-----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, BinBej8VSeExG2MRib9hWXw1Xo3X4PWQwxoKN7EbjCVqHyDPoh0jdOzDEFuddMed GMJPowlcfHdJ7HY3DQB+aw== /in/edgar/work/20000811/0000950130-00-004390/0000950130-00-004390.txt : 20000921 0000950130-00-004390.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950130-00-004390 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMBAC FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000874501 STANDARD INDUSTRIAL CLASSIFICATION: [6351 ] IRS NUMBER: 133621676 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10777 FILM NUMBER: 692683 BUSINESS ADDRESS: STREET 1: ONE STATE ST PLZ CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 2126680340 MAIL ADDRESS: STREET 1: ONE STATE ST PLZ CITY: NEW YORK STATE: NY ZIP: 10004 FORMER COMPANY: FORMER CONFORMED NAME: AMBAC INC /DE/ DATE OF NAME CHANGE: 19930328 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-10777 Ambac Financial Group, Inc. (Exact name of Registrant as specified in its charter) Delaware 13-3621676 (State of incorporation) (I.R.S. employer identification no.) One State Street Plaza New York, New York 10004 (Address of principal executive offices) (Zip code) (212) 668-0340 (Registrant's telephone number, including area code) 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__ - As of June 30, 2000, 69,860,269 shares of Common Stock, par value $0.01 per share, (net of 820,115 treasury shares) of the Registrant were outstanding. Ambac Financial Group, Inc. and Subsidiaries INDEX -----
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Consolidated Unaudited Financial Statements Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 ..................................................... 3 Consolidated Statements of Operations - three months and six months ended June 30, 2000 and 1999 .............................................. 4 Consolidated Statements of Stockholders' Equity - six months ended June 30, 2000 and 1999 .................................................... 5 Consolidated Statements of Cash Flows - six months ended June 30, 2000 and 1999 .................................................... 6 Notes to Consolidated Unaudited Financial Statements ...................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................................... 21 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders ....................... 23 Item 6. Exhibits and Reports on Form 8-K .......................................... 24 SIGNATURES ......................................................................... 25 INDEX TO EXHIBITS .................................................................. 26
PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries Ambac Financial Group, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 2000 and December 31, 1999 (Dollars in Thousands)
June 30, 2000 December 31, 1999 ------------- ----------------- (unaudited) Assets - ------ Investments: Fixed income securities, at fair value (amortized cost of $8,495,124 in 2000 and $9,028,184 in 1999) $ 8,297,541 $ 8,738,471 Short-term investments, at cost (approximates fair value) 128,556 220,896 Other 5,341 3,168 ----------------- -------------- Total investments 8,431,438 8,962,535 Cash 11,971 13,588 Securities purchased under agreements to resell 146,003 103,000 Receivable for investment agreements 254,750 45,918 Receivable for securities sold 6,470 15,369 Investment income due and accrued 113,465 128,668 Reinsurance recoverable 668 500 Prepaid reinsurance 232,723 217,977 Deferred acquisition costs 142,080 135,324 Deferred income taxes 10,590 57,377 Loans 691,231 685,488 Receivable from brokers and dealers 500,000 717,000 Other assets 256,844 262,352 ----------------- -------------- Total assets $ 10,798,233 $ 11,345,096 ================= ============== Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Unearned premiums $ 1,441,946 $ 1,431,076 Losses and loss adjustment expenses 127,300 121,475 Ceded reinsurance balances payable 8,160 15,028 Obligations under investment and payment agreements 3,773,509 4,180,513 Obligations under investment repurchase agreements 1,828,151 1,959,741 Current income taxes 21,239 24,831 Debentures 424,028 423,995 Accrued interest payable 77,269 91,142 Other liabilities 266,642 268,696 Payable to brokers and dealers 500,000 717,000 Payable for securities purchased 99,935 93,149 ----------------- -------------- Total liabilities 8,568,179 9,326,646 ----------------- -------------- Stockholders' equity: Preferred stock -- -- Common stock 707 707 Additional paid-in capital 526,768 525,012 Accumulated other comprehensive loss (132,416) (187,540) Retained earnings 1,871,599 1,713,446 Common stock held in treasury at cost (36,604) (33,175) ----------------- -------------- Total stockholders' equity 2,230,054 2,018,450 ----------------- -------------- Total liabilities and stockholders' equity $ 10,798,233 $ 11,345,096 ================= ==============
See accompanying Notes to Consolidated Unaudited Financial Statements 3 Ambac Financial Group, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) For the Periods Ended June 30, 2000 and 1999 (Dollars in Thousands Except Share Data)
Three Months Ended Six Months Ended June 30, June 30, -------------------------------------- -------------------------------------- 2000 1999 2000 1999 -------------------------------------- -------------------------------------- Revenues: Financial Guarantee: Gross premiums written $121,669 $98,708 $191,007 $188,862 Ceded premiums written (26,247) (16,458) (42,374) (21,544) ----------------- ----------------- ----------------- ----------------- Net premiums written $95,422 $82,250 $148,633 $167,318 ================= ================= ================= ================= Net premiums earned $80,921 $63,944 $152,079 $124,241 Net fees earned and other income 1,206 1,077 3,001 2,584 Net investment income 58,902 51,296 116,533 100,780 Net realized gains (losses) 2,017 (5,569) 2,479 (5,480) Financial Services: Revenue 21,127 13,138 35,569 25,850 Net realized losses (7,090) (2,987) (7,271) (3,300) Other: Revenue 438 2,603 1,005 6,423 Net realized gains - - - 775 ----------------- ----------------- ----------------- ----------------- Total revenues 157,521 123,502 303,395 251,873 ----------------- ----------------- ----------------- ----------------- Expenses: Financial Guarantee: Losses and loss adjustment expenses 3,600 2,500 6,849 5,000 Underwriting and operating expenses 13,876 11,872 27,354 23,789 Financial Services 6,276 6,779 12,755 13,756 Interest 9,380 9,094 18,759 18,177 Other 2,219 1,272 3,414 3,215 ----------------- ----------------- ----------------- ----------------- Total expenses 35,351 31,517 69,131 63,937 ----------------- ----------------- ----------------- ----------------- Income before income taxes 122,170 91,985 234,264 187,936 Provision for income taxes 29,530 21,016 55,986 43,773 ----------------- ----------------- ----------------- ----------------- Net income $92,640 $70,969 $178,278 $144,163 ================= ================= ================= ================= Net income per share $1.33 $1.02 $2.55 $2.06 ================= ================= ================= ================= Net income per diluted share $1.30 $1.00 $2.50 $2.02 ================= ================= ================= ================= Weighted average number of shares outstanding 69,828,677 69,877,457 69,845,690 69,898,316 ================= ================= ================= ================= Weighted average number of diluted shares outstanding 71,259,881 71,309,111 71,217,284 71,319,712 ================= ================= ================= =================
See accompanying Notes to Consolidated Unaudited Financial Statements 4 Ambac Financial Group, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Unaudited) For The Six Months Ended June 30, 2000 and 1999 (Dollars in Thousands)
2000 1999 --------------------------- ----------------------------- Retained Earnings: Balance at January 1 $1,713,446 $1,449,832 Net income 178,278 $178,278 144,163 $144,163 ------------- ------------- Dividends declared - common stock (15,375) (13,983) Exercise of stock options (4,750) (2,110) --------------- ---------------- Balance at June 30 $1,871,599 $1,577,902 --------------- ---------------- Accumulated Other Comprehensive (Loss) Income: Balance at January 1 ($187,540) $159,313 Unrealized gains (losses) on securities, $93,717, and ($93,341), pre-tax in 2000 and 1999, respectively(1) 56,573 (176,693) Foreign currency (loss) gain (1,449) (1,057) ------------- ------------- Other comprehensive income (loss) 55,124 55,124 (177,750) (177,750) ---------------------------- ----------------------------- Comprehensive income (loss) $233,402 ($33,587) ============= ============= Balance at June 30 ($132,416) ($18,437) --------------- ---------------- Preferred Stock: Balance at January 1 and June 30 $- $- --------------- ---------------- Common Stock: Balance at January 1 and June 30 $707 $707 --------------- ---------------- Additional Paid-in Capital: Balance at January 1 $525,012 $519,305 Exercise of stock options 1,756 1,161 --------------- ---------------- Balance at June 30 $526,768 $520,466 --------------- ---------------- Common Stock Held in Treasury at Cost: Balance at January 1 ($33,175) ($33,067) Cost of shares acquired (12,560) (9,126) Shares issued under equity plans 9,131 6,023 --------------- ---------------- Balance at June 30 ($36,604) ($36,170) --------------- ---------------- Total Stockholders' Equity at June 30 $2,230,054 $2,044,468 =============== ================ (1) Disclosure of reclassification amount: Unrealized holding gains (losses) arising during period $53,458 ($181,896) Less: reclassification adjustment for net gains included in net income (3,115) (5,203) --------------- ---------------- Net unrealized gains (losses) on securities $56,573 ($176,693) =============== ================
See accompanying Notes to Consolidated Unaudited Financial Statements. 5 Ambac Financial Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) For The Periods Ended June 30, 2000 and 1999 (Dollars in Thousands)
Six Months Ended June 30, ---------------------------------------------------- 2000 1999 ---------------------- ---------------------- Cash flows from operating activities: Net income $178,278 $144,163 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,758 1,407 Amortization of bond premium and discount (5,367) (3,234) Current income taxes (3,592) 7,544 Deferred income taxes 9,643 1,773 Deferred acquisition costs (6,756) (9,619) Unearned premiums, net (3,876) 42,833 Losses and loss adjustment expenses 5,657 4,659 Ceded reinsurance balances payable (6,868) (698) Investment income due and accrued 15,203 14,016 Accrued interest payable (13,873) (10,120) Net losses on sales of investments 4,792 8,005 Interest rate swaps, at market (246) (22,386) Other, net (1,273) (6,219) ---------------------- ---------------------- Net cash provided by operating activities 173,480 172,124 ---------------------- ---------------------- Cash flows from investing activities: Proceeds from sales of bonds 703,116 1,753,245 Proceeds from matured bonds 860,364 693,290 Purchases of bonds (1,014,330) (2,935,988) Change in short-term investments 92,340 2,090 Securities purchased under agreements to resell (43,003) 183,309 Loans (5,743) (7,670) Other, net (1,611) 8,210 ---------------------- ---------------------- Net cash provided by (used in) investing activities 591,133 (303,514) ---------------------- ---------------------- Cash flows from financing activities: Dividends paid (15,375) (13,983) Proceeds from issuance of investment agreements 810,643 1,310,852 Payments for investment agreement draws (1,563,812) (1,169,976) Payment agreements 5,743 7,670 Proceeds from sale of treasury stock 9,131 6,023 Purchases of treasury stock (12,560) (9,126) ---------------------- ---------------------- Net cash (used in) provided by financing activities (766,230) 131,460 ---------------------- ---------------------- Net cash flow (1,617) 70 Cash at January 1 13,588 8,239 ---------------------- ---------------------- Cash at June 30 $11,971 $8,309 ====================== ====================== Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $48,200 $33,500 ====================== ====================== Interest expense on debt $18,920 $18,266 ====================== ====================== Interest expense on investment agreements $149,540 $143,436 ====================== ======================
See accompanying Notes to Consolidated Unaudited Financial Statements 6 Ambac Financial Group, Inc. and Subsidiaries Notes to Consolidated Unaudited Financial Statements (Dollars in thousands) (1) Basis of Presentation Ambac Financial Group, Inc., (the "Company") headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. The Company's principal operating subsidiary, Ambac Assurance Corporation ("Ambac Assurance"), a leading provider of financial guarantees for municipal and structured finance obligations, has earned triple-A ratings, the highest ratings available from Moody's Investors Service, Inc., Standard & Poor's Ratings Group, Fitch, and Rating and Investment Information, Inc. The Company, through its subsidiaries, also provides investment agreements, interest rate swaps and investment advisory and cash management services, primarily to states, municipalities and municipal authorities. The Company's consolidated unaudited interim financial statements have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP") and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial condition, results of operations and cash flows for the periods presented. 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the three months and six months ended June 30, 2000 may not be indicative of the results that may be expected for the full year ending December 31, 2000. These consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of Ambac Financial Group, Inc. and its subsidiaries contained in (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1999, which was filed with the Securities and Exchange Commission (the "Commission") on March 30, 2000, and (ii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, which was filed with the Commission on May 12, 2000. The consolidated financial statements include the accounts of the Company and each of its subsidiaries. All significant intercompany balances have been eliminated. Certain reclassifications have been made to prior periods' amounts to conform to the current period's presentation. (2) Segment Information The Company has two reportable segments, as follows: (1) Financial Guarantee, which guarantees municipal and structured finance obligations; and (2) Financial Services, which provides investment agreements, interest rate swaps, and investment advisory and cash management services. 7 Notes to Consolidated Unaudited Financial Statements (Continued) (Dollars in thousands) The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different marketing strategies, personnel skill sets and technology. Pursuant to insurance and indemnity agreements, Ambac Assurance guarantees the swap and investment agreement obligations of those financial services subsidiaries. Intersegment revenues include the premiums earned under those agreements, but which are eliminated in the consolidated financial statements. Such premiums are accounted for as if they were premiums to third parties, that is, at current market prices. Information provided below for "Corporate and Other" relates to Ambac Financial Group, Inc. corporate activities. Revenue from unaffiliated customers in the "corporate and other" column consists primarily of interest income and realized gains or losses from investment securities. The following tables summarize the financial information by reportable segment as of and for the three and six-month periods ended June 30, 2000 and 1999:
Financial Financial Corporate Intersegment Three months ended June 30, Guarantee Services And Other Eliminations Consolidated --------------- --------------- -------------- ----------------- ------------------- 2000: Revenues: Unaffiliated customers....... $ 143,046 $ 14,037 $ 438 $ - $ 157,521 Intersegment................. 947 (810) 15,957 (16,094) - --------------- --------------- -------------- ----------------- ------------------- Total revenues................... $ 143,993 $ 13,227 $ 16,395 ($16,094) $ 157,521 --------------- --------------- -------------- ----------------- ------------------- Income before income taxes: Unaffiliated customers....... $ 125,570 $ 7,761 ($11,161) $ - $ 122,170 Intersegment................. 947 (550) 15,957 (16,354) - --------------- --------------- -------------- ----------------- ------------------- Total income before income taxes. $ 126,517 $ 7,211 $ 4,796 ($16,354) $ 122,170 --------------- --------------- -------------- ----------------- ------------------- Identifiable assets.............. $4,353,446 $6,397,803 $ 46,984 $ - $10,798,233 --------------- --------------- -------------- ----------------- ------------------- 1999: Revenues: Unaffiliated customers....... $ 110,748 $ 10,151 $ 2,603 $ - $ 123,502 Intersegment................. 770 (840) 13,143 (13,073) - --------------- --------------- -------------- ----------------- ------------------- Total revenues................... $ 111,518 $ 9,311 $ 15,746 ($13,073) $ 123,502 --------------- --------------- -------------- ----------------- ------------------- Income before income taxes: Unaffiliated customers....... $ 96,376 $ 3,372 ($7,763) $ - $ 91,985 Intersegment................. 912 (1,057) 13,143 (12,998) - --------------- --------------- -------------- ----------------- ------------------- Total income before income taxes. $ 97,288 $ 2,315 $ 5,380 ($12,998) $ 91,985 --------------- --------------- -------------- ----------------- ------------------- Identifiable assets.............. $3,955,428 $6,985,291 $ 141,080 $ - $11,081,799 --------------- --------------- -------------- ----------------- -------------------
8 Notes to Consolidated Unaudited Financial Statements (Continued) (Dollars in thousands)
Financial Financial Corporate Intersegment Six months ended June 30, Guarantee Services And Other Eliminations Consolidated ----------------- --------------- -------------- ----------------- ----------------- 2000: Revenues: Unaffiliated customers....... $ 274,092 $ 28,298 $ 1,005 $ - $ 303,395 Intersegment................. 1,770 (1,648) 31,928 (32,050) - ----------------- --------------- -------------- ----------------- ----------------- Total revenues................... $ 275,862 $ 26,650 $ 32,933 ($32,050) $ 303,395 ----------------- --------------- -------------- ----------------- ----------------- Income before income taxes: Unaffiliated customers....... $ 239,889 $ 15,543 ($21,168) $ - $ 234,264 Intersegment................. 1,770 (1,603) 31,928 (32,095) - ----------------- --------------- -------------- ----------------- ----------------- Total income before income taxes. $ 241,659 $ 13,940 $ 10,760 ($32,095) $ 234,264 ----------------- --------------- -------------- ----------------- ----------------- Identifiable assets.............. $4,353,446 $6,397,803 $ 46,984 $ - $10,798,233 ----------------- --------------- -------------- ----------------- ----------------- 1999: Revenues: Unaffiliated customers....... $ 222,125 $ 22,550 $ 7,198 $ - $ 251,873 Intersegment................. 1,542 (1,740) 26,343 (26,145) - ----------------- --------------- -------------- ----------------- ----------------- Total revenues................... $ 223,667 $ 20,810 $ 33,541 ($26,145) $ 251,873 ----------------- --------------- -------------- ----------------- ----------------- Income before income taxes: Unaffiliated customers....... $ 193,336 $ 8,794 ($14,194) $ - $ 187,936 Intersegment................. 1,684 (1,967) 26,343 (26,060) - ----------------- --------------- -------------- ----------------- ----------------- Total income before income taxes. $ 195,020 $ 6,827 $ 12,149 ($26,060) $ 187,936 ----------------- --------------- -------------- ----------------- ----------------- Identifiable assets.............. $3,955,428 $6,985,291 $ 141,080 $ - $11,081,799 ----------------- --------------- -------------- ----------------- -----------------
The following table summarizes gross premiums written and net premiums earned included in the financial guarantee segment by location of risk for the three and six-month periods ended June 30, 2000 and 1999.
Three Months Six Months ------------------------------------------- ------------------------------------------ Gross Premiums Net Premiums Gross Premiums Net Premiums 2000: Written Earned Written Earned --------------------- ------------------- --------------------- ------------------ United States........................ $ 78,294 $69,751 $132,803 $131,137 Australia............................ 13,035 926 17,426 1,444 Mexico............................... 4,185 1,955 8,146 3,613 Japan................................ 1,751 1,563 3,471 3,206 France............................... 277 321 521 593 United Kingdom....................... 13,484 1,170 13,499 2,424 Internationally diversified (1)...... 3,719 2,717 5,947 5,428 Other international.................. 6,924 2,518 9,194 4,234 --------------------- ------------------- --------------------- ------------------ Total............................ $121,669 $80,921 $191,007 $152,079 --------------------- ------------------- --------------------- ------------------ 1999: United States........................ $ 79,222 $56,876 $157,003 $111,321 Australia............................ 165 244 546 665 Mexico............................... 2,670 1,070 3,935 1,831 Japan................................ 1,493 1,490 2,488 2,467 France............................... 727 183 1,081 431 United Kingdom....................... 9,530 747 15,197 1,408 Internationally diversified (1)...... 3,304 1,957 5,475 3,517 Other international.................. 1,597 1,377 3,137 2,601 --------------------- ------------------- --------------------- ------------------ Total............................ $ 98,708 $63,944 $188,862 $124,241 --------------------- ------------------- --------------------- ------------------
1) Internationally diversified may include components of domestic exposure. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following paragraphs describe the consolidated results of operations of Ambac Financial Group, Inc. and its subsidiaries (sometimes collectively referred to as the "Company") for the three and six-month periods ended June 30, 2000 and 1999, and its financial condition as of June 30, 2000 and December 31, 1999. These results include the Company's two reportable segments: Financial Guarantee and Financial Services. Materials in this Form 10-Q may contain information that includes or is based upon forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Forward-looking statements give the Company's expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Any or all of the Company's forward-looking statements here or in other publications may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the Company's actual future results. The Company's actual results may vary materially, and there are no guarantees about the performance of the Company's stock. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Among factors that could cause actual results to differ materially are: (1) changes in the economic, credit or interest rate environment in the United States and abroad; (2) the level of activity within the national and worldwide debt markets; (3) competitive conditions and pricing levels; (4) legislative and regulatory developments; (5) changes in tax laws, and (6) other risks and uncertainties that have not been identified at this time. The Company undertakes no obligation to publicly correct or update any forward-looking statement if we later become aware that it is not likely to be achieved. You are advised, however, to consult any further disclosures we make on related subjects in the Company's reports to the SEC. Results of Operations Consolidated Net Income The Company's net income for the three months ended June 30, 2000 was $92.6 million, or $1.30 per diluted share, up 30% from the three months ended June 30, 1999 net income of $71.0 million, or $1.00 per diluted share. The increase in net income was primarily attributable to higher Financial Guarantee operating earnings driven by a $32.3 million, or 29%, increase in revenues. The Company's net income for the six months ended June 30, 2000 was $178.3 million, or $2.50, per diluted share. This represents an increase of 24% from the comparable prior period net income of $144.2 million, or $2.02, per diluted share. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Financial Guarantee The Company provides financial guarantees through its principal operating subsidiary, Ambac Assurance Corporation ("Ambac Assurance"). Ambac Assurance's wholly owned subsidiary, Ambac Assurance UK Limited, serves clients in the international market. Additionally, Ambac Assurance had served clients in international markets through its participation in MBIA.AMBAC International, an unincorporated joint venture with MBIA Insurance Corporation ("MBIA"). On March 21, 2000, Ambac Assurance and MBIA announced the restructuring of that arrangement. Ambac Assurance and MBIA will continue its current reciprocal reinsurance arrangements for international business through at least the end of 2000; however, the companies will market and originate financial guarantees independently. This restructuring was in reaction to a growing acceptance of the financial guarantee product internationally and the belief that separate origination functions would be beneficial to the further expansion of the market. The restructuring did not affect business conducted in Japan where the market for financial guarantees is just beginning to develop. The companies will continue to market and originate transactions jointly under the original arrangement in Japan. Ambac Credit Products, L.L.C. ("ACP"), a wholly owned subsidiary of Ambac Assurance, also provides credit protection in the global markets in the form of structured credit derivatives. Gross Par Written. Ambac Assurance guaranteed $18.4 billion in par value ------------------ bonds during the three months ended June 30, 2000, a 6% increase over $17.4 billion in par during the comparable prior year period. During the six months ended June 30, 2000, Ambac Assurance guaranteed $31.7 billion in par value bonds, a decrease of 13% from $36.5 billion in par value bonds during the comparable period in 1999. Par value written for the second quarter of 2000 was comprised of $4.1 billion from municipal bond obligations, $8.2 billion from structured finance obligations and $6.1 billion from international obligations, compared to $7.9 billion, $7.2 billion and $2.3 billion, respectively, in the second quarter of 1999. Par value written for the six months ended June 30, 2000 was comprised of $6.6 billion from municipal bond obligations, $16.1 billion from structured finance obligations and $9.0 billion from international obligations, compared to $16.6 billion, $16.4 billion and $3.5 billion, respectively, in the six months ended June 30, 1999. Insured municipal obligations for the three and six month periods ended June 30, 2000 were affected by declines of 10% and 22%, respectively, in total issuance. The decline in total issuance was largely attributable to the rising interest rate environment causing a decline in the refinancing component of the market during the periods. Additionally, decreases in insured market penetration and Ambac's municipal market share contributed to the decline in insured municipal obligations during the periods. Management anticipates, based on growth experienced in the last few years, that in the foreseeable future, the Company's structured finance and international businesses will grow more rapidly than the municipal business. Management believes that business written in the structured finance and international markets may see large quarterly variances primarily due to general market conditions and the developmental nature of segments of these markets. Gross Premiums Written. Gross premiums written for the three and six- month ---------------------- periods ended June 30, 2000 were $121.7 million and $191.0 million, respectively, an increase of 23% over $98.7 million in the three-month period ended June 30, 1999 and an increase of 1% over $188.9 million in the six months ended June 30, 1999. On the municipal side, the negative factors discussed above under "Gross Par Written" also affected gross premiums written in this 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) segment. Structured finance continues to see strong business activity in the mortgage- backed and asset-backed segments year-to-date and in the utilities segment in the second quarter. The international business has seen strong activity in several areas including asset-backed securities, collateralized bond obligations ("CBO") and infrastructure finance. The following tables set forth the amounts of gross premiums written and the related gross par written by type:
Three Months Ended June 30, --------------------------------------------------------------------- (Dollars in Millions) 2000 1999 -------------------------------- --------------------------------- Gross Gross Gross Gross Premiums Par Premiums Par Written Written Written Written -------------- -------------- --------------- -------------- Municipal finance: Up-front: New issue.................................. $ 25.5 $ 3,164 $54.2 $ 6,417 Secondary market........................... 3.1 333 2.7 489 -------------- -------------- --------------- -------------- Sub-total up-front........................ 28.6 3,497 56.9 6,906 Installment............................... 5.7 660 7.2 949 -------------- -------------- --------------- -------------- Total municipal finance................. 34.3 4,157 64.1 7,855 -------------- -------------- --------------- -------------- Structured finance: Up-front................................... 18.5 1,562 0.5 29 Installment................................ 25.5 6,597 14.6 7,174 -------------- -------------- --------------- -------------- Total structured finance.............. 44.0 8,159 15.1 7,203 -------------- -------------- --------------- -------------- International(1): Up-front............................. 28.4 766 11.0 130 Installment.......................... 15.0 5,312 8.5 2,182 -------------- -------------- --------------- -------------- Total international.................. 43.4 6,078 19.5 2,312 -------------- -------------- --------------- -------------- Total................................ $121.7 $18,394 $98.7 $17,370 ============== ============== =============== ============== Total up-front................................ $ 75.5 $ 5,825 $68.4 $ 7,065 Total installment............................. 46.2 12,569 30.3 10,305 -------------- -------------- --------------- -------------- Total................................ $121.7 $18,394 $98.7 $17,370 ============== ============== =============== ============== Six Months Ended June 30, --------------------------------------------------------------------- (Dollars in Millions) 2000 1999 -------------------------------- --------------------------------- Gross Gross Gross Gross Premiums Par Premiums Par Written Written Written Written -------------- -------------- --------------- -------------- Municipal finance: Up-front: New issue.................................. $ 49.0 $ 5,179 $114.7 $14,102 Secondary market........................... 6.4 596 4.0 630 -------------- -------------- --------------- -------------- Sub-total up-front........................ 55.4 5,775 118.7 14,732 Installment............................... 10.3 815 10.8 1,919 -------------- -------------- --------------- -------------- Total municipal finance................. 65.7 6,590 129.5 16,651 -------------- -------------- --------------- -------------- Structured finance: Up-front................................... 18.6 1,562 0.5 36 Installment................................ 48.5 14,589 27.0 16,316 -------------- -------------- --------------- -------------- Total structured finance.............. 67.1 16,151 27.5 16,352 -------------- -------------- --------------- -------------- International(1): Up-front............................. 32.6 925 18.2 276 Installment.......................... 25.6 8,064 13.7 3,260 -------------- -------------- --------------- -------------- Total international.................. 58.2 8,989 31.9 3,536 -------------- -------------- --------------- -------------- Total................................ $191.0 $31,730 $188.9 $36,539 ============== ============== =============== ============== Total up-front................................ $106.6 $ 8,262 $137.4 $15,044 Total installment............................. 84.4 23,468 51.5 21,495 -------------- -------------- --------------- -------------- Total................................ $191.0 $31,730 $188.9 $36,539 ============== ============== =============== ==============
(1) Gross par written is reduced by reinsurance cessions to MBIA on international business of $3,341.2 million and $1,345.5 million for the three months ended June 30, 2000 and 1999, respectively, and $4,901.1 million and $2,146.4 million for the six months ended June 30, 2000 and 1999, respectively. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Ceded Premiums Written. Ceded premiums written for the three and six months ----------------------- ended June 30, 2000 were $26.2 million and $42.4 million, respectively, an increase of 59% from $16.5 million in the three months ended June 30, 1999 and an increase of 97% from $21.5 million in the six months ended June 30, 1999. The increase in ceded premiums written for the second quarter of 2000 was primarily due to increased ceded premiums written on international policies. The increase in ceded premiums written for the six months ended June 30, 2000 was primarily from a one-time cede of municipal health care exposure during the first quarter of 2000 and increased ceded premiums written on international policies during the period. Ceded premiums written were 21.6% and 22.2% of gross premiums written for the three and six months ended June 30, 2000, respectively, compared with 16.7% and 11.4% for the three and six months ended June 30, 1999, respectively. Net Premiums Written. Net premiums written for the three and six months --------------------- ended June 30, 2000 were $95.4 million and $148.6 million, respectively. The increase of 16% from $82.3 million in the three months ended June 30, 1999 reflects the higher level of gross premiums written during the second quarter of 2000, partially offset by increased ceded premiums. The decrease of 11% from $167.3 million in the six months ended June 30, 1999 reflects higher premiums ceded to reinsurers in the first quarter of 2000, partially offset by slightly higher gross premiums written during the six-month period as compared to the same six-month period of 1999. Net Premiums Earned. Net premiums earned during the three and six months -------------------- ended June 30, 2000 were $80.9 million and $152.1 million, respectively, an increase of 27% from $63.9 million in the three months ended June 30, 1999, and an increase of 22% from $124.2 million in the six months ended June 30, 1999. These increases were primarily the result of increased normal net premiums earned (defined as net premiums earned excluding the effects of refundings, calls and other accelerations of previously insured obligations, collectively referred to as "refundings") during the periods. Normal net premiums earned increased 31% from $54.0 million in the second quarter of 1999 to $70.5 million in the second quarter of 2000. Normal net premiums earned for the six months ended June 30, 2000 were $137.1 million, an increase of 32% from $103.9 million in the six months ended June 30, 1999. The increases in normal net premiums earned resulted primarily from strong business written from prior periods in all areas, particularly structured and international finance. Net premiums earned include accelerated premiums that result from refundings. When an issue insured by Ambac Assurance has been refunded or called, the remaining unearned premium (net of refunding credits, if any) is generally earned at that time. Refunding levels vary depending upon a number of conditions, primarily the relationship between current interest rates and interest rates on outstanding debt. Net premiums earned for the three and six months ended June 30, 2000 included $10.4 million (which had a net income per diluted share effect of $0.08) and $15.0 million (which had a net income per diluted share effect of $0.12), respectively, from refundings. Net premiums earned for the three and six months ended June 30, 1999 included $9.9 million (which had a net income per diluted share effect of $0.08) and $20.3 million (which had a net income per diluted share effect of $0.16), respectively, from refundings. During the second quarter of 2000, Ambac performed a detailed review of its insured book of business. This review resulted in the reporting of refunded issues totaling approximately $7.5 million (net income per diluted share effect of $0.06) during the second quarter. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Net Investment Income. Net investment income for the three and six months ---------------------- ended June 30, 2000 were $58.9 million and $116.5 million, respectively, an increase of 15% from $51.3 million in the three months ended June 30, 1999 and an increase of 16% from $100.8 million in the six months ended June 30, 1999. The increases were primarily attributable to the growth of the investment portfolio from ongoing operations. Additionally, investment income benefited from capital contributions from the parent company to Ambac Assurance. Ambac Assurance's investments in tax-exempt securities amounted to 76% of the total fair value of its portfolio as of June 30, 2000, versus 74% at June 30, 1999. The average pre-tax yield-to-maturity on the investment portfolio was 6.12% and 6.09% as of June 30, 2000 and 1999, respectively. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses ------------------------------------ for the three and six months ended June 30, 2000 were $3.6 million and $6.8 million, respectively, compared to $2.5 million and $5.0 million for the three and six months ended June 30, 1999, respectively. These increases are due to the recent increases in business activity over most sectors. Losses and loss adjustment expenses are generally based upon estimates of the ultimate aggregate losses inherent in the insured portfolio. There was no salvage received during the respective periods in 2000 and 1999. Underwriting and Operating Expenses. Underwriting and operating expenses ------------------------------------ for the three and six months ended June 30, 2000 were $13.9 million and $27.4 million, respectively, an increase of 17% from $11.9 million in the three months ended June 30, 1999 and an increase of 15% from $23.8 million in the six months ended June 30, 1999. Underwriting and operating expenses consist of gross underwriting and operating expenses, less the deferral to future periods of expenses and reinsurance commissions related to the acquisition of new insurance contracts, plus the amortization of previously deferred expenses and reinsurance commissions. During the three and six-month periods ended June 30, 2000, gross underwriting and operating expenses were $20.6 million and $41.0 million, respectively, an increase of 14% from both $18.1 million in the three months ended June 30, 1999 and $35.9 million in the six months ended June 30, 1999. The increase reflects the overall increased business activity during recent periods and is primarily due to increased compensation related to new hires. Underwriting and operating expenses deferred for the three and six months ended June 30, 2000 were $12.6 million and $25.0 million, respectively, compared to $11.2 million and $21.7 million for the three and six months ended June 30, 1999, respectively. The amortization of previously deferred expenses and reinsurance commissions for the three and six months ended June 30, 2000 were $5.9 million and $11.3 million, respectively, compared to $4.9 million and $9.7 million for the three and six months ended June 30,1999, respectively. Financial Services Through its financial services subsidiaries, the Company provides investment agreements, interest rate swaps and investment advisory and cash management services, principally to states, municipalities and their authorities, school districts, and hospitals and health organizations. Revenues. Revenues, net of realized gains and losses, for the three and --------- six months ended June 30, 2000 were $21.1 million and $35.6 million, respectively, up 61% from $13.1 million for the three months ended June 30, 1999 and up 37% from $25.9 million in the six months ended June 30, 1999. Interest rate swap revenue more than tripled from $4.2 million in 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) the second quarter of 1999 to $13.0 million in the second quarter of 2000 primarily attributable to higher inception revenue during the quarter. The increase in interest rate swap revenues was partially offset by a decline in investment agreement revenues from $6.2 million in the second quarter of 1999, to $5.2 million in the second quarter of 2000. The investment agreement decline resulted primarily from lower municipal market issuance. Interest rate swap revenues for the six months ended June 30, 2000 were $18.8 million, up 114% from $8.8 million in the six months ended June 30, 1999. Investment agreement revenues for the six months ended June 30, 2000 were $10.8 million, down 7% from $11.6 million in the six months ended June 30, 1999. Expenses. Expenses for the three and six months ended June 30, 2000 were --------- $6.3 million and $12.8 million, respectively, down 7% from $6.8 million for the three months ended June 30, 1999 and down 7% from $13.8 million for the six months ended June 30, 1999. The decline in expenses is primarily driven by lower compensation costs at the financial services subsidiaries. Corporate Items Interest Expense. Interest expense for the three and six months ended June ----------------- 30, 2000 was $9.4 million and $18.8 million, respectively, compared to $9.1 million for the three months ended June 30, 1999 and $18.2 million for the six months ended June 30, 1999. These increases are primarily due to increased fees associated with the December 1999 increase in Ambac Assurance's third party capital support. Income Taxes. Income taxes for the three and six months ended June 30, 2000 ------------- were at an effective rate of 24.2% and 23.9%, respectively, versus 22.8% and 23.3% for the three and six months ended June 30, 1999. The increased effective tax rate is primarily the result of the growth in underwriting profits in proportion to the primarily tax-advantaged investment income. Supplemental Analytical Financial Data Management, equity analysts and investors consider the following four measures important in analyzing the financial results, and measuring the intrinsic value of the Company: core earnings; operating earnings; adjusted gross premiums written; and adjusted book value. However, none of these measures are promulgated in accordance with GAAP and should not be considered as substitutes for net income, gross premiums written and book value. The definitions of core earnings, operating earnings, adjusted gross premiums written and adjusted book value described below may differ from the definitions used by other public holding companies of financial guarantee insurers. Core Earnings. The Company defines core earnings as consolidated net -------------- income, less the effect of net realized gains and losses, net insurance premiums earned from refundings and calls and certain non-recurring items. Core earnings for the three and six months ended June 30, 2000 were $90.0 million and $172.9 million, respectively, an increase of 27% from $70.9 million for the three months ended June 30, 1999 and an increase of 25% from $137.8 million for the six months ended June 30, 1999. These increases in core earnings were primarily the result of higher normal net premiums earned from the growth in the financial guarantee book of business and higher net investment income from the financial guarantee segment, as well as higher revenues from interest rate swaps in the financial services segment. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating Earnings. The Company defines operating earnings as consolidated ------------------- net income, less the effect of net realized gains and losses and certain non- recurring items. Operating earnings for the three and six months ended June 30, 2000 were $95.9 million and $181.4 million, respectively, an increase of 25% from $76.5 million in the three months ended June 30, 1999 and an increase of 21% from $149.4 million in the six months ended June 30, 1999. The following table reconciles net income computed in accordance with GAAP to operating earnings and core earnings for the three and six months ended June 30, 2000 and 1999:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------- (Dollars in Millions) 2000 1999 2000 1999 ------------------------------------------- Net Income................................................ $92.6 $71.0 $178.3 $144.2 Net realized losses, after tax............................ 3.3 5.5 3.1 5.2 ---------- ---------- --------- -------- Operating earnings..................................... 95.9 76.5 181.4 149.4 Premiums earned from refundings, calls and other accelerations, after tax.................................. (5.9) (5.6) (8.5) (11.6) ---------- ---------- --------- -------- Core earnings.......................................... $90.0 $70.9 $172.9 $137.8 ========== ========== ========= ========
There were 71.3 million and 71.2 million weighted-average diluted shares outstanding during the three and six months ended June 30, 2000, respectively. The weighted-average number of diluted shares outstanding during the three and six months ended June 30, 1999 was 71.3 million shares. Adjusted Gross Premiums Written. The Company defines adjusted gross premiums - -------------------------------- written as gross up-front premiums written plus the present value of estimated installment premiums written on insurance policies and structured credit derivatives issued in the period. While the majority of municipal finance premiums are collected up-front at policy issuance, the majority of Ambac Assurance's structured finance premiums are collected on an installment basis. Adjusted gross premiums written for the three and six months ended June 30, 2000 were $171.5 million and $287.6 million, respectively, up 27% from $134.8 million in the three months ended June 30, 1999 and up 8% from $265.2 million in the six months ended June 30, 1999. The increases in 2000 were primarily due to increased activity in structured finance and international transactions, partially offset by a significant decline in municipal transactions driven by lower issuance and decreased market penetration during the period. Structured finance and international business increased as a result of continued strong issuance in the asset-backed markets and the utilities market. The number of large transactions guaranteed further highlights the growth in the international market. International transactions guaranteed by Ambac Assurance with AGP greater than $4.0 million increased from one and two for the three and six months ended June 30, 1999, respectively, to seven and ten for the three and six months ended June 30, 2000, respectively. The present value of future installment premiums written for the three and six months ended June 30, 2000 was $109.2 million and $196.2 million, respectively, an increase of 52% from $71.9 million written in the second quarter of 1999, and an increase of 44% from $136.7 million in the six months ended June 30, 1999. The aggregate net present value of estimated future installment premiums was $656.9 million and $527.2 million as of June 30, 2000 and December 31, 1999, respectively. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The following table sets forth the amounts of adjusted gross premiums written by type and percent of total for the three and six months ended June 30, 2000 and 1999:
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------- ------------------------------------------- (Dollars in Millions) 2000 % 1999 % 2000 % 1999 % ----------- --------- ---------- --------- ---------- --------- --------- ------- Municipal Finance: Up-front: New issue....................... $ 25.5 15% $ 54.3 40% $ 49.0 17% $114.7 43% Secondary market................ 3.1 2 2.7 2 6.4 2 4.0 2 ----------- --------- ---------- --------- ---------- --------- --------- ------- Sub-total up-front........... 28.6 17 57.0 42 55.4 19 118.7 45 Installment.................. 10.6 6 13.8 10 13.9 5 23.6 9 ----------- --------- ---------- --------- ---------- --------- --------- ------- Total Municipal Finance.. 39.2 23 70.8 52 69.3 24 142.3 54 ----------- --------- ---------- --------- ---------- --------- --------- ------- Structured Finance: Up-front........................ 17.8 10 0.5 - 17.8 6 0.4 - Installment..................... 47.4 28 36.9 28 104.2 36 77.1 29 ----------- --------- ---------- --------- ---------- --------- --------- ------- Total Structured Finance... 65.2 38 37.4 28 122.0 42 77.5 29 ----------- --------- ---------- --------- ---------- --------- --------- ------- International (1): Up-front...................... 15.9 9 5.5 4 18.2 7 9.4 3 Installment................... 51.2 30 21.1 16 78.1 27 36.0 14 ----------- --------- ---------- --------- ---------- --------- --------- ------- Total International....... 67.1 39 26.6 20 96.3 34 45.4 17 ----------- --------- ---------- --------- ---------- --------- --------- ------- Total adjusted gross premiums.......... $171.5 100% $134.8 100% $287.6 100% $265.2 100% =========== ========= ========== ========= ========== ========= ========= ======= Total up-front......................... $ 62.3 36% $ 62.9 47% $ 91.4 32% $128.5 48% Total installment...................... 109.2 64 71.9 53 196.2 68 136.7 52 ----------- --------- ---------- --------- ---------- --------- --------- ------- Total adjusted gross premiums......... $171.5 100% $134.8 100% $287.6 100% $265.2 100% =========== ========= ========== ========= ========== ========= ========= =======
(1) Adjusted gross premiums written is reduced by reinsurance cessions to MBIA on international business of $41.9 million and $13.5 million for the three months ended June 30, 2000 and 1999, respectively, and $47.1 million and $29.8 million for the six months ended June 30, 2000 and 1999, respectively. Adjusted Book Value. Adjusted book value ("ABV") per common share increased -------------------- 10% to $49.03 at June 30, 2000 compared to $44.68 at December 31, 1999. The Company derives ABV by beginning with stockholders' equity (book value) and adding or subtracting the after-tax value of: the net unearned premium reserve; deferred acquisition costs; the present value of estimated net future installment premiums; and the unrealized gain or loss on investment agreement liabilities. These adjustments will not be realized until future periods and may differ materially from the amounts used in determining ABV. The following table reconciles book value per share to ABV per share as of June 30, 2000 and December 31, 1999: June 30, December 31, 2000 1999 ------------------- ------------------- Book value per share.................................................. $31.92 $28.85 After-tax value of: Net unearned premium reserve........................................ 11.25 11.28 Deferred acquisition costs.......................................... (1.32) (1.26) Present value of installment premiums............................... 6.11 4.90 Unrealized gain on investment agreement liabilities................. 1.07 0.91 ------------------- ------------------- Adjusted book value per share......................................... $49.03 $44.68 =================== ===================
17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources Ambac Financial Group, Inc. Liquidity. The Company's liquidity, both on a -------------------------------------- short-term basis (for the next twelve months) and a long-term basis (beyond the next twelve months), is largely dependent upon (i) Ambac Assurance's and other subsidiaries' ability to pay dividends or make payments to the Company; and (ii) external financings. Pursuant to Wisconsin insurance laws, Ambac Assurance may declare dividends, provided that, after giving effect to the distribution, it would not violate certain statutory equity, solvency and asset tests. During the six months ended June 30, 2000, Ambac Assurance paid dividends of $29.9 million on its common stock to the Company. The Company's principal uses of liquidity are for the payment of its operating expenses, interest on its debt, dividends on its shares of common stock, purchases of its common stock in the open market and capital investments in its subsidiaries. Based on the amount of dividends that it expects to receive from Ambac Assurance and other subsidiaries during the next twelve months and the income it expects to receive from its investment portfolio, management believes that the Company will have sufficient liquidity to satisfy its liquidity needs over the next twelve months, including the ability to pay dividends on its common stock in accordance with its dividend policy. Beyond the next twelve months, Ambac Assurance's ability to declare and pay dividends to the Company may be influenced by a variety of factors, including adverse market changes, insurance regulatory changes and changes in general economic conditions. Consequently, although management believes that the Company will continue to have sufficient liquidity to meet its debt service and other obligations over the long term, no guarantee can be given that Ambac Assurance will be permitted to dividend amounts sufficient to pay all of the Company's operating expenses, debt service obligations and dividends on its common stock. Ambac Assurance Liquidity. The principal uses of Ambac Assurance's -------------------------- liquidity are the payment of operating expenses, reinsurance premiums, income taxes and dividends to the Company. Management believes that Ambac Assurance's operating liquidity needs can be funded exclusively from its operating cash flow. The principal sources of Ambac Assurance's liquidity are gross premiums written, scheduled investment maturities, net investment income and receipts from structured credit derivatives. During 1999, the Company contributed $200 million to Ambac Assurance to support the growth in the financial guarantee business. Financial Services Liquidity. The principal uses of liquidity by Financial ----------------------------- Services subsidiaries are payment of investment agreement obligations pursuant to defined terms, net obligations under interest rate swaps and related hedges, operating expenses and income taxes. Management believes that its Financial Services liquidity needs can be funded primarily from its operating cash flow and the maturity of its invested assets. The principal sources of this segment's liquidity are proceeds from issuance of investment agreements, net investment income, maturities of securities from its investment portfolio (which are invested with the objective of matching the cash flows of its obligations under the investment agreements), net receipts from interest rate swaps and related hedges, and fees for investment management services. Additionally, from time to time, liquidity needs are satisfied by short-term inter-company loans from Ambac Financial Group, Inc. The investment objectives with respect to investment agreements are to achieve the highest after-tax total return, subject to a minimum average credit quality rating of Aa/AA on invested assets, and to maintain cash flow matching of invested assets to related liabilities to minimize interest rate and liquidity exposure. Financial Services 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) maintains a portion of its assets in short-term investments and repurchase agreements in order to meet unexpected liquidity needs. Credit Facilities. The Company and Ambac Assurance have a revolving credit ------------------ facility with three major international banks for $150 million, which expires in August 2001 and provides a two-year term loan provision. The facility is available for general corporate purposes, including the payment of claims. As of June 30, 2000 and December 31, 1999, no amounts were outstanding under this credit facility. Ambac Assurance maintains third party capital support in the form of a seven-year irrevocable limited recourse credit facility from a group of highly rated banks for $750 million. This credit facility provides liquidity to Ambac Assurance in the event claims from municipal obligations in its covered portfolio exceed specified levels. Repayment of amounts drawn under the credit facility are limited primarily to the amount of any recoveries of losses related to municipal policy obligations. The line expires in December 2006. As of June 30, 2000 and December 31, 1999, no amounts were outstanding under this facility. ACP has a revolving credit facility with a major international bank for $50 million that expires in June 2001 and provides a three-year term loan provision. The facility is available to ACP for general corporate purposes, including payments in regard to its credit derivative activities. As of June 30, 2000 and December 31, 1999, no amounts were outstanding under this facility. Stock Repurchase Program. The Board of Directors of the Company has ------------------------- authorized the establishment of a stock repurchase program that permits the repurchase of up to 6,000,000 shares of the Company's Common Stock. During the six months ended June 30, 2000, the Company acquired approximately 276,000 shares for an aggregate amount of $12.6 million. Since inception of the Stock Repurchase Program, the Company has acquired approximately 4,849,000 shares for an aggregate amount of $172.9 million. Balance Sheet. As of June 30, 2000, the fair value of the Company's -------------- consolidated investment portfolio was $8.43 billion, down 6% from $8.96 billion at December 31, 1999. This decrease was primarily due to a decrease in volume in investment and payment agreements, partially offset by cash flow from financial guarantee operations and a decline in interest rates causing market values of the investment portfolio to rise. As of June 30, 2000, stockholders' equity was $2.23 billion, a 10% increase from year-end 1999 stockholders' equity of $2.02 billion. The increase stemmed from a combination of net income for the period and an increase in the value of the investment portfolio due to a decline in interest rates. Cash Flows. Net cash provided by operating activities was $173.5 million ----------- and $172.1 million during the six months ended June 30, 2000 and 1999, respectively. These cash flows were primarily provided by financial guarantee operations. Net cash used in financing activities was $766.2 million during the six months ended June 30, 2000, $753.2 million was used by investment agreements draws paid (net of investment agreements issued). For the six months ended June 30, 1999, $131.5 million was provided by financing activities, of which $140.9 million was from investment agreements issued (net of draws paid). 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Net cash provided by investing activities was $591.1 million during the six months ended June 30, 2000, $1,563.5 million was provided by sales and maturities of bonds, partially offset by $1,014.3 million used to purchase bonds. For the six months ended June 30, 1999, $303.5 million was used in investing activities, $2,936.0 million was used to purchase bonds, partially offset by proceeds from sales and maturities of bonds of $2,446.5 million. Material Commitments. The Company has made no commitments for material --------------------- capital expenditures within the next twelve months. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk In the ordinary course of business, the Company, through its subsidiaries, manages a variety of risks, principally market, credit, liquidity, operational, and legal. These risks are identified, measured and monitored through a variety of control mechanisms that are in place at different levels throughout the organization. Market risk represents the potential for losses that may result from changes in the market value of a financial instrument as a result of changes in market conditions. The primary market risks that would impact the value of the Company's financial instruments are interest rate risk, basis risk (taxable interest rates relative to tax-exempt interest rates, discussed below) and credit spread risk. Below we discuss each of these risks and the specific types of financial instruments impacted. Senior managers in the Company's market risk management group are involved in setting and monitoring risk limits and the application of risk measurement methodologies. The estimation of potential losses arising from adverse changes in market conditions is a key element in managing market risk. The Company utilizes various systems, models and stress test scenarios to monitor and manage market risk. This process includes frequent analyses of parallel and non-parallel shifts in the yield curve, "value-at-risk" and changes in credit spreads. Models include estimates, made by management, which utilize current and historical market information. The valuation results from these models could differ materially from amounts that would actually be realized in the market. Financial instruments that may be adversely affected by changes in interest rates consist primarily of investment securities, investment agreement liabilities, debentures, and derivative contracts (primarily interest rate swaps) used for hedging purposes. The Company monitors interest rate risk by running frequent analyses of parallel and non-parallel shifts in the yield curve and other stress test scenarios. Financial instruments that may be adversely affected by changes in basis include the Company's municipal interest rate swap portfolio. The Company, through its affiliate Ambac Financial Services, L.P. ("AFSLP"), is a provider of interest rate swaps to states, municipalities and their authorities and other entities in connection with their financings. AFSLP manages its business with the goal of being market neutral to changes in overall interest rates, while seeking to profit from retaining some basis risk. If actual or projected tax- exempt interest rates change in relation to taxable interest rates, the Company will experience an unrealized mark-to-market gain or loss. Since late 1995, most municipal interest rate swaps transacted by AFSLP contain provisions that are designed to protect the Company against certain forms of tax reform, thus mitigating its basis risk. The estimation of potential losses arising from adverse changes in market relationships, known as value-at-risk, is a key element in management's monitoring of basis risk for the municipal interest rate swap portfolio. The Company has developed a value-at-risk methodology to estimate potential losses over a specified holding period and based on certain probabilistic assessments. The Company's methodology estimates value-at-risk using a 300-day historical "look back" period. This means that changes in market values are simulated using market inputs from the past 300 days. Since no single measure can capture all dimensions of market risk, the Company supplements its value-at-risk methodology by performing daily analyses of parallel and non- parallel shifts in yield curves and stress test scenarios which measure the potential impact of normal market conditions, which might cause abnormal volatility swings or disruptions of market relationships. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk (Continued) Financial instruments that may be adversely affected by changes in credit spreads include the Company's outstanding structured credit derivative contracts. The Company, through its affiliate, ACP, enters into structured credit derivative contracts. These contracts require ACP to make payments upon the occurrence of certain defined credit events relating to underlying obligations (generally fixed income securities). If credit spreads of the underlying obligations change, the market value of the related structured credit derivative could change. As such, ACP could experience an unrealized mark-to- market gain or loss. Market liquidity could also impact valuations. Changes in credit spreads are generally caused by changes in the market's perception of the credit quality of the underlying obligations. The majority of ACP's contracts are partially hedged with various financial institutions or structured with first loss protection. Such structuring mitigates ACP's risk of loss and the price volatility of these financial instruments. Management models the potential impact of credit spread changes on the value of the credit derivative contracts and personnel in the Company's credit surveillance group monitor credit spread risk. 22 PART II - OTHER INFORMATION Items 1, 2, 3 and 5 are omitted either because they are inapplicable or because the answer to such question is negative. Item 4 - Submission of Matters to a Vote of Security Holders The following matters were voted upon at the Annual Meeting of Stockholders of the Company held on May 10, 2000, and received the votes set forth below: Proposal 1. The following directors were elected to serve on the Company's ---------- Board of Directors: Number of Votes Cast ----------------------------------------- For Withheld ----------------------------------------- Phillip B. Lassiter 63,583,895 32,711 Michael A. Callen 63,584,775 31,831 Renso L. Caporali 63,582,666 33,940 Jill M. Considine 62,562,639 1,053,967 Richard Dulude 63,582,356 34,250 W. Grant Gregory 63,583,575 33,031 C. Roderick O'Neil 63,583,865 32,741 There were no broker non-votes for this proposal. Proposal 2. The proposal to approve the amendments to the 1997 Executive ---------- Incentive Plan that will (i) increase the maximum incentive amount that may be awarded to any participant under the Plan; (ii) redefine the "Covered Employees" performance goals set forth in the Plan; and (iii) extend the term of the Plan to January 1, 2005 were adopted, with 62,167,040 votes in favor, 1,417,042 votes against and 32,524 votes abstaining. There were no broker non-votes for this proposal. Proposal 3. The proposal to ratify the selection of KPMG as independent ---------- auditors of the Company and its subsidiaries for 2000 was adopted, with 63,602,730 votes in favor, 7,274 votes against and 6,602 votes abstaining. There were no broker non-votes for this proposal. 23 PART II - OTHER INFORMATION (Continued) Item 6 - Exhibits and Reports on Form 8-K (a) The following are annexed as exhibits: Exhibit Number Description -------------- ---------------------------------------------------------- 10.23* Ambac Financial Group, Inc. 1997 Executive Incentive Plan, amended as of January 1, 2000 10.24 First Extension of U.S. $50,000,000 Revolving Credit Agreement, dated June 9, 2000 among Ambac Credit Products, LLC, the banks, financial institutions and other institutional lenders (the "Lenders"), and the Bank of New York, as Agent for the Lenders. 27.00 Financial Data Schedule. 99.03 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited Financial Statements as of June 30, 2000 and December 31, 1999 and for the periods ended June 30, 2000 and 1999. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the second quarter of 2000. -------------- - ----------------------- * Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit pursuant to Item 6(a) of Form 10-Q. --------- 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Ambac Financial Group, Inc. (Registrant) Dated: August 11, 2000 By: /s/ Frank J. Bivona --------------------------------- Frank J. Bivona Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) 25 INDEX TO EXHIBITS Exhibit Number Description -------------- ----------------------------------------------------------- 10.23 Ambac Financial Group, Inc. 1997 Executive Incentive Plan, amended as of January 1, 2000 10.24 First Extension of U.S. $50,000,000 Revolving Credit Agreement, dated June 9, 2000 among Ambac Credit Products, LLC, the banks, financial institutions and other institutional lenders (the "Lenders"), and the Bank of New York, as Agent for the Lenders. 27.00 Financial Data Schedule. 99.03 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited Financial Statements as of June 30, 2000 and December 31, 1999 and for the periods ended June 30, 2000 and 1999. 26 EX-10.23 2 0002.txt EXECUTIVE INCENTIVE PLAN, AMENDED AS OF 01/01/2000 EXHIBIT 10.23 AMBAC EXECUTIVE INCENTIVE PLAN 1. Purposes The purposes of the Ambac Executive Incentive Plan (the "Plan") are to enable Ambac Financial Group, Inc. (the "Company") to attract, retain, motivate and reward executives and key employees of the highest caliber and quality by providing them with the opportunity to earn incentive compensation directly linked to the Company's performance. 2. Definitions For purposes of the Plan, the following terms shall be defined as follows: "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended, and the applicable rulings and regulations (including any proposed regulations) thereunder. "Committee" means the Compensation and Organization Committee of the Board, any successor committee thereto or any other committee appointed by the Board to administer the Plan. The Committee shall consist of at least two individuals, each of whom shall be qualified as an "outside director" (or shall satisfy any successor standard thereto) for purposes of Section 162(m), and shall serve at the pleasure of the Board. "Common Stock" means the Common Stock, par value $.01 per share, of the Company. "Covered Employee" means a Participant who has been designated by the Committee as a Participant whose compensation for the relevant fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. "Disability" means eligibility for disability benefits under the terms of the Company's long-term disability plan in effect at the time the Participant becomes disabled. "Equity Plan" means the AMBAC 1997 Equity Incentive Plan and any successor or similar plan of the Company. "Fair Market Value" means, with respect to a share of Common Stock, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee. In the absence of any alternative valuation methodology approved by the Committee, the Fair Market Value of a share of Common Stock shall equal the average of the highest and the lowest quoted selling price of a share of Common Stock as reported on the composite tape for securities listed on the New York Stock Exchange, or such other national securities exchange as may be designated by the Committee, or, in the event that the Common Stock is not listed for trading on a national securities exchange but is quoted on an automated system, on such automated system, in any such case on the valuation date (or, if there were no sales on the valuation date, the average of the highest and the lowest quoted selling prices as reported on said composite tape or automated system for the most recent day during which a sale occurred). "Participant" means each executive officer, senior officer or key employee of the Company or a Subsidiary whom the Committee designates as a participant under the Plan. "Performance Targets" means the targets related to the performance goals designated in Section 4(d), which Performance Targets will be established by the Committee for a Performance Period. "Performance Period" means each fiscal year of the Company or such other period as may be designated by the Committee. "Section 162(m)" means Section 162(m) of the Code. "Subsidiary" means (i) a corporation or other entity with respect to which the Company, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation's board of directors or analogous governing body, or (ii) any other corporation or other entity in which the Company, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan. 3. Administration (a) Power and Authority of the Committee. The Plan shall be administered by the Committee which shall have full power and authority, subject to the express provisions hereof: (i) to select Participants from executive officers, senior officers and key employees of the Company; (ii) to establish the Performance Targets for achievement during a Performance Period and to determine whether such Performance Targets have been achieved; (iii) to determine the cash amount and/or number of shares of Common Stock payable in connection with an award; (iv) to prescribe, amend and rescind rules and procedures relating to the Plan; (v) to vary the terms of awards to take account of tax, securities law and other regulatory requirements of foreign jurisdictions; (vi) subject to the provisions of the Plan and subject to such additional limitations and restrictions as the Committee may impose, to delegate to one or more officers of the Company some or all of its authority under the Plan; (vii) to employ such legal counsel, independent auditors and consultants as it deems desirable for the administration of the Plan and to rely upon any opinion or computation received therefrom; and (viii) to make all other determinations and to formulate such procedures as may be necessary or advisable for the administration of the Plan. (b) Plan Construction and Interpretation. The Committee shall have full power and authority, subject to the express provisions hereof, to construe and interpret the Plan. (c) Determinations of Committee Final and Binding. All determinations by the Committee in carrying out and administering the Plan and in construing and interpreting the Plan shall be final, binding and conclusive for all purposes and upon all persons interested herein. (d) Liability of Committee. No member of the Committee shall be liable for any action nor determination made in good faith, and the members of the Committee shall be entitled to indemnification and reimbursement in the manner provided in the Company's Certificate of Incorporation as it may be amended from time to time. In the performance of its responsibilities with respect to the Plan, the Committee shall be entitled to rely upon information and advice furnished by the Company's officers, the 2 Company's accountants, the Company's counsel and any other party the Committee deems necessary, and no member of the Committee shall be liable for any action taken or not taken in reliance upon any such advice. 4. Awards (a) Performance Targets. The Committee shall determine in its sole discretion whether any executive officer, senior officer or other employee of the Company shall have the opportunity to earn incentive compensation under this Plan during any Performance Period. If the Committee decides to offer such opportunity to one or more executive officers, senior officers or other employees of the Company, then no later than 90 days after the beginning of a Performance Period (or such other time as may be required or permitted by Section 162(m)), the Committee shall (i) designate each Participant for the Performance Period, (ii) select from the performance goals set forth in Section 4(d) below the performance goal or goals to be applicable to the Performance Period, (iii) establish specific Performance Targets related to such performance goals and the incentive amounts which may be earned for the Performance Period by each Participant and (iv) specify the relationship between Performance Targets and the incentive amount to be earned by each Participant for the Performance Period. The Committee may specify that the incentive amount for a Performance Period will be earned if the applicable Performance Target is achieved for one performance goal or for any one of a number of performance goals. The Committee may also provide that the incentive amount for a Performance Period will be earned only if a Performance Target is achieved for more than one performance goal, or that the incentive amount to be earned for a given Performance Period will vary based upon different levels of achievement of the applicable Performance Targets. (b) Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable Performance Targets have been achieved for such Performance Period and the incentive amounts, if any, payable to Participants for such Performance Period. In determining the incentive amount earned by a Participant for a given Performance Period, the Committee shall have the right to reduce (but not to increase) the incentive amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the Performance Period. (c) Payment of Awards; Maximum Limitation. Anything in this Plan to the contrary notwithstanding, (i) the maximum aggregate incentive amount that may be earned under the Plan by a Participant for all Performance Periods of one year or less beginning in any given fiscal year of the Company shall be $2,000,000, and (ii) the maximum aggregate incentive amount that may be earned under the Plan by a Participant for all Performance Periods of more than one year beginning in any given fiscal year of the Company shall be $6,000,000. (d) Performance Goals. For purposes of this Plan, the performance goals from which the Committee shall establish Performance Targets applicable to specific Performance Periods shall be limited to the following: (i) return on equity; (ii) core earnings/operating earnings growth; (iii) total return to stockholders; (iv) expense management; (v) risk management (vi) market share; 3 (vii) industry leadership/image building; (viii) new products/initiative; and (ix) organizational development/corporate culture; each of which may be established (x) on a corporate-wide basis or with respect to one or more operating units, divisions, acquired businesses, minority investments, partnerships or joint ventures, or, where applicable, (y) on a relative or an absolute basis or (z) on a per share or an aggregate basis. 5. Termination of Employment If a Participant's employment with the Company or a Subsidiary terminates during a Performance Period by reason of death, Disability or retirement or with the approval of the Committee, the Participant shall receive a pro rata payment based upon the number of full months during which the Participant was employed during the Performance Period and the degree to which the Performance Targets are determined by the Committee to have been achieved prior to the Participant's termination. If a Participant's employment with the Company or a Subsidiary terminates during a Performance Period for any reason other than death, Disability or retirement or other than with the approval of the Committee, the Participant's participation in the Plan shall terminate forthwith and he or she shall not be entitled to an award for such Performance Period. 6. Payment of Awards Payment of awards determined under Section 4 shall be made to each Participant as soon as practicable after the Committee determines that the applicable Performance Targets have been achieved. The Committee in its sole discretion shall determine whether awards shall be payable in cash, in the form of stock awards or restricted stock units issued pursuant to an Equity Plan or from treasury, or in any combination thereof. If the Committee determines that an award shall be paid in the form of stock awards or restricted stock units issued under an Equity Plan or from treasury, then for purposes of determining the number of shares of Common Stock subject to an award the Committee may value such shares at a discount to Fair Market Value to reflect any restrictions, conditions and limitations set forth in the relevant Equity Plan or the applicable award agreement or certificate or otherwise applicable to the shares, provided, that such discount shall not exceed 50% of the Fair Market Value as of the relevant date of determination. 7. Effective Date; Term The Plan shall become effective upon its adoption by the Board subject to its approval by the stockholders of the Company. Prior to such stockholder approval, the Committee may grant awards conditioned on stockholder approval. If such stockholder approval is not obtained at or before the first annual meeting of stockholders to occur after the adoption of the Plan by the Board (including any adjournment or adjournments thereof), the Plan and any awards made hereunder shall terminate ab initio and be of no further force and effect. Unless earlier terminated in accordance with Section 8 below, no award shall be made under the Plan with respect to Performance Periods beginning after January 1, 2002. 8. Amendment and Termination Notwithstanding Section 7, the Board or the Committee may at any time amend, suspend, discontinue or terminate the Plan; provided, however, that no such action shall be effective without approval by the stockholders of the Company to the extent necessary to continue to qualify the amounts payable hereunder to Covered Employees as performance-based compensation under Section 162(m). 4 9. Miscellaneous (a) Tax Withholding. No later than the date as of which an amount first becomes includable in the gross income of the Participant for applicable income tax purposes with respect to any award under the Plan, the Participant shall pay to the Company or make arrangements satisfactory to the Committee regarding the payment of any federal, state or local taxes of any kind required by law to be withheld with respect to such amount. In the case of an award that is payable in shares of Common Stock, the Company may permit the Participant to satisfy, in whole or in part, such obligation to remit taxes by directing the Company to withhold shares of Common Stock that would otherwise be received by such individual, pursuant to such rules as the Committee may establish from time to time. (b) No Rights to Awards or Employment. No Participant shall have any claim or right to receive awards under the Plan. Nothing in the Plan shall confer upon any employee of the Company any right to continued employment with the Company or interfere in any way with the right of the Company to terminate the employment of any of its employees at any time, with or without cause. (c) Other Compensation. Nothing in this Plan shall preclude or limit the ability of the Company to pay any compensation to a Participant under the Company's other compensation and benefit plans and programs, including without limitation any Equity Plan. (d) No Limitation on Corporate Actions. Nothing contained in the Plan shall be construed to prevent the Company or any Subsidiary from taking any corporate action which is deemed by it to be appropriate or in its best interest, whether or not such action would have an adverse effect on any awards made under the Plan. No Participant, beneficiary or other person shall have any claim against the Company or any Subsidiary as a result of any such action. (e) Unfunded Plan. The Plan is intended to constitute an unfunded plan for incentive compensation. Prior to the payment of any award, nothing contained herein shall give any Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver payment in cash or Common Stock with respect to awards hereunder. (f) Non-Transferability. Except as expressly provided herein, no Participant or beneficiary shall have the power or right to sell, transfer, assign, pledge or otherwise encumber or dispose of the Participant's interest under the Plan. (g) Designation of Beneficiary. A Participant may designate a beneficiary or beneficiaries to receive any payments which may be made following the Participant's death. Such designation may be changed or canceled at any time without the consent of such beneficiary. Any such designation, change or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee. If a Participant does not designate a beneficiary, or the designated beneficiary or beneficiaries predeceases the Participant, any payments which may be made following the Participant's death shall be made to the Participant's estate. (h) Severability. If any provision of this Plan is held unenforceable, the remainder of the Plan shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Plan. (i) Expenses. The costs and expenses of administering the Plan shall be borne by the Company. (j) Governing Law. The Plan and all actions taken thereunder shall be governed by and construed in accordance with and governed by the laws of the State of Delaware, without reference to the principles of conflict of laws. 5 EX-10.24 3 0003.txt 1ST EXTENSION OF U.S. $50,000,000 REVOLVING CREDIT EXHIBIT 10.24 FIRST EXTENSION OF COMMITMENT TERMINATION DATE UNDER REVOLVING CREDIT AGREEMENT ------------------------------------------------- FIRST EXTENSION (this "Extension") dated as of June 9, 2000, under the Revolving Credit Agreement, dated as of July 1, 1999 (the "Credit Agreement") by and among AMBAC CREDIT PRODUCTS, LLC, a Delaware limited liability company (the "Borrower"), the banks, financial institutions and other institutional lenders from time to time party thereto (collectively, together with their respective assigns, the "Lenders", and each a "Lender"), and THE BANK OF NEW YORK, as Agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent"). RECITALS -------- A. The Borrower has requested that the Commitment Termination Date be extended for a 364-day period from the current Commitment Termination Date and the Lenders agree to such extension, subject to the terms and conditions set forth below. B. Capitalized terms used herein that are defined in the Credit Agreement and are not otherwise defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. Accordingly, in consideration of the Recitals and the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: Section 1.1 Extension of Maturity Date. Notwithstanding the -------------------------- procedures set forth in Section 2.16 of the Credit Agreement, the Agent and each of the Lenders hereby consents to the extension of the Commitment Termination Date for a period of 364 days from the current Commitment Termination Date. Accordingly, the new Commitment Termination Date shall be June 28, 2001. Section 1.2 Amendment to Credit Agreement. The Credit Agreement and ----------------------------- the other Loan Documents shall each be deemed amended hereby to the extent necessary, if any, to give effect to the provisions of this Extension. Section 1.3 References in the Credit Agreement. All references in ---------------------------------- the Credit Agreement and the other Loan Documents to: (i) the "Credit Agreement", and also in the case of the Credit Agreement to "this Agreement", shall be deemed to refer to the Credit Agreement, as amended hereby, and (ii) the "Loan Documents" shall be deemed to include this Extension. Section 1.4 Representations and Warranties. The Borrower hereby ------------------------------ represents and warrants that (i) there exists no Default or Event of Default on the date hereof, and (ii) the representations and warranties contained in the Credit Agreement, are true and correct in all material respects on and as of the date hereof (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date shall be required to be true and correct in all material respects only as of such date). Section 1.5 Miscellaneous. ------------- (a) Except as amended hereby, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms. (b) This Extension may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one agreement. It shall not be necessary in making proof of this Extension to produce or account for more than one counterpart signed by the party against which enforcement is sought. (c) THIS EXTENSION IS BEING DELIVERED IN AND IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE AND BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. AS EVIDENCE of the agreement by the parties hereto to the terms and conditions herein contained, each such party has caused this Extension to be executed on its behalf as of the date first written above. AMBAC CREDIT PRODUCTS, LLC By:___________________________ Name:_________________________ Title:________________________ THE BANK OF NEW YORK, in its capacity as a Lender and in its capacity as the Agent By:___________________________ Name:_________________________ Title:________________________ 2 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
7 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 8,297,541 0 0 5,341 0 0 8,431,438 11,971 0 142,080 10,798,233 127,300 1,441,946 0 0 424,028 0 0 707 2,229,347 10,798,233 152,079 116,533 (4,792) 3,001 6,849 27,354 0 234,264 55,986 178,278 0 0 0 178,278 2.55 2.50 0 0 0 0 0 0 0
EX-99.03 5 0005.txt CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS EXHIBIT 99.03 AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES (a wholly owned subsidiary of Ambac Financial Group, Inc.) Consolidated Unaudited Financial Statements As of June 30, 2000 and December 31, 1999 and for the Periods Ended June 30, 2000 and 1999 Ambac Assurance Corporation and Subsidiaries Notes to Consolidated Unaudited Financial Statements (Dollars in Thousands) (1) Basis of Presentation Ambac Assurance Corporation ("Ambac Assurance") is a leading guarantor of municipal and structured finance obligations. Ambac Assurance has earned triple-A ratings, the highest ratings available from Moody's Investors Service, Inc., Standard & Poor's Rating Group, Fitch, and Rating and Investment Information, Inc. Financial guarantees underwritten by Ambac Assurance guarantee payment when due of the principal of and interest on the obligation guaranteed. In the case of a monetary default on the guaranteed bond, payments may not be accelerated by the policyholder without Ambac Assurance's consent. As of June 30, 2000, Ambac Assurance's net guarantees in force (principal and interest) were $390,987,000. Ambac Assurance is a wholly owned subsidiary of Ambac Financial Group, Inc. ("AFGI"), a holding company whose subsidiaries provide financial guarantees and financial services to clients in both the public and private sectors around the world. In December 1997, Ambac Assurance acquired Construction Loan Insurance Corporation ("CLIC"). CLIC's wholly owned subsidiary, Connie Lee Insurance Company ("Connie Lee"), a triple-A rated financial guarantee insurance company, guaranteed bonds primarily for college and hospital infrastructure projects. Ambac Assurance and Connie Lee have arrangements in place to ensure that Connie Lee maintains a level of capital sufficient to support Connie Lee's outstanding obligations and for Connie Lee insured bonds to retain their triple-A rating. Ambac Assurance serves clients in international markets through its wholly- owned subsidiary Ambac Assurance UK Limited. Additionally, Ambac Assurance had served clients in international markets through its participation in MBIA. AMBAC International, an unincorporated joint venture with MBIA Insurance Corporation ("MBIA"). On March 21, 2000, Ambac Assurance and MBIA announced the restructuring of that arrangement. Ambac Assurance and MBIA will continue having reciprocal reinsurance arrangements for international business until at least the end of 2000, however, the companies will market and originate financial guarantees independently. The restructuring did not affect business conducted in Japan where the companies will continue to market and originate transactions jointly under the original arrangement. Ambac Credit Products L.L.C. ("ACP"), a wholly owned subsidiary of Ambac Assurance, also provides credit protection in the form of structured credit derivatives. These structured credit derivatives require that ACP make a payment upon the occurrence of certain defined credit events relating to an underlying obligation. Should a credit event occur, ACP would generally pay an amount equivalent to the difference between the par value and market value of the underlying obligation. The majority of ACP's structured credit derivatives have been structured with certain first loss protection. Ambac Assurance Corporation and Subsidiaries Notes to Consolidated Unaudited Financial Statements, (Continued) (Dollars in Thousands) Ambac Assurance, as the sole limited partner, owns a limited partnership interest representing 90% of the total partnership interests of Ambac Financial Services, L..P. ("AFSLP"), a limited partnership which provides interest rate swaps primarily to states, municipalities and their authorities. The sole general partner of AFSLP, Ambac Financial Services Holdings, Inc., a wholly owned subsidiary of AFGI, owns a general partnership interest representing 10% of the total partnership interest in AFSLP. The accompanying consolidated unaudited interim financial statements have been prepared on the basis of U.S. Generally Accepted Accounting Principles ("GAAP") and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial condition, results of operations and cash flows for the periods presented. 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the six months ended June 30, 2000 may not be indicative of the results that may be expected for the full year ending December 31, 2000. These financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of Ambac Assurance Corporation and its subsidiaries as of December 31, 1999 and 1998, and for each of the years in the three-year period ended December 31, 1999. Ambac Assurance Corporation and Subsidiaries Consolidated Balance Sheets June 30, 2000 and December 31, 1999 (Dollars in Thousands Except Share Data)
June 30, 2000 December 31, 1999 -------------------- ------------------- ASSETS ------ Investments: Fixed income securities, at fair value (amortized cost of $3,846,020 in 2000 and $3,657,146 in 1999) $3,777,423 $3,515,969 Short-term investments, at cost (approximates fair value) 118,599 207,121 Other 767 -- -------------------- ------------------- Total investments 3,896,789 3,723,090 Cash 9,328 6,531 Securities purchased under agreements to resell 6,003 -- Receivable for securities sold 5,570 18,011 Investment income due and accrued 64,210 61,147 Deferred acquisition costs 142,080 135,324 Reinsurance recoverable 668 500 Prepaid reinsurance 232,723 217,977 Other assets 222,277 219,231 -------------------- ------------------- Total assets $4,579,648 $4,381,811 ==================== =================== LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ Liabilities: Unearned premiums $1,452,278 $1,441,679 Losses and loss adjustment expenses 127,300 121,475 Ceded reinsurance balances payable 8,160 15,028 Deferred income taxes 61,646 27,860 Current income taxes 38,339 33,782 Other liabilities 234,510 233,127 Payable for securities purchased 34,072 93,149 -------------------- ------------------- Total liabilities 1,956,305 1,966,100 -------------------- ------------------- Stockholder's equity: Preferred stock, par value $1,000 per share; authorized shares - 285,000; issued and outstanding shares - none -- -- Common stock, par value $2.50 per share; authorized shares - 40,000,000; issued and outstanding shares - 32,800,000 at June 30, 2000 and December 31, 1999 82,000 82,000 Additional paid-in capital 753,256 751,522 Accumulated other comprehensive loss (46,321) (92,049) Retained earnings 1,834,408 1,674,238 -------------------- ------------------- Total stockholder's equity 2,623,343 2,415,711 -------------------- ------------------- Total liabilities and stockholder's equity $4,579,648 $4,381,811 ==================== ===================
See accompanying Notes to Consolidated Unaudited Financial Statements. Ambac Assurance Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) For The Periods Ended June 30, 2000 and 1999 (Dollars in Thousands)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ========= ========= ========= ========= Revenues: Gross premiums written $122,109 $100,009 $192,370 $191,050 Ceded premiums written (26,247) (16,458) (42,374) (21,544) --------- --------- --------- --------- Net premiums written $95,862 $83,551 $149,996 $169,506 ========= ========= ========= ========= Net premiums earned $81,716 $64,678 $153,698 $125,707 Net fees earned and other income 13,899 5,198 21,391 10,946 Net investment income 59,087 51,371 116,870 100,958 Net realized gains (losses) 2,017 (5,569) 2,479 (5,480) --------- --------- --------- --------- Total revenues 156,719 115,678 294,438 232,131 --------- --------- --------- --------- Expenses: Losses and loss adjustment expenses 3,600 2,500 6,849 5,000 Underwriting and operating expenses 16,784 13,606 32,110 27,234 Interest expense 1,020 733 2,039 1,457 --------- --------- --------- --------- Total expenses 21,404 16,839 40,998 33,691 --------- --------- --------- --------- Income before income taxes 135,315 98,839 253,440 198,440 Provision for income taxes 35,093 23,101 63,370 47,135 --------- --------- --------- --------- Net income $100,222 $75,738 $190,070 $151,305 ========= ========= ========= =========
See accompanying Notes to Consolidated Unaudited Financial Statements Ambac Assurance Corporation and Subsidiaries Consolidated Statements of Stockholder's Equity For The Periods Ended June 30, 2000 and 1999 (Dollars in Thousands)
2000 1999 ---------------------- ------------------------ Retained Earnings: Balance at January 1 $1,674,238 $1,404,673 Net income 190,070 $190,070 151,305 $151,305 ----------- ------------- Dividends declared - common stock (29,900) (26,000) ----------- ----------- Balance at June 30 $1,834,408 $1,529,978 ----------- ----------- Accumulated Other Comprehensive (Loss) Income: Balance at January 1 ($92,049) $138,651 Unrealized gains (losses) on securities, $72,580 and ($151,059), pre-tax, in 2000 and 1999, respectively (1) 47,177 (98,188) Foreign currency loss (1,449) (1,057) ----------- ------------- Other comprehensive income (loss) 45,728 45,728 (99,245) (99,245) ---------------------- ------------------------ Comprehensive income $235,798 $52,060 =========== ============= Balance at June 30 ($46,321) $39,406 ----------- ----------- Preferred Stock: Balance at January 1 and June 30 $- $- ----------- ----------- Common Stock: Balance at January 1 and June 30 $82,000 $82,000 ----------- ----------- Additional Paid-in Capital: Balance at January 1 $751,522 $541,021 Capital contribution - 101,479 Exercise of stock options 1,734 1,065 ----------- ----------- Balance at June 30 $753,256 $643,565 ----------- ----------- Total Stockholder's Equity at June 30 $2,623,343 $2,294,949 =========== =========== (1) Disclosure of reclassification amount: Unrealized holding gains (losses) arising during period $48,788 ($101,750) Less: reclassification adjustment for net gains included in net income 1,611 (3,562) ----------- ----------- Net unrealized gains (losses) on securities $47,177 ($98,188) =========== ===========
See accompanying Notes to Consolidated Unaudited Financial Statements. Ambac Assurance Corporation and Subsidiaries Consolidated Statements of Cash Flows For The Periods Ended June 30, 2000 and 1999 (Dollars in Thousands)
Six Months Ended June 30, --------------------------------- 2000 1999 --------- --------- Cash flows from operating activities: Net income $190,070 $151,305 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,429 1,100 Amortization of bond premium and discount (2,467) (2,479) Current income taxes 4,557 (309) Deferred income taxes 8,383 6,551 Deferred acquisition costs (6,756) (9,619) Unearned premiums, net (4,147) 43,556 Losses and loss adjustment expenses 5,657 4,659 Ceded reinsurance balances payable (6,868) (697) (Gains) losses on sales of investments (2,479) 5,480 Premiums receivable 3,443 1,609 Other, net 170 (1,699) --------- --------- Net cash provided by operating activities 190,992 199,457 --------- --------- Cash flows from investing activities: Proceeds from sales of bonds 325,992 742,060 Proceeds from maturities of bonds 76,610 79,961 Purchases of bonds (634,512) (995,702) Change in short-term investments 88,522 7,033 Securities purchased under agreements to resell (6,003) 1,844 Other, net (974) (864) --------- --------- Net cash used in investing activities (150,365) (165,668) --------- --------- Cash flows from financing activities: Dividends paid (29,900) (26,000) Short-term financing (7,930) (6,000) --------- --------- Net cash used in financing activities (37,830) (32,000) --------- --------- Net cash flow 2,797 1,789 Cash at January 1 6,531 4,895 --------- --------- Cash at June 30 $9,328 $6,684 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $48,700 $37,000 ========= ========= Interest expense on intercompany line of credit $15 $335 ========= =========
See accompanying Notes to Consolidated Unaudited Financial Statements. -----END PRIVACY-ENHANCED MESSAGE-----