SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
x | ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
¨ | TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-10777
A. | Full title of the plan and the address of the plan, if different from that of the issuer named below: |
Ambac Financial Group, Inc.
Savings Incentive Plan
B. | Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: |
Ambac Financial Group, Inc.
One State Street Plaza
New York, New York 10004
AMBAC FINANCIAL GROUP, INC.
SAVINGS INCENTIVE PLAN
Financial Statements and Supplemental Schedules
December 31, 2005 and 2004
(With Report of Independent Registered Public Accounting Firm Thereon)
Savings Incentive Plan
INDEX
PAGE | ||
2 | ||
Financial Statements: | ||
Statements of Net Assets Available for Plan Benefits as of December 31, 2005 and 2004 | 3 | |
4 | ||
5 –10 | ||
Supplemental Schedules*: | ||
Schedule 1 – Schedule H, Line 4i- Schedule of Assets (Held at End of Year) as of December 31, 2005 | 11 | |
12 | ||
13 | ||
14 |
Report of Independent Registered Public Accounting Firm
The Administrator
Ambac Financial Group, Inc. Savings Incentive Plan:
We have audited the accompanying statements of net assets available for plan benefits of the Ambac Financial Group, Inc. Savings Incentive Plan (the Plan) as of December 31, 2005 and 2004, and the related statements of changes in net assets available for plan benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits as of December 31, 2005 and 2004, and the changes in net assets available for plan benefits for the years then ended, in conformity with U.S. generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedule H, line 4i – Schedule of Assets (Held at End of Year) as of December 31, 2005 and Schedule H, line 4j – Schedule of Reportable Transactions for the year ended December 31, 2005 are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan’s management. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ KPMG LLP
New York, New York
June 26, 2006
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Savings Incentive Plan
Statements of Net Assets Available for Plan Benefits
December 31, 2005 and 2004
2005 | 2004 | |||||
Assets: | ||||||
Investments, at fair value (see note 3): | ||||||
Ambac Financial Group, Inc. Stock Fund | $ | 22,823,208 | $ | 24,045,315 | ||
Mutual Funds | 49,711,321 | 45,352,088 | ||||
Loans to participants | 700,562 | 844,678 | ||||
Total investments | 73,235,091 | 70,242,081 | ||||
Receivables: | ||||||
Employer contributions receivable (see note 1(b)) | 2,082,976 | 1,987,048 | ||||
Participant contributions receivable | 136,590 | 125,549 | ||||
Total receivables | 2,219,566 | 2,112,597 | ||||
Net assets available for plan benefits | $ | 75,454,657 | $ | 72,354,678 | ||
See Accompanying Notes to the Financial Statements
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Savings Incentive Plan
Statements of Changes in Net Assets Available for Plan Benefits
For the years ended December 31, 2005 and 2004
2005 | 2004 | ||||||
Additions to net assets attributed to: | |||||||
Contributions: | |||||||
Employer contributions | $ | 2,877,264 | $ | 2,734,708 | |||
Participant contributions | 2,833,149 | 2,635,424 | |||||
Rollovers | 875,979 | 38,448 | |||||
Total contributions | 6,586,392 | 5,408,580 | |||||
Investment Income: | |||||||
Interest and dividends | 1,907,707 | 1,091,496 | |||||
Net (depreciation) appreciation in fair value of investments (see note 3) | (52,976 | ) | 7,109,251 | ||||
Total investment income | 1,854,731 | 8,200,747 | |||||
Total additions | 8,441,123 | 13,609,327 | |||||
Deductions from net assets attributed to: | |||||||
Benefit payments | 5,339,804 | 5,791,620 | |||||
Administrative expenses | 1,340 | 1,300 | |||||
Total deductions | 5,341,144 | 5,792,920 | |||||
Net increase | 3,099,979 | 7,816,407 | |||||
Net assets available for plan benefits: | |||||||
Beginning of year | 72,354,678 | 64,538,271 | |||||
End of year | $ | 75,454,657 | $ | 72,354,678 | |||
See Accompanying Notes to the Financial Statements
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SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 31, 2005 and 2004
(1) | Description of the Plan |
The following description of the Ambac Financial Group, Inc. Savings Incentive Plan (the “Plan”) provides only general information. Participants should refer to the Summary Plan Description or Plan document for more complete information of the Plan’s provisions.
(a) | General |
The Plan is a defined contribution plan covering all regular employees of Ambac Financial Group, Inc. (“Ambac”) who have completed at least six months of service in which the employee is credited with at least 500 hours of service. Ambac is the Plan sponsor. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended.
The Plan is a program designed to encourage long-term savings by eligible employees of Ambac. These savings are achieved through a systematic program of salary deferrals. The employee’s salary is reduced by the amount elected to be saved on a pre-tax basis. The pre-tax “deferred” part of the employee’s salary is not taxable to the employee until distribution, unless such distribution is to another eligible retirement plan.
(b) | Contributions |
Each participant in the Plan directs Ambac to defer on a pre-tax basis a certain percentage of his or her compensation. Employee contributions are accrued when deducted from employee pay and are invested after receipt by the trustee. Eligible participants age 50 or over may also elect additional catch-up contributions subject to the dollar limits in the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) of 2001. These catch-up contributions are not matched by Ambac. Employees may contribute to the Plan up to 20% of base compensation. The maximum annual contribution is $14,000 for 2005 and $13,000 for 2004. Ambac makes an employer matching contribution of 50% of the employee’s contributions up to 6% of such participants’ base compensation, subject to limits set by the Internal Revenue Code. Ambac may also make a Basic Profit Sharing contribution of 3% of base compensation and a Supplemental Profit Sharing contribution of an additional 3% of base compensation in the subsequent year to eligible employees. Additionally, Ambac may make a Discretionary Profit Sharing contribution equal to an amount determined by Ambac, in its sole discretion, for the taxable year with or within which the applicable Plan year ends. In 2006 and 2005, Ambac made a $2,082,976 and $1,987,048 contribution for its Basic and Supplemental Profit Sharing Contribution for 2005 and 2004, respectively. All employer Supplemental Profit Sharing contributions and Discretionary Profit Sharing contributions are automatically allocated to the Ambac Financial Group, Inc. Stock Fund. Contributions are subject to certain limitations as prescribed by the Internal Revenue Code. When one reaches the age of 55, one may begin to allocate certain portions of his/her Supplemental Profit Sharing
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AMBAC FINANCIAL GROUP, INC.
SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 31, 2005 and 2004
(1), Continued
account balance that are invested in the Ambac Stock Fund to other Investment Funds in accordance with a formula in the Plan. Effective with the Plan year beginning January 1, 2005, all contributions are invested as directed by the participant. There is no requirement to hold any portion of the employee’s account in the Ambac Financial Group Inc. Stock Fund.
(c) | Participant Accounts |
Each participant’s account is credited with the participant’s contribution and allocation of (a) Ambac’s contributions, and (b) Plan earnings or losses. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
(d) | Vesting |
Participants are immediately vested in all contributions plus actual earnings or losses thereon.
(e) | Payments of Benefits |
On termination of employment, retirement, total and permanent disability, or death, a participant or participant’s beneficiary may elect to receive an immediate lump-sum amount equal to the value of his or her account, or may elect to defer receipt of such lump sum payment until such participant attains the age of 70 1/2. If the participant’s amount is less than $5,000, a lump sum distribution is made following termination of employment.
(f) | Participant Loans |
Participants may borrow, subject to limitations relative to prior loans, up to one-half of their vested account balances, but not to exceed $50,000. The minimum loan amount is $500. The loan will bear a fixed rate of interest as determined by the Plan Administrative Committee. Participants may have up to three outstanding loans at any one time. Repayment of the loan shall be made through payroll deductions over a term not to exceed five years. However, if the loan is used to acquire a principal residence, the term of the loan may be for up to 15 years. All outstanding loans shall be due and payable at the time of any distribution of all or any portion of the value of a participant’s account.
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AMBAC FINANCIAL GROUP, INC.
SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 31, 2005 and 2004
(2) | Summary of Significant Accounting Policies |
The following are the significant accounting policies followed by the Plan:
(a) | Basis of Accounting and Use of Estimates |
The financial statements of the Plan are prepared under the accrual method of accounting. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, as well as disclosures of contingent assets and liabilities. Actual results could differ from those estimates and assumptions.
(b) | Investment Valuation and Income Recognition |
The Plan’s investments are stated at fair value. Shares of registered investment companies (mutual funds) are valued at quoted market prices, which represent the net asset value of shares held by the Plan at year-end. The Ambac Financial Group, Inc. Stock Fund is valued at its year-end unit closing price. The Ambac Financial Group, Inc. Stock Fund consists of Ambac Financial Group, Inc. Common Stock as well as small amounts of cash and cash equivalents. The Ambac Financial Group, Inc. Common Stock in the stock fund is valued using quoted market prices. Participant loans are valued at cost which approximates fair value. Purchases and sales of investments are recorded on a trade date basis. Interest income is accrued when earned. Dividend income is recorded on the ex-dividend date. Capital gain distributions are included in dividend income.
(c) | Plan Expenses |
It is Ambac’s present practice to pay routine administrative, accounting, legal and investment advisory expenses of the Plan.
(d) | Payment of Benefits |
Benefits are recorded when paid.
(e) | Risks and Uncertainties |
The Plan offers a number of investment options including the Ambac Financial Group, Inc. Stock Fund and a variety of mutual funds. The investment funds consist of U.S. equities, international equities, and fixed income securities. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risk. Due to the level of risk associated with certain investment securities, it is reasonable to expect that changes in the values of investment securities will occur in the near term and that such changes could materially affect participant account balances.
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AMBAC FINANCIAL GROUP, INC.
SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 31, 2005 and 2004
(2), Continued
The Plan’s exposure to a concentration of credit risk is limited by the diversification of investments across all participant-directed fund elections. Additionally, the investments within each participant-directed fund election are further diversified into varied financial instruments, with the exception of the Ambac Financial Group, Inc. Stock Fund, which principally invests in the securities of a single issuer.
(3) | Investments |
The following presents investments that represent 5 percent or more of the Plan’s net assets.
2005 | 2004 | |||||||
Ambac Financial Group, Inc. Stock Fund | $ | 22,823,208 | * | $ | 24,045,315 | * | ||
Vanguard Growth & Income Mutual Fund | 6,649,094 | 6,339,398 | ||||||
Vanguard 500 Index Mutual Fund | 6,285,354 | 6,135,662 | ||||||
Vanguard Prime Money Market Mutual Fund | 5,773,211 | 6,312,057 | ||||||
Vanguard Windsor II Mutual Fund | 4,911,005 | 3,763,595 | ||||||
Vanguard International Growth Mutual Fund | 4,432,780 | 3,428,835 | ||||||
Vanguard U.S. Growth Mutual Fund | 4,383,815 | 4,102,402 | ||||||
Vanguard Explorer Mutual Fund | 4,261,442 | 3,833,859 |
* | Includes nonparticipant-directed portion (see note 4) |
The net (depreciation) appreciation of investments (including gains and losses on investments bought and sold, as well as held) for the years ended December 31, 2005 and 2004 is as follows:
2005 | 2004 | ||||||
Ambac Financial Group, Inc. Stock Fund | $ | (1,520,314 | ) | $ | 3,913,095 | ||
Mutual Funds | 1,467,338 | 3,196,156 | |||||
Total | $ | (52,976 | ) | $ | 7,109,251 | ||
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AMBAC FINANCIAL GROUP, INC.
SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 31, 2005 and 2004
(4) | Nonparticipant-Directed Investments |
Information about the net assets and significant components of the changes in net assets relating to the nonparticipant-directed investments is as follows:
2005 | 2004 | |||||
Net Assets: | ||||||
Ambac Financial Group Inc. Stock Fund * | $ | 22,823,208 | $ | 24,045,315 | ||
Employer contribution receivable | $ | 246,372 | $ | 1,114,298 | ||
Year Ended December 31, 2005 | Year Ended December 31, 2004 | |||||||
Changes in Net Assets*: | ||||||||
Contributions | $ | 1,578,744 | $ | 1,628,662 | ||||
Interest and dividends | 169,920 | 144,150 | ||||||
Net (depreciation) appreciation in fair value | (1,520,314 | ) | 3,913,095 | |||||
Benefit payments | (1,268,191 | ) | (1,526,533 | ) | ||||
Administrative expenses | (580 | ) | (604 | ) | ||||
Transfers to participant directed-investments, net | (181,686 | ) | (1,442,236 | ) | ||||
$ | (1,222,107 | ) | $ | 2,716,534 | ||||
* | The Ambac Financial Group, Inc. Stock Fund displayed above is for both participant / nonparticipant-directed investments. It is not practicable to determine the balance of nonparticipant-directed net assets. |
(5) | Income Tax Status |
The Internal Revenue Service has determined and informed Ambac by a letter dated March 5, 2004 that the Plan, and related trust are designed in accordance with applicable sections of the Internal Revenue Code.
(6) | Plan Termination |
Although it has not expressed any intention to do so, Ambac has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions set forth in ERISA. In the event the Plan was terminated, the net assets of the Plan would be allocated as prescribed by ERISA and its related regulations, generally to provide benefits, after all expenses, to the participants and beneficiaries of the Plan.
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AMBAC FINANCIAL GROUP, INC.
SAVINGS INCENTIVE PLAN
Notes to Financial Statements
December 31, 2005 and 2004
(7) | Related Party Transactions |
Certain Plan investments are shares of mutual funds managed by Vanguard Fiduciary Trust Company (“Vanguard”). Vanguard is the trustee as defined by the Plan and, therefore, these transactions qualify as party-in-interest transactions.
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Ambac Financial Group, Inc.
Savings Incentive Plan
Schedule H, Line 4i - Schedule of Assets (Held at End of Year)
December 31, 2005
Identity of Issue | Description | Current Value | |||
* Ambac Financial Group, Inc. Stock Fund | Common Stock Fund; 324,328 shares at cost of $12,199,869 | $ | 22,823,208 | ||
* Vanguard Growth & Income Mutual Fund | Mutual Fund; 208,501 shares | 6,649,094 | |||
* Vanguard 500 Index Mutual Fund | Mutual Fund; 54,693 shares | 6,285,354 | |||
* Vanguard Prime Money Market Mutual Fund | Mutual Fund; 5,773,211 shares | 5,773,211 | |||
* Vanguard Windsor II Mutual Fund | Mutual Fund; 156,751 shares | 4,911,005 | |||
* Vanguard International Growth Mutual Fund | Mutual Fund; 211,085 shares | 4,432,780 | |||
* Vanguard U.S. Growth Mutual Fund | Mutual Fund; 244,224 shares | 4,383,815 | |||
* Vanguard Explorer Mutual Fund | Mutual Fund; 56,736 shares | 4,261,442 | |||
* Vanguard Long-Term Investment Grade | Mutual Fund; 278,595 shares | 2,652,225 | |||
* Vanguard Wellington Mutual Fund | Mutual Fund; 71,988 shares | 2,184,850 | |||
* Vanguard Total Bond Market Index Mutual Fund | Mutual Fund; 216,445 shares | 2,177,435 | |||
* Vanguard Inflation-Protected Securities Mutual Fund | Mutual Fund; 138,963 shares | 1,689,789 | |||
* Vanguard REIT Index Mutual Fund | Mutual Fund; 80,509 shares | 1,594,079 | |||
* Vanguard LifeStrategy Growth Mutual Fund | Mutual Fund; 52,690 shares | 1,106,496 | |||
* Vanguard LifeStrategy Conservative Growth Mutual Fund | Mutual Fund; 34,002 shares | 526,683 | |||
* Vanguard LifeStrategy Moderate Growth Mutual Fund | Mutual Fund; 20,889 shares | 385,823 | |||
* Vanguard LifeStrategy Income Mutual Fund | Mutual Fund; 23,758 shares | 320,498 | |||
* Vanguard GNMA Mutual Fund | Mutual Fund; 18,038 shares | 185,787 | |||
* Vanguard Short-term Bond Index Mutual Fund | Mutual Fund; 14,311 shares | 141,969 | |||
* Vanguard Calvert Social Index Mutual Fund | Mutual Fund; 5,938 shares | 48,984 | |||
* Participant Loans | 86 participants loans (Interest rate range 5.00% to 10.5%) | 700,562 | |||
$ | 73,235,091 | ||||
* | party-in-interest as defined by ERISA |
See accompanying report of Independent Registered Public Accounting Firm
11
Ambac Financial Group, Inc.
Savings Incentive Plan
Schedule H, Line 4j - Schedule of Reportable Transactions
Year Ended December 31, 2005
Identity and Description | Number of purchases | Purchase price | Number sales | Selling price | Cost of assets sold | Net gain | ||||||||||
The Vanguard Group - Vanguard Prime Money Mkt | 113 | $ | 1,988,335 | |||||||||||||
The Vanguard Group - Vanguard Prime Money Mkt | 85 | $ | 2,527,181 | $ | 2,527,181 | $ | — | |||||||||
The Vanguard Group - Ambac Inc Stock Fund | 57 | 3,165,789 | ||||||||||||||
The Vanguard Group - Ambac Inc Stock Fund | 85 | 2,867,582 | 2,004,094 | 863,488 |
See accompanying report of Independent Registered Public Accounting Firm
12
Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administrator the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
Ambac Financial Group, Inc. | ||||
Savings Incentive Plan | ||||
Dated: June 27, 2006 | By: | /s/ Sean T. Leonard | ||
Sean T. Leonard | ||||
Senior Vice President and Chief Financial Officer | ||||
Dated: June 27, 2006 | By: | /s/ Gregg L. Bienstock | ||
Gregg L. Bienstock, Esq. | ||||
Senior Vice President, | ||||
Chief Administrative Officer and Employment Counsel | ||||
Plan Administrator |
13
Exhibit Number | Document | |
23 | Consent of Independent Registered Public Accounting Firm. |
14