PROSPECTUS SUPPLEMENT
(To prospectus dated November 20, 2002)
$200,000,000
PUBLIC SERVICE COMPANY OF OKLAHOMA
6% Senior Notes, Series B, due 2032
Interest on the Senior Notes is payable quarterly on March 31, June 30,
September 30 and December 31 of each year, beginning March 31, 2003. The Senior
Notes will mature on December 31, 2032. We must redeem the Senior Notes in whole
at any time under the limited circumstances described in this prospectus
supplement at the redemption price described herein. We also may redeem the
Senior Notes either as a whole or in part at our option on or after November 26,
2007, in each case at a redemption price equal to 100% of the principal amount
of the Senior Notes being redeemed plus accrued interest to the date of
redemption. The Senior Notes will be available for purchase in denominations of
$25 and integral multiples of $25.
The Senior Notes are unsecured and rank equally with all of our other
unsecured and unsubordinated indebtedness from time to time outstanding and will
be effectively subordinated to all secured debt from time to time outstanding,
including $300,000,000 of outstanding first mortgage bonds as of September 30,
2002.
The Senior Notes are expected to be approved for listing on the New York
Stock Exchange, subject to official notice of issuance. Trading of the Senior
Notes on the New York Stock Exchange is expected to commence within a 30-day
period after initial delivery of the Senior Notes.
Payment of the principal of and interest on the Senior Notes when due will
be insured by a financial guaranty insurance policy to be issued by Ambac
Assurance Corporation simultaneously with the delivery of the Senior Notes.
A M B A C
Per Note Total
Public offering price(1) . . . . . . . . . 100.00% $200,000,000
Underwriting discount . . . . . . . . . . 3.15% $ 6,300,000
Proceeds, before expenses,
to Public Service Company of Oklahoma . . . 96.85% $193,700,000
(1)Plus accrued interest, if any, from November 26, 2002.
INVESTING IN THESE NOTES INVOLVES RISKS. SEE THE SECTION ENTITLED "RISK
FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS FOR MORE
INFORMATION.
Neither the U.S. Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the Senior Notes or
determined that this prospectus supplement or the accompanying prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
The Senior Notes will be ready for delivery in book-entry form only
through The Depository Trust Company on or about November 26, 2002.
Joint Book-Running Managers
Merrill Lynch & Co. Salomon Smith Barney UBS Warburg
Co-Managers
ABN AMRO Incorporated Danske Securities
The date of this prospectus supplement is November 21, 2002.
You should rely only on the information incorporated by reference or
provided in this prospectus supplement or the accompanying prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus
supplement is accurate as of any date other than the date on the front of the
document.
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY CONSOLIDATED FINANCIAL DATA........................... S-3
USE OF PROCEEDS............................................... S-4
SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES.................. S-4
THE INSURANCE POLICY AND THE INSURER.......................... S-8
RATINGS...................................................... S-11
UNDERWRITING................................................. S-11
EXPERTS....................................................... S-14
SPECIMEN INSURANCE POLICY...................................... A-1
Prospectus
THE COMPANY..................................................... 2
RISK FACTORS.................................................... 2
PROSPECTUS SUPPLEMENTS.......................................... 11
RATIO OF EARNINGS TO FIXED CHARGES.............................. 11
WHERE YOU CAN FIND MORE INFORMATION............................. 11
USE OF PROCEEDS ................................................ 12
DESCRIPTION OF THE NOTES ....................................... 12
PLAN OF DISTRIBUTION............................................ 17
LEGAL OPINIONS.................................................. 18
EXPERTS......................................................... 18
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial information
for each of the periods indicated. You should read the information in this table
together with our consolidated financial statements and other financial
information incorporated by reference in this prospectus supplement and the
accompanying prospectus.
Nine
Months
Ended Year Ended
September December 31,
30, 2002 2001 2000 1999
(in thousands)
INCOME STATEMENTS DATA:
Operating Revenues $ 537,414 $ 957,000 $ 956,398 $ 749,390
Operating Expenses 458,093 860,012 859,729 650,677
---------- ---------- ---------- ----------
Operating Income 79,321 96,988 96,669 98,713
Nonoperating Income (net) 1,004 20 8,974 946
Interest Charges 29,351 39,249 38,980 38,151
---------- ---------- ---------- ----------
Net Income 50,974 57,759 66,663 61,508
Preferred Stock Dividend
Requirements 159 213 212 212
---------- ---------- ---------- ----------
Earnings Applicable to
Common Stock $ 50,815 $ 57,546 $ 66,451 $ 61,296
========== ========== ========== ==========
As of As of
September December 31,
30, 2002 2001 2000 1999
(in thousands)
BALANCE SHEETS DATA:
Electric Utility Plant $2,736,525 $2,695,099 $2,604,670 $2,459,705
Accumulated Depreciation
and Amortization 1,235,343 1,184,443 1,150,253 1,114,255
Net Electric Utility Plant $1,501,182 $1,510,656 $1,454,417 $1,345,450
========== ========== ========== ==========
Total Assets $1,876,200 $1,917,897 $2,138,333 $1,524,726
Common Shareholder's Equity $ 463,732 $ 480,224 $ 474,918 $ 476,467
Cumulative Preferred Stock $ 5,267 $ 5,283 $ 5,283 $ 5,286
Long-term Debt (a) $ 451,360 $ 451,129 $ 470,822 $ 384,516
Total Capitalization and
Liabilities $1,876,200 $1,917,897 $2,138,333 $1,524,726
(a) Including portion due within one year.
USE OF PROCEEDS
We propose to use the net proceeds from the sale of the Senior Notes to
redeem or repurchase certain of our outstanding debt, to fund our construction
program, to repay short-term indebtedness and for other corporate purposes.
Proceeds may be temporarily invested in short-term instruments pending their
application to the foregoing purposes.
We have estimated that our consolidated construction costs (inclusive of
allowance for funds used during construction) for 2002 will be approximately
$68,000,000. At September 30, 2002, we had approximately $229,000,000 of
short-term unsecured indebtedness outstanding. Our Floating Rate Notes, Series
A, Due 2002 ($106,000,000 principal amount outstanding), mature on November 21,
2002.
SUPPLEMENTAL DESCRIPTION OF THE SENIOR NOTES
The following description of the particular terms of the Senior Notes
supplements and in certain instances replaces the description of the general
terms and provisions of the Senior Notes under "Description of the Notes" in the
accompanying Prospectus. We will issue the Senior Notes under an Indenture,
dated as of November 1, 2000, between us and The Bank of New York, as Trustee,
as supplemented and amended and as to be further supplemented and amended.
Principal Amount, Maturity, Interest and Payment
The Senior Notes will initially be issued in an aggregate principal amount
of $200,000,000. We may from time to time, without consent of the holders of the
Senior Notes, issue additional notes having the same ranking, interest rate,
maturity and other terms as the Senior Notes. These notes will be designated as
a series of notes separate from the Senior Notes under the Indenture.
The Senior Notes will mature and become due and payable, together with any
accrued and unpaid interest, on December 31, 2032 and will bear interest at the
rate of 6% per year from November 26, 2002 until December 31, 2032. The Senior
Notes are not subject to any sinking fund provision.
Interest on each Senior Note will be payable quarterly in arrears on each
March 31, June 30, September 30 and December 31 and at redemption, if any, or
maturity. The initial interest payment date is March 31, 2003. Each payment of
interest shall include interest accrued through the day before such interest
payment date. Interest on the Senior Notes will be computed on the basis of a
360-day year consisting of twelve 30-day months.
We will pay interest on the Senior Notes (other than interest payable at
redemption, if any, or maturity) in immediately available funds to the owners of
the Senior Notes as of the Regular Record Date (as defined below) for each
interest payment date.
We will pay the principal of the Senior Notes and any premium and interest
payable at redemption, if any, or at maturity in immediately available funds at
the office of The Bank of New York, 101 Barclay Street in New York, New York.
If any interest payment date, redemption date or the maturity is not a
Business Day (as defined below), we will pay all amounts due on the next
succeeding Business Day and no additional interest will be paid, except that if
such Business Day is in the next succeeding calendar year, we will make payment
on the immediately preceding Business Day.
The "Regular Record Date" will be the close of business on the Business
Day prior to the relevant interest payment date, except that if we issue note
certificates, the "Regular Record Date" shall be the close of business on the
March 15, June 15, September 15 or December 15, as the case may be, next
preceding an interest payment date or if such March 15, June 15, September 15 or
December 15 is not a Business Day, the next preceding Business Day.
"Business Day" means any day that is not a day on which banking
institutions in New York City are authorized or required by law or regulation to
close.
Certain Trading Characteristics of the Senior Notes
The Senior Notes are expected to trade at a price that takes into account
the value, if any, of accrued but unpaid interest. This means that purchasers
will not pay, and sellers will not receive, accrued and unpaid interest on the
Senior Notes except as included in the trading price thereof. Any portion of the
trading price of a Senior Note that is attributable to accrued but unpaid
interest will be treated as ordinary interest income for federal income tax
purposes and will not be treated as part of the amount realized for purposes of
determining gain or loss on the disposition of the Senior Notes.
The trading price of the Senior Notes is likely to be sensitive to the
level of interest rates generally. If interest rates rise in general, the
trading price of the Senior Notes may decline to reflect the additional yield
requirements of the purchasers. Conversely, a decline in interest rates may
increase the trading price of the Senior Notes, although any increase will be
moderated by our ability to call the Senior Notes at any time on or after
November 26, 2007.
Optional Redemption
We may redeem the Senior Notes at our option at any time on or after
November 26, 2007, upon no more than 60 and not less than 30 days' notice by
mail. We may redeem the Senior Notes either as a whole or in part at a
redemption price equal to 100% of the principal amount of the Senior Notes being
redeemed plus accrued interest thereon to the date of redemption.
Mandatory Redemption
In the event that (a) we reorganize, or otherwise transfer a substantial
portion of our assets, and (b) that reorganization or transfer results in us no
longer being a regulated utility company, and (c) the Senior Notes and our
obligations under the Indenture are not assumed by, and do not become the direct
and primary obligations of, a regulated utility company, unless Ambac Assurance
Corporation consents to such reorganization or transfer, we are obligated to
redeem the Senior Notes upon consummation of such reorganization or transfer,
which may be prior to maturity. We will also be obligated to redeem the Senior
Notes if (i) we fail to pay an insurance premium to Ambac Assurance Corporation
or (ii) we incur or issue additional indebtedness for borrowed money secured by
our assets and fail to secure our repayment obligations to Ambac Assurance
Corporation under the insurance agreement. As a condition to the issuance of the
insurance policy, we are required to pay the first five annual insurance
premiums immediately prior to the issuance of the Senior Notes. Our obligation
to pay annual insurance premiums recommences on November 26, 2007. If we are
required to redeem the Senior Notes, we will redeem the Senior Notes, in whole,
upon not less than 30 days' nor more than 60 days' notice.
If we redeem the Senior Notes as described under "- Mandatory Redemption"
on or after November 26, 2007, the redemption price will be 100% of the
principal amount of the Senior Notes plus accrued and unpaid interest thereon to
the date of redemption. If we redeem the Senior Notes as described under "-
Mandatory Redemption" before November 26, 2007, the redemption price will be
equal to the accrued interest on the Senior Notes to the date of redemption plus
the greater of:
o 100% of the principal amount of the Senior Notes; and
o the sum of the present value of the principal amount of the Senior Notes
together with the present values of the scheduled payments of interest
on the Senior Notes (not including any portion of such payments of
interest accrued as of the date of redemption) from the date of
redemption to the interest payment date on December 31, 2007 (such
time period between the date of redemption and the interest payment
date on December 31, 2007 being referred to as the "Remaining Term"),
in each case discounted to the date of redemption on a quarterly basis
(assuming a 360-day year consisting of twelve 30-day months) at the
Adjusted Treasury Rate plus twenty-five (25) basis points, as
calculated by an Independent Investment Banker.
For purposes of determining the redemption price where the redemption occurs
before November 26, 2007, the following terms shall have the following meanings:
"Adjusted Treasury Rate" means, with respect to any redemption rate:
o the yield, under the heading which represents the average for the
immediately preceding week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor
publication which is published weekly by the Board of Governors of the
Federal Reserve System and which establishes yields on actively traded
United States Treasury securities adjusted to constant maturity under
the caption "Treasury Constant Maturities", for the maturity
corresponding to the Comparable Treasury Issue (if no maturity is
within three months before or after the Remaining Term, yields for the
two published maturities most closely corresponding to the Comparable
Treasury issue shall be determined and the adjusted Treasury Rate
shall be interpolated or extrapolated from such yields on a straight
line basis, rounding to the nearest month); or
o if such release (or any successor release) is not published during the
week preceding the calculation date or does not contain such yields, the
rate per annum equal to the semi-annual equivalent yield to maturity of
the Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Issue (expressed as a percentage of its principal
amount) equal to the Comparable Treasury Price for such redemption date.
The Adjusted Treasury Rate shall be calculated on the third business day
preceding the redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the Remaining Term of the securities to be redeemed that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
Remaining Term of the Senior Notes.
"Comparable Treasury Price" means (1) the average of five Reference
Treasury Dealer Quotations for such Redemption Date, after excluding the highest
and lowest Reference Treasury Dealer Quotations, or (2) if the Independent
Investment Banker obtains fewer than five such Reference Treasury Dealer
Quotations, the average of all such quotations.
"Independent Investment Banker" means one of the Reference Treasury
Dealers appointed by us.
"Reference Treasury Dealer" means:
o each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon
Smith Barney Inc. and UBS Warburg LLC, and their respective
successors; provided that, if any of the foregoing ceases to be a
primary U.S. Government securities dealer in the United States (a
"Primary Treasury Dealer"), we will substitute another Primary
Treasury Dealer; and
o any other Primary Treasury Dealer selected by us.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Independent Investment Banker, of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Independent Investment Banker at 5:00
p.m., New York City time, on the third business day preceding such redemption
date.
Events of Default
In addition to the Events of Default described under "Description of the
Notes" in the accompanying Prospectus, the occurrence and continuance of an
event of default under the insurance agreement also constitutes an Event of
Default with respect to the Senior Notes. An event of default under the
insurance agreement includes failure by us in the observance of certain
representations and covenants thereunder and certain bankruptcy events. Our
covenants in the insurance agreement include our obligation to pay insurance
premiums, our agreement to secure our repayment obligations to Ambac Assurance
Corporation under the insurance agreement if we incur or issue additional
indebtedness for borrowed money secured by our assets, and our agreement not to
enter into corporate transactions generally of the type that would require a
mandatory redemption of the Senior Notes as described above. See "The Insurance
Policy and the Insurer" in this prospectus supplement.
Special Insurance Provisions
Subject to the provisions of the Indenture, so long as Ambac Assurance
Corporation is not in default under the policy, Ambac Assurance Corporation
shall be entitled to control and direct the enforcement of all rights and
remedies with respect to the Senior Notes upon the occurrence and continuation
of an Event of Default. No amendment, supplement or change to, or other
modification of, the Indenture requiring the consent of holders of the Senior
Notes may be made without the prior written consent of Ambac Assurance
Corporation. See "The Insurance Policy and the Insurer" in this prospectus
supplement.
Additional Information
For additional important information about the Senior Notes, see
"Description of the Notes" in the accompanying Prospectus, including: (i)
additional information about the terms of the Senior Notes, (ii) general
information about the Indenture and the trustee, and (iii) a description of
Events of Default under the Indenture.
THE INSURANCE POLICY AND THE INSURER
The Insurance Policy
We will enter into an insurance agreement with Ambac Assurance Corporation
under which Ambac Assurance Corporation will agree to issue a financial guaranty
insurance policy relating to the Senior Notes. A form of this policy is attached
to this prospectus supplement as Appendix A. The following summary of the terms
of the insurance policy does not purport to be complete and is qualified in its
entirety by reference to the insurance policy.
Ambac Assurance Corporation has made a commitment to issue the insurance
policy effective as of the date of issuance of the Senior Notes. Under the terms
of the insurance policy, Ambac Assurance Corporation will pay to The Bank of New
York, in New York, New York, or any successor, as insurance trustee, that
portion of the principal of and interest on the Senior Notes that becomes "due
for payment" but has not been paid by reason of "nonpayment" (as such terms are
defined in the insurance policy) by us. Ambac Assurance Corporation will make
such payments to the insurance trustee on the later of the date on which such
principal or interest becomes due for payment or within one Business Day
following the date on which Ambac Assurance Corporation receives notice of
nonpayment from the corporate trustee for the Senior Notes. The insurance policy
will extend for the term of the Senior Notes and, once issued, cannot be
canceled by us or Ambac Assurance Corporation.
The insurance policy will insure payment only on the stated maturity date,
in the case of principal, and on interest payment dates, in the case of
interest. If the Senior Notes become subject to mandatory redemption and
insufficient funds are available for redemption of all outstanding Senior Notes,
Ambac Assurance Corporation will remain obligated to pay principal of and
interest on outstanding Senior Notes on the originally scheduled interest and
principal payment dates. In the event of any acceleration of the principal of
the Senior Notes, the insured payments will be made at the times and in the
amounts as would have been made had there not been an acceleration.
If the corporate trustee for the Senior Notes receives notice that any
payment of principal of or interest on a Senior Note that has become due for
payment and that is made to a holder by or on our behalf has been deemed a
preferential transfer and recovered from its holder pursuant to the United
States Bankruptcy Code in accordance with a final, non-appealable order of a
court of competent jurisdiction, that holder will be entitled to payment from
Ambac Assurance Corporation to the extent of such recovery if sufficient funds
are not otherwise available.
The insurance policy does NOT insure any risk other than nonpayment, as
defined in the insurance policy. Specifically, the insurance policy does NOT
cover:
o payment on acceleration of the Senior Notes, as a result of a call for
redemption or as a result of any other advancement of maturity,
o payments of any redemption or acceleration premiums, and
o nonpayment of principal or interest caused by the insolvency or
negligence of the corporate trustee for the Senior Notes or any paying
agent.
If it becomes necessary to call upon the insurance policy, payment of
principal requires surrender of the related Senior Notes to the insurance
trustee together with an appropriate instrument of assignment so as to permit
ownership of such Senior Notes to be registered in the name of Ambac Assurance
Corporation to the extent of the payment under the insurance policy. Payment of
interest pursuant to the insurance policy requires proof of holder entitlement
to interest payments and an appropriate assignment of the holder's right to
payment to Ambac Assurance Corporation.
Upon payment of the insurance benefits in respect of any Senior Notes,
Ambac Assurance Corporation will become the owner of the related rights to
payment of principal or interest on such Senior Notes and will be fully
subrogated to the surrendering holder's rights to payment.
The Insurer
The following information has been supplied by Ambac Assurance Corporation
for inclusion in this prospectus supplement. No representation is made by us,
the corporate trustee, the underwriters or any of our or their affiliates as to
the accuracy or completeness of the information.
Ambac Assurance Corporation is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. Ambac
Assurance primarily insures newly-issued municipal and structured finance
obligations. Ambac Assurance Corporation is a wholly owned subsidiary of Ambac
Financial Group, Inc. (formerly AMBAC Inc.), a 100% publicly held company.
Moody's Investors Service, Inc., Standard & Poor's Ratings Services, a Division
of The McGraw-Hill Companies, Inc., and Fitch Ratings have each assigned a
triple-A financial strength rating to Ambac Assurance Corporation.
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries as of December 31, 2001 and December 31, 2000, and for each of the
years in the three-year period ended December 31, 2001, prepared in accordance
with accounting principles generally accepted in the United States of America,
included in the Annual Report on Form 10-K of Ambac Financial Group, Inc. (which
was filed with the SEC on March 26, 2002, File Number 1-10777), the unaudited
consolidated interim financial statements of Ambac Assurance Corporation and its
subsidiaries as of March 31, 2002 and for the periods ended March 31, 2002 and
March 31, 2001 included in the Quarterly Report on Form 10-Q of Ambac Financial
Group, Inc. (filed with the SEC on May 13, 2002); as of June 30, 2002 and for
the periods ended June 30, 2002 and June 30, 2001 included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. (filed with the SEC on August
14, 2002); and as of September 30, 2002 and for the periods ended September 30,
2002 and September 30, 2001 included in the Quarterly Report on Form 10-Q of
Ambac Financial Group, Inc. (filed with the SEC on November 14, 2002); and
Current Reports on Form 8-K of Ambac Financial Group, Inc. filed with the SEC on
January 25, 2002, April 18, 2002, July 19, 2002, August 14, 2002, October 17,
2002 and November 20, 2002, as such current reports related to Ambac Assurance
Corporation, are hereby incorporated by reference into this prospectus
supplement and are deemed to be a part of this prospectus supplement. Any
statement contained in a document incorporated in this prospectus supplement by
reference will be modified or superseded for the purposes of this prospectus
supplement to the extent that the statement is modified or superseded by this
prospectus supplement or by any other document incorporated by reference into
this prospectus supplement. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus supplement.
All information related to Ambac Assurance Corporation and subsidiaries,
including the financial statements of Ambac Assurance Corporation and
subsidiaries, that is contained in documents filed by Ambac Financial Group,
Inc. with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the Senior Notes will
be deemed to be incorporated by reference into this prospectus supplement and to
be a part hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of Ambac Assurance
Corporation and subsidiaries as of December 31, 2000, December 31, 2001 and
September 30, 2002 in conformity with accounting principles generally accepted
in the United States of America.
Ambac Assurance Corporation and Subsidiaries
Capitalization Table
(Dollars in Millions)
December December September
31, 31, 30,
2000 2001 2002
(unaudited)
Unearned premiums $1,556 $1,790 1,936
Other liabilities 581 973 1,702
------ ------ -----
Total liabilities 2,137 2,763 3,638
------ ------ -----
Stockholder's Equity:
Common stock 82 82 82
Additional paid-in capital 760 928 922
Accumulated other
comprehensive income 82 81 273
Retained earnings 2,002 2,386 2,708
----- ----- -----
Total stockholder's equity 2,926 3,477 3,985
----- ----- -----
Total liabilities and
stockholder's equity $5,063 $6,240 $7,623
------ ------ ------
For additional financial information concerning Ambac Assurance
Corporation, see the audited financial statements of Ambac Assurance Corporation
incorporated by reference in this prospectus supplement. Copies of the financial
statements of Ambac Assurance Corporation incorporated by reference and copies
of Ambac Assurance Corporation's annual statement for the year ended December
31, 2001 prepared in accordance with statutory accounting standards are
available, without charge, from Ambac Assurance Corporation. The address of
Ambac Assurance Corporation's administrative offices and its telephone number
are One State Street Plaza, 19th Floor, New York, New York 10004 and (212)
668-0340.
Ambac Assurance Corporation makes no representation regarding the Senior
Notes or the advisability of investing in the Senior Notes and makes no
representation regarding, nor has it participated in the preparation of, this
prospectus supplement other than the information supplied by Ambac Assurance
Corporation and presented under the headings "The Insurance Policy" and "The
Insurer" in this prospectus supplement and in its financial statements
incorporated in this prospectus supplement by reference.
RATINGS
It is anticipated that S&P and Moody's will assign the Senior Notes
triple-A ratings conditioned upon the issuance and delivery by Ambac Assurance
Corporation at the time of delivery of the Senior Notes of the insurance policy,
insuring the timely payment of the principal of and interest on the Senior
Notes. Such ratings reflect only the views of such rating agencies, and an
explanation of the significance of such ratings may be obtained only from such
rating agencies at the following addresses: Moody's Investors Service, Inc., 99
Church Street, New York, New York 10007; Standard & Poor's, 25 Broadway, New
York, New York 10004. There is no assurance that such ratings will remain in
effect for any period of time or that they will not be revised downward or
withdrawn entirely by said rating agencies if, in their judgment, circumstances
warrant. Neither we nor any underwriter has undertaken any responsibility to
oppose any proposed downward revision or withdrawal of a rating on the Senior
Notes. Any such downward revision or withdrawal of such ratings may have an
adverse effect on the market price of the Senior Notes.
At present, each of such rating agencies maintains four categories of
investment grade ratings. They are Standard & Poor's -- AAA, AA, A and BBB and
for Moody's -- Aaa, Aa, A and Baa. S&P defines "AAA" as the highest rating
assigned to a debt obligation. Moody's defines "Aaa" as representing the best
quality debt obligation carrying the smallest degree of investment risk.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, we have
agreed to sell to each of the underwriters named below and each of the
underwriters has severally and not jointly agreed to purchase from us the
respective principal amount of Senior Notes set forth opposite its name below:
Principal Amount
Underwriter of Senior Notes
----------- -----------------
UBS Warburg LLC........................... $ 49,650,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................ 49,625,000
Salomon Smith Barney Inc.................. 49,625,000
ABN AMRO Incorporated..................... 9,750,000
Danske Securities (US) Inc................ 9,750,000
A.G. Edwards & Sons, Inc.................. 1,500,000
Charles Schwab & Co., Inc................. 1,500,000
CIBC World Markets Corp................... 1,500,000
Deutsche Banc Alex. Brown Inc............. 1,500,000
Fahenstock & Co. Inc...................... 1,500,000
H & R BLOCK Financial Advisors, Inc....... 1,500,000
HSBC Securities USA, Inc.................. 1,500,000
McDonald Investments Inc., a KeyCorp Company 1,500,000
Prudential Securities Incorporated........ 1,500,000
Quick & Reilly, Inc....................... 1,500,000
Raymond James & Associates, Inc........... 1,500,000
RBC Dain Rauscher Inc..................... 1,500,000
TD Waterhouse Investor Services, Inc...... 1,500,000
First Union Securities, Inc............... 1,500,000
Wells Fargo Van Kasper LLC................ 1,500,000
Banc of America Securities LLC............ 700,000
D.A. Davidson & Co........................ 700,000
Ferris, Baker Watts, Incorporated......... 700,000
Fidelity Capital Markets.................. 700,000
Janney Montgomery Scott LLC............... 700,000
J.J.B Hilliard, W.L. Lyons, Inc........... 700,000
Legg Mason Wood Walker, Incorporated...... 700,000
Morgan Keegan & Company, Inc.............. 700,000
Muriel Siebert & Co....................... 700,000
Robert W. Baird & Co. Incorporated........ 700,000
Ryan, Beck & Co. LLC ..................... 700,000
The Williams Capital Group, L.P........... 700,000
Utendahl Capital Partners, L.P............ 700,000
------------
$200,000,000
In the underwriting agreement, the underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Senior Notes
offered hereby if any of the Senior Notes are purchased.
The expenses associated with the offer and sale of the Senior Notes are
expected to be approximately $400,000.
The underwriters have advised us that the underwriters propose to offer
the Senior Notes to the public initially at the offering price set forth on the
cover page of this prospectus supplement, and to certain dealers initially at
that price less a concession not in excess of $.50 per Senior Note. The
underwriters may allow, and those dealers may reallow, a concession to certain
other dealers not in excess of $.45 per Senior Note. After the initial offering
of the Senior Notes to the public, the public offering price and the concession
may be changed.
We have agreed, during the period of 30 days from the date of the
underwriting agreement, not to sell, offer to sell, grant any option for the
sale of, or otherwise dispose of any Senior Notes, any security convertible into
or exchangeable into or exercisable for Senior Notes or any debt securities
substantially similar to the Senior Notes (except for the Senior Notes issued
pursuant to the underwriting agreement and our Senior Notes, Series C), without
the prior written consent of the underwriters.
The Senior Notes are expected to be approved for listing on the New York
Stock Exchange, subject to official notice of issuance. In order to meet the
requirements for listing the Senior Notes, the underwriters will undertake to
sell the Senior Notes to a minimum of 400 beneficial holders. We expect trading
of the Senior Notes on the New York Stock Exchange to commence within a 30-day
period after the initial delivery of the Senior Notes.
Prior to this offering, there has been no public market for the Senior
Notes. Certain underwriters have advised us that they intend to make a market in
the Senior Notes. The underwriters will have no obligation to make a market in
the Senior Notes, however, and may cease market making activities, if commenced,
at any time. There can be no assurance of a secondary market for the Senior
Notes, or that the Senior Notes may be resold.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
In connection with the offering the underwriters may purchase and sell the
Senior Notes in the open market. These transactions may include over-allotment,
syndicate covering transactions and stabilizing transactions. Over-allotment
involves syndicate sales of Senior Notes in excess of the principal amount of
the Senior Notes creating a syndicate short position. Syndicate covering
transactions involve purchases of the Senior Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of Senior Notes
made for the purpose of preventing or retarding a decline in the market price of
the Senior Notes while the offering is in progress.
The underwriters may also impose a penalty bid. A penalty bid permits the
underwriters to reclaim a selling concession from a syndicate member when the
Senior Notes originally sold by that syndicate member are purchased in a
syndicate transaction.
Any of these activities may cause the price of the Senior Notes to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. Neither we nor the underwriters make any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Senior Notes. In
addition, neither we nor the underwriters make any representation that the
underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Some of the underwriters or their affiliates engage in transactions with,
and have performed services for, us and our affiliates in the ordinary course of
business.
EXPERTS
The consolidated financial statements and related consolidated financial
statement schedule as of December 31, 2001 and December 31, 2000 and for the
years then ended incorporated in this prospectus supplement and the accompanying
prospectus by reference from our Annual Report on Form 10-K for the year ended
December 31, 2001 as updated by our Current Report on Form 8-K dated November
18, 2002 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports, which are incorporated herein by reference, and have
been so incorporated in reliance upon the reports of such firm given upon their
authority as experts in auditing and accounting.
In connection with the audit by Arthur Andersen LLP ("Andersen") of our
consolidated financial statements for the year ended December 31, 1999
incorporated by reference in this prospectus, there were no disagreements
between Andersen and us on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Andersen would have caused
them to make reference thereto in their report on the financial statements for
such year.
We have not been able to obtain, after reasonable efforts, a consent from
Andersen to the inclusion of its report in this prospectus, and we have
dispensed with the requirement to file their consent in reliance upon Rule 437a
of the Securities Act. Because Andersen has not consented to the inclusion of
its report in this prospectus, you will not be able to recover against Andersen
under Section 11 of the Securities Act for any untrue statements of a material
fact contained in the financial statements audited by Andersen or any omissions
to state a material fact required to be stated therein.
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries as of December 31, 2001 and 2000 and for each of the years in the
three-year period ended December 31, 2001 are incorporated by reference in this
prospectus supplement and the registration statement in reliance on the report
of KPMG LLP, independent certified public accountants, incorporated by reference
in this prospectus supplement, upon the authority of that firm as experts in
auditing and accounting.