<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10777
AMBAC FINANCIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3621676
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE STATE STREET PLAZA
NEW YORK, NEW YORK 10004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 668-0340
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of September 30, 1997, 70,117,170 shares of Common Stock, par value
$0.01 per share, (net of 563,214 treasury shares) of the Registrant were
outstanding.
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996............................................................. 3
Consolidated Statements of Operations - three months and nine months
ended September 30, 1997 and September 30, 1996................................... 4
Consolidated Statements of Cash Flows - nine months
ended September 30, 1997 and September 30, 1996................................... 5
Notes to Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 7
PART II OTHER INFORMATION
Item 5. Other Information..................................................................... 21
Item 6. Exhibits and Reports on Form 8-K...................................................... 21
SIGNATURES..................................................................................... 22
INDEX TO EXHIBITS.............................................................................. 23
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
Assets
- ------
Investments:
Bonds, at fair value
(amortized cost of $5,805,053 in 1997 and $4,979,017 in 1996) $5,980,343 $5,088,031
Short-term investments, at cost (approximates fair value) 149,026 112,511
------------------ -----------------
Total investments 6,129,369 5,200,542
Cash 45 7,734
Securities purchased under agreements to resell 179,595 201,169
Receivable for municipal investment agreements 359,275 33,299
Receivable for securities sold 55,973 18,467
Investment income due and accrued 69,115 65,920
Deferred acquisition costs 103,922 94,212
Prepaid reinsurance 169,962 168,786
Loans 280,791 -
Other assets 64,662 85,836
------------------ -----------------
Total assets $7,412,709 $5,875,965
================== =================
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Unearned premiums $1,042,081 $ 991,224
Losses and loss adjustment expenses 61,087 60,220
Ceded reinsurance balances payable 4,544 7,438
Obligations under investment and payment agreements 3,270,407 2,417,817
Obligations under municipal investment repurchase agreements 645,892 336,773
Deferred income taxes 115,721 80,086
Current income taxes 11,743 6,538
Debentures 223,847 223,798
Accrued interest payable 46,821 29,958
Accounts payable and other liabilities 89,731 57,689
Payable for securities purchased 112,883 49,408
------------------ -----------------
Total liabilities 5,624,757 4,260,949
------------------ -----------------
Stockholders' equity:
Preferred stock - -
Common stock 707 353
Additional paid-in capital 499,825 498,401
Unrealized gains on investments, net of tax 95,828 58,911
Retained earnings 1,210,885 1,072,418
Cumulative translation adjustment (154) -
Common stock held in treasury at cost (19,139) (15,067)
------------------ -----------------
Total stockholders' equity 1,787,952 1,615,016
------------------ -----------------
Total liabilities and stockholders' equity $7,412,709 $5,875,965
================== =================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Periods Ended September 30,1997 and 1996
(Dollars in Thousands Except Common Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Guarantee Insurance operations:
Gross premiums written $ 52,371 $ 67,613 $ 177,903 $ 176,015
Ceded premiums written (6,495) (9,813) (19,122) (29,261)
------------ ------------ ------------ ------------
Net premiums written 45,876 57,800 158,781 146,754
Increase in unearned premiums (10,204) (24,055) (49,690) (45,171)
------------ ------------ ------------ ------------
Net premiums earned 35,672 33,745 109,091 101,583
Net investment income 40,109 36,887 117,814 107,212
Net realized gains (losses) 13,931 (5,381) 18,222 (25,125)
Other income 881 1,305 4,269 4,933
------------ ------------ ------------ ------------
Total Financial Guarantee revenues 90,593 66,556 249,396 188,603
------------ ------------ ------------ ------------
Losses and loss adjustment expenses 730 1,301 2,122 3,811
Underwriting and operating expenses 10,173 8,646 28,997 27,745
------------ ------------ ------------ ------------
Total Financial Guarantee expenses 10,903 9,947 31,119 31,556
------------ ------------ ------------ ------------
Financial Guarantee Insurance operating income 79,690 56,609 218,277 157,047
Financial Management Services operating income 4,380 965 3,377 8,577
Equity in income of affiliate - - - 627
Interest expense (5,391) (5,248) (15,935) (15,673)
Other income (deductions), net 998 2,359 3,402 3,278
Other net realized gains (40) - 748 155,613
------------ ------------ ------------ ------------
Income before income taxes 79,637 54,685 209,869 309,469
------------ ------------ ------------ ------------
Income tax expense (benefit):
Current taxes 10,746 9,994 32,495 89,907
Deferred taxes 8,096 863 13,228 (4,766)
------------ ------------ ------------ ------------
Total income taxes 18,842 10,857 45,723 85,141
------------ ------------ ------------ ------------
Net income $ 60,795 $ 43,828 $ 164,146 $ 224,328
============ ============ ============ ===========
Net income per common share $0.87 $0.63 $2.35 $3.21
============ ============ ============ ===========
Weighted average number of
common shares outstanding 70,108,341 69,811,116 69,984,344 69,916,612
============ ============ ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended September 30, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 164,146 $ 224,328
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,292 1,696
Amortization of bond premium and discount (1,881) (980)
Current income taxes 5,205 25,888
Deferred income taxes 13,364 (5,154)
Deferred acquisition costs (9,710) (7,402)
Unearned premiums, net 49,681 45,171
Losses and loss adjustment expenses 867 (5,826)
Ceded reinsurance balances payable (2,894) (3,374)
Investment income due and accrued (3,195) (6,510)
Accrued interest payable 16,863 14,852
Gain on sales of investments (20,118) (130,473)
Accounts payable and other liabilities 32,042 5,684
Other, net 13,196 (12,774)
------------ ------------
Net cash provided by operating activities 258,858 145,126
------------ ------------
Cash flows from investing activities:
Proceeds from sales of bonds 1,413,892 1,324,619
Proceeds from matured bonds 838,475 713,445
Purchases of bonds (3,035,714) (2,840,183)
Change in short-term investments (36,515) (2,563)
Securities purchased under agreements to resell 21,574 23,225
Proceeds from sale of affiliate - 202,609
Other, net (1,258) 3,424
------------ ------------
Net cash used in investing activities (799,546) (575,424)
------------ ------------
Cash flows from financing activities:
Dividends paid (17,871) (15,730)
Proceeds from issuance of municipal investment agreements 1,716,586 1,268,896
Payments for municipal investment agreement draws (1,161,644) (813,672)
Proceeds from sale of treasury stock 28,131 12,835
Purchases of treasury stock (32,203) (20,891)
------------ ------------
Net cash provided by financing activities 532,999 431,438
------------ ------------
Net cash flow (7,689) 1,140
Cash at January 1 7,734 12,167
------------ ------------
Cash at September 30 $45 $13,307
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $20,663 $59,401
============ ============
Interest expense on debt $18,460 $18,375
============ ============
Interest expense on municipal investment agreements $113,695 $96,540
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Ambac Financial Group, Inc., (the "Company") headquartered in New York
City, is a holding company that provides through its affiliates financial
guarantee insurance and financial management services to clients in both the
public and private sectors in the U.S. and abroad. The Company's principal
operating subsidiary, Ambac Assurance Corporation ("Ambac Assurance"), a leading
insurer of municipal and structured finance obligations, has been assigned
triple-A claims-paying ability ratings, the highest ratings available from
Moody's Investors Service, Inc., Standard & Poor's Ratings Group, Fitch
Investors Service, L.P. and Nippon Investors Service, Inc. Through its Financial
Management Services Division, the Company provides investment agreements,
interest rate swaps, investment advisory and cash management services, and
electronic commerce solutions, principally to states, municipalities and their
authorities, school districts, and hospitals and health organizations.
The Company's consolidated unaudited interim financial statements have
been prepared on the basis of generally accepted accounting principles ("GAAP")
and, in the opinion of management, reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company's
financial condition, results of operations and cash flows for the periods
presented. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported revenues
and expenses during the reporting period. Actual results could differ from those
estimates. The results of operations for the three months and nine months ended
September 30, 1997 may not be indicative of the results that may be expected
for the full year ending December 31, 1997. These consolidated financial
statements and notes should be read in conjunction with the financial statements
and notes included in the audited consolidated financial statements of Ambac
Financial Group, Inc. and its subsidiaries contained in (i) the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, which was filed
with the Securities and Exchange Commission (the "Commission") on March 31,
1997, (ii) the Company's Quarterly Report on Form 10-Q for the quarterly period
ended on March 31, 1997, which was filed with the Commission on May 15, 1997 and
(iii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, which was filed with the Commission on August 14, 1997.
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have been
eliminated.
Certain reclassifications have been made to prior periods' amounts to
conform to the current period's presentation.
All common stock data has been retroactively adjusted to reflect the two-
for-one stock split effective September 10, 1997.
6
<PAGE>
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(2) FUTURE IMPACT OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), entitled "Earnings Per
Share." SFAS 128 will replace the presentations of primary and fully diluted
earnings per share under current accounting standards with "basic earnings per
share" and "diluted earnings per share," respectively. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, whereas primary earnings per share includes the impact of assumed
conversion of common stock equivalents. Diluted earnings per share under SFAS
128 is generally similar to fully diluted earnings per share. For calendar year
enterprises, SFAS 128 must be adopted commencing with year end 1997 financial
statements, and will then apply retroactively to both annual and interim
periods, requiring the restatement of previously presented earnings per share
data. Earlier application of SFAS 128 is not permitted. Based on preliminary
calculations, the Company does not believe that earnings per share computed
under SFAS 128 would be materially different from the earnings per share data
presented herein.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following paragraphs describe the consolidated results of operations of
Ambac Financial Group, Inc. and its subsidiaries (sometimes collectively
referred to as the "Company") for the three and nine month periods ended
September 30, 1997 and 1996, and its financial condition as of September 30,
1997 and December 31, 1996. These results are presented for the Company's two
business segments: Financial Guarantee Insurance and Financial Management
Services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1996
CONSOLIDATED NET INCOME
The Company's net income for the three months ended September 30, 1997 was
$60.8 million or $0.87 per common share, an increase of 38% from $43.8 million
or $0.63 per common share in the three months ended September 30, 1996. This
increase in net income was attributable to higher operating income in both
business segments.
FINANCIAL GUARANTEE INSURANCE
Operating Income. Through its principal operating subsidiary, Ambac
----------------
Assurance, the Company insures municipal and structured finance obligations.
Operating income for the three months ended September 30, 1997 was $79.7
million, an increase of 41% from $56.6 million in the three months ended
September 30, 1996. This increase was primarily due to realized gains from sales
of securities for the period, increased premiums earned from the underlying book
of business, and higher net investment income, partially offset by lower
premiums earned from refundings, calls and other accelerations and higher
underwriting and operating expenses.
7
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross Par Written. Ambac Assurance insured $9.3 billion in par value bonds
-----------------
during the three months ended September 30, 1997, an increase of 12% from $8.3
billion in the three months ended September 30, 1996. Par value written for the
third quarter of 1997 was comprised of $5.9 billion from municipal bond
insurance and $3.4 billion from structured finance insurance, compared to $6.7
billion and $1.6 billion, respectively, in the third quarter of 1996. According
to estimates based on industry sources, the total volume of new issues of
municipal bonds increased 59% from $35.5 billion during the three months ended
September 30, 1996 to $56.3 billion in the three months ended September 30,
1997. During the three months ended September 30, 1997, the insured portion of
the new issue municipal bond market decreased slightly to approximately 51% from
approximately 52% for the three months ended September 30, 1996. (Market size
amounts and insured percentage figures used in this paragraph were determined on
a sale date basis, in conformity with industry practices; all other amounts and
percentage figures in this discussion were determined on a closing date basis.)
Gross Premiums Written. Gross premiums written for the three months ended
----------------------
September 30, 1997 were $52.4 million, a decrease of 22% from $67.6 million in
the three months ended September 30, 1996. The following table sets forth the
amounts of gross premiums written by type and percent of total:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------------------
(Dollars in Millions) 1997(1) %(1) 1996(1) %(1)
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Domestic:
Municipal finance premiums:
Up-front policies:
New issue.......................................... $33.3 64% $49.1 73%
Secondary market................................... 2.0 4 10.2 15
------------ ---------- ------------- -----------
Sub-total up-front written........................ 35.3 67 59.3 88
------------ ---------- ------------- -----------
Installment policies:
Annual policies.................................... 2.3 4 2.3 3
Portfolio products................................. 0.7 1 0.9 1
------------ ---------- ------------- -----------
Sub-total installment written.................. 3.0 6 3.2 5
------------ ---------- ------------- -----------
Total municipal finance written................. 38.4 73 62.5 92
------------ ---------- ------------- -----------
Structured finance premiums:
Up-front........................................... 0.9 2 0.1 -
Installment........................................ 5.2 10 2.3 3
------------ ---------- ------------- -----------
Total structured finance written.............. 6.1 12 2.4 4
------------ ---------- ------------- -----------
Total domestic written..................... 44.5 85 64.9 96
------------ ---------- ------------- -----------
International:
Up-front........................................... 6.5 12 1.6 2
Installment........................................ 1.4 3 1.1 2
------------ ---------- ------------- -----------
Total international written................ 7.9 15 2.7 4
------------ ---------- ------------- -----------
Total up-front written................................ 42.7 81 61.0 90
Total installment written............................. 9.7 19 6.6 10
------------ ---------- ------------- -----------
Grand total written $52.4 100% $67.6 100%
============ ========== ============= ===========
</TABLE>
(1) Numbers may not add due to rounding.
Ceded Premiums Written. Ceded premiums written for the third quarter of
----------------------
1997 were $6.5 million, compared to $9.8 million in the third quarter of 1996.
The 34% decrease in ceded premiums written is primarily due to the non-renewal
of the automatic treaty reinsurance for domestic business effective January 1,
1997, partially offset by higher ceded premiums for international business.
Ambac Assurance uses facultative reinsurance agreements to reduce its risk and
manage its insurance portfolio. Ceded premiums written were 12% and 15% of
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
gross premiums written for the three month periods ended September 30, 1997 and
1996, respectively.
Net Premiums Written. Net premiums written for the three months ended
--------------------
September 30, 1997 were $45.9 million, a decrease of 21% from the $57.8 million
in the three months ended September 30, 1996. This decrease reflects lower gross
premiums written, offset by lower premiums ceded to reinsurers in the three
months ended September 30, 1997 compared with the corresponding prior period.
Net Premiums Earned. Net premiums earned during the three months ended
-------------------
September 30, 1997 were $35.7 million, an increase of 6% from $33.7 million in
the three months ended September 30, 1996. The increase was primarily the result
of increased premiums earned from the underlying book of business during the
period, partially offset by a decline in premiums earned from refundings, calls
and other accelerations for the three months ended September 30, 1997. Net
premiums earned for the three months ended September 30, 1997 included $3.5
million (which had a net income per common share effect of $0.03) from
refundings, calls and other accelerations of previously insured issues. Net
premiums earned in the three months ended September 30, 1996 included $7.1
million (which had a net income per common share effect of $0.06) from
refundings, calls and other accelerations. Refunding levels vary depending upon
a number of conditions, primarily the relationship between current interest
rates and interest rates on outstanding debt. Excluding the effect of
accelerated earnings from refundings, calls and other accelerations, net
premiums earned for the three months ended September 30, 1997 were $32.2
million, an increase of 21% from $26.7 million in the three months ended
September 30, 1996.
Net Investment Income. Net investment income for the three months ended
---------------------
September 30, 1997 was $40.1 million, an increase of 9% from $36.9 million in
the three months ended September 30, 1996. The increase was primarily
attributable to the growth of the investment portfolio. Ambac Assurance's
investments in tax-exempt securities amounted to 79% of the total market value
of its portfolio as of September 30, 1997, versus 76% at September 30, 1996. The
average pre-tax yield-to-maturity on the investment portfolio was 6.35% and
6.47% as of September 30, 1997 and 1996, respectively.
Net Realized Gains (Losses). Net realized gains were $13.9 million for the
---------------------------
three months ended September 30, 1997, compared to $5.4 million in net realized
losses for the comparative prior period in 1996.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
-----------------------------------
for the three months ended September 30, 1997 were $0.7 million, versus $1.3
million in the three months ended September 30, 1996. Losses and loss adjustment
expenses are generally based upon estimates of the ultimate aggregate losses
inherent in the obligations insured. No salvage was recognized for the three
month periods ended September 30, 1997 and 1996, respectively.
Underwriting and Operating Expenses. Underwriting and operating expenses
-----------------------------------
for the third quarter of 1997 were $10.2 million, an increase of 19% from $8.6
million in the third quarter of 1996, primarily as a result of higher gross
underwriting expenses. Underwriting and operating expenses consist of gross
underwriting and operating expenses, less the deferral to future periods of
expenses and reinsurance commissions related to the acquisition of new insurance
contracts, plus the amortization of previously deferred expenses and reinsurance
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
commissions. During the three month period ended September 30, 1997, gross
underwriting and operating expenses were $14.3 million, an increase of 12% from
$12.8 million in the three months ended September 30, 1996, primarily due to
higher rating agency fees and advertising, partially offset by lower premium
taxes. Underwriting and operating expenses deferred were $7.5 million and $7.3
million for the three months ended September 30, 1997 and 1996, respectively.
The amortization of previously deferred expenses and reinsurance commissions
was $3.4 million and $3.2 million for the three months ended September 30, 1997
and 1996, respectively.
FINANCIAL MANAGEMENT SERVICES
Operating Income. Through its Financial Management Services subsidiaries,
----------------
the Company provides investment agreements, interest rate swaps, investment
advisory and cash management services, and electronic commerce solutions,
principally to states, municipalities and their authorities, school districts,
and hospitals and health organizations. Operating income for the three months
ended September 30, 1997 was $4.4 million, up from $1.0 million in the three
months ended September 30, 1996. Revenues for the third quarter of 1997 were
$10.1 million (includes $1.1 million in realized gains), up from $4.0 million in
the third quarter of 1996. The increase was primarily due to the inclusion of
investment advisory and cash management services revenues of Cadre Financial
Services, Inc. ("Cadre"), the assets and name of which the Company acquired on
December 31, 1996, as well as higher revenues on interest rate swaps and
investment agreements. Expenses for the third quarter of 1997 were $5.7 million,
up from $3.1 million in the third quarter of 1996. These increased expenses
resulted primarily from the consolidation of Cadre and the Company's electronic
commerce solutions affiliate, Ambac Connect, Inc., into the Financial Management
Services segment.
CORPORATE ITEMS
Interest Expense and Other Income (Deductions), Net. Interest expense for
---------------------------------------------------
the three months ended September 30, 1997 was $5.4 million, up 4% from $5.2
million for the three months ended September 30, 1996, primarily due to lower
net payments received under an interest rate swap related to the Company's
debentures. Other income (deductions), net, includes investment income and
operating expenses of the holding company. Other income (deductions), net, was
$1.0 million for the three months ended September 30, 1997, down from $2.4
million in the comparative prior period.
Income Taxes. Income taxes for the three months ended September 30, 1997
------------
were at an effective rate of 23.7%, versus 19.9% in the three months ended
September 30, 1996. This increase was primarily due to realized gains in the
three months ended September 30, 1997.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SUPPLEMENTAL ANALYTICAL FINANCIAL DATA
Management, equity analysts and investors consider the following four
measures important in analyzing the financial results, and measuring the
intrinsic value of the Company: core earnings; operating earnings; adjusted
gross premiums written; and adjusted book value. However, none of these measures
are promulgated in accordance with GAAP and should not be considered as
substitutes for net income, gross premiums written and book value. The
definitions of core earnings, operating earnings, adjusted gross premiums
written and adjusted book value described below may differ from the definitions
used by other public holding companies of financial guarantee insurers.
Core Earnings. Core earnings for the three months ended September 30, 1997
-------------
were $49.5 million , an increase of 14% from $43.3 million for the three months
ended September 30, 1996. The increase in core earnings was primarily the result
of continued growth in net premiums earned from the underlying book of business
and higher net investment income from insurance operations, as well as higher
operating income from the Financial Management Services segment. The Company
defines core earnings as consolidated net income, less the effect of net
realized gains and losses, net insurance premiums earned from refundings and
calls and certain non-recurring items.
Operating Earnings. Operating earnings for the third quarter of 1997 were
------------------
$51.5 million, an increase of 9% from $47.3 million in the third quarter of
1996. The Company defines operating earnings as consolidated net income, less
the effect of net realized gains and losses and certain non-recurring items.
The following table reconciles net income computed in accordance with
GAAP to operating earnings and core earnings for the three months ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in Millions) 1997(1) 1996(1)
---------- ----------
<S> <C> <C>
Net Income................................................................................... $60.8 $43.8
Net realized (gains) / losses, after tax..................................................... (9.3) 3.5
---------- ----------
Operating earnings........................................................................ 51.5 47.3
Premiums earned from refundings,
calls and other accelerations, after tax.................................................. (2.0) (4.0)
---------- ----------
Core earnings............................................................................. $49.5 $43.3
========== ==========
</TABLE>
(1) Numbers may not add due to rounding.
The weighted average number of shares outstanding during the third quarter
of 1997 and 1996 was 70.1 million and 69.8 million, respectively.
Adjusted Gross Premiums Written. Adjusted gross premiums written were $62.8
-------------------------------
million in the third quarter of 1997, down 19% from $77.7 million in the third
quarter of 1996. The Company defines adjusted gross premiums written as up-front
premiums written plus the present value of estimated future installment premiums
written in the period. While most premiums are collected up-front at policy
issuance, a growing portion of premiums are collected on an installment basis.
The net present value of estimated future installment premiums written in the
third quarter of 1997 was $20.1 million, an increase of 20% from $16.7 million
written in the third quarter of 1996. The aggregate net present value of
estimated future
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
installment premiums was $187.5 million and $157.7 million as of September 30,
1997 and December 31, 1996, respectively.
The following table reconciles total up-front premiums written to adjusted
gross premiums written for the three months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in Millions) 1997(1) 1996(1)
---------- ----------
<S> <C> <C>
Adjusted Gross Premium Analysis:
Total Up-front premiums written.............................................................. $42.7 $61.0
PV of estimated future installment premiums.................................................. 20.1 16.7
---------- ----------
Adjusted gross premiums written.......................................................... $62.8 $77.7
========== ==========
</TABLE>
(1) Numbers may not add due to rounding.
Adjusted Book Value. Adjusted book value ("ABV") per common share increased
--------------------
9% to $34.21 at September 30, 1997 compared to $31.25 at December 31, 1996. The
Company derives ABV by beginning with stockholders' equity (book value) and
adding or subtracting the after-tax value of: the net unearned premium reserve;
deferred acquisition costs; the present value of estimated net future
installment premiums; and the unrealized gain or loss on investment agreement
liabilities. These adjustments will not be realized until future periods and may
differ materially from the amounts used in determining ABV.
The following table reconciles book value per share to ABV per share as of
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
September 30, December 31,
1997(1) 1996(1)
------------------------ ------------------------
<S> <C> <C>
Book value per share.......................................... $25.50 $23.01
After-tax value of:
Net unearned premium reserve.............................. 8.09 7.62
Deferred acquisition costs................................ (0.97) (0.87)
Present value of installment premiums..................... 1.74 1.45
Unrealized gain on investment agreement liabilities....... (0.14) 0.03
------------------------ ------------------------
Adjusted book value per share................................. $34.21 $31.25
======================== ========================
</TABLE>
(1) Numbers may not add due to rounding.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996
CONSOLIDATED NET INCOME
The Company's net income for the nine months ended September 30, 1997 was
$164.1 million or $2.35 per common share, a decrease of 27% from $224.3 million
or $3.21 per common share in the nine months ended September 30, 1996. The
decrease in net income from the prior period was primarily the result of a net
realized gain of $155.6 million (which had a net income per common share effect
of $1.44) from the Company's sale of its former affiliate, HCIA Inc. Excluding
the effect of this one-time gain, net income increased 33% over the nine months
ended September 30, 1996. This increase in net income was attributable to higher
operating income in the insurance segment, partially offset by lower operating
income in the Financial Management Services segment.
FINANCIAL GUARANTEE INSURANCE
Operating Income. Operating income for the nine months ended September 30,
----------------
1997 was $218.3 million, an increase of 39% from $157.0 million in the nine
months ended September 30, 1996 This increase was primarily due to realized
gains from sales of securities for the period, increased premiums earned from
the underlying book of business and higher net investment income, partially
offset by lower premiums earned from refundings, calls, and other accelerations.
Gross Par Written. Ambac Assurance insured $27.8 billion in par value bonds
-----------------
during the nine months ended September 30, 1997, an increase of 17% from $23.8
billion in the nine months ended September 30, 1996. Par value written for the
first nine months of 1997 was comprised of $18.4 billion from municipal bond
insurance and $9.4 billion from structured finance insurance, compared to $18.4
billion and $5.4 billion, respectively, in the first nine months of 1996.
According to estimates based on industry sources, the total volume of new issues
of municipal bonds increased 18% from $126.8 billion during the nine months
ended September 30, 1996 to $149.9 billion in the nine months ended September
30, 1997. During the nine months ended September 30, 1997, the insured portion
of the new issue municipal bond market increased to approximately 52% from
approximately 49% for the nine months ended September 30, 1996, reflecting
increased demand for insured bonds. (Market size amounts and insured percentage
figures used in this paragraph were determined on a sale date basis, in
conformity with industry practices; all other amounts and percentage figures in
this discussion were determined on a closing date basis.)
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross Premiums Written. Gross premiums written for the nine months ended
----------------------
September 30, 1997 were $177.9 million, an increase of 1% from $176.0 million in
the nine months ended September 30, 1996. The following table sets forth the
amounts of gross premiums written by type and percent of total:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
(Dollars in Millions) 1997(1) %(1) 1996(1) %(1)
------------ ---------- ------------- -----------
Domestic:
Municipal finance premiums:
Up-front policies:
New issue.......................................... $112.9 63% $125.3 71%
Secondary market................................... 13.9 8 17.5 10
------------ ---------- ------------- -----------
Sub-total up-front written........................ 126.9 71 142.8 81
------------ ---------- ------------- -----------
Installment policies:
Annual policies.................................... 7.2 4 6.2 3
Portfolio products................................. 2.3 1 3.0 2
------------ ---------- ------------- -----------
Sub-total installment written.................... 9.4 5 9.2 5
------------ ---------- ------------- -----------
Total municipal finance written................. 136.3 77 152.0 86
------------ ---------- ------------- -----------
Structured finance premiums:
Up-front........................................... 8.7 5 0.9 1
Installment........................................ 13.5 8 5.5 3
------------ ---------- ------------- -----------
Total structured finance written................ 22.2 12 6.4 4
------------ ---------- ------------- -----------
Total domestic written..................... 158.5 89 158.4 90
------------ ---------- ------------- -----------
International:
Up-front........................................... 15.6 9 15.7 9
Installment........................................ 3.9 2 1.9 1
------------ ---------- ------------- -----------
Total international written................ 19.4 11 17.6 10
------------ ---------- ------------- -----------
Total up-front written................................ 151.1 85 159.5 91
Total installment written............................. 26.8 15 16.5 9
------------ ---------- ------------- -----------
Grand total written.................................. $177.9 100% $176.0 100%
============ ========== ============= ===========
</TABLE>
(1) Numbers may not add due to rounding.
Ceded Premiums Written. Ceded premiums written for the first nine months of
----------------------
1997 were $19.1 million, compared to $29.3 million in the first nine months of
1996. The 35% decrease in ceded premiums written is primarily due to the non-
renewal in 1997 of the automatic treaty reinsurance for domestic business,
partially offset by higher ceded premiums for international business. Ambac
Assurance uses facultative reinsurance agreements to reduce its risk and manage
its insurance portfolio. Ceded premiums written were 11% and 17% of gross
premiums written for the nine month periods ended September 30, 1997 and 1996,
respectively.
Net Premiums Written. Net premiums written for the nine months ended
--------------------
September 30, 1997 were $158.8 million, an increase of 8% from the $146.8
million in the nine months ended September 30, 1996. This increase reflects
slightly higher gross premiums written and lower premiums ceded to reinsurers in
the nine months ended September 30, 1997 compared with the corresponding prior
period.
Net Premiums Earned. Net premiums earned during the nine months ended
-------------------
September 30, 1997 were $109.1 million, an increase of 7% from $101.6 million in
the nine months ended September 30, 1996. The increase was primarily the result
of increased premiums earned from the underlying book of business during the
nine months ended September 30, 1997, partially offset by lower premiums earned
from refundings, calls and other accelerations during the period. Net premiums
earned for the nine months ended September 30, 1997 included $16.9 million
(which had a net income per common share effect of $0.14) from refundings, calls
and
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
other accelerations of previously insured issues. Net premiums earned in the
nine months ended September 30, 1996 included $25.2 million (which had a net
income per common share effect of $0.20) from refundings, calls and other
accelerations. Excluding the effect of accelerated earnings from refundings,
calls and other accelerations, net premiums earned for the nine months ended
September 30, 1997 were $92.2 million, an increase of 21% from $76.4 million in
the nine months ended September 30, 1996.
Net Investment Income. Net investment income for the nine months ended
---------------------
September 30, 1997 was $117.8 million, an increase of 10% from $107.2 million in
the nine months ended September 30, 1996. The increase was primarily
attributable to the growth of the investment portfolio. Ambac Assurance's
investments in tax-exempt securities amounted to 79% of the total market value
of its portfolio as of September 30, 1997, versus 76% at September 30, 1996. The
average pre-tax yield-to-maturity on the investment portfolio was 6.35% and
6.47% as of September 30, 1997 and 1996, respectively.
Net Realized Gains (Losses). Net realized gains were $18.2 million for the
---------------------------
nine months ended September 30, 1997, compared to $25.1 million in net realized
losses for the comparative prior period in 1996. The net realized losses in the
nine months ended September 30, 1996 partially offset the net realized gain on
the sale of HCIA Inc.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
-----------------------------------
for the nine months ended September 30, 1997 were $2.1 million, versus $3.8
million in the nine months ended September 30, 1996. Losses and loss adjustment
expenses are generally based upon estimates of the ultimate aggregate losses
inherent in the obligations insured. Losses and loss adjustment expenses,
exclusive of salvage recognized, were $2.2 million and $3.9 million for the nine
months ended September 30, 1997 and 1996, respectively. Salvage recognized
amounted to $0.1 million for both nine month periods ended September 30, 1997
and 1996.
Underwriting and Operating Expenses. Underwriting and operating expenses
-----------------------------------
for the first nine months of 1997 were $29.0 million, an increase of 5% from
$27.7 million in the first nine months of 1996, primarily due to higher rating
agency fees and expenses relating to Ambac Insurance UK Limited (which began
operations during the first quarter of 1997), partially offset by lower ceding
commission expenses in the nine months ended September 30, 1997. During the nine
month period ended September 30, 1997, gross underwriting and operating expenses
were $42.3 million, an increase of 4% from $40.6 million in the nine months
ended September 30, 1996. Underwriting and operating expenses deferred were
$23.4 million and $22.9 million for the nine months ended September 30, 1997 and
1996, respectively. Reinsurance commissions which relate to the current period
were none and $0.6 million for the nine months ended September 30, 1997 and
1996, respectively. The amortization of previously deferred expenses and
reinsurance commissions was $10.1 million and $9.5 million for the three months
ended September 30, 1997 and 1996, respectively.
FINANCIAL MANAGEMENT SERVICES
Operating Income. Operating income for the nine months ended September 30,
----------------
1997 was $3.4 million, down from $8.6 million in the nine months ended September
30, 1996. These results include a $3.5 million restructuring charge (which had a
net income per common share effect of $0.03) in the current period for the
consolidation of the Company's Westport,
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Connecticut office into the Company's corporate headquarters in New York City.
Revenues for the first nine months of 1997 were $23.6 million (includes $1.1
million in net realized gains), up from $16.1 million in the first nine months
of 1996. The increase was primarily due to the inclusion of revenues of Cadre,
partially offset by lower revenues on interest rate swaps. Expenses for the
first nine months of 1997, excluding the restructuring charge, were $16.7
million, compared to $7.5 million in the first nine months of 1996. These
increased expenses resulted primarily from the consolidation of Cadre and Ambac
Connect into the Financial Management Services segment.
CORPORATE ITEMS
Interest Expense and Other Income (Deductions), Net. Interest expense for
---------------------------------------------------
the nine months ended September 30, 1997 was $15.9 million, up slightly from
$15.7 million for the nine months ended September 30, 1996. Other income
(deductions), net, includes investment income and operating expenses of the
holding company. Other income (deductions), net, increased slightly from $3.3
million for the nine months ended September 30, 1996 to $3.4 million for the
nine months ended September 30, 1997.
Income Taxes. Income taxes for the nine months ended September 30, 1997
------------
were at an effective rate of 21.8%, compared to 27.5% in the nine months ended
September 30, 1996. The higher effective tax rate in the nine months ended
September 30, 1996 reflected the realized gain from the sale of HCIA.
SUPPLEMENTAL ANALYTICAL FINANCIAL DATA
Management, equity analysts and investors consider the following four
measures important in analyzing the financial results, and measuring the
intrinsic value of the Company: core earnings; operating earnings; adjusted
gross premiums written; and adjusted book value. However, none of these measures
are promulgated in accordance with GAAP and should not be considered as
substitutes for net income, gross premiums written and book value. The
definitions of core earnings, operating earnings, adjusted gross premiums
written and adjusted book value described below may differ from the definitions
used by other public holding companies of financial guarantee insurers.
Core Earnings. Core earnings for the nine months ended September 30, 1997
-------------
were $144.0 million , an increase of 15% from $125.7 million for the nine months
ended September 30, 1996. The increase in core earnings was primarily the result
of continued growth in net premiums earned from the underlying book of business
and higher net investment income from insurance operations, partially offset by
lower operating income from the Financial Management Services segment. The
Company defines core earnings as consolidated net income, less the effect of net
realized gains and losses, net insurance premiums earned from refundings and
calls and certain non-recurring items.
Operating Earnings. Operating earnings for the nine months ended September
------------------
30, 1997 were $153.6 million, an increase of 10% from $140.0 million in the nine
months ended September 30, 1996. The Company defines operating earnings as
consolidated net income, less the effect of net realized gains and losses and
certain non-recurring items.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table reconciles net income computed in accordance with GAAP
to operating earnings and core earnings for the nine months ended September 30,
1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in Millions) 1997(1) 1996(1)
---------------------------------------
<S> <C> <C>
Net Income................................................................... $164.1 $224.3
Net realized gains, after tax................................................ (12.6) (84.3)
Non-recurring item, after tax................................................ 2.1 -
---------------- ----------------
Operating earnings........................................................ 153.6 140.0
Premiums earned from refundings,
calls and other accelerations, after tax.................................. (9.6) (14.3)
---------------- ----------------
Core earnings............................................................. $144.0 $125.7
================ ================
</TABLE>
(1) Numbers may not add due to rounding.
The weighted average number of shares outstanding during the nine month
period ended September 30, 1997 and 1996 were 70.0 million and 69.9 million,
respectively .
Adjusted Gross Premiums Written. Adjusted gross premiums written were
-------------------------------
$216.7 million in the first nine months of 1997, an increase of 5% from $205.8
million in the first nine months of 1996. The Company defines adjusted gross
premiums written as up-front premiums written plus the present value of
estimated future installment premiums written in the period. While most premiums
are collected up-front at policy issuance, a growing portion of premiums are
collected on an installment basis. The net present value of estimated future
installment premiums written in the nine months ended September 30, 1997 was
$65.5 million, an increase of 41% from $46.3 million in the nine months ended
September 30, 1996. The aggregate net present value of estimated future
installment premiums was $187.5 million and $157.7 million as of September 30,
1997 and December 31, 1996, respectively.
The following table reconciles total up-front premiums written to adjusted
gross premiums written for the nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in Millions) 1997(1) 1996(1)
---------- -----------
<S> <C> <C>
Adjusted Gross Premium Analysis:
Total Up-front premiums written.............................................................. $151.1 $159.5
PV of estimated future installment premiums.................................................. 65.5 46.3
---------- -----------
Adjusted gross premiums written.......................................................... $216.7 $205.8
========== ===========
</TABLE>
(1) Numbers may not add due to rounding.
Adjusted Book Value. ABV per common share increased 9% to $34.21 at
-------------------
September 30, 1997 compared to $31.25 at December 31, 1996. The Company derives
ABV by beginning with stockholders' equity (book value) and adding or
subtracting the after-tax value of: the net unearned premium reserve; deferred
acquisition costs; the present value of estimated net future installment
premiums; and the unrealized gain or loss on investment agreement liabilities.
These adjustments will not be realized until future periods and may differ
materially from the amounts used in determining ABV.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table reconciles book value per share to ABV per share as of
September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
September 30, December 31,
1997(1) 1996(1)
------------------------ ------------------------
<S> <C> <C>
Book value per share.......................................... $25.50 $23.01
After-tax value of:
Net unearned premium reserve.............................. 8.09 7.62
Deferred acquisition costs................................ (0.97) (0.87)
Present value of installment premiums..................... 1.74 1.45
Unrealized gain on investment agreement liabilities....... (0.14) 0.03
------------------------ ------------------------
Adjusted book value per share................................. $34.21 $31.25
======================== ========================
</TABLE>
(1) Numbers may not add due to rounding.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for the Holding Company. The Company's liquidity, both on a
----------------------------------
short-term basis (for the next twelve months) and a long-term basis (beyond the
next twelve months), is largely dependent upon Ambac Assurance's ability to pay
dividends or make payments to the Company and external financings.
Pursuant to Wisconsin insurance laws, Ambac Assurance may declare
dividends, provided that, after giving effect to the distribution, it would not
violate certain statutory equity, solvency and asset tests. During the nine
months ended September 30, 1997, Ambac Assurance paid dividends of $33.0 million
on its common stock to the Company.
The Company's principal uses of liquidity are for the payment of its
operating expenses, interest on its debt, dividends on its shares of Common
Stock and capital investments in its subsidiaries. Given the amount of dividends
that the Company expects to receive from Ambac Assurance during 1997 and the
income it expects to receive from its investment portfolio, the Company believes
it will have sufficient liquidity to satisfy its liquidity needs over the next
twelve months, including the payment of dividends on the Common Stock in
accordance with its current dividend policy. Beyond the next twelve months,
Ambac Assurance's ability to declare and pay dividends to the Company may be
influenced by a variety of factors, including adverse market changes, insurance
regulatory changes and changes in general economic conditions. Consequently,
although the Company believes that it will continue to have sufficient liquidity
to meet its debt service and other obligations over the long term, no assurance
can be given that Ambac Assurance will be permitted to dividend amounts
sufficient to pay all of the Company's operating expenses, debt service
obligations and cash dividends on its Common Stock.
Liquidity for Insurance Operations. Ambac Assurance's principal uses of
-----------------------------------
liquidity are for the payment of operating expenses, reinsurance premiums,
income taxes and dividends to the Company. The Company believes that Ambac
Assurance's operating liquidity needs can be funded exclusively from its
operating cash flow. The principal sources of Ambac Assurance's liquidity are
gross premiums written, scheduled investment maturities and net investment
income. The majority of premiums for Ambac Assurance's Financial Guarantee
Insurance policies are payable in full at the outset of the term of the policy,
even though premiums are earned over the life of such policies for financial
accounting purposes.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity for Financial Management Services Operations. The principal uses
-------------------------------------------------------
of liquidity by the Company's Financial Management Services subsidiaries are the
payment of investment agreement obligations pursuant to defined terms, net
obligations under interest rate swaps, operating expenses and income taxes. The
Company believes that the operating liquidity needs for Financial Management
Services can be funded primarily from its operating cash flow. The principal
sources of this segments liquidity are proceeds from issuance of investment
agreements, net investment income, maturities of securities from its investment
portfolio which are invested with the objective of matching the duration of its
obligations under the investment agreements, net receipts from interest rate
swaps and related hedges and fees for investment management services. The
Company's investment objectives with respect to investment agreements are to
achieve the highest after-tax total return, subject to a minimum average quality
rating of Aa/AA on invested assets, and to maintain cash flow matching of
invested assets to funded liabilities to minimize interest rate and liquidity
exposure. The Company maintains a portion of its Financial Management Services
assets in short-term investments and repurchase agreements in order to meet
unexpected liquidity needs.
Credit Facilities. The Company and Ambac Assurance have a joint revolving
------------------
credit facility with two major international banks, as co-agents, for $100.0
million, which expires in July 1998. This facility is available for general
corporate purposes, including the payment of claims. As of September 30, 1997
and 1996, no amounts were outstanding under this credit facility.
Ambac Assurance has an agreement with a group of Aaa/AAA-rated
international banks for a $350.0 million credit facility, expiring in December
2003. This facility is a seven-year stand-by irrevocable limited recourse line-
of-credit, which will provide liquidity to Ambac Assurance in the event that
claims from municipal obligations exceed specified levels. Repayment of any
amounts drawn under the line will be limited primarily to the amount of any
recoveries of losses related to policy obligations. As of September 30, 1997 and
1996, no amounts were outstanding under this line.
Stock Repurchase Program. During the nine months ended September 30, 1997,
-------------------------
the Company acquired approximately 949,000 shares under its existing stock
repurchase program. Since inception of the Stock Repurchase Program, the Company
has acquired approximately 3,072,000 shares. Under the Stock Repurchase Program
established by the Board of Directors, the Company is authorized to repurchase
up to 6,000,000 shares of the Common Stock.
Balance Sheet. As of September 30, 1997, the fair value of the Company's
--------------
consolidated investment portfolio was $6.13 billion, an increase of 18% from
$5.20 billion at December 31, 1996. This was primarily due to the growth of
operations in both business segments.
Cash Flows. Net cash provided by operating activities was $258.9 million
-----------
and $145.1 million during the nine months ended September 30, 1997 and 1996,
respectively. These cash flows were primarily provided from insurance
operations.
Net cash provided by financing activities was $533.0 million and $431.4
million during the nine months ended September 30, 1997 and 1996, respectively.
This activity included $554.9 million and $455.2 million, respectively, in
investment agreements issued (net of draws paid).
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The total cash provided by operating and financing activities was $791.9
million and $576.5 million during the nine months ended September 30, 1997 and
1996, respectively. From these totals, $799.5 million and $575.4 million was
used in investing activities during the nine months ended September 30, 1997 and
1996, respectively, principally for purchases of bonds, offset by proceeds from
sales and maturities of bonds and from the sale of affiliate.
Off-Balance Sheet Risk. In the normal course of business, the Company
-----------------------
uses interest rate contracts for hedging purposes as part of its overall
interest rate risk management. In addition, one of the subsidiaries in the
Financial Management Services segment is a dealer of interest rate swaps
primarily to states, municipalities and municipal authorities. This subsidiary
manages its interest rate swap business with the goal of being market neutral to
changes in taxable interest rates, while retaining "basis risk," the
relationship between changes in floating tax-exempt and floating taxable
interest rates. In the ordinary course of business, the Company manages a
variety of other risks principally credit, market, liquidity, operational, and
legal. These risks are identified, measured, and monitored through a variety of
control mechanisms, which are in place at different levels throughout the
organization.
Material Commitments. The Company has made no commitments for material
---------------------
capital expenditures within the next twelve months. However, management
continually evaluates opportunities to expand the Company's businesses through
internal development of new products as well as acquisitions. (See "Part II
Other Information, Item 5." for Ambac Assurance's proposed acquisition of
Construction Loan Insurance Corporation.)
20
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3 and 4 are omitted either because they are inapplicable or
because the answer to such question is negative.
ITEM 5 - OTHER INFORMATION
On November 12, 1997, Ambac Assurance announced that the Company and the
shareholders of Construction Loan Insurance Corporation ("CLIC") had approved
their previously announced plans to merge. The merger, which Ambac Assurance
expects to close by December 31, 1997, remains subject to certain contingencies
including satisfaction of applicable federal and state regulatory requirements.
Ambac Assurance will pay $106 million in cash for all of the outstanding shares
of stock of CLIC and will also retire $18.4 million of CLIC's debt obligations.
Based on unaudited financial statements as of September 30, 1997, CLIC had a
book value of $160.8 million. Assuming the merger is consummated as anticipated,
the purchase is expected to have a positive effect on the earnings of the
Company in the range of approximately $0.07 to $0.09 per share in 1998,
depending upon several factors, including, interest rates and general economic
conditions. CLIC is a private, for-profit financial guaranty company that,
through its wholly-owned insurance subsidiary, Connie Lee Insurance Company
("Connie Lee"), guarantees bonds primarily issued for college and hospital
infrastructure projects. While Ambac Assurance does not expect Connie Lee to
write new business, it will make sure that Connie Lee bonds retain their triple-
A ratings.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING ARE ANNEXED AS EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
4.05 Amended and Restated Certificate of Incorporation of the Company
10.21* 1997 Ambac Equity Plan, as amended
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited
Financial Statements as of September 30, 1997 and December 31, 1996
and for the periods ended September 30, 1997 and 1996.
</TABLE>
(B) REPORTS ON FORM 8-K:
There were no Reports on Form 8-K filed during the third quarter of 1997.
- ---------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 6(a) of Form 10-Q.
----------
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ambac Financial Group, Inc.
(REGISTRANT)
Dated: November 14, 1997 By: /S/ FRANK J. BIVONA
-------------------
Frank J. Bivona
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
4.05 Amended and Restated Certificate of Incorporation of the Company.
10.21* 1997 Ambac Equity Plan, as amended.
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited
Financial Statements as of September 30, 1997 and December 31, 1996
and for the periods ended September 30, 1997 and 1996.
</TABLE>
- ---------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 6(a) of Form 10-Q.
----------
23
<PAGE>
EXHIBIT 4.05
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
AMBAC INC.
AMBAC Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows:
1. The name of the Corporation is AMBAC Inc. The Corporation was originally
incorporated under the name of AMBAC Inc. and the original Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware
on April 29, 1991.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the Restated Certificate of
Incorporation of the Corporation.
3. The text of the Restated Certificate of Incorporation of the Corporation
is hereby restated and further amended to read in its entirety as follows:
ARTICLE I
NAME
The name of the corporation is Ambac Financial Group, Inc. (the
"CORPORATION").
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
ARTICLE III
CORPORATE PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware (the "GENERAL CORPORATION LAW").
ARTICLE IV
CAPITAL STOCK
Section 4.1. AUTHORIZED CAPITAL. The total number of shares of all
classes of stock that the Corporation shall have authority to issue is
104,000,000 consisting of 100,000,000 shares of Common Stock, par value $.01 per
share (the "COMMON STOCK") and 4,000,000 shares of Preferred Stock, par value
$.01 per share (the "PREFERRED STOCK").
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SECTION 4.2. PREFERRED STOCK. The designations and the powers,
preferences and rights and the qualifications, limitations or restrictions
thereof of the shares of each class as Preferred Stock are as follows:
(a) The Preferred Stock may be issued from time to time in one or more
series, the shares of each series to have such voting powers, full or limited,
and such designations, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions thereof
as are stated and expressed herein or in the resolution or resolutions
providing for the issuance of such series, adopted by the Board of Directors
as hereinafter provided; provided, however, that in the event the Board of
Directors of the Corporation provides that any series of Preferred Stock shall
be given voting powers, such series shall not be entitled to vote separately
as a single class other than as expressly required by law and for the election
of one or more additional directors of the Corporation in the case of dividend
arrearages or other specified events and such series of Preferred Stock shall
not be granted the right to cast in excess of one vote per share of Preferred
Stock.
(b) Authority is hereby expressly granted to the Board of Directors,
subject to the provisions of this Article IV and to the limitations prescribed
by law, to authorize the issuance of one or more series of Preferred Stock and
with respect to each such series to fix by resolution or resolutions providing
for the issuance of such series the voting powers, full or limited, if any, of
the shares of such series and the designations, preferences and relative,
participating, optional or other special rights and the qualifications,
limitations or restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, the
determination or fixing of the following:
(i) The designation of such series;
(ii) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the relation which such dividends
shall bear to the dividends payable on any other class or classes of stock,
and whether such dividends shall be cumulative or non- cumulative;
(iii) Whether the shares of such series shall be subject to redemption by
the Corporation and, if made subject to such redemption, the times, prices
and other terms and conditions of such redemption;
(iv) The terms and amount of any sinking fund provided for the purchase
or redemption of the shares of such series;
(v) Whether or not the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes or of any other
series of any class or classes of stock, or for debt securities, of the
Corporation and, if provision be made for conversion or exchange, the
times, prices, rates, adjustments, and other terms and conditions of such
conversion or exchange;
(vi) The extent, if any, to which the holders of the shares of such
series shall be entitled to vote with respect to the election of directors
or otherwise;
(vii) The restrictions, if any, on the issue or reissue of any additional
Preferred Stock; and
(viii) The rights of the holders of the shares of such series upon the
dissolution of, or upon the distribution of assets of, the Corporation.
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SECTION 4.3. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. Pursuant to
the authority vested in the Board of Directors in accordance with Section 4.2
hereof, the Board of Director has authorized the creation of a series of
Preferred Stock with the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof as follows:
(a) DESIGNATION AND AMOUNT. The shares of such series shall be designated
as "SERIES A JUNIOR PARTICIPATING PREFERRED STOCK" and the number of shares
constituting such series shall be 500,000.
(b) DIVIDENDS AND DISTRIBUTIONS.
(i) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Participating Preferred Stock with respect to dividends,
the holders of shares of Series A Junior Participating Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the fifteenth day of March, June, September
and December in each year (each such date being referred to herein as a
"QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00 or
(b) subject to the provision for adjustment hereinafter set forth, 100
times the aggregate per share amount of all cash dividends, and 100 times
the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Junior Participating Preferred
Stock. In the event the Corporation shall at any time after January 31,
1996 (the "RIGHTS DECLARATION DATE") (i) declare any dividend on Common
Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the amount to which holders of
shares of Series A Junior Participating Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(ii) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in subparagraph
(b)(i) above immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $1.00 per share on the Series A Junior Participating
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(iii) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of
Series A Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the
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record date for the determination of holders of shares of Series A Junior
Participating Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such dividends
at the time accrued and payable on such shares shall be allocated pro rata
on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of
holders of shares of Series A Junior Participating Preferred Stock entitled
to receive payment of a dividend or distribution declared thereon, which
record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
(c) VOTING RIGHTS. The holders of shares of Series A Junior Participating
Preferred Stock shall have the following voting rights:
(i) Each share of Series A Junior Participating Preferred Stock shall
entitle the holder thereof to one vote on all matters submitted to a vote
of the stockholders of the Corporation.
(ii) Except as otherwise provided herein or by law, the holders of shares
of Series A Junior Participating Preferred Stock and the holders of shares
of Common Stock shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(iii) (A) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "DEFAULT PERIOD") which shall extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on
all shares of Series A Junior Participating Preferred Stock then
outstanding shall have been declared and paid or set apart for payment.
During each default period, all holders of Preferred Stock (including
holders of the Series A Junior Participating Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly dividends
thereon, voting as a class, irrespective of series, shall have the right to
elect two (2) Directors.
(B) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially
at a special meeting called pursuant to subparagraph (C) of this
subsection (c)(iii) or at any annual meeting of stockholders, and
thereafter at annual meetings of stockholders, provided that such voting
right shall not be exercised unless the holders of ten percent (10%) in
number of shares of Preferred Stock outstanding shall be present in
person or by proxy. The absence of a quorum of the holders of Common
Stock shall not affect the exercise by the holders of Preferred Stock of
such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default
period, they shall have the right, voting as a class, to elect Directors
to fill such vacancies, if any, in the Board of Directors as may then
exist up to two (2) Directors or, if such right is exercised at an annual
meeting, to elect two (2) Directors. If the number which may be so
elected at any special meeting does not amount to the required number,
the holders of the Preferred Stock shall have the right to make such
increase in the number of Directors as shall be necessary to permit the
election by them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect Directors in
any default period and during the continuance of such period, the number
of Directors shall not be increased or decreased except by vote of the
holders of Preferred Stock as herein provided or pursuant to the rights
of any equity securities ranking senior to or pari passu with the Series
A Junior Participating Preferred Stock.
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(C) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect Directors,
the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent (10%) of the total
number of shares of Preferred Stock outstanding, irrespective of series,
may request, the calling of special meeting of the holders of Preferred
Stock, which meeting shall thereupon be called by the President, a Vice-
President or the Secretary of the Corporation. Notice of such meeting and
of any annual meeting at which holders of Preferred Stock are entitled to
vote pursuant to this subparagraph (c)(iii)(C) shall be given to each
holder of record of Preferred Stock by mailing a copy of such notice to
him at his last address as the same appears on the books of the
Corporation. Such meeting shall be called for a time not earlier than 20
days and not later than 60 days after such order or request or in default
of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any stockholder
or stockholders owning in the aggregate not less than ten percent (10%)
of the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this subparagraph (c)(iii)(C) no such
special meeting shall be called during the period within 60 days
immediately preceding the date fixed for the next annual meeting of the
stockholders.
(D) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of Directors until the holders of
Preferred Stock shall have exercised their right to elect two (2)
Directors voting as a class, after the exercise of which right (x) the
Directors so elected by the holders of Preferred Stock shall continue in
office until their successors shall have been elected by such holders or
until the expiration of the default period, and (y) any vacancy in the
Board of Directors may (except as provided in subparagraph (iii)(B) of
this subsection (c)) be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of stock which
elected the Director whose office shall have become vacant. References in
this paragraph (iii) to Directors elected by the holders of a particular
class of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(E) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock as a class to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Preferred
Stock as a class shall terminate, and (z) the number of Directors shall
be such number as may be provided for in the Certificate of Incorporation
or By-laws irrespective of any increase made pursuant to the provisions
of subparagraph (iii)(B) of this subsection (c) (such number being
subject, however, to change thereafter in any manner provided by law or
in the Certificate of Incorporation or By-laws). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in
the preceding sentence may be filled by a majority of the remaining
Directors.
(iv) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
(d) CERTAIN RESTRICTIONS.
(i) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
subsection (b) are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
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Series A Junior Participating Preferred Stock outstanding shall have been
paid in full, the Corporation shall not
(A) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock;
(B) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, except dividends paid ratably on the
Series A Junior Participating Preferred Stock and all such parity stock
on which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(C) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such parity
stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Junior Participating Preferred Stock; or
(D) purchase or otherwise acquire for consideration any shares of
Series A Junior Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred
Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(ii) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of
the Corporation unless the Corporation could, under paragraph (i) of this
subsection (d), purchase or otherwise acquire such shares at such time and
in such manner.
(e) REACQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
(f) LIQUIDATION, DISSOLUTION OR WINDING UP.
(i) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock unless, prior thereto, the holders of shares of Series A Junior
Participating Preferred Stock shall have received $100 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the "SERIES A
LIQUIDATION PREFERENCE"). Following the payment of the full
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amount of the Series A Liquidation Preference, no additional distributions
shall be made to the holders of shares of Series A Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Common
Stock shall have received an amount per share (the "COMMON ADJUSTMENT")
equal to the quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 100 (as appropriately adjusted as set forth in paragraph
(iii) below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause
(ii), the "ADJUSTMENT NUMBER"). Following the payment of the full amount
of the Series A Liquidation Preference and the Common Adjustment in respect
of all outstanding shares of Series A Junior Participating Preferred Stock
and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed
in the ratio of the Adjustment Number to 1 with respect to such Series A
Junior Participating Preferred Stock and Common Stock, on a per share
basis, respectively.
(ii) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference
and the liquidation preferences of all other series of preferred stock, if
any, which rank on a parity with the Series A Junior Participating
Preferred Stock, then such remaining assets shall be distributed ratably to
the holders of such parity shares in proportion to their respective
liquidation preferences. In the event, however, that there are not
sufficient assets available to permit payment in full of the Common
Adjustment, then such remaining assets shall be distributed ratably to the
holders of Common Stock.
(iii) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then
in each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
(g) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares
of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the
provision for adjustment hereinafter set forth) equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Corporation shall at any time
after the Rights Declaration Date (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, then in each such case the amount set forth in the preceding sentence
with respect to the exchange or change of shares of Series A Junior
Participating Preferred Stock shall be adjusted by multiplying such amount by
a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
(h) NO REDEMPTION. The shares of Series A Junior Participating Preferred
Stock shall not be redeemable.
(i) RANKING. The Series A Junior Participating Preferred Stock shall rank
junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of such
series shall provide otherwise.
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(j) AMENDMENT. The Certificate of Incorporation of the Corporation shall
not be further amended in any manner which would materially alter or change
the powers, preferences or special rights of the Series A Junior Participating
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Series A Junior
Participating Preferred Stock, voting separately as a class.
(k) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may
be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
SECTION 4.4. COMMON STOCK. Except as otherwise provided by this Certificate
of Incorporation or as otherwise from time to time provided by law, the holders
of Common Stock shall be entitled to one vote per share on all matters to be
voted on by the stockholders of the Corporation.
SECTION 4.5. SUBSTANTIAL STOCKHOLDER.
(a) So long as any Person other than the Corporation or a Subsidiary
thereof is (without giving effect to this Section 4.5(a)) the beneficial owner
of capital stock representing 10% or more of the votes entitled to be cast by
the holders of all outstanding shares of capital stock (a "SUBSTANTIAL
STOCKHOLDER"), the record holders of the shares of capital stock beneficially
owned by such Substantial Stockholder shall have limited voting rights on all
matters, as follows: with respect to the shares of capital stock that would
entitle such record holders in the aggregate to cast less than 10% of the votes
entitled to be cast by the holders of all Outstanding shares of capital stock,
such record holders shall be entitled to cast the vote per share specified in
this Certificate of Incorporation; and with respect to the shares of capital
stock that would otherwise entitle such record holders in the aggregate to cast
10% or more of the votes entitled to be cast by the holders of all outstanding
shares of capital stock, such record holders shall not be entitled to cast any
votes for such shares, so that such record holders shall be entitled to cast
with respect to all shares of capital stock held by such record holders in the
aggregate only such number of votes that would equal (after giving effect to
this Section 4.5(a)) one vote less than 10% of the votes entitled to be cast by
all holders of outstanding shares of capital stock; provided, however, that the
restriction on voting contained in this Section 4.5(a) shall not apply to any
capital stock beneficially owned by any Substantial Stockholder whose
acquisition or ownership of capital stock representing 10% or more of the votes
entitled to be cast by the holders of all Outstanding shares of capital stock
has been approved by the Wisconsin Insurance Commissioner. The aggregate voting
power of such record holders, so limited, for all shares of capital stock
beneficially owned by the Substantial Stockholder shall be allocated
proportionately among such record holders as follows: for each such record
holder, this allocation shall be accomplished by multiplying the aggregate
voting power (after giving effect to the provisions of this Section 4.5(a)) of
the Outstanding shares of capital stock beneficially owned by the Substantial
Stockholder by a fraction the numerator of which is the number of votes that
the shares of capital stock owned of record by such record holder would have
entitled such record holder to cast were no effect given to this Section
4.5(a), and the denominator of which is the total number of votes which all
shares of capital stock beneficially owned by the Substantial Stockholder would
have entitled their record holders to cast were no effect given to this Section
4.5(a).
(b) The Board of Directors by majority vote shall have the power and duty
to determine for the purposes of this Article IV, on the basis of information
known to them after reasonable inquiry, (i) whether a Person is a Substantial
Stockholder, (ii) the number of shares of capital stock beneficially owned by
any Person, (iii) whether a Person is an Affiliate or Associate of another,
(iv) the Persons who may be deemed to be the record holders of shares
beneficially owned by a Substantial Stockholder
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and (v) such other matters with respect to which a determination is required
under this Article IV. Any such determination made in good faith shall be
binding and conclusive on all parties.
(c) The Board of Directors shall have the right to demand that any Person
who is reasonably believed to be a Substantial Stockholder (or to hold of
record shares of capital stock beneficially owned by a Substantial Stockholder)
supply the Corporation with complete information as to (i) the record holder or
holders of all shares beneficially owned by such Person, (ii) the number of
shares of capital stock beneficially owned by such Person and held of record by
each such record holder, and (iii) any other factual matter relating to the
applicability or effect of this Article IV, as may reasonably be requested of
such Person, and such Person shall furnish such information within ten days
after the receipt of such demand.
(d) Nothing contained in this Article IV shall be construed to relieve any
Substantial Stockholder from any fiduciary obligation imposed by law.
SECTION 4.6. QUORUM. Except as otherwise provided in this Certificate of
Incorporation, the presence in person or by proxy of the holders of record of
shares of capital stock entitling the holders thereof to cast a majority of the
votes (after giving effect, if required, to the provisions of Section 4.5(a))
entitled to be cast by the holders of all Outstanding shares of capital stock
entitled to vote shall constitute a quorum at all meetings of the stockholders.
SECTION 4.7. MAJORITY VOTE. If any class or series of the Corporation's
capital stock shall be entitled to more or less than one vote for any share, on
any matter for which such class or series is entitled to vote with one or more
other classes or series, together as one class, every reference in this
Certificate of Incorporation, the By-laws and in any relevant provision of law
to a majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock.
SECTION 4.8. NO PREEMPTIVE RIGHTS. Except as otherwise provided by this
Certificate of Incorporation or as otherwise from time to time provided by law,
no holder of shares of any class or series of capital stock of the Corporation
or of any security or obligation convertible into, or of any warrant, option or
right to subscribe for, purchase or otherwise acquire, shares of any class or
series of capital stock of the Corporation, whether now or hereafter authorized,
shall, as such holder, have any preemptive right to subscribe for, purchase or
otherwise acquire shares of any class or series of capital stock of the
Corporation or any security or obligation convertible into, or any warrant,
option or right to subscribe for, purchase or otherwise acquire, shares of any
class or series of capital stock of the Corporation, whether now or hereafter
authorized.
ARTICLE V
Definitions
As used in this Certificate of Incorporation, the following terms shall have
the following meanings:
"AFFILIATE", with respect to any Person, means any other Person directly or
indirectly controlling, controlled by or under common control with, such Person.
For purposes of this definition, "CONTROL" (including, with correlative
meanings, the terms "CONTROLLING," "CONTROLLED BY" or "UNDER COMMON CONTROL
WITH"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities,
by contract, by common management or otherwise. A Person having a contract or
arrangement giving that Person control is deemed to be in control despite any
limitations placed by law on the validity of the contract or arrangement. A
corporation is deemed to be under
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common control with any corporation, regardless of ownership, if substantially
the same group of persons manage the two corporations.
"ASSOCIATE", used to indicate a relationship with a specified Person, shall
mean (i) any Person (other than the Corporation or a Subsidiary) of which such
specified Person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of the voting securities of such Person, (ii)
any trust or other estate in which such specified Person has a substantial
beneficial interest or as to which such specified Person serves as trustee or in
a similar fiduciary capacity, (iii) any relative or such spouse of such
specified Person or any relative of such spouse who has the same home as such
specified Person or who is a director or officer of the Corporation or any
Subsidiary, and (iv) any Person who is a director or officer of such specified
Person or any of its parents or subsidiaries (other than the Corporation or a
Subsidiary).
A Person shall be deemed a "BENEFICIAL OWNER" of any shares of capital stock
of the Corporation (a) which such Person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; (b) which such Person or any of its
Affiliates or Associates has, directly or indirectly, the right to vote pursuant
to any agreement, contract, arrangement or understanding, or (c) which are
beneficially owned, directly or indirectly, by any other Person with which such
Person or any of its Affiliates or Associates has any contract, agreement,
arrangement or understanding for the purpose of holding or voting of any capital
stock of the Corporation.
"OUTSTANDING", when used in reference to shares of stock, shall mean issued
shares, excluding shares held in treasury.
"PERSON" shall mean any individual, firm, corporation or other entity and
shall include any group comprised of any Person and any other Person with whom
such Person or any Affiliate or Associate of such Person has any agreement,
contract, arrangement or understanding, directly or indirectly, for the purpose
of acquiring, holding, voting or disposing of any shares of capital stock of the
Corporation.
"SUBSIDIARY" shall mean any corporation of which a majority of any class of
equity securities is beneficially owned, directly or indirectly, by the
Corporation.
"SUBSTANTIAL STOCKHOLDER" shall be defined as in Section 4.5 of this
Certificate of Incorporation.
ARTICLE VI
DIRECTORS
Section 6.1. WRITTEN BALLOT. Elections of directors of the Corporation need
not be by written ballot, except and to the extent provided in the By-laws of
the Corporation.
SECTION 6.2. NO LIABILITY. To the fullest extent permitted by the General
Corporation Law as it now exists and as it may hereafter be amended, no director
of the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty as a
director.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 7.1. INDEMNIFICATION. (a) The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
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Corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a false plea of nolo contendere
or its equivalent, shall not, of itself, create a presumption that the person
seeking indemnification did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation unless and only to
the extent that the Court of Chancery of the State of Delaware or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 7.1(a) and (b) or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection therewith.
(d) Any indemnification under Sections 7.1(a) and (b) (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in such Sections 7.1(a) and (b). Such
determination shall be made (i) by the Board of Directors of the Corporation
by a majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (ii) if such a quorum is not obtainable,
or, even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (iii) by the stockholders
of the Corporation.
(e) Expenses incurred by a director or officer of the Corporation in
defending a civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation authorized in this Article
VII. Such expenses incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the Board of Directors of the
Corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other sections of this Article VII shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law,
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agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in an official capacity and as to action in another capacity
while holding such office.
(g) The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of Section 145 of
the General Corporation Law.
(h) For purposes of this Article VII, references to "THE CORPORATION" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, employees or agents so
that any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Article VII with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.
(i) For purposes of this Article VII, references to "OTHER ENTERPRISES"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan;
and references to "SERVING AT THE REQUEST OF THE CORPORATION" shall include
any service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "NOT OPPOSED TO THE BEST INTERESTS OF THE CORPORATION" as referred to
in this Article VII.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VII shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VIII
BY-LAWS
The directors of the Corporation shall have the power to adopt, amend or
repeal the By-laws of the Corporation.
ARTICLE IX
REORGANIZATION
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation
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under the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE X
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal any
provision of this Certificate of Incorporation, in the manner now or hereafter
prescribed by law and the Certificate of Incorporation, and all rights conferred
on stockholders in this Certificate of Incorporation are subject to this
reservation.
IN WITNESS WHEREOF, AMBAC Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed on this 10th day of July, 1997, in its
name and on its behalf by its Chairman, President and Chief Executive Officer.
/s/ Phillip B. Lassiter
------------------------
Phillip B. Lassiter
Chairman, President and
Chief Executive Officer
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EXHIBIT 10.21
AMBAC 1997 EQUITY PLAN
1. PURPOSES
The purposes of the Ambac 1997 Equity Plan (the "PLAN") are to attract, retain
and motivate key employees of the Company, to compensate them for their
contributions to the growth and profits of the Company and to encourage
ownership by them of Common Stock.
2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as follows:
"ADMINISTRATOR" means the individual or individuals to whom the Committee
delegates authority under the Plan in accordance with Section 3(d).
"AMBAC" means Ambac Financial Group, Inc., a Delaware corporation.
"AWARD" means an award made pursuant to the terms of the Plan to an Eligible
Individual in the form of Stock Options, Stock Appreciation Rights, Stock
Awards, Restricted Stock Units, Performance Units or Other Awards.
"AWARD AGREEMENT" means a written document approved in accordance with Section
3 which sets forth the terms and conditions of the Award to the Participant. An
Award Agreement may be in the form of (i) an agreement between Ambac or one of
its Subsidiaries which is executed by an officer on behalf of Ambac or such
Subsidiary and is signed by the Participant or (ii) a certificate issued by
Ambac or one of its Subsidiaries which is executed by an officer on behalf of
Ambac or such Subsidiary but does not require the signature of the Participant.
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended, and the applicable
rulings and regulations (including any proposed regulations) thereunder.
"COMMITTEE" means the Compensation and Organization Committee of the Board,
any successor committee thereto or any other committee appointed from time to
time by the Board to administer the Plan. The Committee shall consist of at
least two individuals and shall serve at the pleasure of the Board.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of the
Company.
"COMPANY" means Ambac and its Subsidiaries.
"ELIGIBLE INDIVIDUALS" means the individuals described in Section 6 who are
eligible for Awards under the Plan.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the
applicable rulings and regulations thereunder.
"FAIR MARKET VALUE" means, with respect to a share of Common Stock, the fair
market value thereof as of the relevant date of determination, as determined in
accordance with a valuation methodology approved by the Committee. In the
absence of any alternative valuation methodology approved by the Committee, the
Fair Market Value of a share of Common Stock shall equal the average of the
highest and the lowest quoted selling price of a share of Common Stock as
reported on the composite tape for
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securities listed on the New York Stock Exchange, or such other national
securities exchange as may be designated by the Committee, or, in the event that
the Common Stock is not listed for trading on a national securities exchange but
is quoted on an automated system, on such automated system, in any such case on
the valuation date (or, if there were no sales on the valuation date, the
average of the highest and the lowest quoted selling prices as reported on said
composite tape or automated system for the most recent day during which a sale
occurred).
"INCENTIVE STOCK OPTION" means a Stock Option which is an "incentive stock
option" within the meaning of Section 422 of the Code and designated by the
Committee as an Incentive Stock Option in an Award Agreement.
"NONQUALIFIED STOCK OPTION" means a Stock Option which is not an Incentive
Stock Option.
"OTHER AWARD" means any other form of award authorized under Section 13 of the
Plan.
"PARTICIPANT" means an Eligible Individual to whom an Award has been granted
under the Plan.
"PERFORMANCE UNIT" means a performance unit granted to an Eligible Individual
pursuant to Section 12 hereof.
"PREDECESSOR PLAN" means the AMBAC Inc. 1991 Stock Incentive Plan, as amended.
"RESTORATION OPTION" means a Stock Option that is awarded upon the exercise of
a Stock Option earlier awarded under the Plan or the Predecessor Plan (an
"UNDERLYING OPTION") for which the exercise price is paid in whole or in party
by tendering shares of Common Stock previously owned by the Participant, where
such Restoration Option (i) covers a number of shares of Common Stock no greater
than the number of previously owned shares tendered in payment of the exercise
price of the Underlying Option plus the number of shares withheld to pay taxes
arising upon such exercise, (ii) the expiration date of the Restoration Option
is no later than the expiration date of the Underlying Option and (iii) the
exercise price per share of the Restoration Option is no less than the Fair
Market Value per share of Common Stock on the date of exercise of the Underlying
Option.
"RESTRICTED STOCK UNIT" means a restricted stock unit granted to an Eligible
Individual pursuant to Section 11 hereof.
"STOCK APPRECIATION RIGHT" means a right to receive all or some portion of the
appreciation on shares of Common Stock granted to an Eligible Individual
pursuant to Section 9 hereof.
"STOCK AWARD" means a share of Common Stock granted to an Eligible Individual
for no consideration other than the provision of services or offer for sale to
an Eligible Employee at a purchase price determined by the Committee, in either
case pursuant to Section 10 hereof.
"STOCK OPTION" means an Award to purchase shares of Common Stock granted to an
Eligible Individual pursuant to Section 8 hereof, which Award may be either an
Incentive Stock Option or a Nonqualified Stock Option.
"SUBSIDIARY" means (i) a corporation or other entity with respect to which
Ambac, directly or indirectly, has the power, whether through the ownership of
voting securities, by contract or otherwise, to elect at least a majority of the
members of such corporation's board of directors or analogous governing body, or
(ii) any other corporation or other entity in which Ambac, directly or
indirectly, has an equity or similar interest and which the Committee designates
as a Subsidiary for purposes of the Plan.
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"SUBSTITUTE AWARD" means an Award granted upon assumption of, or in
substitution for, outstanding awards previously granted by a company or other
entity in connection with a corporate transaction, such as a merger,
combination, consolidation or acquisition of property or stock.
3. ADMINISTRATION OF THE PLAN
(a) POWER AND AUTHORITY OF THE COMMITTEE. The Plan shall be administered by
the Committee, which shall have full power and authority, subject to the express
provisions hereof:
(i) to select Participants from the Eligible Individuals;
(ii) to make Awards in accordance with the Plan;
(iii) to determine the number of shares of Common Stock subject to each
Award or the cash amount payable in connection with an Award;
(iv) to determine the terms and conditions of each Award, including, without
limitation, those related to vesting, forfeiture, payment and exercisability,
and the effect, if any, of a Participant's termination of employment with the
Company, and including the authority to amend the terms and conditions of an
Award after the granting thereof to a Participant in a manner that is not,
without the consent of the Participant, prejudicial to the rights of such
Participant in such Award;
(v) to specify and approve the provisions of the Award Agreements delivered
to Participants in connection with their Awards;
(vi) to construe and interpret any Award Agreement delivered under the Plan;
(vii) to prescribe, amend and rescind rules and procedures relating to the
Plan;
(viii) to vary the terms of Awards to take account of tax, securities law
and other regulatory requirements of foreign jurisdictions;
(ix) subject to the provisions of the Plan and subject to such additional
limitations and restrictions as the Committee may impose, to delegate to one
or more officers of the Company some or all of its authority under the Plan;
(x) to employ such legal counsel, independent auditors and consultants as it
deems desirable for the administration of the Plan and to rely upon any
opinion or computation received therefrom; and
(xi) to make all other determinations and to formulate such procedures as
may be necessary or advisable for the administration of the Plan.
(b) PLAN CONSTRUCTION AND INTERPRETATION. The Committee shall have full
power and authority, subject to the express provisions hereof, to construe and
interpret the Plan.
(c) DETERMINATIONS OF COMMITTEE FINAL AND BINDING. All determinations by the
Committee in carrying out and administering the Plan and in construing and
interpreting the Plan shall be final, binding and conclusive for all purposes
and upon all persons interested herein.
(d) DELEGATION OF AUTHORITY. The Committee may, but need not, from time to
time delegate some or all of its authority under the Plan to an Administrator
consisting of one or more members of the Committee or of one or more officers of
the Company; provided, however, that the Committee may not delegate its
authority (i) to make Awards to Eligible Individuals who are officers of the
Company who are
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delegated authority by the Committee hereunder, or (ii) under Sections 3(b) and
16 of the Plan. Any delegation hereunder shall be subject to the restrictions
and limits that the Committee specifies at the time of such delegation or
thereafter. Nothing in the Plan shall be construed as obligating the Committee
to delegate authority to an Administrator, and the Committee may at any time
rescind the authority delegated to an Administrator appointed hereunder or
appoint a new Administrator. At all times, the Administrator appointed under
this Section 3(d) shall serve in such capacity at the pleasure of the Committee.
Any action undertaken by the Administrator in accordance with the Committee's
delegation of authority shall have the same force and effect as if undertaken
directly by the Committee, and any reference in the Plan to the Committee shall,
to the extent consistent with the terms and limitations of such delegation, be
deemed to include a reference to the Administrator.
(e) LIABILITY OF COMMITTEE. No member of the Committee shall be liable for
any action nor determination made in good faith, and the members of the
Committee shall be entitled to indemnification and reimbursement in the manner
provided in Ambac's Certificate of Incorporation as it may be amended from time
to time. In the performance of its responsibilities with respect to the Plan,
the Committee shall be entitled to rely upon information and advice furnished by
the Company's officers, the Company's accountants, the Company's counsel and any
other party the Committee deems necessary, and no member of the Committee shall
be liable for any action taken or not taken in reliance upon any such advice.
(f) ACTION BY THE BOARD. Anything in the Plan to the contrary
notwithstanding, any authority or responsibility which, under the terms of the
Plan, may be exercised by the Committee may alternatively be exercised by the
Board.
4. EFFECTIVE DATE AND TERM
The Plan shall become effective upon its adoption by the Board subject to its
approval by the stockholders of Ambac. Prior to such stockholder approval, the
Committee may grant Awards conditioned on stockholder approval. If such
stockholder approval is not obtained at or before the first annual meeting of
stockholders to occur after the adoption of the Plan by the Board (including any
adjournment or adjournments thereof), the Plan and any Awards made thereunder
shall terminate ab initio and be of no further force and effect. In no event
shall any Awards be made under the Plan after the seventh anniversary of the
date of stockholder approval.
5. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
(a) GENERAL. Subject to adjustment as provided in Section 15(b) hereof, the
number of shares of Common Stock that may be issued pursuant to Awards under the
Plan (the "SECTION 5 LIMIT") shall not exceed, in the aggregate:
(I) 2,750,000 shares; plus
(II) the number of shares of Common Stock that remain available for issuance
under the Predecessor Plan as of the date this Plan is approved by the
stockholders of the Company (increased by any shares of Common Stock subject
to any award (or portion thereof) outstanding under the Predecessor Plan on
such date which lapses, expires or is otherwise terminated without the
issuance of such shares or is settled by the delivery of consideration other
than shares).
Shares issued under this Plan may be either authorized but unissued shares,
treasury shares or any combination thereof.
(b) RULES APPLICABLE TO DETERMINING SHARES AVAILABLE FOR ISSUANCE. For
purposes of determining the number of shares of Common Stock that remain
available for issuance, the following shares shall be added back to the Section
5 Limit and again be available for Awards:
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(x) The number of shares tendered to pay the exercise price of a Stock
Option or other Award; and
(y) The number of shares withheld from any Award to satisfy a Participant's
tax withholding obligations or, if applicable, to pay the exercise price of a
Stock Option or other Award.
In addition, any shares underlying Substitute Awards shall not be counted
against the Section 5 Limit and shall not be subject to Section 5(c) below.
(c) SPECIAL LIMITS. Anything to the contrary in Section 5(a) above
notwithstanding, but subject to Section 15(b) below, the following special
limits shall apply to shares of Common Stock available for Awards under the
Plan:
(i) The maximum number of shares that may be issued in the form of Stock
Awards, or issued upon settlement of Restricted Stock Units or Other Awards,
shall equal 800,000 shares, of which no more than a number of shares equal to
10% of the Section 5 Limit shall be in the form of Other Awards, provided,
however, that any such Stock Awards, Restricted Stock Units or Other Awards
that are issued in lieu of cash compensation that otherwise would be paid to a
Participant, or in satisfaction of any other obligation owed by the Company to
a Participant, shall not be counted against such limitation; and
(ii) The maximum number of shares of Common Stock that may be subject to
Stock Options or Stock Appreciation Rights granted to any Eligible Individual
in any fiscal year of the Company shall equal 200,000 shares plus any shares
which were available under this Section 5(c)(ii) for Awards of Stock Options
or Stock Appreciation Rights to such Eligible individual in any prior fiscal
year but which were not covered by such Awards.
(d) NO FURTHER AWARDS UNDER PREDECESSOR PLAN. From and after the date this
Plan is approved by the stockholders of the Company, no further awards shall be
made under the Predecessor Plan.
6. ELIGIBLE INDIVIDUALS
Awards may be granted by the Committee to individuals ("ELIGIBLE INDIVIDUALS")
who are officers or other key employees of the Company. Members of the Committee
will not be eligible to receive Awards under the Plan. An individual's status as
an Administrator will not affect his or her eligibility to participate in the
Plan.
7. AWARDS IN GENERAL
(a) TYPES OF AWARD AND AWARD AGREEMENT. Awards under the Plan may consist of
Stock Options, Stock Appreciation Rights, Stock Awards, Restricted Stock Units,
Performance Units or Other Awards. Any Award described in Sections 8 through 13
of the Plan may be granted singly or in combination or tandem with any other
Award, as the Committee may determine. Awards may be made in combination with,
in replacement of, or as alternatives to grants of rights under any other
employee compensation plan of the Company, including the plan of any acquired
entity, or may be granted in satisfaction of the Company's obligations under any
such plan.
(b) TERMS SET FORTH IN AWARD AGREEMENT. The terms and provisions of an Award
shall be set forth in a written Award Agreement approved by the Committee and
delivered or made available to the Participant as soon as practicable following
the date of the award. The vesting, exercisability, payment and other
restrictions applicable to an Award (which may include, without limitation,
restrictions on transferability or provision for mandatory resale to the
Company) shall be determined by the Committee and set forth in the applicable
Award Agreement. Notwithstanding the foregoing, the Committee may
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accelerate (i) the vesting or payment of any Award, (ii) the lapse of
restrictions on any Award or (iii) the date on which any Stock Option, Stock
Appreciation Right or other Award first becomes exercisable.
(c) TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. The Committee shall
also have full authority to determine and specify in the applicable Award
Agreement the effect, if any, that a Participant's termination of employment for
any reason will have on the vesting, exercisability, payment or lapse of
restrictions applicable to an Award. The date of a Participant's termination of
employment for any reason shall be determined in the sole discretion of the
Committee. Similarly, the Committee shall have full authority to determine the
effect, if any, of a change in control of Ambac on the vesting, exercisability,
payment or lapse of restrictions applicable to an Award, which effect may be
specified in the applicable Award Agreement or determined at a subsequent time.
(d) DIVIDENDS AND DIVIDEND EQUIVALENTS. The Committee may provide
Participants with the right to receive dividends or payments equivalent to
dividends or interest with respect to an outstanding Awards, which payments can
either be paid currently or deemed to have been reinvested in shares of Common
Stock, and can be made in Common Stock, cash or a combination thereof, as the
Committee shall determine.
8. STOCK OPTIONS
(a) TERMS OF STOCK OPTIONS GENERALLY. A Stock Option shall entitle the
Participant to whom the Stock Option was granted to purchase a specified number
of shares of Common Stock during a specified period at a price that is
determined in accordance with Section 8(b) below. Stock Options may be either
Nonqualified Stock Options or Incentive Stock Options. The Committee will fix
the vesting and exercisability conditions applicable to a Stock Option, provided
that no Stock Option shall vest sooner than one year from the date of grant
(subject to early vesting, if so provided by the Committee, upon death,
disability, termination of employment or a change in control of the Company),
but provided, further, that such minimum vesting period shall not apply to any
Restoration Option.
(b) EXERCISE PRICE. The exercise price per share of Common Stock purchasable
under a Stock Option shall be fixed by the Committee at the time of grant or,
alternatively, shall be determined by a method specified by the Committee at the
time of grant; provided, however, that the exercise price per share shall be no
less than 100% of the Fair Market Value per share on the date of grant (or it
the exercise price is not fixed on the date of grant, then on such date as the
exercise price is fixed); and provided further, that, except as provided in
Section 15(b) below, the exercise price per share of Common Stock applicable to
a Stock Option may not be adjusted or amended, including by means of amendment,
cancellation or the replacement of such Stock Option with a subsequently awarded
Stock Option. Notwithstanding the foregoing, the exercise price per share of a
Stock Option that is a Substitute Award may be less than the Fair Market Value
per share on the date of award, provided that the excess of:
(i) the aggregate Fair Market Value (as of the date such Substitute Award is
granted) of the shares of Common Stock subject to the Substitute Award, over
(ii) the aggregate exercise price thereof,
does not exceed the excess of:
(iii) the aggregate fair market value (as of the time immediately preceding
the transaction giving rise to the Substitute Award, such fair market value to
be determined by the Committee) of the shares of the predecessor entity that
were subject to the award assumed or substituted for by the Company, over
(iv) the aggregate exercise price of such shares.
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(c) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee and shall not exceed ten years from the date of grant.
(d) METHOD OF EXERCISE. Subject to the provisions of the applicable Award
Agreement, the exercise price of a Stock Option may be paid in cash or
previously owned shares or a combination thereof and, if the applicable Award
Agreement so provides, in whole or in part through the withholding of shares
subject to the Stock Option with a value equal to the exercise price. In
accordance with the rules and procedures established by the Committee for this
purpose, the Stock Option may also be exercised through a "cashless exercise"
procedure approved by the Committee involving a broker or dealer approved by the
Committee, that affords Participants the opportunity to sell immediately some or
all of the shares underlying the exercised portion of the Stock Option in order
to generate sufficient cash to pay the Stock Option exercise price and/or to
satisfy withholding tax obligations related to the Stock Option.
9. STOCK APPRECIATION RIGHTS
(a) GENERAL. A Stock Appreciation Right shall entitle a Participant to
receive, upon satisfaction of the conditions to the payment specified in the
applicable Award Agreement, an amount equal to the excess, if any, of the Fair
Market Value on the exercise date of the number of shares of Common Stock for
which the Stock Appreciation Right is exercised, over the exercise price for
such Stock Appreciation Right specified in the applicable Award Agreement. The
exercise price per share of Common Stock covered by a Stock Appreciation Right
shall be fixed by the Committee at the time of grant or, alternatively, shall be
determined by a method specified by the Committee at the time of grant;
provided, however, that, except as provided in Section 9(b) below, the exercise
price per share shall be no less than 100% of the Fair Market Value per share on
the date of grant (or if the exercise price is not fixed on the date of grant,
then on such date as the exercise price is fixed); and provided further, that,
except as provided in Section 15(b) below, the exercise price per share of
Common Stock subject to a Stock Appreciation Right may not be adjusted or
amended, including by means of amendment, cancellation or the replacement of
such Stock Appreciation Right with a subsequently awarded Stock Appreciation
Right. Notwithstanding the foregoing, the exercise price per share of a Stock
Appreciation Right that is a Substitute Award may be less than the Fair Market
Value per share on the date of award, provided, that such exercise price is not
less than the minimum exercise price that would be permitted for an equivalent
Stock Option as determined in accordance with Section 8(b) above. At the sole
discretion of the Committee, payments to a Participant upon exercise of a Stock
Appreciation Right may be made in cash, in shares of Common Stock having an
aggregate Fair Market Value as of the date of exercise equal to such amount, or
in a combination of cash and shares having an aggregate value as of the date of
exercise equal to such amount.
(b) STOCK APPRECIATION RIGHTS IN TANDEM WITH STOCK OPTIONS. A Stock
Appreciation Right may be granted alone or in addition to other Awards, or in
tandem with a Stock Option. A Stock Appreciation Right granted in tandem with a
Stock Option may be granted either at the same time as such Stock Option or
subsequent thereto. If granted in tandem with a Stock Option, a Stock
Appreciation Right shall cover the same number of shares of Common Stock as
covered by the Stock Option (or such lesser number of shares as the Committee
may determine) and shall be exercisable only at such time or times and to the
extent the related Stock Option shall be exercisable, and shall have the same
term and exercise price as the related Stock Option (which, in the case of a
Stock Appreciation Right granted after the grant of the related Stock Option,
may be less than the Fair Market Value per share on the date of grant of the
tandem Stock Appreciation Right). Upon exercise of a Stock Appreciation Right
granted in tandem with a Stock Option, the related Stock Option shall be
canceled automatically to the extent of the number of shares covered by such
exercise; conversely, if the related Stock Option is exercised as to some or all
of the shares covered by the tandem grant, the tandem Stock Appreciation Right
shall be canceled automatically to the extent of the number of shares covered by
the Stock Option exercise.
10. STOCK AWARDS
7
<PAGE>
(a) GENERAL. A Stock Award shall consist of one or more shares of Common
Stock granted to a Participant for no consideration other than the provision of
services (or, if required by applicable law in the reasonable judgment of the
Company, for payment of the par value of such shares). Stock Awards shall be
subject to such restrictions (if any) on transfer or other incidents of
ownership for such periods of time, and shall be subject to such conditions of
vesting, as the Committee may determine and as shall be set forth in the
applicable Award Agreement.
(b) DISTRIBUTIONS. Any shares of Common Stock or other securities of the
Company received by a Participant to whom a Stock Award has been granted as a
result of a stock distribution to holders of Common Stock or as a stock dividend
on Common Stock shall be subject to the same terms, conditions and restrictions
as such Stock Award.
11. RESTRICTED STOCK UNITS
An Award of Restricted Stock Units shall consist of a grant of units, each of
which represents the right of the Participant to receive one share of Common
Stock, subject to the terms and conditions established by the Committee in
connection with the Award and set forth in the applicable Award Agreement. Upon
satisfaction of the conditions to vesting and payment specified in the
applicable Award Agreement, Restricted Stock Units will be payable, at the
discretion of the Committee, in Common Stock, in cash equal to the Fair Market
Value of the shares subject to such Restricted Stock Units, or in a combination
of Common Stock and cash. Restricted Stock Units that are granted in respect to
individual or corporate performance shall vest no sooner than one year from the
date of grant, and Restricted Stock Units that are granted in connection with
hiring or retention arrangements between the Company and a Participant shall
vest no sooner than three years from the date of grant (subject, in either case,
to early vesting, if so provided by the Committee, upon death, disability,
termination of employment or a change in control of the Company).
12. PERFORMANCE UNITS
Performance units may be granted as fixed or variable share- or dollar-
denominated units subject to such conditions of vesting and time of payment as
the Committee may determine and as shall be set forth in the applicable Award
Agreement relating to such Performance Units. Performance Units may be paid in
Common Stock, cash or a combination of Common Stock and cash, as the Committee
may determine.
13. OTHER AWARDS
The Committee shall have the authority to specify the terms and provisions of
other forms of equity-based or equity-related Awards not described above which
the Committee determines to be consistent with the purpose of the Plan and the
interests of the Company, which Awards may provide for cash payments based in
whole or in part on the value or future value of Common Stock, for the
acquisition or future acquisition of Common Stock, or any combination thereof.
Other Awards shall also include cash payments (including the cash payment of
dividend equivalents) under the Plan which may be based on one or more criteria
determined by the Committee which are unrelated to the value of Common Stock and
which may be granted in tandem with, or independent of, other Awards under the
Plan.
14. CERTAIN RESTRICTIONS
(a) TRANSFERS. Unless the Committee determines otherwise, no Award shall be
transferable other than by will or by the laws of descent and distribution or
pursuant to a domestic relations order; provided, however, that the Committee
may, in its discretion and subject to such terms and conditions as it shall
specify, permit the transfer of an Award for no consideration to a Participant's
family members or to one or more trusts or partnerships established in whole or
in part for the benefit of one or more of such family members (collectively,
"PERMITTED TRANSFEREES"). Any Award transferred to a Permitted Transferee shall
be further transferable only by will or the laws of descent and distribution or,
for no consideration, to
8
<PAGE>
another Permitted Transferee of the Participant. The Committee may in its
discretion permit transfers of Awards other than those contemplated by this
Section.
(b) EXERCISE. During the lifetime of the Participant, a Stock Option, Stock
Appreciation Right or similar-type Other Award shall be exercisable only by the
Participant or by a Permitted Transferee to whom such Stock Option, Stock
Appreciation Right or Other Award has been transferred in accordance with
Section 14(a).
15. RECAPITALIZATION OR REORGANIZATION
(a) AUTHORITY OF THE COMPANY AND STOCKHOLDERS. The existence of the Plan,
the Award Agreements and the Awards granted hereunder shall not affect or
restrict in any way the right or power of the Company or the stockholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of stock or of options, warrants or
rights to purchase stock or of bonds, debentures, preferred or prior preference
stocks whose rights are superior to or affect the Common Stock or the rights
thereof or which are convertible into or exchangeable for Common Stock, or the
dissolution or liquidation of the Company, or any sale or transfer of all or any
part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
(b) CHANGE IN CAPITALIZATION. Notwithstanding any provision of the Plan or
any Award Agreement, the number and kind of shares authorized for issuance under
Section 5(a) above, including the maximum number of shares available under the
special limits provided for in Section 5(c) above, may be equitably adjusted in
the sole discretion of the Committee in the event of a stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, extraordinary
dividend, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase Common Stock at a price substantially below Fair
Market Value or other similar corporate event affecting the Common Stock in
order to preserve, but not increase, the benefits or potential benefits intended
to be made available under the Plan. In addition, upon the occurrence of any of
the foregoing events, the number of outstanding Awards and the number and kind
of shares subject to any outstanding Award and the purchase price per share, if
any, under any outstanding Award may be equitably adjusted (including by payment
of cash to a Participant) in the sole discretion of the Committee in order to
preserve the benefits or potential benefits intended to be made available to
Participants granted Awards. Such adjustments shall be made by the Committee,
whose determination as to what adjustments shall be made, and the extent
thereof, shall be final. Unless otherwise determined by the Committee, such
adjusted Awards shall be subject to the same vesting schedule and restrictions
to which the underlying Award is subject.
16. AMENDMENTS
The Board or Committee may at any time and from time to time alter, amend,
suspend or amend the Plan in whole or in part; provided, however, that any
amendment which under the requirements of any applicable law or stock exchange
rule must be approved by the stockholders of the Company shall not be effective
unless and until such stockholder approval has been obtained in compliance with
such law or rule; and provided further, that, except as contemplated by Section
15(b) above, the Board or Committee may not, without the approval of the
Company's stockholders, increase the maximum number of shares issuable under the
Plan or reduce the exercise price of a Stock Option or Stock Appreciation Right.
No termination or amendment of the Plan may, without the consent of the
Participant to whom an Award has been granted, adversely affect the rights of
such Participant under such Award. Notwithstanding any provision herein to the
contrary, the Board or Committee shall have broad authority to amend the Plan or
any Award under the Plan to take into account changes in applicable tax laws,
securities laws, accounting rules and other applicable state and federal laws.
17. MISCELLANEOUS
9
<PAGE>
(a) TAX WITHHOLDING. The Company may require any individual entitled to
receive a payment in respect of an Award to remit to the Company, prior to such
payment, an amount sufficient to satisfy any Federal, state or local tax
withholding requirements. The Company shall also have the right to deduct from
all cash payments made pursuant to or in connection with any Award any Federal,
state or local taxes required to be withheld with respect to such payments. In
the case of an Award payable in shares of Common Stock, the Company may permit
such individual to satisfy, in whole or in part, such obligation to remit taxes
by directing the Company to withhold shares of Common Stock that would otherwise
be received by such individual, pursuant to such rules as the Committee may
establish from time to time.
(b) NO RIGHT TO GRANTS OR EMPLOYMENT. No Eligible Individual or Participant
shall have any claim or right to receive grants of Awards under the Plan.
Nothing in the Plan or in any Award or Award Agreement shall confer upon any
employee of the Company any right to continued employment with the Company or
interfere in any way with the right of the Company to terminate the employment
of any of its employees at any time, with or without cause.
(c) OTHER COMPENSATION. Nothing in this Plan shall preclude or limit the
ability of the Company to pay any compensation to a Participant under the
Company's other compensation and benefit plans and programs.
(d) OTHER EMPLOYEE BENEFIT PLANS. Payments received by a Participant under
any Award made pursuant to the Plan shall not be included in, nor have any
effect on, the determination of benefits under any other employee benefit plan
or similar arrangement provided by the Company, unless otherwise specifically
provided for under the terms of such plan or arrangement or by the Committee.
(e) UNFUNDED PLAN. The Plan is intended to constitute an unfunded plan for
incentive compensation. Prior to the payment or settlement of any Award, nothing
contained herein shall give any Participant any rights that are greater than
those of a general creditor of the Company. In its sole discretion, the
Committee may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Common Stock or payments in lieu
thereof with respect to awards hereunder.
(f) SECURITIES LAW RESTRICTIONS. The Committee may require each Eligible
Individual purchasing or acquiring shares of Common Stock pursuant to a Stock
Option or other Award under the Plan to represent to and agree with the Company
in writing that such Eligible Individual is acquiring the shares for investment
and not with a view to the distribution thereof. All certificates for shares of
Common Stock delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Securities and Exchange
Commission, any exchange upon which the Common Stock is then listed, and any
applicable federal or state securities law, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate reference to
such restrictions. No shares of Common Stock shall be issued hereunder unless
the Company shall have determined that such issuance is in compliance with, or
pursuant to an exemption from, all applicable federal and state securities laws.
(g) COMPLIANCE WITH RULE 16B-3. Notwithstanding anything contained in the
Plan or in any Award Agreement to the contrary, if the consummation of any
transaction under the Plan would result in the possible imposition of liability
on a Participant pursuant to Section 16(b) of the Exchange Act, the Committee
shall have the right, in its sole discretion, but shall not be obligated, to
defer such transaction or the effectiveness of such action to the extent
necessary to avoid such liability, but in no event for a period longer than six
months.
(h) AWARD AGREEMENT. In the event of any conflict or inconsistency between
the Plan and any Award Agreement, the Plan shall govern, and the Award Agreement
shall be interpreted to minimize or eliminate any such conflict or
inconsistency.
(i) EXPENSES. The costs and expenses of administering the Plan shall be
borne by the Company.
10
<PAGE>
(j) APPLICATION OF FUNDS. The proceeds received from the Company from the
sale of Common Stock or other securities pursuant to Awards will be used for
general corporate purposes.
(k) APPLICABLE LAW. Except as to matters of federal law, the Plan and all
actions taken thereunder shall be governed by and construed in accordance with
the laws of the State of Delaware without giving effect to conflicts of law
principles.
11
<PAGE>
EXHIBIT NUMBER 11
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1997 September 30, 1997
------------------------ ------------------------
<S> <C> <C>
Net income...................................................... $60,795 $164,146
------- --------
Fully diluted shares:
Average number of common shares outstanding.................. 70,108 69,984
Assumed exercise of dilutive stock options (1)............... 2,019 2,019
------- --------
72,127 72,003
======= ========
Earnings per share assuming full dilution (2)................... $ 0.84 $ 2.28
======= ========
</TABLE>
(1) As of September 30, 1997, approximately 4,319,000 stock options, restricted
shares and restricted stock units had been granted and were outstanding.
Based upon various exercise prices, the total consideration for the options
and restricted stock units will be approximately $93.8 million. The
dilution would be the equivalent of approximately 2,019,000 shares, using
the treasury stock method, based upon an average value of $40.764 per
share.
(2) In accordance with Accounting Principles Board Opinion No. 15, any
reduction of less than 3% need not be considered as dilution. Accordingly,
the consolidated statements of operations on page 4 of this report reflect
net income per common share of $0.87 and $2.35 for the three and nine
months ended September 30, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 5980343
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6129369
<CASH> 45
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 103922
<TOTAL-ASSETS> 7412709
<POLICY-LOSSES> 61087
<UNEARNED-PREMIUMS> 1042081
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 223847
0
0
<COMMON> 707
<OTHER-SE> 1787245
<TOTAL-LIABILITY-AND-EQUITY> 7412709
109091
<INVESTMENT-INCOME> 117814
<INVESTMENT-GAINS> 20118
<OTHER-INCOME> 7671
<BENEFITS> 2122
<UNDERWRITING-AMORTIZATION> 28997
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 209869
<INCOME-TAX> 45723
<INCOME-CONTINUING> 164146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164146
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
EXHIBIT 99.04
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF AMBAC FINANCIAL GROUP, INC.)
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Ambac Assurance Corporation ("Ambac Assurance") is a leading insurer of
municipal and structured finance obligations and has been assigned triple-A
claims-paying ability ratings, the highest ratings available from Moody's
Investors Service, Inc., Standard & Poor's Ratings Group, Fitch Investors
Service, L.P., and Nippon Investors Services, Inc. Financial guarantee insurance
underwritten by Ambac Assurance guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
obligation, payments under the insurance policy may not be accelerated by the
policyholder without Ambac Assurance's consent. As of September 30, 1997, Ambac
Assurance's net insurance in force (principal and interest) was $249.4 billion.
Ambac Assurance is a wholly-owned subsidiary of Ambac Financial Group, Inc.,
which is a holding company that provides through its affiliates financial
guarantee insurance and financial services to clients in both the public and
private sectors.
American Municipal Bond Holding Company ("AMBH"), a wholly-owned subsidiary
of Ambac Assurance, is a holding company for certain real estate interests.
During the first quarter of 1997, Ambac Assurance established a new
subsidiary in the United Kingdom, AMBAC Insurance UK Limited ("AMBAC UK"), which
was authorized to conduct certain classes of general insurance business in the
United Kingdom. As of February 4, 1997, AMBAC UK is the primary vehicle for the
issuance of financial guarantee insurance policies in the United Kingdom and
Europe.
Ambac Assurance, as the sole limited partner, owns 90% of the total
partnership interests of Ambac Financial Services, Limited Partnership ("AFS"),
a limited partnership which provides interest rate swaps primarily to states,
municipalities and municipal authorities. The sole general partner of AFS, Ambac
Financial Services Holdings, Inc., a wholly-owned subsidiary Ambac Financial
Group, Inc., owns a general partnership interest representing 10% of the total
partnership interest in AFS.
Ambac Assurance's consolidated unaudited interim financial statements
have been prepared on the basis of generally accepted accounting principles
("GAAP") and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial condition, results of operations and cash flows for the
periods presented. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The results of operations for the nine months ended
September 30, 1997 may not be indicative of the results that may be expected for
the full year ending December 31, 1997. These financial statements and notes
should be read in conjunction with the financial statements and notes included
in the audited consolidated financial statements of Ambac Assurance Corporation
and its subsidiaries as of December 31, 1996 and 1995, and for each of the years
in the three-year period ended December 31, 1996.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
-------------------- -------------------
(unaudited)
<S> <C>
Assets
- ------
Investments:
Bonds held in available for sale account, at fair value
(amortized cost of $2,530,218 in 1997 and $2,323,259 in 1996) $2,667,860 $2,424,524
Short-term investments, at cost (approximates fair value) 104,541 91,320
-------------------- -------------------
Total investments 2,772,401 2,515,844
Cash 295 5,025
Securities purchased under agreements to resell 10,158 4,369
Receivable for securities sold 41,194 18,462
Investment income due and accrued 42,944 42,263
Deferred acquisition costs 103,922 94,212
Prepaid reinsurance 169,962 168,786
Other assets 39,148 59,544
-------------------- -------------------
Total assets $3,180,024 $2,908,505
==================== ===================
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Unearned premiums $1,047,131 $995,220
Losses and loss adjustment expenses 61,087 60,220
Ceded reinsurance balances payable 4,544 7,438
Deferred income taxes 110,431 84,842
Current income taxes 11,050 8,974
Accounts payable and other liabilities 47,860 50,244
Payable for securities purchased 75,801 46,246
-------------------- -------------------
Total liabilities 1,357,904 1,253,184
-------------------- -------------------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share; authorized
shares - 285,000; issued and outstanding shares - none - -
Common stock, par value $2.50 per share; authorized shares
- 40,000,000; issued and outstanding shares - 32,800,000
at September 30, 1997 and December 31, 1996 82,000 82,000
Additional paid-in capital 521,123 515,684
Unrealized gains on investments, net of tax 89,467 65,822
Cumulative translation adjustment (154) -
Retained earnings 1,129,684 991,815
-------------------- -------------------
Total stockholder's equity 1,822,120 1,655,321
-------------------- -------------------
Total liabilities and stockholder's equity $3,180,024 $2,908,505
==================== ===================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $53,444 $67,875 $180,207 $177,935
Ceded premiums written (6,495) (9,813) (19,122) (29,261)
------------------ ------------------ ------------------ ------------------
Net premiums written 46,949 58,062 161,085 148,674
Increase in unearned premiums (10,860) (23,900) (50,743) (45,840)
------------------ ------------------ ------------------ ------------------
Net premiums earned 36,089 34,162 110,342 102,834
Net investment income 40,206 36,977 118,100 107,466
Net realized gains 13,931 (5,381) 18,222 64,555
Other income 4,120 2,377 10,436 13,182
------------------ ------------------ ------------------ ------------------
Total revenues 94,346 68,135 257,100 288,037
------------------ ------------------ ------------------ ------------------
Expenses:
Losses and loss adjustment expenses 730 1,301 2,122 3,811
Underwriting and operating expenses 11,244 9,713 33,061 31,379
Interest expense 566 514 1,696 1,542
------------------ ------------------ ------------------ ------------------
Total expenses 12,540 11,528 36,879 36,732
------------------ ------------------ ------------------ ------------------
Income before income taxes 81,806 56,607 220,221 251,305
------------------ ------------------ ------------------ ------------------
Income tax expense:
Current taxes 12,051 10,521 36,176 62,834
Deferred taxes 7,190 888 12,857 1,648
------------------ ------------------ ------------------ ------------------
Total income taxes 19,241 11,409 49,033 64,482
------------------ ------------------ ------------------ ------------------
Net income $62,565 $45,198 $171,188 186,823
================== ================== ================== ==================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1997 1,996
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $171,188 $186,823
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,292 1,463
Amortization of bond premium and discount (779) (1,525)
Current income taxes 2,076 15,134
Deferred income taxes 12,857 1,648
Deferred acquisition costs (9,710) (7,402)
Unearned premiums 50,735 45,840
Losses and loss adjustment expenses 867 (5,826)
Ceded reinsurance balances payable (2,894) (3,374)
Gain on sales of investments (18,222) (64,555)
Other, net 22,932 (2,004)
---------------- -----------------
Net cash provided by operating activities 230,342 166,222
---------------- -----------------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 1,085,317 1,210,927
Proceeds from maturities of bonds at amortized cost 87,000 78,368
Purchases of bonds at amortized cost (1,358,009) (1,462,567)
Change in short-term investments (13,221) 12,846
Proceeds from sale of affiliate - 115,865
Securities purchased under agreements to resell (5,789) (4,346)
Other, net 2,630 (1,724)
---------------- -----------------
Net cash used in investing activities (202,072) (50,631)
---------------- -----------------
Cash flows from financing activities:
Dividends paid (33,000) (145,865)
Capital contribution - 32,500
---------------- -----------------
Net cash used in financing activities (33,000) (113,365)
---------------- -----------------
Net cash flow (4,730) 2,226
Cash at January 1 5,025 6,912
---------------- -----------------
Cash at September 30 $295 $9,138
================ =================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $29,900 $13,300
================ =================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
