<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: September 24, 1998
Date of Earliest
Event Reported: September 24, 1998
MBIA Inc.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 1-9583 06-1185706
--------------- ---------------------- ---------------
(State of (Commission File Number) (IRS Employer
Incorporation) Identification
Number)
113 King Street, Armonk, New York 10504
-------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(914) 273-4545
------------------------------------------------------------------
(Registrant's telephone number, including area code)
Page 1 of 4
<PAGE>
Items 1-6. Not Applicable.
Item 7. Financial Statement and Exhibits
(c) Exhibits.
On February 17, 1998, the Registrant acquired CapMAC
Holdings, Inc., and on July 31, 1998, the Registrant acquired
1838 Investment Advisors, Inc. ("1838"), in transactions
each accounted for as a "pooling of interest" for financial
and accounting reporting purposes (the "Mergers"). The
audited consolidated financial statements of the Company have
been restated to give effect to the Mergers and are filed
herewith, along with the report of PricewaterhouseCoopers LLP
dated September 21, 1998 (the "Report"), as Exhibit 99.01.
Financial Data Schedules based on the restated financial
statements are filed herewith as Exhibits 27.01, 27.02 and 27.03.
A Ratio of Earnings to Fixed Charges giving effect to the Mergers
is filed herewith as Exhibit 99.02. A Computation of Ratio of
Earnings to Fixed Charges giving effect to the Mergers is filed
herewith as Exhibit 99.03.
On July 28, 1998, the Registrant filed a Registration
Statement on Form S-3 (Registration No. 333-60039) (the
"Registration Statement") with respect to various
securities. On July 31, 1998, the Commission declared the
Registration Statement effective. A form of underwriting
agreement and opinions of counsel as to the validity of the
securities covered by the Registration Statement are
filed herewith as Exhibits 1.01, 99.04 and 99.05,
respectively. The Consent of PricewaterhouseCoopers LLP to
incorporation by reference of their Report in the Registration
Statement is filed herewith as Exhibit 23.04.
(1.01) Form of Underwriting Agreement
(23.04) Consent of PricewaterhouseCoopers LLP
(27.01) Financial Data Schedule
(27.02) Financial Data Schedule
(27.03) Financial Data Schedule
(99.01) Report of PricewaterhouseCoopers LLP and Restated
Financial Statements
(99.02) Ratio of Earnings to Fixed Charges
(99.03) Computation of Ratio of Earnings to Fixed Charges
(99.04) Opinion of Debevoise & Plimpton
(99.05) Opinion of Day, Berry & Howard LLP
Item 8. Not Applicable.
Page 2 of 4
<PAGE>
SIGNATURE
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 hereunto duly authorized.
MBIA Inc.
By: /s/ LOUIS G. LENZI
-----------------------------
Name: Louis G. Lenzi
Title: Secretary and General
Counsel
Date: September 24, 1998
Page 3 of 4
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(1.01) Form of Underwriting Agreement
(23.04) Consent of PricewaterhouseCoopers LLP
(27.01) Financial Data Schedule
(27.02) Financial Data Schedule
(27.03) Financial Data Schedule
(99.01) Report of PricewaterhouseCoopers LLP and Restated Financial
Statements
(99.02) Ratio of Earnings to Fixed Charges
(99.03) Computation of Ratio of Earnings to
Fixed Charges
(99.04) Opinion of Debevoise & Plimpton
(99.05) Opinion of Day, Berry & Howard LLP
Page 4 of 4
<PAGE>
EXHIBIT 1.01
MBIA INC.
DEBT SECURITIES
----------
UNDERWRITING AGREEMENT -- STANDARD TERMS
----------------------------------------
SEPTEMBER __, 1998
From time to time MBIA Inc., a Connecticut corporation (the "Company"),
proposes to enter into one or more Pricing Agreements (each a "Pricing
Agreement") in the form of Annex I hereto, with such additions and deletions as
the parties thereto may determine, and, subject to the terms and conditions
stated herein and therein, to issue and sell to the firms named in Schedule I to
the applicable Pricing Agreement (such firms constituting the "Underwriters"
with respect to such Pricing Agreement and the securities specified therein)
certain of its debt securities (the "Securities") specified in Schedule II to
such Pricing Agreement (with respect to such Pricing Agreement, the "Designated
Securities").
The terms and rights of any particular issuance of Designated Securities
shall be as specified in the Pricing Agreement relating thereto and in or
pursuant to the indenture (the "Indenture") identified in such Pricing
Agreement.
1. Particular sales of Designated Securities may be made from time to
time to the Underwriters of such Securities, for whom the firms designated as
representatives of the Underwriters of such Securities in the Pricing Agreement
relating thereto will act as representatives (the "Representatives"). The term
"Representatives" also refers to a single firm acting as sole representative of
the Underwriters and to an Underwriter or Underwriters who act without any firm
being designated as its or their representatives. The obligation of the Company
to issue and sell any of the Securities and the obligation of any of the
Underwriters to purchase any of the Securities shall be evidenced by the Pricing
Agreement with respect to the Designated Securities specified therein. Each
Pricing Agreement shall specify the aggregate principal amount of such
Designated Securities, the initial public offering price of such Designated
Securities, the purchase price to the Underwriters of such Designated
Securities, the names of the Underwriters of such Designated Securities, the
names of the Representatives of such Underwriters and the principal amount of
such Designated Securities to be purchased by each Underwriter and shall set
forth the date, time and manner of delivery of such Designated Securities and
payment therefor. The Pricing Agreement shall also specify (to the extent not
set forth in the Indenture and the registration statement and prospectus with
respect thereto) the terms of such Designated Securities. A Pricing Agreement
shall be in the form of an executed writing (which may be in counterparts), and
may be evidenced by an exchange of telegraphic communications or any other rapid
transmission device designed to produce a written record of communications
transmitted. The obligations of the Underwriters under this Agreement and each
Pricing Agreement shall be several and not joint.
2. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-....) (the
"Initial Registration Statement") in respect of the Securities has been
filed with the Securities and
<PAGE>
Exchange Commission (the "Commission"); the Initial Registration Statement
and any post-effective amendment thereto, each in the form heretofore
delivered or to be delivered to the Representatives and, excluding exhibits
to the Initial Registration Statement, but including all documents
incorporated by reference in the prospectus contained therein, to the
Representatives for each of the other Underwriters have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial Registration
Statement or document incorporated by reference therein has heretofore been
filed or transmitted for filing with the Commission (other than
prospectuses filed pursuant to Rule 424(b) of the rules and regulations of
the Commission under the Act, each in the form heretofore delivered to the
Representatives); and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto or the
Rule 462(b) Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) under the
Act, is hereinafter called a "Preliminary Prospectus"; the various parts of
the Initial Registration Statement, any post-effective amendment thereto
and the Rule 462(b) Registration Statement, if any, including all exhibits
thereto and the documents incorporated by reference in the prospectus
contained in the Initial Registration Statement at the time such part of
the Initial Registration Statement became effective but excluding Form T-1,
each as amended at the time such part of the Initial Registration Statement
became effective or such part of the Rule 462(b) Registration Statement, if
any, became or hereafter becomes effective, are hereinafter collectively
called the "Registration Statement"; the prospectus relating to the
Securities, in the form in which it has most recently been filed, or
transmitted for filing, with the Commission on or prior to the date of this
Agreement, being hereinafter called the "Prospectus"; any reference herein
to any Preliminary Prospectus or the Prospectus shall be deemed to refer to
and include the documents incorporated by reference therein pursuant to the
applicable form under the Act, as of the date of such Preliminary
Prospectus or Prospectus, as the case may be; any reference to any
amendment or supplement to any Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include any documents filed after the date
of such Preliminary Prospectus or Prospectus, as the case may be, under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
incorporated by reference in such Preliminary Prospectus or Prospectus, as
the case may be; any reference to any amendment to the Initial Registration
Statement shall be deemed to refer to and include any annual report of the
Company filed pursuant to Sections 13(a) or 15(d) of the Exchange Act after
the effective date of the Initial Registration Statement that is
incorporated by reference in the Registration Statement; and any reference
to the Prospectus as amended or supplemented shall be deemed to refer to
the Prospectus as amended or supplemented in relation to the applicable
Designated Securities in the form in which it is filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof, including any documents incorporated by reference therein as of the
date of such filing);
(b) The documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case may
be, conformed in all material respects to the requirements of the Act or
the Exchange Act, as applicable, and the rules and regulations of the
Commission thereunder, and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact
2
<PAGE>
required to be stated therein or necessary to make the statements therein
not misleading; and any further documents so filed and incorporated by
reference in the Prospectus or any further amendment or supplement thereto,
when such documents become effective or are filed with the Commission, as
the case may be, will conform in all material respects to the requirements
of the Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter of Designated Securities through the Representatives expressly
for use in the Prospectus as amended or supplemented relating to such
Securities;
(c) The Registration Statement and the Prospectus conform, and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") and the rules and regulations of the Commission thereunder
and do not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter of Designated Securities through the Representatives
expressly for use in the Prospectus as amended or supplemented relating to
such Securities;
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change, or any development involving a prospective material adverse
change, in the general affairs, financial position, shareholders' equity or
results of operations of the Company and its subsidiaries taken as a whole,
otherwise than as set forth or contemplated in the Prospectus;
(e) The Company and each of its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with the corporate
power and authority to own its properties and conduct its business as
described in the Prospectus, and each is duly qualified and in good
standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the
business, results of operations or financial condition of the Company and
its subsidiaries, taken as a whole;
(f) All of the outstanding shares of capital stock of, or other
ownership interests in, each of the Company's Significant Subsidiaries, as
defined in Rule 1-02 of Regulation S-X ("Significant Subsidiaries"), have
been duly authorized and validly issued and are fully paid and non-
assessable, and are owned by the Company, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature;
3
<PAGE>
(g) The Securities have been duly authorized, and, when Designated
Securities are issued and delivered pursuant to this Agreement and the
Pricing Agreement with respect to such Designated Securities, such
Designated Securities will have been duly executed, authenticated, issued
and delivered and will constitute valid and legally binding obligations of
the Company entitled to the benefits provided by the Indenture, which will
be substantially in the form filed as an exhibit to the Registration
Statement; the Indenture has been duly authorized and duly qualified under
the Trust Indenture Act and constitutes a valid and legally binding
instrument, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws of general applicability relating to or affecting creditors'
rights, general equity principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing;
and the Indenture conforms, and the Designated Securities will conform, to
the descriptions thereof contained in the Prospectus as amended or
supplemented with respect to such Designated Securities;
(h) The issue and sale of the Securities and the compliance by the
Company with all of the provisions of the Securities, the Indenture, this
Agreement and any Pricing Agreement, and the consummation of the
transactions herein and therein contemplated, will not conflict with or
result in a material breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other material agreement or instrument to which the
Company is a party or by which the Company is bound or to which any of the
property or assets of the Company is subject, nor will such action result
in any violation of the provisions of the Amended and Restated Certificate
of Incorporation or By-laws of the Company or in any material violation of
any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
properties; and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Securities or the consummation by
the Company of the transactions contemplated by this Agreement or any
Pricing Agreement or the Indenture, except such as have been, or will have
been prior to the Time of Delivery, obtained under the Act and the Trust
Indenture Act and such consents, approvals, authorizations, registrations
or qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Securities by
the Underwriters;
(i) The statements set forth in the Prospectus under the captions
"Description of Debt Securities" and "Description of Debentures", insofar
they purport to constitute a summary of the terms of the Securities, are
accurate and complete in all material respects;
(j) Neither the Company nor any of its Significant Subsidiaries is in
violation of its respective charter or by-laws or in default in the
performance or observance of any material obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument material to the conduct
of the business of the Company and its subsidiaries, taken as a whole, to
which it is a party or by which it or any of its properties may be bound;
(k) Other than as set forth in the Prospectus, there are no material
legal or governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property of the Company or any
of its subsidiaries is the subject;
4
<PAGE>
and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others;
(l) The Company is not and, after giving effect to the offering and
sale of the Securities, will not be an "investment company", as such term
is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
(m) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder.
3. Upon the execution of the Pricing Agreement applicable to any
Designated Securities and authorization by the Representatives of the release of
such Designated Securities, the several Underwriters propose to offer such
Designated Securities for sale upon the terms and conditions set forth in the
Prospectus as amended or supplemented.
4. Designated Securities to be purchased by each Underwriter pursuant to
the Pricing Agreement relating thereto, in the form specified in such Pricing
Agreement, and in such authorized denominations and registered in such names as
the Representatives may reasonably request upon at least forty-eight hours'
prior notice to the Company, shall be delivered by or on behalf of the Company
to the Representatives for the account of such Underwriter, against payment by
such Underwriter or on its behalf of the purchase price therefor by wire
transfer of Federal (same-day) funds to the account specified by the Company to
the Representatives at least forty-eight hours in advance or at such other place
and time and date as the Representatives and the Company may agree upon in
writing, such time and date being herein called the "Time of Delivery" for such
Securities.
5. The Company agrees with each of the Underwriters of any Designated
Securities:
(a) To prepare the Prospectus as amended or supplemented in relation
to the applicable Designated Securities in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under
the Act not later than the Commission's close of business on the second
business day following the execution and delivery of the Pricing Agreement
relating to the applicable Designated Securities or, if applicable, such
earlier time as may be required by Rule 424(b); to make no further
amendment or any supplement to the Registration Statement or Prospectus as
amended or supplemented after the date of the Pricing Agreement relating to
such Securities and prior to the Time of Delivery for such Securities which
shall be disapproved by the Representatives for such Securities promptly
after reasonable notice thereof; to advise the Representatives promptly of
any such amendment or supplement after such Time of Delivery and furnish
the Representatives with copies thereof; to file promptly all reports and
any definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act for so long as the delivery of a prospectus is required
in connection with the offering or sale of such Securities, and during such
same period to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed with the Commission, of
the issuance by the Commission of any stop order or of any order preventing
or suspending the use of any prospectus relating to the Securities, of the
suspension of the qualification of such Securities for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding for
any
5
<PAGE>
such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any such stop order or of
any such order preventing or suspending the use of any prospectus relating
to the Securities or suspending any such qualification, to promptly use its
best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify such Securities for
offering and sale under the securities laws of such jurisdictions as the
Representatives may reasonably request and to comply with such laws so as
to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution
of such Securities (but in no event longer than one year from the date
hereof), provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent
to service of process in any jurisdiction;
(c) At or about 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to
time, to furnish the Underwriters with copies of the Prospectus in New York
City as amended or supplemented in such quantities as the Representatives
may reasonably request, and, if the delivery of a prospectus is required at
any time in connection with the offering or sale of the Securities and if
at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary during such
same period to amend or supplement the Prospectus or to file under the
Exchange Act any document incorporated by reference in the Prospectus in
order to comply with the Act, the Exchange Act or the Trust Indenture Act,
to notify the Representatives and upon their request to file such document
and to prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as the Representatives may from time to
time reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date of the Pricing Agreement
for such Designated Securities and continuing to and including the Time of
Delivery for such Designated Securities, not to offer, sell, contract to
sell or otherwise dispose of any debt securities of the Company which
mature more than one year after such Time of Delivery and which are
substantially similar to such Designated Securities, without the prior
written consent of the Representatives; and
(f) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement, and the Company
6
<PAGE>
shall at the time of filing either pay to the Commission the filing fee for
the Rule 462(b) Registration Statement or give irrevocable instructions for
the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Securities under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
this Agreement, any Pricing Agreement, any Indenture, any Blue Sky and Legal
Investment Memoranda, closing documents (including any compilations thereof) and
any other documents in connection with the offering, purchase, sale and delivery
of the Securities; (iii) all expenses in connection with the qualification of
the Securities for offering and sale under state securities laws as provided in
Section 5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky and Legal Investment Surveys; (iv) any fees charged by securities
rating services for rating the Securities; (v) any filing fees incident to, and
the fees and disbursements of counsel for the Underwriters in connection with,
any required review by the National Association of Securities Dealers, Inc. of
the terms of the sale of the Securities; (vi) the cost of preparing the
Securities; (vii) the fees and expenses of any Trustee and any agent of any
Trustee and the fees and disbursements of counsel for any Trustee in connection
with any Indenture and the Securities; and (viii) all other costs and expenses
incident to the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section. It is understood, however, that,
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, transfer taxes on resale of any of the Securities by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters of any Designated Securities under
the Pricing Agreement relating to such Designated Securities shall be subject,
in the discretion of the Representatives, to the condition that all
representations and warranties and other statements of the Company in or
incorporated by reference in the Pricing Agreement relating to such Designated
Securities are, at and as of the Time of Delivery for such Designated
Securities, true and correct, the condition that the Company shall have
performed all of its obligations hereunder theretofore to be performed, and the
following additional conditions:
(a) The Prospectus as amended or supplemented in relation to the
applicable Designated Securities shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 5(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have become effective
by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no
stop order suspending the effectiveness of the Registration Statement or
any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission;
(b) Counsel for the Underwriters shall have furnished to the
Representatives such written opinion, dated the Time of Delivery for such
Designated Securities, with respect to the matters covered in subsections
(i) (but only as to the Company), (vi), (vii), (viii), (xi), (xii) and
(xiii) of Section 7(c) below as well as such other related matters as the
7
<PAGE>
Representatives may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters.
Each of the opinions delivered pursuant to this Section 7(b) may
rely as to matters of Connecticut law on the opinion of Day, Berry & Howard
LLP or of such other local counsel as shall be reasonably satisfactory to
the Representatives.
(c) Louis G. Lenzi, Esq., General Counsel of the Company, shall have
furnished to the Representatives his written opinion, dated the Time of
Delivery for such Designated Securities, in form and substance satisfactory
to the Representatives, to the effect that:
(i) The Company and each of its subsidiaries (other than MBIA
Insurance Corporation ("MBIA Corp."), which is discussed below) has
been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation,
with the corporate power and authority to own its properties and
conduct its business as described in the Prospectus as amended or
supplemented;
(ii) The Company and each of its subsidiaries (other than MBIA
Corp., which is discussed below) is duly qualified and is in good
standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the business, results of operations or financial condition of the
Company and its subsidiaries, taken as a whole;
(iii) (A) MBIA Corp. has been duly incorporated, is validly
existing as an insurance company in good standing under the laws of
the State of New York and (B) is duly licensed and in good standing to
conduct its business in each state in the United States and the
District of Columbia;
(iv) All of the outstanding shares of capital stock of, or other
ownership interests in, each of the Company's Significant Subsidiaries
have been duly and validly authorized and issued and are fully paid
and non-assessable, and are owned of record and, to the best knowledge
of such counsel, beneficially by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any
nature;
(v) To the best of such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened to which the Company
or any of its subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which are required
to be described in the Prospectus or the Registration Statement and
are not so described;
(vi) This Agreement and the Pricing Agreement with respect to the
Designated Securities have been duly authorized, executed and
delivered by the Company;
8
<PAGE>
(vii) The Designated Securities have been duly authorized by the
Company, and when executed, authenticated, issued and delivered in
accordance with the provisions of the Indenture and delivered to and
paid for by the Underwriters in accordance with this Agreement, will
constitute valid and legally binding obligations of the Company
entitled to the benefits provided by the Indenture; and the Designated
Securities and the Indenture conform in all material respects to the
descriptions thereof in the Prospectus as amended or supplemented;
(viii) The Indenture has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally binding
instrument, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws of general applicability relating to or affecting
creditors' rights, general equity principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good faith
and fair dealing; and the Indenture has been duly qualified under the
Trust Indenture Act;
(ix) The issue and sale of the Designated Securities and the
compliance by the Company with all of the provisions of the Designated
Securities, the Indenture, this Agreement and the Pricing Agreement
with respect to the Designated Securities and the consummation of the
transactions herein and therein contemplated will not conflict with or
result in a material breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other material agreement or
instrument known to such counsel to which the Company is a party or by
which the Company is bound, nor will such actions result in any
violation of the provisions of the Amended and Restated Certificate of
Incorporation or By-laws of the Company or in any material violation
of any laws, administrative regulations or rulings or court decrees
under United States Federal law or the laws of the State of
Connecticut or the State of New York known to such counsel and
applicable to the Company or any of its subsidiaries or their
respective properties;
(x) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required under United States Federal law or the laws of the State
of Connecticut or the State of New York for the issue and sale of the
Designated Securities or the consummation by the Company of the
transactions contemplated by this Agreement or such Pricing Agreement
or the Indenture, except such as have been obtained under the Act and
the Trust Indenture Act and such consents, approvals, authorizations,
orders, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Designated Securities by the Underwriters;
(xi) The statements set forth in the Prospectus under the
captions "Description of Debt Securities" and "Description of
Debentures", insofar as such statements constitute a summary of legal
matters, documents or proceedings referred to therein, fairly present,
in all material respects, the information called for with respect to
such legal matters, documents and proceedings;
(xii) The Company is not an "investment company", as such term
is defined in the Investment Company Act; and
9
<PAGE>
(xiii) The Registration Statement and the Prospectus as amended
or supplemented and any further amendments and supplements thereto
made by the Company prior to the Time of Delivery for the Designated
Securities (other than the financial statements, related schedules and
other financial and statistical information therein, as to which such
counsel need express no opinion) comply as to form in all material
respects with the requirements of the Act and the Trust Indenture Act
and the rules and regulations thereunder; although such counsel does
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or
the Prospectus, except for those referred to in the opinion in
subsection (xi) of this Section 7(c), such counsel has no reason to
believe that, as of its effective date, the Registration Statement or
any further amendment thereto made by the Company prior to the Time of
Delivery (other than the financial statements, related schedules and
other financial and statistical information therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus as amended or
supplemented or any further amendment or supplement thereto made by
the Company prior to the Time of Delivery (other than the financial
statements, related schedules and other financial and statistical
information therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading or
that, as of the Time of Delivery, the Prospectus as amended or
supplemented or any further amendment or supplement thereto made by
the Company prior to the Time of Delivery (other than the financial
statements, related schedules and other financial and statistical
information therein, as to which such counsel need express no opinion)
contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
In giving such opinion with respect to the matters covered by
subsection (xiii) such counsel may state that his opinion and belief are based
upon his participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification
except as specified. Each of the opinions delivered pursuant to this Section
7(c) may rely as to matters of Connecticut law on the opinion of Day, Berry &
Howard LLP or of such other local counsel as shall be reasonably satisfactory to
the Representatives.
(d) Debevoise & Plimpton, counsel for the Company, shall furnish to the
Representatives their written opinion, dated the Time of Delivery for such
Designated Securities, with respect to the matters covered in subsections (i)
(but only as to the Company), (iii)(A), (vi), (vii), (viii), (xi), (xii) and
(xiii) of Section 7(c) above as well as such other related matters as the
Representatives may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable them to
pass on such matters.
In giving such opinion with respect to the matters covered by
subsection (xiii) such counsel may state that their opinion and belief are based
upon their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification
except as specified. Each of the opinions delivered pursuant to this Section
7(d) may
10
<PAGE>
rely as to matters of Connecticut law on the opinion of Day, Berry & Howard LLP
or of such other local counsel as shall be reasonably satisfactory to the
Representatives.
(e) On the date of the execution of the Pricing Agreement for such
Designated Securities at a time prior to the execution of the Pricing Agreement
with respect to such Designated Securities and at the Time of Delivery for such
Designated Securities, the independent accountants of the Company who have
certified the financial statements of the Company and its subsidiaries included
or incorporated by reference in the Registration Statement shall have furnished
to the Representatives a letter, dated the effective date of the Registration
Statement or the date of the most recent report filed with the Commission
containing financial statements and incorporated by reference in the
Registration Statement, if the date of such report is later than such effective
date, and a letter dated such Time of Delivery, respectively, to the effect set
forth in Annex II hereto, and with respect to such letter dated such Time of
Delivery, as to such other matters as may be specified in the Pricing Agreement
for such Designated Securities;
(f) Since the respective dates as of which information is given in the
Prospectus as amended prior to the date of the Pricing Agreement relating to the
Designated Securities there shall not have been any material adverse change, or
any development involving a prospective material adverse change, in the general
affairs, financial position, shareholders' equity or results of operations of
the Company and its subsidiaries taken as a whole, otherwise than as set forth
or contemplated in the Prospectus as amended prior to the date of the Pricing
Agreement relating to the Designated Securities, which in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Designated Securities on the terms and in the
manner contemplated in the Prospectus as amended or supplemented relating to the
Designated Securities;
(g) On or after the date of the Pricing Agreement relating to the
Designated Securities (i) no downgrading shall have occurred in the rating
accorded the Company's debt securities or preferred stock or the financial
strength or claims paying ability of MBIA Corp. by any "nationally recognized
statistical rating organization", as that term is defined by the Commission for
purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall
have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt securities or
preferred stock;
(h) On or after the date of the Pricing Agreement relating to the
Designated Securities there shall not have occurred any of the following: (i) a
suspension or material limitation in trading in securities generally on the New
York Stock Exchange; (ii) a general moratorium on commercial banking activities
in New York declared by either Federal or New York State authorities; or (iii)
the outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the effect
of any such event specified in this clause (iii) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Designated Securities on the terms and in the
manner contemplated in the Prospectus as amended or supplemented relating to the
Designated Securities;
(i) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
11
<PAGE>
(j) The Company shall have furnished or caused to be furnished to the
Representatives at the Time of Delivery for the Designated Securities a
certificate or certificates of officers of the Company satisfactory to the
Representatives as to the accuracy of the representations and warranties of the
Company herein at and as of such Time of Delivery, as to the performance by the
Company of all of its obligations hereunder to be performed at or prior to such
Time of Delivery, as to the matters set forth in subsections (a) and (f) of this
Section and as to such other matters as may be specified in the Pricing
Agreement for such Designated Securities.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, any preliminary
prospectus supplement, the Registration Statement and the Prospectus as amended
or supplemented, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, any preliminary prospectus supplement, the
Registration Statement and the Prospectus as amended or supplemented, or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter of Designated Securities
through the Representatives expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, any preliminary prospectus supplement, the Registration
Statement and the Prospectus as amended or supplemented, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, any preliminary prospectus supplement, the Registration Statement
and the Prospectus as amended or supplemented, or any such amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through the Representatives expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability hereunder except to the extent it is
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may
12
<PAGE>
have to any indemnified party otherwise than under such subsection. In case any
such action shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party
(who shall not, except with the consent of the indemnified party, be counsel to
the indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party. The indemnifying party shall not be liable for any
settlement of any action effected by an indemnified party without the written
consent of the indemnifying party, which consent shall not be unreasonably
withheld or delayed.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters of the Designated Securities
on the other from the offering of the Designated Securities to which such loss,
claim, damage or liability (or action in respect thereof) relates. If, however,
the allocation provided by the immediately preceding sentence is not permitted
by applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters of the Designated
Securities on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations (including,
without limitation the responsibility of any indemnified party for failing to
notify the indemnifying party in accordance with subsection (c)). The relative
benefits received by the Company on the one hand and such Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from such offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by such Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or such Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other
13
<PAGE>
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the applicable Designated Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The obligations of the Underwriters of Designated
Securities in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations with respect to such Securities and
not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Designated Securities which it has agreed to purchase under the Pricing
Agreement relating to such Designated Securities, the Representatives may in
their discretion arrange for themselves or another party or other parties to
purchase such Designated Securities on the terms contained herein. If within
thirty-six hours after such default by any Underwriter the Representatives do
not arrange for the purchase of such Designated Securities, then the Company
shall be entitled to a further period of thirty-six hours within which to
procure another party or other parties satisfactory to the Representatives to
purchase such Designated Securities on such terms. In the event that, within
the respective prescribed period, the Representatives notify the Company that
they have so arranged for the purchase of such Designated Securities, or the
Company notifies the Representatives that it has so arranged for the purchase of
such Designated Securities, the Representatives or the Company shall have the
right to postpone the Time of Delivery for such Designated Securities for a
period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus as
amended or supplemented, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments or supplements to the
Registration Statement or the Prospectus which in the opinion of the
Representatives may thereby be made necessary. The term "Underwriter" as used
in this Agreement shall include any person substituted under this Section with
like effect as if such person had originally been a party to the Pricing
Agreement with respect to such Designated Securities.
(b) If, after giving effect to any arrangements for the purchase of the
Designated Securities of a defaulting Underwriter or Underwriters by the
Representatives and the Company as provided in subsection (a) above, the
aggregate principal amount of such Designated Securities which remains
unpurchased does not exceed one-tenth of the aggregate principal amount of the
Designated Securities, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the principal amount of Designated
Securities which such Underwriter agreed to purchase under the Pricing Agreement
relating to such Designated Securities and, in addition, to require each non-
defaulting Underwriter to purchase its pro rata share (based on the principal
amount of Designated Securities which such Underwriter agreed to purchase under
such Pricing Agreement) of the Designated Securities of such defaulting
14
<PAGE>
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Designated Securities of a defaulting Underwriter or Underwriters by the
Representatives and the Company as provided in subsection (a) above, the
aggregate principal amount of Designated Securities which remains unpurchased
exceeds one-tenth of the aggregate principal amount of the Designated
Securities, as referred to in subsection (b) above, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Designated Securities of a defaulting Underwriter or
Underwriters, then the Pricing Agreement relating to such Designated Securities
shall thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company, except for the expenses to be borne by the Company
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Securities.
11. If any Pricing Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
with respect to the Designated Securities covered by such Pricing Agreement
except to each non-defaulting Underwriter as provided in Sections 6 and 8
hereof; but, if for any reason attributable to the company Designated Securities
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through the Representatives for all out-of-
pocket expenses approved in writing by the Representatives, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of such Designated Securities,
but the Company shall then be under no further liability to any Underwriter with
respect to such Designated Securities except as provided in Sections 6 and 8
hereof.
12. In all dealings hereunder, the Representatives of the Underwriters of
Designated Securities shall act on behalf of each of such Underwriters, and the
parties hereto shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of any Underwriter made or given by such
Representatives jointly or by such of the Representatives, if any, as may be
designated for such purpose in the Pricing Agreement.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Representatives as set forth in the
Pricing Agreement; and if to the Company shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set forth in the
Registration Statement: Attention: Secretary; provided, however, that any notice
to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
15
<PAGE>
13. This Agreement and each Pricing Agreement shall be binding upon, and
inure solely to the benefit of, the Underwriters, the Company and, to the extent
provided in Sections 8 and 10 hereof, the officers and directors of the Company,
and each person who controls the Company or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement or any such Pricing Agreement. No purchaser of any of the Securities
from any Underwriter shall be deemed a successor or assign by reason merely of
such purchase.
14. Time shall be of the essence of each Pricing Agreement. As used
herein, "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT AND EACH PRICING AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement and each Pricing Agreement may be executed by any
one or more of the parties hereto and thereto in any number of counterparts,
each of which shall be deemed to be an original, but all such respective
counterparts shall together constitute one and the same instrument.
16
<PAGE>
ANNEX I
PRICING AGREEMENT
-----------------
[Name and Address
of Representatives
of Underwriters]
September __, 1998
Ladies and Gentlemen:
MBIA Inc., a Connecticut corporation (the "Company"), proposes,
subject to the terms and conditions stated herein and in the Underwriting
Agreement -- Standard Terms, dated September __ 1998 (the "Underwriting
Agreement"), to issue and sell to the Underwriters named in Schedule I hereto
(the "Underwriters") the Securities specified in Schedule II hereto (the
"Designated Securities"). Each of the provisions of the Underwriting Agreement,
insofar as such provision relates to the Designated Securities, or the issuance
and sale, and not insofar as such provision relates to other Securities, or
their issuance or sale, is incorporated herein by reference in its entirety, and
shall be deemed to be a part of this Agreement to the same extent as if such
provisions had been set forth in full herein; and each of the representations
and warranties set forth therein shall be deemed to have been made at and as of
the date of this Pricing Agreement, except that each representation and warranty
which refers to the Prospectus in Section 2 of the Underwriting Agreement shall
be deemed to be a representation or warranty as of the date of the Underwriting
Agreement in relation to the Prospectus (as therein defined), and also a
representation and warranty as of the date of this Pricing Agreement in relation
to the Prospectus as amended or supplemented relating to the Designated
Securities which are the subject of this Pricing Agreement. Each reference to
the Representatives herein and in the provisions of the Underwriting Agreement
so incorporated by reference shall be deemed to refer to you. Unless otherwise
defined herein, terms defined in the Underwriting Agreement are used herein as
therein defined. The Representatives designated to act on behalf of the
Representatives and on behalf of each of the Underwriters of the Designated
Securities pursuant to Section 12 of the Underwriting Agreement and the address
of the Representatives referred to in such Section 12 are set forth at the end
of Schedule II hereto.
An amendment to the Registration Statement, or a supplement to the
Prospectus, as the case may be, relating to the Designated Securities, in the
form heretofore delivered to you is now proposed to be filed with the
Commission.
Subject to the terms and conditions set forth herein and in the
Underwriting Agreement incorporated herein by reference, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the time and place
and at the purchase price to the Underwriters set forth in Schedule II hereto,
the principal amount of Designated Securities set forth opposite the name of
such Underwriter in Schedule I hereto.
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us counterparts hereof, and upon acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof,
including the provisions of the Underwriting Agreement incorporated herein by
reference, shall constitute a binding agreement between each of the Underwriters
and the Company. It is understood that your acceptance of this letter on behalf
of each of the Underwriters is or will be pursuant to the authority set forth in
a form of Agreement among Underwriters, the form of which shall be submitted to
the Company for examination upon request, but without warranty on the part of
the Representatives as to the authority of the signers thereof.
Very truly yours,
MBIA INC.
By: .........................
Name:
Title:
Accepted as of the date hereof:
[Names of Representatives
of Underwriters]
By:...............................
[Names of Authorized Signatory
for Representatives]
On behalf of each of the Underwriters
2
<PAGE>
SCHEDULE I
PRINCIPAL
AMOUNT OF
DESIGNATED
SECURITIES
TO BE
PURCHASED
UNDERWRITERS ---------
------------
---------
Total........................................ $
=========
3
<PAGE>
SCHEDULE II
TITLE OF DESIGNATED SECURITIES:
% Debentures due 2028
AGGREGATE PRINCIPAL AMOUNT:
$
PRICE TO PUBLIC:
% of the principal amount of the Designated Securities, plus accrued
interest, if any, from to
PURCHASE PRICE BY UNDERWRITERS:
% of the principal amount of the Designated Securities, plus accrued
interest from to
FORM OF DESIGNATED SECURITIES:
Book-entry only form represented by one or more global securities deposited
with The Depository Trust Company ("DTC") or its designated custodian, to
be made available for checking by the Representatives at least twenty-four
hours prior to the Time of Delivery at the office of DTC.
SPECIFIED FUNDS FOR PAYMENT OF PURCHASE PRICE:
Federal (same day) funds
TIME OF DELIVERY:
a.m. (New York City time), , 1998
INDENTURE:
Indenture, dated as of August 1, 1990, between the Company and The First
National Bank of Chicago, as Trustee
MATURITY: _______ __, 2028
INTEREST RATE:
%
INTEREST PAYMENT DATES:
months and dates, commencing ....................., 1998
4
<PAGE>
REDEMPTION PROVISIONS:
No provisions for redemption
SINKING FUND PROVISIONS:
No sinking fund provisions
DEFEASANCE PROVISIONS: The Designated Securities are subject to defeasance and
covenant defeasance as provided in Article Thirteen of
the Indenture.
CLOSING LOCATION FOR DELIVERY OF DESIGNATED SECURITIES: Simpson Thacher &
Bartlett
425 Lexington Avenue
New York, New York
10017
INFORMATION PROVIDED TO THE COMPANY BY THE UNDERWRITERS
PURSUANT TO SECTION 8 OF THE UNDERWRITING AGREEMENT:
ADDITIONAL CLOSING CONDITIONS:
NAMES AND ADDRESSES OF REPRESENTATIVES:
Designated Representatives:
Address for Notices, etc.:
5
<PAGE>
ANNEX II
Pursuant to Section 7(e) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules audited (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included or incorporated by reference in the Registration Statement or the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Act or the Exchange Act, as applicable, and
the related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the consolidated
interim financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been [separately] furnished to the representative or
representatives of the Underwriters (the "Representatives") such term to
include an Underwriter or Underwriters who act without any firm being
designated as its or their representatives [and are attached hereto];
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus and/or included in the Company's quarterly report(s) on Form 10-
Q incorporated by reference into the Prospectus as indicated in their
reports thereon copies of which [have been separately furnished to the
Representatives][are attached hereto]; and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether the
unaudited condensed consolidated financial statements referred to in
paragraph (v)(A)(i) below comply as to form in all material respects with
the applicable accounting requirements of the Act and the Exchange Act and
the related published rules and regulations, nothing came to their
attention that caused them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the
Exchange Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus and
included or incorporated by reference in Item 6 of the Company's Annual
Report on Form 10-K for the most recent fiscal year agrees with the
corresponding amounts (after restatement where applicable) in the audited
consolidated financial statements for five such fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-K for such fiscal years;
(v) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the
<PAGE>
unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company
and its subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A)(i) the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus and/or included or incorporated
by reference in the Company's Quarterly Reports on Form 10-Q
incorporated by reference in the Prospectus do not comply as to form
in all material respects with the applicable accounting requirements
of the Exchange Act and the related published rules and regulations,
or (ii) any material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the
Prospectus or included in the Company's Quarterly Reports on Form 10-Q
incorporated by reference in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with the
basis for the corresponding amounts in the audited consolidated
financial statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent fiscal year;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived the unaudited condensed
financial statements referred to in clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in clause (B) were not determined on a
basis substantially consistent with the basis for the audited
financial statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent fiscal year;
(D) any unaudited pro forma consolidated condensed financial
statements included or incorporated by reference in the Prospectus do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest balance sheet
included or incorporated by reference in the Prospectus) or any
increase in the consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated stockholders' equity or
other items specified by the
2
<PAGE>
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the
latest balance sheet included or incorporated by reference in the
Prospectus, except in each case for changes, increases or decreases
which the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(F) for the period from the date of the latest financial
statements included or incorporated by reference in the Prospectus to
the specified date referred to in clause (E) there were any decreases
in consolidated revenues or operating profit or the total or per share
amounts of consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable period
of the preceding year and with any other period of corresponding
length specified by the Representatives, except in each case for
increases or decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vi) In addition to the audit referred to in their report(s) included
or incorporated by reference in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to in
paragraphs (iii) and (v) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally accepted
auditing standards, with respect to certain amounts, percentages and
financial information specified by the Representatives which are derived
from the general accounting records of the Company and its subsidiaries,
which appear in the Prospectus (excluding documents incorporated by
reference), or in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Representatives or in documents
incorporated by reference in the Prospectus specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
All references in this Annex II to the Prospectus shall be deemed to refer
to the Prospectus (including the documents incorporated by reference therein) as
defined in the Underwriting Agreement as of the date of the letter delivered on
the date of the Pricing Agreement for purposes of such letter and to the
Prospectus as amended or supplemented (including the documents incorporated by
reference therein) in relation to the applicable Designated Securities for
purposes of the letter delivered at the Time of Delivery for such Designated
Securities.
3
<PAGE>
EXHIBIT 23.04
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
MBIA Inc. and Subsidiaries on Forms S-3 (Nos. 333-15003 and 333-60039) and S-8
(Nos. 33-22441 and 33-46062 and 333-34101) of our report dated September 21,
1998, on our audits of the consolidated financial statements of MBIA Inc. and
Subsidiaries as of December 31, 1997 and December 31, 1996 and for each of the
three years in the period ended December 31, 1997, which report is included in
this Current Report on Form 8-K.
/s/PricewaterhouseCoopers LLP
-----------------------------
New York, New York
September 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 5,211,311
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,908,296
<CASH> 26,296
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 216,165
<TOTAL-ASSETS> 10,384,991
<POLICY-LOSSES> 103,061
<UNEARNED-PREMIUMS> 2,090,460
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 508,878
<COMMON> 98,754
0
0
<OTHER-SE> 3,262,758
<TOTAL-LIABILITY-AND-EQUITY> 10,384,991
349,537
<INVESTMENT-INCOME> 301,415
<INVESTMENT-GAINS> 16,903
<OTHER-INCOME> 95,914
<BENEFITS> 31,877
<UNDERWRITING-AMORTIZATION> 34,897
<UNDERWRITING-OTHER> 76,580
<INCOME-PRETAX> 525,252
<INCOME-TAX> 119,642
<INCOME-CONTINUING> 405,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405,610
<EPS-PRIMARY> 4.18
<EPS-DILUTED> 4.12
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 4,455,122
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,007,997
<CASH> 10,266
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 196,889
<TOTAL-ASSETS> 9,030,877
<POLICY-LOSSES> 70,299
<UNEARNED-PREMIUMS> 1,854,137
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 418,110
<COMMON> 95,458
0
0
<OTHER-SE> 2,665,765
<TOTAL-LIABILITY-AND-EQUITY> 9,030,877
292,269
<INVESTMENT-INCOME> 265,467
<INVESTMENT-GAINS> 9,936
<OTHER-INCOME> 63,155
<BENEFITS> 20,149
<UNDERWRITING-AMORTIZATION> 30,016
<UNDERWRITING-OTHER> 68,854
<INCOME-PRETAX> 448,415
<INCOME-TAX> 100,679
<INCOME-CONTINUING> 347,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 347,736
<EPS-PRIMARY> 3.68
<EPS-DILUTED> 3.62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 3,868,327
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,937,104
<CASH> 27,004
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 176,801
<TOTAL-ASSETS> 7,670,008
<POLICY-LOSSES> 49,053
<UNEARNED-PREMIUMS> 1,662,082
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 406,900
0
0
<COMMON> 92,810
<OTHER-SE> 2,404,408
<TOTAL-LIABILITY-AND-EQUITY> 7,670,008
244,314
<INVESTMENT-INCOME> 232,701
<INVESTMENT-GAINS> 12,663
<OTHER-INCOME> 40,983
<BENEFITS> 13,780
<UNDERWRITING-AMORTIZATION> 27,809
<UNDERWRITING-OTHER> 58,226
<INCOME-PRETAX> 375,009
<INCOME-TAX> 84,719
<INCOME-CONTINUING> 290,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290,290
<EPS-PRIMARY> 3.21
<EPS-DILUTED> 3.15
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
EXHIBIT 99.01
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of MBIA Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of MBIA
Inc. and Subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion of these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
--------------------------------
New York, New York
September 21, 1998
(1)
<PAGE>
MBIA INC.
RESTATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
AND FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
(2)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (RESTATED)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------
Dollars in thousands
except per share amounts 1997 1996 1995
<S> <C> <C> <C>
REVENUES
Insurance:
Gross premiums written $651,890 $533,513 $405,963
Ceded premiums (116,526) (69,956) (61,042)
---------- ---------- ---------
Net premiums written 535,364 463,557 344,921
Increase in deferred premium revenue (185,827) (171,288) (100,607)
---------- ---------- ---------
Premiums earned (net of ceded premiums
of $62,353, $48,679 and $39,027) 349,537 292,269 244,314
Net investment income 301,415 265,467 232,701
Net realized gains 16,903 9,936 12,663
Advisory fees 17,110 10,786 7,349
Investment management services:
Income 47,174 44,331 35,310
Net realized gains (losses) 3,416 2,572 (6,092)
Other 28,214 5,466 4,416
---------- ---------- ---------
Total revenues 763,769 630,827 530,661
---------- ---------- ---------
EXPENSES
Insurance:
Losses and loss adjustment 31,877 20,149 13,780
Policy acquisition costs, net 34,897 30,016 27,809
Operating 76,580 68,854 58,226
Investment management services 29,822 26,357 23,998
Interest 38,653 34,665 29,642
Other 26,688 2,371 2,197
---------- ---------- ---------
Total expenses 238,517 182,412 155,652
---------- ---------- ---------
Income before income taxes 525,252 448,415 375,009
Provision for income taxes 119,642 100,679 84,719
---------- ---------- ---------
NET INCOME $405,610 $347,736 $290,290
========== ========== =========
NET INCOME PER COMMON SHARE:
BASIC $ 4.18 $ 3.68 $ 3.21
DILUTED $ 4.12 $ 3.62 $ 3.15
Weighted average number of common shares outstanding:
Basic 96,937,314 94,368,038 90,465,515
Diluted 98,344,163 96,159,066 92,140,436
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(3)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (RESTATED)
<TABLE>
<CAPTION>
Dollars in thousands
except per share amounts December 31, 1997 December 31, 1996
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $4,936,760 and $4,303,846) $5,211,311 $4,455,122
Short-term investments, at amortized cost
(which approximates fair value) 303,898 209,840
Other investments 51,693 49,737
---------------- ----------------
5,566,902 4,714,699
Municipal investment agreement portfolio held as available-for-sale
at fair value (amortized cost $3,241,703 and $3,263,211) 3,341,394 3,293,298
---------------- ----------------
TOTAL INVESTMENTS 8,908,296 8,007,997
Cash and cash equivalents 26,296 10,266
Securities borrowed or purchased under agreements to resell 472,963 217,000
Accrued investment income 121,090 108,589
Deferred acquisition costs 216,165 196,889
Prepaid reinsurance premiums 289,508 235,335
Goodwill (less accumulated amortization of $55,788 and $48,037) 121,642 107,769
Property and equipment, at cost (less accumulated depreciation
of $31,882 and $26,650) 66,709 54,606
Receivable for investments sold 13,435 980
Other assets 148,887 91,446
---------------- ----------------
TOTAL ASSETS $10,384,991 $9,030,877
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $2,090,460 $1,854,137
Loss and loss adjustment expense reserves 103,061 70,299
Municipal investment agreements 1,974,165 2,290,609
Municipal repurchase agreements 1,177,022 968,671
Long-term debt 488,878 389,010
Short-term debt 20,000 29,100
Securities loaned or sold under agreements to repurchase 606,263 217,000
Deferred income taxes 298,498 216,082
Deferred fee revenue 48,126 39,417
Payable for investments purchased 44,007 52,029
Other liabilities 172,999 143,300
---------------- ----------------
TOTAL LIABILITIES 7,023,479 6,269,654
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Preferred stock, par value $1 per share; authorized shares--10,000,000;
issued and outstanding--none --- ---
Common stock, par value $1 per share; authorized shares--200,000,000;
issued shares -- 98,754,523 and 95,458,499 98,754 95,458
Additional paid-in capital 1,133,950 984,303
Retained earnings 1,901,608 1,572,646
Cumulative translation adjustment (9,040) (1,056)
Unrealized appreciation of investments,
net of deferred income tax provision of $132,026 and $62,689 245,135 116,353
Unallocated ESOP shares (4,083) (5,430)
Unearned compensation - restricted stock (4,812) (1,051)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 3,361,512 2,761,223
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,384,991 $9,030,877
================ ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(4)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (RESTATED)
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Cumulative Appreciation
In thousands except ---------------- Paid-in Retained Translation (Depreciation)
per share amounts Shares Amount Capital Earnings Adjustment of Investments
- ------------------------ ------ ------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 91,087 $91,087 $ 838,882 $1,077,766 $ 503 $(92,082)
- -------------------------------------------------------------------------------------------------------
Net proceeds from
issuance of shares 1,723 1,723 67,300 --- --- ---
Allocation of ESOP shares --- --- --- --- --- ---
Unearned compensation -
restricted stock --- --- --- 116 --- ---
Exercise of stock options --- --- ----- (12,806) --- ---
Net income --- --- --- 290,290 --- ---
Change in foreign
currency translation --- --- --- --- 2,330 ---
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(162,694) --- --- --- --- --- 302,173
Dividends (declared per
common share $0.655,
paid per common share $0.638) --- --- --- (59,055) --- ---
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 92,810 92,810 906,182 1,296,311 2,833 210,091
- -------------------------------------------------------------------------------------------------------
Net proceeds from
issuance of shares 1,690 1,690 53,190 --- --- ---
Allocation of ESOP shares --- --- --- --- --- ---
Unearned compensation -
restricted stock --- --- --- --- --- ---
Exercise of stock options 958 958 24,931 (1,757) --- ---
Net income --- --- --- 347,736 --- ---
Change in foreign
currency translation --- --- --- --- (3,889) ---
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $50,874 --- --- --- --- --- (93,738)
Dividends (declared
per common share $0.725,
paid per common share $0.708) --- --- --- (69,644) --- ---
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 95,458 95,458 984,303 1,572,646 (1,056) 116,353
- -------------------------------------------------------------------------------------------------------
Net proceeds from
issuance of shares 2,679 2,679 125,096 --- --- ---
Allocation of ESOP shares --- --- --- --- --- ---
Unearned compensation -
restricted stock 67 67 3,729 --- --- ---
Stock issued for
acquisition 120 120 6,880 --- --- ---
Exercise of stock options 430 430 13,942 --- --- ---
Net income --- --- --- 405,610 --- ---
Change in foreign
currency translation --- --- --- --- (7,984) ---
Change in unrealized
appreciation of
investments, net
of change in deferred
income taxes of $(69,337) --- --- --- --- --- 128,782
Dividends (declared per
common share $0.770,
paid per common share $0.765) --- --- --- (76,648) --- ---
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 98,754 $98,754 $1,133,950 $1,901,608 $(9,040) $245,135
=======================================================================================================
<CAPTION>
Unearned
Unallocated Compensation- Treasury Stock
In thousands except ESOP Restricted -----------------
per share amounts Shares Stock Shares Amount
- ------------------------ ----------- -------------- ------ --------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 (7,169) --- (924) $(28,146)
- ------------------------------------------------------------------------------
Net proceeds from
issuance of shares --- --- --- ---
Allocation of ESOP shares 672 --- --- ---
Unearned compensation -
restricted stock --- (426) 12 319
Exercise of stock options --- --- 764 23,741
Net income --- --- --- ---
Change in foreign
currency translation --- --- --- ---
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(162,694) --- --- --- ---
Dividends (declared per
common share $0.655,
paid per common share $0.638) --- --- --- ---
- ------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 (6,497) (426) (148) (4,086)
- ------------------------------------------------------------------------------
Net proceeds from
issuance of shares --- --- --- ---
Allocation of ESOP shares 1,067 --- --- ---
Unearned compensation -
restricted stock --- (625) --- ---
Exercise of stock options --- --- 148 4,086
Net income --- --- --- ---
Change in foreign
currency translation --- --- --- ---
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $50,874 --- --- --- ---
Dividends (declared
per common share $0.725,
paid per common share $0.708) --- --- --- ---
- -----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 (5,430) (1,051) --- ---
- -----------------------------------------------------------------------------
Net proceeds from
issuance of shares --- --- --- ---
Allocation of ESOP shares 1,347 --- --- ---
Unearned compensation -
restricted stock --- (3,761) --- ---
Stock issued for
acquisition --- --- --- ---
Exercise of stock option --- --- --- ---
Net income --- --- --- ---
Change in foreign
currency translation --- --- --- ---
Change in unrealized
appreciation of
investments, net
of change in deferred
income taxes of $(69,337) --- --- --- ---
Dividends (declared per
common share $0.770,
paid per common share $0.765) --- --- --- ---
- -----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (4,083) $(4,812) --- ---
=============================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(5)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------
Dollars in thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 405,610 $ 347,736 $ 290,290
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in accrued investment income (12,501) (18,420) (18,877)
Increase in deferred acquisition costs (19,276) (20,088) (18,279)
Increase in prepaid reinsurance premiums (54,173) (21,277) (22,015)
Increase in deferred premium revenue 240,000 192,565 122,622
Increase in loss and loss adjustment expense reserves 32,762 21,246 3,714
Depreciation 6,284 4,949 4,488
Amortization of goodwill 7,751 6,380 6,499
Amortization of bond discount, net (20,191) (20,933) (18,468)
Net realized gains on sale of investments (20,319) (12,508) (6,571)
Deferred income taxes 13,191 9,521 14,534
Other, net (30,606) 338 51,182
--------------- --------------- --------------
Total adjustments to net income 142,922 141,773 118,829
--------------- --------------- --------------
Net cash provided by operating activities 548,532 489,509 409,119
--------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed-maturity securities, net
of payable for investments purchased (2,296,490) (1,743,180) (1,321,193)
Sale of fixed-maturity securities, net of
receivable for investments sold 1,336,458 931,033 773,405
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 251,793 281,860 121,428
Purchase of short-term investments (15,022) (5,705) (54,591)
Purchase of other investments (559) (394) (1,065)
Sale of other investments 1,223 862 6,926
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (1,447,004) (1,861,126) (2,210,571)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 1,487,437 1,264,033 1,115,239
Capital expenditures, net of disposals (17,369) (10,150) (7,698)
Other, net (14,554) (2,445) (10,713)
--------------- --------------- --------------
Net cash used by investing activities (714,087) (1,145,212) (1,588,833)
--------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 127,775 54,880 69,023
Net proceeds from issuance of long-term debt 98,880 --- 74,344
Net (repayment) proceeds from (retirement) issuance
of short-term debt (9,100) 11,100 ---
Dividends paid (76,743) (69,795) (57,595)
Proceeds from issuance of municipal investment
and repurchase agreements 1,823,422 2,242,872 2,351,206
Payments for drawdowns of municipal investment
and repurchase agreements (1,930,321) (1,628,310) (1,251,517)
Securities loaned or sold under agreements
to repurchase, net 133,300 --- ---
Exercise of stock options 14,372 28,218 10,935
--------------- --------------- --------------
Net cash provided by financing activities 181,585 638,965 1,196,396
--------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents 16,030 (16,738) 16,682
Cash and cash equivalents - beginning of year 10,266 27,004 10,322
--------------- --------------- --------------
Cash and cash equivalents - end of year $ 26,296 $ 10,266 $ 27,004
--------------- --------------- --------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 103,065 $ 79,671 $ 59,516
Interest paid:
Municipal investment and
repurchase agreements $ 195,344 $ 172,237 $ 104,301
Long-term debt 32,953 32,850 27,703
Short-term debt 2,017 1,309 1,228
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(6)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
- ----------------------------
MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as
a licensed insurer and, through a series of transactions during December 1986,
became the successor to the business of the Municipal Bond Insurance Association
(the Association), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies.
The company operates its insurance business primarily through its wholly owned
subsidiaries, MBIA Insurance Corporation (MBIA Corp.) and Capital Markets
Assurance Corporation (CMAC).
On February 17, 1998, MBIA Inc. consummated a merger with CapMAC Holdings
Inc. ("CapMAC"), by exchanging 8.1 million shares of its common stock for all of
the common stock of CapMAC. Each share of CapMAC was exchanged for 0.4675 of one
share of MBIA Inc. common stock. On July 31, 1998, MBIA Inc. completed a merger
of its investment management business with 1838 Investment Advisors ("1838")
through the issuance of 1.1 million shares of common stock. Each share of 1838
was exchanged for 2.134 shares of MBIA Inc.
The mergers constituted tax-free reorganizations and have been accounted for
as pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of CapMAC and 1838 as though they had always been a part of MBIA
Inc.
There were no transactions between MBIA Inc., CapMAC and/or 1838 prior to the
combinations, and immaterial adjustments were recorded to conform CapMAC's and
1838's accounting policies. Certain reclassifications were made to the CapMAC
and 1838 financial statements to conform to MBIA Inc.'s presentations.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Dollar in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Premiums earned
MBIA $297,377 $251,712 $215,072
CapMAC 52,160 40,557 29,242
------------------------------------------------
Combined $349,537 $292,269 $244,314
================================================
Net income
MBIA $374,176 $322,163 $271,419
CapMAC 23,989 19,679 14,586
1838 7,445 5,894 4,285
------------------------------------------------
Combined $405,610 $347,736 $290,290
================================================
(7)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective December 31, 1989, the company acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of
Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA
Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been
accounted for as a purchase and the price was allocated to the net assets of the
acquired company based on the fair value of such assets and liabilities at the
date of acquisition.
In 1990, the company formed MBIA Assurance S.A. (MBIA Assurance), a wholly
owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with
MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is
reinsured by MBIA Corp.
At the end of 1990, MBIA Municipal Investors Service Corporation (MBIA-MISC)
was formed as a wholly owned subsidiary of the company. MBIA-MISC operates
cooperative cash management programs for school districts and municipalities.
In 1993, the company formed a wholly owned subsidiary, MBIA Investment
Management Corp. (IMC). IMC provides guaranteed investment agreements to states,
municipalities and municipal authorities that are guaranteed as to principal and
interest.
In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp.
which was subsequently renamed MBIA Capital Management Corp., (CMC). CMC
provides fixed-income investment management services for the company, its
municipal cash management service businesses and public pension funds.
In December 1995, as part of its strategy to expand into Asia, CapMAC
purchased 36.3% of CapMAC Asia Ltd. As of December 31, 1997, CapMAC currently
owns 30.7% of CapMAC Asia Ltd. CapMAC Asia Ltd. has a 33.33% investment in Asia
Credit Services (Pte) Ltd. ("Asia Services"). Asia Services owns all of the
stock of Asian Securitization & Infrastructure Assurance (Pte) Ltd. ("ASIA
Ltd."), a regional financial guarantee company located in Singapore. ASIA Ltd.
was formed to provide guarantees of high quality debt securities in the primary
and secondary Asian fixed income capital markets and, together with Asia
Services, to engage in related business activities in the Asian capital markets
and to provide technical advice and assistance in connection with Asian
securitization transactions.
In 1996, MBIA-MISC acquired American Money Management Associates, Inc.,
(AMMA), which provides investment and treasury management consulting services
for municipal and quasi-public sector clients.
(8)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1996, the company formed a wholly owned subsidiary, Strategic Services,
Inc., which was subsequently renamed MBIA MuniServices Company (MuniServices).
Also in 1996, MuniServices acquired an interest in Capital Asset Holdings Inc.
(Capital Asset), a limited partnership that buys, services and manages
delinquent municipal tax liens. In January 1997, MuniServices acquired a 95
percent interest in the Municipal Tax Bureau (MTB) of Philadelphia, a provider
of tax compliance services to state and local governments. In July 1997,
MuniServices acquired MuniFinancial, a public finance consulting firm
specializing in municipal debt administration.
In early 1997, CMAC made an investment of 50 million French Francs
(approximately 10 million U. S. dollars) in CapMAC Assurance S.A., an insurance
subsidiary established in Paris, France. CapMAC Assurance S.A. is licensed to
write financial guarantee insurance in the European Union member states. CapMAC
Assurance S. A. has had only limited business activity to date.
CapMAC Financial Services Inc. ("CFS") and CapMAC Financial Services (Europe)
Ltd. ("CFS Europe") receive fees for providing advisory, consulting and
structuring services to third parties. CFS also provides various services,
including underwriting, reinsurance, marketing, data processing and other
services to CapMAC and its other subsidiaries. CapMAC and its other subsidiaries
pay CFS a fee for providing such services, but not in excess of CFS' cost for
such services.
2. SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its significant subsidiaries. All significant intercompany balances have been
eliminated. Certain amounts have been reclassified in prior years' financial
statements to conform to the current presentation.
INVESTMENTS
The company's entire investment portfolio is considered available-for-sale and
is reported in the financial statements at fair value, with unrealized gains and
losses, net of deferred taxes, reflected as a separate component of
shareholders' equity.
(9)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bond discounts and premiums are amortized using the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value, and
include all fixed-maturity securities, other than those held in the municipal
investment agreement portfolio, with a remaining term to maturity of less than
one year. Investment income is recorded as earned. Realized gains or losses on
the sale of investments are determined by specific identification, and are
included as a separate component of revenues.
Investment income from the municipal investment agreement portfolio is
recorded as a component of investment management services income. Municipal
investment agreement portfolio accrued interest income, receivables for
investments sold and payables for investments purchased are included in the
respective consolidated accounts.
Other investments include the company's interest in a limited partnership and
a mutual fund which invests principally in marketable equity securities. The
company records dividends from these investments as a component of investment
income. In addition, the company records its share of the unrealized gains and
losses on these investments, net of applicable deferred income taxes, as a
separate component of shareholders' equity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES
LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE
Securities borrowed or purchased under agreements to resell and securities
loaned or sold under agreements to repurchase are accounted for as
collateralized transactions and are recorded at principal or contract value. It
is the company's policy to take possession of securities borrowed or purchased
under agreements to resell.
The company minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and requiring additional collateral to be
deposited with the company when deemed necessary.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in underwriting and policy
issuance functions, certain rating agency fees, state premium taxes and certain
other underwriting expenses, reduced by ceding commission income on premiums
ceded to reinsurers. Policy acquisition costs are deferred and amortized over
the period in which the related premiums are earned.
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREMIUM REVENUE RECOGNITION
Upfront premiums are earned pro rata over the period of risk. Premiums are
allocated to each bond maturity based on par amount and are earned on a
straight-line basis over the term of each maturity. Installment premiums are
earned over each installment period - generally one year or less. When an
insured issue is retired early, is called by the issuer, or is in substance paid
in advance through a refunding or defeasance accomplished by placing U.S.
Government securities in escrow, the remaining deferred premium revenue, net of
the portion which is credited to a new policy in those cases where the company
insures the refunding issue, is earned at that time, since there is no longer
risk to the company. Accordingly, deferred premium revenue represents the
portion of premiums written that is applicable to the unexpired risk of insured
bonds and notes.
ADVISORY FEE REVENUE RECOGNITION
The company collects certain advisory fees for services rendered in connection
with advising clients as to the most appropriate structure to use for a given
structured finance transaction that the company will insure. Advisory fees are
deferred and earned consistent with the premium revenues generated on the
transactions.
GOODWILL
Goodwill represents the excess of the cost of acquisitions over the tangible net
assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years. Goodwill attributed to the acquisition of
all other subsidiaries is amortized by the straight-line method over 15 years.
PROPERTY AND EQUIPMENT
Property and equipment consist of the company's headquarters, furniture,
fixtures and equipment, which are recorded at cost and are depreciated by the
straight-line method over their estimated service lives ranging from 3 to 31
years. Maintenance and repairs are charged to expense as incurred.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expenses (LAE) reserves are established in an amount
equal to the company's estimate of identified or case basis reserves and
unallocated losses, including costs of settlement, on the obligations it has
insured.
Case basis reserves are established when specific insured issues are
identified as currently or likely to be in default. Such a reserve is based on
the present value of the expected loss and LAE payments, net of recoveries under
salvage and subrogation rights. The total reserve is calculated by applying a
loss factor, determined based on an independent rating agency study of bond
defaults, to net debt service written. When a case basis reserve is recorded, a
corresponding reduction is made to the unallocated reserve.
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management of the company periodically evaluates its estimates for losses and
LAE, and any resulting adjustments are reflected in current earnings. Management
believes that the reserves are adequate to cover the ultimate net cost of
claims, however, because the reserves are based on estimates, there can be no
assurance that the ultimate liability will not exceed such estimates.
MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS
Municipal investment agreements and municipal repurchase agreements are recorded
as liabilities on the balance sheet at the time such agreements are executed.
The liabilities for municipal investment and repurchase agreements are carried
at the face value of the agreement plus accrued interest, whereas the related
assets are recorded at fair value. Investment management services income
includes investment income on the assets underlying the municipal investment
agreement portfolio, net of interest expense at rates specified in the
agreements, computed daily based upon the outstanding balances.
DERIVATIVES
The company's policies with respect to the use of derivative financial
instruments include limitations with respect to the amount, type and
concentration of such instruments. The company uses interest rate swaps for
hedging purposes as part of its overall risk management strategy. Gains and
losses on the derivative financial instruments that qualify as accounting hedges
of existing assets and liabilities are included with the carrying amounts and
amortized over the remaining lives of the assets and liabilities as an
adjustment to interest income or expense. When a hedged asset is sold or
liability extinguished, the unamortized gain or loss on the related hedge is
recognized in income. Gains and losses on derivative financial instruments that
do not qualify as accounting hedges are recognized in current period income. At
year-end 1997, the company's exposure to derivative financial instruments was
not material.
INVESTMENT MANAGEMENT SERVICES OPERATIONS
Investment management services income is comprised of the net investment income
and operating revenues of MBIA-MISC, IMC, CMC and 1838. The operating expenses
of MBIA-MISC, IMC, CMC and 1838 are reported in investment management services
expenses.
INCOME TAXES
Deferred income taxes are provided with respect to the temporary differences
between the tax bases of assets and liabilities and the reported amounts in the
financial statements that will result in deductible or taxable amounts in future
years when the reported amount of the asset or liability is recovered or
settled. Such temporary differences relate principally to premium revenue
recognition, deferred acquisition costs and the contingency reserve.
The Internal Revenue Code permits companies writing financial guarantee
insurance to deduct from taxable income amounts added to the statutory
contingency reserve, subject to certain limitations. The tax benefits obtained
from such deductions must be invested in non-interest bearing U.S. Government
(12)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tax and loss bonds. The company records purchases of tax and loss bonds as
payments of federal income taxes. The amounts deducted must be restored to
taxable income when the contingency reserve is released, at which time the
company may present the tax and loss bonds for redemption to satisfy the
additional tax liability.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholders' equity. Gains
and losses resulting from transactions in foreign currencies are recorded in
current income.
3. RECENT ACCOUNTING PRONOUNCEMENTS
- ------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. This statement
will require the company to report in the financial statements, in addition to
net income, comprehensive income and its components including, as applicable,
foreign currency items, unearned compensation from restricted stock awards and
unrealized gains and losses on certain investments in debt and equity
securities. Upon adoption, the company will be required to reclassify financial
statements for earlier periods provided for comparative purposes. Adoption of
this statement will not change the content of the financial statements; instead
it will only change the presentation.
Also, in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements, and
requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas and major customers.
Under SFAS 131, operating segments are to be determined consistent with the way
that management organizes and evaluates financial information internally for
making operating decisions and assessing performance. As a result of the new
requirements, the company will be providing additional segment information,
however the future presentation and disclosures have not yet been determined.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for fiscal years beginning after June
15, 1999. The company will adopt SFAS 133 by January 1, 2000. Adoption of SFAS
133 is not expected to have a material impact on the consolidated financial
statements.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STATUTORY ACCOUNTING PRACTICES
- ----------------------------------
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
. upfront premiums are earned only when the related risk has expired rather
than over the period of the risk;
. acquisition costs are charged to operations as incurred rather than
deferred and amortized as the related premiums are earned;
. a contingency reserve is computed on the basis of statutory requirements,
and reserves for losses and LAE are established, at present value, for
specific insured issues that are identified as currently or likely to be in
default. Under GAAP, reserves are established based on the company's
reasonable estimate of the identified and unallocated losses and LAE on the
insured obligations it has written;
. federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
. fixed-maturity securities are reported at amortized cost rather than fair
value;
. tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
. certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of consolidated shareholders' equity presented
on a GAAP basis for the company and its consolidated subsidiaries to statutory
capital and surplus for MBIA Corp. and CMAC:
As of December 31
--------------------------
In thousands 1997 1996
- ---------------------------------------------------------
Company's GAAP
shareholders' equity $3,361,512 $2,761,223
Contributions to MBIA Corp. 459,567 361,494
Premium revenue recognition (413,729) (371,856)
Deferral of acquisition costs (216,165) (196,889)
Unrealized gains (377,161) (179,042)
Contingency reserve (1,187,882) (958,928)
Loss and loss adjustment
expense reserves 77,816 49,738
Deferred income taxes 298,498 216,082
Tax and loss bonds 130,055 103,364
Goodwill (95,829) (100,718)
Other (85,172) (23,364)
- ---------------------------------------------------------
Statutory capital and surplus $1,951,510 $1,661,104
- ---------------------------------------------------------
Consolidated net income of MBIA Corp. and CMAC, determined in accordance with
statutory accounting practices for the years ended December 31, 1997, 1996 and
1995 was $404.4 million, $335.3 million and $287.3 million, respectively.
5. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
- --------------------------------------------------
Premiums earned include $50.9 million, $44.4 million and $34.0 million for 1997,
1996 and 1995, respectively, related to refunded and called bonds.
6. INVESTMENTS
- ---------------
The company's investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital through maintenance of
high-quality investments with adequate liquidity. The company's investment
policies limit the amount of credit exposure to any one issuer. The
fixed-maturity portfolio is comprised of high-quality (average rating Double-A)
taxable and tax-exempt investments of diversified maturities.
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of the company, as of December 31, 1997 and 1996:
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ------------------------------------------------------------------------------
December 31, 1997
Taxable bonds
United States Treasury
and Government
Agency $ 547,206 $ 30,668 $ (4) $ 577,870
Corporate and other
obligations 3,156,676 96,520 (1,114) 3,252,082
Mortgage-backed 1,495,667 30,579 (1,054) 1,525,192
Tax-exempt bonds
State and municipal
obligations 3,282,812 219,613 (966) 3,501,459
- ------------------------------------------------------------------------------
Total $8,482,361 $377,380 $(3,138) $8,856,603
- ------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ------------------------------------------------------------------------------
December 31, 1996
Taxable bonds
United States Treasury
and Government Agency $ 537,725 $ 13,667 $ (997) $ 550,395
Corporate and other
obligations 2,745,267 34,595 (16,985) 2,762,877
Mortgage-backed 1,390,995 20,568 (6,621) 1,404,942
Tax-exempt bonds
State and municipal
obligations 3,102,910 141,991 (4,855) 3,240,046
- ------------------------------------------------------------------------------
Total $7,776,897 $210,821 $(29,458) $7,958,260
- ------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $12.0 million and $11.7
million as of December 31, 1997 and 1996, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A portion of the obligations under municipal investment and repurchase
agreements require the company to pledge securities as collateral. As of
December 31, 1997 and 1996, the fair value of securities pledged as collateral
with respect to these obligations approximated $1.8 billion and $1.5 billion,
respectively.
The following table sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1997. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
In thousands Amortized Cost Fair Value
- ----------------------------------------------------------------
Within 1 year $ 675,113 $ 675,133
Beyond 1 year but within 5 years 1,489,052 1,523,381
Beyond 5 years but within 10 years 1,759,479 1,845,653
Beyond 10 years but within 15 years 1,106,117 1,190,167
Beyond 15 years but within 20 years 1,096,739 1,173,131
Beyond 20 years 860,194 923,946
- ----------------------------------------------------------------
6,986,694 7,331,411
Mortgage-backed 1,495,667 1,525,192
- ----------------------------------------------------------------
Total fixed-maturities and
short-term investments $8,482,361 $8,856,603
- ----------------------------------------------------------------
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT INCOME AND GAINS AND LOSSES
- ------------------------------------------
Investment income consists of:
Years ended December 31
--------------------------------
In thousands 1997 1996 1995
- --------------------------------------------------------------
Fixed-maturities $299,488 $261,200 $227,758
Short-term investments 7,060 7,792 7,922
Other investments (1,542) (383) 112
- --------------------------------------------------------------
Gross investment income 305,006 268,609 235,792
Investment expenses 3,591 3,142 3,091
- --------------------------------------------------------------
Net investment income 301,415 265,467 232,701
- --------------------------------------------------------------
Net realized gains (losses):
Fixed-maturities
Gains 25,963 17,532 11,427
Losses (5,877) (5,889) (2,672)
- --------------------------------------------------------------
Net 20,086 11,643 8,755
- --------------------------------------------------------------
Other investments
Gains 564 333 3,917
Losses (3,747) (2,040) (9)
- --------------------------------------------------------------
Net (3,183) (1,707) 3,908
- --------------------------------------------------------------
Total net realized gains 16,903 9,936 12,663
- --------------------------------------------------------------
Total investment income $318,318 $275,403 $245,364
- --------------------------------------------------------------
Total investment income excludes investment income and realized gains and losses
from MBIA-MISC, IMC, CMC and 1838, which are reported in investment management
services income.
(18)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net unrealized gains consist of:
As of December 31
---------------------
In thousands 1997 1996
- -------------------------------------------------
Fixed-maturities:
Gains $377,380 $210,821
Losses (3,138) (29,458)
- -------------------------------------------------
Net 374,242 181,363
- -------------------------------------------------
Other investments:
Gains 2,976 934
Losses (57) (3,255)
- -------------------------------------------------
Net 2,919 (2,321)
- -------------------------------------------------
Total 377,161 179,042
Deferred income taxes 132,026 62,689
- -------------------------------------------------
Unrealized gains, net $245,135 $116,353
- -------------------------------------------------
The deferred income taxes relate primarily to unrealized gains and losses on the
company's fixed-maturity investments, which are reflected in shareholders'
equity.
The change in net unrealized gains (losses) consists of:
Years ended December 31
--------------------------------
In thousands 1997 1996 1995
- -------------------------------------------------------------------
Fixed-maturities $196,042 $(146,050) $466,920
Other investments 2,077 1,438 (2,053)
- -------------------------------------------------------------------
Total 198,119 (144,612) 464,867
Deferred income taxes 69,337 (50,874) 162,694
- -------------------------------------------------------------------
Unrealized gains (losses), net $128,782 $ (93,738) $302,173
- -------------------------------------------------------------------
(19)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
- ----------------
The company files a consolidated tax return that includes all of its U.S.
subsidiaries.
The provision for income taxes is composed of:
Years ended December 31
-------------------------------
In thousands 1997 1996 1995
- ------------------------------------------------------------------
Current $106,452 $ 91,158 $70,185
Deferred 13,190 9,521 14,534
- ------------------------------------------------------------------
Total $119,642 $100,679 $84,719
- ------------------------------------------------------------------
The provision for income taxes gives effect to permanent differences between
financial and taxable income. Accordingly, the company's effective income tax
rate differs from the statutory rate on ordinary income. The reasons for the
company's lower effective tax rates are as follows:
Years ended December 31
-----------------------------
1997 1996 1995
- --------------------------------------------------------------------
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 35.0% 35.0%
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (10.6) (12.1) (12.9)
Amortization of goodwill 0.3 0.4 0.5
Other (1.9) (0.8) ---
- --------------------------------------------------------------------
Provision for income taxes 22.8% 22.5% 22.6%
- --------------------------------------------------------------------
The company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
(20)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1997 and 1996 are presented below:
In thousands 1997 1996
- ----------------------------------------------------------------
Deferred tax assets:
Tax and loss bonds $130,080 $102,222
Alternative minimum tax credit
carryforward 62,279 58,068
Loss and loss adjustment expense reserves 23,762 15,200
Other 92,099 20,368
- ----------------------------------------------------------------
Total gross deferred tax assets 308,220 195,858
- ----------------------------------------------------------------
Deferred tax liabilities
Contingency reserve 229,389 180,957
Deferred premium revenue 154,240 74,082
Deferred acquisition costs 73,081 67,596
Unrealized gains 132,026 62,689
Contingent commissions 408 1,052
Other 17,574 25,564
- ----------------------------------------------------------------
Total gross deferred tax liabilities 606,718 411,940
- ----------------------------------------------------------------
Net deferred tax liability $298,498 $216,082
- ----------------------------------------------------------------
The company believes that a valuation allowance is unnecessary in connection
with the deferred tax assets.
9. NET INCOME PER COMMON SHARE
- -------------------------------
In February 1997, the FASB issued (SFAS) 128, "Earnings per Share", effective
for financial statements issued for periods ending after December 15, 1997. SFAS
128 establishes standards for computing and presenting earnings per share (EPS).
Under the new standard, basic EPS is computed by dividing income applicable to
common stock by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the additional dilution that could occur from
employee stock options and other items that could potentially result in the
issuance of common stock. The company has adopted this Statement and as required
has restated all prior-period EPS data presented.
The mergers with CapMAC and 1838, subsequent to year-end, resulted in the
issuance of 8,102,255 and 1,191,197 additional common shares, respectively,
which are included in the following table. The table provides a reconciliation
of the denominator of the basic EPS computation to the denominator of the
diluted EPS computation.
(21)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31
------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------
Net income (in thousands) $405,610 $347,736 $290,290
- ----------------------------------------------------------------------
Basic weighted average shares 96,937,314 94,368,038 90,465,515
Effect of stock options 1,406,849 1,791,028 1,674,921
- ----------------------------------------------------------------------
Diluted weighted average shares 98,344,163 96,159,066 92,140,436
- ----------------------------------------------------------------------
Basic EPS $4.18 $3.68 $3.21
Diluted EPS $4.12 $3.62 $3.15
Options to purchase 292,100, 256,028 and 477,388 shares of common stock during
1997, 1996 and 1995, respectively, were not included in the computation of
diluted EPS because the options exercise price was greater than the average
market price of common shares during the respective years.
10. STOCK SPLIT
- ----------------
On September 17, 1997, the Board of Directors approved a two-for-one stock
split, to be effected in the form of a 100% stock dividend payable on October
29, 1997 to shareholders of record as of October 1, 1997. An amount equal to the
par value of common shares issued was transferred from additional paid-in
capital to the common stock account. This transfer has been reflected in the
Consolidated Statements of Changes in Shareholders' Equity at January 1, 1995.
All references to the number of common shares, except shares authorized, and to
per share information in the consolidated financial statements and related notes
have been adjusted to reflect the stock split on a retroactive basis.
11. DIVIDENDS AND CAPITAL REQUIREMENTS
- ---------------------------------------
Under New York state insurance law, MBIA Corp. and CMAC may pay dividends only
from earned surplus subject to the maintenance of a minimum capital requirement.
The dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends that can be
paid in any 12-month period, MBIA Corp. had $176 million available for the
payment of dividends to the company as of December 31, 1997. In 1997, no
dividends were paid by MBIA Corp. to the company due to cash available from
(22)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financing activities. In 1996 and 1995, MBIA Corp. declared and paid dividends
of $29 million and $83 million, respectively, to the company. No dividends were
paid by CMAC to CapMAC during the years ended December 31, 1997, 1996 and 1995.
No dividends could be paid during these periods because CMAC had negative earned
surplus.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies that rate the bonds insured by
MBIA Corp., CMAC and their subsidiaries have various requirements relating to
the maintenance of certain minimum ratios of statutory capital and reserves to
net insurance in force. MBIA Corp., CMAC and their subsidiaries were in
compliance with these requirements as of December 31, 1997.
12. LONG-TERM DEBT AND LINES OF CREDIT
- ---------------------------------------
Long-term debt consists of:
As of December 31
---------------------
In thousands 1997 1996
- -------------------------------------------------
7.520% Notes due 1999-2002 $ 15,000 $ 15,000
9.000% Notes due 2001 100,000 100,000
9.375% Notes due 2011 100,000 100,000
8.200% Debentures due 2022 100,000 100,000
7.000% Debentures due 2025 75,000 75,000
7.150% Debentures due 2027 100,000 ---
- -------------------------------------------------
490,000 390,000
Less unamortized discount 1,122 990
- -------------------------------------------------
Total $488,878 $389,010
- -------------------------------------------------
The company's long-term debt is subject to certain covenants, none of which
significantly restrict the company's operating activities or dividend-paying
ability.
MBIA Corp. has a standby line of credit commitment in the amount of $825
million with a group of major Triple-A-rated banks to provide loans to MBIA
Corp. if it incurs cumulative losses (net of any recoveries) from September 30,
1997 in excess of the greater of $825 million or 4.00% of average annual debt
service. The obligation to repay loans made under this agreement is a limited
recourse obligation payable solely from, and collateralized by, a pledge of
recoveries realized on defaulted insured obligations including certain
installment premiums and other collateral. This commitment has a seven-year term
expiring on September 30, 2004, and contains an annual renewal provision subject
to approval by the bank group. CMAC maintains stop-loss reinsurance coverage of
$75 million in excess of incurred losses of $150 million.
(23)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The company, MBIA Corp. and CMAC maintain bank liquidity facilities
aggregating $450 million. At December 31, 1997 and 1996, $20.0 million and $29.1
million, respectively, were outstanding under these facilities.
The company has outstanding letters of credit for MBIA-MISC that are intended
to support the net asset value of certain investment pools managed by MBIA-MISC.
These letters can be drawn upon in the event the liquidation of such assets at
below cost is required.
13. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------
Obligations under municipal investment agreements and municipal repurchase
agreements are recorded as liabilities on the balance sheet based upon proceeds
received plus unpaid accrued interest from that date. Upon the occurrence of
certain contractually agreed upon events, some of these funds may be withdrawn
at various times prior to maturity at the option of the investor. As of December
31, 1997, the interest rates on these agreements ranged from 4.35% to 8.25%.
Principal payments due under these investment agreements in each of the next
five years ending December 31, and thereafter, based upon expected withdrawal
dates, were as follows:
In thousands Principal Amount
- ----------------------------------------------
Expected withdrawal date:
1998 $1,141,366
1999 640,452
2000 261,320
2001 57,886
2002 12,824
Thereafter 1,000,806
- ----------------------------------------------
Total $3,114,654
- ----------------------------------------------
IMC also provides agreements obligating it to purchase designated securities in
a bond reserve fund at par value upon the occurrence of certain contractually
agreed upon events. The opportunities and risks in these agreements are
analogous to those of municipal investment agreements and municipal repurchase
agreements. The total par value of securities subject to these agreements was
$43 million at December 31, 1997.
(24)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. NET INSURANCE IN FORCE
- ---------------------------
MBIA Corp. and CMAC guarantee the timely payment of principal and interest on
municipal, asset-/mortgage-backed and other non-municipal securities. MBIA
Corp.'s and CMAC's ultimate exposure to credit loss in the event of
nonperformance by the insured is represented by the insurance in force as set
forth below.
The insurance policies issued by MBIA Corp. and CMAC are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s and CMAC's
underwriting guidelines. Further, the payments to be made by the issuer on the
bonds or notes may be backed by a pledge of revenues, reserve funds, letters of
credit, investment contracts or collateral in the form of mortgages or other
assets. The right to such money or collateral would typically become MBIA
Corp.'s or CMAC's upon the payment of a claim by MBIA Corp. or CMAC.
Under CMAC's structured asset-backed transactions, a pool of assets
covering at least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special purpose bankruptcy remote entity.
CMAC's primary risk from such insurance contracts is the impairment of cash
flows due to delinquency or loss on the underlying assets. CMAC, therefore,
evaluates all the factors affecting past and future asset performance by
studying historical data on losses, delinquencies and recoveries of the
underlying assets. Each transaction is reviewed to ensure that an appropriate
legal structure is used to protect against the bankruptcy risk of the originator
of the assets. Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or dilution.
This first level of loss protection is usually available from reserve funds,
excess cash flows, overcollateralization, or recourse to a third party. The
level of first loss protection depends upon the historical losses and dilution
of the underlying assets, but is typically several times the normal historical
loss experience for the underlying type of assets.
As of December 31, 1997, insurance in force, net of cessions to reinsurers,
had a range of maturity of 1 - 41 years. The distribution of net insurance in
force by geographic location and type of bond, excluding $3.2 billion and $3.3
billion relating to IMC municipal investment agreements guaranteed by MBIA Corp.
in 1997 and 1996, respectively, is set forth in the following tables:
(25)
<PAGE>
<TABLE>
<CAPTION>
As of December 31
- ---------------------------------------------------------------------------------------------------------
$ in billions 1997 1996
- ----------------------------------------------------------------- ----------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance Of Issues Insurance
Geographic Location In Force Outstanding In Force In Force Outstanding In Force
- ----------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
California $ 68.8 3,455 13.4% $ 61.1 3,389 14.1%
New York 38.2 5,057 7.4 31.3 4,906 7.2
Florida 33.1 1,578 6.5 29.6 1,633 6.8
New Jersey 24.7 1,885 4.8 19.0 1,886 4.4
Texas 24.7 2,099 4.8 21.9 2,065 5.0
Pennsylvania 23.0 2,262 4.5 21.5 2,268 5.0
Illinois 20.3 1,236 4.0 18.8 1,184 4.3
Massachusetts 15.5 1,089 3.0 11.0 1,102 2.5
Ohio 12.5 1,014 2.4 11.3 1,038 2.6
Michigan 11.2 1,032 2.2 9.6 1,035 2.2
--------- ---------- --------- ---------- --------- ---------
Subtotal 272.0 20,707 53.0 235.1 20,506 54.1
Other states 223.6 12,278 43.5 186.2 11,820 42.9
--------- ---------- --------- ---------- --------- ---------
Total domestic 495.6 32,985 96.5 421.3 32,326 97.0
International 18.1 279 3.5 13.1 207 3.0
--------- ---------- --------- ---------- --------- ---------
Total $513.7 33,264 100.0% $434.4 32,533 100.0%
--------- ---------- --------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
As of December 31
- ---------------------------------------------------------------------------------------------------------
$ in billions 1997 1996
- ----------------------------------------------------------------- ----------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance Of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ----------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Municipal:
General obligation $119.5 12,096 23.3% $111.1 11,830 25.6%
Utilities 75.4 4,775 14.7 68.2 4,832 15.7
Health care 62.2 2,248 12.1 54.0 2,388 12.4
Transportation 40.6 1,503 7.9 30.4 1,536 7.0
Special revenue 34.2 1,653 6.7 29.0 1,554 6.7
Higher education 20.6 1,366 4.0 18.0 1,316 4.1
Industrial development and
pollution control revenue 19.6 943 3.8 18.1 931 4.2
Housing 18.9 1,896 3.7 17.7 2,460 4.1
Other 12.5 543 2.4 3.9 171 0.9
--------- ---------- --------- --------- --------- ---------
Total municipal 403.5 27,023 78.6 350.4 27,018 80.7
--------- ---------- --------- --------- --------- ---------
Structured finance* 74.8 709 14.5 54.0 534 12.4
--------- ---------- --------- --------- --------- ---------
Other
Investor owned utilities 11.0 4,872 2.2 10.0 4,529 2.3
Financial institution 5.8 366 1.1 6.4 237 1.5
Corporate direct 0.5 15 0.1 0.5 8 0.1
--------- ---------- --------- --------- --------- ---------
Total other 17.3 5,253 3.4 16.9 4,774 3.9
--------- ---------- --------- --------- --------- ---------
Total domestic 495.6 32,985 96.5 421.3 32,326 97.0
--------- ---------- --------- --------- --------- ---------
International
Infrastructure
Sovereign 1.9 35 0.4 0.5 13 0.1
Sub-sovereign 1.4 53 0.3 1.5 48 0.3
Utilities 0.8 60 0.2 0.7 59 0.2
Transportation 0.8 5 0.1 0.9 4 0.2
Higher education 0.6 1 0.1 -- -- --
Housing 0.3 2 0.1 -- -- --
Health care 0.2 6 -- 0.1 3 --
--------- ---------- --------- --------- --------- ---------
Total infrastructure 6.0 162 1.2 3.7 127 0.8
--------- ---------- --------- --------- --------- ---------
Structured finance* 9.3 76 1.8 6.4 46 1.5
--------- ---------- --------- --------- --------- ---------
Other
Financial institution 2.2 34 0.4 2.9 33 0.7
Investor owned utility 0.6 7 0.1 0.1 1 --
--------- ---------- --------- --------- --------- ---------
Total other 2.8 41 0.5 3.0 34 0.7
--------- ---------- --------- --------- --------- ---------
Total international 18.1 279 3.5 13.1 207 3.0
--------- ---------- --------- --------- --------- ---------
Total $513.7 33,264 100.0% $434.4 32,533 100.0%
--------- ---------- --------- --------- --------- ---------
*Asset-/mortgage-backed
</TABLE>
(26)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. REINSURANCE
- ----------------
MBIA Corp. and CMAC reinsures exposure with other insurance companies under
various treaty and facultative reinsurance contracts, both on a pro rata and
excess of loss basis. In the event that any or all of the reinsurers were unable
to meet their obligations, MBIA Corp. or CMAC would be liable for such defaulted
amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by MBIA
Corp., CMAC and their subsidiaries were $76.6 billion and $64.1 billion, at
December 31, 1997 and 1996, respectively. The distribution of ceded insurance in
force by geographic location and type of bond is set forth in the following
tables:
As of December 31
- ----------------------------------------------------------------------
In billions 1997 1996
- --------------------------------------------- ----------------------
% of % of
Ceded Ceded Ceded Ceded
Geographic Insurance Insurance Insurance Insurance
Location In Force In Force In Force In Force
- --------------------------------------------- ----------------------
Domestic
California $10.4 13.6% $9.4 14.7%
New York 6.1 8.0 6.3 9.8
Texas 4.0 5.2 2.9 4.5
New Jersey 3.7 4.9 3.3 5.1
Massachusetts 3.0 3.9 1.4 2.2
Pennsylvania 3.0 3.9 2.9 4.5
Illinois 2.7 3.5 2.6 4.1
Florida 2.6 3.4 2.4 3.7
Colorado 2.4 3.1 1.2 1.9
Puerto Rico 2.4 3.1 1.2 1.9
Washington 1.9 2.5 1.9 3.0
District of Columbia 1.6 2.1 1.6 2.5
- --------------------------------------------- ----------------------
Subtotal 43.8 57.2 37.1 57.9
Other states 22.1 28.8 19.6 30.6
- --------------------------------------------- ----------------------
Total domestic 65.9 86.0 56.7 88.5
International 10.7 14.0 7.4 11.5
- --------------------------------------------- ----------------------
Total $76.6 100.0% $64.1 100.0%
- --------------------------------------------- ----------------------
(27)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31
- ---------------------------------------------------------------------
In billions 1997 1996
- --------------------------------------------- ---------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- --------------------------------------------- ---------------------
Domestic
Municipal:
General obligation $12.3 16.1% $14.4 22.5%
Utilities 11.6 15.1 10.2 15.9
Transportation 9.6 12.5 6.4 10.0
Health care 8.0 10.5 6.3 9.8
Special revenue 5.0 6.5 3.4 5.3
Industrial development
and pollution control
revenue 3.3 4.3 3.2 5.0
Housing 1.7 2.2 1.6 2.5
Higher education 1.3 1.7 1.5 2.3
Other 2.7 3.5 1.0 1.6
- --------------------------------------------- ---------------------
Total municipal 55.5 72.4 48.0 74.9
- --------------------------------------------- ---------------------
Structured finance* 8.4 11.0 6.9 10.8
- --------------------------------------------- ---------------------
Other
Financial institution 1.3 1.7 1.3 2.0
Corporate direct 0.2 0.3 0.2 0.3
Investor-owned utilities 0.5 0.6 0.3 0.5
- --------------------------------------------- ---------------------
Total other 2.0 2.6 1.8 2.8
- --------------------------------------------- ---------------------
Total domestic 65.9 86.0 56.7 88.5
- --------------------------------------------- ---------------------
International
Infrastructure
Sovereign 1.0 1.3 0.4 0.6
Higher education 0.7 0.9 --- ---
Sub-sovereign 0.6 0.8 0.8 1.2
Transportation 0.4 0.5 0.4 0.6
Health care 0.2 0.3 0.1 0.2
- --------------------------------------------- ---------------------
Total infrastructure 2.9 3.8 1.7 2.6
- --------------------------------------------- ---------------------
Structured finance* 6.6 8.6 4.4 6.9
- --------------------------------------------- ---------------------
Other
Financial institution 1.0 1.3 1.3 2.0
Investor-owned utilities 0.2 0.3 --- ---
- --------------------------------------------- ---------------------
Total other 1.2 1.6 1.3 2.0
- --------------------------------------------- ---------------------
Total international 10.7 14.0 7.4 11.5
- --------------------------------------------- ---------------------
Total $76.6 100.0% $64.1 100.0%
- --------------------------------------------- ---------------------
* Asset-/mortgage-backed
(28)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PENSION AND PROFIT SHARING PLANS
- -------------------------------------
The company has a non-contributory, defined contribution pension plan to which
the company contributes 10% of each eligible employee's annual total
compensation. Pension expense for the years ended December 31, 1997, 1996 and
1995 was $4.6 million, $3.9 million and $3.6 million, respectively. The company
also has a profit sharing/401(k) plan that allows eligible employees to
contribute up to 10% of eligible compensation. The company matches employee
contributions up to the first 5% of total compensation. Company contributions to
the profit sharing/401(k) plan aggregated $1.9 million, $1.7 million and $1.5
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
profit sharing/401(k) plan company match amounts are invested in common stock of
the company. Amounts relating to the above plans that exceed limitations
established by Federal regulations are contributed to a non-qualified deferred
compensation plan.
17. LONG-TERM INCENTIVE PLANS
- ------------------------------
On March 2, 1987, the company adopted a plan for key employees of the company
and its subsidiaries to enable those employees to acquire shares of common stock
of the company or to benefit from appreciation in the price of the common stock
of the company. Options granted will either be Incentive Stock Options (ISOs),
where they qualify under Section 422(a) of the Internal Revenue Code, or
Non-Qualified Stock Options (NQSOs).
ISOs and NQSOs may be granted at a price not less than 100% of the fair value
of the company's common stock as determined on the date granted. Options will be
exercisable as specified at the time of grant and expire ten years from the date
of grant (or shorter if specified or following termination of employment).
The Board of Directors of the company has authorized a maximum of 9,311,122
shares of the company's common stock to be granted as options. As of December
31, 1997, 6,538,410 options had been granted, net of expirations and
cancellations, leaving the total number available for future grants at
2,772,712. Options granted through 1990 are exercisable in equal annual
installments on each of the first three anniversaries of the grant at 100% of
the market price at the date of grant. The options granted from 1991 through
1994 are exercisable in five equal annual installments commencing one year after
the date of grant. On all options granted from 1991 through 1994, accelerated
vesting and exercisability of those options is possible if the company's return
on equity for the year is at least equal to the threshold return on equity
specified in the annual financial plan and if earnings per share are at least
2.5% greater than plan earnings per share.
In December 1995, the MBIA Inc. Board of Directors approved the "MBIA
Long-Term Incentive Program." The incentive program includes a stock option
program and adds a compensation component linked to the growth in adjusted book
value per share (ABV) of the company's stock. Awards under the long-term program
are divided equally between the two components, with 50% of the award given in
stock options and 50% of the award (multiplied by a 1.5 conversion factor for
the December 1995 award only) to be paid in cash or shares of company stock.
(29)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Target levels for the option/incentive award are established as a
percentage of total salary and bonus, based upon the recipient's position.
Awards under the long-term program typically will be granted from the vice
president level up to and including the chairman and chief executive officer.
The ABV portion of the long-term incentive program may be awarded every year.
The December 1997 award will cover growth in ABV from December 31, 1997 through
December 31, 2000 and the December 1995 award will cover growth in ABV from
December 31, 1995 through December 31, 1998, with a base line growth of 12% on
both awards. The amount to be paid in respect of such award will be adjusted
upward or downward based on the actual ABV growth with a minimum growth of 8%
necessary to receive any payment and an 18% growth needed to receive the maximum
payment of 200% of the target levels. The amount, if any, to be paid under this
portion of the program will be paid in early 2001 for the December 1997 award
and early 1999 for the December 1995 award in the form of cash or shares of the
company's common stock. Subsequent awards, if any, will be made every year with
concomitant payments occurring after the three-year cycle. During 1997 and 1996,
$3.7 million and $2.9 million, respectively, were recorded as a charge related
to the December 1997 and December 1995 ABV awards.
The stock option grants, which may continue to be awarded every year,
provide the right to purchase shares of common stock at the fair value (closing
price) of the stock on the date of the grant. Each option vests over five years
and has a ten-year term. Prior option grants are not taken into account in
determining the number of options granted in any year. In December 1997, 449,274
options were awarded.
In December 1995, the company adopted a restricted stock program whereby
key executive officers are granted restricted shares of the company's stock.
These stock awards may only be sold three or four years from the date of grant,
at which time the awards fully vest.
In 1997 and 1996, respectively, 73,696 and 15,506 restricted shares of the
company's stock were granted to certain officers of the company. The fair value
of the shares awarded in 1997 and 1996 determined on the grant date is $4.4
million and $0.8 million, respectively, and has been recorded as "Unearned
compensation restricted stock" and is shown as a separate component of
shareholders' equity. Unearned compensation is amortized to expense over the
appropriate three-to four-year vesting period.
In 1992, certain officers of CapMAC were granted 182,633 (85,381 as
restated subsequent to the merger with MBIA Inc.) restricted stock units ("RSU")
in respect of certain deferred compensation. In December 1995, the RSU's were
converted to cash in the amount of $3.7 million, and such officers agreed to
defer receipt of such cash amount in exchange for receiving the same number of
new shares of restricted stock as the number of RSU's such officers previously
held. The cash amount is held by CapMAC and invested in accordance with certain
guidelines. Such amount, including the investment earnings thereon, amounted to
$3.8 million and $3.7 million at December 31, 1997 and 1996, respectively, and
will be paid to each officer upon the occurrence of certain events, but no later
(30)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
than December 2000. Compensation expense related to the restricted stock and
RSU's was $0.2 million, $1.4 million and $1.5 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
In 1992, CapMAC adopted an Employee Stock Ownership Plan "ESOP" to provide
its employees the opportunity to obtain beneficial interests in the stock of
CapMAC through a trust (the "ESOP Trust"). The ESOP Trust purchased 750,000
(350,625 as restated subsequent to the merger with MBIA Inc.) shares CapMAC's
stock. The ESOP Trust financed its purchase of common stock with a loan from
CapMAC in the amount of $10 million. The ESOP loan is evidenced by a promissory
note delivered to CapMAC. An amount representing unearned employee compensation,
equivalent in value to the unpaid balance of the ESOP loan, is recorded as
"Unallocated ESOP shares" and is shown as a separate component of shareholders'
equity.
CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to CapMAC. The ESOP expense is calculated using
the shares allocated method. Shares are released for allocation to the
participants and held in trust for the employees based upon the ratio of the
current year's principal and interest payment to the sum of principal and
interest payments estimated over the life of the loan. As of December 31, 1997
and 1996 443,810 (207,570 as restated) and 342,739 (160,353 as restated) shares,
respectively, were allocated to the participants. Compensation expense related
to the ESOP was $1.3 million, $2.4 million and $1.6 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 required the company to adopt, at its
election, either 1) the provisions in SFAS 123 which require the recognition of
compensation expense for employee stock-based compensation plans, or 2) the
provisions in SFAS 123 which require the pro forma disclosure of net income and
earnings per share as if the recognition provisions of SFAS 123 had been
adopted. SFAS 123 explicitly provides that employers may continue to account for
their employee stock-based compensation plans using the accounting prescribed by
Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to
Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123
effective January 1, 1996 and continues to account for its employee stock-based
compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no
impact on the company's financial position or results of operations. As the
table below shows, had compensation cost for the company's stock option program
been recognized based on the fair value at the grant date, consistent with the
recognition provisions of SFAS 123, the impact on the company's net income and
earnings per share would not have been material. However, since the options vest
over five years and additional awards could be made in future years, the effects
of applying SFAS 123 in 1997 are not likely to be representative of the effects
on reported net income and earnings per share for future years.
(31)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31
1997 1996 1995
----------------------------------
Net income (in thousands):
Reported $405,610 $347,736 $290,290
Pro-forma 404,881 347,455 290,281
Basic earnings per share:
Reported $4.18 $3.68 $3.21
Pro-forma 4.17 3.68 3.21
Diluted earnings per share:
Reported $4.12 $3.62 $3.15
Pro-forma 4.11 3.61 3.15
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively; exercise price
of $64.7661, $48.8219 and $38.2783; dividend yield of 1.220%, 1.492% and 1.937%;
expected volatility of .2070, .2110 and .2787; risk-free interest rate of 5.80%,
5.96% and 5.97%; and expected option term of 5.72, 5.52 and 5.52 years.
A summary of the company's stock option plan as of December 31, 1997, 1996 and
1995, and changes during the years ending on those dates, is presented below:
1997
-----------------------------
Weighted
Number Avg. Price
Options of Shares per Share
- ---------------------------------------------------------------------------
Outstanding at beginning of year 4,049,879 $31.7892
Granted 449,274 64.7661
Exercised 430,314 57.3585
Expired or canceled 34,909 34.5547
- ---------------------------------------------------------------------------
Outstanding at year-end 4,033,930 $37.0004
- ---------------------------------------------------------------------------
Exercisable at year-end 2,450,080 $26.9218
- ---------------------------------------------------------------------------
Weighted-average fair value
per share of options granted
during the year $18.38
(32)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996
-----------------------------
Weighted
Number Avg. Price
Options of Shares per Share
- ---------------------------------------------------------------------------
Outstanding at beginning of year 4,529,632 $24.0847
Granted 672,481 48.8219
Exercised 1,105,561 41.1025
Expired or canceled 46,673 29.6053
- ---------------------------------------------------------------------------
Outstanding at year-end 4,049,879 $31.7892
- ---------------------------------------------------------------------------
Exercisable at year-end 2,512,278 $24.9806
- ---------------------------------------------------------------------------
Weighted-average fair value
per share of options granted
during the year $14.09
1995
-----------------------------
Weighted
Number Avg. Price
Options of Shares per Share
- ---------------------------------------------------------------------------
Outstanding at beginning of year 5,064,871 $21.8212
Granted 297,684 38.2783
Exercised 764,494 34.4789
Expired or canceled 68,429 29.3345
- ---------------------------------------------------------------------------
Outstanding at year-end 4,529,632 $24.0847
- ---------------------------------------------------------------------------
Exercisable at year-end 3,250,307 $20.7039
- ---------------------------------------------------------------------------
Weighted-average fair value
per share of options granted
during the year $11.80
The following table summarizes information about the plan's stock options at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted-Average
Number Remaining Number
Range of Outstanding Contractual Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/97 Life in Years Exercise Price at 12/31/97 Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.2500 to $25.0000 773,661 2.87 $17.9339 773,661 $17.9339
$25.0630 to $30.0630 1,568,918 5.62 27.8143 1,175,798 28.0060
$34.5000 to $72.7260 1,691,351 8.27 54.2430 500,621 38.2654
- ----------------------------------------------------------------------------------------------------------
Total 4,033,930 6.20 $37.0004 2,450,080 $26.9218
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(33)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SHAREHOLDERS' RIGHTS PLAN
- ------------------------------
In December 1991, the Board of Directors of the company declared a dividend
distribution of one preferred share purchase right (a Right) for each
outstanding share of the company's common stock. Each Right entitles its holder
to purchase from the company one one-hundredth of a share of the company's
Junior Participating Cumulative Preferred Shares at a price of $160, subject to
certain adjustments. Initially, the Rights are attached to the common stock and
will not be transferable separately nor become exercisable until the earlier to
occur of (i) ten business days following the date of the public announcement by
the company (the Shares Acquisition Date) that a person or group of persons has
acquired or obtained the right to acquire beneficial ownership of 10% or more of
the outstanding shares of the company's common stock and (ii) ten business days
(or later as may be determined by the Board of Directors) after the announcement
or commencement of a tender offer or exchange offer which, if successful, would
result in the bidder owning 10% or more of the outstanding shares of the
company's common stock. However, no person shall be deemed to have acquired or
obtained the right to acquire the beneficial ownership of 10% or more of the
outstanding shares of the company's common stock, if the Board of Directors
determines that such acquisition is inadvertent, and such person promptly
divests itself of a sufficient number of shares to be below the 10% ownership
threshold.
If the acquiring person or group acquires beneficial ownership of 10% or more
of the company's common stock (except pursuant to a tender or exchange offer for
all outstanding common stock of the company, determined by the company's
independent directors to be at a fair price and in the best interests of the
company and its shareholders), each holder of a Right (other than the acquirer)
will be entitled to purchase, for $160, that number of shares of common stock of
the company having a fair value of $320. Similarly, if after an acquiring person
or group so acquires 10% or more of the company's common stock, the company is
acquired in a merger or other business combination and is not the surviving
entity, or its common stock is changed or exchanged in whole or in part, or 50%
or more of the company's assets, cash flow or earning power is sold, each holder
of a Right (other than the acquirer) will be entitled to purchase, for $160,
that number of shares of common stock of the acquiring company having a fair
value of $320. The Board of Directors may redeem the Rights in whole at $.01 per
Right at any time prior to ten business days following the Shares Acquisition
Date. Further, at any time after a person or group acquires 10% or more, but
less than 50%, of the company's common stock, the Board of Directors of the
company may exchange the Rights (other than those held by the acquirer) in whole
or in part, at an exchange ratio of one share of common stock per Right. The
Board of Directors may also amend the Rights at any time prior to the Shares
Acquisition Date. The Rights will expire on December 12, 2001, unless earlier
redeemed or exchanged.
(34)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. RELATED PARTY TRANSACTIONS
- -------------------------------
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association which had their Standard & Poor's
Corporation claims-paying rating downgraded from Triple-A on their previously
issued Association policies. In the event that they do not meet their
Association policy payment obligations, MBIA Corp. will pay the required amounts
directly to the paying agent. The aggregate outstanding exposure on these surety
bonds as of December 31, 1997 is $340 million.
In 1995, the company sold 78,000 shares of Credit Local de France, a former
major shareholder. Realized gains from the sale amounted to $3.5 million.
The company had investment management and advisory agreements with an
affiliate of a former principal shareholder, which provided for payment of fees
on assets under management. Total related expenses for the year ended December
31, 1995 amounted to $2.5 million. These agreements were terminated on January
1, 1996, at which time CMC assumed full management of MBIA Corp.'s consolidated
investment portfolios.
The company has various insurance coverages provided by a former principal
shareholder, the cost of which totaled $2.2 million, $2.1 million and $1.9
million, respectively, for the years ended December 31, 1997, 1996 and 1995.
MuniServices provides financing to Capital Asset under various borrowing
arrangements. The net balance outstanding under these agreements at December 31,
1997 and 1996 were $49.7 million and $15.7 million, respectively, including
accrued interest, and is included in other assets on the company's consolidated
balance sheet. Net interest earned under these agreements during 1997 and 1996
was $7.0 million and $2.1 million, respectively.
Certain officers of Dillon, Read & Co. Inc. are directors of CapMAC, and
receive no compensation from CapMAC. Dillon, Read & Co. Inc., which serves as
investment manager for Saratoga Partners II, a principal stockholder of CapMAC,
received an advisory retention fee of $0.2 million in 1995. Additionally, in
1995 Dillon, Read & Co. Inc. received advisory fees of $4.0 million from CapMAC
related to the offerings of its common stock.
20. PUBLIC OFFERINGS OF COMMON STOCK
- ------------------------------------
In July 1997, the company completed a public offering of 2,300,000 new shares of
the company's common stock. The company realized $126 million in new capital
from the offering. In February 1996, the company completed a public offering of
7,780,000 shares of the company's common stock. Of the shares offered, 6,240,000
were sold by an existing shareholder and 1,540,000 were new shares offered by
the company. The company realized $55 million in new capital from the offering.
In July 1996, CapMAC completed a public offering by some of its
stockholders of 3,737,500 shares (1,747,281 as restated subsequent to the merger
(35)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with MBIA Inc.) of common stock. CapMAC did not receive any proceeds from the
offering but incurred costs of $0.4 million.
In July 1995, CapMAC sold 500,001 shares (233,750 as restated) of common
stock to ORIX USA Corporation ("ORIX"), a subsidiary of ORIX Corporation, a
leading Japanese leasing company, resulting in $10 million in new capital.
In December 1995, CapMAC sold 2,500,000 new shares (1,168,775 as restated)
of its common stock in an initial public offering, resulting in $50 million of
new capital. In conjunction with the offering, CapMAC also sold 500,000 shares
(233,750 as restated) of common stock to Centre Reinsurance Limited, a wholly
owned subsidiary of The Zurich Insurance Company, in a private placement,
resulting in $10 million of new capital.
In June 1992, CapMAC granted 2,230,025 warrants (1,042,537 as restated) to
non-employee stockholders of CapMAC to purchase common stock. The warrants
expire in June 1999. During 1996, 551,390 warrants (257,775 as restated) were
exercised. The exercise of the warrants being cashless resulted in the issuance
of 321,758 shares (150,422 as restated) of common stock. During 1997, CapMAC
exercised its right to purchase all outstanding warrants for its common stock.
As a result, 94,789 warrants (44,314 as restated) were exercised for cash
resulting in the issuance of 94,789 shares (44,314 as restated) of common stock,
and 1,583,846 warrants (740,448 as restated) were exercised on a cashless basis
resulting in the issuance of 810,371 shares (378,848 as restated) of common
stock.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------
The estimated fair value amounts of financial instruments shown in the following
table have been determined by the company using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount the company could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
Fixed-maturity securities - The fair value of fixed-maturity securities is based
upon quoted market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Short-term investments - Short-term investments are carried at amortized cost
which approximates fair value.
(36)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other investments - Other investments include the company's interest in a
limited partnership and a mutual fund that invests principally in marketable
equity securities. The fair value of these investments is based on quoted market
prices.
Municipal investment agreement portfolio - The municipal investment agreement
portfolio is comprised of fixed-maturity securities and short-term investments.
Its fair value equals the quoted market prices, if available, of its
fixed-maturities plus the amortized cost of its short-term investments which,
because of their short duration, is a reasonable estimate of fair value. If a
quoted market price is not available for a fixed-maturity security, fair value
is estimated using quoted market prices for similar securities.
Cash and cash equivalents, receivable for investments sold, short-term debt, and
payable for investments purchased - The carrying amounts of these items are a
reasonable estimate of their fair value.
Securities borrowed or purchased under agreements to resell - The fair value is
estimated based upon the quoted market prices of the transactions' underlying
collateral.
Prepaid reinsurance premiums - The fair value of the company's prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third-party reinsurers under current
market conditions.
Deferred premium revenue - The fair value of the company's deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third-party reinsurers under current market conditions.
Loss and loss adjustment expense reserves - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
Long-term debt - The fair value is estimated based on the quoted market prices
for the same or similar securities.
Municipal investment agreements and municipal repurchase agreements - The fair
values of municipal investment agreements and municipal repurchase agreements
are estimated using discounted cash flow calculations based upon interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued.
Securities loaned or sold under agreements to repurchase - The fair value is
estimated based upon the quoted market prices of the transactions' underlying
collateral.
(37)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Installment premiums - The fair value is derived by calculating the present
value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1997 As of December 31, 1996
------------------------ ------------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------
ASSETS:
Fixed-maturity securities $5,211,311 $5,211,311 $4,455,122 $4,455,122
Short-term investments 303,898 303,898 209,840 209,840
Other investments 51,693 51,693 49,737 49,737
Municipal investment
agreement portfolio 3,341,394 3,341,394 3,293,298 3,293,298
Cash and cash equivalents 26,296 26,296 10,266 10,266
Securities borrowed
or purchased under
agreements to resell 472,963 473,841 217,000 219,718
Prepaid reinsurance
premiums 289,508 245,613 235,335 203,095
Receivable for
investments sold 13,435 13,435 980 980
LIABILITIES:
Deferred premium revenue 2,090,460 1,795,890 1,854,137 1,596,497
Loss and loss adjustment
expense reserves 103,061 103,061 70,299 70,299
Municipal investment
agreements 1,974,165 2,024,230 2,290,609 2,297,272
Municipal repurchase
agreements 1,177,022 1,214,641 968,671 982,410
Long-term debt 488,878 536,871 389,010 417,976
Short-term debt 20,000 20,000 29,100 29,100
Securities loaned or sold
under agreements to
repurchase 606,263 607,304 217,000 221,575
Payable for investments
purchased 44,007 44,007 52,029 52,029
OFF-BALANCE SHEET
INSTRUMENTS:
Installment premiums --- 536,929 --- 442,986
22. SUBSEQUENT EVENT
- ---------------------
On July 21, 1998, MBIA Inc. announced that it expects that the company's
unallocated loss reserve will be sufficient to meet anticipated losses arising
from the bankruptcy filing of Delaware Valley Obligated Group (DVOG). As a
(38)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
result, the company does not expect losses from this insured credit to affect
its earnings. MBIA has insured $256 million of net par outstanding of DVOG, an
entity comprising five hospitals and a medical university in the Philadelphia
area that is part of Allegheny Health, Education and Research Foundation (AHERF)
based in Pittsburgh, Pa. AHERF has announced that DVOG will be part of a
bankruptcy reorganization filing. As of December 31, 1997, the company's
unallocated case reserve was $78 million.
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------------
A summary of selected quarterly income statement information follows:
In thousands except per share amounts
1997 First Second Third Fourth Year
- ------------------------------------------------------------------------------
Gross premiums written $108,807 $184,043 $146,941 $212,099 $651,890
Net premiums written 98,479 154,937 123,309 158,639 535,364
Premiums earned 83,380 85,452 87,687 93,018 349,537
Investment income and
realized gains and losses 76,056 75,647 83,536 86,495 321,734
All other revenues 18,754 19,179 24,093 30,472 92,498
Income before income taxes 124,358 126,224 137,194 137,476 525,252
Net income $ 98,474 $ 98,175 $106,552 $102,409 $405,610
- ------------------------------------------------------------------------------
Net income per common share:
Basic $ 1.03 $ 1.02 $ 1.09 $ 1.04 $ 4.18
Diluted $ 1.01 $ 1.01 $ 1.07 $ 1.03 $ 4.12
- ------------------------------------------------------------------------------
1996 First Second Third Fourth Year
- -------------------------------------------------------------------------------
Gross premiums written $135,628 $152,773 $ 97,124 $147,988 $533,513
Net premiums written 119,003 135,756 83,959 124,839 463,557
Premiums earned 69,180 72,054 74,581 76,454 292,269
Investment income and
realized gains and losses 67,018 69,161 72,063 69,733 277,975
All other revenues 14,448 16,542 13,852 15,741 60,583
Income before income taxes 110,346 111,940 115,065 111,064 448,415
Net income $ 84,511 $ 86,960 $ 89,610 $ 86,655 $347,736
- ------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.90 $ 0.92 $ 0.95 $ 0.91 $ 3.68
Diluted $ 0.89 $ 0.91 $ 0.93 $ 0.89 $ 3.62
- ------------------------------------------------------------------------------
(39)
<PAGE>
EXHIBIT 99.02
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for the
Company for the periods indicated. Earnings represent consolidated earnings
before income taxes and fixed charges. Fixed charges consist of interest and
that portion of rental expense deemed representative of the interest factor for
such rental expense. The Company had no capitalized interest for the periods
presented.
Six Months
Ended
Years Ended December 31, June 30,
------------------------ ----------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ----- ----
Ratio of earnings to fixed charges(1).. 12.8 12.9 13.3 13.6 14.2 14.5 14.2
- ---------------
(1) Fixed charges do not include the amount of fixed charges associated with
obligations insured by MBIA Corp. All data retroactively adjusted to reflect
the mergers with CapMAC and 1838.
<PAGE>
EXHIBIT 99.03
MBIA INC AND SUBSIDIARIES (1)
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT FOR RATIOS)
THE INFORMATION APPEARING BELOW PRESENTS HISTORICAL CONSOLIDATED FINANCIAL
RESULTS FOR THE COMPANY.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31 ENDED JUNE 30
----------------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
----------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS
Operating income before taxes $339,790 $347,315 $375,009 $448,415 $525,252 $250,582 $289,140
Interest expense 28,103 28,362 29,642 34,665 38,653 17,913 21,090
Portion of rentals
deemed to be interest 765 867 869 886 1,200 591 742
----------------------------------------------------------------- -------------------
EARNINGS $368,658 $376,544 $405,520 $483,966 $565,105 $269,086 $310,972
================================================================= ===================
FIXED CHARGES
Interest expense $ 28,103 $ 28,362 $ 29,642 $ 34,665 $ 38,653 $ 17,913 $ 21,090
Portion of rentals
deemed to be interest 765 867 869 886 1,200 591 742
----------------------------------------------------------------- -------------------
FIXED CHARGES $ 28,868 $ 29,229 $ 30,511 $ 35,551 $ 39,853 $ 18,504 $ 21,832
================================================================= ===================
RATIO OF EARNINGS TO FIXED CHARGES 12.8 12.9 13.3 13.6 14.2 14.5 14.2
================================================================= ===================
</TABLE>
(1) Includes merged company results (MBIA Inc, CapMAC Holdings Inc. &
1838 Investment Advisors)
<PAGE>
EXHIBIT 99.04
[Debevoise & Plimpton Letterhead]
September 23, 1998
MBIA Inc.
113 King Street
Armonk, New York 10504
MBIA Inc.
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to MBIA Inc., a Connecticut
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "1933 Act"), of a Registration Statement on Form S-
3 (the "Registration Statement"), and the prospectus included therein (the
"Prospectus"), relating to the registration by the Company of $350,000,000 in
the aggregate of (i) debt securities representing unsecured obligations of the
-
Company (the "Senior Debt Securities") to be issued pursuant to the Senior
Indenture, dated as of August 1, 1990, (the "Senior Indenture"), between the Com
pany and The First National Bank of Chicago, as trustee (the "Senior Trustee")
and subordinated debt securities ("Subordinated Debt Securities" and, together
with the Senior Debt Securities, the "Debt Securities") to be issued pursuant to
a Subordinated Indenture, (the "Subordinated Indenture") between the Company and
a trustee to be named in a prospectus supplement relating to the Subordinated
Debt Securities (the "Subordinated Trustee"), (ii) shares of preferred stock of
--
the Company, par value $1.00 per share ("Preferred Stock"), (iii) shares of
---
common stock of the Company, par value
<PAGE>
2
MBIA Inc. September 23, 1998
$1.00 per share ("Common Stock"), and the rights to purchase Junior
Participating Cumulative Preferred Stock of the Company, par value $1.00 per
share, or in certain circumstances either Common Stock or the common stock of
any acquiring company, related to the Common Stock (the "Rights") to be issued
pursuant to the Rights Agree ment, dated December 12, 1991 (the "Rights
Agreement"), between the Company and Mellon Bank, N.A., as Rights Agent, (iv)
--
such indeterminate number of shares of Common Stock as may be issuable in
exchange for or upon conversion of any Subordinated Debt Securities or Preferred
Stock that provide for conversion or exchange into Common Stock, and the Rights
relating thereto, and (v) such indeterminate number of shares of-Preferred Stock
-
as may be issuable in exchange for or upon conversion of any Subordinated Debt
Securities that provide for conversion or exchange into Preferred Stock.
In so acting, we have examined and relied upon the originals, or
copies certified or otherwise identified to our satisfaction, of such records,
documents, certificates and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below. Our opinion
assumes that the definitive Subordinated Indenture will be in substantially the
form filed as an Exhibit to the Registration Statement.
In rendering the opinion set forth in paragraph 1 below, we have
assumed the corporate authority of the Senior Indenture Trustee to enter into
and perform the Senior Indenture. In rendering the opinion set forth in
paragraph 2 below, we have assumed the corporate authority of the Subordinated
Indenture Trustee to enter into and perform the Subordinated Indenture.
Based upon the foregoing, we are of the following opinion:
1. The Senior Indenture has been duly authorized, executed and
delivered by the Company. Assuming the Senior Indenture has been duly
authorized, executed and delivered by the Senior Trustee, when the Senior Debt
Securities have been duly authorized by all necessary corporate action of the
Company and duly executed, authenticated, issued, delivered and paid for as
contemplated by the Registration Statement and any prospectus supplement
relating to the Senior Debt Securities and in accordance with the Senior
Indenture, assuming the terms of such Debt Securities have been duly established
so as not to violate any applicable law or result in a default under or breach
of any agreement or instrument binding upon the Company and so as to comply with
any requirement or restriction imposed by any court or governmental body having
jurisdiction over the Company, the Senior Debt Securities will be validly issued
and will constitute valid and binding obligations of the Company enforceable
against the
<PAGE>
3
MBIA Inc. September 23, 1998
Company in accordance with their terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws of general ap
plicability relating to or affecting the rights of creditors and by general
principles of equity (whether considered in a proceeding at law or in equity).
2. When the Subordinated Indenture has been duly authorized, executed
and delivered by the Company and the Subordinated Trustee, and the Subordinated
Debt Securities have been duly authorized by all necessary corporate action of
the Company and duly executed, authenticated, issued, delivered and paid for as
contemplated by the Registration Statement and any prospectus supplement
relating to the Subordinated Debt Securities and in accordance with the
Subordinated Indenture, assuming the terms of such Subordinated Debt Securities
have been duly established so as not to violate any applicable law or result in
a default under or breach of any agreement or instrument binding upon the
Company and so as to comply with any requirement or restriction imposed by any
court or governmental body having jurisdiction over the Company,
(i) the Subordinated Debt Securities will be validly issued and will
constitute valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws of general applicability relating to or affecting the rights of
creditors and by general principles of equity (whether considered in a
proceeding at law or in equity); and
(ii) if the Subordinated Debt Securities are exchangeable for or
convertible into Common Stock or Preferred Stock, as the case may be, (a)
-
when such Common Stock has been duly issued in exchange for or upon
conversion of such Subordinated Debt Securities in accordance with the
terms of the Subordinated Indenture and the supplemental indenture thereto
fixing the terms for such exchange or conversion, such Common Stock will be
duly authorized, validly issued, fully paid and nonassessable, assuming
authorization of sufficient number of shares of Common Stock in the
Company's Restated Certificate of Incorporation, as amended to date, and
issuance of such Common Stock in accordance with duly adopted resolutions
of the Board of Directors of the Company or a duly authorized committee
thereof authorizing the issuance of such Common Stock and fixing the terms
of such exchange or conversion, and (b) when (1) the terms of such
- -
Preferred Stock and of its issuance and sale have been duly established in
conformity with the Company's Restated Certificate of Incorporation, as
amended to date, so as not to violate any applicable law or result in a
default under or breach of any agreement or instrument binding upon the
Company and so as to comply with any requirement or restriction imposed by
any court or governmental body having jurisdiction over the Company, (2) a
-
<PAGE>
4
MBIA Inc. September 23, 1998
certificate of amendment to the Company's Restated Certificate of
Incorporation (a "Certificate of Amendment") fixing and determining the
terms of the Preferred Stock has been filed with the Secretary of State of
the State of Connecticut and (3) the Preferred Stock has been duly issued
-
in exchange for or upon conversion of such Subordinated Debt Securities in
accordance with the terms of the Subordinated Indenture and the
supplemental indenture thereto fixing the terms for such exchange or
conversion, such Preferred Stock will be duly authorized, validly issued,
fully paid and nonassessable, assuming authorization of sufficient number
of shares of Preferred Stock in the Company's Restated Certificate of
Incorporation, as amended to date, and issuance of such Preferred Stock in
accordance with duly adopted resolutions of the Board of Directors of the
Company or a duly authorized committee thereof authorizing the issuance of
such Preferred Stock and fixing the terms of such exchange or conversion.
3. When (i) the terms of the Preferred Stock and of its issuance and
-
sale have been duly established in conformity with the Company's Restated
Certificate of In corporation, as amended, so as not to violate any applicable
law or result in a default under or breach of any agreement or instrument
binding upon the Company and so as to comply with any requirement or restriction
imposed by any court or governmental body having jurisdiction over the Company,
(ii) a Certificate of Amendment fixing and determining the terms of the
--
Preferred Stock has been filed with the Secretary of State of the State of
Connecticut and (iii) the Preferred Stock has been duly issued and sold as
---
contemplated by the Registration Statement and any prospectus supplement
relating thereto, against payment of the consideration fixed therefor by the
Board of Directors or a duly authorized committee thereof,
(a) the Preferred Stock will be duly authorized, validly issued,
fully paid and nonassessable, assuming authorization of sufficient number
of shares of Preferred Stock in the Company's Restated Certificate of
Incorporation, as amended to date, and issuance of such Preferred Stock in
accordance with duly adopted resolutions of the Board of Directors of the
Company or a duly authorized committee thereof authorizing the issuance of
such Preferred Stock; and
(b) if the Preferred Stock is exchangeable for or convertible into
Common Stock, when such Common Stock has been duly issued in exchange for
or upon conversion of such Preferred Stock in accordance with the terms of
the Certificate of Designation for such Preferred Stock, such Common Stock
will be duly authorized, validly issued, fully paid and nonassessable,
assuming authorization of sufficient number of shares of Common Stock in
the Company's Restated Certificate of Incorporation, as amended to date,
and issuance of such Common Stock in accordance with duly adopted
resolutions of the Board of Directors of the
<PAGE>
5
MBIA Inc. September 23, 1998
Company or a duly authorized committee thereof authorizing the issuance of
such Common Stock and fixing the terms of such exchange or conversion.
4. When the Common Stock has been duly issued and sold as
contemplated by the Registration Statement and any prospectus supplement
relating to the Common Stock, assuming authorization of the issuance of such
Common Stock, and receipt of payment of the consideration fixed therefor, by the
Board of Directors of the Company or a duly authorized committee thereof, the
Common Stock will be validly issued, fully paid and nonassessable.
5. Assuming the Rights Agreement has been duly authorized, executed
and delivered by the Rights Agent and the Common Stock has been validly issued
(i) against payment of the consideration fixed therefor by the Board of
-
Directors of the Company or a duly authorized committee thereof or (ii) in
--
exchange for or upon conversion of any Preferred Stock or Debt Securities in
accordance with the terms of exchange or conversion fixed for such Preferred
Stock or Debt Securities, the Rights attributable to such Common Stock will be
validly issued.
In connection with our opinion set forth in paragraph (5) above, we
note that the question whether the Board of Directors of the Company might be
required to redeem the Rights at some future time will depend upon the facts and
circumstances existing at the time and, accordingly, is beyond the scope of such
opinion.
To the extent the foregoing opinions involve matters of Connecticut
law, we have relied on the opinion of Day, Berry & Howard LLP, Connecticut
counsel for the Company, dated today and addressed to you, and this opinion
incorporates all of the assumptions and qualifications set forth in that
opinion.
Our opinion expressed above is limited to the laws of the State of New
York and the federal laws of the United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus. In giving such consent, we do not thereby concede
that we are within the category of persons whose consent is required under
Section 7 of the 1933 Act or the Rules and Regulations of the Commission
thereunder.
Very truly yours,
<PAGE>
EXHIBIT 99.05
[Day, Berry & Howard LLP Letterhead]
September 23, 1998
MBIA Inc.
113 King Street
Armonk, New York 10504
Re: MBIA Inc.
Registration Statement on Form S-3
Registration Statement No. 333-60039
Dear Ladies and Gentlemen:
We have acted as special Connecticut counsel to MBIA Inc., a Connecticut
corporation (the "Company"), as to certain matters of Connecticut law in
connection with the preparation and filing with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"1933 Act"), of a Registration Statement on Form S-3 (the "Registration
Statement"), and the prospectus included therein (the "Prospectus"), relating to
the registration by the Company of $350,000,000 in the aggregate of (i) debt
securities representing unsecured obligations of the Company (the "Senior Debt
Securities") to be issued pursuant to the Senior Indenture, dated as of August
1, 1990, as supplemented from time to time (the "Senior Indenture"), between the
Company and The First National Bank of Chicago, as trustee (the "Senior
Indenture Trustee") and subordinated debt securities ("Subordinated Debt
Securities" and, together with the Senior Debt Securities, the "Debt
Securities") to be issued pursuant to a Subordinated Indenture, as supplemented
from time to time (the "Subordinated Indenture"), between the Company and a
trustee to be named in a prospectus supplement relating to the Subordinated Debt
Securities (the "Subordinated Indenture Trustee"), (ii) shares of preferred
stock of the Company, par value $1.00 per share ("Preferred Stock"), (iii)
shares of common stock of the Company, par value $1.00 per share ("Common
Stock"), and the rights to purchase Junior Participating Cumulative Preferred
Stock of the Company, par value $1.00 per share, or, in certain circumstances,
either Common Stock or the common stock of an acquiring company (the "Rights"),
to be issued pursuant to the Rights Agreement, dated as of December 12, 1991
(the "Rights Agreement"), between the Company and Mellon Bank, N.A., as Rights
Agent, (iv) such indeterminate number of shares of Common Stock as may be
issuable in exchange for or upon conversion of any
<PAGE>
MBIA Inc.
September 23, 1998
Page 2
Subordinated Debt Securities or Preferred Stock that provides for conversion or
exchange into Common Stock, and the Rights relating thereto, and (v) such
indeterminate number of shares of Preferred Stock as may be issuable in exchange
for or upon conversion of any Subordinated Debt Securities that provide for
conversion or exchange into Preferred Stock.
We have examined the Company's Restated Certificate of Incorporation, as
amended to date, the Company's By-Laws, as amended to date, the Rights
Agreement, records of the corporate proceedings of the Board of Directors of the
Company with respect to the Debt Securities, the Preferred Stock, the Common
Stock, the Rights, the Senior Indenture, the Subordinated Indenture, the
Registration Statement and the offering contemplated thereby and such other
documents, and have made such examination of law, as we have deemed relevant and
necessary in order to render our opinion expressed below.
We have also examined and relied upon the Senior Indenture and form of the
Subordinated Indenture filed as Exhibits to the Registration Statement. The
governing law of each of these Indentures is expressly stated to be that of the
State of New York. For purposes of the opinion set forth below, we have assumed
that the Senior Indenture, the Subordinated Indenture and the Debt Securities,
when duly issued, will constitute legal, valid and binding obligations of the
Company under the laws of the State of New York (as to which we express no
opinion). Our opinion assumes that the definitive Subordinated Indenture will
be in substantially the form filed as an Exhibit to the Registration Statement.
In rendering the opinion set forth in paragraph 1 below, we have assumed
the corporate authority of the Senior Indenture Trustee to enter into and
perform the Senior Indenture. In rendering the opinion set forth in paragraph 2
below, we have assumed the corporate authority of the Subordinated Indenture
Trustee to enter into and perform the Subordinated Indenture.
We have also noted that other large publicly held corporations chartered in
Connecticut have adopted rights agreements and issued rights similar to the
Rights Agreement and the Rights. In addition, we have noted that the Rights
would operate in a way similar to rights issued by numerous other corporations
incorporated in Connecticut and in other states.
For purposes of this opinion, we have assumed that the Board of Directors
of the Company, after fully informing itself with respect to the Rights
Agreement and the Rights and after giving due consideration to all relevant
matters, determined that the execution
<PAGE>
MBIA Inc.
September 23, 1998
Page 3
and delivery of the Rights Agreement and the issuance of the Rights thereunder
would be in the best interests of the Company and its shareholders, that such
action by the Board of Directors was not contrary to its fiduciary obligations
and that the Rights Agreement has been duly authorized, executed and delivered
by the Rights Agent.
The Connecticut Business Corporation Act (the "Act") provides a board of
directors with broad authority and empowers a Connecticut corporation to issue
rights, options or warrants for the purchase of shares of the corporation on
such terms, with such form and content, and for such consideration as the board
of directors may determine. Sections 33-665(a) and 33-666(c) of the Act provide
that all shares of a class or series of stock shall have preferences,
limitations and relative rights identical with those of other shares of the same
class (except to the extent otherwise provided in the description of the series)
or series.
A number of courts construing similar provisions of the corporation laws of
states other than Connecticut have upheld the issuance of rights substantially
similar to the Rights. On the other hand, a number of courts construing similar
provisions of the corporation laws of other states have invalidated rights
similar to the Rights on the basis that the provisions pursuant to which rights
held by certain persons could become void violated the requirements that shares
of the same class and series be identical. Courts sustaining the issuance of
rights have distinguished between discrimination among shares and discrimination
among shareholders, and determined that the relevant statutory authority does
not prohibit the latter form of discrimination. The Act requires in effect that
all shares of the same class and series be identical, with specified exceptions.
However, the Act does not say whether this requirement applies to provisions of
rights that have been issued in respect of shares of a particular class or to
shareholders or holders of rights who take specified actions resulting in those
rights becoming void. There is no published judicial decision interpreting
Sections 33-665(a) and 33-666(c) or other provisions of the Act in the context
of the issuance of rights similar to the Rights.
We also note that the Connecticut legislature has added provisions to the
Act which evidence concern for fair treatment of shareholders and other
constituencies in light of the prevalence of abusive takeover tactics. These
enactments indicate public policy support for the objectives which the Rights
are designed to further, which we think would be persuasive to a court faced
with a case questioning the validity of the Rights.
The opinion set forth below with respect to the Rights is limited to the
authorization of the Rights Agreement by the Board and the issue of Rights
pursuant to the Rights Agreement, and does not extend to any subsequent action
or inaction by the Board with respect to the Rights Agreement, including any
decision relating to
<PAGE>
MBIA Inc.
September 23, 1998
Page 4
redemption of the Rights or amendment of the Rights Agreement, which would need
to be evaluated in light of all relevant facts, circumstances and legal
precedents applicable at that time.
Based on the foregoing, we are of the following opinion:
1. The Senior Indenture has been duly authorized, executed and delivered
by the Company. Assuming the Senior Indenture has been duly authorized,
executed and delivered by the Senior Indenture Trustee, when the Senior Debt
Securities have been duly authorized by all necessary corporate action of the
Company and duly executed, authenticated, issued, delivered and paid for as
contemplated by the Registration Statement and any prospectus supplement
relating to the Senior Debt Securities and in accordance with the Senior
Indenture, assuming the terms of such Debt Securities have been duly established
so as not to violate any applicable law or result in a default under or breach
of any agreement or instrument binding upon the Company and so as to comply with
any requirement or restriction imposed by any court or governmental body having
jurisdiction over the Company, the Senior Debt Securities will be validly issued
and will constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of
general applicability relating to or affecting the rights of creditors and by
general principles of equity.
2. When the Subordinated Indenture has been duly authorized, executed and
delivered by the Company and the Subordinated Indenture Trustee, and the
Subordinated Debt Securities have been duly authorized by all necessary
corporate action of the Company and duly executed, authenticated, issued,
delivered and paid for as contemplated by the Registration Statement and any
prospectus supplement relating to the Subordinated Debt Securities and in
accordance with the Subordinated Indenture, assuming the terms of such
Subordinated Debt Securities have been duly established so as not to violate any
applicable law or result in a default under or breach of any agreement or
instrument binding upon the Company and so as to comply with any requirement or
restriction imposed by any court or governmental body having jurisdiction over
the Company,
(i) the Subordinated Debt Securities will be validly issued and will
constitute valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
<PAGE>
MBIA Inc.
September 23, 1998
Page 5
or similar laws of general applicability relating to or affecting the
rights of creditors and by general principles of equity; and
(ii) if the Subordinated Debt Securities are exchangeable for or
convertible into Common Stock or Preferred Stock, as the case may be, (a)
when such Common Stock has been duly issued in exchange for or upon
conversion of such Subordinated Debt Securities in accordance with the
terms of the Subordinated Indenture and the supplemental indenture thereto
fixing the terms for such exchange or conversion, such Common Stock will be
duly authorized, validly issued, fully paid and nonassessable, assuming
authorization of sufficient number of shares of Common Stock in the
Company's Restated Certificate of Incorporation, as amended to date, and
issuance of such Common Stock in accordance with duly adopted resolutions
of the Board of Directors of the Company or a duly authorized committee
thereof authorizing the issuance of such Common Stock and fixing the
terms of such exchange or conversion, and (b) when (1) the terms of such
Preferred Stock and of its issuance and sale have been duly established in
conformity with the Company's Restated Certificate of Incorporation, as
amended, so as not to violate any applicable law or result in a default
under or breach of any agreement or instrument binding upon the Company and
so as to comply with any requirement or restriction imposed by any court or
governmental body having jurisdiction over the Company, (2) a certificate
of amendment to the Company's Restated Certificate of Incorporation, as
amended (a "Certificate of Amendment"), fixing and determining the terms of
the Preferred Stock has been filed with the Secretary of the State of the
State of Connecticut and (3) the Preferred Stock has been duly issued in
exchange for or upon conversion of such Subordinated Debt Securities in
accordance with the terms of the Subordinated Indenture and the
supplemental indenture thereto fixing the terms for such exchange or
conversion, such Preferred Stock will be duly authorized, validly issued,
fully paid and nonassessable, assuming authorization of sufficient number
of shares of Preferred Stock in the Company's Restated Certificate of
Incorporation, as amended to date, and issuance of such Preferred Stock in
accordance with duly adopted resolutions of the Board of Directors of the
Company or a duly authorized committee thereof authorizing the issuance of
such of Preferred Stock and fixing the terms of such exchange or
conversion.
<PAGE>
MBIA Inc.
September 23, 1998
Page 6
3. When (i) the terms of the Preferred Stock and of its issuance and sale
have been duly established in conformity with the Company's Restated Certificate
of Incorporation, as amended, so as not to violate any applicable law or result
in a default under or breach of any agreement or instrument binding upon the
Company and so as to comply with any requirement or restriction imposed by any
court or governmental body having jurisdiction over the Company, (ii) a
Certificate of Amendment fixing and determining the terms of the Preferred Stock
has been filed with the Secretary of the State of the State of Connecticut and
(iii) the Preferred Stock has been duly issued and sold as contemplated by the
Registration Statement and any prospectus supplement relating thereto, against
payment of the consideration fixed therefor by the Board of Directors or a duly
authorized committee thereof,
(a) the Preferred Stock will be duly authorized, validly issued, fully
paid and nonassessable, assuming authorization of sufficient number of
shares of Preferred Stock in the Company's Restated Certificate of
Incorporation, as amended to date, and issuance of such Preferred
Stock in accordance with duly adopted resolutions of the Board of
Directors of the Company or a duly authorized committee thereof
authorizing the issuance of such Preferred Stock; and
(b) if the Preferred Stock is exchangeable for or convertible into Common
Stock, when such Common Stock has been duly issued in exchange for or
upon conversion of such Preferred Stock in accordance with the terms
of the Certificate of Amendment for such Preferred Stock, such Common
Stock will be duly authorized, validly issued, fully paid and
nonassessable, assuming authorization of sufficient number of shares
of Common Stock in the Company's Restated Certificate of
Incorporation, as amended to date, and issuance of such Common Stock
in accordance with duly adopted resolutions of the Board of Directors
of the Company or a duly authorized committee thereof authorizing the
issuance of such Common Stock and fixing the terms of such exchange
or conversion.
4. When the Common Stock has been duly issued and sold as contemplated by
the Registration Statement and any prospectus supplement relating to the Common
Stock, assuming authorization of sufficient number of shares of Common Stock in
the Company's Restated Certificate of Incorporation, as amended to date, and
authorization of the issuance of such Common Stock by, and receipt of payment of
the consideration fixed therefor by, the Board of Directors of the Company or a
duly authorized committee
<PAGE>
MBIA Inc.
September 23, 1998
Page 7
thereof, the Common Stock will be duly authorized, validly issued, fully paid
and nonassessable.
5. Assuming the Rights Agreement has been duly authorized, executed and
delivered by the Rights Agent and the Common Stock has been validly issued (i)
against payment of the consideration fixed therefor by the Board of Directors of
the Company or a duly authorized committee thereof or (ii) in exchange for or
upon conversion of any Preferred Stock or Subordinated Debt Securities in
accordance with the terms of exchange or conversion fixed for such Preferred
Stock or Subordinated Debt Securities, although there is no Connecticut case law
or express statutory provision dispositive of the issue and the matter thus is
not entirely free from doubt, the Rights attributable to such Common Stock will
be validly issued.
In connection with our opinion set forth in paragraph 5 above, we note that
the question whether the Board of Directors of the Company might be required to
redeem the Rights at some future time will depend upon the facts and
circumstances existing at the time and, accordingly, is beyond the scope of such
opinion.
Our opinion expressed above is limited to the laws of the State of
Connecticut.
Messrs. Debevoise & Plimpton may rely upon this opinion as though it were
addressed to them on the date hereof.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters". In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Day, Berry & Howard LLP
Day, Berry & Howard LLP
WHC/LTW
