a) The definition of the term "Expiration Date" contained in Exhibit A to the Credit Agreement is hereby amended and restated to read in its entirety as follows: "'Expiration Date' shall mean the date on which the night to obtain Loans terminates, initially October 31, 2007, as such date may be extended pursuant to Section 3.3." (b) The definition of the term "Loan Commencement Event" contained in Exhibit A to the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Loan Commencement Event" shall mean the time at which Cumulative Losses for the current Commitment Period first exceed the aggregate Pledged Recoveries received by MBIA during the current Commitment Period by 3 an amount equal to the greater of (a) the highest Maximum Commitment at any time during the such Commitment Period and (b) five and six-tenths percent (5.6%) of Average Annual Debt Service on the Covered Portfolio." Section 1.3. Commitments. The aggregate Commitments of the Banks are hereby amended so that, from and after October 27, 2000 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. Section 1.4. Amendment to Security Agreement. Each Bank and the Administrative Agent hereby consent to an amendment to the Security Agreement which will provide that the definition of the term "Special Event of Default" contained therein be amended and restated to read in its entirety as follows: "Special Event of Default" means any of (i) any Event of Default described in clause (i) of paragraph (a) of Section 7.1 of the Credit Agreement in respect of principal of or interest on the Loans or the Notes, (ii) any MBIA Event of insolvency, or (iii) If MBIA shall have incurred Cumulative Losses during the current Commitment Period of more than the greater of (A) 50% of the highest Maximum Commitment at any time during, the current Commitment Period (or, if the last Commitment Period has expired, at any time during such Commitment Period), and (B) 2.8% of Average Annual Debt Service on the Covered Portfolio, any failure of MBIA to perform or observe the covenant contained in Section 6.8 of the Credit Agreement." ARTICLE 2. CONDITIONS PRECEDENT Section 2. 1. Conditions Precedent to Amendment Effective Date. The provisions of Article 1 hereof shall become effective as of October 27, 2000 when this Amendment shall have been executed and delivered by MBIA, each Agent and consented to by each Bank and 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 November 17, 2000, the provisions of Article 1 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. (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, Vice Chairman, Managing Director, 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, 4 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 29, 1999, 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 27, 2000, 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) 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 27, 2000, in a principal amount equal to the amount of its Commitment or of the increase in its Commitment, as applicable. (e) The Security Agreement shall have been amended as contemplated by Section 1.4 hereof. (f) 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. (g) 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. - 3 - 5 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 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, 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 right court of law or a court of equity. Section 3.4. Financial Statements. etc. (a) 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, 1999, the related audited consolidated statements of income, 6 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, 1999, and (ii) the unaudited consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries as of March 31 and June 30, 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 2000, the six months ended June 30, 2000. 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, 2000. (b) 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, 1999 and its quarterly statements and financial statements as filed with the Department for the periods ended March 31, 2000 and June 30, 2000. 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. c) 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, 1999, its quarterly reports on Form 10-Q of MBIA Inc. for each of the quarters ended March 31, 2000 and June 30, 2000 and each current report on Form 8-K filed by MBIA Inc. on or after January 1, 2000, each as filed with the Securities and Exchange Commission. Such annual quarterly and current reports were prepared in 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. Section 3.6. Confirmation of Representations and Warranties. MBIA hereby confirms that its representations and warranties set forth in the 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. - 5 - 7 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 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. Severability. 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. 8 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/ Joseph L. Sevely -------------------------------------- Name: Joseph L. Sevely Title: Treasurer COOPERATIEVE CENTRALE RAIFFEISEN BOERENILEENBANK B.A. "RABOBANK NEDERLAND", New York Branch, as Administrative Agent and as a Bank By /s/ Ian Reece -------------------------------------- Name: Ian Reece Title: Senior Credit Officer By /s/ Angela R. Reilly -------------------------------------- Name: Angela R. Reilly Title: Vice President DEUTSCHE BANK AG, New York Branch, as Documentation Agent and as a Bank By /s/ John S. McGill -------------------------------------- Name: John S. McGill Title: Director By /s/ Clinton M. Johnson -------------------------------------- Name: Clinton M. Johnson Title: Managing Director 9 SCHEDULE 1 TO THIRD AMENDMENT BANKS, ADDRESSES AND COMMITMENTS
Name and Notice Address of Bank Commitment Banco Santander Central Hispano S.A., $ 18,596,491 New York Branch 45 East 53rd Street New York, NY 10022 Attn: Victoria Moreno The Bank of America, N.A. $ 50,000,000 901 Main Street, 66th Floor Dallas, Texas 75202 Attn: Joan D'Amico The Bank of New York $ 37,192,982 Insurance Division 1 Wall Street, 17th Floor New York, NY 10286 Attn: Evan Glass The Bank of Nova Scotia $ 23,245,614 One Liberty Plaza New York, NY 10006 Attn: David Schwartzbard Bayerische Landesbank Girozentrale, $ 50,000,000 New York Branch 560 Lexington Avenue, 17th Floor New York, NY 10022 Attn: Roberto Albano Commonwealth Bank of Australia, $ 23,245,615 New York Branch 599 Lexington Avenue New York, NY 10022 Attn: Randy Kase
10
Name and Notice Address of Bank Commitment Credit Suisse First Boston, $ 75,000,000 New York Branch Eleven Madison Avenue New York, NY 10010-3629 Attn: James Lee The Chase Manhattan Bank $ 23,245,614 270 Park Avenue, 201h Floor New York, NY 10017 Attn: Marybeth Mullen Dexia Public Finance Bank, New York Branch $ 9,298,246 f/k/a Credit Local de France, New York Branch 445 Park Avenue New York, NY 10022 Attn: James Beck Deutsche Bank AG, New York Branch $ 75,000,000 Deutsche Bank Securities Inc. 31 West 52nd Street New York, NY 10019 Attn: John McGill DGZ DekaBank Deutsche Kommunalbank $ 35,000,000 International Finance Department Taunusanlage 10 D-60329 Frankfurt am Main GERMANY Attn: Stephan Wagner Fleet National Bank $ 25,000,000 777 Main Street, CT-MO 0250 Hartford, CT 06115 Attn: Jan-Gee McCollam Bayerische Hypo-und Vereinsbank AG, $ 46,491,228 New York Branch 150 East 42nd Street New York, NY 10017-4679 Attn: David Lefkovits
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Name and Notice Address of Bank Commitment KBC Bank N.V. $ 18,596,491 125 West 55th Street New York, NY 10019 Attn: Patrick Owens Landesbank Hessen-Thuringen Girozentrale, $ 50,000,000 New York Branch 420 Fifth Avenue, 24th Floor New York, NY 10018 Attn: John Sarno Landesbank Baden Wurttemberg $100,000,000 535 Madison Avenue New York, NY 10022 Attn: Robert O'Brien Lloyds TSB Bank Plc $ 46,491,228 575 Fifth Avenue, 17th Floor New York, NY 10017 Attn: Michelle White Norddeutsche Landesbank Girozentrale, $ 18,596,491 New York Branch 1114 Avenue of the Americas, 37th Floor New York, NY 10036 Attn: Stephanie Finnen Westdeutsche Landesbank Girozentrale $ 50,000,000 New York Branch 1211 Avenue of the Americas New York, NY 10036 Attn: Lillian Tung Lum, VP Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. $125,000,000 "Rabobank Nederland", New York Branch 245 Park Avenue, 37th Floor New York, NY 10167 Attn: Angela R. Reilly TOTAL $900,000,000
12 EXHIBIT A TO THIRD 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 1 West 52nd Street New York, NY 10019 Re: Third Amendment, dated as of October 27, 2000, 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 Third Amendment, dated as of October 27, 2000 (the "Amendment"), to the Second Amended and Restated Credit Agreement dated as of October 1, 1997, as heretofore amended (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 13 MBIA and copies 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: 1. 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 and the additional Notes dated October 27, 2000 being issued to certain parties (the "Transaction Documents"). 2. The execution, delivery and performance of the Transaction Documents are within the corporate powers of MBIA, have been duly authorized by all necessary 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. 3. 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. 4. 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. 14 5. 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. 6. 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. 7. 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] 15 EXHIBIT B TO THIRD AMENDMENT Form of Opinion of Kutak Rock [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 1 West 52nd Street New York, NY 10019 Re: Third Amendment, dated as of October 27, 2000, 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 Third Amendment, dated as of October 27, 2000 (the "Amendment"), to the Second Amended and Restated Credit Agreement dated as of October 1, 1997, as heretofore amended (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 and the additional Notes dated October 27, 2000 being issued to certain parties. 16 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. -2- 17 obligations of MBIA, including without limitation MBIA's obligation to pay claims under Insurance Contracts 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 October 1, 1997, delivered in connection with the Second Amended and Restated 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 (except for the financing statements described in our October 1, 1997 opinion and 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. 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 furnished 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, -3- EX-10.14 5 y46810ex10-14.txt CREDIT AGREEMENT 1 Exhibit 10.14 Deutsche Bank To: All Lenders party to the MBIA Credit Agreements dated August 28, 1998 From: Deutsche Bank MBIA Date: August 29, 2000 Re: Extension of MBIA's $650 Million Corporate Credit Facilities We are pleased to report that the Credit Facilities totaling $650 million for MBIA have been extended successfully. On behalf of MBIA, Deutsche Bank as the Administrative Agent thanks you for your enthusiastic support for the transaction. The following provides a listing of all banks' commitments to the respective facilities:
Lender Multi-year 364-day Title Commitment Commitment (US$ millions) (US$ millions) Deutsche Bank AG, New $76.5 $38.5 Administrative Agent York Branch Banc One, NA $56.7 $28.3 Syndication Agent Fleet National Bank $56.7 $28.3 Documentation Agent Banca Monte Dei Paschi Di $50.0 $25.0 Lender Siena Spa Bank of Montreal $33.3 $16.7 Lender Chase Manhattan Bank $33.3 $16.7 Lender Fortis (USA) Finance LLC $33.0 $17.0 Lender Bank of America National $26.7 $13.3 Lender Trust & Savings Association Banco Santander S.A., New $16.7 $8.3 Lender York Branch Commerzbank AG, New York $16.7 $8.3 Lender Branch National Australia Bank $16.7 $8.3 Lender Limited, New York Branch Norddeutsche Landesbank $16.7 $8.3 Lender Girozentrale, New York and/or Cayman Islands Branches Total $433.0 $217.0
2 The 364-Day Facility will be extended as of August 25, 2000 with a final maturity of August 24, 2001 and the Four-Year Facility will be extended as of August 28, 2000 with a final maturity of August 28, 2004. Extension fees will be paid on August 30, 2000, Should you have any questions, please don't hesitate to call John McGill, Deutsche Bank at (212) 469-8666. 3 Monte Dei Paschi Di Siena August 11, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10501 Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Ladies and Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $25,000,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Banca Monte dei Paschi di Siena S.p.A By: /s/ Gurilio Nomilcchi Senior Vice President & General Manager By: /s/ Brian T. Landy Vice President 4 Deutsche Bank Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 August 29, 2000 Tel 212-469-8000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Director Deutsche Bank AG, New York Branch 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Ladies and Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $38,500,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Deutsche Bank AG, New York and/or Cayman Islands Branches By: /s/ John S. McGill By: /s/Alan Frost Title: Director Title: Vice President 5 Timothy J. Stambaugh Bank One, NA tel 212.373.1124 Senior Vice President Insurance Division fax 212.373.1499 153 West 51st Street New York, NY 10019 Bank One August 9, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, Various Lending Institutions, Deutsche Bank AG, New York Branch, as Administrative Agent; Bank One, NA (formerly known as The First National Bank of Chicago), as Syndication Agent, and Fleet National Bank, as Documentation Agent (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $28,300,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Bank One, NA (formerly known as The First National Bank of Chicago) By:/s/ Timothy J. Stambaugh Title: Senior Vice President 6 Bank of Montreal Corporate Banking 115 South LaSalle Street, 12th Floor Chicago, Illinois 60603 (312)750-4300 August 9, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 9l4-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-9366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $16,667,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Bank of Montreal /s/ Karen Modi Karen Modi Director 7 Jan-Gee W. McCollam Managing Director Financial Institutions Mail Stop: CT EH 40225C 777 Main Street Hartford, CT 06115 860.986.4535 tel 860.986.7264 fax jan-gee_w_mccollam@fleet.com FLEET Corporate and Investment Banking August 21, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8377) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $28,300,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Fleet National Bank By: /s/ Jan-Gee W. McCollam Jan-Gee W. McCollam Title: Managing Director 8 CHASE The Chase Manhattan Bank 270 Park Avenue, 20th Floor New York, NY 10017 August 14, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28th, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $16,700,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. The Chase Manhattan Bank By: /s/ MaryBeth Mueller Vice President 9 FORTIS Solid partners, flexible solutions August 10, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $17,000,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Sincerely, Fortis (USA) Finance LLC By: /s/ E. Matthews By: /s/ Robert Fakhoury Title: VP Title: Treasurer 10 Bank of America Bank of America PO Box 831000 Dallas, TX 75383-1000 Tel 888-279-3247 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 Tel: 914-765-3327 Fax: 914-755-3410 Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 Tel: 212-469-9665 Fax: 212-469-8366 RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $13,300,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Bank of America, N.A. /s/ Joan D'Amico Joan D'Amico Managing Director 11 Banco Santander Central Hispano August 15, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $8,333,333 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. BANCO SANTANDER CENTRAL HISPANO, S.A., New York Branch. By: /s/ John Hennessy By: /s/ Meeta Anand Title: Manager Asset Backed Finance Title: Assistant Vice President 12 COMMERZBANK 2 World Financial Center AKTIENGESELSCHAFT NEW YORK, NY 10281-050 NEW YORK BRANCH Telephone (212) 266-7200 August 10, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of US$8,300,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Very truly yours, COMMERZBANK AG New York Branch /s/ Thomas Ausfahl /s/ James F. Ahern Thomas Ausfahl James F. Ahern Vice President Senior Vice President 13 National Australia Bank
National Australia 34th Floor Telex 3728852 NATAUS Telephone (212) 916-9800 Bank Limited 200 Park Avenue SWIM NATAUS33 Facsimile (212) 983-1969 A.C.N. 004044937 New York, N.Y. 10166 (212) 983-1960
August 11, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $200,000,000 (subsequently increased to $217,000,000) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $8,300,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. National Australia Bank Limited By: /s/ Craig Manning Title: Vice President 14 NORD/LB NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK/CAYMAN ISLANDS August 10, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) Re: MBIA/Notice of Extension of final maturity date Ladies and Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for 200,000,000 (subsequently increased to $217,000,000) among MBIA Insurance Corporation, 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 ("Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its 364-day commitment of $8,300,000 effective the Final Maturity Date August 25, 2000, such that the extended Final Maturity Date shall be August 24, 2001. Sincerely, Norddeutsche Landesbank Girozentrale New York and/or Cayman Islands Branch /s/ Stephanie Finnen /s/ Josef Haas Stephanie Finnen Josef Haas Vice President Vice President EX-10.15 6 y46810ex10-15.txt CREDIT AGREEMENT (5 YEAR AGREEMENT) 1 Exhibit 10.15 Deutsche Bank To: All Lenders party to the MBIA Credit Agreements dated August 28, 1998 From: Deutsche Bank MBIA0 Date: August 29, 2000 Re: Extension of MBIA's $650 Million Corporate Credit Facilities We are pleased to report that the Credit Facilities totaling $650 million for MBIA have been extended successfully. On behalf of MBIA, Deutsche Bank as the Administrative Agent thanks you for your enthusiastic support for the transaction. The following provides a listing of all banks' commitments to the respective facilities: Lender Multi-year 364-day Title Commitment Commitment (US$ millions) (US$ millions) Deutsche Bank AG, New $76.5 $38.5 Administrative Agent York Branch Banc One, NA $56.7 $28.3 Syndication Agent Fleet National Bank $56.7 $28.3 Documentation Agent Banca Monte Dei Paschi D $50.0 $25.0 Lender Siena Spa Bank of Montreal $33.3 $16.7 Lender Chase Manhattan Bank $33.3 $16.7 Lender Fortis (USA) Finance LLC $33.0 $17.0 Lender Bank of America National $26.7 $13.3 Lender Trust & Savings Associat Banco Santander S.A., Ne $16.7 $8.3 Lender York Branch Commerzbank AG, New York $16.7 $8.3 Lender Branch National Australia Bank $16.7 $8.3 Lender Limited, New York Branch Norddeutsche Landesbank $16.7 $8.3 Lender Girozentrale, New York and/or Cayman Islands Branches Total $433.0 $217.0 2 The 364-Day Facility will be extended as of August 25, 2000 with a final maturity of August 24, 2001 and the Four-Year Facility will be extended as of August 28, 2000 with a final maturity of August 28, 2004. Extension fees will be paid on August 30, 2000. Should you have any questions, please don't hesitate to call John McGill, Deutsche Bank at (212) 469-8666. 3 Monte Dei Paschi Di Siena August 11, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10501 Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Ladies and Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $50,000,000 such that the extended Final Maturity Date shall be August 28, 2004. Banca Monte dei Paschi di Siena S.p.A By: /s/ Gurilio Nomilcchi Senior Vice President & General Manager By: /s/ Brian T. Landy Vice President 4 Deutsche Bank Deutsche Bank AG New York 31 West 52nd Street August 29, 2000 New York NY 10019 Tel 212-469-8000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Director Deutsche Bank AG, New York Branch 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Ladies and Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $76,500,000 such that the extended Final Maturity Date shall be August 28, 2004. Deutsche Bank AG, New York and/or Cayman Islands Branches By: /s/ John S. McGill By: /s/ Alan Frouk Title: Director Title: Vice President 5 Timothy J. Stambaugh Bank One, NA tel 212.373.1124 Senior Vice President Insurance Division fax 212.373.1499 153 West 51st Street New York, NY 10019 Bank One August 9, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, Various Lending Institutions, Deutsche Bank AG, New York Branch, as Administrative Agent; Bank One, NA (formerly known as The First National Bank of Chicago), as Syndication Agent, and Fleet National Bank, as Documentation Agent (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $56,950,000 such that the extended Final Maturity Date shall be August 28, 2004. Bank One, NA (formerly known as The First National Bank of Chicago) By:/s/ Timothy J. Stambaugh Title: Senior Vice President 6 Bank of Montreal Corporate Banking 15 South LaSalle Street, 12th Floor Chicago, Illinois 60603 (312) 750-4300 August 9, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 9l4-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-9366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $33,333,000 such that the extended Final Maturity Date shall be August 28, 2004. Bank at Montreal /s/ Karen Modi Karen Modi Director 7 Jan-Gee W. McCollam Managing Director Financial Institutions Mail Stop: CT EH 40225C 777 Main Street Hartford, CT 06115 FLEET 860 986-4535 tel Corporate and 860 986-7264 fax Investment Banking jan-gee_w_mccollam@fleet.com August 21, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8377) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $56,700,000 such that the extended Final Maturity Date shall be August 28, 2004. Fleet National Bank By: /s/ Jan-Gee W. McCollam Jan-Gee W. McCollam Title: Managing Director 8 CHASE The Chase Manhattan Bank 270 Park Avenue, 20th Floor New York, NY 10017 August 14,2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-469-8666) (Fax 212-469-8366) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28th, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $33,300,000 such that the extended Final Maturity Date shall be August 28, 2004. The Chase Manhattan Bank By: /s/ MaryBeth Mueller Vice President 9 FORTIS Solid partners. flexible solutions August 10, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $33,000,000 such that the extended Final Maturity Date shall be August 28, 2004. Sincerely, Fortis (USA) Finance LLC By: /s/ E. Matthews By: /s/ Robert Fakhoury Title: VP Title: Treasurer 10 Bank of America August 11, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 Tel: 914-765-3327 Fax: 914-755-3410 Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street Now York, NY 10019 Tel: 212-469-9665 Fax: 212-469-8366 RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $26,700,000 such that the extended Final Maturity Date shall be August 28, 2004. Bank of America, N.A. /s/ Joan D'Amico Joan D'Amico Managing Director 11 Banco Santander Central Hispano August 15, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $16,686,667 such that the extended Final Maturity Date shall be August 28, 2004. BANCO SANLANDER CENTRAL HISPANO, S.A., New York Branch. By: /s/ John Hennessy By: /s/ Meeta Anand Title: Manager Asset Backed Finance Title: Assistant Vice President 12 COMMERZBANK 2 World Financial Center AKTIENGESELSCHAFT NEW YORK, NY 10281-050 NEW YORK BRANCH Telephone (212) 266-7200 August 10, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $16,700,000 such that the extended Final Maturity Date shall be August 28, 2004. Very truly yours, COMMERZBANK AG New York Branch /s/ Thomas Ausfahl /s/ James F. Ahern Thomas Ausfahl James F. Ahern Vice President Senior Vice President 13 National Australia Bank
National Australia 34th Floor Telex 3728852 NATAUS Telephone (212) 916-9800 Bank Limited 200 Park Avenue SWIM NATAUS33 Facsimile (212) 983-1969 A.C.N. 004044937 New York, N.Y. 10166 (212) 983-1960
August 11, 2000 Mr. Joseph Sevely Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York, NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) RE: NOTICE OF EXTENSION OF FINAL MATURITY DATE Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for $400,000,000 (subsequently increased to $433,000,000 ) among MBIA Inc., MBIA Insurance Corporation, 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 (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $16,700,000 such that the extended Final Maturity Date shall be August 28, 2004. National Australia Bank Limited By: /s/ Craig Manning Title: Vice President 14 NORD/LB NORDDEUTSCHE LANDESBANK GIROZENTRALE NEW YORK/CAYMAN ISLANDS Mr. Joseph Sevely August 10, 2000 Treasurer MBIA Inc. 113 King Street Armonk, NY 10504 (Tel 914-765-3327) (Fax 914-765-3410) Mr. John S. McGill Vice President Deutsche Bank AG New York 31 West 52nd Street New York NY 10019 (Tel 212-459-0666) (Fax 212-469-8365) RE: MBIA/Notice of Extension of final maturity date Ladies and Gentlemen: Reference is made to the August 28, 1998 Credit Agreement for 200,000,000 (subsequently increased to $433,000,000 ) among MBIA Insurance Corporation, 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 ("Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. It is also understood that Mr. Sevely is an officer of both Parent and Corp. Pursuant to Section 1.15 Recommitment: Replacement of Non-Continuing Lender of the Credit Agreement, the undersigned Lender hereby notifies you that it has elected to Recommit its commitment of $56,950,000 such that the extended Final Maturity Date shall be August 28, 2004. Sincerely, Norddeutsche Landesbank Girozentrale New York and/or Cayman Islands Branch /s/ Stephanie Finnen /s/ Josef Haas Stephanie Finnen Josef Haas Vice President Vice President EX-10.19 7 y46810ex10-19.txt ISDA MASTER AGREEMENT DATED MAY 2, 2000 1 EXHIBIT 10.19 (Multicurrency-Cross Border) ISDA(R) International Swap Dealers Association. Inc. MASTER AGREEMENT dated as of May 2, 2000 DEUTSCHE BANK AG and MBIA, INC. have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows: 1. Interpretation (a) Definitions. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) Single Agreement. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. Obligations (a) General Conditions. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. Copyright(C)1992 by International Swap Dealers Association. Inc. 2 (b) Change of Account. Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) Netting. If on any date amounts would otherwise be payable: (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other. then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable out We same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (in which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries. (d) Deduction or Withholding for Tax. (i) Gross-Up. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party ("X") will: (1) promptly notify the other party ("Y") of such requirement; (2) pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y; (3) promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities; and (4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for: (A) the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d); or (B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law. 2 ISDA(R)1992 3 (ii) Liability. If: (1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4); (2) X does not so deduct or withhold; and (3) a liability resulting from such Tax is assessed directly against X, then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)). (e) Default Interest; Other Amounts. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. Representations Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement) that: (a) Basic Representations. (i) Status. It is duly organised and validly existing under the laws of the jurisdiction of its organisation or incorporation and, if relevant under such laws, in good standing; (ii) Powers. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement to deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorise such execution, delivery and performance; (iii) No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (iv) Consents. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) Obligations Binding. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganisation, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). 3 ISDA(R)1992 4 (b) Absence of Certain Events. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) Absence of Litigation. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action. suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) Accuracy of Specified Information. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. (e) Payer Tax Representation. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true. (f) Payee Tax Representations. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true. 4. Agreements Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party: (a) Furnish Specified Information. It will deliver to the other party or, in certain cases under subparagraph (iii) below, to such government or taxing authority as the other party reasonably directs: (i) any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation; (ii) any other documents specified in the Schedule or any Confirmation; and (iii) upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification, in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) Maintain Authorisations. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) Comply with Laws. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. (d) Tax Agreement. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure. (e) Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, 4 ISDA(R)1994 5 organised, managed and controlled, or considered to have it's seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located ("Stamp Tax Jurisdiction") and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the other party. 5. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party: (i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party: (ii) Breach of Agreement. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice. of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) Credit Support Default. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) Misrepresentation. A representation (other than a representation under Section 3(e) or (f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated. (v) Default under Specified Transaction. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of an acceleration of obligations under, or an early termination of, the Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) Cross Default. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however 5 ISDA(R)1992 6 described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party: (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof, (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer, (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) Termination Events. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, a Tax Event if the event is specified in (ii) below or a Tax Event Upon Merger if the event is specified in (iii) below, and, if specified to be applicable, a Credit Event 6 ISDA(R)1992 7 Upon Merger if the event is specified pursuant to (iv) below or an Additional Termination Event if the event is specified pursuant to (v) below: (i) Illegality. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party): (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) Tax Event. Due to (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); (iii) Tax Event Upon Merger. The party (the "Burdened Party") on the next succeeding Scheduled Payment Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Indemnifiable Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets to, another entity (which will be the Affected Party) where such action does not constitute an event described in Section 5(a)(viii); (iv) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or (v) Additional Termination Event. If "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) Event of Default and Illegality. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 7 ISDA(R)1992 8 6. Early Termination (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) Right to Terminate Following Termination Event. (i) Notice. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) Transfer to Avoid Termination Event. If either an, Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such other party's policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed. (iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(l) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iv) Right to Terminate. If: (1) a transfer under Section 6(b)(ii) or an agreement under Section 6(b)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party, either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then 8 ISDA(R)1992 9 continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) Effect of Designation. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) Calculations. (i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) Payment Date. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) Events of Default. If the Early Termination Date results from an Event of Default: (1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. (2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) Second Method and Marker Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the 9 ISDA(R)1992 10 Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) Termination Events. If the Early Termination Date results from a Termination Event: (1) One Affected Party. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(c)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) Two Affected Parties. If there are two Affected Parties: (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the party with the lower Settlement Amount ("Y") and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. (iii) Adjustment for Bankruptcy. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to. reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) Pre-Estimate. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 10 ISDA(R)1992 11 7. Transfer Subject to Section 6(b)(ii), neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that: (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8. Contractual Currency (a) Payment in the Contractual Currency. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the "Contractual Currency"). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in a reasonable manner and in good faith in converting the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess. (b) Judgments. To the extent permitted by applicable law, if any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgement or order of another court for the payment of any amount described in (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purposes of such judgment or order and the rate of exchange at which such party is able, acting in a reasonable manner and in good faith in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party. The term "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into Contractual Currency. (c) Separate Indemnities. To the extent permitted by applicable law, these indemnities constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement. (d) Evidence of Loss. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss bad an actual exchange or purchase been made. 11 ISDA(R)1992 12 9. Miscellaneous (a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) Amendments. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. (d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) Counterparts and Confirmations. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) No Waiver of Rights. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) Headings. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 10. Offices; Multibranch Parties (a) If Section 10(a) is specified in the Schedule as applying, each party that enters into a Transaction through an Office other than its head or home office represents to the other party that, notwithstanding the place of booking office or jurisdiction of incorporation or organisation of such party, the obligations of such party are the same as if it had entered into the Transaction through its head or home office. This representation will be deemed to be repeated by such party on each date on which a Transaction is entered into. (b) Neither party may change the Office through which it makes and receives payments or deliveries for the purpose of a Transaction without the prior written consent of the other party. (c) If a party is specified as a Multibranch Party in the Schedule, such Multibranch Party may make and receive payments or deliveries under any Transaction through any Office listed in the Schedule, and the Office through which it makes and receives payments or deliveries with respect to a Transaction will be specified in the relevant Confirmation 11. Expenses A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees and Stamp Tax incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document 12 ISDA(R)1992 13 to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 12. Notices (a) Effectiveness. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated: (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) Change of Addresses. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 13. Governing Law and Jurisdiction (a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably: (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at anytime to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 10) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) Service of Process. Each party irrevocably appoints the Process Agent (if any) specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any 13 ISDA(R)1992 14 reason any party's Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days appoint a substitute process agent acceptable to the other Party. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12. Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by law. (d) Waiver of Immunities. Each party irrevocably waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity it, any Proceedings. 14. Definitions As used in this Agreement: "Additional Termination Event" has, the meaning specified in Section 5(b). "Affected Party" has the meaning specified in Section 5(b). "Affected Transactions" means (a) with respect to any Termination Event consisting of an Illegality Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "Affiliate" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "Applicable Rate" means: (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "Burdened Party" has the meaning specified in Section 5(b). "Change in Tax Law" means the enactment. promulgation, execution or ratification of or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into. "consent" includes a consent, approval, action, authorisation, exemption, notice, filing, registration or exchange control consent. "Credit Event Upon Merger" has the meaning specified in Section 5(b). "Credit Support Document" means any agreement or instrument that is specified as such in this Agreement. "Credit Support Provider" has the meaning specified in the Schedule. "Default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. 14 ISDA(R)1992 15 "Defaulting Party" has the meaning specified in Section 6(a). "Early Termination Date" means the date determined in accordance with Section 6(a) or 6(b)(iv). "Event of Default" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "Illegality" has the meaning specified in Section 5(b). "Indemnifiable Tax" means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction. or being or having been organised, present or engaged in a trade or business in such jurisdiction or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document). "law" includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority) and "lawful" and "unlawful" will be construed accordingly. "Local Business Day" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located and, if different, in the principal financial centre, if any, of the currency of such payment, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2) in the relevant locations for performance with respect to such Specified Transaction. "Loss" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section II. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "Market Quotation" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have 15 ISDA(R)1992 16 been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement Transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transactions or group of Terminated Transactions cannot be determined. "Non-default Rate" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "Non-defaulting Party" has the meaning specified in Section 6(a). "Office" means a branch or office of a party, which may be such party's head or home office. "Potential Event of Default" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "Reference Market-makers" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "Relevant Jurisdiction" means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organised. managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made. "Scheduled Payment Date" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "Set-off" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by or imposed on, such payer. "Settlement Amount" means, with respect to a party and any Early Termination Date, the sum of: (a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. "Specified Entity" has the meaning specified in the Schedule. 16 ISDA(R)1992 17 "Specified Indebtedness" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "Specified Transaction " means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange, transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b)these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "Stamp Tax" means any stamp, registration, documentation or similar tax. "Tax" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax. "Tax Event" has the meaning specified in Section 5(b). "Tax Event Upon Merger" has the meaning specified in Section 5(b). "Terminated Transactions" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "Termination Currency" has the meaning specified in the Schedule. "Termination Currency Equivalent" means, in respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the "Other Currency"), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Market Quotation or Loss (as the case may be), is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties. "Termination Event" means an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "Termination Rate" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section, 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market 17 ISDA(R)1992 18 value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. DEUTSCHE BANK AG MBIA, INC. (Name of Party) (Name of Party) By: /s/ A. Levenson By: /s/ Joseph . Sevely Name: A. Levenson Name: Joseph Sevely Title: Title: Treasurer Date: Date: May 3, 2000 By: /s/ D. Nestler Name: D. Nestler Title: 18 ISDA(R)1992 19 SCHEDULE to the ISDA Master Agreement dated as of May 2, 2000 between Deutsche Bank AG ("Party A")) and MBIA, Inc. ("Party B") Part 1. Termination Provisions. (a) "Specified Entity" means: (i) in relation to Party A: Not Applicable (ii) in relation to Party B: Not Applicable (b) "Specified Transaction" shall have the meaning specified in Section 14 of this Agreement save that Section 14 shall be hereby amended by adding the text "commodity transaction, credit derivative transaction, repurchase or reverse repurchase transaction, securities lending transaction" after the words "foreign exchange transaction" in the sixth line thereof. (c) The "Cross Default" provisions of Section 5(a)(vi) will apply to both parties subject to amendment by adding at the end thereof the following words: "and in either case, the other party determines in good faith that it has reasonable grounds to conclude that the performance by the Defaulting Party of its financial obligations hereunder is endangered." With regard to Party A, "Threshold Amount" means 2% of its shareholders' equity (i.e., the sum of capital and disclosed reserves as reported in the most recently published annual audited consolidated financial statements of Deutsche Bank AG). With regard to Party B or any Credit Support Provider, "Threshold Amount" means 2% of its shareholders' equity (as calculated in accordance with generally accepted accounting principles applicable to it). (d) The "Credit Event Upon Merger" provision of Section 5(b)(iv) will apply to both Party A and Party B. 19 20 (e) The "Automatic Early Termination" provision of Section 6(a) will not apply to Party A and will not apply to Party B. (f) Payments on Early Termination. For the purpose of Section 6(e) of this Agreement: (i)Loss will apply. (ii)The Second Method will apply. "Termination Currency" means United States Dollars. (h) "Additional Termination Event" will not apply to either party. Part 2. Tax Representations. (a) Payer Tax Representations. For the purposes of Section 3(e) of this Agreement, Party A and Party B will each make the following representations to the other: It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(10 or 6(e) of this Agreement) to be made by it to the other party under this Agreement. In making this representation, each party may rely on: (i)the accuracy of any representations made by the other party pursuant to Section 3(f) of this Agreement; (ii)the satisfaction of the agreement of the other party contained in Section 4(a)(i) or 4(a)(iii) of this Agreement and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of this Agreement, and (iii)the satisfaction of the agreement of the other party contained in Section 4(d) of this Agreement, provided that it shall not be a breach of this representation where reliance is placed on clause (ii) and the other party does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position. (b) Payee Tax Representations. For the purpose of Section 3(f) of this Agreement, Party A and Party B each represent to the other that, in respect of each Transaction which it enters into through an Office or discretionary agent in the United States of America ("U.S."), 20 21 each payment received or to be received by it under that Transaction will be effectively connected with its conduct of a trade or business in the U.S. Part 3. Documents to be delivered. (a) For the purpose of Section 4(a)(i), the documents to be delivered are:
Party required to Form/Document/ Date by which to be Section deliver document Certificate delivered 3(d) Representation Party A An executed United (i) Upon execution of Not Applicable States Internal this Agreement, (ii) Revenue Service Form promptly upon W-8ECI (or any reasonable demand by successor thereto) and Party B and (iii) an executed United promptly upon States Internal learning that any such Revenue Service Form form previously W-8BEN (or any provided by Party A successor thereto). has become obsolete or incorrect. Party B An executed United (i) Upon execution of Not Applicable States Internal this Agreement, (ii) Revenue Service Form promptly upon W-8ECI (or any reasonable demand by successor thereto), Party A and (iii) Form W-8BEN (or promptly upon any successor thereto), learning that any such or W-9 (or any form previously successor thereto), as provided by Party B applicable. has become obsolete or incorrect.
(b) For the purposes of Section 4(a)(11), the other documents to be delivered are as follows: 21 22
Party required to Form/Document/ Date by which to be Section 3(d) deliver document Certificate delivered representation: Party A and Evidence of the Upon or prior to the Applicable Party B authority, incumbency execution and delivery and specimen of this Agreement and, signature of each with respect to any person executing this Confirmation upon Agreement or any request by the other Confirmation, Credit party. Support Document or other document entered into in connection with this Agreement on its behalf or on behalf of a Credit Support Provider or otherwise, as the case may be. Party A and A copy of the most Promptly after request Applicable Party B recent annual report by the other party. containing consolidated financial statements of each party or its Credit Support Provider, if any, and such other public information respecting the condition or operations, financial or otherwise of such party or its Credit Support Provider, if any, as the other party may reasonably request from time to time. Party A and Party B A duly executed and As of execution of this Applicable delivered copy of the Agreement Credit Support Document.
22 23 Party A and Party B Legal opinions in As of execution of this Applicable form and substance Agreement satisfactory to the other party.
Part 4. Miscellaneous. (a) Address for Notices. For the purpose of Section 12(a) of this Agreement, the addresses for notices and communications to Party A and Party B shall be as follows: TO PARTY A: (i) Deutsche Bank AG, Head Office Taunusanlage 12 60262 Frankfurt GERMANY Attention: Legal Department Telex No: 411836 or 416731 or 41233 Answerback: DBF-D (ii) All notices to Party A (other than those provided for in paragraph (i) above) shall be sent directly to the office through which Party A is acting for the relevant Transaction, using the address and contact particulars specified in the Confirmation for the purposes of confirming that Transaction. If no such particulars are so specified, such notices shall be sent to the address of the relevant office set out below: 23 24
Where Party A is acting through its Where Party A is acting through its Frankfurt Head Office: London Branch: Deutsche Bank AG, Head Office Deutsche Bank AG, London Branch Taunusanlage 12 6, Bishopsgate 60262 Frankfurt London EC2N 4DA GERMANY UNITED KINGDOM Attention: Trading & Sales/Evidenz Attn: OTC Derivatives Tel: (49)(69) 910 33339 Tel: (44)(171) 545 8000 Fax No: (49) (69) 910-38406 Fax: (44)(171) 545 4455 Telex No: 41730-701 Telex: 94015555 Answerback: 41730-702 FMD Answerback: DBLN G Where Party A is acting through its New York Branch: Deutsche Bank AG, New York Branch 31 W. 52nd Street New York, New York 10019 USA Attn: Swap Group Tel: (1)(212) 469-4338 Fax: (1)(212) 469-4654 Telex: 429166 Answerback: DEUTNYK TO PARTY B: MBIA, Inc. 113 King St. Armonk, NY 10504 Attention: Treasurer Fax No: (914) 765-3375
and for purposes of notices under Sections 5 or 6 of the Agreement (other than notices under Section 5(a)(i)), a copy to: MBIA, Inc. 113 King St. Armonk, NY 10504 Attention: General Counsel Fax No: (914) 765-3919 24 25 (b) Process Agent. For the purposes of Section 13(c) of this Agreement: Party A appoints as its Process Agent: Not applicable. Party B appoints as its Process Agent: Not applicable. (c) Offices. The provisions of Section 10(a) will apply to this Agreement. (d) Multibranch Party. For purposes of Section 10(c) of this Agreement: (i) Party A is a Multibranch Party and may act through the following offices: New York Branch, London Branch and Head Office, Frankfurt (ii) Party B is not a Multibranch Party (e) The Calculation Agent shall be Party A. (f) Credit Support Document. Details of any Credit Support Document: With respect to Party A and Party B: the Credit Support Annex attached hereto and incorporated herein by reference. (g) Credit Support Provider. Credit Support Provider means in relation to Party A and Party B: Not applicable (h) Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York (without reference to its choice of law doctrine). (i) "Affiliate" will have the meaning specified in Section 14 of this Agreement. Part 5. Other Provisions. (a) Representations. (i) Non-Reliance, Etc. Each party will be deemed to represent to the other party on the date that it enters into a Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for that Transaction): 25 26 (1) Non-Reliance. It is acting for its own account, and it has made its own independent decisions to enter into that Transaction and as to whether that Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered to be investment advice or a recommendation to enter into that Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of that Transaction. (2) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts the terms and conditions and risks of that Transaction. It is also capable of assuming, and assumes, the risks of that Transaction. (3) Status of Parties. The other party is not acting as a fiduciary for or adviser to it in respect of that Transaction. (ii) Commodity Exchange Act. Each party represents to the other party on and as of the date hereof and on each date on which a Transaction is entered into between them that: (1) each Transaction is intended to be exempt from, or otherwise not subject to regulation under, the Commodity Exchange Act; (2) such party is an "eligible swap participant" within the meaning of CFTC Regulation Section 35.1(b)(2); and (3) such party is entering into each Transaction in connection with its line of business and not for purposes of speculation. (iii) Securities Act Representations. Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into) that: (1) it acknowledges that certain Transactions under the Agreement may involve the purchase or sale of "securities" as defined under the U.S. Securities Act of 1933, as amended (the "Securities Act") and understands that any such purchase or sale of securities will not be registered under the Securities Act and that any such securities may not be reoffered, resold, 26 27 pledged or otherwise transferred except (1) pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act and (2) in accordance with any applicable securities laws of any state of the United States. (2) it is a "qualified institutional buyer" as defined in Rule 144A under the Securities Act, or an "accredited investor" as defined under the Securities Act; and (3) unless otherwise expressly provided in a Confirmation for a Transaction, any securities it is required to deliver under this Agreement and any Transaction will ' not at the time of such delivery constitute "restricted securities" or be subject to restrictions on transfer (including so-called "control securities") under the Securities Act (as defined above) or otherwise. This representation will be deemed repeated at the time of such delivery. (b) Consent to Recording. Each party (i) consents to the recording of the telephone conversations of trading and marketing and/or other personnel of the parties and their Affiliates in connection with this Agreement or any potential Transaction (ii) agrees to obtain any necessary consent of and give notice of such recording to such personnel of it and its Affiliates; and (iii) agrees that recordings may be submitted in evidence in any Proceedings relating to this Agreement. (c) Tax Provisions. (i) The definition of Tax Event, Section 5 (b)(ii), is hereby modified by adding the following provision at the end thereof "provided, however, that for purposes of clarification, the parties acknowledge that the introduction or proposal of legislation shall not, in and of itself, give rise to a presumption that a Tax Event has occurred." (ii) The definition of term "Indemnifiable Tax" is amended by adding the following provisions at the end thereof. "Notwithstanding the foregoing, Indemnifiable Tax" also means any Tax imposed in respect of a payment under this Agreement by reasons of a Change in Tax Law by a government or taxing authority of a Relevant Jurisdiction of the party making such payment, unless the other party is incorporated, organized, managed and controlled or considered to have its 27 28 seat in such jurisdiction, or is acting for purposes of this Agreement through a branch or office located in such jurisdiction." 5. Set-off Section 6 of this Agreement is amended by the addition of the following Sections 6(f) at the end thereof: (f) Any amount (the "Early Termination Amount") payable to one party (the "Payee") by the other party (the "Payer") under Section 6(e), in circumstances where there is a Defaulting Party or one Affected Party in the case where a Termination Event under Section 5(b)(iv) has occurred, will, at the option of the party ("X") other than the Defaulting Party or the Affected Party (and without prior notice to the Defaulting Party or the Affected Party), be reduced by being set-off against any amount(s) (the "Other Agreement Amount") payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreements) between the Payee and the Payer or instrument(s) or undertaking(s) issued or executed by one party to, or in favor of, the other party (and the Other Agreement Amount will be discharged promptly and in all respects to the extent it is so set-off). X will give notice to the other party of any set-off effected under this Section 6(f). For the purpose of this provision, either the Early Termination Amount or the Other Agreement Amount (or the relevant portion of such amounts) may be converted by X into the currency in which the other is denominated at the rate of exchange at which such party would be able, acting in a reasonable manner and in good faith, to purchase the relevant amount of such currency. If an obligation under this provision is unascertained, X may in good faith estimate such amount and effect a set-off hereunder in the amount of such estimate, subject to the relevant party accounting to the other when the amount of the obligation is ascertain. Nothing in this Section 6(f) shall be effective to create a charge or other security interest. This Section shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise)." (e) Escrow. On any date on which both parties are required to make payments hereunder, either party may at its option and in its sole discretion notify the other party that payments on that 28 29 date are to be made in escrow. In this case deposit of the payment due earlier on that date shall be made by 2:00 p.m. (local time at the place for the earlier payment if there is a time difference between the cities in which payments are to be made) on that date with an escrow agent selected by the party giving the notice and reasonably acceptable to the other party, accompanied by irrevocable payment instructions (a) to release the deposited payment to the intended recipient upon receipt by the escrow agent of the required deposit of the corresponding payment from the other party on the same date accompanied by irrevocable payment instructions to the same effect or (b) if the required deposit of the corresponding payment is not made on that same date, to return the payment deposited to the party that paid it into escrow at such party's request. The party that elects to have payments made in escrow shall pay the costs of the escrow arrangements and shall cause those arrangements to provide that the intended recipient of the payment due to be deposited first shall be entitled ' to interest on that deposited payment for each day in the period of its deposit at the rate offered by the escrow agent for that day for overnight deposits in the relevant currency in the office where it holds that deposited payment (at 11:00 a.m. local time on that day) if that payment is not released by 5:00 p.m. local time on the date it is deposited for any reason other than the intended recipient's failure to make the escrow deposit it is required to make hereunder in a timely fashion. Additional Acknowledgments and Agreements of the Parties. (i) Deutsche Bank Securities Inc. Each party acknowledges and agrees that (i) Deutsche Bank Securities Inc. or another designated Affiliate of Party A (the "Designated Agent") will act as agent for Party A in connection with certain Transactions when so specified in the Transaction Confirmation; and (ii) the Designated Agent is acting solely as agent and shall have no liability for the performance of either party's obligations under this Agreement or any Transaction, or for costs, expenses, damages or claims arising out of the failure of either party to perform any such obligation. (ii) Bankruptcy Code. Without limiting the applicability if any, of any other provision of the U.S. Bankruptcy Code as amended (the "Bankruptcy Code") (including without limitation Sections 362, 546, 556, and 560 thereof and the applicable definitions in Section 101 thereof), the parties acknowledge and agree that all Transactions entered into hereunder will constitute "forward contracts" or "swap agreements" as defined in Section 101 of the Bankruptcy Code or "commodity contracts" as defined in Section 761 of the Bankruptcy Code, that the rights of the parties under Section 6 of this Agreement will constitute contractual rights to liquidate Transactions, that any margin or collateral provided under any margin, collateral, security, pledge, or similar agreement related hereto will constitute a "margin payment" as defined in Section 101 of the Bankruptcy Code, and that the parties are entities entitled to the rights under, and protections afforded by, Sections 362, 546, 556, and 560 of the Bankruptcy Code. 29 30 (iii) Waiver of Right to Trial by Jury. Each of the parties hereby irrevocably waives any and all right to a trial by jury with respect to any legal proceeding arising out of or relating to this Agreement or any Transaction. (g) Confirmations for Foreign Exchange Transactions. (i) With effect from the date hereof, any FX Transaction or Currency Option (as defined in the 1998 FX and Currency Option Definitions, as published by the International Swaps and Derivatives Association, Inc., the Emerging Markets Traders Association and The Foreign Exchange Committee (the "FX Definitions")) which the parties may enter or may have entered into prior to the date hereof, in respect of which the Confirmation fails by its terms expressly to exclude the application of this Agreement, shall (to the extent not otherwise provided for in this Agreement) be deemed to incorporate the terms of and shall be governed by and be subject to this Agreement (in substitution for any existing terms, if any, whether express or implied) and, for the purposes hereof, shall be deemed to be a Transaction. (ii) Where a Transaction is confirmed by means of exchange of electronic messages on an electronic messaging system or other document or other confirming evidence exchanged between the parties confirming such Transaction such messages, document or evidence will constitute a Confirmation for the purposes of this Agreement even where not so specified therein. (iii) Reference is made to the FX Definitions with respect to any FX Transaction or Currency Option. Unless other-wise specified in a Confirmation relating to a FX Transaction or a Currency Option, any terms used in that Confirmation which are not otherwise defined herein and which are contained in the FX Definitions shall have the meaning set forth in those definitions. In the event of any inconsistency between the provisions of this Agreement and the FX Definitions, the provisions of this Agreement shall prevail. (h) Premium Payments If any Premium relating to a Currency Option is not received on the Premium Payment Date, the Seller may elect: (1) to accept a late payment of such Premium; (2) to give written notice of such non-payment and, if such payment shall not be received within two (2) Local Business Days of such notice, treat the related Currency Option as void; or (3) to give written notice of such non-payment and, if such payment shall not be received within two (2) Local Business Days of such notice, treat such non-payment as an Event of Default under Section 5(a)(i). If the Seller elects to act under either clause (1) or (2) of the preceding sentence, the Buyer shall pay all out-of-pocket costs and actual damages incurred in connection with such unpaid or late Premium or void Currency Option, including, without limitation, interest on such Premium in the same currency as such 30 31 Premium at the then prevailing market rate and any other costs or expenses incurred by the Seller in covering its obligations (including, without limitation, any hedge) with respect to such Currency Option. DEUTSCHE BANK AG MBIA, INC. By: /s/A. Levenson By: ----------------------- ---------------------------- Name: A. Levenson Name: Title: Title: Date: Date: By: /s/D. Nestler By: /s/ Joseph Sevely ----------------------- ---------------------------- Name: D. Nestler Name: Joseph Sevely Title: Title: Treasurer Date: Date: May 3, 2000 31 32 Paragraph 13. Elections and Variables (a) Security Interest for "Obligations". The term "Obligations" as used in this Annex includes the following additional obligations. With respect to Party A and Party B: Inapplicable. (b) Credit Support Obligations. (i) Delivery Amount, Return Amount and Credit Support Amount. (A) "Delivery Amount" has the meaning specified in Paragraph 3(a). (B) "Return Amount" has the meaning specified in Paragraph 3(b). (C) "Credit Support Amount" has the meaning specified in Paragraph 3, except that, if an Independent Amount or Independent Amounts are specified for a party, the Credit Support Amount for such party will never be less than the aggregate of all Independent Amounts applicable to that party. (ii) Eligible Collateral. The following items will qualify as "Eligible Collateral" for the party specified:
Party A Party B Valuation Percentage (A) Cash [X] [X] 100% (B) negotiable debt obligations issued by the U.S. [X] [X] 98% Treasury Department having a remaining maturity of less than one year (C) negotiable debt obligations issued by the U.S. [X] [X] 95% Treasury Department having a remaining maturity of 1-10 years (D) negotiable debt obligations issued by the U.S. [X] [X] 90% Treasury Department having a remaining maturity of more than 10 years (E)single-class mortgage participation certificates [X] [X] 90% ("FHLMC Certificates") in book-entry form backed by single-family residential mortgage loans, the full and timely payment of interest at the applicable certificate rate and the ultimate collection of principal of which are guaranteed by the Federal Home Loan Mortgage Corporation (excluding Real Estate Mortgage Investment Conduit ("REMIC") or other multi-class Pass-through certificates, collateralized mortgage obligations, pass-through certificates backed by adjustable rate mortgages, securities paying interest or principal only and similar derivative securities);
32 33 (F) single-class mortgage pass-through certificates [X] [X] 90% ("FNMA Certificates") in book-entry form backed by single-family residential mortgage loans, the full and timely payment of interest at the applicable certificate rate and ultimate collection of principal of which are guaranteed by the Federal National Mortgage Association (excluding REMIC or other multi-class pass-through certificates, pass-through certificates backed by adjustable rate mortgages collateralized mortgage obligations, securities paying interest or principal only and similar derivative securities); (G) single-class fully modified pass-through certificates [X] [X] 90% ("GNMA Certificates" in book-entry form backed by single-family residential mortgage loans, the full and timely payment of principal and interest of which is guaranteed by the Government National Mortgage Association (excluding REMIC or other multi-class Pass-through certificates, collateralized mortgage obligations, pass-through certificates backed by adjustable rate mortgages, securities paying interest or principal only and similar derivatives securities). (H) Such other collateral as Party A and Party B may [X] [X] As may be agreed
(iii) Other Eligible Support. The following items will qualify as "Other Eligible Support" for the party specified:
Party A Party B (A) Inapplicable [ ] [ ] (B) Inapplicable [ ] [ ]
33 34 (iv) Thresholds. (A) "Independent Amount" means with respect to Party A: $ Inapplicable "Independent Amount" means with respect to Party B: $ Inapplicable (B) "Threshold" means, with respect to each Party A and Party B, the amount set forth opposite the lower of the ratings in the table set forth below in effect on any Valuation Date for the unsubordinated, unsecured, long-term debt of Party A or of Party B, respectively; provided however that if the unsubordinated, unsecured, long-term debt of Party A or of Party B ceases to be rated by either Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies ("S&P") or Moody's Investors Service ("Moody's"), then the rating by whichever of S&P or Moody's that has continued to rate the unsubordinated, unsecured, long-term debt of such entity shall be used as the sole rating of such entity for purposes of this table; and provided further that, if (x) an Event of Default, Potential Event of Default, Termination Event, Additional Termination Event or Specified Condition has occurred and is continuing with respect to (i) Party A or (ii) Party B or (y) (i) Party A or (ii) of Party B has no unsubordinated, unsecured, long-term debt rated by either Standard & Poor's Corporation or Moody's, then the Threshold of the applicable party shall be zero.
Rating by S&P Rating by Moody's Threshold in Dollars AAA to AA- Aaa to Aa3 $75,000,000.00 A+ Al $5,000,000.00 A&A- A2 & A3 $3,000,000 BBB+ or below Baa 1 $0
(C) "Minimum Transfer Amount" means with respect to Party A: $250,000; provided, however, that the Minimum Transfer Amount for such party shall be zero upon the occurrence and during the continuance of an Event of Default, Potential Event of Default, Termination Event, Additional Termination Event, or Specified Condition with respect to such party. "Minimum Transfer Amount" means with respect to Party B: $250,000; provided, however, that the Minimum Transfer Amount for such party shall be zero upon the occurrence and during the continuance of an Event of Default, Potential Event of Default, Termination Event, Additional Termination Event, or Specified Condition with respect to such party. 34 35 (D) Rounding. The Delivery Amount and the Return Amount will be rounded up and down to the nearest integral multiple of $50,000.00, respectively, or to zero, in the case of a return amount lower than $50,000.00. (c) Valuation and Timing. (i) "Valuation Agent" means:, for purposes of Paragraphs 3 and 5, the party making the demand under Paragraph 3, and, for purposes of Paragraph 6(d), the Secured Party receiving or deemed to receive the Distributions or the Interest Amount, as applicable. (ii) "Valuation Date" means: Any Local Business Day. (iii) "Valuation Time" means: [ ] the close of business in the city of the Valuation Agent on the Valuation Date or date of calculation, as applicable; [X] the close of business on the Local Business Day before the Valuation Date or date of calculation, as applicable; provided that the calculations of Value and Exposure will be made as of approximately the same time on the same date. (iv) "Notification Time" means 1:00pm, New York time, on a Local Business Day. (v) "Exposure" has the meaning provided in Paragraph 12 except that the proviso in the definition of "Exposure" is deleted and the following is substituted therefor: "provided, that Market Quotation will be determined by the Valuation Agent (i) in respect of any equity-based total return swap, using the closing price or last sale price (as applicable) of each stock, basket, or index (as applicable) on the relevant determination date or (ii) in respect of any other Transaction type (including, without limitation, equity-related option) using its good faith estimate at mid-market of the amounts that would be payable for Replacement Transactions (as that term is defined in the definition of "Market Quotation"). (d) Conditions Precedent and Secured Party's Rights and Remedies. Each Termination Event specified below with respect to a party will be a "Specified Condition" for that party (the specified party being the Affected Party if a Termination Event or Additional Termination Event occurs with respect to that party):
Party A Party B Illegality [X] [X] Tax Event [ ] [ ] Tax Event Upon Merger [ ] [ ] Credit Event Upon Merger [X] [X] The Additional Termination Events specified in Part I of the Schedule to this Agreement or any event which, with the giving of notice or the lapse of time or both, would constitute an Additional Termination Event.
(e) Substitution. 35 36 (i) "Substitution Date" has the meaning specified in Paragraph 4(d)(ii). (ii) Consent. If specified here as applicable, then the Pledgor must obtain the Secured Party's consent for any substitution pursuant to Paragraph 4(d): Inapplicable (f) Dispute Resolution. (i) "Resolution Time" means 1:00 p.m., New York time, on the Local Business Day following the date on which the notice is given that gives rise to a dispute under Paragraph 5. (ii) Value. For the purpose of Paragraphs 5(i)(C) and 5(ii), the Value of Posted Credit Support will be calculated as follows: as set forth for other purposes in Paragraph 12. (iii) Alternative. The provisions of Paragraph 5 will apply, except to the following extent: (A) pending the resolution of a dispute, Transfer of the undisputed Value of Eligible Credit Support or Posted Credit Support involved in the relevant demand will be due as provided in Paragraph 5 if the demand is given by the Notification Time, but will be due on the second Local Business Day after the demand if the demand is given after the Notification Time; and (B) the Disputing Party need not comply with the provisions of Paragraph 5(11)(2) if the amount to be Transferred does not exceed the Disputing Party's Minimum Transfer Amount. (g) Holding and Using Posted Collateral. (i) Eligibility to Hold Posted Collateral, Custodians. Party A and its Custodian will be entitled to hold Posted Collateral pursuant to Paragraph 6(b); provided that the following conditions applicable to it are satisfied: (A) Party A is not a Defaulting Party. (B) Posted Collateral may be held only in the following jurisdictions: New York. Initially, the Custodian for Party A is: Deutsche Bank AG New York Branch. Party B and its Custodian will be entitled to hold Posted Collateral pursuant to Paragraph 6(b); provided that the following conditions applicable to it are satisfied: (A) Party B is not a Defaulting Party. (B) Posted Collateral may be held only in the following jurisdictions: New York. (C) In the event that the Custodian holds Posted Collateral, the long-term unsubordinated unsecured debt of the Custodian is rated at least A by Standard & Poors, a division of The McGraw-Hill Companies, Inc. (or any successor thereto) and at least A2 by Moody's Investors Service, Inc. (or any successor thereto). Initially, the Custodian for Party B is: as agreed upon from time to time. (ii) Use of Posted Collateral. The provisions of Paragraph 6(c) will not apply to Party A and Party B. (h) Distributions and Interest Amount. (i) Interest Rate. The "Interest Rate" will be with respect to Eligible Collateral in the form of Cash, for any day, the rate opposite the caption "Federal Funds (Effective)" for such day as published for such 36 37 day in Federal Reserve Publication H.15(519) or any successor publication as published by the Board of Governors of the Federal Reserve System. (ii) Transfer of interest Amount. The Transfer of the Interest Amount will be made on the first Local Business Day of each calendar month and on any Local Business Day that Posted Collateral in the form of Cash is Transferred to the Pledgor pursuant to Paragraph 3(b). (iii) Alternative to Interest Amount. The provisions of Paragraph 6(d)(ii) will apply. (i) Other Eligible Support and Other Posted Support. (i) "Value" with respect to Other Eligible Support and Other Posted Support means: Inapplicable (ii) "Transfer" with respect to Other Eligible Support and Other Posted Support means: Inapplicable (j) Demands and Notices. All demands, specifications and notices under this Annex will be made pursuant to the Notices Section of this Agreement, unless otherwise specified here: Party A: Deutsche Bank AG 31 West 52nd Street New York, NY 10019 Attention: Global Margin Management Party B: MBIA, Inc. 113 King St. Armonk, NY 10504 Attention: Treasurer Fax No: (914) 765-3375 (k) Addresses for Transfers Party A: For Cash: DBAG NY, ABA: 026003780, Ref: A C# [to be provided] For Eligible Collateral: Bank of NYC / DBNYC, ABA: 021000018, Ref. GMM /[Client name] Party B: To be provided. (l) Other Provisions. (i) Limit on Secured Party's Liability. The Secured Party will not be liable for any losses or damages that the Pledgor may suffer as a result of any failure by the Secured Party to perform, or any delay by it in performing, any of its obligations under this Annex if the failure or delay results from circumstances beyond the reasonable control of the Secured Party or its Custodian, such as interruption or loss of computer or communication services, labor disturbance, natural disaster or local or national emergency. (ii) Further Assurances. If the Pledgor fails (a) to execute and deliver to the Secured Party such financing statements, assignments, or other documents or (b) to do such other things relating to the Posted Collateral as the Secured Party may reasonably request in order to protect and maintain its security interest in the Posted Collateral and to protect, preserve, and realize upon the Posted Collateral, then the Secured Party is hereby authorized by the Pledgor (but not required) to complete and execute such financing 37 38 statements, assignments, and other documents as the Secured Party deems appropriate for such purposes. The Pledgor hereby appoints the Secured Party, during the term of this Agreement, as the Pledgor's agent and attorney-in-fact to complete and execute such financing statements, assignments and other documents and to perform all other acts which the Secured Party may deem appropriate to protect and maintain its security interest in the Posted Collateral and to protect, preserve, and realize upon the Posted Collateral. The power-of-attorney granted herein to the Secured Party is coupled with an interest and is irrevocable during the term of this Agreement. (iii) The following is added as a new paragraph 1 l(g): (g) Pledgor shall deliver to the Secured Party an opinion of counsel in form and substance, satisfactory to the Secured Party but with customary exceptions and qualifications, to the effect that the Transfer of the Posted Collateral effects a valid perfected security interest, such opinion to be requested by the Secured Party in writing within one week of the first Transfer of Posted Collateral by the Pledgor and such opinion will be delivered in writing within thirty (30) Local Business Days of such request. If counsel is unable to render such an opinion, the parties agree that they will work in good faith to amend the Agreement and the Credit Support Annex as required in order to permit such an opinion to be rendered. DEUTSCHE BANK AG MBIA, INC. By: /s/A. Levenson By: /s/ Joseph Sevely ------------------------- --------------------------- Name: A. Levenson Name: Joseph Sevely Title: Title: Treasurer By: /s/D. Nestler ------------------------ Name: D. Nestler Title: 38 39 ISDA(R) International Swaps and Derivatives Association, Inc. CREDIT SUPPORT ANNEX to the Schedule to the MASTER AGREEMENT dated as of May 2, 2000 between DEUTSCHE BANK AG and MBIA, INC. ("Party A") ("Party B") This Annex supplements, forms part of, and is subject to, the above-referenced Agreement, is part of its Schedule and is a Credit Support Document under this Agreement with respect to each party. Accordingly, the parties agree as follows: Paragraph 1. Interpretation (a) Definitions and Inconsistency. Capitalized terms not otherwise defined herein or elsewhere in this Agreement have the meanings specified pursuant to Paragraph 12, and all references in this Annex to Paragraphs are to Paragraphs of this Annex. In the event of any inconsistency between this Annex and the other provisions of this Schedule, this Annex will prevail, and in the event of any inconsistency between Paragraph 13 and the other provisions of this Annex, Paragraph 13 will prevail. (b) Secured Party and Pledgor. All references in this Annex to the "Secured Party" will be to either party when acting in that capacity and all corresponding references to the "Pledgor" will be to the other party when acting in that capacity; provided, however, that if Other Posted Support is held by a party to this Annex, all references herein to that party as the Secured Party with respect to that Other Posted Support will be to that party as the beneficiary thereof and will not subject that support or that party as the beneficiary thereof to provisions of law generally relating to security interests and secured parties. Paragraph 2. Security Interest Each party, as the Pledgor, hereby pledges to the other party, as the Secured Party, as security for its Obligations, and grants to the Secured Party a first priority continuing security interest in, lien on and right of Set-off against all Posted Collateral Transferred to or received by the Secured Party hereunder. Upon the Transfer by the Secured Party to the Pledgor of Posted Collateral, the security interest and lien granted hereunder on that Posted Collateral will be released immediately and, to the extent possible, without any further action by either party. Copyright (C) 1994 by International Swaps and Derivatives Association, Inc. 40 Paragraph 3. Credit Support Obligations (a) Delivery Amount Subject to Paragraphs 4 and 5, upon a demand made by the Secured Party on or promptly following a Valuation Date, if the Delivery Amount for that Valuation Date equals or exceeds the Pledgor's Minimum Transfer Amount, then the Pledgor will Transfer to the Secured Party Eligible Credit Support having a Value as of the date of Transfer at least equal to the applicable Delivery Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "Delivery Amount" applicable to the Pledgor for any Valuation Date will equal the amount by which: (i) the Credit Support Amount exceeds (ii) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party. (b) Return Amount. Subject to Paragraphs 4 and 5, upon a demand made by the Pledgor on or promptly following a Valuation Date, if the Return Amount for that Valuation Date equals or exceeds the Secured Party's Minimum Transfer Amount, then the Secured Party will Transfer to the Pledgor Posted Credit Support specified by the Pledgor in that demand having a Value as of the date of Transfer as close as practicable to the applicable Return Amount (rounded pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the "Return Amount" applicable to the Secured Party for any Valuation Date will equal the amount by which: (i) the Value as of that Valuation Date of all Posted Credit Support held by the Secured Party exceeds (ii) the Credit Support Amount. "Credit Support Amount" means, unless otherwise specified in Paragraph 13, for any Valuation Date (i) the Secured Party's Exposure for that Valuation Date plus (ii) the aggregate of all Independent Amounts applicable to the Pledgor, if any, minus (iii) all Independent Amounts applicable to the Secured Party, if any, minus (iv) the Pledgor's Threshold; provided, however, that the Credit Support Amount will be deemed to be zero whenever the calculation of Credit Support Amount yields a number less than zero. Paragraph 4. Conditions Precedent, Transfer Timing, Calculations and Substitutions (a) Conditions Precedent. Each Transfer obligation of the Pledgor under Paragraphs 3 and 5 and of the Secured Party under Paragraphs 3, 4(d)(ii), 5 and 6(d) is subject to the conditions precedent that: (i) no Event of Default, Potential Event of Default or Specified Condition has occurred and is continuing with respect to the other party; and (ii) no Early Termination Date for which any unsatisfied payment obligations exist has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the other party. (b) Transfer Timing. Subject to Paragraphs 4(a) and 5 and unless otherwise specified, if a demand for the Transfer of Eligible Credit Support or Posted Credit Support is made by the Notification Time, then the relevant Transfer will be made not later than the close of business on the next Local Business Day; if a demand is made after the Notification Time, then the relevant Transfer will be made not later than the close of business on the second Local Business Day thereafter. (c) Calculations. All calculations of Value and Exposure for purposes of Paragraphs 3 and 6(d) will be made by the Valuation Agent as of the Valuation Time. The Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) of its calculations not later than the Notification Time on the Local Business Day following the applicable Valuation Date (or in the case of Paragraph 6(d), following the date of calculation). 2 ISDA(R) 1994 41 (d) Substitutions. (i) Unless otherwise specified in Paragraph 13, upon notice to the Secured Party specifying the item of Posted Credit Support to be exchanged, the Pledgor may, on any Local Business Day, Transfer to the Secured Party substitute Eligible Credit Support (the "Substitute Credit Support"); and (ii) subject to Paragraph 4(a), the Secured Party wilt Transfer to the Pledgor the items of Posted Credit Support specified by the Pledgor in its notice not later than the Local Business Day following the date on which the Secured Party receives the Substitute Credit Support, unless otherwise specified in Paragraph 13 (the "Substitution Date"); provided that the Secured Party will only be obligated to Transfer Posted Credit Support with a Value as of the date of Transfer of that Posted Credit Support equal to the Value as of that date of the Substitute Credit Support. Paragraph 5. Dispute Resolution If a party (a "Disputing Party") disputes (I) the Valuation Agent's calculation of a Delivery Amount or a Return Amount or (II) the Value of any Transfer of Eligible Credit Support or Posted Credit Support, then (1) the Disputing Party will notify the other party and the Valuation Agent (if the Valuation Agent is not the other party) not later than the close of business on the Local Business Day following (X) the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (2) subject to Paragraph 4(a), the appropriate party will Transfer the undisputed amount to the other party not later than the close of business on the Local Business Day' following (X) the date that the demand is made under Paragraph 3 in the case of (I) above or (Y) the date of Transfer in the case of (II) above, (3) the parties will consult with each other in an attempt to resolve the dispute and (4) if they fail to resolve the dispute by the Resolution Time, then: (i) In the case of a dispute involving a Delivery Amount or Return Amount, unless otherwise specified in Paragraph 13, the Valuation Agent will recalculate the Exposure and the Value as of the Recalculation Date by: (A) utilizing any calculations of Exposure for the Transactions (or Swap Transactions) that the parties have agreed are not in dispute; (B) calculating the Exposure for the Transactions (or Swap Transactions) in dispute by seeking four actual quotations at mid-market from Reference Market-makers for purposes of calculating Market Quotation, and taking the arithmetic average of those obtained; provided that if four quotations are not available for a particular Transaction (or Swap Transaction), then fewer than four quotations may be used for that Transaction (or Swap Transaction); and if no quotations are available for a particular Transaction (or Swap Transaction), then the Valuation Agent's original calculations will be used for that Transaction (or Swap Transaction); and (C) utilizing the procedures specified in Paragraph 13 for calculating the Value, if disputed, of Posted Credit Support. (ii) In the case of a dispute involving the Value of any Transfer of Eligible Credit Support or Posted Credit Support, the Valuation Agent will recalculate the Value as of the date of Transfer pursuant to Paragraph 13. Following a recalculation pursuant to this Paragraph, the Valuation Agent will notify each party (or the other party, if the Valuation Agent is a party) not later than the Notification Time on the Local Business Day following the Resolution Time. The appropriate party will, upon demand following that notice by the Valuation Agent or a resolution pursuant to (3) above and subject to Paragraphs 4(a) and 4(b), make the appropriate Transfer. 3 42 Paragraph 6. Holding and Using Posted Collateral (a) Care of Posted Collateral. Without limiting the Secured Party's rights under Paragraph 6(c), the Secured Party will exercise reasonable care to assure the safe custody of all Posted Collateral to the extent required by applicable law, and in any event the Secured Party will be deemed to have exercised reasonable care if it exercises at least the same degree of care as it would exercise with respect to its own property. Except as specified in the preceding sentence, the Secured Party will have no duty with respect to Posted Collateral, including, without limitation, any duty to collect any Distributions, or enforce or preserve any rights pertaining thereto. (b) Eligibility to Hold Posted Collateral; Custodians. (i) General. Subject to the satisfaction of any conditions specified in Paragraph 13 for holding Posted Collateral, the Secured Party will be entitled to hold Posted Collateral or to appoint an agent (a "Custodian") to hold Posted Collateral for the Secured Party. Upon notice by the Secured Party to the Pledgor of the appointment of a Custodian, the Pledgor's obligations to make any Transfer will be discharged by making the Transfer to that Custodian. The holding of Posted Collateral by a Custodian will be deemed to be the holding of that Posted Collateral by the Secured Party for which the Custodian is acting. (ii) Failure to Satisfy Conditions. If the Secured Party or its Custodian fails to satisfy any conditions for holding Posted Collateral, then upon a demand made by the Pledgor, the Secured Party will, not later than five Local Business Days after the demand, Transfer or cause its Custodian to Transfer all Posted Collateral held by it to a Custodian that satisfies those conditions or to the Secured Party if it satisfies those conditions. (iii) Liability. The Secured Party will be liable for the acts or omissions of its Custodian to the same extent that the Secured Party would be liable hereunder for its own acts or omissions. (c) Use of Posted Collateral. Unless otherwise specified in Paragraph 13 and without limiting the rights and obligations of the parties under Paragraphs 3, 4(d)(ii), 5, 6(d) and 8, if the Secured Party is not a Defaulting Party or an Affected Party with respect to a Specified Condition and no Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then the Secured Party will, notwithstanding Section 9-207 of the New York Uniform Commercial Code, have the right to: (i) sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of, or otherwise use in its business any Posted Collateral it holds, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor; and (ii) register any Posted Collateral in the name of the Secured Party, its Custodian or a nominee for either. For purposes of the obligation to Transfer Eligible Credit Support or Posted Credit Support pursuant to Paragraphs 3 and 5 and any rights or remedies authorized under this Agreement, the Secured Party will be deemed to continue to hold all Posted Collateral and to receive Distributions made thereon, regardless of whether the Secured Party has exercised any rights with respect to any Posted Collateral pursuant to (i) or (ii) above. (d) Distributions and Interest Amount. (i) Distributions. Subject to Paragraph 4(a), if the Secured Party receives or is deemed to receive Distributions on a Local Business Day, it will Transfer to the Pledgor not later than the following Local Business Day any Distributions it receives or is deemed to receive to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). 4 ISDA(R)1994 43 (ii) Interest Amount. Unless otherwise specified in Paragraph 13 and subject to Paragraph 4(a), in lieu of any interest, dividends or other amounts paid or deemed to have been paid with respect to Posted Collateral in the form of Cash (all of which may be retained by the Secured Party), the Secured Party will Transfer to the Pledgor at the times specified in Paragraph 13 the Interest Amount to the extent that a Delivery Amount would not be created or increased by that Transfer, as calculated by the Valuation Agent (and the date of calculation will be deemed to be a Valuation Date for this purpose). The Interest Amount or portion thereof not Transferred pursuant to this Paragraph will constitute Posted Collateral in the form of Cash and will be subject to the security interest granted under Paragraph 2. Paragraph 7. Events of Default For purposes of Section 5(a)(iii)(1) of this Agreement, an Event of Default will exist with respect to a party if: (i) that party fails (or fails to cause its Custodian) to make, when due, any Transfer of Eligible Collateral, Posted Collateral or the Interest Amount, as applicable, required to be made by it and that failure continues for two Local Business Days after notice of that failure is given to that party; (ii) that party fails to comply with any restriction or prohibition specified in this Annex with respect to any of the rights specified in Paragraph 6(c) and that failure continues for five Local Business Days after notice of that failure is given to that party; or (iii) that party fails to comply with or perform any agreement or obligation other than those specified in Paragraphs 7(i) and 7(ii) and that failure continues for 30 days after notice of that failure is given to that party. Paragraph 8. Certain Rights and Remedies (a) Secured Party's Rights and Remedies. If at any time (1) an Event of Default or Specified Condition with respect to the Pledgor has occurred and is continuing or (2) an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Pledgor, then, unless the Pledgor has paid in full all of its Obligations that are then due, the Secured Party may exercise one or more of the following rights and remedies: (i) all rights and remedies available to a secured party under applicable law with respect to Posted Collateral held by the Secured Party; (ii) any other rights and remedies available to the Secured Party under the terms of Other Posted Support, if any; (iii) the right to Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral); and (iv) the right to liquidate any Posted Collateral held by the Secured Party through one or more public or private sales or other dispositions with such notice, if any, as may be required under applicable law, free from any claim or right of any nature whatsoever of the Pledgor, including any equity or right of redemption by the Pledgor (with the Secured Party having the right to purchase any or all of the Posted Collateral to be sold) and to apply the proceeds (or the Cash equivalent thereof) from the liquidation of the Posted Collateral to any amounts payable by the Pledgor with respect to any Obligations in that order as the Secured Party may elect. Each party acknowledges and agrees that Posted Collateral in the form of securities may decline speedily in value and is of a type customarily sold on a recognized market, and, accordingly, the Pledgor is not entitled to prior notice of any sale of that Posted Collateral by the Secured Party, except any notice that is required under applicable law and cannot be waived. 5 ISDA(R)1994 44 (b) Pledgor's Rights and Remedies. If at any time an Early Termination Date has occurred or been designated as the result of an Event of Default or Specified Condition with respect to the Secured Party, then (except in the case of an Early Termination Date relating to less than all Transactions (or Swap Transactions) where the Secured Party has paid in full all of its obligations that are then due under Section 6(e) of this Agreement): (i) the Pledgor may exercise all rights and remedies available to a pledgor under applicable law with respect to Posted Collateral held by the Secured Party; (ii) the Pledgor may exercise any other rights and remedies available to the Pledgor under the terms of Other Posted Support, if any; (iii) the Secured Party will be obligated immediately to Transfer all Posted Collateral and the Interest Amount to the Pledgor', and (iv) to the extent that Posted Collateral or the Interest Amount is not so Transferred pursuant to (iii) above, the Pledgor may: (A) Set-off any amounts payable by the Pledgor with respect to any Obligations against any Posted Collateral or the Cash equivalent of any Posted Collateral held by the Secured Party (or any obligation of the Secured Party to Transfer that Posted Collateral); and (B) to the extent that the Pledgor does not Set-off under (iv)(A) above, withhold payment of any remaining amounts payable by the Pledgor with respect to any Obligations, up to the Value of any remaining Posted Collateral held by the Secured Party, until that Posted Collateral is Transferred to the Pledgor. (c) Deficiencies and Excess Proceeds. The Secured Party will Transfer to the Pledgor any proceeds and Posted Credit Support remaining after liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b) after satisfaction in full of all amounts payable by the Pledgor with respect to any Obligations; the Pledgor in all events will remain liable for any amounts remaining unpaid after any liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b). (d) Final Returns. When no amounts are or thereafter may become payable by the Pledgor with respect to any Obligations (except for any potential liability under Section 2(d) of this Agreement), the Secured Party will Transfer to the Pledgor all Posted Credit Support and the Interest Amount, if any. Paragraph 9. Representations Each party represents to the other party (which representations will be deemed to be repeated as of each date on which it, as the Pledgor, Transfers Eligible Collateral) that: (i) it has the power to grant a security interest in and lien on any Eligible Collateral it Transfers as the Pledgor and has taken all necessary actions to authorize the granting of that security interest and lien; (ii) it is the sole owner of or otherwise has the right to Transfer all Eligible Collateral it Transfers to the Secured Party hereunder, free and clear of any security interest, lien, encumbrance or other restrictions other than the security interest and lien granted under Paragraph 2; (iii) upon the Transfer of any Eligible Collateral to the Secured Party under the terms of this Annex, the Secured Party will have a valid and perfected first priority security interest therein (assuming that any central clearing corporation or any third-party financial intermediary or other entity not within the control of the Pledgor involved in the Transfer of that Eligible Collateral gives the notices and takes the action required of it under applicable law for perfection of that interest); and (iv) the performance by it of its obligations under this Annex will not result in the creation of any security interest, lien or other encumbrance on any Posted Collateral other than the security interest and lien granted under Paragraph 2. 6 ISDA@ 1994 45 Paragraph 10. Expenses (a) General. Except as otherwise provided in Paragraphs 10(b) and 10(c), each party will pay its own costs and expenses in connection with performing its obligations under this Annex and neither party will be liable for any costs and expenses incurred by the other party in connection herewith. (b) Posted Credit Support. The Pledgor will promptly pay when due all taxes, assessments or charges of any nature that are imposed with respect to Posted Credit Support held by the Secured Party upon becoming aware of the same, regardless of whether any portion of that Posted Credit Support is subsequently disposed of under Paragraph 6(c), except for those taxes, assessments and charges that result from the exercise of the Secured Party's rights under Paragraph 6(c). (c) Liquidation/Application of Posted Credit Support. All reasonable costs and expenses incurred by or on behalf of the Secured Party or the Pledgor in connection with the liquidation and/or application of any Posted Credit Support under Paragraph 8 will be payable, on demand and pursuant to the Expenses Section of this Agreement, by the Defaulting Party or, if there is no Defaulting Party, equally by the parties. Paragraph 11. Miscellaneous (a) Default Interest. A Secured Party that fails to make, when due, any Transfer of Posted Collateral or the Interest Amount will be obligated to pay the Pledgor (to the extent permitted under applicable law) an amount equal to interest at the Default Rate multiplied by the Value of the items of property that were required to be Transferred, from (and including) the date that Posted Collateral or Interest Amount was required to be Transferred to (but excluding) the date of Transfer of that Posted Collateral or Interest Amount. This interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (b) Further Assurances. Promptly following a demand made by a party, the other party will execute, deliver, file and record any financing statement, specific assignment or other document and take any other action that may be necessary or desirable and reasonably requested by that party to create, preserve, perfect or validate any security interest or lien granted under Paragraph 2, to enable that party to exercise or enforce its rights under this Annex with respect to Posted Credit Support or an Interest Amount or to effect or document a release of a security interest on Posted Collateral or an Interest Amount. (c) Further Protection. The Pledgor will promptly give notice to the Secured Party of, and defend against, any suit, action, proceeding or lien that involves Posted Credit Support Transferred by the Pledgor or that could adversely affect the security interest and lien granted by it under Paragraph 2, unless that suit, action, proceeding or lien results from the exercise of the Secured Party's rights under Paragraph 6(c). (d) Good Faith and Commercially Reasonable Manner. Performance of all obligations under this Annex, including, but not limited to, all calculations, valuations and determinations made by either party, will be made in good faith and in a commercially reasonable manner. (e) Demands and Notices. All demands and notices made by a party under this Annex will be made as specified in the Notices Section of this Agreement, except as otherwise provided in Paragraph 13. (f) Specifications of Certain Matters. Anything referred to in this Annex as being specified in Paragraph 13 also may be specified in one or more Confirmations or other documents and this Annex will be construed accordingly. 7 ISDA(R)1994 46 Paragraph 12. Definitions As used in this Annex: "Cash" means the lawful currency of the United States of America. "Credit Support Amount" has the meaning specified in Paragraph 3. "Custodian" has the meaning specified in Paragraphs 6(b)(i) and 13. "Delivery Amount" has the meaning specified in Paragraph 3(a). "Disputing Party" has the meaning specified in Paragraph 5. "Distributions" means with respect to Posted Collateral other than Cash, all principal, interest and other payments and distributions of cash or other property with respect thereto, regardless of whether the Secured Party has disposed of that Posted Collateral under Paragraph 6(c). Distributions will not include any item of property acquired by the Secured Party upon any disposition or liquidation of Posted Collateral or, with respect to any Posted Collateral in the form of Cash, any distributions on that collateral, unless otherwise specified herein. "Eligible Collateral" means, with respect to a party, the item, if any, specified as such for that party in Paragraph 13. "Eligible Credit Support" means Eligible Collateral and Other Eligible Support. "Exposure" means for any Valuation Date or other date for which Exposure is calculated and subject to Paragraph 5 in the case of a dispute, the amount, if any, that would be payable to a party that is the Secured Party by the other party (expressed as a positive number) or by a party that is the Secured Party to the other party (expressed as a negative number) pursuant to Section 6(e)(ii)(2)(A) of this Agreement as if all Transactions (or Swap Transactions) were being terminated as of the relevant Valuation Time; provided that Market Quotation will be determined by the Valuation Agent using its estimates at mid-market of the amounts that would be paid for Replacement Transactions (as that term is defined in the definition of "Market Quotation"). "Independent Amount" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Interest Amount" means, with respect to an Interest Period, the aggregate sum of the amounts of interest calculated for each day in that Interest Period on the principal amount of Posted Collateral in the form of Cash held by the Secured Party on that day, determined by the Secured Party for each such day as follows: (x) the amount of that Cash on that day; multiplied by (y) the Interest Rate in effect for that day; divided by (z) 360. "Interest Period" means the period from (and including) the last Local Business Day on which an Interest Amount was Transferred (or, if no Interest Amount has yet been Transferred, the Local Business Day on which Posted Collateral in the form of Cash was Transferred to or received by the Secured Party) to (but excluding), the Local Business Day on which the current Interest Amount is to be Transferred. "Interest Rate" means the rate specified in Paragraph 13. "Local Business Day", unless otherwise specified in Paragraph 13, has the meaning specified in the Definitions Section of this Agreement, except that references to a payment in clause (b) thereof will be deemed to include a Transfer under this Annex. 8 ISDA(R)1994 47 "Minimum Transfer Amount" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Notification Time" has the meaning specified in Paragraph 13. "Obligations" means, with respect to a party, all present and future obligations of that party under this Agreement and any additional obligations specified for that party in Paragraph 13. "Other Eligible Support" means, with respect to a party, the items, if any, specified as such for that party in Paragraph 13. "Other Posted Support" means all Other Eligible Support Transferred to the Secured Party that remains in effect for the benefit of that Secured Party. "Pledgor" means either party, when that party (i) receives a demand for or is required to Transfer Eligible Credit Support under Paragraph 3(a) or (ii) has Transferred Eligible Credit Support under Paragraph 3(a). "Posted Collateral" means all Eligible Collateral, other property, Distributions, and all proceeds thereof that have been Transferred to or received by the Secured Party under this Annex and not Transferred to the Pledgor pursuant to Paragraph 3(b), 4(d)(ii) or 6(d)(i) or released by the Secured Party under Paragraph 8. Any Interest Amount or portion thereof not Transferred pursuant to Paragraph 6(d)(ii) will constitute Posted Collateral in the form of Cash. "Posted Credit Support" means Posted Collateral and Other Posted Support. "Recalculation Date" means the Valuation Date that gives rise to the dispute under Paragraph 5; provided, however, that if a subsequent Valuation Date occurs under Paragraph 3 prior to the resolution of the dispute, then the "Recalculation Date" means the most recent Valuation Date under Paragraph 3. "Resolution Time" has the meaning specified in Paragraph 13. "Return Amount" has the meaning specified in Paragraph 3(b). "Secured Party" means either party, when that party (i) makes a demand for or is entitled to receive Eligible Credit Support under Paragraph 3(a) or (ii) holds or is deemed to hold Posted Credit Support. "Specified Condition" means, with respect to a party, any event specified as such for that party in Paragraph 13. "Substitute Credit Support" has the meaning specified in Paragraph 4(d)(i). "Substitution Date" has the meaning specified in Paragraph 4(d)(ii). "Threshold" means, with respect to a party, the amount specified as such for that party in Paragraph 13; if no amount is specified, zero. "Transfer" means, with respect to any Eligible Credit Support, Posted Credit Support or Interest Amount, and in accordance with the instructions of the Secured Party, Pledgor or Custodian, as applicable: (i) in the case of Cash, payment or delivery by wire transfer into one or more bank accounts specified by the recipient; (ii) in the case of certificated securities that cannot be paid or delivered by book-entry, payment or delivery in appropriate physical form to the recipient or its account accompanied by any duly executed instruments of transfer, assignments in blank, transfer tax stamps and any other documents necessary to constitute a legally valid transfer to the recipient; (iii) in the case of securities that can be paid or delivered by book-entry, the giving of written instructions to the relevant depository institution or other entity specified by the recipient, together with a written copy thereof to the recipient, sufficient if complied with to result in a legally effective transfer of the relevant interest to the recipient; and (iv) in the case of Other Eligible Support or Other Posted Support, as specified in Paragraph 13. 9 ISDA(R)1994 48 "Valuation Agent" has the meaning specified in Paragraph 13. "Valuation Date" means each date specified in or otherwise determined pursuant to Paragraph 13. "Valuation Percentage" means, for any item of Eligible Collateral, the percentage specified in Paragraph 13. "Valuation Time" has the meaning specified in Paragraph 13. "Value" means for any Valuation Date or other date for which Value is calculated and subject to Paragraph 5 in the case of a dispute, with respect to: (i) Eligible Collateral or Posted Collateral that is: (A) Cash, the amount thereof, and (B) a security, the bid price obtained by the Valuation Agent multiplied by the applicable Valuation Percentage, if any; (ii) Posted Collateral that consists of items that are not specified as Eligible Collateral, zero; and (iii) Other Eligible Support and Other Posted Support, as specified in Paragraph 13. 10 ISDA(R)1994 49 Deutsche Bank Aktiengesellschaft Revised as of January 11, 2001 Date: November 15, 2000 To: MBIA Inc. Attention: Joe Buonadonna Facsimile no.: 914-765-3410 Our Reference: 603260 - MJ Re: Cross Currency Swap Transaction - This Confirmation supersedes and replaces all prior communication between the parties hereto with respect to the Transaction described below Ladies and Gentlemen: The purpose of this letter agreement is to set forth the terms and conditions of the Transaction entered into between Deutsche Bank AG ("DBAG") and MBIA Inc. ("Counterparty") on the Trade Date specified below (the "Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the Agreement specified below. The definitions and provisions contained in the 2000 ISDA Definitions (the "Definitions") as published by the International Swaps and Derivatives Association, Inc. are incorporated by reference herein. In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. For the purpose of this Confirmation, references in the Definitions or the Agreement to a "Swap Transaction" shall be deemed to be references to this Transaction. 1. This Confirmation supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of May 2, 2000, (as the same may be amended or supplemented from time to time, the "Agreement"), between DBAG and Counterparty. All provisions contained in the Agreement shall govern this Confirmation except as modified below. 2. The terms of the particular Transaction to which this Confirmation relates are as follows: Trade Date: November 13, 2000 Effective Date: December 15, 2000 Termination Date: June 15, 2010 Fixed Amounts I: Fixed Rate Payer: DBAG 50 Fixed Rate Payer Currency Amount: CHF 175,000,000.00 Fixed Rate Payer Payment Dates: The 15th day of June of each year, commencing June 15, 2001, through and including the Termination Date. Fixed Amounts: With respect to the period from and including the Effective Date to but excluding June 15, 2001*, CHF 3,941,437.50; With respect to the period from and including June 15, 2001* to but excluding June 15, 2009*, CHF; 7,882,875.00. With respect to the period from and including June 15, 2009 to but excluding the Termination Date, CHF 7,900,375.00. *subject to adjustment in accordance with the Following Business Day Convention, with No Adjustment to Period End Dates. Business Days: Zurich Fixed Amounts II: Fixed Rate Payer: Counterparty Fixed Rate Payer Currency Amount: USD 99,262,621.00 Fixed Rate Payer Payment Dates: The 15th day of June and December of each year, commencing June 15, 2001, through and including the Termination Date, subject to adjustment in accordance with the Following Business Day Convention, with No Adjustment to Period End Dates. Initial Fixed Rate Payer Calculation Period: From and including December 15, 2000, to but excluding June 15, 2001. 2 51 Fixed Rate: 7.56% Fixed Rate Day Count Fraction: 30/360 Business Days: New York and London Initial Exchange: Initial Exchange Date: The Effective Date DBAG Initial Exchange Amount: USD 99,262,621.00 Counterparty Initial Exchange Amount: CHF 175,000,000.00 Final Exchange: Final Exchange Date: The Termination Date DBAG Final Exchange Amount: CHF 175,000,000.00 Counterparty Final Exchange Amount: USD 99,262,621.00 Business Days for Final Exchange: Zurich, London, and New York 3. HEDGE IDENTIFICATION On this day, November 13, 2000, this swap entered into on November 13, 2000 with Deutsche Banc Alex Brown has been identified by MBIA Inc. under IRC 1221(b)(2) and Treasury Regulation 1.1221-2 as a "hedging transaction" with respect to the following debt issuance of MBIA, Inc.: Description of Debt: CHF 175mm 4.50% Notes Date of Debt Issuance: December 15, 200 Maturity Date: June 15, 2010 Principal Amount: CHF 175,000,000 USD 99,262,621 Annual Coupon: 4.50% 3 52 4. Account Details Account Details for DBAG: Deutsche Bank AG New York Branch (Direct) CHIPS UID 053335 ABA #: 026003780 A/c: 100440170004 / Ref: Interest Rate Swaps Account Details for Counterparty: Chase Manhattan Bank Brooklyn, NY ABA # 021000021 For credit to: MBIA Inc. Custody DDA A/C # 323-8-97274 Ref: Debt issue proceeds 5. Offices: The Office of DBAG for this Transaction is New York. 6. Calculation Agent: DBAG 7. Representations Each party will be deemed to represent to the other party on the date on which it enters into this Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for this Transaction): (i) Non-Reliance. It is acting for its own account, and it has made its own independent decisions to enter into this Transaction and as to whether this Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into this Transaction; it being understood that information and explanations related to the terms and conditions of this Transaction shall not be considered investment advice or a recommendation to enter into this Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of this Transaction. (ii) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of this Transaction. It is also capable of assuming, and assumes, the risks of this Transaction. (iii) Status of Parties. The other party is not acting as a fiduciary for, or an adviser to it in respect of this Transaction. 4 53 8. Please confirm that the foregoing correctly sets forth the terms of our agreement by having an authorized officer sign this Confirmation and return it by facsimile to: Attention Swap Documentation Telephone: (212) 250-5360 Facsimile: (212) 250-7263 This message will be the only form of Confirmation dispatched by us. If you wish to exchange hard copy forms of this Confirmation, please contact us. Yours sincerely, Deutsche Bank AG By: /s/ Katherine Andrews Name: Katherine Andrews Authorized Signatory By: /s/ Eric Lip Name: Eric Lip Authorized Signatory Confirmed as of the date first written above: MBIA Inc. By: /s/ Joseph Sevely Name: Joseph Sevely Title: Treasurer 5 54 Deutsche Bank Aktiengesellschaft Date: May 5, 2000 To: MBIA Inc. Attention: Mr. Joe Buonadonna Facsimile no.: 914-765-3410 Our Reference: 527323 - EC Re: Interest Rate Swap Transaction Ladies and Gentlemen: The purpose of this letter agreement is to set forth the terms and conditions of the Transaction entered into between Deutsche Bank AG ("DBAG") and MBIA Inc. ("Counterparty") on the Trade Date specified below (the "Transaction""). This letter agreement constitutes a "Confirmation" as referred to in the Agreement specified below. The definitions and provisions contained in the 1991 ISDA Definitions (as supplemented by the 1998 Supplement)(the "Definitions") as published by the International Swaps and Derivatives Association, Inc. are incorporated by reference herein. In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. For the purpose of this Confirmation, references in the Definitions or the Agreement to a "Swap Transaction" shall be deemed to be references to this Transaction. 1. This Confirmation supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of May 2, 2000, (as the same may be amended or supplemented from time to time, the "Agreement"), between DBAG and Counterparty. All provisions contained in the Agreement shall govern this Confirmation except as expressly modified below. 2. The terms of the particular Transaction to which this Confirmation relates are as follows: Notional Amount: USD 100,000,000.00 Trade Date: May 3, 2000 Effective Date: May 5, 2000 Termination Date: October 1, 2022, (the "Scheduled Termination Date"), subject to the provisions of Section 3 and 4 of this Confirmation. Fixed Amounts: Fixed Rate Payer: DBAG 55 Fixed Rate Payer Payment Dates: The 1st day of April and October of each year, commencing October 1, 2000, through and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention, with No Adjustment to Period End Dates. Fixed Rate: 8.20% Fixed Raft Day Count Fraction: 30/360 Floating Amounts: Floating Rate Payer: Counterparty Floating Rate Payer Payment Dates: The 1st day of April and October of each year, commencing October 2, 2000, through and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate Option: USD-LIBOR-BBA Designated Maturity: Six months Spread: Minus 0.015% Floating Rate Day Count Fraction: Actual/360 Floating Rate for initial Calculation Period: 6.71%(inclusive of Spread) Reset Dates: The first Business Day in each Calculation Period or Compounding Period, if Compounding is applicable. Compounding: Inapplicable Business Days: London and New York 2 56 3. (a) Early Termination: Optional Early Termination: Applicable Option Style: American Seller: Counterparty Buyer: DBAG Seller Business Day: New York (b) Procedure for Exercise: Commencement Daft: October 1, 2002 Exercise Period: All days which are Seller Business Days from, and including, the Commencement Date, to, but excluding, the Expiration Date between 9:00 a.m., New York time, to, and including, the Expiration Time Expiration Date: Thirty (30) calendar days preceding 0ctober 1, 2022, provided that if such date that would otherwise be the Expiration Date is not a Seller Business Day, such date shall be adjusted in accordance with the Preceding Business Day Convention and Business Days for such purpose shall be a day that is a Seller Business Day Expiration Time: 11:00 a.m., Now York time Optional Termination Date: Thirty calendar days following the Exercise Date, subject to adjustment in accordance with the Modified Following Business Day Convention Multiple Exercise: Inapplicable (c) Settlement Terms: Cash Settlement: Inapplicable 3 57 Special Provisions: In the event that the Exercising Party exercises its Option pursuant to the foregoing terms and conditions, the amounts payable by the parties on the Optional Termination Date shall be calculated as if the Optional Termination Dam were the final Payment Date for this Transaction. No further rights or obligations shall exist between the parties with respect to this Transaction upon payment of any such amounts due in accordance with this provision Additional Payment: On Optional Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention, Buyer shall pay to Seller a Termination Fee, (a "Termination Fee") determined in accordance with the schedule set forth below. If the Optional Termination Date is Designated within the period from and Including "A" to but excluding "B"
A* B* Termination Fee October 1, 2001 October 1, 2002 3.999% x Fixed Rate Payer Calculation Amount October 1, 2002 October 1, 2003 3.589% x Fixed Rate Payer Calculation Amount October 1, 2003 October 1, 2004 3.190% x Fixed Rate Payer Calculation Amount October 1, 2004 October 1, 2005 2.791% x Fixed Rate Payer Calculation Amount October 1, 2005 October 1, 2006 2.393% x Fixed Rate Payer Calculation Amount October 1, 2006 October 1, 2007 1.994% x Fixed Raw Payer Calculation Amount October 1, 2007 October 1, 2008 1.595% x Fixed Rate Payer Calculation Amount October 1, 2008 October 1, 2009 1.196% x Fixed Rate Payer Calculation Amount October 1, 2009 October 1, 2010 0.7986 x Fixed Rate Payer Calculation Amount October 1, 2010 October 1. 2011 0.399% x Fixed Rate Payer Calculation Amount
4. (a) Early Termination: Optional Early Termination: Applicable, provided that no Event of Default or Potential Event of Default with respect to the Exercising Party shall have occurred and be continuing Option Style: Bermuda Seller Business Day: New York (b) Procedure for Exercise Exercise Period: Each Bermuda Option Exercise Date and the Expiration Date from, and including 9:00 am., New York time, to, and including the Expiration Time 4 58 Bermuda Option Exercise Dates: Five Seller Business Days preceding each 1st day of October of each year, commencing October 1, 2010 subject to adjustment in accordance with the Modified Following Business Day Convention Expiration Date: Five Seller Business Days preceding October 1, 2021, subject to adjustment in according with the Modified Following Business Day Convention Expiration Time: 11:00 a.m., New York time Multiple Exercise: Inapplicable (c) Settlement Terms: Cash Settlement: Applicable Cash Settlement Valuation Time: 11:00 am., New York time Cash Settlement Valuation Date: Two Valuation Business Days preceding the Cash Settlement Payment Daft Valuation Business Days: New York and London Cash Settlement Payment Deft: Five Seller Business Days following the Exercise Date Business Day Convention for Cash Settlement Payment Date: Modified Following Cash Settlement Method: Cash Price Settlement Rate: Inapplicable Quotation Rate: Mid 5. Account Details: Account Details for DBAG: Deutsche Bank AG New York Branch (Direct) CHIPS UID 053335 ABA #: 026003780 Account Details for Counterparty: Chase Manhattan Bank Brooklyn, NY 11245 ABA # 021 000021 For Credit: MBIA Inc. Operations A/C # 9102 723153 5 59 6. Offices: The Office of DBAG for this Transaction is Now York. 7. Calculation Agent: DBAG 8. Representations Each party will be deemed to represent to the other party on the date on which it enters into this Transaction that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary for this Transaction): (i) Non-Reliance. It is acting for its own account, and it has made its own independent decisions to enter into this Transaction and as to whether this Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into this Transaction; it being understood that information and explanations related to the terms and conditions of this Transaction shall not be considered investment advice or & recommendation to enter into this Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of this Transaction. (ii) Assessment and Understanding. It is capable of assessing the merits of and understanding (on its own behalf or through independent professional advice), and understands and accepts, the terms, conditions and risks of this Transaction. It is also capable of assuming. and assumes, the risks of this Transaction. (iii) Status of Parties The other party is not acting as a fiduciary for, or an adviser to it in respect of this Transaction. 9. Please confirm that the foregoing correctly sets forth the terms of our agreement by having an authorized officer sign this Confirmation and return it by facsimile to: Attention Edward Childs - Swap Documentation Telephone: (212) 250-5360 Facsimile: (212) 669-1592 6 60 This message will be the only form of Confirmation dispatched by us. If you wish to exchange hard copy forms of this Confirmation, please contact us. Yours sincerely, Deutsche Bank AG By: /s/ Maria Costagliola Name: Authorized Signatory By: /s/ Katherine Andrews Name: Katherine Andrews Authorized Signatory Confirmed as of the date first written above: MBIA Inc. By: /s/ Joseph Sevely Name: Joseph Sevely Title: Treasurer 7 EX-10.20 8 y46810ex10-20.txt 2000 STOCK OPTION PLAN, EFFECTIVE MAY 11, 2000 1 Exhibit 10.20 MBIA INC. 2000 STOCK OPTION PLAN ARTICLE 1. PURPOSE The purpose of the "MBIA INC. 2000 STOCK OPTION PLAN" (the "Plan") is to foster and promote the long-term financial success of the Company and materially increase shareholder value by (a) motivating superior performance by means of performance-related incentives, (b) encouraging and providing for the acquisition of an ownership interest in the Company by the Company's and its Subsidiaries' employees and (c) enabling the Company to attract and retain the services of an outstanding management team upon whose judgment, interest, and special effort the successful conduct of its operations is largely dependent. ARTICLE 2. DEFINITIONS (a) Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below: (l) "Act" means the Securities Exchange Act of 1934, as amended. (2) "Board" means the Board of Directors of the Company. (3) "Cause" means (i) the willful failure by the Participant to perform substantially his duties as an Employee of the Company (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (ii) the Participant's engaging in serious misconduct that is injurious to the Company or any Subsidiary in any way; including, but not limited to, by way of damage to their respective reputations or standings in their respective industries, (iii) the Participant's having been convicted of, or entered a plea of nolo contenders to, a crime that constitutes a felony or (iv) the breach by the Participant of any written covenant or agreement with the Company or any Subsidiary not to disclose or misuse any information pertaining to, or misuse any property of, the Company or any Subsidiary or not to compete or interfere with the Company or any Subsidiary. (4) "Change of Control" shall be deemed to have occurred if: (i) any person (within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including any group (within the meaning of Rule 13d-5(b) under the Exchange Act)), but excluding 2 any of the Company, any Subsidiary or any employee benefit plan sponsored or maintained by the Company or any Subsidiary, acquires "beneficial ownership" (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined Voting Power (as defined below) of the Company's securities; or (ii) within any 24-month period, the persons who were directors of the Company at the beginning of such period (the "Incumbent Directors") shall cease to constitute at least a majority of the Board or the board of directors of any successor to the Company; provided, however, that any director elected to the Board, or nominated for election, by a majority of the Incumbent Directors then still in office shall be deemed to be an Incumbent Director for purposes of this subclause (ii); or (iii) upon the consummation of a merger, consolidation, share exchange, division, sale or other disposition of all or substantially all of the assets of the Company which has been approved by the shareholders of the Company (a "Corporate Event"), and immediately following the consummation of which the stockholders of the Company immediately prior to such Corporate Event do not hold, directly or indirectly, 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 assets, each surviving, resulting or acquiring corporation which, immediately following the relevant Corporate Event, holds more than 25% of the consolidated assets of the Company immediately prior to such Corporate Event. (5) "Change of Control Price" means the highest price per share of Common 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 Common Stock on any of the 30 trading days immediately preceding the date on which a Change of Control occurs. (6) "Code" means the Internal Revenue Code of 1986, as amended. (7) "Committee" means the Compensation and Organization Committee of the Board or such other committee of the Board as the Board shall designate from time to time, which committee shall consist of three or more members. Each of the Committee members shall be a "Non-Employee Director" within the meaning of Rule 16b-3, as promulgated under the Act, and an "outside 2 3 director" within the meaning of section 162(m) of the Code and the Treasury Regulations promulgated thereunder. (8) "Common Stock" means the common stock of the Company, par value $1.00 per share. (9) "Company" means MBIA Inc., a Connecticut corporation, and any successor thereto. (10) "Disability" has the meaning given in the Company's long-term disability insurance policy or program as in effect from time to time. (11) "Employee" means any employee (including each officer) of the Company or any Subsidiary (as determined by the Committee in its sole discretion). (12) "Fair Market Value" means, on any date, the closing price of the Common Stock as reported on the consolidated tape of the New York Stock Exchange (or on such other recognized quotation system on which the trading prices of the Common Stock are quoted at the relevant time) on such date. In the event that there are no Common Stock transactions reported on such tape (or such other system) on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Common Stock transactions were so reported. (13) "Family Member" means, as to a Participant, any (i) child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law (including adoptive relationships), of such Participant, (ii) trusts for the exclusive benefit of such persons and (iii) other entity owned solely by such persons. (14) "Option" means the right to purchase Common Stock at a stated price for a specified period of time. For purposes of the Plan, an Option may be either (i) an "Incentive Stock Option" (ISO) within the meaning of Section 422 of the Code or (ii) an option which is not an Incentive Stock Option (a "Nonstatutory Stock Option" (NSO)). (15) "Participant" means any Employee designated by the Committee to participate in the Plan. (16) "Subsidiary" means any corporation or partnership in which the Company owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation or of the capital interest or profits interest of such partnership or in which the Company has, either directly or 3 4 indirectly, a material equity interest and which the Committee has designated as a "Subsidiary" for purposes of this definition. (17) "Voting Power" when used in the definition of Change in Control shall mean such specified number of the Voting Securities as shall enable the holders thereof to cash 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. (18) Gender and Number. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. ARTICLE 3, POWERS OF THE COMMITTEE (a) Power to Grant. The Committee shall determine those Employees to whom Options shall be granted and the terms and conditions of any and all such Options. The Committee may establish different terms and conditions for different Participants and for the same Participant for each Option such Participant may receive, whether or not granted at different times. (b) Administration. (1) Rules, Interpretations and Determinations. The Plan shall be administered by the Committee. The Committee shall have full authority to interpret and administer the Plan, to establish, amend, and rescind rules and regulations relating to the Plan, to provide for conditions deemed necessary or advisable to protect the interests of the Company, to construe the respective option agreements and to make all other determinations it determines necessary or advisable for the administration and interpretation of the Plan in order to carry out its provisions and purposes. Determinations, interpretations, or other actions made or taken by the Committee shall be final, binding, and conclusive for all purposes and upon all persons. (2) Agents and Expenses. The Committee may appoint agents (who may be officers or employees of the Company) to assist in the administration of the Plan and may grant authority to such persons to execute agreements or other documents on its behalf. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. All expenses 4 5 incurred in the administration of the Plan, including, without limitation, for the engagement of any counsel, consultant or agent, shall be paid by the Company. (3) Delegation of Authority. The Committee may delegate to the Company's Chief Executive Officer the power and authority to make awards under the Plan with respect to individuals who are at or below the position of Senior Managing Director (or analogous title), pursuant to such conditions and limitations as the Committee may establish; provided that only the Committee or the Board may select, and grant Options to, Participants who are subject to Section 16 of the Act. (c) Certain Rules Relating to Grants. (1) Maximum Individual Grants. During any 12 month period, no individual Participant may be granted Options to acquire more than 500,000 shares of Common Stock. It is understood that this provision is subject to the adjustment provided for in Section 4(c). (2) Repricing or Substitution of Options. The Committee shall not have the right to reprice outstanding Options or to grant new Options under the Plan in substitution for or upon the cancellation of Options previously granted. Additionally, the Committee shall not have the right to grant reload options under the Plan. ARTICLE 4. COMMON STOCK SUBJECT TO PLAN (a) Number. Subject to the provisions of Section 4(c), the number of shares of Common Stock issuable under the Plan shall not exceed 5,000,000 shares. Any shares which, as of the effective date of the Plan, remain available for awards under the Company's 1987 Stock Option Plan shall, upon approval of the Plan by the Company's shareholders, be canceled and no longer available for awards. The shares to be delivered under the Plan may consist, in whole or in part, of treasury Common Stock or authorized but unissued Common Stock, not reserved for any other purpose. (b) Canceled, Terminated, or Forfeited Options. Any shares of Common Stock subject to an Option which for any reason is canceled, terminated or otherwise settled without the issuance of any Common Stock (and, except with respect to ISO's, including, but not limited to, shares tendered to exercise outstanding Options or shares tendered or withheld for taxes) shall again be available for Options under the Plan. (c) Adjustment in Capitalization. In the event of any Common Stock dividend or Common Stock split, recapitalization (including, but not limited, to the 5 6 payment of an extraordinary dividend), merger, consolidation, combination, spin-off, distribution of assets to stockholders (other than ordinary cash dividends), exchange of shares, or other similar corporate change, the aggregate number of shares of Common Stock available for Options under Sections 3(c)(1) and 4(a) or subject to outstanding Options and the respective exercise prices applicable to outstanding Options may be appropriately adjusted by the Committee, in its discretion, and the Committee's determination shall be conclusive. ARTICLE 5. STOCK OPTIONS (a) Grant of Options. Subject to the provisions of Section 4(a), Options may be granted to Participants at such time or times as shall be determined by the Committee. Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Nonstatutory Stock Options. Except as otherwise provided herein, the Committee shall have complete discretion in determining the number of Options, if any, to be granted to a Participant, except that Incentive Stock Options may only be granted to Employees who are common law employees of the Company or one of its majority owned subsidiaries (within the meaning of Section 424 of the Code). Each Option shall be evidenced by an Option agreement that shall specify the type of Option granted, the exercise price, the duration of the Option, the number of shares of Common Stock to which the Option pertains, and such other terms and conditions as the Committee shall determine which are not inconsistent with the provisions of the Plan. (b) Option Price. Nonstatutory Stock Options and Incentive Stock Options granted pursuant to the Plan shall have an exercise price no less than the Fair Market Value of a share of Common Stock on the date on which the Option is granted. (c) Exercise of Options. Unless the Committee shall, at grant, impose an alternative exercise schedule with respect to Options granted hereunder, 40% of each Nonstatutory Stock Option or Incentive Stock Option granted pursuant to the Plan shall become exercisable on the second anniversary of the date such Option is granted and the remaining 60% of each Option shall become exercisable in equal 20% installments on each of the third, fourth and fifth anniversaries of the option grant date; provided that the Committee may at any time accelerate the exercisability of all or any portion of any Option at its discretion. Subject to the provisions of this Article 5, once any portion of any Option has become exercisable it shall remain exercisable for its full term. The Committee shall determine the term of each Nonstatutory Stock Option or Incentive Stock Option granted, but in no event shall any such Option be exercisable for more than 10 years after the date on which it is granted. (d) Payment. The Committee shall establish procedures governing the exercise of Options. No shares shall be delivered pursuant to any exercise of an Option 6 7 unless arrangements satisfactory to the Committee have been made to assure full payment of the option price therefor. Without limiting the generality of the foregoing, payment of the option price may be made (i) in cash or its equivalent, (ii) by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), (iii) through an arrangement with a broker approved by the Company whereby payment of the exercise price is accomplished with the proceeds of the sale of Common Stock or (iv) by any combination of the foregoing; provided that the combined value of all cash and cash equivalents paid and the Fair Market Value of any such Common Stock so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. (e) Incentive Stock Options. Notwithstanding anything in the Plan to the contrary, no Option that is intended to be an Incentive Stock Option may be granted after the tenth anniversary of the effective date of the Plan and no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of any Participant affected thereby, to disqualify any Incentive Stock Option under such Section 422. (f) Termination of Employment (1) Due to Death or Disability. In the event a Participant's employment terminates by reason of death or Disability, any Options granted to such Participant shall become immediately exercisable in full and may be exercised by the Participant's designated beneficiary, and if none is named, in accordance with Section 8(b), at any time prior to the earlier of (i) the first anniversary of the Participant's death or termination of employment due to Disability or (ii) the expiration of the term of the Options. (2) Termination of Employment For Cause. In the event a Participant's employment is terminated by the Company or any Subsidiary for Cause, any Options granted to such Participant that are then not yet exercised shall be forfeited. (3) Termination of Employment for Any Other Reason. Unless otherwise determined by the Committee at or following the time of grant, in the event the employment of the Participant shall terminate for any reason other than one described in Section 5(f)(1) or (2), any Options granted to such Participant which are exercisable at the date of the Participant's termination of employment may be exercised at any time prior to the expiration of the term of the Options or the ninetieth day following the Participant's termination of employment, whichever period is shorter, and any Options that are not exercisable at the time of termination of employment shall be forfeited. 7 8 (g) Restrictive Covenants and Other Conditions. Without limiting the generality of the foregoing, the Committee may condition the grant of any Option under the Plan upon the Employee to whom such Option would be granted agreeing in writing to certain conditions in addition to the provisions regarding exercisability of the Option (such as restrictions on the ability to transfer the underlying shares of Common Stock) or covenants in favor of the Company and/or one or more Subsidiaries (including, without limitation, covenants not to compete, not to solicit employees and customers and not to disclose confidential information, that may have effect following the termination of the Employee's employment with the Company and its Subsidiaries and after the Option has been exercised, including, without limitation, the requirement that the Employee disgorge any profit, gain or other benefit received in respect of the exercise of the Option prior to any breach of any such covenant by the Employee). ARTICLE 6. CHANGE OF CONTROL (a) Accelerated Vesting and Payment. Subject to the provisions of Section 6(b), in the event of a Change of Control each Option shall be fully exercisable regardless of the exercise schedule otherwise applicable to such Option and, in connection with such a Change of Control, the Committee may, in its discretion, provide that each Option shall, upon the occurrence of such Change of Control, be canceled in exchange for a payment in an amount equal to the excess, if any, of the Change of Control Price over the exercise price for such Option. (b) Alternative Awards. Notwithstanding Section 6(a), no cancellation, acceleration of exercisability, vesting, cash settlement or other payment shall occur with respect to any Option if the Committee reasonably determines in good faith prior to the occurrence of a Change of Control that such Option shall be honored or assumed, or new rights substituted therefore (such honored, assumed or substituted award hereinafter called an "Alternative Award"), by a Participant's employer (or the parent or an affiliate of such employer) immediately following the Change of Control; provided that any such Alternative Award must: 1) be based on stock which is traded on an established securities market, or that the Committee reasonably believes will be so traded within 60 days after the Change in Control; 2) provide such Participant with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under such Option, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; 8 9 3) have substantially equivalent economic value to such Option (determined at the tine of the Change in Control); and 4) 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 any restrictions on transfer or exercisability applicable to, each such Alternative Award shall be waived or shall lapse, as the case may be. For this purpose, a constructive termination shall mean a termination of employment 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. ARTICLE 7. AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN The Board at any time may terminate the Plan, and from time to time may amend or modify the Plan; provided, however, that any amendment which would (i) increase the number of shares available for issuance under the Plan, (ii) lower the minimum exercise price at which an Option may be granted or (iii) extend the maximum term for Options granted hereunder shall be subject to the approval of the Company's shareholders. No amendment, modification, or termination of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant. ARTICLE 8. MISCELLANEOUS PROVISIONS (a) Transferability of Options. No Options granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution; provided that the Committee may, in the Option agreement or otherwise, permit transfers of Nonstatutory Stock Options to Family Members (including, without limitation, transfers effected by a domestic relations order). (b) Beneficiary Designation. Each Participant under the Plan may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid or by whom any right under the Plan is to be exercised in case of his death. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when received by the Committee in writing during 9 10 his lifetime. In the absence of any such effective designation, benefits remaining unpaid at the Participant's death shall be paid to or exercised by the Participant's surviving spouse, if any, or otherwise to or by his estate. (c) Deferral of Payment. The Committee may, in the Option agreement or otherwise, permit a Participant to elect, upon such terms and conditions as the Committee may establish, to defer receipt of shares of Common Stock that would otherwise be issued upon exercise of a Nonstatutory Stock Option. (d) No Guarantee of Employment or Participation. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary or any other affiliate of the Company. No Employee shall have a right to be selected as a Participant, or, having been so selected, to receive any future Options. (e) Tax Withholding. The Company shall have the power to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local withholding tax requirements on any Option under the Plan, and the Company may defer issuance of Common Stock until such requirements are satisfied. The Committee may, in its discretion, permit a Participant to elect, subject to such conditions as the Committee shall impose, (i) to have shares of Common Stock otherwise issuable under the Plan withheld by the Company or (ii) to deliver to the Company previously acquired shares of Common Stock having a Fair Market Value sufficient to satisfy such withholding tax obligation associated with the transaction. (f) Indemnification. Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be made a party or in which he may be involved by reason of any action taken or failure to act under the Plan (in the absence of bad faith) and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit, or proceeding against him; provided that he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive and shall be independent of any other rights of indemnification to which such person may be entitled under the Company's Certificate of Incorporation or By-Laws, by contract, as a matter of law, or otherwise. 10 11 (g) No Limitation on Compensation. Nothing in the Plan shall be construed to limit the right of the Company to establish other plans if and to the extent permitted by applicable law. (h) Requirements of Law. The granting of Options and the issuance of shares of Common Stock shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. (i) Term of Plan. The Plan shall be effective on May 11, 2000, the date of its approval by the Company's shareholders. The Plan shall expire on the tenth anniversary of such date, provided that any awards granted prior to the expiration of this Plan may extend beyond that date. (j) Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Connecticut, without regard to principles of conflict of laws. (k) No Impact On Benefits. Except as may otherwise be specifically stated under any employee benefit plan, policy or program, Options shall not be treated as compensation for purposes of calculating an Employee's right under any such plan, policy or program. (1) No Constraint on Corporate Action. Nothing in this Plan shall be construed (i) to limit, impair or otherwise affect the Company's right or power to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets or (ii) except as provided in Article 7, to limit the right or power of the Company or any of its Subsidiaries to take any action which such entity deems to be necessary or appropriate. 11 EX-10.28 9 y46810ex10-28.txt CAPMAC EMPLOYEE STOCK OWNERSHIP PLAN 1 Exhibit 10.28 CapMAC EMPLOYEE STOCK OWNERSHIP PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1999 2 TABLE OF CONTENTS Page ARTICLE I GENERAL .................................................... 1 ARTICLE II DEFINITIONS ................................................ 2 ARTICLE III PARTICIPATION IN THE PLAN .................................. 11 ARTICLE IV COMPANY CONTRIBUTIONS ...................................... 13 ARTICLE V TRUST FUND ................................................. 14 ARTICLE VI ALLOCATION OF CONTRIBUTIONS TO THE TRUST FUND............... 23 ARTICLE VII VESTING .................................................... 31 ARTICLE VIII RETIREMENT BENEFITS......................................... 35 ARTICLE IX DEATH BENEFITS ............................................. 41 ARTICLE X DESIGNATION OF BENEFICIARIES................................ 42 ARTICLE XI MAXIMUM AMOUNT OF ALLOCATION................................ 44 ARTICLE XII RIGHTS AND OPTIONS CONCERNING DISTRIBUTED SHARES............ 47 ARTICLE XIII ADMINISTRATION OF THE PLAN ................................. 51 ARTICLE XIV WITHDRAWAL OF PARTICIPATING COMPANY ........................ 56 ARTICLE XV AMENDMENT OR TERMINATION OF THE PLAN AND TRUST ............. 55 ARTICLE XVI GENERAL LIMITATIONS AND PROVISIONS ......................... 60 ARTICLE XVII TOP HEAVY PROVISIONS ....................................... 66 3 1 ARTICLE I GENERAL 1.1 History and Nature of Plan. The purpose of the CapMAC Employee Stock Ownership Plan (the Plan), which was adopted concurrently with the purchase of CapMac Holdings, Inc. from Citicorp on June 25, 1992 by a group of investors, was to provide employees of CapMAC and other Participating Companies with the opportunity to obtain ownership interests in the employer. The stock of CapMac, which was first offered to the public in December of 1995, was exchanged for MBIA shares on February 17, 1998 in connection with the acquisition of CapMac by MBIA. The ESOP, as well as all other CapMac shareholders, received .4675 MBIA shares for each share of CapMac. MBIA, as a successor Employer, has elected, to continue to maintain the Plan and to extend benefits under the Plan to all MBIA employees (not only former CapMac employees) effective January 1, 1999. Further, effective July 1, 1999, the Plan shall be merged into the MBIA Inc. Employees Profit Sharing and Salary Deferral Plan (40l (k) Plan). The Plan and Trust are intended to qualify as a stock bonus plan and trust which are qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code (and the Plan is intended to qualify as, and shall be construed so as to be, an employee stock ownership plan, as defined by Section 4975(e)(7) of the Code and Section 407(d)(6) of the Act), designed to invest primarily in shares of stock of the Employer which meet the requirements for "qualifying employer securities" under Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act, and to incur debt in order to purchase such shares, and all provisions of the Plan and Trust shall be construed accordingly. All Trust Fund assets, Participating Company contributions, income and other additions to the Trust Fund shall be administered, distributed, forfeited and otherwise governed by the provisions of the Plan. 4 2 1.2 Effective Date. The original effective date of the Plan is June 25, 1992. The Plan is amended and restated effective January 1, 1999, except as may be noted otherwise. 1.3 Defined Terms. All capitalized terms used in the Plan shall have the meaning set forth in Article II, unless the context clearly indicates otherwise or such terms are not defined in Article II. 5 2 ARTICLE 11 DEFINITIONS 2.1 "Account" means the account (including any subaccounts established from time to time under each such account including ESOP matching accounts established after December 31, 1998) maintained to record the interest of a Participant in the Trust Fund. 2.2 "Act" means the Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended. All citations to sections of the Act are to such sections as they may from time to time be amended or renumbered. 2.3 "Affiliate" means any entity aggregated with the Company within the meaning of Sections 414(b), (c) or (m) of the Code, or under Regulations prescribed under Section 414(o) of the Code, except that, for the purposes of applying the provisions of Article XI and Sections 17.3(a) and 17.4 herein with respect to the limitations or contributions, Section 415(h) of the Code shall apply. 2.4 "Anniversary Date" means the last day of each Plan Year, or any other date during the Plan Year specified on a nondiscriminatory basis by the Committee in order to avoid prejudice either to continuing Participants or inactive Participants or for such other reasons as the Committee shall determine to be appropriate. 2.5 "Beneficiary" means the beneficiary or beneficiaries designated by a Participant pursuant to Article X to receive the amount, if any, payable under the Plan upon the death of such Participant, or, where there has been no such designation or an invalid designation, the individual or entity, or the individuals or entities, who will receive such amount. 2.6 "Board of Directors" means the Board of Directors of the Company. 2.7 "Break in Service" means a Plan Year during which an individual has not completed more than 500 Hours of Service, as determined by the Company (or its delegate, which may be the Committee) in accordance with the Regulations. Effective with respect to absences commencing on or after January 1, 1985, solely for purposes of determining 6 3 whether a Break in Service has occurred for vesting and eligibility purposes, an individual shall be credited with the Hours of Service which such individual would have completed but for a maternity or paternity absence, as determined by the Company (or its delegate, which may be the Committee) in accordance with and to the extent required by this Section and the Code and Regulations; provided, however, that the total Hours of Service so credited for a maternity or paternity absence shall not exceed 501 hours and that the individual shall timely provide the Company (or its delegate, which may be the Committee) with such information as it shall require. Hours of Service credited for a maternity or paternity absence shall be credited entirely (a) in the Plan Year in which the absence began if such Hours of Service are necessary to prevent a Break in Service in such Plan Year, or (b) in the following Plan Year. For purposes of this Section, maternity or paternity absence shall mean an absence from work by reason of the individual's pregnancy, the birth of the individual's child or the placement of a child with the individual in connection with adoption of the child by such individual, or for the purposes of caring for a child for the period immediately following such birth or placement. 2.8 "Code" means the internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. 2.9 "Committee" means the Committee provided for in Article XIII, which shall be the administrator of the Plan and the named fiduciary for purposes of the Act with respect to Plan administration. 2.10 "Company" means MBIA Inc. Any corporation which shall, by merger, consolidation, purchase or otherwise, succeed to substantially all the business of the Company shall, upon such succession and without any appointment or other action of the Trustee, the Committee or the Company, be and become the Company. 2.11 "Compensation" means, unless otherwise indicated, (a) an individual's wages from Participating Companies under Section 3401(a) of the Code and all other payments of compensation made in the course of such Participating 7 4 Companies' trades or business for which a Participating Company must furnish a written statement under Sections 6041(d) and 6051(a)(3) of the Code (i.e., a Form W-2 or successor thereto), other than amounts paid or reimbursed for moving expenses incurred by the individual to the extent that it is then reasonable to believe that such amounts are deductible under Section 217 of the Code, but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed, and (b) any amounts not otherwise includable under the foregoing provisions of this sentence which are contributed by Participating Companies pursuant to a salary reduction agreement to a "qualified cash or deferred arrangement" within the meaning of Section 401(k)(2) of the Code or a "cafeteria plan" within the meaning of Section 125 of the Code; provided, however, that Compensation in excess of $160,000 (as adjusted upwards, when applicable, to the extent permitted by the Code and Regulations) shall not be taken into account to the extent and in the manner required by Section 401(a)(17) of the Code. (c) Solely for purposes of allocating Shares; Forfeitures or Participating Company contributions to Accounts under the Plan (and subject to the limitations of the Internal Revenue Code) (i) only Compensation paid to an individual while a Participant and an Employee of a Participating Company shall be taken into account, (ii) Compensation that is accrued for a Plan Year shall be taken into account provided that such amounts accrued are paid to the Participant within 2-1/2 months after the close of the Plan Year and such amounts are reasonable compensation, (iii) Compensation amounts which are deferred under a supplemental deferred compensation plan maintained by MBIA or a Participating Company shall be taken into account, (iv) Compensation amounts which represent payment of amounts deferred in a prior year under a supplemental deferred compensation plan maintained by MBIA or a Participating Company shall not be taken into account, and (v) Compensation shall not include any foreign service premium paid to a Participant temporarily assigned overseas. 8 5 (d) In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual Compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost-of-living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, the OBRA '93 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. (e) For Plan Years beginning on or after January 1 , 1994, any reference in this Plan to the limitation under section 401(a)(17) of the Code shall mean the OBRA '93 annual Compensation limit set forth in this provision. (f) If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual Compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994; the OBRA '93 annual Compensation limit is $ 150,000. 2.12 "Disability" means a physical or mental condition under which the Employee qualifies for disability benefits under the long-term disability plan of the Participating Company which employs the Employee. 2.13 "Employee" means a person who is an employee of a Participating Company, excluding any employee (a) who is included in a unit of employee covered by a negotiated collective bargaining agreement (where there exists evidence that retirement in a unit of employees covered by a negotiated collective benefits were the subject of good-faith bargaining), unless such agreement provides for participation in the Plan; (b) who is a leased employee (for purposes of Section 414(n) of the Code); or (c) who is a nonresident alien. 9 6 2.14 "Entry Date" means each January 1 and July 1. 2.15 "Exempt Loan" means any loan to the Plan or Trust not prohibited by Section 4975(c) of the Code and Section 406 of the Act because the loan meets the requirements set forth in Section 4975(d)(3) of the Code and Section 408(b)(3) of the Act, and the Regulations promulgated thereunder, the proceeds of which loan are used to finance the acquisition of Shares or refinance or repay such a loan. 2.16 "Forfeiture" means the portion of a Participant's Account which is forfeited under Article VII. 2.17 "Hour of Service" means all of the following: (a) Each hour for which an employee is paid or entitled to payment, for the performance of duties for the Company or an Affiliate. These hours shall be credited to such individual for the computation period in which the duties are performed. (b) Each hour for which an employee is paid, or entitled to payment, by the Company or an Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 hours of service shall be credited under this paragraph for any single continuous period during which such individual performs no duties (whether or not such period occurs in a single computation period). (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company or an Affiliate. The same hours of service shall not be credited both under Subsection (a) or Subsection (b), as the case may be, and under this Subsection (c) These hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. No more than 501 hours are required to be credited for payments of back pay, to the extent that such back pay is agreed to or awarded for a period of time during which an employee did not or would not have performed duties. 10 7 In the case of a family and medical leave absence, a Participant shall be credited to the extent required by the Family and Medical Leave Act of 1993, for purposes of eligibility for participation and vesting, with the total number of Hours of Service he or she would have worked had he or she not been on a family and medical leave of absence; In the case of an absence of employment because of qualified military service, a Participant shall be credited, to the extent required by the Uniformed Services Employment and Reemployment Rights Act of 1994 and Section 414(u) of the Code, for purposes of eligibility for participation and vesting, the total number of Hours of Service he or she would have worked had he or she not been on a leave of absence due to military service. An individual with respect to whom Hours of Service are not recorded shall be credited hereunder with 45 Hours of Service for each week in which the individual would otherwise be entitled to be credited with one Hour of Service. A Participant shall be deemed to have completed 45 Hours of Service for each week of leave of absence approved for military service. Hours of Service shall be determined in accordance with Section 2530.200b-2(b) and (c) of the Department of Labor Regulations, which is hereby incorporated herein by reference. 2.18 "IRS" means the Internal Revenue Service. 2.19 "Limitation Year" means the one-year period ending on the last day of the Plan Year. 2.20 "Normal Retirement Date" means the date described in Section 8.1. 2.21 "Participant" means any individual who begins to participate in the Plan as provided in Article III, and whose participation has not been terminated as provided in such Article. 2.22 "Participating Company" means the Company and, subject to Section 16.16, any Affiliate, whose board of directors or equivalent governing body has adopted the Plan and Trust Agreement by appropriate action with the written consent of the Board of Directors. 2.23 "Plan" means the CapMAC Employee Stock Ownership Plan, as now in effect or as hereafter amended. 11 8 2.24 "Plan Administrator" means the Committee. 2.25 "Plan Year" means the period beginning on January 1 and ending on December 31, except that the first Plan Year of the Plan shall begin on the Effective Date. 2.26 "Prohibited Individual" means a Participant described in Section 409(n)(1) of the Code. 2.27 "Regulations" means the applicable regulations issued under the Code, the Act or other applicable law, by the IRS, the Department of Labor or any other governmental authority, and any temporary or other appropriate and effective regulations or rules promulgated by such authorities pending the issuance of such regulations. 2.28 "Retirement Date" means a Participant's Normal Retirement Date, Deferred Retirement Date or Disability Termination Date, as provided in Article VIII. 2.29 "Shares" means the common stock issued by the Company. To the extent the Board of Directors so resolves, or if the Board of Directors has not so resolved and stock described in the first sentence does not meet the requirements under both Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act for "qualifying employee securities," then "Shares" shall mean any stock satisfying such requirements. If such stock is of an entity other than the Company, such other entity may (and, if necessary, shall) be deemed to be the Company for purposes of such Plan and Trust Agreement provisions relating to Shares as may be appropriate. 2.30 "Surviving Spouse" means the survivor of a deceased former Participant to whom such deceased former Participant had been legally married (as determined by the Committee) immediately before the Participant's death. 2.31 "Suspense Subfund" means the subfund established under Section 6.2 as part of the Trust Fund to hold Shares purchased with the proceeds of an Exempt Loan pending the allocation of such Shares to individual Accounts. 2.32 "Termination of Service" means a termination of employment with the Company or an Affiliate as determined by the Committee in accordance with reasonable standards and policies adopted by the Committee; provided, however, that the transfer of an Employee 12 9 from employment by one Participating Company or an Affiliate to employment by another Participating Company or Affiliate shall not constitute a Termination of Service. Notwithstanding the foregoing, an Employee who is absent on account of service in the armed forces of the United States of America shall not incur a Termination of Service in contravention of federal law. 2.33 "Trust" means the CapMAC Employee Stock Ownership Plan Trust, created by the Trust Agreement entered into between the Company and the Trustee. 2.34 "Trust Agreement" means the CapMAC Employee Stock Ownership Plan Trust Agreement by and between the Company and the Trustee, as now in effect or as hereafter amended. 2.35 "Trustee" means HSBC, (formerly Marine Midland Bank). or such other entity serving as a trustee under the Trust Agreement. 2.36 "Trust Fund" means all Shares, cash and other securities and all other assets deposited with or acquired by the Trustee in its capacity as such hereunder, together with accumulated income, subject to all liabilities incurred by the Trustee in its capacity as such and less all disbursements made in respect thereof. 2.37 "Valuation Date" means December 31, or any other date during the Plan Year specified by the Committee, upon or as of which the assets and liabilities of the Trust Fund are valued, as prescribed by Section 5.5. 2.38 "Vested Interest" means the portion of a Participant's Account which has become nonforfeitable pursuant to Sections 7.1 and 17.3. 2.39 "Year of Service" means, with respect to an individual, each Plan Year during which the individual has completed at least 1,000 Hours of Service; provided, however, that for purposes of determining whether a Participant is vested under the Plan under Section 7.1, only Hours of Service after an individual has attained age 18 shall be counted. For purposes of determining whether an Employee may be enrolled in the membership of the Plan as provided in Article III, the initial twelve consecutive month period shall begin on the first day on which such Employee is credited with an Hour of Service (rather than the first day of 13 10 the Plan Year in which such Employee is first credited with an Hour of Service). If an Employee does not complete 1,000 Hours of Service during this initial twelve consecutive month period, the first Plan Year beginning after the first day on which such Employee is credited with an Hour of Service shall be used to determine whether an Employee may be enrolled in the membership of the Plan as provided in Article III. Years of Service before a Break in Service shall be taken into account if a Year of Service shall be taken into account if a Year of Service has been completed after such Break in Service. Years of Service before five consecutive Breaks in Service of a non-vested Participant shall not be taken into account. Years of Service shall not include Hours of Service with the Company or an Affiliate before the Effective Date; provided, however, that with respect to Employees who are employed by a Participating Company on the Effective Date (and only with respect to such Employees), Years of Service for purposes of eligibility to participate in the Plan and vesting in Accounts under the Plan, shall be determined by taking into account, without limitation, hours of service for which credit was given under the Citicorp Retirement Plan before the Effective Date. 14 11 ARTICLE III PARTICIPATION IN THE PLAN 3.1 Participation. Each individual who was a Participant in the Plan on February 16, 1998 shall continue to be a Participant in the Plan as of such date. Each other individual who is an Employee of MBIA shall participate in the Plan on the Entry Date coincident with or immediately following the Employee's completion of 6 Months of Service, but in no event prior to July 1, 1999 and in no event later than the Entry Date coincident with or immediately following the Employee's completion of one Year of Service. For purposes of this Section, an Employee shall be deemed to have completed six Months of Service if he is in the employ of the Employer at any time six months after the first day upon which he is credited with an Hour of Service for the performance of duty. 3.2 Participation Upon Reemployment or Transfer. (a) A Participant (whether or not vested) who incurs a Termination of Service and becomes an Employee again before incurring a Break in Service shall be eligible to participate in the Plan on the date he or she again performs an Hour of Service as an Employee. (b) A vested Participant who incurs a Termination of Service shall always be eligible to participate in the Plan on the date he or she again performs an Hour of Service. (c) A non-vested Participant who incurs a Termination of Service, but becomes an Employee again before incurring five consecutive Breaks in Service, shall be eligible to participate in the Plan on the date he or she again performs an Hour of Service as an Employee. (d) A non-vested Participant who incurs a Termination of Service and also incurs five consecutive Breaks in Service before again becoming an Employee shall be treated as a new employee for all purposes of the Plan. A reemployed Employee with no Years of Service for purposes of Article III shall also be treated as a new employee. 15 12 3.3 Participation and Adjustments. The Committee shall take any necessary or appropriate action to ensure that each Employee eligible to become a Participant under Article III becomes a Participant and, if it is determined that such an Employee has for any reason not been made a Participant in the Plan or an administrative adjustment is required, each Employee shall retroactively become a Participant or such administrative adjustment shall be made. 'The Account of an Employee who retroactively becomes a Participant or for whom an administrative adjustment is made shall, upon becoming a Participant or upon such adjustment, consist solely of the aggregate amount of contributions which would have been allocated to the Employee's Account had the Employee become a Participant when first eligible. 3.4 Cessation of Participation. The participation of a Participant shall end when no further benefits are payable to the Participant or on the Participant's account under the Plan. Except as otherwise specifically provided in the Plan, no contributions shall be made for the benefit of, and no contributions, or Forfeitures or Shares released from a Suspense Subfund shall be allocated, added or otherwise credited to the Account of, a Participant on or after the date on which the Participant has a Termination of Service or otherwise ceases to be an Employee, and before the day, if any, on which the Participant next performs an Hour of Service as an Employee. 16 13 ARTICLE IV COMPANY CONTRIBUTIONS 4.1 Contributions to Trust Fund. (a) Subject to Article XI and the provisions of any applicable loan or contribution agreement, the Company shall contribute to the Trust Fund for each Plan Year such sum as the Board of Directors may, in its sole discretion, determine, which sum may be zero. Any Participating Company may contribute all or part of the entire amount due on behalf of one or more other Participating Companies and charge the amount thereof to the Participating Company responsible therefor. In any Plan Year, the contribution on behalf of the Participants who are Employees of a Participating Company, when expressed as a percentage of the aggregate Compensation of such Participants, may, but need not be, the same as the contribution on behalf of the Participants who are Employees of another Participating Company. (b) All or part of the contributions made under Section 4.1(a) may be applied to repay principal or interest on any outstanding Exempt Loan. The Committee may, subject to any pledge or similar agreement, direct or determine the proportions of such contributions which are applied to repay each such Exempt Loan. (c) All or part of the contributions made under Section 4.1(a) may be used to purchase Shares allocated to the Account of any Participant or Beneficiary in order to make a distribution under Article VIII, IX or X to such Participant or Beneficiary. 4.2 No Participant Contributions. No Participant shall be allowed to contribute to the Trust Fund. 17 14 Article V TRUST FUND 5.1 Plan Assets. The Company has entered into the Trust Agreement providing for the establishment of a single Trust to hold the assets of the Plan. All contributions shall be paid over to the Trustee and held pursuant to the provisions of the Plan and the Trust Agreement. The Trustee shall be the named fiduciary of the Plan for purposes of the Act with respect to all matters relating to the investment and management of Plan assets, except as otherwise provided under Sections 5.5, 5.6, 12.1 and 13.1, and the applicable provisions of the Trust Agreement. 5.2 Accounts. A Participant's interest in the Trust Fund shall be reflected in the Participant's Account. One or more subaccounts may be established under each Participant's Account for such purposes as the Committee deems appropriate. Notwithstanding the foregoing, the Trust Fund shall be treated as a single trust for purposes of investment and administration, and nothing contained herein shall require the physical segregation of assets for any Account. 5.3 Investment of Trust Fund. The Trust Fund shall be invested exclusively in Shares, except for cash or cash equivalent investments held (a) for the limited purpose of making Plan distributions to Participants and Beneficiaries, (b) pending the investment of contributions or other cash receipts in Shares, (c) pending use to repay an Exempt Loan, (d) for purposes of paying, under the terms described in the Plan or Trust Agreement, fees and expenses incurred with respect to the Plan or Trust and not paid for by the Participating Companies or (e) in the form of de minimis cash balances. 5.4 Exempt Loan. (a) Any Exempt Loan must be primarily for the benefit of Participants and their Beneficiaries. 18 15 (b) Notwithstanding any other provision of the Plan or the Trust, all proceeds of an Exempt Loan shall be used, within a reasonable time after receipt by the Trust, only for any or all of the following purposes: (i) to acquire Shares; (ii) to repay the same Exempt Loan; or (iii) to repay any previous Exempt Loan. (c) To the extent required by the Code, the Act or the Regulations, the terms of any Exempt Loan shall comply with each of the following requirements: (i) the terms shall be at least as favorable to the Plan as the terms of a comparable loan negotiated at arm's length by independent parties; (ii) the interest rate shall be no more than a reasonable interest rate considering all relevant factors including the amount and duration of the Exempt Loan, the security and guarantee involved, if any, the credit standing of the Plan and the guarantor of the Exempt Loan, if any, and the interest rate prevailing for comparable loans; (iii) the Exempt Loan must be for a specific term and may not be payable at the demand of any person except in the case of default; (iv) the Exempt Loan shall be without recourse against the Plan, and the only assets of the Plan that nay be given as collateral on the Exempt Loan are Shares acquired with the proceeds of the same Exempt Loan or Shares used as collateral for a prior Exempt Loan, which prior loan is repaid with the proceeds of the same Exempt Loan; (v) no person entitled to payment under the Exempt Loan shall have any right to assets of the Plan other than collateral given for the Exempt Loan, contributions made to the Plan (other than contributions of employer securities) to enable it to meet obligations under the Exempt Loan and earnings attributable to such collateral and such contributions, including dividends on allocated Shares to the extent permitted by the law ("Eligible Earnings"); (vi) the value of Plan assets transferred in satisfaction of the Exempt Loan upon an event of default shall not exceed the amount of the default; provided, however, that, if the lender is a "disqualified person" (as such term is defined in section 4975(e) of the Code), or a "party in interest" (as such term is defined in Section 3(14) of the Act), Plan assets may only be transferred upon default and only to the extent of the failure of 19 16 the Plan to meet the payment schedule of the Exempt Loan; (vii) upon payment of any portion of the balance due on the Exempt Loan, the assets pledged as collateral for such portion shall be released from encumbrance in accordance with Section 6.3; and (viii) payments made from the Trust Fund with respect to the Exempt Loan during a Plan Year shall not exceed an amount equal to the sum of amounts contributed to the Plan by the Participating Companies to enable the Plan to meet its obligations under an Exempt Loan and Eligible Earnings (as defined in Section 5.4(c)(v)), less any such payments made in prior Plan Years. Such contributions and earnings shall be accounted for separately in the books of accounts of the Plan maintained by the Committee or the Trustee until the Exempt Loan is repaid: 5.5 Accounting and Valuations. (a) Subject to the requirements of Section 5.5(e), the fair market value of the assets of the Trust Fund shall be determined as of each Valuation Date, in accordance with generally accepted valuation methods and practices including, but not limited to, in the case of Shares, the use of one or more independent investment bankers or appraisers. (b) The value of a Participant's Account as of any Valuation Date shall equal the sum of: (i) The aggregate fair market value (as determined under Section 5.5(a)) of all Shares allocated to such Participant's Account as of such Valuation Date; (ii) Subject to Section 5.5(c), the aggregate fair market value (as determined under Section 5.5(a)) of undistributed dividends, if any, received on Shares allocated to such Participant's Account; and (iii) Such Participant's allocable portion (determined in accordance with the rules set forth in Section 6.4 for determining Participants' allocable portion of Shares released from the Suspense Subfund) of the undistributed earnings, if any, on all amounts contributed to the Trust Fund for purposes other than the repayment of a Exempt Loan. (c) Dividends payable, if any, with respect to Shares held by the Trust Fund will be, to the extent permitted by law and the terms of the Shares on which such dividends 20 17 are paid, (i) used for the purpose of repaying one or more Exempt Loans, or, (ii) if no such Exempt Loan is outstanding, and if determined in the discretion of the Board of Directors (which determination shall be communicated to the Committee) and in conformity with such terms, (A) distributed from the Trust Fund to Participants or their Beneficiaries not later than 90 days after the close of the Plan Year in which they are paid to the Trust Fund, (B) paid directly to such Participants or their Beneficiaries, (C) retained in the Trust Fund and allocated pursuant to Section 5.5(b), or (D) paid or utilized in a combination of any or all of the foregoing three options. (d) The Committee shall establish accounting procedures for the purpose of making allocations, valuations and adjustments to Participants' Accounts in accordance with the provisions of the Plan. From time to time, the Committee may modify its accounting procedures for the purpose of achieving equitable and nondiscriminatory allocations among the Accounts of Participants in accordance with the provisions of the Plan. (e) All valuations of Shares, where such Shares are not readily tradable on an established securities market and where such valuations relate to activities carried on by the Plan, shall be made by one or more independent appraisers, retained by and acceptable to the Trustee, who may be chosen by the Trustee if not chosen by the Committee, and who meet the requirements, if any, of the Code and Regulations. 5.6 Voting and Tender or Exchange Rights. If any Participating Company has a registration-type class of securities (as defined in Section 409(e)(4) of the Code), then, with respect to all corporate matters submitted to shareholders, all Shares (which for purposes of this Section shall include any securities of the Company or an Affiliate) shall be voted only in accordance the provisions of Section 5.6(a), (b), (d) and (e) applicable to voting. If no Participating Company has a registration-type class of securities (as defined in Section 409(e)(4) of the Code), then, only with respect to corporate matters relating to a corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such other similar transaction that Regulations require, all Shares shall be voted only in accordance with the provisions of 21 18 Section 5.6(a), (b), (d) and (e) applicable to voting. In all cases in which a "tender offer" (as defined in Section 5.6(a)) is made, the provisions of Section 5.6(a), (c), (d) and (e) applicable to a "tender offer" (as so defined) shall apply. Where the Trustee is not required to solicit voting instructions under the second sentence of this paragraph or where the Committee is explicitly given discretion under Section 5.6(a) or (b), the Trustee shall vote and take action in connection with a "tender offer" (as so defined), as applicable, only as the Committee directs in the Committee's sole discretion, after the Committee determines such action to be in the best interests of Participants and Beneficiaries. (a) To the extent provided under the foregoing paragraph, the Trustee shall vote Shares allocated to each Participant's and Beneficiary's Account (including fractional as well as whole Shares) in accordance with timely directions of such Participant or Beneficiary, respectively; provided, that a failure of a Participant or Beneficiary affirmatively to direct timely the manner in which Shares allocated to the Participant's or Beneficiary's Account is to be voted shall be deemed for purposes of this Section to be an affirmative direction to abstain from voting. The Trustee shall, with respect to shares allocated to each Participant's and Beneficiary's Account (including fractional as well as whole Shares), act in response to any tender offer or exchange offer for Shares commenced by a person or persons, including, but not limited to, a tender offer or exchange offer within the meaning of the Securities Exchange Act of 1934, as amended from time to time (all such tender or exchange offers collectively, a "tender offer") in accordance with timely directions of such Participant or Beneficiary, respectively; provided, that a failure of a Participant or Beneficiary affirmatively to direct timely the manner in which the Trustee is to act in response to a tender offer with respect to Shares allocated to the Participant's or Beneficiary's Account shall be deemed for purposes of this Section to be an affirmative direction not to take action with respect to such Shares. For purposes of determining the number of Shares to be voted in any particular manner or to be the subject of any particular response to a tender offer, the Trustee shall use the nearest practicable date as determined by the Trustee. 22 19 (b) To the extent provided in the first paragraph of this Section, the Trustee's functions and responsibilities with respect to Shares, including Shares in the Suspense Subfund, with respect to voting, shall be exercised as follows: (i) Each Participant and Beneficiary: (1) is hereby designated as a named fiduciary for purposes of the Act with respect to the voting of Shares allocated to the applicable Account, and with respect to the voting of the applicable portion (as determined under Section 5.6(b)(iii)) of the Shares held in the Suspense Subfund, and (2) shall have the right to direct the Trustee with respect to the voting of such Shares on each matter brought before any meeting of the stockholders of the Company. (ii) Before each such meeting of stockholders, the Trustee shall cause to be furnished to each Participant and Beneficiary a copy of the proxy solicitation materials (at or about the same time as such materials are furnished generally to Company stockholders), together with a form requesting confidential directions to the Trustee on how the whole and fractional Shares, which are allocated to such Participant's or Beneficiary's Account (or with respect to which such Participant or Beneficiary otherwise has control under Section 5.6(b)(iii)), shall be voted on each such matter. The Company and the Committee shall cooperate with the Trustee in an attempt to ensure that Participants and Beneficiaries receive the requisite information in a timely manner. Upon timely receipt of such directions, the Trustee shall on each such matter vote as directed the number of Shares (including fractional Shares) allocated to such Participant's or Beneficiary's Account, and the Trustee shall have no discretion in such matter. The instructions received by the Trustee from Participants and Beneficiaries shall be held by the Trustee in confidence and shall not be divulged or released to any person, including the Committee, or the officers or employees of the Company or any Affiliate. (iii) The Trustee shall vote all Shares in the Suspense Subfund in the same proportion as the allocated Shares for which affirmative directions to vote for or against each proposal are voted. The Committee may establish procedures, which shall be followed by the Trustee upon and after its receipt of notice thereof, by which Participants and 23 20 Beneficiaries may provide separate sets of instructions with respect to Shares allocated to their Accounts and the pro rata amount to unallocated Shares over which they have voting control. The Trustee shall have no discretion in these matters. If a vote is taken at a time when there are no allocated Shares, the Trustee shall vote the Shares in the Suspense Subfund as directed by the Committee in the Committee's discretion. (c) The Trustee's functions and responsibilities with respect to Shares, including Shares in the Suspense Subfund, with respect to all decisions made in response to a tender offer shall be exercised as follows: (i) In the event a tender offer is commenced, the Committee, promptly after, receiving notice of the commencement of any such tender offer, shall transfer certain of the Plan's record-keeping functions to an independent record-keeper (which, if the Trustee consents in writing, may be the Trustee). The functions so transferred shall be those necessary to preserve the confidentiality of any directions given by Participants and Beneficiaries, in connection with the tender offer. The record-keeper shall use its best efforts to timely distribute or to cause to be distributed to each Participant and Beneficiary such information as is being distributed to other stockholders of the Company in connection with any such tender offer. The Company and the Committee shall cooperate with such recordkeeper in are attempt to ensure that Participants and Beneficiaries receive the requisite information in a timely manner. The independent record-keeper shall solicit confidentially from each Participant and Beneficiary the directions described below as to the action to be taken with respect to Shares held under the Plan in response to a tender offer. The independent record-keeper, if different from the Trustee, shall instruct the Trustee as to required action, including an identification of the amount of Shares covered by any particular required action, in accordance with the following provisions. (ii) Each Participant and Beneficiary: (1) is hereby designated as a named fiduciary for purposes of the Act with respect to all decisions made in response to a tender offer regarding Shares allocated to the applicable Account, and with respect to all such decisions regarding the applicable portion (as determined. under Section 5.6(c)(iv)) of the 24 21 Shares held in the Suspense Subfund, and (2) shall have the right to direct the Trustee with respect to all such decisions. (iii) Upon timely receipt of such directions, the Trustee shall on each such matter act as directed (including, without limitation, engage in selling, exchanging, tendering or retaining) with respect to the number of Shares (including fractional Shares) allocated to such Participant's or Beneficiary's Account, and the Trustee shall have no discretion in such matter. The instructions received by the Trustee from Participants and Beneficiaries shall be held by the Trustee in confidence and shall not be divulged or released to any person, including the Committee, or the officers or employees of the Company. (iv) The Trustee shall act as directed (including, without limitation, engage in selling, exchanging, tendering or retaining) with respect to the number of Shares (including fractional Shares) in the Suspense Subfund in the same proportion as it acts regarding allocated Shares. The Committee may establish procedures, which shall be followed by the Trustee upon and after its receipt of notice thereof, by which Participants and Beneficiaries may provide separate sets of instructions with respect to Shares allocated to their Accounts and the pro rata amount of unallocated Shares over which they have control regarding tender offers. The Trustee shall have no discretion in these matters. If a tender offer occurs at a time when there are no allocated Shares, the Trustee shall act in response to the tender offer with respect to Shares in the Suspense Subfund as directed by the Committee in the Committee's discretion. (d) (i) Nothing contained in this Section shall confer upon Participants, Beneficiaries, the Committee or the Trustee any additional voting rights in respect of Shares held under the Plan other than such rights set forth in the certificate of incorporation of the Company and applicable under state and federal law. (ii) Nothing contained in this Section shall confer upon Participants, Beneficiaries, the Committee or the Trustee any additional rights in respect of a tender offer, merger or consolidation relating to the Shares held under the Plan other than such rights set 25 22 forth in the certificate of incorporation of the Company and applicable under state and federal law. (e) Any individual who has an interest under the Plan in the nature of the interest of a Participant or Beneficiary but who is not technically a Participant or Beneficiary shall be treated as a Beneficiary for purposes of the foregoing provisions of this Section. 26 23 ARTICLE VI ALLOCATION OF CONTRIBUTIONS TO THE TRUST FUND 6.1 Allocation of Contributions. (a)(i) For Plan Years beginning prior to January 1, 1999. The account maintained for each Participant will be credited as of each Anniversary date with the Participant's allocable. share of (A) Shares contributed to the Trust Fund or purchased by the Trust Fund using cash contributed by or an behalf of the Participating Company employing such Participant for contributed directly to the Trust Fund and (B) Shares released from the Suspense Subfund pursuant to Section 6.3 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 any Plan Year shall be made only to the Accounts of those Participants who were Employees of a Participating Company as of the last day of the Plan Year and who completed at least 1,000 Hours of Service for such Plan Year; provided, however, that for purposes of this Section and any other provision of the Plan pertaining to the entitlement to receive an allocation of contributions, Forfeitures or Shares released from the Suspense Subfund (including Sections 6.1, 6.4, 7.3 and 11.3), a Participant who has a Termination of Service while an Employee on account of death, or on or after the Participant's Retirement date, shall be deemed to have completed 1,000 Hours of Service and to have been employed as an Employee on the last day of the Plan Year in which such Termination of Service occurs. For plan Years beginning on or after January 1, 1999. The account maintained for each Participant will be credited as of each payroll date with the Participant's allocable share of (A) shares contributed to the Trust Fund or purchased by the Trust Fund using cash contributed by or on behalf of the Participating Company employing such Participant (for contributed directly to the Trust Funds) and (B) shares released from the Suspense Subfund pursuant to Section 6.3 and allocable to the contribution made by or on 27 24 behalf of such Participating Company pursuant to Section 6.4. The allocation of contributions of each participating Company during the Plan Year shall be made only to the Accounts of those participants who made elective contributions to the MBIA Inc. Employees Profit Sharing and Salary Deferral Plan (MBIA 401(k) Plan). (a)(ii) Special rule for the Plan Year beginning January 1, 1998. Notwithstanding the foregoing, the Account maintained for each Participant will be credited as of February 16, 1998 with the Participant's allocable share of (A) 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 (B) Shares released from the Suspense Subfund pursuant to Section 6.3(a)(ii) and allocable to the contribution made on or behalf of such Participating Company pursuant to Section 6.4. The allocation of shares during the period January 1 through February 16, 1998 (including shares released from. any dividends paid in 1998 on unallocated shares) shall be made only to the Accounts of those Participants who were Employees of CapMAC Holdings, Inc. as of February 16, 1998, without regard to the 1,000 Hours of Service requirement of section 6.1(a)(i). 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 16, 1998. For the period from February 17, 1998 through December 31, 1998 and subsequent Plan Years, shares shall be allocated in accordance with Section 6.1 (a)(i) and 6.1 (b) except that Compensation as defined in Section 6.1 (b) shall be limited to Compensation earned from February 17, 1998 through December 31, 1998. (b) Allocation of Shares. For purposes of allocating Shares in proportion to contributions under Sections 6.1(c), 6.4(b)(iii) and 7.3, and the other purposes of the Plan, contributions for a Plan Year allocable to a Participating Company shall be allocated among the Accounts of each Participant to benefit from such contributions, as follows: (I) for Plans Years beginning prior to January 1, 1998, in the same ratio that the Participant's Compensation from such Participating Company for the Plan Year while a Participant and an Employee of a Participating Company bears to the total Compensation 28 25 from such Participating Company for the Plan Year of all such Participants while Participants and Employees of a Participating Company, (II) for the period January 1, 1998 to February 16, 1998, in the same ratio that the Participant's Compensation from such Participating Company for the period from January 1, 1998 through February 16, 1998 while a Participant and an Employee of a Participating Company bears to the total Compensation from such Participating Company for such period of all such Participants while Participants and Employees of a Participating Company, and (III) for the period February 17, 1998 to December 31, 1998; in the same ratio that the Participant's Compensation from such Participating Company for the period from February 17, 1998 to December 31, 1998 while a, Participant and an Employee of a Participating Company bears to the total Compensation from such Participating Company for such period of all such Participants while Participants and Employees of a Participating Company, and (IV) for Plan Years beginning on or after January 9 , 1999, in an amount equivalent in value (based on the value of such shares as of each payroll date (or a date with 5 business day of each payroll date) to the amount of matching contribution that each such Participant would be entitled to under the MBA 401(k) Plan, reduced by any amount of cash contribution that the Company nay choose to make to the MBIA 401 (k) Pan on behalf of a Participant to provide matching contributions. (c) Subject to Section 6.4(b)(ii), Shares purchased by the Trust Fund for a Plan Year with contributions for a Plan Year (or contributed directly to the Trust Fund) shall be allocated under Section 6.1 (a)(i) in the same manner that contributions are allocated under Section 6.1 (b). (d) Allocations of Shares shall be expressed in terms of numbers of whole and fractional interests in Shares. 6.2 Suspense Subfund. Shares acquired by the Trust Fund through an Exempt Loan shall be added to and maintained in the Suspense Subfund and shall thereafter be released 29 26 from the Suspense Subfund and allocated to Accounts of Participants as provided in Sections 6.3 and 6.4. For purposes of Section 5.6, Shares released from the Suspense Subfund on account of the repayment of an Exempt Loan but not yet allocated to Accounts on the books and records of the Plan shall be deemed to continue to be in the Suspense Subfund. 6.3 Release from Suspense Subfund. Shares acquired for the Trust Fund with the proceeds of an Exempt Loan shall be released from the Suspense Subfund as the Exempt Loan is repaid, in accordance with the provisions of this Section. (a)(i) For each Plan Year until an Exempt Loan is fully repaid, 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 multiplied by the "Release Fraction." As used herein, the term "Release Fraction" shall mean a fraction, the numerator of which is the amount of principal and interest paid on the Exempt Loan for such current Plan Year and the denominator of which is the sum of the numerator plus the principal and interest to be paid on such Exempt Loan for 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, if the interest rate on the Exempt Loan is variable, the interest to be paid in subsequent Plan Years shall be calculated by assuming that the interest rate in effect as of the end of the applicable Plan Year 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. (ii) Notwithstanding anything herein to the contrary, for the period beginning January 1, through February 16, 1998 the number of shares released from the suspense subfund shall equal the number of unreleased Shares attributable to such Exempt 30 27 Loan immediately before such release multiplied 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 paid and interest paid or accrued on such Exempt loan (including any dividends on unallocated shares use to pay the Exempt loan) for the period January 1,1998 to February 16, 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 all future years, and portions of a year, during the term of such Exempt Loan (determined without reference to any possible extensions or renewals thereof). For purposes of 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 16, 1998 shall be calculated by assuming that the interest rate in effect as of February 16, 1998 shall be calculated by assuming that the interest rate in effect for the remainder of the term of the term of the Exempt Loan. (iii) Notwithstanding anything herein to the contrary, for the period beginning February 17, through December 31, 1998 the number of shares released from the Suspense Subfund shall equal the number of unreleased Share attributable to such Exempt Loan immediately before such release multiplied by the Special Release Fraction. For purposes of this Section 6.3(a)(iii) the term "Special Release Fraction" shall mean a fraction, the numerator of which is the amount of principal paid and interest paid or accrued on such Exempt Loan (including any dividends on unallocated shares use to pay the Exempt loan) for the period February 17, 1998 through December 31, 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 all future years during the term of such Exempt Loan (determined without reference to any possible extensions or renewals thereof). For purposes of this Section 6.3(a)(iii), if the interest rate on the Exempt Loan is variable, the interest rate to be paid subsequently to December 31, 1998 shall be calculated by assuming that the interest rate in effect as of December 31, 1998 shall be calculated by assuming that the interest rate in effect for the remainder of the term of the term of the Exempt Loan. 31 28 Notwithstanding the foregoing, in the event such Exempt Loan shall be repaid with the proceeds of a subsequent Exempt Loan (the "Subsequent 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. (b) If required by any pledge or similar agreement, or if permitted by such pledge or agreement and required pursuant to a designation by the Board of Directors, then, in lieu of applying the provisions of Section 6.3(a) with respect to an Exempt Loan, Shares shall be released from the Suspense Subfund as the principal amount of such Exempt Loan is repaid (without regard to interest payments), provided, the following three conditions are satisfied: (i) The Exempt Loan shall provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years; (ii) The interest portion of any payment shall be disregarded only to the extent it would be treated as interest under standard loan amortization tables; and (iii) If the Exempt Loan is renewed, extended or refinanced, the sum of the expired duration of the Exempt Loan and the renewal, extension or new Exempt Loan period shall not exceed 10 years. (c) If at any time there is more than one Exempt Loan outstanding, then separate accounts may be established under the Suspense Subfund for each such Exempt Loan. Each Exempt Loan for which a separate account is maintained may be treated separately for purposes of the provisions governing the release of Shares from the Suspense Subfund under this Section (including for purposes of determining whether Section 6.3(a) or Section 6.3(b) governs the release of Shares from any particular separate account) and for purposes of the provisions governing the application of Participating Company contributions to repay an exempt loan under section 4.1. 32 29 (d) All Shares released from the Suspense Subfund during any Plan Year shall be allocated among Participants as prescribed by Section 6.4. 6.4 Allocation of Shares Released from Suspense Subfund. (a) Shares released from the Suspense Subfund for a Plan Year in accordance with Section 6.3 shall be held in the Trust Fund on an unallocated basis until allocated by the Committee as of the Anniversary Date for that Plan Year. (b) (i) Where dividends paid on Shares allocated to an Account ("Allocated Dividends") are being used for a Plan Year to pay principal or interest on an Exempt Loan, a portion of the Shares released from the Suspense Subfund, which shall be then equal in value to such Allocated Dividends, shall be allocated to each such Account. (ii) For each Plan Year, the Participating Companies shall make, at the tine or times determined by the Committee, an additional contribution if and to the extent that (1) the amount required to restore the amount of the Allocated Dividends to the Account in accordance with the requirements of Section 404(k)(2)(B) of the Code, exceeds (2) the value of Shares available to be allocated to such Accounts from those release from the Suspense Subfund. (iii) The remaining Shares released from the Suspense Subfund on account of the payment for a Plan Year of principal or interest on an Exempt Loan shall be allocated under Section 6.1(a)(ii) in the same proportion as contributions used to pay principal or interest on such Exempt Loan are allocated under Section 6.1(b). Notwithstanding, the foregoing, (1) if, with respect to the Suspense Subfund, principal or interest on an Exempt Loan is paid for a Plan Year but there is no contribution for such Plan Year that is used therefor, then, for such Plan Year, Section 6.1(b) shall be applied for purposes of this Section 6.4(b)(iii) as though such a contribution were made and as though all Employees of any Participating Company were employed by the same Participating Company, and (2) where a release of any such remaining Shares from the Suspense Subfund is attributable to the use of amounts that are not contributions, in applying Section 6.1(b) for purposes of allocating such Shares under this Section 6.4(b)(iii), the reference in Section 33 30 6.1 (b) to contributions shall be deemed to be a reference to contributions that are of a type not subject to Article XI (except to the extent, if any, that such amounts are subject to Article XI). (c) To the extent that Shares released on account of the use of dividends and other earnings to pay principal or interest on an Exempt Loan are insufficient to satisfy, and Shares released on account of the use of contributions are therefore used under, Section 6.4(b)(i), the allocation of contributions otherwise provided under Section 6.1(b)(ii) shall be adjusted to reflect the allocation required by Section 6.4(b)(i). (d) Unless otherwise specifically provided hereunder, all Shares in the Trust, Fund, other than Shares held in the Suspense Subfund as of an Anniversary Date, must be allocated to Accounts as of the Anniversary Date. 6.5 Prohibited Allocations. (a) Notwithstanding the foregoing provisions of this Article, in the event that the Trust acquires Shares in a transaction to which Section 1042 of the Code applies, then, in accordance with the Regulations, such Shares shall not be allocated, directly or indirectly, to Prohibited Individuals for the duration of the "nonallocation period" (as defined in Section 409(n)(3)(C) of the Code). (b) Where any Shares are prevented from being allocated due to the prohibition contained in Section 6.5(a), the allocation of contributions otherwise provided under Section 6.1 shall be adjusted to reflect such result. 6.6 Stock Dividends, Splits, Recapitalizations, Etc. Any Shares received by the Trustee as a result of a stock split, dividend, conversion, or as a result of a reorganization or other recapitalization of the Company shall be allocated as of the day on which such Shares are received by the Trustee in the same manner as the Shares to which they are attributable are then allocated. 34 31 ARTICLE VII VESTING 7.1 Vesting Schedule. (a) A Participant's Vested Interest shall be the percentage of the amount credited to the Participant's Account determined by the Committee from the following vesting schedule on the basis of the number of Years of Service which the Participant has completed as of the date of the Participant's Termination of Service. For Plan Years beginning prior to January 1, 1999:
Years of Service Non-forfeitable Percentage - ---------------- -------------------------- Less than 5 0% 5 or more 100%
For Plan years beginning on or after January 1, 1999:
Years of Service Non-forfeitable Percentage - ---------------- -------------------------- Less than 3 0% 3 years 60% 4 years 80% 5 years 100%
(b) Notwithstanding the foregoing, a Participant who is then an employee of the Company or an Affiliate shall be fully 100% vested in the Participant's Account on the earlier of the Participant's Normal Retirement Date; Disability Termination Date, or death. 7.2. Non-includible Service. The following rules shall apply to the determination, Participant's non-forfeitable percentage: 35 32 a) Years of Service before any series of One-Year Breaks in Service shall be disregarded if a Participant terminates employment, has no non-forfeitable interest in his benefits, and incurs a consecutive series of One-Year Breaks in Service that equals or exceeds the greater of: i) his Year of Service prior to such consecutive One-Year Breaks in Service; or ii) five (5). b) Years of Service after any five (5) consecutive year One-Year Breaks in Service shall not increase the non-forfeitable percentage of the Participant's Company Contribution Account which accrued before such One-Year Breaks in Service. 7.3. Forfeitures. The non-vested portion of a Participant's Company Contribution Account shall be forfeited at the time the Participant incurs a consecutive series of One-Year Breaks in Service of five (5) years, or if earlier, at the tine the Participant receives a lump sum distribution of the non-forfeitable portion of his benefit upon his termination of participation in the Plan. A distribution shall be deemed to be made upon termination of participation in this Plan if such distribution is made prior to the close of the second Plan Year following the Plan Year in which such termination occurs. A Participant who incurs a Termination of Employment without a vested interest in his Accounts shall be deemed to receive a distribution of the vested portion of his Accounts on the date of such Termination of Employment. Forfeitures arising under this Section 7.3 shall be reallocated to the Accounts of eligible Plan Participants in the Plan Year in which such forfeitures arise. All Forfeitures shall occur in conformity with the ordering rules of Section 54.4975-11(d)(4) of the Treasury Regulations. Subject to Section 6.1(a), all Forfeitures occurring pursuant to Section 7.2 with respect to a Plan Year shall be allocated to the Account of each Participant in the same manner as shares allocated under section 6.1 (b). 36 33 7.4. Distribution and Re-Employment Before a Break in Service. In the event that a former Participant who was not 100% vested in his Company Contribution Account and who received a lump sure distribution upon his Termination of Employment prior to the tine he incurred consecutive One-Year Breaks in Service of five (5) years and who forfeited a portion of his Company Contribution Account upon such distribution, is re-employed by the Company or an ERISA Affiliate prior to the time he incurs a consecutive series of One Year Breaks in Service of five (5) years, such Participant may elect on a form prescribed by the Administrative Committee to repay to the Plan in cash, on any Valuation Date prior to the earlier of (A) the fifth anniversary date of his re-employment or (B) his incurring a consecutive series of One-Year Breaks in Service of five (5) years, the full amount distributed to hire upon his prior Termination of Employment (for this purpose, a distribution of a zero amount shall deemed as automatically repaid upon a former Participant's re-employment). In such event, the amount repaid plus the amount forfeited by such Participant upon his prior Termination of Employment will be restored and credited to his Account as of such Valuation Date. Any forfeited amounts so restored shall be derived, to the extent necessary and in the following order, from: a) The amount, if any, of Participant forfeitures that would otherwise be allocated under Section 7.3; b) The amount, if any, of the Trust Fund net income or gain for the Plan Year. To the extent the amounts available for restoration for a particular Plan Year is insufficient to enable (the Administrative Committee to make the required restoration, the Employer shall contribute, without regard to any requirement or condition of Article Four, such additional amount as is necessary to enable the Administrative Committee to make the required restoration. If, for a particular Plan Year, the Administrative Committee must restore the Account of more than one (1) re-employed Participant, then the Administrative Committee shall make the restoration allocations) to each such Participant's Account in the same proportion that a Participant's restored amount for the Plan Year bears to the aggregate restored amount for the Plan Year of all re-employed Participants. The Administrative 37 34 Committee shall not take into account the allocation(s) under this Section 7.4 in applying the limitations set forth in Sections 11.2 and 11.3. 38 35 ARTICLE VIII RETIREMENT BENEFITS 8.1 Normal Retirement Date. A Participant's Normal Retirement Date shall be the later of the fifth anniversary of the Participant's participation in the Plan or the date the Participant attains age 65. 8.2 Deferred Retirement Date. If a Participant remains an Employee after the participant's Normal Retirement Date, the Participant shall participate in the contributions and benefits of the Plan in the same manner as any other Participant. The Deferred Retirement Date of a Participant who remains as Employee after the Participant's Normal Retirement Date shall be the first day of the month coincident with or following the date of the Participant's Termination of Service. 8.3 Disability Termination Date. A participant shall be considered, if the Participant so elects, to have retired for the purposes of the Plan on the Participant's Disability Termination Date, which shall be the date of the Participant's Termination of Service on account of the Participant's Disability, regardless of age. The determination of the Committee as to whether a Participant has a Disability and the date of such Disability shall be final, binding and conclusive. 8.4 Method of Distribution. Subject to Article XII, Section 8.6(d) and the second sentence of Section 8.6(a), distribution of a Participant's Vested Interest shall be made in a lump sum. 8.5 Distribution in Shares. (a) (i) Unless the Participant elects otherwise, distribution of a Participant's Vested Interest from the Participant's Account will be made entirely in whole Shares, with the value of any fractional interest in Shares paid in cash. To the extent a distribution is to be made in Shares, any cash or other property in a Participant's Account will be used to acquire Shares from the Company (based on the value of such Shares as of the roost recent 39 36 Valuation Date) for distribution. To the extent there is any fractional interest in a Share, and the distribution of such fractional interest is to be made in cash, (1) distributable Shares in a Participant's Account shall be liquidated, with the proceeds, net of expenses of liquidation, being distributed, or (2) cash in the Plan may be utilized based on the value of such Shares as of the most recent Valuation Date preceding distribution. (ii) Notwithstanding the foregoing, if applicable corporate charter or bylaw provisions restrict ownership of substantially all outstanding Shares to Employees or to a plan or trust described in Section 401(a) of the Code, then any distribution of a Participant's Vested Interest shall be in cash. (b) Distribution to a Participant shall be based upon the amount of Shares, and the value of any other allocations, consisting of the Vested Interest in the Participant's Account on the Valuation Date coinciding with or immediately preceding the date of distribution. 8.6 Benefit Commencement. (a) Subject to Sections 8.b(b), 8.6(c) and 16.6; unless the Participant elects a later date (or Section 8.6(e) requires an earlier date), the payment of any benefit to which a Participant is entitled under the Plan shall commence as soon as practicable (and not more than 60 days) after (i) the close of the Plan Year in which the Participant retires on a Retirement Date or, in all other cases, (ii) the close of the Plan Year in which occurs the latest of (1) the 10th anniversary of the year in which the Participant commenced Plan participation, (2) the Participant's attainment of age 65, or (3) the Participant's Termination of Service. Distributions required in connection with subsequent allocations made pursuant to the provision of the last sentence of Section 6.1(a) shall be made in one single sum distribution as soon as practicable. Notwithstanding the foregoing, if the amount payable cannot be ascertained, or, subject to the provisions of Section 16.6, the Participant cannot be located after reasonable efforts, a payment retroactive to the date determined under the forgoing sentence may be made not later than 60 days after the earliest day on which the 40 37 amount of such payment can be ascertained under the Plan or the date on which the Participant is located (whichever is applicable). (b) Notwithstanding Section 8.6(a),(I) no distribution on account of Section 8.6(a)(i) shall be made unless the Participant does not again become an Employee on or prior to the day as of which the Participant's distribution is otherwise to be commenced, and (II) the commencement of the distribution of the Participant's benefit shall not, unless the Participant elects otherwise or the provisions of the last sentence of Section 8.6(a) apply, be deferred under the provisions of Section 8.6(a)(ii) beyond the 60th day after the close of the Plan Year in which the Participant, while a former Employee, attains the Participant's Normal Retirement Date. (c) Prior to July 1, 1999, subject to Section 16.6, unless the Participant elects a later date (or Section 8.6(a) or (e) requires an earlier date), payment of any benefit to which a Participant is entitled shall commence not later than one year after the close of the Plan Year (i) in which the Participant incurs a Termination of Service due to the occurrence of the Participant's Retirement Date or death, or (ii) which is the fifth Plan Year following the Plan Year in which the Participant's Termination of Service occurs for any reason other than a Retirement Date or death, provided, that the Participant is not reemployed by the Company or an Affiliate before distribution is required to begin under this Section 8.6(c). Notwithstanding the foregoing, section 8.6(c)(ii) shall not apply to shares held in the Participant's Account until the close of the Plan Year in which the Exempt Loan or Exempt Loans, if any, used to acquire such Shares had been repaid in full. Effective July 7, 1999, subject to section 16.6, unless the Participant elects a later date (or section 8.6(a) or (e) requires an earlier date), payment of any benefit to which a Participant is entitled shall commence not later than one year after the close of the Plan Year in which the Participant incurs a Termination of Service due to the occurrence of the Participant's Retirement Date or death, disability or Termination of Employment, provided, that the Participant is not reemployed by the Company or an Affiliate before distribution is required to begin under this Section 8.6(c). 41 38 (d) Notwithstanding the foregoing, but subject to Sections 8.6(e) and 16.6, (i) a Vested Interest with a value of $5,000 or less shall be distributed in a single sum distribution as soon as practicable after the close of the Plan Year in which occurs the Participant's Termination of Service, and (ii) a Vested Interest with a value of more than $5,000 shall not commence to be distributed to the Participant before the Participant's Normal Retirement Date without the Participant's consent upon notice given to the Participant in accordance with the applicable Treasury Regulations. Where such consent is not given to a distribution otherwise provided for above, but is given before such Normal Retirement Date, distribution shall be made, subject to the other provisions of Section 8.6(a) and (b), (i) after the Valuation Date coincident or next following the giving of such consent and (ii) as of such Valuation Date provided, that the Participant notifies the Committee a reasonable time before such Valuation Date of the Participant's intent to provide consent. (e) Notwithstanding the foregoing, and except as provided in Section 16.6, if a Participant who has not been a five percent (5%) owner (as defined in Section 416(i) of the Code) at any time in the Plan Year ending in the calendar year in which such Participant attains age 70-1/2, the Participant's required distributions under Code Section 401(a)(9) shall begin April 1 of the calendar year following the later of: (i) the calendar year in which the Participant attains age 70-1/2; or (ii) the calendar year in which the Participant retires. (f) For a Participant who is a five percent (5%) owner (as defined in Section 416(i) of the Code), his or her required distribution under Code Section 401(a)(9) shall begin no later than the earlier of (i) the 60th day of the later of the close of the Plan Year in which the Participant attains age 65, or the Participant's service terminates; or (ii) the April 1 of the calendar year in which the Participant attain age 70-1/2. 8.7 Diversification. An individual may elect, within 90 days after the close of the first Plan Year in which the Participant becomes a Qualified Participant (as defined below) and within 90 days of the close of each of the four succeeding Plan Years, to have up to 25 percent of the total number of Shares that have been allocated to the Qualified Participant's 42 39 Account on or before the most recent Anniversary Date (inclusive of Shares which were subject to a prior election pursuant to this Section), reduced by any Shares which were the subject of a prior election pursuant to this Section, distributed to the Qualified Participant in the form of a single payment. For purposes of this Section, a "Qualified Participant" shall mean an individual who (a) has been a participant in the Plan for 10 years after the Effective Date and (b) has attained age 55. Such a Qualified Participant may also elect, within 90 days after the close of the Plan Year within which the last such election is offered, to have 50 percent of the total number of Shares that have been allocated to the Qualified Participant's Account on or before the most recent Anniversary Date (inclusive of Shares which were subject to a prior election pursuant to this Section), reduced by any Shares which were the subject of a prior election pursuant to this Section, distributed to the Qualified Participant in the form of a single payment. The Qualified Participant shall make the election during the Qualified Election Period which is the six (6) Plan Year period beginning with the 1st Plan Year in which the individual first becomes a Qualified Participant. 8.8 Direct Transfer Option. This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provisions of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the plan administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (a) Definitions (i) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years 43 40 or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(b) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) Distributee: A distributee includes an employee or former employee. In addition, the employee's or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (iv) Direct rollover: A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. 44 41 ARTICLE IX DEATH BENEFITS 9.1 Death Prior to Other Termination of Service. Subject to Section 8.5(a), upon the death of a Participant prior to the Participant's Termination of Service with the Company and all Affiliates, all amounts then credited to the Participant's Account shall be distributed in one single sum distribution to the Participant's Beneficiary. Such distribution shall be made as soon as practicable after the end of the Plan Year in which the Participant's death occurs. The amount distributed shall be based on the value of the decedent's Account on the Valuation Date coinciding with or immediately preceding the date of distribution. Distributions required in connection with subsequent allocations made pursuant to the requirements of the proviso of the last sentence of Section 6.1(a) shall be made as soon as administratively practicable. 9.2 Death After Termination of Employment. Upon the death of a Participant after retirement, Disability or other Termination of Service with the Company and all Affiliates, but prior to the distribution of the Participant's entire Vested Interest, the Committee shall direct the Trustee to make distribution of any balance of the decedent's Vested Interest in the manner provided in Section 9.1. 45 42 ARTICLE X DESIGNATION OF BENEFICIARIES 10.1 Beneficiary Designation. Each Participant shall file with the Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon the Participant's death. A Participant may from time to time revoke or change the Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Committee. Notwithstanding the foregoing, no designation of a nonspouse Beneficiary by a Participant shall be given effect unless such Participant's Surviving Spouse, if any, had consented in writing to such designation and, if the requirements of Section 417(a)(2)(A)(ii) of the Code and the Regulations are met, to all future designations; provided, that (a) spousal consent shall not be required where the spouse cannot be located or on account of such other circumstances, if any, as are set forth in the Regulations and (b) spousal consent, if required, must acknowledge the effect of such designation and be witnessed by a Plan representative or notary public. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. All decisions of the Committee concerning the effectiveness of any Beneficiary designation, and the identity of any Beneficiary, shall be final. If a Beneficiary shall die after the death of the Participant and prior to receiving the distribution that would have been made to such Beneficiary had such Beneficiary's death not occurred, and no alternate Beneficiary has been designated, then for the purposes of the Plan the distribution that would have been received by such Beneficiary shall be made to the Beneficiary's estate. 10.2 Failure to Designate Beneficiary. Subject to Section 10.1, if no Beneficiary designation is in effect at the time of a Participant's death, the payment of the amount, if any, 46 43 payable under the Plan upon death shall he made to the Participant's Surviving Spouse, if any, or if the Participant has no Surviving Spouse, to the Participant's estate. If the Committee is in doubt as to the right of any person to receive such amount, the Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may direct the Trustee to pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Trust therefor. 47 44 ARTICLE XI MAXIMUM AMOUNT OF ALLOCATION 11.1 Application of Article XI. The provisions of this Article XI shall govern notwithstanding any other provisions of the Plan, and shall be applied with respect to each Limitation Year. 11.2 Maximum Additions to Account. Annual Additions to a Participant's Account may not exceed the lesser of (a) the greater of $30,000 (or such other amount as is permissible under Section 415(c)(1)(A) of the Code), or (b) 25 percent of the Participant's compensation (as defined in Section 1.415-2(d) of the Income Tax Regulations prior to January 1, 1998, and as defined in Code Section 415(c)(3)(D) effective January 1, 1998) for the Plan Year. For this purpose, the term "Annual Additions" shall mean the following amounts which, without regard to this Article, would have been credited to the Participant's Account for any Plan Year: (a) Participating Company contributions which are used to repay principal and/or pay interest on one or more Exempt Loans, or to purchase (or which are made in the form of) Shares, which are allocated to such Participant's Account, (b) Forfeitures which arise under the Plan and are allocable to such Participant's Account in respect of such Plan Year, and (c) such other amounts with respect to other plans as may be required to be included under the Code and Regulations; provided, however, that if no more than one-third of Participating Company contributions for a Plan Year which are deductible under Section 404(a)(9) of the Code would be allocated, in the aggregate, to the Accounts of Participants described in Section 414(q) of the Code, then "Annual Additions" shall not include (i) any Participating Company contributions which are used to pay interest on one or more Exempt Loan, and (ii) Forfeitures of Shares acquired with the proceeds of an Exempt Loan. In the case of Limitation Year of less than twelve (12) months duration, the dollar limit of clause (a) above, as adjusted, shall be proportionately reduced. Notwithstanding any other provision in the Plan, "Annual Additions" shall exclude, without limitation, any (a) rollover contributions, (b) Shares released from the Suspense 48 45 Subfund for the Plan Year, (c) contributions used to pay interest on an Exempt Loan, (d) reallocated Forfeitures of Shares acquired with the proceeds of an Exempt Loan, (e) contributions and allocations made in connection with the satisfaction of the requirements of Section 6.4(b)(i) and (ii), (f) restorations under Section 7.2(b) and (g) dividends and other earnings (and any assets acquired therewith). 11.3 Order of Reduction. After reducing to the extent permitted by law the annual additions to a Participant's account in any other defined contribution plan maintained by a Participating Company or an Affiliate, if the amounts which would otherwise be allocated to a Participant's Account must be reduced by reason of the limitations of Section 11.2, such reduction shall be made in the following order of priority, but only to the extent necessary and permitted by the Regulations: (a) Forfeitures of Shares not acquired with the proceeds of an Exempt Loan arising under the Plan and allocable to such Account in respect of such Plan Year (without regard to Section 11.2) shall be allocated to the Accounts of other eligible Participants as of the end of the current Plan Year in the manner provided under Section 7.3; and then (b) Participating Company contributions allocable to such Account in respect of such Plan Year and Shares allocable in proportion thereto (without regard to Section 11.2,) shall be allocated to the Accounts of other eligible Participants at the end of the current Plan Year in the manner provided under Section 6.1(b), and, to the extent such allocation cannot be made under Section 11.2, then reallocated at the end of the succeeding Plan Years in such manner and as provided in Section 11.3(c). (c) Any amount to be allocated under Section 11.3(b) at the end of a succeeding Plan Year shall be allocated to a suspense account until such tine as any amount in the suspense account can be allocated to Participants' Accounts without having to be reallocated under Section 1I.3(b); provided, that, to the extent required by the Regulations, no contribution shall be made in such a succeeding Plan Year which would restrict such reallocation. 49 46 11.4 Additional Account Limitations. For Plan Years prior to January 1, 2000, in the event that, in any Plan Year and with respect to any Participant, the sum of the "Defined Contribution Fraction" and the "Defined Benefit Fraction" (both as defined for purposes of Section 415 of the Code) would otherwise exceed 1.0, the benefit payable under the defined benefit plan shall be reduced in accordance with the provisions of that plan, but only to the extent necessary to ensure that such limitation is not exceeded. If this reduction does not ensure that the limitation is not exceeded, then the annual addition to any defined contribution plan, other than the Plan, shall be reduced in accordance with the provisions of that plan but only to the extent necessary to ensure that such limitation is not exceeded. If this reduction does not ensure that the limitation is not exceeded, then the Annual Addition to the Plan shall be reduced in accordance with the provisions of the Plan, but only to the extent necessary to ensure that such limitation is not exceeded. For Plan Years beginning after December 31, 1999, the provisions of Section 11.4 shall no longer be applicable. 65 50 47 ARTICLE XII RIGHTS AND OPTIONS CONCERNING DISTRIBUTED SHARES 12.1 RIGHT of First Refusal. (a) All distributions of Shares that are not publicly traded to any Participant, Beneficiary or other distributee (each, a "Distributee") by the Trust shall be subject to a "right of first refusal" upon the terms and conditions hereinafter set forth. The "right of first refusal" shall provide that prior to any transfer (as determined by the Committee) of the Shares, the Distributee must first offer to sell such Shares to the Company and, if the Company refuses to exercise its right to purchase the Shares, then the Trust shall have a "right of first refusal" to purchase such Shares. Neither the Company nor the Trust shall be required to exercise the "right of first refusal." (b) The terms and conditions of the "right of first refusal" shall be determined as follows: (i) if the Distributee receives a bona fide offer for the purchase of all or any part of the Distributee Shares from a third party, the Distributee shall forthwith deliver (by registered mail, return receipt requested) a copy of any such offer to the Committee. The Company or the Trustee (as directed by the Committee), as the case may be, shall then have 14 days after receipt by the Committee of the written offer to exercise the right to purchase all or any portion of the Shares. Subject to Section 12.1(b)(ii), the purchase price to be paid by the Company or the Trust for the Shares shall be the purchase price stated in the bona fide offer received by the Distributee; and (ii) The selling price and other terms under the "right of first refusal", must not be less favorable to the Distributee than the greater of the value of the Shares determined pursuant to the Regulations or the purchase price and other terns offered by a buyer other than the Company or the Trust, making a good faith. offer to purchase the Shares. 51 48 12.2 Put 0ption. If, at the time of distribution (or at any time during a period during which the put option described below may be exercised), Shares distributed from the Trust (or Shares used under this Section to purchase such distributed Shares) are not treated as "readily tradable on an established market" within the meaning of Section 409(h) of the Code, such Shares shall be subject to a put option in the hands of a Qualified Holder (as defined in Section 12.2(a)) by which such Qualified Holder may sell to the Company all or any part of the Shares distributed to the Qualified Holder by the Trust. Should the Company initially decline to purchase all or any part of the Shares put to it by the Qualified Holder, the Trust may purchase those Shares that the Company declines to purchase. Should the Trust so decline, the Company shall purchase those Shares that the Trust declines to purchase. The put option shall be subject to the following conditions: (a) The term "Qualified Holder" shall mean the Distributee receiving the distribution of such Shares, any other party to whom the Shares are transferred by gift or by reason of death and any trustee of an individual retirement account (as defined under Section 408 of the Code to which all or any portion of the distributed Shares (or Shares paid for such distributed Shares under this Section) is transferred pursuant to a tax-free "rollover" transaction satisfying the requirements of Sections 402 and 408 of the Code. (b) During the 60-day period following any distribution of such shares, a Qualified Holder shall have the right to require the Company or the Trust, as applicable, to purchase all or a portion of the distributed Shares (or Shares paid for such distributed Shares under this Section) held by the Qualified Holder. Except as otherwise required by law, the purchase price to be paid for any such Shares shall be their fair market value determined as of the Valuation Date (which, for purposes of this Section, shall include the last day of each month) coinciding with or next preceding the payment in response to the exercise of a put option under this Section. The purchase shall occur as soon as administratively feasible after, but not before the end of the month of, such exercise. (c) If a Qualified Holder shall fall to exercise the Qualified Holder's put option right under Section 12.2(b), the option right shall temporarily lapse upon the 52 49 expiration of the 60-day period. As soon as practicable following the last day of the Plan Year in which the 60-day option period expires, the Company shall notify the non-electing Qualified Holder (if the Qualified Holder is then a shareholder of record) of the valuation of the Shares as of that date. During the 60-day period following receipt of such valuation notice, the Qualified Holder shall again have the right to require the Company or the Trust, as applicable, to purchase all or any portion of the distributed Shares (or Shares paid for such distributed Shares under this Section). Except as otherwise required by law, the purchase price to be paid therefor shall be based on the valuation of the Shares as of the Valuation Date coinciding with or next preceding the payment in response to the exercise of a put option under this Section. The purchase shall occur as soon as administratively feasible after, but not before the end of the month of, such exercise. (d) The foregoing put options under Section 12.2(b) and (c) shall be effective solely against the Company and shall not obligate the Plan or Trust in any manner. (e) Except as otherwise permitted by Section 409(h) or (l) of the Code, applicable Regulations or other applicable law, (i) the put-option provisions of this Article 12 shall apply to Shares, if acquired with the proceeds of an Exempt loan, when held under or distributed from the Plan whether or not the Plan at that tine is or contains an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Code, and (ii) no Shares acquired with the proceeds of an Exempt Loan may be subject to a put, call or other, option, or buy-sell or similar arrangement (other than this article 12) while held by or distributed from the Plan. Without limiting the generality of the foregoing, in no event may the Plan obligate itself to acquire securities from a particular security holder at an indefinite tine determined upon the happening of an event such as the death of the holder. 12.3 Exercise of Put Option. If a Qualified Holder exercises the put option under Section 12.2, the Qualified Holder shall have the right to have payment for the Shares repurchased made, in the case of a distribution within one taxable year of the balance to the credit of the Participant's Account (other than a $5,000 or less distribution under Section 8.6(d)(i)), in substantially equal annual payments over a period beginning not later than 30 53 50 days after the exercise of the put option and not exceeding five years (provided, that adequate security and reasonable interest are provided with respect to unpaid amounts) or, in the case of other distributions, not later than 30 days after such exercise. 54 51 ARTICLE XIII ADMINISTRATION OF THE PLAN 13.1 Powers and Duties of the Committee. (a) The Committee shall have general responsibility for the administration and interpretation of the Plan (including but not limited to complying with reporting and disclosure requirements, and establishing and maintaining Plan records). Such interpretations (including, without limitation interpretations relating to the determination of eligibility under the Plan and the disposition of claims for benefits under the Plank and other actions of the Committee shall be afforded the maximum deference allowed by law. The Committee shall engage such certified public accountants and other advisers and service providers, who may be accountants, advisors or service providers for the Company or an Affiliate, as it shall require or may deem advisable for purposes of the Plan. (b) To the extent that the Trust Fund is invested in assets other than Shares, the Committee shall have the power to appoint or remove one or more investment advisers and to delegate to such adviser authority and. discretion to manage (including the power to acquire and dispose of) the assets of the Plan, provided, that (i) each adviser with such authority and discretion shall be either a bank, an insurance company or a registered investment adviser under the Investment Advisers Act of 1940, and shall acknowledge in writing that it is fiduciary with respect to the Plan and (ii) the Committee shall periodically review the investment performance and methods of each adviser with such authority and discretion. (c) Notwithstanding any provision of the Plan to the contrary, the Committee shall have those additional powers, rights and obligations provided under the Trust Agreement. 13.2 Certain Powers and Duties. Except as otherwise provided in the Plan or Trust Agreement, the Trustee shall have exclusive responsibility for the management and control 55 52 of the assets of the Trust Fund and shall have discretionary responsibility for the investment and management of such assets; provided, however, that, subject to Section 5.3, the Trustee shall invest all assets in Shares except as is otherwise required under an exempt loan agreement, the terms of the Trust Agreement, or under applicable law. Other than with respect to such responsibilities, except as otherwise provided in the Trust Agreement or the Plan, the Trustee may act only as directed by the Committee, the Company or any other party, as applicable. 13.3 Agents: Report of Committee to Board. The Committee may arrange for the engagement of such legal counsel, who may be counsel for the Company or an Affiliate, and make use of such agents and clerical or other personnel as it shall require or may deem advisable for purposes of the Plan. The Committee may rely upon the written opinion of such counsel and the accountants engaged by the Committee, and may delegate to any such agent, or to any subcommittee or member of the Committee, its authority to perform any act hereunder, including, without limitation, those matters involving the exercise of discretion; provided, that such delegation shall be subject to revocation at any time at the discretion of the Committee. The Committee shall report to the Board of Directors, or to a committee of the Board of Directors designated for that purpose, as frequently as shall be specified by the Board of Directors or such committee, with regard to the matters for which it is responsible under the Plan. 13.4 Structure of Committee. The Committee shall consist of three or more members, each of whom shall be appointed by, shall remain in office at the will of, and nay be removed, with or without cause, by the Board of Directors. Any member of the Committee may resign at any time. No member of the Committee shall be entitled to act on or decide any matter relating solely to the member or any of the member's rights or benefits under the Plan. In the event that the Committee is unable to act in any matter by reason of the foregoing restriction, the Board of Director: shall act on such matter. The members of the Committee shall not receive any special compensation for serving in their capacities as members of the Committee but shall be reimbursed for any reasonable expenses incurred in 56 53 connection therewith; provided, that, if and to the extent permitted by law, reasonable compensation may be paid if and to the extent that the Company so directs. Except as otherwise required by the Act, no bond or other security need be required of the Committee or any member thereof in any jurisdiction. Any member of the Committee, any subcommittee or agent to whom the Committee delegates any authority, and any other person or group of persons, may serve in more than one fiduciary capacity (including service both as a trustee and administrator) with respect to the Plan. 13.5 Adoption of Procedures of Committee. The Committee shall establish its own procedures and the time and place for its meetings, and provide for the keeping of minutes of all meetings. A majority of the members of the Committee shall constitute a quorum for the transaction of business at a meeting of the Committee. Any action of the Committee may be taken upon the affirmative vote of a majority of the members of the Committee at a meeting or without a meeting, by mail, telegraph or telephone, provided, that all of the members of the Committee are informed by mail, teletransmission or telegraph of their right to vote on the proposal and of the outcome of the vote thereon. 13.6 Demands for Money. Except as otherwise provided in the Trust Agreement, all demands for money from the Plan shall be signed by a member of the Committee or such other person or persons as the Committee may from time to time designate in writing. Such person shall cause to be kept full and accurate accounts of receipts and disbursements of the Plan, shall cause to be deposited all funds of the Plan to the name and credit of the Plan, in such depositories as may be designated by the Committee, shall cause to be disbursed the monies and funds of the Plan when so authorized by the Committee, and shall generally perform such other duties as may be assigned to such person from time to time by the Committee. 13.7 Claims for Benefits. All claims for benefits under the Plan shall be submitted in writing to, and within a reasonable period of time decided by, a majority of the Committee. Written notice of the decision on each such claim shall be furnished within 90 days after receipt of the claim; provided, that, if special circumstances require an extension of time for 57 54 processing the claim, an additional 90 days from the end of the initial period shall be allowed for processing the claim, in which event the claimant shall be furnished with a written notice of the extension prior to the termination of the initial 90-day period indicating the special circumstances requiring an extension. If the claim is wholly or partially denied, such written notice shall set forth an explanation of the specific findings and conclusions on which such denial is based. A claimant may review all pertinent documents and may request a review by the Committee of such a decision denying the claim. Such a request shall be made in writing and filed with the Committee within 60 days after delivery to said claimant of written notice of said decision. Such written request for review shall contain all additional information which the claimant wishes the Committee to consider. The Committee may hold any hearing or conduct any independent investigation which it deems necessary to render its decision, and the decision on review shall be made as soon as possible after the Committee's receipt of the request for review. Written notice of the decision on review shall be furnished to the claimant within 60 days after receipt by the Committee of a request for review, unless special circumstances require an extension of time for processing, in which event an additional 60 days shall be allowed for review and the claimant shall be so notified in writing. Written notice of the decision on review shall include specific reasons for such decision. For all purposes under the Plan, such decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested parties as to participation and benefit eligibility, the Employee's amount of Compensation and as to any other matter of fact or interpretation relating to the Plan. 13.8 Hold Harmless. To the maximum extent permitted by law, no member of the Committee shall be personally liable by reason of any contract or other instrument executed by the member or on the member's behalf in the capacity as a member of the Committee nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless, directly from its own assets (including the proceeds of any insurance policy the premiums of which are paid from the Company's own assets), each member of the 58 55 Committee and each other officer, employee, or director of the Company or an Affiliate to whom any duty or power relating to the administration or interpretation of the Plan or to the management and control of the assets of the Plan may be delegated or allocated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. 13.9 Service of Process. The Committee, or such other person as may from time to time be designated by the Board of Directors, shall be the agent for service of process under the Plan. 59 56 ARTICLE XIV WITHDRAWAL OF PARTICIPATING COMPANY 14.1 Withdrawal of Participating Company. Any Participating Company (other than the Company) may withdraw from participating in the Plan by giving the Committee and the Trustee prior written notice in a resolution by its board of directors specifying a withdrawal date which shall be the last day of a month at least 30 days subsequent to the date such notice is received by the Committee or the Trustee, whichever receives such notice the latest. A Participating Company shall withdraw from participation in the Plan if and when it ceases to be either a division of the Company or an Affiliate. The Committee may require any Participating Company to withdraw from the Plan, as of any withdrawal date specified by the Committee, for the failure of the Participating Company to make proper contributions or to comply with any other provision of the Plan and shall require a Participating Company's withdrawal upon its complete and final discontinuance of contributions. 14.2 Distribution after Withdrawal. Upon withdrawal from the Plan by any Participating Company, such Participating Company shall not make any further contributions under the Plan and no amount shall thereafter be payable under the Plan to or in respect of any Participants then employed by such Participating Company except as provided in this Article XIV. To the maximum extent permitted by the Act, the withdrawal from the Plan by any Participating Company shall not in any way affect any other Participating Company's participation in the Plan. 14.3 Transfer to Successor Plan. No transfer of the Plan's assets and liabilities to a successor employee benefit plan (whether by merger or consolidation with such successor plan or otherwise) shall be made unless each Participant would, if either the Plan or such successor plan then terminated, receive a benefit immediately after such transfer which (after taking account of any distributions or payments to them as part of the same transaction) is equal to or greater than the benefit the Participant would have been entitled to receive immediately before such transfer if the Plan had then been terminated. 60 57 AMENDMENT OR TERMINATION OF THE PLAN AND TRUST 15.1 Right to Amend, Suspend or Terminate Plan. (a) Subject to the provisions of Section 15.1(b) and any applicable contribution or loan agreement, the Board of Directors reserves the right at any time to amend, suspend or terminate the Plan, any contributions thereunder, the Trust, or any contract issued by an insurance carrier foreign a part of the Plan, in whole or in part, and for any reason and without the consent of any Participating Company, Participant, Beneficiary, Surviving Spouse or other eligible survivor. Each Participating Company by its participation in the Plan shall be deemed to have delegated this authority to the Board of Directors. The Plan shall automatically be terminated upon complete and final discontinuance of contributions thereunder. (b) No amendment or modification shall be made which would retroactively (i) reduce, in contravention of Section 411(d)(6) of the Code, any accrued benefits or (ii) make it possible for any part of the funds of the Plan (other than such part as is rewired to pay taxes, if any, and administrative expenses as provided in Section 16.14) to be used for or diverted to any purposes other than for the exclusive benefit of Participants and their beneficiaries and Surviving Spouses and other eligible survivors under the Plan prior to the satisfaction of all liabilities with respect thereto. 15.2 Retroactivity. Subject to the provisions of Section 15.1, any amendment, modification, suspension or termination of any provisions of the Plan may be made retroactively if necessary or appropriate. 15.3 Notice. Notice of any amendment, modification, suspension or termination of the Plan shall be given by the Board of Directors or the Committee, whichever adopts the amendment, to the other and to the Trustee and all Participating Companies. 61 58 15.4 No Further Contributions. (a) Upon termination of the Plan or a complete discontinuance of contributions, no Participating Company shall make any further contributions under the Plan and no amount shall thereafter be payable under the Plan to or in respect of any Participant except as provided in this Article. To the maximum extent permitted by the Act, transfers, distributions or other dispositions of the assets of the Plan as provided in this Article shall constitute a complete discharge of all liabilities under the Plan. The Committee shall remain in existence and all of the provisions of the Plan which in the opinion of the Committee are necessary for the execution of the Plan and the administration, distribution, transfer or other disposition of the assets of the Plan in accordance with this Section shall remain in force. (b) After (i) appropriate adjustment of the Accounts of Participants who are employed as of the date of such termination in the manner described in Section 7.3 for any Forfeitures arising under the Plan prior to such date and (ii) adjustment for profits and losses of the Trust Fund to such termination date in the manner described in section 5.5, each Account of a Participant which Account contains a Vested Interest (determined without regard to this Section, but with regard to all forfeiture provisions of the Plan) as of the date of such termination shall be fully vested as of such date; provided, that the Board of Directors may by appropriate resolution provide that amounts credited to the Accounts of other Participants shall be nonforfeitable as of such date. All nonvested amounts after application of the foregoing sentence shall be treated as Forfeitures in the Plan Year of and prior to such termination. (c) Except as may be prohibited by Section 411(a)(11) of the Code and the Regulations thereunder, upon or after the termination of the Plan the Board of Directors may terminate the Trust and upon such termination the Trustee shall pay in a single sum distribution to each Participant the full amount credited to the Participant's Account and the unallocated Shares in the Suspense Subfund attributable to an Exempt Loan from the Company to the Trust shall, to the extent it would not result in a violation of the Code, Act and Regulations, be returned to the Company in full satisfaction of any outstanding Exempt 62 59 Loan from the Company to the Trust; provided, however, that the fair market value of such unallocated Shares that may be returned to the Company may not exceed the remaining unpaid balance of such Exempt Loan and outstanding accrued interest, as such fair market value is determined by an independent investment bank or appraiser. Without limiting the foregoing, any such distributions may be made in cash, Shares, other property, or any combination, as the Committee in its sole discretion may direct in accordance with the Code and Regulations. 15.5 Partial Termination. In the event that a "partial termination" (within the meaning of Section 411(d)(3) of the Code) of the Plan has occurred then (a) the interest of each affected Participant in the Participant's Account as to whom such termination occurred shall thereupon be nonforfeitable, but shall otherwise be payable as though such termination had not occurred and (b) the provisions of Sections 15.2, 15.3, 15.4 and Section 14.2 which in the opinion of the Committee are necessary for the execution of the Plan and the allocation and distribution of the assets of the Plan shall apply; provided, however, that the Board of Directors, in its discretion, subject to any necessary governmental approval, may direct that the amounts held in the Accounts of such Participants as to whom such partial termination occurred be segregated by the Trustee as a separate plan and applied for the benefit of such Participants in the manner described in Section 15.4. In the case of a sale of all or a significant portion of the assets used by a Participating Company in a trade or business or of the sale of all or a significant portion of a Participating Company's interest in a subsidiary, the Company, in its sole discretion, may elect to treat any similarly situated employees of such trade or business or such subsidiary as fully vested hereunder. 63 60 ARTICLE XVI GENERAL LIMITATIONS AND PROVISIONS 16.1 All Risk on Participants and Beneficiaries. Except as may otherwise be required by the Act, (a) each Participant and Beneficiary shall assume all risk in connection with any decrease in the value of the Accounts, (b) the Participating Companies and the Committee shall not be liable or responsible for any decrease in the value of the Accounts and (c) without limiting the generality of the foregoing, neither the Board of Directors, any Participating Company, the Committee, any member of the Committee nor the Trustee shall be responsible for the adequacy of the Trust Fund to meet and discharge Plan liabilities. 16.2 Trust Fund Is Sole Source of Benefits. Without limiting the generality of Section 16.1, the Trust Fund shall be the sole source of benefits under the Plan and, except as otherwise required by the Act, the Participating Companies anal the Committee assume no liability or responsibility for payment of such benefits, and each Participant, Beneficiary or other person who shall claim the right to any payment under the Plan shall be entitled to look only to the Trust Fund for such payment and shall not have any right, claim or demand therefor against the Trustee, any Participating Company, the Committee or any member thereof, or any employee or director of any Participating Company. 16.3 No Right to Continued Employment. Nothing contained in the Plan shall give any employee the right to be retained in the employment of the Company or any of its subsidiaries or affiliated or associated corporations or affect the right of any such employer to dismiss any employee. The adoption and maintenance of the Plan shall not constitute a contract between any Participating Company and any employee or consideration for, or an inducement to or condition of, the employment of any employee. 16.4 Payment on Behalf of Payee. If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for the person's affairs because of illness or accident, or is a minor, or has died, then any payment due the person or the person's estate (unless a prior claim therefor has been made by a duly appointed legal 64 61 representative) may, if the Committee so elects, be paid to the person's spouse, a child, a relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Plan and the Trust therefor. 16.5 Anti-Alienation. Except, pursuant to a Qualified Domestic Relations Order or insofar as applicable law may otherwise require, no economic interest, expectancy, benefit, payment, claim or right of any Participant or Beneficiary under the Plan and the Trust shall be subject in any manner to any claims of any creditor of any Participant or Beneficiary, nor to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind. If any person shall attempt to take any action contrary to this Section, such action shall be null and void and of no effect, and the Trustee shall disregard such action and shall not in any manner be bound thereby and shall suffer no liability on account of its disregard thereof. For purposes of the Plan, a "Qualified Domestic Relations Order" means any judgment, decree or order (including approval of a property settlement agreement) which has been determined by the Committee in accordance with procedures established under the Plan to constitute a qualified domestic relations order within the meaning of Section 414(p)(1) of the Code. 16.6 Missing Payee. If the Committee cannot ascertain the whereabouts of any person to whom a payment is due under the Plan, and if, after five years from the date such payment is due, a notice of such payment due is mailed to the last known address of such person, as shown on the records of the Committee or the Company, and within three months after such mailing such person has not made written claim therefor, the Committee, if it so elects, after receiving advice from counsel to the Plan, nay direct that such payment and all remaining payments otherwise due to such person be canceled on the records of the Plan and the amount thereof applied as though it were a Forfeiture, and upon such cancellation, the Plan and Trust shall have no further liability therefor, except that, in the event such person later 65 62 notifies the Committee, of the person's whereabouts and requests the payment or payments, due to such person under the Plan, the amounts so applied shall be paid to such person as provided herein. 16.7 Subject to Funding Documents. Any and all rights or benefits accruing to any persons under the Plan shall be subject to the terms of the Trust Agreement which the Company shall enter into with the Trustee providing for the administration of the Trust Fund. If the payment of any benefit under the Plan is provided for by a contract with an insurance company, the payment of such benefit shall also be subject to all the provisions of such contract. 16.8 Communications. (a) All elections, designations, requests, notices, instructions and other communications from a Participating Company, a Participant, Beneficiary or other person to the Committee required or Permitted under the Plan shall be in such form as is prescribed from time to time by the Committee, shall be mailed by first class mail or delivered to such location as shall be specified by the Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof by the Committee at such location. (b) All notices, statements, reports and other communications from a Participating Company or the Committee to any employee, Participant, Surviving Spouse, Beneficiary or other person required or permitted under the Plan shall be deemed to have been duly given when delivered to, or when mailed by first class mail, postage prepaid and addressed to, such employee, Participant, Surviving Spouse, Beneficiary or other person at the person's address last appearing on the records of the Committee, or when posted by the Participating Company or the Committee as permitted by law. (c) Each Participant shall file with the Committee such pertinent information concerning the Participant, the Participant's spouse and the Participant's Beneficiary, or such other person as the Committee may specify, and, except as may otherwise be required by law, no Participant, Beneficiary, or other person shall have any 66 63 rights or be entitled to any benefits under the Plan unless such information is filed by or with respect to the applicable individual. 16.9 Transfers and Rollovers. Neither the Plan nor the Trust shall accept funds transferred, directly or indirectly (including a rollover from a conduit individual retirement account, an individual retirement annuity or a retirement bond) to the Plan or Trust from an employee benefit plan, whether or not such plan is qualified under Section 401(a) of the Code. 16.10 Gender. Whenever used in the Plan the masculine gender includes the feminine. 16.11 Captions. The captions preceding the sections of the Plan have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions of the Plan. 16.12 Applicable Law. The Plan and all rights thereunder shall be governed by and construed in accordance with the Act and, to the extent state law is found to be applicable, the laws of the State of New York. 16.13 Return of Contributions. The provisions of this Section shall apply notwithstanding any other provision of the Plan. (a) if any contribution is made due to a mistake of fact, such contribution shall upon the direction of the Company, which shall be given in conformity with the provisions of the Act, be returned to the Company or the parties who made it, as directed by the Company, without liability to any person. (b) The Plan is entered into on the conditions that (i) the Plan and the Trust Agreement shall be approved by the IRS as a qualified and exempt plan and trust under the provisions of the Code and Regulations so that contributions to the Trust may be deducted for Federal income tax purposes, within the limits of the Code and Regulations, and be nontaxable to Participants when contributed and (ii) the Plan shall be approved by the IRS as an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Code. If such initial approval should be denied for any reason (including failure to comply with any conditions for such approval imposed by the IRS), contributions made after the 67 64 execution of the Trust Agreement and prior to such denial and all assets in the Trust Fund shall be returned to the Company, without any liability to any person, within one year after the date of denial of such approval, and any Exempt Loans, to the extent provided under the terms thereof, and related Suspense Subfunds shall be canceled. (c) All contributions are hereby expressly conditioned upon their deductibility under Section 404 of the Code and Regulations, as amended from time to time, and if the deduction for any contribution is disallowed in whole or in part, then such contribution (to the extent the deduction is disallowed) shall upon direction of the Committee, which shall be given in conformity with the provisions of the Act, be returned, without liability to any person, within one year after such disallowance. 16.14 Fees and Expenses. The expenses of administering the Plan including (a) the fees and expenses of any employee and of the Trustee for the performance of their duties under the Trust, (b) the expenses incurred by the members of the Committee in the performance of their duties under the Plan (including reasonable compensation for any legal counsel, certified public accountants and any agents and cost of services rendered in respect of the Plan), and (c) all other proper charges and disbursements of the Trustee or the members of the Committee (including settlements of claims or legal actions brought against any party, including the Trustee, approved by the Company and the Committee), are to be paid by the Trust unless, in the Company's sole discretion (but subject to any agreements entered between the Company and the Trustee), paid by the Participating Companies or in full by the Company. In estimating costs under the Plan, administrative costs may be anticipated. The members of the Committee shall not receive any special compensation for serving in their capacities as members of the Committee. 16.15 Exclusive Benefit of Participants and Beneficiaries. In no event shall any part of the funds of the Plan be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Beneficiaries under the Plan except as permitted under Section 403(c) of the Act. Upon the transfer by a Participating Company of any money to the Trustee, all interest of the Participating Company therein shall cease and terminate. 68 65 16.16 Participation by Participating Companies. The Board of Directors shall not give consent under Section 2.22 with respect to an entity adopting the Plan unless, with respect to such entity, Shares held under the Plan would then constitute "qualifying employer securities" within the meaning of Section 407(d)(5) of the Act and Section 4975(e)(8) of the Code; provided, that the Board of Directors may, subject to the foregoing requirement relating to Shares held under the Plan, waive the requirement that the board of directors or equivalent governing body referred to in Section 2.22 effect such adoption. By its adoption of or participation in the Plan, a Participating Company shall be deemed to appoint the Company its exclusive agent to exercise on its behalf all of the power and authority conferred by the Plan or by the Trust Agreement upon the Company and accept the delegation to the Committee and the Trustee of all the power and authority conferred upon them by the Plan and the Trust Agreement. The authority of the Company to act as such agent shall continue until the Plan is terminated as to the Participating Company and the relevant Trust Fund assets have been distributed by the Trustee as provided in Article XIV or Article XV of the Plan. 69 66 ARTICLE XVII TOP HEAVY PROVISIONS 17.1 Top Heavy Plan. The Plan will be considered a Top Heavy Plan for any Plan Year if it is determined to be a Top Heavy Plan as of the last day of the preceding Plan Year or, with respect to the first Plan Year, the last day of such Plan Year. Notwithstanding any other provisions in the Plan, the provisions of this Article shall apply and supersede all other provisions in the Plan during any Plan Year with respect to which the Plan is determined to be a Top Heavy Plan. 17.2 Definitions for Article XVII. For purposes of this Article and as otherwise used in the Plan, the following terms shall have the meanings set forth below: (a) "Aggregation Group" shall mean the group composed of each qualified retirement plan of the Company or an Affiliate in which a Key Employee is a participant and each other qualified retirement plan of the Company or an Affiliate which enables a plan of the Company or an Affiliate in which a Key Employee is a participant to satisfy Section 401(a)(4) or 410 of the Code. In addition, the Company may choose to treat any other qualified retirement plan as a member of the Aggregation Group if such Aggregation Group will continue to satisfy Sections 401(a)(4) and 410 of the Code with such plan being taken into account. For purposes of determining whether the Plan is part of an Aggregation Group, all qualified retirement plans (whether or not terminated) maintained by the Company or an Affiliate in which a Key Employee participates in the Plan Year containing the day determined under the first sentence of Section 17.1 or any of the preceding four Plan Years shall be taken into account to the extent required by Section 416(g) of the Code and the Regulations thereunder. (b) "Key Employee" shall mean a key employee as defined in Section 416(i) of the Code and Section 1.416-1 (T-12--T-21) of the Treasury Regulations. For purposes of determining which employee is a Key Employee, compensation shall mean Compensation for purposes of Article XI. 70 67 (c) "Top Heavy Plan" shall mean a "Top Heavy Plan" as defined in Section 416(g) of the Code and Regulations, and, accordingly, a plan shall be considered a Top Heavy Plan for any Plan Year in which the Top Heavy Ratio exceeds 60%. For purposes of determining whether a plan is a Top Heavy Plan, the value of Account balances shall be determined as of the most recent Valuation Date within the 12-month period ending on the day determined under the first sentence of Section 17.1. (d) "Top Heavy Ratio" shall mean the ratio of (i) the account balances (in the case of a defined contribution plan) and present value of accrued benefits (in the case of a defined benefit plan) for Key Employees under all plans in the Aggregation Group to (ii) the account balances and present value of accrued benefits for all employees in all plans in the Aggregation Group, without regard to the account balances and accrued benefits, as applicable, for Key Employees who performed no services for the Company or an Affiliate during the five-year period ending on the day determined under the first sentence of Section 17.1, calculated as of the day determined under the first sentence of Section 17.1 and otherwise in accordance with Section 416 of the Code and the Regulations thereunder. 17.3 Minimum Contribution and Vesting. (a) Subject to Section 17.4, for each Plan Year that the Plan is a Top Heavy Plan, the Company contribution (including Forfeitures) allocable to the Account of each Participant who has performed an Hour of Service at the end of the Plan Year and who is not a Key Employee, shall not be less than the lesser of (i) three percent of such Participant's Compensation, for purposes of Article XI, or (ii) the percentage at which contribution's and Forfeitures for such Plan Year are made and allocated on behalf of the Key Employee for whom such percentage is the highest. For the purpose of determining the appropriate percentage under Section 17.3(a)(ii), all defined contribution plans required to be included in an Aggregation Group shall be treated as one plan. Section 17.3(a)(ii) shall not be applicable if the Plan is required to be included in an Aggregation Group which enables a defined benefit plan also required to be included in said Aggregation Group to satisfy Section 401(a)(4) or 410 of the Code. 71 68 (b) For each Plan Year that the Plan is a Top Heavy Plan, each Participant with three or more Years of Service shall be 100 percent vested in the Participant's Account Limitations on Contributions. 17.4 Limitations on Contributions. (a) For each Plan Year that the Plan is a Top Heavy Plan, 1.0 shall be substituted for 1.25 as the multiplicand of the dollar limitation in determining the denominator of the defined benefit plan fraction and of the defined contribution plan fraction for purposes of Section 415(e) of the Code. (b) If, after substituting 90 percent for 60 percent wherever the latter appears in Section 416(g) of the Code, the Plan is not determined to be a Top Heavy Plan, the provisions of Subsection (a) shall not be applicable if the minimum Participating Company contribution (including Forfeitures) allocable to the Account of any Participant who is not a Key Employee as specified in Section 17.3 is determined by substituting "4" for "3." 17.5 Other Plans. The Committee shall, to the extent permitted by the Code and in accordance with the Regulations, apply the provisions of this Article by taking into account the benefits payable and the contributions made under any other plans maintained by the Company or any of its subsidiaries or affiliated or associated entities which are qualified under Section 401(a) of the Code to prevent inappropriate omissions or required duplication of minimum benefits or contributions. 72 69 IN WITNESS WHEREOF, the Company has caused The Plan to be executed this _______ day of _________, 1999, to be effective as specified in the Plan. MBIA By: --------------------------------- Title: ------------------------------ EX-10.30 10 y46810ex10-30.txt ESOP LOAN AGREEMENT BY DATED JUNE 30, 1999 1 Exhibit 10.30 ESOP LOAN AGREEMENT THIS ESOP LOAN AGREEMENT (this "Agreement") is dated as of June 30, 1999, by and between MBIA Inc., a Connecticut corporation (the "Company"), and the CapMAC Employee Stock Ownership Plan Trust (the "Trust"), established pursuant to the CapMAC Employee Stock Ownership Plan (the "ESOP") by a trust agreement dated as of June 25, 1992 (the "Trust Agreement") by and between CapMAC Holdings Inc. (to which the Company is a successor), as settlor, and HSBC Bank USA, as trustee ("the Trustee"). W I T N E S S E T H: WHEREAS, the Trustee is the trustee of the Trust, established pursuant to the ESOP; WHEREAS, the Trustee was a party to an ESOP loan agreement by and between CapMAC Holdings Inc. ("CapMAC"), the Trust and the ESOP; WHEREAS, as of February 17, 1998, CapMAC merged into the Company, with shares of the Company being exchanged for shares of CapMAC; WHEREAS, as of July 1, 1999, the ESOP will be merged into the MBIA Inc. Employees Profit Sharing Plan and 401(k) Salary Deferral Plan (the "MBIA Plan"), converting the latter into an employee stock ownership plan, as defined by Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), with its employer matching contributions; 2 WHEREAS, the ESOP and the Trust Agreement contemplate a refinancing of the outstanding balance of the original CapMAC loan agreement, par value $0.01 per share, of the Company ("Common Stock"); WHEREAS, as consideration for such refinancing, the Company will lend Eight Hundred, Sixty-Seven Thousand, Four Hundred Fifty-Five Dollars and Seventy-Five Cents ($867,455.75) in addition to the amount of the refinancing, and will sell 13,397 additional shares to the ESOP at the closing price of the stock on 6/29/99 (the "Additional Shares"). WHEREAS, under the terms of the ESOP and the Trust Agreement, the Trustee has full power and authority to act for and on behalf of the Trust and may, in its sole discretion, cause the Trust to refinance the purchase of Common Stock on terms in the best interests of the ESOP's participants and beneficiaries; WHEREAS, the Company has agreed to lend the sum of Five Million, Three Hundred Sixty-Four Thousand, Nine Hundred Five Dollars and Seventy-Five Cents ($5,364,905.75) (the "ESOP Loan") to the Trust for the purpose of refinancing the original CapMAC ESOP loan and the purchase of the Additional Shares of the Common Stock (the "Shares"), and the Trustee, acting for and on behalf of the Trust, has determined that such actions are in the best interests of the participants of the ESOP; 2 3 WHEREAS, the ESOP Loan is intended to be an "exempt loan" as described in Section 4975(d)(3) of the Code and as defined in Section 54.4975-7(b)(l)(iii) of the Treasury Regulations (the "Regulations"); NOW THEREFORE, in consideration of the premises and mutual covenants made herein, it is agreed as follows: 1. Agreement to Lend and Borrow Funds. On June 30, 1999 (the "Closing Date"), the Company will refinance the existing CapMAC ESOP loan to the Trust and lend sufficient additional funds to the Trust to purchase the Additional Shares in the aggregate principal amount of Five Million, Three Hundred Sixty-Four Thousand, Nine Hundred Five Dollars and Seventy-Five Cents ($5,364,905.75) 2. The Note. The ESOP Loan shall be evidenced by a promissory note executed and delivered by the Trust to the Company on the Closing Date in the form attached hereto as Exhibit A (the "Note"). The Trust shall, pursuant to the attached Exhibit B, make scheduled principal payments. The Trust shall also pay interest on the aggregate unpaid principal amount of the ESOP Loan on the first day of each quarter, beginning on the first day of the second full quarter following the Closing Date. The Trust may at its option at any time upon one (1) day's written notice, prepay without penalty the ESOP Loan in any amount and also may prepay without penalty the ESOP Loan to the extent that shares which are not allocated to the accounts of participants in the ESOP are sold pursuant to the ESOP; provided, however, that no repayment or prepayment of the ESOP Loan shall be required or permitted if it would cause the Company to incur an 3 4 excise tax under Section 4972 of the Code or it would adversely affect (a) the qualification of the ESOP or the Trust under the Code or the Employee Retirement Income Security Act of 1974, as amended from time to time ("ERISA"), or (b) the status of the ESOP Loan as an "exempt loan" as such term is described in Section 4975(d)(3) of the Code. Any such prepayments shall be applied to remaining installments of principal of the ESOP Loan in the normal order of their stated maturity. 3. Interest On the ESOP Loan. The Trust shall pay interest on the aggregate unpaid principal amount of the ESOP Loan outstanding from time to time during each calendar quarter until payment in full of such amount at an interest rate per annum equal to the rate that the most creditworthy international banks dealing in the London interbank eurodollar market charge each other for large eurodollar loans with a term of three months as quoted on the money rate screen by Bloomberg L.P. at the close of business on the second business day preceding the commencement of such calendar quarter plus 1.75%; provided, however, that in no event shall the interest rate exceed 7.52% per annum for any calendar quarter. 4. Source of Funds. The Note and any interest thereon (a) shall be payable from contributions (other than contributions of employer securities) made to the Trust in accordance with the ESOP to enable the Trust to pay its obligations under the Note, from earnings attributable to such contributions and from dividends on the Shares purchased with the proceeds of the ESOP Loan, and (b) may be payable from the proceeds of any sale of the Shares not then allocated to participants' accounts that are sold as permitted by 4 5 this Agreement to the extent and in the manner that such payments are permitted by law, provided, however, that such sale would not constitute a prohibited transaction under Section 4975 of the Code or Section 406 of ERISA. No contributions, earnings, dividends and proceeds may be applied in payment of the Note or any interest thereon if such application would cause the Company to incur an excise tax under Section 4972 of the Code or would adversely affect (a) the qualification of the ESOP or the Trust under the Code or ERISA or (b) the status of the ESOP Loan as an "exempt loan" as such term is described in section 4975(d)(3) of the Code. 5. Purpose of the ESOP Loan. The proceeds of the ESOP Loan shall be used by the Trust only to refinance the existing ESOP Loan and to purchase the Additional Shares and should the Trustee determine that the Trust is unable to purchase the Additional Shares or is prohibited from purchasing the Additional Shares or should any purchase of the Additional Shares be rescinded, then the trust shall return the proceeds of the ESOP Loan to the Company pursuant to Section 12 hereof, but only to the extent of the total purchase price of the Additional Shares. 6. Covenant of the Company. The Company will cause contributions to be made to the Trust at such times and in such amounts sufficient to enable the Trust to meet all obligations under the ESOP Loan provided, however, that the Company shall have no obligation to cause any contributions to be made that could reasonably be expected (i) to have an adverse effect on the qualification of the ESOP or the tax-exempt status of the 5 6 Trust under the Code or ERISA, or (ii) not to be deductible under Section 404 of the Code. 7. Representations of the Trustee, The Trustee represents and warrants to the Company that: (a) This Agreement and the Note have been duly executed and delivered by the Trustee; (b) This Agreement and the Note are in all respects valid, legally binding upon the Trust and enforceable against the Trust in accordance with their respective terms, except to the extent that the enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally, ERISA or general principles of equity. The execution, delivery and performance of this Agreement, the Note, and all other documents or instruments executed or delivered by the Trustee for and on behalf of the Trust in connection with the ESOP Loan are within the Trustee's and the Trust's powers and have been duly authorized by all necessary action; (c) The Trustee has determined that the ESOP's investment in the Additional Shares is prudent, in the best interests of the participants in the Plan, and in accordance with its fiduciary obligations under ERISA and the Code; (d) The Trustee is a commercial bank validly existing and in good standing under the laws of the State of New York; and 6 7 (e) The Trustee has all requisite corporate power and authority to execute, deliver and perform this Agreement. 8. Contingencies to Performance by the Company. This Agreement shall become effective only upon satisfaction of the following conditions: (a) The Company shall have received originals (which may be executed in several counterparts), duly executed by the Trustee, of this Agreement and the Note; (b) Prior to the Closing Date, there shall have been no legal action or administrative proceeding initiated or threatened which affects this Agreement, the Note or consummation of any of the transactions contemplated hereby or thereby; (c) All legal matters incident to this Agreement, the Note and the other documents and transactions contemplated hereby and thereby, shall be reasonably satisfactory in form and substance to the Company and its counsel; 9. Collateral. The Shares shall be and are hereby pledged by the Trust as security for the Note (the "Collateral"). Each time there is a payment on the ESOP Loan by the Trust, the Collateral shall be reduced by the number of Shares that are to be allocated to the ESOP participants as a result of that contribution, in accordance with the provisions of the ESOP. 10. Default/Remedies. (a) The failure of the Trust to pay when due any payment of principal or interest on the Note shall constitute an event of default ("Event of Default"). 7 8 (b) Notwithstanding any provision in the Trust Agreement, the Note, or in any document referred to therein or entered into in connection therewith, the obligations of the Trust under this Agreement are without recourse to the Trust except as provided in this Agreement. If an Event of Default shall occur and be continuing, the Company shall have no rights to assets of the Trust other than contributions (other than contributions of employer securities) that are made by the Company to enable the Trust to meet its obligations hereunder and earnings attributable to the investment of such contributions and the Collateral; provided, however, that (i) the value of Trust assets transferred in satisfaction of the ESOP Loan shall not exceed the amount in default (without regard to any acceleration of the payment schedule that occurs as a result of the default, and (ii) Trust assets shall he transferred to the Company only to the extent of the failure of the Trust to meet the payment schedule of the ESOP Loan. 11. Amendments of this Agreement. Each of the parties hereto agrees that it will not, without the prior written consent of the other party hereto, (i) cancel or terminate this Agreement or consent to or accept any cancellation or termination hereof, or (ii) amend or otherwise modify this Agreement. 12. Construction and Purpose. All provisions hereof shall be construed so as to maintain (i) the ESOP as a qualified leveraged employee stock ownership plan under Section 401(a) and Section 4975(e)(7) of the Code, (ii) the Trust as exempt from taxation under Section 501(a) of the Code and (iii) this ESOP Loan as an exempt loan under 8 9 Section 54.4975-7(b)(1)(iii) of the Regulations. The parties agree that the purpose of the ESOP Loan is to enable the Trust to refinance the existing ESOP Loan and to purchase the Additional Shares. The parties further agree that, to the extent permitted by Section 54.4975-7(b) of the Regulations, should the Trust be prohibited from purchasing the Additional Shares or should the purchase of the Additional Shares by the Trust pursuant thereto be rescinded pursuant to any government decree or court order, writ or judgment, then this Agreement will be considered to be rescinded and the Trust shall promptly pay to the Company, or its assigns, the proceeds of the ESOP Loan to the extent that such proceeds are returned to the Trust pursuant to the rescission of the purchase of the Additional Shares. In no event shall payments made with respect to the ESOP Loan exceed an amount equal to the sum of contributions, dividends, proceeds and earnings received during or prior to the due date of such payments, less such payments in prior years. 13. Notices. It shall be a sufficient giving of any notice or other communication hereunder if the party giving the same shall either deliver said notice personally or shall mail a copy thereof by express mail or registered or certified first class mail, postage prepaid, addressed as follows: 9 10 (a) To the Trustee: HSBC Bank USA 140 Broadway New York, New York 10005 Telephone: (212) 658-7713 Facsimile: (212) 658-7780 Attention: Stephen J. Hartman, Jr. (b) To the Company: MBIA Inc. 113 King Street Armonk, New York 10504 Telephone: 914-765-3872 Facsimile: 914-765-3299 Attention: Alan Pearlman The date of giving any such notice, or other communication shall be the date on which such envelope was either personally delivered or deposited. The post office receipt showing the date of such deposit shall be prima facie evidence of these facts. Either party may change the address to which notices are sent to it in the manner herein provided for giving notice to the other party. 14. Miscellaneous. (a) Amendments and Waivers. No amendment or waiver of any provisions of this Agreement, nor consent to any departure by the Trust therefrom, shall in any event be effective unless the same shall be in writing and signed by the Company and the Trust, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of the 10 11 Company to exercise any rights hereunder shall operate as a waiver thereof, nor shall any single waiver of any right hereunder preclude any other future exercise thereof. (b) Governing Law. The interpretation and construction of this Agreement, and all matters relating hereto, shall be governed by the laws of the State of New York without regard to conflicts of laws rules or principles. (c) Assignment. This Agreement shall be binding upon and, shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. (d) Counterparts. This Agreement may he executed in two or more counterparts, all of which taken together shall constitute one instrument. (e) Integration. This Agreement, including the other documents referred to herein which form a part hereof, contains the entire understanding of the parties hereto with respect to the subject matter contained herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. MBIA Inc. By: /s/ illegible ------------------------------------ Title: E.V.P. CAO --------------------------------- 11 12 MBIA INC. EMPLOYEES PROFIT SHARING AND 401(k) SALARY DEFERRAL TRUST By: HSBC Bank USA, not in its individual or corporate capacity but solely as Trustee By: /s/ Stephen J. Hartman, Jr. ------------------------------------ Title: Senior Vice President --------------------------------- 12 13 NON-RECOURSE PROMISSORY NOTE $5,364,905.75 June 30, 1999 FOR VALUE RECEIVED, the undersigned CapMAC Employee Stock Ownership Plan (the "Borrower") PROMISES TO PAY to the order of MBIA Inc. (the "Lender") the principal sum of Five Million, Three Hundred Sixty-Four Thousand, Nine Hundred Five Dollars and Seventy-Five Cents ($5,364,905.75), in accordance with and pursuant to the terns of the loan agreement, dated June 30, 1999, by and between the Lender, the Borrower, pursuant to the terms of the CapMAC Employee Stock Ownership Plan (the "ESOP") and the CapMAC Employee Stock Ownership Trust Agreement (the "Trust Agreement"), and HSBC Bank USA (the "Trustee") (hereinafter the "Loan Agreement"). The Borrower promises to pay interest on the unpaid principal amount hereof from the date hereof until paid in full at such interest rates and at such times as are specified in the Loan Agreement. The unpaid principal amount of this obligation at any time shall be the total amounts advanced hereunder less any amount of principal payments made hereon by the Borrower. Both principal and interest are payable in lawful money of the United States of America to the Lender at 113 King Street, Armonk, New York 10504 (or other location specified by the Lender) in immediately available funds. 14 This document is the Note referred to in, and is subject to the terms of, the Loan Agreement. This Note is subject to prepayment as provided in the Loan Agreement. Presentment and demand for payment, notice of dishonor, protest and notice of protest are hereby waived. The obligations of the Borrower hereunder are without recourse to the borrower, except as otherwise provided for in the Loan Agreement. This Note (a) may not be amended orally, but only in writing; (b) shall be governed in all respects by the laws of the State of New York without regard to conflicts of laws rules or principles (except as the same may be preempted by federal law); and (c) shall inure to the benefit of and shall be binding upon the Borrower, the Lender and their respective successors and assigns. CapMAC EMPLOYEE STOCK OWNERSHIP PLAN By: HSBC Bank, USA not in its individual or corporate capacity but solely as Trustee By: /s/ Stephen J. Hartman, Jr. --------------------------------------- Title: Senior Vice President ------------------------------------ 2 15 MBIA agrees to make the following quarterly payments of principal on or before the corresponding dates:
Date Principal Payment ---- ----------------- 07/01/1999 $75,000 10/01/1999 $75,000 01/01/2000 $175,000 04/01/2000 $175,000 07/01/2000 $175,000 10/0l/2000 $175,000 01/01/2001 $175,000 04/01/2001 $175,000 07/01/2001 $175,000 10/01/2001 $175,000 01/01/2002 $175,000 04/01/2002 $175,000 07/01/2002 $175,000 10/01/2002 $175,000 01/01/2003 $175,000 04/01/2003 $175,000 07/01/2003 $175,000 10/01/2003 $175,000 01/01/2004 $175,000 04/01/2004 $175,000 07/01/2004 $175,000 10/01/2004 $175,000 01/01/2005 $175,000 04/01/2005 $175,000 07/01/2005 $175,000 10/01/2005 $175,000 01/01/2006 $175,000 04/01/2006 $175,000 07/01/2006 $175,000 10/01/2006 $489,905.75
EX-10.46 11 y46810ex10-46.txt KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT 1 EXHIBIT 10.46 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and John S. Pizzarelli (the "Executive"), dated as of this.14th day of March, 2000. WITNESSETH: WHEREAS, the Company has employed the Executive in an officer position and has determined that the Executive holds an important positron 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 Executive's 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 employ- 2 ed 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 1(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 majority of the Voting Power of (x) in the case of a merger or 2 3 consolidation, the surviving or resulting corporation, (y) in the case of a share exchange, the acquiring corporation or (2) 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 last 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 rate 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. (c) Voting Power refined. A specified percentage of "Voting Power" of a company shall mean such number of the Voting Securities as shall enable the holders 3 4 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 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 4 5 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 tune 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 male 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 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. 5 6 (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 tine 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 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 6 7 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.. (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"). 7 8 (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 trough 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"). 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), 8 9 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 (D) the Accrued Obligations; and 9 10 (E) a cash amount (the "Severance Amount") equal to three times the sum of (1) the Executive's annual Ease 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 l0 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, 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 1987 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on 10 11 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 full 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. (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 Fax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax that may hereafter be 11 12 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: (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 12 13 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 male 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 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 13 14 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 rights 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 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: 14 15 (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 an asserted violation of the provisions of this Section II 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. 15 16 (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 77 (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, 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) Note. 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: 16 17 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 77 (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 planner 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. (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. 17 18 (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. ------------------------------------- By: Kevin D. Silva Title: Vice President of MBIA Inc. EXECUTIVE: /s/ John A. Pizzarelli --------------------------------------- 18 EX-10.47 12 y46810ex10-47.txt KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT 1 EXHIBIT 10.47 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREE THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Ram Wertheim (the "Executive"), dated as of this 24th day of January, 2000. 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 Executive's 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 employ- 2 ed 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 1(a), if (1) 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 3 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) 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 Chance 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 4 (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 5 salary paid to the Executive by the Company and any of its affiliated companies immediately prior to the Effective Late. 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 Late (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 Late, 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 seasonable expenses incurred by the Executive in accordance with the policies and procedures of the Company as in effect 5 6 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 tine 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 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 7 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 8 (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) of 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 8 9 "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"). Any Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than to 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 (1i) 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 tune 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 9 10 book value, determined as of the end of the month in which the Date of Termination occurs; and (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. 10 11 (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 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 1987 Stock Option Plan shall automatically be and become fully exercisable on the late 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 Snaring 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 full 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. 11 12 (e) Certain Further Payments by the Company. (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 tame 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. 12 13 (iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calender 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 13 14 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 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 rights 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 14 15 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 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 15 16 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 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. 16 17 (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, 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 17 18 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. (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, ail as of the day and year first above written. MBIA Inc. /s/ Kevin D. Silva ----------------------------------- By: Kevin D. Silva Title: Vice President of MBIA Inc. EXECUTIVE: /s/ illegible signature ----------------------------------- 18 EX-10.48 13 y46810ex10-48.txt KEY EMPLOYEE PROTECTION AGREEMENT 1 Exhibit 10.48 KEY EMPLOYMENT PROTECTION AGREEMENT ----------------------------------- THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Robert T. Wheeler (the "Executive"), dated as of this 17th day of April, 2000. 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 Executive's 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 tile 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 1b), if the Executive is not employ- 2 ed 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 1(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 tern 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 2 3 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) 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 4 (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 late. (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 5 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 6 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 7 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 8 (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 8 9 "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"). 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 9 10 book value, determined as of the end of the month in which the Date of Termination occurs; and (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. 10 11 (iv) Post-Termination Exercise Period. Notwithstanding anything else contained in Section 14 of the Company's 1987 Stock Option Plan to the contrary, 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 1987 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 full 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 12 (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 13 (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. 13 14 (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 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 rights 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 14 15 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 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) Confident 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 15 16 addition to any other rights and remedies the Company may have at law or in equity. In no event shall 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 to 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, 16 17 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, 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 17 18 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. (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/ Kevin D. Silva ------------------------------------ By: Kevin D. Silva Title: Vice President of MBIA Inc. EXECUTIVE: /s/ Robert T. Wheeler ------------------------------------ 18 EX-10.49 14 y46810ex10-49.txt KEY EMPLOYEE AGREEMENT PROTECTION AGREEMENT 1 Exhibit 10.49 KEY EMPLOYEE EMPLOYMENT PROTECTION AGREEMENT -------------------------------------------- THIS AGREEMENT between MBIA Inc., a Connecticut corporation (the "Company"), and Mark S. Zucker (the "Executive"), dated as of this 14th day of March, 2000. 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 Executive's 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 employ- 2 ed 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 1(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 majority of the Voting Power of (x) in the case of a merger or 2 3 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. (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 3 4 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 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 4 5 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 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. 5 6 (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 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 6 7 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. (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"). 7 8 (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"). 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), 8 9 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: (1) 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 (D) the Accrued Obligations; and 9 10 (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, 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 1987 Stock Option Plan shall automatically be and become fully exercisable on the Date of Termination without further action on 10 11 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 full 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. (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 11 12 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: (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 12 13 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 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 13 14 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 rights 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 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: 14 15 (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 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. 15 16 (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 terns 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, 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; 16 17 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 terns, the Executive and the Company agree that such Section shall be reformed to male 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 terns 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. (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. 17 18 (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/ Kevin D. Silva ------------------------------------ By: Kevin D. Silva Title: Vice President of MBIA Inc. EXECUTIVE: /s/ Mark S. Zucker ------------------------------------ 18 EX-13 15 y46810ex13.txt ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries
Dollars in millions except per share amounts 2000 1999 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 687 $ 625 $ 677 $ 654 $ 535 $ 406 $ 405 $ 504 Premiums earned 446 443 425 351 294 244 241 249 Net investment income 394 359 332 302 265 233 204 189 Total insurance expenses 170 315 140 141 117 100 89 86 Insurance income 698 515 643 530 453 385 360 353 Investment management services income (loss) 56 41 29 17 18 11 5 (1) Income before income taxes 715 388 565 525 448 375 347 339 NET INCOME 529 321 433 406 348 290 270 268 NET INCOME PER COMMON SHARE BASIC 5.37 3.22 4.37 4.18 3.68 3.21 3.00 3.00 DILUTED 5.33 3.19 4.32 4.12 3.62 3.15 2.96 2.95 - ------------------------------------------------------------------------------------------------------------------------------ GAAP SUMMARY BALANCE SHEET DATA: Total investments 12,233 10,694 10,080 8,908 8,008 6,937 5,069 3,735 Total assets 13,894 12,264 11,826 10,387 9,033 7,671 5,712 4,320 Deferred premium revenue 2,398 2,311 2,251 2,090 1,854 1,662 1,538 1,413 Loss and LAE reserves 499 467 300 105 72 50 47 37 Municipal investment and repurchase agreements 4,789 4,513 3,485 3,151 3,259 2,642 1,526 493 Long-term debt 795 689 689 489 389 389 314 314 Shareholders' equity 4,223 3,513 3,792 3,362 2,761 2,497 1,881 1,761 Book value per share 42.89 35.34 38.15 34.09 28.98 27.02 20.92 19.77 Dividends declared per common share 0.820 0.805 0.790 0.770 0.725 0.655 0.570 0.470 - ------------------------------------------------------------------------------------------------------------------------------ STATUTORY DATA: Net income 544 522 510 404 335 287 229 263 Capital and surplus 2,382 2,413 2,290 1,952 1,661 1,469 1,250 1,124 Contingency reserve 2,123 1,739 1,451 1,188 959 788 652 561 - ------------------------------------------------------------------------------------------------------------------------------ Capital base 4,505 4,152 3,741 3,140 2,620 2,257 1,902 1,685 Unearned premium reserve 2,465 2,376 2,324 2,193 1,971 1,768 1,640 1,484 Loss and LAE reserves 209 204 188 15 10 7 22 8 - ------------------------------------------------------------------------------------------------------------------------------ Policyholders' reserves 7,179 6,732 6,253 5,348 4,601 4,032 3,564 3,177 Present value of installment premiums 886 732 644 537 443 347 249 234 Standby line of credit / stop-loss 1,075 1,075 900 900 775 700 650 625 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL CLAIMS-PAYING RESOURCES 9,140 8,539 7,797 6,785 5,819 5,079 4,463 4,036 - ------------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS: GAAP Loss and LAE reserves 11.5% 44.8% 8.2% 9.1% 6.9% 5.6% 3.9% 3.5% Underwriting expense ratio 26.7 26.4 24.7 31.0 32.9 35.2 32.9 31.2 Combined ratio 38.2 71.2 32.9 40.1 39.8 40.8 36.8 34.7 Statutory Loss and LAE reserves 6.2 12.3 8.0 1.2 1.7 0.4 8.7 (3.3) Underwriting expense ratio 22.1 23.6 16.8 21.2 22.8 27.2 28.3 22.0 Combined ratio 28.3 35.9 24.8 22.4 24.5 27.6 37.0 18.7 NET DEBT SERVICE OUTSTANDING $680,878 $635,883 $595,895 $513,736 $434,417 $359,175 $315,340 $273,630 NET PAR AMOUNT OUTSTANDING $418,443 $384,459 $359,472 $303,803 $252,896 $201,326 $173,760 $147,326 - --------------------------------------------------------------------------------------------------------------------------- Dollars in millions except per share amounts 1992 1991 - ------------------------------------------------------- GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 377 $ 269 Premiums earned 169 132 Net investment income 155 132 Total insurance expenses 65 59 Insurance income 260 207 Investment management services income (loss) (1) (2) Income before income taxes 249 190 NET INCOME 193 145 NET INCOME PER COMMON SHARE BASIC 2.24 1.89 DILUTED 2.20 1.87 - ------------------------------------------------------- GAAP SUMMARY BALANCE SHEET DATA: Total investments 2,701 1,961 Total assets 3,234 2,438 Deferred premium revenue 1,202 1,019 Loss and LAE reserves 28 21 Municipal investment and repurchase agreements -- -- Long-term debt 314 199 Shareholders' equity 1,533 1,063 Book value per share 17.19 13.79 Dividends declared per common share 0.380 0.310 - ------------------------------------------------------- STATUTORY DATA: Net income 194 149 Capital and surplus 1,044 647 Contingency reserve 419 316 - ------------------------------------------------------- Capital base 1,463 963 Unearned premium reserve 1,248 1,044 Loss and LAE reserves 14 12 - ------------------------------------------------------- Policyholders' reserves 2,725 2,019 Present value of installment premiums 211 151 Standby line of credit / stop-loss 550 500 - ------------------------------------------------------- TOTAL CLAIMS-PAYING RESOURCES 3,486 2,670 - ------------------------------------------------------- FINANCIAL RATIOS: GAAP Loss and LAE ratio 3.6% 13.0% Underwriting expense ratio 34.6 30.1 Combined ratio 38.2 43.1 Statutory Loss and LAE ratio 2.3 12.7 Underwriting expense ratio 20.7 20.4 Combined ratio 23.0 33.1 NET DEBT SERVICE OUTSTANDING $225,220 $ 184,604 NET PAR AMOUNT OUTSTANDING $114,317 $ 90,043 - -------------------------------------------------------
(34 & 35) 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries OVERVIEW - -------- MBIA Inc. (MBIA or the company) is engaged in providing financial guarantee insurance, investment management services and municipal services to public finance clients and financial institutions on a global basis. The company turned in a solid year as we continue to focus on our Triple-A ratings, no-loss underwriting standards and building shareholder value. Our insurance operations showed strong growth in the structured finance and international businesses, which helped offset reduced activity in the domestic public finance market. Our investment management operations had a record year in assets under management and operating earnings. Looking forward, the company is well positioned to take advantage of very favorable growth prospects domestically and internationally across all of our business lines. FORWARD-LOOKING AND CAUTIONARY STATEMENTS - ----------------------------------------- Statements included in this annual report which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1998. The words "believe," "anticipate," "project," "plan," "expect," "intend," "will likely result," or "will continue," and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only to their respective dates. The following are some of the factors that could affect our financial performance or could cause actual results to differ materially from estimates contained in or underlying the company's forward-looking statements: * fluctuations in the economic, credit or interest rate environment in the United States and abroad; * the level of activity within the national and international credit markets; * competitive conditions and pricing levels; * legislative and regulatory developments; * technological developments; * changes in tax laws; * the effects of mergers, acquisitions and divestitures; and, * uncertainties that have not been identified at this time. The company undertakes no obligation to publicly correct or update any forward-looking statement if we later become aware that such results are not likely to be achieved. NEW ACCOUNTING PRONOUNCEMENT - ---------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for the company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the use and type of the hedge. The company has entered into derivative transactions that do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. The Insurance segment, which represents the majority of the company's derivative exposure and mark-to-market as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into primarily forward delivery agreements, interest rate and credit default swaps. The Corporate segment has entered into derivatives to hedge foreign exchange and interest rate risks related to the issuance of certain MBIA long-term debt issues. Adoption of SFAS 133 on January 1, 2001 will result in cumulative after-tax reductions in net income of approximately $12 million and other comprehensive income of approximately $4 million. In addition, the company will increase its assets by approximately $50 million and liabilities by approximately $66 million on an after-tax basis. RESULTS OF OPERATIONS - --------------------- SUMMARY The company uses various measures of profitability and intrinsic value, namely, "core earnings", "operating earnings", "adjusted gross premiums" and "adjusted book value" which are not in accordance with accounting principles generally accepted in the United States of America. We view these measures as the most meaningful measures of our performance and the intrinsic value of the company. The following chart presents highlights of our consolidated financial results for 2000, 1999 and 1998. Percent Change -------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Net income (in millions): As reported $529 $321 $433 65% (26)% Excluding one- time charges $529 $490 $482 8% 2% - -------------------------------------------------------------------------------- Per share data:* Net income: As reported $5.33 $3.19 $4.32 67% (26)% Excluding one- time charges $5.33 $4.88 $4.81 9% 1% Operating earnings $5.12 $4.72 $4.58 8% 3% Core earnings $4.91 $4.34 $4.19 13% 4% Book value $42.89 $35.34 $38.15 21% (7)% Adjusted book value $60.40 $52.51 $53.28 15% (1)% - -------------------------------------------------------------------------------- *All earnings per share calculations are diluted. Core earnings, which exclude the effects of refundings and calls on our insured issues, realized gains and losses on our investment portfolio and one-time charges, provide the most meaningful measure of our underlying profit. Core earnings per share at $4.91 for 2000 grew by 13% over 1999, following a 4% increase in 1999. The 2000 growth in core earnings per share was the result of a 42% increase in investment management services over 1999 and the elimination of losses in our municipal services segment. Insurance operations had growth in core earnings per share of 9% in 2000 compared with growth of 4% in 1999, although higher levels of reinsurance cessions continue to depress the growth in insurance operations income. (36) 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries Our 2000 net income increased by 8%, excluding one-time charges in 1999, or by 9% on a per share basis. In 1999 net income increased by 2% over 1998, excluding the one-time charges, which resulted in a 1% per share increase. Compared with core earnings per share, these results were lower due to the low level of refunding activity in 2000, with premiums earned from refundings down 47% compared with 1999. Net income as reported increased by 65% in 2000 over 1999, compared with a 26% decrease in 1999 over 1998. These variances are due to the one-time charges incurred in 1999. Operating earnings per share, which include refundings but exclude the impact of realized gains and losses and one-time charges, increased by 8% and 3% for 2000 and 1999, respectively. The increases in operating earnings per share were consistent throughout the year and highlight the predictable earnings pattern of the company. Our book value at year-end 2000 was $42.89 per share, up 21% from $35.34 at year-end 1999. The increase was caused primarily by a 150% increase in the unrealized appreciation of our investment portfolio and an 18% increase in retained earnings, partially offset by the increase in treasury stock from share repurchases. A more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. Adjusted book value 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. Our adjusted book value per share was $60.40 at year-end 2000, a 15% increase from year-end 1999 following a 1% decline in the preceding year. The 2000 increase reflects the same factors that impacted book value, but is reduced by lower growth in net deferred premium revenue and a reduction in unrealized gains on investment contract liabilities. The following table presents the components of our adjusted book value per share: Percent Change -------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Book value $42.89 $35.34 $38.15 21% (7)% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 11.09 10.83 10.91 2% (1)% Present value of future installment premiums* 5.85 4.78 4.21 22% 14% Unrealized gain on investment contract liabilities 0.57 1.56 0.01 (63)% n/m - -------------------------------------------------------------------------------- Adjusted book value $60.40 $52.51 $53.28 15% (1)% - -------------------------------------------------------------------------------- * The discount rate used to present value future installment premiums was 9%. FINANCIAL GUARANTEE INSURANCE MBIA's production in terms of adjusted gross premiums (AGP), gross premiums written (GPW) and par insured for the last three years is presented in the following table: Percent Change -------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Premiums written (in millions): AGP $803 $724 $832 11% (13)% GPW $687 $625 $677 10% (8)% Par insured (in billions): $ 99 $ 92 $119 7% (23)% - -------------------------------------------------------------------------------- In 2000, our top line results continue to reflect a more profitable relationship between AGP and par insured for the period. AGP is composed of our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. AGP was up 11%, while total par insured was up 7% which translates into more premiums for each dollar of par value insured. This continues to be indicative of price improvements across our whole book of business and is consistent with our strategy to improve profitability on the business written. Furthermore, we did not sacrifice credit quality to capture higher prices as 75% of the business written in 2000 was rated A or above. The average credit rating on new business in each of our insurance divisions continued to improve. As an industry leader, MBIA maintained a conservative 9% discount rate when calculating AGP, and still continued to lead the market in terms of AGP market share at 40% for 2000, 37% for 1999 and 46% for 1998. We estimate the present value of our total future installment premium stream on outstanding policies to be $885 million at year-end 2000, compared with $732 million at year-end 1999 and $644 million at year-end 1998. The 21% growth in 2000 is due to the increase in structured finance and international installment insured policies. GPW, as reported in our financial statements, primarily reflects cash receipts and does not include the value of future premium receipts expected from installment policies originated in the period. GPW increased 10% in 2000 following an 8% decline in 1999 as both structured finance and international had significant growth over the prior year, partially offset by a modest decline in public finance. PUBLIC FINANCE MARKET > Domestic new issue public finance market information and MBIA's par and premium writings in both the new issue and secondary domestic public finance markets are shown in the following table: Percent Change -------------- 2000 1999 Domestic vs. vs. Public Finance 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Total new issue market:* Par value (in billions) $168 $199 $257 (16)% (22)% Insured penetration 47% 52% 55% MBIA market share 28% 26% 36% MBIA insured: Par insured (in billions) $ 33 $ 36 $ 60 (11)% (39)% Premiums (in millions): AGP $361 $378 $435 (5)% (13)% GPW $332 $349 $431 (5)% (19)% - -------------------------------------------------------------------------------- * 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. (37) 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries Although MBIA's public finance par insured for 2000 was down 11% compared with last year, the insured market was down 25%, indicative of our better than market performance. AGP declined 5% in 2000 compared with a 13% decrease in 1999. The greater decline in par insured compared with AGP once again exemplifies the positive effects of our pricing discipline. This relationship between par insured and AGP was exhibited in most sectors within the public finance business. Issues rated A and above remained over 80% for the third year in a row and the Standard & Poor's (S&P) capital charges, which are intended to represent the likelihood of default as well as the magnitude of losses under default, were the lowest they have been for many years. MBIA continued to lead the industry in terms of market share for both AGP and par insured, as we recorded a market share of 43% for AGP and 28% for par insured. STRUCTURED FINANCE MARKET > The details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary domestic structured finance markets are shown in the table below: Percent Change -------------- 2000 1999 Domestic vs. vs. Structured Finance 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Total asset-backed market:* Par value (in billions) $230 $191 $167 20% 14% MBIA insured: Par insured (in billions) $48 $48 $48 -- -- Premiums (in millions): AGP $278 $229 $208 22% 10% GPW $188 $159 $134 18% 18% - -------------------------------------------------------------------------------- * Market data exclude mortgage-backed securities and private placements. For the year AGP was up 22% after an increase of 10% in 1999. For 2000, par insured was $48 billion, which is consistent with the last two years. Here too, the relationship of AGP to par insured was positive and is indicative of our pricing discipline. In 2000, 63% of the business written was rated A or better compared with 54% in 1999, with a substantial portion rated Triple-A before our guarantee. During 2000 and 1999 we saw a decline in mortgage related business, however, this was more than offset by an increase in other asset-backed business. Despite the fact that we use a higher discount rate (9%) than others in the industry, we continue to lead in terms of AGP market share at 37% for 2000, 32% for 1999, and 44% for 1998. INTERNATIONAL MARKET > Our company's international business volume in the new issue and secondary markets for the last three years is illustrated as follows: Percent Change -------------- 2000 1999 vs. vs. International 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Par insured (in billions) $18 $8 $11 144% (29)% Premiums (in millions): AGP $164 $117 $189 40% (38)% GPW $167 $117 $112 43% 4% - -------------------------------------------------------------------------------- International business tends to be less predictable and results will vary from year to year. Par insured was up 144% in 2000 after being down 29% in 1999, while AGP was up 40% after being down 38% in 1999. Almost 90% of business written in 2000 was rated A or better, substantially more than the 60% rated A or better written in 1999. This accounts for the weakening of the AGP to par insured ratio. Our share of international AGP in 2000 was approximately 37%, despite using a higher discount rate (9%) than the rest of the industry. On March 21, 2000 the company and Ambac Financial Group, Inc. (Ambac) announced the restructuring of the international joint marketing and reinsurance arrangements that have been in place since 1995 with the formation of the MBIA-AMBAC International joint venture. The company and Ambac will continue having certain reciprocal reinsurance arrangements for international business in 2001 but will market and originate international business independently. Additionally, during the third quarter of 2000 the company and Ambac dissolved a four-way joint venture in Japan. REINSURANCE > Premiums ceded to reinsurers from all insurance operations were $189 million, $171 million, and $156 million in 2000, 1999 and 1998, respectively. Cessions as a percentage of GPW increased to 28% in 2000 from 27% in 1999 and 23% in 1998. The increase in our cession rate since 1998 reflects increased cessions across all business lines, especially in public finance and international. Reinsurance is a cost effective capital substitute for MBIA. In addition to treaty reinsurance, the decision of whether to reinsure any particular policy on a facultative basis is based on portfolio, single risk and other factors related to that policy. These reinsurance activities continue to have a positive impact and are consistent with our emphasis on a strong balance sheet. In fact, the ratio of insured net debt service outstanding to our statutory capital base at year-end was 151:1, down from 153:1 at the end of 1999. At year-end 2000, 98% of our outstanding ceded exposure is with reinsurers who 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 > The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated as follows: (38) 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries Percent Change -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Premiums earned: Scheduled $412 $379 $357 9% 6% Refunded 34 64 68 (47)% (6)% - -------------------------------------------------------------------------------- Total $446 $443 $425 1% 4% - -------------------------------------------------------------------------------- Upfront premiums are recognized over the life of the bonds we insure. The extended premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. In 2000, premiums earned from scheduled amortization increased by 9%, augmented by the disciplined pricing strategy established in early 1999. In 1999 scheduled premiums earned grew only 6% because of the increased usage of reinsurance. Refunded premiums earned declined significantly in 2000 after a slight decrease in 1999, primarily reflecting the higher interest rate environment. 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. NET INVESTMENT INCOME > Our insurance-related investment income (exclusive of net realized gains) was $394 million, up from $359 million in 1999 and $332 million in 1998. These increases were primarily due to the growth of cash flow available for investment and a shift in the investment portfolio from tax-exempt to taxable investments. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. ADVISORY FEES > The company collects fee revenues in conjunction with certain insured transactions. In addition, the company earns advisory fees in connection with its administration of certain third-party-owned conduits. Fees are generally deferred and earned over the life of the related transactions. Certain fees, however, are earned in the quarter they are due and include administrative fees for transactions where the fee is collected on a periodic installment basis, and fees for transactions that terminate prior to the expected maturity date. Advisory fee revenues increased 3% in 2000. This modest increase was due to a 13% increase in the recognition of previously deferred fees partially offset by a reduction in non-deferrable fees. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) > We maintain a loss and LAE 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 issuer defaults to net debt service written. To the extent that we identify a specific insured issue with respect to which we anticipate a loss, the present value of our expected payment, net of expected reinsurance and recoveries, is allocated within the total loss and LAE reserve as a case-specific reserve. 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 based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. In 2000 and 1999 we reviewed our loss reserving methodology. Each review included an analysis of loss-reserve factors based on the latest available industry data, an analysis of historical default and recovery experience for the relevant sectors of the fixed-income market, and consideration for the changing mix of our book of business. For the 2000 review, there were no adjustments to the company's loss and LAE reserves. For 1999, the review resulted in an increase in our company's current loss and LAE reserving factors and a one-time charge of $153 million. The following table shows the case-specific, reinsurance recoverable 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 -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Case-specific: Gross $240 $235 $219 2% 8% Reinsurance recoverable on unpaid losses 31 31 30 -- 3% - -------------------------------------------------------------------------------- Net case reserves $209 $204 $189 2% 8% Unallocated reserves 259 232 81 12% 185% - -------------------------------------------------------------------------------- Net loss and LAE reserves $468 $436 $270 7% 62% - -------------------------------------------------------------------------------- Provision $ 51 $198 $ 35 (74)% 472% - -------------------------------------------------------------------------------- POLICY ACQUISITION COSTS AND OPERATING EXPENSES > 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, operating expenses and total insurance operating expenses, as well as related expense ratios, are shown below: Percent Change -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Policy acquisition costs, net $ 36 $ 37 $ 35 (2)% 6% Operating expenses 83 80 70 4% 14% - -------------------------------------------------------------------------------- Total insurance operating expenses $119 $117 $105 2% 11% Expense ratio: GAAP 26.7% 26.4% 24.7% Statutory 22.1% 23.6% 16.8% - -------------------------------------------------------------------------------- (39) 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries For 2000, policy acquisition costs, net of deferrals, decreased slightly to $36 million, or 2% below 1999's $37 million. This compares with $35 million in 1998. The decrease in 2000 is attributable to the company's increased focus on expense management and overall effort to control expense growth. The ratio of policy acquisition costs, net of deferrals, to earned premiums has remained steady at 8% in 2000, 1999 and 1998. Operating expenses increased by 4% in 2000 following an increase of 14% in 1999. The increase in 2000 was due to the company's increased building and equipment related costs associated with its expanded Armonk, New York headquarters. The increase in 1999 was the result of expanded international operations. Financial guarantee insurance companies also calculate a statutory expense ratio (insurance operating expenses before deferrals as a function of net premiums written) as a measure of expense management. The decrease in our statutory expense ratio for 2000 reflects increased net premium written and attentive expense control. The increase in 1999 was related to a decline in premium volume for the year. INSURANCE INCOME > In 2000 MBIA's insurance income increased to $698 million or 36% from the $515 million recorded in 1999. This increase reflects the one-time addition to the loss and LAE reserves mentioned previously, which reduced 1999's insurance income by $153 million. Excluding this factor insurance income increased by 5%. In 1999 insurance income, adjusted for the one-time loss and LAE reserve addition, increased 4% over 1998, reflecting revenue growth in the structured finance and international businesses. INVESTMENT MANAGEMENT SERVICES In 1998, after our merger with 1838 Investment Advisors, Inc. (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 experienced record performances in 1999. Continuing in this vein, operating income in 2000 increased by 38% and we ended the year with over $36 billion in assets under management, a record, up 22% from a year ago. Gains in assets under management were across the board, with all units showing strong growth. The table below summarizes our consolidated investment management results over the last three years: Percent Change -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Revenues $119 $ 87 $65 37% 33% Expenses 63 46 36 36% 28% - -------------------------------------------------------------------------------- Operating income $ 56 $ 41 $29 38% 40% - -------------------------------------------------------------------------------- MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal Investors Services Corporation (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 $14 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. In 2000, assets under management were up 27% compared with 57% growth in 1999. 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. In May 2000, MBIA-MISC merged with AMMA and combined the investment expertise into a consolidated investment management business. MBIA-MISC is a Securities and Exchange Commission (SEC)-registered investment adviser and at year-end had $7.9 billion in assets under management, up 20% over 1999's $6.6 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 2000, principal and accrued interest outstanding on investment and repurchase agreements was $4.8 billion, compared with $4.5 billion at year-end 1999. At amortized cost, the assets supporting IMC's investment agreements were $4.9 billion and $4.6 billion at year-end 2000 and 1999, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. 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. At year-end 2000, CMC's third party assets under management increased by 27% over year-end 1999. MUNICIPAL SERVICES MBIA MuniServices Company (MBIA MuniServices) was established in 1996 as part of the company's strategy to broaden its product offerings to its core clients, leveraging its relationships and presence as a leading provider of products and services to the public sector. During 1999, the company completed a reorganization of the operations of two subsidiaries, Municipal Tax Bureau (MTB) and Municipal Resource Consultants (MRC). (40) 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries With the reorganization complete, this business, operating as MBIA MuniServices, is now focused on delivering revenue enhancement services and products to public-sector clients nationwide, consisting of discovery, audit, collections/recovery, enforcement and information (data) services. The Municipal Services segment also includes Capital Asset Holdings GP, Inc. and certain affiliated entities (Capital Asset), a servicer of delinquent tax certificates. In 2000, Municipal Services had operating income of $600 thousand compared with a loss of $12 million in 1999 and a loss of $11 million in 1998. This turnaround was due to operating income from MRC and a breakeven result for Capital Asset. Both subsidiaries recorded operating losses in 1999 and 1998. The company is a majority owner of Capital Asset which was in the business of acquiring and servicing tax liens. The company became a majority owner in December 1998 when it acquired the interest of the company's founder. In 1999, the company recorded a $102 million pre-tax charge related to its investment in Capital Asset. MBIA Insurance Corp. continues to insure three securitizations of tax liens that were originated and continue to be serviced by Capital Asset. In the third quarter of 1999, Capital Asset engaged a specialty servicer of residential mortgages to help manage its business and operations and to assist in administering the portfolios supporting the securitizations. As of December 31, 2000, the aggregate gross insured amounts in connection with these securitizations was approximately $318 million, and there can be no assurance that MBIA Corp. will not incur losses under such policies. In addition, Capital Asset and its subsidiaries have other contingent liabilities, including potential liabilities in connection with pending lawsuits, including class action lawsuits, in which it is involved. The claims giving rise to these lawsuits arose as a result of Capital Asset's business activities that took place primarily before the company obtained its majority ownership of Capital Asset. Capital Asset is defending these lawsuits. During the second quarter of 1999, MBIA MuniServices Company sold its wholly owned subsidiary MBIA Muni-Financial, recognizing a $3 million pre-tax loss on disposition, which is recorded in one-time charges. During 1998, the company recorded reorganization-related pre-tax charges totaling $20 million consisting of the write-off of goodwill and other asset impairments, which is also recorded in one-time charges. CORPORATE NET REALIZED GAINS > In 2000, net realized gains increased 31% to $33 million from $25 million in 1999, which decreased 28% from $35 million in 1998. These gains were generated as a result of ongoing management of the investment portfolio. INTEREST EXPENSE > In 2000, 1999 and 1998, respectively, we incurred $54 million, $54 million and $45 million of interest expense. The increase in 1999 in interest expense reflects our long-term debt financings of $50 million in November 1998 and $150 million in September 1998. OTHER EXPENSES > Other expenses are composed primarily of general corporate expenses. In 2000, other expenses were $19 million compared with $21 million in 1999 and $11 million in 1998. The 1999 increase was due primarily to legal expenses, expenses incurred for year 2000 computer contingencies and reorganization expenses. ONE-TIME CHARGES > As discussed above, one-time charges for 1999 includes a $102 million pre-tax charge which reflects the write-down of the carrying value of MBIA's investment in Capital Asset and the value of the loans provided by MBIA to Capital Asset. Also included in one-time charges for 1999 is the $3 million pre-tax loss on the sale of MuniFinancial. In 1998, one-time charges includes $55 million of pre-tax charges related to our mergers with CapMAC and 1838, and a $20 million pre-tax charge related to the reorganization of our municipal services business. TAXES Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, our tax rate fluctuates from time-to-time as we manage our investment portfolio on a total return basis. Our effective tax rate for 2000 increased to 26.1% from 17.4% in 1999 and 23.4% in 1998. For 1999, our tax provision is net of the benefit resulting from the one-time charges discussed previously, as well as the benefit from the one-time increase to the loss reserve. Excluding these benefits our effective tax rate increased over 1999 as a result of a shift from tax-exempt investments to taxable investments to maximize long-term after-tax income. 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 2000, our total shareholders' equity was $4.2 billion, with total long-term borrowings of $795 million. We use debt financing 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 the ratio we use to measure it: 2000 1999 1998 - -------------------------------------------------------------------------------- Long-term debt (in millions) $795 $689 $689 Long-term debt to total capital 16% 16% 15% - -------------------------------------------------------------------------------- In addition, MBIA Insurance Corporation (MBIA Corp.) has a $900 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 of severe losses. The agreement is for a seven-year term, which expires on October 31, 2007, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. MBIA Corp. and its subsidiaries also maintain stop-loss reinsurance coverage of $175 million in excess of incurred losses of $762 million. From time to time we access the capital markets to support the growth of our businesses. In December 2000 we issued 175 million Swiss Francs 10-year bonds (converted to approximately $99 million) and $100 million of 40-year notes. (41) 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries In November 1998 we issued $50 million of 40-year notes and in September 1998 we issued $150 million of 30-year debentures. As of year-end 2000, total claims-paying resources for MBIA Corp. stood at $9.1 billion, a 7% increase over 1999. LIQUIDITY - --------- Cash flow needs at our parent company level are primarily for dividends to our shareholders and principal and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from MBIA Corp., which generates substantial cash flow from premium writings and investment income. In 2000, operating cash flow was $640 million. 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. During 2000, MBIA Corp. declared and paid $197 million of dividends and at year-end 2000 had dividend capacity in excess of $40 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 2000, cash equivalents and short-term investments totaled $471 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 2000, 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 2000, the fair value of our consolidated investment portfolio increased 14% to $12.2 billion, as shown below: Percent Change -------------- In millions 2000 1999 2000 vs. 1999 - -------------------------------------------------------------------------------- Insurance operations: Amortized cost $ 7,108 $ 6,427 11% Unrealized gain(loss) 128 (223) 157% - -------------------------------------------------------------------------------- Fair value $ 7,236 $ 6,204 17% - -------------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $ 4,948 $ 4,584 8% Unrealized gain(loss) 49 (94) 152% - -------------------------------------------------------------------------------- Fair value $ 4,997 $ 4,490 11% - -------------------------------------------------------------------------------- Total portfolio at fair value $12,233 $10,694 14% - -------------------------------------------------------------------------------- The growth of our insurance-related investments in 2000 was the result of positive cash flows. The fair value of investments related to our municipal investment agreement business increased 11% to $5.0 billion at year-end 2000, reflecting positive operations. 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. 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 2000, this hypothetical increase in interest rates would result in an after-tax decrease in net fair value of our company's financial instruments of $241 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 by 1.0%. 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-exempt securities 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%. (42) 9 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 accounting principles generally accepted in the United States of America, 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 that 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 auditing standards generally accepted in the United States of America, 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/Joseph W. Brown - ----------------------- Joseph W. Brown Chairman and Chief Executive Officer /s/ Neil G. Budnick - ------------------- Neil G. Budnick Chief Financial Officer REPORT ON INDEPENDANT 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 its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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. /s/ PricewaterhouseCoopers LLP - ------------------------------ New York, New York February 2, 2001 (43) 10 CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 2000 December 31, 1999 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $6,612,498 and $6,006,506) $ 6,740,127 $ 5,783,979 Short-term investments, at amortized cost (which approximates fair value) 376,604 274,022 Other investments 119,591 146,038 - ---------------------------------------------------------------------------------------------------------------------------------- 7,236,322 6,204,039 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $4,947,653 and $4,583,920) 4,996,608 4,489,551 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS 12,232,930 10,693,590 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 93,962 93,559 Securities borrowed or purchased under agreements to resell 314,624 261,171 Accrued investment income 152,043 135,344 Deferred acquisition costs 274,355 251,922 Prepaid reinsurance premiums 442,622 403,210 Reinsurance recoverable on unpaid losses 31,414 30,819 Goodwill (less accumulated amortization of $67,472 and $68,388) 104,322 110,023 Property and equipment, at cost (less accumulated depreciation of $62,026 and $50,469) 133,514 128,733 Receivable for investments sold 13,772 24,922 Other assets 100,780 130,606 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $13,894,338 $12,263,899 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $ 2,397,578 $ 2,310,758 Loss and loss adjustment expense reserves 499,279 467,279 Municipal investment agreements 3,821,652 3,483,911 Municipal repurchase agreements 967,803 1,028,921 Long-term debt 795,102 689,204 Short-term debt 144,243 68,751 Securities loaned or sold under agreements to repurchase 489,624 288,750 Deferred income taxes 252,463 32,805 Deferred fee revenue 32,694 36,536 Payable for investments purchased 7,899 102,666 Other liabilities 262,588 241,217 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 9,670,925 8,750,798 - ---------------------------------------------------------------------------------------------------------------------------------- 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 - 100,773,295 and 100,072,846 100,773 100,073 Additional paid-in capital 1,219,587 1,191,108 Retained earnings 2,934,608 2,486,478 Accumulated other comprehensive income (loss), net of deferred income tax provision (benefit) of $57,141 and $(112,920) 85,707 (224,511) Unallocated ESOP shares (2,950) (4,363) Unearned compensation - restricted stock (10,659) (9,986) Treasury stock - 2,209,358 shares in 2000 and 520,722 shares in 1999 (103,653) (25,698) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 4,223,413 3,513,101 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,894,338 $12,263,899 - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. (44) 11 CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended December 31 ------------------------------------------------ Dollars in thousands except per share amounts 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- INSURANCE Revenues: Gross premiums written $687,408 $624,871 $677,050 Ceded premiums (189,316) (171,256) (156,064) - ----------------------------------------------------------------------------------------------------------------------- Net premiums written 498,092 453,615 520,986 Increase in deferred premium revenue (51,739) (10,819) (96,436) Premiums earned (net of ceded premiums of $147,249, $119,879 and $92,802) 446,353 442,796 424,550 Net investment income 393,985 359,456 331,802 Advisory fees 28,284 27,486 26,130 - ----------------------------------------------------------------------------------------------------------------------- Total insurance revenues 868,622 829,738 782,482 Expenses: Losses and loss adjustment 51,291 198,454 34,683 Policy acquisition costs, net 35,976 36,700 34,613 Operating 83,066 80,082 70,330 - ----------------------------------------------------------------------------------------------------------------------- Total insurance expenses 170,333 315,236 139,626 - ----------------------------------------------------------------------------------------------------------------------- Insurance income 698,289 514,502 642,856 - ----------------------------------------------------------------------------------------------------------------------- INVESTMENT MANAGEMENT SERVICES Revenues 118,859 86,600 65,032 Expenses 62,535 45,920 36,012 - ----------------------------------------------------------------------------------------------------------------------- Investment management services income 56,324 40,680 29,020 - ----------------------------------------------------------------------------------------------------------------------- MUNICIPAL SERVICES Revenues 37,089 22,923 29,392 Expenses 36,479 35,372 40,682 - ----------------------------------------------------------------------------------------------------------------------- Municipal services income (loss) 610 (12,449) (11,290) - ----------------------------------------------------------------------------------------------------------------------- CORPORATE Net realized gains 32,884 25,160 34,976 Interest expense 53,756 53,935 44,620 Other expenses 19,494 21,052 10,701 One-time charges -- 105,023 75,203 - ----------------------------------------------------------------------------------------------------------------------- Corporate loss (40,366) (154,850) (95,548) Income before income taxes 714,857 387,883 565,038 - ----------------------------------------------------------------------------------------------------------------------- Provision for income taxes 186,220 67,353 132,310 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME $528,637 $320,530 $432,728 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: BASIC $5.37 $3.22 $4.37 DILUTED $5.33 $3.19 $4.32 - ----------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding: Basic 98,476,442 99,590,870 98,978,641 Diluted 99,112,629 100,402,339 100,163,014 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. (45) 12 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Additional Other --------------------- Paid-in Retained Comprehensive In thousands except per share amounts Shares Amount Capital Earnings Income (Loss) - -------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1998 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 -- -- Unallocated 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 - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net income -- -- -- 320,530 -- Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $270,330 -- -- -- -- (502,996) Change in foreign currency translation -- -- -- -- (10,430) Other comprehensive loss Total comprehensive loss Treasury shares acquired -- -- -- -- -- Unallocated ESOP shares -- -- 391 -- -- Unearned compensation - restricted stock 99 99 4,883 -- -- Stock issued for acquisition 38 38 2,392 -- -- Exercise of stock options 366 366 14,250 -- -- Dividends (declared per common share $0.805, paid per common share $0.800) -- -- -- (80,273) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 100,073 100,073 1,191,108 2,486,478 (224,511) - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 528,637 -- Other comprehensive income (loss): Change in unrealized depreciation of investments net of change in deferred income taxes of $(170,061) -- -- -- -- 316,010 Change in foreign currency translation -- -- -- -- (5,792) Other comprehensive loss Total comprehensive loss Treasury shares acquired -- -- -- -- -- Unallocated ESOP shares -- -- (43) -- -- Unearned compensation - restricted stock 76 76 5,463 -- -- Exercise of stock options 624 624 23,059 -- -- Dividends (declared and paid per common share $0.820) -- -- -- (80,507) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 100,773 $100,773 $1,219,587 $2,934,608 $ 85,707 - -------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Con't) For the years ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------------------------------------------------------- Unearned Unallocated Compensation Treasury Stock Total ESOP -Restricted --------------------- Shareholders' In thousands except per share amounts Shares Stock Shares Amount Equity - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1998 $(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) -- Unallocated 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 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net income -- -- -- -- 320,530 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $270,330 -- -- -- -- (502,996) Change in foreign currency translation -- -- -- -- (10,430) ------------ Other comprehensive loss (513,426) ------------ Total comprehensive loss (192,896) ------------ Treasury shares acquired -- -- (500) (24,698) (24,698) Unallocated ESOP shares (319) -- 13 462 534 Unearned compensation - restricted stock -- (3,179) (12) (632) 1,171 Stock issued for acquisition -- -- -- -- 2,430 Exercise of stock options -- -- -- -- 14,616 Dividends (declared per common share $0.805, paid per common share $0.800) -- -- -- -- (80,273) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 (4,363) (9,986) (521) (25,698) 3,513,101 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- -- 528,637 Other comprehensive income (loss): Change in unrealized depreciation of investments net of change in deferred income taxes of $(170,061) -- -- -- -- 316,010 Change in foreign currency translation -- -- -- -- (5,792) ------------ Other comprehensive loss 310,218 ------------ Total comprehensive loss 838,855 ------------ Treasury shares acquired -- -- (1,680) (77,717) (77,955) Unallocated ESOP shares 1,413 -- -- -- 1,370 Unearned compensation - restricted stock -- (673) (8) (238) 4,866 Exercise of stock options -- -- -- -- 23,683 Dividends (declared and paid per common share $0.820) -- -- -- -- (80,507) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $(2,950) $(10,659) (2,209) $(103,653) $4,223,413 - --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
DISCLOSURE OF RECLASSIFICATION AMOUNT: 1998 1999 2000 - --------------------------------------------------------------------------------------------------- Unrealized appreciation (depreciation) of investments arising during the period, net of taxes $78,142 $(448,686) $317,092 Reclassification of adjustment, net of taxes (30,100) (54,310) (1,082) - --------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation), net of taxes $48,042 $(502,996) $316,010 - ---------------------------------------------------------------------------------------------------
(46) 13 CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 -------------------------------------------------- Dollars in thousands 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $528,637 $320,530 $432,728 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (16,699) (8,354) (5,900) Increase in deferred acquisition costs (22,433) (21,837) (13,920) Increase in prepaid reinsurance premiums (39,412) (50,511) (63,191) Increase in deferred premium revenue 91,151 61,329 159,627 Increase in loss and loss adjustment expense reserves, net 31,405 166,346 167,053 Depreciation 11,557 11,368 8,174 Amortization of goodwill 6,701 6,983 9,051 Amortization of bond discount, net (31,379) (25,338) (22,699) Net realized gains on sale of investments (32,884) (25,160) (34,976) Deferred income tax provision (benefit) 49,575 (40,505) 19,943 Other, net 64,124 48,400 26,155 - ----------------------------------------------------------------------------------------------------------------------- Total adjustments to net income 111,706 122,721 249,317 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 640,343 443,251 682,045 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (7,417,426) (6,778,179) (2,479,245) Sale of fixed-maturity securities, net of receivable for investments sold 6,543,563 6,144,650 1,102,460 Redemption of fixed-maturity securities, net of receivable for investments redeemed 282,540 288,710 745,515 (Purchase) sale of short-term investments (93,552) 113,896 (97,177) Purchase of other investments (24,697) (84,018) (51,769) Sale of other investments 43,235 33,402 1,785 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (5,418,222) (2,672,918) (2,456,265) Sales from municipal investment agreement portfolio, net of receivable for investments sold 5,002,639 1,650,111 2,218,342 Capital expenditures, net of disposals (16,363) (58,650) (22,909) Other, net 8,297 11,146 (8,098) - ----------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,089,986) (1,351,850) (1,047,361) - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayment) from issuance (retirement) of long-term debt 192,363 (3,750) 197,113 Net (repayment) proceeds from (retirement) issuance of short-term debt (24,500) 65,001 (20,000) Dividends paid (80,708) (79,764) (85,667) Purchase of treasury stock (77,955) (24,698) -- Proceeds from issuance of municipal investment and repurchase agreements 2,674,379 2,787,906 2,352,908 Payments for drawdowns of municipal investment and repurchase agreements (2,404,637) (1,770,418) (2,017,056) Securities loaned or sold under agreements to repurchase, net 147,421 (7,492) (98,229) Exercise of stock options 23,683 14,616 30,708 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 450,046 981,401 359,777 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 403 72,802 (5,539) Cash and cash equivalents - beginning of year 93,559 20,757 26,296 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $93,962 $93,559 $20,757 - ----------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $96,395 $136,877 $108,297 Interest paid: Municipal investment and repurchase agreements $265,988 $210,495 $202,502 Long-term debt 53,234 53,466 39,499 Short-term debt -- -- 1,057 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. (47) 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 1: BUSINESS AND ORGANIZATION - --------------------------------- MBIA Inc. (MBIA or 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 portion 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 and its affiliates and third party institutional clients. 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 May 2000, MBIA-MISC merged with AMMA and combined the investment expertise into a consolidated investment management business. 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 September 1999, MBIA MuniServices sold MuniFinancial. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was acquired. On February 17, 1998, MBIA 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 completed a merger of its investment management business with 1838 Investment Advisors, Inc. (1838). Effective December 31, 2000, 1838 was converted into a limited liability corporation. 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 the company's investment management services. In July 1998, the company contributed the common stock of MBIA-MISC, IMC, CMC and 1838 to MBIA-AMC. Effective December 31, 2000, MBIA-AMC was converted into a limited liability corporation. TRS Funding Corporation (TRS) was formed to provide clients with innovative structured financing solutions. 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, its significant subsidiaries and entities under its control. 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 effective 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. 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 equity-oriented and equity-method investments. The company records its share of the unrealized gains and losses on equity-oriented 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. (48) 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 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. These contracts are primarily entered into to obtain securities that are repledged as part of MBIA's collateralized municipal investment and repurchase agreement activity and are only transacted with high-quality dealer firms. 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 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 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 advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given insured transaction. In addition, the company earns advisory fees in connection with its administration of certain third-party-owned conduits. Most fees are deferred and earned pro-rata over the life of the underlying transactions. Certain fees, however, are earned in the quarter they are collected and include administrative fees for transactions where the fee is collected on a periodic installment basis and fees for transactions which terminate prior to the expected maturity date. 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 using 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, based on a discounted rate of 6.12%. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of issuer 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. In 2000 and 1999 the company reviewed its loss reserving methodology. The reviews included an analysis of loss reserve factors based on the latest available industry data. They included the analysis of historical default and recovery experience for the relevant sectors of the fixed-income market. Also factored in was the changing mix of our book of business. The 1999 review resulted in an increase in the company's current loss reserving factors. 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. 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 and foreign currency swaps for hedging purposes as part of its overall risk management strategy. Currently, 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 income when realized. (49) 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Effective January 1, 2001 the company will adopt Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." See footnote 4 for an explanation of the impact the adoption of this statement will have on the company's financial statements. INVESTMENT MANAGEMENT SERVICES OPERATIONS > Investment management services results are comprised of the net investment income, operating revenues and expenses of MBIA-MISC, IMC, CMC and 1838. MUNICIPAL SERVICES OPERATIONS > Municipal services results are comprised of the net investment income, operating revenues and expenses of MTB, MRC and Capital Asset, and for 1999 and 1998 only, MuniFinancial. CORPORATE > Corporate consists of net realized gains, interest expenses, general corporate overhead expenses and one-time 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, unrealized appreciation or depreciation of investments 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. NET INCOME PER COMMON SHARE > Basic earnings per share are based on the weighted average number of common shares outstanding during the year, whereas diluted earnings per share also gives effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares include stock options and other items that could potentially result in the issuance of common stock. 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 material 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. 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. NOTE 4: RECENT ACCOUNTING PRONOUNCEMENT - --------------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for the company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the use and type of the hedge. The company has entered into derivative transactions that do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. The Insurance segment, which represents the majority of the company's derivative exposure and mark-to-market as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into primarily forward delivery agreements, interest rate and credit default swaps. The Corporate segment has entered into derivatives to hedge foreign exchange and interest rate risks related to the issuance of certain MBIA long-term debt issues. Adoption of SFAS 133 on January 1, 2001 will result in cumulative after-tax reductions in net income of approximately $12 million and other comprehensive income of approximately $4 million. In addition, the company will increase its assets by approximately $50 million and liabilities by approximately $66 million on an after-tax basis. NOTE 5: ASSET IMPAIRMENT - ------------------------ Early in 1999, the company concluded that its investment in Capital Asset was not consistent with its strategic objectives, and took steps to restructure it for divestiture. The company was unsuccessful in its attempts to sell Capital Asset and in the second quarter of 1999, the company ceased these efforts and decided to limit the activities of Capital Asset primarily to the servicing of the portfolios then being serviced by Capital Asset. In the second quarter of 1999, the company completed a valuation of Capital Asset's tax lien portfolio, and as a result the company determined that it was necessary to write down its investment in Capital Asset by $102 million. A one-time charge for that amount was recorded in the consolidated statement of income during the second quarter of 1999. (50) 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 6: SECURITIZATION OF FINANCIAL ASSETS - ------------------------------------------ In September 1999, Capital Asset sold substantially all of its remaining tax lien portfolio through a securitization. This securitization was the third in a series of such securitizations. Proceeds from this transaction were used to extinguish an existing warehouse financing facility that had been guaranteed by the company. The notes issued in connection with the securitizations have been insured by MBIA Corp. In connection therewith, the company recorded a servicing liability which represents the fair value of such liability based upon the present value of projected servicing costs in excess of servicing revenues, discounted at 11%. The servicing liability will be amortized in proportion to and over the period of the estimated net servicing loss, and accordingly, $776 thousand was amortized during the year ended December 31, 2000. The balance of the servicing liability as of December 31, 2000 is $10.9 million. During the fourth quarter of 1999, a specialty servicing concern was engaged to oversee the management of Capital Asset, whose activities now primarily consist of the administering and servicing of the securitizations and other delinquent tax liens and related assets. NOTE 7: 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: * upfront premiums are earned only when the related risk has expired rather than over the period of the risk; * acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; * 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; * 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; * fixed-maturity securities are reported at amortized cost rather than fair value; * tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and * certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 2000, 1999 and 1998 was $543.9 million, $521.8 million and $509.9 million, respectively. 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 2000 1999 - -------------------------------------------------------------------------------- Company's GAAP shareholders' equity $4,223,413 $3,513,101 Contributions to MBIA Corp. 534,776 508,719 Premium revenue recognition (535,920) (491,766) Deferral of acquisition costs (274,355) (251,922) Unrealized (gains) losses (163,331) 322,739 Contingency reserve (2,123,403) (1,738,730) Loss and LAE reserves 258,706 232,004 Deferred income taxes 266,593 44,917 Tax and loss bonds 202,195 219,195 Goodwill (81,196) (86,075) Other 74,191 141,185 - -------------------------------------------------------------------------------- Statutory capital and surplus $2,381,669 $2,413,367 - -------------------------------------------------------------------------------- In 1998, The National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles guidance, which replaces the current Accounting Practices and Procedures manuals as the NAIC's primary guidance on statutory accounting effective as of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas; e.g. deferred income taxes are recorded. The New York State Insurance Department has adopted the Codification guidance, effective January 1, 2001. The New York State Insurance Department has not adopted the Codification rules on certain accounting issues, e.g. deferred taxes and goodwill. The effect of adoption on MBIA Corp's statutory surplus is expected to be immaterial to MBIA Corp. NOTE 8: PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - ------------------------------------------------------ Premiums earned include $34.0 million, $64.2 million and $68.4 million for 2000, 1999 and 1998, respectively, related to refunded and called bonds. NOTE 9: 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. (51) 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 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, 2000 and 1999. Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------- December 31, 2000 Taxable bonds: United States Treasury and government agency $ 678,619 $ 35,292 $ (1,657) $ 712,254 Corporate and other obligations 5,546,960 73,564 (68,706) 5,551,818 Mortgage-backed 1,956,200 26,857 (4,396) 1,978,661 Tax-exempt bonds: State and municipal obligations 3,754,976 127,916 (12,286) 3,870,606 - -------------------------------------------------------------------------------- Total $11,936,755 $263,629 $ (87,045) $12,113,339 - -------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------- December 31, 1999 Taxable bonds: United States Treasury and government agency $ 559,204 $ 8,679 $ (13,056) $ 554,827 Corporate and other obligations 5,000,814 6,843 (171,015) 4,836,642 Mortgage-backed 1,662,636 4,441 (28,079) 1,638,998 Tax-exempt bonds: State and municipal obligations 3,641,794 50,334 (175,043) 3,517,085 - -------------------------------------------------------------------------------- Total $10,864,448 $ 70,297 $(387,193) $10,547,552 - -------------------------------------------------------------------------------- Fixed-maturity investments carried at fair value of $11.7 million and $11.6 million as of December 31, 2000 and 1999, respectively, 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, 2000 and 1999, the fair value of securities pledged as collateral with respect to these obligations approximated $2.3 billion and $1.9 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, 2000. 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 $ 588,128 $ 588,128 Beyond 1 yr but within 5 yrs 2,623,722 2,642,267 Beyond 5 yrs but within 10 yrs 1,630,315 1,643,653 Beyond 10 yrs but within 15 yrs 1,432,345 1,483,471 Beyond 15 yrs but within 20 yrs 1,544,195 1,598,390 Beyond 20 yrs 2,161,850 2,178,769 - -------------------------------------------------------------------------------- 9,980,555 10,134,678 Mortgage-backed 1,956,200 1,978,661 - -------------------------------------------------------------------------------- Total fixed-maturities and short-term investments $11,936,755 $12,113,339 - -------------------------------------------------------------------------------- NOTE 10: INVESTMENT INCOME AND GAINS AND LOSSES - ----------------------------------------------- Investment income consists of: Years ended December 31 ------------------------------------------ In thousands 2000 1999 1998 - -------------------------------------------------------------------------------- Fixed-maturities $389,159 $358,127 $331,857 Short-term investments 10,473 7,672 5,692 Other investments 1,122 24 16 - -------------------------------------------------------------------------------- Gross investment income 400,754 365,823 337,565 Investment expenses 6,769 6,367 5,763 - -------------------------------------------------------------------------------- Net investment income 393,985 359,456 331,802 - -------------------------------------------------------------------------------- Net realized gains (losses): Fixed-maturities Gains 58,349 62,300 50,438 Losses (34,166) (28,360) (7,197) - -------------------------------------------------------------------------------- Net 24,183 33,940 43,241 - -------------------------------------------------------------------------------- Other investments Gains 12,110 2,270 901 Losses (3,409) (11,050) (9,166) - -------------------------------------------------------------------------------- Net 8,701 (8,780) (8,265) - -------------------------------------------------------------------------------- Total net realized gains 32,884 25,160 34,976 - -------------------------------------------------------------------------------- Total investment income $426,869 $384,616 $366,778 - -------------------------------------------------------------------------------- Net unrealized gains (losses) consist of: As of December 31 -------------------------------- In thousands 2000 1999 - -------------------------------------------------------------------------------- Fixed-maturities: Gains $263,629 $ 70,297 Losses (87,045) (387,193) - -------------------------------------------------------------------------------- Net 176,584 (316,896) - -------------------------------------------------------------------------------- Other investments: Gains 279 828 Losses (13,531) (6,671) - -------------------------------------------------------------------------------- Net (13,252) (5,843) - -------------------------------------------------------------------------------- Total 163,332 (322,739) Deferred income tax (benefit) 57,141 (112,920) - -------------------------------------------------------------------------------- Unrealized gains (losses), net $106,191 $(209,819) - -------------------------------------------------------------------------------- The deferred income tax (benefit) relates 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 2000 1999 1998 - -------------------------------------------------------------------------------- Fixed-maturities $493,480 $(772,041) $80,903 Other investments (7,409) (1,285) (7,477) - -------------------------------------------------------------------------------- Total 486,071 (773,326) 73,426 Deferred income tax (benefit) 170,061 (270,330) 25,384 - -------------------------------------------------------------------------------- Unrealized gains (losses), net $316,010 $(502,996) $48,042 - -------------------------------------------------------------------------------- NOTE 11: 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 2000 1999 1998 - -------------------------------------------------------------------------------- Current $136,645 $107,858 $112,367 Deferred 49,575 (40,505) 19,943 - -------------------------------------------------------------------------------- Total $186,220 $ 67,353 $132,310 - -------------------------------------------------------------------------------- (52) 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 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 -------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------- 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 (8.6) (16.1) (10.8) Amortization of goodwill 0.3 0.5 0.4 Other (0.6) (2.0) (1.2) - -------------------------------------------------------------------------------- Provision for income taxes 26.1% 17.4% 23.4% - -------------------------------------------------------------------------------- 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, 2000 and 1999 are presented below: In thousands 2000 1999 - -------------------------------------------------------------------------------- Deferred tax assets: Tax and loss bonds $199,607 $206,999 Unrealized losses -- 112,920 Alternative minimum tax credit carryforward 11,381 65,404 Loss and loss adjustment expense reserves 88,396 79,051 Other 66,611 64,456 - -------------------------------------------------------------------------------- Total gross deferred tax assets 365,995 528,830 - -------------------------------------------------------------------------------- Deferred tax liabilities: Contingency reserve 317,631 330,125 Deferred premium revenue 113,524 110,785 Deferred acquisition costs 96,024 88,173 Unrealized gains 57,141 -- Contingent commissions 620 408 Other 33,518 32,144 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 618,458 561,635 - -------------------------------------------------------------------------------- Net deferred tax liability $252,463 $ 32,805 - -------------------------------------------------------------------------------- The company believes that a valuation allowance is unnecessary in connection with the deferred tax assets. NOTE 12: NET INCOME PER COMMON SHARE - ------------------------------------ The following table provides a reconciliation of the denominator of the basic earnings per share (EPS) computation to the denominator of the diluted EPS computation: Years ended December 31 ------------------------------------------------ 2000 1999 1998 - -------------------------------------------------------------------------------- Net income (in thousands) $528,637 $320,530 $432,728 Basic weighted average shares 98,476,442 99,590,870 98,978,641 Stock options 543,437 674,295 1,042,537 Unallocated ESOP shares 92,750 137,174 141,836 - -------------------------------------------------------------------------------- Diluted weighted average shares 99,112,629 100,402,339 100,163,014 - -------------------------------------------------------------------------------- Basic EPS $5.37 $3.22 $4.37 Diluted EPS $5.33 $3.19 $4.32 - -------------------------------------------------------------------------------- Options to purchase 3,329,028, 2,603,897 and 621,244 shares of common stock during 2000, 1999 and 1998, 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 13: 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 services. Each of these is a business segment, with its respective financial performance detailed in this report. The financial guarantee business provides an unconditional and irrevocable guarantee of the payment of principal and interest on insured obligations when due. The 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. The municipal services business provides revenue enhancement services and products to public-sector clients nationwide. During 1999, the company completed its reorganization of the operations of two subsidiaries, Municipal Tax Bureau (MTB) and Municipal Resource Consultants (MRC). With this reorganization complete, this business, operating as MBIA MuniServices, is now focused on delivering revenue enhancement services, consisting of discovery, audit, collections/recovery, enforcement and information (data) services. 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: (53) 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Year ended December 31, 2000 --------------------------------------------------- INVESTMENT FINANCIAL MANAGEMENT MUNICIPAL In thousands GUARANTEE SERVICES SERVICES TOTAL - -------------------------------------------------------------------------------- Operating revenues $ 868,622 $ 118,859 $ 37,089 $ 1,024,570 Expenses (170,333) (62,535) (36,479) (269,347) - -------------------------------------------------------------------------------- Income from segments $ 698,289 $ 56,324 $ 610 $ 755,223 - -------------------------------------------------------------------------------- Corporate loss (40,366) - -------------------------------------------------------------------------------- Pre-tax income $ 714,857 - -------------------------------------------------------------------------------- Segment assets $8,067,874 $5,768,793 $ 57,671 $13,894,338 ================================================================================ Year ended December 31, 1999 --------------------------------------------------- Investment Financial Management Municipal In thousands Guarantee Services Services Total - -------------------------------------------------------------------------------- Operating revenues $ 829,738 $ 86,600 $ 22,923 $ 939,261 Expenses (315,236) (45,920) (35,372) (396,528) - -------------------------------------------------------------------------------- Income (loss) from segments $ 514,502 $ 40,680 $(12,449) $ 542,733 - -------------------------------------------------------------------------------- Corporate loss (154,850) - -------------------------------------------------------------------------------- Pre-tax income $ 387,883 - -------------------------------------------------------------------------------- Segment assets $7,108,122 $5,073,269 $ 82,508 $12,263,899 ================================================================================ Year ended December 31, 1998 --------------------------------------------------- Investment Financial Management Municipal 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) - -------------------------------------------------------------------------------- Income (loss) from segments $ 642,856 $ 29,020 $(11,290) $ 660,586 - -------------------------------------------------------------------------------- Corporate loss (95,548) - -------------------------------------------------------------------------------- Pre-tax income $ 565,038 - -------------------------------------------------------------------------------- Segment assets $7,163,316 $4,497,333 $165,806 $11,826,455 ================================================================================ For 2000, 1999 and 1998 domestic premiums earned were $377 million, $391 million and $387 million, respectively. For 2000, 1999 and 1998 international premiums earned were $69 million, $52 million and $38 million, respectively. NOTE 14: 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 $40 million available for the payment of dividends to the company as of December 31, 2000. During 2000 and 1999, MBIA Corp. declared and paid dividends of $197 million and $180 million to the company. The insurance departments of New York State, 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, 2000. NOTE 15: STOCK REPURCHASE PLAN - ------------------------------ In the third quarter of 1999, the company began acquiring shares of its common stock in connection with its stock repurchase plan announced in August 1999. The plan authorizes the company to repurchase up to 7.5 million outstanding common shares. During 2000 and 1999, the company purchased 1.7 million and 0.5 million shares of common stock at an aggregate cost of $77.7 million and $24.7 million, respectively. The company will only repurchase shares under this program when it is economically attractive and within the constraints of the company's Triple-A claims-paying ratings. NOTE 16: LONG-TERM DEBT AND LINES OF CREDIT - ------------------------------------------- Long-term debt consists of: As of December 31 -------------------------------- In thousands 2000 1999 - -------------------------------------------------------------------------------- 7.520% Notes due 2001-2002 $ 7,500 $ 11,250 9.000% Notes due 2001 100,000 100,000 6.880% Notes due 2008* 7,550 7,550 7.560% Notes due 2010 108,648 -- 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 150,000 150,000 6.950% Notes due 2038*** 50,000 50,000 8.000% Notes due 2040**** 100,000 -- - -------------------------------------------------------------------------------- 898,698 693,800 Less current portion 103,750 3,750 Less unamortized discount 760 846 Plus unamortized premium 914 -- - -------------------------------------------------------------------------------- Total $795,102 $689,204 - -------------------------------------------------------------------------------- * Callable 3/2000 @ 100.00 *** Callable 11/2003 @ 100.00 ** Callable 10/2002 @ 103.99 **** Callable 12/2005 @100.00 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. (54) 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries In December 2000, MBIA issued unsecured bonds denominated in Swiss Francs. The principal amount of 175 million Swiss Francs is due June 15, 2010 and accrues interest at a rate of 4.50%, which is paid annually. These bonds are not redeemable prior to maturity, except in the event of certain changes involving taxation in the United States or the imposition of certain certification, identification or reporting requirements. Simultaneous with the issuance of this debt, MBIA entered into a swap transaction which effectively converted MBIA's net interest expense to a U.S. dollar liability with a rate of 7.56%, which requires the payment of proceeds at maturity of approximately $99.3 million in exchange for 175 million Swiss Francs and interest thereon. In December 2000, MBIA also issued $100 million of 40-year debentures with a coupon rate of 8.00% which is callable at MBIA's option after the fifth year. The proceeds of both debt offerings in 2000 will be used for general corporate purposes and for the repayment of MBIA's $100 million 9.00% notes maturing February 15, 2001. Aggregate maturities of long-term obligations for each of the next five years commencing in 2001 are: Years ended December 31 ------------------------------------------------------------------ After In thousands 2001 2002 2003 2004 2005 Total - -------------------------------------------------------------------------------- $103,750 $3,750 -- -- $791,198 $898,698 - -------------------------------------------------------------------------------- MBIA Corp. has a standby line of credit commitment in the amount of $900 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 27, 2000 in excess of the greater of $900 million or 5.60% 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, 2007, and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. also maintains stop-loss reinsurance coverage of $175 million in excess of incurred losses of $762 million. The company and MBIA Corp. maintain bank liquidity facilities totaling $650 million. As of December 31, 2000, there were no borrowings outstanding under these agreements. From time to time TRS will access the capital markets for short-term asset-backed financings through a A1/P1-rated commercial paper conduit under conditions that the rating agencies agree will have no adverse impact on the rating of such conduit. Proceeds are invested under various client programs, which provide opportunities for MBIA Corp. to issue financial guarantee policies. 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. NOTE 17: 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, 2000, the annual interest rates on these agreements ranged from 2.5% to 8.08%. Principal payments due under these investment agreements in each of the next five years ending December 31 and thereafter, based upon expected withdrawal dates, are as follows: In thousands Principal Amount - -------------------------------------------------------------------------------- Expected withdrawal date: 2001 $1,932,918 2002 948,024 2003 391,199 2004 86,869 2005 26,893 Thereafter 1,352,377 - -------------------------------------------------------------------------------- Total $4,738,280 - -------------------------------------------------------------------------------- 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 $25 million at December 31, 2000. NOTE 18: 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 in the tables that follow. 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 issuer 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 structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under the 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. As of December 31, 2000, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-49 years diversified among 35,154 outstanding policies. The distribution of net insurance in force by geographic location, excluding $5.4 billion and $4.5 billion relating to investment management transactions guaranteed by MBIA Corp. in 2000 and 1999, respectively, is set forth in the following table: (55) 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries As of December 31 ------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------- NET % OF NET Net % of Net $ in billions INSURANCE INSURANCE Insurance Insurance Geographic Location IN FORCE IN FORCE In Force In Force - -------------------------------------------------------------------------------- Domestic: California $ 80.0 11.8% $ 76.6 12.0% New York 71.1 10.4 71.3 11.2 Florida 35.7 5.3 36.3 5.7 Texas 26.7 3.9 26.6 4.2 New Jersey 26.0 3.8 24.4 3.8 Pennsylvania 24.5 3.6 25.8 4.1 Illinois 22.6 3.3 22.1 3.5 Massachusetts 20.5 3.0 19.2 3.0 Michigan 14.8 2.2 15.0 2.4 Ohio 13.5 2.0 13.1 2.1 Subtotal 335.4 49.3 330.4 52.0 Nationally diversified 117.2 17.2 97.1 15.3 Other states 180.4 26.5 175.0 27.5 - -------------------------------------------------------------------------------- Total Domestic 633.0 93.0 602.5 94.8 International 47.9 7.0 33.4 5.2 - -------------------------------------------------------------------------------- Total $680.9 100.0% $635.9 100.0% - -------------------------------------------------------------------------------- The distribution of net insurance in force by type of bond is set forth in the table below: As of December 31 ------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------- NET % OF NET Net % of Net $ in billions INSURANCE INSURANCE Insurance Insurance Type of Bond IN FORCE IN FORCE In Force In Force - -------------------------------------------------------------------------------- Domestic: Public Finance: General obligation $152.7 22.4% $147.5 23.2% Utilities 77.9 11.4 78.1 12.3 Health care 68.3 10.0 70.6 11.1 Special revenue 61.4 9.0 52.5 8.3 Transportation 48.7 7.2 45.5 7.1 Investor owned utilities 37.2 5.5 33.0 5.2 Higher education 28.8 4.2 27.1 4.3 Housing 24.4 3.6 23.3 3.7 - -------------------------------------------------------------------------------- Total Public Finance 499.4 73.3 477.6 75.2 - -------------------------------------------------------------------------------- Structured Finance: Mortgage backed: Home equity 33.8 5.0 43.2 6.8 Other 20.5 3.0 19.8 3.0 First mortgage 11.3 1.7 13.1 2.1 Asset backed: Other 23.3 3.4 16.9 2.6 Auto 14.7 2.2 8.7 1.4 Leasing 5.3 0.8 6.3 1.0 Pooled corp. obligation & other 18.9 2.8 10.7 1.7 Financial risk 5.8 0.8 6.2 1.0 - -------------------------------------------------------------------------------- Total Structured Finance 133.6 19.7 124.9 19.6 - -------------------------------------------------------------------------------- Total Domestic 633.0 93.0 602.5 94.8 International: Infrastructure: Sovereign 2.7 0.4 2.1 0.3 Utilities 2.5 0.4 1.6 0.2 Transportation 1.6 0.2 1.1 0.2 Investor owned utilities 1.4 0.2 1.1 0.2 Sub-sovereign 1.0 0.1 1.2 0.2 Health care 0.6 0.1 0.7 0.1 Housing 0.5 0.1 0.6 0.1 Higher education 0.1 -- 0.1 -- - -------------------------------------------------------------------------------- Total Infrastructure 10.4 1.5 8.5 1.3 - -------------------------------------------------------------------------------- Structured Finance: Mortgage backed: First mortgage 3.9 0.6 1.5 0.2 Home equity 0.4 0.1 -- -- Other 0.2 -- 0.2 -- Asset backed: Other 1.7 0.2 1.8 0.3 Auto -- -- 0.1 -- Pooled corp. obligation & other 27.9 4.1 17.6 2.8 Financial risk 3.4 0.5 3.7 0.6 - -------------------------------------------------------------------------------- Total Structured Finance 37.5 5.5 24.9 3.9 - -------------------------------------------------------------------------------- Total International 47.9 7.0 33.4 5.2 - -------------------------------------------------------------------------------- Total $680.9 100.0% $635.9 100.0% - -------------------------------------------------------------------------------- (56) 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 19: 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 $143.3 billion and $129.0 billion at December 31, 2000 and 1999, respectively. The distribution of ceded insurance in force by type of bond is set forth in the following table: As of December 31 ------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------- % OF % of CEDED CEDED Ceded Ceded In billions INSURANCE INSURANCE Insurance Insurance Type of Bond IN FORCE IN FORCE In Force In Force - -------------------------------------------------------------------------------- Domestic: Public Finance: General obligation $19.8 13.9% $18.8 14.6% Transportation 18.4 12.8 14.7 11.4 Utilities 17.1 11.9 17.2 13.3 Health care 15.3 10.7 15.7 12.2 Special revenue 9.4 6.6 8.8 6.8 Investor owned utilities 6.1 4.2 5.7 4.5 Housing 2.8 1.9 2.7 2.1 Higher education 2.4 1.7 2.1 1.6 - -------------------------------------------------------------------------------- Total Public Finance 91.3 63.7 85.7 66.5 - -------------------------------------------------------------------------------- Structured Finance: Mortgage backed: Home equity 8.2 5.7 8.8 6.8 Other 2.0 1.4 1.5 1.2 First mortgage 1.6 1.1 2.1 1.6 Asset backed: Other 2.9 2.0 2.4 1.8 Auto 2.6 1.8 1.9 1.4 Leasing 2.1 1.5 2.4 1.9 Pool corp. obligation & other 4.7 3.3 2.3 1.8 Financial risk 0.6 0.4 0.6 0.5 - -------------------------------------------------------------------------------- Total Structured Finance 24.7 17.2 22.0 17.0 - -------------------------------------------------------------------------------- Total Domestic $116.0 80.9 $107.7 83.5 - -------------------------------------------------------------------------------- (Continued) As of December 31 ------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------- % OF % of CEDED CEDED Ceded Ceded In billions INSURANCE INSURANCE Insurance Insurance Type of Bond IN FORCE IN FORCE In Force In Force - -------------------------------------------------------------------------------- International: Infrastructure: Transportation $1.7 1.2 $1.2 0.9 Sovereign 1.6 1.1 1.4 1.1 Utilities 1.1 0.8 0.7 0.5 Sub-sovereign 0.8 0.6 0.9 0.7 Investor owned utilities 0.6 0.4 0.5 0.4 Health care 0.4 0.3 0.4 0.3 - -------------------------------------------------------------------------------- Total infrastructure 6.2 4.4 5.1 3.9 - -------------------------------------------------------------------------------- Structured Finance: Pooled corp.obligation & other 15.0 10.4 9.5 7.4 Financial risk 2.8 2.0 3.1 2.4 Asset backed 1.8 1.2 2.4 1.9 Mortgage backed 1.5 1.1 1.2 0.9 - -------------------------------------------------------------------------------- Total Structured Finance 21.1 14.7 16.2 12.6 - -------------------------------------------------------------------------------- Total International 27.3 19.1 21.3 16.5 - -------------------------------------------------------------------------------- Total $143.3 100.0% $129.0 100.0% - -------------------------------------------------------------------------------- The distribution of ceded insurance in force by geographic location is set forth in the following table: As of December 31 ------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------- % OF % of CEDED CEDED Ceded Ceded In billions INSURANCE INSURANCE Insurance Insurance Geographic Location IN FORCE IN FORCE In Force In Force - -------------------------------------------------------------------------------- Domestic: California $ 17.9 12.5% $ 17.6 13.6% New York 13.7 9.5 14.0 10.9 New Jersey 6.9 4.8 5.5 4.3 Texas 5.3 3.7 5.5 4.2 Florida 4.7 3.3 5.0 3.9 Massachusetts 4.2 3.0 4.1 3.2 Pennsylvania 4.2 2.9 4.6 3.5 Colorado 3.8 2.7 2.4 1.9 Puerto Rico 3.7 2.6 3.2 2.5 Illinois 3.6 2.5 3.4 2.6 - -------------------------------------------------------------------------------- Subtotal 68.0 47.5 65.3 50.6 Nationally Diversified 18.8 13.1 14.4 11.2 Other States 29.2 20.3 28.0 21.7 - -------------------------------------------------------------------------------- Total Domestic 116.0 80.9 107.7 83.5 - -------------------------------------------------------------------------------- International 27.3 19.1 21.3 16.5 - -------------------------------------------------------------------------------- Total $143.3 100.0% $129.0 100.0% - -------------------------------------------------------------------------------- As part of the company's portfolio shaping activity in 1998, the company entered into facultative 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 (57) 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries retroactive basis in accordance with SFAS 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." Components of premiums written including reinsurance assumed from and ceded to other companies is set forth in the following table: Years ended December 31 ------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------- Direct $641,452 $590,597 $664,269 Assumed 45,956 34,274 12,781 - -------------------------------------------------------------------------------- Gross 687,408 624,871 677,050 Ceded (189,316) (171,256) (156,064) - -------------------------------------------------------------------------------- Net $498,092 $453,615 $520,986 - -------------------------------------------------------------------------------- Ceding commissions received from reinsurers before deferrals were $37.3 million, $35.3 million and $37.2 million in 2000, 1999 and 1998, respectively. In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group. NOTE 20: 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, 2000, 1999 and 1998 was $7.8 million, $7.8 million and $7.3 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 $2.8 million, $4.2 million and $2.9 million for the years ended December 31, 2000, 1999 and 1998, 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. NOTE 21: LONG-TERM INCENTIVE PLANS - ---------------------------------- On March 2, 1987, the company adopted a plan (the 1987 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 under the 1987 plan. As of May 11, 2000, 9,161,959 options had been granted, net of expirations and cancellations. On May 11, 2000, at the annual meeting of shareholders, the company adopted the 2000 Stock Option Plan (the 2000 plan). Upon adoption of the 2000 plan, the 149,163 shares available for grant as of that date under the 1987 plan were canceled and no longer available for awards. The number of shares authorized under the 2000 plan is 4,900,000. As of December 31, 2000, 456,228 options had been granted under the 2000 plan, net of expirations and cancellations, leaving the total available for future grants at 4,443,772. 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. In 2000, 586,938 options were awarded under the 1987 and 2000 plans. These options vest over four or five years depending on the level of the recipient. Prior option grants are not taken into account in determining the number of options granted in any year. 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 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 2000 award covers growth in ABV from December 31, 2000 through December 31, 2003, with a base line growth of 13.5%. The 1999 award covers growth in ABV from December 31, 1999 through December 31, 2002 and the 1998 award covers growth in ABV from December 31, 1998 through December 31, 2001, with a base line growth of 12% on both 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 2004 for the 2000 award, in early 2003 for the 1999 award and early 2002 for the 1998 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 2000, 1999 and 1998, $13.6 million, $8.5 million and $5.5 million, respectively, were recorded as compensation expense related to ABV awards. In December 1995, the company adopted a restricted stock program whereby key executive officers are granted (58) 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries restricted shares of the company's stock. These stock awards may only be sold three to five years from the date of grant, at which time the awards fully vest. In 2000 and 1999, respectively, 76,512 and 96,968 restricted shares (net of canceled shares) of the company's stock were granted to certain officers of the company. The fair value of the shares awarded in 2000 and 1999 determined on the grant date was $6.1 million and $5.0 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 five-year vesting period. Compensation expense related to the restricted stock was $4.2 million, $1.9 million and $1.3 million for the years ended December 31, 2000, 1999 and 1998, 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. Prior to 1999, the ESOP expense was calculated using the shares allocated method. Shares were 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 interest payments estimated over the life of the loan. Compensation expense related to the ESOP was $1.3 million for the year ended December 31, 1998. As of December 31, 1998, 208,789 shares were allocated to the participants. In July 1999, the company contributed 13,397 additional shares to the ESOP plan. Subsequent to this contribution the ESOP plan was merged with the MBIA Inc. Employees Profit Sharing and 401(k) plan. In conjunction with the merger of the plans, released ESOP shares are used to fund the 401(k) company match obligations. During 2000 and 1999, 44,424 and 10,190 shares, respectively, were utilized for the 401(k) company match. As of December 31, 2000 and 1999, respectively, a total of 267,789 and 223,365 shares have been allocated to the participants. 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 No. 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 2000 are not likely to be representative of the effects on reported net income and earnings per share for future years. Years ended December 31 -------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------- Net income (in thousands): Reported $528,637 $320,530 $432,728 Pro-forma 520,238 314,074 430,224 Basic earnings per share: Reported $5.37 $3.22 $4.37 Pro-forma 5.28 3.15 4.35 Diluted earnings per share: Reported $5.33 $3.19 $4.32 Pro-forma 5.25 3.13 4.30 - -------------------------------------------------------------------------------- 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: DECEMBER December January December 2000 1999 1999 1998 - -------------------------------------------------------------------------------- Exercise price $72.8750 $48.8125 $67.1250 $63.8152 Dividend yield 1.130% 1.680% 1.190% 1.254% Expected volatility .2834 .2512 .2392 .2392 Risk-free interest rate 5.342% 6.28% 4.83% 4.63% Expected option term (in years) 6.18 6.05 6.05 5.86 - -------------------------------------------------------------------------------- (59) 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries A summary of the company's stock option plans as of December 31, 2000, 1999 and 1998, and changes during the years ending on those dates, is presented below: 2000 ------------------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 5,530,090 $50.7047 Granted 586,938 68.2659 Exercised 623,937 60.7741 Expired or canceled 205,629 60.7840 - -------------------------------------------------------------------------------- Outstanding at year-end 5,287,462 $55.0067 - -------------------------------------------------------------------------------- Exercisable at year-end 1,765,194 $39.5690 Weighted-average fair value per share of options granted during the year $23.6069 - -------------------------------------------------------------------------------- 1999 ------------------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 3,679,414 $42.2591 Granted 2,373,540 61.1806 Exercised 365,816 64.0688 Expired or canceled 157,048 66.2718 - -------------------------------------------------------------------------------- Outstanding at year-end 5,530,090 $50.6911 - -------------------------------------------------------------------------------- Exercisable at year-end 2,092,322 $32.5158 Weighted-average fair value per share of options granted during the year $21.4250 - -------------------------------------------------------------------------------- 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 185,276 61.2550 - -------------------------------------------------------------------------------- Outstanding at year-end 3,679,414 $42.2591 - -------------------------------------------------------------------------------- Exercisable at year-end 2,095,767 $29.3827 Weighted-average fair value per share of options granted during the year $18.1565 - -------------------------------------------------------------------------------- The following table summarizes information about the plan's stock options at December 31, 2000:
Weighted-Average Number Remaining Number Range of Average Outstanding Contractual Weighted-Average Exercisable Weighted-Average Exercise Price at 12/31/00 Life in Years Exercise Price 12/31/00 Exercise Price - --------------------------------------------------------------------------------------------------------------------- $17.5630-42.7800 1,207,297 2.85 $29.8921 1,187,297 $29.7255 $44.5630-57.5000 954,844 8.75 $49.1693 17,898 $53.7235 $57.9380-72.8750 3,125,321 7.81 $66.4918 559,999 $62.3175 - --------------------------------------------------------------------------------------------------------------------- Total 5,287,462 6.85 $55.0067 1,765,194 $39.5690 - ---------------------------------------------------------------------------------------------------------------------
NOTE 22: 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 (60) 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 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 23: 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, 2000 is $340 million. NOTE 24: 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 equity oriented and equity method 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%. DERIVATIVES > The fair value reflects the estimated amounts that the company would receive or pay to terminate the transaction at the reporting date. (61) 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
As of December 31, 2000 As of December 31, 1999 ----------------------------------------------------- CARRYING ESTIMATED Carrying Estimated In thousands AMOUNT FAIR VALUE Amount Fair Value - ----------------------------------------------------------------------------------------------------- ASSETS: Fixed-maturity securities $6,740,127 $6,740,127 $5,783,979 $5,783,979 Short-term investments 376,604 376,604 274,022 274,022 Other investments 119,591 119,591 146,038 146,038 Municipal investment agreement portfolio 4,996,608 4,996,608 4,489,551 4,489,551 Cash and cash equivalents 93,962 93,962 93,559 93,559 Securities borrowed or purchased under agreements to resell 314,624 332,179 261,171 260,819 Reinsurance recoverable on unpaid losses 31,414 31,414 30,819 30,819 Prepaid reinsurance premiums 442,622 380,047 403,210 342,837 Receivable for investments sold 13,772 13,772 24,922 24,922 LIABILITIES: Deferred premium revenue 2,397,578 2,123,661 2,310,758 2,022,357 Loss and loss adjustment expense reserves 499,279 499,279 467,279 467,279 Municipal investment agreements 3,821,652 3,911,348 3,483,911 3,413,014 Municipal repurchase agreements 967,803 994,742 1,028,921 1,023,823 Long-term debt 795,102 799,345 689,204 660,567 Short-term debt 144,243 144,243 68,751 68,751 Securities loaned or sold under agreements to repurchase 489,624 504,739 288,750 289,469 Payable for investments purchased 7,899 7,899 102,666 102,666 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums -- 885,477 -- 731,748 Derivatives* 9,386 25,603 -- 9,617 - -----------------------------------------------------------------------------------------------------
*The estimated fair value for 2000 includes net derivative liabilities identified as part of the company's implementation of SFAS 133. NOTE 25: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - -------------------------------------------------------- A summary of selected quarterly income statement information follows:
In thousands except per share amounts 2000 FIRST SECOND THIRD FOURTH YEAR - -------------------------------------------------------------------------------------- Gross premiums written $148,837 $189,295 $172,010 $177,266 $687,408 Net premiums written 105,871 127,485 122,789 141,947 498,092 Premiums earned 104,704 109,152 113,153 119,344 446,353 Investment income and realized gains and losses 107,255 106,897 105,474 107,243 426,869 All other revenues 42,475 46,475 47,594 47,688 184,232 Income before income taxes 179,077 174,111 177,493 184,176 714,857 Net income $132,320 $129,393 $130,714 $136,210 $528,637 Net income per common share:* Basic $ 1.34 $ 1.32 $ 1.33 $ 1.39 $ 5.37 Diluted $ 1.33 $ 1.31 $ 1.32 $ 1.38 $ 5.33 - -------------------------------------------------------------------------------------- 1999 First Second Third Fourth Year - -------------------------------------------------------------------------------------- Gross premiums written $154,910 $146,817 $152,749 $170,395 $624,871 Net premiums written 94,914 111,461 119,720 127,520 453,615 Premiums earned 112,111 107,217 110,139 113,329 442,796 Investment income and realized gains and losses 97,429 96,152 97,094 93,941 384,616 All other revenues 27,986 33,161 36,275 39,587 137,009 Income before income taxes 11,954 53,358 160,178 162,393 387,883 Net income $ 9,420 $ 56,793 $127,410 $126,907 $320,530 Net income per common share:* Basic $ 0.09 $ 0.57 $ 1.28 $ 1.28 $ 3.22 Diluted $ 0.09 $ 0.56 $ 1.27 $ 1.27 $ 3.19 - --------------------------------------------------------------------------------------
*Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. The pre-tax one-time charge of $153 million relating to the increase in the company's loss reserving factor is included in the first quarter of 1999 results. The pre-tax one-time charge of $102 million relating to the impairment of the company's investment in Capital Asset is included in the second quarter of 1999 results. (62) 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 26: SUBSEQUENT EVENT - STOCK SPLIT (UNAUDITED) - --------------------------------------------------- On March 15, 2001 the Company's Board of Directors approved a 3 for 2 stock split by means of a stock dividend. The 3 for 2 stock split will be accomplished through a stock dividend which will be distributed on April 20, 2001 to shareholders of record as of April 2, 2001. The pro-forma per share amounts on a post-split basis for the years ended December 31, 2000, 1999 and 1998 would be as follows: - -------------------------------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------- Net income per common share: Basic $3.58 $2.15 $2.91 Diluted $3.56 $2.13 $2.88 Book value per share $28.59 $23.56 $25.43 - -------------------------------------------------------------------------------- (63) EX-21 16 y46810ex21.txt LIST OF SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF MBIA INC.
NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- MBIA Insurance Corporation New York Municipal Issuers Service Corporation New York MBIA Insurance Corp. of Illinois Illinois MBIA Asset Management LLC Delaware MBIA Municipal Investors Service Corporation Delaware Colorado Investor Services Corporation Colorado MBIA Investment Management Corp. Delaware MBIA Capital Management Corp. Delaware 1838 Investment Advisors, LLC Delaware 1838 Delaware Holding, LLC Delaware MBIA & Associates Consulting, Inc. Delaware MBIA Capital Corp. Delaware MBIA International Marketing Services, Pty. Limited Australia MBIA Assurance S.A. France MBIA Singapore Pte Ltd. Singapore MBIA Services Company Delaware MBIA MuniServices Company Delaware Municipal Tax Collection Bureau, Inc. Pennsylvania 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 Investment Management, Inc. Delaware CapMAC Financial Services, Inc. Delaware CapMAC Financial Services (Europe) Ltd. United Kingdom CapMAC Asia Ltd. Bermuda
EX-23 17 y46810ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS 1 Exhibit 23.1 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, 2001 on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, which report is incorporated by reference in this Annual Report on Form 10-K for the fiscal year ended December 31, 2000; (2) Our report dated February 2, 2001 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, 2000; and (3) Our report dated February 2, 2001 on our audits of the consolidated financial statements of MBIA Insurance Corporation and Subsidiaries as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, which is included in Exhibit 99 to this Annual Report on Form 10-K for the fiscal year ended December 31, 2000. /s/PricewaterhouseCoopers LLP ----------------------------- PricewaterhouseCoopers LLP New York, New York February 2, 2001 EX-99 18 y46810ex99.txt ADDITIONAL EXHIBITS 1 Exhibit 99 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 2 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 LLP ------------------------------ PricewaterhouseCoopers LLP New York, New York February 2, 2001 3 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
December 31, 2000 December 31, 1999 ----------------- ----------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $6,539,891 and $6,006,506) $6,665,533 $5,783,979 Short-term investments, at amortized cost (which approximates fair value) 269,900 273,816 Other investments 9,663 8,425 ------------- ------------- TOTAL INVESTMENTS 6,945,096 6,066,220 Cash and cash equivalents 12,541 33,702 Securities purchased under agreements to resell 330,000 205,000 Accrued investment income 106,822 93,512 Deferred acquisition costs 274,355 251,922 Prepaid reinsurance premiums 442,622 403,210 Reinsurance recoverable on unpaid losses 31,414 30,819 Goodwill (less accumulated amortization of $61,784 and $56,906) 81,196 86,075 Property and equipment, at cost (less accumulated depreciation of $38,309 and $31,104) 117,338 111,549 Receivable for investments sold 2,497 2,882 Other assets 105,846 161,082 ------------- ------------- TOTAL ASSETS $8,449,727 $7,445,973 ============= ============= LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue $2,397,578 $2,310,758 Loss and loss adjustment expense reserves 499,279 467,279 Securities sold under agreements to repurchase 330,000 205,000 Deferred income taxes 253,363 79,895 Deferred fee revenue 26,138 28,478 Payable for investments purchased 2,334 18,948 Other liabilities 133,429 107,988 ------------- ------------- TOTAL LIABILITIES 3,642,121 3,218,346 ------------- ------------- 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 1,540,071 1,514,014 Retained earnings 3,191,536 2,858,210 Accumulated other comprehensive income (loss), net of deferred income tax provision (benefit) of $43,910 and $(77,942) 60,999 (159,597) ------------- ------------- TOTAL SHAREHOLDER'S EQUITY 4,807,606 4,227,627 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $8,449,727 $7,445,973 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. -2- 4 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ----------------------------------------------- 2000 1999 1998 ------------ ------------- ------------ Revenues: Gross premiums written $687,408 $624,871 $725,269 Ceded premiums (189,316) (171,256) (149,280) ------------ ------------- ------------ Net premiums written 498,092 453,615 575,989 Increase in deferred premium revenue (51,739) (10,819) (166,182) ------------ ------------- ------------ Premiums earned (net of ceded premiums of $147,249 $119,879, and $92,802) 446,353 442,796 409,807 Net investment income 392,078 358,836 326,391 Net realized gains 24,721 32,680 29,891 Advisory fees 24,027 22,885 23,964 Other 1,564 --- 713 ------------ ------------- ------------ Total revenues 888,743 857,197 790,766 ------------ ------------- ------------ Expenses: Losses and loss adjustment 51,291 198,454 33,661 Policy acquisition costs, net 35,976 36,700 33,168 Operating 80,376 76,599 65,445 ------------ ------------- ------------ Total expenses 167,643 311,753 132,274 ------------ ------------- ------------ Income before income taxes 721,100 545,444 658,492 Provision for income taxes 190,474 73,456 134,593 ------------ ------------- ------------ Net income $530,626 $471,988 $523,899 ============ ============= ============
The accompanying notes are an integral part of the consolidated financial statements. -3- 5 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (In thousands except per share amounts)
Accumulated Common Stock Additional Other Total -------------------- Paid-in Retained Comprehensive Shareholder's Shares Amount Capital Earnings Income (Loss) Equity -------- -------- ---------- ---------- -------------- -------------- Balance, January 1, 1998 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 -------- -------- ---------- ---------- -------------- -------------- Comprehensive income: Net income --- --- --- 471,988 --- 471,988 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $(190,225) --- --- --- --- (354,231) (354,231) Change in foreign currency translation --- --- --- --- (10,456) (10,456) -------------- Other comprehensive income (loss) (364,687) -------------- Comprehensive income 107,301 -------------- Dividends declared (per common share $1,800.00) --- --- --- (180,000) --- (180,000) Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 22,981 --- --- 22,981 -------- -------- ---------- ---------- -------------- -------------- Balance, December 31, 1999 100,000 15,000 1,514,014 2,858,210 ($159,597) 4,227,627 -------- -------- ---------- ---------- -------------- -------------- Comprehensive income: Net income --- --- --- 530,626 --- 530,626 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $121,852 --- --- --- --- 226,480 226,480 Change in foreign currency translation --- --- --- --- (5,884) (5,884) -------------- Other comprehensive income 220,596 -------------- Comprehensive income 751,222 -------------- Dividends declared (per common share $1,973.00) --- --- --- (197,300) --- (197,300) Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 26,057 --- --- 26,057 -------- -------- ---------- ---------- -------------- -------------- Balance, December 31, 2000 100,000 $15,000 $1,540,071 $3,191,536 $60,999 $4,807,606 ======== ======== ========== ========== ============== ==============
2000 1999 1998 --------- --------- -------- Disclosure of reclassification amount: Unrealized (depreciation) appreciation of investments arising during the period, net of taxes $228,513 $(304,809) $53,415 Reclassification of adjustment, net of taxes (2,033) (49,422) (19,331) --------- --------- -------- Net unrealized appreciation, net of taxes $226,480 $(354,231) $34,084 ========= ========= ======== The accompany notes are an integral part of the consolidated financial statements. -4- 6 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 ------------------------------------------ 2000 1999 1998 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 530,626 $ 471,988 $ 523,899 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (13,310) (2,273) (12,638) Increase in deferred acquisition costs (22,433) (21,837) (75,985) Increase in prepaid reinsurance premiums (39,412) (50,511) (99,806) Increase in deferred premium revenue 91,151 61,330 265,983 Increase in loss and loss adjustment expense reserves, net 31,405 166,346 191,242 Depreciation 7,205 7,803 5,626 Amortization of goodwill 4,879 4,875 4,879 Amortization of bond discount, net (16,756) (18,642) (15,831) Net realized gains on sale of investments (24,721) (32,680) (29,891) Deferred income tax provision (benefit) 51,597 (33,170) 21,856 Other, net 94,282 (84,803) 43,593 ------------- ------------- ------------- Total adjustments to net income 163,887 (3,562) 299,028 ------------- ------------- ------------- Net cash provided by operating activities 694,513 468,426 822,927 ------------- ------------- ------------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (2,984,404) (2,001,636) (2,800,008) Sale of fixed-maturity securities, net of receivable for investments sold 2,183,222 1,376,747 1,086,973 Redemption of fixed-maturity securities, net of receivable for investments redeemed 282,541 288,710 745,516 Sale (purchase) of short-term investments, net 12,947 114,096 (158,339) Sale (purchase) of other investments, net 331 8,222 (527) Capital expenditures, net of disposals (13,011) (47,409) (18,894) ------------- ------------- ------------- Net cash used by investing activities (518,374) (261,270) (1,145,279) ------------- ------------- ------------- Cash flows from financing activities: Capital contribution from MBIA Inc. --- --- 324,915 Dividends paid (197,300) (180,000) --- ------------- ------------ ------------- Net cash (used) provided by financing activities (197,300) (180,000) 324,915 ------------- ------------ ------------- Net (decrease) increase in cash and cash equivalents (21,161) 27,156 2,563 Cash and cash equivalents - beginning of year 33,702 6,546 3,983 ------------- ------------- ------------- Cash and cash equivalents - end of year $ 12,541 $ 33,702 $ 6,546 ============= ============= ============= Supplemental cash flow disclosures: Income taxes paid $ 83,020 $ 125,176 $ 105,451
The accompanying notes are an integral part of the consolidated financial statements. -5- 7 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 -6- 8 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) management services for MBIA Inc. and its affiliates and third party institutional clients. 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. 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, MBIA Corp. 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 MBIA Corp. resulting in additional paid-in capital of $324.9 million. MBIA Corp. has one business segment - Financial Guarantee Insurance. The financial guarantee business provides an unconditional and irrevocable guarantee of the payment of principal and interest on insured obligations when due. 2. SIGNIFICANT ACCOUNTING POLICIES - ----------------------------------- The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (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 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 -7- 9 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 effective 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. Other investments include MBIA Corp.'s interest in equity oriented investments. 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. These contracts are primarily entered into to obtain securities that are repledged as part of MBIA Corp.'s collateralized municipal investment and repurchase activity and are only transacted with high-quality dealer firms. 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. -8- 10 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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 MBIA Corp. 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 MBIA Corp. collects advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given insured transaction. In addition, the company earns advisory fees in connection with its administration of certain third-party-owned conduits. Most fees are deferred and earned pro-rata over the life of the underlying transactions. Certain fees, however, are earned in the quarter they are collected and include administrative fees for transactions where the fee is collected on a periodic installment basis and fees for transactions which terminate prior to the expected maturity date. 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 expense 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. -9- 11 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, based on a discount rate of 6.12%. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of issuer 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. In 2000 and 1999, MBIA Corp. reviewed its loss reserving methodology. The reviews included an analysis of loss reserve factors based on the latest available industry data. They included the analysis of historical default and recovery experience for the relevant sectors of the fixed-income market. Also factored in was the changing mix of our book of business. The 1999 review resulted in an increase in MBIA Corp.'s current loss reserving factors. DERIVATIVES Effective January 1, 2001 the company will adopt Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities". See footnote 4 for an explanation of the impact the adoption of this statement will have on MBIA Corp.'s financial statements. 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 -10- 12 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) premium revenue recognition, deferred acquisition costs, unrealized appreciation or depreciation of investments 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. 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 on a basis proportionate to the scheduled periodic maturity of principal and payment of interest ("debt service") to the original total principal and interest insured; 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; -11- 13 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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 2000 1999 - -------------------------------------------------------------------------------- GAAP shareholder's equity $4,807,606 $4,227,627 Premium revenue recognition (535,920) (491,766) Deferral of acquisition costs (274,354) (251,922) Unrealized (gains) losses (125,529) 222,803 Contingency reserve (2,123,403) (1,738,730) Loss and loss adjustment expense reserves 258,706 232,004 Deferred income taxes 253,363 79,895 Tax and loss bonds 202,195 219,195 Goodwill (81,196) (86,075) Other 201 336 - -------------------------------------------------------------------------------- Statutory capital and surplus $2,381,669 $2,413,367 - -------------------------------------------------------------------------------- Aggregate net income of MBIA Corp. and its subsidiaries determined in accordance with statutory accounting practices for the years ended December 31, 2000, 1999 and 1998 was $543.9 million, $521.8 million and $498.2 million, respectively. In 1998, the National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles guidance, which replaces the current Accounting Practices and Procedures manuals as the NAIC's primary guidance on statutory accounting effective as of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas; e.g. deferred income taxes are recorded. The New York State Insurance Department has adopted the Codification guidance, effective January 1, 2001. The New York State Insurance Department has not adopted the Codification rules on certain -12- 14 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) accounting issues; e.g. deferred income taxes and goodwill. The effect of adoption on MBIA Corp.'s statutory surplus is expected to be immaterial to MBIA Corp. 4. RECENT ACCOUNTING PRONOUNCEMENT - ----------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." which is effective for the company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the use and type of the hedge. MBIA Corp. has entered into derivative transactions that do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. The Insurance segment, which represents the majority of the company's derivative exposure and mark to market as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. Adoption of SFAS 133, on January 1, 2001 will result in MBIA Corp.'s after-tax reductions in net income of approximately $10.7 million. In addition, the company will increase its assets by approximately $36.2 million and liabilities by approximately $46.9 million on an after-tax basis. 5. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - -------------------------------------------------- Premiums earned include $34.0 million, $64.2 million and $68.4 million for 2000, 1999 and 1998, 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, 2000 and 1999: -13- 15 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, 2000 Taxable bonds United States Treasury and Government Agency $ 148,911 $ 2,364 $ (690) $ 150,585 Corporate and other obligations 2,126,124 32,188 (35,383) 2,122,929 Mortgage-backed 779,780 14,785 (3,252) 791,313 Tax-exempt bonds State and municipal obligations 3,754,976 127,916 (12,286) 3,870,606 - --------------------------------------------------------------------------------------------------- Total $6,809,791 $177,253 $(51,611) $6,935,433 - --------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - --------------------------------------------------------------------------------------------------- December 31, 1999 Taxable bonds United States Treasury and Government Agency $ 29,913 $ 116 $ (2,926) $ 27,103 Corporate and other obligations 1,817,867 2,227 (79,673) 1,740,421 Mortgage-backed 790,748 3,874 (21,436) 773,186 Tax-exempt bonds State and municipal obligations 3,641,794 50,334 (175,043) 3,517,085 - --------------------------------------------------------------------------------------------------- Total $6,280,322 $ 56,551 $(279,078) $6,057,795 - ---------------------------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $11.7 million and $11.6 million as of December 31, 2000 and 1999, respectively, were on deposit with various regulatory authorities to comply with insurance laws. -14- 16 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2000. 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 $ 252,609 $ 252,609 Beyond 1 year but within 5 years 847,492 858,562 Beyond 5 years but within 10 years 1,118,948 1,134,494 Beyond 10 years but within 15 years 1,128,016 1,170,286 Beyond 15 years but within 20 years 1,254,464 1,293,067 Beyond 20 years 1,428,482 1,435,101 - -------------------------------------------------------------------------------- 6,030,011 6,144,119 Mortgage-backed 779,780 791,314 - -------------------------------------------------------------------------------- Total fixed-maturities and short-term investments $6,809,791 $6,935,433 - -------------------------------------------------------------------------------- 7. INVESTMENT INCOME AND GAINS AND LOSSES - ------------------------------------------ Investment income consists of: Years ended December 31 --------------------------------------- In thousands 2000 1999 1998 - -------------------------------------------------------------------------------- Fixed-maturities $388,134 $357,702 $326,820 Short-term investments 10,410 7,221 5,311 Other investments (80) 24 16 - -------------------------------------------------------------------------------- Gross investment income 398,464 364,947 332,147 Investment expenses 6,386 6,111 5,756 - -------------------------------------------------------------------------------- Net investment income 392,078 358,836 326,391 Net realized gains (losses): Fixed-maturities: Gains 42,765 47,244 32,211 Losses (19,516) (16,793) (3,149) - -------------------------------------------------------------------------------- Net 23,249 30,451 29,062 - -------------------------------------------------------------------------------- Other investments: Gains 1,853 2,229 829 Losses (380) --- --- - -------------------------------------------------------------------------------- Net 1,473 2,229 829 - -------------------------------------------------------------------------------- Total net realized gains 24,722 32,680 29,891 - -------------------------------------------------------------------------------- Total investment income $416,800 $391,516 $356,282 - -------------------------------------------------------------------------------- -15- 17 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net unrealized gains (losses) consist of: As of December 31 ------------------------------------- In thousands 2000 1999 - -------------------------------------------------------------------------------- Fixed-maturities: Gains $177,253 $ 56,551 Losses (51,611) (279,078) - -------------------------------------------------------------------------------- Net 125,642 (222,527) - -------------------------------------------------------------------------------- Other investments: Gains --- --- Losses (113) (276) - -------------------------------------------------------------------------------- Net (113) (276) - -------------------------------------------------------------------------------- Total 125,529 (222,803) Deferred income tax provision (benefit) 43,910 (77,942) - -------------------------------------------------------------------------------- Unrealized gains (losses), net $ 81,619 $(144,861) - -------------------------------------------------------------------------------- The deferred income tax provision (benefit) relate primarily to unrealized gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected in shareholder's equity. The change in net unrealized gains (losses) consists of: Years ended December 31 ------------------------------------------- In thousands 2000 1999 1998 - -------------------------------------------------------------------------------- Fixed-maturities $348,169 $(541,520) $52,267 Other investments 163 (2,936) (316) - -------------------------------------------------------------------------------- Total 348,332 (544,456) 51,951 Deferred income taxes 121,852 (190,225) 17,867 - -------------------------------------------------------------------------------- Unrealized gains (losses), net $226,480 $(354,231) $34,084 - -------------------------------------------------------------------------------- 8. INCOME TAXES - ---------------- The provision for income taxes is composed of: Years ended December 31 ------------------------------------------------------------ In thousands 2000 1999 1998 - -------------------------------------------------------------------------------- Current $138,877 $106,626 $112,737 Deferred 51,597 (33,170) 21,856 - -------------------------------------------------------------------------------- Total $190,474 $ 73,456 $134,593 - -------------------------------------------------------------------------------- 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: -16- 18 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended December 31 ------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------- 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 (8.5) (11.4) (9.1) Amortization of goodwill 0.2 0.3 0.3 Other (0.3) (10.4) (5.8) - -------------------------------------------------------------------------------- Provision for income taxes 26.4% 13.5% 20.4% - -------------------------------------------------------------------------------- The 1999 effective tax rate includes a reduction of 10.4% pertaining to the loss reserve strengthening. 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, 2000 and 1999 are presented below: In thousands 2000 1999 - -------------------------------------------------------------------------------- Deferred tax assets: Tax and loss bonds $199,607 $206,999 Alternative minimum tax credit carryforward 11,381 65,404 Loss and loss adjustment expense reserves 88,396 79,051 Unrealized losses --- 77,942 Other 36,319 45,668 - -------------------------------------------------------------------------------- Total gross deferred tax assets 335,703 475,064 - -------------------------------------------------------------------------------- Deferred tax liabilities: Contingency reserve 324,305 330,125 Deferred premium revenue 105,731 110,785 Deferred acquisition costs 96,024 88,173 Unrealized gains 43,910 --- Contingent commissions 620 408 Other 18,476 25,468 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 589,066 554,959 - -------------------------------------------------------------------------------- Net deferred tax liability $253,363 $ 79,895 - -------------------------------------------------------------------------------- -17- 19 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. and CMAC 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 (total capital and 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 which can be paid in any 12-month period, MBIA Corp. had in excess of $40 million available for the payment of dividends as of December 31, 2000. MBIA Corp. declared and paid dividends of $197.3 million and $180.0 million to MBIA Inc. in 2000 and 1999, respectively. CMAC declared and paid dividends of $4.5 million and $1.0 million to its parent MBIA Corp in 2000 and 1999, respectively. 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 that can be paid in any 12-month period, MBIA Illinois had in excess of $100 thousand available for the payment of dividends as of December 31, 2000. MBIA Illinois declared and paid dividends of $17.5 million and $1.0 million to its parent MBIA Corp. in 2000 and 1999, respectively. 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, 2000. -18- 20 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. LINES OF CREDIT - -------------------- MBIA Corp. has a standby line of credit commitment in the amount of $900 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 27, 2000 in excess of the greater of $900 million or 5.60% 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, 2007, and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. also maintains stop-loss reinsurance coverage of $175 million in excess of incurred losses of $762 million. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities totaling $650 million. As of December 31, 2000, there were no borrowings outstanding under these agreements. 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, 2000, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-49 years diversified among 35,691 outstanding policies. The distribution of net insurance in force by geographic location, including $5.3 billion and $4.5 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 2000 and 1999, respectively, is set forth in the following table: -19- 21 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31 -------------------------------------------------- $ in billions 2000 1999 - -------------------------------------------------------------------------------- Net % of Net Net % of Net Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - -------------------------------------------------------------------------------- Domestic: California $ 80.0 11.6% $ 76.6 12.0% New York 76.4 11.1 75.8 11.8 Florida 35.7 5.2 36.3 5.7 Texas 26.7 3.9 26.6 4.1 New Jersey 26.0 3.8 24.4 3.8 Pennsylvania 24.5 3.6 25.8 4.0 Illinois 22.6 3.3 22.1 3.5 Massachusetts 20.5 3.0 19.2 3.0 Michigan 14.8 2.1 15.0 2.3 Ohio 13.5 2.0 13.1 2.1 - -------------------------------------------------------------------------------- Subtotal 340.7 49.6 334.9 52.3 Nationally Diversified 117.2 17.1 97.1 15.2 Other states 180.4 26.3 175.0 27.3 - -------------------------------------------------------------------------------- Total domestic 638.3 93.0 607.0 94.8 International 47.9 7.0 33.4 5.2 - -------------------------------------------------------------------------------- Total $686.2 100.0% $640.4 100.0% - -------------------------------------------------------------------------------- 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 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 -20- 22 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 following table: -21- 23 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31 ------------------------------------------------ $ in billions 2000 1999 - ------------------------------------------------------------------------------- Net % of Net Net % of Net Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ------------------------------------------------------------------------------- Domestic Public Finance: General obligation $152.7 22.3% $147.5 23.0% Utilities 77.9 11.4 78.1 12.2 Health care 68.3 10.0 70.6 11.1 Special revenue 61.4 8.9 52.5 8.2 Transportation 48.7 7.1 45.5 7.1 Investor owned utilities 37.2 5.4 33.0 5.2 Higher education 28.8 4.2 27.1 4.2 Housing 24.4 3.5 23.3 3.6 - ------------------------------------------------------------------------------- Total public finance 499.4 72.8 477.6 74.6 - ------------------------------------------------------------------------------- Structured finance: Mortgage-backed: Home equity 33.8 4.9 43.2 6.7 Other 20.5 3.0 19.8 3.1 First mortgage 11.3 1.6 13.1 2.0 Asset-backed: Other 23.3 3.4 16.9 2.6 Auto 14.7 2.2 8.7 1.4 Leasing 5.3 0.8 6.3 1.0 Pooled corp. obligations and other 24.2 3.5 15.2 2.4 Financial risk 5.8 0.8 6.2 1.0 - ------------------------------------------------------------------------------- Total structured finance 138.9 20.2 129.4 20.2 - ------------------------------------------------------------------------------- Total domestic 638.3 93.0 607.0 94.8 - ------------------------------------------------------------------------------- International Infrastructure: Sovereign 2.7 0.4 2.1 0.3 Utilities 2.5 0.4 1.6 0.2 Transportation 1.6 0.2 1.1 0.2 Investor owned utilities 1.4 0.2 1.1 0.2 Sub-sovereign 1.0 0.1 1.2 0.2 Health care 0.6 0.1 0.7 0.1 Housing 0.5 0.1 0.6 0.1 Higher education 0.1 -- 0.1 -- - ------------------------------------------------------------------------------- Total infrastructure 10.4 1.5 8.5 1.3 - ------------------------------------------------------------------------------- Structured finance: Pooled corp. obligation and other 27.9 4.0 17.6 2.8 Mortgage-backed 4.5 0.7 1.7 0.2 Financial risk 3.4 0.5 3.7 0.6 Asset-backed 1.7 0.3 1.9 0.3 - ------------------------------------------------------------------------------- Total structured 37.5 5.5 24.9 3.9 finance Total international 47.9 7.0 33.4 5.2 - ------------------------------------------------------------------------------- Total $686.2 100.0% $640.4 100.0% - ------------------------------------------------------------------------------- -22- 24 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. 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 $143.3 billion and $129.0 billion, at December 31, 2000 and 1999, respectively. The distribution of ceded insurance in force by geographic location is set forth in the following table: As of December 31 ------------------------------------------------ In billions 2000 1999 - ------------------------------------------------------------------------------- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - ------------------------------------------------------------------------------- Domestic California $ 17.9 12.5 $ 17.6 13.6% New York 13.7 9.5 14.0 10.9 New Jersey 6.9 4.8 5.5 4.3 Texas 5.3 3.7 5.5 4.2 Florida 4.7 3.3 5.0 3.9 Massachusetts 4.2 3.0 4.1 3.2 Pennsylvania 4.2 2.9 4.6 3.5 Colorado 3.8 2.7 2.4 1.9 Puerto Rico 3.7 2.6 3.2 2.5 Illinois 3.6 2.5 3.4 2.6 - ------------------------------------------------------------------------------- Subtotal 68.0 47.5 65.3 50.6 Nationally diversified 18.8 13.1 14.4 11.2 Other states 29.2 20.3 28.0 21.7 - ------------------------------------------------------------------------------- Total domestic 116.0 80.9 107.7 83.5 International 27.3 19.1 21.3 16.5 - ------------------------------------------------------------------------------- Total $143.3 100.0% $129.0 100.0% - ------------------------------------------------------------------------------- -23- 25 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The distribution of ceded insurance in force by type of bond is set forth in the following table: As of December 31 ------------------------------------------------- In billions 2000 1999 - -------------------------------------------------------------------------------- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - -------------------------------------------------------------------------------- Domestic: Public Finance: General obligation $19.8 13.9% $18.8 14.6% Transportation 18.4 12.8 14.7 11.4 Utilities 17.1 11.9 17.2 13.3 Health care 15.3 10.7 15.7 12.2 Special revenue 9.4 6.6 8.8 6.8 Investor owned utilities 6.1 4.2 5.7 4.5 Housing 2.8 1.9 2.7 2.1 Higher education 2.4 1.7 2.1 1.6 - -------------------------------------------------------------------------------- Total public finance 91.3 63.7 85.7 66.5 - -------------------------------------------------------------------------------- Structured finance: Mortgage-backed: Home equity 8.2 5.7 8.8 6.8 Other 2.0 1.4 1.5 1.2 First mortgage 1.6 1.1 2.1 1.6 Asset-backed: Other 2.9 2.0 2.4 1.8 Auto 2.6 1.8 1.9 1.4 Leasing 2.1 1.5 2.4 1.9 Pooled corp. obligation and other 4.7 3.3 2.3 1.8 Financial risk 0.6 0.4 0.6 0.5 - -------------------------------------------------------------------------------- Total structured finance 24.7 17.2 22.0 17.0 - -------------------------------------------------------------------------------- Total domestic 116.0 80.9 107.7 83.5 - -------------------------------------------------------------------------------- International Infrastructure: Transportation 1.7 1.2 1.2 0.9 Sovereign 1.6 1.1 1.4 1.1 Utilities 1.1 0.8 0.7 0.5 Sub-sovereign 0.8 0.6 0.9 0.7 Investor owned utilities 0.6 0.4 0.5 0.4 Health care 0.4 0.3 0.4 0.3 - -------------------------------------------------------------------------------- Total infrastructure 6.2 4.4 5.1 3.9 - -------------------------------------------------------------------------------- Structured finance: Pooled corp. obligation and other 15.0 10.4 9.5 7.4 Financial risk 2.8 2.0 3.1 2.4 Asset-backed 1.8 1.2 2.4 1.9 Mortgage-backed 1.5 1.1 1.2 0.9 - -------------------------------------------------------------------------------- Total structured finance 21.1 14.7 16.2 12.6 - -------------------------------------------------------------------------------- Total international 27.3 19.1 21.3 16.5 - -------------------------------------------------------------------------------- Total $143.3 100.0% $129.0 100.0% - -------------------------------------------------------------------------------- As part of MBIA Corp's reinsurance activity in 1998, MBIA Corp. entered into facultative reinsurance agreements with highly rated reinsurers that obligate it to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a -24- 26 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) retroactive basis in accordance with SFAS 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". Components of premiums written including reinsurance assumed from and ceded to other companies is set forth in the following table: Years ended December 31 -------------------------------------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------- Direct $641,452 $590,597 $664,269 Assumed 45,956 34,274 12,781 - -------------------------------------------------------------------------------- Gross 687,408 624,871 667,050 Ceded (189,316) (171,256) (156,064) - -------------------------------------------------------------------------------- Net $498,092 $453,615 $520,986 - -------------------------------------------------------------------------------- Ceding commissions received from reinsurers before deferrals were $37.3 million, $35.3 million and $37.2 million in 2000, 1999 and 1998, respectively. 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, 2000, 1999 and 1998 was $4.9 million, $6.7 million and $5.9 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 eligible compensation. MBIA Corp. contributions to the profit-sharing/401(k) plan aggregated $1.9 million, $3.2.million and $2.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. The profit-sharing/401(k) plan match 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 2000, 1999 and 1998, former CMAC employees were covered under MBIA Inc.'s pension and profit-sharing/401(k) plans. 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 paid in cash or shares of MBIA Inc.'s stock. -25- 27 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 2000 award covers growth in ABV from December 31, 2000 through December 31, 2003; with a base line growth of 13.5%. The 1999 award covers growth in ABV from December 31, 1999 through December 31, 2002 and the 1998 award covers growth in ABV from December 31, 1998 through December 31, 2001, with a base line growth of 12% on both 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 2004 for the 2000 award, in early 2003 for the 1999 award and in early 2002 for the 1998 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 2000, 1999 and 1998, $11.6 million, $7.2 million and $4.8 million, respectively, were recorded as compensation expense related to ABV awards. 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 to five years from the date of grant, at which time the awards fully vest. Compensation expense related to the restricted stock was $2.2 million, $1.7 million and $0.9 million for the years ended December 31, 2000, 1999 and 1998. 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 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". -26- 28 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2000 is $340 million. Included in other assets at December 31, 2000 and 1999 were $48.6 million and $64.2 million net receivables from 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 $330 million and $205.0 million as of December 31, 2000 and 1999, respectively, and transferred securities subject to agreements to repurchase of $330 million and $205.0 million as of December 31, 2000 and 1999. These agreements have a term of less than one year. The interest expense relating to these agreements was $17.4 million and $10.9 million, respectively, for the years ended December 31, 2000 and 1999. The interest income relating to these agreements was $18.0 million and $11.5 million, respectively, for the years ended December 31, 2000 and 1999. 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. -27- 29 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 equity oriented investments. 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. 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%. -28- 30 MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DERIVATIVES - The fair value reflects the estimated amounts that the MBIA Corp. would receive or pay to terminate the transaction at the reporting date.
As of December 31, 2000 As of December 31, 1999 -------------------------------------------------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------------------- ASSETS: Fixed-maturity securities 6,665,533 6,665,533 $5,783,979 $5,783,979 Short-term investments 269,900 269,900 273,816 273,816 Other investments 9,663 9,663 8,425 8,425 Cash and cash equivalents 12,541 12,541 33,702 33,702 Securities purchased under agreements to resell 330,000 396,951 205,000 267,881 Prepaid reinsurance premiums 442,622 380,047 403,210 342,837 Reinsurance recoverable on unpaid losses 31,414 31,414 30,819 30,819 Receivable for investments sold 2,497 2,497 2,882 2,882 LIABILITIES: Deferred premium revenue 2,397,578 2,123,661 2,310,758 2,022,357 Loss and loss adjustment expense reserves 499,279 499,279 467,279 467,279 Securities sold under agreements to repurchase 330,000 390,367 205,000 209,894 Payable for investments purchased 2,334 2,334 18,948 18,948 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums --- 885,477 --- 731,748 Derivatives * --- 16,454 --- ---
* The estimated fair value for 2000 includes net derivative liabilities identified as part of the company's implementation of SFAS 133. -29- -----END PRIVACY-ENHANCED MESSAGE-----