Qualifications to Serve As Senior Managing Underwriter Badger Tobacco Asset Securitization Corporation September 13, 2007 Bear, Stearns & Co. Inc. 383 Madison Avenue New York, New York 10179 Tel 212-272-2000 www.bearstearns.com September 13, 2007 Frank R. Hoadley, President Badger Tobacco Asset Securitization Corp. C/O State of Wisconsin DOA Capital Finance Office 101 E. Wilson St., 10th Floor Madison, WI 53703 Dear Mr. Hoadley: Bear Stearns is pleased to present its qualifications to serve as book-running senior manger for the Badger Tobacco Asset Securitization Corporation (the “Corporation”) on this important transaction, which will advance refund the currently outstanding Series 2002 Bonds and free up $50 million of TSRs for the State Health Care Quality Trust Fund. While our attached response details our recommendations and credentials, we have summarized several salient points below. Proven Leadership. Bear Stearns offers the Corporation the nation’s most experienced tobacco securitization team. q Bear Stearns is the undisputed leader in the tobacco securitization industry, ranked #1 by Securities Data Company. We have led 27 tobacco transactions with a total par of $25.8 billion. Our track record of repeat issuers includes Alaska, California, Michigan, New Jersey, Virginia and TSASC. q Our leadership is even more pronounced for unenhanced state level tobacco securitizations where Bear Stearns has led $18.7 billion of transactions. Since Virginia’s transaction in 2005, virtually every state level issuer has chosen Bear Stearns to lead its tobacco securitization. q Bear Stearns’ leadership in the tobacco sector has continued with the advent of tobacco restructurings. Bear Stearns has led $13.5 billion of tobacco restructurings, which is $11.3billion more than our nearest competitor. q Our expertise perfectly matches the transaction that the Corporation is contemplating. Specifically, Bear Stearns has: Ø lead managed 72.5% of unenhanced state level tobacco issuances (#1 ranked), 74.7% of unenhanced state level restructurings (#1 ranked) and 63.6% of unenhanced state level taxable transactions (#1 ranked); Ø a unique understanding of the Corporation’s tobacco securitization documents and existing holders; and Ø a proven record of structuring and marketing innovation in the tobacco sector, allowing us to meet our client’s financing objectives. Dedicated Team of Professionals. As the leading tobacco securitization underwriter, we offer the Corporation superior tobacco experience, technical and structuring resources, retail and institutional distribution networks, secondary market presence and sector-specific research support which results in unparalleled structuring and marketing expertise. Our team is comprised of 18 professionals including tobacco structuring specialists, senior underwriters, capital market specialists and numerous banking professionals. Not only will the tobacco team be completely dedicated to the Corporation but Bear Stearns will also commit its capital and firm-wide resources to ensure the success of this financing. Commitment to Wisconsin. For over twenty years, Bear Stearns has demonstrated its commitment to serve the State of Wisconsin. Since 2004, Bear Stearns has senior managed five financings totaling in excess of $900 million for the State. The hallmark of our service has been our ability to analyze complex problems, present effective solutions to the State and then flawlessly implement the agreed upon strategy. With regard to the State’s proposed tobacco restructuring, our performance on the Corporation’s first tobacco securitization is our best, most relevant credential. Our unique experience provides us with a thorough understanding of the existing indenture, escrow investment alternatives, working capital requirements and investor holdings. Bear Stearns has been actively involved for over a year in presenting alternative structures and assisting the State in developing its securitization strategy. Bear Stearns has consistently demonstrated the ability to deliver superior tax-exempt and taxable tobacco results. We look forward to the opportunity to again serve the Corporation as senior manager on this important financing. We are ready to “hit the ground running” and provide the level of service that we demonstrated on the Corporation’s Series 2002 issuance. Sincerely, Neil Flanagan Senior Managing Director Kym Arnone Senior Managing Director TABLE OF CONTENTS Page SECTION A 1. Name And Information About Firm. Provide the name and address of the firm and indicate if your firm is a minority-owned firm, women-owned firm, or other form of DBE. 1 2. Office Location. Provide the location of the office, if other than that shown above, at which the services will be performed. If this office is not located within the State of Wisconsin, identify the physical location of other offices that your firm may have in the State. 1 3. Contact Information. Provide the name, telephone number, cell number, telefax number, and email address of the banker(s) responsible for (a) submitting the response who may be contacted in the event of questions or notification, and (b) overseeing the firm’s involvement with the pending transaction. Include resume(s) as an appendix to your response; not subject to the respective page limits. 1 4. Banking Team. Provide the name, telephone number, cell number, telefax number, and e-mail address of all people from your firm that will provide investment banking, quantitative, or other services for the pending transaction. Identify what role in the pending transaction each individual will perform. Include resumes as an appendix to your response; not subject to the respective page limits. 1 5. Underwriters. Provide the name, telephone number, telefax number, and e-mail address of the underwriters, dealers, and traders who will be responsible for the marketing of this pending transaction. Include resumes as an appendix to your response; not subject to the respective page limits. 2 6. Experience With Similar Transactions. Itemize in the form of a table the tobacco-related transactions that your firm has participated in and place these transactions into two categories: 2 • Involve the initial sale/securitization of a governmental unit’s TSRs under the MSA. • Involve (i) the subsequent refunding of bonds previously issued for the securitization of TSRs under the MSA, and/or (ii) the additional sale/securitization of TSRs under the MSA. For each transaction listed, show the following: • Issuer, name of obligations, dated date, and par amount • Role your firm played in the transaction • Amount of initial underwriting liability for your firm • Amount of all orders, amount of priority orders, and amount of securities allocated to your firm Finally, provide the total amount of tobacco securitization bonds that your firm has traded in the secondary market since (i) July 15, 2007, and (ii) January 1, 2004. Page 7. State Of Wisconsin Transactions. Itemize in the form of a table your firm’s State of Wisconsin underwriting activity for calendar years 2004, 2005, 2006, and year-to-date 2007 (not subject to the respective page limits). Categorize this activity into three categories: 2 • State of Wisconsin issues (do not include prior issues for the Corporation). • State Authority issuers (for example, WHEDA and WHEFA) • Wisconsin local governmental issuers For each transaction listed, show the following: • Issuer, name of obligations, dated date, and par amount • Negotiated or competitive sale • Role your firm played in the transaction • Amount of initial underwriting liability for your firm 8. References. Provide (including name, address, phone number, and e-mail address) two references that are issuers for which your firm partic ipated in a tobacco securitization transaction. 2 9. Capital Strength. 2 a. Provide the most recent financial information for your firm that shows, at a minimum, (i) total capital, (ii) excess net capital (uncommitted) as of your firm’s most current reporting date, and (iii) 12- and 24-month average of excess net capital (uncommitted). b. What strategies has your firm’s municipal department employed to manage the recent market dislocation? c. How has the recent market environment impacted your firm’s municipal market trading limits and what is the potential impact upon the offering of the Corporation’s securities? 10. Required Certifications. Responses must include the following certifications (not subject to the respective page limits): a. Certification Of No Conflicting Statutory Relationship. The respondent certifies that no relationship which would constitute a violation of Section 19.45 (6), Wisconsin Statutes, regarding a state public official or their immediate family exists. The respondent also certifies that no relationship exists which interferes with fair competition with respect to its submittal. The Corporation may waive this provision, in writing, if those activities of the respondent will not be adverse to the interests of the State and the Corporation. b. Statement Regarding Other Conflicts Of Interest. Provide a statement that, if selected to serve on the underwriting team, no relationship exists which could constitute a conflict of interest between the Corporation and your firm, if selected to serve in the underwriting team for the pending transaction. The statement should further certify that the firm will promptly provide notice to the Corporation when the firm learns of any conflict of interest that may arise in the future. c. Statement Regarding Criminal Actions. Provide a statement as to the status of any pending or resolved criminal actions under federal law or by any state against your firm or registered principals of the firm (relating to the business of your firm) since January 1, 2006. d. Statement Regarding Political Contributions. 3 Page Provide a statement that neither your firm nor any person or entity associated with your firm (and covered by Municipal Securities Rulemaking Board Rule G-37) has made any contribution during the past three years, directly or indirectly, to an official of the Corporation or the State, which statement, with respect to the State of Wisconsin, further describes your firm’s compliance with MSRB Rule G-37. SECTION B 1. Statement Of Interest. Provide a statement of interest in serving as Senior Manager (which may include Book-Running Senior Manager or Co-Senior Manager). 4 2. Qualifications. Describe the qualifications of your firm as they relate to services to be provided as Senior Manager for the pending transaction. Separately describe the qualifications of your firm as they relate to services to be provided as Book-Running Senior Manager for this pending transaction. 4 3. Timing Of Pending Transaction. Identify and discuss the biggest challenge the Corporation faces in completing the pending transaction by November 15, 2007. Further discuss the timing of this pending transaction relative to other similar transactions that may be occurring in approximately this same time period, the current market environment for these obligations, and any possible litigation in the tobacco market. 4 4. Conflicts. Discuss any conflicts that may exist if your firm is selected as Book-Running Senior Manager or Senior Manager and your firm is already serving such role for other similar transactions that may be approaching the market during the same time period. 6 5. Working Relationships. There have been various articles in the press that raise questions about the working relationships among Senior Managers in other tobacco securitization transactions. Comment on this situation and how your firm would address and improve this situation. 6 6. a. Explain how your firm, if selected as Book-Running Senior Manager, would involve and enhance participation of other Co- Senior Managers. b. Explain how your firm, if not selected as Book-Running Senior Manager, would provide ‘value’ to the pending transaction in terms of structure and marketing/distribution of the securities. Detailed Structure Information. Based on the assumed transaction outlined in Section II.A. present a detailed plan of finance, terms, sizing, and structuring for the pending transaction (detailed cash flows and supporting detail may be provided in an appendix and are not subject to the 15-page limitation). As a benchmark, use the MMD scale and U.S. Treasuries as of Monday, September 10, 2007. Clearly outline all your assumptions related to yield levels (and the rationale for these levels, including credit spreads), rating requirements, details and return associated with the related investments, and Global Insight consumption. a. 7. 7 Highlight and discuss the economic savings (or costs) associated with the advance refunding of the 2002 Bonds in your proposed plan of the finance for the assumed pending transaction. If the advance refunding of the 2002 Bonds does not currently provide economic savings, please provide a sensitivity analysis that shows the change in yield levels needed for the advance refunding to “break even”. Detailed Alternate Structure Information. Discuss in detail any concerns with the assumed transaction outlined in Section II.A. Present a detailed plan of finance, terms, sizing, and structuring of an alternative transaction that may be more cost-effective for the Corporation. Explain the benefits of this alternative transaction over the assumed transaction outlined in 11 Page Section II.A. above. As a benchmark, use the MMD scale and U.S. Treasuries as of Monday, September 10, 2007. In addition, clearly outline all assumptions parallel to those required in Section III.B.6. above. 8. Working Capital Requirements. The 2002 Bonds were issued for working capital purposes. Summarize the working capital requirements that the Corporation will need to comply with and address in the pending transaction. Discuss ideas that the Corporation should consider to reduce the working capital requirements. 11 9. Marketing Plan. Provide and discuss in detail a summary of the marketing plan you envision for the securities to be issued. 13 a. Given the recent market dislocation, is there a segment of investors, such as tender offer bond programs, that may be less likely to participate and how will that impact your marketing plan and the offering yields for the Corporation’s securities? b. What traditional buyers are currently in the market that have capacity for the Corporation’s securities? c. Discuss how the proposed marketing plan, or other efforts of your firm, can address the current market dislocation for the benefit of the Corporation. Appendix Resumes A Tobacco Experience B Wisconsin Experience C Regulatory Information D Detailed Structuring Information E CONFIDENTIAL TREATMENT REQUESTED Bear Stearns requests that this proposal and the information herein (the “Proposal”) be kept and treated as confidential and exempt from the Wisconsin Public Records Law, Wis. Stat. § 19.31 et seq. This request for confidential treatment is based on the fact that (i) the Proposal contains trade secrets that need not be disclosed pursuant to Wis. Stat. § 19.36(5), and (ii) the public interest in maintaining confidentiality of the Proposal outweighs the public interest in disclosure. The Proposal is of significant independent economic value to both Bear Stearns and its competitors. This information was prepared solely at Bear Stearns’ expense, and is the result of the firm’s substantial investment of time, money and analytical resources in an effort to compete for potential business. Accordingly, Bear Stearns has endeavored to maintain the secrecy of the Proposal, not revealing it to any competitors or any other third parties. If the Proposal is disclosed, Bear Stearns’ competitors will freely acquire information and ideas for which Bear Stearns has expended substantial resources and will therefore acquire a significant competitive advantage. The public interest in maintaining the confidentiality of the Proposal greatly outweighs any public interest in disclosure. While the public may eventually have an interest in the actual activities undertaken by Badger Tobacco Asset Securitization Corporation, the suggested approaches, expectations and opinions set forth in the Proposal are not currently of any public interest. Disclosure of the Proposal would be a disservice to the public because, in the future, investment banks such as Bear Stearns will be less likely to submit detailed proposals to Wisconsin government entities on an unpaid basis. This request is not to be construed as a waiver of any other protection from disclosure of confidential treatment accorded by law. If any person (outside the staff of the State, the Badger Tobacco Asset Securitization Corporation and the Financial Advisors) asks for an opportunity to copy the Proposal, Bear Stearns requests that the undersigned be immediately notified of such request and be given advance notice of any intended release of documents or information, so that Bear Stearns may, if deemed necessary or appropriate, substantiate the request for confidential treatment at the appropriate time and pursue the remedies available. Neil Flanagan Senior Managing Director Bear, Stearns & Co. Inc. Kym Arnone Senior Managing Director Bear, Stearns & Co. Inc. BADGER TOBACCO ASSET S ECURITIZATION CORPORATION A.1. NAME AND INFORMATION ABOUT FIRM LOCATION. Bear Stearns is headquartered at 383 Madison Avenue, New York, New York 10179. MINORITY, WOMEN OR DBE OWNED BUSINESS. Bear Stearns is not a MBE/WBE/DBE firm. However, Bear Stearns is proud of its strong track record of working with these firms in a variety of underwriting capacities. In addition to our own workforce policies, Bear Stearns continually supports minority and disadvantaged enterprises and as senior manager routinely meets and exceeds the MBE/DBE goals of our clients. A.2. OFFICE LOCATION Although Bear Stearns does not have local offices in Wisconsin, we have provided continuous superior coverage to the State for over 20 years. A.3. CONTACT INFORMATION Bear Stearns’ primary contacts will be Neil Flanagan and Kym Arnone, both Senior Managing Directors in our New York office. Mr. Flanagan will have overall responsibilities for managing Bear Stearns’ activities throughout our engagement. Ms. Arnone will manage day-to-day tobacco related matters. Together, they will ensure that the full resources of the Firm are made available to the State on this important financing. Contact information for Mr. Flanagan and Ms. Arnone is provided in Question A.4. A.4. BANKING TEAM Bear Stearns has assembled a multi-disciplinary team of municipal finance and asset-backed securities (“ABS”) professionals who will be assigned to the Badger Tobacco Asset Securitization Corporation’s (the “Corporation”) Member Role S EPTEMBER 13, 2007 issuance on a priority basis. The #1 ranked Bear Stearns team has created, by far, the most innovations in the tobacco sector leading to exceptional structuring and pricing accomplishments. We maintain our position as the dominant underwriter of tobacco bonds by dedicating a consistent team of finance and marketing specialists to the sector. The core Bear Stearns tobacco team has worked on each of the 27 tobacco securitizations that the Firm has led including the Corporation’s successful 2002 issuance. CAPITAL COMMITMENT. Jeff Mayer and Craig Overlander, co-heads of Fixed Income, will fully commit the Firm’s resources and capital to the Corporation. PRINCIPAL BANKERS . Bear Stearns’ principal bankers are Neil Flanagan and Kym Arnone. Mr. Flanagan and Ms. Arnone provide Wisconsin and tobacco banking expertise, respectively. Ira Wagner, a Senior Managing Director and Head of the ABS Department provides taxable tobacco banking expertise. John Schopfer, a Managing Director in the Public Finance Department and former bond attorney, will provide legal documentation expertise. Michael Britchkow will be providing Wisconsin banking support. QUANTITATIVE EXPERTISE. Our quantitative team is led by Nora Ostrovskaya, Reshma Patel, and John Suh. Rachel Betton and Jeff Swhier will provide quantitative and banking support. Larry Cohen, Amy Kessler and Frances Barone in the Financial Analytics and Structured Transactions (“F.A.S.T.”) group are responsible for Monte Carlo analysis. Significantly, we do not rely on quantitative generalists to structure tobacco securitizations. Rather, the core of our technical and structuring resources are the tobacco securitization specialists who have worked on every one of the 27 tobacco securitizations we have led since the sector’s inception. Phone Cellular Capital Commitment Jeff Mayer Capital Commitment 212-272-6554 201-341-7326 Craig Overlander Capital Commitment 212-272-7221 203-966-9249 Tobacco Banking Neil Flanagan Primary Contact/Wisconsin Banker 212-272-2840 914-610-1395 Kym Arnone Primary Contact/Tobacco Specialist 212-272-2343 917-734-2958 Ira Wagner Lead ABS Banker 212-272-5826 212-729-3399 John Schopfer Documentation Expert 212-272-7588 646-342-4473 Michael Britchkow Wisconsin Banking Support 212-272-6015 201-906-4380 Tobacco Structuring Nora Ostrovskaya Structuring Specialist 212-272-2286 917-239-7868 Reshma Patel Structuring & Stress Testing 212-272-7300 917-532-5709 John Suh Structuring & Stress Testing 212-272-4866 201-424-5900 Rachel Betton Structuring Support 212-272-6046 646-285-2433 Jeff Swhier Structuring Support 212-272-2986 646-300-4006 Larry Cohen FAST Monte Carlo Specialist 212-272-4043 201-694-7251 Amy Kessler FAST & Stress Testing 212-272-3544 347-739-5682 Frances Barone FAST Monte Carlo Specialist 212-272-2379 917-494-1183 Sales, Underwriting & Trading Dan Keating Dept. Head & Underwriter 212-272-4911 973-632-5019 Roy Carlberg Underwriter 212-272-4910 917-837-3995 John Young Underwriter 212-272-2618 973-727-6469 Carol Fuller Underwriter 212-272-4955 917-319-7948 Chris Durso Tobacco Trader 212-272-4900 201-653-4045 Chris Tota Tobacco Trader 212-272-4900 818-439-4722 BEAR, STEARNS & CO. INC. 1 Fax Email 212-272-9978 212-272-4419 jmayer@bear.com coverlander@bear.com 212-272-5310 212-272-5948 917-849-0906 212-272-5948 212-272-5948 nflanagan@bear.com karnone@bear.com iwagner@bear.com jschopfer@bear.com mbritchkow@bear.com 212-272-5948 212-272-5948 212-272-5948 212-272-5948 212-272-5948 212-272-0514 917-397-5088 212-272-0514 nostrovskaya@bear.com rpatel2@bear.com hsuh@bear.com rbetton@bear.com jswhier@bear.com lcohen@bear.com akessler@bear.com barone@bear.com 212-272-4843 212-272-3899 212-272-3899 212-272-4711 212-272-5320 212-272-5320 dkeating@bear.com carlberg@bear.com johnyoung@bear.com cfuller@bear.com durso@bear.com ctota@bear.com BADGER TOBACCO ASSET S ECURITIZATION CORPORATION Bear Stearns will commit this professional team to the Corporation’s engagement and these individuals will be available to the Corporation at all times. Resumes for all team members can be found in Appendix A. A.5. A.6. SIMILAR TRANSACTION EXPERIENCE Previous Tobacco Experience # of Deals First Time Issuances 22 Refunding/ Additional Sales 21 Bear Stearns’ Senior Managed State of Wisconsin Experience (2004-2007 YTD) Dated Date Obligation Par Amount 7/2/07 Operating Notes $50.00 MM 2/10/05 GO Refunding Bonds $430.24 MM 9/30/04 Transportation Rev Ref Bonds $95.91 MM 6/15/04 GO Refunding Bonds $175.00 MM 3/16/04 GO Refunding Note $175.00 MM Total $926.15 MM Total Par $17.9 Bil $26.4 Bil SECONDARY MARKET TRADING. Bear Stearns has traded $15.76 billion and $1.53 billion in the secondary market since January 1, 2004 and July 15, 2007 respectively. We are a dominant player in the secondary market having on average executed 38.5% of secondary tobacco trades since January 1, 2004. Significantly, Bear Stearns has traded $831.7 million of the Corporation’s Series 2002 Bonds since their issuance. STATE OF WISCONSIN TRANSACTIONS Bear Stearns’ commitment to and familiarity with the State of Wisconsin’s financing needs is unsurpassed. We have consistently dedicated senior resources to the State over the past twenty years and provided many innovative financing ideas. Neil Flanagan, Senior Managing Director, has personally overseen each State of Wisconsin financing senior managed by Bear Stearns since 1990. Since 2004, Bear Stearns has senior managed five financings totaling in excess of $900 million for the State on both a negotiated and competitive bases as illustrated in the table on the right. Most recently, Bear Stearns competitively won $50 million of the State’s Operating Notes. Over the same time frame, Bear Stearns has served BEAR, STEARNS & CO. INC. We constantly monitor refunding opportunities on all of the State’s credits, most recently identifying several opportunities on the State’s General Obligation and Transportation Revenue Bond credits which the State ultimately refunded competitively. A complete list of our Wisconsin underwriting experience since January 1, 2004 is included in Appendix C. A.8. Please see Appendix B for a table outlining detailed information on the 22 first time issuances and 21 refundings or additional sales that Bear Stearns has participated in. Significantly, Bear Stearns has served as the number one ranked senior manager for tobacco securitizations since the sector’s inception, having led $25.8 billion of transactions. No firm has led more subsequent tobacco refundings than Bear Stearns (10 transactions). A.7. as a co-manager on five additionalfinancings totaling more than $1.1 billion. UNDERWRITERS Dan Keating, a Senior Managing Director and the Head of Municipal Markets, will personally price the Corporation’s refinancing. Mr. Keating has underwritten 16 transactions for the State since 1988 and has priced every one of the 27 tobacco securitizations we have led including the Corporation’s 2002 issuance. Mr. Keating will be assisted by Roy Carlberg, John Young, and Carol Fuller. Chris Durso and Chris Tota are responsible for tobacco trading and will support the marketing effort by monitoring the investor base and trading environment. Please see the table on the prior page for their contact information. S EPTEMBER 13, 2007 REFERENCES Bear Stearns believes that issuer client references provide the best demonstration of our ability to deliver an unparalleled level of tobacco expertise and service. As requested, we have offered references for our performance on recent financings completed. We have chosen the two largest tobacco refundings given their relevance to the Corporation’s proposed financing. TSFC (New Jersey) Nancy Feldman, Director P.O. Box 005, 50 West State Street, 5th Floor Trenton, New Jersey 08625 Phone: (609) 984-8229 Fax: (609) 777-1987 nancy.feldman@treas.state.nj.us A.9. GSTSC (California) Katie Carroll, Director 915 Capitol Mall, Section 261 Sacramento, CA 95814 Phone: (916) 653-1815 Fax: (916) 657-4827 kcarroll@treasurer.ca.gov CAPITAL STRENGTH CAPITAL AND COMMITMENT. Bear Stearns is among the most capitalized firms on Wall Street with over $75 billion in total capital. More specifically, Bear Stearns has uncommitted excess net capital totaling $3.1 billion as of our last NASD filing. Our average excess net capital for the 12 and 24 months prior to this filing was $3.7 billion and $2.6 billion, respectively. Bear Stearns, as sole manager, could underwrite a single transaction of over $31 billion. Willingness to Commit Capital. While the amount of capital is an important barometer of a firm’s qualifications to serve as the book-running senior manager, it is paramount that the book-running senior manager is willing to commit its capital to ensure a successful underwriting and provide secondary market support. This willingness has always been important in the tobacco sector which has frequently experienced periods of extreme volatility. 2 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION Bear Stearns’ willingness to commit its capital in the tobacco sector was best evidenced in January 2007 when we served as book-running senior manager for the New Jersey Tobacco Settlement Financing Corporation’s sale of $3.62 billion of Series 2007 Bonds. At the time, this transaction was the largest tax-exempt tobacco bond issue ever marketed and was priced amid concerns of transaction-specific litigation, unprecedented tobacco bond supply and unstable market conditions. In order to ensure the success of the transaction for our client and in support of the broader tobacco sector, on the day of pricing Bear Stearns purchased $600 million of the Series 2007 Bonds. Rhetoric and hollow promises to backstop deals are cheap; actual performance in underwriting bonds is “priceless.” Assuming Bear Stearns is the book-running senior manager on BTASC’s upcoming financing and has an underwriting liability of 50% of the proposed $1.5 billion issue, our capital commitment to BTASC would equal up to $750 million. As the State knows well, an underwriter uses capital for market stabilization as opposed to taking on the role of an investor and owning a significant portion of the transaction. The sensitivity of this relationship is heightened in today’s market. No buyer wants to own bonds when they know that an underwriter will be working out of a sizable position and may need to sell bonds at lower prices which will negatively impact the value of the investment the investors make in the Badger financing. METHODS TO MANAGE CURRENT MARKET DISLOCATION. The recent market dislocation has been characterized by a credit crunch and a lack of liquidity which has affected investors’ ability to sell securities and raise capital. Bear Stearns has employed firm-wide and department specific strategies to maintain our commitment to meet our clients’ liquidity needs. In mid 2006, well before the recent subprime turbulence, Bear Stearns recognized that it would be desirable to minimize its reliance on short-term financing vehicles, such as commercial paper. Over the next 12 months, we more than doubled our cash balance and reduced our commercial paper from $23 billion to $4.6 billion. These actions positioned the Firm to handle the unforeseen recent market dislocation. Recently, Bear Stearns has taken additional steps to ensure the availability of funding and related customer liquidity. Recent term debt issuance in July and August totaled $5 billion and at present, we have over $4 billion of committed unsecured bank lines and $18 billion of unencumbered collateral. In our municipal department, we have selectively reduced our trading positions to avoid any adverse effects from today’s volatile market in order to ensure our capital is readily available to support our client’s needs. We have committed significant capital to stabilize markets. For example, as some investors wish to exit auction rates securities that have direct or indirect exposure to mortgage BEAR, STEARNS & CO. INC. S EPTEMBER 13, 2007 securities or certain credit enhancers, Bear Stearns has stepped in to purchase these securities to orchestrate an orderly transition to a new investor base. In response to the decline in demand from arbitrageurs and hedge funds, Bear Stearns has also aggressively supported our client’s new issuance by redoubling efforts with traditional investors and reestablishing relationships with buyers who have been out of the market during the past few years. For example, Bear Stearns focused on retail demand for a recent $325.16 million New York State Personal Income Tax bond offering. Our efforts led to approximately $260 million in retail orders, a 3 bps repricing on the bonds and set the tone for the following week’s strong municipal bond rally. We have also continued to cultivate demand from crossover buyers who are attracted to municipals given their relative “cheapness.” TRADING LEVELS AND COMMITMENT TO STATE. The recent market environment has had no impact on Bear Stearns’ municipal market trading limits. Moreover, the current market environment will not have any effect on Bear Stearns commitment to the State of Wisconsin, the Corporation or the offering of the Corporations’ securities. As discussed above, Bear Stearns stands ready to commit $700 million of our capital in connection with the underwriting of the Corporation’s proposed $1.5 billion tobacco refinancing. A.10. REQUIRED CERTIFICATIONS CERTIFICATION OF NO CONFLICTING STATUTORY RELATIONSHIP. There is no relationship that would constitute a violation of Section 19.45(6), nor that would interfere with fair competition with respect to this submittal. STATEMENT REGARDING OTHER CONFLICTS OF INTEREST. No relationships exist that would constitute a conflict of interest between the Corporation and Bear Stearns. Should Bear Stearns be selected to serve in the underwriting team for the upcoming transaction, it would have procedures in place to notify the Corporation if it were to become aware of any conflicts of interest. STATEMENT REGARDING CRIMINAL ACTIONS. Bear Stearns is a registered broker-dealer that operates in a highly-regulated industry. Every year Bear Stearns and its affiliates receive thousands of inquiries and requests for information from various self-regulatory and law enforcement agencies. Those matters deemed material to Bear Stearns’ parent company are reported in the parent’s annual and quarterly filings with the SEC, which can be accessed at www.bearstearns.com by clicking “Investor Relations” and then “SEC Filings.” This document should be read in conjunction with the parent’s filings. Disciplinary history concerning Bear Stearns is available via the NASD’s website at www.brokercheck.nasd.com. For a more complete description, please see Appendix D. The fact that we have included certain matters herein should not suggest that these matters are significant. 3 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION STATEMENT REGARDING POLITICAL CONTRIBUTIONS. We have no contributions to the Corporation or the State of Wisconsin on record. In addition, Bear Stearns has policies and procedures in place to ensure compliance with MSRB Rule G-37. B.1. STATEMENT OF INTEREST Bear Stearns wishes to be considered for the position of book-running manager for the Corporation’s proposed Series 2007 transaction. B.2. QUALIFICATIONS Our expertise perfectly matches the transaction the Corporation is contemplating. Specifically, Bear Stearns: q q q dominates state level tobacco issuance; has managed the most restructurings in the industry; and leads the taxable tobacco sector. DOMINANT STATE LEVEL TOBACCO UNDERWRITER. According to Securities Data Company, Bear Stearns is by far the top ranked senior manager of tobacco securitizations. As illustrated in the graph below, our leadership is even more pronounced for unenhanced state level tobacco securitizations. Bear Stearns has led $18.7 billion of unenhanced state level transactions with a 72.5% market share. Since Virginia’s transaction in 2005, Bear Stearns has led nearly every state level tobacco securitization. All Tobacco Securitizations ($) Billions 30 Bear Stearns’ Mkt Share: 53% 1999-2004 25 2005-2007 20 15 10 5 0 Bear Stearns Citi JPMorgan Goldman Sachs ($) Billions 30 25 1999-2004 Bear Stearns’ Mkt. Share 73% 2005-2007 20 15 10 5 0 Bear Stearns Citi Goldman Sachs BEAR, STEARNS & CO. INC. UBS UNPARALLELED RESTRUCTURING EXPERIENCE. Bear Stearns’ leadership in the tobacco sector has continued with the advent of tobacco restructurings. Bear Stearns has led $13.5 billion of tobacco restructurings with a 79.7% market share. Bear Stearns has senior managed restructurings in excess of $1 billion for California in 2005, TSASC in 2006, Virginia in 2007 and the two largest restructurings in the sector for the states of California and New Jersey in 2007. Importantly, Bear Stearns is the only firm that has executed a restructuring that minimized the percentage of TSRs pledged. TAXABLE EXPERIENCE. No other firm has more taxable experience than Bear Stearns. Bear Stearns is the undisputed industry leader having led the first and the longest senior state level taxable tobacco tranches for South Carolina, Louisiana, South Dakota, Iowa, Michigan and Virginia. Bear Stearns has led 63.6% of the state level taxable market. Notably, Bear Stearns’ $1.9 billion of state level taxable tobacco experience is twice that of our closest competitor. We have introduced numerous products and structures to the taxable sector including indexed floating rate notes and taxable capital appreciation bonds. Furthermore, the Bear Stearns team was the first to market a 100% taxable securitization for Michigan in 2006. BOOK-RUNNING SENIOR MANAGER. Given our extensive qualifications in all aspects of tobacco securitizations including those that are particularly relevant to the Corporation, Bear Stearns is best equipped to perform the services required of the book-running senior manager. Although co-senior managers play an important role in broadening the distribution reach of the underwriting team, the pivotal marketing power and structuring expertise will be provided by the senior bookrunning manager. This is especially true for tobacco securitizations given the level of investor interaction that is required for a successful sale. A wealth of experience as a co-senior manager of tobacco securitizations is decidedly less meaningful than a record of service as a senior bookrunning manager. UBS State Level Unenhanced Tobacco Securitizations Merrill Lynch S EPTEMBER 13, 2007 B.3. TIMING OF PENDING TRANSACTION The Corporation faces several challenges in order to complete the pending transaction by November 15, 2007 including: (i) the global credit dislocation and its impact on the current market environment for tobacco securitization obligations; (ii) competing supply, principally the State of Ohio’s Tobacco Securitization, and (iii) possible near-term tobacco litigation decisions and regulatory developments. GLOBAL CREDIT MARKET DISLOCATION. Since early July, global illiquidity has caused credit risk to be repriced across all fixed income sectors resulting in a dramatic widening of credit spreads. By way of example, from June through August, 46 visible leveraged buyout financings (“LBOs”) were pulled from the market. This shift in investor appetite and risk tolerance is due in part to the enormous high yield supply with an LBO forward 4 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION S EPTEMBER 13, 2007 calendar of $200+ billion and market sentiment that is reflective of the end of “easy credit.” Although the tobacco securitization market has lagged the corporate and collaterized loan obligations markets, credit spreads have also increased in the tobacco sector, reaching their widest levels during August. Negative investor sentiment reached its zenith on August 22, 2007, with municipal bond funds experiencing cash outflows totaling $563 million. This reversal was significant as the high yield bond fund cash infusion had been one of the principal drivers of tobacco demand leading to the compressed tobacco credit spreads from May 2005 through June 2007. POTENTIAL LITIGATION AND REGULATORY DEVELOPMENTS. The major litigation decisions that could impact the Corporation’s timing of its transaction and pending regulatory initiatives are described below. While market volatility remains high, as described further in response to Question B. 9 there are signs of stability that suggest that tobacco investors (who are comfortable with credit fundamentals) are once again participating as market technical factors “return to a degree of normalcy.” Summary of Several Active MSA Related Lawsuits Nature of Next Plaintiffs’ Expected Case Challenge Action Ruling by District Court Freedom MSA & State C.L. potentially by Holdings in New York September/October 2007 MSA & State C.L. Trial expected to commence Grand River in 31 states at the District Court in 2008 9th Circuit hearing occurred MSA & State C.L. Sanders in February 2007; Ruling in California expected shortly ASR Repealer in Unknown. Scheduling order Xcaliber (LA) Louisiana has recently been suspended MSA & State C.L. District Court decision A.B. Coker in Louisiana expected in 2008 ASR Repealer in 10th Circuit ruling is Xcaliber (OK) Oklahoma imminent ASR Repealer in 10th Circuit ruling is Xcaliber (KS) Kansas imminent District Court dismissed International ASR Repealer in case in February 2007, case Tobacco Kansas has now been appealed to 10th Circuit th 6 Circuit rejected anti-trust MSA & State C.L. complaint. Retroactive S&M Brands in Tennessee application of ASR is pending Litigation Events. As summarized in the chart below, there are several pending lawsuits which allege, among other things, that the MSA and/or Qualifying Statutes and related state legislation (i.e., Complementary Legislation (“State C.L.”)) are void or unenforceable under the Commerce Clause and certain other provisions of the U.S. Constitution and the federal antitrust laws. Bottom Line: As stability and liquidity return and traditional and non-traditional tobacco investors again participate in the market, the Corporation should be able to successfully execute its 2002 refunding at reasonable interest rate levels. COMPETING SUPPLY. In many respects the fate of the tobacco securitization market will be determined by the success of Ohio’s Buckeye Tobacco Settlement Financing Authority’s transaction, which will be the largest tobacco securitization to date. Bear Stearns, as joint book-running senior manager, is scheduled to price this $5.6 billion financing during the week of October 22nd. Given the sheer size of Ohio’s proposed financing, we are currently charged with product diversification strategies that can expand the investor base and entice sizable hedge fund participation. The Badger financing should be separated by at least 6 weeks from the Buckeye financing in order to allow the market to resume a more typical trading range that is not as impacted by tobacco technical supply factors. Bear Stearns is also leading a $237 million Puerto Rico financing which is not comparable to the Badger financing in that it includes deeply subordinate third lien, long dated (2057) BBB- and non-rated CABs. This financing remains “day-to-day” at the direction of the Government Development Bank, as they rejected pricing into the extreme market volatility that was present throughout August. Bottom Line: Assuming Ohio’s $5.6 billion financing prices, as expected, on October 22nd, we conservatively expect that the Corporationrdcould price no sooner than the week ofthDecember 3 and close on or about December 13 . That said, the Corporation should still proceed with a schedule to price the week of November 5th and close on November 15th in the event that the Ohio transaction is delayed or market conditions improve dramatically. BEAR, STEARNS & CO. INC. The case that has the greatest likelihood of a district court decision being released prior to the Corporation’s issuance is Freedom Holdings. If any decision is released prior to the Badger sale, the scope of the decision would determine whether it would have any impact on the ratings, marketability and pricing levels for the Badger refunding. If, as we expect, the decision is limited in scope to a permanent injunction regarding enforcement of New York’s ASR Amendment, it should not impact the Badger offering. However, to the extent that the District Court determines the MSA or related state legislation to be void or unenforceable, the decision could unsettle the market for some period and could materially impair the Corporation’s ability to issue its bonds within the expected timeframe as it could signal a negative ruling in Grand River. 5 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION Wisconsin is a party to Grand River. In July of 2002, Grand River was filed in the Southern District Court of NY by certain NPMs. The plaintiffs alleged that the MSA, Qualifying Statute and Complementary Legislation of New York and 30 other Settling States violated the Commerce Clause and federal anti-trust laws. An adverse decision by the Second Circuit in Grand River would be controlling not only within the Second Circuit, but would be binding in each of the Grand River Defendant States, including Wisconsin. Should plaintiffs be successful in challenging the repeal of the ASR provisions of 31 States’ escrow statutes, it could give the NPMs a considerable competitive edge. This case is not expected to be resolved prior to the Corporation’s proposed November sale. Regulatory Initiatives. There are three Congressional proposals that could impact the tobacco bond market: q The Senate approved a 61 cent increase to the FET that would fund expansion of the State Children’s Health Insurance Program (“SCHIP”). According to Global Insight, the Cigarette Consumption Consultant, should the FET increase to $1.00 per pack, the resulting price increase would lead to a sharper, onetime, consumption decline of 4.3%, or 15.5 billion cigarettes by 2009. q The House of Representatives approved a 45 cent FET increase for the SCHIP expansion. q Conference Committee action on the FET is currently stalled with House members holding their ground on retaining Medicare portions that are not included in the smaller Senate version. With the White House threatening aveto, it is unclear whether the House and Senate can reach a compromise by September 30, 2007. q The Senate Health Committee approved legislation that would give the FDA regulatory authority over cigarettes requiring ingredients to be listed and cigarette packages to be half-covered by warning labels with colored graphic. q The next step in the FDA regulation is a full Senate vote. Bottom Line: Given the recent market volatility, upward pressure on tobacco yields, unprecedented forward supply and uncertain regulatory and litigation environment, it is more important than ever that the Corporation select the most experienced tobacco securitization underwriter – Bear Stearns – to address the marketing and timing challenges that are currently present in the tobacco sector. B.4. S EPTEMBER 13, 2007 CONFLICTS Currently, Bear Stearns is serving as joint book-running senior manager on Ohio’s Buckeye Tobacco Settlement Financing Authority’s transaction as well as a subordinate third lien wrap for Puerto Rico. The Government Development Bank elected to postpone the Puerto Rico securitization in early August given the volatile conditions in the tobacco market. As illustrated by the tobacco deal flow graphic below, the Bear Stearns team has an unmatched track record of simultaneously leading multiple tobacco securitizations. From March through May 2006 we led three transactions with parallel schedules, including Michigan’s cutting edge taxable transaction which required innovation for all three products that were introduced to the taxable tobacco market for the first time (longest average life CIBs, Indexed Floating Rate CIBs and Taxable CABs). In fact, with the exception of the Alaska securitization led by Bear Stearns last August, we have always led several tobacco transactions at the same time. Working on numerous transactions simultaneously has never impacted our performance and client commitment. This is further demonstrated by the sheer number of repeat clients that Bear Stearns has served, including Alaska, California, Louisiana, Michigan, New Jersey, Virginia and TSASC. The fact that Bear Stearns has been repeatedly hired demonstrates our ability to successfully fulfill the expectations of our clients. B.5. WORKING RELATIONSHIPS TEAMWORK. Bear Stearns views the articles in the press as most unfortunate and we have not contributed to this press coverage. Bear Stearns has conducted itself in a professional manner, operated “above the fray” and focused on what is most important – achieving our client’s objectives through pro-active communication and teamwork. To that end, as the negative sentiment between some underwriters reached a crescendo just prior to California’s financing, Bear Stearns’ recommended that the State conduct a co-senior meeting to establish ground rules for co-senior manager protocol at the outset of the transaction and articulate communication goals and expectations. The precedent that Bear Stearns established with the California securitization has become the model for maximizing co-senior participation and the template for improved working relationships within the tobacco sector. As the Corporation’s book-running senior manager, we would involve and enhance participation of Michigan New Jersey Virginia California Mar. Apr. May Jun. Jul. California Iowa Sacramento Aug. Sep. Oct. TSASC Nov. Dec. Jan. Feb. Mar. Apr. San Diego May Jun. Jul. Alaska Aug. Sep. Oct. Bear Stearns’ Senior Managed Tobacco Engagements 2005-2007 BEAR, STEARNS & CO. INC. Michigan Nassau 6 New Jersey Virginia Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. BADGER TOBACCO ASSET S ECURITIZATION CORPORATION other co-senior managers through the similar following steps: q q q q Conduct a kick-off meeting with the Corporation, its Financial Advisors and co-senior managers to discuss preliminary structure, marketing game plan, rating strategy, financing schedule and to seek input on product alternatives to expand the investor base. Host frequent conference calls with the co-senior managers to provide an ongoing forum for structuring and marketing input. Bring the co-managers into the fold early with frequent syndicate update calls that describe structure, status, liability and designation rules. Disseminate the POC sufficiently early to facilitate thorough due diligence and enhance syndicate marketing participation. Tobacco transactions require effective management and Bear Stearns is the only firm that has experience in managing large tobacco syndicates and selling groups while accomplishing total transparency and maximizing syndicate communication. ADDING VALUE. In addition to senior managing $25.8 billion of tobacco securitizations, Bear Stearns has served as co-senior manager on another $7.3 billion and comanager on over $8.3 billion. While Bear Stearns’ strength rests in its ability to successfully senior manage tobacco transactions, we nevertheless have added considerable value in those limited instances when we were not the lead manager on significant state level tobacco transactions. q q q On California’s $2.6 billion 2003 B securitization, we played a major role in crafting the appropriation credit. Bear Stearns contributions were subsequently acknowledged when we were selected to lead California’s restructuring of its 2003 B enhanced tobacco securitization in 2005. On Iowa’s 2005 restructuring, Bear Stearns was elevated to joint book-running manager in recognition of our unquestionable leadership in the taxable tobacco sector. As joint book-running senior manager for Iowa, Bear Stearns was instrumental in bringing in the anchor order for the taxable bond. As a co-senior manager on the West Virginia taxable transaction in May 2007, Bear Stearns prepared a 23 point memorandum that highlighted substantive disclosure issues in the draft offering document. All of our suggestions were incorporated in the final offering documents. B.6. DETAILED STRUCTURE INFORMATION While our national leadership role in tobacco is noteworthy, our Wisconsin-specific tobacco expertise as book-running senior manager on the Corporation’s $1.59 billion Series 2002 securitization will be especially meaningful to the Corporation as it evaluates its BEAR, STEARNS & CO. INC. S EPTEMBER 13, 2007 restructuring options. Our unique experience provides us with a thorough understanding of the existing indenture, escrow investment alternatives and investor holdings. STRUCTURING GOALS . Having provided myriad analyses to the State over the last two and a half years as it evaluated Series 2002 Bond refinancing options and the potential purchase of additional assets under the Residual Certificate, it is our understanding that the State’s primary structuring goals are to simultaneously: q advance refund all of its currently outstanding Series 2002 Bonds with publicly offered investment grade tax-exempt securities; q produce the lowest cost of capital and the shortest extension of the existing expected final maturity; and q free-up $50 million of TSRs annually to pay interest on a privately placed security to be deposited in the State Health Care Quality Trust Fund. $625 MILLION PRIVATELY PLACED STATE HEALTH CARE QUALITY TRUST BONDS. The private placement will be deposited to the State Health Care Quality Trust Fund (“Trust Fund Bonds”). This structure is similar to the taxable subsidy bonds that Bear Stearns developed for the State in connection with the Clean Water Fund Program in 1990 and will commit the State to funding the Trust Fund as the Trust will become the holder of the bonds and receive the related principal and interest payments. In accordance with the State’s objectives, the Trust Fund Bonds are structured to produce annual interest payments of $50 million and will amortize after the Series 2007 Bonds are retired. In order to ensure that the Trust Fund receives $50 million annually, interest on the privately placed bonds will be senior to any publicly offered securities. Principal on the Trust Fund Bonds will be subordinate to the publicly offered Series 2007 Bonds. The par amount of the Trust Fund Bonds will be determined based on the assumed interest rate on such bonds. In the current market, an 8.0% annual interest rate results in a par amount of $625 million ($50 million / 8% = $625 million). Please see Appendix Ewhich summarizes the debt service and amortization of the privately placed Trust Fund Bonds and the publicly offered Series 2007 Refunding Bonds. Freeing up $50 million of TSRs on a priority basis to pay interest on the Trust Fund Bonds is a variation of partial/variable pledge structures which Bear Stearns pioneered in the tobacco sector and presents no structuring or rating issues. However, as more fully described in our answer to Question B.8, freeing up $50 million of TSRs may create certain tax law compliance issues for the State. In addition, the Trust Fund Bonds’ senior interest/subordinate principal structure requires adequate disclosure, so that investors are: (i) clear that they have no claim on the first $50 million of TSRs received by the Corporation annually; and (ii) comfortable that under no circumstances will TSRs be diverted to pay the principal 7 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION on the Trust Fund Bonds while the Series 2007 Bonds are outstanding. S EPTEMBER 13, 2007 bonds are not exempt in-state. $439 million 2027 Short Average Life Turbo Term Bond. Bear Stearns’ structure employs the highest leverage for the earliest, most secure TSRs. We have maximized the size of the shortest duration term bond within a highly marketable 5.5 year average life horizon. The short average life allows us to maximize investor demand among the more risk averse institutional and retail investors who, while comfortable with tobacco risk, prefer limited duration exposure to tobacco consumption declines and potential adverse litigation. $1.5 BILLION PUBLICLY OFFERED SERIES 2007 REFUNDING BONDS . Given the closed lien nature of the 2002 Indenture, which was state of the art at the time, it is not possible to partially refund the Series 2002 Bonds and free up $50 million of TSRs annually for the Trust. Therefore, our structure assumes a full refunding of the Series 2002 Bonds and the issuance of the Series 2007 Bonds under a new, modern Indenture which will allow additional parity bonds and fully subordinate bonds. OVERVIEW OF FINANCING STRUCTURE. Since the Corporation’s 2002 transaction, Bear Stearns has developed numerous innovative strategies to expand the tobacco investor base for jumbo transactions of $3 billion or greater. However, given the manageable size of the Corporation’s proposed transaction and the fact that the transaction is not designed to achieve additional net proceeds, Bear Stearns has developed a structure that relies largely on market-tested products that will achieve the lowest cost of capital. As summarized in the accompanying table and discussed in detail below, our recommended structure incorporates: (i) fixed amortization serial bonds; (ii) three turbo term bonds with optimal average lives; (iii) one indexed floating rate note in the maturity range that is often the most difficult to sell in the fixed rate market; and (iv) a relatively small first subordinate CAB. $101 million 2009-2017 Fixed Amortization Serial Bonds. The inclusion of serial bonds maturing in 20092017 allows the Corporation to lower its cost of capital by capitalizing on the slight slope of the yield curve since the fixed amortization serial bonds will be marketed at yields below the short average life turbo term bond. We believe the serial bonds will attract national retail demand from sophisticated high net worth investors, since retail investors value the certainty of amortization associated with these bonds. As articulated in Question B.9, we do not expect significant Wisconsin retail demand as the Corporation’s $254 million 2035 Intermediate Average Life Turbo Term Bonds - Product Diversification. The intermediate turbo term bond with an average life of approximately 11 years is usually the most difficult to sell since there is no natural investor base for this bond and purchasing it requires investors to accept relatively long term tobacco risk without being compensated by the maximum yield in the structure. We recommend incorporating $150 million of Indexed Floaters into this intermediate maturity as they will supplant the most difficult bonds in the structure to sell. Indexed Floaters enhance marketability by offering product diversification and broadening the potential investor base to include intermediate and short term investors in addition to the traditional long term buyers. Even though this security has a 28 year final maturity, the variable rate component allows some bond funds to classify them as short term investments. Bear Stearns is the only firm to have negotiated rating criteria and executed floating rate tobacco bonds. We have demonstrated to the rating agencies that a natural hedge for tobacco bonds exists because rising short-term interest rates are likely to be accompanied by a higher than expected inflation adjustment to TSRs. To illustrate this point, we completed a comprehensive analysis of the correlation between 6-Month LIBOR and CPI for All Urban Consumers, which is the basis for the inflation Term Structure, Sizing, Yields, Credit Spreads and Ratings Bond Type Fixed Am Serials Turbo Term CIB Indexed Floater Turbo Term CIB Turbo Term CIB 1st Sub CAB Total Par/ PV ($mil) $101 439 150 104 641 78 $1,513 Rated Maturity Various 2027 2035 2035 2047 2047 Expected Maturity N/A 2017 2020 2020 2025 2027 Avg. Life (yrs) N/A 5.3 11.2 11.2 15.4 18.1 Coupon Various 5.375% Float 5.750% 6.000% 0.000% Yield Various 5.650% Float 6.000% 6.250% 7.250% Spread (bps)* 148 249 168 192 292 Ratings** BBB/Baa3 BBB/Baa3 BBB/Baa3 BBB/Baa3 BBB/Baa3 BBB/Baa3 * Fixed rate bonds spread to MMD. Indexed Floater spread to 67% of LIBOR. ** Please refer to rating discussion, Fitch’s tobacco securitization ratings are under review for an upgrade to BBB+. Delivery Date: Global Insight Consumption: Operating Expenses in 2008*: Underwriters Discount & COI Minimum Annual Coverage: * Inflated at 3% thereafter. BEAR, STEARNS & CO. INC. Other Structuring Assumptions 11/15/2007 Escrow Cost: Base Case Escrow Securities: $716,431.00 Additional Net Proceeds: 0.50% Liquidity Reserve Earnings Rate: 1.27x Debt Service Earnings Rate: 8 $1,544,171,341.22 Treasuries & Agencies $0 5% 4% BADGER TOBACCO ASSET S ECURITIZATION CORPORATION adjustment in the MSA. This analysis served as the foundation for the current rating agencies’ stress tests negotiated by Bear Stearns in 2003 and updated in 2006 for our Michigan transaction, the only tobacco securitization to date incorporating floaters. In our analysis, we have assumed that the Indexed Floater would yield 67% of 6-Month LIBOR+249 basis points. On a historic basis, this translates into an expected all-in cost of funds of 5.23 % based upon the 10-year average of 6-Month LIBOR and results in approximately 77 basis points of expected yield benefit. $641 million 2047 Maximum Yield Turbo Term Bonds. The strongest institutional demand exists for bonds with the longest weighted average life from investors seeking to maximize yield. It is interesting to note that as a result of higher debt service coverage required for the “$50 million off the top” structure, the average life of this bond is projected to be approximately 15 years, which is significantly shorter than the more typical 18-19 year average life for 2047 turbo term bonds (see a more detailed discussion of required debt service coverage below). Given the manageable size and relatively short average life of this bond, we do not recommend splitting the coupon in this maturity to include premium coupon or par bonds, as higher interest associated with premium coupons will force us to reduce the amount of bonds in the serial and short average life maturities, which will lead to an overall higher cost of capital. Minimize the Subordinate CABs. Given the dramatic repricing of credit risk for subordinate tobacco Capital Appreciation Bonds (“CABs”), we would recommend minimizing the CAB present value to the amount required to fund the escrow. Conclusion. Our proposed structure results in an estimated cost of funds of 6.34%. It achieves a full defeasance of the Series 2002 Bonds and frees up $50 million annually for the State Health Care Quality Trust Fund by extending the rated final maturity from 2032 to 2047 and the expected final maturity from 2018 to 2027. S EPTEMBER 13, 2007 Golden State maturity. Although our goal si to minimize the spread to secondary market trading levels, this spread is necessary to entice investors in the dislocated market which still suffers from oversupply, lingering illiquidity and risk aversion. 2007 Golden State 2047 Bond 5.125% Coupon Yield: 6.00% 2007 Badger 2047 Bond Yield: 6.25% +25 bps Debt Service Coverage/Final Rated Maturity. As we presented to the Corporation in our numerous previous submissions, there are multiple ways to achieve a partial pledge of TSRs such as a fixed percentage pledge, variable percentage pledge, or a pledge subordinate to a fixed dollar amount retained by the Issuer (“subordinate pledge”). The latter methodology, favored by the State, allows the State to achieve more certainty as to the amount of nonsecuritized TSRs it retains. However, from astructuring perspective, this type of pledge requires additional rated debt service coverage and a longer rated final maturity than the variable percentage pledge. To illustrate this point the graph below shows the projected TSRs pledged to the bondholders in the Base Case and the 4% consumption decline stress scenario for both the subordinate pledge and the variable percentage pledge. In the Base Case these revenue streams are identical. However, in the 4% decline scenario the variable percentage pledge results in significantly higher pledged TSRs than the subordinate pledge, since in the variable percentage pledge scenario the bondholders and the Corporation share the burden of TSR declines proportionately, whereas in the subordinate pledge the Corporation continues to receive $50 million annually and the bondholders bear all the burden of a TSR reduction. Therefore, to pass the 4% decline stress scenario, we had to extend the rated final maturity to 2047 and increase the minimum debt service coverage to 1.27x and the maximum coverage to 2.56x compared to a 2040 rated final maturity, 1.20x minimum coverage and 1.36x maximum coverage for the variable percentage pledge scenario. 250 ($) Millions Base Case TSRs in $50 Mil Off the Top & Variable Percentage Pledge Scenarios 4% Decline TSRs- 50mm Off The Top Scenario 4% Decline TSRs- Percentage Scenario Please see Appendix Efor a detailed set of cash flows. STRUCTURING ASSUMPTIONS 200 1 Credit Spreads. The 2047 maturity 5 /8% coupon Golden State tobacco turbo term bond priced by Bear Stearns in March 2007 as part of California’s $4.4 billion tobacco securitization is widely recognized by the trading community as the “bellwether” tobacco maturity. Our proposed yield spread to the Golden State benchmark for Badger’s long bond are predicated on the assumption that the Corporation’s offering is marketed by November 15th pursuant to the RFP specifications and as such will be priced on the heels of Ohio’s $5.6 billion transaction. We have assumed a 25 basis point spread between the Corporation’s 2047 maturity maximum yield term bond, relative to the current trading levels for the comparable BEAR, STEARNS & CO. INC. 150 100 50 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 Defeasance Escrow Requirements. The 2002 Indenture requires that the escrow be sized to fund projected turbo redemptions established at the time of issuance and due on or before the call date of June 1, 2012. Given our assumed 9 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION delivery date of November 15th, and the two-week redemption notice required under the 2002 Indenture, the escrow will fund turbo redemptions commencing on December 1, 2007. We note that the December 2007 $31.03 million turbo payment will allow the Corporation to “catch up” to the original projected turbo schedule established in 2002. The escrow will be funded with agencies and treasuries reflecting rates as of the close of business on September 10th. Liquidity Reserve. Our structure assumes a Liquidity Reserve funded at maximum annual rated debt service. Based on our experience with large tobacco liquidity reserves, we expect sufficient provider capacity from Lehman Brothers and DEPFA. Our Liquidity Reserve earning rate assumption is 5% and is based on the actual rate achieved recently in our Michigan tobacco securitization. Global Insight Cigarette Consumption Forecast. For the purposes of this proposal we utilized the most recent Global Insight Cigarette Consumption Forecast submitted in August of this year for the Michigan tobacco securitization. Although we note that recently the major manufacturers have increased the per pack price of cigarettes fromth 5 cents to 15 cents and Moody’s, on September 10 , said that cigarette shipment volume is down 5% for major manufacturers over the past six months, and if the decline continues, it will replace litigation risk as the largest threat to cigarette company credit ratings, we expect Global Insight to address these points in their revised report. Market Share. Since June 2007, Bear Stearns has been using an increased PM market share assumption of 94.86%. Utilizing a higher PM market share results in more accurate and favorable TSR projections and has a positive impact on projected average lives. NPM Adjustment Assumption. Our Base Case TSR projection does not assume NPM Adjustments or deposits into the Disputed Payments Account. However, the bonds are structured to survive a 28% proportional NPM Adjustment deposit into the Disputed Payments Account annually for the life of the transaction without requiring a draw on the Liquidity Reserve. We note that beginning with the Michigan 2006 financing we have pioneered the concept of carving existing Disputed Payment Account (“DPA”) deposits out of the TSR pledge such that issuers retain amounts withheld or deposited into the DPA to date. Rating Strategy. Since the inception of the tobacco market, Bear Stearns has been instrumental in negotiating favorable changes to the Rating Agencies’ criteria. Bear Stearns assisted S&P in “getting their arms around” the proportionate NPM Adjustment as they streamlined their criteria in May 2007. More recently, in July we convinced Moody’s to incorporate 100% payment recovery in their bankruptcy scenarios. Also, in July Fitch published new criteria that Bear Stearns negotiated in their BEAR, STEARNS & CO. INC. S EPTEMBER 13, 2007 entirety during the rating process for our Puerto Rico tobacco transaction. Previously, Fitch scenarios assumed conservative 5% and 7% consumption declines in the first two years of the transaction designed to reflect price increases associated with a large federal settlement. As we pointed out to Fitch, the positive resolution of the DOJ case against the tobacco industry rendered these declines obsolete. We also negotiated with Fitch a more favorable consumption starting point for “year zero” of the transaction. These improvements, especially those to S&P and Fitch’s criteria, directly affect the ability of the Corporation to achieve a lower cost of capital as they allow for higher leverage in the short end of the structure. In addition, on August 29th Fitch upgraded its tobacco industry rating to BBB from BBB- and in turn on September 12th placed all outstanding tobacco settlement asset-backed bonds on ratings watch positive. The upgrade will result in a BBB+ Fitch rating on the senior tranches of the tobacco securitization bonds, which will positively differentiate Fitch from Moody’s and S&P. In fact, moving in the opposite direction, Moody’s just published a new U.S. tobacco industry report that suggests greater than expected volume declines* constrain ratings. Moody’s also suggested that if the decline continues, it will replace litigation risk as the largest threat to manufacturer ratings. As a result of these changes, for a relatively short financing such as the one contemplated by the Corporation, the senior current interest bond capacity is not impacted by the choice of the rating agency. Global Insight’s Alternative 4% Consumption Decline scenario serves as a limiting factor for sizing the senior tranche. Rating Recommendation. Future upgrades by Fitch makes a rating strategy recommendation for the Corporation less straightforward than it was on our other 2007 tobacco securitizations. We usually recommend two ratings for financings with par amounts in excess of a $1 billion, such as the upcoming Corporation’s transaction. Given the fact that the State is issuing just enough bonds to fund the escrow and is not fully leveraging to the maximum BBB rating capacity coupled with investors’ tendency to prefer Moody’s and S&P on CIBs, we recommend the Corporation apply for ratings from these two rating agencies. However, in light of the Fitch upgrade, it may be beneficial for the Corporation to apply for a Fitch rating instead of either Moody’s or S&P’s, to obtain the benefit of the higher BBB+ rating on the senior tranche. All of the senior bonds in our recommended plan of finance are structured to pass Moody’s and S&P’s scenarios (the BBB CAB is structured to achieve only an * Shipments are down 5% for the major manufacturers in the first six months, which exceeds the 2% annual sector decline. 10 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION S&P rating). At the time of the execution of the financing, the optimal rating strategy should be revisited in light of the then-current investor preferences, rating requirements, and rating levels. 250 ($) Millions Series 2007 Expected Net Debt Service Savings of $50 Mil/yr PV Savings =$396 Mil 200 Series 2002 Expected Net Debt Service Avg. Dis-savings of $133 Mil/yr PV Dis- savings =$490 Mil 150 100 50 0 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 DEBT SERVICE SAVINGS ANALYSIS In the current market, the proposed refunding will generate a present value loss due primarily to four factors that offset the $50 million free-up in TSRs annually: (i) costs of issuance; (ii) negative arbitrage in the refunding escrow; (iii) lower investment rates on reserve funds; and (iv) increased debt service cost related to the low-to-high refunding of the outstanding bonds. These offsets manifest themselves in the form of additional debt service payments beyond the expected final maturity of the Series 2002 Bonds as summarized in the graph above. The actual magnitude of present value results cannot be known today as they are driven in part by the receipt of future TSRs and the resultant average life of the refunding bonds. Assuming that TSRs are received consistent with the Global Insight Base Case Cigarette Consumption forecast, the economic cost is approximately $94 million. Prevailing rates would need to decline by approximately 115 basis points for the advance refunding to “break even.” Please note that before the recent market dislocation and the subsequent 90 basis point increase in tobacco yields, the Corporation was within 25 basis points of a “breakeven” refunding. B.7. ALTERNATE STRUCTURE In the event that market conditions do not allow for a $1.5 billion issuance necessary to advance refund the Series 2002 Bonds, the Corporation has an option of raising $100 million in proceeds for Fiscal Years 2008 and 2009 through a subordinate wrap structure. Bear Stearns considered two alternative wrap scenarios for the Corporation. Both of these scenarios assume issuing only subordinate CABs rated BBB by S&P. Wrap Scenario 1. Wrap Scenario 1 is a securitization of the State's Residual Certificate and assumes that the CABs amortize sequentially after the Series 2002 Bonds are retired. Under this scenario, the BBB subordinate CAB will have a 2047 maturity and an expected average life of BEAR, STEARNS & CO. INC. S EPTEMBER 13, 2007 10.9 years. In the current market, we estimate this CAB would yield 7.25%. To date, subordinate CAB structures have permitted the issuance of additional senior bonds as long as such issuance does not extend the average life of subordinate CABs by more than one year. Despite this flexibility, a wrap structure could severely limit the Corporation's ability to benefit from a full refunding of the Series 2002 Bonds if the refunding requires an extension of expected average life of more than one year. Wrap Scenario 2. To permit the increased flexibility associated with a refunding of the Series 2002 Bonds in the future, the Corporation may consider structuring the initial amortization on the CABs up to 10 years after the current expected amortization of the Series 2002 Bonds. Under this scenario, the BBB subordinate CAB will have a 2047 maturity, an expected average life of 21.6 years and a yield of approximately 7.25%. Please see Appendix E for detailed term structure, yields, credit spreads and other structuring assumptions. The key benefits of a wrap strategy are: (i) elimination of negative arbitrage on the refunding escrow; (ii) elimination of the PV loss caused by extending the expected debt service in the full refunding scenario; (iii) reduction of issuance size; (iv) reduction of costs of issuance in the wrap scenarios; and (v) preservation of the opportunity to complete the full refunding in a more favorable market environment. On the other hand, this structure fails to provide a permanent financing solution as it does not guarantee the deposit of $50 million annually for the State Health Care Quality Trust Fund beyond the next biennium. Furthermore, the success of a wrap strategy depends on the ability to sell CABs in a saturated market characterized by an extremely narrow investor base. B.8. WORKING CAPITAL REQUIREMENTS RESTRUCTURING. As described below, the proposed Series 2007 Bonds will be subject to the same working capital restrictions as the Series 2002 Bonds. However the taxable private placement bonds trigger additional compliance requirements which are in part dependent on the use of $50 million a year of income which will be deposited in the State Health Care Quality Trust. Working Capital Restrictions – Deficit Analysis. As the State is aware, the Series 2002 sale proceeds were allocated for working capital expenditures based on the State’s structural deficit at the time of issuance. The 2002 proceeds were “deemed spent” when they were deposited into the General Fund. Additionally, the State has been subject to ongoing monitoring and deficit analysis compliance. The same ongoing compliance requirements will transfer to the Series 2007 Bonds. At least annually, while the 2007 Bonds remain outstanding, the State will be required to perform an ongoing deficit analysis and invest any General Fund resources in excess of a reasonable working capital 11 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION reserve (calculated at 5% of the prior year’s operating budget) in Non-AMT tax-exempt bonds. This excess is referred to as replacement proceeds. In the event that replacement proceeds exist, the State must expend such replacement proceeds in a manner that does not adversely impact the tax exemption on the outstanding working capital bonds. Examples of permissible expenditures include: (i) reducing the State’s cash flow borrowing for the subsequent Fiscal Year by the amount of replacement proceeds; (ii) demonstrating that such amount is expected to be spent for working capital purposes during the subsequent Fiscal Year (i.e., the State still has a structural deficit); (iii) funding capital project expenditures which reduce other borrowings or pay-as-you go capital expenditures; or (iv) repaying the 2007 Bonds or other State working capital borrowings. If replacement proceeds are not used for one or more of these purposes, replacement proceeds must be invested in non-AMT taxexempt bonds until deallocated under the Universal Cap. Working Capital Escrow Issues. Please note that the funds released from the Series 2002 Liquidity Reserve are considered unspent tax-exempt proceeds of a working capital financing and as such may have to be invested in non-AMT securities if deposited into the defeasance escrow and not expended within a year. Given the delivery date of November 15th, the refunded bond debt service in the escrow is estimated at approximately $74.7 million on December 1, 2007 and $131.9 million on June 1, 2008. Thus, in the first year the expenditures in the escrow are estimated to be well in excess of the size of 2002 Liquidity Reserve of $137.1 million, making it easy for the Corporation to comply with this tax law requirement. REDUCING WORKING CAPITAL REQUIREMENTS. As the State is aware, the Tax Certificate for the 2002 transaction established that sale proceeds allocated to both the General Fund and the Permanent Endowment Fund would be utilized for working capital purposes. One way to theoretically reduce the working capital requirements would be to recharacterize the nature of the 2002 financing after the fact as allocable to capital expenditures. However, this approach may be challenging from a tax perspective. Treasury regulation 1.148-6(d)(iii) appears to permit a reallocation for tax purposes, within 5 years and 60 days from the settlement of the transaction. If the State filed an election to recharacterize the 2002 financing by July 22, 2007, this alternative is potentially viable. However, we note that this rule seems to apply where no allocation has previously been made. Where the documentation and paper trail already exists tax counsel may have difficulties providing comfort that such a reallocation can subsequently be made. Although the State may not be able to reduce the working capital requirements with respect to the Series 2002 proceeds, as discussed above, if replacement proceeds arise in the future they can be allocated to capital projects or BEAR, STEARNS & CO. INC. S EPTEMBER 13, 2007 used to fund the subsequent year's operating deficit, thus avoiding the non-AMT investment requirement. PRIVATELY PLACED TAXABLE SECURITY. The privately placed Trust Fund Bond, which will flow $50 million of TSRs annually into the State Health Care Quality Trust Fund will not be treated as debt of the Corporation by the Tax Counsel since an obligation held by an entity related to an issuer is not considered debt under the tax code. We note that in Kirby Lumber v U.S., an entity affiliated with the plaintiff acquired a portion of the plaintiff's debt, and the US Supreme Court held that the debt was forgiven, imposing a forgiveness penalty on the issuer. This case suggests that the privately placed security sold to the State Health Care Quality Fund (a related state entity) will not be deemed debt of the Corporation for tax purposes, and therefore, the terms and conditions of this security will not be the focus of the tax analysis. However, the result of the State's plan of finance is effectively a revised pledge of TSRs with the State retaining $50 million of TSRs annually. As we have described to the State in the past, the freed up TSRs allocable to the Trust Fund Bond would delay the amortization of the tax-exempt bonds and could be viewed as creating a "window". The TSRs freed up by virtue of the "window" in the tax-exempt refunding would be treated as replacement proceeds for the tax-exempt bonds and would be subject to the restrictions described above. Once again the State must spend the replacement proceeds on an eligible purpose. For example, even though a portion of the State Health Care Quality Trust Fund proceeds may be used for smoking cessation programs, if they were granted to unrelated third parties, there would not be any further investment restrictions and the proceeds would be "deemed spent" when the grants were made. If the State were to use these funds for "working capital" purposes, Tax Counsel would need to determine whether the State had a "deficit" within the fiscal year analyzed. Depending on the relationship of the State Health Care Quality Trust Fund to the State, the deficit analysis might extend to the State's General Fund, and could be as detailed as the analysis which the State already performs with respect to the proceeds of the 2002 Bonds and will have to carry out for the Series 2007 Bonds. Other options for spending the $50 million of replacement proceeds (should the conclusion be reached that the $50 million constitutes replacement proceeds) are described above in our discussion of Working Capital Restrictions- Deficit Analysis. WRAP STRUCTURE. Although the Subordinate CAB structure does not create any window refunding issues, if the working capital requirements will apply if the proceeds of a subordinate CAB financing are spent for working capital. Again, spending the proceeds on working capital grants (for example, grants to other entities administering smoking cessation programs) would essentially eliminate further deficit analysis. 12 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION B.9. 2047 and New Jersey’s 5.00% of 2041 – which traded at yields as high as 6.30% during early August are currently trading at 6.00%. MARKETING PLAN MARKET BACKDROP As described in response to Question B.3, the recent global market dislocation had a pronounced impact on the tobacco securitization sector in August. Major tobacco investors curtailed new purchases as they experienced dramatic losses in Net Asset Value (“NAV”). Consequently, high yield mutual fund buying power was diminished considerably. Additionally, during August the tax-exempt hedge funds/arbitrage accounts such as Susquehanna and many dealer arbs found it more expensive to finance the purchase of tobacco bonds which forced them out of the market. Additionally, many of the TOB-based hedge funds retreated from the market in anticipation of redemptions. These high impact investors: (i) had been providing liquidity to the tobacco sector; (ii) made the absorption of “jumbo” tobacco deals possible; and (iii) kept credit spreads tight. It is important to note that the lack of demand was not due to a shift in the investors’ view of the tobacco credit but rather a result of their inability to secure cost effective financing. The financing issue proved to be the key factor as several of the dominant hedge funds remained on the sidelines during August given their inability to obtain cost effective third party financing which would have allowed them to purchase additional tobacco bonds. Illiquidity and the re-pricing of credit risk that crept into the tax-exempt market did not just affect “non-traditional” investors such as TOBs, hedge funds and arbitrageurs but also impacted “traditional” investor sectors such as bond funds, property and casualty insurers and retail. Signs of Stability. Despite the recent seismic shift in investor risk tolerance and credit re-pricing, we are encouraged by the recent signs of stability. q q q q q q The market has experienced an astounding reversal where many of the “sellers of August” have become the “buyers of September.” Although approximately $2.5 billion of TOBs were collapsed in recent weeks, $3.0 billion of new TOBs were created. Over the past two weeks the tax-exempt market has rallied dramatically as evidenced by a 38 basis point reduction in MMD. The Fed’s capital infusion through a 50 basis point discount rate cut to 5.75% and longer loan duration (30 days) is filtering its way into the capital markets. The market is also expecting a 25th basis point cut in the Fed Funds rate on September 18 . Credit Default Swaps have narrowed, particularly for the financial sector where the average of the five year CDS spreads for the major investment banks moved from 138 to 93 bps per annum. In the tobacco sector, secondary market activity and retail participation has increased. The bellwether tobacco trading names – Golden State’s 5.125% of BEAR, STEARNS & CO. INC. S EPTEMBER 13, 2007 MARKETING STRATEGY While the marketing of the Badger refinancing is likely to come on the heels of Ohio’s $5.6 billion financing which will absorb considerable new issue capacity, the Corporation’s financing has three substantial advantages: q As a refunding and not a new money issuance, the existing Series 2002 holders represent a “captive” investor audience. These accounts will benefit directly through price appreciation when their current holdings are pre-refunded and re-rated “AAA.” Many of these pre-refunded bonds will be transferred to high grade portfolios, freeing up capacity in their high yield portfolios. These investors will seek to replace their existing holdings and potentially add to their positions. q Unlike virtually every other tobacco refunding, the Corporation is not generating incremental leverage. As a result, the refunding par of $1.5 billion is $100 million greater than the refunded par amount of $1.4 billion. q The $1.5 billion size of the Corporation’s refunding is manageable and more easily digestible than a multibillion new money issuance and lends itself to a “back to basics” approach with a simple structure that has shorter weighted average lives, higher annual coverage and limited reliance on subordinate CABs relative to recent transactions. Notwithstanding the refunding advantages, our marketing strategy acknowledges that the recent market dislocation may require product and coupon diversification and techniques to expand the investor base. INVESTOR SEGMENTS Existing Holders. Given the refunding nature of the Corporation’s offering, the existing holders are the most logical starting point to establish anchor orders. No firm knows the existing Badger buyers and their current motivation better than Bear Stearns. For example, Cap Re is very focused on short average life bonds and would be inclined to replace existing positions. Although Rochester continues to have appetite for subordinate CABs and max yield CIBs, facilitated both through bond swaps and new high yield cash infusion. PIMCO, which had previously reduced its tobacco holdings by 80%, bought approximately $500 million of bonds in the secondary market on August 23, 2007 at new “risk adjusted” levels. PIMCO has ample capacity to add to its position as their holdings are a fraction of their all time high tobacco position of nearly $2.5 billion. These accounts will be targeted to replace existing Wisconsin holdings. 13 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION Current Holders Wisconsin Series 2002 Bonds Capital Research Rochester Dreyfus Pacific Investment Nuveen Putnam Wells Capital Mgt GSAM MFS Riversource Guardian Investor American Financial Group Columbia Mgt JP Morgan Investment Mgt Van Kampen Mercury Casualty Prudential Equitrust Investment Mgt Factory Mutual Insurance Standish MTB Investment Advisors Principal Global Investors Lord Abbett JP Morgan Investment Advisors 0 20 40 60 80 100 120 140 Millions ($) Traditional Buyers. The Corporation’s existing holders are comprised largely of traditional buyers. As depicted in the table below, traditional tobacco investors include retail, money managers, national bond funds, insurance companies and high yield bond funds. Within the traditional investor segment, the most relevant buyers for the Corporation are the money managers and national and high yield bond funds. Insurance companies have not been dominant in the sector and Wisconsin retail is not sufficient to impact pricing given that the Corporation’s bonds are not exempt in-state. Traditional Buyers High Net Worth Retail Money Managers • GSAM • MSAM National Bond Funds • Nuveen • Van Kampen • Eaton Vance Insurance Cos. • Loews • USAA High Yield Funds • Rochester • Van Kampen • Lord Abbett • Eaton Vance Nontraditional Buyers Arbs, Hedge Funds & TOBs • Susquehanna • Stark • 1861 Cross-overBuyers • Kingstreet • Icahn • Fir Tree Products/ Maturity Focus S EPTEMBER 13, 2007 Bond Funds and Money Managers. These buyers are active in the tobacco market and their participation should continue to improve if cash flows into the bonds funds and money managers continue their one-week positive turn around. For the reporting period ending September 5th, mutual fund inflows turned positive for the first time in a month at $155 million (although we note that more than half of these inflows were attributed to Van Kampen opening a fund which had previously been closed to investors). For the traditional investors, Bear Stearns will facilitate bond and tax swaps so that these accounts can sell other tobacco names and invest in the Corporation’s offering. Non-Traditional Buyers. There are two major groups of non-traditional buyers: (i) arbs, hedge funds and TOBs who accounted for over 20% of the purchases on the jumbo tobacco deals led by Bear Stearns this year (New Jersey, California, and Virginia); and (ii) cross-over buyers who are attracted to the relative “cheapness” of the sector. Arbs and Hedge Funds. As indicated in the table below, the recent market dislocation has most negatively impacted the buyer sentiment for hedge funds, arb accounts, and TOBs, such as Susquehanna, Stark, Duration, 1861, Saybrook, dealer TOBs and dealer arbs. As previously mentioned in Question B.3, through the end of August there was a retrenchment among the hedge funds, given their inability to attain cost effective financing through their Current Buyer Motivation/Sentiment MarketingStrategy • Consider retail order period to attract national retail • Corporations’ bonds are not exempt in state Serials and Short CIBs • Very active in secondary at high yield levels Ranges from Serials and Short Average Life CIBs to CABs • Accounts have sizable tobacco positions • One-on-one calls with portfolio managers • Resumption of Net Positive AMG Short, Intermediate and Inflows totaling $538.2 millionfor the Long Average Life CIBs, week ending September 7th CCABs, and CABs • Comfortable with Credit Fundamentals Long CIBs • Can be active but not dominant in the sector • Dramatic reduction in NAV for dominant CAB buyers Max Yield CIBs, CCABs and CABs • Positive High Yield AMG Inflows totaling $155.8 million Products/ Maturity Focus Current Buyer Motivation/Sentiment • Market Dislocation caused significant trading losses Long Average Life CIBs • Cost of Capital dramatically increased under Prime Brokerage Agreements • Certain TOBs collapsed Max Yield CIBs and CABs BEAR, STEARNS & CO. INC. • Replace existing bonds • Offer Bond and Tax Swaps • Targets for Principal Protected Notes, if necessary • Offer bond and Tax Swaps • One-on-one calls with key accounts • Investor call participation MarketingStrategy • Consider Forward Delivery Bonds for Hedge Funds • Consider Index Floaters • Open leverage through 3rd party TOBs • Opportunistic buyers with deep pockets • Will participate if dislocation is short lived and an • Competition is higher yielding distressed exit strategy is demonstrated (liquidity) credits in other markets 14 BADGER TOBACCO ASSET S ECURITIZATION CORPORATION prime brokerage agreements. Over the past few weeks dealer arbs have once again been active in the market. However, the largest hedge fund purchaser of tobacco on a historical basis, Susquehanna, has still not participated. As described below, a forward delivery bond may be a technique to entice major hedge funds such as Susquehanna off of the sidelines. TOBs. TOBs have historically been used in the tobacco sector to increase leverage for those investors who are already “bullish” on the tobacco credit (Rochester, Dreyfus, and Van Kampen). Buyers effectively use a dealer’s TOB program to leverage their returns. When an investor knows 3rd party leverage is available in the primary market they can use this leverage to increase the order placed – meaning if an investor has $10 million to spend and 10x leverage is available through a dealer TOB, the investor can place a $100 million order for the Corporation’s bonds. The last two weeks of August were very difficult for TOBs as leverage cuts two ways – it magnify returns when markets are liquid, stable, etc. but it also amplifies losses when markets sell off and become illiquid. Many buyers that used leveraged third party TOBs for tobacco received margin calls. Dealers are also scaling back the amount of leverage they are willing to offer on a non-recourse basis as the investment community looks for signs of stabilization. Cross-over Buyers. Like all markets which experience dramatic sell-offs, the pain experienced by one group of investors attracts others looking to profit. Over the course of the last few weeks, Bear Stearns has been in direct contact with numerous “cash rich” accounts looking to take advantage of market opportunities. These accounts include names such as: King Street, Silver Point, Fir Tree, Icahn, Elliot, Avenue and Sankaty and can be characterized as opportunistic buyers who have deep pockets and are likely to participate given that the dislocation appears to be short lived and they foresee an exit strategy (i.e., liquidity) within a 6 month time frame. Retail and their bond fund proxies are likely to provide liquidity once the market stabilizes. Bear Stearns’ marketing outreach will include an effort to generate demand from the cross-over accounts that can provide support to the market. Successfully converting cross-over buyers would provide liquidity to the Corporation and could also increase traditional demand. the Bond Purchase Agreement. The inclusion of forward delivery bonds would only be necessary to the extent that Susquehanna does not resume sector participation naturally by November and/or traditional buyer demand is not sufficient to absorb the Corporation’s offering. Indexed Floating Rate Bonds. Indexed Floaters enhance marketability by offering product diversification and broadening the potential investor base to include intermediate and short term investors in addition to the traditional long term buyers. Bear Stearns is the only firm to have structured Indexed Floating rate bonds on a tobacco securitization. For Ohio’s tobacco securitization, Bear Stearns has proposed the inclusion of $250 million of Indexed floating rate bonds and in fact, a new buyer— DEPFA –has preliminary executive committee approval within the exact average life constraints that Bear Stearns has targeted. While product diversification is much more essential for Ohio than it is for Wisconsin, we nonetheless believe it is important to have as many “structuring arrows in the quiver” as possible given the intense volatility and rapid swings in buyer participation over the last 6 weeks. In our Base Case analysis, we have assumed that the Indexed Floater would yield 67% of 6-Month LIBOR+ 249 basis points. Since Indexed Floaters are structured to bear interest at a fixed spread to 6-Month LIBOR, as LIBOR fluctuates, investors will receive payments of interest based upon this formula with no opportunity ot receive a higher credit spread or put the bonds back to the Corporation if there are adverse changes in the MSA credit. As a result, there is no need for a liquidity facility and the Corporation is completely insulated from any deterioration in credit quality, as the investor has accepted this credit risk for the life of the bond. CONCLUSION The State of Wisconsin needs to hire the best tobacco underwriting firm in the industry to manage its restructuring. Bear Stearns is that Firm. We are a known entity with a proven track record in the tobacco sector, including the Corporation’s successful 2002 securitization, and in the State of Wisconsin. This is not the time to experiment. The challenging market environment that this transaction faces requires the skills and leadership of the number one ranked tobacco securitization firm. TECHNIQUES TO EXPAND THE INVESTOR BASE AND INCREASE PARTICIPATION Forward Delivery Bonds. A Forward Delivery tranche can be used to assist in the financing of tobacco bonds. The Corporation may want to consider issuing a portion of the 2047 term bond on a forward delivery basis (i.e., 6 months). This tranche would be targeted to major hedge funds such as Susquehanna, allowing them to participate in the deal without having to arrange for financing immediately. The Corporation would not have any exposure to the hedge funds, only the underwriters through BEAR, STEARNS & CO. INC. S EPTEMBER 13, 2007 15 APPENDIX A RESUMES Bear, Stearns Co. Inc. APPENDIX A CAPITAL COMMITMENT Craig Overlander, Senior Managing Director. Mr. Overlander is co-head of the Global Fixed Income Department. In this role, he oversees all aspects of the firm’s fixed income business including trading, sales, research and capital markets. Mr. Overlander serves on the Boards of Directors for Bear, Stearns & Co. Inc., Bear, Stearns International (BSIL), and Bear Stearns (Japan), Ltd. He is also a member of the firm’s President’s Advisory Council, and has participated on its International Committee. Mr. Overlander joined Bear Stearns in 1982 and during his twenty-five year tenure with the firm he has held a variety of senior management positions. After six years at Bear Stearns as a mortgage specialist, Mr. Overlander assumed responsibility for managing the firm’s mortgage-backed sales effort, which has consistently ranked as one of the industry’s top mortgage securities dealers. In 1992, he was promoted to Senior Managing Director, and in 1995, Mr. Overlander became head of Global Fixed Income Institutional Sales. In this capacity, he supervised over 230 sales professionals in numerous domestic and international branch offices. His group was responsible for the distribution of all taxable fixed income products to institutional accounts, commercial banks, insurance companies, mutual funds, money managers, hedge funds, and state funds. He assumed his current position, co-head of global fixed income in 2002. Mr. Overlander is actively involved in numerous industry and charitable organizations. He has been a member of the Executive Committee of the BMA (Bond Market Association) since 2003 and is now CoTreasurer and an Executive Committee Member of SIFMA (Securities Industry Financial Market Association) a role which he assumed after the merger of the BMA and SIA. He received a BA in political science from Williams College. Jeffrey Mayer, Senior Managing Director. Mr. Mayer is co-head of the firm’s Global Fixed Income Division. He is responsible for overseeing all aspects of the firm’s fixed income business, including trading, sales, research and capital markets. He is a member of Bear Stearns’ Management & Compensation Committee, which is responsible for overseeing policy and day-to-day operations. He also serves on the Board of Directors and the President’s Advisory Council. Joining Bear Stearns in 1989, Mr. Mayer was initially a senior mortgage trader on the company’s industry-leading CMO desk. He became the head of the Mortgage Department seven years later, responsible for the trading and securitization of residential and commercial mortgages and asset-backed receivables. He has been co-head of Fixed Income with Craig Overlander since 2002. Prior to his tenure at Bear Stearns, Mr. Mayer served as a mortgage trader at Merrill Lynch and LF Rothschild. He received a B.A. in Economics and Finance from SUNY College at Oneonta in 1981. Mr. Mayer is active in several charities and sits on the Board of Directors of City Meals on Wheels. TOBACCO BANKING Neil Flanagan, Senior Managing Director. Mr. Flanagan will serve as the project manager and oversee day-to-day investment banking services to the State. Mr. Flanagan has considerable experience with State over the past 20 years having developed and implemented many important financings. Mr. Flanagan has senior managed 16 Wisconsin financing issues totaling more than $3.4 billion. Mr. Flanagan worked with the State to develop and implement the State's Clean Water Fund financing program in 1991, the PECFA program in 2000, the State’s tobacco securitization in 2002, the $1.79 billion taxable General Fund Appropriation financing in 2003 and numerous refundings. Mr. Flanagan is responsible for providing banking coverage to clients in the states of Wisconsin, Illinois and New York. His areas of expertise include general obligation debt, state revolving funds, sales tax revenue bonds, convention centers, stadium financings and refunding strategies. Mr. Flanagan received his BSc in Financial Decision and Management Information Systems from the State University of New York at Albany. Kym Arnone, Senior Managing Director. During her 21-year career, Ms. Arnone has senior managed over $43 billion of financings for major issuers across the nation. Ms. Arnone runs the Firm’s tobacco securitization group and will be the Corporation’s senior banker. Ms. Arnone has led every one of the 27 tobacco securitizations senior managed by Bear Stearns, totaling $25.8 billion. Ms. Arnone’s tobacco transactions include the first senior/subordinate transaction and the first 100% full turbo tobacco securitization as well as the landmark $490 million State of Michigan 100% taxable transaction in 2006. In addition, she was the lead banker on the Corporation’s Series 2002 transaction and has senior managed tobacco securitizations for Virginia, California, New Jersey, Alaska, New York, Oregon, South Carolina, South Dakota and Michigan as well as Erie County, Nassau County, San Diego County, Puerto Rico’s Children’s Trust and New York City’s TSASC. Ms. Arnone received a BA in finance from St. John's University. Ira Wagner, Senior Managing Director. Mr. Wagner will provide senior Asset Backed Securities expertise to the Corporation. Mr. Wagner began his career as a housing finance banker in 1981. Since that time he has developed a broad background in mortgage and asset securitization. He joined Bear Stearns in 1996 and has been responsible for bringing a number of new asset classes to the ABS market. Mr. Wagner and Ms. Arnone have co-led the Firm’s municipal asset securitization practice and, together with Ms. Arnone, Mr. Wagner has led every taxable tobacco transaction senior managed by Bear Stearns. His tobacco securitization experience includes the first transaction for TSASC as well as subsequent securitizations for Nassau County, NY, Erie County, NY, Michigan, Virginia, California, New Jersey, Alaska, South Carolina, Louisiana and South Dakota. Mr. Wagner has also structured the first securitization of future film receivables for DreamWorks and the first securitization of future revenue rights for the Pepsi Center Sports Arena in Denver. Mr. Wagner runs the firm’s ABS Department. Prior to joining Bear Stearns, Mr. Wagner was a Senior Vice President at Donaldson, Lufkin & Jenrette, managing securitizations of residential mortgages, commercial mortgages and small business loans. He received a BA in Government from the University of Virginia and his MBA in Finance from the Wharton School of the University of Pennsylvania. John Schopfer, Managing Director. Mr. Schopfer has over 27 years of municipal finance experience, starting with his position as a municipal bond attorney at Hawkins, Delafield & Wood. Mr. Schopfer has recently worked on tobacco transactions for Virginia, California, New Jersey, Alaska and Iowa as well as the Counties of San Diego, Los Angeles, Sacramento, and Nassau. Mr. Schopfer specializes in document review and disclosure. Mr. Schopfer received a BA from Drew University and a JD from the University of Pennsylvania Law School. Michael Britchkow, Vice President. In his fourth year at Bear Stearns, Mr. Britchkow has been a key member on an array of financings for issuers in Wisconsin, Ohio, New York, New Jersey and Massachusetts totaling in excess of $6.0 billion. Mr. Britchkow will assist senior bankers in the day-to-day deal process. Mr. Britchkow’s experience with the State of Wisconsin over the past four years includes two senior managed transactions totaling $526 million. Mr. Britchkow is a graduate of Rutgers with a degree in economics and prior to joining Bear Stearns worked for two years hedging interest rates for a major mortgage originator and servicer. TOBACCO STRUCTURING Nora Ostrovskaya, Managing Director. Ms. Ostrovskaya joined Bear Stearns in 2007 from Citi where she performed structuring and rating analysis on 25 out of 26 of the firm’s senior managed tobacco securitizations for an aggregate par amount of over $12 billion. She was integral in the development of Citi’s proprietary model used when running the Monte Carlo simulations. Ms. Ostrovskaya has structured a number of tobacco transactions, including most recently, Michigan, Los Angeles County, Santa Clara County, Stanislaus County and the City of San Diego as well as securitizations for the Virginia, Iowa, California, New Jersey and New York. She received the equivalent of an MS in Mathematics from St. Petersburg University and received a MBA from the University of Pennsylvania. Reshma Patel, Managing Director. Ms. Patel has worked with the nation’s largest tobacco securitization issuers since the inception of the sector in 1999. She has recently structured the $523 million Michigan transaction and the $1.15 billion Virginia transaction. Ms. Patel also served as part of the analytical team for tobacco securitization executed by the States of New Jersey, California, Alaska and the Counties of Nassau County, NY, Sacramento County, CA as well as the City of New York. She was also part of the financing team for the inaugural issues for TSASC and the South Carolina tobacco securitization, which funded the nation’s first working capital endowment and established the taxable endowment strategy. Prior to joining Bear Stearns in July of 2005, Ms. Patel was a financial advisor at Public Resources Advisory Group, where she primarily served the District of Columbia, the City of Atlanta and the City of New York. Ms. Patel is a graduate of the Massachusetts Institute of Technology. John Suh, Vice President. Mr. Suh joined Bear Stearns in 2003. He recently structured the refinancings for the States of Michigan and New Jersey as well as the State of California’s $3.1 billion tobacco restructuring and its most recent $4.45 billion restructuring. He provided extensive analytical support for the State of Virginia’s $448 million securitization in 2005 and their $1.15 billion restructuring in 2007. In addition, he provided extensive quantitative support evaluating structuring and endowment alternatives for the San Diego County transaction. Mr. Suh graduated from Hanyang University in Seoul, Korea and holds an MS in Computational Finance from Carnegie Mellon University and an MS in Mathematics from the University of Illinois Urbana-Champaign. Rachel Betton, Analyst. Ms. Betton joined the Bear Stearns Public Finance Department in 2006 and assists senior bankers with quantitative and analytical support. Her experience includes the $523 million new money transaction for the State of Michigan, $1.15 billion restructuring and new money transaction for the Commonwealth of Virginia, the $4.45 billion restructuring for the State of California, the $3.62 billion refinancing for the State of New Jersey and the $411.99 million transaction for the State of Alaska. Jeff Swhier, Analyst Mr. Swhier joined Bear Stearns in 2006. In his short time with the firm he has designed and implemented a comprehensive marketing database of all tobacco new issuances. He will provide quantitative and analytical support. His tobacco experience includes the $523 million Michigan Series 2007 transaction and the $1.3 billion TSASC Series 2006 transaction. Larry Cohen, Senior Managing Director. Mr. Cohen runs Bear Stearns’ Financial Analytics and Structured Transactions Group for Asset-Backed Securities. He designed and built Bear Stearns’ proprietary, multi-lien, stochastic models used in the simulation of tobacco settlement revenues. He is responsible for all Monte Carlo simulations and stress testing for all tobacco securitization transactions underwritten by the Firm. Mr. Cohen also has experience securitizing home equities, mortgages, credit cards and auto loans. In addition, he has extensive experience in the valuation and trading of issuer retained interests in these transactions. Prior to joining Bear Stearns in 1985, Mr. Cohen worked as an Engineer at Sperry Systems Management in Great Neck, New York. He received his BA in Computer Science from Columbia University. Amy Kessler, Managing Director. Ms. Kessler is Bear Stearns’ linear optimization specialist, a member of the FAST group and has designed and built the firm’s proprietary tobacco linear optimization models. She has been a key member in the structuring team that executed securitizations for New York City, California, New Jersey, Alaska, Louisiana, Michigan, New York, South Carolina, South Dakota, Virginia, Washington and Wisconsin as well as the Counties of Erie, Sacramento and Nassau. Ms. Kessler holds a BA in Economics and an MA in International Economics & Finance from Brandeis University, where she is a member of the Board of Overseers of the International Business School. Frances Barone, Managing Director. Ms. Barone has 15 years of experience in Bear Stearns’ Financial Analytics and Structured Transactions Group. She designs, builds and runs Bear Stearns’ proprietary Monte Carlo models for simulations and stress testing of tobacco securitizations at the firm. She also has experience structuring deals in the agency and non-agency mortgage and asset backed markets including home equity and auto loan securitizations. Ms. Barone received a BA in Economics in 1985 from Northwestern University and an MBA in Finance from the Anderson School at UCLA in 1991. SALES , UNDERWRITING & TRADING Daniel L. Keating, Senior Managing Director. Dan Keating is the Head of Municipal Markets at Bear Stearns and oversees investment banking, underwriting, derivative products and sales and trading. As the Firm’s senior underwriter for tax-exempt securities, Mr. Keating has personally priced each of our 27 tobacco securitization transactions, totaling over $25.8 billion in volume. These transactions include the largest and most innovative tobacco securitizations ever brought to market, including the Corporation’s Series 2002 transaction. Mr. Keating is a member of the Board of Directors of the Firm’s broker/dealer subsidiary as well as a past Chairman of Bear Stearns’ President’s Advisory Committee. He is on the Board of Directors for the SIFMA and is serving as Chair of the Municipal Securities Division. He is a former Chairman of the Municipal Securities Rulemaking Board. He is a graduate of St. Peter’s College in New Jersey. Roy Carlberg, Senior Managing Director. Mr. Carlberg has been with Bear Stearns since 1990 and an underwriter on the municipal desk since 1993. He has worked on the pricing, marketing and underwriting of numerous financings including Golden State’s successful $4.45 billion issuance in March and Virginia’s $1.15 billion transaction in May. Mr. Carlberg graduated from Bucknell University with a degree in economics. John Young, Senior Managing Director. Mr. Young, in his 33rd year in the industry, has a broad range of experience in the underwriting and marketing of municipal securities, with a particular emphasis on tobacco securitization bonds. Mr. Young is also the sales and marketing manager for the Municipal Bond Department. In this capacity, he is responsible for the design and execution of all investor tours and investor relations programs as well as the production and distribution of all marketing materials, including credit summaries, trade ideas, and relative value analyses. Mr. Young has been an integral part of the marketing effort for each of Bear Stearns’ 27 tobacco securitizations. Prior to joining Bear Stearns, Mr. Young worked for Citicorp/Citibank for 15 years serving at various times as head of its municipal securities commitment desk and as manager of both tax-exempt and taxable fixed income underwriting. Mr. Young has a BA from Hamilton College. Carol Fuller, Senior Managing Director. Ms. Fuller is the head of the Mortgage Syndicate Desk. She coordinates the new issue marketing and pricing for taxable tobacco securitization bonds as well as a wide range of other products. She worked on the recent $1.15 billion restructuring and new money transaction for the Commonwealth of Virginia. Ms. Fuller has a BA in English from Fordham University. Christopher Durso, Senior Managing Director. Mr. Durso has over 21 years of experience trading municipal securities at Bear Stearns. For the past seven years he has been the senior long bond trader and in that capacity has been responsible for trading, among other credits, the Firm’s tobacco bond position. He has traded the long-term Golden State Tobacco Securitization Corporation’s bonds since their inception in 2003 and is well acquainted with their trading characteristics in all market conditions. Mr. Durso is a graduate of Pennsylvania State University. Christopher Tota, Senior Managing Director. Mr. Tota is integrally involved in the primary and secondary market sales of issues managed by Bear Stearns. Mr. Tota joined Bear Stearns after working for PaineWebber for 11 years where he managed the New England bond trading desk, prior to that he traded institutional serial bonds. Mr. Tota received a BS from New Hampshire College. APPENDIX TOBACCO EXPERIENCE Bear, Stearns Co. Inc. APPENDIX B Dated Date 05/17/2006 05/16/2005 04/16/2003 01/29/2003 11/05/2002 09/24/2002 05/23/2002 11/07/2001 03/22/2001 10/26/2000 09/22/2000 11/15/2000 02/08/2006 06/19/2003 10/30/2002 08/28/2002 7/25/2002 06/27/2002 10/25/2001 03/13/2001 11/23/1999 11/18/1999 Previous Tobacco Experience: Initial Sale Amount of Issuer Name of Obligation Role Issue ($ mils) Michigan $490,500,589 Tobacco Settlement Asset-Backed Bonds Lead Virginia 448,260,000 Tobacco Settlement Asset-Backed Bonds Lead Oregon 431,560,000 Tobacco Settlement Asset-Backed Bonds Lead California 3,000,000,000 Tobacco Settlement Asset-Backed Bonds Lead Washington 517,905,000 Tobacco Settlement Asset-Backed Bonds Lead South Dakota 278,045,000 Tobacco Settlement Asset-Backed Bonds Lead Wisconsin 1,591,095,000 Tobacco Settlement Asset-Backed Bonds Lead Louisiana 1,202,770,000 Tobacco Settlement Asset-Backed Bonds Lead South Carolina 934,530,000 Tobacco Settlement Asset-Backed Bonds Lead Alaska 116,050,000 Tobacco Settlement Asset-Backed Bonds Lead Erie 246,325,000 Tobacco Settlement Asset-Backed Bonds Lead Puerto Rico 397,005,000 Tobacco Settlement Asset-Backed Bonds Joint L.A County 319,800,000 Tobacco Settlement Asset-Backed Bonds Cosr-mgr New York 2,903,200,000 Tobacco Settlement Asset-Backed Bonds Co-mgr Alameda County 220,500,000 Tobacco Settlement Asset-Backed Bonds Co-mgr New Jersey 1,801,500,000 Tobacco Settlement Asset-Backed Bonds Cosr-mgr Fresno 92,900,000 Tobacco Settlement Asset-Backed Bonds Co-mgr Rhode Island 685,390,000 Tobacco Settlement Asset-Backed Bonds Co-mgr Iowa 644,300,000 Tobacco Settlement Asset-Backed Bonds Cosr-mgr D.C 521,100,000 Tobacco Settlement Asset-Backed Bonds Co-mgr Nassau County 294,500,000 Tobacco Settlement Asset-Backed Bonds Cosr-mgr TSASC 790,280,000 Tobacco Settlement Asset-Backed Bonds Cosr-mgr Total $17,927,515,589 Order information only available for Bear Stearns Book-Running Senior Managed transactions Liability 52.0% 32.0% 50.0% 27.0% 50.0% 46.5% 33.0% 50.0% 50.1% 50.0% 40.0% 25.0% 18.0% 7.5% 15.0% N/A 20.0% 5.0% 25.0% 6.3% 30.0% 26.6% All Orders 1,970,205 3,554,520 1,017,890 3,851,598 805,360 203,590 2,923,935 1,677,690 2,088,460 141,785 404,205 Priority Orders 362,745 3,290,260 863,890 2,381,660 607,305 203,590 1,796,135 1,204,925 1,628,965 97,495 254,235 Allocations 1,970,645 353,365 375,730 2,067,860 473,935 129,540 1,420,510 115,370 661,275 105,845 204,505 Previous Tobacco Experience: Refunding/ Additional Sale Amount of Dated Date Issuer Name of Obligation Role Liability Issue ($ mils) 8/20/2007 Michigan $522,991,697 Tobacco Settlement Asset-Backed Bonds Lead 60.000% 05/03/2007 Virginia 1,149,273,283 Tobacco Settlement Asset-Backed Bonds Lead 61.000% 03/14/2007 California 4,446,826,391 Tobacco Settlement Asset-Backed Bonds Joint 25.625% 01/23/2007 New Jersey 3,622,208,082 Tobacco Settlement Asset-Backed Bonds Lead 50.000% 08/17/2006 Alaska 411,987,860 Tobacco Settlement Asset-Backed Bonds Lead 50.000% 05/31/2006 San Diego 583,630,660 Tobacco Settlement Asset-Backed Bonds Lead 60.000% 04/05/2006 Nassau 431,034,246 Tobacco Settlement Asset-Backed Bonds Lead 50.000% 02/08/2006 TSASC 1,353,510,000 Tobacco Settlement Asset-Backed Bonds Lead 20.000% 12/06/2005 Sacramento 255,486,288 Tobacco Settlement Asset-Backed Bonds Lead 60.000% 11/30/2005 Iowa 831,962,030 Tobacco Settlement Asset-Backed Bonds Joint 20.000% 08/04/2005 California 3,140,563,508 Tobacco Settlement Asset-Backed Bonds Lead 40.000% 03/07/2003 New Jersey 1,659,170,000 Tobacco Settlement Asset-Backed Bonds Lead 40.000% 08/15/2002 TSASC 500,000,000 Tobacco Settlement Asset-Backed Bonds Lead 80.000% 08/15/2001 Alaska 126,790,000 Tobacco Settlement Asset-Backed Bonds Lead 50.000% 08/01/2007 Riverside 294,084,292 Tobacco Settlement Asset-Backed Bonds Co-mgr N/A 06/27/2007 Rhode Island 197,005,742 Tobacco Settlement Asset-Backed Bonds Co-mgr 10.000% 06/26/2007 West Virginia 911,141,503 Tobacco Settlement Asset-Backed Bonds Cosr-mgr 12.500% 08/30/2006 D.C 248,300,000 Tobacco Settlement Asset-Backed Bonds Co-mgr 5.000% 12/02/2003 New York 2,015,400,000 Tobacco Settlement Asset-Backed Bonds Co-mgr 7.500% 09/30/2003 California 2,572,300,000 Tobacco Settlement Asset-Backed Bonds Cosr-mgr N/A 10/10/2002 Puerto Rico 1,171,200,000 Tobacco Settlement Asset-Backed Bonds Co-mgr 10.000% Total $26,444,865,581 Order information only available for Bear Stearns Book-Running Senior Managed transactions All Orders Priority Orders Allocations 2,779,290 6,179,410 21,142,180 9,073,240 1,274,280 1,939,145 2,934,790 2,521,880 1,057,355 2,688,890 5,568,110 17,804,850 6,098,175 1,106,200 1,536,500 2,832,575 1,335,005 971,805 1,539,840 2,041,825 7,651,375 4,083,095 536,060 1,179,835 1,769,430 1,339,100 504,380 10,123,220 3,766,560 906,305 1,137,215 8,303,485 2,404,855 285,500 1,001,675 3,211,065 1,167,315 303,150 92,510 APPENDIX WISCONSIN EXPERIENCE Bear, Stearns Co. Inc. APPENDIX C Dated Date 2007 7/2/2007 2006 3/28/2006 1/31/2006 2005 3/10/2005 2/10/2005 2004 10/21/2004 9/30/2004 6/15/2004 4/14/2004 3/16/2004 Issuer State Level Wisconsin Transactions Amount of Name of Issue ($ mils) Obligation Role of Bear Stearns Liability Bid Wisconsin $50.00 Operating Notes Lead 100.00% C Wisconsin Wisconsin 331.22 General Obligation Bonds 96.78 GO Refunding Bonds Co-mgr Co-mgr 42.60% 9.20% C N Wisconsin Wisconsin 235.59 Transportation Revenue Bonds 430.24 GO Refunding Bonds Co-mgr Lead 10.00% 40.00% N N Co-mgr Lead Lead Co-mgr Lead 17.10% 35.00% 40.00% 15.60% 25.00% C N N C N Wisconsin Wisconsin Wisconsin Wisconsin Wisconsin Total 225.00 95.91 175.00 307.435 175.00 $2,122.18 General Obligation Bonds Transportation Rev Ref Bonds GO Refunding Bonds General Obligation Bonds GO Refunding Note Dated Date 2007 6/28/2007 6/28/2007 6/28/2007 6/28/2007 4/10/2007 4/10/2007 2006 12/14/2006 12/14/2006 12/14/2006 10/25/2006 10/25/2006 5/23/2006 5/23/2006 1/19/2006 1/19/2006 2005 12/14/2005 12/14/2005 12/14/2005 11/2/2005 11/2/2005 9/29/2005 6/9/2005 6/9/2005 4/15/2005 4/12/2005 2004 7/27/2004 7/27/2004 4/29/2004 4/29/2004 4/29/2004 Issuer Wisconsin Authority Transactions Amount of Name of Obligation Issue ($ mils) Role of Bear Stearns Liability Bid Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth $13.32 45.87 69.94 95.88 61.22 90.00 Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Lead Lead Lead Lead Co-mgr Co-mgr 50% 50% 100% 100% 15% 15% N N N N N N Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth 4.86 14.59 9.13 54.00 126.00 73.17 174.42 40.00 160.00 Housing Revenue Bonds Housing Revenue Bonds Housing Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Lead Lead Lead Lead Lead Cosr-mgr Cosr-mgr Lead Lead 100% 100% 100% 50% 50% 15% 15% 100% 100% N N N N N N N N N Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Public Power Inc Sys Wisconsin Public Power Inc Sys Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth 29.38 9.89 127.50 143.02 93.90 37.23 35.00 165.00 28.88 120.00 Housing Revenue Bonds Housing Revenue Bonds Housing Revenue Bonds Power Supply System Rev Bonds Power Supply System Rev Bonds Home Ownership Rev Bonds Home Ownership Rev Bonds Home Owner Rev Bonds Home Ownership Revenue Bonds Home Ownership Revenue Bonds Lead Lead Lead Cosr-mgr Cosr-mgr Cosr-mgr Lead Lead Co-mgr Remarketing Agent 50% N 100% N 100% N 25% N 25% N 15% N 85% N 100% N 20% N N/A N Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Wisconsin Hsg & Econ Dev Auth Total 1.96 37.07 6.30 26.43 103.57 $1,997.53 Home Ownership Revenue Bonds Home Ownership Revenue Bonds Home Ownership Rev Bonds Home Ownership Rev Bonds Home Ownership Rev Bonds Co-mgr Co-mgr Lead Lead Lead 20% 20% 100% 50% 100% N N N N N Dated Date 2006 7/1/2006 2005 11/1/2005 7/1/2005 7/1/2005 6/1/2005 6/1/2005 5/1/2005 5/1/2005 3/1/2005 2004 11/30/2004 11/1/2004 5/6/2004 5/1/2004 3/1/2004 3/1/2004 Issuer Janesville City-Wisconsin Milwaukee Co-Wisconsin Janesville City-Wisconsin Dane Co-Wisconsin Brookfield City-Wisconsin Brown Co-Wisconsin Oshkosh City-Wisconsin Neenah City-Wisconsin Waunakee Village-Wisconsin Univ of Wisconsin Hosp & Clinics Dane Co-Wisconsin Milwaukee City-Wisconsin Wausau City-Wisconsin Oshkosh City-Wisconsin De Pere-Wisconsin Total Wisconsin Local Governmental Issuers Amount of Name of Obligation Issue ($ mils) $15.08 GO Promissory Notes 63.03 11.17 14.26 5.01 4.00 4.82 5.24 10.12 60.00 7.19 46.00 3.05 6.48 4.82 $260.27 Role of Bear Stearns Co-mgr Liability Bid N/A C GO Refunding Bonds GO Promissory Notes General Obligation Bonds GO Corp Purpose Bonds GO Airport Imp Bonds Storm Water Utility Revenue Bonds GO Community Development Bonds GO Corporate Purpose Bonds Co-mgr Co-mgr Co-mgr Co-mgr Co-mgr Co-mgr Co-mgr Co-mgr 50.0% 25.0% 25.0% 16.7% 25.0% 25.0% 25.0% 25.0% C C C C C C C C Hospital Revenue Bonds General Obligation Bonds RANs GO Promissory Notes GO Corporate Purpose Bonds GO Refunding Bonds Lead Co-mgr Lead Co-mgr Co-mgr Co-mgr 100.0% 25.0% 100.0% 25.0% 25.0% 25.0% N C C C C C APPENDIX REGULATORY INFORMATION Bear, Stearns CO. Inc. Prospectus Delivery In September 2007, an NYSE Hearing Panel approved a settlement via stipulation under whic h Bear Stearns, without admitting or denying guilt, consented to findings that it failed to deliver product descriptions to customers that purchased Exchange Traded Funds and failed to deliver prospectuses in connection with certain customer purchases of mutual funds. Bear Stearns consented to a censure and a $500,000 fine. ISE Matter In June 2007, Bear Stearns agreed to a $1,000 fine and restitution payment of unpaid execution fees due in the amount of $720.00 in connection with alleged violations of ISE Rule 712. Hedge Funds In June 2007, Bear Stearns received a request for documents and information from the SEC and certain state regulatory authorities regarding two structured credit strategies hedge funds managed by Bear Stearns Asset Management, which is an affiliate of Bear Stearns. The Firm is cooperating with these inquiries. El Paso Matter In June and July of 2007, Bear Stearns learned that officials in El Paso County pleaded guilty to charges involving wire fraud and bribery in securing vendor contracts. The charges filed by the U.S. Attorney’s Office against one official were detailed in an “information,” which anonymously identified 15 co-conspirators. The press has identified one of the anonymous co-conspirators as a former employee of Bear Stearns. Bear Stearns has not been advised, as of September 2007, that it is the subject of any investigation relating to matters in El Paso County. Misappropriation of Confidential Information In March 2007, the SEC brought an action against 14 defendants in connection with a scheme to trade upon information stolen from UBS Securities LLC and Morgan Stanley & Co., Inc. The SEC complaint alleged that eight Wall Street professionals, including a UBS research executive and a Morgan Stanley attorney, two broker-dealers and a day-trading firm participated in the scheme. Four of the individuals charged by the SEC were former employees of Bear Stearns. The former employees worked in the Private Client Services Department, the area of the Firm that provides services primarily to high net worth individuals and small institutions. On the same day the SEC filed its complaint, the U.S. Attorney’s Office for the Southern District of New York announced charges against many of the same defendants. Bear Stearns has received requests for information from the SEC in connection with this matter and continues to cooperate with the SEC. Short Interest Reporting In February 2007, the NASD accepted a Letter of Acceptance, Waiver, and Consent from Bear, Stearns Securities Corp. (“BSSC,” a subsidiary of Bear Stearns) that found that BSSC failed to comply with rules relating to short interest reporting and did not have adequate procedures in this area. Based upon a review of a 21 month period of short interest reports, the NASD found that BSSC underreported approximately one percent of the total shares that BSSC should have reported during the review period. BSSC consented to a censure and a $250,000 fine, to be paid jointly to the NASD and the American Stock Exchange (with which BSSC simultaneously settled this matter). BSSC settled this matter without admitting or denying the findings. Communications in Connection with Offerings In November 2006, the SEC published a settlement order finding that Bear Stearns had violated Section 5(b) of the Securities Act of 1933 in connection with the sending of certain unauthorized e-mails in 2002 and 2003, during the quiet period of securities offerings. As part of the settlement, under which the Firm neither admitted nor denied the findings, Bear Stearns was censured, but was not fined. Certain Municipal Derivatives Transactions and Guaranteed Investment Contract Brokers CONFIDENTIAL TREATMENT REQUESTED In November 2006, the Firm received subpoenas from law enforcement/ regulatory agencies concerning certain municipal derivatives transactions and guaranteed investment contract brokers. The Firm understands that these subpoenas were issued as part of a broad, industry-wide investigation into such matters. The Firm is cooperating with the regulators in connection with the subpoenas. Municipal Security Trade Reporting In October 2006, the NASD accepted a Letter of Acceptance, Waiver, and Consent from Bear Stearns that found that the Firm had violated an MSRB rule with respect to reporting of certain trades in municipal securities. As part of the settlement, under which the Firm neither admitted nor denied the findings, Bear Stearns consented to a censure and a $5,000 fine. Odd Lot Orders In August 2006, the NYSE announced a settlement via stipulation between it and Bear Stearns that found that the Firm had introduced and/or failed to prevent certain non-member customers from entering, for execution on the NYSE, odd-lot orders that were inconsistent with the NYSE’s odd-lot policies and other NYSE rules. Bear Stearns consented to a censure and a $115,000 fine. Options Communications In July 2006, the NASD accepted a Letter of Acceptance, Waiver, and Consent from Bear Stearns that found that the Firm had violated certain rules with respect to options communications with the public. As part of the settlement, under which the Firm neither admitted nor denied the findings, Bear Stearns consented to a censure and a $150,000 fine. Trade Reporting In July 2006, the NASD accepted a Letter of Acceptance, Waiver, and Consent from Bear Stearns that found that the Firm had violated certain rules with respect to certain trade reporting rules. As part of the settlement, under which the Firm neither admitted nor denied the findings, Bear Stearns consented to a censure and a $42,000 fine. Auction Rate Securities Investigation Bear Stearns, along with numerous other broker-dealer firms, was the subject of an SEC industry-wide investigation regarding practices and procedures in the Auction Rate Securities Market between January 2003 and June 2004. On May 31, 2006, the SEC announced a settlement of this matter with Bear Stearns and 14 other firms. Pursuant to the terms of the settlement, under which the firms neither admitted nor denied the findings, the firms agreed to a censure, payment of penalties, and implementation of procedures that are reasonably designed to prevent and detect violations in the Auction Rate Securities area. The penalty imposed on Bear Stearns and seven other firms was $1.5 million. In conjunction with the settlement, the SEC noted that the firms involved had cooperated with the investigation and had voluntarily disclosed the practices at issue to the SEC. Mutual Fund Matters In March 2006, the Securities and Exchange Commission and the New York Stock Exchange announced a settlement with Bear Stearns of previously disclosed investigations relating to mutual fund trading. The terms of the settlement include a payment of $250 million and retention of independent consultants to review aspects of Bear Stearns’s mutual fund trading and global clearing operations. NYSE Matters In February 2006, the NYSE announced a settlement via stipulation between it and Bear Stearns regarding violations concerning, among other matters, a trading error that occurred in 2002 in the Firm’s index arbitrage area, the supervision of one of the Firm’s former account executives, and supervision related to a communication by a research analyst. Bear Stearns consented to a censure and a $1.5 million fine. CONFIDENTIAL TREATMENT REQUESTED Municipal Bond Offering Matters Bear Stearns was previously the subject of a formal investigation by the Chicago office of the Securities and Exchange Commission into its municipal bond offering practices, which was focused on the municipal underwriting business conducted through the Chicago office of Bear Stearns. In June 2007, the Firm was notified by the SEC that the investigation had been completed and that the SEC staff did “not intend to recommend any enforcement action” by the SEC. On May 9, 2005, a federal grand jury indictment against three individuals, including a former employee of Bear Stearns’s Chicago office, was unsealed. The indictment includes allegations of mail fraud, wire fraud, and extortion in connection with the building and financing of medical facilities in Illinois. The indictment did not charge Bear Stearns with any unlawful conduct. On March 20, 2007, the United States District Court for the Northern District of Illinois dismissed all charges against the former Bear Stearns employee; the court found that the charges in the indictment failed to allege an offense. Specialist Matters Bear Wagner Specialists, LLC (“Bear Wagner”), an indirect subsidiary of The Bear Stearns Companies Inc., has entered into an agreement with the NYSE and the staff of the SEC to settle certain claims concerning specialist trading activity. On March 29, 2004, without admitting or denying the allegations, findings or conclusions of the SEC and the NYSE, Bear Wagner consented to a final settlement of the claims asserted by these regulatory organizations with respect to certain specialist trading activities. Under the terms of the settlement, Bear Wagner entered into agreements with the SEC and NYSE to resolve their investigations of Bear Wagner relating to those matters. Pursuant to the settlement, Bear Wagner has consented, among other things, to (i) pay an aggregate of $16,259,446 million as penalties, involving a payment of $5,534,543 as a penalty and the remaining $10,724,903 as disgorgement to a distribution fund for the benefit of certain customers and (ii) adopt various additional policies, systems, procedures and other safeguards to ensure and further the integrity of Bear Wagner’s trading activity. Illinois Notice of Hearing In February 2005, Bear Stearns received a notice that the Office of the Secretary of State, Illinois Securities Department, had named Bear Stearns as a respondent in a hearing to determine if an order should be entered imposing a monetary fine and/or revoking Bear Stearns’ registration in the State of Illinois because of an alleged failure to respond to a subpoena by its due date. Bear Stearns produced the documents subpoenaed, and settled this matter by agreeing to pay $10,000 to the Illinois Securities Department Audit and Enforcement Fund, without any revocation of its registration. This matter is unrelated to the investigation being conducted by the SEC and requests for documents received from various regulatory authorities concerning Bear Stearns’ municipal underwriting business. IPO Investigation Bear Stearns, among other major brokerage firms, was the subject of an NASD industry-wide investigation into certain initial public offering practices. On May 3, 2004, without admitting or denying the allegations or findings and without an adjudication of any issue of law or fact, Bear Stearns consented to a settlement with the NASD. Pursuant to the settlement agreement, Bear Stearns agreed to a censure and the payment of $450,000 as penalty and $4.5 million as disgorgement. On May 18, 2004, the NASD accepted the settlement. NASD Inquiry Regarding New Jersey Consultant In March 2004, after news articles appeared regarding a New Jersey consultant retained by Bear Stearns, the Firm received a request for information about this consultant from the NASD. Bear Stearns provided the requested information and has not received further communication from the NASD regarding this consultant. Breakpoint Discounts Letter of Acceptance, Waiver, and Consent CONFIDENTIAL TREATMENT REQUESTED In February 2004 without admitting or denying the allegations or findings and without an adjudication of any issue of law or fact, the NASD accepted a Letter of Acceptance, Waiver, and Consent (the “AWC”) from Bear Stearns concerning failure to deliver mutual fund discount breakpoints to customers in 2001 and 2003. Pursuant to the AWC, Bear Stearns agreed to a censure and a fine in the amount of $280,469 as well as certain undertaking relating to its practices concerning delivery of breakpoints to customers purchasing front-end load shares of mutual funds. Bear Stearns has paid the fine imposed and complied with the required undertakings. IPO and Research Investigation The SEC, NASD, NYSE and several state attorney generals’ offices conducted an industry-wide investigation of certain research and initial public offering practices of major brokerage firms, including Bear Stearns. Bear Stearns cooperated with the investigation. On April 28, 2003, without admitting or denying the allegations, findings or conclusions of the various federal and state regulators and self-regulatory organizations, Bear Stearns consented to a final settlement involving many of the leading securities firms operating in the United States. The various regulatory complaints alleged conflicts of interest relating to the alleged involvement of research analyst with investment banking activities. Under the terms of the settlement, Bear Stearns entered into consent agreements and other definitive documents with the SEC, NYSE, NASD and the State of New Jersey, Bureau of Securities, to resolve their investigations of Bear Stearns relating to those matters. Pursuant to the settlement, which resolved the research aspects of the investigations, but not the NASD’s investigations relating to IPO practices, Bear Stearns has consented, among other things, to (i) pay an aggregate of $25 million as penalties, (ii) pay an aggregate of $25 million as disgorgement to a distribution fund for the benefit of certain customers, (iii) contribute $25 million to provide independent third-party research over five years to clients, (iv) contribute an aggregate of $5 million over five years for investor education, (v) adopt various additional policies, systems, procedures and other safeguards to ensure further the integrity of Bear Stearns’ investment research and (vi) be permanently restrained and enjoined from violating certain rules of the NYSE and NASD relating to investment research activities. In connection with the settlement, Bear Stearns has also consented to a voluntary initiative imposing restrictions on the allocation of shares in initial public offerings to executives and directors of public companies. On October 31, 2003, the United States District Court for the Southern District of New York entered a series of orders effectuating the settlement. The State of New Jersey, Bureau of Securities acted as Bear Stearns’ lead state regulator in connection with the settlement. Bear Stearns has reached similar arrangements with all of the states, the District of Columbia and the Commonwealth of Puerto Rico. Any monetary penalties and other payments by such arrangements are included within the aggregate amounts discussed above. In May 2003, the SEC, NYSE and NASD issued subpoenas to the Company requesting documents and information in connection with its continuing investigation, focusing on supervision by the heads of equity research and investment banking as well as the chief executive officer. Similar subpoenas were issued by these regulatory agencies to all the firms that recently settled research investigations. Bear Stearns has cooperated with these regulatory agencies in connection with this matter. Other Investigations/Inquiries Bear Stearns has been notified by the Staff of the SEC, Southeast Regional Office, that the Staff intends to recommend that the Commission bring a civil enforcement action against Bear Stearns in connection with Bear Stearns’ involvement in the pricing, valuation, and analysis related to approximately $62.9 million of collateralized debt obligations that were purchased by a client of Bear Stearns. Such an action could result in, among other things, disgorgement, civil monetary penalties and/or other remedial sanctions. Other Matters Bear Stearns and its affiliates often receive inquiries as part of “sweeps” or broad-based inquiries by self-regulatory organizations to gather information on specific issues from multiple firms at the same time. Bear Stearns has received such sweep inquiries and requests from the SEC, FINRA and/or other regulatory authorities on subjects that include: (1) certain aspects of firms’ municipal securities business and their political contributions to issuer officials in certain states; (2) proprietary trading and information controls; (3) marketing and promotion of investment company securities; (4) derivatives transactions with affiliates of issuers; (5) gifts and gratuities; (6) conflicts of interests; (7) retail fixed income CONFIDENTIAL TREATMENT REQUESTED practices; (8) mortgage securitizations; (9) equity and fixed income trading; (10) subprime mortgage research, (11) credit default swaps. Bear Stearns is cooperating with the SEC and/or FINRA with respect to such inquiries. CONFIDENTIAL TREATMENT REQUESTED APPENDIX DETAILED STRUCTURING INFORMATION Bear, Stearns Co. Inc. Millions Rated Debt Service Schedule 350 Private Offering - Principal Only Public Offering - Rated Debt Service (Subordinate Lien) Public Offering - Rated Debt Service (Sr. Lien) TSRs-$50mm TSRs 300 $1.3 Billion in FV CABs 250 200 150 100 50 2008 2011 2014 2017 Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Total • • • 2020 TSRs 162,219,106 164,316,820 166,228,478 168,246,754 170,227,461 172,182,761 174,078,522 175,922,171 178,110,123 180,303,149 177,413,297 179,472,689 181,470,629 183,681,345 185,868,790 188,158,027 190,442,742 192,945,716 195,473,688 198,057,108 200,697,256 203,395,510 206,133,183 208,904,467 211,633,085 214,450,449 217,308,894 220,166,197 222,656,516 225,503,848 228,430,727 231,465,719 234,320,437 237,259,503 240,293,914 243,224,690 246,219,002 249,273,088 252,372,334 255,551,405 258,801,979 262,134,191 265,540,349 2023 2026 Interest (Private) 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 29,295,842 8,325,106 2029 2032 2035 Interest (Public) Principal (Public) 85,551,644 81,356,022 80,652,804 79,835,367 78,917,950 77,805,892 76,680,629 75,509,929 74,183,750 72,631,304 71,058,242 69,448,429 67,783,000 66,067,554 64,363,679 62,608,742 60,798,188 58,843,554 56,776,867 54,629,554 53,228,381 51,433,590 49,697,598 48,029,887 46,418,802 44,601,075 42,624,830 40,354,426 37,483,500 35,425,500 33,169,500 30,703,500 28,030,500 25,126,500 21,970,500 18,592,500 14,967,000 11,047,500 6,818,250 2,310,000 - 2038 2041 Principal (Private) 7,300,000 12,840,000 14,850,000 17,700,000 19,800,000 23,000,000 21,000,000 25,000,000 27,900,000 31,200,000 28,300,000 31,600,000 31,300,000 31,600,000 31,800,000 33,500,000 34,800,000 37,000,000 39,900,000 40,000,000 29,855,000 29,385,000 28,370,000 26,680,000 29,895,000 32,090,000 37,835,000 39,525,000 32,800,000 35,800,000 39,400,000 42,800,000 46,300,000 50,500,000 54,700,000 57,900,000 62,950,000 67,700,000 73,275,000 1,387,770,000 - 258,801,979 262,134,191 104,063,829 2,745,920,000 625,000,000 Average Life of Public Placement Bonds: 19 yrs (based on rated debt service) Average Life of Private Placement Bonds: 41 yrs Coupon on Private Placement Bond is assumed at 8.00% 2044 2047 2050 Millions Expected Debt Service Schedule 350 Public Offering - Expected Debt Service (All Liens) Private Offering - Principal Only TSRs TSRs-$50mm 300 Mandatory Clean Up Call 250 200 150 100 50 2008 2011 2014 2017 Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Total • • • 2020 TSRs 162,219,106 164,316,820 166,228,478 168,246,754 170,227,461 172,182,761 174,078,522 175,922,171 178,110,123 180,303,149 177,413,297 179,472,689 181,470,629 183,681,345 185,868,790 188,158,027 190,442,742 192,945,716 195,473,688 198,057,108 200,697,256 203,395,510 206,133,183 208,904,467 211,633,085 214,450,449 217,308,894 220,166,197 222,656,516 225,503,848 228,430,727 231,465,719 234,320,437 237,259,503 240,293,914 243,224,690 246,219,002 249,273,088 252,372,334 255,551,405 258,801,979 262,134,191 265,540,349 2023 2026 Interest (Private) 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 29,295,842 8,325,106 2029 Interest (Public) 84,852,894 79,207,769 76,945,801 74,469,235 71,781,697 68,785,970 65,540,807 62,024,457 58,236,259 53,967,049 49,228,591 44,055,993 38,440,972 32,319,750 25,678,800 18,494,400 10,730,250 3,349,500 - 2032 2035 2038 2041 Principal (Public) Principal (Private) 33,300,000 40,775,000 44,915,000 49,370,000 53,995,000 58,895,000 63,985,000 69,295,000 75,215,000 81,615,000 83,375,000 90,530,000 98,065,000 106,315,000 115,050,000 124,430,000 134,375,000 245,406,205 144,831,028 5,704,648 - 258,801,979 262,134,191 104,063,829 1,719,441,881 625,000,000 Average Life of Public Placement Bonds: 10 yrs (based on expected debt service) Average Life of Private Placement Bonds: 41 yrs Coupon on Private Placement Bond is assumed at 8.00% 2044 2047 2050 Summary of Results Base Scenario Alternative Wrap 1 Alternative Wrap 2 Rated Final Senior Maturity Rated Final Subordinate Maturity Expected Final Maturity 2047 2047 2027 N/A 2047 2019 N/A 2047 2031 First TSRs Pledged 2008 2018 2028 Proceeds Senior Lien CIB (TE) BBB Rated CAB Sales Proceeds $ Transaction Net Proceeds Existing Reserves Indenture Held Funds Total Sources $ Escrow Deposit Additional Net Proceeds Rounding Liquidity Reserve Deposit Costs of Issuance Total Uses $ Annual TSRs to State Outstanding Series 2002 Bonds Refunded Bonds (Par) Rated Final Maturity Expected Final Maturity 1,393,825,502 78,423,369 1,472,248,871 $ 1,472,248,871 137,134,941 46,186,915 1,655,570,727 $ $ $ 1,544,171,341 215 103,831,304 7,567,867 1,655,570,727 $ 50,000,000 $ $ 1,419,065,000 2032 2018 $ $ 101,202,445 101,202,445 $ 101,202,445 101,202,445 $ 100,000,000 2,445 1,200,000 101,202,445 $ - 1,419,065,000 2032 2018 $ $ $ 101,200,051 101,200,051 101,200,051 101,200,051 100,000,000 51 1,200,000 101,200,051 - 1,419,065,000 2032 2018 Badger Tobacco Asset Securitization Corporation Tobacco Settlement Asset-Backed Bonds, Series 2007 Key Dates Issue Date: First Interest Payment: First Rated Principal Payment: Final Rated Principal Installment: First Expected Principal Payment: Final Expected Principal Payment: 15-Nov-2007 1-Jun-2008 1-Jun-2008 1-Jun-2047 1-Jun-2008 1-Jun-2027 Financing Assumptions Costs of Issuance as a % of Par: 0.50% Cost of Funds: Average Coverage: 6.34% 1.85 Sources of Funds PV of CABs and CCABs Current Interest Bond Par: Plus CIB OIP / Less CIB OID: Subtotal - Sale Proceeds Existing Reserve Balances: All Indenture Held Funds: Total Sources of Funds Total 78,423,369.10 1,435,150,000.00 (41,324,497.80) 1,472,248,871.30 137,134,940.63 46,186,915.33 1,655,570,727.26 Uses of Funds Escrow Deposit: Rounding: Liquidity Reserve Funds: Costs of Issuance: Total Uses of Funds Issue Size: Sale Proceeds: 1,544,171,341.22 215.03 103,831,304.17 7,567,866.85 1,655,570,727.26 1,513,573,369.10 1,472,248,871.30 Badger Tobacco Asset Securitization Corporation Tobacco Settlement Asset-Backed Bonds, Series 2007 Production Summary Tax Status TE TE TE TE TE Maturity Type Fixed Am Serials Turbo Term CIB Indexed Floater Turbo Term CIB Turbo Term CIB Rated Maturity Various 6/1/2027 6/1/2035 6/1/2035 6/1/2047 Face Amount Coupon Yield 101,390,000 Various Various 439,000,000 5.375% 5.650% 150,000,000 FLOAT FLOAT 103,635,000 5.750% 6.000% 641,125,000 6.000% 6.250% 1,435,150,000 Tax Status Maturity Type Rated Maturity Face Amount Ratings Yield 1,310,770,000 NR/BBB 7.250% TE 1st Sub CAB 6/1/2047 Price Various 96.767% 100.000% 96.647% 96.347% Price 5.983% Production 101,153,550 424,807,130 150,000,000 100,160,118 617,704,704 1,393,825,502 Production 78,423,369 Detailed Production Summary for Fixed Amortization Serial Bonds Maturity 1-Jun-2009 1-Jun-2010 1-Jun-2011 1-Jun-2012 1-Jun-2013 1-Jun-2014 1-Jun-2015 1-Jun-2016 1-Jun-2017 Maturity Type Serial Serial Serial Serial Serial Serial Serial Serial Serial Principal 2,140,000 4,950,000 5,900,000 9,900,000 11,500,000 12,600,000 15,000,000 18,600,000 20,800,000 101,390,000 Coupon 4.150% 4.250% 4.375% 4.650% 4.900% 4.900% 4.900% 5.000% 5.125% Yield 4.150% 4.300% 4.500% 4.650% 4.800% 4.900% 5.000% 5.100% 5.150% Price 100.000% 99.878% 99.592% 100.000% 100.479% 100.000% 99.375% 99.311% 99.810% Production 2,140,000.00 4,943,961.00 5,875,928.00 9,900,000.00 11,555,085.00 12,600,000.00 14,906,250.00 18,471,846.00 20,760,480.00 101,153,550 Last Expected Turbo N/A 2017 2020 2020 2025 Expected Average Life N/A 5.3 11.2 11.2 15.4 Last Expected Turbo Expected Average Life 2027 18.1 Badger Tobacco Asset Securitization Corporation Tobacco Settlement Asset-Backed Bonds, Series 2007 Coverage of Current Interest Bond Debt Service by Expected Revenues Revenue Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 Total TSRs 86,529,656 112,219,106 114,316,820 116,228,478 118,246,754 120,227,461 122,182,761 124,078,522 125,922,171 128,110,123 130,303,149 127,413,297 129,472,689 131,470,629 133,681,345 135,868,790 138,158,027 140,442,742 142,945,716 145,473,688 148,057,108 150,697,256 153,395,510 156,133,183 158,904,467 161,633,085 164,450,449 167,308,894 170,166,197 172,656,516 175,503,848 178,430,727 181,465,719 184,320,437 187,259,503 190,293,914 193,224,690 196,219,002 199,273,088 202,372,334 205,551,405 Earnings on TSRs and Reserves 6,587,028 6,355,190 6,353,174 6,352,592 6,347,650 6,344,475 6,321,627 6,320,522 6,312,884 6,304,040 6,271,424 6,261,637 6,237,442 6,215,282 6,192,665 6,174,932 6,154,704 6,136,338 6,118,798 6,089,729 6,036,896 6,010,689 5,982,931 5,953,498 5,943,691 5,927,368 5,922,474 5,897,849 5,826,600 5,809,459 5,791,820 5,770,563 5,746,837 5,722,528 5,694,765 5,660,265 5,629,202 5,593,001 5,555,599 2,911,759 Total Available Funds Rated CIB Amortization Average: CIB Interest Net of Cap I Operating Expenses Total Debt Service and Operating Expenses 118,806,134 120,672,010 122,581,652 124,599,346 126,575,110 128,527,236 130,400,149 132,242,693 134,423,007 136,607,190 133,684,720 135,734,325 137,708,071 139,896,628 142,061,456 144,332,960 146,597,446 149,082,054 151,592,485 154,146,837 156,734,152 159,406,199 162,116,114 164,857,965 167,576,776 170,377,817 173,231,368 176,064,046 178,483,115 181,313,308 184,222,547 187,236,282 190,067,274 192,982,032 195,988,678 198,884,955 201,848,204 204,866,089 207,927,934 208,463,164 7,300,000 12,840,000 14,850,000 17,700,000 19,800,000 23,000,000 21,000,000 25,000,000 27,900,000 31,200,000 28,300,000 31,600,000 31,300,000 31,600,000 31,800,000 33,500,000 34,800,000 37,000,000 39,900,000 40,000,000 29,855,000 29,385,000 28,370,000 26,680,000 29,895,000 32,090,000 37,835,000 39,525,000 32,800,000 35,800,000 39,400,000 42,800,000 46,300,000 50,500,000 54,700,000 57,900,000 62,950,000 67,700,000 73,275,000 77,000,000 85,551,644 81,356,022 80,652,804 79,835,367 78,917,950 77,805,892 76,680,629 75,509,929 74,183,750 72,631,304 71,058,242 69,448,429 67,783,000 66,067,554 64,363,679 62,608,742 60,798,188 58,843,554 56,776,867 54,629,554 53,228,381 51,433,590 49,697,598 48,029,887 46,418,802 44,601,075 42,624,830 40,354,426 37,483,500 35,425,500 33,169,500 30,703,500 28,030,500 25,126,500 21,970,500 18,592,500 14,967,000 11,047,500 6,818,250 2,310,000 716,431 737,924 760,062 782,863 806,349 830,540 855,456 881,120 907,553 934,780 962,823 991,708 1,021,459 1,052,103 1,083,666 1,116,176 1,149,661 1,184,151 1,219,676 1,256,266 1,293,954 1,332,773 1,372,756 1,413,939 1,456,357 1,500,047 1,545,049 1,591,400 1,639,142 1,688,317 1,738,966 1,791,135 1,844,869 1,900,215 1,957,222 2,015,938 2,076,416 2,138,709 2,202,870 2,268,956 93,568,075 94,933,946 96,262,866 98,318,230 99,524,299 101,636,432 98,536,085 101,391,049 102,991,303 104,766,084 100,321,065 102,040,137 100,104,459 98,719,657 97,247,345 97,224,918 96,747,849 97,027,705 97,896,542 95,885,820 84,377,335 82,151,363 79,440,354 76,123,826 77,770,159 78,191,123 82,004,879 81,470,826 71,922,642 72,913,817 74,308,466 75,294,635 76,175,369 77,526,715 78,627,722 78,508,438 79,993,416 80,886,209 82,296,120 81,578,956 6,372,919,528 1,435,150,000 2,057,536,439 54,019,800 3,546,706,239 1.85 Debt Service Coverage for Series 2007 CIBs 1.27 1.27 1.27 1.27 1.27 1.26 1.32 1.30 1.31 1.30 1.33 1.33 1.38 1.42 1.46 1.48 1.52 1.54 1.55 1.61 1.86 1.94 2.04 2.17 2.15 2.18 2.11 2.16 2.48 2.49 2.48 2.49 2.50 2.49 2.49 2.53 2.52 2.53 2.53 2.56 Badger Tobacco Asset Securitization Corporation Tobacco Settlement Asset-Backed Bonds, Series 2007 Expected Debt Service Revenue Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 Jun-01 Fixed Am Principal Jun-01 Turbo CIB & Principal Jun-01 Turbo CAB Accreted Value Jun-01 Interest Dec-01 Interest Less Capitalized Interest Expected Debt Service 2,140,000 4,950,000 5,900,000 9,900,000 11,500,000 12,600,000 15,000,000 18,600,000 20,800,000 - 33,300,000 38,635,000 39,965,000 43,470,000 44,095,000 47,395,000 51,385,000 54,295,000 56,615,000 60,815,000 83,375,000 90,530,000 98,065,000 106,315,000 115,050,000 124,430,000 134,375,000 111,650,000 - 133,756,205 144,831,028 5,704,648 - 44,695,145.03 40,132,740.42 39,050,019.79 37,870,772.92 36,598,462.50 35,158,226.04 33,602,735.42 31,913,063.54 30,111,393.75 28,099,857.29 25,845,233.35 23,369,621.39 20,686,372.01 17,754,600.00 14,565,150.00 11,113,650.00 7,380,750.00 3,349,500.00 - 40,157,748.75 39,075,028.13 37,895,781.25 36,598,462.50 35,183,234.38 33,627,743.75 31,938,071.88 30,111,393.75 28,124,865.63 25,867,191.50 23,383,357.63 20,686,372.01 17,754,600.00 14,565,150.00 11,113,650.00 7,380,750.00 3,349,500.00 - - 118,152,893.78 119,982,768.54 121,860,801.04 123,839,235.42 125,776,696.88 127,680,969.79 129,525,807.29 131,319,457.29 133,451,259.38 135,582,048.79 132,603,590.98 134,585,993.40 136,505,972.01 138,634,750.00 140,728,800.00 142,924,400.00 145,105,250.00 248,755,704.70 144,831,027.76 5,704,648.31 - 101,390,000 1,333,760,000 284,291,881 481,297,293.44 436,812,901.14 - 2,637,552,075.35 ESCROW REQUIREMENTS Badger Tobacco Asset Securitization Corporation Rates as of 9/10/07 Dated Date Delivery Date Period Ending 12/01/2007 06/01/2008 12/01/2008 06/01/2009 12/01/2009 06/01/2010 12/01/2010 06/01/2011 12/01/2011 06/01/2012 Prepared by Bear, Stearns & Co. Inc. 11/15/2007 11/15/2007 Principal Redeemed Total 123,385,000.00 43,684,387.50 42,734,246.88 40,177,956.25 40,177,956.25 37,400,421.88 37,400,421.88 34,296,534.38 34,296,534.38 30,871,015.63 30,871,015.63 859,800,000.00 74,709,387.50 131,939,246.88 40,177,956.25 137,037,956.25 37,400,421.88 142,330,421.88 34,296,534.38 148,156,534.38 30,871,015.63 1,014,056,015.63 559,265,000.00 371,910,490.66 859,800,000.00 1,790,975,490.66 Principal Interest 31,025,000.00 89,205,000.00 96,860,000.00 104,930,000.00 113,860,000.00 SUMMARY OF BONDS REFUNDED Badger Tobacco Asset Securitization Corporation Rates as of 9/10/07 Bond Maturity Date Interest Rate Par Amount 06/01/2008 06/01/2009 06/01/2010 06/01/2011 06/01/2012 06/01/2013 06/01/2014 06/01/2015 06/01/2016 06/01/2017 06/01/2008 06/01/2009 06/01/2010 06/01/2011 06/01/2012 06/01/2013 06/01/2014 12/01/2007 06/01/2014 06/01/2015 06/01/2015 06/01/2016 06/01/2017 06/01/2018 5.000% 5.000% 5.500% 5.750% 5.750% 6.000% 6.000% 6.000% 6.000% 6.000% 6.125% 6.125% 6.125% 6.125% 6.125% 6.125% 6.125% 6.125% 7.000% 7.000% 6.375% 6.375% 6.375% 6.375% 31,220,000.00 33,565,000.00 35,070,000.00 32,770,000.00 34,040,000.00 37,685,000.00 39,080,000.00 41,480,000.00 44,285,000.00 46,730,000.00 57,985,000.00 63,295,000.00 69,860,000.00 81,090,000.00 89,345,000.00 95,740,000.00 40,330,000.00 31,025,000.00 64,955,000.00 35,045,000.00 79,675,000.00 124,735,000.00 135,820,000.00 74,240,000.00 Call Date Call Price Turbo: SERIAL TERM17 TERM27 TERM27X TERM28 TERM32 1,419,065,000.00 Prepared by Bear, Stearns & Co. Inc. 06/01/2012 06/01/2012 06/01/2012 06/01/2012 06/01/2012 100.000 100.000 100.000 100.000 100.000 06/01/2012 06/01/2012 100.000 100.000 06/01/2012 06/01/2012 06/01/2012 06/01/2012 06/01/2012 06/01/2012 100.000 100.000 100.000 100.000 100.000 100.000 ESCROW COST Badger Tobacco Asset Securitization Corporation Rates as of 9/10/07 Type of Security Maturity Date TNote TNote Agency Agency Agency Agency Agency Agency Agency Agency 11/30/2007 05/31/2008 11/14/2008 05/21/2009 11/03/2009 05/15/2010 11/15/2010 05/15/2011 11/15/2011 05/18/2012 Par Amount Rate Yield Price Cost 44,567,000 96,156,000 6,738,000 103,720,000 6,806,000 111,897,000 6,171,000 120,236,000 6,557,000 989,926,000 4.250% 4.875% 3.625% 5.250% 4.750% 4.125% 6.625% 6.000% 5.625% 4.875% 3.894793% 4.232503% 4.518000% 4.414000% 4.385000% 4.367000% 4.403000% 4.426000% 4.573000% 4.481000% 100.011425 100.338160 99.138607 101.212596 100.679036 99.432696 106.181091 105.052011 103.806062 101.591876 44,572,091.78 96,481,161.13 6,679,959.34 104,977,704.57 6,852,215.19 111,262,203.84 6,552,435.13 126,310,335.95 6,806,563.49 1,005,684,394.41 1,516,179,064.83 1,492,774,000 Purchase Date 11/15/2007 Prepared by Bear, Stearns & Co. Inc. Accrued Interest Total Cost 869,421.80 2,151,687.54 678.48 2,631,895.00 10,776.17 23,727,288.81 45,441,513.58 98,632,848.67 6,680,637.82 107,609,599.57 6,862,991.36 111,262,203.84 6,552,435.13 126,310,335.95 6,806,563.49 1,029,411,683.22 29,391,747.80 1,545,570,812.63 Cost of Securities Float Contract Cash Deposit Total Escrow Cost 1,545,570,812.63 -1,399,673.95 202.54 1,544,171,341.22 1,545,570,812.63 -1,399,673.95 202.54 1,544,171,341.22 ESCROW SUFFICIENCY Badger Tobacco Asset Securitization Corporation Rates as of 9/10/07 Date 11/15/2007 11/30/2007 12/01/2007 05/31/2008 06/01/2008 11/30/2008 12/01/2008 05/31/2009 06/01/2009 11/30/2009 12/01/2009 05/31/2010 06/01/2010 11/30/2010 12/01/2010 05/31/2011 06/01/2011 12/01/2011 05/31/2012 06/01/2012 Escrow Requirement Excess Receipts Excess Balance 202.54 74,709,184.96 202.54 74,709,184.96 -74,709,387.50 131,939,246.88 -131,939,246.88 40,177,956.25 -40,177,956.25 137,037,956.25 -137,037,956.25 37,400,421.88 -37,400,421.88 142,330,421.88 -142,330,421.88 34,296,534.38 -34,296,534.38 148,156,534.38 -148,156,534.38 202.54 74,709,387.50 74,709,387.50 131,939,246.88 131,939,246.88 40,177,956.25 40,177,956.25 137,037,956.25 137,037,956.25 37,400,421.88 37,400,421.88 142,330,421.88 142,330,421.88 34,296,534.38 34,296,534.38 148,156,534.38 148,156,534.38 30,871,015.63 30,871,015.63 1,014,056,015.73 1,014,056,015.63 1,790,975,490.66 Prepared by Bear, Stearns & Co. Inc. Net Escrow Receipts 1,790,975,490.76 1,014,056,015.73 -1,014,056,015.63 0.10 131,939,246.88 40,177,956.25 137,037,956.25 37,400,421.88 142,330,421.88 34,296,534.38 148,156,534.38 1,014,056,015.73 0.10 ESCROW STATISTICS Badger Tobacco Asset Securitization Corporation Rates as of 9/10/07 Escrow IND DSRF ESC Total Escrow Cost Modified Duration (years) Yield to Receipt Date Yield to Disbursement Date Perfect Escrow Cost Value of Negative Arbitrage Cost of Dead Time 46,186,915.33 137,134,940.63 1,360,849,485.27 0.049 3.344 3.344 3.923758% 4.447985% 4.447985% 3.716898% 4.447663% 4.447663% 46,125,156.72 128,811,200.54 1,278,249,402.82 53,885.06 8,321,707.98 82,579,916.87 7,873.55 2,032.11 20,165.58 1,453,185,760.08 90,955,509.91 30,071.24 1,544,171,341.23 Delivery date Yield limit for negative arb Prepared by Bear, Stearns & Co. Inc. 11/15/2007 6.340000% Badger Tobacco Settlement Financing Authority Tobacco Settlement Asset-Backed Bonds, Series 2007 Alternative Wrap Structures - Summary of Results Wrap Scenario 1 Tax Status Maturity Type TE 1st Sub CAB Rated Maturity 1-Jun-2047 Face Amount 1,691,500,000 Moody's / S&P Rating Yield Price NR/BBB 7.250% 5.983% Production 101,202,445.00 Last Expected Turbo Expected Average Life 2019 10.9 Last Expected Turbo Expected Average Life 2031 21.6 Wrap Scenario 2 Tax Status Maturity Type TE 1st Sub CAB Rated Maturity 1-Jun-2047 Face Amount 1,691,460,000 Moody's / S&P Rating Yield Price NR/BBB 7.250% 5.983% Production 101,200,051.80