-----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, Wxs5B5FgKKIxaWei6EBGKZ1dvoh6lro4tb+yN/QoIFK9tAdlae41mhpSQxl7HEbN sNQ43AL/5SjRCYmT1AkpKg== 0000950130-98-001576.txt : 19980331 0000950130-98-001576.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950130-98-001576 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE 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: 98578908 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 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1997. 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 exchanqe on which reqistered - ------------------- ----------------------------------------- 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 20, 1998 was $ 7,541,534,910.00 As of March 20, 1998, 97,704,096 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, 1997 are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement of the Registrant, dated March 30, 1998 are incorporated by reference into Parts I and III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] PART I Item 1. Business MBIA Inc. (the "Company") is engaged primarily in providing financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, selected corporate debt, including investor-owned utility bonds, and debt of high-quality financial institutions. The Company provides these services both in the new issue and secondary markets and both domestically and internationally. These financial guarantees are provided through the Company's wholly-owned subsidiary, MBIA Insurance Corporation ("MBIA Corp."). MBIA Corp. is the successor to the business of the Municipal Bond Insurance Association (the "Association") which began writing financial guarantees for municipal bonds in 1974. Effective as of December 31, 1989, the Company purchased Bond Investors Guaranty Insurance Company ("BIG Ins."), another municipal bond insurance company. Subsequently, MBIA Corp. reinsured the net exposure on the municipal bond insurance policies previously issued by BIG Ins. (See "Business--Reinsurance" below) and changed the name of BIG Ins. to MBIA Insurance Corp. of Illinois ("MBIA Illinois"). In 1990, the Company formed a French company, MBIA Assurance S.A. ("MBIA Assurance"), to write financial guarantee insurance in the countries of the international community. MBIA Assurance, which is a wholly-owned subsidiary of MBIA Corp., writes policies insuring sovereign risk, public infrastructure financings, asset-backed transactions and certain obligations of corporations and financial institutions. In September 1995, MBIA Corp. entered into a joint venture agreement with Ambac Assurance Corporation for the purpose of jointly marketing financial guarantee insurance outside the United States. Generally, throughout the text references to MBIA Corp. include the activities of its subsidiaries, MBIA Illinois and MBIA Assurance. Financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of and interest on insured obligations when due. MBIA Corp.'s primary business is insuring obligations issued by states, municipalities and other governmental authorities, instrumentalities and agencies. Such obligations are secured by the issuer's taxing power in the case of general obligation or special tax supported bonds, or by the issuer's ability to impose and collect fees and charges for public services or specific projects in the case of most revenue bonds. MBIA Corp. also provides financial guarantees for structured finance transactions (principally mortgage-backed and asset-backed securities), investor-owned utility debt and obligations of high-quality financial institutions. MBIA Corp.'s substantial capital base permits it to support a large portfolio of insured obligations and to write new business. MBIA Corp. primarily insures obligations which are sold in the new issue and secondary markets, or which are held in unit investment trusts ("UIT") and by mutual funds. It also provides surety bonds for debt service reserve funds. The principal economic value of financial guarantee insurance to the entity offering the obligations is the savings in interest costs resulting from the difference in the market yield between an insured obligation and the same obligation on an uninsured basis. In addition, for complex financings and for obligations of issuers that are not well-known by investors, insured obligations receive greater market acceptance than uninsured obligations. The financial guarantee industry is subject to the direct and indirect effects of governmental regulation, including changes in tax laws affecting the municipal and asset-backed debt markets. No assurance can be given that future legislative or regulatory changes might not adversely affect the results of operations and financial conditions of the Company. The Association was the first issuer of financial guarantees to receive both the AAA claims-paying rating from Standard and Poor's Corporation ("S&P"), which it received in 1974, and the Aaa claims-paying rating from Moody's Investors Service, Inc. ("Moody's"), which it received in 1984. Both rating agencies have continuously issued Triple-A claims-paying ratings for MBIA Corp. and Triple-A ratings to obligations guaranteed by MBIA Corp. Both rating agencies have also continued the Triple-A rating on MBIA Illinois guaranteed bond issues. In addition, in 1995 MBIA Corp. received a Triple-A claims-paying rating from Fitch IBCA, Inc. ("Fitch"). 1 The Company also provides investment management products and consulting services to the public sector through a group of subsidiary companies. These services include cash management, municipal investment agreements, discretionary asset management, purchase and administrative services, tax discovery and compliance, tax audit, analysis and information services and bond administration services. MBIA Municipal Investors Service Corporation ("MBIA-MISC") provides cash management services and investment placement services to local governments and school districts, and provides those clients with fund administration services. In 1996, MBIA-MISC acquired American Money Management Associates, Inc. ("AMMA") which offers investment and treasury management consulting services to municipal and quasi-municipal clients. Both MBIA-MISC and AMMA are registered investment advisors. MBIA Investment Management Corp. ("IMC") offers guaranteed investment agreements primarily for bond proceeds to states and municipalities. MBIA Capital Management Corp. ("CMC") performs investment management services for the Company, MBIA-MISC, IMC and selected external clients. MBIA MuniServices Company ("MuniServices") was formed in 1996 to provide bond administration, revenue enhancement and other services to state and local governments. In 1996, MuniServices acquired an equity interest in Capital Asset Holdings, which purchases and services delinquent taxes for municipalities. In 1997, MuniServices acquired (i) the Municipal Tax Bureau entities ("MTB"), which provide tax revenue compliance and collection services to the public sector and (ii) MBIA MuniFinancial to provide debt administration services to municipalities. Early in 1998, MuniServices acquired Municipal Resource Consultants which specializes in providing revenue enhancement and information services to municipalities. Additionally in 1997, the Company formed MBIA & Associates Consulting, Inc. to provide strategic financial planning and management consulting to state and local governments, colleges and universities, and international entities. MBIA Corp. Insured Portfolio At December 31, 1997, the net par amount outstanding on MBIA Corp.'s insured obligations (including insured obligations of MBIA Illinois and MBIA Assurance but excluding the guarantee of $3.2 billion of obligations of IMC (see "Operations--Miscellaneous")) was $277.1 billion, comprised of $244.0 billion in new issues and $33.1 billion in secondary market issues. Net insurance in force was $482.7 billion. MBIA Corp. guarantees to the holder of the underlying obligation the timely payment of the principal of and interest on such obligation in accordance with its original payment schedule. Accordingly, in the case of a default on an insured obligation, payments under the insurance policy cannot be accelerated by the holder. MBIA Corp. will be required to pay principal and interest only as originally scheduled payments come due. MBIA Corp. seeks to maintain a diversified insured portfolio designed to spread risk based on a variety of criteria including revenue source, issue size, type of bond and geographic area. As of December 31, 1997, MBIA Corp. had 32,568 policies outstanding. These policies are diversified among 8,220 "credits," which MBIA Corp. defines as any group of issues supported by the same revenue source. 2 The table below sets forth information with respect to the original par amount written per issue in MBIA Corp.'s portfolio as of December 31, 1997: MBIA Corp. Original Par Amount Per Issue as of December 31, 1997
% 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 26,499 81.4% $ 41.1 14.8% $10-25 million 2,834 8.7 35.4 12.8 $25-50 million 1,505 4.6 39.2 14.2 $50-100 million 966 3.0 48.3 17.4 Greater than $100 million 764 2.3 113.1 40.8 ------ ------ ------- ------ Total 32,568 100.0% $ 277.1 100.0% ====== =======
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, 1997 was 11.5 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, 1997 was $28.9 billion. 3 The table below shows the diversification of MBIA Corp.'s insured portfolio by bond type: MBIA Corp. Insured Portfolio by Bond Type as of December 31, 1997 (1)
Bond Type Number Net Par % of Net Of Issues Amount Par Amount Outstanding Outstanding Outstanding (In billions) Domestic Municipal General obligation 12,016 $70.3 25.4% Utilities 4,739 40.9 14.8 Health care 2,246 33.3 12.0 Transportation 1,487 20.4 7.4 Special revenue 1,641 18.3 6.6 Higher education 1,359 11.4 4.1 Housing 1,891 8.5 3.1 Industrial development & pollution control revenue 943 7.7 2.8 Other 539 5.3 1.9 ------- ------- ------ Total Municipal 26,861 216.1 78.1 ------- ------- ------ Structured Finance* 510 45.3 16.3 Other 4,990 9.2 3.3 ------- ------- ------ Total Domestic 32,361 270.6 97.7 ------- ------- ------ International Infrastructure 148 2.8 0.9 Structured Finance* 32 2.1 0.7 Other 27 1.6 0.7 ------- ------- ------ Total International 207 6.5 2.3 ------- ------- ------ Total 32,568 $277.1 100.0% ======= =======
* Asset/mortgage-backed - ---------- (1) Excludes IMC's $3.2 billion relating to municipal investment agreements guaranteed by MBIA Corp. As illustrated by the table above, approximately 40% of the net par amount outstanding of the MBIA Corp. insured portfolio consists of general obligation bonds, which are supported by the full faith and credit and taxing power of state and local governmental issuers, and water, sewer and electric revenue bonds, which are secured by a pledge of revenues imposed and collected by state and local public entities for the provision of essential services. MBIA Corp. seeks to avoid bond issues which entail excessive single project risk, over-capacity or customer contract disputes. MBIA Corp. engages primarily in insuring municipal bonds. As of December 31, 1997, of the $277.1 billion outstanding net par amount of obligations insured, $216.1 billion, or 78%, consisted of municipal bonds, $54.5 billion, or 4 approximately 20%, consisted primarily of asset/mortgage-backed transactions and investor-owned utility obligations and $6.5 billion or approximately 2% 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 1993 1994 1995 1996 1997 (In millions) Domestic Municipal General obligation $11,952 $11,086 $10,127 $12,807 $13,722 Health care 6,342 3,655 2,913 4,147 7,414 Utilities 9,293 4,858 5,018 6,731 6,868 Transportation 3,419 1,747 2,624 3,146 6,009 Special revenue 3,246 1,888 1,935 3,761 3,100 Higher education 2,126 1,346 1,264 2,106 2,517 Housing 469 876 1,962 1,802 1,791 Industrial development & pollution control revenue 1,533 1,486 1,155 693 781 Other -- 575 1,240 401 421 ------- ------- ------- ------- ------- Total Municipal 38,380 27,517 28,238 35,594 42,623 ------- ------- ------- ------- ------- Structured Finance* 3,581 4,832 7,766 18,765 26,596 Other 1,548 1,355 1,289 4,603 3,567 ------- ------- ------- ------- ------- Total Domestic $43,509 $33,704 $37,293 $58,962 $72,786 ------- ------- ------- ------- ------- International Infrastructure 190 243 591 788 947 Structured Finance* -- 725 479 896 851 Other -- 980 444 765 385 ------- ------- ------- ------- ------- Total International 190 1,948 1,514 2,449 2,183 ------- ------- ------- ------- ------- Total $43,699 $35,652 $38,807 $61,411 $74,969 ======= ======= ======= ======= =======
* Asset/mortgage-backed (1) Par amount insured by year, net of reinsurance. 5 MBIA Corp. is licensed to write business in all 50 states, the District of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of Spain and the Republic of France. MBIA Illinois is licensed to write business in 48 states, the District of Columbia and Puerto Rico. MBIA Assurance is licensed to write business in France. The following table sets forth by geographic location in which MBIA Corp. has at least 2% of its total net par amount outstanding: MBIA Corp. Insured Portfolio By Geographic Location as of December 31, 1997 (1)
Number of Net Par % of Net Issues Amount Par Amount Geographic Location Outstanding Outstanding Outstanding (In billions) California 3,441 $ 35.2 12.7% New York 4,961 20.4 7.4 Florida 1,577 17.9 6.5 Texas 2,086 13.0 4.7 Pennsylvania 2,209 12.6 4.5 New Jersey 1,859 12.1 4.4 Illinois 1,191 10.9 3.9 Massachusetts 1,085 8.2 3.0 Ohio 1,005 7.1 2.6 Michigan 1,016 6.0 2.2 All other states 11,931 127.2 45.8 ------ ------ ----- Total United States 32,361 270.6 97.7 International 207 6.5 2.3 ------ ------ ----- Total 32,568 $277.1 100.0% ====== =====
- ---------- (1) Excludes IMC's $3.2 billion relating to municipal investment agreements guaranteed by MBIA Corp. MBIA Corp. has underwriting guidelines that limit the net insurance in force for any one insured credit. MBIA Corp. has not exceeded any applicable regulatory single-risk limit with respect to any bond issue insured by it. As of December 31, 1997, MBIA Corp.'s net par amount outstanding for its ten largest insured municipal credits totalled $12.1 billion, representing 4.4% of MBIA Corp.'s total net par amount outstanding, and for its ten largest structured finance credits, the net par outstanding was $10.1 billion, or 3.7% of the total. 6 MBIA Corp. Insurance Programs MBIA Corp. offers financial guarantee insurance in both the new issue and secondary markets. At present, no new financial guarantee insurance is being offered by MBIA Illinois, but it is possible that MBIA Illinois will insure transactions in the future. MBIA Corp. and MBIA Assurance offer financial guarantee insurance in Europe and other areas outside the United States. Set forth below are the different types of programs through which insurance presently is offered. New Issue Programs: Direct Purchase Program. Under the Direct Purchase Program, an issuer or underwriter purchases a policy directly from MBIA Corp. and pays the premium itself. Substantially all MBIA Corp. insured issues that are sold through a negotiated offering utilize this program. Of those issues which sell through competitive bidding, some use this program but the majority use the Optional Bidding Program described below. The critical elements in the Direct Purchase Program are that the issuer or underwriter determines to use insurance well before the sale date and then works closely with MBIA Corp. in developing documentation and legal structure. Optional Bidding Program. Under the Optional Bidding Program, MBIA Corp. offers insurance as an option to the underwriters bidding on an issue. It is used only for issues sold through competitive bidding. Under this program, the MBIA Corp. policy is purchased and the premium paid by the successful underwriter who chooses to use MBIA Corp. insurance. The flexibility of this program, where insurance may be chosen or rejected until sale time, makes adjustment to current market conditions easy for underwriters. In addition, this program eliminates any need for the issuer to budget for or allocate bond proceeds to pay the premium. Secondary Market Programs: Unit Investment Trusts. MBIA Corp. offers insurance to the UIT market through ongoing arrangements with investment banking and financial service companies which are UIT sponsors. MBIA Corp. insurance covers all of the bond issues in each of the insured unit trusts through one of two programs. Under one program, each issue in a trust is insured until maturity and, under the other program, each issue is insured only while it is held in the UIT. Mutual Funds. MBIA Corp. offers insurance in the mutual fund sector through ongoing arrangements with fund sponsors, which are investment advisers to individual mutual funds or families of mutual funds. All premiums for insuring bond issues in mutual funds are paid on the "while-in-trust" basis and consist of monthly charges. Under certain of these policies, MBIA Corp. is committed to offer insurance to maturity to the sponsor on issues sold out of the fund for an additional premium payable at the time of sale. Other Secondary Market Insurance. MBIA Corp. provides insurance on whole and partial maturities for bond issues which are being traded in the secondary market in response to requests from bond traders and institutions. MBIA Corp. charges the purchaser of this insurance a single premium payable upon issuance of the policy for insuring the designated bonds to maturity. 7 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, 1997
Net Par % Of Net Amount Par Amount Type of Program Outstanding Outstanding (in billions) New issue $244.0 88.0% Secondary market issues Unit investment trusts 4.9 1.8 Mutual funds 2.2 0.8 Other secondary market issues 26.0 9.4 ------ ------ Total $277.1 100.0% ====== ======
Operations The operations of MBIA Corp. are conducted through the Insurance Operations Division. The Insurance Operations Division includes the Public Finance and the Packaged Products Groups, the Structured Finance and the International Departments, and the Underwriting Policy and Review Department ("UPR"). The functions of each are more fully described below. The Public Finance Group and the Packaged Products Group each have underwriting authority with respect to certain categories of business and with respect to credits up to a certain par amount per category. With respect to larger, complex or unique credits, underwriting is performed by a committee drawn from outside the business unit originating the transaction. For all transactions done by the Structured Finance or International Departments, MBIA Corp.'s review and approval procedure has two stages. The first stage consists of transaction screening and in-depth credit review and structuring by the appropriate department within the Insurance Operations Division. The second stage, final review and approval of credit and structure, is performed by UPR. Pricing, in all cases, is carried out by the Market Research Group in the Insurance Operations Division, and the continuing review of insured issues is administered by the Insured Portfolio Management Group within UPR. Marketing and Credit Review: MBIA Corp.'s marketing activities and initial credit review functions for insured transactions are carried out primarily by various departments within the Insurance Operations Division. They are also involved in structuring credits on negotiated new issue business and in insuring secondary market issues. These groups employ research analysts who have extensive experience in the industry and who develop business within established credit analysis criteria. Market intelligence and client contact related to identifying, screening and developing candidates for insurance are also handled by the various departments within the Insurance Operations Division. The primary factors in issue screening are credit quality, legal security and transaction structure, as well as evaluation of the potential for interest cost savings through the use of insurance. Premium rates are determined by the Market Research Department, MBIA Corp.'s pricing and syndicate unit, which focuses on the type of business and credit strength of the bond issue, the maturity and structure of the issue, and other credit and market factors. Premium rates are based upon established premium ranges, which take into account capital charges, rating agency models and degrees of perceived risk. The Market Research Group also conducts extensive consultation with analysts on the issue and considers updated market intelligence developed from daily contact with syndicate managers and traders to help form the most accurate view of the value of MBIA Corp.'s guarantee on each issue. Minimum pricing standards are established at levels that management believes should generate an appropriate level of return on capital. 8 The Company recognizes that adherence to its pricing and quality standards may result in the loss of business to other insurers offering insurance at rates or on terms that the Company does not believe to be appropriate. The Company gives primary emphasis to maintaining its pricing and quality standards and secondary emphasis to market share. Underwriting Review: UPR, which consists of the Structured Finance Underwriting Department, the International Underwriting Analysis Department, the Corporate Risk Department and the Insured Portfolio 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 and for monitoring the insured portfolio. MBIA Corp. maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. 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. Such guidelines are subject to periodic review. An inter-divisional committee, the Credit Policy Committee, is responsible for establishing and maintaining underwriting standards and criteria for all insurance products. In order to ensure that the existing guidelines are followed, UPR monitors and periodically reviews underwriting decisions made by the Insurance Operations Division. The Corporate Risk Group underwrites and monitors MBIA Corp.'s direct and indirect exposure to financial institutions and other corporate entities with respect to investment contracts, letters of credit and liquidity facilities supporting MBIA-insured issues, and recommends limits on such exposures. The department provides in-depth financial analyses of financial institutions for which there is existing or proposed exposure and gives advice on related contract terms, transfers of these instruments to new institutions and renewal dates and procedures. Insured Portfolio Management: The Insured Portfolio Management Group is responsible for monitoring outstanding issues insured by MBIA Corp. This group's first function is to detect any deterioration in credit quality or changes in the economic or political environment which could interrupt the timely payment of debt service on an insured issue. Once a problem is detected, the group then works with the issuer, trustee, bond counsel, underwriters and other interested parties to deal with the concern before it develops into a default. Although MBIA Corp. has to date had only ten insured issues requiring claim payments for which it has not been fully reimbursed, there are nine additional insured issues for which case loss reserves have been established (see "Losses and Reserves" below). Other potential losses have been avoided through the early detection of problems and subsequent negotiations with the issuer and other parties involved. In a limited number of instances, the solution involved the restructuring of insured issues or underlying security arrangements. More often, MBIA Corp. utilizes a variety of other techniques to resolve problems, such as enforcement of covenants, assistance in resolving management problems and working with the issuer to develop potential political solutions. Issuers are under no obligation to restructure insured issues or underlying security arrangements in order to prevent losses. Moreover, MBIA Corp. is obligated to pay amounts equal to defaulted interest and principal payments on insured bonds on their respective due dates even if the issuer or other parties involved refuse to restructure or renegotiate the terms of the insured bonds or related security arrangements. The Company believes that early detection and continued involvement by the Insured Portfolio Management Group are crucial in avoiding or minimizing claims on insurance policies. 9 Once an obligation is insured, the issuer and the trustee are asked, or in some cases required, to furnish financial information, including audited financial statements, annually to the Insured Portfolio Management Group for review. Potential problems uncovered through this review, such as low operating fund balances, covenant violations, trustee or servicer problems, tax certiorari proceedings or excessive litigation, could result in an immediate surveillance review and an evaluation of possible remedial actions. The Insured Portfolio Management Group also monitors state finances and budget developments and evaluates their impact on local issuers. The Company's computerized credit surveillance system records situations where follow-up is needed, such as letter of credit renewal, construction status and the receipt of additional data after the closing of a transaction. Further, 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 two departments within the Insured Portfolio Management Group: the Public Finance Portfolio Management Department handles the more traditional types of issues such as general obligation, utility, special revenue and health care bonds; and the Structured Finance Portfolio Management Department is responsible for housing and asset-backed issues. The Public Finance Portfolio Management Department reviews and reports on the major credit quality factors of risks insured by the Company, evaluates the impact of new developments on insured weaker credits and carries out remedial activity. In addition, it performs analysis of financial statements and key operating data on a large scale basis and maintains various databases for research purposes. It responds to consent and waiver requests and monitors pool programs. This department is responsible for preparing special reports which include analyses of regional economic trends, proposed tax limitations, the impact of employment trends on local economies or legal developments affecting bond security. The Structured Finance Portfolio Management Department monitors insured structured finance programs, focusing on the adequacy of reserve balances and investment of earnings, the status of mortgage or loan delinquencies and underlying insurance coverage and the performance of the trustee for insured issues. Monitoring of issues typically involves review of records and statements, review of transaction documents with regard to compliance, analysis of cash flow adequacy and communication with trustees. Review of servicer performance is also conducted through 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. Investment Management Services Over the last seven years, the Company's investment management businesses have expanded their services to the public sector and added new revenue sources. MBIA-MISC provides cash management services and fixed-rate investment placement services directly to local governments and school districts. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue. AMMA provides investment and treasury management consulting services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission registered investment advisers. MBIA-MISC/AMMA operates in 20 states and the Commonwealth of Puerto Rico. IMC provides customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other public funds. At year-end 1997, principal and accrued interest outstanding on investment agreements was $3.2 billion compared with 3.3 billion at year-end 1996. 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, which was previously managed externally. CMC is also a registered investment advisor. 10 Municipal Services MuniServices provides various consulting and administrative services to municipal clients through a network of subsidiaries. MTB offers tax revenue enhancement, compliance and collection services to public clients. Municipal Resources Consultants, acquired in early 1998, provides revenue enhancement and related information services to public sector clients. MBIA MuniFinancial, acquired in late 1997, provides municipalities in California and other neighboring states with debt administration, disclosure, arbitrage rebate and related services. MBIA & Associates Consulting, Inc., which was formed in 1997, has begun to provide strategic planning and management consulting to public sector clients. Recent Developments In February, 1998, the Company acquired CapMAC Holdings Inc. ("Holdings"), in a stock-for-stock merger valued at approximately $536 million which was accounted for as a pooling of interests. Holdings, a Delaware corporation, is the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC Financial Services, Inc. ("CFS"), and CapMAC Financial Services (Europe) Limited ("CFS (Europe)"), a subsidiary of CFS. Holdings is also a lead investor in CapMAC Asia Ltd. ("CapMAC Asia"). The Company has begun to combine the businesses and operations of CapMAC and the Company and to eliminate certain redundant operations. As part of this process, the Company's business will be reorganized into three divisions; financial guarantees for municipal and corporate transactions, financial guarantees for asset-backed transactions and investment management and municipal services. CapMAC insures structured asset-backed, corporate, municipal and other financial obligations in the U.S. and international capital markets. CapMAC also provides financial guarantee reinsurance for structured asset-backed, corporate, municipal and other financial obligations written by other major insurance companies. CapMAC's claims-paying ability is rated triple-A by Moody's, S&P, Duff & Phelps Credit Rating Co. ("Duff & Phelps"), and Nippon Investors Service, Inc. ("Nippon"), a Japanese rating agency. CapMAC focuses on the asset-backed market while participating on a limited basis in selected transactions in the primary municipal market. As of December 31, 1997, obligations backed by consumer, trade and corporate receivables and other taxable obligations constituted approximately 95% of CapMAC's portfolio of insured obligations while municipal and government obligations constituted approximately 5%. CFS and CFS (Europe) provide advisory, consulting and structuring services to third parties. CFS also provides various services, including underwriting, reinsurance, marketing, data processing and other services to Holdings, CapMAC and CFS (Europe), in connection with the operation of the business. CapMAC Asia is a subsidiary of Holdings formed for the purpose of making investments in Asia in connection with Holding's strategy to expand its Asian structured finance business. Holdings currently owns 30.2% of the equity of CapMAC Asia. CapMAC Asia has invested its capital in Asia Credit Services (Pte) Ltd. ("Asia Services"), which owns all of the stock of Asian Securitization & Infrastructure Assurance (Pte) Ltd. ("ASIA Ltd."), a regional financial guarantee company located in Singapore, rated, at December 31, 1997, double-A by Duff & Phelps, single-A by S&P and double-A plus by Nippon. At December 31, 1997 and 1996, CapMAC Asia had a $33.8 million and $33.4 million investment in Asia Services, respectively, representing 33.33% of the outstanding shares of Asia Services. ASIA Ltd. was formed to provide guarantees of debt securities in the primary and secondary Asian fixed income capital markets. In January, 1998, S&P downgraded the credit ratings of certain Asian countries and of Asia Ltd. This had the effect of downgrading certain credits in CapMAC's insured portfolio and the reinsurance provided by Asia Ltd. to CapMAC is now being provided by a non-investment grade provider. 11 No insurance claims have yet arisen as a result of the activity in the Asian markets. (See page 54 of the Company's 1997 Annual Report to Shareholders - Note 22 to Consolidated Financial Statements.) Competition The financial guarantee insurance business is highly competitive. In 1997 MBIA Corp. was the largest insurer of new issue long-term municipal bonds, accounting for 42% of the par amount of such insured bonds. The other principal insurers in 1997 were Ambac Assurance Corporation, Financial Guaranty Insurance Company and Financial Security Assurance Inc., all of which, like MBIA Corp., have Aaa and AAA claims-paying ratings from Moody's and S&P, respectively. According to Asset Sales Report, in 1997 MBIA Corp. was the leading insurer of new issue asset/mortgage-backed securities. The three principal competitors in this area in 1997 were CapMAC, Financial Security Assurance and Ambac Assurance Corporation. Financial guarantee insurance also competes with other forms of credit enhancement, including over-collateralization, letters of credit and guarantees (for example, mortgage guarantees where pools of mortgages secure debt service payments) provided by banks and other financial institutions, some of which are governmental agencies or have been assigned the highest credit ratings awarded by one or more of the major rating agencies. Letters of credit are most often issued for periods of less than 10 years, although there is no legal restriction on the issuance of letters of credit having longer terms. Thus, financial institutions and banks issuing letters of credit compete directly with MBIA Corp. to guarantee short-term notes and bonds with a maturity of less than 10 years. To the extent that banks providing credit enhancement may begin to issue letters of credit with commitments longer than 10 years, the competitive position of financial guarantee insurers, such as MBIA Corp., could be adversely affected. Letters of credit also are frequently used to assure the liquidity of a short-term put option for a long-term bond issue. This assurance of liquidity effectively confers on such issues, for the short term, the credit standing of the financial institution providing the facility, thereby competing with MBIA Corp. and other financial guarantee insurers in providing interest cost savings on such issues. Financial guarantee insurance and other forms of credit enhancement also compete in nearly all instances with the issuer's alternative of foregoing credit enhancement and paying a higher interest rate. If the interest savings from insurance or another form of credit enhancement are not greater than the cost of such credit enhancement, the issuer will generally choose to issue bonds without enhancement. MBIA Corp. also competes in the international market with composite (multi-line) insurers. There are minimum capital requirements imposed on a financial guarantee insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under a New York law, multi-line insurers are prohibited from writing financial guarantee insurance in New York State, except during a transitional period which, subject to certain specific conditions, expired in May 1997. 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 which may be written and the maximum size of any single risk exposure which may be assumed. MBIA Corp. increases its capacity to write new business by using treaty and facultative reinsurance to reduce its gross liabilities on an aggregate and single risk basis. From its reorganization in December 1986 through December 1987, MBIA Corp. reinsured a portion of each policy through quota and surplus share reinsurance treaties. Each treaty provides reinsurance protection with respect to policies written by MBIA Corp. during the term of the treaty, for the full term of the policy. Under its quota share treaty MBIA Corp. ceded a fixed percentage of each policy insured. Since 1988, MBIA Corp. has entered into only surplus share treaties under which a variable percentage of risk over a minimum size is ceded, subject to a maximum percentage specified in the treaty. Reinsurance ceded under the treaties is for the full term of the underlying policy. 12 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, 1997, MBIA Corp. retained approximately 88% of the gross debt service outstanding of all transactions insured by it, MBIA Assurance and MBIA Illinois, and ceded approximately 12% to treaty and facultative reinsurers. MBIA Corp.'s and MBIA Illinois' principal reinsurers are Capital Re Management Corporation, Enhance Reinsurance Company, Capital Mortgage Reinsurance Company, Axa Re Finance and Asset Guaranty Reinsurance Co. The first two of these reinsurers, whose claims-paying ability is rated Triple-A by S&P and Moody's, reinsured approximately 60% of the total ceded insurance in force at December 31, 1997. The other principal reinsurers are rated AA by S&P. All other reinsurers reinsured less than 5% of the total ceded insurance in force at December 31, 1997 and are diversified geographically and by lines of insurance written. MBIA Corp.'s net retention on the policies it writes varies from time to time depending on its own business needs and the capacity available in the reinsurance market. The amounts of reinsurance ceded at December 31, 1997 and 1996 by bond type and by geographic location are set forth in Note 15 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. In connection with the BIG Ins. acquisition, MBIA Corp. and MBIA Illinois entered into a reinsurance agreement under which MBIA Corp. agreed to reinsure 100% of all business written by MBIA Illinois, net of cessions by MBIA Illinois to third party reinsurers, in exchange for MBIA Illinois' transfer of the assets underlying the related unearned premium and contingency reserves. Pursuant to such reinsurance agreement with MBIA Illinois, MBIA Corp. reinsured all of the net exposure of $30.9 billion, or approximately 68% of the gross debt service outstanding, of the municipal bond insurance portfolio of MBIA Illinois, the remaining 32% having been previously ceded to treaty and facultative reinsurers of MBIA Illinois (see preceding paragraph). MBIA Corp. retroceded 3% and 1% of this portfolio to its treaty and facultative reinsurers in 1990 and 1991, respectively; additionally, in 1990, 10% of this portfolio was ceded back to MBIA Illinois to comply with regulatory requirements. MBIA Corp. and MBIA Assurance have both a reinsurance agreement and a net worth maintenance agreement. 13 Investments and Investment Policy The Finance Committee of the Board of Directors of the Company approves the general investment objectives and policies of the Company, and also reviews more specific investment guidelines. On January 1, 1996 CMC assumed full management of all of MBIA Corp.'s consolidated investment portfolios. Certain investments of the Company and MBIA Assurance related to non-U.S. insurance operations are managed by independent managers. To continue to provide strong capital resources and claims-paying capabilities for its insurance operations, the investment objectives and policies for insurance operations set quality and preservation of capital as the primary objective subject to an appropriate degree of liquidity. Maximization of after-tax investment income and investment returns are an important but secondary objective. Investment objectives, policies and guidelines related to the Company's municipal investment agreement business are also subject to review and approval by the Finance Committee of the Board of Directors. The primary investment objectives are to preserve capital, to achieve an investment duration that closely approximates the expected duration of related liabilities, and to maintain appropriate liquidity. The investment agreement assets are managed by CMC subject to an investment management agreement between IMC and CMC. For 1997, approximately 66% of the Company's net income was derived from after-tax earnings on its investment portfolio (excluding the amounts earned on investment agreement assets which are recorded as a component of investment management services revenues). The following table sets forth investment income and related data for the years ended December 31, 1995, 1996 and 1997: Investment Income of the Company (1)
1995 1996 1997 (In thousands) Investment income before expenses (2) $222,704 $250,415 $284,591 Investment expenses 2,846 2,854 3,132 -------- -------- -------- Net investment income before income taxes 219,858 247,561 281,459 Net realized gains 11,312 11, 740 17,478 -------- -------- -------- Total investment income before income taxes $231,170 $259,301 $298,937 ======== ======== ======== Total investment income after income taxes $196,269 $219,798 $247,233 ======== ======== ========
- ---------- (l) Excludes investment income and realized gains and losses from investment management services. (2) Includes taxable and tax-exempt interest income. 14 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 book value as of December 31, 1997, 1996 and 1995. Investment Portfolio by Security Type as of December 31, 1997
Investment Insurance Management Services Weighted Weighted Fair Value Average Fair Value Average Investment Category (in thousands) Yield (1) (in thousands) Yield (1) Fixed income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 394,703 6.90% $ 1,106,396 6.08% GNMAs 118,670 7.23 105,865 6.91 Other mortgage & asset backed securities 157,363 6.49 726,126 6.03 Corporate obligations 819,944 6.40 691,252 6.49 Foreign obligations (2) 165,506 6.27 300,232 6.73 ------------- ------------ Total 1,656,186 2,929,871 6.26 ------------- ------------ Tax-exempt bonds: State & municipal 3,211,068 7.29 -- ------------- ------------ Total long-term investments 4,867,254 7.04 2,929,871 6.26 Short-term investments (3) 245,029 5.11 411,523 5.73 ------------- ------------ Total fixed income investments 5,112,283 6.95% 3,341,394 6.19% Other investments (4) 16,802 -- -- -- ------------- ------------ Total investments $ 5,129,085 -- $ 3,341,394 -- ============= ============
- ---------- (1) Prospective market yields as of December 31, 1997. Yield on tax-exempt bonds is presented on a taxable bond equivalent basis using a 35% federal income tax rate. (2) Consists of U.S. demonimated foreign government and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. 15 Investment Portfolio by Security Type as of December 31, 1996
Investment Insurance Management Services Investment Category Fair Value Weighted Fair Value Weighted (In thousands) Average Yield (1) (In thousands) Average Yield (1) Fixed income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 340,397 7.30% $1,121,511 6.32% GNMAs 71,080 7.62 71,315 7.35 Other mortgage & asset backed securities 125,382 7.14 767,271 5.92 Corporate obligations 468,386 6.78 706,574 6.82 Foreign obligations (2) 152,392 6.87 182,885 7.37 ---------- ---------- Total 1,157,637 7.04 2,849,556 6.43 Tax-exempt bonds: State & municipal 2,992,063 8.03 -- -- ---------- ---------- Total long-term investments 4,149,700 7.76 2,849,556 6.43 Short-term investments (3) 176,088 5.96 443,742 5.65 ---------- ---------- Total fixed income investments 4,325,788 7.69% 3,293,298 6.33% Other investments (4) 14,851 -- -- -- ---------- ---------- Total investments $4,340,639 -- $3,293,298 -- ========== ==========
(1) Prospective market yields as of December 31, 1996. Yield on tax-exempt bonds is presented on a taxable equivalent basis using a 35% federal income tax rate. (2) Includes direct obligations of foreign governments and foreign corporations. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of marketable equity securities and interests in limited partnerships; yield information not meaningful. 16 Investment Portfolio by Security Type as of December 31, 1995
Investment Insurance Management Services Investment Category Fair Value Weighted Fair Value Weighted (In thousands) Average Yield (1) (In thousands) Average Yield (1) Fixed income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 265,209 6.82% $1,028,805 5.90% GNMAs 58,853 7.07 141,957 7.01 Other mortgage & asset backed securities 137,542 6.71 702,144 5.58 Corporate obligations 366,076 6.12 520,236 6.29 Foreign obligations (2) 98,620 6.08 122,692 6.86 ----------- ---------- Total 926,300 6.46 2,515,834 6.00 Tax-exempt bonds: State & municipal 2,726,321 7.76 --- -- ----------- ---------- Total long-term investments 3,652,621 7.44 2,515,834 6.00 Short-term investments (3) 198,035 6.49 226,792 5.48 ----------- ---------- Total fixed income investments 3,850,656 7.39% 2,742,626 5.96% Other investments (4) 14,064 -- --- -- ----------- ---------- Total investments $ 3,864,720 -- $2,742,626 -- =========== ==========
(1) Prospective market yields as of December 31, 1996. Yield on tax-exempt bonds is presented on a taxable equivalent basis using a 35% federal income tax rate. (2) Includes direct obligations of foreign governments and foreign corporations. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of marketable equity securities and interests in limited partnerships; yield information not meaningful. 17 The average maturity of the insurance fixed income portfolio excluding short-term investments as of December 31, 1997 was 10.1 years. After allowing for estimated principal pre-payments on mortgage pass-through securities, the duration of the portfolio was 6.3 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, 1997
Investment Insurance Management Services Maturity Fair Value % of Total Fair Value % of Total (In thousands) Fixed Income (In thousands) Fixed Income Investments Investments Within 1 year $ 245,029 4.8% $ 411,523 12.3% Beyond 1 year but within 5 years 753,051 14.7 872,651 26.1 Beyond 5 years but within 10 years 1,734,760 33.9 563,945 16.9 Beyond 10 years but within 15 years 1,050,596 20.6 211,443 6.3 Beyond 15 years but within 20 years 1,032,227 20.2 402,519 12.1 Beyond 20 years 296,620 5.8 879,313 26.3 ---------- ------ ---------- ------ Total fixed income investments $5,112,283 100.0% $3,341,394 100.0% ========== ==========
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, 1997
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 $2,573,635 51.4% $2,165,153 66.2% Aa 1,085,147 21.7 290,676 8.9 A 1,101,553 22.0 767,243 23.4 Baa 245,655 4.9 49,964 1.5 ---------- ----- ---------- ----- $5,005,990 100.0% $3,273,036 100.0% ========== ==========
(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 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 Illinois is licensed in, and is subject to insurance regulation and supervision by, the State of Illinois (its state of incorporation), 47 other states, the District of Columbia and Puerto Rico. MBIA Assurance is licensed to do insurance business in France and is subject to regulation under the corporation and insurance laws of the Republic of France. The extent of state insurance regulation and supervision varies by jurisdiction, but New York, 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. MBIA Illinois is required to file detailed annual financial statements with the Illinois Department of Insurance and similar supervisory agencies in each of the other jurisdictions in which it is licensed. The operations and accounts of both MBIA Corp. and MBIA Illinois 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. MBIA Illinois is licensed to provide fidelity and surety and other miscellaneous lines of insurance under Section 4 of the Illinois Insurance Code. Section 4 defines fidelity and surety insurance to include becoming surety or guarantor for any person, co-partnership or corporation in any position or place of trust or as custodian of money or property, public or private; or becoming a surety or guarantor for the performance of any person, co-partnership or corporation of any lawful obligation, undertaking, agreement or contract of any kind, except contracts or policies of insurance; and underwriting blanket bonds. Under Section 9, MBIA Illinois is licensed to transact any business activity reasonably complementary or supplementary to its insurance business. In addition, MBIA Illinois is empowered to assume or reinsure the kinds of insurance described above. As financial guarantee insurers, MBIA Corp. and MBIA Illinois are required by the laws of New York, California, Connecticut, Florida, Illinois, Iowa, New Jersey and Wisconsin to maintain contingency reserves on their municipal bond and other financial guarantee liabilities. Under New Jersey, Illinois and Wisconsin regulations, contributions by such an insurer to its contingency reserves are required to equal 50% of earned premiums on its municipal bond business. Under New York law, such an insurer is required to contribute to contingency reserves 50% of premiums as they are earned on policies written prior to July 1, 1989 (net of reinsurance) and, with respect to policies written on and after July 1, 1989, must make contributions over a period of 15 or 20 years (based on issue type), or until the contingency reserve for such insured issues equals the greater of 50% of premiums written for the relevant category of insurance or a percentage of the principal guaranteed, varying from 0.55% to 2.5%, depending upon the type of obligation guaranteed (net of reinsurance, refunding, refinancings and certain insured securities). California, Connecticut, Iowa and Florida law impose a generally similar requirement. In each of these states, MBIA Corp. and MBIA Illinois may apply for release of portions of the contingency reserves in certain circumstances. 19 The laws and regulations of these states also limit both the aggregate and individual municipal bond risks that MBIA Corp. and MBIA Illinois may insure on a net basis. California, Connecticut, Florida, Illinois and New York, among other things, limit insured average annual debt service on insured municipal bonds with respect to a single entity and backed by a single revenue source (net of qualifying collateral and reinsurance) to 10% of policyholders' surplus and contingency reserves. In New Jersey, Virginia and Wisconsin, the average annual debt service on any single issue of municipal bonds (net of reinsurance) is limited to 10% of policyholders' surplus. Other states that do not explicitly regulate financial guarantee or municipal bond insurance do impose single risk limits which are similar in effect to the foregoing. California, Connecticut, Florida, Illinois and New York also limit the net insured unpaid principal issued by a single entity and backed by a single revenue source to 75% of policyholders' surplus and contingency reserves. Under New York, California, Connecticut, Florida, Illinois, New Jersey and Wisconsin law, aggregate insured unpaid principal and interest under policies insuring municipal bonds (in the case of New York, California, Connecticut, Florida and Illinois, net of reinsurance) are limited to certain multiples of policyholders' surplus and contingency reserves. New York, California, Connecticut, Florida, Illinois and other states impose a 300:1 limit for insured municipal bonds, although more restrictive limits on bonds of other types do exist. For example, New York, California, Connecticut and Florida impose a 100:1 limit for certain types of non-municipal bonds. The Company, MBIA Corp. and MBIA Illinois are also subject to regulation under insurance holding company statutes of New York, Illinois and other jurisdictions in which MBIA Corp. and MBIA Illinois are licensed to write insurance. The requirements of holding company statutes vary from jurisdiction to jurisdiction but generally require insurance holding companies, such as the Company, and their insurance subsidiaries, to register and file certain reports describing, among other information, their capital structure, ownership and financial condition. The holding company statutes also generally require prior approval of changes in control, of certain dividends and other intercorporate transfers of assets, and of transactions between insurance 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 or MBIA Corp. Prior approval by the Illinois Department of Insurance is required for any entity seeking to acquire "control" of the Company, MBIA Corp. or MBIA Illinois. 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 and Illinois regulate the payment of dividends by MBIA Corp. and MBIA Illinois, respectively, and provide that a New York domestic stock property/casualty insurance company (such as MBIA Corp.) or an Illinois domestic stock insurance company (such as MBIA Illinois) may not declare or distribute dividends except out of statutory earned surplus. In the case of MBIA Corp., New York law provides that the sum of (i) the amount of dividends declared or distributed during the preceding 12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders' surplus, as shown by the most recent statutory financial statement on file with the New York Insurance Department, and (b) 100% of adjusted net investment income for such 12-month period (the net investment income for such 12-month period plus the excess, if any, of net investment income over dividends declared or distributed during the two-year period preceding such 12-month period), unless the New York Superintendent of Insurance approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations and writings. See Note 11 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. In the case of MBIA Illinois, Illinois law provides that the fair market value of the dividend to be declared, together with other dividends declared or distributed during the preceding 12-month period, may not exceed the greater of (a) 10% of policyholders' surplus as of the previous December 31, and (b) net income during the previous calendar year (which does not include pro rata distributions of any class of the Company's own securities) without the approval of the Illinois Director of Insurance. The foregoing restrictions are currently the most restrictive limitations on the ability of MBIA Corp. and MBIA Illinois to declare and pay dividends. 20 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 4 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. MBIA Corp. and MBIA Illinois are exempt from assessments by the insurance guarantee funds in the majority of the states in which they do business. Guarantee fund laws in most states require insurers transacting business in the state to participate in guarantee associations which pay claims of policyholders and third-party claimants against impaired or insolvent insurance companies doing business in the state. In most states, insurers licensed to write only municipal bond insurance, financial guarantee insurance and other forms of surety insurance are exempt from assessment by these funds and their policyholders are prohibited from making claims on these funds. Losses and Reserves The Company's policy is to provide for loss reserves to cover losses that may be reasonably estimated on its insured obligations over the lives of such obligations. The loss reserve, at any financial statement date, is the Company's estimate of the identified and unidentified losses on the obligations it has insured, including expected costs of settlement. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of the expected payments, including costs of settlement, net of expected recoveries, is allocated within the total loss reserve as a case basis reserve. At December 31, 1997, $24.9 million of the $78.9 million reserve for loss and loss adjustment expense represents case basis reserves, of which $18.9 million is attributable to a health care financing in Pennsylvania. The remaining case basis reserves represent various housing financings and structured finance transactions, the largest of which is $3.9 million. The Company believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate net cost of claims. Such reserves are based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. To the extent that actual case losses for any period are less than the unallocated portion of total loss reserve, there will be no impact on the Company's earnings for that period other than an addition to the reserve which results from applying the loss rate factor to new debt service insurance. To the extent that case losses, for any period, exceed the unallocated portion of the total loss reserve, the excess will be charged against the Company's earnings for that period. The Company periodically evaluates the appropriateness of the loss rate factor based on actual case loss experience. 21 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 4 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, 1994 1995 1996 1997 MBIA Corp. Loss ratio 9.8% 0.4% 2.0% 1.5% Expense ratio 22.9 20.6 17.6 16.7 Combined ratio 32.7 21.0 19.6 18.2 Financial guarantee industry (1) Loss ratio 11.3% 5.3% 4.9% * Expense ratio 36.3 32.7 31.6 * Combined ratio 47.6 38.0 36.5 *
- ---------- (1) Industry statistics were taken from the 1996 Annual Report of the Association of Financial Guaranty Insurors. * Not Available. The SAP loss ratio differs from the GAAP loss ratio because the GAAP ratio recognizes a provision for unidentified losses. The SAP expense ratio varies from the GAAP expense ratio because the GAAP ratio recognizes the deferral of policy acquisition costs and includes the amortization of purchase accounting adjustments, principally goodwill. In addition, the SAP expense ratio is calculated using premiums written while the GAAP expense ratio uses premiums earned. Net insurance in force, qualified statutory capital (which is comprised of policyholders' surplus and the contingency reserve), and policyholders' leverage ratios for MBIA Corp. and for the financial guarantee industry are shown in the table below:
As of December 31, 1994 1995 1996 1997 (Dollars in millions) MBIA Corp. Net insurance in force $304,502 $344,037 $411,106 $482,653 Qualified statutory capital 1,731 2,018 2,360 2,854 Policyholders' leverage ratio 176:1 171:1 174:1 169:1 Financial guarantee industry (1) Net insurance in force $785,126 $895,559 $1,076,821 * Qualified statutory capital 5,807 6,495 7,350 * Policyholders' leverage ratio 135:1 138:1 147:1 *
- ---------- (1) Industry statistics were taken from the 1996 Annual Report of the Association of Financial Guaranty Insurors. * Not Available. 22 The policyholders' leverage ratio is the ratio of net insurance in force to qualified statutory capital. This test is sometimes focused on as a measure of a company's claims-paying capacity. The Company believes that the leverage ratio has significant limitations since it compares the total debt service (undiscounted) coming due over the next 30 years or so to a company's current capital base. It thereby fails to recognize future capital that will be generated during the period of risk being measured, arising from unearned premium reserve and future installment premium commitments. Further, the leverage ratio does not consider the underlying quality of the issuers whose debt service is insured and thereby does not differentiate among the risk characteristics of a financial guarantor's insured portfolio, nor does it give any benefit for third-party commitments such as standby lines of credit. To assist state insurance departments in overseeing the financial condition of the insurance companies in their respective states, the National Association of Insurance Commissioners (the "NAIC") has developed a system intended to provide an early warning of impending financial trouble, the Insurance Regulatory Information System ("IRIS"). IRIS identifies eleven financial ratios and specifies "usual values" for each ratio. These are derived from financial statements prepared on a SAP basis. For each of the years 1987 to 1992, MBIA Corp. had financial ratio values within the usual values established by the NAIC for all of the applicable financial ratio tests with the exception of the test that measures the change in net premiums written. For the year ended December 31, 1992 the growth in net premiums written exceeded NAIC test range values of - -33% to +33% due to an extremely favorable business environment marked by a surge in municipal financings and strong demand for insurance. MBIA Corp. also had values outside of the normal range for premiums written for the years ended December 31, 1987, 1990 and 1991. These were due to the assumption by MBIA Corp. of most of the book of net insured obligations of its predecessor, the Association, in 1986, and upon the assumption of the entire book of net insured obligations of MBIA Illinois in 1990 following its acquisition by the Company. In 1993, MBIA Corp. had financial ratio values within the NAIC test ranges for all ratios except loss-related ratios. MBIA Corp. fell below the NAIC test range values of 0% to +25% for the three loss reserve development ratios due to the reduction in expected losses related to salvage. In 1994 and 1995, MBIA Corp. had financial ratio values within the NAIC test ranges for all ratios. In 1996, MBIA Corp. had financial ratio values within the usual values established by the NAIC for all of the applicable financial ratio tests with the exception of the test that measures the change in net premium written. For the year ended December 31, 1996, the growth in net premiums written equaled NAIC test range values of -33% to +33% due to a favorable business environment marked by a strong demand for insurance. In 1997, MBIA Corp. had financial ratio values within the NAIC test ranges for all ratios. MBIA Corp. Insurance Policies The insurance policies issued by MBIA Corp. provide an unconditional and irrevocable guarantee of the payment to a designated paying agent for the bondholders of an amount equal to the principal of and interest on insured bonds not paid when due. In the event of a default in payment of principal or interest by an issuer, MBIA Corp. promises to make funds available in the amount of the default on the next business day following notification. MBIA Corp. has a Fiscal Agency Agreement with State Street Bank and Trust Company, N.A. to provide for this payment upon receipt of proof of ownership of the bonds, as well as upon receipt of instruments appointing MBIA Corp. as agent for the bondholders and evidencing the assignment of bondholder rights with respect to the debt service payments made by MBIA Corp. Even if bondholders are permitted by the indenture securing the bonds to have the full amount of principal of the bonds, together with accrued interest, declared due and payable immediately in the event of a default, MBIA Corp. is required to pay only the principal and interest scheduled to be paid, but not in fact paid, on each original principal and interest payment date. The MBIA Illinois insurance policies provide for payments on default in substantially the same manner as the MBIA Corp. policies. The paying agent on MBIA Illinois policies is Bankers Trust Company. MBIA Assurance writes policies that are substantially similar in coverage and manner of payment to the MBIA Corp. policies. 23 Rating Agencies Moody's, S&P and Fitch perform periodic reviews of MBIA Corp. and other companies providing financial guarantee insurance. Their reviews focus on the insurer's underwriting policies and procedures and on the issues insured. Additionally, each rating agency has certain criteria as to exposure limits and capital requirements for financial guarantors. The rating agencies have reaffirmed their Triple-A claims-paying ratings assigned to MBIA Corp., MBIA Illinois and to MBIA Assurance. The rating for MBIA Illinois is based in significant part on the reinsurance agreement between MBIA Corp. and MBIA Illinois. The rating of MBIA Assurance is based in significant part on the reinsurance agreement between MBIA Corp. and MBIA Assurance and the net worth maintenance agreement between the two parties. See "Business--Reinsurance." Although MBIA Corp. intends to comply with the requirements of the rating agencies, no assurance can be given that these requirements will not change or that, even if MBIA Corp. complies with these requirements, one or more rating agencies will not reduce or withdraw their rating. MBIA Corp.'s ability to attract new business and to compete with other financial guarantors, and its results of operations and financial condition would be materially adversely affected by any reduction in its ratings. Credit Agreement MBIA Corp. entered into a Credit Agreement, dated as of December 29, 1989, which has been amended from time to time (the "Credit Agreement") with Credit Suisse, New York Branch ("Credit Suisse") to provide MBIA Corp. with an unconditional, irrevocable line of credit. The Credit Agreement was amended and restated by the Second Restated Credit Agreement, dated as of October 1, 1997 among MBIA Corp., Credit Suisse, as Administrative Agent and a consortium of highly rated banks. The line of credit is available to be drawn upon by MBIA Corp., in an amount up to $825 million, after MBIA Corp. has incurred, during the period commencing October 1, 1997 and ending September 30, 2004, cumulative losses (net of any recoveries) in excess of the greater of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under the Credit Agreement is a limited recourse obligation of MBIA Corp. payable solely from, and secured by a pledge of, recoveries realized on defaulted insured obligations, from certain pledged installment premiums and other collateral. Borrowings under the Credit Agreement are repayable on the expiration date of the Credit Agreement. The current expiration date of the Credit Agreement is September 30, 2004, 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 26, 1998, the Company had 887 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.
Name Age Position and Term of Office - ---- --- --------------------------- David H. Elliott 56 Chairman and Chief Executive Officer (officer since 1986) Richard L. Weill 55 Vice Chairman (officer since 1989) Neil G. Budnick 43 President, Public and Corporate Finance Division (officer since 1992) John B. Caouette 53 President, Structured Finance Division (officer since February, 1998)
24 Gary C. Dunton 42 President, Investment Management and Financial Services Division (officer since January, 1998) Louis G. Lenzi 49 General Counsel and Secretary (officer since 1986) Kevin D. Silva 44 Senior Vice President (officer since 1995) Julliette S. Tehrani 51 Executive Vice President, Chief Financial Officer and Treasurer (officer since 1987)
David H. Elliott is Chairman and Chief Executive Officer of the Company and of MBIA Corp. From 1986 to 1991, he served as the President and Chief Operating Officer of the Company and MBIA Corp. He is a director of MBIA Corp. and was the President of the Association from 1976 to 1980 and from 1982 through 1986. Richard L. Weill is Vice Chairman of the Company, President of MBIA Corp. and a director of MBIA Corp. From 1989 through 1991, Mr. Weill was General Counsel and Corporate Secretary of the Company. Mr. Weill was previously a partner with the law firm of Kutak Rock, with which he had been associated from 1969 to 1989. Kevin D. Silva is Senior Vice President of the Company and MBIA Corp. and a director of MBIA Corp. He has been in charge of the Management Services Division of MBIA Corp. since joining the Company in late 1995. Neil G. Budnick is President, Public and Corporate Finance Division of the Company and MBIA Corp. and a director of MBIA Corp. Mr. Budnick has been involved in the insurance operations area of MBIA Corp. since joining the Company in 1983. John B. Caouette is President, Structured Finance Division of the Company and MBIA Corp. and a director of MBIA Corp. Mr. Caouette was, until February 1998, the Chairman and Chief Executive Officer of CapMAC Holdings Inc. Gary C. Dunton is President, Investment Management and Financial Services Division of the Company and MBIA Corp. and a director of MBIA Corp. Mr. Dunton was, prior to joining the Company as an officer, a director of the Company and President of the Family and Business Insurance Group, USF&G Insurance Louis G. Lenzi is General Counsel and Secretary of the Company and MBIA Corp. He is also a director of MBIA Corp. Mr. Lenzi has held various legal positions within the Company and MBIA Corp. since July of 1984. Julliette S. Tehrani is Executive Vice President, Chief Financial Officer and Treasurer of the Company and of MBIA Corp. and a director of MBIA Corp. From 1986 to 1995, Ms. Tehrani held the position of Senior Vice President and Controller. Ms. Tehrani has held various positions in the Company's Finance Division since 1978. Item 2. Properties MBIA Corp. owns the 157,500 square foot office building on approximately 15.5 acres of property in Armonk, New York, in which the Company and MBIA Corp. have their headquarters. The Company also has rental space in New York, New York, San Francisco, California, Paris, France, Madrid, Spain and Sydney, Australia. The Company believes that these facilities are is adequate and suitable for its current needs. Item 3. Legal Proceedings There are no material lawsuits pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a party. 25 Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information concerning the market for the Company's Common Stock and certain information concerning dividends appears under the heading "Shareholder Information" on the inside back cover of the Company's 1997 Annual Report to Shareholders and is incorporated herein by reference. As of March 26, 1998, there were 462 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 28-29 of the Company's 1997 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 30-35 of the Company's 1997 Annual Report to Shareholders is incorporated by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements of the Company, the Report of Independent Accountants thereon by Coopers & Lybrand L.L.P. and the unaudited "Quarterly Financial Information" are set forth on pages 36-54 of the Company's 1997 Annual Report to Shareholders and are incorporated by reference. Item 9. Disagreements on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information regarding directors is set forth under "Election of Directors" in the Company's Proxy Statement, dated March 30, 1998, which is incorporated by reference. Information regarding executive officers is set forth under Item 1, "Business - Executive Officers," in this report. Item 11. Executive Compensation Information regarding compensation of the Company's executive officers is set forth under "Compensation of Executive Officers" in the Company's Proxy Statement, dated March 30, 1998, which is incorporated by reference. 26 Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management is set forth under "Election of Directors" and "Security Ownership of Certain Beneficial Owners" in the Company's Proxy Statement, dated March 30, 1998, which is incorporated by reference. Item 13. Certain Relationships and Related Transactions Information regarding relationships and related transactions is set forth under "Certain Relationships and Related Transactions" in the Company's Proxy Statement dated March 30, 1998, which is incorporated by reference. 27 PART IV Item 14. (a) Financial Statements and Financial Statement Schedules and Exhibits. 1. Financial Statements MBIA Inc. has incorporated by reference from the 1997 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. 36 Consolidated statements of income for the years ended 37 December 31, 1997, 1996 and 1995. Consolidated balance sheets as of December 31, 1997 and 38 1996. Consolidated statements of changes in shareholders' 39 equity for the years ended December 31, 1997, 1996 and 1995. Consolidated statements of cash flows for the years 40 ended December 31, 1997, 1996 and 1995. Notes to consolidated financial statements. 41-54
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, 1997. II Condensed financial information of Registrant for December 31, 1997, 1996 and 1995. IV Reinsurance for the years ended December 31, 1997, 1996 and 1995. 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 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the "1990 10-K"). 28 3.2. By-Laws as Amended as of May 7, 1992, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Comm. File 1-9583) (the "1992 10-K"). 10. Material Contracts 10.01. Reinsurance Agreements, each dated as of December 30, 1986, between the Company and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.09 to the 1987 S-1. 10.02. Reinsurance Assumption Agreements, each dated as of December 30, 1986, among the Company, Municipal Bond Investors Assurance Corporation ("MBIA Corp.") and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.10 to the 1987 S- 1. 10.03. Endorsement No. 1 to the December 30, 1986 Reinsurance Agreements, dated as of July 1, 1987, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (Comm. File No. 1-9583) (the "1987 10-K"). 10.04. Endorsement No. 2 to the December 30, 1986 Reinsurance Agreements, dated as of October 1, 1987, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.35 to the 1987 10-K. 10.05. Endorsement No. 3 to the December 30, 1986 Reinsurance Agreements, dated as of December 31, 1987, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.06 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 10K") 10.06. Endorsement No. 4 to the December 30, 1986 Reinsurance Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.07 to the 1989 10-K. 10.07. Endorsement No. 5 to the December 30, 1986 Reinsurance Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.08 to the 1989 10-K. 10.08. Endorsement No. 6 to the December 30, 1986 Reinsurance Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.09 to the 1989 10-K. 10.09. Endorsement No. 7 to the December 30, 1986 Reinsurance Agreements, effective September 30, 1989, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.10 to the 1989 10-K. 10.10. Restated Management Agreement, dated as of January 5, 1987, between MISC and Municipal Bond Insurance Association (the "Association"), as further amended by Supplement to the Restated Management Agreement, dated September 30, 1989, incorporated by reference to Exhibit 10.16 to the 1989 10-K. 29 as amended by Second Amendment and Restatement of Management Agreement, dated as of August 31, 1993, incorporated by reference to Exhibit 10.12 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"). 10.11. License Agreement, dated as of December 30, 1986, between the Company and the Association, incorporated by reference to Exhibit 10.15 to the 1987 S-l. 10.12. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to Exhibit 10.13 to the 1987 S-1. 10.13. MBIA Inc. Deferred Compensation and Excess Benefit Plan, incorporated by reference to Exhibit 10.16 to 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"). 10.14. 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 1991 10-K, as further amended and restated effective January 1, 1994, incorporated by reference to Exhibit 10.16 to the 1994 10-K. 10.15. 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 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. 10.16. 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. 10.17. Stock Option Agreement, dated as of March 2, 1987, between the Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the 1987 S-1. 10.18. Indemnification Agreement, dated as of January 5, 1987, among MISC, The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, The Travelers Indemnity Company, Aetna Insurance Company, The Continental Insurance Company and the Company, incorporated by reference to Exhibit 10.33 to Amendment No. 1 to the 1987 S-l. 10.19. Amended and Restated Shareholders' Agreement, dated as of May 21, 1987, among the Company, Aetna Life and Casualty Company, The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Guaranty Holdings, Inc., Aetna Insurance Company, The Continental Insurance Company and The Fidelity and Casualty Company of New York, incorporated by reference to Exhibit 10.30 to Amendment No. I to the 1987 S-1, as amended by Amendment No. 1 to the Amended and Restated Shareholders' Agreement, dated as of April 1, 1989, as amended by Amendment No. 2 to the Amended and Restated Shareholders' Agreement, dated November 21, 1989, incorporated by reference to Exhibit 10.41 to the 1989 10-K, as amended by Amendment No. 3 to the Amended and Restated Shareholders' Agreement, dated as of November 30, 1990, incorporated by reference to Exhibit 10.28 to the 1990 10-K and as amended by Amendment No. 4 to the Amended and Restated Shareholders' Agreement, dated as of September 30, 1991, incorporated by reference to Exhibit 10.28 to the 1991 10-K. 10.20. Surety Bond, dated December 28, 1989, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of Continental Insurance Company (the "Continental Surety Bond"), incorporated by reference to Exhibit 10.62 to the 1989 10-K. 30 10.21. The Fiscal Agency Agreement, dated December 27, 1989, between MBIA Corp. and Citibank, N.A., with regard to the Continental Surety Bond, incorporated by reference to Exhibit 10.63 to the 1989 10-K. 10.22. Surety Bond, dated December 28, 1989, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of CIGNA Property and Casualty Insurance Company (the "CIGNA Surety Bond"), incorporated by reference to Exhibit 10.64 to the 1989 10-K. 10.23. Fiscal Agency Agreement, dated December 27, 1989, between MBIA Corp. and Citibank, N.A., with regard to the CIGNA Surety Bond, incorporated by reference to Exhibit 10.65 to the 1989 10-K. 10.24. Amended and Restated Tax Allocation Agreement, dated as of January 1, 1990, between the Company and MBIA Corp., incorporated by reference to Exhibit 10.66 to the 1989 10-K. 10.25. Endorsement No. 8 to the December 30, 1986 Reinsurance Agreements, effective June 30, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File No. 1-9583) (the "1990 10 K"). 10.26. Endorsement No. 9 to the December 30, 1986 Reinsurance Agreements, effective December 31, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.52 to the 1990 10-K. 10.27. Endorsement No. 10 to the December 30, 1986 Reinsurance Agreements, effective January 1, 1990, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.53 to the 1990 10-K. 10.28. Reinsurance Agreement, dated as of December 31, 1990, between MBIA Corp. and Bond Investors Guaranty Insurance Company, incorporated by reference to Exhibit 10.54 to the 1990 10-K. 10.29. Surety Bond, dated August 24, 1990, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of The Travelers Indemnity Company (the "Travelers Surety Bond"), incorporated by reference to Exhibit 10.59 to the 1990 10-K. 10.30. Insurer Fiscal Agency Agreement, dated August 24, 1990, between MBIA Corp. and Citibank, N.A. with regard to the Travelers Surety Bond, incorporated by reference to Exhibit 10.60 to the 1990 10-K. 10.31. Surety Bond, dated April 5, 1991, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of The Aetna Casualty and Surety Company (the "Aetna Surety Bond"), incorporated by reference to Exhibit 10.73 to the 1991 10-K. 10.32. The Fiscal Agency Agreement, dated April 5, 1991, between MBIA Corp. and Citibank, N.A. with regard to the Aetna Surety Bond, incorporated by reference to Exhibit 10.74 to the 1991 10-K. 10.33. Revolving Credit Agreement, dated as of February 15, 1991, between the Company and Credit Suisse, New York Branch, incorporated by reference to Exhibit 10.76 to the 1991 10-K, as amended by the First Amendment to Revolving Credit Agreement, dated as of September 30, 1992, incorporated by reference to Exhibit 10.61 to the 1992 10-K, as further amended by the Second Amendment to Revolving Credit Agreement, dated as of September 30, 1994, incorporated by reference to Exhibit 10.48 to the 1994 10-K, as further amended by the Third Amendment to Revolving Credit Agreement, dated as of May 23, 1996, incorporated by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1996 (Comm. File No. 1-9583) (the "1996 10-K"). 10.34. 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 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. 31 10.35. Owner/Contractor Agreement, dated as of June 1, 1991, between MBIA Corp. and Trafalgar House Construction Management, Inc., incorporated by reference to Exhibit 10.77 to the 1991 10-K. 10.36. Trust Agreement, dated as of December 31, 1991, between MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January 21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated as of April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the 1995 10-K, as amended by Fifth Amendment to Trust Agreement, dated as of November 1, 1995, as further amended by Sixth Amendment to Trust Agreement, dated as of January 1, 1996, incorporated by reference to Exhibit 10.46 to the 1996 10-K, further amended by Seventh Amendment to Trust Agreement, dated as of October 15, 1997. 10.37. 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. 10.38. Endorsements to the December 30, 1986 Reinsurance Agreements (i) Nos. 11 and 12, both effective June 30, 1992; (ii) No. 14, effective November 30, 1990; and (iii) No. 16, effective September 30, 1992, each, between the Company (except with respect to No. 14 which was subsequently assumed by MBIA Corp.) and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company), the Continental Insurance Company, incorporated by reference to Exhibit 10.69 to the 1992 10-K. 10.39. Surety Bond, dated October 15, 1992, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of Fireman's Fund Insurance Company (the "Fireman's Surety Bond"), incorporated by reference to Exhibit 10.70 to the 1992 10-K. 10.40. Fiscal Agency Agreement, dated October 15, 1992, between MBIA Corp. and Citibank, N.A. with regard to the Fireman's Surety Bond, incorporated by reference to Exhibit 10.71 to the 1992 10-K. 10.41. Indenture, dated as of August 1, 1990, between MBIA Inc. and The First National Bank of Chicago, Trustee, incorporated by reference to Exhibit 10.72 to the 1992 10-K. 10.42. Reinsurance Agreement. dated as of August 31, 1993, between The Travelers Indemnity Company and MBIA Corp., incorporated by reference to Exhibit 10.73 to the 1993 10-K. 10.43. Endorsement No. 15 to the December 30, 1986 Reinsurance Agreements, effective January 1, 1992, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.74 to the 1993 10-K. 10.44. Endorsement No. 17 to the December 30, 1986 Reinsurance Agreements, effective January 1, 1993, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.75 to the 1993 10-K. 10.45. Endorsement No. 18 to the December 30, 1986 Reinsurance Agreements, effective April 1, 1993, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.76 to the 1993 10-K. 10.46. 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 32 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. 10.47. 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 the 1993 10-K. 10.48. 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. 10.49. Credit Agreement, dated as of August 31, 1994, among Municipal Bond Investors Assurance Corporation, the Company, Wachovia Bank of Georgia, N.A., Banco Santander, The Sumitomo Bank, Ltd., New York Branch, The Chase Manhattan Bank, N.A., Commerzbank Aktiengesellschaft, The Industrial Bank of Japan, Limited New York Branch and NBD Bank, N.A., and as further amended by the First Amendment to Credit Agreement, dated as of October 14, 1994, incorporated by reference to Exhibit 10.66 to the 1994 10-K, as amended by the Second Amendment to Credit Agreement, dated as of October 31, 1995, incorporated by reference to Exhibit 10.61 to the 1995 10-K. 10.50. Endorsement No. 13 to the December 30, 1986 Reinsurance Agreements, effective December 1, 1990, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, dated as of March, 1993, incorporated by reference to Exhibit 10.67 to the 1994 10-K. 10.51. Endorsement No. 16 to the December 30, 1986 Reinsurance Agreements, effective September 30, 1992, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, dated as of February 28, 1993, incorporated by reference to Exhibit 10.68 to the 1994 10-K. 10.52. Endorsement No. 19 to the December 30, 1986 Reinsurance Agreements, effective October 1, 1993, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, dated as of June 30, 1994, incorporated by reference to Exhibit 10.69 to the 1994 10-K. 10.53. 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. 10.54. 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. 10.55. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K. 10.56. 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. 10.57. 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. 33 10.58. 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. 10.59. Employment Agreement, dated as of June 25, 1992, between CapMAC Acquisition Corp. and John B. Caouette, incorporated by reference to Exhibit 10.7 of CapMAC's Registration Statement on Form S-1 (Reg. No. 33-982554), filed in 1992, as amended (the "CapMAC Form S-1"). 10.60. CapMAC Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.18 to the CapMAC Form S-1. 10.61. CapMAC Employee Stock Ownership Plan Trust Agreement, incorporated by reference to Exhibit 10.19 to the CapMAC Form S-1. 10.62. ESOP Loan Agreement by and between CapMAC and the ESOP Trust dated as of June 25, 1992, incorporated by reference to Exhibit 10.20 to the CapMAC Form S-1. 10.63. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between John B. Caouette and CapMAC, incorporated by reference to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the year ended December 31, 1995 (the "CapMAC 1995 10-K"). 10.64. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Michael L. Hein and CapMAC, incorporated by reference to Exhibit 10.29 of the CapMAC 1995 10-K. 10.65. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Charles Jackson Lester and CapMAC, incorporated by reference to Exhibit 10.31 of the CapMAC 1995 10-K. 10.66. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between C. Thomas Meyers and CapMAC, incorporated by reference to Exhibit 10.32 of the CapMAC 1995 10-K. 10.67. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Paul V. Palmer and CapMAC, incorporated by reference to Exhibit 10.33 of the CapMAC 1995 10-K. 10.68. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Joyce S. Richardson and CapMAC, incorporated by reference to Exhibit 10.35 of the CapMAC 1995 10-K. 10.69. 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. 34 Executive Compensation Plans and Arrangements The following Exhibits identify all existing executive compensation plans and arrangements: 10.12. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to Exhibit 10.13 to the 1987 S-1. 10.13. MBIA Inc. Deferred Compensation and Excess Benefit Plan, incorporated by reference to Exhibit 10.16 to the 1988 10-K, as amended as of July 22, 1992, incorporated by reference to Exhibit 10.15 to the 1992 10-K. 10.14. 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 1991 10-K. 10.15. 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 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 10-K. 10.16. 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. 10.17. Stock Option Agreement, dated as of March 27, 1987, between the Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the 1987 S-1. 10.37. 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. 10.55. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K. 10.56. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December 4, 1996. 10.59. Employment Agreement, dated as of June 25, 1992, between CapMAC Acquisition Corp. and John B. Caouette, incorporated by reference to Exhibit 10.7 of CapMAC's Registration Statement on Form S-1 (Reg. No. 33-982554), filed in 1992, as amended (the "CapMAC Form S-1"). 10.60. CapMAC Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.18 to the CapMAC Form S-1. 10.61. CapMAC Employee Stock Ownership Plan Trust Agreement, incorporated by reference to Exhibit 10.19 to the CapMAC Form S-1. 10.62. ESOP Loan Agreement by and between CapMAC and the ESOP Trust dated as of June 25, 1992, incorporated by reference to Exhibit 10.20 to the CapMAC Form S-1. 35 10.63. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between John B. Caouette and CapMAC, incorporated by reference to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the year ended December 31, 1995 (the "CapMAC 1995 10-K"). 10.64. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Michael L. Hein and CapMAC, incorporated by reference to Exhibit 10.29 of the CapMAC 1995 10-K. 10.65. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Charles Jackson Lester and CapMAC, incorporated by reference to Exhibit 10.31 of the CapMAC 1995 10-K. 10.66. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between C. Thomas Meyers and CapMAC, incorporated by reference to Exhibit 10.32 of the CapMAC 1995 10-K. 10.67. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Paul V. Palmer and CapMAC, incorporated by reference to Exhibit 10.33 of the CapMAC 1995 10-K. 10.68. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Joyce S. Richardson and CapMAC, incorporated by reference to Exhibit 10.35 of the CapMAC 1995 10-K. 10.69. 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. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 1997. 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 Coopers & Lybrand L.L.P. 24. Power of Attorney 27. Financial Data Schedule 36 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements (b) Reports on Form 8-K: The Company filed the following reports on Form 8-K during 1997: July 10 - Press release in connection with debt and equity offerings. July 14 - Underwriting agreement and ration of earnings to fixed charges in equity offering. September 18 - Press release announcing stock split. November 19 - Press release regarding merger with CapMAC Holdings Inc. and agreement and plan of merger. 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 27, 1998 By /s/ David H. Elliott ---------------------------- Name: David H. Elliott Title: Chairman Pursuant to the requirements of Instruction D to Form 10-K under the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ David H. Elliott Chairman and Director March 27, 1998 - ------------------------------- David H. Elliott /s/ Julliette S. Tehrani Executive Vice President, March 27, 1998 - ------------------------------- Chief Financial Officer Julliette S. Tehrani and Treasurer /s/ Elizabeth B. Sullivan Vice President and March 27, 1998 - ------------------------------- Controller Elizabeth B. Sullivan /s/ Joseph W. Brown, Jr. * Director March 27, 1998 - ------------------------------- Joseph W. Brown, Jr. /s/ David C. Clapp * Director March 27, 1998 - ------------------------------- David C. Clapp 38 Signature Title Date --------- ----- ---- /s/ Claire L. Gaudiani * Director March 27, 1998 - ----------------------------------- Claire L. Gaudiani /s/ William H. Gray, III * Director March 27, 1998 - ------------------------------------- William H. Gray, III /s/ Freda S. Johnson * Director March 27, 1998 - ----------------------------------- Freda S. Johnson /s/ Daniel P. Kearney * Director March 27, 1998 - ----------------------------------- Daniel P. Kearney /s/ James A. Lebenthal * Director March 27, 1998 - ----------------------------------- James A. Lebenthal /s/ Pierre-Henri Richard * Director March 27, 1998 - ----------------------------------- Pierre-Henri Richard - ----------------------------------- Director March 27, 1998 John A. Rolls /s/ Richard L. Weill Director March 27, 1998 - ----------------------------------- Richard L. Weill *By /s/ Louis G. Lenzi - ------------------------------------- Louis G. Lenzi Attorney-in Fact 39 Report of Independent Accountants To the Board of Directors and Shareholders of MBIA Inc.: Our report on the consolidated financial statements of MBIA Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 36 of the 1997 Annual Report to Shareholders of MBIA Inc. and Subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on Page 28 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND L. L. P. New York, New York February 3, 1998 SCHEDULE I MBIA INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1997 (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 $ 359,075 $ 389,504 $ 389,504 State and municipal obligations 2,998,093 3,211,068 3,211,068 Corporate and other obligations 2,717,223 2,811,869 2,811,869 Mortgage-backed 1,356,317 1,384,684 1,384,684 ---------- ---------- ---------- Total fixed-maturities 7,430,708 7,797,125 7,797,125 Short-term investments 656,552 XXXXXXX 656,552 Other investments 13,695 XXXXXXX 16,802 ---------- ---------- ---------- Total investments $8,100,955 XXXXXXX $8,470,479 ========== ========== ==========
SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (Dollars in thousands, except per share amounts)
December 31, 1997 December 31, 1996 ----------------- ----------------- ASSETS Investments: Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $1,986,139 and $1,564,499) $ 2,020,489 $ 1,567,048 Short-term investments, at amortized cost (which approximates fair value) 2,300 6,198 ----------- ----------- Total investments 2,022,789 1,573,246 Cash and cash equivalents 3,891 413 Securities borrowed or purchased under agreements to resell 512,283 196,400 Investment in and amounts due from wholly-owned subsidiaries 3,593,593 2,938,875 Accrued investment income 22,389 17,150 Receivables for investments sold 11,272 -- Other assets 10,368 3,996 ----------- ----------- Total assets $ 6,176,585 $ 4,730,080 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Municipal investment agreements $ 1,356,926 $ 1,405,170 Municipal repurchase agreements 567,897 212,271 Long-term debt 473,878 374,010 Short-term debt 20,000 29,100 Securities loaned or sold under agreements to repurchase 645,583 196,400 Deferred income taxes 11,973 842 Payable for investments purchased 14,925 3,218 Dividends payable 17,449 16,453 Other liabilities 19,701 12,919 ----------- ----------- Total liabilities 3,128,332 2,250,383 ----------- ----------- 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 - 89,461,035 and 86,588,486 89,461 86,588 Additional paid-in capital 906,744 759,784 Retained earnings 1,825,333 1,518,994 Cumulative translation adjustment (8,558) (1,042) Unrealized appreciation of investments, net of deferred income tax provision of $129,308 and $62,706 240,085 116,424 Unearned compensation - restricted stock (4,812) (1,051) ----------- ----------- Total shareholders' equity 3,048,253 2,479,697 ----------- ----------- Total liabilities and shareholders' equity $ 6,176,585 $ 4,730,080 =========== ===========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (In thousands)
Years Ended December 31 ----------------------------------------------------- 1997 1996 1995 --------- --------- --------- Revenues: Net investment income $ (909) $ 283 $ 646 Net realized gains -- -- 3,535 Investment management services income 4,469 2,806 2,929 Investment management services realized losses 202 (2,549) (5,735) --------- --------- --------- Total revenues 3,762 540 1,375 --------- --------- --------- Expenses: Interest expense 34,762 32,705 27,786 Operating expenses 4,304 2,384 2,749 --------- --------- --------- Total expenses 39,066 35,089 30,535 --------- --------- --------- Loss before income taxes and equity in earnings of of subsidiaries (35,304) (34,549) (29,160) Benefit for income taxes (12,444) (10,911) (9,604) --------- --------- --------- Loss before equity in earnings of subsidiaries (22,860) (23,638) (19,556) Equity in earnings of subsidiaries 397,036 345,801 290,975 --------- --------- --------- Net income $ 374,176 $ 322,163 $ 271,419 ========= ========= =========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31 ----------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 374,176 $ 322,163 $ 271,419 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (356,536) (316,801) (208,075) Net realized (gains) losses on sales of investments (202) 2,549 2,200 Benefit for deferred income taxes -- -- (50) Other, net (615) 2,742 (2,556) ----------- ----------- ----------- Total adjustments to net income (357,353) (311,510) (208,481) ----------- ----------- ----------- Net cash provided by operating activities 16,823 10,653 62,938 ----------- ----------- ----------- Cash flows from investing activities: Purchase of fixed-maturity securities -- -- (252,125) Sale of fixed-maturity securities -- -- 246,171 Sale (purchase) of short-term investments 3,898 (6,198) -- Sale of other investments -- -- 6,552 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,276,589) (1,192,350) (940,871) Sales from municipal investment agreement portfolio, net of receivable for investments sold 856,637 464,593 106,678 Contributions to subsidiaries (99,111) (17,900) (52,800) Advances to subsidiaries, net (96,597) (21,763) (89,550) ----------- ----------- ----------- Net cash used by investing activities (611,762) (773,618) (975,945) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 126,377 55,233 -- Net proceeds from issuance of long-term debt 98,880 -- 74,344 Net proceeds from issuance of short-term debt (9,100) 11,100 -- Dividends paid (66,841) (60,501) (53,179) Proceeds from issuance of municipal investment and repurchase agreements 1,499,080 1,504,140 1,182,298 Payments for drawdowns of municipal investment agreements (1,195,939) (786,938) (297,679) Securities loaned or sold under agreements to repurchase, net 133,300 -- -- Exercise of stock options 12,660 26,238 16,338 ----------- ----------- ----------- Net cash provided by financing activities 598,417 749,272 922,122 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents 3,478 (13,693) 9,115 Cash and cash equivalents - beginning of year 413 14,106 4,991 ----------- ----------- ----------- Cash and cash equivalents - end of year $ 3,891 $ 413 $ 14,106 =========== =========== =========== Supplemental cash flow disclosures: Income taxes paid $ 1,568 $ 305 $ 443 Interest paid: Long-term debt 31,825 31,722 26,575 Short-term debt 2,017 1,309 1,228
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Condensed Financial Statements Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto. 2. Significant Accounting Policies The Parent company carries its investments in subsidiaries under the equity method. 3. Dividends from Subsidiary In 1997, no dividends were paid by MBIA Corp. to MBIA Inc. In 1996 and 1995, MBIA Corp. declared and paid dividends of $29,000,000 and $82,900,000, respectively, to MBIA Inc. Also, in 1997 MBIA Investment Management Corp. declared and paid dividends of $40,500,000 to MBIA Inc. 4. Obligations under Municipal Investment and Repurchase Agreements The municipal investment and repurchase agreement business, as described in footnotes 2 and 13 to the consolidated financial statements of MBIA Inc. and Subsidiaries (which are incorporated by reference in the 10-K), is conducted by both the Registrant and its wholly owned subsidiary, MBIA Investment Management Corp. SCHEDULE IV MBIA INC. AND SUBSIDIARIES REINSURANCE for the Years Ended December 31, 1997, 1996 and 1995 (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 - --------------------------------------------------------------------------------------------------------------------- 1997 $529,665 $ 79,781 $ 13,351 $463,235 2.9% ---- -------- -------- -------- -------- --- 1996 $434,014 $ 54,852 $ 26,661 $405,823 6.6% ---- -------- -------- -------- -------- --- 1995 $336,768 $ 45,050 $ 11,719 $303,437 3.9% ---- -------- -------- -------- -------- ---
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, 1997 Commission File No. 1-9583 - -------------------------------------------------------------------------------- MBIA Inc. Exhibit Index 10.36. Trust Agreement, dated as of December 31, 1991, between MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January 21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated as of April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the 1995 10-K, as amended by Fifth Amendment to Trust Agreement, dated as of November 1, 1995, as further amended by Sixth Amendment to Trust Agreement, dated as of January 1, 1996, incorporated by reference to Exhibit 10.46 to the 1996 10-K, further amended by Seventh Amendment to Trust Agreement, dated as of October 15, 1997. 10.46. 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. 10.53. 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. 10.57. Agreement and Plan of Merger among the Company, CMA Acquisition Corporation and CapMAC Holdings Inc., dated as of November 13, 1997, incorporated by reference to the Company's Form S-4 filed on December 5, 1997. 10.58. Amendment No. 1 to Agreement and Plan of Merger among the Company, CMA Acquisition Corporation and CapMAC Holdings Inc., dated January 16, 1998, incorporated by reference to the Company's Post Effective Amendment No. 1 to Form S-4 filed on January 21, 1998. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 1997. 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 Coopers & Lybrand L.L.P. 24. Power of Attorney 27. Financial Data Schedule 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements EX-10.36 2 TRUST AGREEMENT DATED AS OF 12/31/91 Exhibit 10.36 SEVENTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS SEVENTH AMENDMENT, dated as of the fifteenth day of October, 1997, by and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance Corporation (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated December 31, 1991, with regard to the MBIA Inc. Employees Pension Plan and 401(k) Salary Deferral Plan (individually and collectively, the "Plan"); and WHEREAS, the Trustee and the Sponsor now desire to amend said Trust Agreement as provided for in Section 13 thereof; NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the Trust Agreement by: (1) Amending the "investment options" section of Schedules "A" and "C" to add the following: - Spartan U.S. Equity Index Fund IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Seventh Amendment to be executed by their duly authorized officers effective as of the day and year first above written. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By [SIGNATURE APPEARS HERE] 10/09/97 By [SIGNATURE APPEARS HERE] 11/04/97 ----------------------------------- ----------------------------------- Date Date EX-10.46 3 1ST RESTATED CREDIT AGREEMENT DATED AS OF 10/01/93 Exhibit 10.46 ================================================================================ SECOND AMENDED AND RESTATED CREDIT AGREEMENT among MBIA INSURANCE CORPORATION THE BANKS SIGNATORY HERETO CREDIT SUISSE FIRST BOSTON New York Branch as Administrative Agent and DEUTSCHE BANK AG New York Branch as Documentation Agent --------------------------------- dated as of October 1, 1997 --------------------------------- ================================================================================ TABLE OF CONTENTS ----------------- ARTICLE 1 DEFINED TERMS...................................................... 1 ARTICLE 2 LOANS.............................................................. 2 Section 2.1 Commitment........................................... 2 Section 2.2 Manner of Borrowing and Disbursement................. 2 Section 2.3 Notes; Loan Account.................................. 2 Section 2.4 Interest Rates....................................... 3 Section 2.5 Repayment of Loans................................... 3 Section 2.6 Prepayments.......................................... 3 Section 2.7 Limitations on Sources of Payment.................... 4 Section 2.8 Several Obligations and Rights of Banks.............. 4 Section 2.9 Pro Rata Treatment of Loans, Etc. ................... 5 Section 2.10 Individual Recovery.................................. 5 Section 2.11 Fronting Banks....................................... 5 ARTICLE 3 FEES; REDUCTION, TERMINATION AND EXTENSION OF COMMITMENT........... 10 Section 3.1 Commitment and Termination Fees...................... 10 Section 3.2 Termination or Reduction of Commitments.............. 10 Section 3.3 Extension of Commitments............................. 11 Section 3.4 Yield Protection..................................... 12 Section 3.5 Reimbursement........................................ 15 Section 3.6 Manner of Payment; Calculations, etc. ............... 15 ARTICLE 4 CONDITIONS PRECEDENT............................................... 18 Section 4.1 Conditions Precedent to Effective Date and Restatement Effective Date........................... 18 Section 4.2 Conditions Precedent to Each Loan.................... 21 ARTICLE 5 REPRESENTATIONS AND WARRANTIES; OTHER AGREEMENTS................... 22 Section 5.1 Due Incorporation, Etc. ............................. 22 Section 5.2 Due Authorization, Etc. ............................. 22 Section 5.3 Approvals............................................ 23 Section 5.4 Enforceability....................................... 23 Section 5.5 Pari Passu Obligations............................... 23 Section 5.6 Financial Information, etc. ......................... 23 Section 5.7 Litigation........................................... 24 Section 5.8 Taxes................................................ 24 Section 5.9 Absence of Defaults, etc. ........................... 25 Section 5.10 ERISA................................................ 25 Section 5.11 Compliance with Insurance Law........................ 25 Section 5.12 Covered Portfolio.................................... 26 Section 5.13 Investment Company Status............................ 27 Section 5.14 SEC Reports.......................................... 27 Section 5.15 Ownership; Subsidiaries.............................. 27 Section 5.16 Disclosure........................................... 27 - ---------------------- * This table of contents is not a part of the Second Amended and Restated Credit Agreement. -ii- ARTICLE 6 COVENANTS.......................................................... 28 Section 6.1 Use of Proceeds...................................... 28 Section 6.2 Conduct of Business and Corporate Existence.......... 28 Section 6.3 Compliance with Laws................................. 28 Section 6.4 Obligations and Taxes................................ 28 Section 6.5 Liens................................................ 29 Section 6.6 Merger or Sale of Assets............................. 29 Section 6.7 Underwriting Criteria................................ 29 Section 6.8 Collection of Pledged Recoveries and Pledged Premiums............................................. 30 Section 6.9 Inspection of Books and Records...................... 30 Section 6.10 Information Requirements............................. 30 ARTICLE 7 EVENTS OF DEFAULT.................................................. 34 Section 7.1 Events of Default.................................... 34 Section 7.2 Remedies............................................. 37 Section 7.3 No Waiver; Remedies Cumulative....................... 38 Section 7.4 Right of Setoff; etc. ............................... 38 Section 7.5 Adjustment of Commitment Fee......................... 38 ARTICLE 8 THE AGENT.......................................................... 39 Section 8.1 Appointment.......................................... 39 Section 8.2 Delegation........................................... 39 Section 8.3 Agent Not Liable; Reliance........................... 39 Section 8.4 Indemnity............................................ 41 Section 8.5 Liability of Agent................................... 42 Section 8.6 Agent May Act........................................ 42 Section 8.7 Successor............................................ 42 Section 8.8 Determination by the Agent Conclusive and Binding.... 43 ARTICLE 9 NATURE OF OBLIGATIONS; INDEMNIFICATION............................. 43 Section 9.1 Nature of Obligations; Survival...................... 43 Section 9.2 Indemnification...................................... 43 ARTICLE 10 MISCELLANEOUS..................................................... 44 Section 10.1 Costs, Expenses and Taxes............................ 44 Section 10.2 Jurisdiction......................................... 45 Section 10.3 Severability......................................... 45 Section 10.4 Governing Law........................................ 45 Section 10.5 Waiver of Jury Trial................................. 45 Section 10.6 Headings............................................. 46 Section 10.7 Notices and Addresses for Notice..................... 46 Section 10.8 Successors and Assigns; Assignment and Assumption; Participations; Additional Banks..................... 46 Section 10.9 Lending Office....................................... 49 -iii- Section 10.10 Counterparts......................................... 49 Section 10.11 Records.............................................. 49 Section 10.12 Amendments and Waivers............................... 49 SIGNATURES................................................................... 50 LIST OF EXHIBITS AND SCHEDULES EXHIBIT A - Certain Definitions EXHIBIT B - Form of Notice of Borrowing EXHIBIT C - Form of Note EXHIBIT D - Form of Security Agreement EXHIBIT E - List of Insured Obligations Excluded from the Covered Portfolio EXHIBIT F - Form of Assignment and Assumption Agreement EXHIBIT G - Form of Fronting Bank Supplement EXHIBIT H - Form of Fronting Bank Note EXHIBIT I - Form of Opinion of General Counsel to MBIA EXHIBIT J - Form of Opinion of Kutak Rock SCHEDULE 1 - Schedule of Commitments SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS AGREEMENT, dated as of October 1, 1997, among MBIA INSURANCE CORPORATION, a New York stock insurance corporation ("MBIA"), the financial ---- institutions from time to time parties hereto as Banks (collectively, the "Banks"), CREDIT SUISSE FIRST BOSTON, New York Branch, as Administrative Agent ----- for the Banks (in such capacity, the "Administrative Agent"), and DEUTSCHE BANK -------------------- AG, New York Branch (in such capacity, the "Documentation Agent" and, ------------------- collectively with the Administrative Agent, the "Agents"); ------ WHEREAS, MBIA (formerly known as Municipal Bond Investors Assurance Corporation), the Administrative Agent (formerly known as Credit Suisse, New York Branch), the Documentation Agent and certain of the Banks are parties to the First Restated Credit Agreement, dated as of October 1, 1993, as amended through the Third Amendment thereto, dated as of October 1, 1996, which First Restated Credit Agreement amended and restated the Credit Agreement, dated as of December 29, 1989, referred to therein (said Credit Agreement, as so amended, restated and modified, the "Original Credit Agreement"); and ------------------------- WHEREAS, the parties have agreed to add the other Banks as parties to the Original Credit Agreement, to amend the Original Credit Agreement and, as so amended and modified, to restate the Original Credit Agreement, all as more fully set forth below; 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 that, effective from the Restatement Effective Date (as hereinafter defined) the Original Credit Agreement is hereby further amended and, as so amended, is hereby restated to read in its entirety as follows: ARTICLE 1 DEFINED TERMS ------------- Unless otherwise specified, terms not otherwise defined in this Agreement and which are defined in Exhibit A of this Agreement shall have the meanings provided in such Exhibit A. -2- ARTICLE 2 LOANS ----- Section 2.1 Commitment. Each Bank, severally and not jointly, ----------- ---------- irrevocably agrees, upon the terms and subject only to the conditions of this Agreement, to lend to MBIA on a limited recourse basis as set forth in Section 2.7, on and after the Restatement Effective Date and prior to the Expiration Date amounts which in the aggregate do not exceed the Commitment of such Bank as set forth in Schedule 1 hereto. Section 2.2 Manner of Borrowing and Disbursement. (a) MBIA shall give ----------- ------------------------------------ the Administrative Agent at least five (5) Business Days' notice prior to each Loan to be made hereunder. Such notice shall specify the date, which shall be a Business Day, and the amount of the proposed borrowing and shall be substantially in the form of, and contain the certifications contained in, Exhibit B hereto. (b) Upon receipt of each notice described in paragraph (a), the Administrative Agent shall promptly notify each Bank of the contents thereof and the amount of such Bank's Loan thereunder. Each Bank shall, not later than 12:00 noon (New York City time) on the date specified in such notice and subject to the satisfaction of the conditions set forth in Section 4.2, make available through its Lending Office to the Administrative Agent at the Administrative Agent's Office for such account as the Administrative Agent shall designate, the amount of its Loan in immediately available funds. (c) On the date of a borrowing hereunder, the Administrative Agent shall, subject to the satisfaction of the conditions set forth in Section 4.2, disburse the amounts made available to the Administrative Agent by the Banks in like funds by transferring such amounts to an account of MBIA maintained at the Administrative Agent or by wire transfer to an account in New York City pursuant to MBIA's instructions. Section 2.3 Notes; Loan Account. (a) Each Bank's Loans shall be ----------- ------------------- evidenced by, and be repayable with interest in accordance with the terms of, one or more Notes payable to the order of such Bank for the account of its Lending Office and substantially in the form of Exhibit C hereto. (b) Each Bank is irrevocably authorized from time to time to record the date and amount of each Loan made by such Bank and each payment and prepayment with respect thereto on the grid -3- attached to such Bank's Note or on a continuation thereof which may be attached thereto by such Bank and made a part thereof, and any such notation shall, absent manifest error, constitute prima facie evidence of the accuracy of the ----- ----- information so recorded; provided, that the failure to make any such notations -------- shall not affect the validity of MBIA's obligations hereunder or under such Note. Section 2.4 Interest Rates. (a) Each Loan shall bear interest on the ----------- -------------- outstanding principal amount thereof, for each day from and including the date such Loan is made to but excluding the day it becomes due, at a rate per annum equal to the sum of the Base Margin plus the Base Rate, which interest rate shall change as and when the Base Rate shall change. Such interest shall be payable (i) on the first day of each January, April, July and October commencing with the first such date after the making of such Loan, and (ii) when such Loan is due (whether at maturity, after acceleration or otherwise). (b) Any overdue principal of any Loan and, to the extent permitted by law, overdue interest thereon shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment (after as well as before judgment), at a rate pen annum equal to the sum of the Base Margin plus the Base Rate plus two percent (2%), which interest rate shall change as and when the Base Rate shall change. (c) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to MBIA and the Banks by telefax or by telephone of each rate of interest so determined, and its determination thereof shall be conclusive, absent manifest error. Section 2.5 Repayment of Loans. All Loans shall mature and the ----------- ------------------ principal amount thereof shall be due and payable on the Expiration Date. Section 2.6 Prepayments. (a) MBIA shall have the right at any time, ----------- ----------- and from time to time, upon at least three (3) Business Days notice to the Administrative Agent to prepay, in whole or in part, Loans at the time outstanding. Any such notice shall specify the amount of the Loans to be prepaid and the date of prepayment. The Administrative Agent shall promptly notify the Banks of the contents of each such notice. Amounts to be prepaid pursuant to this paragraph shall irrevocably be due and payable on the date specified in the applicable notice of prepayment. Interest on the amount prepaid, accrued to the prepayment date, shall be paid on such date. Each partial prepayment of Loans made -4- pursuant to this paragraph shall be in a principal amount of at least $1,000,000. (b) MBIA shall make mandatory prepayments of the principal amount of Loans outstanding on any date on which amounts on deposit or required to be on deposit in the Escrow Account in accordance with Section 8 of the Security Agreement as of such date exceed the sum of (i) the aggregate amount of accrued and unpaid interest on the Loans, plus (ii) interest which will accrue on the Loans remaining outstanding after giving effect to such prepayment from the prepayment date to but excluding the next scheduled interest payment date, in the amount of such excess. Interest on the amount prepaid, accrued to the prepayment date, shall be paid on such date. (c) Amounts prepaid or repaid in respect of Loans may not be reborrowed. Section 2.7 Limitations on Sources of Payment. The obligations of ----------- --------------------------------- MBIA under this Article 2 to make payments of principal and interest on the Loans and the Notes are limited recourse obligations of MBIA payable solely from the Pledged Recoveries, the Pledged Premiums and the other Collateral, and the Banks shall not be entitled to procure any money judgment against any other assets or properties of MBIA for payment of such obligations; provided, however, -------- ------- that nothing herein contained shall limit, restrict or impair the lien created by the Security Agreement or the right of the Administrative Agent or the Banks to exercise any of their rights herein or in any of the other Loan Documents upon the occurrence of an Event of Default or otherwise, or to bring suit and obtain a judgment against MBIA (recourse thereon being limited as to payment of principal and interest on the Loans and the Notes as provided in this Section 2.7). Section 2.8 Several Obligations and Rights of Banks. The failure of ----------- --------------------------------------- any Bank to make any Loan to be made by it on the date specified therefor shall not relieve any other Bank of its obligation to make its Loan on such date, but, except as provided in Section 2.11, no Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. The amounts payable at any time hereunder to each Bank shall be a separate and independent debt, and each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and the other Loan Documents, and it shall not be necessary for any other Bank to be joined as an additional party in any proceeding for such purpose. -5- Section 2.9 Pro Rata Treatment of Loans, Etc. Except to the extent ----------- -------------------------------- otherwise provided herein, each borrowing under Section 2.2 shall be made from the Banks pro rata on the basis of their respective Commitments, and each prepayment and payment of principal of or interest on Loans shall be made to the Administrative Agent for the account of the Banks pro rata in accordance with the respective unpaid principal amounts of the Loans held by such Banks. Section 2.10 Individual Recovery. Each Bank agrees that if it shall, ------------ ------------------- through the exercise of any right of counterclaim, setoff, banker's lien, realization of security or otherwise, receive payment of a proportion of the amount due and payable to it hereunder or under its Note as principal or interest which is greater than the proportion received by any other Bank in respect of the aggregate of such amounts due and payable to the Bank hereunder and under the Notes, the Bank receiving such proportionately greater payment shall purchase participations in, or if and to the extent specified by any such other Banks direct interests in, the rights of such Banks hereunder and under their Notes (which it shall be deemed to have done simultaneously upon the receipt of such payment), so that all such recoveries with respect to such amounts due and payable hereunder and under all the Notes held by the Banks (net of any expenses which may have been incurred by the respective Banks in obtaining or preserving such recoveries) shall be pro rata in accordance with the unpaid principal and interest on the Loans held by each Bank. In the event that any such payment is required to be returned on disgorged, or is otherwise disturbed by legal process, further appropriate adjustments shall be made. MBIA expressly consents to the foregoing arrangements. Section 2.11 Fronting Banks. (a) From time to time MBIA shall have ------------ -------------- the right, with the consent of the Administrative Agent and each affected Fronting Bank, to designate one or more Banks as Fronting Banks with respect to one or more other Banks under this Agreement. The designation of a Bank as a Fronting Bank shall become effective when (i) MBIA, the Administrative Agent and such Bank have entered into a Fronting Bank Supplement (or on such later date as may be set forth in such Fronting Bank Supplement), which shall set forth the Fronting Bank Commitment of such Bank with respect to each other Bank for which it is acting as Fronting Bank, and (ii) MBIA shall have duly executed and delivered to such Fronting Bank a Fronting Bank Note in the aggregate amount of its Fronting Bank Commitments, dated the date of such Fronting Bank Supplement (or of any applicable modification thereto), payable to the order of such Fronting Bank for the account of its Lending Office and substantially in the form of Exhibit H hereto. Each -6- Fronting Bank's Fronting Bank Note shall evidence Fronting Bank Loans made by such Fronting Bank pursuant to this Section 2.11 and otherwise shall constitute a Note for all purposes under this Agreement and the Loan Documents. A Fronting Bank Supplement may be amended or otherwise modified from time to time or terminated with the written consent of MBIA, the Administrative Agent and the Fronting Bank which is a party thereto. (b) The Fronting Bank Commitment of each Fronting Bank with respect to another Bank shall be automatically reduced by an amount equal to its applicable Fronting Bank Percentage of the amount of any reduction in such other Bank's Commitment. In addition, the Fronting Bank Commitment of each Fronting Bank with respect to another Bank shall be automatically reduced by an amount equal to its applicable Fronting Bank Percentage of the amount of the Commitment of such other Bank which is sold, assigned or otherwise transferred by such other Bank to another Person; provided that a participation granted by such -------- other Bank in accordance with Section 10.8(c) shall not constitute a sale, assignment or transfer for purposes of this paragraph. The Fronting Bank Commitment of each Fronting Bank with respect to another Bank shall be automatically terminated upon the termination of the Commitment of such other Bank. (c) In the event that a Bank (including a Bank which is a Defaulting Bank) determines that, for any reason (other than the failure of MBIA to satisfy the conditions set forth in Section 4.2), it will not make available to the Administrative Agent the full amount of a Loan required to be made by it pursuant to this Agreement on the date specified for a borrowing hereunder pursuant to Section 2.2, it will give notice (a "Nonfunding Notice") thereof to ----------------- MBIA and the Administrative Agent not later than 12:00 noon (New York City time) on the Business Day immediately preceding the date of such borrowing. In the event that a Bank shall have given a Nonfunding Notice, or in the event that any Bank for any reason (other than the failure of MBIA to satisfy the conditions set forth in Section 4.2) fails to make available to the Administrative Agent the full amount of a Loan required to be made by it pursuant to this Agreement by 12:00 noon (New York City time) on the date specified for a borrowing hereunder pursuant to Section 2.2, such Bank shall thereupon become a "Defaulting Bank", and the amount of the Loan identified in the Nonfunding --------------- Notice or any other amount of a Loan which a Defaulting Bank was required but failed to advance when required hereunder shall be a "Defaulted Amount". ---------------- (d) The Administrative Agent shall notify MBIA and each Fronting Bank (if any) with respect to a Defaulting Bank (i) promptly following the Administrative Agent's receipt of any -7- Nonfunding Notice from such Defaulting Bank, which notice shall describe the contents of such Nonfunding Notice, identify the Defaulting Bank and state the date on which the Loan described in such Nonfunding Notice is required to be made, the Defaulting Bank's Defaulted Amount and such Fronting Bank's Fronting Bank Percentage thereof, and (ii) unless described in a notice given pursuant to clause (i) not later than 1:00 p.m. (New York City time) on the date on which such Defaulting Bank failed to make available to the Administrative Agent the full amount of a Loan required to be made by it pursuant to this Agreement, which notice shall identify the Defaulting Bank and state the amount of the Defaulting Bank's Loan which was not made available and such Fronting Bank's Fronting Bank Percentage thereof. (e) Each Fronting Bank receiving a notice from the Administrative Agent pursuant to Section 2.11(d) shall, (i) not later than 12:00 noon (New York City time) on the date specified in such notice, if such notice was received prior to such date, or (ii) not later than 4:00 p.m. (New York City time) on such date, if such notice was received on such date, in either case subject to the satisfaction of the conditions set forth in Section 4.2, make available through its Lending Office to the Administrative Agent at the Administrative Agent's Office for such account as the Administrative Agent shall designate, a Fronting Bank Loan in the amount of its Fronting Bank Percentage of the Defaulted Amount specified in such notice, in immediately available funds; provided that the aggregate amount of Fronting Bank Loans (determined without - -------- regard to any repayments or purchases thereof) which a Fronting Bank is required to make in respect of a Defaulting Bank shall not exceed its Fronting Bank Commitment with respect to such Defaulting Bank. Such funds received by the Administrative Agent shall be disbursed to MBIA as provided in Section 2.2(c). (f) Fronting Bank Loans shall constitute Loans for all purposes under this Agreement and the Loan Documents, except as otherwise provided herein. Upon making of a Fronting Bank Loan by a Fronting Bank pursuant to this Section 2.11, such Fronting Bank, to the extent of such Fronting Bank Loan, shall have all the rights, but none of the obligations, of the Defaulting Bank hereunder in respect of the related Defaulted Amount, including, but not limited to, the right to receive the Defaulting Bank's pro rata share of any payment received in respect of Loans hereunder and the voting or consent rights of the Defaulting Bank in respect of the related Defaulted Amount and an amount of the Defaulting Bank's Commitment equal to such Defaulted Amount; provided -------- that the Defaulting Bank's pro rata share of any payment received in respect of principal of Loans hereunder shall be allocated first to its Fronting Banks in respect of Fronting Bank Loans made in respect of -8- such Defaulting Bank and then to the Loans of such Defaulting Banks. (g) No Fronting Bank Loan made by a Fronting Bank pursuant to this Section 2.11 shall relieve any Defaulting Bank of its obligations under this Agreement. Without limitation of other rights any party hereto may have against such Defaulting Bank, if one or more Fronting Banks have made one or more Fronting Bank Loans in respect of a Defaulting Bank, such Defaulting Bank shall on demand by a Fronting Bank, advance funds in respect of the aggregate Defaulted Amount in respect of which such Fronting Bank made Fronting Bank Loans pursuant to clause (i) or clause (ii) below: (i) If such Fronting Bank elects to have funds provided under this clause (i), the Defaulting Bank, without regard to any failure of the conditions set forth in Section 4.2 to be satisfied with respect to such Loan, shall make a Loan to MBIA hereunder in the amount of the aggregate outstanding principal amount of the Fronting Bank Loans of such Fronting Bank in respect of such Defaulting Bank and simultaneously purchase from such Fronting Bank the right to receive the accrued and unpaid interest on such Fronting Bank Loans for a purchase price equal to the amount of such accrued and unpaid interest. Any Loan described in this clause (i) shall be made available by the Defaulting Bank through its Lending Office to the Administrative Agent at the Administrative Agent's Office for such account as the Administrative Agent shall designate, in immediately available funds. On any date on which any such amounts are made available to the Administrative Agent by a Defaulting Bank, the Administrative Agent shall notify MBIA and each affected Fronting Bank and shall disburse such amounts in like funds by transferring such amounts to the affected Fronting Banks, in proportion to their respective Fronting Bank Commitments relating to such Defaulting Bank. Such disbursement received by a Fronting Bank, to the extent thereof, shall be deemed to constitute the prepayment of outstanding principal amount of its Fronting Bank Loans relating to such Defaulting Bank and the purchase by such Defaulting Bank of the right to receive the accrued and unpaid interest thereon concurrently with the making of the Loan by such Defaulting Bank, but as between such Defaulting Bank and MBIA, such Fronting Bank Loans shall be deemed to be continued on such date as a Loan hereunder owed to such Defaulting Bank and interest thereon shall accrue from the date on which interest was last paid on such Fronting Bank Loans (or, if no interest has been paid thereon, from the date on which such Fronting Bank Loans were made). -9- (ii) If such Fronting Bank elects to have funds provided under this clause (ii), the Defaulting Bank, without regard to any failure of the conditions set forth in Section 4.2 to be satisfied with respect to such Loan, shall purchase the Fronting Bank Loans of such Fronting Bank in respect of such Defaulting Bank or participations therein, in either case for a purchase price equal to the outstanding principal amount of the Fronting Bank Loans or portion thereof being purchased or in which a participation is being purchased, plus accrued and unpaid interest thereon. Such purchase price shall be made available by the Defaulting Bank through its Lending Office to the Administrative Agent at the Administrative Agent's Office for such account as the Administrative Agent shall designate, in immediately available funds. On any date on which any such amounts are made available to the Administrative Agent by a Defaulting Bank, the Administrative Agent shall notify MBIA and each affected Fronting Bank and shall disburse such amounts in like funds by transferring such amounts to the affected Fronting Banks, in proportion to their respective Fronting Bank Commitments relating to such Defaulting Bank. Upon payment in accordance with this clause (ii) and to the extent of the payment received by a Fronting Bank representing the outstanding principal amount of its Fronting Bank Loans to such Defaulting Bank, at the election of such Fronting Bank either (A) such Fronting Bank shall be deemed to have assigned to the Defaulting Bank such portion of such Loan, in which case such portion shall cease to be a Fronting Bank Loan and shall be continued as a Loan hereunder made pursuant to the Commitment of such Defaulting Bank, and the outstanding principal amount thereof shall cease to be evidenced by the Fronting Bank Note held by such Fronting Bank and shall become evidenced by the Note held by such Defaulting Bank; without further action by any party, or (B) such Defaulting Bank shall be deemed to have purchased a participation in the such Fronting Bank's Fronting Bank Loan pursuant to Section 10.8(c). In addition to the foregoing and to the rights of Fronting Banks to receive interest in respect of Fronting Bank Loans as provided herein (or payments of purchase price in respect thereof as provided in this Section 2.11), such Defaulting Bank shall pay compensation to its Fronting Banks on demand in respect of the outstanding principal amount of each Fronting Bank Loan made in respect of such Defaulting Bank calculated at a per annum rate equal to 2.00% for the period commencing on the date on which such Fronting Bank Loan was made and continuing until the date such Loan is repaid (including pursuant to clause (i) above) or the purchase price described in clause (ii) above is received by such Fronting Bank. -10- ARTICLE 3 FEES; REDUCTION, TERMINATION AND EXTENSION OF COMMITMENT -------------------------------------------------------- Section 3.1 Commitment and Termination Fees. (a) MBIA hereby ----------- ------------------------------- agrees to pay to the Administrative Agent for the account of the Banks a nonrefundable commitment fee for the period commencing on the Restatement Effective Date and ending on the Expiration Date, at the rate per annum set forth in the fee letter among MBIA, the Administrative Agent and the Banks dated on or about the date hereof which refers to this Section 3.1 (the "Bank Fee -------- Letter"), plus the Applicable Margin (if any) determined pursuant to Section 7.5 - ------ hereof, on the Available Commitment of the Banks. Such fee shall be payable in immediately available funds quarterly in arrears on the first day of each January, April, July and October and on the Expiration Date, for the period commencing on the most recent payment date and ending on the Expiration Date, in each case calculated on the average daily amount of the Available Commitment for such period. (b) Except to the extent otherwise provided herein, each payment of the commitment fee accruing under Section 3.1(a) shall be made for the account of the Banks, pro rata according to their respective Commitments. (c) MBIA hereby agrees to pay to the Administrative Agent for its own account or for the account of the Documentation Agent, as the case may be, the fees set forth in the fee letter between MBIA and the Administrative Agent which refers to this Section 3.1(c) (the "Agent Fee Letter"). ---------------- Section 3.2 Termination or Reduction of Commitments. ----------- --------------------------------------- (a) MIBIA may at any time terminate or reduce the Maximum Commitment by giving the Administrative Agent at least five Business Days notice thereof. Each such reduction shall reduce the Maximum Commitment only in integral multiples of $1,000,000. Any notice of reduction or termination pursuant to this Section 3.2(a) shall be irrevocable. Any such reduction shall be applied to the Commitment of each Bank pro rata based upon their respective Commitments as in effect immediately prior to such reduction, and any such termination shall terminate the Commitments of all Banks. (b) If any Bank shall have become an Affected Bank, MBIA may terminate the Commitment (and, if applicable, Fronting Bank Commitment) of such Bank by notice to the Administrative Agent and such Bank, unless prior to the effective date of such termination (i) such Bank ceases to be an Affected Bank, (ii) any Loan has been made or (iii) any Default or Event of Default has occurred and is -11- continuing. Any such termination shall be effective on the later to occur of the 60th day after the giving of such notice by MBIA or the date of termination specified in such notice. In addition, MBIA may terminate the Commitment of a Nonextending Bank in accordance with Section 3.3 hereof. On the effective date of any termination referred to in this Section 3.2(b), the Commitment and any further obligation of such Affected Bank or Nonextending Bank to make Loans hereunder shall terminate. Subject to the foregoing, any notice of termination given pursuant to this Section 3.2(b) shall be irrevocable. (c) The Administrative Agent shall give prompt notice to each Bank of any reduction or termination of the Maximum Commitment or of the Commitment of any Bank pursuant to this Section 3.2 or Section 3.3. Section 3.3 Extension of Commitments. The Expiration Date ----------- ------------------------ may be extended from time to time with the consent of the Administrative Agent and all Banks (other than Nonextending Banks whose Commitments have been terminated), each in their sole discretion, as provided in this Section 3.3. Not later than July 1, 1998, and not later than each July 1 thereafter in respect of succeeding one-year extension periods provided for below, or such later date to which the Administrative Agent and the Majority Banks may consent in writing, MBIA may notify the Administrative Agent if MBIA desires to have the Expiration Date extended for a period of one year from the date on which it is then scheduled to occur. The Administrative Agent shall promptly give the Banks notice of its receipt of any such request and shall request each Bank to consent to such extension, unless the Administrative Agent has determined to withhold its consent to such extension. Such notice and request from the Administrative Agent to the Banks may be given by the Administrative Agent subject to a reservation by the Administrative Agent of its right to withhold consent to such extension at a later date. Each Bank which elects to give its consent to such extension shall deliver such consent to the Administrative Agent and MBIA prior to the later to occur of (a) 90 days following the date of MBIA's request and (b) the July 1 of the year which is six years prior to then scheduled Expiration Date (or in each case such later date to which the Administrative Agent and MBIA have consented). Any Bank which has not given its consent within such period shall be deemed to be a "Nonextending Bank", and MBIA shall have the right at ----------------- any time thereafter to elect to terminate the Commitment of such Nonextending Bank by not less than five Business Days' prior notice to such Nonextending Bank and the Administrative Agent unless, prior to the effectiveness of such termination, (i) any Loan has been made or (ii) any Default or Event of Default has -12- occurred and is continuing. Any such termination shall be effective on the date specified in such notice. Section 3.4 Yield Protection. (a) If (i) any law, rule, ----------- ---------------- regulation or guideline, whether or not having the force of law (including but not limited to any United States or foreign law, rule, regulation or guideline) or the enforcement, interpretation or administration thereof by any court or any administrative or governmental authority, central bank or comparable agency charged with the interpretation or administration thereof shall at any time after the date of this Agreement (A) impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, pursuant to Regulation D of the Board of Governors of the Federal Reserve System) against credits or commitments to extend credit extended by, or participations therein by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, any Bank or any Participant (or any Lending Office thereof), or (B) subject credits or commitments to extend credit extended by any Bank or any Participant (or any Lending Office thereof) to any assessment or other cost imposed by the Federal Deposit Insurance Corporation or any successor thereto, or (C) impose on any Bank or any Participant (or any Lending Office thereof) any other or similar condition regarding this Agreement, the commitments or obligations of any Bank or any Participant (or any Lending Office thereof) hereunder or the participation of such Participant (or any Lending Office thereof) therein, or (ii) under any law, rule, regulation or guideline, whether or not having the force of law (including but not limited to any United States or foreign law, rule, regulation or guideline) or the enforcement, interpretation or administration thereof by any court or any administrative or governmental authority, central bank or comparable agency charged with the interpretation or administration thereof presently or at any time hereafter in effect, the obligations of any Bank or any Participant hereunder shall be treated as a letter of credit or similar obligation for purposes of (A) any applicable reserve, special deposit or similar requirement (including, without limitation, pursuant to Regulation D of the Board of Governors of the Federal Reserve System) or (B) any assessment or other cost imposed by the Federal Deposit Insurance Corporation or any successor thereto, or (C) any other or similar condition regarding this Agreement, the commitments or obligations of any Bank (or any Lending Office thereof) hereunder or the participation of such Participant (or any Lending Office thereof) therein, and the result of any event referred to in clause (i) or (ii) above shall be to increase the cost to such Bank or such Participant (or such Lending Office thereof) of making, funding or maintaining (or agreeing to make, fund or maintain) its Loans or its commitments or obligations -13- hereunder or its participation therein by an amount which such Bank or such Participant shall in its reasonable judgment deem to be material (which increase in cost shall be the result of the reasonable allocation by such Bank or such Participant, as the case may be, of the aggregate of such cost increases resulting from such events), then, MBIA shall pay to the Administrative Agent ---- (for the account of such Bank or such Participant, as the case may be) from time to time as specified by such Bank (which shall be at least 30 days after the related notice from such Bank or such Participant given pursuant to Section 3.4(c)) additional amounts which shall be sufficient to compensate such Bank or Participant, as the case may be, for such increased cost, together with interest on each such amount from the date payment is due until the date of payment in full thereof at the rate set forth in Section 3.6(g); provided that -------- no Bank or Participant shall be entitled under this Section 3.4(a) to compensation for any increased costs incurred earlier than one year prior to the date of notice thereof to MBIA or, in the case of compensation relating to a reserve, special deposit or similar requirement pursuant to clause (i) (A) of this Section 3.4(a), earlier than the date of notice thereof to MIBIA. (b) If any Bank or any Participant shall have determined in its reasonable judgment that the adoption after the date hereof of any law, rule, regulation or guideline (whether or not having the force of law) regarding capital adequacy (including but not limited to any United States or foreign law, rule, regulation or guideline), or any change in any applicable law, rule, regulation or guideline, as the case may be, or any change in the enforcement or interpretation or administration thereof by any court or any administrative or governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank or any Participant (or any Lending Office thereof) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank or such Participant or of its bank holding company, if any, as a consequence of the obligations of such Bank hereunder or under the participation of such Participant therein to a level below that which such Bank, such Participant or such bank holding company could have achieved but for such adoption, change or compliance (taking, into consideration the policies of such Bank or such Participant, as the case may be, and of its bank holding company, if any, with respect to capital adequacy) by an amount deemed by such Bank or such Participant to be material, then MBIA shall pay to the Administrative Agent (for the account of such Bank or such Participant, as the case may be) from time to time as specified by such Bank (which shall be at least 30 days after the related notice -14- from such Bank or such Participant given pursuant to Section 3.4(c)) such additional amount or amounts as will compensate such Bank, Participant or bank holding company, as the case may be, for such reduction, together with interest on each such amount from the date payment is due until the date of payment in full thereof at the rate set forth in Section 3.6(g); provided that no Bank or -------- Participant shall be entitled under this Section 3.4(b) to compensation for any such reduction that is (i) attributable solely to the applicability of any law, rule, regulation or guideline effective on December 31, 1992 adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards" as in effect on such date (it being understood that any reduction attributable to any `changes in such report or in any such law, rule, regulation or guideline or to any additional laws, rules, regulations or guidelines adopted pursuant to or arising out of such report shall be subject to the provisions of this Section 3.4(b)) or (ii) incurred earlier than one year prior to the date of notice thereof to MIBIA. (c) Each demand by any Bank or any Participant for compensation pursuant to Section 3.4(a) or 3.4(b) shall be accompanied by a certificate of such Bank or such Participant (submitted through the Administrative Agent), as the case may be, in reasonable detail setting forth the computation of such compensation (including the reason therefor), which certificate shall be conclusive, absent manifest error. In determining such amount, such Bank or such Participant may use any reasonable averaging and attribution methods. A copy of any such demand shall be sent to the Administrative Agent concurrently when given to MBIA. The provisions of this Section 3.4 shall survive termination of this Agreement for a period of one year. (d) If any Participant makes a demand for compensation pursuant to Section 3.4(a) or 3.4(b), in amounts which are materially in excess of the compensation payable to the Bank which has granted a participation to such Participant, such Bank shall, at the written request and at the expense of MIBIA, use reasonable efforts to replace such Participant with a Participant reasonably acceptable to such Bank which would not impose such an excess claim for such compensation; provided, that nothing contained in this paragraph shall -------- be deemed to require any Bank to terminate any participation agreement which is not terminable by such Bank at will without the payment of any compensation or penalties or to repurchase the interest of any Participant or to terminate any such participation agreement unless a replacement Participant is located. -15- Section 3.5 Reimbursement. Whenever any Bank or any ----------- ------------- Participant shall sustain or incur any losses, expenses and liabilities (including, without limitation, any interest paid by such Bank or such Participant to lenders of funds borrowed by it to make or carry any Loan or its participation therein, any termination costs paid by such Bank or such Participant to other parties to interest rate swap or similar arrangements, and any loss, including without limitation, lost profits sustained by such Bank or such Participant in connection with the re-employment of such funds) in connection with the (i) failure by MBIA to borrow any Loan after having given notice of its intention to borrow in accordance with Section 2.2(a) or 2.11 hereof (whether by reason of MBIA's election not to proceed or the nonfulfillment of any of the conditions set forth in Article 4), or (ii) failure by MBIA to pay the principal amount of any Loan when due (whether at maturity, on the date fixed for prepayment, by reason of acceleration or otherwise) other than solely by reason of the operation of the provisions of Section 2.7 and the unavailability or insufficiency of Pledged Recoveries or Pledged Premiums to pay such amounts, MBIA agrees to pay to the Administrative Agent (for the account of such Bank or such Participant, as the case may be), upon its demand, an amount sufficient to compensate such Bank or such Participant for all such losses and out-of-pocket expenses. The provisions of this Section 3.5 shall survive termination of this Agreement. Section 3.6 Manner of Payment; Calculations, etc. (a) Each ----------- ------------------------------------ payment (including prepayments) by MBIA on account of the principal of or interest on the Loans and any other amount owed to the Administrative Agent or any Bank under this Agreement or the Notes shall be made not later than 12:00 noon (New York City time) on the date specified for payment under this Agreement to the Administrative Agent at the Payment Office, for the account of such Bank or the Administrative Agent, as the case may be, and any payments received by the Administrative Agent after such time shall be deemed to have been paid on the next succeeding Business Day. In the case of a payment for the account of a Bank, the Administrative Agent will promptly thereafter distribute the amount so received in like funds to such Bank. If the Administrative Agent shall not have received any payment from MBIA on any such date and at such time, the Administrative Agent will notify the Banks accordingly. (b) All payments hereunder and under the Notes shall be made in freely transferable Dollars and in same day funds at the Payment Office without setoff or counterclaim and in such amounts as may be necessary in order that all such payments (after giving effect to (i) withholdings for or on account of any present or future taxes, levies, imposts, duties or other similar charges of -16- whatsoever nature imposed by any government or any political subdivision or taxing authority thereof, other than any tax (other than such taxes referred to in clause (ii) below) on or measured by the net income, profits, capital or net worth of any Bank or any franchise or general doing business tax pursuant to the income tax laws of the jurisdiction where the Bank's principal or lending office or offices are located (collectively, the "Taxes"), and (ii) deduction of an ----- amount equal to any taxes on or measured by such net income payable by such Bank with respect to the amount by which the payments required to be made by this Section 3.6(b) exceed the amount otherwise specified to be paid under this Agreement) shall not be less than the amounts otherwise specified to be paid under this Agreement or the Notes. A certificate of any Bank as to additional amounts due under this Section 3.6(b), stating in reasonable detail the amount and nature of such Taxes, shall, absent manifest error, be final, conclusive and binding on the parties hereto. With respect to each deduction or withholding for or on account of any Taxes, MBIA shall promptly furnish to any Bank such certificates, receipts and other documents as may be required (in the judgment of such Bank) to establish any tax credit to which such Bank may be entitled. The provisions of this Section 3.6(b) shall survive termination of this Agreement. (c) Prior to the Effective Date in the case of the Banks, and on the date a Participant accepts its participation in any Bank's Commitment and this Agreement, in the case of such Participant, and from time to time thereafter if requested by MBIA, each Bank and each Participant organized under the laws of a jurisdiction outside the United States shall provide MBIA with the forms prescribed by the Internal Revenue Service of the United States certifying as to such Person's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to it hereunder or other documents reasonably satisfactory to MBIA which shall indicate that all payments to be made to such Bank or such Participant hereunder are not subject to deduction or withholding of any United States Federal income taxes. Unless MBIA has received forms (such as IRS Form 1001 or Form 4224) or other documents reasonably satisfactory to it, indicating that payments hereunder are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, MBIA shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for such Bank or such Participant organized under the laws of a jurisdiction outside the United States, as the case may be. (d) In the event that any Bank determines in good faith that it has received a cash refund of, or that it has received a reduction in United States federal income taxes which it would -17- otherwise be required to pay by reason of a deduction against its income or a credit against tax liability for, any Taxes for which it has received an additional payment by MBIA pursuant to Section 3.6(b) hereof, such Bank shall remit an amount equal to such refund or reduction, but not exceeding the amount of such additional payment made by MBIA, to the Administrative Agent for the account of MBIA to the extent such Bank determines that it can do so without prejudicing its retention of the amount of such refund or reduction or any of its rights to any other relief or allowance which may be available to it. Each agreement between a Bank and a Participant shall require that in the event such Participant in good faith makes such a determination with respect to a refund or reduction, it shall remit an amount equal to such refund or reduction, but not exceeding the amount of such additional payment made by MBIA, to such Bank for the account of MBIA, and such Bank shall deliver any such payments actually received to the Administrative Agent for such account. The Administrative Agent shall deliver to MBIA any amounts actually received for the account of MBIA pursuant to the provisions of this Section. In the event that any Bank or any Participant determines in good faith that it is no longer entitled to receive or retain any such refund, deduction or credit, MBIA shall upon notice promptly return to the Administrative Agent for the account of such Bank or such Participant, as the case may be, any related payment made to MBIA pursuant to this paragraph. Nothing contained herein shall be construed (i) to grant to MBIA or its agents or representatives access to any financial or tax records of the Administrative Agent or any Bank or Participant or any right to receive copies thereof, (ii) to impose upon any Bank or Participant any obligation to file for or otherwise claim any such deduction or credit or to institute, prosecute or defend any claim, action or proceeding for the recovery of any such refund or for obtaining any such reduction, which matters shall remain in the sole discretion of such Bank or such Participant, or (iii) to impose upon any Bank any obligation to claim or to institute, prosecute or defend any action for collecting or obtaining any amounts due from a Participant to such Bank pursuant to this Section. (e) If any payment under this Agreement or under the Notes shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day, and such extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. (f) Interest on the Loans and Notes and commitment fees hereunder shall be computed on the basis of a year of 365 days and for the actual number of days elapsed. -18- (g) If any payment under this Agreement shall not be paid when due, such payment shall, unless otherwise specified herein or in the Notes, bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment (after as well as before judgment), at a rate per annum equal to the sum of two percent (2%) plus the rate of interest otherwise applicable on such payment, or if no such rate is specified herein at a rate per annum equal to the sum of the Base Margin plus the Base Rate plus two percent (2%) , which interest rate shall change as and when the Base Rate shall change. (h) If some but less than all amounts due from MBIA are received by the Administrative Agent, the Administrative Agent shall distribute such amounts in the following order of priority: (i) to the payment of all other amounts not otherwise referred to in this Section 3.6(h) then due and payable hereunder or under the Notes, (ii) to the payment of interest then due and payable on the Loans, and (iii) to the payment of principal then due and payable on the Loans. ARTICLE 4 CONDITIONS PRECEDENT -------------------- Section 4.1 Conditions Precedent to Effective Date and ----------- ------------------------------------------ Restatement Effective Date. (a) The obligations of the initial Bank to make - -------------------------- Loans under the Original Credit Agreement became effective as of the Effective Date upon the satisfaction of the conditions stated in Section 4.1 thereof. (b) The amendments to and restatement of the Original Credit Agreement provided for herein shall become effective as of the Restatement Effective Date when each of the following conditions has been fulfilled to the reasonable satisfaction of the Agents. If such conditions have not been satisfied on or prior to the Restatement Effective Date, then at the written election of the Administrative Agent delivered to MBIA, the amendments to and restatement of the Original Credit Agreement set forth herein shall terminate and be of no further force or effect and the Original Credit Agreement shall remain in full force and effect in accordance with its terms. (i) As of the Restatement Effective Date (and after giving effect to amendments to and restatement of the Original Credit Agreement set forth herein), (A) there shall exist no Default or Event of Default, and (B) all representations and warranties made by MBIA herein or in any of the Loan Documents -19- shall be true and correct with the same effect as though such representations and warranties had been made at and as of such time; (ii) Each Bank shall have received a replacement Note dated the Restatement Effective Date, in a principal amount equal to its Commitment and otherwise meeting the requirements of Section 2.3 (the "Substitute Notes") , which, in the case of Banks which are ---------------- parties to the Original Credit Agreement, shall be issued in exchange for the Note or Notes heretofore issued by MBIA to such Banks under the Original Credit Agreement; (iii) Each Fronting Bank shall have received a Fronting Bank Note dated the Restatement Effective Date and otherwise meeting the requirements of Section 2.11 and substantially in the form of Exhibit H hereto (the "Initial Fronting Bank Notes") --------------------------- (iv) The Administrative Agent and MBIA shall have entered into the Second Amended and Restated Security Agreement and Collateral Assignment, substantially in the form of Exhibit D hereto (the "Restated Security Agreement"), amending the Security Agreement --------------------------- as currently in effect and, as so amended, restating the Security Agreement as heretofore in effect, which shall be in full force and effect; (v) The Agent shall have received (A) results of Uniform Commercial Code searches with respect to the names "MBIA Insurance Corporation" and "Municipal Bond Investors Assurance Corporation" and the Collateral from the office of the Secretary of State of New York, confirming the absence of Liens thereon other than in favor of the Administrative Agent for the benefit of the Banks, and (B) Form UCC-l financing statements (or amendments thereto) duly executed and delivered by MBIA and naming the Administrative Agent as secured party, each appropriate for the continued perfection of the Administrative Agent's Lien on the Collateral created and held for the benefit of the Banks under the Restated Security Agreement; (vi) The Administrative Agent shall have received each of the following, in form and substance satisfactory to the Administrative Agent: (A) a certificate of any two of the President, any Vice President or the Treasurer of MBIA, dated the Restatement Effective Date, to the effect that the -20- conditions set forth in Section 4.1(b) (i) hereof have been satisfied and that no governmental filings, consents and approvals are necessary to be secured by MBIA in order to permit the borrowings hereunder, the grant of the Lien under the Security Agreement and the execution, delivery and performance in accordance with their respective terms of this Agreement 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; (B) A legal existence and good standing certificate with respect to MBIA issued as of a recent date by the Superintendent of the Department; (C) 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 Agreement, the Substitute Notes, the Initial Fronting Bank Notes and the Restated Security Agreement (collectively, the "Restatement ----------- Documents"), accompanied by a certificate of the Secretary or --------- an Assistant Secretary of MBIA stating as to (x) the effect that such resolutions are in full force and effect, (y) the incumbency and signatures of the officers signing the Restatement Documents on behalf of MBIA, and (z) the effect that, from and after September 30, 1996, there has been no amendment, modification or revocation of the articles of incorporation or by-laws of MBIA; (D) opinions of the General Counsel of MBIA and Kutak Rock, MBIA's counsel, each dated as of the Restatement Effective Date, which are substantially to the effect set forth in the forms attached hereto as, respectively, Exhibits I and J; and (E) such other documents, instruments, approvals (and, if reasonably requested by either 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 either Agent or the Majority Banks may reasonably request; (vii) The Agents 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; -21- (viii) The Bank Fee Letter shall have been modified in a manner satisfactory to MBIA and the Agents and consented to by all of the Banks; (ix) The Agent Letter shall have been modified in a manner satisfactory to MBIA and each Agent; and (x) 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 Agents. A certificate of the Agents delivered to MBIA stating that amendments to and restatement of the Original Credit Agreement set forth herein have been become effective shall be conclusive evidence thereof. Section 4.2 Conditions Precedent to Each Loan. The obligation ----------- --------------------------------- of each Bank to make each Loan is subject to the fulfillment of each of the following conditions immediately prior to or contemporaneously with the making of such Loan, unless waived in writing by the Administrative Agent and each Bank: (a) The Administrative Agent shall have received the appropriate notice of borrowing pursuant to Section 2.2(a); (b) The Loan Commencement Event shall have occurred; (c) Immediately after giving effect to each such Loans, the aggregate principal amount of Loans made hereunder, determined without regard to any repayments or prepayments thereof, shall not exceed MBIA's Cumulative Losses incurred after the occurrence of the Loan Commencement Event; (d) The aggregate amount of such Loans does not exceed the aggregate Available Commitment in effect on such date (after giving effect to any reduction of the Maximum Commitment on such date pursuant to Section 3.2 or 3.3); and (e) The aggregate amount of such Loan to be made by any Bank (other than a Fronting Bank Loan) does not exceed the Commitment of such Bank in effect on such date (after giving effect to any reduction thereof on such date pursuant to Section 3.2 or 3.3) minus the aggregate principal amount of Loans theretofore made by such Bank (other than a Fronting -22- Bank Loan) hereunder without regard to any repayment or prepayment thereof. Each borrowing hereunder, whether or not accompanied by a written notice of borrowing, shall be deemed to be a representation and warranty by MBIA on the date thereof as to the satisfaction of the conditions set forth in paragraphs (b), (c), (d) and (e) above. ARTICLE 5 REPRESENTATIONS AND WARRANTIES; OTHER AGREEMENTS ------------------------------------------------ In order to induce the Agents and the Banks to enter into this Agreement and to make the Loans, MBIA makes the following representations and warranties to the Agents and the Banks, which shall survive the execution and delivery of this Agreement and the making of each Loan: Section 5.1 Due Incorporation, Etc. MBIA is a stock insurance ---------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of New York, is duly qualified as a foreign corporation in good standing in each jurisdiction in which failure to so qualify would materially adversely affect its business, assets, operations or financial condition, and has all requisite power and authority, corporate or other, and all requisite governmental licenses, authorizations, permits, consents and approvals to conduct its business and to own its properties. Section 5.2 Due Authorization, Etc. The execution, delivery ---------------------------------- and performance by MBIA of this Agreement and the Loan Documents 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 G, T, U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the corporate articles 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, -23- assets, operations or financial condition of MBIA or the ability of: MBIA to perform its obligations under this Agreement or any Loan Document. Section 5.3 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 this Agreement or any of the Loan Documents. Section 5.4 Enforceability. This Agreement and each of the ----------- -------------- Loan Documents constitute a legal, valid and binding obligation of MBIA, enforceable against MBIA in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, whether such matter is heard in a court of law or a court of equity. Section 5.5 Pari Passu Obligations. Except with respect to ----------- ---------------------- MBIA's obligations to pay the principal of and interest on the Loans (which the Banks acknowledge are limited by Section 2.7) , the obligations of MBIA under this Agreement and the Loan Documents are recourse and general obligations of MBIA which shall at all times rank at least pari passu in priority of payment and in all other respects with all other unsecured obligations of MBIA, including without limitation MBIA's obligations to pay claims under Insurance Contracts, subject, however, to statutory priorities granted to certain claims under Sections 7426 or 7435 of the New York Insurance Law. Section 5.6 Financial Information, etc. (a) MBIA has ----------- -------------------------- heretofore furnished to the Administrative Agent and, through the Administrative Agent, to each Bank (i) the audited consolidated and unaudited consolidating balance sheets of MBIA Inc. and its subsidiaries at December 31 in each of the years 1991 through 1996, inclusive, the related audited consolidated statements of income, changes in stockholders' equity and financial position or cash flows, as the case may be, and unaudited consolidating statements of income for each of the years then ended and (ii) the unaudited consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries as of March 31 and June 30, 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 1997 and the six months ended June 30, 1997. 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 -24- 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 December 31, 1996. (b) MBIA has heretofore furnished to the Administrative Agent and, through the Administrative Agent, to each Bank its annual statements and its financial statements as filed with the Department for the years ended December 31, 1991 through December 31, 1996, inclusive, and its quarterly statements and financial statements as filed with the Department for the periods ended March 31 and June 30, 1997. 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. Section 5.7 Litigation. There are no actions, suits or ----------- ---------- proceedings pending or, to the knowledge of MBIA, threatened against or affecting MBIA, or any properties or rights of MBIA, by or before any court, arbitrator or administrative or governmental body in which there is a reasonable possibility of an adverse decision or determination which could materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under this Agreement or any Loan Document or which in any way draws into question the validity or enforceability of this Agreement or any of the Loan Documents. Section 5.8 Taxes. MBIA has filed all Federal and state ----------- ----- income tax returns which are required to be filed, and has paid all taxes as shown on said returns and all assessments received by it to the extent that such taxes have become due and to the extent that failure to pay the same could materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under this Agreement or any Loan Document, other than taxes being contested in a manner permitted by Section 6.4. -25- Section 5.9 Absence of Defaults, etc. 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 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 this Agreement or any other Loan Document. Section 5.10 ERISA. Each member of the Controlled Group has ------------ ----- fulfilled any applicable obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA. No member of the Controlled Group is a party to, or is or has been required to make contributions to, or has terminated any Multi-employer Plan. Section 5.11 Compliance with Insurance Law. MBIA is duly ------------ ----------------------------- licensed to transact business as a financial guaranty insurance corporation by the Department and (a) has all other requisite federal, state and other governmental licenses, authorizations, permits, consents and approvals to conduct its insurance and other business as presently conducted and proposed to be conducted in the State of New York and each other jurisdiction in which it writes or issues policies of insurance (including without limitation any form of financial guaranty insurance, fidelity and surety insurance or credit insurance), surety bonds, guaranties, contracts of reinsurance or other undertakings similar to the foregoing (collectively, "Insurance Contracts") or in which it conducts business, except for failures, if any, to have such licenses, authorizations, permits, consents and approvals 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 this Agreement or any of the Loan Documents, (b) has made all filings of each of its forms of Insurance Contracts and of its rates and charges with the Department and all other federal, state and other administrative or governmental bodies required for the use thereof and has obtained all requisite approvals thereof, except for failures, if any, to file or to obtain such approvals 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 this Agreement or any of the Loan -26- Documents, (c) has duly established and maintains all reserves required under the New York Insurance Law and the regulations of the Department thereunder and other applicable federal, state and other laws, rules and regulations, except for failures, if any, to maintain reserves which 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 this Agreement or any of the Loan Documents, (d) has duly filed all annual statements, financial statements and other information and reports required to have been filed with the Department and each other federal, state and other administrative or governmental body, except for failures, if any, to file 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 this Agreement or any of the Loan Documents, and (e) is in compliance (and has not received any notice from the Department or similar administrative or governmental body or an authorized representative thereof claiming that it is not 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 this Agreement or any of the Loan Documents. Section 5.12 Covered Portfolio. Substantially all of the Insured ------------ ----------------- Obligations in the Covered Portfolio on the Restatement Effective Date were insured by MBIA under Insurance Contracts in the form or forms heretofore supplied to the Administrative Agent in accordance with MBIA's underwriting criteria as heretofore disclosed to the Administrative Agent and each Bank, 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 Restatement Effective Date. MBIA has no reason to believe that its rights included among the Collateral are not valid and binding against the obligors thereunder in accordance with their respective terms, except insofar as 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, except for such Collateral which, in the aggregate, will not have a material and adverse effect on the right and ability of the Administrative Agent, on behalf of the Banks, in -27- accordance with the Security Agreement, to realize upon the Pledged Recoveries. The several reinsurance agreements between MBIA, on the one hand, and certain member companies of the Municipal Bond Insurance Association, respectively, on the other, are the legal, valid, binding and enforceable obligations of the parties thereto in accordance with their terms, except insofar as 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. Section 5.13 Investment Company Status. MBIA is not an "investment ------------ ------------------------- company" or a company "controlled by" an investment company within the meaning of the Investment Company Act of 1940, as amended. Section 5.14 SEC Reports. MBIA has heretofore furnished to the ------------ ----------- Administrative Agent and, through the Administrative Agent, to each Bank true and complete copies of (a) the Annual Reports of MBIA Inc. on Form 10-K filed with the Securities and Exchange Commission for each of its fiscal years ended December 31, 1991 through December 31, 1996, inclusive, (b) the Quarterly Reports of MBIA Inc. on Form l0-Q filed with such Commission for its fiscal quarters ended March 31 and June 30, 1997, (c) each report, if any, on Form 8-K filed by MBIA Inc. with such Commission since December 31, 1996, and (d) each filing on Form 8 or other amendment, if any, filed by MBIA Inc. with such Commission with respect to any of the foregoing, together in each case with true and complete copies of all reports, proxy statements and other materials incorporated by reference therein (collectively, the "SEC Reports"). None of the SEC Reports contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading. Section 5.15 Ownership; Subsidiaries. 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. MBIA has and, as of the Restatement Effective Date, MBIA will have no Subsidiaries other than its Subsidiaries identified in the SEC report for the year ended December 31, 1996. Section 5.16 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 this Agreement or any Loan Document which has not been set forth in this Agreement, in the financial statements referred to in Section 5.6(a) or the SEC Reports. -28- ARTICLE 6 COVENANTS --------- MBIA agrees that, so long as any Loan remains outstanding or any obligation of MBIA hereunder or under the Notes or any other Loan Document remains unpaid or unsatisfied or any Bank has any obligation to make a Loan or advance other amounts hereunder, unless the Administrative Agent and the Majority Banks otherwise consent in writing: Section 6.1 Use of Proceeds. MBIA will use the proceeds of the Loans ----------- --------------- only to pay or reimburse itself for the payment of Losses in respect of the Covered Portfolio. Section 6.2 Conduct of Business and Corporate Existence. MBIA will ----------- ------------------------------------------- continue to engage in business of the same general type as now conducted by it and do or cause to be done all things necessary to preserve, renew and keep in full force and effect its corporate existence, material rights, licenses, permits and franchises. Section 6.3 Compliance with Laws. MBIA will comply in all material ----------- -------------------- respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, the New York Insurance Law, the insurance laws of any other jurisdiction applicable to MBIA and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. Section 6.4 Obligations and Taxes. MBIA shall pay all its material ----------- --------------------- obligations promptly and in accordance with their terms and pay and discharge promptly all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become in default, as well as all material lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a Lien or charge upon such properties or any part thereof; provided, however, that -------- ------- MBIA shall not be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and adequate reserves with respect thereto shall have been established on the books of MBIA. -29- Section 6.5 Liens. MBIA will not create, assume or permit to exist any ----------- ----- Lien on any Pledged Recoveries, Pledged Premiums or other Collateral, other than the Lien in favor of the Banks under the Security Agreement. Section 6.6 Merger or Sale of Assets. MBIA shall not consolidate or ----------- ------------------------ merge with or into, or transfer all or substantially all of its properties or assets to, another Person, except that MBIA may merge or consolidate with another corporation or may transfer all or substantially all of its property, business and assets as an entirety to another corporation, if (i) immediately prior and after giving effect to such transaction there shall exist no Default or Event of Default (including without limitation an Event of Default described in paragraph (j) of Section 7.1), (ii) the surviving or acquiring corporation, as the case may be, expressly and unconditionally assumes all of the obligations of MBIA hereunder in an instrument in form and substance satisfactory to the Majority Banks which is enforceable directly by the Administrative Agent and the Banks, (iii) MBIA shall have delivered to the Administrative Agent and the Banks an opinion, in form and substance satisfactory to the Administrative Agent, from counsel acceptable to the Administrative Agent, confirming the matters set forth in clause (ii) above, (iv) immediately after giving effect to such transaction, the net worth, determined in accordance with generally accepted accounting principles, and its capital and surplus, determined in accordance with statutory accounting principles, of the surviving corporation is at least equal to MBIA's net worth or capital and surplus, as the case may be, immediately prior to giving effect to such transaction, (v) MBIA shall have provided to the Administrative Agent and the Banks, in form and substance satisfactory to the Administrative Agent, a report from Coopers & Lybrand LLP or other independent public accountants of recognized national standing, confirming the matters set forth in clause (iv) above, and (vi) the Administrative Agent shall have received evidence satisfactory to it that such transaction will not result in any downgrading or potential downgrading of any obligation insured by MBIA by Moody's, S&P or any other nationally recognized rating agency which, with the consent of MBIA, rates the creditworthiness of such obligations. Section 6.7 Underwriting Criteria. MBIA shall maintain its criteria ----------- --------------------- for underwriting Insurance Contracts substantially as in effect on the Restatement Effective Date and as disclosed to the Administrative Agent and the Banks, and Insured Obligations which are placed in the Covered Portfolio by MBIA shall in MBIA's reasonable judgment represent an overall risk of loss (based on all factors including without limitation investment quality and geographical and market diversification) which is not materially -30- greater than the risk of loss represented by all of MBIA's Insured Obligations. Section 6.8 Collection of Pledged Recoveries and Pledged Premiums. ----------- ----------------------------------------------------- MBIA shall at all times use its best efforts to collect and otherwise realize upon all Pledged Recoveries and Pledged Premiums in compliance with applicable law and in a commercially reasonably manner. Section 6.9 Inspection of Books and Records. MBIA will keep proper ----------- ------------------------------- books of record and account in which full, true and correct entries in conformity with generally accepted accounting principles shall be made of all dealings and transactions in relation to its business and activities; and will permit representatives of any Bank or the Administrative Agent following reasonable notice to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers, employees and independent public accountants, during regular business hours, and as often as may reasonably be desired. Section 6.10 Information Requirements. MBIA will furnish or cause to ------------ ------------------------ be furnished to the Administrative Agent (with sufficient copies for distribution to the Banks): (a) within 60 days after the end of each of the first three quarterly fiscal periods in each fiscal year of MBIA Inc., consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries (including MBIA), as at the end of such period and the related consolidated statements of income, changes in stockholders' equity and cash flows and consolidating statement of income of MBIA Inc. and its subsidiaries for such period and (in the case of the second and third quarterly periods) for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form the consolidated and, where applicable, consolidating figures for the corresponding periods of the previous fiscal year, all in reasonable detail and certified by a principal financial officer of MBIA Inc. and, with respect to the information set forth therein relating to MBIA, a principal financial officer of MBIA as presenting fairly, in accordance with generally accepted accounting principles (except for the absence of notes thereto) applied (except as specifically set forth therein) on a basis consistent with such prior fiscal periods, the information contained therein, subject to changes resulting from normal year-end audit adjustments; -31- (b) within 120 days after the end of each fiscal year of MBIA Inc., consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries (including MBIA) as at the end of such year and the related consolidated statements of income, changes in stockholders' equity and cash flows and consolidating statement of income of MBIA Inc. and its subsidiaries for such fiscal year, setting forth in each case on comparative form the consolidated and, where applicable, consolidating figures for the previous fiscal year, all in reasonable detail and (i) in the case of such consolidated financial statements, accompanied by a report thereon of Coopers & Lybrand or other independent public accountants of recognized national standing selected by MBIA Inc., which report shall state that such consolidated financial statements present fairly the consolidated financial position of MBIA Inc. and its subsidiaries as at the dates indicated and the consolidated results of their operations and cash flows for the periods indicated in conformity with generally accepted accounting principles applied on a basis consistent with prior years (except as otherwise specified in such report) and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards, and (ii) in the case of such consolidating financial statements, certified by a principal financial officer of MBIA Inc. and, with respect to the information set forth therein relating to MBIA, a principal financial officer of MBIA as presenting fairly, in accordance with generally accepted accounting principles applied (except as specifically set forth therein) on a basis consistent with such prior fiscal periods, the information contained therein; (c) together with each delivery of financial statements pursuant to paragraphs (a) and (b) of this Section 6.10, (i) a certificate of a principal financial officer of MBIA listing the Insured Obligations in the Covered Portfolio and identifying the Insurance Contracts with respect thereto and calculating in reasonable detail as of the date of such financial statements (A) the Average Annual Debt Service on the Covered Portfolio, (B) if such date is prior to the Loan Commencement Event, the excess of MBIA's Cumulative Losses (stating separately any Incremental Reserves included therein) for the current Commitment Period over MBIA's aggregate Pledged Recoveries received during the current -32- Commitment Period, and (C) if such date is on or alter the occurrence of the Loan Commencement Event, (1) evidence of the occurrence thereof, (2) the amount of Installment Premiums with respect to defaulted obligations received on or prior to such date and thereafter payable in respect of the Covered Portfolio, (3) the aggregate amount or Pledged Recoveries received by or for the account of MBIA during the current Commitment Period on or prior to such date, and (4) the balance of the Escrow Account as of such date; and (ii) a certificate of the President or a Vice President of MBIA stating that the signer has reviewed the terms of this Agreement and has made, or caused to be made under his supervision; a review in reasonable detail of the transactions and condition of MBIA during the period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date of the officer's certificate, of any condition or event which constitutes a Default or an Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action MBIA has taken or is taking or proposes to take with respect thereto; (d) promptly after the filing thereof, a copy of the annual statement for each calendar year and quarterly statements for each calendar quarter as filed with the Department or other then comparable agency of other jurisdictions and the financial statements of MBIA for such calendar year or quarter prepared in accordance with statutory accounting practices accompanied by a report thereon of the independent public accountants of MBIA Inc. referred to in paragraph (b) above; (e) promptly upon the mailing thereof, a copy of each annual report to stockholders and proxy statement of MBIA Inc. and, promptly upon the filing thereof with the Securities and Exchange Commission, a copy of each annual report on Form 10-K, quarterly report on Form 10-Q and current report on Form 8-K of MBIA Inc. and each Form 8 with respect thereto; -33- (f) promptly after MBIA has received written notice or otherwise has knowledge thereof, written notice describing in reasonable detail: (i) the commencement of all proceedings and investigations by or before the Department or any other governmental body and any actions and proceedings in any court or before any arbitrator against or in any other way relating to MBIA which, if adversely determined, could singly or when aggregated with all other such proceedings, investigations and actions if adversely determined, have a materially adverse effect on the business, assets, liabilities, financial position, results of operations or cash flows of MBIA, or on the ability of MBIA to perform its obligations under this Agreement or any Loan Document; (ii) the occurrence of any Reportable Event, Prohibited Transaction or any withdrawal by any member of the Controlled Group from any Multiemployer Plan or any reasonable expectation of the occurrence of any Reportable Event, Prohibited Transaction or any withdrawal by any member of the Controlled Group from any Multiemployer Plan; (iii) any report known to and relating to MBIA published by Moody's, S&P or any other nationally recognized rating agency which, with the consent of MBIA, rates the creditworthiness of obligations insured by MBIA; (iv) any material adverse change with respect to the business, assets, liabilities, financial position, results of operations or cash flows of MBIA; and (v) any Default or Event of Default; (g) promptly after MBIA has received notice or otherwise has knowledge thereof, written notice describing in reasonable detail: (i) each Loss, including without limitation identification of the Insured Obligation with respect to which such Loss occurred; -34- (ii) each default by the issuer of any Insured Obligation in the Covered Portfolio or other obligor with respect thereto which could form the basis of a claim under an Insurance Contract; (iii) each default by any party to a reinsurance agreement or similar arrangement with MBIA which covers any material amount of Insured Obligations in the Covered Portfolio; and (iv) all reserves (including without limitation Incremental Reserves) established by MBIA with with respect to each matter referred to in clauses (i), (ii) or (iii) above; and (h) from time to time and promptly upon each request, such material data, certificates, reports, statements, opinions of counsel addressed to the Administrative Agent and the Banks, documents or further information regarding the Covered Portfolio, the Collateral or the business, assets, liabilities, financial position, results of operations or cash flows of MBIA or MBIA Inc. as any Bank or the Administrative Agent reasonably may request. All information, reports, statements and other papers and data furnished to the Administrative Agent shall be, at the time the same are so furnished, complete and correct in all material respects to the extent necessary to give the Administrative Agent and the Banks true and accurate knowledge of the subject matter thereof. ARTICLE 7 EVENTS OF DEFAULT ----------------- Section 7.1 Events of Default. Each of the following shall constitute an ----------- ----------------- Event of Default hereunder (each herein called "an Event of Default"): ---------------- (a) default in the payment when due of (i) the principal of or interest on any Loan or Note or (ii) any other interest, fees or other amounts payable under this Agreement, in any such case if such default described in this clause (ii) shall have continued for a period of five (5) Business Days after notice of such failure from the Administrative Agent or any Bank; or -35- (b) any representation or warranty made by MBIA herein or any of the Loan Documents or in any writing furnished in connection with or pursuant to this Agreement or any of the Loan Documents shall be false or misleading in any material respect on the date as of which made; or (c) MBIA shall fail to perform or observe any of the provisions contained in Section 6.1, 6.2, 6.5 or 6.6 hereof or in the Security Agreement, and such failure remains unremedied for 30 days after notice of such failure from the Administrative Agent or any Bank; or (d) MBIA shall fail to perform or observe any other term, covenant or agreement contained in this Agreement or any of the Loan Documents on its part to be performed or observed and with respect to any such term, covenant or agreement contained herein, and such failure remains unremedied for 45 days after notice of such failure from the Administrative Agent or any Bank or, if by reason of the nature of such failure the same cannot be remedied within such 45 days, MBIA shall fail to proceed with reasonable diligence to remedy such failure; (e) MBIA shall be in default in the payment of any principal of or interest on any material Debt or in respect of which it is contingently liable beyond any period of grace stated with respect thereto in any such obligation or in any agreement under which any such obligation is created, or MBIA shall default in the performance of any agreement under which any such obligation is created if the effect of such default is to cause such obligation to become, or to permit any holder or beneficiary thereof, or a trustee on behalf thereof, with notice if required, to declare such obligation to be, due prior to its normal maturity; provided that a notice or declaration of any such default or -------- acceleration by any such holder, beneficiary or trustee shall not constitute an Event of Default described in this paragraph (e) if such notice or declaration is being contested by MBIA in good faith by appropriate proceedings and MBIA has established all adequate reserves with respect thereto; or a moratorium shall have been declared or announced (whether or not in writing) by MBIA with respect to any of its Debt; or (f) MBIA shall commence a voluntary case concerning it under Title 11 of the United States Code entitled "Bankruptcy" as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code") or any involuntary case is --------------- commenced against MBIA under the Bankruptcy Code and relief is -36- ordered against MBIA or the petition is controverted but is not dismissed within 60 days after the commencement of the case; or MBIA is not generally paying its debts as such debts become due; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of MBIA; or MBIA commences any other proceeding under any reorganization, arrangement, readjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to MBIA or there is commenced against MBIA any such proceeding which remains undismissed for a period of 60 days or MBIA is adjudicated insolvent or bankrupt; or MBIA fails to controvert in a timely manner any such case under the Bankruptcy Code or any such proceeding or any order of relief or other order approving any such case or proceeding or in the appointment of any custodian or the like of or for it or any substantial part of its property or suffers any such appointment to continue undischarged or unstayed for a period of 60 days; or MBIA makes a general assignment for the benefit of creditors; or any action is taken by MBIA for the purpose of effecting any of the foregoing; or a receiver or trustee or other officer or representative of a court or of creditors, or any court, governmental officer or agency, shall under color of legal authority, take and hold possession of any substantial part of the property or assets of MBIA for a period in excess of 60 days; or (g) entry against MBIA of a decree or order of a court or the Department or other agency or supervisory authority having jurisdiction in the premises for the appointment of a conservator or receiver or rehabilitator or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, and such decree or order shall have remained in force undischarged or unstayed for a period of 60 days; or (h) consent by MBIA to the appointment of a conservator or receiver or rehabilitator or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to MBIA or of or relating to all or substantially all of its property; or (i) this Agreement, any Note, the Security Agreement or any other material Loan Document shall not be or shall cease to be in full force and effect for any reason; or the Security Agreement shall fail to grant to the Banks the liens and security interests intended to be created thereby; -37- or any Person other than the Banks shall have any Lien on any Collateral; or any Pledged Recoveries or Pledged Premiums shall be unavailable to pay the obligations of MBIA hereunder or under any Loan Documents in accordance with the terms hereof or thereof for any reason; or (j) MBIA Inc. shall cease to own at least 90% of each class of issued and outstanding Voting Stock of MBIA, or a Change of Control shall occur with respect to MBIA Inc.; for purposes of this paragraph, a "Change of Control" shall be deemed to occur if any person or group ----------------- (as defined in the Securities Exchange Act of 1934, as amended), after December 31, 1996, acquires ownership of 20% or more of the issued and outstanding capital stock of MBIA Inc. Section 7.2 Remedies. Upon the occurrence of an Event of ----------- -------- Default and while such Event of Default shall be continuing, the Administrative Agent shall, at the request of the Majority Banks in their sole discretion, subject to the limitations of Section 2.7 hereof, take any one or more of the following actions; provided that the Banks shall not in any event have the right -------- to decline to make additional Loans when otherwise required by this Agreement except as otherwise provided in Section 4.2 hereof: (a) by notice to MBIA, declare all amounts payable by MBIA hereunder to be forthwith due and payable, and the same shall thereupon become due and payable without demand, presentment, protest or further notice of any kind, all of which are hereby expressly waived; provided -------- that no notice or declaration of any kind is required upon the occurrence of an MBIA Event of Insolvency; (b) by notice to MBIA, exclude any additional Insured Obligations from the Covered Portfolio; (c) exercise any or all of the rights and remedies of the Administrative Agent or the Banks under any or all of the Loan Documents, subject to the limitations in the Security Agreement with respect to rights and remedies thereunder which are exercisable only upon and after the occurrence of a Special Event of Default; and (d) take whatever other action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due hereunder or to enforce any other of its rights hereunder. -38- Section 7.3 No Waiver; Remedies Cumulative. No failure by the ----------- ------------------------------ Administrative Agent or any Bank to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any exercise or partial exercise of any right hereunder or under any Loan Document preclude any other further exercise thereof or the exercise of any other right. Subject to the provisions of Section 2.7, the remedies provided are cumulative and not exclusive of any remedies provided by law. Section 7.4 Right of Setoff; etc. Except as otherwise ----------- -------------------- provided in Section 2.7 hereof, in addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, during the continuance of any Event of Default hereunder, the Administrative Agent and each Bank is hereby authorized at any time and from time to time, without notice to MBIA or to any other person or entity, any such notice being hereby expressly waived by MBIA, to setoff and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by the Administrative Agent or such Bank to or for the credit or the account of MBIA against and on account of the obligations and liabilities of MBIA to the Administrative Agent or such Bank under this Agreement, irrespective of whether or not (i) the Administrative Agent or such Bank shall have made any demand hereunder, or (ii) the Administrative Agent shall have declared the principal of and interest on the Loans and Notes and any other amounts due hereunder to be due and payable as permitted by Section 7.2 and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured. Section 7.5 Adjustment of Commitment Fee. The Applicable ----------- ---------------------------- Margin for purposes of Section 3.1 hereof (the "Applicable Margin") shall equal ---------- ------ zero, unless the rating publicly assigned to long-term obligations insured by MBIA based upon its claims paying ability shall be reduced to below Aaa by Moody's (if it is then rating the claims paying ability with the consent of MBIA) or to below AAA by S&P (if it is then rating the claims paying ability with the consent of MBIA), in which case the Applicable Margin shall equal .025% if such ratings are at least Aa in the case of Moody's or AA in the case of S&P, and otherwise shall equal .05%. -39- ARTICLE 8 THE AGENT --------- Section 8.1 Appointment. Each Bank hereby irrevocably ----------- ----------- designates and appoints (a) Credit Suisse First Boston, New York Branch, as its agent to act as the Administrative Agent as specified herein and in the other Loan Documents, and (b) Deutsche Bank AG, New York Branch, as its agent to act as the Documentation Agent as specified herein and in the other Loan Documents; and each Bank hereby irrevocably authorizes the Administrative Agent or the Documentation Agent, as the case may be, to take such action on behalf of such Bank under the provisions of this Agreement and the other Loan Documents and to give such consents, approvals or directions and to exercise such other powers and perform such duties as are expressly delegated to the Administrative Agent or the Documentation Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Each of the Administrative Agent and the Documentation Agent agrees to act as such upon the express conditions contained in this Agreement. Notwithstanding any provision to the contrary elsewhere in this Agreement or in any other Loan Document, neither Agent shall have any duties or responsibilities (except those expressly set forth herein or in the other Loan Documents) or any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against either Agent. The provisions of this Article 8 are solely for the benefit of the Agents and the Banks, and MBIA shall have no rights as a third party beneficiary of any of the provisions hereof. In performing functions and duties under this Agreement and the Loan Documents, each Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with MBIA. Section 8.2 Delegation. Each Agent may execute any of its ----------- ---------- duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Section 8.3 Agent Not Liable; Reliance. (a) Neither of the ----------- -------------------------- Agents nor any of their respective officers, directors, employees, agents or attorneys-in-fact shall be (i) liable for any -40- action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except in the case of an Agent for its own gross negligence or willful misconduct) or (ii) responsible in any manner to any Bank for any recitals, statements, representations or warranties made by MBIA or any of its officers contained in this Agreement or any of the Loan Documents, any other document or in any certificate, report, statement or other document referred to or provided for in, or received by either Agent under or in connection with, this Agreement or any other document of for any failure of MBIA or its officers to perform its obligations hereunder or thereunder. Neither Agent shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or the other Loan Documents, or to inspect the properties, books or records of MBIA. Neither Agent shall be responsible to any Bank for the effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by either Agent to any Bank or by or on behalf of MBIA to either Agent or any Bank, or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Event of Default. (b) Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to MBIA), independent accountants and other experts selected by either Agent or MBIA. Each Agent shall be fully justified in failing or refusing to take an action under this Agreement or any other Loan Document, unless it shall first receive such advice or concurrence of the Banks as it deems appropriate and it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request -41- of the Majority Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon all Banks. (c) Neither Agent shall be deemed to have knowledge or notice of the occurrence of any Event of Default, unless it has received notice from a Bank or MBIA referring to this Agreement, describing such Event of Default or other event and stating that such notice is furnished pursuant to Section 8.3(c) of this Agreement. In the event that an Agent receives such a notice, it shall give prompt notice thereof to each Bank. (d) Each Bank expressly acknowledges that neither of the Agents nor any of their respective officers, directors, employees, agents or attorneys-in-fact have made any representations or warranties to it and that no act by either Agent hereinafter taken, including any review of the affairs of MBIA, shall be deemed to constitute any representation or warranty by either Agent to any Bank. Each Bank represents to each Agent that it has, independently and without reliance upon either Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of MBIA and made its own decision to enter into this Agreement and its Assignment and Assumption Agreement. Each Bank also represents that it will, independently and without reliance upon either Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of MBIA. Neither Agent shall have any duty or responsibility to provide any Bank with any credit or other information concerning the business, operations, assets, property, financial and other conditions, prospects or creditworthiness of MBIA which may come into the possession of either Agent or any of its respective officers, directors, employees, agents or attorneys-in-fact. (e) Each Bank expressly agrees that the Administrative Agent, as collateral agent, shall enter into the Security Agreement on its behalf, and expressly consents to the terms and conditions thereof. Section 8.4 Indemnity. The Banks agree to indemnify each ----------- --------- Agent ratably according to their respective Commitments from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses -42- (including, without limitation, inspection expenses pursuant to Section 6.9 and reasonable fees and expenses of legal counsel and other experts) or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of any Loan or the termination of this Agreement) be imposed on, incurred by or asserted against such Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Loan Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by such Agent under or in connection with any of the foregoing is not paid by MBIA; provided that no Bank shall be liable to an Agent for the payment of any -------- ---- portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from such Agent's gross negligence or willful misconduct. If any indemnity furnished to an Agent for any purpose shall, in its opinion, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this paragraph shall survive the repayment of the Loans and the termination of this Agreement. Section 8.5 Liability of Agent. In no event shall either ----------- ------------------ Agent have any liabilities or responsibilities to MBIA on account of the failure of any Bank to perform its obligations hereunder or to any Bank on account of the failure of MBIA to perform its obligations hereunder or under any other Loan Document. Section 8.6 Agent May Act. Each Agent may make loans to, ----------- ------------- accept deposits from and generally engage in any kind of business with MBIA, all as though it were not an Agent hereunder. The terms "Banks" and "Majority Banks" and any similar terms shall include each Agent in its individual corporate capacity as a Bank or one of the Majority Banks. Section 8.7 Successor. The Administrative Agent and the ----------- --------- Documentation Agent each may resign as such at any time upon at least 30 days' prior notice to MBIA and all Banks, such resignation not to be effective until a successor Administrative Agent or Documentation Agent, as the case may be, is in place. If the Administrative Agent or the Documentation Agent at any time shall resign, the Majority Banks may appoint another Bank reasonably acceptable to MBIA as a successor Administrative Agent or the Documentation Agent, as the case may be, which shall thereupon become the Administrative Agent or the Documentation Agent hereunder. If no such successor shall have been so appointed by the Majority Banks, and shall have accepted such appointment, -43- within 30 days after the retiring agent has given notice of resignation, then the retiring agent may, on behalf of the Banks, appoint a successor Administrative Agent or the Documentation Agent, as the case may be, which shall be one of the Banks. Notwithstanding the resignation of an Agent hereunder, the provisions of Sections 8.2 through 8.5 shall continue to inure to the benefit such Agent in respect of any action taken or omitted to be taken by it in its capacity as such while it was an Agent under this Agreement or any Loan Document. Section 8.8 Determination by the Agent Conclusive and ----------- ----------------------------------------- Binding. Any determination required or expressly permitted to be made by the - ------- Administrative Agent or the Documentation Agent under this Agreement shall be made by the Administrative Agent or the Documentation Agent, as the case may be, in good faith and, when made, shall be conclusive and binding on all parties. ARTICLE 9 NATURE OF OBLIGATIONS; INDEMNIFICATION -------------------------------------- Section 9.1 Nature of Obligations; Survival. The obligations ----------- ------------------------------- of MBIA under this Agreement and the Notes and the other Loan Documents (other than payment of principal of and interest on the Loans or under any Note, which are limited recourse obligations subject to the provisions of Section 2.7) shall be absolute, unconditional and irrevocable, shall be full recourse and general obligations of MBIA and shall be satisfied strictly in accordance with the terms of this Agreement, under all circumstances whatsoever. All covenants, agreements, representations and warranties made herein or in any Note or any Loan Document or in any certificate, document or instrument delivered pursuant hereto or thereto shall survive the Effective Date and the Restatement Effective Date, the making of each 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 or any Note remains outstanding or unpaid, any other amount payable by MBIA under this Agreement, any Note or any other Loan Document remains unpaid or any other obligation of MBIA to perform any other act hereunder or under any Note or any other Loan Document remains unsatisfied or any Bank has any obligation to make a Loan or any other advance of moneys to MBIA hereunder. Section 9.2 Indemnification. Notwithstanding the provisions ----------- --------------- of Section 2.7 hereof, MBIA hereby further indemnifies and holds harmless each Agent, each Bank and each Participant from and against any and all claims, damages, losses, liabilities, reason- -44- able costs and expenses whatsoever (including attorneys' fees) which such Agent, such Bank or such Participant may incur (or which may be claimed against such Agent, such Bank or such Participant by any person or entity whatsoever), including without limitation the failure of MBIA to make payments of principal of and interest on the Loans and the Notes, by reason of or in connection with (a) the failure by MBIA to deposit any amounts in the Escrow Account which are required to be deposited therein as provided in the Security Agreement or (b) the unavailability to any Bank or to any Participant for any reason of any Pledged Recoveries or Pledged Premiums by reason of (i) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to MBIA, or (ii) MBIA's rescission or repudiation of any term hereof or of any Loan Document or any Loan. ARTICLE 10 MISCELLANEOUS ------------- Section 10.1 Costs, Expenses and Taxes. Upon the receipt of ------------ ------------------------- reasonable documentation evidencing such expenses, MBIA agrees to pay or cause to be paid (a) to the Administrative Agent all reasonable out-of-pocket expenses, including but not limited to fees and expenses of counsel for the Administrative Agent (including New York and foreign counsel) incurred by the Administrative Agent from time to time (i) arising in connection with the preparation, execution, duplication, delivery and performance of this Agreement, any Loan Documents and any documents, instruments or transactions pursuant to or in connection herewith and (ii) relating to any requested amendments, waivers or consents to this Agreement, any Loan Documents or any such documents or instruments, (b) to each Bank, the legal fees and expenses (up to a maximum of $2,500 per opinion) incurred by such Bank in obtaining opinions of counsel required by Moody's or S&P or requested by MBIA relating to this Agreement or any amendment or other modification hereof, and (c) to the Administrative Agent and each Bank, fees and expenses of counsel for the Administrative Agent or such Bank incurred by the Administrative Agent or such Bank in connection with the enforcement or preservation by any of them of rights under this Agreement or any such documents or instruments, including but not limited to such expenses as may be incurred by the Administrative Agent or such Bank in enforcing this Agreement or any of such other documents or instruments after an Event of Default shall have occurred. MBIA agrees to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Administrative Agent -45- or such Bank to be payable in connection with this Agreement, the Notes or any other documents, instruments or transactions pursuant to or in connection herewith, and MBIA agrees to save each Agent and the Banks harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions. The provisions of this Section 10.1 shall survive the termination of this Agreement. Section 10.2 Jurisdiction. Each party hereto hereby agrees ------------ ------------ that any legal action or proceeding against the others with respect to this Agreement, any of the Loan Documents or any of the agreements, documents or instruments delivered in connection herewith or therewith may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York as the applicable party may elect,' and, by execution and delivery hereof, MBIA, for itself and in respect to its property, generally and unconditionally accepts and consents to the jurisdiction of the aforesaid courts and agrees that such jurisdiction shall be exclusive, unless waived by the Administrative Agent in writing, with respect to any action or proceeding brought by it against either Agent or any Bank and any questions relating to usury. Each party agrees that Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York shall apply to this Agreement and the Loan Documents and waives any right to stay or to dismiss any action or proceeding brought against it before said courts on the basis of forum non conveniens. Except as specifically set forth herein, nothing herein shall limit the right of either party to bring proceedings against the other in any other court or tribunal otherwise having jurisdiction. Section 10.3 Severability. Any provision of this Agreement ------------ ------------ 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 10.4 Governing Law. THIS AGREEMENT SHALL BE GOVERNED ------------ ------------- BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Section 10.5 Waiver of Jury Trial. EXCEPT TO THE EXTENT ------------ -------------------- PROHIBITED BY LAW WHICH CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN CONNECTION WITH ANY ACTION OR PROCEEDING OF ANY NATURE WHATSOEVER ARISING UNDER, OUT OF OR IN CONNECTION WITH -46- THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND IN CONNECTION WITH SUCH ACTION OR PROCEEDING, WHETHER ARISING UNDER STATUTE (INCLUDING ANY FEDERAL OR STATE CONSTITUTION) OR UNDER THE LAW OF CONTRACT, TORT OR OTHERWISE AND INCLUDING, WITHOUT LIMITATION, ANY CHALLENGE TO THE LEGALITY, VALIDITY, BINDING EFFECT OR ENFORCEABILITY OF THIS PARAGRAPH OR THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS. Section 10.6 Headings. Section headings in this Agreement ------------ -------- are included herein for convenience or reference only and shall not constitute a part of this Agreement for any other purpose. Section 10.7 Notices and Addresses for Notice. All notices ------------ -------------------------------- and other communications provided for hereunder shall be in writing and, (a) if to MBIA, mailed or delivered to it, addressed to it at 113 King Street, Armonk, New York 10504, Attention: Julliette S. Tehrani, Senior Vice President and Chief Financial Officer; (b) if to the Administrative Agent, mailed or delivered to it, addressed to it at Eleven Madison Avenue, New York, New York 10010-3629, Attention: Public Finance Department; (c) if to the Documentation Agent, mailed or delivered to it, addressed to it at 31 West 52nd Street, New York, New York 10019, Attention: Clinton M. Johnson; and (d) if to a Bank, mailed or delivered to it at its address as shown on Schedule 1 hereto; or as to any party as such party may direct in a written notice to all other parties. All such notices and other communications shall, when mailed, be effective three days after the date of deposit in the mails, addressed as aforesaid. In lieu of notice by mail or delivery, written notice may be given over telecopier at the appropriate numbers set forth below, such notice over telecopier to be effective when transmitted. If to the Admin- istrative Agent: Telecopier No.: 212-325-8388 If to the Documen- tation Agent: Telecopier No.: 212-474-8013 If to MBIA: Telecopier No.: 914-765-3163 If to a Bank: To it at its telecopier number as set forth on Schedule 1 hereto. Section 10.8 Successors and Assigns; Assignment and ------------ -------------------------------------- Assumption; Participations; Additional Banks. (a) This Agreement is a continuing - -------------------------------------------- obligation and binds, and the benefits hereof shall inure to, MBIA, the Administrative Agent, the Documentation Agent and the Banks and their respective successors and assigns; provided -------- -47- that, except as specifically provided herein, MBIA may not transfer or assign - ---- any or all of its rights or obligations hereunder without the prior written consent of the Administrative Agent and the Majority Banks. (b) Each Bank may, at any time, sell, assign, and transfer to another commercial bank or other financial institution approved in advance by the Administrative Agent and MBIA ("Assignee") all or a portion of its rights -------- and obligations as Bank in this Agreement, its Note, the other Loan Documents or any Loan. Any such sale or assignment of a portion of a Bank's interest in such Bank's Loan shall be in respect of integral multiples of $1,000,000 in principal amount (or such other amount to which the Administrative Agent and MBIA may consent in writing). MBIA shall have no obligation to have any communication or relationship with any Assignee in order to enforce the obligations of any other Bank hereunder; provided, however, that no Bank shall be deemed to have retained -------- ------- or assumed any obligations of an Assignee hereunder. Each assignment pursuant to this Section shall be effected by the Administrative Agent, the assignor Bank and its Assignee executing an Assignment and Assumption Agreement substantially in the form of Exhibit F hereto (appropriately completed) and the rights and duties of such Bank and the Assignee each to the other shall be as defined therein. The parties hereto agree to execute such documents as may be necessary to effectuate any such assignment, including without limitation, in the case of MBIA, to exchange the Note or Notes held by the assignor Bank for a new Note or Notes payable to such Bank (if it has retained any Commitment) and a new Note or Notes payable to the Assignee in the respective amounts which reflect the assignment being made under this Section 10.8(b). Promptly following any assignment pursuant to this Section 10.8(b), the Administrative Agent shall notify the Banks thereof. (c) Each Bank shall be entitled at any time to sell, assign, transfer or otherwise grant participations in the whole or any part of such Bank's rights and/or obligations under this Agreement, its Assignment and Assumption Agreement (if applicable), the Loan Documents or any Loan to any Person. No such participation pursuant to this Section 10.8(c) shall relieve a Bank from its obligations hereunder. Any such participant is referred to in this Agreement as a "Participant", which term shall not include any sub-participant, ----------- assignee, purchaser or transferee of any such direct participant. Except as specifically set forth below, no such Participant shall have any rights under this Agreement (the Participant's rights against any Bank in respect of such participation or other arrangement or transfer to be those set forth in the agreement or agreements executed by such Bank in favor of such Participant). MBIA agrees that the provisions of Sections -48- 3.4, 3.5, 3.6(b), 3.6(c), 3.6(d) and 9.2 shall run to the benefit of each Participant and its participations or interests herein, and each Bank may enforce such provisions in behalf of any of its Participants. Each Bank shall use its best efforts to give the Administrative Agent and MBIA at least 30 days prior written notice of any participation, assignment, sale or other transfer under this Section. Each Bank agrees that without the consent of the Administrative Agent and MBIA, it will not enter into or grant any such participation to a Participant which has not (i) delivered to the Administrative Agent and MBIA the forms and documents applicable to it contemplated by Section 3.6(c) and (ii) agreed to be bound by and subject to the provisions set forth in the second sentence of Section 3.6(d). In entering into any participation agreement with a Participant, each Bank shall use reasonable efforts to provide that, if such Participant demands such materially excess compensation as described in Section 3.4(d), such agreement may be terminated by such Bank without the payment of any compensation or penalties. Upon a participation, assignment, sale or transfer in accordance with the foregoing, MBIA shall execute such documents and do such acts as such Bank may reasonably request to effect such transaction. (d) From time to time with the prior consent of the Administrative Agent and so long as no Loans have been made hereunder, MBIA shall have the right to increase the Maximum Commitment by (i) increasing the amount of the Commitment of any Bank with the prior consent of such Bank, or (ii) adding as a Bank hereunder one or more commercial banks or other financial institutions (each, a "New Bank"). No such increase in the Maximum Commitment shall be effective until (A) in the case of an increased Commitment of a Bank, MBIA shall have exchanged the Note held by such Bank for a new Note payable to such Bank in the amount of the increased Commitment, and such Bank shall have entered into an amendment to Schedule 1 to this Agreement modifying the amount of such Bank's Commitment, or (B) in the case of the addition of a New Bank, MBIA shall have executed and delivered to the New Bank a Note payable to such Bank in the amount of its Commitment, and the New Bank shall have executed and delivered to MBIA and the Administrative Agent a joinder agreement by which it agrees to be bound hereunder and the Loan Documents as a Bank and, without limiting the generality of the foregoing, confirms to the Agents and other Banks the acknowledgments and representations as to the New Bank contained in Section 8.3(d) hereof as of the date of such joinder agreement and amends Schedule 1 to this Agreement to add the appropriate information with respect to the New Bank and its Commitment. -49- (e) Each Bank shall endeavor to notify the Administrative Agent and MBIA within 60 days after the Restatement Effective Date and, with respect to each new Participant or New Bank, within 60 days after such Person becomes a Participant or a Bank, of each Insured Obligation identified in the most recent certificate delivered by MBIA to the Banks pursuant to Section 6.10(c) (i) hereof which such Bank or such Participant, as the case may be, is obligated to purchase under the terms of a line of credit, standby bond purchase agreement, letter of credit, liquidity agreement or similar agreement or arrangement. Section 10.9 Lending Office. Any Bank or any Participant may make, transfer and carry any Loan at, to or for the account of any branch office, subsidiary or affiliate (its "Lending Office"); provided that no such Bank or Participant shall be entitled to receive any greater amount pursuant to Section 3.4 or 3.6(b) as a result of any voluntary action taken by such Bank or such Participant (other than for the purpose of complying with applicable law) pursuant to this Section than such Bank or such Participant would have been entitled to receive absent such action except as a result of circumstances arising after the date of such action. Section 10.10 Counterparts. This Agreement 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 Agreement. Section 10.11 Records. The unpaid principal amount of all outstanding Loans, the unpaid interest accrued thereon, the interest rate or rates applicable to such unpaid principal amount and the duration of such applicability, and the accrued and unpaid fees and other amounts due hereunder shall at all times be ascertained from the records of the Banks. Such records and the Administrative Agent's records with respect to any loan account maintained pursuant to Section 2.3(b) shall be presumed to be correct unless the contrary shall be shown. Section 10.12 Amendments and Waivers. Subject to the next succeeding sentence, any term, covenant, agreement or condition of this Agreement and the other Loan Documents may be amended with the consent of MBIA, the Administrative Agent and the Majority Banks or compliance therewith may be waived (either generally or in a particular instance and either retroactively or prospectively) by the Administrative Agent and the Majority Banks, and in any such event the failure to observe, perform or discharge any such covenant, condition or obligation (whether such amendment is executed or such consent or waiver is given before or after such -50- failure) shall not be construed as a breach of such covenant, condition or obligation or an Event of Default. Notwithstanding the preceding sentence, (a) MBIA, the Administrative Agent and certain Banks may enter into amendments pursuant to Section 10.8(d) hereof without the consent of any other Bank, (b) without the prior written consent of each Bank adversely affected thereby, no amendment to or waiver under this Agreement or any Loan Document shall (i) increase the Commitment of any Bank, (ii) alter the time for the payment of the principal of or interest on the Loans, the amount of principal thereof, the rate of interest thereon, or the requirement pursuant to Section 2.9 of the pro rata application of amounts received by the Administrative Agent, (iii) permit any subordination of the principal of or interest on any Loan, (iv) alter the amount of any fee to be paid to any Bank, (v) change the percentage of the Banks required to constitute the Majority Banks, (vi) amend or waive the provisions of Sections 2.7, 2.8, 2.10, 3.4, 3.5, 3.6(b), 3.6(g), 4.2, 6.8, 9.2, 10.8 or 10.12 of, or the definition of "Loan Commencement Event" set forth in Exhibit A to, this Agreement, (vii) amend or waive Section 7.1 of this Agreement applicable to an Event of Default relating to the timing or amount of any payment due under this Agreement, (viii) amend or waive Section 2 of, or the definitions of "Collateral" or "Secured Obligations" contained in, the Security Agreement, or (ix) waive, release or reduce any Collateral; and (c) without the prior consent of the Administrative Agent, if it is adversely affected thereby, and the Documentation Agent, if it is adversely affected thereby, no such amendment or waiver shall alter the rights of the Administrative Agent or the Documentation Agent. Subsequent holders of the Notes shall be bound by any waiver hereunder or amendment hereof, whether or not any such subsequent holder had notice of such waiver or amendment and whether or not such waiver or amendment is reflected in any or all of the Notes. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. MBIA INSURANCE CORPORATION By /s/ Julliette S. Tehrani ------------------------------ Name: Julliette S. Tehrani Title: EVP/CFO and Treasurer -51- CREDIT SUISSE FIRST BOSTON, New York Branch, as Administrative Agent and as a Bank By /s/ Bruce R. Brown ------------------------------ Name: Bruce R. Brown Title: Director By /s/ Andrea Shkane ------------------------------ Name: Andrea Shkane Title: Vice President -52- DEUTSCHE BANK AG, New York Branch, as Documentation Agent and as a Bank By /s/ John S. McGill --------------------------------- Name: John S. McGill Title: Vice President By /s/ Louis Caltavuturo --------------------------------- Name: Louis Caltavuturo Title: Vice President -53- CAISSE DES DEPOTS ET CONSIGNATIONS, as a Bank By /s/ Luc De Clapiers --------------------------------- Name: Luc De Clapiers Title: President and CEO By [SIGNATURE APPEARS HERE] --------------------------------- Name: Title: -54- COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. (RABOBANK NEDERLAND), New York Branch, as a Bank By /s/ Dana W. Hemenway --------------------------------- Name: Dana W. Hemenway Title: Vice President By /s/ Michei de Konkoly Thege --------------------------------- Name: Michei de Konkoly Thege Title: Deputy General Manager -55- UNION BANK OF SWITZERLAND, New York Branch, as a Bank By /s/ Allyson Samson --------------------------------- Name: Allyson Dale Samson Title: Managing Director By /s/ Ellen Cahill --------------------------------- Name: Ellen Cahill Title: Assistant Treasurer -56- BAYERISCHE LANDESBANK GIROZENTRALE, New York Branch, as a Bank By /s/ Peter Obermann --------------------------------- Name: Peter Obermann Title: Senior Vice President By /s/ S. Allison --------------------------------- Name: Scott Allison Title: First Vice President -57- LANDESBANK HESSEN-THURINGEN GIRONZENTRALE, New York Branch, as a Bank By /s/ Lisa S. Pent --------------------------------- Name: Lisa S. Pent Title: Senior Vice President Manager By /s/ Richard E. Skiera --------------------------------- Name: Richard E. Skiera Title: Vice President -58- WESTDEUTSCHE LANDESBANK GIROZENTRALE, New York Branch, as a Bank By /s/ Lillian Tung Lum --------------------------------- Name: Lillian Tung Lum Title: Vice President By /s/ David J. Sellers --------------------------------- Name: David J. Sellers Title: Vice President -59- LLOYDS BANK PLC, New York Branch, as a Bank By /s/ Peter Kernick --------------------------------- Name: PETER KERNICK Title: DIRECTOR, STRUCTURED FINANCE KO60 By /s/ Amy Vespasiano --------------------------------- Name: AMY VESPASIONO Title: VICE PRESIDENT STRUCTURED FINANCE VO24 -60- THE CHASE MANHATTAN BANK, as a Bank By /s/ Heather A. Lindstrom ---------------------------- Name: Heather A. Lindstrom Title: Vice President -61- BANCO SANTANDER, S.A., New York Branch, as a Bank By: /s/ Robert E. Schlegel ----------------------------- Name: ROBERT E. SCHLEGEL Title: VICE PRESIDENT MANAGER-CORPORATE BANKING BANCO SANTANDER By: [SIGNATURE APPEARS HERE] ----------------------------- Name: Title: -62- DEUTSCHE GIROZENTRALE DEUTSCHE KOMMUNALBANK, as a Bank By /s/ Dr. N. Hasslinger ----------------------------- Name: Dr. N. Hasslinger Title: Senior Vice President By /s/ B. Bohlinger ----------------------------- Name: B. Bohlinger Title: Assistant Manager -63- FLEET NATIONAL BANK, as a Bank By /s/ Julian B. Dalton ------------------------------ Name: Julian B. Dalton Title: Vice President -64- THE INDUSTRIAL BANK OF JAPAN, LIMITED, New York Branch, as a Bank By /s/ Masahiro Ito ----------------------------- Name: Masahiro Ito Title: Senior Vice President -65- KREDIETBANK, N.V., Grand Cayman Branch, as a Bank By /s/ Armen Karozichian ---------------------------- Name: ARMEN KAROZICHIAN Title: VICE PRESIDENT By /s/ Robert Shauffer ---------------------------- Name: Robert Shauffer Title: Vice President -66- NORDDEUTSCHE LANDESBANK GIROZENTRALE, New York Branch, as a Bank By /s/ Stephanie Finnen -------------------------------- Name: Stephanie Finnen Title: Vice President By /s/ Stephen K. Hunter -------------------------------- Name: Stephen K. Hunter Title: Senior Vice President -67- CREDIT LOCAL DE FRANCE, New York Agency, as a Bank By /s/ John S. Williams -------------------------- Name: John S. Williams Title: Vice President By -------------------------- Name: Title: -68- THE DAI-ICHI KANGYO BANK, LIMITED, New York Branch, as a Bank By /s/ John A. Sarno --------------------------------- Name: John A. Sarno Title: Vice President & Group Leader Public Finance Group -69- NBD BANK, as a Bank By /s/ Samuel W. Bridges ---------------------------- Name: Samuel W. Bridges Title: First Vice President -70- THE SUMITOMO BANK, LIMITED, New York Branch, as a Bank By /s/ Kazuyoshi Ogawa ------------------------------ Name: Kazuyoshi Ogawa Title: Joint General Manager EXHIBIT A TO CREDIT AGREEMENT CERTAIN DEFINITIONS As used in the Agreement to which this Exhibit A is annexed, the following terms (which terms shall include in the singular, the plural and vice versa) shall have the meanings herein specified or as specified in the Section of such Agreement herein referenced: "Administrative Agent" -- Recitals. -------------------- "Affected Bank" shall mean (i) a Fronting Bank which ceases to ------------- have the Required Ratings or (ii) any Bank which has made a demand pursuant to Section 3.4 of this Agreement, which demand has not been withdrawn, for additional compensation or any Participant (other than a Bank purchasing a participation pursuant to Section 2.10 hereof) which has made a demand pursuant to Section 3.4 for additional compensation and has not withdrawn such demand or been replaced as a Participant by such Bank within 180 days following MBIA's request for replacement, if such additional compensation demanded by such Bank and such Participants of such Bank, on an aggregate and cumulative basis, in respect of the unused portion of such Bank's Commitment, exceeds the rate of additional compensation demanded by any other Bank, taken together with its Participants, in respect of the unused portion of such Bank's Commitment, by one basis point (.01%) per annum or more. "Agents" -- Recitals. ------ "Agent Fee Letter" -- Section 3.1(c). ---------------- "Agreement" shall mean this Credit Agreement, as it may from --------- time to time be amended, supplemented or otherwise modified. "Applicable Margin" -- Section 7.5. ----------------- "Assignment and Assumption Agreement" - Section 10.8. ----------------------------------- "Available Commitment" as of any day shall mean (a) the -------------------- Maximum Commitment (giving effect to any reduction thereof effective on such day), minus (b) the aggregate principal amount of Loans made by the Banks hereunder determined without regard to any repayment or prepayment thereof. Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -2- "Average Annual Debt Service" as of a specified date with --------------------------- respect to an Insured Obligation, shall mean the applicable Retained Percentage times the sum of (i) the aggregate outstanding principal amount of such Insured Obligation, and (ii) the aggregate amount of interest thereafter required to be paid on such Insured Obligation (giving effect to all mandatory sinking fund payments or other regularly scheduled required redemptions, prepayments or other retirement of principal), divided by the number of whole and fractional years from the date of determination to the latest maturity date of such Insured Obligation, and with respect to the Covered Portfolio as of such date as specified, shall mean the sum of the Average Annual Debt Service as of such date of all Insured Obligations contained in the Covered Portfolio. In the event that an Insured Obligation bears interest at a variable rate, the interest thereon for purposes of the determination of Average Annual Debt Service shall be calculated at the rate employed by MBIA to compute average annual debt service with respect to such Insured Obligation in accordance with its customary business practices. "Bank Fee Letter" - Section 3.1(a). -------------- "Banks" shall mean the Banks listed on Schedule 1 hereto and ----- any assignees of such Banks or New Banks which hereafter become parties hereto pursuant to and in accordance with Section 10.8(b) or 10.8(d) hereof; and "Bank" ---- shall mean any one of the foregoing Banks. "Bankruptcy Code" - Section 7.1(f). --------------- "Base Margin" shall mean one and one-half percent (1-1/2%). ----------- "Base Rate" shall mean, for any day, the higher of (i) the --------- base commercial lending rate announced from time to time by Credit Suisse First Boston (New York Branch) in effect on such date, or (ii) the rate quoted by Credit Suisse First Boston (New York Branch) at. approximately 11:00 a.m., New York City Time, on such date to dealers in the New York Federal funds market for the overnight offering of Dollars by Credit Suisse First Boston (New York Branch) for deposit, plus one quarter of one percent (1/4%). "Business Day" shall mean any day excluding (i) Saturday and ------------ Sunday and (ii) any day on which banks in New York City are authorized by law or other governmental action to close. Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -3- "Code" shall mean the Internal Revenue Code of 1986, as ---- amended. "Collateral" shall have the meaning assigned to that term in ---------- the Security Agreement. "Commitment" shall mean with respect to any Bank, the amount ---------- set forth opposite its name in Schedule 1 hereto under the heading "Commitment." "Commitment Period" shall mean initially the period commencing ----------------- on the Restatement Effective Date and ending on September 30, 2004 or, if such day is not a Business Day, on the next preceding Business Day) and, from and after the date of any extension of the Expiration Date pursuant to Section 3.3, shall mean the period commencing on the first day of October which immediately follows the 30th day of September which is seven years prior to the Expiration Date, and ending on the Expiration Date (or, if such day is not a Business Day, on the next preceding Business Day). "Controlled Group" shall mean all members of a controlled ---------------- group of corporations and all trades and businesses, whether or not incorporated) under common control which, together with MBIA, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Covered Portfolio" shall mean and include each Insured ----------------- Obligation outstanding on the Effective Date and each Insured Obligation issued thereafter and prior to the date of the first Loan (or such later date to which the Agent and the Majority Banks may consent in writing), other than (a) Insured Obligations listed on Exhibit E hereto, (b) additional Insured Obligations which MBIA hereafter elects in writing to exclude from the Covered Portfolio with the prior written consent of the Agent and the Majority Banks (which writing and consent shall be deemed to constitute an amendment supplementing Exhibit E hereto and shall not be unreasonably withheld); provided that no additional -------- Insured Obligations shall become part of the Covered Portfolio from and after the date on which any Bank has given a notice to MBIA pursuant to Section 7.2(b) hereof as a result of the occurrence of an Event of Default; and (c) any Insured Obligation which any Bank or any Participant is obligated to purchase under the terms of a line of credit, standby bond purchase agreement, letter of credit, liquidity agreement or similar agreement or arrangement; provided, further, that -------- ------- at no time shall the Covered Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -4- Portfolio contain industrial development bonds having an aggregate Average Annual Debt Service exceeding one percent (1%) of the Average Annual Debt Service on the entire Covered Portfolio. "Cumulative Losses" for a specified period shall mean the ----------------- aggregate Losses of MBIA determined cumulatively during such period determined without regard to Pledged Recoveries. "Debt" shall mean and include all obligations for borrowed ---- money, obligations (other than accounts payable and other similar items arising in the normal course of business) for the deferred payment of the purchase price of property and lease obligations which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of the balance sheet of the respective company as at the date as of which Debt is to be determined, or any guarantee of any such obligation. "Default" shall mean any condition, event or act which with ------- notice or lapse of time, or both, would become an Event of Default. "Defaulted Amount" - Section 2.11(c). ---------------- "Defaulting Bank" - Section 2.11(c). --------------- "Department" shall mean the Insurance Department of the State ---------- of New York. "Documentation Agent" - Recitals. ------------------- "Dollars", "U.S.$", "$" and "U.S. dollar" shall mean the ------- ----- - ----------- lawful currency of the United States of America. "Effective Date" shall mean December 29, 1989, the "Effective -------------- Date" under the Original Credit Agreement. "ERISA" shall mean the Employee Retirement Income Security ----- Act of 1974, as amended. "Escrow Account" shall mean the Escrow Account established -------------- under the Security Agreement. "Event of Default" - Section 7.1. ---------------- Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -5- "Expiration Date" shall mean the date on which the right to --------------- obtain Loans terminates, initially September 30, 2004, as such date may be extended pursuant to Section 3.3. "Fronting Bank" shall mean, with respect to a Bank, another ------------- Bank which is designated as a "Fronting Bank" for such Bank, as set forth in a Fronting Bank Supplement. "Fronting Bank Commitment" shall mean, with respect to a ------------------------ Fronting Bank and another Bank for which it acts as Fronting Bank, the commitment of such Fronting Bank to provide Loans in respect of the Commitment of such other Bank, as set forth in such Fronting Bank's Fronting Bank Supplement. "Fronting Bank Loan" shall mean a Loan made by a Fronting Bank ------------------ pursuant to Section 2.11, unless otherwise provided in such Section. "Fronting Bank Note" shall mean the Note issued to any Bank ------------------ pursuant to Section 2.11 evidencing Loans made by such Bank in its capacity as a Fronting Bank, and any Notes issued by MBIA and accepted by such Bank or a transferee in exchange, substitution or replacement therefor, as each may be amended from time to time. "Fronting Bank Percentage" shall mean, with respect to a ------------------------ Fronting Bank and the Commitment of another Bank for which it acts as Fronting Bank, its applicable Fronting Bank Commitment expressed as a percentage of the Commitment of such other Bank. "Fronting Bank Supplement" shall mean each supplement to this ------------------------ Agreement among a Fronting Bank, MBIA and the Administrative Agent, substantially in the form of Exhibit G hereto, which is in effect from time to time, as such supplement may have been amended or otherwise modified at such time. "Incremental Reserve" shall mean, on any date with respect to ------------------- an Insured Obligation, an amount equal to the increase, if any, on such date in a Reserve with respect to such Insured Obligation. "Initial Fronting Bank Notes" - Section 4.1(b) (iii). --------------------------- "Installment Premiums" shall mean any and all premiums which -------------------- are required to be paid or claimed to be required to be paid to or for the account of MBIA in respect of Insured Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -6- Obligations in the Covered Portfolio on a periodic basis rather than by payment in full on the date of the effectiveness of the relevant Insurance Contract. "Insurance Contracts" - Section 5.11. ------------------- "Insured Obligation" shall mean (a) municipal obligation ------------------ bonds, special revenue bonds and industrial development bonds hereof issued by the United States of America, a state thereof or the District of Columbia, a municipality or governmental unit or other political subdivision of the foregoing or any public agency or instrumentality thereof, and (b) other obligations which the Majority Banks have approved in writing, in each case to the extent that the payment of principal thereof, together with interest thereon, is insured, reinsured or otherwise guaranteed by MBIA under an Insurance Contract in compliance with the applicable provisions of the New York Insurance Law. "Lending Office" - Section 10.9. -------------- "Lien" shall mean any mortgage, pledge, security interest, ---- encumbrance, lien or other charge of any kind (including any lease in the nature thereof, and any conditional sale or other title retention agreement), and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Loan" or "Loans" shall mean the loans extended to MBIA by the ---- ----- Banks pursuant to Section 2.1. "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 an amount equal to the greater of (a) Eight Hundred Twenty Five Million Dollars ($825,000,000) and (b) four percent (4%) of Average Annual Debt Service on the Covered Portfolio. "Loan Documents" shall mean this Agreement, the Notes, the -------------- Security Agreement, the Bank Fee Letter, the Agent Fee Letter, the Restatement Agreement and each such other agreement or instrument evidencing, securing or pertaining to this Agreement, the Notes, the Security Agreement or any Loan, as shall, from time to time, be executed by MBIA and delivered to Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -7- the Administrative Agent or any Bank, as such documents may be amended from time to time. "Loss" shall mean, on any date, (a) the applicable Retained ---- Percentage times the amount required to be paid on such date by MBIA on claims under an Insurance Contract with respect to an Insured Obligation in the Covered Portfolio by reason of the failure by the issuer thereof or other obligor with respect thereto to pay insured amounts on such Insured Obligation when due, except to the extent the payment results in a Released Reserve, and (b) Incremental Reserves established on such date relating to Insured Obligations in the Covered Portfolio; provided that, without limiting the generality of the -------- foregoing, the term "Loss" shall not include any damages, penalties or similar amounts required to be paid by MBIA in respect of an Insurance Contract by reason of its breach of its obligations thereunder or the cancellation or termination thereof other than in accordance with its terms or any reserves related thereto. "Majority Banks" shall mean, at any time, Banks to which -------------- greater than 66-2/3% or more of the Loans in the aggregate are owing, or, if no Loans are outstanding, Banks having given greater than 66-2/3% in the aggregate of the Commitments. "Maximum Commitment" shall mean the aggregate of the ------------------ Commitments of all Banks, initially an amount equal to Eight Hundred Twenty Five Million Dollars ($825,000,000), as such amount may be reduced as provided in Section 3.2 or 3.3 or increased pursuant to Section 10.18(d). "MBIA Event of Insolvency" shall mean an Event of Default ------------------------ described in any of paragraphs (f), (g) or (h) of Section 7.1. "MBIA Inc." shall mean MBIA, Inc., a Connecticut corporation, --------- the holder of all of the issued and outstanding capital stock of MBIA on the date of this Agreement. "Moody's" shall mean Moody's Investors Service, Inc. and its ------- successors. "Multiemployer Plan" shall mean a Plan that is a multi- ------------------ employer plan as defined in Section 4001(a)(3) of ERISA. "New Bank" - Section 10.8(d). -------- Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -8- "Nonextending Bank" -- Section 3.3. ----------------- "Nonfunding Notice" -- Section 2.11(c). ----------------- "Note" shall mean the limited recourse promissory note of MBIA ---- issued to any Bank pursuant to Section 2.3 evidencing such Bank's Loan (including a Fronting Bank Note), and any notes issued by MBIA and accepted by such Bank or a transferee in exchange, substitution or replacement therefor, as each may be amended from time to time, and "Notes" shall mean all such Notes ----- collectively. "PBGC" shall mean the Pension Benefit Guaranty Corporation or ---- any entity succeeding to any or all of its functions under ERISA. "Participant" -- Section 10.8(c). ----------- "Payment Office" shall mean the office of the Administrative -------------- Agent at Eleven Madison Avenue, New York, New York 10010-3629, or such office as the Administrative Agent shall from time to time designate by notice to MBIA. "Person" shall mean and include an individual, a partnership, ------ a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Plan" shall mean at any time an employee pension benefit plan ---- which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Pledged Premiums" shall mean any and all Installment ---------------- Premiums which are paid or payable with respect to defaulted Insured Obligations in the Covered Portfolio on or after the date of a default thereunder and on or after the date of the first Loan. Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -9- "Pledged Recoveries" shall mean the amount of (a) all ------------------ Released Reserves from and after the Restatement Effective Date with respect to Insured Obligations in the Covered Portfolio, and (b) without duplication of Released Reserves, any and all moneys and other payments, property and other consideration and compensation received or receivable by or for the account of MBIA from and after the Restatement Effective Date as repayment or reimbursement of, or otherwise in respect of or arising out of, the payment of a claim by MBIA under an Insurance Contract covering any Insured Obligation in the Covered Portfolio (without regard to whether such claim was paid from the proceeds of a Loan), whether from the issuer thereof or any other Person (including without limitation under or pursuant to (i) such Insurance Contract, any reimbursement agreement, guaranty, letter of credit, mortgage, security agreement, pledge agreement or other contract, agreement or arrangement, (ii) any account or account receivable, (iii) any compromise, settlement or similar arrangement, (iv) any voluntary payment or gift, (v) any reinsurance of such Insured Obligation to the extent that the payment under such reinsurance was not deducted in determining the Loss attributable to MBIA's payment of such claim, (vi) any contractual, statutory, common law or other right of subrogation, (vii) any realization upon any mortgage, security interest or other Lien, (viii) any cause of action, whether sounding in tort, contract or otherwise, and any judicial, arbitration or other proceeding by or before any court, agency, tribunal, association or other governmental or private body, or (ix) any other legal or equitable right or claim, whether or not similar to the foregoing), less the amount of the out-of-pocket costs and expenses, including without limitation attorneys fees and court costs, reasonably incurred by MBIA in connection with the collection or other realization of such moneys and other payments, property and other consideration and compensation. "Prohibited Transaction" shall mean a transaction that is ---------------------- prohibited under Section 4975 of the Code or Section 406 of ERISA and not exempt under Section 4975 of the Code or Section 408 of ERISA. "Released Reserve" shall mean, on any date with respect to an ---------------- Insured Obligation, an amount equal to the reduction, if any, on such date in a Reserve with respect to such Insured Obligation, other than a reduction representing a charge to such Reserve for MBIA's payment of claims under an Insurance Contract with respect to such Insured Obligation; provided that any -------- reductions of any such Reserve below the amount of such Reserve Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -10- which had been maintained on the first day of the current Commitment Period shall not constitute a Released Reserve. "Reportable Event" shall mean (i) a reportable event described ---------------- in Section 4043 of ERISA and regulations thereunder, (ii) a withdrawal by a substantial employer from a Plan to which more than one employer contributes, as referred to in Section 4063(b) of ERISA, or (iii) a cessation of operations at a facility causing more than twenty percent (20%) of Plan participants to be separated from employment, as referred to in Section 4062(e) of ERISA. "Required Ratings" shall mean, with respect to a Fronting ---------------- Bank, the long term credit ratings from Moody's and S&P specified as the Required Ratings for such Fronting Bank in the Fronting Bank Supplement to which it is a party (or such other ratings to which MBIA and the Administrative Agent may consent). "Reserve" shall mean, with respect to an Insured Obligation, ------- case-specific reserves required to be maintained by MBIA under the New York Insurance Law or other applicable insurance law solely by reason of the failure or anticipated failure by the issuer of such Insured Obligation or other obligor with respect thereto to pay such Insured Obligations when due. "Restated Security Agreement" - Section 4.1(b)(iv). --------------------------- "Restatement Effective Date" shall mean October 1, 1997. -------------------------- "Retained Percentage" of an Insured Obligation shall mean ------------------- 100% minus the aggregate percentage of the risk under Insurance Contracts with respect thereto which has been ceded by MBIA to other Persons under reinsurance agreements (whether facultative or treaty) and similar arrangements. "S&P" shall mean Standard & Poor's Corporation and its --- successors. "SEC Reports" - Section 5.14. ----------- "Security Agreement" shall mean the Second Amended and ------------------ Restated Security Agreement and Collateral Assignment between MBIA and the Administrative Agent, executed and delivered pursuant to Section 4.1(b)(iv) of this Agreement, as amended from time to time. Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- -11- "Special Event of Default" shall have the meaning assigned to ------------------------ that term in the Security Agreement. "Subsidiary" shall mean, with respect to any Person (herein ---------- referred to as the "parent"), any corporation, association or other business entity (whether now existing or hereafter organized) of which at least a majority of the Voting Stock is, owned or controlled by the parent or one or more Subsidiaries of the parent, or by the parent and one or more Subsidiaries of the parent. "Substitute Notes" -- Section 4(b)(ii). ---------------- "Taxes" - Section 3.6(b). ----- "Voting Stock" shall mean stock of any class or classes (or ------------ equivalent interests) or any other securities of a business entity if the holders of the stock of such class or classes (or equivalent interests) or such securities are ordinarily, or may, upon the occurrence of contingencies be, entitled to vote for the election of directors (or persons performing similar functions) of such business entity, even though the right so to vote has been suspended or such contingencies have not yet occurred. "written" or "in writing" shall mean any form of written ------- ---------- communication or a communication by means of telex, telecopier device, telegraph or cable. The terms "hereof", "hereby", "hereto", "hereunder" and ------ ------ ------ --------- similar terms mean this Agreement, and the term "heretofore" means before, and ---------- the term "hereafter" means after, the execution date hereof. --------- Exhibit A to Second Amended and Restated Credit Agreement --------------------------------------------------------- EXHIBIT B TO CREDIT AGREEMENT FORM OF NOTICE OF BORROWING --------------------------- [Date] CREDIT SUISSE FIRST BOSTON, New York Branch, as Administrative Agent Eleven Madison Avenue New York, New York 10017 Attention: Public Finance Department Re: Borrowing under Credit Agreement, dated as of December 29, 1989, as restated by the Second Amended and Restated Credit Agreement dated as of October 1, 1997, among MBIA Insurance Corporation, the Banks named therein, Credit Suisse First Boston, New York Branch, as Administrative Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent, and as further amended Dear Sirs: MBIA Insurance Corporation, a New York stock insurance corporation ("MBIA"), hereby requests that a Loan be made to MBIA by the Banks ---- under the Credit Agreement referred to above (the "Credit Agreement") as follows ---------------- (all capitalized terms herein having the meanings ascribed thereto in the Credit Agreement): 1. The aggregate amount of the Loans requested hereby (the "Subject Loans") is $ __________. ------------- 2. The date on which the Subject Loans are requested to be made (the "Loan Date") is __________, which is a Business Day not less than five --------- (5) Business Days after the date hereof. 3. The Loan Commencement Event has occurred. 4. The Available Commitment as of the Loan Date (determined after giving effect to any reduction of the Maximum Commitment on or prior to the Loan Date) will be $ _________, which is at least equal to the amount of the Subject Loans. 5. Immediately after giving effect to the Subject Loans, the aggregate principal amount of Loans made under the Exhibit B to Second Amended and Restated Credit Agreement --------------------------------------------------------- -2- Credit Agreement, determined without regard to any repayments or prepayments thereof, does not exceed $_________, which equals MBIA's Cumulative Losses incurred after the Loan Commencement Event. 6. Each of the conditions set forth in the Credit Agreement to the Banks' obligations to make the Subject Loans have been satisfied. 7. The proceeds of the Subject Loans will be applied as provided in Section 6.1 of the Credit Agreement, and Schedule 1 hereto contains a description in reasonable detail of the Loss which the proceeds of the Loans will be applied to pay, including without limitation an identification of the Insured Obligation which is in default, the amount of such default, a calculation of the Incremental Reserves, if any, being established with respect to such Loss and the amount of Pledged Premiums, if any, received by MBIA or hereafter payable in respect of such Insured Obligation. 8. The statements set forth above shall be true and correct on and as of the Loan Date. 9. The aggregate amount of the Pledged Recoveries and Pledged Premiums received by or for the account of MBIA during the current Commitment Period as of [date within 15 days of the date of the Notice of Borrowing] equals $__________, which amount has been deposited into the Escrow Account and has been applied or is available to pay the principal of and interest on Loans when due (whether at the stated or any accelerated maturity date thereof), and the balance of the Escrow Account as of such date equals $____________. 10. The Subject Loans are to be disbursed to the following account of MBIA: ------------------------- ------------------------- ------------------------- 11. The undersigned is duly authorized and empowered in the name and on behalf of MBIA to present this Notice of Borrowing and to request and obtain the Subject Loans upon and in accordance with, and subject to, the terms and conditions set forth in the Credit Agreement and the Loan Documents. Exhibit B to Second Amended and Restated Credit Agreement --------------------------------------------------------- -3- IN WITNESS WHEREOF, MBIA has executed and delivered this Notice of Borrowing this ____ day of ________________, 19__. MBIA INSURANCE CORPORATION By -------------------------- Name: Title: Exhibit B to Second Amended and Restated Credit Agreement --------------------------------------------------------- EXHIBIT C TO CREDIT AGREEMENT FORM OF PROMISSORY NOTE ----------------------- New York, New York US$________________ [date] FOR VALUE RECEIVED, the undersigned, MBIA INSURANCE CORPORATION, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"), hereby promises to pay to the order of ___________________________________ (the "Bank") at the offices of Credit Suisse First Boston, New York Branch, at Eleven Madison Avenue, New York, New York, 10010-3629, in lawful money of the United States of America in immediately available funds, the principal sum of ____________________________ Dollars (US$______________) or, if less, the aggregate unpaid principal amount of the Loans (as defined in the hereinafter referred to Credit Agreement) outstanding and payable to the Bank by MBIA under the Credit Agreement, dated as of December 29, 1989, as amended through the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, and as further amended from tine to time (the "Credit Agreement") in the amounts and on the dates set out in the Credit Agreement. MBIA also promises to pay interest on the unpaid principal amount of such Loans from the date on which such Loans are made until the Loans are repaid in full at such interest rates and payable on such dates as are determined pursuant to the Credit Agreement. If any payment on this Note shall be specified to be made upon a day which is not a Business Day (as defined in the Credit Agreement), it shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence ----- ----- of the accuracy of the information so recorded; provided that the failure to -------- ---- make any Exhibit C to Second Amended and Restated Credit Agreement --------------------------------------------------------- -2- such notations shall not affect the validity of MBIA's obligations hereunder. Presentment, demand, protest and notice of dishonor are hereby waived by the undersigned. This Note evidences the Bank's Loans under, and is entitled to the benefits and subject to the provisions of, and is secured by, the Credit Agreement and the other Loan Documents (as defined therein). The Credit Agreement, among other things, contains provisions with respect to the acceleration of the maturity of this Note upon the happening of certain stated events, and for mandatory and optional prepayments of the principal of this Note prior to maturity, all upon the terms and conditions specified therein. The payment obligations of MBIA under this Note are limited as provided in Section 2.7 of the Credit Agreement. This Note shall be construed in accordance with and governed by the laws of the State of New York. MBIA INSURANCE CORPORATION By: --------------------------- Name: Title: Exhibit C to Second Amended and Restated Credit Agreement --------------------------------------------------------- GRID - -------------------------------------------------------------------------------- Unpaid Principal Principal Amount of Paid or Amount of Notation Date Loan Prepaid Note Made by - ---- --------- --------- --------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Exhibit C to Second Amended and Restated Credit Agreement --------------------------------------------------------- EXHIBIT D TO CREDIT AGREEMENT FORM OF SECURITY AGREEMENT -------------------------- THIS SECOND AMENDED AND RESTATED SECURITY AGREEMENT AND COLLATERAL ASSIGNMENT, dated as of October 1, 1997, between MBIA INSURANCE CORPORATION, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"), and CREDIT SUISSE FIRST BOSTON, a banking ---- corporation organized under the laws of Switzerland formerly known as Credit Suisse ("CSFB"), acting through its New York Branch, in its capacity as ---- Administrative Agent under the Credit Agreement referred to herein (the "Collateral Agent") for the several Banks which are signatories to the Credit ---------------- Agreement (as defined below) and such other Banks as may from time to time become parties thereto and be listed on Schedule 1 thereto (collectively, the "Banks"); ----- WHEREAS, MBIA and the Collateral Agent are parties to the First Restated Security Agreement and Collateral Assignment, which amended and, as so amended, restated the Security Agreement and Collateral Assignment, dated as of December 28, 1989, between MBIA and CSFB, New York Branch, in its individual capacity, as theretofore amended (as so amended and restated, the "Original -------- Security Agreement") and - ------------------ WHEREAS, the parties to the Credit Agreement have entered into the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, which further amends and, as so amended, restates the Credit Agreement; and WHEREAS, pursuant to said Second Amended and Restated Credit Agreement, the parties to the Credit Agreement have agreed to amend the Original Security Agreement in certain respects and, as so amended, to restate the Original Security Agreement, all as more fully set forth below; NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that effective as of the date hereof, the Original Security Agreement is Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -2- hereby amended and, as so amended, is restated to read in its entirety as follows: Section 1. Definitions. (a) All terms defined in Article 1, 8 or 9 of ---------- ----------- the Uniform Commercial Code, as in effect on the date of this Agreement, are used herein with the meanings therein given; such terms include but are not limited to "account", "chattel paper", "collateral", "deposit account", "document", "general intangibles", "instrument", "money", "proceeds", "security" and "security interest". In addition, the term "collateral" when capitalized has the meaning as specified in paragraph (c) below. (b) Except in the case of "Agreement" and as otherwise specified herein, all terms including, without limitation, the terms "MBIA", "Average Annual Debt Service", "Banks", "Covered Portfolio", "Cumulative Losses", "Commitment Period", "Default", "Effective Date", "Event of Default", "Insured Obligations", "Lien", "Loan", "Loan Documents", "Majority Banks", "Maximum Commitment", "MBIA Event of Insolvency", "Note", "Participant", "Person", "Pledged Premiums" and "Pledged Recoveries" defined in the Credit Agreement are used herein with the meanings therein given, whether or not the Credit Agreement is otherwise in effect. (c) As used herein the following terms shall have the meanings specified below: "Agreement" means this Agreement. --------- "Collateral" means all of MBIA's right, title and interest in, to ---------- and under or arising out of the following, wherever located and now existing or hereafter arising: (i) all Pledged Recoveries and all Pledged Premiums, and all accounts, chattel paper, deposit accounts, documents, instruments, general intangibles, and general intangibles evidencing, securing, constituting or relating to any Pledged Recoveries or Pledged Premiums, including without limitation (A) all reimbursement agreements, guaranties, letters of credit, mortgages, security agreements, pledge agreements and other contracts, agreements or arrangements, (B) all accounts receivable, (C) all compromises, settlements or similar arrangements, (D) all voluntary payments or gifts, (E) all reinsurance of Insured Obligations to the extent that the payment under such reinsurance was not Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -3- deducted in determining the Loss attributable to MBIA's payment of a claim giving rise to a Pledged Recovery, (F) all Subrogation Rights, (G) all mortgages, security interests and other Liens, (H) all causes of action, whether sounding in tort, contract or otherwise, and (I) all other legal or equitable rights and claims, whether or not similar to the foregoing, including without limitation all claims, rights, powers, privileges and remedies under any of the foregoing, all rights to make determinations, to exercise any election (including without limitation election of remedies) or option, to give or receive any notice, consent, waiver or approval, to demand, receive, enforce, collect or receipt for any of the foregoing or any property subject thereto, to enforce or execute any checks, instruments or orders, to file any claims and to take any action which (in the opinion of the Collateral Agent) may be necessary or advisable in connection with any of the foregoing; (ii) the Escrow Account and all amounts, moneys, securities (certificated and uncertificated), instruments, documents, general intangibles, financial assets or other investment property on deposit therein or distributable therefrom and all interest, dividends, gains and other earnings thereon; and (iii) all additions, accessions, replacements, substitutions or improvements and all products and proceeds of any and all of the Collateral described in clauses (i) and (ii) above. "Credit Agreement" means the Credit Agreement, dated as of ---------------- December 29, 1989, between MBIA and CSFB, New York Branch, as amended through the Second Amended and Restated Credit Agreement dated October 1, 1997, and as further amended from time to time. "Default Rate" means the rate of interest set forth in Section ------------ 3.6(g) of the Credit Agreement. "Escrow Account" means the account established by MBIA pursuant -------------- to Section 8 of this Agreement. "Qualified Investments" means (i) direct and general obligations --------------------- of the United States Government or any agency thereof and obligations guaranteed by the United States Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -4- Government, due within six months from the date of purchase and payable in the United States of America in dollars of the United States of America, (ii) certificates of deposit of, or demand or time deposits in, or money market funds of a commercial bank or financial institution rated Aa or P-1 or equivalent or better by Moody's and AA or A-l or equivalent or better by S&P approved by the Collateral Agent and MBIA which are fully secured by securities of the type listed in clause (i) above, and (iii) certificates of deposit of, or demand or time deposits in, or money market funds of financial institutions approved by the Collateral Agent and MBIA. "Secured Obligations" means all principal at any time outstanding ------------------- and all interest from time to time accrued or payable in respect of the Loans or the Notes, now existing or hereafter arising. "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) $412,500,000 and (B) 2% 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. "Subrogation Rights" means all contractual, statutory and common ------------------ law and other rights of subrogation. "Uniform Commercial Code" means the Uniform Commercial Code as in ----------------------- effect from time to time in any applicable jurisdiction. Section 2. Security Interests. As security for the prompt payment and ---------- ------------------ performance of all Secured Obligations, MBIA does hereby grant, assign, transfer, deliver and set over to the Collateral Agent, as agent for each of the Banks, and for the ratable benefit of the Banks and all other holders from time to time of any Secured Obligations, a continuing security interest in all of the Collateral, whether now existing or hereafter arising or acquired and wherever located. Section 3. General Representations, Warranties and Covenants. MBIA ---------- ------------------------------------------------- represents, warrants and covenants, which repre- Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -5- sentations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: (a) This Agreement creates in favor of the Collateral Agent and each of the Banks a valid security interest in and assignment of all of MBIA's right, title and interest in and to substantially all of the Collateral now owned or acquired from time to time after the date hereof by MBIA, and such right, title and interest is and will be free from any Lien. MBIA shall defend such right, title and interest against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Collateral Agent or the Banks. MBIA has filed or caused to be filed in the office of the Secretary of State of New York and the office of the County Clerk of Westchester County, New York, requisite financing statements relating to the Collateral. To the extent such matters are governed by the provisions of the Uniform Commercial Code, the Collateral Agent's having possession of all instruments and money constituting Collateral from time to time and the filing of such financing statements results in the perfection of the security interest granted in this Agreement in all of MBIA's right, title and interest in and to substantially all of (a) the Pledged Recoveries, (b) the Pledged Premiums, (c) all Subrogation Rights, rights under Insurance Contracts, accounts and general intangibles included among the Collateral, (d) all Collateral described in clause (ii) of the definition thereof contained in Section 1(c), and (e) all Collateral described in clause (iii) of the definition thereof contained in Section 1(c) relating to the Collateral described in the foregoing clauses (a) through (d), and such security interest is, or in the case of such Collateral in which MBIA obtains rights after the date hereof, will be a perfected, first priority security interest therein; provided that continuation of the first priority security interest of the Collateral Agent and the Banks in the cash proceeds of the Collateral (other than proceeds in the Escrow Account created under and maintained in accordance with the provisions of Section 8 hereof) is limited by the provisions of Section 9-306 of the Uniform Commercial Code. To the extent such matters are not governed by the provisions of the Uniform Commercial Code, the Collateral Agent and each of the Banks have and will have a first priority Lien on such Collateral. Notwithstanding the foregoing, no representation or warranty is made in this Section 3(a) as to the perfection or priority of the Lien of the Collateral Agent or the Banks on any reimbursement agreements, guaranties, letters of credit, mortgages, security agreements, pledge agreements or other contracts, agreements or similar agreements or instruments not constituting Insurance Contracts from which Pledged Recoveries may Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -6- be derived and which (i) by their terms prohibit the assignment or pledge thereof without a consent of another party or parties thereto, to the extent that such consents have not been obtained, or (ii) by law require recordings or filings, other than the filing of financing statements under the Uniform Commercial Code, which have not been made; provided that the failure to obtain such consents or to make such recordings or filings does not adversely affect the Lien of the Collateral Agent and the Banks on Pledged Recoveries received by or for the account of MBIA therefrom. (b) There is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) naming MBIA or any of its predecessors in interest as debtor now on file or registered in any public office evidencing any Lien on the Collateral, or intended so to be, which has not been terminated, and neither MBIA nor any of its predecessors in interest has executed or filed, and so long as this Agreement remains in effect or any of the Secured Obligations remain unpaid, MBIA will not execute or file, any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to any of its right, title or interest in or to any of the Collateral, except financing statements filed or to be filed in respect of and covering the security interest of the Collateral Agent for the benefit of the Banks granted and provided for in this Agreement. (c) The chief executive offices and chief place of business of MBIA are located at 113 King Street, Armonk, New York 10504, and MBIA will not move its chief executive offices or its chief place of business except to such new location as MBIA may establish in accordance with the last sentence of this Section 3(c). Originals of all material documents evidencing Collateral which are held by MBIA and the only original books of account and records of MBIA relating thereto are, and will continue to be, kept at such chief executive office or at such new location as MBIA may establish in accordance with the last sentence of this Section 3(c). MBIA shall establish no such new location until (i) it shall have given to the Collateral Agent not less than 45 days' prior written notice of its intention so to do, clearly describing such new location and providing such other information in connection therewith as the Collateral Agent may reasonably request, and (ii) with respect to such new location, it shall have taken such action, satisfactory to the Collateral Agent (including, without limitation, all action required by Section 5 hereto), to maintain the security interest of the Collateral Agent for the benefit of Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -7- the Banks in the Collateral intended to be granted in full force and effect. (d) The corporate name of MBIA is as set forth on the signature page hereto, and MBIA shall not change such name, conduct its business in any name other than such name and "MBIA" and variations thereof or take title to any Collateral in any name other than such name while this Agreement remains in effect until (i) it shall have given to the Collateral Agent not less than 45 days' prior written notice of its intention so to do, setting forth such name or names and providing such other information in connection therewith as the Collateral Agent may reasonably request, and (ii) with respect to such new name or names, it shall have taken such action, satisfactory to the Collateral Agent (including, without limitation, all action required by Section 5 hereto), to maintain the security interest of the Collateral Agent for the benefit of the Banks in the Collateral intended to be granted in full force and effect. Neither MBIA nor any predecessor to its business and assets has ever had any name, or conducted business under any name in any jurisdiction, other than MBIA's name set forth on the signature page hereto, "MBIA", "Municipal Bond Investors Assurance Corporation", "Municipal Issuers Service Company" and "Municipal Bond Insurance Association". (e) MBIA shall mark its books and records as may be necessary or appropriate to evidence, protect and perfect the security interest of the Collateral Agent for the benefit of the Banks in the Collateral and shall cause its financial statements to reflect such security interest in accordance with generally accepted and statutory accounting principles. (f) MBIA will not sell, transfer, change the registration, if any, of, dispose of, attempt to dispose of, or materially modify, compromise, settle, release, surrender or abandon the Collateral or any part thereof, or grant any material waiver, consent, extension or indulgence affecting rights of payment with respect thereto, other than (i) in the ordinary course of its business and in compliance with the provisions of Section 6.8 of the Credit Agreement or (ii) with the prior written consent of the Collateral Agent. MBIA will not create, incur, assume or suffer to exist any Lien upon any of its right, title or interest in or to any of the Collateral other than the Lien of this Agreement without the prior written consent of the Collateral Agent. (g) The Collateral Agent is authorized (but is under no obligation) to make, upon five Business Days' notice to MBIA Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -8- (except in the case of exigent circumstances, in which circumstances upon such notice, if any, as may then be practical), any payments which in the opinion of the Collateral Agent or the Majority Banks are necessary to discharge any Liens which have or may take priority over the Lien of this Agreement. MBIA shall have no claim against the Collateral Agent or any Bank by reason of its' decision not to make any payments or perform such obligations permitted under this Section. MBIA shall repay to the Collateral Agent any sums paid by the Collateral Agent upon demand. Any sums paid and expenses incurred by the Collateral Agent pursuant to this paragraph shall bear interest at the Default Rate, payable upon demand. In the event that MBIA claims, by written notice to the Collateral Agent received within the five (5) Business Days immediately following the giving of any notice by the Collateral Agent pursuant to the first sentence of this paragraph or, if any payment described therein shall have been made without notice, the five Business Days immediately following the giving of notice by the Collateral Agent of the making of any such payment, that such payment is not necessary to discharge such Lien and to preserve the priority of the Lien of this Agreement, and obtains a final determination by a court of competent jurisdiction confirming such claim in a proceeding in which the Collateral Agent has the opportunity to participate fully, the Collateral Agent will upon demand reimburse MBIA for its reasonable expenses incurred under this paragraph. (h) MBIA will not assert against the Collateral Agent or any Bank any claim or defense which MBIA may have against any obligor under the Collateral or any part thereof or any other Person with respect to the Collateral or any part thereof. (i) MBIA will upon receipt of reasonable documentation evidencing such expense pay to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of agents, which the Collateral Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Collateral Agent or the Banks hereunder or (iv) the failure by MBIA to perform or observe any of the provisions hereof. Section 4. Special Provisions Concerning Pledged Recoveries, ---------- ------------------------------------------------- etc. MBIA represents, warrants and agrees as follows: - ---- Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -9- (a) From and after the date of the first Loan, MBIA will cause all Pledged Recoveries and, from and after the date on which there is a default under an Insured Obligation in the Covered Portfolio, all Pledged Premiums thereafter received or receivable by or for the account of MBIA with respect thereto to be promptly deposited into the Escrow Account in accordance with the provisions of Section 8 below, and prior to such deposit and from and after the date of the first Loan will hold any payments received by it representing Pledged Recoveries or such Pledged Premiums for and on behalf of the Banks. (b) The provisions of Section 6.8 of the Credit Agreement are hereby incorporated herein by reference. Section 5. Financing Statements; Documentary Stamp Taxes. ----------- ------------------------------------------------ (a) MBIA will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such financing statements and other assurances or instruments and take such further steps relating to its right, title and interest in and to the Collateral, which the Collateral Agent or the Majority Banks reasonably deem appropriate or advisable to perfect, preserve or protect the security interest of the Collateral Agent and the Banks therein or to more fully grant, assign, transfer, deliver and set over to and vest in the Collateral Agent and the Banks all and singular the Collateral hereby granted, assigned, transferred, delivered or set over or intended to be so. MBIA authorizes the Collateral Agent, upon MBIA's failure to do so for a period of ten (10) Business Days following the request of the Collateral Agent, to file any such financing statements without the signature of MBIA, and MBIA will pay all applicable filing fees and related reasonable expenses. In the event that MBIA claims by written notice to the Collateral Agent received within ten (10) Business Days after a request made by the Collateral Agent pursuant to the first sentence of this paragraph that the financing statements or other assurances or instruments or the steps described in such request are not appropriate or advisable to perfect, preserve or protect the security interest of the Collateral Agent and the Banks in such Collateral or to more fully grant, assign, transfer, deliver and set over to and vest in the Collateral Agent and the Banks such Collateral, as the case may be, and obtains a final determination by a court of competent jurisdiction confirming such claim in a proceeding in which the Collateral Agent has the opportunity to participate fully, the Collateral Agent will upon demand reimburse Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -10- MBIA for its reasonable expenses incurred under this paragraph with respect to such financing statements or other assurances or instruments or such steps, as the case may be. (b) MBIA agrees to procure, pay for, affix to any and all documents and cancel any documentary tax stamps required by and in accordance with applicable law, and MBIA will indemnify and hold the Collateral Agent and each Bank harmless against any liability (including interest and penalties) in respect of such documentary stamp taxes. Section 6. Events of Default. Upon the occurrence of a Special ---------- ----------------- Event of Default and during the continuance thereof, in addition to any rights and remedies now or hereafter granted under applicable law or under the Credit Agreement or the Loan Documents and not by way of limitation of any such rights and remedies: (a) The Collateral Agent, acting on behalf of the Banks, shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any applicable jurisdiction with respect to MBIA's right, title and interest in and to the Collateral and any portion thereof, and the right, without notice to, or assent by, MBIA, in the name of MBIA or in the name of the Collateral Agent or otherwise: (i) with respect to Insurance Contracts, Subrogation Rights, accounts, general intangibles and contract rights, to ask for, demand, collect, receive, compound and give acquittance therefor or any part thereof, to extend the time of payment of, compromise or settle for cash, credit or otherwise, and upon any terms and conditions, any thereof, to endorse the name of MBIA on any checks, drafts or other orders or instruments for the payment of moneys payable to MBIA which shall be issued in respect thereof, to exercise and enforce any rights and remedies in respect thereof, to file any claims, commence, maintain or discontinue any actions, suits or other proceedings deemed by the Collateral Agent or the Majority Banks necessary or advisable for the purpose of collecting or enforcing payment and performance thereof or to direct MBIA to perform any of the foregoing, to make test verifications thereof or any portion thereof, to notify any or all account debtors thereunder to make payment thereof directly to the Collateral Agent for the account of the Banks and to require MBIA to forthwith give similar notice to the Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -11- account debtors, and to require MBIA forthwith to account for and transmit to the Collateral Agent in the same form as received all proceeds (other than physical property) of collection thereof received by MBIA and, until so transmitted, to hold the same in trust for the Collateral Agent for the benefit of the Banks and not commingle such proceeds with any other funds of MBIA; (ii) to exercise all claims, rights, powers, privileges and remedies under any of the Collateral all rights to make determinations, to exercise any election (including without limitation election of remedies) or option, to give or receive any notice, consent, waiver or approval, to demand, receive, enforce, collect or receipt for any of the Collateral or any property subject thereto, to enforce or execute any checks, instruments or orders, to file any claims and to take any action which (in the opinion of the Collateral Agent or the Majority Banks) may be necessary or advisable in connection with any of the foregoing; (iii) to pay all payments or perform any obligations which are payable or to be performed by MBIA under any of the Collateral (whether to the Banks or others), upon the failure of MBIA to make such payments or perform such obligations within the time permitted therein; (iv) to take possession of any or all of the Collateral and, for that purpose, to enter, with the aid and assistance of any Person or Persons and with or without legal process, any premises where the Collateral, or any part thereof, is, or may be, placed or assembled, and to remove any of such Collateral; (v) to execute any instrument and do all other things necessary and proper to protect and preserve and realize upon the Collateral and the other rights contemplated hereby; (vi) upon notice to such effect, to require MBIA to deliver, at MBIA's expense, any or all Collateral which is reasonably movable to the Collateral Agent at a place designated by the Collateral Agent, and after delivery thereof MBIA shall have no further claim to or interest in the Collateral; and Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -12- (vii) without obligation to resort to other security, at any time and from time to time, to sell, resell, assign and deliver all or any of the Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and, demand therein and right of redemption thereof, at public or private sale, for cash, upon credit or for future delivery, and at such price or prices and on such terms as the Collateral Agent may determine, with the amounts realized from any such sale to be applied to the Secured Obligations in the manner determined by the Collateral Agent. MBIA hereby agrees, to the extent permitted by law, that all of the foregoing may be effected without demand, advertisement or notice (except as hereinafter provided or as may be required by law), all of which (except as hereinafter provided) are hereby expressly waived, to the extent permitted by law. The Collateral Agent shall not be obligated to do any of the acts hereinabove authorized, but in the event that the Collateral Agent elects to do any such act, the Collateral Agent shall not be responsible to MBIA except for its gross negligence or willful misconduct. The Collateral Agent is hereby irrevocably appointed the true and lawful attorney-in-fact of MBIA in its name and stead, to make all necessary agreements, instruments and documents and to take all other actions and for such other purposes as are necessary or desirable to effectuate the provisions of this paragraph (a), and for that purpose it may substitute one or more Persons with like power, MBIA hereby ratifying and confirming all that its said attorney, or such substitute or substitutes, shall lawfully do by virtue hereof. (b) The Collateral Agent may take legal proceedings for the appointment of a receiver or receivers (to which the Collateral Agent shall be entitled as a matter of right) to take possession of the Collateral pending the sale thereof pursuant either to the powers of sale granted by this Agreement or to a judgment, order or decree made in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement. (c) Upon any sale of any of the Collateral, whether made under the power of sale hereby given or under judgment, order or decree in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement, Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -13- (i) the Collateral Agent or any Bank may bid for and purchase the property being sold, and upon compliance with the terms of sale may hold, retain and possess and dispose of such property for the ratable benefit of the Banks without further accountability, and may, in paying the purchase money therefor, deliver any instruments evidencing the Secured Obligations or agree to the satisfaction of all or a portion of the Secured Obligations in lieu of cash in payment of the amount which shall be payable thereon, and such instruments, in case the amounts so payable thereon shall be less than the amount due thereon, shall be returned to the Collateral Agent after being appropriately stamped to show partial payment; (ii) the Collateral Agent is, hereby irrevocably appointed the true and lawful attorney-in-fact of MBIA in its name and stead, to make all necessary deeds, bills of sale and instruments of assignment and transfer of the property thus sold and for such other purposes as are necessary or desirable to effectuate the provisions of this Agreement, and for that purpose it may execute and deliver all necessary deeds, bills of sale and instruments of assignment and transfer, and may substitute one or more Persons with like power, MBIA hereby ratifying and confirming all that its said attorney, or such substitute or substitutes, shall lawfully do by virtue hereof; but if so requested by the Collateral Agent or by any purchaser, MBIA shall ratify and confirm any such sale or transfer by executing and delivering to the Collateral Agent or to such purchaser all property, deeds, bills of sale, instruments or assignment and transfer and releases as may be designated in any such request; (iii) all right, title, interest, claim and demand whatsoever, either at law or in equity or otherwise, of MBIA of, in and to the property so sold shall be divested; such sale shall be a perpetual bar both at law and in equity against MBIA, its successors and assigns, and against any and all Persons claiming or who may claim the property sold or any part thereof from, through or under MBIA, its successors or assigns; (iv) the receipt of the Collateral Agent or of the officer thereof making such sale shall be a suf- Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -14- ficient discharge to the purchaser or purchasers at such sale for his or their purchase money, and such purchaser or purchasers, and his or their assigns or personal representatives, shall not, after paying such purchase money and receiving such receipt of the Collateral Agent or of such officer therefor, be obliged to see to the application of such purchase money or be in any way answerable for any loss, misapplication or nonapplication thereof; and (v) to the extent that it may lawfully do so, MBIA agrees that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the advantage of, any appraisement, valuation, stay, extension or redemption laws, or any law permitting it to direct the order in which the Collateral or any part thereof shall be sold, now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance or enforcement of this Agreement or any Loan Document, and MBIA hereby expressly waives all benefit or advantage of any such laws and covenants that it will not hinder, delay or impede the execution of any power granted or delegated to the Collateral Agent in this Agreement, but will suffer and permit the execution of every such power as though no such laws were in force. In the event of any sale of Collateral pursuant to this Section, the Collateral Agent shall, at least 10 days before such sale, give MBIA written, telegraphic or telex notice of its intention to sell, except that, if the Collateral Agent shall determine in its sole discretion that any of the Collateral threatens to decline speedily in value, any such sale may be made upon 3 days' written, telegraphic or telex notice to MBIA. (d) MBIA upon request of the Collateral Agent from time to time will deliver to the Collateral Agent executed counterparts or copies of each contract, agreement, document or instrument constituting part of the Collateral. (e) MBIA shall not exercise any rights or powers with respect to the Collateral or take any other action with respect thereto, including without limitation those described in clauses (i) and (ii) of paragraph (a) of this Section 6, except at the written direction of the Collateral Agent. Prior to the occurrence of a Special Event of Default, the Collateral Agent shall not exercise the rights granted by this Section 6. Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -15- Section 7. Application of Moneys. Except as otherwise provided ---------- --------------------- herein or in the Credit Agreement, all moneys which the Collateral Agent shall receive pursuant hereto shall first be applied (to the extent thereof) to the payment of all reasonable costs and expenses incurred in connection with the administration and enforcement of, or the preservation of any rights under, this Agreement or any of the reasonable expenses and disbursements of the Collateral Agent (including, without limitation, the fees and disbursements of its counsel and agents), and the balance, if any, shall then be applied to the Banks ratably in accordance with amounts then due to each Bank to discharge the Secured Obligations, in such order as the Collateral Agent and the Banks may designate in their sole discretion. Section 8. Escrow Account. On the date of the first Loan, the ---------- -------------- amount of all Pledged Recoveries (including any Released Reserves which constitute Pledged Recoveries) received by or for the account of MBIA on or after the first day of the current Commitment Period and prior to such date, and on each Business Day thereafter the amount of all Pledged Recoveries (including any Released Reserves which constitute Pledged Recoveries) and all Pledged Premiums received by or for the account of MBIA thereafter, in each case to the extent not applied directly on such date by MBIA to make payments of Secured Obligations or theretofore deposited into the Escrow Account, shall be deposited by MBIA into a segregated escrow account (the "Escrow Account") established and -------------- maintained by MBIA in the Collateral Agent or another bank or banks (the "Depository") acceptable to the Collateral Agent under an escrow deposit ---------- agreement in form and substance satisfactory to the Collateral Agent. Upon establishment of the Escrow Account, MBIA will enter into, and cause the Depository (if not the Collateral Agent) to enter into an agreement providing the Collateral Agent with control (within the meaning of Section 8-106 of the 1994 Revised Article 8 of the Uniform Commercial Code (as published by The American Law Institute and the National Conference of Commissioners on Uniform State Laws) or any other applicable provision of the Uniform Commercial Code) over the Escrow Account and all amounts, moneys, instruments, documents, general intangibles, securities (certificated and uncertificated), financial assets and other investment property therein or distributable therefrom, in form and substance reasonably satisfactory to the Collateral Agent. All cash, documents, instruments, securities general intangibles, financial assets and other investment property from time to time on deposit in the Escrow Account, and all rights pertaining to investments of funds in the Escrow Account, shall immediately and without any need for Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -16- any further action on the part of MBIA or the Collateral Agent become subject to the security interest, lien and assignment set forth in this Agreement. Prior to the termination of this Agreement and subject to the following provisions of this Section 8, amounts in the Escrow Account shall be applied only to pay and discharge Secured Obligations. The Escrow Account shall be under the exclusive control of the Collateral Agent and MBIA shall have no right to draw thereon. Amounts in the Escrow Account shall remain uninvested, unless MBIA shall have provided to the Collateral Agent an opinion, in form and substance and from counsel satisfactory to the Collateral Agent that the investment of amounts in the Escrow Account is in compliance with the provisions of the New York Insurance Law and all other applicable laws, rules and regulations and will not adversely affect the rights of the Collateral Agent and the Banks therein, in which case prior to the occurrence of a Special Event of Default such amounts may be invested at the direction of MBIA in Qualified Investments and earnings thereon, if any, shall be transferred promptly after the receipt thereof by the Collateral Agent or the Depository, as the case may be, to MBIA free of the lien of this Agreement, and otherwise shall be deposited into or retained in the Escrow Account. Upon the occurrence of any Special Event of Default, MBIA shall immediately take all actions necessary to cause the Depository to transfer custody and exclusive control of the Escrow Account to the Collateral Agent or its designee, and the terms under which the Escrow Account are established shall provide that, upon delivery of a certificate of the Collateral Agent to the Depository that a Special Event of Default has occurred and is continuing, the Depository will effect such transfer unless the Collateral Agent otherwise directs in such certificate. Without limitation of any other rights which the Collateral Agent and the Banks may have in and to any funds in the Escrow Account, including interest accrued and accredited thereto, if any Special Event of Default has occurred and is continuing, (i) such funds may without notice to MBIA be withdrawn by the Collateral Agent therefrom and applied in such manner and at such time as the Collateral Agent and the Banks may determine in payment in whole or in part of any Secured Obligations, (ii) the Escrow Account shall be under the exclusive control of the Collateral Agent for the ratable benefit of the Banks, and MBIA shall have no further right to draw thereon, (iii) the Collateral Agent shall have the exclusive right to deliver instructions and entitlement orders to the issuer of or any securities intermediary for any Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -17- securities financial assets or other investment property in the Escrow Account without further consent from MBIA, (iv) the proceeds of any investments in the Escrow Account which mature or which shall from time to time be sold may be reinvested in investments for the account of the Escrow Account, (v) any net income or gain on the investment of funds from time to time held in the Escrow Account shall be credited to the Escrow Account, and any net loss on any such investment shall be charged against the Escrow Account and (vi) the Collateral Agent shall be authorized to invest and reinvest the funds from time to time deposited in the Escrow Account in Qualified Investments in the sole discretion of the Collateral Agent. The Collateral Agent shall not be a trustee for MBIA, nor shall have any obligations or responsibilities, or shall be liable for anything done or not done, in connection with this Agreement or any funds in the Escrow Account, except as expressly provided herein and except that the Collateral Agent shall have the obligations of a secured party under the Uniform Commercial Code in effect from time to time in the State of New York. In no event, however, shall the Collateral Agent have any obligations or responsibilities or be liable in any way for any investment decision made pursuant to this Section or for any fall in the value of any funds pledged or invested pursuant to this Agreement. At any time during the continuation of a Special Event of Default the Collateral Agent may sell any documents, instruments and securities held in the Escrow Account and deliver instructions and entitlement orders with respect thereto and may immediately apply the proceeds thereof and any other cash held in the Escrow Account to the Banks ratably in accordance with amounts then due to each Bank to discharge the Secured Obligations, in such order as the Collateral Agent and the Banks may designate in their sole discretion. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, during the continuance of any Special Event of Default, the Collateral Agent is hereby authorized at any time and from time to time, without notice to MBIA or to any other person or entity, any such notice being hereby expressly waived by MBIA, to setoff and to appropriate and apply any and all amounts in the Escrow Account against and on account of the Secured Obligations, irrespective of whether or not the Collateral Agent shall have made any demand hereunder. The Collateral Agent is hereby authorized to debit the Escrow Account and to withdraw funds therefrom to pay interest and principal when due under the Credit Agreement and the Notes without further instruction from MBIA. Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -18- Any amounts remaining in the Escrow Account in the custody and control of the Collateral Agent after termination of this Agreement shall be paid or delivered to MBIA, unless a court of competent jurisdiction otherwise directs. Section 9. Agreement as Security. This Agreement is being made as ---------- --------------------- security for the Secured Obligations, and the Collateral Agent's acceptance of this Agreement shall not constitute a satisfaction of any indebtedness, liability, duty or obligation, or any part thereof, now or hereafter owed by MBIA or relieve MBIA of any of its indebtedness, liabilities, duties or obligations under the Credit Agreement or the Loan Documents. Neither the Collateral Agent nor any Bank hereby assumes any indebtedness, liabilities, duties or obligations of MBIA under or in respect of any of the Collateral, and neither the Collateral nor any Bank shall have any liability or obligation to any Person by reason of the failure of MBIA to perform any thereof. MBIA shall indemnify and hold harmless the Collateral Agent and each Bank from and against any and all liability, loss or damage which it may suffer or incur and which arises out of or results from any claim or any alleged indebtedness, liability, duty or obligation on the part of the Collateral Agent or any Bank to perform or discharge any indebtedness, liabilities, duties or obligations of MBIA under or in respect of any of the Collateral, together with all costs and expenses (including, without limitation, court costs and attorneys' fees) paid or incurred in connection therewith. Section 10. Termination. On the date on which all Loans and the ----------- ----------- indebtedness represented thereby (including without limitation the interest thereon) have been paid in full pursuant to and in accordance with the Credit Agreement and the Notes, all other Secured Obligations have been paid in full in accordance with the terms thereof, the Maximum Commitment has terminated and the Banks have no further obligation to make Loans or otherwise to advance funds under the Credit Agreement or the Loan Documents, this Agreement shall terminate, any Collateral held by the Collateral Agent shall be turned over to MBIA or as MBIA may otherwise direct, the grant, assignment and transfer contained in Section 2 shall become null and void, the Collateral shall be reassigned to MBIA by the Collateral Agent without recourse to the collateral Agent and without any representations, warranties or agreements of any kind and the Collateral Agent shall release in writing MBIA from its obligations hereunder, subject, however, in each case to retroactive reinstatement if at any time all or any part of any payment theretofore applied by the Collateral Agent hereunder to any of the Secured Obligations is or must be Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -19- rescinded, disgorged or returned for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of MBIA). Section 11. Miscellaneous. ----------- ------------- (a) All notices and other communications provided for hereunder shall be in writing and, if to MBIA, mailed or delivered to it, addressed to it at 113 King Street, Armonk, New York 10504, Attention: Arthur M. Warren, Chief Financial Officer; if to the Collateral Agent, mailed or delivered to it, addressed to it at 12 East 49th Street, New York, New York 10017, Attention: Public Finance Department; if to any Bank, mailed or delivered to it, addressed to it as indicated on Schedule 1 to the Credit Agreement; or as to any party as such party may otherwise direct in a written notice. All such notices and other communications shall, when mailed, be effective three days after the date of deposit in the mails, addressed as aforesaid. In lieu of notice by mail or delivery, written notice may be given over telecopier at the appropriate numbers set forth below, such notice over telecopier to be effective when transmitted: If to the Collateral Agent: Telecopier No.: 212-325-8388 If to MBIA: Telecopier No.: 914-765-3163 If to any Bank: As specified in Schedule 1 to the Credit Agreement (b) No delay on the part of the Collateral Agent in exercising any of its rights, remedies, powers and privileges hereunder or partial or single exercise thereof, shall constitute a waiver thereof. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by MBIA and the Collateral Agent and consented to in the manner and to the extent required by Section 10.12 of the Credit Agreement. No notice to or demand on MBIA in any case shall entitle MBIA to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Collateral Agent to any other or further action in any circumstances without notice or demand. (c) The obligations of MBIA hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (i) subject to applicable law, any bankruptcy, insolvency, Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -20- reorganization, arrangement, readjustment, composition, liquidation or the like of MBIA; (ii) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement, the Credit Agreement or the Loan Documents approved by MBIA or of any Secured Obligations or any security for any of the Secured Obligations; (iii) any amendment to or modification of any of the Credit Agreement or the Loan Documents, the Secured Obligations or any security for any of the Secured Obligations; or (iv) any other event or circumstance, whether or not MBIA shall have notice or knowledge of any of the foregoing. The rights and remedies of the Collateral Agent and the Banks herein provided for are cumulative and not exclusive of any rights or remedies which the Collateral Agent or any Bank would otherwise have. (d) This Agreement shall be binding upon MBIA band its successors and assigns and shall inure to the benefit of the Collateral Agent, the Banks and their successors and assigns (including, without limitation any successor Agent under the Credit Agreement and any subsequent holder of Secured Obligations), except that MBIA may not transfer or assign any of its obligations, right or interest hereunder without the prior written consent of the Collateral Agent and the Majority Banks. Without limiting the generality of the foregoing, MBIA acknowledges and agrees that any Bank may assign all or any portion of its rights and interest herein as provided in Section 10.8 of the Credit Agreement, and the term "Bank" or "Banks" as used herein shall include any Assignee, any New Bank or any other party which at any time hereafter is deemed to be or have the rights of a "Bank" under the Credit Agreement. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement. (e) The Collateral Agent has been appointed as Collateral Agent hereunder by the Banks and shall be entitled hereunder to the benefits of the Credit Agreement. The Collateral Agent shall be obligated, and shall have the right, hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the release or substitution of Collateral) solely in accordance with this Agreement and the Credit Agreement. (f) Each party hereby agrees that any legal action or proceeding against the other with respect to this Agreement, any of the Loan Documents or any of the agreements, documents or instruments delivered in connection herewith or therewith may be brought Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -21- in the courts of the State of New York or of the United States of America for the Southern District of New York as the applicable party may elect, and, by execution and delivery hereof, MBIA, for itself and in respect to its property, generally and unconditionally accepts and consents to the jurisdiction of the aforesaid courts and agrees that such jurisdiction shall be exclusive, unless waived by the Collateral Agent in writing, with respect to any action or proceeding brought by it against the Collateral Agent or any Bank and any questions relating to usury. Each party agrees that Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York shall apply to this Agreement and the Loan Documents and waives any right to stay or to dismiss any action or proceeding brought against it before said courts on the basis of forum non convenient. Except as specifically set forth herein, nothing herein shall limit the right of either party to bring proceedings against the other in any other court or tribunal otherwise having jurisdiction. (g) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, except to the extent that matters of title, or creation, perfection and priority of the security interests created hereby, or procedural issues of foreclosures are required to be governed by the laws of the state in which the Collateral, or part thereof, is located. (h) Any provision of this Agreement 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. (i) Section headings in this Agreement are included herein for convenience or reference only and shall not constitute a part of this Agreement for any other purpose. (j) This Agreement 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 Agreement. [The remainder of this page has been intentionally left blank.] Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- -22- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. MBIA INSURANCE CORPORATION By: ------------------------- Title: CREDIT SUISSE FIRST BOSTON, New York Branch, as Collateral Agent By: ------------------------- Title: By: ------------------------- Title: Exhibit D to Second Amended and Restated Credit Agreement --------------------------------------------------------- EXHIBIT E TO CREDIT AGREEMENT LIST OF INSURED OBLIGATIONS EXCLUDED FROM THE COVERED PORTFOLIO ----------------------------------- Delivered to the Administrative Agent. This Exhibit E is subject to supplementation as provided in the definition of "Covered Portfolio" contained in Exhibit A to the Credit Agreement. EXHIBIT F TO CREDIT AGREEMENT FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT [date] Reference is made to the Credit Agreement described in Item 1 of Annex I annexed hereto (as such agreement may hereafter be amended, modified or supplemented from time to time, the "Credit Agreement"). Unless defined in ----------------- Annex I attached hereto, terms defined in or defined for purposes of the Credit Agreement are used herein as so defined. Credit Suisse First Boston, New York Branch, as Administrative Agent under the Credit Agreement (in such capacity, the "Administrative Agent"), ___________________ (the "Assignor") and ---------------------- --------- _________________ (the "Assignee"), hereby agree as follows: -------- (a) The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty (other than as expressly provided herein), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to that portion of the Assignor's Commitment and other rights, duties and obligations under the Credit Agreement, in and to that portion of the Assignor's Loans (if any) as of the date hereof which represents the percentage interest specified in Item 2 of Annex I hereto (the "Assigned Share"). --------------- (b) Following the execution of this Agreement by the Administrative Agent, the Assignor and the Assignee, the consent hereto by MBIA and payment by the Assignee to the Assignor of the purchase price for the Assigned Share as agreed upon by the Assignor and the Assignee, this Agreement shall become effective as of the Settlement Date specified in Item 3 of Annex I hereto (the "Settlement Date"). As of the Settlement ---------------- Date, [(i) the Assignee shall be a party to the Credit Agreement and, to the extent provided herein and therein, have the rights and obligations of a Bank thereunder and under the other Loan Documents and (ii) the Assignor shall, to the extent provided in this Agreement and in the Credit Agreement, relinquish its rights and be released from its obligations under the Credit Agreement and the other Loan Exhibit F to Second Amended and Restated Credit Agreement --------------------------------------------------------- -2- Documents] [the Assignee's Commitment set forth on Schedule I to the Credit Agreement shall be increased by the amount set forth in Item 2(d) of Annex I hereto and (ii) the Assignor's Commitment set forth on said Schedule shall be decreased by the same amount]. (c) The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties and representations made in or in connection with the Credit Agreement or any of the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any of the Loan Documents or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of or the performance or observance by MBIA of any of its obligations under the Credit Agreement, any of the Loan Documents or any other instrument or document furnished pursuant thereto; and (iv) requests that the Administrative Agent request that MBIA exchange the Note held by the Assignor evidencing any Loans made by the Assignor under the Credit Agreement for a new Note payable to the Assignor (if the Assignor has retained any interest in the Commitment or any Loans) and a new Note payable to the Assignee in the respective amounts which reflect the assignment being made hereby. (d) The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements and SEC Reports referred to therein, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement; (ii) agrees that it will, independently and without reliance upon the Assignor or either Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms its agreement with the provisions of Article 9 of the Credit Agreement and appoints and authorizes the each Agent on its behalf to exercise such powers under the Credit Agreement and the other Loan Documents, as are delegated to such Agent by the terms thereof and hereof, together with such powers as are reasonably incidental Exhibit F to Second Amended and Restated Credit Agreement --------------------------------------------------------- -3- thereto; and (iv) agrees that it will be bound by all of the terms and conditions of the Credit Agreement and the other Loan Documents and will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement and the other Loan Documents are required to be performed by it as a Bank. (e) Notwithstanding any provision to the contrary contained in the Credit Agreement, (i) the Assignee's pro rata share of commitment fees, interest payments and other periodic payments will be appropriately adjusted to reflect the period of time during which this Agreement has been in effect, and (ii) to the extent that the Assignee receives any such interest or other amount pursuant to the Credit Agreement in respect of any period of time during which this Agreement was not in effect, or that the Assignor receives any such interest or other amount pursuant to the Credit Agreement in respect of any period of time prior to the time during which this Agreement was in effect, the Assignor or the Assignee, as the case may be, will forthwith pay to the other its pro rata share thereof, appropriately adjusted as provided in clause (i) above. (f) Any amendment to, waiver of any provision of or consent pursuant to this Agreement, shall be effective with and only upon the prior concurrence of the Administrative Agent, MBIA, the Assignor and the Assignee, unless otherwise provided in the Credit Agreement. (g) The address of Assignor and Assignee for purposes of all notices or other communications hereunder or under the Credit Agreement are as set forth in Item 4 of Annex I hereto, or to such other address as shall be designated by such party pursuant to Section 10.7 of the Credit Agreement. (h) All payments to be made to the Assignor or the Assignee hereunder or under the Credit Agreement shall be made by federal wire in accordance with the instructions set forth in Item 5 of Annex I hereto, or as otherwise directed by the Assignor or the Assignee, as the case may be, by notice to the other and to the Administrative Agent and as may be acceptable to the Administrative Agent. (i) This Agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective successors and assigns; provided that -------- the Assignee may not Exhibit F to Second Amended and Restated Credit Agreement --------------------------------------------------------- -4- assign any of its rights or obligations hereunder except as permitted by Section 10.8(b) or 10.8(c) of the Credit Agreement. (j) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution also being made on Annex I hereto. CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH, as Administrative Agent By: ---------------------------------------- Name: Title: By: ---------------------------------------- Name: Title: [NAME OF ASSIGNOR], as Assignor By: ---------------------------------------- Name: Title: Exhibit F to Second Amended and Restated Credit Agreement --------------------------------------------------------- -5- [ASSIGNEE], as Assignee By: ----------------------------- Name: Title: ACCEPTED AND AGREED TO: MBIA INSURANCE CORPORATION By ---------------------------- Name: Title: Exhibit F to Second Amended and Restated Credit Agreement --------------------------------------------------------- ANNEX FOR ASSIGNMENT AND ASSUMPTION AGREEMENT ANNEX I 1. Name and Date of Credit Agreement: Credit Agreement, dated as of December 29, 1989, as amended through the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, among MBIA Insurance Corporation, a New York stock insurance corporation, Credit Suisse First Boston, New York Branch, as Administrative Agent, Deutsche Bank AG, New York Branch, as Documentation Agent, and the Banks signatory thereto, as it may have been further amended. 2. Amounts (as of date of Assignment and Assumption Agreement): (a) Aggregate Amount of Assignor's Commitment $ ------------ (b) Aggregate Amount of Assignor's Fronting Bank Commitment $ ------------ (c) Aggregate Amount of Assignor's Loans Currently Outstanding $ ------------ (d) Aggregate Amount of Assignor's Fronting Bank Loans Currently Outstanding $ ------------ (e) Percentage of Assignor's Commitment and Loans Assigned % ----- (f) Assigned Amount of Commitment $ ------------ (g) Assigned Amount of Fronting Bank Commitments $ ------------ (h) Amount of Assigned Share of Loans Currently Outstanding $ ------------ (i) Amount of Assigned Share of Fronting Bank Loans Annex I for Assignment and Assumption Agreement ----------------------------------------------- -ii- Currently Outstanding $ ------------ 3. Settlement Date: 4. Notice Addresses: ASSIGNOR : Attention : Telephone : Telecopier: Reference : ASSIGNEE : Attention : Telephone : Telecopier: Reference : 5. Payment Instructions: ASSIGNOR : Attention: Reference: ASSIGNEE : Attention: Reference: Accepted and Agreed: Annex I for Assignment and Assumption Agreement ----------------------------------------------- -iii- [NAME OF ASSIGNOR] [NAME OF ASSIGNEE] By: By: --------------------------- ------------------------------ Title: Title: CREDIT SUISSE FIRST BOSTON, New York Branch, as Administrative Agent By: --------------------------- Title: By: --------------------------- Title: Annex I for Assignment and Assumption Agreement ----------------------------------------------- EXHIBIT C TO CREDIT AGREEMENT FORM OF FRONTING BANK SUPPLEMENT [date] Reference is made to the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, among MBIA Insurance Corporation ("MBIA"), Credit ---- Suisse First Boston, New York Branch, as Administrative Agent (the "Administrative Agent"), Deutsche Bank AG, New York Branch, as Documentation -------------------- Agent, and the Banks signatory thereto (as such agreement may hereafter be amended, modified or supplemented from time to time, the "Credit Agreement"). ---------------- Terms defined in or defined for purposes of the Credit Agreement are used herein as so defined. MBIA, the Administrative Agent and the Bank identified in Item 1 on Annex I hereto (the "Fronting Bank") hereby agree as follows: ------------- 1. By this Supplement and effective on the date identified in Item 2 on Annex I hereto, the Fronting Bank hereby agrees to be bound by, and shall have rights and obligations under, the Credit Agreement and the Loan Documents as a Fronting Bank. 2. The Banks for which the Fronting Bank is acting as Fronting Bank and the Fronting Bank Commitment and the Fronting Bank Percentage of the Fronting Bank for each such Bank are set forth in Item 3 on Annex I hereto, subject to adjustment as provided in the Credit Agreement. 3. The entire Commitment of each Bank for which the Fronting Bank is acting as Fronting Bank is identified in the list of all Banks and Commitments as of the date hereof set forth on Annex II hereto. 4. The Administrative Agent hereby requests, on behalf of the Fronting Bank, that MBIA deliver, and MBIA does hereby agree to deliver, a Fronting Bank Note payable to the Fronting Bank in the aggregate amount of Fronting Bank Commitments of the Fronting Bank hereunder or under other Fronting Bank Supplements dated the date hereof. 5. The Required Ratings for the Fronting Bank are those set forth in Item 4 on Annex I hereto. 6. MBIA hereby agrees to pay to the Administrative Agent for the account of the Fronting Bank a fronting bank Exhibit G to Second Amended and Restated Credit Agreement --------------------------------------------------------- -2- commitment fee as set forth in the fee letter among MBIA, the Administrative Agent and the Fronting Bank dated on or about the date hereof which refers to this Supplement. 7. Any amendment to, waiver of any provision of or consent pursuant to this Supplement shall be effective with and only upon the prior concurrence of MBIA, the Administrative Agent and the Fronting Bank, unless otherwise provided in the Credit Agreement. 8. This Supplement shall be binding upon, and inure to the benefit of the parties hereto and their respective successors and assigns; provided -------- that the Fronting Bank may not assign any of its rights or obligations hereunder except as permitted by Section 10.8(b) or 10.8(c) of the Credit Agreement. 9. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Supplement to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution also being made on Annex I hereto. MBIA INSURANCE CORPORATION By ---------------------------------- Title: CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH, as Administrative Agent By ---------------------------------- Title: By ---------------------------------- Title: [NAME OF FRONTING BANK] By ---------------------------------- Title: Exhibit G to Second Amended and Restated Credit Agreement --------------------------------------------------------- ANNEX I TO FRONTING BANK SUPPLEMENT 1. Name of Fronting Bank: 2. Effective Date: 3. Fronting Bank Commitments and Percentages: Fronting Bank Fronting Bank Percentage of Commitment Total Bank Name of Bank of [ ] Commitment ------------ ------------ ---------- (a) $ % -------------------- --------------- ---- (b) $ % -------------------- --------------- ---- (c) $ % -------------------- --------------- ---- Total Fronting Bank Commitments hereunder: $ . --------------- 4. Required Ratings: Moody's: ------- S&P: ------- ACCEPTED AND AGREED: MBIA INSURANCE CORPORATION By ------------------------------------ Title: Annex I to Fronting Bank Supplement ----------------------------------- -ii- CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH, as Administrative Agent By ----------------------------------- Title: By ----------------------------------- Title: [NAME OF FRONTING BANK] By ----------------------------------- Title: Annex I to Fronting Bank Supplement ----------------------------------- ANNEX II TO FRONTING BANK SUPPLEMENT [List of Banks and Commitments] ------------------------------- EXHIBIT H TO CREDIT AGREEMENT FORM OF FRONTING BANK PROMISSORY NOTE ------------------------------------- New York, New York US$______________ [date] FOR VALUE RECEIVED, the undersigned, MBIA INSURANCE CORPORATION, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"), hereby promises to pay to the order of ___________________________________ (the "Bank") at the offices of Credit Suisse First Boston, New York Branch, at Eleven Madison Avenue, New York, New York, 10010-3629, in lawful money of the United States of America in immediately available funds, the principal sum of ___________________________ Dollars (US$______________) or, if less, the aggregate unpaid principal amount of the Fronting Bank Loans (as defined in the hereinafter referred to Credit Agreement) outstanding and payable to the Bank by MBIA under the Credit Agreement, dated as of December 29, 1989, as amended through the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, and as further amended from time to time (the "Credit Agreement") in the amounts and on the dates set out in the Credit Agreement. MBIA also promises to pay interest on the unpaid principal amount of such Fronting Bank Loans from the date on which such Fronting Bank Loans are made until the Fronting Bank Loans are repaid in full at such interest rates and payable on such dates as are determined pursuant to the Credit Agreement. If any payment on this Note shall be specified to be made upon a day which is not a Business Day (as defined in the Credit Agreement), it shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. The Bank is authorized to record the date and amount of each Fronting Bank Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so recorded; provided - ----- ----- -------- that the - ---- Exhibit H to Second Amended and Restated Credit Agreement --------------------------------------------------------- -2- failure to make any such notations snail not affect the validity of MBIA's obligations hereunder. Presentment, demand, pretest and notice of dishonor are hereby waived by the undersigned. This Note evidences the Bank's Fronting Bank Loans under, and is entitled to the benefits and subject to the provisions of, and is secured by, the Credit Agreement and the other Loan Documents (as defined therein). The Credit Agreement, among other things, contains provisions with respect to the acceleration of the maturity of this Note upon the happening of certain stated events, and for mandatory and optional prepayments of the principal of this Note prior to maturity, all upon the terms and conditions specified therein. The payment obligations of MBIA under this Note are limited as provided in Section 2.7 of the Credit Agreement. This Note shall be construed in accordance with and governed by the laws of the State of New York. MBIA INSURANCE CORPORATION By: ------------------------------- Name: Title: Exhibit H to Second Amended and Restated Credit Agreement --------------------------------------------------------- GRID - -------------------------------------------------------------------------------- Unpaid Amount do Principal Principal Fronting Bank Paid or Amount of Notation Date Loan Prepaid Note Made by - ---- ------------- --------- --------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Exhibit H to Second Amended and Restated Credit Agreement --------------------------------------------------------- EXHIBIT I TO CREDIT AGREEMENT 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 Credit Suisse First Boston, Administrative Agent Eleven Madison Avenue New York, NY 10010-3629 Credit Suisse First Boston, New York Branch, as Administrative Agent Eleven Madison Avenue New York, NY 10010-3629 Deutsche Bank AG, New York Branch, as Documentation Agent 31 West 52nd Street New York, NY 10019 Re: 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, formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"). This opinion is being given in connection with the Second Amended and Restated Credit Agreement dated as of October 1, 1997 (the "Credit Agreement") among MBIA, Credit Suisse First Boston, New York Branch, as a Bank and as Administrative Agent, Deutsche Bank AG, New York Branch, as Exhibit I to Second Amended and Restated Credit Agreement --------------------------------------------------------- [date] Page 2 a Bank and as Documentation Agent, and the other Banks signatory thereto. All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. As General Counsel to MBIA, I am familiar with its Restated Charter and its By-Laws, as amended to date, and I have responsibility for supervision of MBIA's insurance regulatory compliance. I have examined such certificates of public officials, such certificates of officers of MBIA and copies 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 Credit Agreement, the Substitute Notes, the Restated Security Agreement, the Fronting Bank Supplements being entered into as of the date hereof and the Fronting Bank Notes (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 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 G, T, U Exhibit I to Second Amended and Restated Credit Agreement --------------------------------------------------------- [date] Page 3 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. 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. Exhibit I to Second Amended and Restated Credit Agreement --------------------------------------------------------- [date] Page 4 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] Exhibit I to Second Amended and Restated Credit Agreement --------------------------------------------------------- EXHIBIT J TO CREDIT AGREEMENT FORM OF OPINION OF KUTAK ROCK [date] Each of the Banks which are parties to the Credit Agreement referred to herein c/o Credit Suisse First Boston, Administrative Agent Eleven Madison Avenue New York, NY 10010-3629 Credit Suisse First Boston, New York Branch, as Administrative Agent Eleven Madison Avenue New York, NY 10010-3629 Deutsche Bank AG, New York Branch, as Documentation Agent 31 West 52nd Street New York, NY 10019 Re: 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 Second Amended and Restated Credit Agreement dated as of October 1, 1997 (the "Credit Agreement"), among MBIA Insurance Corporation, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"), Credit Suisse First Boston, acting through its New York Branch, as a Bank and as Administrative Agent, Deutsche Bank AG, New York Branch, as a Bank Exhibit J to Second Amended and Restated Credit Agreement --------------------------------------------------------- [date] Page 2 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 or the Restated Credit Agreement (as defined therein). As used herein, "Transaction Documents" means the Credit Agreement, the Substitute Notes, the Restated Security Agreement, the Fronting Bank Supplements being entered into as of the date hereof and the Fronting Bank Notes. 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 Exhibit J to Second Amended and Restated Credit Agreement --------------------------------------------------------- [date] Page 3 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 G, T, U or X of the Board of Governors of the Federal Reserve System) presently in effect having applicability to MBIA the violation of which would (i) affect the validity or enforceability of any Transaction Document or the ability of MBIA to perform its obligations thereunder, (ii) adversely affect the Banks or their rights under any Transaction Document or (iii) materially adversely affect the business, assets, operations or financial condition of MBIA. 4. To the best of our knowledge, no consent, approval or other action by or any notice to or filing with any court or administrative or governmental body is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. No consent, approval or other action by or any notice to or filing with the Department is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. 5. Except with respect to MBIA's obligations to pay the principal of and interest on the Loans, the obligations of MBIA under the Transaction Documents will rank, under the New York Insurance Law, at least pari passu in priority of payment with all other unsecured obligations of MBIA, including without limitation MBIA's obligation to pay claims under Insurance Contracts 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, 1993, delivered in connection with the first restatement of the Credit Agreement, dated as of such date, with respect to the Security Interest (as defined in such opinion) and the collateral assignment of Collateral referred to therein. Exhibit J to Second Amended and Restated Credit Agreement --------------------------------------------------------- [date] Page 4 No filings under the UCC are required to perfect or to continue the perfection of the Security Interest (subject to the matters described in the paragraph following paragraph 7 of such opinion) in favor of the Collateral Agent for the benefit of the Banks in all of MBIA's right, title and interest in and to the Collateral, to the extent that the Security Interest can be perfected by the filing of financing statements under the UCC, other than [ __________________ ]. 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 First 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, Exhibit J to Second Amended and Restated Credit Agreement --------------------------------------------------------- SCHEDULE 1 TO CREDIT AGREEMENT BANKS, ADDRESSES AND COMMITMENTS -------------------------------- Name and Notice Address of Bank Commitment - ------------------------------- ---------- Credit Suisse First Boston, New York Branch $100,000,000 Eleven Madison Avenue New York, New York 10010-3629 Attention: Public Finance Department Telecopier No.: (212) 325-8388 Deutsche Bank AG, New York Branch 100,000,000 31 West 52nd Street New York, NY 10019 Attention: Clinton M. Johnson, Vice President Telecopier No.: (212) 474-8013 Caisse des Depots et Consignations 100,000,000 c/o CDC North America, Inc. 9 West 57th Street - 36th Floor New York, NY 10019 Attention: David L. Askren Senior Vice President Telecopier No.: (212) 891-6118 Cooperatieve Centrale 100,000,000 Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland), New York Branch 245 Park Avenue New York, NY 10167 Attention: Angela Reilly Telecopier No.: (212) 916-7837 Union Bank of Switzerland, New York Branch 65,000, 000 299 Park Avenue New York, NY 10171-0026 Attention: Allyson Samson Telecopier No: (212) 821-3934 Name and Notice Address of Bank Commitment - ------------------------------- ---------- Bayerische Landesbank Girozentrale, 50,000,000 New York Branch 560 Lexington Avenue New York, NY 10022 Attention: Scott Allison Telecopier No: (212) 310-9868 Landesbank Hessen-Thuringen Girozentrale, New York Branch 50,000,000 420 Fifth Avenue New York, NY 10018 Attention: Richard Skiera Telecopier No: (212) 703-5256 Westdeutsche Landesbank Girozentrale, 50,000,000 New York Branch 1211 Avenue of the Americas New York, NY 10036 Attention: Lillian Tung Lum Telecopier No: (212) 852-6156 Lloyds Bank Plc, New York Branch 30,000,000 575 Fifth Avenue, 18th Floor New York, NY 10017 Attention: Mela Dorgan Telecopier No: (212) 930-5098 The Chase Manhattan Bank 25,000,000 1 Chase Manhattan Plaza 4th Floor New York, NY 10081 Attention: Heather Lindstrom Telecopier No: (212) 552-5231 Name and Notice Address of Bank Commitment - ------------------------------- ---------- Banco Santander, S.A., 20,000,000 New York Branch 45 East 53rd Street New York, NY 10022 Attention: Dom Rodriguez Telecopier No: (212) 350-3690 Deutsche Girozentrale 20,000,000 Deutsche Kommunalbank Taunusanlage 10 Postfach 11 0542 D-6000 Frankfurt Am Main 11 GERMANY Attention: Stephan Wagner Telecopier No: 49-69-269-3490 Fleet National Bank 20,000,000 777 Main Street, CT-MO 0250 Hartford, CT 06115 Attention: Juliana Dalton Telecopier No: (860) 986-1264 The Industrial Bank of Japan, Limited, 20,000,000 New York Branch 1251 Avenue of the Americas, 31st Floor New York, NY 10020-1104 Attention: Hirofumi Imaji Telecopier No: (212) 282-4488 Kredietbank, N.V., 20,000,000 Grand Cayman Branch c/o New York Branch 125 West 55th Street New York, NY 10019 Attention: Armen Karozichian Telecopier No: (212) 956-5580 Name and Notice Address of Bank Commitment - ------------------------------- ---------- Norddeutsche Landesbank Girozentrale, 15,000,000 New York Branch 1270 Avenue of the Americas New York, NY 10020 Attention: Jens Beerman Telecopier No: (212) 332-8660 Credit Local de France, 10,000,000 New York Agency 450 Park Avenue, 3rd Floor New York, NY 10022 Attention: John Williams Telecopier No: (212) 753-5522 The Dai-Ichi Kangyo Bank, Limited, 10,000,000 New York Branch One World Trade Center 48th Floor New York, NY 10048 Attention: Peter Reagan Telecopier No: (212) 466-3348 NBD Bank 10,000,000 153 West 51st Street New York, NY 10019 Attention: Samuel Bridges Telecopier No: (212) 373-1439 The Sumitomo Bank, Limited, 10,000,000 New York Branch 277 Park Avenue New York, NY 10172 Attention: Bruce Gregory Telecopier No: (212) 224-5188 TOTAL: $825,000,000 EX-10.53 4 INVESTMENT SERVICES AGREEMENT EFF. AS OF 4/28/95 Exhibit 10.53 AMENDMENT NO.2 TO INVESTMENT SERVICES AGREEMENT WHEREAS, MBIA Insurance Corporation and MBIA Capital Management Corp. (formerly known as MBIA Securities Corp.) have entered into an Investment Services Agreement (the "Agreement"); and WHEREAS the parties adopted Amendment No. 1 to said Agreement on December 29, 1995, and WHEREAS, the parties have agreed to further amend said Agreement. NOW, THEREFORE, the Agreement is hereby amended as follows effective as of the date set forth below: 1. Exhibit B of the Agreement is replaced in is entirety by the substitute Exhibit B attached hereto. 2. All other provisions of the Agreement shall remain unchanged. IN WITNESS WHEREOF, the parties have caused the signatures of their duly authorized officers to be hereto affixed this 14th day of January, 1997. MBIA INSURANCE CORPORATION MBIA CAPITAL MANAGEMENT CORP. By: [SIGNATURE APPEARS HERE] By: [SIGNATURE APPEARS HERE] ------------------------------- ------------------------------- Title: Chief Financial Officer Title: President EXHIBIT B January 1997 ------------ MBIA Insurance Corporation Statement of Investment Objectives & Guidelines ----------------------------------------------- Section I. Objectives ---------- A. Preservation of Capital in the context of maintaining triple-A ratings ----------------------- for MBIA Insurance Corporation ("MBIA Corp.") and supporting recognition of MBIA Corp.'s financial stability and strength by insured bond investors, municipal market intermediaries, and other municipal bond market constituencies. B. Subject to A. above, optimization of after-tax investment income to ---------------------------------------------------------------- support the predictability and consistency of company earnings and cash flow. C. Subject to A. and B. above, optimization of long-term total returns. ------------------------------------------------------------------- D. Maintenance of reasonable liquidity after taking into account the ----------------------------------- company's other sources of liquidity (including bank credit facilities and cash flow) for potential claims-paying and other corporate needs. Overall, these objectives call for maintenance of high quality investments, avoidance of undue volatility in both income and returns and generally minimal amounts of short-term investments and/or U.S. Treasury obligations for immediate liquidity. MBIA Corp.'s investment selections will be made with a bias to hold for the long-term, and to avoid sales or swaps in the absence of compelling circumstances of tax credit, structural or other economic reasons, and not to rely on short-term trading or market timing to achieve performance. The mix of taxable and tax-exempt investments will vary from time to time with both market conditions and company tax circumstances. In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and report on the performance of its investment managers and the portfolio, using appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an awareness of and periodically report on the investment practices and results of key competitors and comply with the constraints or limitations related to guidelines and regulatory or rating agency considerations. Section II. Guidelines ---------- The following shall constitute the Investment Guidelines for MBIA Corp., acting through its duly authorized officers and/or through its outside investment advisors: A. Investments shall be made and maintained in compliance with all applicable provisions of Article 14 of the New York Insurance Laws, as amended. B. Fixed Income Policy (1) Quality: For fixed-income securities (over 1 year when purchased) ------- average quality will be AA to AA-, with minimum purchase quality, BBB. For short-term investments (less than 1 year), only investments rated Al/P1 (or equivalent rating) or better may be purchased. (2) Maturity: The average duration target is a maximum of 7.5 years; -------- minimum duration is 6.0 years. (3) Maturity Distribution: Diversification in maturity to minimize --------------------- reinvestment risk is an objective. Although this objective is not quantified, a reasonably well-laddered portfolio over a wide range of maturities is to be achieved. (4) Insured Obligations: MBIA Corp. may purchase or hold obligations ------------------- insured by MBIA Corp. or its competitors, subject to an aggregate limit of 40% of the total investment portfolio. Limitations Per Insurer: MBIA 50% FGIC 50% AMBAC 50% FSA/Capital Guaranty 40% CapMAC 25% Asset Guaranty 10% (5) Other: Securities may be purchased in both public and private ----- markets, subject to the maintenance of an appropriate level of overall portfolio liquidity and to all other objectives/guidelines. C. Equity Policy MBIA Corp. holds interests in certain equity-oriented investments in limited amounts. It is MBIA Corp.'s current policy not to purchase equity oriented securities. 2 D. Further Restrictions (1) At the time of purchase, no investment may be in default as to principal or interest payments and all shall be rated "investment grade" by at least one nationally-recognized domestic rating agency. (2) Only U.S. dollar denominated securities may be purchased, except those required for MBIA Corp.'s foreign operations. (3) No investment shall be made in futures or options on futures. (4) All investments shall be held by a third-party custodian (or via book entry at the Depository Trust Company or a similarly qualified clearing corporation), as prescribed in approved custody agreements, or in other customary forms of safekeeping. 3 E. Fixed income investments are further limited to the following types and amounts (with the term "assets" defined by the New York statutes):
Type of Obligation Limitation Basis ---------------------- ------------- ----------------- (i) Backed by full faith and credit of the Unlimited In Aggregate United States, including Government Unlimited Per Issuer or National Mortgage Association direct Mortgage Pool obligations and guaranteed mortgage- backed securities. (ii) Federal National Mortgage Association 10% of Assets In Aggregate direct obligations and guaranteed 2% of Assets Per Mortgage Pool mortgage-backed securities. (iii) Federal Home Loan Mortgage 10% of Assets In Aggregate Corporation direct obligations and 2% of Assets Per Mortgage Pool guaranteed mortgage-backed securities. (iv) Bonds which have been fully Unlimited In Aggregate collateralized by direct U.S. government obligations (i.e., pre- refunded or escrowed-to-maturity) and upgraded to triple-A by at least one nationally-recognized domestic rating agency. (v) Obligations not included in Section (iv) above and backed by full faith and credit of: (a) Any state government. 5% of Assets Per State (b) Any political subdivision 2% of Assets Per Issuer of a State or any municipality within the United States. (vi) Obligations not included in Section (iv) 2% of Assets Per Issuer above and backed by revenue or other income sources of a single facility or system. (vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate one nationally recognized domestic 0.5% of Assets Per Single Issue rating agency (excluding assets otherwise permitted under this agreement).
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Type of Obligation Limitation Basis ---------------------- -------------- ---------------- (viii) Securities backed by pools of assets 3% of Assets In Aggregate rated single-A and double-A by at 0.5% of Assets Per Single Issue least one nationally recognized domestic rating agency (examples may include, but are not limited to, commercial or residential mortgages, automobile loans). (ix) Investments in any entity, obligations 1% of Assets Per Issuer of which are insured by MBIA Corp., (and which are identified on a list furnished by MBIA Corp. to its advisors from time-to-time) with the exception of United States municipalities rated AA or better by at least on nationally-recognized domestic rating agency. (x) Backed by full faith and credit of a 2% of Assets Per Issuer non-public corporate entity, whether foreign or domestic. (xi) Backed by full faith and credit of 10% of Assets In Aggregate Canada, its Provinces and other 10% of Assets For Federal Govt. political subdivisions. 2% of Assets Per all Other Issuers (xii) Backed by full faith and credit of 10% of Assets In Aggregate OECD foreign governments other than 1% of Assets Per Country in Canada. (xiii) Repurchase agreements with a bank 2% of Assets In Aggregate or registered broker-dealer, provided 1% of Assets Per Bank or that all securities underlying such Broker-Dealer agreements: (a) Would be eligible investments under these Guidelines; and, (b) Have maturities of one year or less and the agreement is fully collateralized and marked to market daily.
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Type of Obligation Limitation Basis ------------------------------ ------------- ------------ (xiv) Investments of one year or 10% of Assets In Aggregate less in term which are either 1% of Assets Per Bank direct obligations of or supported by letters of credit from banks rated in the highest short-term category by at least one nationally- recognized domestic rating agency (or judged to be of equivalent quality). (xv) Mutual funds or other such 5% of Assets In Aggregate investment conduits registered with the SEC under the Investment Company Act of 1940, as amended (provided that all investments within each fund would be eligible under the Guidelines). Investments may be made in -------------------------- mutual funds where the ---------------------- Advisor has entered into ------------------------ arrangements to act as a ------------------------ selling dealer and servicing ---------------------------- agent any may receive --------------------- compensation for its services. ------------------------------ Such investments will be ------------------------ permitted provided that MBIA ---------------------------- Corp. pays no commissions in ---------------------------- connection with the purchase ---------------------------- of the mutual fund shares and ----------------------------- the Advisor has determined in ----------------------------- good faith that the investment ------------------------------ provides MBIA Corp. with a -------------------------- rate of return comparable to ---------------------------- similar investments. ------------------- (xvi) Equity-linked debt instruments $100 million In Aggregate rated A or better by at least one nationally recognized domestic rating agency with a maturity no greater than 10 years or equity-index investments. Equity index must be nationally recognized, such as the S&P 500. (xvii) Reverse repurchase 5% of Assets In Aggregate agreements with a bank or (greater amount
6 registered broker-dealer. permitted with written authorization from (a) Maximum term of one MBIA Corp.) year. 3% of Assets Per Bank or (b) For liquidity purposes and Broker-Dealer not for yield enhancement. (c) May be executed only with primary dealers rated Al/Pi or better. 7 Type of Obligation Limitation Basis ------------------ ---------- ----- (d) PSA Master Repurchase Agreement must be executed prior to any transaction. (e) Transaction must be executed using the Fed wire-book entry system. (xviii) Repurchase and/or reverse Subject to New Statutory admitted repurchase agreements with York Insurance assets. MBIA affiliated entities. Department restrictions and (a) Maximum term of one approved operating year. procedures. b) PSA Master Repurchase Agreement must be executed prior to any transaction. ************** This Statement of investment Objective & Guidelines shall remain in effect until revised or amended by action of the MBIA Corp. Board of Directors, in accordance with its by-laws. 8 Section III. Specific Instructions for Taxable Fixed-Income Investments ---------------------------------------------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for taxable fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp., its investment advisor; it being understood that these instructions set forth in this Section III. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. A. Maturity -------- The maximum allowable average duration is 7.5 years; minimum duration is 5.0 years. B. Quality ------- Minimum average quality of total portfolio, "A." Minimum purchase quality, "BBB+." Maximum of investments held rated less than "A-," 4 percent. Minimum holding quality, "BBB-." 9 Section IV. Specific Instructions for Tax-Exempt Fixed-Income Investments ------------------------------------------------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for tax-exempt fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp., its investment advisor; it being understood that the instructions set forth in this Section IV. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. Minimum average quality for the tax-exempt portfolio is "AA." Minimum purchase quality for the tax-exempt portfolio is "BBB." Minimum holding quality for the taxable portfolio is investment grade, unless specific waiver of this limit is obtained from MBIA Corp. Maximum of investments held rated less than A-, 10 percent, unless specific waiver of this limit is obtained from MBIA Corp. 10 EX-10.57 5 AGREEMENT & PLAN OF MERGER EXHIBIT 10.57 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER AMONG MBIA INC. CMA ACQUISITION CORPORATION AND CAPMAC HOLDINGS INC. DATED AS OF NOVEMBER 13, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER SECTION 1.1 The Merger................................................. A-1 SECTION 1.2 Effective Time............................................. A-1 SECTION 1.3 Effects of the Merger...................................... A-1 SECTION 1.4 Certificate of Incorporation; By-Laws...................... A-1 SECTION 1.5 Directors and Officers..................................... A-2 SECTION 1.6 Conversion of Securities................................... A-2 SECTION 1.7 Treatment of Options....................................... A-2 SECTION 1.8 Fractional Interests....................................... A-3 SECTION 1.9 Surrender of Shares; Stock Transfer Books.................. A-3 SECTION 1.10 Closing and Closing Date................................... A-4 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 2.1 Organization............................................... A-5 SECTION 2.2 Capitalization............................................. A-5 SECTION 2.3 Company Subsidiaries....................................... A-6 Corporate Authorization; Validity of Agreement; Company SECTION 2.4 Action..................................................... A-6 SECTION 2.5 Consents and Approvals; No Violations...................... A-6 SECTION 2.6 SEC Reports and Financial Statements....................... A-7 SECTION 2.7 Absence of Certain Changes................................. A-8 SECTION 2.8 Absence of Undisclosed Liabilities......................... A-8 SECTION 2.9 Information Supplied....................................... A-8 SECTION 2.10 Employee Benefit Plans..................................... A-9 SECTION 2.11 Compliance................................................. A-9 SECTION 2.12 No Default................................................. A-9 SECTION 2.13 Investment Advisor; Investment Company..................... A-10 SECTION 2.14 Absence of Litigation...................................... A-10 SECTION 2.15 Taxes...................................................... A-10 SECTION 2.16 Opinion of Financial Advisors.............................. A-11 SECTION 2.17 Accounting Matters......................................... A-11 SECTION 2.18 Tax Matters................................................ A-11 SECTION 2.19 Brokers.................................................... A-11 SECTION 2.20 Ownership of Parent Common Stock........................... A-11 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB SECTION 3.1 Organization............................................... A-11 SECTION 3.2 Capitalization............................................. A-11 SECTION 3.3 Parent Subsidiaries........................................ A-12 Corporate Authorization; Validity of Agreement; Necessary SECTION 3.4 Action..................................................... A-12 SECTION 3.5 Consents and Approvals; No Violations...................... A-13 SECTION 3.6 SEC Reports and Financial Statements....................... A-13
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PAGE ---- SECTION 3.7 Absence of Certain Changes................................. A-14 SECTION 3.8 Absence of Undisclosed Liabilities......................... A-14 SECTION 3.9 Information Supplied....................................... A-14 SECTION 3.10 Compliance................................................. A-14 SECTION 3.11 No Default................................................. A-15 SECTION 3.12 Investment Advisor; Investment Company..................... A-15 SECTION 3.13 Absence of Litigation...................................... A-15 SECTION 3.14 Taxes...................................................... A-15 SECTION 3.15 Opinion of Financial Advisors.............................. A-16 SECTION 3.16 Ownership of Company Common Stock.......................... A-16 SECTION 3.17 Accounting Matters......................................... A-16 SECTION 3.18 Tax Matters................................................ A-16 SECTION 3.19 Brokers.................................................... A-16 ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER SECTION 4.1 Conduct of Business of the Company Pending the Merger...... A-16 SECTION 4.2 Conduct of Business of Parent Pending the Merger........... A-18 SECTION 4.3 Pooling and Tax-Free Reorganization Treatment.............. A-18 ARTICLE V ADDITIONAL AGREEMENTS Preparation of Form S-4 and the Proxy Statement; SECTION 5.1 Stockholder Meetings....................................... A-19 SECTION 5.2 Accountants' Letters....................................... A-19 SECTION 5.3 Access to Information; Confidentiality..................... A-20 SECTION 5.4 No Solicitation of Transactions............................ A-20 SECTION 5.5 Employee Benefits Matters.................................. A-21 SECTION 5.6 Directors' and Officers' Indemnification and Insurance..... A-22 SECTION 5.7 Further Action; Reasonable Best Efforts.................... A-22 SECTION 5.8 Public Announcements....................................... A-23 SECTION 5.9 Stock Exchange Listing..................................... A-23 SECTION 5.10 Affiliates................................................. A-23 ARTICLE VI CONDITIONS OF MERGER Conditions to Obligation of Each Party to Effect the SECTION 6.1 Merger..................................................... A-24 Conditions to Obligations of the Company to Effect the SECTION 6.2 Merger..................................................... A-24 Conditions to Obligations of Parent and Sub to Effect the SECTION 6.3 Merger..................................................... A-25 ARTICLE VII TERMINATION, AMENDMENT AND WAIVER SECTION 7.1 Termination................................................ A-25 SECTION 7.2 Effect of Termination...................................... A-26
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PAGE ---- SECTION 7.3 Fees and Expenses............................................ A-26 SECTION 7.4 Amendment.................................................... A-27 SECTION 7.5 Waiver....................................................... A-27 ARTICLE VIII GENERAL PROVISIONS SECTION 8.1 Non-Survival of Representations, Warranties and Agreements... A-27 SECTION 8.2 Notices...................................................... A-27 SECTION 8.3 Certain Definitions.......................................... A-28 SECTION 8.4 Severability................................................. A-28 SECTION 8.5 Entire Agreement; Assignment................................. A-28 SECTION 8.6 Parties in Interest.......................................... A-29 SECTION 8.7 Governing Law................................................ A-29 SECTION 8.8 Headings..................................................... A-29 SECTION 8.9 Counterparts................................................. A-29
Exhibit A--Form of Affiliate Letter iii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of November 13, 1997 (the "Agreement''), among MBIA INC., a Connecticut corporation ("Parent''), CMA ACQUISITION CORPORATION, a Delaware corporation and a wholly owned subsidiary of Parent ("Sub''), and CAPMAC HOLDINGS INC., a Delaware corporation (the "Company''). WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and the stockholders of the Company to enter into this Agreement with Parent and Sub, providing for the merger (the "Merger'') of Sub with the Company in accordance with the General Corporation Law of the State of Delaware ("DGCL''), upon the terms and subject to the conditions set forth herein; WHEREAS, the Board of Directors of Parent and Sub has each approved the Merger of Sub with and into the Company in accordance with the DGCL upon the terms and subject to the conditions set forth herein; WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code''); and WHEREAS, for accounting purposes, it is intended that the Merger shall be accounted for as a "pooling of interests". NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Sub and the Company hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions of this Agreement and in accordance with the DGCL, at the Effective Time (as defined in Section 1.2), Sub shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation''). At Parent's election, any direct wholly-owned subsidiary of Parent other than Sub may be merged with and into the Company instead of Sub. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election. SECTION 1.2 Effective Time. As soon as practicable after the satisfaction or waiver of the conditions set forth in Article VI, the parties hereto shall cause the Merger to be consummated by filing this Agreement or a certificate of merger or a certificate of ownership and merger (the "Certificate of Merger'') with the Secretary of State of the State of Delaware, in such form as required by and executed in accordance with the relevant provisions of the DGCL (the date and time of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (or such later time as is specified in the Certificate of Merger) being the "Effective Time''). SECTION 1.3 Effects of the Merger. The Merger shall have the effects set forth in the applicable provisions of the DGCL. Without limiting the generality of the foregoing and subject thereto, at the Effective Time all the property, rights, privileges, immunities, powers and franchises of the Company and Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Sub shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.4 Certificate of Incorporation; By-Laws. (a) At the Effective Time and without any further action on the part of the Company and Sub, the Restated Certificate of Incorporation of the Company (as amended, the "Certificate of Incorporation''), as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the Surviving Corporation until thereafter and further amended as provided therein and under the DGCL. A-1 (b) At the Effective Time and without any further action on the part of the Company and Sub, the By-Laws of Sub shall be the By-Laws of the Surviving Corporation and thereafter may be amended or repealed in accordance with their terms or the Certificate of Incorporation of the Surviving Corporation and as provided by law. SECTION 1.5 Directors and Officers. The directors of Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed (as the case may be) and qualified. SECTION 1.6 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Sub, the Company or the holders of any of the following securities: (a) Subject to Section 1.8, each share of common stock, par value $.01 per share, of the Company (the "Company Common Stock'') issued and outstanding immediately prior to the Effective Time (other than any shares of Company Common Stock to be cancelled pursuant to Section 1.6(b)) shall be converted into the right to receive a fraction equal to the Exchange Ratio (as defined below) of a share of common stock, par value $1.00 per share, of Parent (the "Parent Common Stock'') (the amount of Parent Common Stock into which each such share of Company Common Stock is converted being referred to herein as the "Merger Consideration''). For purposes of this Agreement, "Exchange Ratio'' means $35.00 divided by the Parent Common Stock Price (as defined below), rounded to the nearest 1/10,000, provided that (i) if the Parent Common Stock Price is less than $53.00, the Exchange Ratio shall be equal to .6604 and (ii) if the Parent Common Stock Price is more than $70.00, the Exchange Ratio shall be equal to .5. "Parent Common Stock Price'' means the average of the closing sales prices of Parent Common Stock on the New York Stock Exchange ("NYSE'') Composite Transactions Tape as reported by The Wall Street Journal (or if not reported thereby, any other authoritative source) on each of the 15 consecutive trading days immediately preceding the third trading day prior to the Effective Time. As of the Effective Time, all such shares of Company Common Stock shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Company Common Stock shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration and any cash in lieu of fractional shares of Parent Common Stock to be issued or paid in consideration therefor upon surrender of such certificate in accordance with Section 1.9, without interest. (b) Each share of Company Common Stock held in the treasury of the Company and each share of Company Common Stock owned by Parent, Sub or any other direct or indirect subsidiary of Parent or of the Company, in each case immediately prior to the Effective Time, shall be cancelled and retired without any conversion thereof and no payment or distribution shall be made with respect thereto. (c) Each share of common, preferred or other capital stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of identical common, preferred or other capital stock of the Surviving Corporation. SECTION 1.7 Treatment of Options. (a) At the Effective Time, each outstanding stock option and any related stock appreciation right granted to employees and non-employee directors of the Company and its subsidiaries with respect to Company Common Stock (together, an "Option''), whether or not then exercisable, shall be deemed assumed by Parent and deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such Option prior to the Effective Time, the number (rounded to the nearest whole number) of shares of Parent Common Stock as the holder of such Option would have been entitled to receive pursuant to the Merger had such holder exercised such Option in full immediately prior to the Effective Time (not taking into account whether or not such Option was in fact exercisable), at a price per share equal to (x) the aggregate price for Company Common Stock otherwise purchasable pursuant to such Option divided by (y) the number of shares of Parent Common Stock deemed purchasable pursuant to such Option. A-2 (b) As soon as practicable after the Effective Time, Parent shall deliver to each holder of an outstanding Option an appropriate notice setting forth such holder's rights pursuant thereto, and such Option shall continue in effect on the same terms and conditions (including antidilution provisions). (c) Parent shall take all corporation action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery pursuant to the terms set forth in this Section 1.7. (d) Subject to any applicable limitations under the Securities Act of 1933, as amended (the "Securities Act''), Parent shall either (i) file a registration statement on Form S-8 (or any successor form), effective as of the Effective Time, with respect to the shares of Parent Common Stock issuable upon exercise of the Options, or (ii) file any necessary amendments to the Company's previously filed registration statements on Form S-8 in order that Parent will be deemed a "successor registrant" thereunder, and in either event Parent shall use all reasonable efforts to maintain the effectiveness of such registration statement(s) (and maintain the current status of the prospectus or prospectuses relating thereto) for so long as such Options remain outstanding. SECTION 1.8 Fractional Interests. No certificates or scrip representing fractional shares of Parent Common Stock shall be issued in connection with the Merger, and such fractional interests will not entitle the owner thereof to any rights of a stockholder of Parent. In lieu of any such fractional interests, each holder of shares of Company Common Stock exchanged pursuant to Section 1.6(a) who would otherwise have been entitled to receive a fraction of a share of Parent Common Stock (after taking into account all shares of Company Common Stock then held of record by such holder) shall receive cash (without interest) in an amount equal to the product of such fractional part of a share of Parent Common Stock multiplied by the Parent Common Stock Price, rounded down to the nearest cent. SECTION 1.9 Surrender of Shares; Stock Transfer Books. (a) As of or as soon as reasonably practicable after the Effective Time, Sub shall designate a bank or trust company who shall be reasonably satisfactory to the Company to act as agent for the holders of shares of Company Common Stock in connection with the Merger (the "Exchange Agent'') to receive the shares of Parent Common Stock (and any cash payable in lieu of any fractional shares of Parent Common Stock) to which holders of shares of Company Common Stock shall become entitled pursuant to Sections 1.6(a) and 1.8. As soon as reasonably practicable as of or after the Effective Time, Parent or Sub will make available to the Exchange Agent sufficient shares of Parent Common Stock and cash to make all exchanges pursuant to Section 1.9(b). (b) Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each record holder, as of the Effective Time, of an outstanding certificate or certificates which immediately prior to the Effective Time represented shares of Company Common Stock (the "Certificates''), a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent) and instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock therefor. Upon surrender to the Exchange Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor, (i) a certificate representing that number of whole shares of Parent Common Stock which such holder has the right to receive pursuant to the provisions of Section 1.6(a) and (ii) cash in lieu of any fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 1.8, after giving effect to any required tax withholdings, and the Certificate so surrendered shall forthwith be cancelled. If the exchange of certificates representing shares of Parent Common Stock is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the exchange of certificates representing shares of Parent Common Stock to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. A-3 (c) At any time following one year after the Effective Time, the Surviving Corporation shall be entitled to require the Exchange Agent to deliver to it any shares of Parent Common Stock (and any cash payable in lieu of any fractional shares of Parent Common Stock) which had been made available to the Exchange Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the shares of Parent Common Stock (and any cash payable in lieu of any fractional shares of Parent Common Stock) payable upon due surrender of their Certificates. Notwithstanding the foregoing, neither the Surviving Corporation nor the Exchange Agent shall be liable to any holder of a Certificate for shares of Parent Common Stock (and any cash payable in lieu of any fractional shares of Parent Common Stock) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by the Company on such shares of Company Common Stock in accordance with the terms of this Agreement or prior to the date of this Agreement and which remain unpaid at the Effective Time. (d) At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares of Company Common Stock except as otherwise provided for herein or by applicable law, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by the Company Common Stock in accordance with the terms of this Agreement or prior to the date of this Agreement and which remain unpaid at the Effective Time. (e) No dividends or other distributions declared or made after the Effective Time with respect to shares of Parent Common Stock shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock it is entitled to receive and no cash payment in lieu of fractional interests shall be paid pursuant to Section 1.8 until the holder of such Certificate shall surrender such Certificate in accordance with the provisions of this Agreement. Upon such surrender, there shall be paid to the person in whose name the certificates representing such shares of Parent Common Stock shall be issued, any dividends or distributions with respect to such shares of Parent Common Stock which have a record date after the Effective Time and shall have become payable between the Effective Time and the time of such surrender. In no event shall the person entitled to receive such dividends or distributions be entitled to receive interest thereon. (f) If between the date hereof and the Effective Time, the outstanding shares of Company Common Stock or Parent Common Stock shall be changed into a different number of shares by reason of any reclassification, recapitalization, split-up, combination or exchange of shares, or any dividend payable in stock or other securities shall be declared thereon with a record date within such period, the Exchange Ratio shall be adjusted accordingly to provide to the holders of Company Common Stock and Parent Common Stock the same economic effect as contemplated by this Agreement prior to such reclassification, recapitalization, split-up, combination, exchange or dividend. SECTION 1.10 Closing and Closing Date. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to the provisions of Section 7.1, the closing (the "Closing'') of this Agreement shall take place (a) at 10:00 a.m. (New York City time) on the second business day after all of the conditions to the respective obligations of the parties set forth in Article VI hereof shall have been satisfied or waived or (b) at such other time and date as Parent and the Company shall agree (such date and time on and at which the Closing occurs being referred to herein as the "Closing Date''). The Closing shall take place at such location as Parent and the Company shall agree. A-4 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Sub as follows: SECTION 2.1 Organization. Each of the Company and its Significant Subsidiaries (as defined in Section 8.3) is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, and has all requisite corporate or other power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect (as defined below) on the Company and its subsidiaries, taken as a whole. Each of the Company and its Significant Subsidiaries is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. The Company has heretofore furnished to Parent a complete and correct copy of the Certificate of Incorporation and Amended and Restated By-Laws of the Company as currently in effect. As used in this Agreement, "Material Adverse Effect'' means any adverse change or effect that is materially adverse to the financial condition, results of operations, assets, liabilities or business of a person or on the ability of such person to perform its obligations hereunder, but shall exclude any change or effect resulting from any occurrence or condition generally affecting the industry in which such person and its subsidiaries operate (including without limitation any change or proposed change in insurance laws or regulations in any jurisdiction or official interpretations thereof) and any occurrence or condition arising out of the transactions contemplated by this Agreement or the public announcement thereof. SECTION 2.2 Capitalization. (a) The authorized capital stock of the Company consists of 50,000,000 shares of Company Common Stock and 20,000,000 shares of preferred stock, par value $.01 per share. As of October 31, 1997, (i) 17,331,104 shares of Company Common Stock were issued and outstanding, (ii) 85 shares of Company Common Stock were held in the treasury of the Company, (iii) options to acquire an aggregate of 2,628,017 shares of Company Common Stock were outstanding pursuant to Options and (iv) no shares of preferred stock were issued and outstanding. All the outstanding shares of the Company's capital stock are duly authorized, validly issued, fully paid and non- assessable and not subject to preemptive rights. There are no bonds, debentures, notes or other indebtedness having voting rights (or convertible into securities having such rights) ("Voting Debt'') of the Company or any of its subsidiaries issued and outstanding. Except as set forth above, as set forth in Section 2.2(a) of the disclosure schedule delivered by the Company to Parent on or prior to the date hereof (the "Company Disclosure Schedule'') and for the transactions contemplated by this Agreement, (i) there are no shares of capital stock of the Company authorized, issued or outstanding and (ii) there are no existing options, warrants, calls, preemptive rights, subscriptions or other rights, proxies, convertible securities, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company or any of its subsidiaries, obligating the Company or any of its subsidiaries to issue, redeem, purchase, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or any of its subsidiaries or securities convertible into or exchangeable for such shares or equity interests or obligations of the Company or any of its subsidiaries to grant, extend or enter into any such option, warrant, call, subscription or other right, convertible security, agreement, arrangement or commitment. (b) Except as set forth in Section 2.2(b) of the Company Disclosure Schedule, all of the outstanding shares of capital stock of each of the Company's subsidiaries are beneficially owned by the Company, directly or A-5 indirectly, and all such shares have been validly issued and are fully paid and nonassessable and are owned by either the Company or one of its subsidiaries free and clear of all liens, charges, security interests, options, claims or encumbrances of any nature whatsoever (collectively, "Liens''). SECTION 2.3 Company Subsidiaries. (a) Section 2.3(a) of the Company Disclosure Schedule sets forth the name of each of the Company's subsidiaries that is an insurance company (collectively, the "Company Insurance Subsidiaries''). Each of the Company Insurance Subsidiaries is (i) duly licensed or authorized as an insurance company in its jurisdiction of incorporation and (ii) duly licensed or authorized as an insurance company in each other jurisdiction where it is required to be so licensed or authorized, except where the failure to be so licensed or authorized would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. (b) Except for the Company's subsidiaries and except as set forth on Section 2.3(b) of the Company Disclosure Schedule, the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity that directly or indirectly conducts any activity which is material to the Company. SECTION 2.4 Corporate Authorization; Validity of Agreement; Company Action. (a) The Company has full corporate power and authority to execute and deliver this Agreement and, subject to obtaining, with respect to the Merger, the approval of this Agreement by the holders of a majority of the outstanding shares of Company Common Stock (the "Company Stockholder Approval''), to consummate the transactions contemplated hereby. The execution, delivery and performance by the Company of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly and validly authorized by its Board of Directors and, except for obtaining the Company Stockholder Approval and the filing of the Certificate of Merger as required by the DGCL, no other corporate action or proceedings on the part of the Company are necessary to authorize the execution and delivery by the Company of this Agreement, and the consummation by it of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming this Agreement constitutes a valid and binding obligation of Parent and Sub, constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except that such enforcement (i) may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) is subject to general principles of equity. (b) The Board of Directors of the Company has duly and validly approved and taken all corporate action required to be taken by the Board of Directors for the consummation of the transactions contemplated by this Agreement, including, but not limited to, all actions necessary to render the provisions of Section 203 of the DGCL inapplicable to this Agreement. (c) The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock entitled to vote thereon is the only vote of the holders of any class or series of the Company's capital stock necessary to approve this Agreement, the Merger and the transactions contemplated hereby. SECTION 2.5 Consents and Approvals; No Violations. Except as set forth in Section 2.5 of the Company Disclosure Schedule and for all filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act (as defined herein), the Securities Act, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act''), state securities or "blue sky" laws, state takeover laws, state insurance regulatory laws and commissions, and for the filing and recordation of the Certificate of Merger as required by the DGCL and appropriate documents with the relevant authorities of other states in which the Company is qualified to do business, and except as may result from any facts or circumstances relating solely to Parent or Sub or its affiliates, neither the execution, delivery or performance of this Agreement nor the consummation by the Company of the transactions contemplated hereby nor compliance by the Company with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Amended and Restated By-laws or similar organizational A-6 documents of the Company or of any of its subsidiaries, (ii) require any filing with, or permit, authorization, consent or approval of, any court, or other governmental or other regulatory authority, commission or agency (a "Governmental Entity''), except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings would not reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole, and would not materially impair the ability of the Company to consummate the Merger or the other transactions contemplated hereby, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, loss or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, lease, license, contract, agreement or other similar instrument or obligation to which the Company or any of its Significant Subsidiaries is a party or by which any of them or any of their properties or assets may be bound, (iv) result in the creation or imposition of any Lien on any asset of the Company or any of the Company's subsidiaries or (v) violate any order, writ, injunction, decree, judgment, law, ordinance, statute, rule or regulation applicable to the Company, any of its Significant Subsidiaries or any of their properties or assets, except in the case of clauses (iii), (iv) and (v) for violations, breaches, defaults, or rights of termination, cancellation, loss or acceleration, or creations of Liens, which would not reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. SECTION 2.6 SEC Reports and Financial Statements. (a) The Company has filed with the SEC and has heretofore made available to Parent true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it and its subsidiaries since January 1, 1996 under the Securities Exchange Act of 1934, as amended (the "Exchange Act''), and the Securities Act (as such documents have been amended since the time of their filing, together with all exhibits and schedules thereto collectively, the "Company SEC Documents''). As of their respective dates or, if amended, as of the date of the last such amendment, the Company SEC Documents (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied as to form in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. Each of the consolidated financial statements (including any related notes and schedules) included in the Company SEC Documents complies as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, has been prepared in accordance with generally accepted accounting principles ("GAAP'') applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto and except, in the case of unaudited interim financial statements, as permitted by Form 10-Q of the SEC) and fairly presents in all material respects the consolidated financial position and the consolidated results of operations and cash flows (and changes in financial position, if any) of the Company and its consolidated subsidiaries as of the dates thereof or for the periods presented therein (subject, in the case of unaudited interim financial statements, to normal year-end adjustments). All material agreements, contracts and other documents required to be filed as exhibits to any of the Company SEC Documents have been so filed. (b) The Annual Statement and Quarterly Statements of Capital Markets Assurance Corporation, a New York domiciled stock insurance company and a wholly owned subsidiary of the Company (the "Company Insurer''), as filed with the New York Superintendent of Insurance (the "New York Superintendent'') for the year ended December 31, 1996 (the "Company Annual Statutory Statement'') and the quarters ended March 31, 1997 and June 30, 1997 (the "Company Quarterly Statutory Statements''), respectively, together with all exhibits and schedules thereto (the Company Annual Statutory Statement and Company Quarterly Statutory Statements, together with all exhibits and schedules thereto, are referred to as the "Company Statutory Financial Statements''), have been prepared in all material respects in accordance with the accounting practices prescribed or permitted by the National Association of Insurance Commissioners (the "NAIC'') and the New York Insurance Department for purposes of financial reporting to the state's insurance regulators ("New York Statutory Accounting Principles''), and such accounting practices have been applied on a basis consistent with New York Statutory Accounting Principles throughout the periods involved, except as expressly set forth in the notes, A-7 exhibits or schedules thereto, and the Company Statutory Financial Statements present fairly in all material respects the financial position and the results of operations for the Company Insurer as of the dates and for the periods therein in accordance with New York Statutory Accounting Principles. The Company has heretofore made available to Parent true and complete copies of the Company Statutory Financial Statements. SECTION 2.7 Absence of Certain Changes. Except as disclosed in the Company SEC Documents filed and publicly available prior to the date of this Agreement (the "Company Filed SEC Documents'') or in Section 2.7 of the Company Disclosure Schedule and except as otherwise provided in or contemplated by this Agreement, since June 30, 1997, there has not occurred (i) any Material Adverse Effect on the Company and its subsidiaries, taken as a whole, (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the equity interests of the Company or any of its subsidiaries, other than regular quarterly cash dividends and dividends paid by wholly owned subsidiaries, (iii) (x) any granting by the Company or any of its subsidiaries to any executive officer or other employee of the Company or any of its subsidiaries of any increase in compensation, except in the ordinary course of business consistent with past practice or as was required under employment agreements in effect as of June 30, 1997, (y) any granting by the Company or any of its subsidiaries to any such executive officer of any increase in severance or termination plans, agreements or arrangements with any of their employees, except as part of a standard employment package to any person promoted or hired, or as was required under employment, severance or termination agreements in effect as of June 30, 1997, or (z) except for employment agreements in the ordinary course of business consistent with past practice with employees other than any executive officer of the Company, any entry by the Company or any of its subsidiaries into any employment, consulting, severance, termination or indemnification agreement with any such employee or executive officer or (iv) any change by the Company or any of its subsidiaries in accounting principles or methods, except insofar as may be required by a change in GAAP or New York Statutory Accounting Principles. Since July 1, 1997, the Company and its subsidiaries have conducted their respective businesses in the ordinary course consistent with past practice. SECTION 2.8 Absence of Undisclosed Liabilities. Except as disclosed in the Company SEC Documents filed prior to the date hereof or in Section 2.8 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries has incurred any liabilities or obligations (absolute, accrued, contingent or otherwise) which would be required to be reflected on a balance sheet or in the notes thereto prepared in accordance with GAAP applied on a consistent basis, other than liabilities or obligations for surety bonds incurred in the ordinary course of business and liabilities or obligations which would not, individually or in the aggregate, have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. SECTION 2.9 Information Supplied. None of the information supplied by the Company for inclusion or incorporation by reference in (i) the registration statement on Form S-4 to be filed with the SEC by Parent in connection with the issuance of shares of Parent Common Stock in the Merger, or any of the amendments or supplements thereto (collectively, the "Form S-4'') will, at the time the Form S-4 becomes effective under the Securities Act and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the proxy statement to be distributed in connection with the Company's meeting of stockholders to vote upon this Agreement or any of the amendments or supplements to such proxy statement (collectively, the "Proxy Statement''), will, at the date it is first mailed to the Company's stockholders and at the time of the meeting of the Company's stockholders held to vote on approval of this Agreement, be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Stockholders Meeting (as defined herein) which has become false or misleading, except that no representation is made by the Company with respect to statements made or incorporated by reference in the Form S-4 or the Proxy Statement based on information supplied by Parent or Sub specifically for inclusion or incorporation by reference in the Proxy Statement. The Proxy Statement and the Form S-4 will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder. A-8 SECTION 2.10 Employee Benefit Plans. (a) Except as set forth in the Company SEC Documents or in Section 2.10 of the Company Disclosure Schedule (the plans disclosed in such Section 2.10 or in the Company SEC Documents, being the "Company Plans''), the Company has no material "employee benefit plan" (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA'')), severance, change-in-control or employment plan, program or agreement, stock option, bonus plan, or incentive plan or program. Copies of the Company Plans (or, where the Company Plan is not written, a description thereof) have been or will be made available to Parent. (b) Each Company Plan has been administered and is in compliance with the terms of such Company Plan and all applicable laws, rules and regulations except where any failure to comply, either individually or in the aggregate, would result in liability that would not reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. (c) Except as set forth on Section 2.10(c) of the Company Disclosure Schedule, each Company Plan intended to be qualified has received a favorable determination from the Internal Revenue Service and to the Company's knowledge, nothing has occurred since that would adversely affect such qualification. (d) Except as set forth on Section 2.10(d) of the Company Disclosure Schedule: (i) no Company Plan is subject to Title IV of ERISA, and (ii) during the past five (5) years, neither the Company nor any member of its "Controlled Group" (defined as any organization which is a member of a controlled group of organizations within the meaning of Code sections 414(b), (c), (m) or (o)) has contributed to, or sponsored, any plan subject to Title IV of ERISA or incurred any Title IV liability which remains unsatisfied. (e) Except as set forth on Section 2.10(e) of the Company Disclosure Schedule, no litigation or administrative or other proceeding involving any Company Plans or other employment related matter is pending or, to the Company's knowledge, is threatened, except where an adverse determination, either individually or in the aggregate, would result in liability that would not reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. SECTION 2.11 Compliance. (a) Each of the Company and its subsidiaries has in effect all federal, state, local and foreign governmental approvals, authorizations, certificates, filings, franchises, licenses, notices, permits and rights ("Permits'') necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, and there has occurred no default under any such Permit, except for the lack of Permits or defaults under Permits which lack or default would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect of the Company and its subsidiaries, taken as a whole. Except as disclosed in the Company Filed SEC Documents, the Company and its subsidiaries are in compliance with all applicable statutes, laws, ordinances, rules, orders, decrees and regulations (including insurance laws and regulations) of any Governmental Entity, and all notices, reports, documents and other information required to be filed thereunder within the last three years were properly filed and were in compliance with such laws, except for noncompliance which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. The business of the Company and its subsidiaries has been and is being conducted in compliance with the Permits, except where noncompliance would not, individually or in the aggregate, have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. Except as disclosed in the Company Filed SEC Documents and except for routine examinations by state Governmental Entities charged with supervision of insurance companies ("Insurance Regulators''), as of the date of this Agreement, to the knowledge of the Company, no investigation by any Governmental Entity with respect to the Company or any of its subsidiaries is pending or threatened. SECTION 2.12 No Default. Except as set forth in the Company SEC Documents or Section 2.12 of the Company Disclosure Schedule, neither the Company nor its subsidiaries is in violation or breach of, or default under (and no event has occurred which with notice or the lapse of time or both would constitute a violation or breach of, or default under) any term, condition or provision of (a) its organizational documents, (b) any note, A-9 bond, mortgage, deed of trust, security interest, indenture, license, agreement, plan, contract, lease, commitment or other instrument or obligation to which the Company or its subsidiaries is a party or by which they or any of their properties or assets may be bound or affected, (c) any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or its subsidiaries or any of their properties or assets, or (d) any permit, license, governmental authorization, consent or approval necessary for the Company or its subsidiaries to conduct their respective businesses as currently conducted, except in the case of clauses (b), (c) and (d) above for breaches, defaults or violations which would not individually or in the aggregate have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. SECTION 2.13 Investment Advisor; Investment Company. Except as set forth in the Company SEC Documents or Section 2.13 of the Company Disclosure Schedule, neither the Company nor its subsidiaries conducts activities of an "investment advisor" as such term is defined in Section (a)(20) of the Investment Company Act of 1940, as amended (the "ICA"), whether or not registered under the Investment Advisers Act of 1940, as amended. Neither the Company nor its subsidiaries is an "investment company" as defined under the ICA, and neither the Company nor its subsidiaries sponsors any person that is such an investment company. SECTION 2.14 Absence of Litigation. Except as disclosed in the Company Filed SEC Documents, as of the date hereof, there is no suit, claim, action, proceeding or investigation (excluding those in the ordinary course of business relating to policies of insurance or reinsurance written by the Company and its subsidiaries) pending or, to the knowledge of the Company, threatened against the Company or any subsidiary, or any property or asset of the Company or any subsidiary, before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign, which, if adversely determined, would reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. Except as disclosed in the Company Filed SEC Documents, as of the date hereof, neither the Company nor any subsidiary nor any property or asset of the Company or any subsidiary is subject to any order, writ, judgment, injunction, decree, determination or award that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. SECTION 2.15 Taxes. The Company and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which the Company or any of its subsidiaries is or has been a member has timely filed all material Tax Returns required to be filed by it, has paid all Taxes shown thereon to be owing and has provided adequate reserves in its most recent financial statements for any Taxes that have not been paid for the periods covered by such financial statements. Except as disclosed in Section 2.15 of the Company Disclosure Schedule, none of the Company or its subsidiaries has granted any extension or waiver of the statute of limitations period applicable to any material Tax Return, which period (after giving effect to such extension or waiver) has not expired. Except as disclosed in Section 2.15 of the Company Disclosure Schedule, no audits or other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Tax Return of the Company and its subsidiaries as to which any taxing authority has asserted in writing any claim which, if adversely determined, individually or in the aggregate would have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. Except as disclosed in Section 2.15 of the Company Disclosure Schedule, the Company and its subsidiaries have not received any notice of deficiency or assessment from any taxing authority with respect to liabilities for income and other material Taxes which have not been fully paid or finally settled. There are no liens with respect to Taxes upon any of the properties or assets of the Company or its subsidiaries other than liens for Taxes not yet due and payable. As used herein, "Taxes'' shall mean any taxes of any kind, including but not limited to those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, "Tax Return'' shall mean any return, report or statement required to be filed with any Governmental Entity with respect to Taxes. A-10 SECTION 2.16 Opinion of Financial Advisors. The Company has received an opinion from Salomon Brothers Inc to the effect that the consideration to be received by the stockholders of the Company pursuant to the Merger is fair to such stockholders from a financial point of view. SECTION 2.17 Accounting Matters. Neither the Company nor, to its knowledge, any of its affiliates, has taken or agreed to take any action that (without regard to any action taken or agreed to be taken by Parent or any of its affiliates) would prevent Parent from accounting for the business combination to be effected by the Merger as a "pooling of interests". SECTION 2.18 Tax Matters. To the Company's knowledge, neither the Company nor any of its affiliates has taken or agreed to take any action, or knows of any circumstances, that (without regard to any action taken or agreed to be taken by Parent or any of its affiliates) would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. SECTION 2.19 Brokers. No broker, finder or investment banker (other than Salomon Brothers Inc and SBC Warburg Dillon Read) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. SECTION 2.20 Ownership of Parent Common Stock. As of the date hereof, neither the Company nor, to its knowledge, any of its affiliates or associates (as such terms are defined under the Exchange Act), (i) beneficially owns, directly or indirectly, or (ii) is party to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, in each case, shares of capital stock of Parent or any securities convertible into or exercisable or exchangeable for capital stock of Parent, which in the aggregate represent 5% or more of the outstanding shares of such capital stock, after giving effect to the conversion, exercise or exchange of all such securities beneficially owned by the Company and its affiliates or associates which are convertible into or exercisable or exchangeable for capital stock of Parent. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub represent and warrant to the Company as follows: SECTION 3.1 Organization. Each of Parent, its Significant Subsidiaries and Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. Each of Parent, its Significant Subsidiaries and Sub is duly qualified or licensed to do business and in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except where the failure to be so duly qualified or licensed and in good standing would not, individually or in the aggregate reasonably be expected to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. Sub has not heretofore conducted any business other than in connection with this Agreement and the transactions contemplated hereby. Parent has heretofore furnished to the Company a complete and correct copy of the Restated Certificate of Incorporation and By-Laws of Parent and the Certificate of Incorporation and By-Laws of Sub, each as currently in effect. SECTION 3.2 Capitalization. (a) The authorized capital stock of Parent consists of 200,000,000 shares of Parent Common Stock and 10,000,000 shares of preferred stock, par value $1.00 per share. As of October 31, A-11 1997, (i) 89,366,104 shares of Parent Common Stock were issued and outstanding, (ii) no shares of Parent Common Stock were held in the treasury of Parent, (iii) options to acquire an aggregate of 2,457,536 shares of Parent Common Stock were outstanding pursuant to Parent's stock option plans (the "Parent Stock Plans'') and (iv) no shares of preferred stock were issued and outstanding. All the outstanding shares of Parent's capital stock are duly authorized, validly issued, fully paid and non-assessable. There is no Voting Debt of Parent or any of its subsidiaries issued and outstanding. Except as set forth above, as set forth in Section 3.2(a) of the disclosure schedule delivered by Parent to the Company on or prior to the date hereof (the "Parent Disclosure Schedule''), and for the transactions contemplated by this Agreement, (i) there are no shares of capital stock of Parent authorized, issued or outstanding and (ii) there are no existing options, warrants, calls, preemptive rights, subscriptions or other rights, proxies, convertible securities, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of Parent or any of its subsidiaries, obligating Parent or any of its subsidiaries to issue, redeem, purchase, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, Parent or any of its subsidiaries or securities convertible into or exchangeable for such shares or equity interests or obligations of Parent or any of its subsidiaries to grant, extend or enter into any such option, warrant, call, subscription or other right, convertible security, agreement, arrangement or commitment. (b) Except as set forth in Section 3.2(b) of the Parent Disclosure Schedule, all of the outstanding shares of capital stock of each of Parent's subsidiaries are beneficially owned by Parent, directly or indirectly, and all such shares have been validly issued and are fully paid and nonassessable and are owned by either Parent or one of its subsidiaries free and clear of all Liens, except where the failure to own such shares free and clear would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. (c) The authorized capital stock of Sub consists of 1000 shares of common stock, par value $.01 per share, all of which have been validly issued and are fully paid and nonassessable and are owned by Parent, free and clear of all Liens, and as of the Closing Date, all the issued and outstanding shares of the common stock of Sub will be owned by Parent free and clear of all Liens. SECTION 3.3 Parent Subsidiaries. Each of Parent's subsidiaries that is an insurance company (collectively, the "Parent Insurance Subsidiaries'') is (i) duly licensed or authorized as an insurance company in its jurisdiction of incorporation and (ii) duly licensed or authorized as an insurance company in each other jurisdiction where it is required to be so licensed or authorized, except where the failure to be so licensed or authorized would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. SECTION 3.4 Corporate Authorization; Validity of Agreement; Necessary Action. (a) Each of Parent and Sub has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance by each of Parent and Sub of this Agreement and the consummation by each of Parent and Sub of the transactions contemplated hereby have been duly and validly authorized by its Board of Directors, and, except for the filing of the Certificate of Merger as required by the DGCL, no other corporate action or proceedings on the part of Parent and Sub are necessary to authorize the execution and delivery by Parent and Sub of this Agreement, and the consummation by Parent and Sub of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and Sub, and, assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding obligation of each of Parent and Sub, enforceable against each of them in accordance with its terms, except that such enforcement (i) may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) is subject to general principles of equity. (b) This Agreement has been approved by Parent, as the sole stockholder of Sub. No other vote of holders of any class or series of capital stock of Parent or Sub is necessary to approve this Agreement, the Merger and the transactions contemplated hereby. A-12 SECTION 3.5 Consents and Approvals; No Violations. Except for all filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Exchange Act, the Securities Act, the DGCL, the HSR Act, state securities or "blue sky" laws, state takeover laws and state insurance regulatory laws and commissions, and except as may result from any facts or circumstances relating solely to the Company or its affiliates, neither the execution, delivery or performance of this Agreement by Parent and Sub nor the consummation by Parent and Sub of the transactions contemplated hereby nor compliance by Parent and Sub with any of the provisions hereof will (i) conflict with or result in any breach of any provision of the certificate of incorporation or by-laws of Parent, any of its subsidiaries or Sub, (ii) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings would not reasonably be expected to have a Material Adverse Effect on Parent and its subsidiaries taken as a whole and would not materially impair the ability of Parent and Sub to consummate the Merger or the other transactions contemplated hereby, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, loss or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, guarantee, other evidence of indebtedness, lease, license, contract, agreement or other similar instrument or obligation to which Parent, any of its subsidiaries or Sub is a party or by which any of them or any of their properties or assets may be bound, (iv) result in the creation or imposition of any Lien on any asset of Parent or its subsidiaries or (v) violate any order, writ, injunction, decree, judgment, law, ordinance, statute, rule or regulation applicable to Parent, any of its Significant Subsidiaries or Sub or any of their properties or assets, except in the case of clauses (iii), (iv) and (v) for violations, breaches, defaults, or rights of termination, cancellation, loss or acceleration, or creations of Liens, which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. SECTION 3.6 SEC Reports and Financial Statements. (a) Parent has filed with the SEC and has heretofore made available to the Company true and complete copies of, all forms, reports, schedules, statements and other documents required to be filed by it and its subsidiaries since January 1, 1996 under the Exchange Act, and the Securities Act (as such documents have been amended since the time of their filing, together with all exhibits and schedules thereto collectively, the "Parent SEC Documents''). As of their respective dates or, if amended, as of the date of the last such amendment, the Parent SEC Documents (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (b) complied as to form in all material respects with the applicable requirements of the Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. Each of the consolidated financial statements (including any related notes and schedules) included in the Parent SEC Documents complies as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, has been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto and except, in the case of unaudited interim financial statements, as permitted by Form 10-Q of the SEC) and fairly presents in all material respects the consolidated financial position and the consolidated results of operations and cash flows (and changes in financial position, if any) of Parent and its consolidated subsidiaries as at the dates thereof or for the periods presented therein (subject, in the case of unaudited interim financial statements, to normal year-end adjustments). All material agreements, contracts and other documents required to be filed as exhibits to any of the Parent SEC Documents have been so filed. (b) The Annual Statement and Quarterly Statements of MBIA Insurance Corporation, a New York domiciled stock insurance company and a wholly owned subsidiary of Parent (the "Parent Insurer''), as filed with the New York Superintendent for the year ended December 31, 1996 (the "Parent Annual Statutory Statement'') and the quarters ended March 31, 1997 and June 30, 1997 (the "Parent Quarterly Statutory Statements''), respectively, together with all exhibits and schedules thereto (the Parent Annual Statutory Statement and Parent Quarterly Statutory Statements, together with all exhibits and schedules thereto, are referred to as the "Parent Statutory Financial Statements''), have been prepared in all material respects in A-13 accordance with the accounting practices prescribed or permitted by the NAIC and the New York Statutory Accounting Principles, and such accounting practices have been applied on a basis consistent with New York Statutory Accounting Principles throughout the periods involved, except as expressly set forth in the notes, exhibits or schedules thereto, and the Parent Statutory Financial Statements present fairly in all material respects the financial position and the results of operations for the Parent Insurer as of the dates and for the periods therein in accordance with New York Statutory Accounting Principles. Parent has heretofore made available to the Company true and complete copies of the Parent Statutory Financial Statements. SECTION 3.7 Absence of Certain Changes. Except as disclosed in the Parent SEC Documents filed and publicly available prior to the date of this Agreement (the "Parent Filed SEC Documents'') or in Section 3.7 of the Parent Disclosure Schedule and except as otherwise provided in or contemplated by this Agreement, since June 30, 1997, there has not occurred (i) any Material Adverse Effect on Parent and its subsidiaries, taken as a whole, (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the equity interests of Parent or any of its subsidiaries, other than regular quarterly cash dividends and dividends paid by wholly owned subsidiaries, (iii) (x) any granting by Parent or any of its subsidiaries to any executive officer or other employee of Parent or any of its subsidiaries of any increase in compensation, except in the ordinary course of business consistent with past practice or as was required under employment agreements in effect as of June 30, 1997, (y) any granting by Parent or any of its subsidiaries to any such executive officer of any increase in severance or termination plans, agreements or arrangements with any of their employees, except as part of a standard employment package to any person promoted or hired, or as was required under employment, severance or termination agreements in effect as of June 30, 1997, or (z) except for employment agreements in the ordinary course of business consistent with past practice with employees other than any executive officer of Parent, any entry by Parent or any of its subsidiaries into any employment, consulting, severance, termination or indemnification agreement with any such employee or executive officer or (iv) any change by Parent or any of its subsidiaries in accounting principles or methods, except insofar as may be required by a change in GAAP or New York Statutory Accounting Principles. Since July 1, 1997, Parent and its subsidiaries have conducted their respective businesses in the ordinary course consistent with past practice. SECTION 3.8 Absence of Undisclosed Liabilities. Except as disclosed in the Parent SEC Documents filed prior to the date hereof or in Section 3.8 of the Parent Disclosure Schedule, neither Parent nor any of its subsidiaries has incurred any liabilities or obligations (absolute, accrued, contingent or otherwise) which would be required to be reflected on a balance sheet or in the notes thereto prepared in accordance with GAAP applied on a consistent basis, other than liabilities or obligations for surety bonds incurred in the ordinary course of business and liabilities or obligations which would not, individually or in the aggregate, have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. SECTION 3.9 Information Supplied. None of the information supplied by Parent for inclusion or incorporation by reference in (i) the Form S-4 will, at the time the Form S-4 becomes effective under the Securities Act and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Proxy Statement will, at the date it is first mailed to the Company's stockholders and at the time of the Company Stockholders Meeting, be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Company Stockholders Meeting which has become false or misleading, except that no representation is made by Parent with respect to statements made or incorporated by reference therein based on information supplied by the Company specifically for inclusion or incorporation by reference in the Proxy Statement. The Form S-4 will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations thereunder. SECTION 3.10 Compliance. Each of Parent and its subsidiaries has in effect all federal, state, local and foreign governmental Permits necessary for it to own, lease or operate its properties and assets and to carry on A-14 its business as now conducted, and there has occurred no default under any such Permit, except for the lack of Permits or defaults under Permits which lack or default would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect of Parent and its subsidiaries, taken as a whole. Except as disclosed in the Parent Filed SEC Documents, Parent and its subsidiaries are in compliance with all applicable statutes, laws, ordinances, rules, orders, decrees and regulations (including insurance laws and regulations) of any Governmental Entity, and all notices, reports, documents and other information required to be filed thereunder within the last three years were properly filed and were in compliance with such laws, except for noncompliance which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. The business of Parent and its subsidiaries has been and is being conducted in compliance with the Permits, except where noncompliance would not, individually or in the aggregate, have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. Except as disclosed in the Parent Filed SEC Documents and except for routine examinations by Insurance Regulators, as of the date of this Agreement, to the knowledge of Parent, no investigation by any Governmental Entity with respect to Parent or any of its subsidiaries is pending or threatened. SECTION 3.11 No Default. Except as set forth in the Parent SEC Documents or Section 3.11 of the Parent Disclosure Schedule, neither Parent nor its subsidiaries is in violation or breach of, or default under (and no event has occurred which with notice or the lapse of time or both would constitute a violation or breach of, or default under) any term, condition or provision of (a) its organizational documents, (b) any note, bond, mortgage, deed of trust, security interest, indenture, license, agreement, plan, contract, lease, commitment or other instrument or obligation to which Parent or its subsidiaries is a party or by which they or any of their properties or assets may be bound or affected, (c) any order, writ, injunction, decree, statute, rule or regulation applicable to Parent or its subsidiaries or any of their properties or assets, or (d) any permit, license, governmental authorization, consent or approval necessary for Parent or its subsidiaries to conduct their respective businesses as currently conducted, except in the case of clauses (b), (c) and (d) above for breaches, defaults or violations which would not individually or in the aggregate have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. SECTION 3.12 Investment Advisor; Investment Company. Except as set forth in the Parent SEC Documents or Section 3.12 of the Parent Disclosure Schedule, neither Parent nor its subsidiaries conducts activities of an "investment advisor" as such term is defined in Section (a)(20) of the Investment Company Act of 1940, as amended (the "ICA"), whether or not registered under the Investment Advisers Act of 1940, as amended. Neither Parent nor its subsidiaries is an "investment company" as defined under the ICA, and neither Parent nor its subsidiaries sponsors any person that is such an investment company. SECTION 3.13 Absence of Litigation. Except as disclosed in the Parent Filed SEC Documents, as of the date hereof, there is no suit, claim, action, proceeding or investigation (excluding those in the ordinary course of business relating to policies of insurance or reinsurance written by Parent and its subsidiaries) pending or, to the knowledge of Parent, threatened against Parent or any subsidiary, or any property or asset of Parent or any subsidiary, before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign, which, if adversely determined, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. Except as disclosed in the Parent Filed SEC Documents, as of the date hereof, neither Parent nor any subsidiary nor any property or asset of Parent or any subsidiary is subject to any order, writ, judgment, injunction, decree, determination or award that would reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. SECTION 3.14 Taxes. Parent and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which Parent or any of its subsidiaries is or has been a member has timely filed all material Tax Returns required to be filed by it, has paid all Taxes shown thereon to be owing and has provided adequate reserves in its most recent financial statements for any Taxes that have not been paid for the periods covered by such financial statements. Except as disclosed in Section 3.14 of the Parent Disclosure A-15 Schedule, none of Parent or its subsidiaries has granted any extension or waiver of the statute of limitations period applicable to any material Tax Return, which period (after giving effect to such extension or waiver) has not expired. Except as disclosed in Section 3.14 of the Parent Disclosure Schedule, no audits or other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Tax Return of Parent and its subsidiaries as to which any taxing authority has asserted in writing any claim which, if adversely determined, individually or in the aggregate would have a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. Except as disclosed in Section 3.14 of the Parent Disclosure Schedule, Parent and its subsidiaries have not received any notice of deficiency or assessment from any taxing authority with respect to liabilities for income and other material Taxes which have not been fully paid or finally settled. There are no liens with respect to Taxes upon any of the properties or assets of Parent or its subsidiaries other than liens for Taxes not yet due and payable. SECTION 3.15 Opinion of Financial Advisors. Parent has received an opinion from Lehman Brothers Inc. to the effect that the Merger Consideration is fair to Parent from a financial point of view. SECTION 3.16 Ownership of Company Common Stock. As of the date hereof, neither Parent nor, to its knowledge, any of its affiliates or associates (as such terms are defined under the Exchange Act), (i) beneficially owns, directly or indirectly, or (ii) is party to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, in each case, shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for capital stock of the Company, which in the aggregate represent 5% or more of the outstanding shares of such capital stock, after giving effect to the conversion, exercise or exchange of all such securities beneficially owned by Parent and its affiliates or associates which are convertible into or exercisable or exchangeable for capital stock of the Company. SECTION 3.17 Accounting Matters. Neither Parent nor Sub, nor to Parent's knowledge, any affiliate of Parent, has taken or agreed to take any action that (without regard to any action taken or agreed to be taken by the Company or any of its affiliates) would prevent Parent from accounting for the business combination to be effected by the Merger as a "pooling of interests". SECTION 3.18 Tax Matters. To Parent's knowledge, neither Parent nor Sub, nor any affiliate of Parent, has taken or agreed to take any action, or knows of any circumstances, that (without regard to any action taken or agreed to be taken by the Company or any of its affiliates) would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. SECTION 3.19 Brokers. No broker, finder or investment banker (other than Lehman Brothers Inc.) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent. ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER SECTION 4.1 Conduct of Business of the Company Pending the Merger. The Company covenants and agrees that, during the period from the date hereof until the Effective Time, unless Parent shall otherwise agree in writing, except as contemplated by this Agreement, the businesses of the Company and its subsidiaries shall be conducted only in, and the Company and its subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and the Company and its subsidiaries shall each use its reasonable best efforts to preserve substantially intact the business organization of the Company and its subsidiaries, to keep available the services of the present key officers and employees of the Company and its subsidiaries and to preserve the present relationships and goodwill of the Company and its subsidiaries with those persons with which the Company or any of its subsidiaries has significant business relations. By way of A-16 amplification and not limitation, except as set forth in Section 4.1 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries shall, during such period, directly or indirectly do, or commit to do, any of the following without the prior written consent of Parent: (a) Amend or otherwise change its certificate of incorporation or by-laws or equivalent organizational documents; (b) Issue, sell, pledge, dispose of or encumber, or authorize, (A) any shares of capital stock, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest, of the Company or any of its subsidiaries (except for the issuance of up to 2,628,017 shares of Company Common Stock required to be issued pursuant to the terms of Options outstanding as of the date of this Agreement) or (B) any assets that are material to the Company or any of its subsidiaries, taken as whole except for sales in the ordinary course of business and in a manner consistent with past practice or as may be necessary to pay claims arising under insurance policies written or reinsured by the Company and its subsidiaries; (c) Declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock (other than regular quarterly cash dividends consistent with past practice, in an amount not to exceed $.02 per share); (d) Reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) Acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; or (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans, advances or capital contributions to, or investments in, any other person (other than in the ordinary course of business consistent with past practice and pursuant to existing credit agreements or arrangements); (f) Except to the extent required under existing employee and director benefit plans, agreements or arrangements as in effect on the date of this Agreement, increase the compensation or fringe benefits of any of its directors, officers or employees, except for increases in salary or wages of officers or employees in the ordinary course of business in accordance with past practice, or grant any severance or termination pay not currently required to be paid under existing severance plans to or enter into any employment, consulting or severance agreement or arrangement with any present or former director, officer or other employee of the Company or any of its subsidiaries, or establish, adopt, enter into or amend or terminate any collective bargaining agreement or Company Plan, including, but not limited to, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any directors, officers or employees. (Nothing in this Section 4.1(f) shall be construed to limit the Company's ability to pay annual bonuses for services rendered in 1997 in a manner consistent with past practices and in an amount not to exceed the amount set forth in Section 4.1 of the Company Disclosure Schedule); (g) Except as may be required as a result of a change in law or in GAAP or New York Statutory Accounting Principles, change any of the accounting practices or principles used by it; (h) Make any material tax election, amend any Tax Return or settle or compromise any material federal, state, local or foreign tax liability; (i) Settle or compromise any pending or threatened suit, action or claim which is material or which relates to the transactions contemplated hereby; (j) Pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the financial A-17 statements of the Company or incurred in the ordinary course of business and consistent with past practice, of liabilities required to be paid, discharged or satisfied pursuant to the terms of any contract in existence on the date hereof (including, without limitation, outstanding insurance policies); (k) (i) Take any action that would reasonably be expected to result in any of its representations or warranties set forth in this Agreement, being or becoming untrue in any material respect, (ii) omit, or agree to omit, to take any action that would reasonably be expected to prevent any such representation or warranty from being or becoming untrue in any material respect or (iii) take, or agree to take, any action that would reasonably be expected to result in any of the conditions of the Merger set forth in Article 6 not being satisfied; or (l) Take, or offer or propose to take, or agree to take in writing or otherwise, any of the actions described in Sections 4.1(a) through 4.1(k). SECTION 4.2 Conduct of Business of Parent Pending the Merger. Parent covenants and agrees that, during the period from the date hereof until the Effective Time, unless the Company shall otherwise agree in writing, except as contemplated by this Agreement, the businesses of Parent and its subsidiaries shall be conducted only in, and Parent and its subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and Parent and its subsidiaries shall each use its reasonable best efforts to preserve substantially intact the business organization of Parent and its subsidiaries, to keep available the services of the present key officers and employees of Parent and its subsidiaries and to preserve the present relationships of Parent and its subsidiaries with those persons with which Parent or any of its subsidiaries has significant business relations. By way of amplification and not limitation, except as set forth on Section 4.2 of the Parent Disclosure Schedule, neither Parent nor any of its subsidiaries shall, during such period, directly or indirectly do, or commit to do, any of the following without the prior written consent of the Company: (a) Amend or otherwise change its certificate of incorporation or by-laws or equivalent organizational documents; (b) Issue, sell, pledge, dispose of or encumber, or authorize, any shares of capital stock, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest, of Parent or any of its subsidiaries (except for the issuance of up to 2,457,536 shares of Parent Common Stock required to be issued pursuant to the terms of options outstanding as of the date of this Agreement); (c) Declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) Reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) Take any action that would reasonably be expected to result in any of its representations or warranties set forth in this Agreement, being or becoming untrue in any material respect, (ii) omit, or agree to omit, to take any action that would reasonably be expected to prevent any such representation or warranty from being or becoming untrue in any material respect or (iii) take, or agree to take, any action that would reasonably be expected to result in any of the conditions of the Merger set forth in Article 6 not being satisfied; or (f) Take, or offer or propose to take, or agree to take in writing or otherwise, any of the actions described in Sections 4.2(a) through 4.2(e). SECTION 4.3 Pooling and Tax-Free Reorganization Treatment. (a) Neither the Company nor Parent shall, or shall permit any of their respective subsidiaries to, take or cause to be taken any action that (without regard to any action taken or agreed to be taken by Parent or its affiliates or the Company or its affiliates, respectively) to its knowledge would reasonably be expected to adversely affect the ability of Parent to treat the Merger as a "pooling of interests" for accounting purposes. A-18 (b) Neither the Company nor Parent shall, or shall permit any of their respective subsidiaries to, take or cause to be taken any action that (without regard to any action taken or agreed to be taken by Parent or its affiliates or the Company or its affiliates, respectively) to its knowledge would reasonably be expected to adversely affect the ability of the Merger to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.1 Preparation of Form S-4 and the Proxy Statement; Stockholder Meetings. (a) Promptly following the date of this Agreement, the Company shall prepare and file with the SEC the Proxy Statement, and Parent shall prepare and file with the SEC the Form S-4, in which the Proxy Statement will be included as a prospectus. Each of the Company and Parent shall use its reasonable best efforts to have the Form S-4 declared effective under the Securities Act as promptly as practicable after such filing. The Company will use its reasonable best efforts to cause the Proxy Statement to be mailed to the Company's stockholders as promptly as practicable after the Form S-4 is declared effective under the Securities Act. Parent shall also take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified) required to be taken under any applicable state securities law in connection with the issuance of Parent Common Stock in the Merger, and the Company shall furnish all information concerning the Company and the holders of the Company Common Stock and rights to acquire Company Common Stock pursuant to the Company Plans as may be reasonably required in connection with any such action. Each of Parent and the Company shall furnish all information concerning itself to the other as may be reasonably requested in connection with any such action and the preparation, filing and distribution of the Form S-4 and the preparation, filing and distribution of the Proxy Statement. The Company, Parent and Sub each agree to correct any information provided by it for use in the Form S-4 or the Proxy Statement which shall have become false or misleading. (b) The Company, acting through its Board of Directors, shall, subject to and in accordance with applicable law and its Certificate of Incorporation and By-Laws, promptly and duly call, give notice of, convene and hold as soon as practicable following the date upon which the Form S-4 becomes effective a meeting of the holders of Company Common Stock for the purpose of voting to approve and adopt this Agreement and the transactions contemplated hereby (the "Company Stockholders Meeting''). The Board of Directors of the Company shall, (i) recommend approval and adoption of this Agreement and the transactions contemplated hereby, by the stockholders of the Company and include in the Proxy Statement such recommendation and (ii) take all reasonable and lawful action to solicit and obtain such approval, except, in the case of each of clauses (i) and (ii), to the extent the Board of Directors of the Company shall have withdrawn or modified its approval or recommendation of this Agreement or the Merger in a manner adverse to Parent or Sub as permitted by Section 5.4. SECTION 5.2 Accountants' Letters. (a) The Company shall use its reasonable best efforts to cause to be delivered to Parent a "comfort" letter of KPMG Peat Marwick LLP, the Company's independent public accountants, dated a date within two business days before the date on which the Form S-4 shall become effective and addressed to Parent, in form and substance reasonably satisfactory to Parent and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Form S-4. In connection with the Company's efforts to obtain such letter, if requested by KPMG Peat Marwick LLP, Parent shall provide a representation letter to KPMG Peat Marwick LLP, complying with the Statement on Auditing Standards No. 72 ("SAS 72''), if then required. (b) Parent shall use its reasonable best efforts to cause to be delivered to the Company a "comfort" letter of Coopers & Lybrand LLP, Parent's independent public accountants, dated a date within two business days before the date on which the Form S-4 shall become effective and addressed to the Company, in form and substance reasonably satisfactory to the Company and customary in scope and substance for letters delivered by A-19 independent public accountants in connection with registration statements similar to the Form S-4. In connection with Parent's efforts to obtain such letter, if requested by Coopers & Lybrand LLP, the Company shall provide a representation letter to Coopers & Lybrand LLP complying with SAS 72, if then required. SECTION 5.3 Access to Information; Confidentiality. From the date hereof to the Effective Time, the Company shall, and shall cause its subsidiaries, officers, directors, employees, auditors and other agents to, upon reasonable notice, afford the officers, employees, auditors and other agents of Parent, reasonable access, consistent with applicable law, at all reasonable times to its officers, employees, agents, properties, and offices, and to all books and records, and shall furnish Parent with all financial, operating and other data and information as Parent, through its officers, employees or agents, may from time to time reasonably request. All information obtained by or on behalf of Parent pursuant to this Section 5.3 shall be kept confidential in accordance with the Confidentiality Agreement dated September 24, 1997 between Parent and the Company (the "Confidentiality Agreement"). SECTION 5.4 No Solicitation of Transactions. (a) The Company shall, shall cause its subsidiaries to, and shall direct and use its best efforts to cause any officers, directors, employees, representatives and agents of the Company and its subsidiaries to immediately cease any existing discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. The term "Acquisition Proposal" shall mean any inquiry, proposal or offer from or to any person relating to (i) any merger, consolidation, share exchange, business combination or other similar transaction involving the Company or any of its subsidiaries; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 15% or more of the assets of the Company and its subsidiaries, taken as a whole, in a single transaction or in a series of transactions; (iii) any tender offer or exchange offer for 15% or more of the outstanding shares of capital stock of the Company or any of its subsidiaries, or the filing of a registration statement under the Securities Act in connection therewith; (iv) any person or group having acquired beneficial ownership of 15% or more of the outstanding shares of capital stock of the Company or any of its subsidiaries; or (v) any proposal, plan, or intention to do any of the foregoing, either publicly announced or otherwise communicated to the Company, or any agreement to engage in any of the foregoing. (b) Except as set forth in this Section 5.4, the Company shall not and shall not permit any of its subsidiaries to, and shall direct and cause the officers, directors, employees, representatives or agents of the Company or its subsidiaries not to, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or furnish any information or access to, any corporation, partnership, person or other entity or group (other than Parent and Sub, any affiliate or associate of Parent or Sub or any designees of Parent or Sub) concerning, or agree to or endorse any Acquisition Proposal. Notwithstanding the foregoing, the Company may, directly or indirectly, furnish information and access, in each case only in response to a written request for such information or access made after the date hereof by any person which was not encouraged, solicited or initiated by the Company or any of its officers, directors, employees, representatives or agents after the date hereof, and participate in discussions and negotiate with such person concerning any Acquisition Proposal, if, and only to the extent that (i) such person has submitted a bona fide definitive written Acquisition Proposal to the Board of Directors of the Company, (ii) the Board, after consultation with its independent financial advisors, determines that (x) the person making such Acquisition Proposal is reasonably capable of completing such Acquisition Proposal, taking into account the legal, financial, regulatory and other aspects of such Acquisition Proposal and the person making such Acquisition Proposal and (y) such Acquisition Proposal involves consideration to the Company's stockholders and other terms and conditions that, taken as a whole, are superior to the Merger (a proposal described in this clause (ii), a "Superior Proposal''), and (iii) the Board determines in good faith, based upon the advice of outside counsel to the Company, that taking any such action is necessary for the Board to comply with its fiduciary duty to stockholders under applicable law. (c) The Board of Directors of the Company shall not (i) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Parent or Sub, the approval or recommendation by such Board of Directors of this Agreement or the Merger, (ii) approve or recommend, or propose publicly to approve or A-20 recommend, any Acquisition Proposal or (iii) enter into any definitive agreement with respect to any Acquisition Proposal, unless, in the case of each of the foregoing clauses (i), (ii) and (iii), (A) the Company receives a bona fide definitive written Acquisition Proposal which is a Superior Proposal and was not solicited after the date hereof, (B) the Company's Board of Directors determines in good faith, based upon the advice of outside counsel to the Company, that it is necessary to comply with its fiduciary duties to stockholders under applicable law for the Board of Directors to approve or recommend such Acquisition Proposal and (C) Parent does not make within 5 business days of receipt of the Company's written notification of its intention to enter into a definitive agreement with respect to a Superior Proposal an offer that the Board of Directors of the Company determines in good faith, after consultation with its independent financial advisors, involves consideration to the Company's stockholders and other terms and conditions that, taken as a whole, are at least as favorable, from a financial point of view, to the stockholders of the Company as the Superior Proposal. If the Board has withdrawn or modified its approval or recommendation of this Agreement or the Merger and/or approved or recommended an Acquisition Proposal, in each case in conformity with the provisions of the preceding sentence, then the Company may terminate this Agreement pursuant to Section 7.1(d) and Parent may terminate this Agreement pursuant to Section 7.1(c). (d) Nothing contained in this Section 5.4 shall prevent the Board from taking, and disclosing to the Company's stockholders, a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender offer or from making any disclosure to the Company's stockholders if, in the good faith judgment of the Board of Directors, based upon the advice of outside counsel to the Company, such disclosure is required under applicable law; provided that, except as otherwise permitted in this Section 5.4, the Company does not approve or recommend, or propose to approve or recommend, an Acquisition Proposal. (e) Nothing contained in this Agreement or the Confidentiality Agreement shall be construed to prohibit Parent from making a competing proposal in response to any Acquisition Proposal. (f) The Company agrees not to release any third party from, or waive any provisions of, any confidentiality or standstill agreement to which the Company is a party, unless the Board shall have determined in good faith, based upon the advice of outside counsel, that releasing such third party or waiving such provisions is necessary to comply with the Board's fiduciary duties to the stockholders of the Company under applicable law. Notwithstanding anything contained in this Agreement to the contrary, any action by the Board of Directors permitted by this Section 5.4 shall not constitute a breach of this Agreement by the Company. SECTION 5.5 Employee Benefits Matters. (a) During the period from the Effective Time until the end of the twelfth month following the Effective Time, Parent shall maintain or cause to be maintained base salaries, bonus opportunities, employee pension and welfare plans for the benefit of employees and former employees of the Company or its subsidiaries, which are equal to or greater than those base salaries, bonus opportunities and other benefits provided under the Company Plans that are in effect on the date hereof. Prior to the Effective Time, Parent and the Company shall cooperate to facilitate a smooth transition with respect to the continued employment of Company employees and the Company shall permit Parent reasonable access to its employees to enable Parent to effect such transition. (b) Parent will, or will cause the Surviving Corporation to, (i) waive all limitations as to preexisting conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the employees of the Company under any welfare plan that such employees may be eligible to participate in after the Effective Time, (ii) provide each employee of the Company with credit for any co-payments and deductibles paid prior to the Effective Time in satisfying any applicable deductible or out-of-pocket requirements under any welfare plans that such employees are eligible to participate in after the Effective Time, and (iii) provide each employee of the Company with credit for all service with the Company and its affiliates under each employee benefit plan, program, or arrangement of the Sub or its affiliates in which such employees are eligible to participate; provided, however, that in no event shall the employees be entitled to any credit to the extent that it would result in a duplication of benefits with respect to the same period of service. A-21 SECTION 5.6 Directors' and Officers' Indemnification and Insurance. (a) The By-Laws of the Surviving Corporation shall contain provisions no less favorable with respect to indemnification than are set forth in the By-laws of the Company, which provisions shall not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at the Effective Time were directors, officers or employees of the Company. (b) Parent shall cause to be maintained in effect for six years from the Effective Time the current policies of the directors' and officers' liability insurance maintained by the Company (provided that Parent may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less advantageous) with respect to matters occurring prior to the Effective Time to the extent available or, if such coverage is not available, the best available coverage; provided, however, that in no event shall Parent or the Company be required to expend more than an amount per year equal to 200% of current annual premiums paid by the Company to maintain or procure insurance coverage pursuant hereto, but in such case shall purchase as much coverage as possible for such amount. (c) For six years after the Effective Time, Parent agrees that it will and it will cause the Surviving Corporation to indemnify and hold harmless each present and former director and officer of the Company, determined as of the Effective Time, against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs'') (but only to the extent such Costs are not otherwise covered by insurance and paid) incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to which such person was or is a party or is threatened to be made a party by reason of the fact that he was or is a director or officer of the Company, to the fullest extent permitted under applicable law (and Parent shall, or shall cause the Surviving Corporation to, also advance expenses as incurred to the fullest extent permitted under applicable law provided the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification). SECTION 5.7 Further Action; Reasonable Best Efforts. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall use its reasonable best efforts to take, or cause to be taken, all reasonably appropriate action, and to do or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as soon as practicable, including but not limited to (i) cooperation in the preparation and filing of the Proxy Statement, any required filings under the HSR Act, filings with the New York Superintendent or other state or foreign insurance commissions or regulations and any amendments to any thereof, (ii) using its reasonable best efforts to promptly make all required regulatory filings and applications including, without limitation, responding promptly to requests for further information and to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company and its subsidiaries as are necessary for the consummation of the transactions contemplated by this Agreement and to fulfill the conditions to the Merger, (iii) taking all actions which may be reasonably necessary to prevent any Governmental Entity from taking steps to obtain, or from issuing, any order, injunction, decree, judgment or ruling or the taking of any other action restraining, enjoining or otherwise prohibiting the Merger, including, without limitation, agreeing to effect such divestitures of assets or businesses of the Company or Parent, or agreeing to such limitations on the Company's or Parent's future operations, as may be necessary to forestall such order, decree, ruling or action, (iv) the Company and Parent each agreeing to take all actions which may be reasonably necessary to contest and resist any action seeking to have imposed any order, decree, judgment, injunction, ruling or other order (whether temporary, preliminary or permanent) (an "Order'') that would delay, restrain, enjoin or otherwise prohibit consummation of the Merger and in the event that any such temporary or preliminary Order is entered in any proceeding that would make consummation of the Merger in accordance with the terms of this Agreement unlawful or that would prevent or delay consummation of the Merger or the other transactions contemplated by this Agreement, to use its reasonable best efforts to take promptly any and all steps (including the appeal thereof, the posting of a bond or the taking of the steps A-22 contemplated by clause (i) of this paragraph) reasonably necessary to vacate, modify or suspend such Order so as to permit such consummation as promptly as practicable after the date hereof and (v) cooperation in connection with obtaining the opinions of special counsel described in Sections 6.2(c) and 6.3(c) including, without limitation, providing to special counsel, and, if required by counsel as necessary for purposes of such opinions, using reasonable efforts to cause each person who beneficially owns five percent or more of the outstanding shares of the Company Common Stock to provide to special counsel, such representation letters as are reasonably required by special counsel to enable them to render such opinions. Notwithstanding the foregoing, neither party shall be obligated to take any action pursuant to the foregoing if the taking of such action or such compliance or the obtaining of such consent, authorization, order, approval or exemption is likely, in such party's reasonable opinion, (x) to have a Material Adverse Effect on such party and its subsidiaries, taken as a whole, or to impact in a materially adverse manner the economic or business benefits of the transactions contemplated by this Agreement so as to render inadvisable the consummation of the Merger or (y) to impose on Parent or its subsidiaries or on the Company or its subsidiaries a requirement to dispose of any assets which individually or in the aggregate would be deemed to constitute a significant amount of assets, as the case may be, to Parent and its subsidiaries, taken as a whole, or to the Company and its subsidiaries, taken as a whole, under Instruction 4 of Item 2 of Form 8-K (any condition referred to in subsections (x) and (y) above, a "Material Condition''). In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such necessary action. (b) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of their subsidiaries, from any Governmental Entity with respect to the Merger or any of the other transactions contemplated by this Agreement. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any other antitrust law. SECTION 5.8 Public Announcements. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or any listing agreement with its securities exchange. SECTION 5.9 Stock Exchange Listing. Parent shall use its best efforts to have approved for listing on the NYSE prior to the Effective Time, subject to official notice of issuance, the Parent Common Stock to be issued pursuant to the Merger and under the Company Plans. SECTION 5.10 Affiliates. (a) Prior to the Closing Date, the Company shall deliver to Parent a letter identifying all persons who are, at the time this Agreement is submitted for approval to the stockholders of the Company, "affiliates" of the Company for purposes of Rule 145 under the Securities Act or for purposes of qualifying the Merger for "pooling of interests" accounting treatment under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations. The Company shall use its reasonable best efforts to cause each such person to deliver to Parent on or prior to the Closing Date a written agreement substantially in the form attached as Exhibit A hereto. (b) Prior to the Closing Date, Parent shall deliver to the Company a letter identifying all persons who are, at the time this Agreement is submitted for approval to the stockholders of the Company, "affiliates" for purposes of qualifying the Merger for "pooling of interests" accounting treatment under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations. Parent shall use its reasonable best efforts to cause all persons who are "affiliates" of Parent for purposes of qualifying the Merger for pooling of interests accounting treatment under Opinion 16 of the Accounting Principles Board and applicable SEC rules and regulations to comply with paragraph number 1, as applicable, of Exhibit A hereto. A-23 ARTICLE VI CONDITIONS OF MERGER SECTION 6.1 Conditions to Obligation of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) The Company Stockholder Approval shall have been obtained. (b) No statute, injunction or other order (whether temporary, preliminary or permanent) shall have been promulgated or issued by any Governmental Entity of competent jurisdiction which prohibits, restrains, enjoins or restricts the consummation of the Merger; provided, however, that each of the parties shall have used its reasonable best efforts to prevent the entry of any such order and to appeal as promptly as possible any injunction or other order that may be entered. (c) Any waiting period applicable to the Merger under the HSR Act shall have terminated or expired. (d) All orders, approvals and consents of (i) the New York Insurance Department and (ii) all other Material Insurance Regulatory Approvals which are required in connection with the Merger shall have been obtained; provided, however, that such orders, approvals and consents may be subject to conditions other than Material Conditions. As used herein, the term "Material Insurance Regulatory Approvals'' shall mean the approvals of the state insurance regulatory department or authority of each state or country other than those states that the failure to obtain would not be reasonably expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole, or Parent and its subsidiaries, taken as a whole. (e) The Form S-4 shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order, and any material "blue sky" and other state securities laws applicable to the registration and qualification of the Parent Common Stock issuable or required to be reserved for issuance pursuant to this Agreement shall have been complied with. (f) The shares of Parent Common Stock issuable to Company stockholders pursuant to this Agreement and such other shares of Parent Common Stock required to be reserved for issuance in connection with the Merger shall have been authorized for listing on the NYSE subject to official notice of issuance. (g) Parent shall have received a letter from Coopers & Lybrand LLP to the effect that the Merger qualifies for "pooling of interests" accounting treatment if consummated in accordance with this Agreement and such letter shall not have been withdrawn. The Company shall have received a letter from KPMG Peat Marwick LLP to the effect that the Company is eligible to be acquired in a transaction to be accounted for using "pooling of interests" accounting treatment and such letter shall not have been withdrawn. (h) There shall not be any action taken, nor any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger which imposes a Material Condition on any party. SECTION 6.2 Conditions to Obligations of the Company to Effect the Merger. The obligation of the Company to effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of the following additional conditions: (a) Parent and Sub shall have performed or complied with in all material respects their agreements and covenants contained in this Agreement required to be performed or complied with at or prior to the Closing Date and the representations and warranties of Parent and Sub contained in this Agreement shall be true and correct in all respects on and as of the Closing Date with the same force and effect as if made on and as of such date (except to the extent such representations and warranties speak as of an earlier date), except where the failure to be true and correct shall not constitute a Material Adverse Effect on Parent and its subsidiaries, taken as a whole. The Company shall have received a certificate signed on behalf of Parent by the chief executive officer and chief financial officer of Parent and Sub to such effect. (b) On the date of the Proxy Statement, the Company shall have received from Salomon Brothers Inc a letter, dated such date, confirming the opinion referred to in Section 2.16. A-24 (c) The Company shall have received an opinion of Simpson Thacher & Bartlett, special counsel to the Company, dated as of the Effective Time, to the effect that the Merger will constitute a reorganization for Federal income tax purposes within the meaning of section 368(a) of the Code. In rendering such opinion, Simpson Thacher & Bartlett may require and rely upon representations contained in the certificates of officers of Parent, Sub, the Company and others, as well as certificates of shareholders who beneficially own five percent or more of the outstanding shares of the Company Common Stock if Simpson Thacher & Bartlett determines that such certificates are necessary for purposes of rendering such opinion. SECTION 6.3 Conditions to Obligations of Parent and Sub to Effect the Merger. The obligations of Parent and Sub to effect the Merger shall be subject to the satisfaction at or prior to the Closing Date of the following additional conditions: (a) The Company shall have performed or complied with in all material respects its agreements and covenants contained in this Agreement required to be performed or complied with at or prior to the Closing Date and the representations and warranties of the Company contained in this Agreement shall be true and correct in all respects on and as of the Closing Date with the same force and effect as if made on and as of such date (except to the extent such representations and warranties speak as of an earlier date), except where the failure to be true and correct shall not constitute a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. Parent shall have received a certificate signed on behalf of the Company by the chief executive officer and chief financial officer of the Company to such effect. (b) Parent shall have received the agreements referred to in Section 5.10 of each person identified as an "affiliate" of the Company. (c) Parent and Sub shall have received an opinion of Debevoise & Plimpton, special counsel to Parent and Sub, dated as of the Effective Time, to the effect that the Merger will constitute a reorganization for Federal income tax purposes within the meaning of section 368(a) of the Code. In rendering such opinion, Debevoise & Plimpton may require and rely upon representations contained in the certificates of officers of Parent, Sub, the Company and others, as well as certificates of shareholders who beneficially own five percent or more of the outstanding shares of the Company Common Stock if Debevoise & Plimpton determines that such certificates are necessary for purposes of rendering such opinion. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER SECTION 7.1 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time, whether before or after the Company Stockholder Approval: (a) By mutual written consent of Parent, Sub and the Company; (b) By Parent or the Company: (i) if any Governmental Entity located or having jurisdiction within the United States shall have issued a final order, injunction, decree, judgment or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Merger and such order, injunction, decree, judgment, ruling or other action is or shall have become final and nonappealable; provided, however, that the right to terminate this Agreement pursuant to this Section 7.1(b)(i) shall not be available to any party who has not used its reasonable best efforts to cause such order to be lifted; (ii) if the Merger shall not have been consummated on or before May 31, 1998 (other than due to the failure of the party seeking to terminate this Agreement to perform its obligations under this Agreement required to be performed at or prior to the Effective Time); or (iii) if upon a vote at a duly held Company Stockholders Meeting or any adjournment thereof at which the Company Stockholder Approval shall have been voted upon, the Company Stockholder Approval shall not have been obtained. A-25 (c) By Parent if prior to the Closing Date the Board of Directors of the Company shall have withdrawn, or modified in a manner adverse to Parent, its approval or recommendation of this Agreement or the Merger or shall have recommended an Acquisition Proposal, or shall have resolved to effect any of the foregoing. (d) By the Company in accordance with Section 5.4; provided that such termination under this clause (d) shall not be effective until the Company has made payment of the Termination Fee required by Section 7.3. (e) By Parent if (a) there has been a breach by the Company of any representation or warranty contained in this Agreement which has a Material Adverse Effect on the Company and its subsidiaries, taken as a whole, or (b) there has been a material breach of any of the covenants or agreements set forth in this Agreement on the part of the Company, which breach in the case of either clause (a) or clause (b) is not curable or, if curable, is not cured within thirty days after written notice of such breach has been given by the Parent to the Company. (f) By the Company if (a) there has been a breach by Parent or Sub of any representation or warranty contained in this Agreement which has a Material Adverse Effect on Parent and its subsidiaries, taken as a whole, or (b) there has been a material breach of any of the covenants or agreements set forth in this Agreement on the part of Parent, which breach in the case of either clause (a) or clause (b) is not curable or, if curable is not cured within thirty days after written notice of such breach has been given by the Company to Parent. SECTION 7.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto except as set forth in Section 7.3 and Section 8.1; provided, however, that nothing herein shall relieve any party from liability for any wilful breach hereof. SECTION 7.3 Fees and Expenses. (a) The Company shall pay, or cause to be paid, in same day funds to Parent $19.4 million (the "Termination Fee'') under the circumstances and at the times set forth as follows: (i) if Parent terminates this Agreement pursuant to Section 7.1(c) hereof, the Company shall pay the Termination Fee upon demand; (ii) if the Company terminates this Agreement pursuant to Section 7.1(d) hereof, the Company shall pay the Termination Fee concurrently therewith; (iii) if (1) Parent terminates this Agreement pursuant to Section 7.1(b)(iii) or 7.1(e) and (2) prior to such termination an Acquisition Proposal shall have been publicly announced (other than an Acquisition Proposal made prior to the date hereof) and (3) within six months thereafter, (A) the Company enters into a definitive agreement with respect to an Acquisition Proposal or an Acquisition Proposal is consummated involving any party (x) with whom the Company had any discussions with respect to an Acquisition Proposal, (y) to whom the Company furnished information with respect to or with a view to an Acquisition Proposal or (z) who had submitted a proposal or expressed any interest publicly in an Acquisition Proposal, in the case of each of clauses (x), (y) and (z), prior to such termination, or (B) the Company enters into a definitive agreement with respect to a Superior Proposal, or a Superior Proposal is consummated, then, in the case of either (A) or (B) above, the Company shall pay the Termination Fee upon the earlier of the execution of such agreement or upon consummation of such Acquisition Proposal or Superior Proposal. (b) Except as otherwise specifically provided herein, each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. A-26 SECTION 7.4 Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of the Company, no amendment may be made which would reduce the amount or change the type of consideration into which each share of Company Common Stock shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 7.5 Waiver. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE VIII GENERAL PROVISIONS SECTION 8.1 Non-Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 7.1, as the case may be, except that the agreements set forth in Article I, Section 5.5, Section 5.6 and Article VIII shall survive the Effective Time and those set forth in Section 5.3, Section 5.8, Section 7.3 and Article VIII shall survive termination of this Agreement. SECTION 8.2 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by telecopy, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice): if to Parent or Sub: MBIA Inc. 113 King Street Armonk, NY 10504 Attention: David Elliott with an additional copy to: Debevoise & Plimpton 875 Third Avenue New York, NY 10022 Telecopy No.: (212) 909-6836 Attention: Andrew L. Sommer if to the Company: CapMAC Holdings Inc. 885 Third Avenue 14th Floor New York, NY 10022 Attention: John B. Caouette with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Attention: Robert L. Friedman, Esq. A-27 SECTION 8.3 Certain Definitions. For purposes of this Agreement, the term: (a) "affiliate'' of a person means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; (b) "beneficial owner'' with respect to any Shares means a person who shall be deemed to be the beneficial owner of such Shares (i) which such person or any of its affiliates or associates beneficially owns, directly or indirectly, (ii) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or person with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares; (c) "control'' (including the terms "controlled by'' and "under common control with'') means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; (d) "knowledge'' means, with respect to the Company, the actual knowledge of those persons listed in Section 8.3 of the Company Disclosure Schedule, and with respect to Parent, the actual knowledge of those persons listed in Section 8.3 of the Parent Disclosure Schedule; (e) "person'' means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act); (f) "Significant Subsidiary'' of the Company, the Surviving Corporation, Parent or any other person means a subsidiary of such person that would constitute a "significant subsidiary" of such person within the meaning of Rule 1.02(v) of Regulation S-X as promulgated by the SEC; and (g) "subsidiary'' or "subsidiaries'' of the Company, the Surviving Corporation, Parent or any other person means any corporation, partnership, joint venture or other legal entity of which the Company, the Surviving Corporation, Parent or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holder of which is generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 8.4 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. SECTION 8.5 Entire Agreement; Assignment. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. Without limiting the generality of the foregoing, this Agreement supersedes and replaces the letter agreement between Parent and the Company dated October 22, 1997, which letter agreement is hereby terminated and shall be of no further force or effect from and after the date of this Agreement. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Sub may assign all or any of their respective rights and obligations A-28 hereunder to any direct or indirect wholly owned subsidiary or subsidiaries of Parent, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. SECTION 8.6 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, except for the provisions of Section 5.6, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 8.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. SECTION 8.8 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 8.9 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. MBIA INC. /s/ David H. Elliott By: ______________________________ Title: Chairman CMA ACQUISITION CORPORATION /s/ David H. Elliott By: ______________________________ Title: President CAPMAC HOLDINGS INC. /s/ John B. Caouette By: ______________________________ Title: Chairman of the Board,President and ChiefExecutive Officer A-29 EX-10.58 6 AMEND. NO.1 TO AGREEMENT & PLAN OF MERGER Exhibit 10.58 AMENDMENT NO. 1 to AGREEMENT AND PLAN OF MERGER AMENDMENT NO.1, dated January 16, 1998, to AGREEMENT AND PLAN OF MERGER, dated as of November 13, 1997 (the "Original Agreement", and as so -------- --------- amended, the "Agreement"), among MBIA INC., a Connecticut corporation --------- ("Parent"), CMA ACQUISITION CORPORATION, a Delaware corporation and a ------ wholly owned subsidiary of Parent ("Sub"), and CAPMAC HOLDINGS INC., a --- Delaware corporation (the "Company"). ------- WHEREAS, the Company, Parent and Sub have entered into the Original Agreement; WHEREAS, the Company, Parent and Sub now wish to amend the Original Agreement as hereinafter provided; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Sub and the Company hereby agree as follows: 1. The preamble to the Original Agreement is hereby amended to read in its entirety as follows: AGREEMENT AND PLAN OF MERGER, dated as of November 13, 1997, as amended by Amendment No. 1 thereto, dated January 16, 1998 (as so amended, the "Agreement"), among MBIA NC., a Connecticut corporation ("Parent"), CMA --------- ------ ACQUISITION CORPORATION, a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and CAPMAC HOLDINGS INC., a Delaware corporation (the --- ("Company"). ------- 2. The second sentence of Section 1.6(a) of the Original Agreement is hereby amended to read in its entirety as follows: For purposes of this Agreement, "Exchange Ratio" means $31.00 divided by -------- ----- the Parent Common Stock Price (as defined below), rounded to the nearest 1/10,000. 3. The second paragraph of Section 2.1 of the Original Agreement is hereby amended to read in its entirety as follows: As used in this Agreement, "Material Adverse Effect" means any -------- ------- ------ adverse change or effect that is materially adverse to the financial condition, results of operations, assets, liabilities or business of a person or on the ability of such person to perform its obligations hereunder, but shall exclude any change or effect resulting from any occurrence or condition generally affecting the industry in which such person and its subsidiaries operate (including without limitation any change or proposed change in insurance laws or regulations in any jurisdiction or official interpretations thereof), any occurrence or condition relating to developments in Asia and any occurrence or condition arising out of the transactions contemplated by this Agreement or the public announcement thereof. 4. The second sentence of Section 5.4(b) of the Original Agreement shall be amended to read in its entirety as follows: Notwithstanding the foregoing, the Company may, at any time after March 15, 1998, directly or indirectly, furnish information and access, in each case only in response to a written request for such information or access made after the date hereof by any person which was not encouraged, solicited or initiated by the Company or any of its officers, directors, employees, representatives or agents after the date hereof, and participate in discussions and negotiate with such person concerning any Acquisition Proposal, if, and only to the extent that (i) such person has submitted a bona fide definitive written Acquisition Proposal to the Board of Directors of the Company, (ii) the Board, after consultation with its independent financial advisors, determines that (x) the person making such Acquisition Proposal is reasonably capable of completing such Acquisition Proposal, taking into account the legal, financial, regulatory and other aspects of such Acquisition Proposal and the person making such Acquisition Proposal and (y) such Acquisition Proposal involves consideration to the Company's stockholders and other terms and conditions that, taken as a whole, are superior to the Merger (a proposal described in this clause (ii) a "Superior Proposal"), and (iii) the Board determines in good faith, based -------- -------- upon the advice of outside counsel to the Company, that taking any such action is necessary for the Board to comply with its fiduciary duty to stockholders under applicable law. 5. Section 7.1(b) of the Original Agreement is hereby amended by deleting the word "or" where it appears at the end of clause (ii) thereof, replacing the period at the end of clause (iii) thereof with "; or", and by adding a new clause (iv) thereto reading as follows: (iv) if the Company Stockholder Approval shall not have been obtained on or before March 15, 1998. 6. Section 7.1(d) of the Original Agreement is hereby amended to read in its entirety as follows: (d) By the Company in accordance with Section 5.4; provided that such -------- termination under this clause (d) shall not be effective until the Company has made payment of the Termination Fee and the Facility Fee required by Section 7.3. 7. Section 7.3(a) of the Original Agreement is hereby amended to read in its entirety as follows: (a) The Company shall pay, or cause to be paid, in same day funds to Parent $19.4 million (the "Termination Fee") and $8 million (the "Facility Fee") ----------- ---- under the circumstances and at the times set forth as follows: (i) if Parent terminates this Agreement pursuant to Section 7.1(c) hereof, the Company shall pay the Termination Fee and the Facility Fee upon demand; (ii) if the Company terminates this Agreement pursuant to Section 7.1(d) hereof, the Company shall pay the Termination Fee and the Facility Fee concurrently therewith; (iii) if (1) Parent terminates this Agreement pursuant to Section 7.1(b)(iii), 7.1(b)(iv) or 7.1(e) and (2) prior to such termination an Acquisition Proposal shall have been publicly announced (other than an Acquisition Proposal made prior to the date hereof) and (3) within six months thereafter, (A) the Company enters into a definitive agreement with respect to an Acquisition Proposal or an Acquisition Proposal is consummated involving any party (x) with whom the Company had any discussions with respect to an Acquisition Proposal, (y) to whom the Company furnished information with respect to or with a view to an 3 Acquisition Proposal or (z) who had submitted a proposal or expressed any interest publicly in an Acquisition Proposal, in the case of each of clauses (x), (y) and (z), prior to such termination, or (B) the Company enters into a definitive agreement with respect to a Superior Proposal, or a Superior Proposal is consummated, then, in the case of either (A) or (B) above, the Company shall pay the Termination Fee and the Facility Fee upon the earlier of the execution of such agreement or upon consummation of such Acquisition Proposal or Superior Proposal. 8. This Amendment shall be governed by the laws of the State of Delaware (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. 9. Except as expressly provided in this Amendment, the Original Agreement shall continue in full force and effect in accordance with the provisions thereof. 10. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 4 EX-13 7 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 [LOGO] MBIA MBIA Inc., 113 King Street, Armonk, New York 10504 [PHOTO] MBIA Inc. 1997 Annual Report Meet Claire, age 7. She's our most important STAKEHOLDER. [PHOTO] Claire's got a big stake in the FUTURE. That's why she's got a big stake in MBIA. Claire's a first grader. She leads her soccer team in goals and loves hip-hop, karate and math. She says she'll be a pilot one day. After Yale, that is. Claire's got big plans for the future - plans that hinge on a pretty basic and completely fair assumption: that she'll always have access to resources that will help her grow into the person she wants to be. After-school activities. Stocked libraries. Sports programs. Museums. And the most essential resources - clean water, good hospitals, excellent schools and housing, reliable power, sound roads, bridges and airports - play a big part in allowing Claire to flourish. All of these resources take money. Public money. And that's where MBIA comes into Claire's life. MBIA helps state and local governments access and manage capital, so kids like Claire will always have access to the tools they need to succeed. This is the story of how MBIA works to secure not just Claire's future, but the future of her parents and grandparents, and the children she may have one day. [PHOTO] - -------------------------------------------------------------------------------- [GRAPHIC] o Cash and asset management for school districts o Bond insurance and consulting services for higher education - -------------------------------------------------------------------------------- Administrators in Claire's school system expect they'll always have enough money to run sports programs and Advanced Placement classes - even dances on the weekends - because they invest their district's bond proceeds in MBIA's guaranteed Investment Agreement Program, and they put their operating funds in CLASS(R), MBIA's cash management program for school districts and municipalities. And one day, Claire may find herself moving into a college dorm that was built by MBIA-insured bonds, on a campus that runs more efficiently and economically because it hired MBIA & Associates, the company's consulting arm, for advice on operational and financial issues. - -------------------------------------------------------------------------------- [GRAPHIC] o Insurance for health care bonds o Asset-backed financings - -------------------------------------------------------------------------------- Though she jokes about it now, Claire was pretty scared when she had to be rushed to the hospital after a hard fall during a breakaway play on the soccer field. The hospital, which funded its recent expansion with MBIA-insured bonds, used its newly leased MRI machine to scan her shoulder. The MRI is part of an asset pool that generates income for investors who buy an interest in it. Interests in the pool were packaged and sold in a securitization which was approved for insurance by MBIA's Structured Finance Division. MBIA also guarantees securities that pool the lease proceeds of fast-food franchises like the one Claire and her dad stopped at for hamburgers on the way home from the hospital. [PHOTO] - -------------------------------------------------------------------------------- [GRAPHIC] o Reduced borrowing rates o Tax administration services - -------------------------------------------------------------------------------- With MBIA's help, Claire's hometown can afford to build for the future. In the last three years alone, it has saved over $10 million in interest payments with MBIA's Triple-A guarantee backing its bonds. And the town collected an additional $4 million when it hired MBIA's new tax administration unit, MTB, to discover and collect delinquent taxes. [PHOTO] - -------------------------------------------------------------------------------- [GRAPHIC] o Worry-free investing o Pension fund protection - -------------------------------------------------------------------------------- Claire's next-door neighbors, the Kemps, always invested with a secure retirement in mind. So throughout their work life, they put their savings into municipal bonds insured by MBIA. They're tax-free and worry-free. If a situation ever comes up that threatens an issuer's ability to pay on an MBIA-insured bond, the company works alongside the bond issuer to identify and resolve its financial problem. If it can't be resolved, MBIA's guarantee ensures continued payment of principal and interest to the bondholder for the life of the bond. The Kemps also benefit from other MBIA products and services. Mrs. Kemp's pension fund is managed by MBIA Capital Management Corp., the company's fixed-income investment management arm, and Mr. Kemp's retirement fund contains guaranteed investment contracts that are wrapped with the protection of MBIA's GIC Wrap(SM) insurance product. - -------------------------------------------------------------------------------- [GRAPHIC] o International transactions o Landmark financings - -------------------------------------------------------------------------------- The international terminal at JFK Airport is one of Claire's favorite places. Not because its renovation was recently financed by one of the largest municipal issues ever insured ($934 million), or because it will soon be a state-of-the-art facility serving over 30 airlines, or even because MBIA insured the deal. It's because a trip to JFK means her mom is coming home. Claire's mom works for MBIA's international joint venture, MBIA-AMBAC International, and she travels a lot to exotic places like Sydney, Madrid, Hong Kong and Paris to analyze important deals. [PHOTO] - -------------------------------------------------------------------------------- [GRAPHIC] o Sleep insurance o Dream securitizations - -------------------------------------------------------------------------------- So much in Claire's life is enhanced in some way by MBIA. The utility company that powers her houselights, the crystal clear water she mixes her Kool-Aid(R) in, the bridges she's scared of crossing - all benefit from financing secured by MBIA. This helps her parents sleep at night because they rest assured knowing that the company's Triple-A guarantee will benefit their community and protect their investments. But more important is how MBIA secures Claire's dreams for the future. With its mission to promote growth and prosperity in communities around the world, MBIA helps strengthen the economic infrastructure of society, giving kids like Claire a sound footing - a springboard, really - in life. What pleasant dreams Claire will have, knowing that the deals MBIA insures today will still be around when her own children are growing up. MBIA is the world's leading financial guarantor and provider of specialized financial products and services. Complementing its core business of financial guarantee insurance, the company provides an array of innovative products and services which help build the financial management capabilities and resources of public and private sector organizations around the world. ================================================================================ Shareholder Information (continued)
Common Stock Data Market Price* Dividends Paid ------------------------------------- Per Share High Low Close ================================================================================ 1997 1st Quarter $0.1900 50 13/16 46 1/4 47 15/16 2nd Quarter 0.1900 61 45 7/16 56 7/16 3rd Quarter 0.1900 64 9/16 55 3/4 62 3/4 4th Quarter 0.1950 67 3/8 56 3/4 66 13/16 - -------------------------------------------------------------------------------- Market Price* Dividends Paid ------------------------------------- Per Share High Low Close ================================================================================ 1996 ================================================================================ 1st Quarter $0.1725 39 11/16 35 37 1/2 2nd Quarter 0.1725 40 7/16 35 1/16 38 15/16 3rd Quarter 0.1725 43 5/16 36 1/2 42 7/8 4th Quarter 0.1900 52 5/16 42 13/16 50 5/8 - -------------------------------------------------------------------------------- * Based on New York Stock Exchange trading data. - --------------------------------------------------------------------------------
$1,000 Invested on December 31, 1987* [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] MBIA Inc. S&P Financial S&P 500 Index Index "87" 1,000 1,000 1,000 "88" 1,551 1,184 1,166 "89" 2,572 1,571 1,534 "90" 2,290 1,234 1,487 "91" 3,974 1,859 1,939 "92" 5,301 2,293 2,086 "93" 5,322 2,548 2,296 "94" 4,846 2,457 2,326 "95" 6,601 3,784 3,200 "96" 9,065 5,114 3,934 "97" 12,125 7,573 5,246 * Includes reinvested dividends [PHOTO] Design: Bloch Graulich Whelan Inc, New York Photography: Black and white: Bill Gallery Color: Bob Sacha p. 17: Max Lerouge, Lille Metropole Communaute urbaine Special thanks to the following "MBIA Kids" for participating in our 1997 Annual Report: Claire DeLaurentis, daughter of Lynne DeLaurentis, Investor-Owned Utility Department; Laura Mansour, daughter of J. Paul Mansour, Secondary Market Department; Sade Banks, daughter of Joyce Banks, Market Research; Melanie Reagan, niece of Kathleen Reagan, Controller's Department; and Robert Walz, son of Richard Walz, MBIA Municipal Investors Service Corp. MBIA Mission and Corporate Responsibility MBIA's mission is to promote growth and prosperity in communities around the world. We work toward fulfilling our mission by providing products and services of enduring quality that strengthen the financial resources and capabilities of local, state and sovereign governments. With offices in five countries, MBIA touches the lives of many highly diverse groups including employees, clients, shareholders, business partners and taxpayers at large. In every business decision we make and every action we take, our employees are guided by five corporate values: customer service, performance excellence, integrity, cooperation and good corporate citizenship. We extend these values to the communities in which we live and work: MBIA provides funding and staff time to a number of charitable organizations nationwide. ================================================================================ FINANCIAL HIGHLIGHTS MBIA Inc. and Subsidiaries
Percent Change ----------------------------------- In millions except per share amounts 1997 1996 1995 1997 vs. 1996 1996 vs. 1995 ========================================================================================================================= Net income $ 374 $ 322 $ 271 16% 19% Gross premiums written 543 461 348 18% 32% Revenues 654 546 462 20% 18% Total assets 9,811 8,562 7,267 15% 18% Shareholders' equity 3,048 2,480 2,234 23% 11% Per share data: Net income Basic $ 4.26 $ 3.75 $ 3.25 14% 15% Diluted 4.22 3.72 3.21 13% 16% Diluted core earnings 3.73 3.31 2.94 13% 13% Book value 34.07 28.64 26.60 19% 8% Adjusted book value 48.07 41.47 38.28 16% 8% Return on average shareholders' equity 13.5% 13.7% 13.8% Total claims-paying resources $ 6,163 $ 5,301 $ 4,643 16% 14% =========================================================================================================================
[BAR CHART] 2 ================================================================================ DEAR FELLOW SHAREHOLDERS, Something occurred to me recently while flying back to New York from a meeting in Boston. I was thinking about the presentation I had just made to a group of equity analysts, shareholders and potential investors. I spent an hour describing MBIA's 23 years of industry leadership, our strategies for growth and the strength behind our Triple-A ratings. I told them about our record-breaking results last year in the municipal and structured finance guarantee businesses, our business diversification successes, and the $13 billion in assets under our management. But as I looked out the window on our final approach into LaGuardia Airport, I suddenly realized what I didn't tell my audience in Boston. The pilot brought us in along the breathtaking "Empire" route, which skims just above the spires of New York City's great buildings. As we floated above the beauty and power of the city, I realized that I didn't tell them that behind everything MBIA does - the municipal projects we guarantee, the structured financings we insure, the towns and cities whose investments we manage and grow, the state and local governments we advise - behind everything we do is a determination to secure a better future for all the people we serve. We help build a better future through the projects we insure in communities around the world, projects that promote clean air and water, efficient power, new airports, tunnels and bridges, and improved school systems and medical facilities; through our services to municipalities which help city and state governments acquire intellectual - and real - capital, and use both to strengthen their financial standing; and through the business strategies we use to build profitability and shareholder wealth. The impact of our work is truly far-reaching; its effects will benefit generations to come. This is really what MBIA is all about. As MBIA succeeds, everyone wins. And if we measure success by our 1997 results, everyone wins big. A BANNER YEAR We reported strong results in almost all areas of the business last year, following similar strong gains in 1996. Profitability reached record heights, [PHOTO] Pictured from left, Richard L. Weill, vice chairman, and David H. Elliott, chairman and chief executive officer. 3 Ten-Year Return on Investment [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] S&P 500 Index S&P Financial Index MBIA Inc. $5,246 $7,575 $12,125 (18%) (22.4%) ( ) S&P 500 Index S&P Financial Index MBIA Inc. * Value of $1,000 invested on December 31, 1997, including reinvested dividends. Percentage represents average annual return. with net income up 16% to $374 million. Diluted core earnings per share - which exclude the effects of capital gains, bond refundings and nonrecurring items such as accounting changes - grew to $3.73 per share, up 13% over 1996. Adjusted book value per share, which includes deferred premium revenue and the present value of future premiums, rose 16% to $48.07. We worked more efficiently, too. We've long held the lowest statutory expense ratio in the industry, and at 16.7%, this trend continued through 1997. Our results built shareholder value. By year-end 1997, MBIA's stock price rose 32% over year-end 1996 to $66.81. Over the past ten years, we've produced an average annual return (share price appreciation plus reinvested dividends) of 28.3%, outperforming the S&P 500 Index of 18.0% and the S&P Financial Index of 22.4%. A $1,000 investment in MBIA at the end of 1987 would be worth $12,125 at the end of 1997. STRATEGIC MOVES But the year was also notable for the strategic moves we made to extend our name, products and services to new markets both here and abroad. At year-end, we announced a merger with CapMAC Holdings Inc., a leader in insuring domestic and international structured finance transactions. The $536 million merger, which was consummated in February 1998, will strengthen MBIA's position as the world's leading financial guarantor, and broaden our capabilities in the rapidly growing global structured finance market. I'm delighted to welcome John B. Caouette, previously CEO of CapMAC, into the MBIA family to serve as president of our newly expanded Structured Finance Division. MBIA brings its considerable financial and analytical strengths to the union; CapMAC brings its aptitude for creating innovative deal structures. There's a great deal of growth potential in this business, and I believe our merged strengths will make MBIA an even more formidable competitor in coming years. We also acquired three promising companies to serve our municipal clients more efficiently. And we launched a consulting practice to leverage the capabilities we've built up over the years helping the public sector resolve their financial and operational issues. To help fund future growth, we raised over $225 million in separate debt and equity offerings, and we split our stock 2-for-1 to make our shares more attractive to a wider range of investors. MBIA also chose to lower its targeted dividend payout ratio to 13% from 20%. Our intention is to continue recommending annual dividend increases as we have done every year since 1987, but the increases will be more modest until the 13% payout ratio is reached. The lower target reflects the capital-intensive nature of financial guarantee insurance and the very favorable outlook we have for future growth opportunities. As a blue-chip corporation and a member of the S&P 500 Index, MBIA's stock is viewed increasingly as a core equity investment. BUSINESS UNIT RESULTS Without question, our growth last year was fueled by a robust economy and record demand for insurance, particularly in the municipal market. Municipal bond issuance rose to $194 billion in 1997, up 20% over 4 1996. Insured volume climbed to $105 billion, 23% higher than the previous year. We again held tight to our leadership reins, insuring 42% of the insured new issue municipal market. We're very pleased with this growth and the positive trends we're seeing. We're also pleased that our structured finance, international, secondary market and corporate insurance lines have grown rapidly and are contributing more and more to both our premium volume and our profit. Our Structured Finance Division ended the year with a 42% increase in insured volume, writing $29 billion in business, up from $20 billion in 1996. Total asset-backed issuance was up 16% for 1997, and with expectations for continued growth in this area and the alliances and expertise in structured transactions that CapMAC brings to MBIA, I expect to see strong activity continuing in this business. Our joint venture, MBIA-AMBAC International, turned in a solid performance, securing many first-time, landmark deals. But its year was perhaps most noteworthy for the strengthening of the partnership and the intellectual growth that occurred as our joint venture staff became increasingly competent in assessing international transaction opportunities. Combining results from all of our insurance segments - Public & Corporate Finance, Structured Finance, Secondary Market and International - MBIA in 1997 insured a total of $84 billion of gross par value - a full 22% increase over 1996. With municipal bond market insured penetration at an all-time high, MBIA's gross premium writings led the industry with $543 million. This figure is 18% higher than 1996 results and surpasses the prior record level of 1993. Due to a slightly higher use of reinsurance in 1997, net premiums written increased 14% over 1996 to $463 million. Meeting Public Sector Needs At year-end 1997, we created the Investment Management and Financial Services Division to help MBIA capitalize on opportunities arising from the shift toward privatization in the public sector. Headed by former MBIA board member Gary C. Dunton, the division provides fixed-income asset management services to the public sector, as well as tax and debt administration services to municipalities. In 1997, we acquired two new businesses under this group's umbrella: Philadelphia-based Municipal Tax Bureau, the nation's leading tax compliance and collection company; and Temecula, California-based MuniFinancial, the largest municipal debt administration company in the country. A third company, Municipal Resource Consultants, a California-based provider of tax audit services, was acquired early in 1998. Through our financial guarantee business, we already have the expertise to assist state, local and global entities with their public finance needs. It just makes good business sense to leverage our capabilities with products and services that complement our core insurance business and help cast MBIA's franchise net farther. WHAT'S AHEAD For 23 years our three-tiered operating strategy - protect our strong financial resources which earn us our Triple-A Ten-Year Average Return on Shareholders' Equity [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Financial Guarantee Industry Group MBIA Inc. S&P 500 Index 15.9% 14.4% 14.3% Financial Guarantee Industry Group MBIA Inc. S&P 500 Index 5 ratings; preserve our financial guarantee industry leadership; and expand our complementary businesses through prudent investments - has kept us focused, successful and moving forward. It will continue to guide us in 1998 and beyond. I believe the coming year will be another favorable one for the company. Financial guarantee insurance will continue to be our foundation for growth, supported by increasing fee income from our asset management and municipal services businesses. I anticipate that steady economic growth in 1998 combined with mild inflation should lead to relatively stable, if low, interest rates, sustaining the current favorable environment for debt financings. Transition, Integration and Growth Although municipal bond insurance will remain under pricing pressure, any reduction in returns should be offset by the growth I believe we will experience in international and structured finance insurance, particularly in light of the CapMAC merger. The successful transition and integration of CapMAC into MBIA will be a major focus in 1998, as we sculpt a unified and powerful competitor in the structured finance arena. I believe we'll see increased earnings in this business, and we'll make important inroads into markets where the opportunities for growth seem almost limitless. Along with the potential in foreign markets comes some risk, as the recent economic volatility in the Asian markets illustrates. After MBIA and CapMAC announced plans to merge in December, a number of Asian entities were downgraded by the ratings agencies. CapMAC's exposure to some of these credits led to a renegotiation of our merger terms in January. To date, no claims have arisen against any of these policies. And we do not expect any significant negative long-term impact on CapMAC's insured portfolio, as it continues to perform according to expectations. There may even be a silver lining to this economic cloud, as historically we have seen such credit crises create the best environment for our financial guarantee products to take root in new markets. As in the past, strong credits that previously saw no need for insurance now seek its benefits. Our asset management products and our services for municipalities will continue to support our public finance businesses throughout 1998, bolstering our clients' credit quality and building their financial strength. I expect our consulting services to increase our underwriting and surveillance knowledge, helping us to preserve the quality of our existing portfolio and to make even better informed underwriting decisions. This "brand extension" strategy will enhance our insurance business while allowing the company to continually grow and deliver valuable products to our clients. With MBIA's corporate profile evolving, our focus will be to assess and build on the strengths of the broader organization we have become. Other factors will contribute to a good year. Our $5 billion insurance-related investment portfolio - the major contributor to our net income - should grow substantially from 6 continued strong cash flow and a boost of more than $400 million as CapMAC's investment portfolio is merged into ours. MBIA'S REMARKABLE PEOPLE In a year punctuated by change came the news that two key members of MBIA's senior staff would retire. Janis S. Christensen, executive vice president and chief credit officer, and James E. Malling, senior executive vice president and chief architect of our investment management businesses, left on January 2 and February 15, 1998, respectively. Both made heroic contributions to our business. Jan's no-loss underwriting legacy and Jim's visionary business diversification efforts will positively influence our bottom line for years to come. I will miss their wisdom and counsel. I will also miss the invaluable contributions of Board Director Robert B. Nicholas, who left our board this past May. Since 1986, Bob's perspective and insight have served MBIA well, and I am grateful to him for his untiring commitment to the company. In another demonstration of unflagging commitment, MBIA employees prevailed with a singular focus in a year filled with challenges. Through reorganizations, expanding product lines, business acquisitions and relentless time and competitive pressures, our employees deftly fielded every challenge and performed superbly. I am grateful to them and so very proud to lead them. Finally, I would like to thank our board of directors and you, our shareholders, for your continued support and belief in our commitment to secure a better future for all. /s/ David H. Elliott David H. Elliott Chairman and Chief Executive Officer March 6, 1998 Value of $1,000 Invested Ten Years Ago* [LINE CHART] * Includes reinvested dividends 7 TRIPLE-A FINANCIAL STRENGTH The mark of a leader in any industry is the ability to outperform the competition on multiple fronts - not once, but consistently, year after year. By this yardstick, MBIA is the leader in the financial guarantee arena and has been since its inception 23 years ago. Perhaps the most compelling evidence of our financial strength and stability is the Triple-A status afforded us by the three top rating agencies. The Triple-A attests to our independently assessed capability to meet potential financial commitments under severely stressed economic conditions. It also reflects our success in mitigating risk through the consistent application of time-tested operating, financial and risk management practices. Not surprisingly, MBIA's financial track record is as important to our shareholders as it is to our clients. Thus, our chief financial imperative is to create maximum long-term value while maintaining our financial strength. To deliver on this responsibility, we maintain exacting underwriting standards and a risk-based pricing strategy designed to produce cash returns that exceed our capital costs. Each product line is managed to achieve the return objectives we define for it. The result: for the ten-year period ending December 31, 1997, our average return on shareholders' equity has been 14.4%, surpassing both the industry peer group average of 13.9% and the S&P 500 average of 14.2%. During that time, the company's market value has increased over nine times. Our core earnings growth - a measure of underlying profitability - has averaged 18% per year in that same period. In 1997, it grew 15%. Additionally, separate debt and equity offerings last year enabled us to raise $225 million in net proceeds, further reinforcing our balance sheet and providing additional capital to fund future growth. Contributors to Growth As more issuers and investors recognize the value of MBIA's financial guarantee, and as revenues from our investment management and public- sector financial services continue to grow, we expect to meet our target of annual core earnings per share growth in the 10% to 15% range. The unique and conservative accounting dynamics that govern the financial guarantee industry contribute to MBIA's steady and consistent earnings growth. While premiums written can vary from year to year, they are booked as deferred revenues and earned over the lives of the guaranteed securities. This shields our earnings from market swings, gives us predictable revenue over the life of the bonds and helps fuel continuous growth in core earnings. Conservative, Wise and Strategic Investments MBIA takes a conservative approach with its investment portfolio, which is [PHOTO] [PHOTO] Contributors to Revenue Growth 1993 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Municipal* 94% Domestic Structured Finance* 5% Investment Management Revenues 1% 1997 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Municipal* 66% Domestic Structured Finance* 16% International* 7% Investment Management & MuniServices Revenues* 7% Other* 4% * Adjusted Gross Premium 8 MBIA'S average return on equity for the past ten years is 14.4%, beating both the industry peer group and the S&P 500 averages. [PHOTOS] From left: Julliette S. Tehrani, executive vice president, CFO and treasurer, Finance; Thomas O. Scherer, senior vice president and internal auditor; and David C. Stevens, senior vice president, are three of the many gatekeepers of MBIA's Triple-A ratings. 9 Triple-A Financial Strength (continued) invested in high-quality fixed-income securities, emphasizing quality, liquidity and diversification. As a matter of policy, we do not invest in real estate or junk bonds, nor do we use derivatives for speculative purposes. Over the past decade, our total invested assets primarily supporting our insurance business have grown from $1 billion to $5 billion, increasing by 18% last year alone. Income from our investment portfolio today contributes more than 63% of our bottom line. Since MBIA's incorporation in 1986, our total claims-paying resources have increased by 20% a year, from less than $1 billion to more than $6 billion. They consist of our statutory capital and reserves (including unearned premiums), the present value of all future installment premiums due on outstanding insurance policies, and an $825 million Triple-A standby line of credit. Our financial resources are by far the largest in the industry and enhance our competitive position, enabling us to insure larger, high-premium transactions. Tracking and Monitoring Credit Performance Risk management has always been central to MBIA's operating philosophy. In our investment and insurance activities, we have a responsibility to avoid excessive risk. Toward this end, we combine well-established qualitative controls with advanced quantitative models to gauge risk levels in both our investment and insurance portfolios. We were the first financial guarantor to formally monitor the performance of its portfolio of insured issues. Today, we employ more surveillance professionals than anyone in the industry. Aided by powerful database and quantitative tools, our analysts continually track the portfolio's financial underpinnings, looking for early signs of credit quality deterioration or shifts in the economic or political landscape that could eventually impede debt service payments. If a problem seems likely, we are prepared to step in and work with the issuer to avoid a default and protect the insured bondholders. In fact, we have rigorous financial and operational controls that govern every area of our business. In our 23-year history, MBIA has guaranteed a cumulative $456 billion of par value and written more than 51,000 bond policies. Our careful winnowing out of insurance risks and diligent surveillance efforts have enabled us to hold losses to a bare minimum. Highest Efficiency; Lowest Average Expense Ratio Our financial strength and our reputation in the industry as the low-cost producer result from our emphasis on aggressively managing both our expenses and our productivity. Since 1987, MBIA has consistently produced the lowest average expense ratio in the industry. We are committed to maintaining our Triple-A ratings, maximizing total long-term returns, and conducting our financial activities with consummate skill, insight and conservatism. [PHOTOS] Investment Portfolio as of 12/31/97 [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Aaa 57% Aa 17% A 23% Baa 3% [PHOTOS] Claims-Paying Resources ($ in billions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Qualified Statutory Capital Total Claims-Paying Resources 93 1.52 3.76 94 1.73 4.15 95 2.02 4.64 96 2.36 5.30 97 2.85 6.16 Qualified Statutory Capital Total Claims-Paying Resources 10 [PHOTO] A $1,000 investment in MBIA ten years ago would be worth over $12,000 today. [PHOTOS] From left: Louis G. Lenzi, senior vice president and general counsel, Legal; Garfield Johnson, Jr., senior vice president, Public and Corporate Finance; and Kevin D. Silva, senior vice president, Management Services, share a commitment to MBIA's vision for growth in communities around the world. 11 FINANCIAL GUARANTEE INSURANCE In the United States, municipal finance is hardly a recent innovation. Towns and cities have sold bonds to the public to pay for public projects since the early days of the Republic. In the years following World War II, infrastructure development and finance activity shifted into high gear. Bonds became the key means of raising the capital needed to build schools and hospitals, airports and rapid transit systems. The idea of providing Triple-A financial guarantees for these bonds, however, is a distinctly modern concept - one that was pioneered by MBIA. It originated in the early 1970s as a way to help state, city and other government entities raise debt capital at lower interest rates and to provide bondholders with safer investments. Every debt obligation insured by MBIA is automatically rated Triple-A, which allows issuers to realize significant savings by borrowing at lower interest rates. Indeed, MBIA has helped issuers save some $10 billion since we began insuring bonds in 1974. The upgrade to Triple-A also enhances the bond's marketability, making it easier to sell. MBIA insurance benefits bond investors too. Should the bond default, the investor's principal and interest payments will continue uninterrupted, paid by MBIA for the life of the bond. Or, if investors decide to sell an MBIA-insured bond before it matures, they are likely to find a highly receptive market. Over the years, these benefits have resulted in a robust market for financial guarantees. Some 54% of all new bond issues in 1997 were insured, compared with 18% in 1987. MBIA led the industry, capturing 42% of the insured market. Building on our leadership position in the municipal finance sector, MBIA began expanding in the early 1990s into new markets for financial guarantees. The largest and fastest-growing is structured finance, which includes public and private asset- and mortgage- backed securities. With insured volume soaring from $5 billion in 1993 to almost $29 billion in 1997, MBIA today is a recognized leader in the structured finance guarantee market. Residential mortgage receivables have historically constituted the bulk of our business in this arena. But in the last few years, the sale of securitized assets - automobile loans, equipment lease receivables, auto and cargo leases, credit card receivables, franchise loans and other assets - has become a routine practice at major financial institutions. We expect that sustained growth in these markets will stimulate increasing demand for insurance in the coming years. [PHOTOS] Domestic Structured Finance Volume* ($ in billions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 93 4.82 94 5.71 95 8.97 96 20.37 97 28.85 * Gross par written 12 Since 1974, MBIA's financial guarantee has saved state and local governments some $10 BILLION in interest costs. [PHOTOS] Emmeline Rocha-Sinha, managing director, Enterprise Finance; Neil G. Budnick, president, Public and Corporate Finance; and Henri N. Gourd, managing director, Secondary Market and Market Research Group, stand in front of a photo of one of four toll plazas along Denver's planned 35-mile, four-lane beltway, the E-470 toll road. The road, which will link the city's northern and southern suburbs, was financed in 1997 by $822 million of revenue bonds, which MBIA insured. 13 Financial Guarantee Insurance (continued) In 1993, MBIA began exporting the same benefits of bond insurance - both municipal and structured finance - outside the United States. Unlike the situation in the U.S., capital markets are new or non-existent concepts in other countries. MBIA again leads the effort - this time, overseas - to improve the use of capital markets and to promote the benefits of financial guarantee insurance. Unparalleled Resources; Unparalleled Opportunities There are many reasons for MBIA's success in the financial guarantee arena. Our personalized approach to client service is one. Our financial strength is another. Because of our unmatched capital base, we are in a position to bid on transactions that our competitors could not insure on their own. One of the several large deals MBIA insured in 1997 is the $934 million financing of the international arrivals building at New York's John F. Kennedy Airport. The transaction qualifies for a number of honorifics, including "first," "biggest" and, arguably, "most ahead of the curve." It is the largest airport deal in U.S. history, the first privatization of a major U.S. airport and one of the largest insured municipal projects ever. It is the largest bond sale ever issued by the Port Authority of New York and New Jersey, which was the first government-chartered issuing agency in America. And it is leading a trend that is gaining momentum in the U.S. - a trend that MBIA is uniquely able to support - privatization of municipal operations. As federal funds for publicly run enterprises become scarce, more and more municipal authorities are choosing to outsource their operations to private companies. At JFK Airport, the operation of the international arrivals terminal has been leased to a private concern that will charge market-rate fees to airline carriers and concessionaires. Debt service on the bonds will be paid from these revenues. Over the next five years, experts predict that airports alone will fund nearly $10 billion in capital improvements. It's likely that there will be plenty more opportunities for privatized service companies - and for MBIA insurance. In one way, the JFK Airport transaction was like every other deal MBIA insures. Before agreeing to provide insurance, our credit analysts - who comprise the largest and most experienced team in the industry - read and digest a wealth of financial reports, demographic data and other documents to evaluate an issuer's creditworthiness. Only if they are satisfied that the issuer is sufficiently capitalized to repay the debt will MBIA agree to provide insurance for the bonds. Our commitment to service all industry sectors is another plus: MBIA's municipal analysts are fully versed in tax-backed, corporate and municipal utilities, higher education, transportation, health care, housing and other revenue-secured issues. Their knowledge is a significant value to issuers and investment bankers, and a key differentiator when it comes to structuring a debt financing. [PHOTOS] MBIA's Public Finance Portfolio [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] General Obligation 29% Utilities 19% Health Care 16% Transportation 10% Special Revenue 8% Industrial Development & Pollution Control Revenue 5% Higher Education 5% Housing 5% Other 3% 14 Since inception, we've insured over $456 BILLION in par value. With incurred losses of just $34 million, or eight one-thousandths of ONE percent of total par insured, our underwriting decisions have been right 99.992% of the time. [PHOTOS] David N. Penchoff, managing director, Eastern Region; Steven C. Citron, managing director, Southern Region; and John S. Pizzarelli, managing director, Western Region, are pictured before a rendering of the Tampa Community Stadium, which is due to open in the Fall of 1998. The stadium was funded in part by two 1997 bond issues totaling $180 million, both insured by MBIA. 15 Financial Guarantee Insurance (continued) To ensure that clients receive superior, timely service, our Public and Corporate Finance Division operates on a regional basis, with full-service operations covering the West, East and South. These regional units are served by professionals with specialized sector expertise. In addition, our Enterprise Finance unit has nationwide responsibility for the health care, housing, student loan and investor-owned utility sectors, as well as corporate financial obligations. We have also insured large transactions in our Structured Finance arena, such as 1997's $1.65 billion securitization of part of the Avis rental car fleet. The deal figured prominently in Avis' effort to raise capital and helped pave the way for a successful initial public offering. To qualify the transaction for insurance, MBIA assessed the credit quality of various corporate entities playing a part in the deal, determined cash flow sufficiency and built adequate first-loss protection into the financing. With MBIA's Triple-A hallmark, the deal became a well-structured securitization of a unique asset class in a high-profile transaction with minimal risk of loss. Just as importantly, it was the first Triple-A-rated securitization of a car rental fleet, the first to carry financial guarantee insurance and the largest ever of its asset type. Combining the Strengths of Two Industry Leaders To help position our company to meet increasing demand for insurance of structured finance deals, MBIA merged in February 1998 with CapMAC Holdings Inc., a leading guarantor of securities backed by trade and corporate receivables, as well as asset-backed commercial paper. CapMAC, which has a strong international presence, also offers customized financial engineering services for structured securities. This merger represents much more than two powerhouse financial guarantee companies coming together just to do what they are already doing, only bigger. It is a firm commitment by MBIA to seek out and capitalize on a market that we believe has extraordinary potential for profitable growth domestically and internationally - a boom waiting to happen. What the merger does not represent, however, is a course correction for MBIA. We are as committed as ever to growing our municipal financial guarantee business. In fact, our municipal business has been the turbine that's powered our success for the last 23 years. Now, with CapMAC, we've added another engine to our franchise but we're still headed in the same direction - to remain the world's foremost provider of financial guarantee insurance while strengthening our earnings growth prospects. [PHOTOS] 16 MBIA leads the structured finance guarantee market. Insured volume soared from $5 billion in 1993 to almost $29 BILLION in 1997. [PHOTOS] Pictured from left are Michael J. Maguire, managing director, MBIA-AMBAC International; John B. Caouette, president, Structured Finance; and Steven A. Campo, Ruth M. Whaley, and Ram D. Wertheim, managing directors, Structured Finance. Behind them is a photo of the Metro system in Lille, France. The Metro and other public projects in Lille have been financed by bonds totaling over $260 million - all guaranteed through the MBIA-AMBAC International joint venture. As a result of MBIA's recent merger with CapMAC Holdings Inc., our structured finance business - in both international and domestic markets - is expected to boom. 17 Financial Guarantee Insurance (continued) Conquering Worldwide Markets The international market for financial guarantees represents another promising area for MBIA. Through MBIA-AMBAC International, our joint venture with Ambac Assurance Corporation, we guarantee new issues and secondary market transactions of every type around the world. These include infrastructure financings for municipal authorities, sovereign debt, securitized and structured transactions, and obligations of financial institutions. The joint venture is active in Europe, Australia and the Pacific Rim, with plans to open an office in Japan in 1998. MBIA-AMBAC International secured a number of landmark deals in 1997, including a $538 million bond offering by Universidades de la Generalitat de Valencia. This transaction is the first bond ever issued by a Spanish university, as well as the first use of financial guarantee insurance in Spain's new issue market. In addition to giving both MBIA and Ambac a more diversified book of international business, the joint venture makes the most of each company's marketing and analytical expertise and establishes a platform for better customer service and broader geographic coverage. As Europe's capital markets continue to evolve, and as CapMAC's proven international capabilities are integrated into the MBIA-AMBAC joint venture, the combined resources will hone our competitive edge in the international marketplace. Secondary Market Strength Although new issues account for most of the business we write in each market segment, we also insure debt securities in the secondary market. In fact, we insure more municipal bonds, corporate bonds and structured finance transactions in the secondary market than any other company. Secondary market coverage allows a fixed-income investor to augment the value and liquidity of a portfolio while adding an important measure of protection to a previously uninsured bond. For that reason, risk-sensitive buyers of debt instruments - institutions and mutual funds, as well as individuals - commonly make MBIA-insured securities an integral component of their portfolios. The price protection inherent in our guarantee is particularly valuable to mutual funds, which serve as proxies for individual investors. MBIA also has insurance products designed to meet the needs of corporate entities. Through its Corporate Financial Obligations Department, MBIA offers Triple-A credit enhancement for corporate debt issues, letters of credit, swap counterparties and other financial obligations. The department also offers ASSURETY(R), a surety bond program [PHOTOS] 18 that guarantees the deposits that state and local governments and government agencies make in banking institutions. With ASSURETY, payment of principal and interest on demand and time deposits is assured in the event the bank is unable to meet its obligation. MBIA also offers the GIC Wrap(SM) product, which enhances the credit of guaranteed investment contracts sold by life insurance companies to pension funds. Since its inception in 1996, over $2 billion in par amount has been insured under this program which includes 31 different issuers. In mid-1997, MBIA "wrapped" its first new-issue GIC in a $200 million transaction with Business Men's Assurance Company of America. These guaranteed contracts will be marketed to pension plans that seek to add Triple-A credit quality and issuer diversification to their portfolios. More than $1.2 billion in outstanding GIC wrap coverage was in place at year-end 1997 - 36% more than in 1996. And the demand for GICs in defined contribution plans and the wide acceptance of MBIA GIC Wrap insurance among investment managers should make new issue GIC wraps a growth area for MBIA. A Robust Demand for Financial Guarantees The outlook today for MBIA's multiple business lines is uniformly optimistic. Demand for our financial guarantee products is at an all-time high. Indeed, issuers and investors appear to recognize with unprecedented clarity the quality of our underwriting and the value of our guarantee. In a recent MBIA survey of over 500 municipal officials, investment bankers, institutional investors and bond counsel, more than 90% said they expected demand for municipal bonds to match or exceed 1997 levels, and over half predicted that municipals would perform as well or better than equities. Growth opportunities in our other markets appear to be as strong, or stronger. [PHOTOS] 19 INVESTMENT MANAGEMENT & MUNICIPAL SERVICES Whether state and city coffers are squeezed by dwindling federal funds or flush with surpluses as they have been of late, citizens have a right to expect that their community's money will be invested and managed with great care. That's where MBIA's investment management and municipal services can help. Using its accumulated expertise and resources, MBIA has, since 1990, provided a variety of products and services to the public and not-for-profit sectors. In late 1997, our investment management and municipal service businesses were brought together under one umbrella: the Investment Management and Financial Services Division. With this new division, we will be able to more effectively expand our franchise in the public sector and make the most of cross-marketing opportunities among our various businesses. The Debut of MBIA MuniServices Within the new division is MBIA MuniServices, a subsidiary comprised of three companies, all of which offer specialized financial services to state and local governments. They are Municipal Tax Bureau (MTB), MuniFinancial and Municipal Resource Consultants. Philadelphia-based MTB, acquired in 1997, is the nation's largest full-service provider of tax compliance and collection services to public sector entities. MuniFinancial, based in California, specializes in municipal debt administration. The company, also purchased in 1997, offers services such as administration of assessment and community facilities districts, arbitrage rebate calculation and municipal disclosure services. And finally, Municipal Resource Consultants, acquired in early 1998 and also based in California, pioneered the concept of revenue enhancement audits for more than 150 California clients. MBIA MuniServices also has a 50% interest in Capital Asset Holdings Inc., a Florida-based company which purchases and services municipal real estate lien certificates. Fixed-Income Expertise for Public Sector Entities Also under the Investment Management and Financial Services Division umbrella are three businesses offering fixed-income products tailored to specific public sector needs. MBIA Municipal Investors Service Corporation (MBIA MISC), an SEC- registered investment adviser, offers short-term pooled cash management programs and administrative services, generally under the name CLASS(R), to state and local governments and school districts from California to Puerto Rico. The company had a significant [PHOTOS] Investment Management Services Assets ($ in billions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1993 2.38 1994 3.60 1995 5.81 1996 11.90 1997 12.57 20 MBIA's innovative financial products and services HELP COMMUNITIES access capital and grow their funds. [PHOTOS] Christopher W. Tilley, president, MBIA MuniServices; Nicholas J. Panarella, Jr., president, Municipal Tax Bureau; and Gary C. Dunton, chief investment officer; president, Investment Management and Financial Services, in front of a photo of Philadelphia's City Hall. In a demonstration of synergy among our businesses, MBIA insured two of Philadelphia's debt obligations in 1997, and we provide the city with tax discovery and compliance services on an ongoing basis. We also secured a $75 million bond issue that was collateralized by tax liens - a first for MBIA. Capital Asset Holdings Inc. (a company in which we own a 50% interest) and MBIA's Municipal Tax Bureau were hired to service the tax lien portfolio. With the city released from the costs and delays associated with tax collection, Philadelphia's taxpayers benefit from lower interest rates on their insured debt and increased efficiency in their city's operations. 21 Investment Management & Municipal Services (continued) win in November 1997 when the Colorado Local Government Liquid Asset Trust selected American Money Management Associates, Inc., a wholly owned subsidiary of MBIA MISC which provides customized investment advisory services, to serve as investment adviser and administrator. COLOTRUST is Colorado's largest and oldest local government investment pool, with over 750 participants and almost $1 billion in assets under management. With COLOTRUST on-line on January 1, 1998, MBIA MISC's clients totaled over 2,700, and public funds under management surpassed $5.2 billion. MBIA Investment Management Corp. (MBIA IMC) offers customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other public funds. The agreements allow entities to successfully manage their market and reinvestment risks, while providing Triple-A quality and attractive yields until the funds are needed for project use or debt service payments. In its four years of operation, MBIA IMC has become a consistent profit contributor and has written over $7.6 billion in investment and repurchase agreements for more than 250 clients. And finally, MBIA Capital Management Corp. (MBIA CMC), an SEC-registered investment adviser, provides fixed income portfolio management services for public entities, pension funds, not-for-profit institutions and corporations. The group also manages several institutional funds, including MBIA's insurance-related and investment agreement portfolios, as well as funds belonging to state and local government entities, school districts, municipalities, insurance companies, unions and corporations. In December, MBIA CMC was selected to manage a retail municipal bond mutual fund - a first for the group. At year-end, MBIA CMC's assets under management totaled $10.8 billion. Sharing our Knowledge and Expertise In nearly a quarter century of analyzing and solving the financial needs of public and not-for-profit entities, we've accumulated a wealth of knowledge. Last year we formed a consulting practice to share this information. MBIA & Associates Consulting, Inc. assists clients in four sectors: state and local government, international, higher education, and real estate. Together, these groups help strengthen the strategic financial planning and management capabilities of entities in the public and private sectors, which in turn bolsters the stability of communities worldwide. Our consulting engagements benefit MBIA as well. Working side-by-side with our public sector clients, we gain an even deeper understanding of their issues and concerns, which further strengthens our underwriting and surveillance capabilities. The shift of federal responsibilities to state and local levels, pressures for government downsizing and tax reform, among other forces, have all come together to advance the privatization and outsourcing of government services. As local governments discover the benefits of hiring outside vendors, the volume of business in this area is likely to experience strong growth. [PHOTOS] 22 At year-end 1997, MBIA had nearly $13 BILLION in assets under management, including our own insurance portfolio and funds for the public sector. That number jumped to almost $14 billion on January 1, 1998. [PHOTOS] Margaret D. Garfunkel, president, MBIA Investment Management Corp.; Robert M. Ohanesian, president, MBIA Capital Management Corp.; and Francie Heller, president, MBIA Municipal Investors Service Corp., stand before a photo of Ossining High School in Westchester County, New York, which is one of over 2,700 clients in school districts and municipalities nationwide whose funds are invested with and managed by MBIA. 23 [PHOTO] MBIA-@-A-GLANCE MBIA's Triple-A guarantee secures municipal bonds and structured finance transactions around the world. With 23 years leading the financial guarantee industry, we've learned a lot about the financial needs and obligations of state and local governments. To that end, we've created a wide range of investment management and municipal products and services to help public and private sector organizations reach their financial goals. [PHOTO] ================================================================================ Financial Guarantee Products and Services - -------------------------------------------------------------------------------- MBIA's financial guarantee products ensure payment of principal and interest for the life of the transaction. Clients benefit from the lower interest rate and easier access to capital that MBIA's Triple-A credit ratings afford them. We guarantee: Municipal Deals - general obligation, tax-backed, health care, transportation, higher education, housing and municipal utility bonds in the new issue and secondary markets Corporate Deals - corporate financial obligations and investor-owned utility bonds. We provide credit enhancement of corporate bonds, letters of credit, swap counterparties and other financial obligations. We also offer: o ASSURETY(R) - guarantees the security of a bank's obligations to its municipal depositors o GIC Wrap(SM) - enhances the credit of guaranteed investment contracts issued by life insurance companies Structured Finance Deals - investments structured from pools of money, such as receivables from mortgages, credit cards, equipment and auto leases, home equity and franchise loans International Deals - global transactions such as infrastructure financings for municipal authorities, sovereign debt, and securitized and structured deals ================================================================================ We've saved municipalities some $10 billion in interest costs since inception. MBIA has been the financial guarantee industry leader for 23 years. [PHOTOS] 24 [PHOTO] MBIA has insured over 51,000 issues since inception. ================================================================================ Investment Management Products & Services - -------------------------------------------------------------------------------- MBIA provides high quality investment products to help our public sector clients strengthen their finances and manage their cash flow and operations more efficiently. They include: CLASS(R) - a highly liquid, short-term cash management program for funds pooled from school districts and municipalities (MBIA MISC) Investment Agreements and Repurchase Agreements - customized, guaranteed investments which provide stable principal value and predictable income for bond proceeds and other public funds (MBIA IMC) Fixed-Income Investment Management - investment management for public entities, pension funds, not-for-profit institutions and corporations (MBIA CMC) ================================================================================ Municipal and Consulting Services - -------------------------------------------------------------------------------- MBIA also has other subsidiaries that offer services which build financial resources and strengthen management capabilities of state and local governments in the United States and around the world. Bond Administration - complete debt administration services, including rebate arbitrage calculation, delinquency management and municipal disclosure requirements. (MuniFinancial) Revenue Enhancement - MBIA subsidiaries offer: o Tax discovery and compliance services (Municipal Tax Bureau) o Tax audit, analysis and information services (Municipal Resource Consultants) o Tax lien purchases and administration (Capital Asset*) * MBIA has a 50% equity interest in Capital Asset. Financial and Management Consulting - strategic financial planning and organizational consultation in four sectors: state & local government, international, higher education, and real estate. (MBIA & Associates Consulting, Inc.) ================================================================================ [PHOTOS] MBIA manages nearly $8 billion of public funds. [PHOTOS] MBIA has assets of almost $10 billion, shareholders' equity of $3 billion, statutory reserves of $5 billion and claims-paying resources of over $6 billion. 25 MBIA Offices CORPORATE HEADQUARTERS MBIA Inc. 113 King Street Armonk, New York 10504 914-273-4545 914-765-3163 (fax) www.mbia.com FINANCIAL GUARANTEE BUSINESS OFFICES: (Includes domestic and international financial guarantees, structured finance and secondary market insurance, GIC Wrap(SM) and ASSURETY(R) products.) 113 King Street Armonk, New York 10504 914-273-4545 885 Third Avenue New York, NY 10043 212-755-1155 The TransAmerica Pyramid 600 Montgomery Street San Francisco, CA 94111-2790 415-352-3050 MBIA-AMBAC International Joint Venture Offices 113 King St. Armonk, NY 10504 914-273-4545 One State Street Plaza New York, NY 10004 212-668-0340 MBIA-AMBAC International Marketing Services Pty. Ltd. Level 29, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia 612 9375 2117 MBIA Assurance, S.A. 112, avenue Kleber 75116 Paris, France 01 53 70 43 43 MBIA Sucursal en Espana Serrano, 20-2(0) Dcha 28001 Madrid, Spain 34 1 435 5432 AMBAC UK Limited St. Helen's One Undershaft London EC3A 8JL England 44 1 71 444 7200 INVESTMENT MANAGEMENT AND FINANCIAL SERVICES OFFICES: MBIA Investment Management Corp. (investment agreements) MBIA Capital Management Corp. (fixed-income asset management) MBIA Municipal Investors Service Corp. (CLASS(R)) 113 King Street Armonk, NY 10504 914-273-4545 American Money Management Associates 1700 Broadway, Suite 1020 Denver, CO 80290 303-860-1100 MBIA MuniServices (specialized financial services for the public sector) MTB 714 Market Street 3rd Floor Philadelphia, PA 19106 800-627-3491 MBIA MuniFinancial 28765 Single Oak Drive Suite 200 Temecula, CA 92590-3661 800-755-6864 Municipal Resource Consultants 32107 West Lindero Canyon Road Westlake Village, CA 91361 800-247-4406 10174 N. Highway 41 Madera, CA 95131 800-800-8181 Capital Asset Holdings Inc.* 3950 RCA Blvd., Suite 5001 Palm Beach Gardens, FL 33410 561-515-1000 * MBIA has a 50% equity interest in Capital Asset MBIA & ASSOCIATES CONSULTING, INC. State & Local Government Group 113 King Street Armonk, NY 10504 914-273-3792 Capital Advisors, Ltd. - International Group 1156 15th Street, NW Suite 304 Washington, DC 20005 202-986-0050 MBIA-Stillwater Higher Education Group 920 East Shore Drive Stillwater, NJ 07875 973-579-7080 MBIA-Bartram & Cochran Real Estate Development Group (a Connecticut corporation providing consulting services with MBIA) 64 Pratt St. Hartford, CT 06103 860-549-5000 [PHOTOS] In 1997, 54% of all new issue municipal bonds were insured. MBIA insured 42% of that amount. 26 - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Table of Contents Selected Financial and Statistical Data 28 Management's Discussion and Analysis of Financial Condition and Results of Operations 30 Report on Management's Responsibility 36 Report of Independent Accountants 36 Consolidated Statements of Income 37 Consolidated Balance Sheets 38 Consolidated Statements of Changes in Shareholders' Equity 39 Consolidated Statements of Cash Flows 40 Notes to Consolidated Financial Statements 41 - -------------------------------------------------------------------------------- 27 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries (1)
Dollars in millions except per share amounts 1997 1996 1995 1994 =========================================================================================== GAAP Summary Income Statement Data: Insurance: Gross premiums written $ 543 $ 461 $ 348 $ 361 Premiums earned 297 252 215 218 Net investment income 281 248 220 194 Net realized gains 17 12 11 10 Insurance operating income 483 412 362 342 Investment management operating income (loss) 10 12 7 6 Income before income taxes 480 408 345 329 Net income 374 322 271 260 Net income per common share: Basic $ 4.26 $ 3.75 $ 3.25 $ 3.12 Diluted $ 4.22 $ 3.72 $ 3.21 $ 3.09 - ------------------------------------------------------------------------------------------- GAAP Summary Balance Sheet Data: Investments $ 8,470 $ 7,634 $ 6,607 $ 4,867 Total assets 9,811 8,562 7,267 5,456 Deferred premium revenue 1,984 1,786 1,616 1,512 Loss reserves 79 59 43 40 Municipal investment and repurchase agreements 3,151 3,259 2,642 1,526 Long-term debt 474 374 374 299 Shareholders' equity 3,048 2,480 2,234 1,705 Book value per share 34.07 28.64 26.60 20.48 Dividends declared per share 0.770 0.725 0.655 0.570 - ------------------------------------------------------------------------------------------- Statutory Data: Net income $ 377 $ 317 $ 278 $ 225 Capital and surplus 1,760 1,467 1,274 1,110 Contingency reserve 1,094 893 744 621 - ------------------------------------------------------------------------------------------- Qualified statutory capital 2,854 2,360 2,018 1,731 Unearned premium reserve 2,119 1,918 1,733 1,620 Loss reserves 15 10 7 22 - ------------------------------------------------------------------------------------------- Total policyholders' reserves 4,988 4,288 3,758 3,373 Present value of installment premiums 350 288 235 177 Standby line of credit 825 725 650 600 - ------------------------------------------------------------------------------------------- Total claims-paying resources 6,163 5,301 4,643 4,150 - ------------------------------------------------------------------------------------------- Financial Ratios: GAAP: Loss ratio 6.3% 6.1% 4.9% 3.7% Underwriting expense ratio 26.2 28.3 29.3 28.8 Combined ratio 32.5 34.4 34.2 32.5 Statutory: Loss ratio 1.5 2.0 0.4 9.8 Underwriting expense ratio 16.7 17.6 20.6 22.9 Combined ratio 18.2 19.6 21.0 32.7 Net debt service outstanding $482,653 $411,106 $344,037 $304,502 Net par amount outstanding $277,106 $233,244 $188,636 $164,318 - -------------------------------------------------------------------------------------------
(1) Balance sheet amounts as of December 31, 1997 - 1989 and income statement amounts for the years ended December 31, 1997 - 1990 include the accounts of MBIA Insurance Corp. of Illinois (formerly BIG Insurance Company). (See Note 1 to consolidated financial statements.) - -------------------------------------------------------------------------------- Premiums Earned ($ in millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1988 82 1989 91 1990 107 1991 132 1992 163 1993 231 1994 218 1995 215 1996 252 1997 297 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Net Investment Income ($ in millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1988 67 1989 80 1990 115 1991 132 1992 150 1993 179 1994 194 1995 320 1996 348 1997 381 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Net Income per Common Share ($ in millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1988 1.23 1989 1.37 1990 1.66 1991 1.87 1992 2.31 1993 3.05 1994 3.09 1995 3.21 1996 3.72 1997 4.32 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 28 - --------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 - -------------------------------------------------------------------------------- $ 479 $ 369 $ 269 $ 211 $ 159 $ 156 231 163 132 107 91 82 179 150 132 115 80 67 10 10 3 -- -- 1 339 255 207 181 136 116 (1) (1) (2) -- -- -- 324 244 190 165 135 118 259 189 145 127 102 92 $ 3.09 $ 2.34 $ 1.89 $ 1.68 $ 1.39 $ 1.23 $ 3.05 $ 2.31 $ 1.87 $ 1.66 $ 1.37 $ 1.23 - -------------------------------------------------------------------------------- $ 3,544 $ 2,529 $ 1,961 $ 1,724 $ 1,501 $ 1,104 4,106 3,049 2,438 2,159 1,904 1,309 1,403 1,196 1,019 902 811 520 34 26 21 5 -- -- 493 -- -- -- -- -- 299 299 199 200 195 -- 1,596 1,382 1,063 932 777 705 19.09 16.50 13.79 12.17 10.54 9.40 0.470 0.380 0.310 0.240 0.205 0.095 - -------------------------------------------------------------------------------- $ 258 $ 190 $ 149 $ 127 $ 84 $ 71 978 896 647 579 485 376 539 404 316 261 216 154 - -------------------------------------------------------------------------------- 1,517 1,300 963 840 701 530 1,474 1,242 1,044 926 828 591 8 14 12 -- -- -- - -------------------------------------------------------------------------------- 2,999 2,556 2,019 1,766 1,529 1,121 186 173 151 134 90 82 575 500 500 500 325 -- - -------------------------------------------------------------------------------- 3,760 3,229 2,670 2,400 1,944 1,203 - -------------------------------------------------------------------------------- 3.4% 3.4% 13.0% 4.7% 0.0% 0.0% 27.4 32.0 30.1 33.7 38.5 39.6 30.8 35.4 43.1 38.4 38.5 39.6 (3.5) 2.4 12.7 0.0 0.0 0.0 17.6 18.3 20.4 23.4 31.6 32.3 14.1 20.7 33.1 23.4 31.6 32.3 $ 266,784 $ 223,056 $ 184,604 $ 157,707 $ 137,221 $ 90,343 $ 141,387 $ 112,483 $ 90,043 $ 75,979 $ 65,290 $ 42,917 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Total Assets ($ in billions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] "88" 1,309 "89" 1,904 "90" 2,159 "91" 2,438 "92" 3,049 "93" 4,106 "94" 5,456 "95" 7,267 "96" 8,562 "97" 9,811 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Book Value & Adjusted Book Value per Share ($) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] "93" 19.09 "94" 20.48 "95" 26.6 "96" 28.64 "97" 34.07 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Claims-Paying Resources ($ in billions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] "88" 1,203 "89" 1,944 "90" 2,400 "91" 2,670 "92" 3,229 "93" 3,760 "94" 4,150 "95" 4,643 "96" 5,301 "97" 6,163 - -------------------------------------------------------------------------------- 29 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries Introduction MBIA Inc. (our company or MBIA) is the world's premier financial guarantee company and a leading provider of investment management products and municipal services. Through MBIA Insurance Corp. and its subsidiaries (our insurance company), we provide financial guarantees to municipalities and other bond issuers. Our primary business is insuring municipal bonds issued by governmental units to finance essential public purposes. We also guarantee structured asset-backed and mortgage-backed transactions; selected corporate bonds, including investor-owned utility debt; and obligations of high-quality financial institutions. We provide these products in both the new issue and secondary markets - internationally as well as domestically. At year-end we announced a merger with CapMAC Holdings Inc., a leading company insuring structured finance transactions. The merger, which was consummated in February 1998, will strengthen MBIA's position as the leading financial guarantor and expand our capabilities in the rapidly growing structured finance market. MBIA also provides investment management products, as well as municipal and consulting services to the public sector. Results of Operations Summary We reported strong results in almost all areas of the business in 1997, following similar strong gains in 1996. The following chart presents highlights of our consolidated financial results for 1997, 1996 and 1995. All per share results have been retroactively adjusted to include the effect of a two-for-one stock split effective October 1, 1997:
Percent Change -------------- 1997 1996 vs. vs. 1997 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Net income (in millions) $ 374 $ 322 $ 271 16% 19% Per share data: Net income* $ 4.22 $ 3.72 $ 3.21 13% 16% Operating earnings* $ 4.06 $ 3.61 $ 3.17 12% 14% Core earnings* $ 3.73 $ 3.31 $ 2.94 13% 13% Book value $ 34.07 $ 28.64 $ 26.60 19% 8% Adjusted book value $ 48.07 $ 41.47 $ 38.28 16% 8% - --------------------------------------------------------------------------------
* Diluted We believe that core earnings, which exclude the effects of refundings and calls of our insured issues and realized capital gains and losses on our investment portfolio, provides the most indicative measure of our underlying profit trend. Core earnings per share of $3.73 for 1997 grew by 13% over 1996, following a 13% increase in 1996. The consistent increases in core earnings were due primarily to growth in premiums earned and net investment income generated by our insurance operations. Our net income grew 16% in 1997 and 19% in 1996. In 1997, on a per share basis, net income increased 13% due to the dilutive effect of the 1997 public offering of additional shares of our company. The difference between the growth rate of core earnings and net income is related to the net income effects of refunded issues and realized capital gains and losses. Operating earnings per share, which excludes the impact of realized capital gains and losses, increased 12% in 1997 and 14% in 1996. Our book value at year-end 1997 was $34.07 per share, up from $28.64 at year-end 1996 and $26.60 at year-end 1995. As with core earnings, we believe that a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of our net deferred premium revenue, net of deferred acquisition costs, plus the present value of unrecorded future installment premiums. The following table presents the components of our adjusted book value per share:
Percent Change -------------- 1997 1996 vs. vs. 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Book value $34.07 $28.64 $26.60 19% 8% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 11.46 10.67 9.86 7% 8% Present value of future installment premiums* 2.54 2.16 1.82 18% 19% - -------------------------------------------------------------------------------- Adjusted book value $48.07 $41.47 $38.28 16% 8% - --------------------------------------------------------------------------------
* The discount rate used to present value future installment premiums was 9%. Our adjusted book value per share was $48.07 at year-end 1997, a 16% increase from year-end 1996 following an 8% growth in the preceding year. The increase was due to our strong operating results, significant growth in new business written, the 1997 offering of common stock and the impact of lower interest rates on the fair value of our fixed-income investment portfolios. Financial Guarantee Insurance Business was strong in 1997 and 1996, fueled by a robust economy and record demand for insurance. Total gross premiums written (GPW) increased significantly to $543.0 million from $460.7 million in 1996 and $348.5 million in 1995. GPW, as reported in our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment-based insurance policies originated in the period. To provide additional information regarding year-to-year changes in new business premium production, we discuss our adjusted gross premiums (AGP), which - -------------------------------------------------------------------------------- 30 - -------------------------------------------------------------------------------- include our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. MBIA's premium production in terms of GPW and AGP for the last three years is presented in the following table:
Percent Change -------------- 1997 1996 vs. vs. In millions 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Premiums written: GPW $ 543.0 $ 460.7 $ 348.5 18% 32% AGP $ 603.9 $ 543.8 $ 372.1 11% 46% - --------------------------------------------------------------------------------
We estimate the present value of our total future installment premium stream on outstanding policies to be $349.6 million at year-end 1997, compared with $288.0 million at year-end 1996 and $235.4 million at year-end 1995. Municipal Market Once again in 1997, we maintained our market leadership in the growing new issue municipal market. In addition, through our substantial financial and capital resources, we were able to provide insurance for several large transactions, thereby increasing our par and premium writings. Domestic new issue municipal market information and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table:
Percent Change -------------- 1997 1996 vs. vs. Domestic Municipal 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Total new issue market:* Par value (in billions) $193.8 $162.0 $142.1 20% 14% Insured penetration 54% 52% 47% MBIA market share 42% 40% 42% MBIA insured: Par value (in billions) $ 48.1 $ 39.2 $ 32.6 23% 20% Premiums (in millions): GPW $429.8 $365.1 $296.9 18% 23% AGP $431.9 $357.8 $291.6 21% 23% - --------------------------------------------------------------------------------
* Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue. Structured Finance Market The par value of issues in the asset-backed securities market (excluding private placements and mortgage-backed securities, for which market data are unavailable) increased 16% in 1997 and 40% in 1996. In 1997 and 1996, we achieved substantial gains in both our domestic new issue and secondary market structured finance business (includes asset-/ mortgage-backed). GPW for 1997 increased by 8% while AGP decreased by 13%. The decline in AGP was due to a non-recurring reinsurance transaction in 1996. Excluding this transaction, GPW and AGP increased 55% and 1%, respectively, during 1997. Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below:
Percent Change -------------- 1997 1996 Domestic vs. vs. Structured Finance 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Total asset-backed market:* Par value (in billions) $176.0 $151.5 $108.0 16% 40% MBIA insured: Par value (in billions) $ 28.8 $ 20.4 $ 9.0 42% 127% Premiums (in millions): GPW $ 56.4 $ 52.3 $ 22.9 8% 128% AGP $101.1 $116.0 $ 46.8 (13)% 148% - --------------------------------------------------------------------------------
* Market data exclude mortgage-backed securities and private placements. International Market In late 1995, we formed a joint venture with Ambac Assurance Corporation (another leading Triple-A-rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business as evidenced by the growth in premium writings over the past two years. The joint venture has underwritten certain business in Southeast Asia. With the turmoil in that region, particular emphasis has been placed on monitoring these transactions, and no losses are expected. Our company's municipal and structured finance international business volume in the new issue and secondary markets for the last three years is illustrated below:
Percent Change -------------- 1997 1996 vs. vs. International 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Par value (in billions) $ 3.3 $ 3.8 $ 2.3 (14)% 65% Premiums (in millions): GPW $34.4 $25.2 $21.3 37% 18% AGP $45.5 $40.6 $24.1 12% 69% - --------------------------------------------------------------------------------
Ceded Premiums Reinsurance allows an insurance company to transfer portions of its insured business to a reinsurance company. In exchange for insuring a portion of our risk, the reinsurance company receives a part of our premiums (ceded premiums) for which we, in turn, receive a ceding commission. We use reinsurance to increase our capacity to write new business when we are subject to single risk limitations, and to manage the overall risk profile of our insurance portfolio. Premiums ceded to reinsurers from all insurance operations were $79.8 million, $54.9 million and $45.1 million in 1997, 1996 and 1995, respectively. Cessions as a percentage of GPW were in the 12 - 15% range for all three years. Year-to-year variances generally reflect the higher utilization of treaty or facultative reinsurance required to comply with regulatory constraints or our own single risk limits. 31 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) MBIA Inc. and Subsidiaries Most of our reinsurers are rated Double-A or higher by Standard & Poor's Corporation or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we believe that we will recover the reinsured portion of any losses which may occur. Revenues Our insurance revenues are primarily comprised of premiums earned and investment income. Premiums are recognized over the life of the bonds we insure. The slow premium recognition, coupled with compounding investment income from investing our premiums and capital, form a solid foundation for consistent revenue growth. Premiums Earned For approximately 80% of our insurance writings, we receive premiums upfront and earn them pro rata over the period of risk of the bond issue. Accordingly, the portion of net premiums earned on each policy in any given year represents a relatively small percentage of the total net upfront premiums received. The balance represents deferred premium revenue to be earned over the remaining life of the insured bond issue. For 20% of our new business writings (primarily our structured finance business) we collect installment premiums. Installment premiums are credited to the deferred premium revenue account when they are received and are recognized as revenue over each installment period - generally one year or less. When an MBIA-insured bond issue is refunded or retired early, the related deferred premium revenue is earned immediately, except for any portion that may be applied as a credit towards insuring the refunding bond issue. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below:
Percent Change -------------- 1997 1996 vs. vs. In millions 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Premiums earned: Scheduled $ 246.5 $ 207.3 $ 181.1 19% 14% Refunded 50.9 44.4 34.0 15% 31% - -------------------------------------------------------------------------------- Total $ 297.4 $ 251.7 $ 215.1 18% 17%
The year-to-year increase in premiums earned from scheduled amortization reflects the additive effect of new business written, including the expanding installment premium activity from the structured finance and international businesses. Investment Income Our insurance related investment income increased to $281.5 million in 1997, up from $247.6 million in 1996 and $219.9 million in 1995. These increases were primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. Insurance related net realized capital gains were $17.5 million in 1997, $11.7 million in 1996 and $11.3 million in 1995. These realized gains were generated as a result of ongoing management of the investment portfolio. Losses and Loss Adjustment Expenses (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. The total reserve is calculated by applying a risk factor based on a study of bond defaults to net debt service written. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, is allocated within the total loss reserve as case-specific reserves. We periodically evaluate our estimates for losses and LAE, and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the end of the last three years, as well as our loss provision for the last three years:
Percent Change -------------- 1997 1996 vs. vs. In millions 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Reserves: Case-specific $24.9 $20.2 $14.5 23% 40% Unallocated 54.0 39.1 28.0 38% 39% - -------------------------------------------------------------------------------- Total $78.9 $59.3 $42.5 33% 40% Provision $18.7 $15.3 $10.6 22% 44%
Over the three-year period from 1995 through 1997, our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve. The unallocated reserve has almost doubled since year-end 1995, from $28.0 million to $54.0 million at year-end 1997. 32 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Operating Expenses Those expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total operating expenses, as well as related expense measures, are shown below:
Percent Change -------------- 1997 1996 vs. vs. In millions 1997 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Policy acquisition costs, net $27.9 $24.7 $21.3 13% 16% Operating 49.9 46.6 41.8 7% 12% - -------------------------------------------------------------------------------- Total insurance operating expenses $77.8 $71.3 $63.1 9% 13% Expense ratio: GAAP 26.2% 28.3% 29.3% Statutory 16.7% 17.6% 20.6%
For 1997, policy acquisition costs net of deferrals increased 13% to $27.9 million following a 16% increase in 1996, in tandem with our year-to-year fluctuations in premiums earned. The ratio of policy acquisition costs net of deferrals to earned premiums has remained in the 10% range for all three years. In 1997, operating expenses increased 7% subsequent to a larger increase in 1996, which was due to an expansion of marketing and surveillance initiatives and one significant structured finance transaction for which a related contingent commission was recorded as an operating expense. Financial guarantee insurance companies also use the statutory expense ratio (expenses before deferrals as a function of net premiums written) as a measure of expense management. Our company's 1997 statutory and GAAP expense ratios have improved over both 1996 and 1995. Investment Management and Municipal Services In late 1997, MBIA's investment management and municipal services businesses were brought together under one umbrella: the Investment Management and Financial Services Division. This new organization will enable us to more effectively expand our franchise in the public sector and make the most of cross-marketing opportunities among our various businesses. The following provides a summary of these businesses: MBIA Municipal Investors Service Corporation (MBIA-MISC) provides cash management, investment fund administration and fixed-rate investment placement services directly to local governments and school districts. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission (SEC)-registered investment advisers. MBIA Investment Management Corp. (IMC) provides customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other public funds. At year-end 1997, principal and accrued interest outstanding on investment and repurchase agreements was $3.2 billion compared with $3.3 billion at year-end 1996. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.2 billion and $3.3 billion at year-end 1997 and 1996, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC, from time to time, uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At year-end 1997, our exposure to derivative financial instruments was not material. MBIA Capital Management Corp. (CMC) provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios, as well as third-party accounts. CMC assumed full management for MBIA's insurance related fixed-income investment portfolios in 1996, which were previously managed externally. CMC is an SEC-registered investment adviser. MBIA MuniServices Company (MuniServices) (formerly known as Strategic Services, Inc.) was established in 1996 to provide bond administration, revenue enhancement and other services to state and local governments. In 1996, MuniServices acquired an equity interest in Capital Asset Holdings Inc. (Capital Asset), a purchaser and servicer of delinquent tax certificates. Capital Asset also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. In January 1997, MuniServices acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public entities. In July 1997, MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. MBIA & Associates Consulting, Inc. was established in 1997 to provide assistance to state and local governments, colleges and universities, and international public and private sector clients seeking to strengthen their strategic financial planning and management capabilities. 33 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Interest Expense In 1997, 1996 and 1995, respectively, we incurred $37.5 million, $33.5 million and $28.4 million of interest expense. The increases in interest expense in 1997 and 1996 were due to the $75 million addition to MBIA's long-term debt in December 1995 and the $100 million addition in July 1997. Taxes Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. Our effective tax rate increased to 22.0% in 1997 as a result of an increase in the taxable component of our investment portfolio. 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 1997, our total capital was $3.0 billion with total long-term borrowings at $474 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 ratios we use to measure it:
1997 1996 1995 - -------------------------------------------------------------------------------- Long-term debt (in millions) $474 $374 $374 Long-term debt to total capital 13% 13% 14% Ratio of earnings to fixed charges 13.8x 13.2x 13.1x
In addition, our insurance company has an $825 million irrevocable standby line of credit facility with a group of major Triple-A rated banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term which expires on September 30, 2004 and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. From time to time we access the capital markets to support the growth of our businesses. In February 1996, we completed a public offering of 7.8 million shares of common stock, of which 1.5 million shares were newly issued, for total net proceeds to MBIA of $55 million. In July 1997, to provide us with additional capital for growth, we raised $126 million of equity and issued $100 million of 30-year debentures. As of year-end 1997, total claims-paying resources for our insurance company stood at $6.2 billion, a 16% increase over 1996. Liquidity Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company, which generates substantial cash flow from premium writings and investment income. In 1997, operating cash flow from our insurance company was $601 million, a 15% increase from $521 million in 1996. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In 1997 our insurance company paid no dividends and at year-end 1997 had dividend capacity of $176 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 1997, cash equivalents and short-term investments totaled $268 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 $300 million with a group of worldwide banks. At year-end 1997, $20.0 million was outstanding under these facilities to fund interim cash requirements. 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 1997, the fair value of our consolidated investment portfolio increased 11% to $8.5 billion, as shown below:
Percent Change -------------- In millions 1997 1996 1997 vs.1996 - -------------------------------------------------------------------------------- Insurance operations: Amortized cost $4,862 $4,193 16% Unrealized gain 267 148 80% - -------------------------------------------------------------------------------- Fair value $5,129 $4,341 18% - -------------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $3,242 $3,263 (1)% Unrealized gain 99 30 231% - -------------------------------------------------------------------------------- Fair value $3,341 $3,293 1% - -------------------------------------------------------------------------------- Total portfolio at fair value $8,470 $7,634 11%
34 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The growth of our insurance related investments in 1997 was the result of positive cash flows and proceeds from our financing activities, as well as an increase in unrealized gains caused by lower interest rates at year-end. The fair value of investments related to our municipal investment agreement business increased slightly to $3.3 billion at year-end 1997. 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 in 1986. 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 market values and interest rates as of year-end 1997, this hypothetical increase in interest rates would result in an after-tax decrease in net fair value of our company's financial instruments of $140 million. This projected change in fair value is primarily a result of our company's "fixed-maturity securities" asset portfolio which loses value with increases in interest rates. Since our company is able and primarily expects to hold the securities to maturity, it does not expect to recognize any adverse impact to income or cash flows under the above scenario. Our company's investment portfolio holdings are primarily U.S. dollar denominated fixed-income securities including municipal bonds, U.S. government bonds, mortgage-backed securities, collateralized mortgage obligations, corporate bonds, and asset-backed securities. In modeling sensitivity to interest rates for the taxable securities, U.S. treasury rates are changed instantaneously by 1.0%, and the option adjusted spreads of the securities are held constant. Tax-exempt securities are subjected to a change in the Municipal Triple-A General Obligation curve that would be equivalent to a 1.0% taxable interest rate change based on year-end taxable/tax-exempt ratios. Simulation for tax-exempts is performed treating securities on a duration-to-worst-case basis. For the liabilities evaluation, where appropriate, the assumed discount rates used to estimate the present value of future cash flows are increased by 1.0%. Year 2000 With the approach of the new millennium, MBIA is actively managing the Year 2000 issue. This issue results from computer programs which use two digits, rather than four digits to define a year. Our company has already re-engineered our significant internal business applications. The costs related to Year 2000 compliance activities did not have a material effect on net income, financial condition or cash flows. We have instituted a corporate-wide effort to address and resolve the system/application tasks associated with Year 2000 at certain subsidiary locations and have targeted December 31, 1998 for complete Year 2000 compliance. MBIA is also in the process of reviewing our exposure to Year 2000 issues resulting from our vendors and insureds' computer systems. Our company is in the process of contacting vendors and insureds regarding the state of their remediation activities for material Year 2000 issues. Management believes that its activities, if any, necessitated by the response to these inquiries will be substantially completed before the end of 1998. We do not expect that there will be material disruptions to our company's business or an increase in our cost of doing business. 35 ================================================================================ - -------------------------------------------------------------------------------- REPORT ON MANAGEMENT'S RESPONSIBILITY REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries Report on Management's Responsibility Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. Coopers & Lybrand L.L.P., independent accountants, is retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. /s/ David H. Elliott David H. Elliott Chairman and Chief Executive Officer /s/ Julliette S. Tehrani Julliette S. Tehrani Executive Vice President, Chief Financial Officer and Treasurer Report of Independent Accountants To the Board of Directors and Shareholders of MBIA Inc.: We have audited the accompanying consolidated balance sheets of MBIA Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBIA Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. New York, New York February 3, 1998 36 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended December 31 ======================================================= Dollars in thousands except per share amounts 1997 1996 1995 ==================================================================================================================================== REVENUES Insurance: Gross premiums written $ 543,016 $ 460,675 $ 348,487 Ceded premiums (79,781) (54,852) (45,050) - ------------------------------------------------------------------------------------------------------------------------------------ Net premiums written 463,235 405,823 303,437 Increase in deferred premium revenue (165,858) (154,111) (88,365) - ------------------------------------------------------------------------------------------------------------------------------------ Premiums earned (net of ceded premiums of $43,734, $38,893 and $30,655) 297,377 251,712 215,072 Net investment income 281,459 247,561 219,858 Net realized gains 17,478 11,740 11,312 Investment management services: Income 26,668 26,663 19,884 Net realized gains (losses) 3,416 2,572 (6,092) Other 27,584 5,289 2,188 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 653,982 545,537 462,222 - ------------------------------------------------------------------------------------------------------------------------------------ EXPENSES Insurance: Losses and loss adjustment 18,673 15,334 10,639 Policy acquisition costs, net 27,873 24,660 21,283 Operating 49,947 46,654 41,805 Investment management services 16,761 14,583 12,857 Interest 37,450 33,462 28,439 Other 23,709 2,714 2,169 - ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 174,413 137,407 117,192 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 479,569 408,130 345,030 Provision for income taxes 105,393 85,967 73,611 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 374,176 $ 322,163 $ 271,419 ==================================================================================================================================== NET INCOME PER COMMON SHARE: BASIC $ 4.26 $ 3.75 $ 3.25 DILUTED $ 4.22 $ 3.72 $ 3.21 Weighted average number of common shares outstanding: Basic 87,912,615 85,856,258 83,525,106 Diluted 88,747,388 86,696,096 84,480,022 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 37 CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 1997 December 31, 1996 ==================================================================================================================================== ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,600,528 and $4,001,562) $ 4,867,254 $ 4,149,700 Short-term investments, at amortized cost (which approximates fair value) 245,029 176,088 Other investments 16,802 14,851 - ------------------------------------------------------------------------------------------------------------------------------------ 5,129,085 4,340,639 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,241,703 and $3,263,211) 3,341,394 3,293,298 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS 8,470,479 7,633,937 Cash and cash equivalents 23,181 7,356 Securities borrowed or purchased under agreements to resell 472,963 217,000 Accrued investment income 115,971 104,725 Deferred acquisition costs 154,100 147,750 Prepaid reinsurance premiums 252,893 216,846 Goodwill (less accumulated amortization of $49,486 and $43,050) 120,326 105,138 Property and equipment, at cost (less accumulated depreciation of $26,523 and $21,642) 60,238 50,923 Receivable for investments sold 13,435 980 Other assets 127,176 77,360 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 9,810,762 $ 8,562,015 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $ 1,984,104 $ 1,785,875 Loss and loss adjustment expense reserves 78,872 59,314 Municipal investment agreements 1,974,165 2,290,609 Municipal repurchase agreements 1,177,022 968,671 Long-term debt 473,878 374,010 Short-term debt 20,000 29,100 Securities loaned or sold under agreements to repurchase 606,263 217,000 Deferred income taxes 286,402 206,492 Payable for investments purchased 44,007 52,029 Other liabilities 117,796 99,218 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 6,762,509 6,082,318 ==================================================================================================================================== COMMITMENTS AND CONTINGENCIES Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares - 10,000,000; issued and outstanding - none -- -- Common stock, par value $1 per share; authorized shares - 200,000,000; issued shares - 89,461,035 and 86,588,486 89,461 86,588 Additional paid-in capital 906,744 759,784 Retained earnings 1,825,333 1,518,994 Cumulative translation adjustment (8,558) (1,042) Unrealized appreciation of investments, net of deferred income tax provision of $129,308 and $62,706 240,085 116,424 Unearned compensation - restricted stock (4,812) (1,051) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 3,048,253 2,479,697 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,810,762 $ 8,562,015 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 38 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 1997, 1996 and 1995 ------------------------------------------------------------------------------------------------------ Unrealized Unearned Common Stock Additional Cumulative Appreciation Compensation- Treasury Stock In thousands except ---------------- Paid-in Retained Translation (Depreciation) Restricted ---------------- per share amounts Shares Amount Capital Earnings Adjustment of Investments Stock Shares Amount ==================================================================================================================================== BALANCE, JANUARY 1, 1995 84,154 $84,154 $677,673 $ 1,057,092 $ 503 $ (86,560) -- (924) $(28,146) - ------------------------------------------------------------------------------------------------------------------------------------ Unearned compensation - restricted stock -- -- -- 116 -- -- (426) 12 319 Exercise of stock options -- -- 5,403 (12,806) -- -- -- 764 23,741 Net income -- -- -- 271,419 -- -- -- -- -- Change in foreign currency translation -- -- -- -- 2,346 -- -- -- -- Change in unrealized appreciation of investments net of change in deferred income taxes of $(158,544) -- -- -- -- -- 294,208 -- -- -- Dividends (declared per common share $0.655, paid per common share $0.638) -- -- -- (54,770) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 84,154 84,154 683,076 1,261,051 2,849 207,648 (426) (148) (4,086) - ------------------------------------------------------------------------------------------------------------------------------------ Net proceeds from issuance of shares 1,540 1,540 53,693 -- -- -- -- -- -- Unearned compensation - restricted stock -- -- -- -- -- -- (625) -- -- Exercise of stock options 894 894 23,015 (1,757) -- -- -- 148 4,086 Net income -- -- -- 322,163 -- -- -- -- -- Change in foreign currency translation -- -- -- -- (3,891) -- -- -- -- Change in unrealized appreciation of investments net of change in deferred income taxes of $49,546 -- -- -- -- -- (91,224) -- -- -- Dividends (declared per common share $0.725, paid per common share $0.708) -- -- -- (62,463) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 86,588 86,588 759,784 1,518,994 (1,042) 116,424 (1,051) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net proceeds from issuance of shares 2,300 2,300 124,077 -- -- -- -- -- -- Unearned compensation - restricted stock 67 67 3,729 -- -- -- (3,761) -- -- Stock issued for acquisition 120 120 6,880 -- -- -- -- -- -- Exercise of stock options 386 386 12,274 -- -- -- -- -- -- Net income -- -- -- 374,176 -- -- -- -- -- Change in foreign currency translation -- -- -- -- (7,516) -- -- -- -- Change in unrealized appreciation of investments net of change in deferred income taxes of $(66,602) -- -- -- -- -- 123,661 -- -- -- Dividends (declared per common share $0.770, paid per common share $0.765) -- -- -- (67,837) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 89,461 $89,461 $906,744 $ 1,825,333 $(8,558) $ 240,085 $(4,812) -- -- ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 39 CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 ---------------------------------------------------- Dollars in thousands 1997 1996 1995 =================================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 374,176 $ 322,163 $ 271,419 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (11,246) (17,709) (18,530) Increase in deferred acquisition costs (6,350) (7,402) (7,300) Increase in prepaid reinsurance premiums (36,047) (15,959) (14,395) Increase in deferred premium revenue 201,905 170,070 102,760 Increase in loss and loss adjustment expense reserves 19,558 16,809 2,357 Depreciation 5,403 4,341 3,984 Amortization of goodwill 6,436 5,064 5,183 Amortization of bond discount, net (20,384) (21,030) (18,468) Net realized gains on sale of investments (20,894) (14,312) (5,222) Deferred income taxes 13,376 9,308 11,349 Other, net (43,796) (19,181) 17,946 - ----------------------------------------------------------------------------------------------------------------------------------- Total adjustments to net income 107,961 109,999 79,664 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 482,137 432,162 351,083 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (2,090,236) (1,519,213) (1,149,253) Sale of fixed-maturity securities, net of receivable for investments sold 1,247,860 873,823 719,523 Redemption of fixed-maturity securities, net of receivable for investments redeemed 190,803 158,087 83,448 Purchase of short-term investments (15,022) (1,523) (32,281) Purchase of other investments (559) (394) (1,065) Sale of other investments 1,223 862 6,926 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,447,004) (1,861,126) (2,210,571) Sales from municipal investment agreement portfolio, net of receivable for investments sold 1,487,437 1,264,033 1,115,239 Capital expenditures, net of disposals (13,700) (9,245) (4,923) Other, net (15,491) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (654,689) (1,094,696) (1,472,957) - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 126,377 55,233 -- Net proceeds from issuance of long-term debt 98,880 -- 74,344 Net (repayment) proceeds from (retirement) issuance of short-term debt (9,100) 11,100 -- Dividends paid (66,841) (60,501) (53,179) Proceeds from issuance of municipal investment and repurchase agreements 1,823,422 2,242,872 2,351,206 Payments for drawdowns of municipal investment and repurchase agreements (1,930,321) (1,628,310) (1,251,517) Securities loaned or sold under agreements to repurchase, net 133,300 -- -- Exercise of stock options 12,660 26,238 16,338 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 188,377 646,632 1,137,192 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 15,825 (15,902) 15,318 Cash and cash equivalents - beginning of year 7,356 23,258 7,940 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $ 23,181 $ 7,356 $ 23,258 =================================================================================================================================== SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 88,448 $ 66,101 $ 52,410 Interest paid: Municipal investment and repurchase agreements $ 195,344 $ 172,237 $ 104,301 Long-term debt 31,825 31,722 26,575 Short-term debt 2,017 1,309 1,228 ===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 40 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 1. Business and Organization MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. The company operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). Effective December 31, 1989, the company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been accounted for as a purchase and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In 1990, the company formed MBIA Assurance S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Service Corporation (MBIA-MISC) was formed as a wholly owned subsidiary of the company. MBIA-MISC operates cooperative cash management programs for school districts and municipalities. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for the company, its municipal cash management service businesses and public pension funds. In 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public sector clients. In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc., which was subsequently renamed MBIA MuniServices Company (MuniServices). Also in 1996, MuniServices acquired an interest in Capital Asset Holdings Inc. (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. In January 1997, 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, MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In 1997, the company formed a wholly owned subsididary, MBIA & Associates Consulting, Inc., to provide assistance to state and local governments, colleges and universities, and international public and private sector clients. In early 1998, the company and CapMAC Holdings Inc. consummated a merger to be accounted for as a pooling of interests. See Note 22 for details regarding this merger. 2. Significant Accounting Policies The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: Consolidation The consolidated financial statements include the accounts of the company and its significant subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. Investments The company's entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholders' equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixed-maturity securities, other than those held in the municipal investment agreement portfolio, with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification, and are included as a separate component of revenues. Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services income. Municipal investment agreement portfolio accrued interest income, receivables for investments sold and payables for investments purchased are included in the respective consolidated accounts. 41 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MBIA Inc. and Subsidiaries Other investments include the company's interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. The company records dividends from these investments as a component of investment income. In addition, the company records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and demand deposits with banks. Securities Borrowed or Purchased Under Agreements to Resell and Securities Loaned or Sold Under Agreements to Repurchase Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. Policy Acquisition Costs Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. Premium Revenue Recognition Upfront premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Installment premiums are earned over each installment period - generally one year or less. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where the company insures the refunding issue, is earned at that time, since there is no longer risk to the company. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. Advisory Fee Revenue Recognition The company collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. Goodwill Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of all other subsidiaries is amortized by the straight-line method over 15 years. Property and Equipment Property and equipment consist of the company's headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated by the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expense as incurred. Losses and Loss Adjustment Expenses Loss and loss adjustment expense (LAE) reserves are established in an amount equal to the company's estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries under salvage and subrogation rights. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of bond defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management of the company periodically 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. 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 42 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- plus accrued interest, whereas the related assets are recorded at fair value. Investment management services income includes 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 for hedging purposes as part of its overall risk management strategy. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in current period income. At year-end 1997, the company's exposure to derivative financial instruments was not material. Investment Management Services Operations Investment management services income is comprised of the net investment income and operating revenues of MBIA-MISC, IMC and CMC. The operating expenses of MBIA-MISC, IMC and CMC are reported in investment management services expenses. Income Taxes Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. The company records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time the company may present the tax and loss bonds for redemption to satisfy the additional tax liability. Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholders' equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. 3. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. This statement will require the company to report in the financial statements, in addition to net income, comprehensive income and its components including, as applicable, foreign currency items, unearned compensation from restricted stock awards and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption, the company will be required to reclassify financial statements for earlier periods provided for comparative purposes. Adoption of this statement will not change the content of the financial statements; instead it will only change the presentation. The company has not yet determined the manner in which comprehensive income will be displayed. Also, in June 1997, FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting information about operating segments in annual financial statements, and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. Under SFAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The company's future segment presentation has not yet been determined. 4. Statutory Accounting Practices The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements, and reserves for case basis losses and LAE are established, at present value, for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on the company's reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; 43 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MBIA Inc. and Subsidiaries o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus, but are reflected as assets under GAAP. The following is a reconciliation of consolidated shareholders' equity presented on a GAAP basis for the company and its consolidated subsidiaries to statutory capital and surplus for MBIA Corp. and its subsidiaries:
As of December 31 -------------------------------- In thousands 1997 1996 - -------------------------------------------------------------------------------- Company's GAAP shareholders' equity $ 3,048,253 $ 2,479,697 Contributions to MBIA Corp. 459,567 361,494 Premium revenue recognition (408,654) (368,762) Deferral of acquisition costs (154,100) (147,750) Unrealized gains (369,393) (179,130) Contingency reserve (1,094,117) (892,793) Loss and loss adjustment expense reserves 53,938 39,065 Deferred income taxes 286,402 206,492 Tax and loss bonds 129,508 103,008 Goodwill (95,829) (100,718) Other (95,377) (33,581) - -------------------------------------------------------------------------------- Statutory capital and surplus $ 1,760,198 $ 1,467,022 - --------------------------------------------------------------------------------
Consolidated net income of MBIA Corp., determined in accordance with statutory accounting practices for the years ended December 31, 1997, 1996 and 1995 was $377.1 million, $316.6 million and $278.3 million, respectively. 5. Premiums Earned from Refunded and Called Bonds Premiums earned include $50.9 million, $44.4 million and $34.0 million for 1997, 1996 and 1995, respectively, related to refunded and called bonds. 6. Investments The company's investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. The company's investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of high-quality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of the company, as of December 31, 1997 and 1996:
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -------------------------------------------------------------------------------- December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 543,459 $ 30,433 $ (4) $ 573,888 Corporate and other obligations 3,071,813 95,698 (1,052) 3,166,459 Mortgage-backed 1,370,400 29,374 (1,006) 1,398,768 Tax-exempt bonds State and municipal obligations 3,101,588 213,551 (577) 3,314,562 - -------------------------------------------------------------------------------- Total $8,087,260 $ 369,056 $ (2,639) $8,453,677 - --------------------------------------------------------------------------------
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -------------------------------------------------------------------------------- December 31, 1996 Taxable bonds United States Treasury and Government Agency $ 533,666 $ 13,657 $ (997) $ 546,326 Corporate and other obligations 2,718,585 34,559 (16,824) 2,736,320 Mortgage-backed 1,263,511 20,201 (5,460) 1,278,252 Tax-exempt bonds State and municipal obligations 2,925,099 137,389 (4,300) 3,058,188 - -------------------------------------------------------------------------------- Total $7,440,861 $ 205,806 $ (27,581) $7,619,086 - --------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $7.7 million and $7.8 million as of December 31, 1997 and 1996, 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, 1997 and 1996, the fair value of securities pledged as collateral with respect to these obligations approximated $1.8 billion and $1.5 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, 1997. 44 - -------------------------------------------------------------------------------- Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
In thousands Amortized Cost Fair Value - -------------------------------------------------------------------------------- Within 1 year $ 642,485 $ 642,469 Beyond 1 year but within 5 years 1,459,017 1,492,799 Beyond 5 years but within 10 years 1,656,507 1,739,656 Beyond 10 years but within 15 years 1,001,918 1,082,908 Beyond 15 years but within 20 years 1,096,739 1,173,131 Beyond 20 years 860,194 923,946 - -------------------------------------------------------------------------------- 6,716,860 7,054,909 Mortgage-backed 1,370,400 1,398,768 - -------------------------------------------------------------------------------- Total fixed-maturities and short-term investments $8,087,260 $8,453,677 - --------------------------------------------------------------------------------
7. Investment Income and Gains and Losses Investment income consists of:
As of December 31 ---------------------------------------- In thousands 1997 1996 1995 - -------------------------------------------------------------------------------- Fixed-maturities $ 279,900 $ 245,109 $ 216,653 Short-term investments 4,695 5,244 5,834 Other investments (4) 62 217 - -------------------------------------------------------------------------------- Gross investment income 284,591 250,415 222,704 Investment expenses 3,132 2,854 2,846 - -------------------------------------------------------------------------------- Net investment income 281,459 247,561 219,858 - -------------------------------------------------------------------------------- Net realized gains (losses): Fixed-maturities: Gains 22,791 16,760 9,941 Losses (5,877) (5,353) (2,537) - -------------------------------------------------------------------------------- Net 16,914 11,407 7,404 - -------------------------------------------------------------------------------- Other investments: Gains 564 333 3,917 Losses -- -- (9) - -------------------------------------------------------------------------------- Net 564 333 3,908 - -------------------------------------------------------------------------------- Total net realized gains 17,478 11,740 11,312 - -------------------------------------------------------------------------------- Total investment income $ 298,937 $ 259,301 $ 231,170 - --------------------------------------------------------------------------------
Total investment income excludes investment income and realized gains and losses from MBIA-MISC, IMC and CMC, which are reported in investment management services income. Net unrealized gains consist of:
As of December 31 ------------------------------ In thousands 1997 1996 - -------------------------------------------------------------------------------- Fixed-maturities: Gains $ 369,056 $ 205,806 Losses (2,639) (27,581) - -------------------------------------------------------------------------------- Net 366,417 178,225 - -------------------------------------------------------------------------------- Other investments: Gains 3,033 934 Losses (57) (29) - -------------------------------------------------------------------------------- Net 2,976 905 - -------------------------------------------------------------------------------- Total 369,393 179,130 Deferred income taxes 129,308 62,706 - -------------------------------------------------------------------------------- Unrealized gains, net $ 240,085 $ 116,424 - --------------------------------------------------------------------------------
The deferred income taxes relate primarily to unrealized gains and losses on the company's fixed-maturity investments, which are reflected in shareholders' equity. The change in net unrealized gains (losses) consists of:
Years ended December 31 --------------------------------------- In thousands 1997 1996 1995 - -------------------------------------------------------------------------------- Fixed-maturities $ 188,192 $(142,208) $ 454,805 Other investments 2,071 1,438 (2,053) - -------------------------------------------------------------------------------- Total 190,263 (140,770) 452,752 Deferred income taxes 66,602 (49,546) 158,544 - -------------------------------------------------------------------------------- Unrealized gains (losses), net $ 123,661 $ (91,224) $ 294,208 - --------------------------------------------------------------------------------
8. Income Taxes The company files a consolidated tax return which includes all of its U.S. subsidiaries. The provision for income taxes is composed of:
Years ended December 31 ------------------------------------------ In thousands 1997 1996 1995 - -------------------------------------------------------------------------------- Current $ 92,017 $ 76,659 $ 62,262 Deferred 13,376 9,308 11,349 - -------------------------------------------------------------------------------- Total $105,393 $ 85,967 $ 73,611 - --------------------------------------------------------------------------------
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 ----------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- 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 (11.1) (12.6) (13.4) Amortization of goodwill 0.4 0.4 0.5 Other (2.3) (1.7) (0.8) - -------------------------------------------------------------------------------- Provision for income taxes 22.0% 21.1% 21.3% - --------------------------------------------------------------------------------
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. 45 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MBIA Inc. and Subsidiaries The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1997 and 1996 are presented below:
In thousands 1997 1996 - -------------------------------------------------------------------------------- Deferred tax assets: Tax and loss bonds $130,080 $102,222 Alternative minimum tax credit carryforward 62,279 58,067 Loss and loss adjustment expense reserves 18,878 13,673 Other 85,734 13,347 - -------------------------------------------------------------------------------- Total gross deferred tax assets 296,971 187,309 - -------------------------------------------------------------------------------- Deferred tax liabilities: Contingency reserve 229,389 180,957 Deferred premium revenue 154,240 74,082 Deferred acquisition costs 53,935 51,713 Unrealized gains 129,308 62,706 Contingent commissions 408 1,052 Other 16,093 23,291 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 583,373 393,801 - -------------------------------------------------------------------------------- Net deferred tax liability $286,402 $206,492 - --------------------------------------------------------------------------------
The company believes that no valuation allowance is necessary in connection with the deferred tax assets. 9. Net Income Per Common Share In February 1997, the FASB issued SFAS 128, "Earnings per Share", effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 establishes standards for computing and presenting earnings per share (EPS). Under the new standard, basic EPS is computed by dividing income applicable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the additional dilution that could occur from employee stock options and other items that could potentially result in the issuance of common stock. The company has adopted this Statement and as required has restated all prior-period EPS data presented. The following provides a reconciliation of the denominator of the basic EPS computation to the denominator of the diluted EPS computation.
Years ended December 31 -------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net income (in thousands) $374,176 $322,163 $271,419 - -------------------------------------------------------------------------------- Basic weighted average shares 87,912,615 85,856,258 83,525,106 Effect of stock options 834,773 839,838 954,916 - -------------------------------------------------------------------------------- Diluted weighted average shares 88,747,388 86,696,096 84,480,022 - -------------------------------------------------------------------------------- Basic EPS $4.26 $3.75 $3.25 Diluted EPS $4.22 $3.72 $3.21
Options to purchase 12,602, 23,925 and 407,837 shares of common stock during 1997, 1996 and 1995, 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. The merger with CapMAC Holdings Inc. subsequent to year-end, as described in Note 22, resulted in the issuance of 8,567,940 additional common shares. 10. Stock Split On September 17, 1997, the Board of Directors approved a two-for-one stock split, which was effected in the form of a 100% stock dividend payable on October 29, 1997 to shareholders of record as of October 1, 1997. An amount equal to the par value of common shares issued was transferred from additional paid-in capital to the common stock account. This transfer has been reflected in the Consolidated Statements of Changes in Shareholders' Equity at January 1, 1995. All references to the number of common shares, except shares authorized, and to per share information in the consolidated financial statements and related notes have been adjusted to reflect the stock split on a retroactive basis. 11. Dividends and Capital Requirements Under New York state insurance law, MBIA Corp. may pay a dividend 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 $176 million available for the payment of dividends to the company as of December 31, 1997. In 1997, no dividends were paid by MBIA Corp. to the company due to cash available from financing activities. In 1996 and 1995, MBIA Corp. declared and paid dividends of $29 million and $83 million, respectively, to the company. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1997. 46 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 12. Long-Term Debt and Lines of Credit Long-term debt consists of:
As of December 31 ------------------------- In thousands 1997 1996 - -------------------------------------------------------------------------------- 9.000% Notes due 2001 $100,000 $100,000 9.375% Notes due 2011 100,000 100,000 8.200% Debentures due 2022 100,000 100,000 7.000% Debentures due 2025 75,000 75,000 7.150% Debentures due 2027 100,000 -- - -------------------------------------------------------------------------------- 475,000 375,000 Less unamortized discount 1,122 990 - -------------------------------------------------------------------------------- Total $473,878 $374,010 - --------------------------------------------------------------------------------
The company's long-term debt is subject to certain covenants, none of which significantly restrict the company's operating activities or dividend-paying ability. MBIA Corp. has a standby line of credit commitment in the amount of $825 million with a group of major Triple-A-rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from September 30, 1997 in excess of the greater of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on September 30, 2004, and contains an annual renewal provision subject to approval by the bank group. The company and MBIA Corp. maintain bank liquidity facilities aggregating $300 million. At December 31, 1997 and 1996, $20.0 million and $29.1 million, respectively, were outstanding under these facilities. The company has outstanding letters of credit for MBIA-MISC that are intended to support the net asset value of certain investment pools managed by MBIA-MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. 13. 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, 1997, the interest rates on these agreements ranged from 4.35% to 8.25%. Principal payments due under these investment agreements in each of the next five years ending December 31, and thereafter, based upon expected withdrawal dates, were as follows:
In thousands Principal Amount - -------------------------------------------------------------------------------- Expected withdrawal date: 1998 $1,141,366 1999 640,452 2000 261,320 2001 57,886 2002 12,824 Thereafter 1,000,806 - -------------------------------------------------------------------------------- Total $3,114,654 - --------------------------------------------------------------------------------
IMC also provides agreements obligating it to purchase designated securities in a bond reserve fund at par value upon the occurrence of certain contractually agreed upon events. The opportunities and risks in these agreements are analogous to those of municipal investment agreements and municipal repurchase agreements. The total par value of securities subject to these agreements was $43 million at December 31, 1997. 14. 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. 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. As of December 31, 1997, insurance in force, net of cessions to reinsurers, had a range of maturity of 1 - 41 years. The distribution of net insurance in force by geographic location and type of bond, excluding $3.2 billion and $3.3 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 1997 and 1996, respectively, is set forth in the following tables: 47 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MBIA Inc. and Subsidiaries
As of December 31 - ------------------------------------------------------------------------------------------------------------------------------------ $ in billions 1997 1996 - -------------------------------------------------------------------------- ----------------------------------------------------- Geographic Net Insurance Number of Issues % of Net Insurance Net Insurance Number of Issues % of Net Insurance Location In Force Outstanding In Force In Force Outstanding In Force - -------------------------------------------------------------------------- ----------------------------------------------------- Domestic California $ 68.4 3,441 14.2% $ 60.7 3,378 14.8% New York 37.2 4,961 7.7 30.4 4,819 7.4 Florida 33.0 1,577 6.8 29.6 1,632 7.2 Texas 24.6 2,086 5.1 21.9 2,052 5.3 New Jersey 24.5 1,859 5.1 18.8 1,863 4.6 Pennsylvania 22.7 2,209 4.7 21.2 2,216 5.1 Illinois 20.0 1,191 4.1 18.5 1,145 4.5 Massachusetts 15.5 1,085 3.2 10.9 1,100 2.6 Ohio 12.4 1,005 2.6 11.1 1,032 2.7 Michigan 11.1 1,016 2.3 9.5 1,021 2.3 - -------------------------------------------------------------------------- ----------------------------------------------------- Subtotal 269.4 20,430 55.8 232.6 20,258 56.5 Other states 203.1 11,931 42.1 170.1 11,502 41.4 - -------------------------------------------------------------------------- ----------------------------------------------------- Total domestic 472.5 32,361 97.9 402.7 31,760 97.9 International 10.1 207 2.1 8.4 169 2.1 - -------------------------------------------------------------------------- ----------------------------------------------------- Total $482.6 32,568 100.0% $411.1 31,929 100.0% - -------------------------------------------------------------------------- -----------------------------------------------------
As of December 31 - ------------------------------------------------------------------------------------------------------------------------------------ $ in billions 1997 1996 - -------------------------------------------------------------------------- ----------------------------------------------------- Net Insurance Number of Issues % of Net Insurance Net Insurance Number of Issues % of Net Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force - -------------------------------------------------------------------------- ----------------------------------------------------- Domestic Municipal: General obligation $118.8 12,016 24.6% $110.5 11,763 26.9% Utilities 75.1 4,739 15.6 67.9 4,799 16.5 Health care 62.2 2,246 12.9 54.0 2,386 13.1 Transportation 40.5 1,487 8.4 30.3 1,520 7.4 Special revenue 34.0 1,641 7.1 28.9 1,543 7.0 Higher education 20.4 1,359 4.2 17.8 1,309 4.3 Ind. dev. and pollution control revenue 19.6 943 4.1 18.1 931 4.4 Housing 18.9 1,891 3.9 17.7 2,455 4.3 Other 11.4 539 2.4 3.8 169 0.9 - -------------------------------------------------------------------------- ----------------------------------------------------- Total municipal 400.9 26,861 83.2 349.0 26,875 84.8 - -------------------------------------------------------------------------- ----------------------------------------------------- Structured finance* 56.1 510 11.5 38.6 349 9.4 - -------------------------------------------------------------------------- ----------------------------------------------------- Other Inv.-owned utilities 9.4 4,610 1.9 8.3 4,293 2.0 Financial institution 5.8 366 1.2 6.4 237 1.6 Corporate direct 0.3 14 0.1 0.4 6 0.1 - -------------------------------------------------------------------------- ----------------------------------------------------- Total other 15.5 4,990 3.2 15.1 4,536 3.7 - -------------------------------------------------------------------------- ----------------------------------------------------- Total domestic 472.5 32,361 97.9 402.7 31,760 97.9 - -------------------------------------------------------------------------- ----------------------------------------------------- International Infrastructure: Sub-sovereign 1.4 53 0.3 1.5 48 0.4 Sovereign 1.3 21 0.3 0.4 7 0.1 Utilities 0.8 60 0.2 0.7 59 0.2 Transportation 0.8 5 0.2 0.9 4 0.2 Higher education 0.6 1 0.1 -- -- -- Housing 0.3 2 0.1 -- -- -- Health care 0.2 6 -- 0.1 3 -- - -------------------------------------------------------------------------- ----------------------------------------------------- Total infrastructure 5.4 148 1.2 3.6 121 0.9 - -------------------------------------------------------------------------- ----------------------------------------------------- Structured finance* 2.6 32 0.5 2.1 22 0.5 - -------------------------------------------------------------------------- ----------------------------------------------------- Other Financial institution 1.9 24 0.4 2.6 25 0.6 Inv.-owned utilities 0.2 3 -- 0.1 1 0.1 - -------------------------------------------------------------------------- ----------------------------------------------------- Total other 2.1 27 0.4 2.7 26 0.7 - -------------------------------------------------------------------------- ----------------------------------------------------- Total international 10.1 207 2.1 8.4 169 2.1 - -------------------------------------------------------------------------- ----------------------------------------------------- Total $482.6 32,568 100.0% $411.1 31,929 100.0% - -------------------------------------------------------------------------- -----------------------------------------------------
* Asset-/mortgage-backed 48 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 15. Reinsurance MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $67.0 billion and $57.6 billion, at December 31, 1997 and 1996, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables:
As of December 31 - --------------------------------------------------------------------------------------------- In billions 1997 1996 - ---------------------------------------------------- ----------------------------- % of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - ---------------------------------------------------- ----------------------------- Domestic California $10.4 15.5% $ 9.4 16.2% New York 5.8 8.7 6.2 10.7 Texas 4.0 6.0 2.9 5.1 New Jersey 3.7 5.5 3.3 5.7 Massachusetts 3.0 4.5 1.4 2.5 Pennsylvania 2.9 4.3 2.9 5.1 Illinois 2.7 4.0 2.6 4.5 Florida 2.6 3.9 2.4 4.1 Colorado 2.4 3.6 1.2 2.1 Puerto Rico 2.3 3.4 1.2 2.1 Washington 1.9 2.8 1.9 3.2 District of Columbia 1.5 2.2 1.5 2.7 - ---------------------------------------------------- ----------------------------- Subtotal 43.2 64.4 36.9 64.0 Other states 19.1 28.6 17.0 29.6 - ---------------------------------------------------- ----------------------------- Total domestic 62.3 93.0 53.9 93.6 International 4.7 7.0 3.7 6.4 - ---------------------------------------------------- ----------------------------- Total $67.0 100.0% $57.6 100.0% - ---------------------------------------------------- -----------------------------
As of December 31 - --------------------------------------------------------------------------------------------- In billions 1997 1996 - ---------------------------------------------------- ----------------------------- % of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - ---------------------------------------------------- ----------------------------- Domestic Municipal: General obligation $12.1 18.1% $14.4 24.9% Utilities 11.5 17.2 10.2 17.7 Transportation 9.6 14.3 6.4 11.1 Health care 8.0 12.0 6.3 11.0 Special revenue 5.0 7.5 3.4 5.9 Ind. dev. and pollution control revenue 3.2 4.7 3.2 5.6 Housing 1.7 2.5 1.6 2.7 Higher education 1.3 1.9 1.5 2.6 Other 2.7 4.0 1.0 1.7 - ---------------------------------------------------- ----------------------------- Total municipal 55.1 82.2 48.0 83.2 - ---------------------------------------------------- ----------------------------- Structured finance* 5.6 8.3 4.5 7.9 - ---------------------------------------------------- ----------------------------- Other Financial institution 1.3 1.9 1.3 2.3 Corporate direct 0.2 0.3 0.1 0.2 Investor-owned utilities 0.1 0.3 -- -- - ---------------------------------------------------- ----------------------------- Total other 1.6 2.5 1.4 2.5 - ---------------------------------------------------- ----------------------------- Total domestic 62.3 93.0 53.9 93.6 - ---------------------------------------------------- ----------------------------- International Infrastructure: Sovereign 0.7 1.1 0.3 0.5 Higher education 0.6 0.9 -- -- Sub-sovereign 0.6 0.9 0.8 1.4 Transportation 0.4 0.6 0.4 0.7 Health care 0.2 0.3 0.1 0.1 Utilities 0.1 0.1 -- -- - ---------------------------------------------------- ----------------------------- Total infrastructure 2.6 3.9 1.6 2.7 - ---------------------------------------------------- ----------------------------- Structured finance* 1.3 1.9 1.1 1.9 - ---------------------------------------------------- ----------------------------- Other Financial institution 0.8 1.2 1.0 1.8 - ---------------------------------------------------- ----------------------------- Total other 0.8 1.2 1.0 1.8 - ---------------------------------------------------- ----------------------------- Total international 4.7 7.0 3.7 6.4 - ---------------------------------------------------- ----------------------------- Total $67.0 100.0% $57.6 100.0% - ---------------------------------------------------- -----------------------------
* Asset-/mortgage-backed 16. 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, 1997, 1996 and 1995 was $4.6 million, $3.9 million and $3.6 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 49 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MBIA Inc. and Subsidiaries company matches employee contributions up to the first 5% of total compensation. Company contributions to the profit sharing/401(k) plan aggregated $1.9 million, $1.7 million and $1.5 million for the years ended December 31, 1997, 1996 and 1995, 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. Of the above amounts for the pension and profit sharing/401(k) plans, $3.4 million, $3.0 million and $2.7 million for the years ended December 31, 1997, 1996 and 1995, respectively, are included in policy acquisition costs. 17. Long-Term Incentive Plans On March 2, 1987, the company adopted a plan for key employees of the company and its subsidiaries to enable those employees to acquire shares of common stock of the company or to benefit from appreciation in the price of the common stock of the company. Options granted will either be Incentive Stock Options (ISOs), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options (NQSOs). ISOs and NQSOs may be granted at a price not less than 100% of the fair value of the company's common stock as determined on the date granted. Options will be exercisable as specified at the time of grant and expire ten years from the date of grant (or shorter if specified or following termination of employment). The Board of Directors of the company has authorized a maximum of 7,242,434 shares of the company's common stock to be granted as options. As of December 31, 1997, 4,889,942 options had been granted, net of expirations and cancellations, leaving the total number available for future grants at 2,352,492. Options granted through 1990 are exercisable in equal annual installments on each of the first three anniversaries of the grant at 100% of the market price at the date of grant. The options granted from 1991 through 1994 are exercisable in five equal annual installments commencing one year after the date of grant. On all options granted from 1991 through 1994, accelerated vesting and exercisability of those options is possible if the company's return on equity for the year is at least equal to the threshold return on equity specified in the annual financial plan and if earnings per share are at least 2.5% greater than plan earnings per share. In December 1995, the MBIA Inc. Board of Directors approved the "MBIA Long-Term Incentive Program." The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of the company's stock. Awards under the long-term program are divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor for the December 1995 award only) 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 December 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000 and the December 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, 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 2001 for the December 1997 award and early 1999 for the December 1995 award in the form of cash or shares of the company's common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1997 and 1996, $3.7 million and $2.9 million, respectively, were recorded as a charge related to the December 1997 and December 1995 ABV awards. Of these amounts, $2.0 million and $1.6 million were included in policy acquisition costs for the same respective periods. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair value (closing price) of the stock on the date of the grant. Each option vests over five years and has a ten-year term. Prior option grants are not taken into account in determining the number of options granted in any year. In December 1997, 219,030 options were awarded. In December 1995, the company adopted a restricted stock program whereby key executive officers are granted restricted shares of the company's stock. Shares are awarded in the name of the employee, who has all rights of a shareholder, subject to certain restrictions or forfeitures. This stock award may only be sold three or four years from the date of grant, at which time the award fully vests. In 1997 and 1996, respectively, a total of 73,696 and 15,506 restricted shares of the company's stock were granted. The fair value of the shares awarded in 1997 and 1996 determined on the grant date is $4.4 million and $0.8 million, respectively, and has been recorded as "Unearned compensation - restricted stock" and is shown as a separate component of shareholders' equity. Unearned compensation is amortized to expense over the appropriate three- to four-year vesting period. 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 50 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the company's financial position or results of operations. As the table below shows, had compensation cost for the company's stock option program been recognized based on the fair value at the grant date, consistent with the recognition provisions of SFAS 123, the impact on the company's net income and earnings per share would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1997 are not likely to be representative of the effects on reported net income and earnings per share for future years.
Years ended December 31 -------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net income (in thousands): Reported $374,176 $322,163 $271,419 Pro-forma 373,447 321,882 271,410 Basic earnings per share: Reported $4.26 $3.75 $3.25 Pro-forma 4.25 3.75 3.25 Diluted earnings per share: Reported $4.22 $3.72 $3.21 Pro-forma 4.21 3.71 3.21
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively; exercise price of $64.1875, $50.938 and $38.563; dividend yield of 1.220%, 1.492% and 1.937%; expected volatility of .2070, .2110 and .2787; risk-free interest rate of 5.80%, 5.96% and 5.97%; and expected option term of 5.72, 5.52 and 5.52 years. A summary of the company's stock option plan as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates, is presented below:
1997 ------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 2,771,516 $27.6900 Granted 219,030 64.1875 Exercised 385,691 57.3585 Expired or canceled 23,620 34.5547 - -------------------------------------------------------------------------------- Outstanding at year-end 2,581,235 $31.9400 - -------------------------------------------------------------------------------- Exercisable at year-end 1,552,229 $24.3400 - -------------------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $18.38
1996 ------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 3,544,960 $22.4300 Granted 312,740 50.9380 Exercised 1,041,064 41.1025 Expired or canceled 45,120 29.6057 - -------------------------------------------------------------------------------- Outstanding at year-end 2,771,516 $27.6900 - -------------------------------------------------------------------------------- Exercisable at year-end 1,593,656 $21.7200 - -------------------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $14.09
1995 ------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 4,182,174 $20.3000 Granted 194,600 38.5630 Exercised 764,894 34.4789 Expired or canceled 66,920 29.3358 - -------------------------------------------------------------------------------- Outstanding at year-end 3,544,960 $22.4300 - -------------------------------------------------------------------------------- Exercisable at year-end 2,358,200 $18.6000 - -------------------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $11.80 - --------------------------------------------------------------------------------
The following table summarizes information about the plan's stock options at December 31, 1997:
Weighted-Average Range of Number Outstanding Remaining Contractual Weighted-Average Number Exercisable Weighted Average Exercise Prices at 12/31/97 Life in Years Exercise Price at 12/31/97 Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ $ 8.2500 to $25.0000 773,661 2.87 $17.9300 773,661 $17.9300 $25.0630 to $30.0630 835,760 6.62 27.2000 442,640 27.1700 $34.5000 to $64.1875 971,814 7.96 47.1500 335,928 35.3700 - ------------------------------------------------------------------------------------------------------------------------------------ Total 2,581,235 6.00 $31.9400 1,552,229 $24.3400 - ------------------------------------------------------------------------------------------------------------------------------------
51 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MBIA Inc. and Subsidiaries 18. Shareholders' Rights Plan In December 1991, the Board of Directors of the company declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of the company's common stock. Each Right entitles its holder to purchase from the company one one-hundredth of a share of the company's Junior Participating Cumulative Preferred Shares at a price of $160, subject to certain adjustments. Initially, the Rights are attached to the common stock and will not be transferable separately nor become exercisable until the earlier to occur of (i) ten business days following the date of the public announcement by the company (the Shares Acquisition Date) that a person or group of persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the outstanding shares of the company's common stock and (ii) ten business days (or later as may be determined by the Board of Directors) after the announcement or commencement of a tender offer or exchange offer which, if successful, would result in the bidder owning 10% or more of the outstanding shares of the company's common stock. However, no person shall be deemed to have acquired or obtained the right to acquire the beneficial ownership of 10% or more of the outstanding shares of the company's common stock, if the Board of Directors determines that such acquisition is inadvertent, and such person promptly divests itself of a sufficient number of shares to be below the 10% ownership threshold. If the acquiring person or group acquires beneficial ownership of 10% or more of the company's common stock (except pursuant to a tender or exchange offer for all outstanding common stock of the company, determined by the company's independent directors to be at a fair price and in the best interests of the company and its shareholders), each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the company having a fair value of $320. Similarly, if after an acquiring person or group so acquires 10% or more of the company's common stock, the company is acquired in a merger or other business combination and is not the surviving entity, or its common stock is changed or exchanged in whole or in part, or 50% or more of the company's assets, cash flow or earning power is sold, each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the acquiring company having a fair value of $320. The Board of Directors may redeem the Rights in whole at $.01 per Right at any time prior to ten business days following the Shares Acquisition Date. Further, at any time after a person or group acquires 10% or more, but less than 50%, of the company's common stock, the Board of Directors of the company may exchange the Rights (other than those held by the acquirer) in whole or in part, at an exchange ratio of one share of common stock per Right. The Board of Directors may also amend the Rights at any time prior to the Shares Acquisition Date. The Rights will expire on December 12, 2001, unless earlier redeemed or exchanged. 19. 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, 1997 is $340 million. In 1995, the company sold 78,000 shares of Credit Local de France, a former major shareholder. Realized gains from the sale amounted to $3.5 million. The company had investment management and advisory agreements with an affiliate of a former principal shareholder, which provided for payment of fees on assets under management. Total related expenses for the year ended December 31, 1995 amounted to $2.5 million. These agreements were terminated on January 1, 1996, at which time CMC assumed full management of MBIA Corp.'s consolidated investment portfolios. The company has various insurance coverages provided by a former principal shareholder, the cost of which totaled $2.2 million, $2.1 million and $1.9 million, respectively, for the years ended December 31, 1997, 1996 and 1995. MuniServices provides financing to Capital Asset under various borrowing arrangements. The net balance outstanding under these agreements at December 31, 1997 and 1996 was $49.7 million and $15.7 million, respectively, including accrued interest, and is included in other assets on the company's consolidated balance sheet. Net interest earned under these agreements during 1997 and 1996 was $7.0 million and $2.1 million, respectively. 20. Public Offerings of Common Stock In July 1997, the company completed a public offering of 2,300,000 new shares of the company's common stock. The company realized $126 million in new capital from the offering. In February 1996, the company completed a public offering of 7,780,000 shares of the company's common stock. Of the shares offered, 6,240,000 were sold by an existing shareholder and 1,540,000 were new shares offered by the company. The company realized $55 million in new capital from the offering. 21. 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 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 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. 52 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Fixed-maturity securities - The fair value of fixed-maturity securities is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Short-term investments - Short-term investments are carried at amortized cost which approximates fair value. Other investments - Other investments include the company's interest in a limited partnership and a mutual fund that invests principally in marketable equity securities. 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%.
As of December 31, 1997 As of December 31, 1996 ----------------------------- ----------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------- ----------------------------- Assets: Fixed-maturity securities $4,867,254 $4,867,254 $4,149,700 $4,149,700 Short-term investments 245,029 245,029 176,088 176,088 Other investments 16,802 16,802 14,851 14,851 Municipal investment agreement portfolio 3,341,394 3,341,394 3,293,298 3,293,298 Cash and cash equivalents 23,181 23,181 7,356 7,356 Securities borrowed or purchased under agreements to resell 472,963 473,841 217,000 219,718 Prepaid reinsurance premiums 252,893 218,571 216,846 189,631 Receivable for investments sold 13,435 13,435 980 980 Liabilities: Deferred premium revenue 1,984,104 1,716,477 1,785,875 1,545,976 Loss and loss adjustment expense reserves 78,872 78,872 59,314 59,314 Municipal investment agreements 1,974,165 2,024,230 2,290,609 2,297,272 Municipal repurchase agreements 1,177,022 1,214,641 968,671 982,410 Long-term debt 473,878 521,871 374,010 402,976 Short-term debt 20,000 20,000 29,100 29,100 Securities loaned or sold under agreements to repurchase 606,263 607,304 217,000 221,575 Payable for investments purchased 44,007 44,007 52,029 52,029 Off-balance sheet instruments: Installment premiums -- 349,619 -- 287,969
53 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) MBIA Inc. and Subsidiaries 22. Subsequent Event - CapMAC Merger (Unaudited) On February 17, 1998, MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a merger to be accounted for as a pooling of interests. Under the terms of the merger, CapMAC shareholders received 0.46751 of a share of MBIA Inc. common stock for each CapMAC share, for a total of 8,567,940 newly issued shares of MBIA Inc. common stock, the value of which is $536 million. CapMAC, through its subsidiaries, provides structured financial solutions; financial guarantee insurance of structured securities - primarily asset-backed securities; advisory and structuring services in connection with structured financings; investment management services, and access to funding for its customers through third-party owned and managed securitization funding vehicles. Capital Markets Assurance Corporation (CapMAC Corp.), CapMAC's principal operating subsidiary, is a worldwide provider of financial guarantee insurance for structured securities. CapMAC Corp. is rated Triple-A by Moody's Investors Service, Standard & Poor's Rating Services, Duff & Phelps Credit Rating Co. and Nippon Investors Service. The following unaudited pro forma data summarizes the combined results of MBIA Inc. and CapMAC accounted for as a pooling of interests under APB 16 "Business Combinations":
Years ended December 31 Dollars in millions ------------------------------------ except per share amounts 1997 1996 1995 - -------------------------------------------------------------------------------- Revenue $ 743 $ 613 $ 515 Net income 398 342 286 Earnings per common share:* Basic 4.16 3.67 3.20 Diluted 4.10 3.60 3.14
* The pro forma earnings per common share are based on the sum of the historical average common shares outstanding, as reported by MBIA Inc., and the historical average common shares outstanding for CapMAC converted to MBIA Inc. shares at the exchange ratio of 0.46751. The unaudited pro forma financial information presented is not necessarily indicative of either the results of operations that would have occurred had the merger taken place at the beginning of these periods or the future results of operations of the combined companies. - -------------------------------------------------------------------------------- 23. Quarterly Financial Information (Unaudited) A summary of selected quarterly income statement information follows:
In thousands except per share amounts 1997 First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------------------------------ Gross premiums written $ 92,092 $164,662 $124,371 $161,891 $543,016 Net premiums written 86,113 141,828 108,167 127,127 463,235 Premiums earned 71,377 73,220 74,208 78,572 297,377 Investment income and realized gains and losses 72,522 69,969 78,357 81,505 302,353 All other revenues 9,968 9,816 14,122 20,346 54,252 Income before income taxes 115,101 112,264 121,953 130,251 479,569 Net income $ 90,939 $ 89,020 $ 96,565 $ 97,652 $374,176 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per common share: Basic $ 1.05 $ 1.03 $ 1.09 $ 1.09 $ 4.26 Diluted $ 1.04 $ 1.02 $ 1.08 $ 1.08 $ 4.22 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 First Second Third Fourth Year - ------------------------------------------------------------------------------------------------------------------------------------ Gross premiums written $120,599 $134,001 $ 79,910 $126,165 $460,675 Net premiums written 105,884 122,087 70,874 106,978 405,823 Premiums earned 60,352 62,066 64,538 64,756 251,712 Investment income and realized gains and losses 62,758 65,334 67,636 66,145 261,873 All other revenues 7,087 7,625 7,850 9,390 31,952 Income before income taxes 98,574 100,830 105,258 103,468 408,130 Net income $ 77,625 $ 79,737 $ 83,321 $ 81,480 $322,163 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per common share: Basic $ 0.91 $ 0.93 $ 0.97 $ 0.94 $ 3.75 Diluted $ 0.90 $ 0.92 $ 0.96 $ 0.93 $ 3.72 - ------------------------------------------------------------------------------------------------------------------------------------
Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. 54 - -------------------------------------------------------------------------------- MBIA INC. BOARD OF DIRECTORS & SENIOR OFFICERS Board of Directors Joseph W. Brown, Jr. [3,4,5] Chairman Crum & Forster Holdings, Inc. Seattle, Washington David C. Clapp [3,5,6] Limited Partner The Goldman Sachs Group, L.P. New York, New York Gary C. Dunton [1,6]* Former President Family and Business Insurance Group USF&G Insurance Baltimore, Maryland David H. Elliott [2,4] Chairman and Chief Executive Officer MBIA Inc. Armonk, New York Claire L. Gaudiani [2,3] President Connecticut College New London, Connecticut William H. Gray, III [1,2] President and Chief Executive Officer United Negro College Fund, Inc. Fairfax, Virginia Freda S. Johnson [1,6] President Government Finance Associates, Inc. New York, New York Daniel P. Kearney [3,4,6] Executive Vice President Aetna Inc. Hartford, Connecticut James A. Lebenthal [1,4,6] Chairman Lebenthal & Co., Inc. New York, New York Robert B. Nicholas [1,6]** Private investor Vero Beach, Florida Pierre-Henri Richard Chairman of the Executive Board Credit Local de France Paris, France John A. Rolls [1,5] President Thermion Systems International Stamford, Connecticut Richard L. Weill [5] Vice Chairman, MBIA Inc. President, MBIA Insurance Corp. Armonk, New York * resigned from the Board on December 31, 1997 ** did not stand for re-election in May, 1997 Board Committees 1. Audit 2. Committee on Directors 3. Compensation and Organization 4. Executive 5. Finance 6. Risk Oversight Senior Officers David H. Elliott+ Chairman and Chief Executive Officer MBIA Inc. and MBIA Insurance Corp. Richard L. Weill+ Vice Chairman MBIA Inc. President MBIA Insurance Corp. Neil G. Budnick+ President, Public and Corporate Finance Division MBIA Insurance Corp. John B. Caouette+ ++ President, Structured Finance Division MBIA Insurance Corp. Gary C. Dunton+ Chief Investment Officer President, Investment Management and Financial Services Division MBIA Insurance Corp. Louis G. Lenzi+ General Counsel and Secretary MBIA Inc. Kevin D. Silva+ Senior Vice President MBIA Inc. Julliette S. Tehrani+ Executive Vice President, Chief Financial Officer and Treasurer MBIA Inc. + member of Executive Policy Committee ++ Mr. Caouette was formerly CEO of CapMAC Holdings Inc. He joined MBIA on February 17, 1998. Steven A. Campo Managing Director MBIA Insurance Corp. Steven C. Citron Managing Director MBIA Insurance Corp. Dall W. Forsythe Managing Principal MBIA & Associates Consulting, Inc. Margaret D. Garfunkel President MBIA Investment Management Corp. Francie Heller President MBIA Municipal Investors Service Corp. Garfield Johnson, Jr. Senior Vice President MBIA Insurance Corp. Michael J. Maguire Senior Vice President MBIA Insurance Corp. Managing Director MBIA-AMBAC International President, MBIA Assurance S.A. Robert M. Ohanesian President MBIA Capital Management Corp. David N. Penchoff Managing Director MBIA Insurance Corp. 55 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Senior Officers (continued) SHAREHOLDER INFORMATION MBIA Inc. and Subsidiaries John S. Pizzarelli Managing Director MBIA Insurance Corp. Emmeline Rocha-Sinha Managing Director MBIA Insurance Corp. Thomas O. Scherer Senior Vice President MBIA Insurance Corp. David C. Stevens Senior Vice President MBIA Insurance Corp. President MBIA & Associates Consulting, Inc. Elizabeth B. Sullivan Vice President and Controller MBIA Insurance Corp. Christopher W. Tilley President MBIA MuniServices Company Ram D. Wertheim Managing Director MBIA Insurance Corp Ruth M. Whaley Managing Director MBIA Insurance Corp. Senior Officer Retirees: Effective January 2, 1998 Janis S. Christensen Executive Vice President MBIA Inc. Effective February 15, 1998 James E. Malling Senior Executive Vice President MBIA Inc. Stock Exchange Listing MBIA Inc. common stock is listed on the New York Stock Exchange (symbol: MBI). The approximate number of shareholders of record of MBIA's common stock, including individual owners, was 448 as of December 31, 1997. Annual Meeting All shareholders are cordially invited to attend the annual shareholders' meeting, which will be held Thursday, May 14, 1998 at 10 a.m. at MBIA Inc. in Armonk, New York. A formal notice of the meeting, together with a proxy statement and proxy form, will be mailed to all shareholders. Financial and Other Information Quarterly earnings, annual reports, Form 10-K, corporate news and other company information is available on MBIA's web site: www.mbia.com. Copies of MBIA's corporate financial information can also be obtained by writing to Shareholder Information at MBIA. Members of the financial community seeking additional information about MBIA should contact: Judith C. Radasch Vice President, Investor Relations 914-765-3014 e-mail: Judy.Radasch@mbia.com Julliette S. Tehrani Executive Vice President, Chief Financial Officer and Treasurer 914-765-3020 e-mail: Julie.Tehrani@mbia.com 1998 Key Financial Dates Payment of future dividends is dependent upon results of MBIA's operations, financial condition and other business considerations. Dividend Declarations March 19, 1998 June 15, 1998 September 17, 1998 December 10, 1998 Record Dates March 30, 1998 June 26, 1998 September 28, 1998 December 21, 1998 Dividend Payment Dates April 15, 1998 July 15, 1998 October 15, 1998 January 15, 1999 Transfer Agent, Registrar and Dividend Disbursing Agent ChaseMellon Shareholder Services, L.L.C. 85 Challenger Road Overpeck Centre Ridgefield Park, New Jersey 07660 800-288-9541 Auditors Coopers & Lybrand L.L.P. New York, New York Trademarks The MBIA logotype, MBIA Insurance Corporation, CLASS, ASSURETY and GIC Wrap are trademarks of MBIA. Kool-Aid(R) is a registered trademark of Kraft Foods, Inc. 56 - -------------------------------------------------------------------------------- SHAREHOLDER INFORMATION (CONTINUED) COMMON STOCK DATA Dividends Paid Market Price* ---------------------------------------- Per Share High Low Close ======================================================================== 1997 1st Quarter $0.1900 50 13/16 46 1/4 47 15/16 2nd Quarter 0.1900 61 45 7/16 56 7/16 3rd Quarter 0.1900 64 9/16 55 3/4 62 3/4 4th Quarter 0.1950 67 3/8 56 3/4 66 13/16 - ------------------------------------------------------------------------ Dividends Paid Market Price* ---------------------------------------- Per Share High Low Close ======================================================================== 1996 ======================================================================== 1st Quarter $0.1725 39 11/16 35 37 1/2 2nd Quarter 0.1725 40 7/16 35 1/16 38 15/16 3rd Quarter 0.1725 43 5/16 36 1/2 42 7/8 4th Quarter 0.1900 52 5/16 42 13/16 50 5/8 - ------------------------------------------------------------------------ * Based on New York Stock Exchange trading data. - ------------------------------------------------------------------------ $1,000 INVESTED ON DECEMBER 31, 1987* [LINE GRAPH]
X-Axis 87 88 89 90 91 92 93 94 95 96 97 - --------------------------------------------------------------------------------------------------------------------------- Y-Axis - ----------------------------- MBIA INC. 1,000 1,551 2,572 2,290 3,974 5,301 5,322 4,846 6,601 9,065 12,125 S&P Financial Index 1,000 1,184 1,571 1,234 1,859 2,293 2,548 2,457 3,784 5,114 7,573 S&P 500 Index 1,000 1,166 1,534 1,487 1,939 2,086 2,296 2,326 3,200 3,934 5,246
* includes reinvested dividends [PHOTO] DESIGN: Bloch Graulich Whelan Inc, New York PHOTOGRAPHY: Black and White: Bill Gallery Color: Bob Sacha p. 17: Max Lerouge, Lille Metropole Communaute urbaine Special thanks to the following "MBIA Kids" for participating in our 1997 Annual Report: Claire DeLaurentis, daughter of Lynne DeLaurentis, Investor-Owned Utility Department; Laura Mansour, daughter of J. Paul Mansour, Secondary Market Department; Sade Banks, daughter of Joyce Banks, Market Research; Melanie Reagan, niece of Kathleen Reagan, Controller's Department; and Robert Walz, son of Richard Walz, MBIA Municipal Investors Service Corp. MBIA MISSION AND CORPORATE RESPONSIBILITY MBIA's mission is to promote growth and prosperity in communities around the world. We work toward fulfilling our mission by providing products and services of enduring quality that strengthen the financial resources and capabilities of local, state and sovereign governments. With offices in five countries, MBIA touches the lives of many highly diverse groups including employees, clients, shareholders, business partners and taxpayers at large. In every business decision we make and every action we take, our employees are guided by five corporate values: customer service, performance excellence, integrity, cooperation and good corporate citizenship. We extend these values to the communities in which we live and work: MBIA provides funding and staff time to a number of charitable organizations nationwide. EX-21 8 LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF MBIA INC. NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- MBIA Insurance Corporation New York Municipal Issuers Service Corporation New York MBIA Municipal Investors Service Corporation Delaware MBIA Investment Management Corp. Delaware MBIA Capital Management Corp. Delaware MBIA Capital Corp. Delaware MBIA MuniServices Company Delaware MBIA-AMBAC International Marketing Australia Services, Pty. Limited MBIA Assurance S.A. France MBIA Insurance Corp. of Illinois Illinois American Money Management Associates, Inc. Colorado Municipal Tax Collection Bureau, Inc. Pennsylvania MBIA MuniFinancial California John T. Austin, Inc. California Allen W. Charkow, Inc. California Municipal Resource Consultants California Muni Resources, LLc Delaware CapMAC Holdings Inc. Delaware Capital Markets Assurance Corporation New York CapMAC Financial Services, Inc. Delaware CapMAC Financial Services (Europe) Ltd. United Kingdom CapMAC Asia Ltd. Bermuda CapMAC Assurance S.A. France EX-23 9 CONSENT OF COOPERS & LYBRAND L.L.P. 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 S-8 (Nos. 33- 22441 and 33-46062 and 333-34101) of: (1) Our report dated February 3, 1998, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which report is incorporated by reference in this Annual Report on Form 10-K for fiscal year ended December 31, 1997; (2) Our report dated February 3, 1998 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, 1997; and (3) Our report dated February 3, 1998 on our audits of the consolidated financial statements of MBIA Insurance Corporation as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which is included in exhibit 99 to this Annual Report on Form 10-K for the fiscal year ended December 31, 1997. /s/ COOPERS & LYBRAND L.L.P. New York, New York March 26, 1998 EX-24 10 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY The undersigned hereby constitutes and appoints each of David H. Elliott, Richard L. Weill and Louis G. Lenzi as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1997, and any or all amendments thereto, and to file the same, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand this 19th day of March, 1998. /s/ Joseph W. Brown, Jr. /s/ Freda S. Johnson - ----------------------------- ------------------------------- Joseph W. Brown, Jr. Freda S. Johnson /s/ David C. Clapp. /s/ Daniel P. Kearney - ----------------------------- ------------------------------- David C. Clapp Daniel P. Kearney /s/ James A. Lebenthal /s/ Claire L. Gaudiani - ----------------------------- ------------------------------- James A. Lebenthal Claire L. Gaudiani /s/ Pierre-Henri Richard /s/ William H. Gray, III - ----------------------------- ------------------------------- Pierre-Henri Richard William H. Gray, III - ------------------------------ John A. Rolls EX-27.1 11 FINANCIAL DATA SCHEDULE YEAR 1997
7 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 4,867,254 0 0 0 0 0 8,470,479 23,181 0 154,100 9,810,762 78,872 1,984,104 0 0 493,878 89,461 0 0 2,958,792 9,810,762 297,377 281,459 17,478 57,668 18,673 27,873 49,947 479,569 105,393 374,176 0 0 0 374,176 4.26 4.22 0 0 0 0 0 0 0
EX-27.2 12 FINANCIAL DATA SCHEDULE 9 MOS 1997
7 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 4,725,555 0 0 0 0 0 8,167,595 8,416 0 153,487 9,383,833 73,246 1,913,605 0 0 493,849 44,678 0 0 2,862,548 9,383,833 218,805 205,832 12,974 35,948 13,150 20,612 36,766 349,318 72,794 276,524 0 0 0 276,524 3.16 3.13 0 0 0 0 0 0 0
EX-27.3 13 FINANCIAL DATA SCHEDULE 6 MOS 1997
7 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 4,342,607 0 0 0 0 0 7,814,364 34,003 0 151,750 8,906,322 68,114 1,873,916 0 0 434,065 43,410 0 0 2,578,681 8,906,322 144,597 133,984 6,855 21,436 8,258 13,575 23,789 227,365 47,406 179,959 0 0 0 179,959 2.08 2.06 0 0 0 0 0 0 0
EX-27.4 14 FINANCIAL DATA SCHEDULE 3 MOS 1997
7 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 4,099,489 0 0 0 0 0 7,504,337 21,064 0 151,271 8,496,788 62,302 1,794,148 0 0 414,037 43,334 0 0 2,427,413 8,496,788 71,377 66,539 4,374 11,577 3,435 6,745 12,138 115,101 24,162 90,939 0 0 0 90,939 1.05 1.04 0 0 0 0 0 0 0
EX-27.5 15 FINANCIAL DATA SCHEDULE YEAR 1996
7 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,149,700 0 0 0 0 0 7,648,187 7,356 0 147,750 8,562,015 59,314 1,785,875 0 0 403,110 43,294 0 0 2,436,403 8,562,015 251,712 247,561 11,740 34,524 15,334 24,660 46,654 408,130 85,967 322,163 0 0 0 322,163 3.75 3.72 0 0 0 0 0 0 0
EX-27.6 16 FINANCIAL DATA SCHEDULE 9 MOS 1996
7 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 3,964,913 0 0 0 0 0 7,200,787 9,135 0 144,937 7,941,978 51,641 1,733,887 0 0 416,382 43,189 0 0 2,318,982 7,941,978 186,956 183,563 9,702 25,025 10,354 18,294 34,625 304,662 63,979 240,683 0 0 0 240,683 2.81 2.78 0 0 0 0 0 0 0
EX-27.7 17 FINANCIAL DATA SCHEDULE 6 MOS 1996
7 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 3,813,749 0 0 0 0 0 7,177,249 11,652 0 143,536 7,869,332 50,437 1,728,845 0 0 412,555 43,005 0 0 2,226,361 7,869,332 122,418 120,571 6,587 15,646 7,466 11,890 22,074 199,404 42,042 157,362 0 0 0 157,362 1.84 1.82 0 0 0 0 0 0 0
EX-27.8 18 FINANCIAL DATA SCHEDULE 3 MOS 1996
7 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 3,784,836 0 0 0 0 0 6,743,217 5,744 0 140,919 7,405,437 46,376 1,666,945 0 0 373,927 42,856 0 0 2,199,118 7,405,437 60,352 59,098 2,692 8,055 3,178 5,900 10,549 98,574 20,949 77,625 0 0 0 77,625 .91 .90 0 0 0 0 0 0 0
EX-27.9 19 FINANCIAL DATA SCHEDULE YEAR 1995
7 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 3,652,621 0 0 0 0 0 6,607,346 23,258 0 140,348 7,267,450 42,505 1,616,315 0 0 391,900 0 0 42,077 2,192,189 7,267,450 215,072 219,858 11,312 15,980 10,639 21,283 41,805 345,030 73,611 271,419 0 0 0 271,419 3.25 3.21 0 0 0 0 0 0 0
EX-99 20 FINANCIAL STATEMENTS EXHIBIT 99 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 Report of Independent Accountants To the Board of Directors and Shareholder of MBIA Insurance Corporation: We have audited the accompanying consolidated balance sheets of MBIA Insurance Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBIA Insurance Corporation and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ COOPERS & LYRAND L.L.P. New York, New York February 3, 1998. MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
December 31, 1997 December 31, 1996 ------------------- ------------------- Assets Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,600,528 and $4,001,562) $4,867,254 $4,149,700 Short-term investments, at amortized cost (which approximates fair value) 242,730 169,889 Other investments 16,802 14,851 ---------- ---------- Total investments 5,126,786 4,334,440 Cash and cash equivalents 3,983 3,288 Securities purchased under agreements to resell 182,820 108,900 Accrued investment income 78,601 65,194 Deferred acquisition costs 154,100 147,750 Prepaid reinsurance premiums 252,893 216,846 Goodwill (less accumulated amortization of $47,152 and $42,262) 95,829 100,718 Property and equipment, at cost (less accumulated depreciation of $18,256 and $14,782) 53,484 47,176 Receivable for investments sold 1,616 975 Other assets 37,437 40,871 ---------- ---------- Total assets $5,987,549 $5,066,158 ========== ========== Liabilities and Shareholder's Equity Liabilities: Deferred premium revenue $1,984,104 $1,785,875 Loss and loss adjustment expense reserves 78,872 59,314 Securities sold under agreements to repurchase 182,820 108,900 Deferred income taxes 251,134 195,704 Payable for investments purchased 23,020 48,811 Other liabilities 103,740 63,683 ---------- ---------- Total liabilities 2,623,690 2,262,287 ---------- ---------- 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 1,139,949 1,041,876 Retained earnings 2,042,323 1,651,315 Cumulative translation adjustment (8,699) (1,188) Unrealized appreciation of investments, net of deferred income tax provision of $94,416 and $52,175 175,286 96,868 ---------- ---------- Total shareholder's equity 3,363,859 2,803,871 ---------- ---------- Total liabilities and shareholder's equity $5,987,549 $5,066,158 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. - 2 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ----------------------------------------------- 1997 1996 1995 ------------- ------------ ------------ Revenues: Gross premiums written $544,974 $462,444 $349,812 Ceded premiums (79,781) (54,852) (45,050) ------------- ------------ ------------ Net premiums written 465,193 407,592 304,762 Increase in deferred premium revenue (165,858) (154,111) (88,365) ------------- ------------ ------------ Premiums earned (net of ceded premiums of $43,734, $38,893 and $30,655) 299,335 253,481 216,397 Net investment income 282,460 247,286 219,834 Net realized gains 17,478 11,740 7,777 Other 1,201 3,163 2,168 ------------- ------------ ------------ Total revenues 600,474 515,670 446,176 ------------- ------------ ------------ Expenses: Losses and loss adjustment 18,673 15,334 10,639 Policy acquisition costs, net 27,873 24,660 21,283 Operating 50,016 46,654 41,812 ------------- ------------ ------------ Total expenses 96,562 86,648 73,734 ------------- ------------ ------------ Income before income taxes 503,912 429,022 372,442 Provision for income taxes 112,904 90,562 81,748 ------------- ------------ ------------ Net income $391,008 $338,460 $290,694 ============= ============ ============
The accompanying notes are an integral part of the consolidated financial statements. - 3 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1997, 1996 and 1995 (In thousands except per share amounts)
Unrealized Common Stock Additional Cumulative Appreciation ------------------------- Paid-in Retained Translation (Depreciation) Shares Amount Capital Earnings Adjustment of Investments ----------- ----------- ----------- ----------- ----------- -------------- Balance, January 1, 1995 100,000 $ 15,000 $ 953,655 $ 1,134,061 $ 427 $ (47,640) Net income -- -- -- 290,694 -- -- Change in foreign currency translation -- -- -- -- 2,277 -- Change in unrealized appreciation of investments net of change in deferred income taxes of $(103,707) -- -- -- -- -- 192,369 Dividends declared (per common share $829.00) -- -- -- (82,900) -- -- Capital contribution from MBIA Inc. -- -- 52,800 -- -- -- Tax reduction related to tax sharing agreement with MBIA Inc. -- -- 15,129 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1995 100,000 15,000 1,021,584 1,341,855 2,704 144,729 ----------- ----------- ----------- ----------- ----------- ----------- Net income -- -- -- 338,460 -- -- Change in foreign currency translation -- -- -- -- (3,892) -- Change in unrealized appreciation of investments net of change in deferred income taxes of $26,197 -- -- -- -- -- (47,861) Dividends declared (per common share $290.00) -- -- -- (29,000) -- -- Tax reduction related to tax sharing agreement with MBIA Inc. -- -- 20,292 -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1996 100,000 15,000 1,041,876 1,651,315 (1,188) 96,868 ----------- ----------- ----------- ----------- ----------- ----------- Net income -- -- -- 391,008 -- -- Change in foreign currency translation -- -- -- -- (7,511) -- Change in unrealized appreciation of investments net of change in deferred income taxes of ($42,241) -- -- -- -- -- 78,418 Capital contribution from MBIA Inc. -- -- 80,000 -- -- -- Tax reduction related to tax sharing agreement with MBIA Inc. -- -- 18,073 -- -- -- =========== =========== =========== =========== =========== =========== Balance, December 31, 1997 100,000 $ 15,000 $ 1,139,949 $ 2,042,323 ($ 8,699) $ 175,286 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. - 4 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 --------------------------------------------------- 1997 1996 1995 --------------- ---------------- ---------------- Cash flows from operating activities: Net income $ 391,008 $ 338,460 $ 290,694 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (13,407) (4,947) (4,900) Increase in deferred acquisition costs (6,350) (7,402) (7,300) Increase in prepaid reinsurance premiums (36,047) (15,959) (14,395) Increase in deferred premium revenue 201,905 170,070 104,104 Increase in loss and loss adjustment expense reserves 19,558 16,809 2,357 Depreciation 3,934 2,952 2,676 Amortization of goodwill 4,889 4,896 4,929 Amortization of bond (discount) premium, net (10,830) (7,526) (2,426) Net realized gains on sale of investments (17,478) (11,740) (7,777) Deferred income taxes 13,382 8,982 11,391 Other, net 50,258 26,687 29,079 --------------- ---------------- ---------------- Total adjustments to net income 209,814 182,822 117,738 --------------- ---------------- ---------------- Net cash provided by operating activities 600,822 521,282 408,432 --------------- ---------------- ---------------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (2,090,236) (1,519,213) (897,128) Sale of fixed-maturity securities, net of receivable for investments sold 1,247,860 873,823 473,352 Redemption of fixed-maturity securities, net of receivable for investments redeemed 190,803 158,087 83,448 Sale (purchase) of short-term investments, net (18,922) 4,676 (32,281) Sale (purchase) of other investments, net 664 468 (692) Capital expenditures, net of disposals (10,296) (8,970) (4,228) --------------- ---------------- ---------------- Net cash used by investing activities (680,127) (491,129) (377,529) --------------- ---------------- ---------------- Cash flows from financing activities: Capital contribution from MBIA Inc. 80,000 -- 52,800 Dividends paid -- (29,000) (82,900) --------------- ---------------- ---------------- Net cash used by financing activities 80,000 (29,000) (30,100) --------------- ---------------- ---------------- Net increase in cash and cash equivalents 695 1,153 803 Cash and cash equivalents - beginning of year 3,288 2,135 1,332 --------------- ---------------- ---------------- Cash and cash equivalents - end of year $ 3,983 $ 3,288 $ 2,135 =============== ================ ================ Supplemental cash flow disclosures: Income taxes paid $ 82,125 $ 63,018 $ 50,790
The accompanying notes are an integral part of the consolidated financial statements. - 5 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business and Organization MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). In January 1990, MBIA Illinois ceded its portfolio of net insured obligations to MBIA Corp. in exchange for cash and investments equal to its unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc. contributed the common stock of BIG to MBIA Corp. resulting in additional paid-in capital of $200 million. The insured portfolio acquired from BIG Ins. consists of municipal obligations with risk characteristics similar to those insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois. Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6 million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities. - 6 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for MBIA Inc., its municipal cash management service businesses and public pension funds. In 1995, portfolio management for a portion of MBIA Corp.'s insurance related investment portfolio was transferred to CMC; the management of the balance of this portfolio was transferred in January 1996. In early 1998, MBIA Inc. and CapMAC Holdings Inc. consummated a merger to be accounted for as a pooling of interests. See Note 16 for details regarding this merger. 2. Significant Accounting Policies The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: Consolidation The consolidated financial statements include the accounts of MBIA Corp. and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. Investments MBIA Corp.'s entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholder's equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixed-maturity securities with a remaining term to maturity of less than one year. Investment income is recorded as earned. - 7 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 a limited partnership and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from these investments as a component of investment income. In addition, MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholder's equity. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and demand deposits with banks. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is MBIA Corp.'s policy to take possession of securities purchased under agreements to resell. MBIA Corp. minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with MBIA Corp. when deemed necessary. Policy Acquisition Costs Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. Premium Revenue Recognition Upfront premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Installment premiums are - 8 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) earned over each installment period - generally one year or less. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where MBIA Corp. insures the refunding issue, is earned at that time, since there is no longer risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. Advisory Fee Revenue Recognition MBIA Corp. collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. Goodwill Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. Property and Equipment Property and equipment consists of MBIA Corp.'s headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expenses as incurred. Losses and Loss Adjustment Expenses Loss and loss adjustment expense (LAE) reserves are established in an amount equal to MBIA Corp.'s estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries, under salvage and subrogation rights. The total reserve is calculated by - 9 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) applying a loss factor, determined based on an independent rating agency study of bond defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management of MBIA Corp. periodically evaluates its estimates for losses and LAE and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims, but the reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. Income Taxes MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax provision for MBIA Corp. for financial reporting purposes is determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time MBIA Corp. may present the tax and loss bonds for redemption to satisfy the additional tax liability. Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholder's - 10 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. 3. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. This statement will require MBIA Corp. to report in the financial statements, in addition to net income, comprehensive income and its components including, as applicable, foreign currency items, unearned compensation from restricted stock awards and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption, MBIA Corp. will be required to reclassify financial statements for earlier periods provided for comparative purposes. Adoption of the statement will not change the content of the financial statements; instead it will only change the presentation. MBIA Corp. has not yet determined the manner in which comprehensive income will be displayed. Also, in June 1997, FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting information about operating segments in annual financial statements, and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. Under SFAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. MBIA Corp.'s future segment presentation has not yet been determined. 4. Statutory Accounting Practices The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk; - 11 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements, and reserves for case basis losses and LAE are established, at present value, for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on MBIA Corp.'s reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. 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 1997 1996 - -------------------------------------------------------------------------------- GAAP shareholder's equity $3,363,859 $2,803,871 Premium revenue recognition (408,654) (368,762) Deferral of acquisition costs (154,100) (147,750) Unrealized (gains) losses (266,727) (148,138) Contingency reserve (1,094,117) (892,793) Loss and loss adjustment expense reserves 53,938 39,065 Deferred income taxes 251,134 195,704 Tax and loss bonds 129,508 103,008 Goodwill (95,829) (100,718) Other (18,814) (16,465) - -------------------------------------------------------------------------------- Statutory capital and surplus $1,760,198 $1,467,022 - --------------------------------------------------------------------------------
- 12 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 1997, 1996 and 1995 was $377.1 million, $316.6 million and $278.3 million, respectively. 5. Premiums Earned from Refunded and Called Bonds Premiums earned include $50.9 million, $44.4 million and $34.0 million for 1997, 1996 and 1995, 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, 1997 and 1996:
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 6,451 $ 191 $ -- $ 6,642 Corporate and other obligations 1,193,321 36,106 (472) 1,228,955 Mortgage-backed 541,898 18,659 (732) 559,825 Tax-exempt bonds State and municipal obligations 3,101,588 213,551 (577) 3,314,562 - -------------------------------------------------------------------------------------------------------------- Total $ 4,843,258 $268,507 $(1,781) $5,109,984 - --------------------------------------------------------------------------------------------------------------
- 13 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- December 31, 1996 Taxable bonds United States Treasury and Government Agency $ 6,585 $ 171 $ (10) $ 6,746 Corporate and other obligations 767,472 13,978 (7,272) 774,178 Mortgage-backed 472,295 12,185 (4,003) 480,477 Tax-exempt bonds State and municipal obligations 2,925,099 137,389 (4,300) 3,058,188 - -------------------------------------------------------------------------------------------------------------- Total $4,171,451 $163,723 $(15,585) $ 4,319,589 - --------------------------------------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $7.7 million and $7.8 million as of December 31, 1997 and 1996, respectively, were on deposit with various regulatory authorities to comply with insurance laws. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1997. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Amortized Fair In thousands Cost Value - -------------------------------------------------------------------------------- Maturity Within 1 year $ 231,793 $ 231,777 Beyond 1 year but within 5 years 639,988 670,038 Beyond 5 years but within 10 years 1,414,321 1,490,227 Beyond 10 years but within 15 years 908,776 980,729 Beyond 15 years but within 20 years 851,402 910,878 Beyond 20 years 255,080 266,510 - -------------------------------------------------------------------------------- 4,301,360 4,550,159 Mortgage-backed 541,898 559,825 - -------------------------------------------------------------------------------- Total fixed-maturities and short-term investments $4,843,258 $ 5,109,984 - --------------------------------------------------------------------------------
- 14 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Investment Income and Gains and Losses Investment income consists of:
Years ended December 31 ------------------------------------------------- In thousands 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Fixed-maturities $279,900 $245,109 $216,653 Short-term investments 5,676 4,961 6,008 Other investments (4) 61 17 - -------------------------------------------------------------------------------------------------- Gross investment income 285,572 250,131 222,678 Investment expenses 3,112 2,845 2,844 - -------------------------------------------------------------------------------------------------- Net investment income 282,460 247,286 219,834 Net realized gains (losses): Fixed-maturities: Gains 22,791 16,760 9,941 Losses (5,877) (5,353) (2,537) - -------------------------------------------------------------------------------------------------- Net 16,914 11,407 7,404 - -------------------------------------------------------------------------------------------------- Other investments: Gains 564 333 382 Losses --- --- (9) - -------------------------------------------------------------------------------------------------- Net 564 333 373 - -------------------------------------------------------------------------------------------------- Total realized gains 17,478 11,740 7,777 - -------------------------------------------------------------------------------------------------- Total investment income $299,938 $259,026 $227,611 - --------------------------------------------------------------------------------------------------
Net unrealized gains consist of:
As of December 31 ------------------------------- In thousands 1997 1996 - -------------------------------------------------------------------------------- Fixed-maturities: Gains $268,507 $163,723 Losses (1,781) (15,585) - -------------------------------------------------------------------------------- Net 266,726 148,138 - -------------------------------------------------------------------------------- Other investments: Gains 3,033 934 Losses (57) (29) - -------------------------------------------------------------------------------- Net 2,976 905 - -------------------------------------------------------------------------------- Total 269,702 149,043 Deferred income taxes 94,416 52,175 - -------------------------------------------------------------------------------- Unrealized gains, net $175,286 $ 96,868 - --------------------------------------------------------------------------------
The deferred income taxes relate primarily to unrealized gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected in shareholder's equity. - 15 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The change in net unrealized gains (losses) consists of:
Years ended December 31 ------------------------------------------------- In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------------- Fixed-maturities $118,588 $(75,497) $295,567 Other investments 2,071 1,439 508 - --------------------------------------------------------------------------------------------------- Total 120,659 (74,058) 296,075 Deferred income taxes 42,241 (26,197) 103,706 - --------------------------------------------------------------------------------------------------- Unrealized gains (losses), net $78,418 $(47,861) $192,369 - ---------------------------------------------------------------------------------------------------
8. Income Taxes The provision for income taxes is composed of:
Years ended December 31 ---------------------------------------------- In thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------- Current $ 99,522 $81,580 $70,357 Deferred 13,382 8,982 11,391 - --------------------------------------------------------------------------------------------- Total $112,904 $90,562 $81,748 - ---------------------------------------------------------------------------------------------
The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, MBIA Corp.'s effective income tax rate differs from the statutory rate on ordinary income. The reasons for MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31 ---------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (10.6) (12.0) (12.5) Amortization of goodwill 0.3 0.4 0.5 Other (2.3) (2.3) (1.1) - -------------------------------------------------------------------------------- Provision for income taxes 22.4% 21.1% 21.9% - --------------------------------------------------------------------------------
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 - 16 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 1997 and 1996 are presented below:
In thousands 1997 1996 - -------------------------------------------------------------------------------- Deferred tax assets Tax and loss bonds $130,080 $102,222 Alternative minimum tax credit carryforward 62,279 58,068 Loss and loss adjustment expense reserves 18,878 13,673 Other 7,444 3,305 - --------------------------------------------------------------------------------- Total gross deferred tax assets 218,681 177,268 - --------------------------------------------------------------------------------- Deferred tax liabilities Contingency reserve 234,904 186,173 Deferred premium revenue 77,150 76,526 Deferred acquisition costs 53,935 51,713 Unrealized gains 94,416 52,175 Contingent commissions 408 491 Other 9,002 5,894 - --------------------------------------------------------------------------------- Total gross deferred tax liabilities 469,815 372,972 - --------------------------------------------------------------------------------- Net deferred tax liability $251,134 $195,704 - ---------------------------------------------------------------------------------
MBIA Corp. believes that no valuation allowance is necessary in connection with the deferred tax assets. 9. Dividends and Capital Requirements Under New York state insurance law, MBIA Corp. may pay a dividend 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 which can be paid in any 12-month period, MBIA Corp. had $176 million available for the payment of dividends as of December 31, 1997. In 1997, no dividends were declared or paid by MBIA Corp. to MBIA Inc. In 1996 and 1995, MBIA Corp. declared and paid dividends of $29 million and $83 million, respectively, to MBIA Inc. - 17 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned surplus, and the dividends in any 12-month period may not exceed the greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without prior approval of the Illinois State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Illinois had $14 million available for the payment of dividends as of December 31, 1997. 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, 1997. 10. Lines of Credit MBIA Corp. has a standby line of credit commitment in the amount of $825 million with a group of major Triple-A rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from September 30, 1997 in excess of the greater of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on September 30, 2004 and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating $300 million. At December 31, 1997 and 1996, $20.0 million and $29.1 million, respectively, were outstanding under these facilities. 11. Net Insurance In Force MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. - 18 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. As of December 31, 1997, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-41 years. The distribution of net insurance in force by geographic location and type of bond, including $3.2 billion and $3.3 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1997 and 1996, respectively, is set forth in the following tables:
As of December 31 -------------------------------------------------------------------------------------------------------------- $ in billions 1997 1996 - ------------------------------------------------------------------------ ---------------------------------------------------------- Net Number % of Net Net Number % of Net Geographic Insurance of Issues Insurance Insurance of Issues Insurance Location In Force Outstanding In Force In Force Outstanding In Force - ------------------------------------------------------------------------ ---------------------------------------------------------- Domestic California $ 68.4 3,441 14.1% $ 60.7 3,378 14.6% New York 40.4 5,265 8.3 33.7 5,057 8.1 Florida 33.0 1,577 6.8 29.6 1,632 7.1 Texas 24.6 2,086 5.1 21.9 2,052 5.3 New Jersey 24.5 1,859 5.0 18.8 1,863 4.6 Pennsylvania 22.7 2,209 4.7 21.2 2,216 5.1 Illinois 20.0 1,191 4.1 18.5 1,145 4.5 Massachusetts 15.5 1,085 3.2 10.9 1,100 2.6 Ohio 12.4 1,005 2.5 11.1 1,032 2.7 Michigan 11.1 1,016 2.3 9.5 1,021 2.3 - ------------------------------------------------------------------------ ---------------------------------------------------------- Subtotal 272.6 20,734 56.1 235.9 20,496 56.9 Other states 203.1 11,931 41.8 170.1 11,502 41.1 - ------------------------------------------------------------------------ ---------------------------------------------------------- Total domestic 475.7 32,665 97.9 406.0 31,998 98.0 International 10.1 207 2.1 8.4 169 2.0 - ------------------------------------------------------------------------ ---------------------------------------------------------- Total $485.8 32,872 100.0% $414.4 32,167 100.0% - ------------------------------------------------------------------------ ----------------------------------------------------------
- 19 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 ------------------------------------------------------------------------------------------------------- $ in billions 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net Number % of Net Net Number % of Net Insurance of Issues Insurance Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force - ------------------------------------------------------------------------------------------------------------------------------------ Domestic Municipal: General obligation $118.8 12,016 24.5% $110.5 11,763 26.7% Utilities 75.1 4,739 15.5 67.9 4,799 16.4 Health care 62.2 2,246 12.8 54.0 2,386 13.0 Transportation 40.5 1,487 8.3 30.3 1,520 7.3 Special revenue 34.0 1,641 7.0 28.9 1,543 7.0 Higher education 20.4 1,359 4.2 17.8 1,309 4.3 Industrial development and pollution control revenue 19.6 943 4.0 18.1 931 4.4 Housing 18.9 1,891 3.9 17.7 2,455 4.3 Other 11.4 539 2.4 3.8 169 0.9 - ------------------------------------------------------------------------------------------------------------------------------------ Total municipal 400.9 26,861 82.6 349.0 26,875 84.3 - ------------------------------------------------------------------------------------------------------------------------------------ Structured finance* 56.1 510 11.5 38.6 349 9.3 - ------------------------------------------------------------------------------------------------------------------------------------ Other: Investor owned utility 9.4 4,610 1.9 8.3 4,293 2.0 Financial Institution 5.8 366 1.2 6.4 237 1.5 Other 3.5 318 0.7 3.7 244 0.9 - ------------------------------------------------------------------------------------------------------------------------------------ Total other 18.7 5,294 3.8 18.4 4,774 4.4 - ------------------------------------------------------------------------------------------------------------------------------------ Total domestic 475.7 32,665 97.9 406.0 31,998 98.0 - ------------------------------------------------------------------------------------------------------------------------------------ International Infrastructure: Sub-sovereign 1.4 53 0.3 1.5 48 0.4 Sovereign 1.3 21 0.3 0.4 7 0.1 Utilities 0.8 60 0.2 0.7 59 0.2 Transportation 0.8 5 0.2 0.9 4 0.2 Higher education 0.6 1 0.1 -- -- -- Housing 0.3 2 0.1 -- -- -- Health care 0.2 6 -- 0.1 3 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total infrastructure 5.4 148 1.2 3.6 121 0.9 - ------------------------------------------------------------------------------------------------------------------------------------ Structured finance* 2.6 32 0.5 2.1 22 0.5 - ------------------------------------------------------------------------------------------------------------------------------------ Other: Financial institution 1.9 24 0.4 2.6 25 0.6 Investor owned utility 0.2 3 -- 0.1 1 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total other 2.1 27 0.4 2.7 26 0.6 - ------------------------------------------------------------------------------------------------------------------------------------ Total international 10.1 207 2.1 8.4 169 2.0 - ------------------------------------------------------------------------------------------------------------------------------------ Total $485.8 32,872 100.0% $414.4 32,167 100.0% - ------------------------------------------------------------------------------------------------------------------------------------ * Asset-/mortgage-backed
- 20 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. Reinsurance MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $67.0 billion and $57.6 billion, at December 31, 1997 and 1996, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables:
As of December 31 ----------------------------------------------------------------------------- In billions 1997 1996 - ---------------------------------------------------------------- -------------------------------------- % of % of Ceded Ceded Ceded Ceded Geographic Location Insurance Insurance Insurance Insurance In Force In Force In Force In Force - ---------------------------------------------------------------- -------------------------------------- Domestic California $ 10.4 15.5% $ 9.4 16.2% New York 5.8 8.7 6.2 10.7 Texas 4.0 6.0 2.9 5.1 New Jersey 3.7 5.5 3.3 5.7 Massachusetts 3.0 4.5 1.4 2.5 Pennsylvania 2.9 4.3 2.9 5.1 Illinois 2.7 4.0 2.6 4.5 Florida 2.6 3.9 2.4 4.1 Colorado 2.4 3.6 1.2 2.1 Puerto Rico 2.3 3.4 1.2 2.1 Washington 1.9 2.8 1.9 3.2 District of Columbia 1.5 2.2 1.5 2.7 - ---------------------------------------------------------------- -------------------------------------- Subtotal 43.2 64.4 36.9 64.0 Other states 19.1 28.6 17.0 29.6 - ---------------------------------------------------------------- -------------------------------------- Total domestic 62.3 93.0 53.9 93.6 International 4.7 7.0 3.7 6.4 - ---------------------------------------------------------------- -------------------------------------- Total $ 67.0 100.0% $ 57.6 100.0% - ---------------------------------------------------------------- --------------------------------------
- 21 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 ----------------------------------------------------------------- In billions 1997 1996 - ------------------------------------------------------------------------ -------------------------------- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ------------------------------------------------------------------------ -------------------------------- Domestic Municipal: General obligation $12.1 18.1% $14.4 24.9% Utilities 11.5 17.2 10.2 17.7 Transportation 9.6 14.3 6.4 11.1 Health care 8.0 12.0 6.3 11.0 Special revenue 5.0 7.5 3.4 5.9 Industrial development and pollution control revenue 3.2 4.7 3.2 5.6 Housing 1.7 2.5 1.6 2.7 Higher education 1.3 1.9 1.5 2.6 Other 2.7 4.0 1.0 1.7 - ------------------------------------------------------------------------ -------------------------------- Total municipal 55.1 82.2 48.0 83.2 - ------------------------------------------------------------------------ -------------------------------- Structured finance* 5.6 8.3 4.5 7.9 - ------------------------------------------------------------------------ -------------------------------- Other: Financial institution 1.3 1.9 1.3 2.3 Corporate direct 0.2 0.3 0.1 0.2 Investor-owned utility 0.1 0.3 -- -- - ------------------------------------------------------------------------ -------------------------------- Total other 1.6 2.5 1.4 2.5 - ------------------------------------------------------------------------ -------------------------------- Total domestic 62.3 93.0 53.9 93.6 - ------------------------------------------------------------------------ -------------------------------- International Infrastructure: Sovereign 0.7 1.1 0.3 0.5 Higher education 0.6 0.9 -- -- Sub-sovereign 0.6 0.9 0.8 1.4 Transportation 0.4 0.6 0.4 0.7 Health care 0.2 0.3 0.1 0.1 Utilities 0.1 0.1 -- -- - ------------------------------------------------------------------------ -------------------------------- Total infrastructure 2.6 3.9 1.6 2.7 - ------------------------------------------------------------------------ -------------------------------- Structured finance* 1.3 1.9 1.0 1.9 - ------------------------------------------------------------------------ -------------------------------- Other: Financial institution 0.8 1.2 1.0 1.8 - ------------------------------------------------------------------------ -------------------------------- Total other 0.8 1.2 1.0 1.8 - ------------------------------------------------------------------------ -------------------------------- Total international 4.7 7.0 3.7 6.4 - ------------------------------------------------------------------------ -------------------------------- Total $67.0 100.0% $57.6 100.0% - ------------------------------------------------------------------------ --------------------------------
* Asset-/mortgage-backed - 22 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 1997, 1996 and 1995 was $3.9 million, $3.4 million and $3.2 million, respectively. MBIA Corp. also has a profit sharing/401(k) plan which allows eligible employees to contribute up to 10% of eligible compensation. MBIA Corp. matches employee contributions up to the first 5% of total compensation. MBIA Corp. contributions to the profit sharing plan aggregated $1.6 million, $1.5 million and $1.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. The 401(k) plan amounts are invested in common stock of MBIA Inc. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. Of the above amounts for the pension and profit sharing plans, $3.4 million, $3.0 million and $2.7 million for the years ended December 31, 1997, 1996 and 1995, respectively, are included in policy acquisition costs. MBIA Corp. also participates in the "MBIA Long-Term Incentive Program". The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of MBIA Inc.'s stock. Awards under the long-term program are divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor for the December 1995 award only) paid in cash or shares of MBIA Inc.'s stock. Target levels for the option/incentive award are established as a percentage of total salary and bonus, based upon the recipient's position. The awards under the long-term program typically will be granted from the vice president level up to and including the chairman and chief executive officer. The ABV portion of the long-term incentive program may be awarded every year. The December 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000 and the December 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, 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 2001 for the December 1997 award and - 23 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) early 1999 for the December 1995 award in the form of cash or shares of MBIA Inc.'s common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1997 and 1996, $3.2 million and $2.6 million, respectively, were recorded as a charge related to the December 1997 and December 1995 ABV awards. Of these amounts, $2.0 million and $1.6 million were included in policy acquisition costs for the same respective periods. MBIA Corp. also participates in MBIA Inc.'s restricted stock program, adopted in December 1995, whereby key executive officers of MBIA Corp. are granted restricted shares of MBIA Inc. common stock. 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". 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, 1997 is $340 million. - 24 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MBIA Corp. had investment management and advisory agreements with an affiliate of a former principal shareholder of MBIA Inc., which provided for payment of fees on assets under management. Total related expenses for the year ended December 31, 1995 amounted to $2.5 million. These agreements were terminated on January 1, 1996 at which time CMC assumed full management of MBIA Corp.'s consolidated investment portfolios. Total fees paid to CMC on assets under management for the years ended December 31, 1997 and 1996 amounted to $3.0 million and $2.8 million, respectively. MBIA Corp. has various insurance coverages provided by a former principal shareholder of MBIA Inc., the cost of which totaled $2.2 million, $2.1 million and $1.9 million, respectively, for the years ended December 31, 1997, 1996 and 1995. Included in other liabilities at December 31, 1997 is $27.1 million of net payables to MBIA Inc. and other subsidiaries. As of December 31, 1996, included in other assets is a $2.0 million net receivable from MBIA Inc. and other subsidiaries. MBIA Corp. held securities subject to agreements to resell of $182.8 million and $108.9 million as of December 31, 1997 and 1996, respectively, and transferred securities subject to agreements to repurchase of $182.8 million and $108.9 million as of December 31, 1997 and 1996. These agreements have a term of less than one year. The interest expense relating to these agreements was $8.3 million and $2.3 million, respectively, for the years ended December 31, 1997 and 1996. The interest income relating to these agreements was $8.4 million and $2.4 million, respectively, for the years ended December 31, 1997 and 1996. 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. - 25 - 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 a limited partnership and a mutual fund that invests principally in marketable equity securities. The fair value of these investments is based on quoted market prices. Cash and cash equivalents, receivable for investments sold and payable for investments purchased - The carrying amounts of these items are a reasonable estimate of their fair value. Securities purchased under agreements to resell - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. Prepaid reinsurance premiums - The fair value of MBIA Corp.'s prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. Deferred premium revenue - The fair value of MBIA Corp.'s deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions. 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. - 26 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Installment premiums - The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1997 As of December 31, 1996 ------------------------------- ------------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------- --------------------------------- Assets: Fixed-maturity securities $4,867,254 $4,867,254 $4,149,700 $4,149,700 Short-term investments 242,730 242,730 169,889 169,889 Other investments 16,802 16,802 14,851 14,851 Cash and cash equivalents 3,983 3,983 3,288 3,288 Securities purchased under agreements to resell 182,820 203,333 108,900 124,471 Prepaid reinsurance premiums 252,893 218,571 216,846 189,631 Receivable for investments sold 1,616 1,616 975 975 Liabilities: Deferred premium revenue 1,984,104 1,716,477 1,785,875 1,545,976 Loss and loss adjustment expense reserves 78,872 78,872 59,314 59,314 Securities sold under agreements to repurchase 182,820 191,932 108,900 115,838 Payable for investments purchased 23,020 23,020 48,811 48,811 Off-balance sheet instruments: Installment premiums --- 349,619 --- 287,969
16. Subsequent Event - CapMAC Merger On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a merger to be accounted for as a pooling of interests. 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 is $536 million. Subsequent to the completion date, MBIA Inc. made a capital contribution to MBIA Corp. of Capital Markets Assurance Corporation (CapMAC Corp.), a wholly owned financial guarantee insurance subsidiary of CapMAC. - 27 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) CapMAC, through its subsidiaries, provides structured financial solutions; financial guarantee insurance of structured securities - primarily asset-backed securities; advisory and structuring services in connection with structured financings; investment management services, and access to funding for its customers through third-party owned and managed securitization funding vehicles. CapMAC Corp. is a worldwide provider of financial guarantee insurance for structured securities. It is rated Triple-A by Moody's Investors Service, Standard & Poor's Rating Services, Duff and Phelps Credit Rating Co., and Nippon Investors Service. The following unaudited proforma data summarizes the combined results of the two insurance entities to be accounted for as a pooling of interests under APB 16 "Business Combinations":
Years ended December 31 --------------------------------------------------- In millions 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Revenue $690 $583 $497 Net income 416 359 305
The unaudited proforma financial information presented is not necessarily indicative of either the results of operations that would have occurred had the merger taken place at the beginning of these periods or the future results of operations of the combined companies. - 28 - -----END PRIVACY-ENHANCED MESSAGE-----