<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997
REGISTRATION NO. 333-32995
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
STIRLING COOKE BROWN HOLDINGS LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA 6411 NOT APPLICABLE
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION OF INDUSTRIAL EMPLOYERIDENTIFICATION
INCORPORATION OR CLASSIFICATION CODE NO.)
ORGANIZATION) NUMBER)
VICTORIA HALL, THIRD FLOOR, 11 VICTORIA STREET
HAMILTON, HM 11, BERMUDA
(441) 295-7556
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
NICHOLAS MARK COOKE
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
STIRLING COOKE BROWN HOLDINGS LIMITED
C/O STIRLING COOKE
BROWN NORTH AMERICAN REINSURANCE INTERMEDIARIES INC.
125 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 269-6700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
JOHN M. OLSON, ESQ. LOIS F. HERZECA, ESQ. WARREN CABRAL, ESQ.
FOLEY & LARDNER 777 FRIED, FRANK, HARRIS, APPLEBY, SPURLING & KEMPE
EAST WISCONSIN SHRIVER & JACOBSON CEDAR HOUSE, 41 CEDAR
AVENUE ONE NEW YORK PLAZA AVENUE HAMILTON, HM 12,
MIWAUKEE,LWISCONSIN 53202 NEW YORK, NEW YORK BERMUDA (441) 295-2244
(414) 271-2400 10004 (212) 859-8000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF
SECURITIES TO BE PROPOSED MAXIMUM AMOUNT OF
REGISTERED AGGREGATE OFFERING PRICE (1)(2) REGISTRATION FEE (3)
- -----------------------------------------------------------------------------------
<S> <C> <C>
Ordinary Shares,
par value $.25 per
share................. $50,000,000 $15,152
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
(1) Estimated in accordance with Rule 457(o) under the Securities Act of 1933
solely for the purpose of calculating the registration fee pursuant to
Section 6(b) thereunder.
(2) Includes (i) up to $43,478,261 aggregate offering price of Ordinary Shares
to be initially offered for sale in the offering described herein and (ii)
up to $6,521,739 aggregate offering price of Ordinary Shares that the
Underwriters have an option to purchase to cover over-allotments, if any,
in connection with the offering. An indeterminate number of Ordinary
Shares are being registered for resale by a dealer in connection with
market-making transactions. See "Explanatory Note".
(3) Paid in connection with prior filing on August 6, 1997.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of $50 million aggregate
offering price of Ordinary Shares of Stirling Cooke Brown Holdings Limited
(the "Company") to be sold in the offering referred to below. This
Registration Statement also covers the registration of an indeterminate number
of Ordinary Shares for resale by Goldman, Sachs & Co. in connection with
market-making transactions in the United States. (No Ordinary Shares are being
registered for the purpose of sales outside the United States.) The complete
Prospectus relating to the offering (the "IPO Prospectus") follows immediately
after this Explanatory Note. Following the IPO Prospectus are certain pages of
the Prospectus relating solely to such market-making transactions (together
with the remainder of the Prospectus as modified as indicated below, the
"Market-Making Prospectus"), including alternate front and back cover pages, a
section entitled "Principal Shareholders" and a section entitled "Plan of
Distribution". The Market-Making Prospectus will not include the stabilization
legend, which will be deleted from the inside front cover page, or the
sections entitled "Principal and Selling Shareholders" and "Underwriting". All
other sections of the IPO Prospectus are to be used in the Market-Making
Prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997
SHARES
STIRLING COOKE BROWN HOLDINGS LIMITED
ORDINARY SHARES
(PAR VALUE $.25 PER SHARE)
-----------
Of the Ordinary Shares offered hereby, shares are being sold by the
Company and shares are being sold by the Selling Shareholders. See
"Principal and Selling Shareholders". The Company will not receive any of the
proceeds from the sale of the shares being sold by the Selling Shareholders.
Prior to the Offering, there has been no public market for the Ordinary
Shares of the Company. It is currently estimated that the initial public
offering price per share will be between $ and $ . For factors to be
considered in determining the initial public offering price, see
"Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE ORDINARY SHARES.
Application has been made for the quotation of the Ordinary Shares on the
Nasdaq National Market under the symbol "SCBHF".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT (1) COMPANY (2) SHAREHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
Total (3).......... $ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $ payable by the Company.
(3) Certain of the Selling Shareholders have granted the Underwriters an option
for 30 days to purchase up to an additional shares at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to
Selling Shareholders will be $ , $ , and $ , respectively. See
"Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1997, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
OPPENHEIMER & CO., INC.
SBC WARBURG DILLON READ INC.
-----------
The date of this Prospectus is , 1997.
<PAGE>
Certain persons participating in the Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the ordinary shares,
including over-allotment, stabilizing and short-covering transactions in such
securities, and the imposition of a penalty bid, in connection with the
Offering. For a description of these activities, see "Underwriting".
----------------
Consent under the Exchange Control Act 1972 (and regulations thereunder) has
been obtained from the Bermuda Monetary Authority for the issue of the shares
being offered pursuant to the Offering. In addition, a copy of this document
has been delivered to the Registrar of Companies in Bermuda for filing
pursuant to the Companies Act 1981 of Bermuda. In giving such consent and in
accepting this prospectus for filing, the Bermuda Monetary Authority and the
Registrar of Companies in Bermuda accept no responsibility for the financial
soundness of any proposal or for the correctness of any of the statements made
or opinions expressed herein.
These securities may not be offered or sold to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses, or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995. All applicable provisions of
the Financial Services Act 1986 of the United Kingdom must be complied with in
relation to anything done in relation to these securities in, from or
otherwise involving the United Kingdom. This document may not be issued or
passed on to any person in the United Kingdom unless that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom this document
may otherwise lawfully be issued or passed on.
----------------
The Company intends to furnish to its shareholders annual reports containing
consolidated financial statements prepared in accordance with United States
generally accepted accounting principles, which financial statements will be
examined and subject to a written opinion expressed by an independent public
accounting firm. The Company also intends to make available to its
shareholders quarterly reports for the first three quarters of each fiscal
year containing unaudited financial information.
----------------
No purchaser may acquire directly or indirectly 10% or more of the Company's
outstanding ordinary shares without prior approval by the Insurance Department
of the State of New York. See "Business--Regulation".
2
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES UNDER UNITED STATES LAWS
Stirling Cooke Brown Holdings Limited was organized pursuant to the laws of
Bermuda and certain of the Company's directors and officers and certain of the
experts named herein reside outside of the United States. Moreover, a
significant portion of the assets of the Company is located outside the United
States. Consequently, it may not be possible to effect service of process on
such persons or entities within the United States or to enforce against any of
them judgments of courts in the United States predicated upon the civil
liability provisions of the federal securities laws of the United States. The
Company has been informed that the United States and Bermuda do not currently
have a treaty providing for reciprocal recognition and enforcement of
judgments in civil and commercial matters, and a final judgment for the
payment of money rendered by any federal or state court in the United States
based on civil liability, whether or not predicated solely upon the federal
securities laws, would, therefore, not be automatically enforceable in
Bermuda. The Company has also been advised that a final and conclusive
judgment obtained in federal or state courts in the United States under which
a sum of money is payable as compensatory damages (i.e., not being a sum
claimed by a revenue authority for taxes or other charges of a similar nature
by a governmental authority, or in respect of a fine or penalty or multiple or
punitive damages) may be the subject of an action on a debt in the Supreme
Court of Bermuda under the common law doctrine of obligation. Such an action
should be successful upon proof that the sum of money is due and payable, and
without having to prove the facts supporting the underlying judgment, as long
as (i) the court that gave the judgment was competent to hear the action in
accordance with private international law principles as applied by the courts
in Bermuda and (ii) the judgment is not contrary to public policy in Bermuda,
was not obtained by fraud or in proceedings contrary to natural justice of
Bermuda and is not based on an error in Bermuda law. A Bermuda court may
impose civil liability on the Company or its directors or officers in a suit
brought in the Supreme Court of Bermuda against the Company or such persons
with respect to a violation of federal securities law, provided that the facts
surrounding such violation would constitute or give rise to a cause of action
under Bermuda law.
The Company has been advised that the United States and the United Kingdom
do not currently have a treaty providing for the reciprocal recognition and
enforcement of judgments (other than arbitration awards) in civil and
commercial matters. Therefore, a final judgment for the payment of money
rendered by any federal or state court in the United States based on civil
liability, whether or not predicated solely upon the U.S. federal securities
laws, would not be automatically enforceable in the United Kingdom. In order
to enforce in the United Kingdom any U.S. judgment, proceedings must be
initiated before a court of competent jurisdiction in the United Kingdom. A
U.K. court will, under current practice, normally issue a judgment
incorporating the judgment rendered by a U.S. court if it finds that (i) the
U.S. court had, according to English rules of conflict of laws, jurisdiction
over the original proceeding, (ii) the judgment was obtained without fraud and
in accordance with the principles of natural justice, (iii) the judgment is
final and conclusive on the merits, (iv) the judgment does not contravene the
public policy or public order of the United Kingdom and (v) the judgment is
for a debt or a definite sum of money (not being a penalty, fine, multiple of
damages or taxes). Based on the foregoing, there can be no assurance that U.S.
investors will be able to enforce in the United Kingdom judgments in civil and
commercial matters obtained in any federal or state court in the United
States. There is doubt as to whether a U.K. court would impose civil liability
in an original action predicated solely upon the U.S. federal securities laws
brought in a court of competent jurisdiction in the United Kingdom.
3
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements. Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward-looking statements may be identified by use of
terms such as "believes", "anticipates", "intends" or "expects". The forward-
looking statements contained and incorporated by reference in this Prospectus
are generally located in the material set forth under the headings "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" but may be found in other
locations as well. These forward-looking statements relate to the plans and
objectives of the Company for future operations, including the Company's
policy concerning dividends. In light of the risks and uncertainties inherent
in all future projections, including but not limited to those set forth under
the heading "Risk Factors", the inclusion of the forward-looking statements in
this Prospectus should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
Many factors could cause the Company's actual results to differ materially
from those in the forward-looking statements, including the following: (i)
loss of the services of any of the Company's key personnel; (ii) increased
competitive pressure caused by increase in the supply of traditional
insurance, new entrants in the alternative market services industry, or the
willingness of existing competitors to accept lower returns in exchange for
market share; (iii) adverse changes in the statutes or regulations under which
the Company's and its subsidiaries' businesses operate in one or more of the
various jurisdictions in which the Company's or its subsidiaries' businesses
are located; (iv) a contention by the United States Internal Revenue Service
that the Company's operations in Bermuda or the United Kingdom are engaged in
the conduct of a trade or business within the U.S.; (v) a competitive
disadvantage resulting from certain of the competitors of Realm National
Insurance Company having higher financial ratings than Realm National
Insurance Company or any future decline in Realm National Insurance Company's
financial ratings; (vi) the termination of the Company's managing general
agency agreements with certain large insurers; (vii) the failure of one or
more of the Company's reinsurers to fulfill their obligations under
reinsurance agreements; (viii) the inability of the Company to obtain adequate
reinsurance coverage at acceptable cost; and (ix) changing rates of inflation
and other economic conditions, which could adversely affect loss payments,
investment returns, and the fundamental financial strength of the Company's
target customer base in the regions in which the Company operates. The
foregoing review of important factors should not be construed as exhaustive
and should be read in conjunction with other cautionary statements that are
included in this Prospectus. The Company undertakes no obligation to update
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements (and the related notes thereto) included elsewhere in this
Prospectus. As used in this Prospectus, unless the context otherwise requires,
the term "Company" includes Stirling Cooke Brown Holdings Limited and all of
its subsidiaries as they have existed from time to time during the periods
covered by this Prospectus, on a consolidated basis. Unless otherwise
indicated, all financial statements used in this Prospectus have been prepared
in accordance with United States generally accepted accounting principles and
all dollar references are to U.S. dollars, which are the Company's functional
currency. Except as otherwise indicated, all information in this Prospectus has
been adjusted to give effect to a four for one split of the Ordinary Shares
which occurred effective June 30, 1997, and assumes no exercise of the
Underwriters' over-allotment option. See "Glossary of Selected Insurance Terms"
for definitions of certain terms used in this Prospectus; such terms are
printed in boldface the first time they appear in the text below. An investment
in the Ordinary Shares offered hereby involves significant risks. See "Risk
Factors".
THE COMPANY
Stirling Cooke Brown Holdings Limited is a Bermuda holding company which,
through its subsidiaries, provides risk management services and products
predominantly to U.S. based small and mid-sized businesses seeking cost-
effective alternatives to traditional WORKERS' COMPENSATION insurance. In
addition, the Company arranges REINSURANCE for its products as well as for
those offered by independent U.S. based insurance carriers active in the
workers' compensation, occupational accident and health insurance markets.
Management believes that its integrated approach, experienced personnel and
market position provide the Company with the ability to offer innovative cost-
effective alternatives to traditional workers' compensation coverage in a
variety of market conditions.
The Company provides most of its services and products to, and derives a
significant portion of its risk management and brokerage fees from, the
workers' compensation insurance market. Workers' compensation is an attractive
market for the structuring of ALTERNATIVE MARKET insurance coverage given the
relatively frequent yet predictable nature of claims, as well as the need to
control costs arising from medical expenses, litigation and other economic
factors. Alternative insurance products typically involve financial
participation by the insured in some or all of the risk, as compared to
traditional insurance products which shift all, or a substantial portion, of
the insured's risk to the insurer. Alternative solutions to traditional
workers' compensation are designed to reduce insurance costs by allowing the
insured to retain a level of risk consistent with the predictable portion of
the loss experience. The Company believes that alternative market workers'
compensation products comprised at least $16.4 billion in 1996, or
approximately 39% of the estimated $42.4 billion total market for workers'
compensation insurance in the U.S. that year. In recent years, the Company has
applied its integrated risk transfer approach to the development of insurance
programs for other SPECIALTY CASUALTY LINES.
The Company has historically experienced strong growth in revenues and
earnings despite the current prolonged SOFT INSURANCE MARKET. The success of
the Company's risk management services and products has led to an increase in
the Company's net income from $2.6 million in 1993 to $10.3 million in 1996,
representing a compound annual growth rate of 57.5%. The Company's revenues are
predominantly fee based, as the Company earns risk management fees for
providing services and products to insureds, insurers and reinsurers. In 1996,
72.2% of the Company's total revenues were derived from risk management fees
including agency and brokerage fees and commissions, underwriting management
and administration fees and fees from other non-risk bearing activities.
5
<PAGE>
In January 1996, certain investment funds affiliated with The Goldman Sachs
Group, L.P. (collectively, the "GS Funds") made an equity investment in the
Company. Consistent with the Company's strategy of providing services and
products at multiple stages in the risk transfer process, the Company used the
proceeds from this investment to acquire and provide additional capital for
Realm National Insurance Company ("Realm"), a New York domiciled insurance
company, in September 1996. The acquisition of Realm had an insignificant
impact on the Company's net income for 1996 and for the first six months of
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The Company is in the process of integrating Realm's
insurance underwriting capabilities with the Company's risk management services
and will seek to earn additional income through a combination of policy
issuance fees and NET PREMIUMS EARNED while retaining a minimum amount of risk.
The net proceeds received by the Company from the offering of the Ordinary
Shares pursuant to this Prospectus (the "Offering") will be used primarily to
provide additional capital to Realm, allowing the Company to expand its
underwriting activities. See "The Company" and "Use of Proceeds".
BUSINESS STRATEGY
The Company believes that growth potential exists in its markets which will
provide opportunities to increase fee-based revenues, net premiums earned and
net investment income. To capitalize on these opportunities, the Company has
established the following strategic priorities which the Company believes will
allow it to maintain and enhance its position as a provider of alternatives to
traditional workers' compensation insurance:
. Increase market penetration and extend agency network. The Company, through
its MANAGING GENERAL AGENCY network, typically receives net fee income from
the insurance carrier of between 13% and 17% of the insured's gross premium
on the underlying policy for providing underwriting services, POLICY
ADMINISTRATION and PREMIUM ACCOUNTING, and CLAIMS ADJUSTING and
administrative services. The Company intends to increase the market
penetration of its existing agency network by concentrating its marketing
efforts on the most productive agents and by continuing to use agency
incentive and promotional programs to encourage increased levels of new
business development. In addition, the Company intends to continue to
increase the number of INDEPENDENT PRODUCING AGENTS distributing the
Company's services and products.
. Expand current insurance operations. The Company currently uses independent
primary insurance carriers in connection with most of its existing workers'
compensation business, and expects these arrangements to continue for much of
this existing business. However, through Realm, the Company intends to act as
an issuing carrier for a portion of its new business opportunities and
receive a combination of policy issuance fees (typically 7% of the insured's
gross premiums) and/or net premiums earned. The Company is in the process of
increasing Realm's capital base and expanding the number of states in which
Realm is licensed.
. Expand product offerings through existing distribution network. The Company
seeks to expand its product offerings by developing services and products
that meet the financial and risk management objectives of its clients. For
example, in response to rising workers' compensation costs, the Company was
one of the pioneers in the development of alternative NON-SUBSCRIBER
PROGRAMS, which the Company began to market and sell in Texas in the early
1990s. The Company intends to continue to develop new services and products
to be marketed through its agency distribution network.
. Expand and develop program business. The Company structures and markets
comprehensive programs to transfer risk from an insured to insurers and
ultimately to reinsurers in the workers' compensation market as well as for
other specialty casualty lines. These programs enable the Company to provide
a range of risk management services and products for retail agents, while
also maximizing the Company's revenues at each stage of the risk transfer
process. The Company intends to utilize its existing reinsurance business
relationships to expand the number of programs it
6
<PAGE>
offers and also intends to increase the sale of insurance policies issued
under existing programs through its agency network. The Company expects the
growth of its PROGRAM BUSINESS to increase total revenues as well as increase
the revenues generated from specialty casualty lines.
. Increase reinsurance brokering revenues. The Company's REINSURANCE BROKERING
subsidiaries arrange the reinsurance programs associated with the Company's
products, and also arrange reinsurance programs for numerous other U.S. and
European insurance companies. The Company expects that Realm's expansion will
generate additional business for the Company's reinsurance brokering
operations.
. Selectively pursue acquisitions. The Company is continuously looking to
expand its business by selectively acquiring general agencies and books of
insurance business. Given the Company's ability to earn fees throughout the
risk transfer process, the Company believes the selective acquisition of
general agencies and books of insurance business can generate significant
additional profits relative to the costs of such acquisitions.
Because the Company has already developed the infrastructure necessary to
implement these strategies, the Company believes that its objectives can be
achieved with minimal additional costs. In connection with the Offering, the
Company will raise additional capital required to facilitate the planned
expansion of Realm's business.
THE OFFERING
<TABLE>
<S> <C> <C>
Ordinary Shares offered by the Company......... Ordinary Shares
Ordinary Shares offered by the Selling
Shareholders.................................. Ordinary Shares
---------
Total...................................... Ordinary Shares
=========
Ordinary Shares to be outstanding immediately
after the Offering............................ Ordinary Shares
</TABLE>
Dividend Policy.......
After the Offering, the Company currently intends to
declare quarterly dividends on the Ordinary Shares and
expects that the first quarterly dividend payment will
be $ per Ordinary Share (a rate of $
annually) and will be declared and paid in the first
quarter of 1998. The declaration and payment of future
dividends is at the discretion of the Company's Board
of Directors and will depend upon, among other things,
future earnings, capital requirements, the general
financial condition of the Company, general business
conditions and other factors. The Company, as a holding
company, is dependent on the payment of dividends from
its operating subsidiaries. Certain of the Company's
insurance subsidiaries are subject to regulations and
may be subject to certain taxes that could limit the
amount of or restrict the payment of dividends to the
Company. See "Risk Factors--Potential Impact of Holding
Company Structure on Dividends", "Dividend Policy",
"Business--Regulation", "Certain Tax Considerations",
and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and
Capital Resources".
Use of Proceeds....... The proceeds to the Company from the sale of Ordinary
Shares by the Company are expected to be approximately
$ million (net
7
<PAGE>
of underwriting discounts and estimated expenses
payable by the Company). The Company currently intends
to use substantially all the net proceeds from the sale
of shares by the Company to periodically provide
additional capital to the Company's wholly-owned
insurance subsidiary, Realm, as Realm expands its
insurance underwriting activities. Any remaining funds
will be used for general corporate purposes, which
could include acquisitions of general insurance
agencies and books of insurance business. Pending
investment of the net proceeds in Realm, the Company
will invest such net proceeds in short-term
investments. The Company will not receive any proceeds
from the sale of shares by the Selling Shareholders.
See "Principal and Selling Shareholders" and "Use of
Proceeds".
Listing...............
Application has been made to have the Ordinary Shares
quoted on the Nasdaq National Market under the symbol
"SCBHF". See "Market for the Ordinary Shares".
RISK FACTORS
Prospective purchasers of the Ordinary Shares should consider carefully the
specific investment considerations set forth under the caption "Risk Factors"
as well as the other information set forth in this Prospectus.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The historical consolidated balance sheet data presented below as of December
31, 1995 and 1996 and the consolidated income statement data for each of the
years in the three-year period ended December 31, 1996, were derived from the
Company's audited consolidated financial statements included elsewhere in this
Prospectus. The historical consolidated balance sheet data as of December 31,
1992, 1993 and 1994 and the consolidated income statement data for the years
ended December 31, 1992 and 1993 were derived from the Company's unaudited
consolidated financial statements. The consolidated income statement data set
forth below for the six-month periods ended June 30, 1996 and 1997 and the
consolidated balance sheet data at June 30, 1997 have been derived from the
Company's unaudited consolidated financial statements appearing elsewhere in
this Prospectus. In the opinion of the Company, such information reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations during, and the financial
condition of the Company at the end of, such periods. Results for interim
periods should not be considered as indicative of results for any other periods
or for the full year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996(1) 1996 1997(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Brokerage fees and
commissions........... $ 4,510 $ 10,283 $ 11,670 $ 17,478 $ 20,117 $ 9,144 $ 11,852
Managing general agency
fees.................. 0 0 578 2,724 6,016 2,717 5,155
Underwriting management
fees.................. 0 718 2,280 3,467 4,045 1,825 1,930
Captive management and
program fees.......... 0 0 0 424 1,625 709 1,314
Loss control and audit
fees.................. 0 0 0 0 2,039 598 1,326
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total risk management
fees................. 4,510 11,001 14,528 24,093 33,842 14,993 21,577
Net premiums earned.... 0 0 0 3,154 8,754 3,603 6,147
Net investment income.. 278 515 770 2,388 3,405 1,349 2,910
Other income........... 0 0 0 0 841 607 389
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues........ 4,788 11,516 15,298 29,635 46,842 20,552 31,023
Expenses
Losses and loss
expenses incurred..... 0 0 0 1,385 6,765 2,421 5,480
Acquisition costs...... 0 0 0 1,345 1,618 1,103 295
Salaries and benefits.. 2,246 3,658 4,872 8,026 13,106 5,064 8,869
General and
administration
expenses.............. 1,386 3,806 4,846 8,398 12,781 5,499 8,807
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses........ 3,632 7,464 9,718 19,154 34,270 14,087 23,451
Income Before Taxation.. 1,156 4,052 5,580 10,481 12,572 6,465 7,572
Taxation............... 398 1,419 1,298 2,603 2,281 1,319 1,394
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............ $ 758 $ 2,633 $ 4,282 $ 7,878 $ 10,291 $ 5,146 $ 6,178
========== ========== ========== ========== ========== ========== ==========
Net Income Per
Share(2)(3)............ $ 0.12 $ 0.42 $ 0.68 $ 1.25 $ 1.24 $ 0.63 $ 0.75
Weighted Average
Ordinary Shares
Outstanding(3)......... 6,288,888 6,288,888 6,288,888 6,304,078 8,306,610 8,224,365 8,267,835
BALANCE SHEET DATA:
Cash and marketable
securities............. $ 620 $ 383 $ 4,293 $ 7,581 $ 38,221 $ 27,049 $ 32,775
Total assets(4)......... 13,057 17,156 73,275 120,640 227,986 148,381 343,019
Long-term debt.......... 0 0 0 0 0 0 0
Ordinary Shares subject
to redemption(5)....... 0 0 0 0 14,457 14,457 14,529
Total shareholders'
equity................. 1,520 3,059 6,660 12,403 21,903 17,549 27,154
OTHER SELECTED DATA:
Fee income as a percent
of total revenues...... 94.2% 95.5% 95.0% 81.3% 72.2% 72.9% 69.6%
Number of employees..... 62 75 96 142 235 183 296
</TABLE>
- --------
(1) Includes the operations of Realm from its September 1996 acquisition by the
Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
(2) Net income per share is calculated by dividing net income by the weighted
average number of Ordinary Shares and Ordinary Share equivalents
outstanding during the period. Stock options are considered share
equivalents and are included in the computation of the weighted average
number of Ordinary Shares outstanding using the treasury stock method.
Shares and options issued within one year prior to the registration
statement are deemed outstanding for all periods presented.
(Continued on following page)
9
<PAGE>
(3) All share and per share data have been retroactively restated to reflect
the four for one stock split effected by the Company on June 30, 1997. See
Note 18 to the Company's Consolidated Financial Statements.
(4) Total assets comprise corporate assets together with cash held and
insurance balances receivable in a fiduciary capacity. See Note 5 to the
Company's Consolidated Financial Statements.
(5) The Ordinary Shares owned by the GS Funds are subject to a conditional put
option exercisable after January 2004. Such shares are excluded from total
shareholders' equity. The put option will expire upon the consummation of
the Offering. See Note 11 to the Company's Consolidated Financial
Statements and Note 3 to the Unaudited Consolidated Financial Statements.
10
<PAGE>
RISK FACTORS
COMPETITION; CYCLICALITY OF INSURANCE AND REINSURANCE BUSINESSES
The business of providing risk management services and products to the
workers' compensation and property and casualty insurance markets is highly
competitive. The Company competes with other providers of alternative market
services (including domestic and foreign insurance companies, reinsurers,
insurance brokers, CAPTIVE insurance companies, RENT-A-CAPTIVES, self-
insurance plans, risk retention groups, state funds, ASSIGNED RISK POOLS and
other risk-financing mechanisms) and with providers of traditional insurance
coverage. Many of the Company's competitors have significantly greater
financial resources, longer operating histories, and better financial ratings
and offer a broader line of insurance products than the Company.
Factors affecting the traditional insurance and reinsurance industry
influence the environment for alternative risk management services and
products. Insurance market conditions historically have been subject to
cyclicality and volatility due to premium rate competition, judicial trends,
changes in the investment and interest rate environment, regulation and
general economic conditions, causing many insurance buyers to search for more
stable alternatives. The traditional insurance and reinsurance industry is in
a protracted period of significant price competition, due in part to excess
capacity in most lines of business. While some form of workers' compensation
insurance is a statutory requirement in most states, the choices exercised by
employers in response to the underwriting cycle in traditional insurance and
reinsurance markets have had and will continue to have a material effect on
the Company's results of operations. Although most of the Company's revenues
are derived from fees and commissions rather than underwriting activities, a
substantial portion of the Company's fees are calculated as a percentage of
premium volume, and therefore the Company's fee revenues are directly and
adversely affected by highly competitive market conditions. Additionally,
changes in risk retention patterns by purchasers of insurance and reinsurance
products could have an adverse effect upon the Company.
DEPENDENCE ON RELATIONSHIPS WITH INDEPENDENT PRIMARY INSURANCE CARRIERS
The Company's managing general agencies market insurance products and
programs developed by the Company on behalf of independent insurance carriers,
primarily Clarendon National Insurance Company and its affiliates
("Clarendon") and Legion Insurance Company and its affiliates ("Legion"). In
addition, the Company's insurance brokering and reinsurance brokering
operations, managing general underwriters, and claims and loss control
servicing operations provide additional business and services to Clarendon and
Legion in respect of these products and other insurance and reinsurance
policies. In 1996, fees received from Clarendon accounted for approximately
55% of the Company's total revenues, while fees received from Legion accounted
for less than 10% of the Company's total revenues. Historically, the Company
has had a good relationship with both Clarendon and Legion. There can be no
assurance, however, that Clarendon or Legion will not institute changes which
affect their relationships with the Company. The loss of business from
Clarendon or Legion could have a material adverse effect on the Company's
results of operations and financial conditions. Additionally, any decline in
or disruption of Clarendon's or Legion's business could disrupt the Company's
business and could have a material adverse effect on the Company's results of
operations and financial condition. See "Business--Relationships with
Independent Primary Insurance Carriers".
REINSURANCE CONSIDERATIONS; AVAILABILITY AND COSTS; CREDIT RISKS
The Company relies upon the use of reinsurance agreements in its various
programs to limit and manage the amount of risk retained by the Company or its
customers, including insurance companies. The availability and cost of
reinsurance may vary over time and is subject to prevailing market conditions.
A lack of available reinsurance coverage could limit the Company's ability to
continue certain of its insurance programs. When the Company's own insurance
operations are participating in
11
<PAGE>
a program, the lack of available reinsurance or increases in the cost of
reinsurance could also increase the amount of risk retained by the Company. In
addition, while the Company seeks to obtain reinsurance with coverage limits
intended to be appropriate for the risk exposures assumed, there can be no
assurance that losses experienced by the Company will be within the coverage
limits of the Company's reinsurance agreements.
The Company is also subject to credit risk as a result of its reinsurance
arrangements, as the Company is not relieved of its liability to policyholders
by ceding risk to its reinsurers. The Company is selective in regard to its
reinsurers, placing reinsurance with only those reinsurers that it believes
have strong balance sheets. The Company monitors the financial strength of its
reinsurers on an ongoing basis. The insolvency or inability of any of the
reinsurers used by the Company to meet its obligations could have a material
adverse effect on the results of operations and financial position of the
Company. No assurance can be given regarding the future ability of any of the
Company's reinsurers to meet their obligations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a substantial extent on the ability and
experience of its executive officers. See "Management". The loss of the
services of one or more such persons could have a material adverse effect on
the business of the Company and its future operations.
POSSIBLE REVISIONS TO LOSS RESERVES
To the extent its activities involve any retention of risk of loss, the
Company maintains LOSS RESERVES to cover its estimated ultimate liability for
losses and loss adjustment expenses with respect to reported and unreported
claims incurred. Reserves are estimates involving actuarial and statistical
projections at a given time of what the Company expects to be the cost of the
ultimate settlement and administration of claims based on facts and
circumstances then known, estimates of future trends in claims severity and
other variable factors such as inflation. To the extent that reserves prove to
be inadequate in the future, the Company would have to increase such reserves
and incur a charge to earnings in the period such reserves are increased,
which could have a material adverse effect on the Company's results of
operations and financial condition. The establishment of appropriate reserves
is an inherently uncertain process and there can be no assurance that ultimate
losses will not materially exceed the Company's loss reserves. The Company has
limited historical claim loss experience to serve as a reliable basis for the
estimation of ultimate claim losses. Although the Company has no reason to
believe that its loss reserves are inadequate, it is possible that the Company
will need to revise the estimate of claim losses significantly in the near
term. In the event of such an increase, the amount, net of associated
reinsurance recoveries, would be reflected in the Company's income statement
in the period in which the reserves were increased.
ADVERSE EFFECT OF LEGISLATION AND REGULATORY ACTIONS
The Company conducts business in a number of states and foreign countries.
Certain of the Company's subsidiaries are subject to comprehensive regulation
and supervision by government agencies in the states and foreign jurisdictions
in which they do business. The primary purpose of such regulation and
supervision is to provide safeguards for policyholders rather than to protect
the interests of shareholders. The laws of the various state jurisdictions
establish supervisory agencies with broad administrative powers with respect
to, among other things, licensing to transact business, licensing of agents,
admittance of assets, regulating premium rates, approving policy forms,
regulating unfair trade and claims practices, establishing reserve
requirements and solvency standards, requiring participation in guarantee
funds and shared market mechanisms, and restricting payment of dividends.
Also, in response to perceived excessive cost or inadequacy of available
insurance, states have from time to time created state insurance funds and
assigned risk pools which compete directly, on a subsidized basis, with
private providers such as the Company. Any such event, in a state in which the
Company has substantial operations, could substantially affect the
profitability of the Company's operations in such state, or cause the Company
to change its marketing focus.
12
<PAGE>
State insurance regulators and the National Association of Insurance
Commissioners (the "NAIC") continually re-examine existing laws and
regulations. It is impossible to predict the future impact of potential state,
federal and foreign country regulations on the Company's operations, and there
can be no assurance that future insurance-related laws and regulations, or the
interpretation thereof, will not have an adverse effect on the operations of
the Company's business.
POSSIBLE ADVERSE IMPACT OF LICENSING PROCESS ON REALM
The Company is in the process of seeking the regulatory approvals necessary
to expand Realm's business to include workers' compensation and other
specialty casualty insurance lines in each of the states in which Realm is
currently licensed to offer other insurance products, and intends to license
Realm in substantially all of the remaining 50 states and the District of
Columbia. See "Business--Risk Transfer and Management". The Company expects
that as Realm receives such approvals and licenses, the revenues to be
generated by Realm and its integration into the Company's existing businesses
will become an important component of the Company's future earnings growth.
However, no assurance can be given that Realm will receive such approvals and
licenses, or when such approvals and licenses will be granted if Realm does
receive them. See "Business--Regulation". A state may require as part of its
licensing process, that the insurer have (or demonstrate) several years of
experience in the lines of business for which a license is being sought. Some
states may determine that Realm does not have the requisite experience to meet
this requirement. In the absence of such experience, the insurance regulatory
authority may delay issuing a license until such time as the experience is
obtained. The failure to receive, or a delay in receiving, one or more of such
approvals and licenses could have a material adverse impact on Realm's ability
to generate future earnings growth for the Company.
POTENTIAL IMPACT OF HOLDING COMPANY STRUCTURE ON DIVIDENDS
The Company is a holding company that conducts no operations of its own and
whose assets essentially consist of its equity interest in its subsidiaries.
The Company will rely on cash dividends and other permitted payments from its
subsidiaries to pay creditors and to pay cash dividends, if any, to the
Company's shareholders. Certain of the Company's subsidiaries are subject to
regulations and may be subject to certain taxes that could limit the amount or
restrict the payment of dividends to the Company. See "Dividend Policy",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources", "Certain Tax Considerations",
"Business--Regulation" and Note 17 to the Company's Consolidated Financial
Statements.
TAXATION OF THE COMPANY AND CERTAIN OF ITS SUBSIDIARIES
The Company and certain of its subsidiaries are incorporated outside the
United States and, as foreign corporations, do not file United States tax
returns. These entities believe that they operate in such a manner that they
will not be subject to U.S. tax (other than U.S. excise tax on reinsurance
premiums and withholding tax on certain investment income from U.S. sources)
because they do not engage in business in the United States. There can be no
assurance, however, that these entities will not become subject to U.S. tax
because U.S. law does not provide definitive guidance as to the circumstances
in which they would be considered to be doing business in the United States.
If such entities are deemed to be engaged in business in the United States
(and, if the Company were to qualify for benefits under the income tax treaty
between the United States and Bermuda or the United States and the United
Kingdom, such business were attributable to a "permanent establishment" in the
United States), the Company would be subject to U.S. tax at regular corporate
rates on its income that is effectively connected with its U.S. business plus
an additional 30% "branch profits" tax on income remaining after the regular
tax. See "Certain Tax Considerations".
SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
The Company is a Bermuda company and the majority of its officers and
directors are residents of various jurisdictions outside the United States. A
significant portion of the assets of the Company and such officers and
directors, at any one time, are or may be located in jurisdictions outside the
United States. It may be difficult for investors to effect service of process
within the United States on
13
<PAGE>
directors and officers of the Company who reside outside the United States or
to enforce against the Company or such directors and officers judgments of
United States courts predicated upon civil liability provisions of the United
States federal securities laws. See "Enforceability of Civil Liabilities Under
United States Laws".
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POSSIBLE ADVERSE EFFECT
ON FUTURE MARKET PRICES
Upon completion of the Offering, there will be Ordinary Shares
outstanding. The shares sold in the Offering will be immediately
tradeable without restriction by persons other than those who may be deemed
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
shares were issued by the Company in private transactions prior to
the Offering and are "restricted securities" as that term is defined in Rule
144. The holders of these shares, as Selling Shareholders, have agreed not to
sell any Ordinary Shares without the consent of Goldman, Sachs & Co., on
behalf of the Underwriters, for a period of 180 days following the date of
this Prospectus. After the Offering, the holders of Ordinary Shares
will have the right to require the Company to register all or a portion of
such shares under the Securities Act to permit the public sale of such shares.
Significant sales of Ordinary Shares under a registration statement, pursuant
to Rule 144 or otherwise in the future, or the prospect of such sales, may
depress the price of the Ordinary Shares or any market that may develop. See
"Shares Eligible for Future Sale" and "Description of Capital Shares--
Registration Rights Agreement".
PRINCIPAL SHAREHOLDERS; POSSIBLE CONFLICTS OF INTEREST
Following the Offering, the Company's officers and directors will
beneficially own approximately % of the outstanding Ordinary Shares.
Accordingly, these officers and directors will have the ability to
significantly influence the election of directors and most other corporate
actions. See "Principal and Selling Shareholders".
The GS Funds own approximately 34.0% of the outstanding Ordinary Shares.
After completion of the Offering, the GS Funds are expected to own
approximately % of the outstanding Ordinary Shares. In addition, of the six
current members of the Company's Board of Directors, two are Managing
Directors of Goldman, Sachs & Co.
Goldman, Sachs & Co. (directly or through affiliates) are engaged in certain
commercial activities and transactions with the Company. See "Certain
Relationships and Related Party Transactions". Goldman, Sachs & Co. are acting
as lead manager of the Offering. Because the GS Funds are affiliates of
Goldman, Sachs & Co. and own in the aggregate more than 10% of the Ordinary
Shares of the Company, the underwriting arrangements for the Offering must
comply with the requirements of Rule 2720 of the National Association of
Securities Dealers, Inc. (the "NASD"). Those requirements provide that, when
an NASD member firm participates in distributing an affiliate's equity
securities, the price of the securities must be no higher than the price
determined by a "qualified independent underwriter". Accordingly, SBC Warburg
Dillon Read Inc. is acting as a qualified independent underwriter for purposes
of determining the price of the Ordinary Shares offered hereby. See
"Underwriting".
POSSIBLE ISSUANCES OF UNDESIGNATED SHARES; ANTI-TAKEOVER PROVISIONS
The Board of Directors is authorized under the Company's Bye-Laws to issue
up to 5,000,000 preference shares and to determine their relative rights,
preferences, privileges and restrictions, including voting rights. Therefore,
the rights of the holders of Ordinary Shares will be subject to and may be
adversely affected by the rights of the holders of any preference shares that
may be designated and issued in the future. Although there is no current
intention to do so, the issuance of newly designated shares could have the
effect of delaying, deferring or preventing a change in control of the
Company, which could deprive the Company's shareholders of opportunities to
sell their
14
<PAGE>
Ordinary Shares at a premium. The Company's Board of Directors is divided into
three groups serving staggered three-year terms. Additionally, directors may
only be removed by shareholders holding not less than 75% of the outstanding
Ordinary Shares. The Company's Bye-Laws contain certain provisions that may
have the effect of making more difficult the acquisition of control of the
Company by means of a tender offer, open market share purchases, a proxy
contest or otherwise. Such provisions include a restriction on voting of
Ordinary Shares held by certain holders (other than the existing shareholders)
of 10% or more of the Ordinary Shares ("Interested Shareholders") and
restrictions on certain business combinations with certain Interested
Shareholders. While these provisions may have the effect of encouraging
persons seeking to acquire control of the Company to negotiate with the Board
of Directors, they could also have the effect of discouraging a prospective
acquiror from making a tender offer or otherwise attempting to gain control of
the Company. See "Description of Capital Shares".
INTEREST RATE FLUCTUATIONS
The Company maintains most of its cash in the form of short-term, fixed-
income securities, the value of which is subject to fluctuation depending on
changes in prevailing interest rates. The Company generally does not hedge its
cash investments against interest rate risk. Accordingly, changes in interest
rates may result in fluctuations in the income derived from the Company's cash
investments.
NO PRIOR MARKET FOR ORDINARY SHARES; POSSIBLE VOLATILITY OF ORDINARY SHARES
PRICE AND THE SECURITIES MARKETS
Prior to the Offering there has been no public market for the Ordinary
Shares. Application has been made to have the Ordinary Shares quoted on the
Nasdaq National Market. The initial public offering price of the Ordinary
Shares will be determined through negotiations between the Company, the
Selling Shareholders and the representatives of the Underwriters. There can be
no assurance that the initial public offering price will correspond to the
price at which the Ordinary Shares will trade in the public market subsequent
to the Offering or that an active trading market for the Ordinary Shares will
develop and continue after the completion of the Offering. See "Underwriting".
In addition, the market price of the Ordinary Shares upon the completion of
the Offering could be subject to significant fluctuations in response to
variations in the Company's quarterly financial results or other developments,
such as announcements of new products by the Company or the Company's
competitors, enactment of legislation or regulation affecting the insurance
industry, interest rate movements or general economic conditions.
The Company has been advised by Goldman, Sachs & Co. that, subject to
applicable laws and regulations, Goldman, Sachs & Co. currently intend to make
a market in the Ordinary Shares following completion of the Offering. However,
they are not obligated to do so and any market-making may be discontinued at
any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act.
There can be no assurance that an active market for the Ordinary Shares will
develop or, if developed, will continue. Moreover, because of the affiliation
of Goldman, Sachs & Co. with the Company, Goldman, Sachs & Co. are required to
deliver a current prospectus and otherwise comply with the requirements of the
Securities Act in connection with any secondary market sale of the Ordinary
Shares, which may affect their ability to continue market-making activities.
DILUTION
Purchasers of Ordinary Shares in the Offering will incur immediate and
substantial dilution in the net tangible book value of their Ordinary Shares
($ per share assuming an initial public offering price of $ per
share, the midpoint of the range set forth on the cover page of this
Prospectus). See "Dilution".
15
<PAGE>
THE COMPANY
The Company is a Bermuda holding company which, through its subsidiaries,
provides risk management services and products predominantly to U.S. based
small and mid-sized businesses seeking cost-effective alternatives to
traditional workers' compensation insurance. In addition, the Company arranges
reinsurance for its products as well as for those offered by independent U.S.
based insurance carriers active in the workers' compensation, occupational
accident and health insurance markets.
The Company believes that its integrated approach, experienced personnel and
market position provide the Company with the ability to offer innovative cost-
effective alternatives to traditional workers' compensation coverage in a
variety of market conditions. The Company structures and markets comprehensive
programs to transfer risk from an insured to insurers and ultimately to
reinsurers in the workers' compensation market as well as other specialty
casualty lines. The Company is able to offer these programs primarily as a
result of the strong relationships and expertise it has developed through its
reinsurance brokering activities. Furthermore, although certain of the
Company's programs utilize an independent primary insurance carrier, the
Company is capable of providing or obtaining the services and products
required at each stage of the risk transfer process. The Company believes
these programs are cost-effective to the insured and provide additional
business to reinsurers with excess underwriting capacity. Thus, the Company is
able to provide RETAIL AGENTS and insureds with the advantages of being a
single source provider of risk management services and products, while also
maximizing its own revenues at each stage of the risk transfer process.
Generally, in the risk transfer process, alternative market insurance
carriers will not offer products directly to the retail agent or insured
unless they have effective reinsurance programs in place. The economics and
quality of these reinsurance arrangements affect the insurance carrier's
ability to compete with other insurance products. Insurance carriers use the
services of reinsurance brokers or other intermediaries to arrange these
reinsurance programs. The Company believes that its reinsurance brokering
operations give it a competitive advantage over other industry participants
and allow it to structure more cost-effective alternative products.
The Company earns risk management fees and may retain a portion of the
premium paid by the insured on the underlying policy for providing its
services and products. In 1996, 72.2% of the Company's total revenues were
derived from risk management fees including agency and brokerage fees and
commissions, underwriting management and administration fees and fees from
other non-risk bearing activities.
The Company provides most of its services and products to, and derives a
significant portion of its risk management and brokerage fees from, the
workers' compensation insurance market. Workers' compensation is an attractive
market for the structuring of alternative market insurance coverage given the
relatively frequent yet predictable nature of claims, as well as the need to
control costs arising from medical expenses, litigation and other economic
factors. Alternative insurance products typically involve financial
participation by the insured in some or all of the risk, as compared to
traditional insurance products which shift all, or a substantial portion, of
the insured's risk to the insurer. Alternative solutions to traditional
workers' compensation are designed to reduce insurance costs by allowing the
insured to retain a level of risk consistent with the predictable portion of
the loss experience. The Company believes, based upon published industry
reports and its own experience, that alternative market workers' compensation
products comprised at least $16.4 billion in 1996, or approximately 39% of the
estimated $42.4 billion total market for workers' compensation insurance in
the U.S. that year. In recent years, the Company has applied its integrated
risk transfer approach to the development of insurance programs for other
specialty casualty lines.
The Company, through its original operating subsidiary, Stirling Cooke Brown
Insurance Brokers Limited, began operations in 1989 as an insurance broker in
London specializing in the placement of alternatives to traditional workers'
compensation insurance and the arrangement of associated
16
<PAGE>
reinsurance programs. The Company soon began to develop and market its own
innovative services and products designed for employers seeking effective
methods of alleviating onerous insurance costs.
Beginning in 1992, the Company identified a number of opportunities and
undertook certain strategic initiatives to enhance its growth prospects,
diversify its revenues and increase its overall control of the risk transfer
process. As a result, the Company has expanded its business and services to
include managing general agency services, insurance underwriting, underwriting
management, claims administration, loss and safety control and premium
auditing.
In January 1996, the GS Funds made an equity investment in the Company. In
furtherance of the Company's strategy of providing services and products at
multiple stages in the risk transfer process, the Company used the proceeds
from this investment to acquire and provide additional capital for Realm in
September 1996. The Company is in the process of integrating Realm's insurance
underwriting capabilities with the Company's risk management services and will
seek to earn additional income through a combination of policy issuance fees
and net premiums earned associated with the underwriting function while
retaining a minimum amount of risk. The net proceeds received by the Company
from the Offering will be used primarily to provide additional capital to
Realm, allowing the Company to expand its underwriting activities. See "Use of
Proceeds".
The Company has historically experienced strong growth in revenues and
earnings despite the current prolonged soft insurance market. The success of
the Company's risk management services and products has led to an increase in
the Company's net income from $2.6 million in 1993 to $10.3 million in 1996,
representing a compound annual growth rate of approximately 57.5%. At June 30,
1997, the Company had approximately $343.0 million in assets and 296
employees.
The Company was incorporated in 1995, its principal offices are located at
Victoria Hall, Third Floor, 11 Victoria Street, Hamilton, HM 11, Bermuda, and
its telephone number at that address is (441) 295-7556. The Company, through
its subsidiaries, also maintains offices in London, England; New York, New
York; and at various locations in Florida and Texas.
USE OF PROCEEDS
The proceeds to the Company from the sale of Ordinary Shares by the Company
are expected to be approximately $ million (net of underwriting
discounts and estimated expenses payable by the Company). The Company
currently intends to use substantially all the net proceeds from the sale of
shares by the Company to periodically provide additional capital to the
Company's wholly-owned insurance subsidiary, Realm, as Realm expands its
insurance underwriting activities. Any remaining funds will be used for
general corporate purposes, which could include acquisitions of general
insurance agencies and books of insurance business. Pending investment of the
net proceeds in Realm, the Company will invest such net proceeds in short-term
investments. The Company will not receive any proceeds from the sale of shares
by the Selling Shareholders. See "Principal and Selling Shareholders".
MARKET FOR ORDINARY SHARES
Prior to the Offering, there has been no public market for the Ordinary
Shares. Application has been made to have the Ordinary Shares quoted on the
Nasdaq National Market under the symbol "SCBHF". The Company has been advised
by Goldman, Sachs & Co. that, subject to applicable laws and regulations,
Goldman, Sachs & Co. currently intend to make a market in the Ordinary Shares
following completion of the Offering. However, they are not obligated to do so
and any market-making may be discontinued at any time without notice. In
addition, such market-making activity will be subject to the limits imposed by
the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). There can be no assurance that an active market for the
Ordinary Shares will develop or, if developed, will continue. See "Risk
Factors--No Prior Market for Ordinary Shares; Possible Volatility of Ordinary
Share Price and the Securities Markets" and "Underwriting".
17
<PAGE>
DIVIDEND POLICY
After the Offering, the Company currently intends to declare quarterly
dividends and expects that the first quarterly dividend payment will be $
per Ordinary Share (a rate of $ annually) and will be declared and paid
in the first quarter of 1998. The declaration and payment of future dividends
is at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, capital requirements, the general
financial condition of the Company, general business conditions and other
factors. The Company, as a holding company, is dependent on the payment of
dividends from its operating subsidiaries. Certain of the Company's
subsidiaries are subject to regulations and may be subject to certain taxes
that could limit the amount of or restrict the payment of dividends to the
Company. See "Risk Factors--Potential Impact of Holding Company Structure on
Dividends", "Business--Regulation", "Certain Tax Considerations",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 17 to the Company's
Consolidated Financial Statements.
DILUTION
At June 30, 1997, the Company had a net tangible book value of $41.7 million
or $4.91 per Ordinary Share. Net tangible book value per share is determined
by dividing the Company's tangible net book value (total tangible assets less
total liabilities) by the total number of Ordinary Shares outstanding. After
giving effect as of that date to the sale of the Ordinary Shares
offered by the Company hereby, at an assumed initial offering price of $
per share (the mid-point of the range set forth on the cover page of this
Prospectus), and after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company, the Company's
adjusted net tangible book value would have been approximately $ million,
or $ per Ordinary Share. This represents an immediate increase in net
tangible book value of $ per share to the existing shareholders and an
immediate dilution in net tangible book value of $ per share to new
investors purchasing Ordinary Shares in the Offering. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $
Net tangible book value per share before the
Offering......................................... $
Increase per share attributable to new investors..
---------
Net tangible book value per share after the Offering..........
---------
Dilution per share to new investors........................... $
=========
</TABLE>
The following table sets forth the number of Ordinary Shares purchased from
the Company, the total consideration paid and the average price per share paid
by the Company's existing shareholders and to be paid by new investors in the
Offering (assuming an initial public offering price of $ per share, the
mid-point of the range set forth on the cover page of this Prospectus) and
before deduction of estimated underwriting discounts and commissions:
<TABLE>
<CAPTION>
ORDINARY
SHARES TOTAL AVERAGE
PURCHASED (1) CONSIDERATION PRICE
-------------- -------------- PER ORDINARY
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................
New investors........................
------ ------ ------ ------ ---
Total..............................
====== ====== ====== ====== ===
</TABLE>
- --------
(1) Does not reflect the sale of Ordinary Shares by the Selling
Shareholders in the Offering.
18
<PAGE>
Sales by the Selling Shareholders in the Offering will reduce the number of
Ordinary Shares held by existing shareholders to or approximately
% and will increase the number of Ordinary Shares held by new investors to
or approximately % of the total number of Ordinary Shares
outstanding after the Offering.
CAPITALIZATION
The following table sets forth as of June 30, 1997 (i) the actual
consolidated capitalization of the Company, (ii) the consolidated
capitalization of the Company on a pro forma basis to reflect the termination,
upon the consummation of the Offering, of the put option relating to the
Ordinary Shares subject to redemption and (iii) such capitalization as
adjusted to reflect the sale of the Ordinary Shares offered by the
Company hereby (at an assumed initial public offering price of $ per share,
the mid-point of the range set forth on the cover page of this Prospectus) and
the application of the net proceeds therefrom, net of estimated underwriting
discounts and expenses of the Offering. See "Use of Proceeds". This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Unaudited
Consolidated Financial Statements and the Notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt................................... $ 0 $ 0 $
Ordinary Shares subject to redemption............ 14,529 0
Shareholders' equity:
Ordinary Shares, $0.25 par value, 20,000,000
shares authorized, 8,488,372 shares issued and
outstanding, shares issued and
outstanding as adjusted....................... 1,550 2,122
Additional paid in capital..................... 1,491 15,448
Notes receivable on exercise of options........ (1,625) (1,625)
Unrealized gain on marketable securities....... 42 42
Retained earnings.............................. 25,696 25,696
------- ------- ----------
Total capitalization......................... $41,683 $41,683 $
======= ======= ==========
</TABLE>
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The historical consolidated balance sheet data presented below as of
December 31, 1995 and 1996 and the consolidated income statement data for each
of the years in the three-year period ended December 31, 1996, were derived
from the Company's audited consolidated financial statements included
elsewhere in this Prospectus. The historical consolidated balance sheet data
as of December 31, 1992, 1993 and 1994 and the consolidated income statement
data for the years ended December 31, 1992 and 1993 were derived from the
Company's unaudited consolidated financial statements. The consolidated income
statement data set forth below for the six-month periods ended June 30, 1996
and 1997 and the consolidated balance sheet data at June 30, 1997 have been
derived from the Company's unaudited consolidated financial statements
appearing elsewhere in this Prospectus. In the opinion of the Company, such
information reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations
during, and the financial condition of the Company at the end of, such
periods. Results for interim periods should not be considered as indicative of
results for any other periods or for the full year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996(1) 1996 1997(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Brokerage fees and
commissions........... $ 4,510 $ 10,283 $ 11,670 $ 17,478 $ 20,117 $ 9,144 $ 11,852
Managing general agency
fees.................. 0 0 578 2,724 6,016 2,717 5,155
Underwriting management
fees.................. 0 718 2,280 3,467 4,045 1,825 1,930
Captive management and
program fees.......... 0 0 0 424 1,625 709 1,314
Loss control and audit
fees.................. 0 0 0 0 2,039 598 1,326
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total risk management
fees.................. 4,510 11,001 14,528 24,093 33,842 14,993 21,577
Net premiums earned.... 0 0 0 3,154 8,754 3,603 6,147
Net investment income.. 278 515 770 2,388 3,405 1,349 2,910
Other income........... 0 0 0 0 841 607 389
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues......... 4,788 11,516 15,298 29,635 46,842 20,552 31,023
Expenses
Losses and loss
expenses incurred..... 0 0 0 1,385 6,765 2,421 5,480
Acquisition costs...... 0 0 0 1,345 1,618 1,103 295
Salaries and benefits.. 2,246 3,658 4,872 8,026 13,106 5,064 8,869
General and
administration
expenses.............. 1,386 3,806 4,846 8,398 12,781 5,499 8,807
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses......... 3,632 7,464 9,718 19,154 34,270 14,087 23,451
Income Before Taxation.. 1,156 4,052 5,580 10,481 12,572 6,465 7,572
Taxation............... 398 1,419 1,298 2,603 2,281 1,319 1,394
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 758 $ 2,633 $ 4,282 $ 7,878 $ 10,291 $ 5,146 $ 6,178
========== ========== ========== ========== ========== ========== ==========
Net Income Per
Share(2)(3)............ $ 0.12 $ 0.42 $ 0.68 $ 1.25 $ 1.24 $ 0.63 $ 0.75
Weighted Average
Ordinary Shares
Outstanding(3)......... 6,288,888 6,288,888 6,288,888 6,304,078 8,306,610 8,224,365 8,267,835
BALANCE SHEET DATA:
Cash and marketable
securities............. $ 620 $ 383 $ 4,293 $ 7,581 $ 38,221 $ 27,049 $ 32,775
Total assets(4)......... 13,057 17,156 73,275 120,640 227,986 148,381 343,019
Long-term debt.......... 0 0 0 0 0 0 0
Ordinary Shares subject
to redemption(5)....... 0 0 0 0 14,457 14,457 14,529
Total shareholders'
equity................. 1,520 3,059 6,660 12,403 21,903 17,549 27,154
OTHER SELECTED DATA:
Fee income as a percent
of total revenues...... 94.2% 95.5% 95.0% 81.3% 72.2% 72.9% 69.6%
Number of employees..... 62 75 96 142 235 183 296
</TABLE>
(Continued on following page)
20
<PAGE>
- --------
(1) Includes the operations of Realm from its September 1996 acquisition by
the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
(2) Net income per share is calculated by dividing net income by the weighted
average number of Ordinary Shares and Ordinary Share equivalents
outstanding during the period. Stock options are considered share
equivalents and are included in the computation of the weighted average
number of Ordinary Shares outstanding using the treasury stock method.
Shares and options issued within one year prior to the registration
statement are deemed outstanding for all periods presented.
(3) All share and per share data have been retroactively restated to reflect
the four for one stock split effected by the Company on June 30, 1997. See
Note 18 to the Company's Consolidated Financial Statements.
(4) Total assets comprise corporate assets together with cash held and
insurance balances receivable in a fiduciary capacity. See Note 5 to the
Company's Consolidated Financial Statements.
(5) The Ordinary Shares owned by the GS Funds are subject to a conditional put
option exercisable after January 2004. Such shares are excluded from
shareholders' equity. The put option will expire upon the consummation of
the Offering. See Note 11 to the Company's Consolidated Financial
Statements and Note 3 to the Unaudited Consolidated Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company derives its revenues principally from (i) risk management fees
earned from non-risk bearing services, (ii) net premiums earned from providing
insurance and reinsurance coverage and (iii) net investment income. In 1996,
the Company's risk management fees accounted for 72.2% of total revenues. The
Company's fees were generated from brokerage activities, managing general
agencies, captive management and various other services. Net premiums earned
accounted for 18.7% of total revenues in 1996. To date, a substantial majority
of the Company's net premiums earned were generated from Comp Indemnity
Reinsurance Company Limited, the Company's reinsurance subsidiary ("CIRCL").
In September 1996, the Company acquired Realm, a primary insurance carrier. As
a result of this acquisition, the Company expects that a greater proportion of
its net premiums earned will be derived from insurance business written
through Realm. However, the Company seeks to structure comprehensive
reinsurance programs in order to reduce the Company's participation to a
minimal level of risk, subject to applicable insurance regulations.
Beginning in 1992, the Company identified a number of opportunities and
undertook certain strategic initiatives to enhance its growth prospects,
diversify its revenues and increase its overall control of the risk transfer
process. As a result, the Company has expanded its businesses and services to
include managing general agency services, insurance underwriting, underwriting
management, claims administration, loss and safety control and premium
auditing. This expansion led to a significant increase in net income from $2.6
million in 1993 to $10.3 million in 1996, representing a compound annual
growth rate of 57.5%.
The Company's ability to achieve profitable growth depends upon, among other
things, (i) its overall volume and mix of business; (ii) its ability to
attract and retain customers; (iii) the size of its investment portfolio; (iv)
pricing of its insurance and reinsurance products (which is primarily a
function of competitive conditions and management's ability to assess and
manage losses) and (v) its effective tax rate, since its subsidiaries are
located in Bermuda, the U.K. and the U.S. Additionally, general economic and
market conditions, including the Company's regulatory environment, will affect
profitability.
In January 1996, the GS Funds made an equity investment in the Company, the
proceeds of which were used to purchase Realm in September 1996. The Company's
1996 consolidated financial statements therefore reflect only three months of
Realm's operations. Following the acquisition, the Company has expanded
Realm's licenses and business to include workers' compensation and other
specialty casualty lines.
The Company earned net income of $10.3 million in 1996, up from $7.9 million
in 1995, marking the seventh consecutive year of growth in net income since
the Company began operations in 1989. The following selected financial data
illustrates the strong growth of the Company's businesses:
22
<PAGE>
SELECTED STATISTICS
<TABLE>
<CAPTION>
AS OF OR FOR
THE
SIX MONTHS
AS OF OR FOR THE YEAR ENDED
ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Risk management fees................ $14,528 $24,093 $33,842 $14,993 $21,577
Year to year change................ 32% 66% 40% -- 44%
Net premiums earned................. 0 3,154 8,754 3,603 6,147
Year to year change................ * * 178 -- 71
Total revenues...................... 15,298 29,635 46,842 20,552 31,023
Year to year change................ 33 94 58 -- 51
Income before taxation.............. 5,580 10,481 12,572 6,465 7,572
Year to year change................ 38 88 20 -- 17
Net income.......................... 4,282 7,878 10,291 5,146 6,178
Year to year change................ 63 84 31 -- 20
Total assets........................ 73,275 120,640 227,986 148,381 343,019
Year to year change................ 327 65 89 -- 131
</TABLE>
- --------
* Not material.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net income increased $1.0 million, or 20.1%, to $6.2 million in the first
six months of 1997 from $5.2 million in the same period of 1996. Excluding
foreign exchange gains, net income increased $1.4 million, or 30.7%, to $6.1
million in the first six months of 1997 from $4.7 million in the same period
of 1996.
REVENUES. The components of the Company's revenues are illustrated below:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------
1996 1997
------------------ ------------------
TOTAL % OF TOTAL TOTAL % OF TOTAL
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Risk management fees...................... $14,993 72.9% $21,577 69.5%
Net premiums earned....................... 3,603 17.5 6,147 19.8
Net investment income..................... 1,349 6.6 2,910 9.4
Other income.............................. 607 3.0 389 1.3
------- ----- ------- -----
Total revenues.......................... $20,552 100.0% $31,023 100.0%
======= ===== ======= =====
</TABLE>
Total revenues increased $10.5 million, or 50.9%, to $31.0 million in the
first six months of 1997, from $20.5 million in the first six months of 1996.
The increase consisted primarily of a $6.6 million increase in risk management
fees due to increased brokerage fees associated with the Company's U.K.
brokering subsidiaries, increased managing general agency fees as a result of
a greater penetration of existing markets by the Company's managing general
agency network, and additional risk management fees generated by services
provided by North American Risk, Inc. ("North American Risk"). Net investment
income increased $1.6 million, reflecting an increase in the average balances
23
<PAGE>
of cash and marketable securities during the first six months of 1997,
primarily as a result of increased cash flow from the Company's operations and
greater retained earnings. Net premiums earned increased $2.5 million
primarily due to the acquisition of Realm in September 1996.
Risk management fees as a percent of total revenues decreased to 69.5% from
72.9% while net premiums earned as a percent of total revenues increased to
19.8% from 17.5% in the first six months of 1997 and 1996, respectively. The
Company expects risk management fees as a percent of total revenues to
continue to decrease in future periods and net premiums earned to continue to
increase as a percent of total revenues as Realm becomes licensed to write
insurance in additional states and increases its policy issuance. This
anticipated trend will be partially offset by an increase in risk management
fees associated with the new business expected to be produced through Realm.
RISK MANAGEMENT FEES. The components of the Company's risk management fees
are illustrated below:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------
1996 1997
------------------ ------------------
TOTAL % OF TOTAL TOTAL % OF TOTAL
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Brokerage fees and commissions............ $ 9,144 61.0% $11,852 54.9%
Managing general agency fees.............. 2,717 18.1 5,155 23.9
Underwriting management fees.............. 1,825 12.2 1,930 8.9
Captive management and program fees....... 709 4.7 1,314 6.1
Loss control and audit fees............... 598 4.0 1,326 6.2
------- ----- ------- -----
Total risk management fees.............. $14,993 100.0% $21,577 100.0%
======= ===== ======= =====
</TABLE>
Risk management fees increased $6.6 million, or 43.9%, to $21.6 million in
the first six months of 1997 from $15.0 million in the first six months of
1996. Brokerage fees and commissions had the most significant impact on the
growth of total risk management fees in the first six months of 1997,
increasing $2.7 million, primarily as a result of increased insurance and
reinsurance brokerage activities from the Company's U.K.-based brokerage
operations. Managing general agency fees increased $2.4 million in the first
six months of 1997, primarily as a result of the Company's expansion of its
managing general agency operations in Florida and, to a lesser extent, Texas.
Captive management and program fees increased $0.6 million due to an increase
in the market penetration of the Company's managing general agency network. In
July 1996, the Company established North American Risk which earns fees by
providing claims administration, safety and loss control services, and premium
audit services. Loss control and audit fees for these services increased $0.7
million in the first six months of 1997. Loss control and audit fees in 1996
include fees for a three month period only, as the Company commenced providing
these services in April 1996.
Brokerage fees and commissions comprised 54.9% of risk management fees in
the first six months of 1997 compared to 61.0% in the first six months of
1996. This decrease was primarily a result of the Company's strategy to
further expand and diversify its risk management business through its managing
general agency operations and other service-providing subsidiaries. As a
result, managing general agency fees comprised 23.9% of risk management fees
in the first six months of 1997 compared to 18.1% in the first six months of
1996 and loss control and audit fees (a service provided by North American
Risk) comprised 6.2% of risk management fees in the first six months of 1997
compared to 4.0% in the same period of 1996.
24
<PAGE>
EXPENSES. The components of the Company's expenses are illustrated below:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
---------------
1996 1997
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net losses and loss expenses incurred.......................... $ 2,421 $ 5,480
Insurance premium acquisition costs............................ 1,103 295
------- -------
Total insurance costs........................................ 3,524 5,775
------- -------
Salaries and benefits.......................................... 5,064 8,869
General and administration expenses............................ 5,499 8,807
------- -------
Total operating expenses..................................... 10,563 17,676
------- -------
Total expenses............................................. $14,087 $23,451
======= =======
</TABLE>
Total expenses increased $9.3 million, or 66.5%, to $23.4 million in the
first six months of 1997 from $14.1 million in the first six months of 1996.
Total insurance costs, which includes net losses and LOSS EXPENSES incurred
and insurance premium acquisition costs, increased $2.3 million. The increase
in total insurance costs from the first six months of 1996 to the first six
months of 1997 was a direct result of the increase in net premiums earned
during those periods. Total operating expenses increased $7.1 million, or
67.3%, to $17.7 million in the first six months of 1997 from $10.6 million in
the first six months of 1996. Salaries and benefits, the largest component of
operating expenses, increased $3.8 million while other general and
administration expenses increased $3.3 million. These increases are primarily
the result of expansion into additional related business lines. The Company
has expanded, and continues to actively seek opportunities to expand, its
operations in order to strengthen its control over the production sources of
its business and to broaden the services it provides to clients.
INCOME. Income before taxation increased $1.1 million, or 17.0%, to $7.6
million in the first six months of 1997 from $6.5 million in the first six
months of 1996. Excluding foreign exchange gains, income before taxation
increased $1.5 million, or 25.2%, to $7.5 million in the first six months of
1997 from $6.0 million in the first six months of 1996. Provision for income
taxes increased $0.1 million to $1.4 million in the first six months of 1997
compared to $1.3 million in the first six months of 1996, representing
effective tax rates of 18.4% and 20.4%, respectively. This decrease in the
effective tax rate was due to the relative increase in profits from the
Company's Bermuda subsidiaries, together with a decrease in corporate income
tax rates in the U.K. from 33% to 31%. The Company expects its effective tax
rate to increase marginally as the percentage of its revenues earned in the
United States increases.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net income increased $2.4 million, or 30.6%, to $10.3 million in 1996 from
$7.9 million in 1995. Excluding foreign exchange gains, net income increased
$1.9 million, or 24.7%, to $9.8 million in 1996 from $7.9 million in 1995.
Net income increased $3.6 million, or 84.0%, to $7.9 million in 1995 from
$4.3 million in 1994.
25
<PAGE>
REVENUES. The components of the Company's revenues are illustrated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
% OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Risk management fees............... $14,528 95.0% $24,093 81.3% $33,842 72.2%
Net premiums earned................ 0 0.0 3,154 10.6 8,754 18.7
Net investment income.............. 770 5.0 2,388 8.1 3,405 7.3
Other income....................... 0 0.0 0 0.0 841 1.8
------- ----- ------- ----- ------- -----
Total revenues................... $15,298 100.0% $29,635 100.0% $46,842 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
1996 vs. 1995. Revenues increased $17.2 million, or 58.1%, to $46.8 million
in 1996 from $29.6 million in 1995. The increase was primarily due to a $9.7
million increase in risk management fees, and to a lesser extent, a $5.6
million increase in net premiums earned and a $1.0 million increase in net
investment income. The increase in net premiums earned was primarily a result
of increased premiums earned by the Company's reinsurance subsidiary, CIRCL,
and to a lesser extent, the impact of net premiums earned through Realm. The
increase in net investment income reflects an increase in the Company's cash
balances and marketable securities to $38.2 million in 1996 from $7.6 million
in 1995, primarily as a result of increased cash flow from the Company's
operations, greater retained earnings and, to a lesser extent, the proceeds
from the GS Funds' equity investment.
Total risk management fees as a percent of total revenues declined to 72.2%
from 81.3% while net premiums earned as a percent of total revenues increased
to 18.7% from 10.6% in 1996 and 1995, respectively, as the Company expanded
its insurance and reinsurance operations.
1995 vs. 1994. Revenues increased $14.3 million, or 93.7%, to $29.6 million
in 1995 from $15.3 million in 1994. The increase was the result of a $9.6
million increase in risk management fees, a $1.6 million increase in net
investment income and $3.1 million of net premiums earned by CIRCL, the
Company's reinsurance subsidiary, which was established in 1995.
RISK MANAGEMENT FEES. The components of the Company's risk management fees
are illustrated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
% OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Brokerage fees and commissions.... $11,670 80.3% $17,478 72.5% $20,117 59.4%
Managing general agency fees...... 578 4.0 2,724 11.3 6,016 17.8
Underwriting management fees...... 2,280 15.7 3,467 14.4 4,045 12.0
Captive management and program
fees............................. 0 0.0 424 1.8 1,625 4.8
Loss control and audit fees....... 0 0.0 0 0.0 2,039 6.0
------- ----- ------- ----- ------- -----
Total risk management fees...... $14,528 100.0% $24,093 100.0% $33,842 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
1996 vs. 1995. Risk management fees increased $9.7 million, or 40.5%, to
$33.8 million in 1996 from $24.1 million in 1995. Managing general agency fees
had the most significant impact on growth in risk management fees in 1996,
increasing $3.3 million primarily as a result of the Company's expansion of
its managing general agency operations in Florida and, to a lesser extent,
Texas. Brokerage fees and commissions also increased $2.6 million in 1996,
primarily as a result of an increase in the Company's overall insurance and
reinsurance brokering operations. Captive management and captive program fees
earned by Realm Captive Management, Ltd. ("Realm Captive Management")
increased $1.2 million in its first full year of operations. Underwriting
management fees
26
<PAGE>
increased $0.6 million as the Company continued to benefit from the expansion
in 1995 of its underwriting management operations. In July 1996, the Company
established North American Risk, which earns fees by providing claims
administration, safety and loss control services, and premium audit services
to its clients. Fees earned by North American Risk contributed $2.0 million to
the Company's total revenues in 1996.
Brokerage fees and commissions comprised 59.4% of risk management fees in
1996 compared to 72.5% in 1995. This decrease was primarily a result of the
Company's strategy to further expand and diversify its risk management
business through its managing general agency operations and other service-
providing subsidiaries. As a result, managing general agency fees comprised
17.8% of risk management fees in 1996 compared to 11.3% in 1995 and loss
control and audit fees (a service provided by North American Risk) comprised
6.0% of risk management fees in 1996.
1995 vs. 1994. Risk management fees increased $9.6 million, or 65.8%, to
$24.1 million in 1995 from $14.5 million in 1994. Brokerage fees and
commissions had the most significant impact on growth in risk management fees,
increasing by $5.8 million. The increase in brokerage fees and commissions was
primarily due to an increase in the Company's reinsurance brokering operations
and, to a lesser extent, an expansion in the Company's insurance brokering
operations through the formation of a Florida-based insurance brokering
subsidiary. Managing general agency fees increased $2.1 million, reflecting
the first full year of operations for the Company's Texas managing general
agency. Underwriting management fees increased $1.2 million as the Company's
reinsurance underwriting business continued to expand. Captive management and
captive program fees contributed $0.4 million in fees in 1995, as these
operations began in January 1995.
EXPENSES. The components of the Company's expenses are illustrated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1994 1995 1996
------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net losses and loss expenses incurred................... $ 0 $ 1,385 $ 6,765
Insurance premium acquisition costs..................... 0 1,345 1,618
------ ------- -------
Total insurance costs................................. 0 2,730 8,383
Salaries and benefits................................... 4,872 8,026 13,106
General and administration expenses..................... 4,846 8,398 12,781
------ ------- -------
Total operating expenses.............................. 9,718 16,424 25,887
------ ------- -------
Total expenses...................................... $9,718 $19,154 $34,270
====== ======= =======
</TABLE>
1996 vs. 1995. Total expenses increased $15.1 million, or 78.9%, to $34.3
million in 1996 from $19.2 million in 1995. Total insurance costs, which
includes net losses and loss expenses incurred and insurance premium
acquisition costs, increased $5.7 million. The increase in total insurance
costs in 1996 was primarily a result of the increase in net premiums earned
during that period. Total operating expenses increased $9.5 million, or 57.6%,
to $25.9 million in 1996 from $16.4 million in 1995. Salaries and benefits,
the largest component of operating expenses, increased $5.1 million while
other general and administration expenses increased $4.4 million. These
increases were primarily the result of additional operating expenses arising
from Realm and North American Risk, both of which were acquired during the
year, and the expansion of the Company's managing general agency and managing
general underwriter operations. The Company has expanded, and continues to
seek opportunities to expand, its operations in order to strengthen its
control over the production sources of its business and broaden the services
it provides to clients. While this planned expansion led to expected lower
operating profit margins in 1996, the Company believes it has developed the
infrastructure necessary to accommodate expected growth opportunities.
27
<PAGE>
1995 vs. 1994. Total expenses increased $9.5 million, or 97.1%, to $19.2
million in 1995 from $9.7 million in 1994. During 1995, CIRCL, the Company's
newly established reinsurance subsidiary, incurred $2.7 million of net losses
and loss expenses incurred and insurance premium acquisition costs. Total
operating expenses increased $6.7 million, or 69.0%, to $16.4 million in 1995
from $9.7 million in 1994. Salaries and benefits increased $3.2 million while
other general and administration expenses increased $3.5 million. These
increases were primarily the result of additional operating expenses arising
from the expansion of the Company's managing general agency operations in
Texas and Florida, together with increased operating expenses associated with
the expansion of the Company's managing general underwriting operations and
captive management and program administration operations in Bermuda.
INCOME. The components of the Company's income are illustrated below:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------ ------ -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Risk management income................................. $4,810 $7,740 $ 8,715
Insurance income (loss)................................ 0 353 (389)
Investment income...................................... 770 2,388 3,405
Other income........................................... 0 0 841
------ ------ -------
Income before taxation............................... 5,580 10,481 12,572
Taxation............................................... 1,298 2,603 2,281
------ ------ -------
Net income......................................... $4,282 $7,878 $10,291
====== ====== =======
Effective tax rate..................................... 23.3% 24.8% 18.1%
</TABLE>
1996 vs. 1995. Income before taxation increased $2.1 million, or 20.0%, to
$12.6 million in 1996 from $10.5 million in 1995. Income before taxation
generated from the Company's risk management operations increased $1.0
million, or 12.6%, to $8.7 million in 1996 from $7.7 million in 1995. The
insurance loss of $0.4 million in 1996 was primarily due to a small number of
underwriting losses incurred by Realm on its existing property insurance
portfolio during the period after its acquisition in September 1996.
Investment income increased $1.0 million reflecting an increase in the
Company's cash balances and marketable securities, primarily as a result of
increased cash flow from the Company's operations and greater retained
earnings and, to a lesser extent, the proceeds from the GS Funds' equity
investment. Other income in 1996 included foreign exchange gains of $0.5
million.
Provision for income taxes decreased $0.3 million, or 12.4%, to $2.3 million
in 1996 from $2.6 million in 1995 representing effective tax rates of 18.1%
and 24.8%, respectively. The decrease in the Company's effective tax rate was
primarily due to the relative increase in the income before taxation earned by
the Company's Bermuda subsidiaries, which are not subject to income tax.
1995 vs. 1994. Income before taxation increased $4.9 million, or 87.8%, to
$10.5 million in 1995 from $5.6 million in 1994. Income before taxation
generated from the Company's risk management operations increased $2.9
million, or 60.9%, to $7.7 million in 1995 from $4.8 million in 1994.
Insurance income before taxation for 1995 did not represent a significant
portion of the Company's income. Investment income increased $1.6 million in
1995 reflecting an increase in the volume of premiums generated by the
Company's operating subsidiaries.
Provision for income taxes increased $1.3 million, or 100.5%, to $2.6
million in 1995 from $1.3 million in 1994 representing effective tax rates of
24.8% and 23.3%, respectively. The increase in the Company's effective tax
rate was primarily due to the relative increase in the income before taxation
earned by the Company's brokerage operations, which are primarily located in
the United Kingdom and subject to income tax.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As a holding company that conducts all its business operations through
subsidiaries based in the United States, England and Bermuda, the Company
relies primarily on dividend payments from its subsidiaries to meet its cash
requirements and to pay dividends to shareholders. The payment of dividends by
certain of the Company's subsidiaries is subject to regulations and may be
subject to certain taxes that could limit the amount or restrict the payment
of such dividends to the Company. See "Risk Factors--Potential Impact of
Holding Company Structure on Dividends", "Business--Regulation" and "Certain
Tax Considerations". The principal uses of funds at the holding company level
are the payment of operating expenses and, following the Offering, the payment
of dividends to shareholders.
During 1996, the Company continued to produce a positive cash flow, with
$14.9 million of net cash provided by operating activities in 1996 compared to
$6.8 million in 1995. The principal sources of funds for the Company are risk
management fees, net premiums earned and net investment income. Operating
funds are used primarily for the payment of operating expenses, claims
payments and reinsurance costs. The Company has raised additional capital in
recent years primarily to support the growth of its insurance operations.
During 1996, the Company raised $14.5 million of additional cash in connection
with the equity investment of the GS Funds. The Company purchased Realm for
$9.0 million, and provided an additional capital contribution to Realm of
$12.1 million in September 1996.
At June 30, 1997, the Company held cash and marketable securities of $32.8
million compared to $38.2 million at December 31, 1996. In addition, the
Company held cash relating to insurance client accounts amounting to $60.3
million at June 30, 1997 compared to $50.2 million at December 31, 1996. These
increased cash balances reflect the growth in the Company's business
activities for the first six months of 1997. Of the $32.8 million of cash and
marketable securities held by the Company at June 30, 1997, $31.9 million were
held by subsidiaries whose payment of dividends to the Company was subject to
regulatory restrictions or possible tax liabilities. At June 30, 1997, Realm's
investment portfolio (at fair market value) totaled $21.6 million. The
portfolio consisted primarily of U.S. Treasury and A rated corporate debt
securities.
During the six months ended June 30, 1997, the Company's operating
activities used $2.9 million of net cash, compared to generating $5.7 million
of net cash during the same period of 1996. This reduction is primarily the
result of timing differences in the Company's payment of insurance and
reinsurance balances payable compared to its receipt of insurance and
reinsurance balances receivable. Additionally, the Company used $1.2 million
of cash to acquire a book of insurance business in January 1997 and $0.8
million to repurchase certain of its Ordinary Shares during the first six
months of 1997. The Company expects its operations will generate positive cash
flow for the remainder of fiscal 1997.
The Company does not have any long-term or short-term debt and therefore has
no debt servicing requirements.
The Company believes that the Company's future operating cash flows and the
proceeds of the Offering will be sufficient to meet the Company's presently
expected liquidity needs both on a short-term basis and long-term basis. No
assurance can be given that the Company will not require additional sources of
funding in the future in light of unexpected business developments or
acquisitions not currently contemplated.
29
<PAGE>
BUSINESS
THE COMPANY
The Company is a Bermuda holding company which, through its subsidiaries,
provides risk management services and products predominantly to U.S. based
small and mid-sized businesses seeking cost-effective alternatives to
traditional workers' compensation insurance. In addition, the Company arranges
reinsurance for its products as well as for those offered by independent U.S.
based insurance carriers active in the workers' compensation, occupational
accident and health insurance markets.
The Company believes that its integrated approach, experienced personnel and
market position provide the Company with the ability to offer innovative cost-
effective alternatives to traditional workers' compensation coverage in a
variety of market conditions. The Company structures and markets comprehensive
programs to transfer risk from an insured to insurers and ultimately to
reinsurers in the workers' compensation market as well as other specialty
casualty lines. The Company is able to offer these programs primarily as a
result of the strong relationships and expertise it has developed through its
reinsurance brokering activities. Furthermore, although certain of the
Company's programs utilize an independent primary insurance carrier, the
Company is capable of providing or obtaining the services and products
required at each stage of the risk transfer process. The Company believes
these programs are cost-effective to the insured and provide additional
business to reinsurers with excess underwriting capacity. Thus, the Company is
able to provide retail agents and insureds with the advantages of being a
single source provider of risk management services and products, while also
maximizing its own revenues at each stage of the risk transfer process.
Generally, in the risk transfer process, alternative market insurance
carriers will not offer products directly to the retail agent or insured
unless they have effective reinsurance programs in place. The economics and
quality of these reinsurance arrangements affect the insurance carrier's
ability to compete with other insurance products. Insurance carriers use the
services of reinsurance brokers or other intermediaries to arrange these
reinsurance programs. The Company believes that its reinsurance brokering
operations give it a competitive advantage over other industry participants
and allow it to structure more cost-effective alternative products.
The Company earns risk management fees and may retain a portion of the
premium paid by the insured on the underlying policy for providing its
services and products. In 1996, 72.2% of the Company's total revenues were
derived from risk management fees including agency and brokerage fees and
commissions, underwriting management and administration fees and fees from
other non-risk bearing activities.
The Company provides most of its services and products to, and derives a
significant portion of its risk management and brokerage fees from, the
workers' compensation insurance market. Workers' compensation is an attractive
market for the structuring of alternative market insurance coverage given the
relatively frequent yet predictable nature of claims, as well as the need to
control costs arising from medical expenses, litigation and other economic
factors. Alternative insurance products typically involve financial
participation by the insured in some or all of the risk, as compared to
traditional insurance products which shift all, or a substantial portion, of
the insured's risk to the insurer. Alternative solutions to traditional
workers' compensation are designed to reduce insurance costs by allowing the
insured to retain a level of risk consistent with the predictable portion of
the loss experience. The Company believes that alternative market workers'
compensation products comprised at least $16.4 billion in 1996, or
approximately 39% of the estimated $42.4 billion total market for workers'
compensation insurance in the U.S. that year. In recent years, the Company has
applied its integrated risk transfer approach to the development of insurance
programs for other specialty casualty lines.
30
<PAGE>
The Company, through its original operating subsidiary, Stirling Cooke Brown
Insurance Brokers Limited, began operations in 1989 as an insurance broker in
London specializing in the placement of alternatives to traditional workers'
compensation insurance and the arrangement of associated reinsurance programs.
The Company soon began to develop and market its own innovative services and
products designed for employers seeking effective methods of alleviating
onerous insurance costs.
Beginning in 1992, the Company identified a number of opportunities and
undertook certain strategic initiatives to enhance its growth prospects,
diversify its revenues and increase its overall control of the risk transfer
process. As a result, the Company has expanded its business and services to
include managing general agency services, insurance underwriting, underwriting
management, claims administration, loss and safety control and premium
auditing.
In January 1996, the GS Funds made an equity investment in the Company. In
furtherance of the Company's strategy of providing services and products at
multiple stages in the risk transfer process, the Company used $9 million of
the proceeds from this investment to acquire Realm in September 1996. For a
description of the assets and liabilities of Realm at the time of the
purchase, see Note 3 to the Company's Consolidated Financial Statements. The
Company is in the process of integrating Realm's insurance underwriting
capabilities with the Company's risk management services and will seek to earn
additional income through a combination of policy issuance fees and net
premiums earned while retaining a minimum amount of risk. The net proceeds
received by the Company from the Offering will be used primarily to provide
additional capital to Realm, allowing the Company to expand its underwriting
activities. See "Use of Proceeds".
The Company has historically experienced strong growth in revenues and
earnings despite the current prolonged soft insurance market. The success of
the Company's risk management services and products has led to an increase in
the Company's net income from $2.6 million in 1993 to $10.3 million in 1996,
representing a compound annual growth rate of approximately 57.5%. At June 30,
1997, the Company had approximately $343.0 million in assets and 296
employees.
For certain financial information concerning the Company's business segments
and a geographic breakdown of the Company's revenues, income and assets, see
Note 15 to the Company's Consolidated Financial Statements.
INDUSTRY OVERVIEW
The Company's operations focus primarily on the workers' compensation market
within the commercial insurance industry in the United States. The Company's
risk management services and products are designed to offer an alternative to
traditional workers' compensation insurance. Consequently, the Company
competes with traditional providers of workers' compensation insurance as well
as alternative market providers. Based upon published industry reports and its
own experience, the Company believes that the annual amount U.S. employers pay
to provide workers' compensation benefits is at least $57 billion. This total
is comprised of estimated premium (for both private insurance carriers and
state funds) and estimated self insurance costs.
Many commercial insurance buyers seek alternative means of coverage due to
the cyclical nature of the commercial insurance market in the United States
which has, in recent years, resulted in unpredictable and severe swings in the
pricing and availability of coverage. Increasing numbers of buyers recognize
that an effective way to stabilize insurance costs is to retain a portion of
the risk, which traditionally has been fully transferred to insurers. This
trend has led to the development of the alternative market. The alternative
market provides insureds with risk management and financing vehicles,
including captive insurance companies, risk retention groups, rent-a-captive
programs, self-
31
<PAGE>
insurance plans, policyholder owned insurance groups, large-deductible and
retrospectively-rated programs, and other non-traditional insurance products.
These risk management and financing vehicles enable the insured to transfer
risk to the various participants in the risk transfer process in order to
obtain the most attractive pricing and coverage terms under various market
conditions. The ability of alternative market providers to offer coverage
terms and attractive pricing depends, in part, upon their obtaining
reinsurance coverage for these vehicles. In the current soft insurance market,
reinsurers with excess underwriting capacity have increasingly expanded their
participation in the risk transfer process through these vehicles.
Generally, a goal of alternative insurance products is for the insured to
retain, in some manner, those loss events that occur frequently, are low in
severity and are relatively predictable. By retaining such risks, the insured
can (i) obtain a desired level of coverage at an attractive premium; (ii)
eliminate or reduce the transaction costs associated with transferring these
loss events to an insurer, which costs can exceed 30% of the insured's gross
insurance premium; (iii) retain the investment income produced by the funds
set aside to cover these loss events; and (iv) avoid the cyclical nature of
the price demanded by the commercial insurance market to insure these events.
Employers' liability under workers' compensation statutes closely fits this
loss profile, and as a result alternative insurance products have been widely
accepted in the workers' compensation risk management market. Insurance
products in which the insured retains some of the risk also highlight the
benefits of aggressive loss prevention and effective claims management by
aligning the interests of the insurer and the insured to reduce costs. The
Company believes, based upon published industry reports and its own
experience, that alternative market workers' compensation products comprised
at least $16.4 billion in 1996, or approximately 39% of the estimated $42.4
billion total market for workers' compensation insurance in the U.S. that
year. The Company has also begun to apply its integrated risk transfer
approach to the development of alternative market insurance programs for other
specialty casualty lines.
BUSINESS STRATEGY
The Company believes that growth potential exists in its markets which will
provide opportunities to increase fee-based revenues, net premiums earned and
net investment income. To capitalize on these opportunities, the Company has
established the following strategic priorities which the Company believes will
allow it to maintain and enhance its position as a provider of alternatives to
traditional workers' compensation insurance.
INCREASE MARKET PENETRATION AND EXTEND AGENCY NETWORK
The Company, through its managing general agency network, typically receives
net fee income from the insurance carrier of between 13% and 17% of the
insured's gross premium on the underlying policy for providing underwriting
services, policy administration and premium accounting, and claims adjusting
and administration services. Business originated in the managing general
agency network is central to the Company's business strategy since the
managing general agencies are able to direct the services and products
provided to the insured. The Company intends to increase the market
penetration of its existing agency network by concentrating its marketing
efforts on the most productive agents and by continuing to use agency
incentive and promotional programs to encourage increased levels of new
business development. In addition, the Company intends to continue to increase
the number of independent producing agents distributing the Company's services
and products.
EXPAND CURRENT INSURANCE OPERATIONS
The Company currently uses independent primary insurance carriers in
connection with most of its existing workers' compensation business, and
expects these arrangements to continue for much of this existing business.
However, through Realm, the Company intends to act as an issuing carrier for a
portion of its new business opportunities and receive a combination of policy
issuance fees (typically
32
<PAGE>
7% of the insured's gross premiums) and/or net premiums earned. The Company is
in the process of increasing Realm's capital base and expanding the number of
states in which Realm is licensed.
EXPAND PRODUCT OFFERINGS THROUGH EXISTING DISTRIBUTION NETWORK
The Company seeks to expand its product offerings by developing services and
products that meet the financial and risk management objectives of its
clients. For example, in response to rising workers' compensation costs, the
Company was one of the pioneers in the development of alternative non-
subscriber programs, which the Company began to market and sell in Texas in
the early 1990s. To better serve client needs, the Company has expanded its
service and product offerings to include loss control and audit services,
premium auditing and claims administration capabilities. The Company intends
to continue to develop new services and products to be marketed through its
agency distribution network.
EXPAND AND DEVELOP PROGRAM BUSINESS
The Company structures and markets comprehensive programs to transfer risk
from an insured to insurers and ultimately to reinsurers in the workers'
compensation market as well as for other specialty casualty lines. These
programs enable the Company to provide a range of risk management services and
products for retail agents, while also maximizing the Company's revenues at
each stage of the risk transfer process. The Company intends to utilize its
existing reinsurance business relationships to expand the number of programs
it offers and also intends to increase the sale of insurance policies issued
under existing programs through its agency network. The Company expects the
growth of its program business to increase its revenues generated from
specialty casualty lines relative to its revenues generated from the workers'
compensation market.
INCREASE REINSURANCE BROKERING REVENUE
The Company's reinsurance brokering subsidiaries arrange for the reinsurance
programs associated with the Company's products and also arrange reinsurance
programs for numerous other U.S. and European insurance companies. The Company
earns commissions for providing these services. The Company's reinsurance
brokering subsidiaries are located in the key markets of the U.S., Bermuda and
London. The Company expects that Realm's expansion will generate additional
business for the Company's reinsurance brokering operations.
SELECTIVELY PURSUE ACQUISITIONS
The Company is continuously looking to expand its business by selectively
acquiring general agencies and books of insurance business. Given the
Company's ability to earn fees throughout the risk transfer process, the
Company believes the selective acquisition of general agencies and books of
insurance business can generate significant additional profits relative to the
costs of such acquisitions. In January 1997, the Company acquired a book of
insurance business of approximately $20 million of annual written premiums
from a managing general agency for approximately $1.2 million. The Company
expects to earn multiple fees from this book of insurance business, including
managing general agency fees, reinsurance brokerage commissions and other
service fees.
RISK TRANSFER AND MANAGEMENT
As a provider of alternative market services and products, the Company seeks
to develop cost-effective risk transfer solutions for clients with specific
insurance or reinsurance needs. Through customized programs, the Company's
clients are able to participate in certain types of risks and retain certain
levels of risk while insuring or reinsuring the remaining risk. The Company
receives fees and commissions for its services and products and may receive a
portion of the UNDERWRITING PROFIT OR LOSS generated from its programs.
33
<PAGE>
The following diagram and discussion illustrate, in summary form, a typical
risk transfer process wherein the Company participates and generates revenues
from services and products provided at various stages in the risk transfer
process. The amount and type of the revenues generated by the Company depends
on the nature of the risk management services and products provided by the
Company, as well as the point at which the business originates in the risk
transfer process. For example, the Company's participation in the risk
transfer process may begin with a retail agent seeking primary insurance
coverage through one of the Company's managing general agency subsidiaries, or
may begin with an insurance company or reinsurance company seeking reinsurance
coverage through the Company's reinsurance brokering operations.
<TABLE>
<CAPTION>
THE RISK
TRANSFER FUNCTIONS TYPE OF REVENUE COMPANY PROVIDER
PROCESS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insured (Employer)
Retail Agent
Underwriting, Policy
Administration, Fees and Commissions MGAs in Texas,
Managing General Premium Collection and Florida and New York
Agent ("MGA") Claims Management
Captive Management Fees and Commissions MGAs and
Realm Captive Mgmt.
Direct Insurance Underwriting Profit Realm
Coverage and Investment Income
Primary Insurance Policy Issuance Fees Realm
Carrier
Premium Auditing, and
Accident and Loss Fees North American Risk
Control
Reinsurance Broker Placement of Risk Commissions Stirling Cooke Brown
Brokers
Managing General
Underwriter Underwriting and Fees and Commissions MGUs in Bermuda
("MGU") Premium Collection
Reinsurance Reinsurance Coverage Underwriting Profit and CIRCL
Company Investment Income
</TABLE>
34
<PAGE>
MANAGING GENERAL AGENT
Typically, when an employer seeks to purchase commercial insurance coverage,
such as workers' compensation insurance or other alternative market products,
it will instruct a local retail insurance agent to survey the market and
obtain the desired coverage at acceptable terms. The retail agent has
established relationships with representatives of insurance carriers known as
managing general agents that have expertise in the relevant property and
casualty program and the ability to offer the requested coverage. Managing
general agents ("MGAs") are authorized to underwrite risks, issue policies,
administer claims and accept associated premiums on behalf of various primary
insurance carriers. The Company's MGA network is an important entry point for
much of the Company's business and typically provides an initial net fee-based
revenue opportunity of between 13% and 17% of the insured's gross premium on
the underlying policy. The Company's MGAs earn fees and commissions for
providing underwriting services, policy administration and premium accounting,
and claims adjusting and administration services. In addition, once an MGA has
secured an account, numerous opportunities exist for the Company to generate
additional revenues at other stages in the risk transfer process, as
illustrated in the preceding diagram.
Through its MGA network, the Company also markets its captive and rent-a-
captive arrangements to larger employers or associations (generating $1
million or more in standard premium) wishing to use this alternative market
strategy. In these circumstances, the Company earns an MGA fee and, through
its subsidiary Realm Captive Management, a captive program administration fee.
PRIMARY INSURANCE CARRIER AND RELATED SERVICES
PRIMARY INSURANCE CARRIER. Once an MGA has accepted risk on behalf of an
insurance carrier, it issues a policy to the insured, collects the required
premium, retains its agreed fees and/or commissions and remits the balance of
the premium to the insurance carrier. The insurance carrier may receive an
issuance fee and/or may retain a portion of the premium to cover its RETAINED
RISK. The balance of the premium typically passes to the insurance carrier's
participating reinsurers through a prearranged reinsurance contract.
The Company currently uses independent primary insurance carriers in
connection with most of its existing workers' compensation business, and
expects these arrangements to continue for much of this existing business.
However, through Realm, the Company intends to act as an issuing carrier for a
portion of its new business opportunities and receive a combination of policy
issuance fees (typically 7% of the insured's gross premiums) and/or net
premiums earned. Furthermore, Realm provides the Company with the opportunity
to generate business and receive premiums and fees from sources outside the
Company's MGA network as non-affiliated MGAs may place business with Realm.
The Company expects the revenues to be generated through the integration of
Realm into the Company's existing businesses to be an important component of
future earnings growth.
Realm had shareholders' equity of approximately $21.5 million at June 30,
1997, net premiums earned of approximately $1.3 million in the six month
period ended June 30, 1997 and a B+ (Very Good) rating from A.M. Best Company.
Prior to its acquisition by the Company, Realm primarily issued property and
casualty insurance in a limited number of states. Subsequent to its
acquisition by the Company, Realm's gross premiums written were $4.0 million
(net premiums written of $0.8 million) in 1996, substantially all of which
were related to property insurance, and its underwriting loss ratio for such
period was 75.3%. For the six months ended June 30, 1997, Realm's gross
premiums written were $6.3 million (net premiums written were $1.2 million),
of which $5.1 million were related to property insurance and $1.2 million were
related to workers' compensation insurance. The Company is in the process of
expanding Realm's business to include workers' compensation and other
specialty casualty insurance lines in each of the 19 states in which Realm is
currently licensed to offer property and casualty insurance. The Company
intends to license Realm in substantially all of the remaining states and the
District of Columbia. In order to obtain a license in a given state, Realm
must complete
35
<PAGE>
an application and demonstrate compliance with state licensing requirements.
The applicable insurance regulatory authority reviews the application, which
review may take from three months to two or more years. If all requirements
are met, a license is issued.
RELATED SERVICES. The Company also provides premium auditing, claims
administration and loss control services to Realm and other issuing carriers
through its subsidiary North American Risk. The Company charges a fee for
providing these services. The Company believes these services are an important
component of its business and allow the Company to provide its customers with
a full range of products.
REINSURANCE BROKERING
Generally, in the risk transfer process, alternative market insurance
carriers will not offer products directly to the retail agent or insured
unless they have effective reinsurance programs in place. The economics and
quality of these reinsurance arrangements affect the insurance carrier's
ability to compete with other insurance products. Insurance carriers use the
services of reinsurance brokers or other intermediaries to arrange these
reinsurance programs. The Company's reinsurance brokering subsidiary, Stirling
Cooke Brown Reinsurance Brokers Limited ("SCBRIB"), is a reinsurance broker
for alternative and traditional workers' compensation, accident, health, and
specialty casualty lines. SCBRIB operates in the reinsurance markets of
London, the U.S. and Bermuda. Through SCBRIB, the Company generates fee and
commission-based revenues without assuming risk. The Company believes that
SCBRIB gives it a competitive advantage over other industry participants and
allows it to structure more cost-effective alternative programs which are then
marketed by its MGAs. SCBRIB also arranges RETROCESSIONAL REINSURANCE coverage
for reinsurers.
MANAGING GENERAL UNDERWRITER
The Company owns a number of reinsurance carrier representatives known as
MANAGING GENERAL UNDERWRITERS ("MGUs"). These MGUs are authorized to
underwrite reinsurance contracts on behalf of a number of reinsurance carriers
and to accept the associated premium. MGUs earn fees and commissions for
providing underwriting and other services related to the reinsurance contract,
including reinsurance claims administration and other services.
REINSURANCE COMPANY
The Company has a Bermuda based reinsurance company, CIRCL, which reinsures
a portion of the underwriting risk on business provided to or by the Company
and receives a reinsurance premium to cover that risk. CIRCL accepts a portion
of the reinsurance risk from an independent insurance carrier on programs
managed by the Company, and then purchases reinsurance protection to minimize
its risk. CIRCL primarily reinsures workers' compensation, and associated
property and general liability risks. CIRCL's gross premiums written were
$12.5 million (net premiums written were $9.3 million) in 1996, of which $9.5
million were related to workers' compensation insurance and $3.0 million were
related to property and general liability insurance. CIRCL's underwriting loss
ratio for such period was 77.5%. For the six months ended June 30, 1997,
CIRCL's gross premiums written were $7.1 million (net premiums written were
$4.5 million), of which $6.5 million were related to workers' compensation
insurance and $0.6 million were related to property and general liability
insurance.
MARKETING
The Company markets and originates business at various stages in the risk
transfer process, through its MGAs, Realm and its insurance and reinsurance
brokering activities.
36
<PAGE>
MGAS
The Company markets its workers' compensation products and other specialty
lines to retail agents in the U.S. through its three Company-owned MGAs and
through other affiliates. Individual MGA offices market their services and
products through sales representatives, targeted direct mail, local and
regional advertising, seminars, and trade and industry conventions. The
Company advertises in U.S. and international trade journals, and has also
contributed articles to a quarterly trade magazine circulated to agents and
policyholders. Additionally, the Company participates as an exhibitor in the
annual Risk and Insurance Management Society conventions.
Given its general reliance on retail agents as an important source of
business production, the Company places emphasis on building and maintaining
relationships with individual retail agents, and on expanding its network of
retail producers. To encourage loyalty from the retail agents to the Company's
MGAs, the Company seeks to provide a high level of service, offer insurance
products that satisfy the needs of clients and reward increased levels of
production through incentive compensation schedules. The Company believes that
it has successfully developed a reputation for providing quality service,
cost-effective products and strong marketing support which has enabled it to
develop strong relationships with its retail agents and commercial customers.
PRIMARY INSURANCE CARRIERS
The Company's MGAs market insurance products on behalf of both Realm and
independent primary insurance carriers, primarily Clarendon and Legion. In
addition, Realm's insurance products are marketed to independent agents and
other procurers of insurance through other unaffiliated MGA networks. The
Company expects Realm's marketing efforts to increase as it becomes licensed
in additional states.
INSURANCE AND REINSURANCE BROKERING
The Company markets its insurance and reinsurance brokering capabilities in
a number of specialty insurance markets, both alternative and traditional. The
Company focuses its insurance brokering marketing efforts on wholesale and
retail agents, and its reinsurance brokering marketing efforts on a number of
primary insurance and reinsurance companies.
COMPETITION
The business of providing risk management services and products to the
workers' compensation and property and casualty insurance markets is highly
competitive. The Company competes with providers of traditional insurance
coverage and with other providers of alternative market services (including
domestic and foreign insurance companies, reinsurers, insurance brokers,
captive insurance companies, rent-a-captives, self-insurance plans, risk
retention groups, state funds, assigned risk pools and other risk-financing
mechanisms). Many of the Company's competitors have significantly greater
financial resources, longer operating histories, better financial ratings and
offer a broader line of insurance products than the Company. The Company
believes the key factors to effectively compete in the risk management market
are price, the ability to tailor programs to the needs of the insured and the
ability to rapidly develop new solutions to address changing market needs. The
Company believes that its services and products are competitively priced, and
that its combination of MGA, insurance and reinsurance services and products
enables it to rapidly develop tailored programs and act as a single source
provider of risk management services and products. See "Risk Factors--
Competition."
Realm is rated B+ (Very Good) by A.M. Best Company and in certain
circumstances may be at a competitive disadvantage to insurance carriers with
higher ratings. The Company's MGAs also represent carriers with higher ratings
from A.M. Best Company, ensuring that the Company's MGAs are not negatively
impacted in circumstances where Realm is not selected as insurance carrier due
to its rating.
37
<PAGE>
REGULATION
The Company's subsidiaries that are engaged in the underwriting of insurance
(primarily Realm and CIRCL) are subject to regulation by government agencies
in the states and foreign jurisdictions in which they do business. The nature
and extent of such regulation vary from jurisdiction to jurisdiction, but
typically involve prior approval of the acquisition of control of an insurance
company or of any company controlling an insurance company; regulation of
certain transactions entered into by an insurance company with any of its
affiliates; approval of premium rates, forms and policies used for many lines
of insurance; standards of solvency and minimum amounts of capital and surplus
which must be maintained; establishment of reserves required to be maintained
for unearned premium, losses and loss expense or for other purposes;
limitations on types and amounts of investments; restrictions on the size of
risks which may be insured by a single company; licensing of insurers and
agents; deposits of securities for the benefit of policyholders; and the
filing of periodic reports with respect to financial condition and other
matters.
In addition, state regulatory examiners perform periodic examinations of
insurance companies. Such regulation is generally intended for the protection
of policyholders rather than security holders. In April, 1997, the New York
Insurance Department issued a report on the examination of Realm's
predecessor, Lloyds New York Insurance Company, covering the period 1991
through 1995. The examination was limited to financial statements and general
business practices. No material deficiencies were found in the financial
statements. However, Realm was penalized for the failure of predecessor
management to provide the Insurance Department prior notice of reinsurance
agreements with affiliates. The Company believes its subsidiaries are in
compliance, in all material respects, with all applicable government
regulations.
In addition to the oversight of the Company's insurance subsidiaries, the
Company, as the ultimate parent of a New York domiciled insurer (Realm), is
also subject to regulation under the New York Insurance Holding Company System
Regulatory Act (the "Holding Company Act"). The Holding Company Act contains
certain reporting requirements including those requiring the Company, as the
ultimate parent company, to file information relating to its capital
structure, ownership, and financial condition and general business operations
of its insurance subsidiaries. The Holding Company Act contains special
reporting and prior approval requirements with respect to transactions among
affiliates.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided.
These include redefinitions of risk exposure in areas such as products
liability, environmental damage, and employee benefits, including workers'
compensation and disability benefits. In addition, individual state insurance
departments may prevent premium rates for some classes of insurers from
reflecting the level of risk assumed by the insurer for those classes. Such
developments may result in adverse effects on the profitability of various
lines of insurance. In some cases, these adverse effects on profitability can
be reduced through repricing of coverages, if permitted by applicable
regulations, or limitation or cessation of the affected business.
Certain of the Company's subsidiaries are also subject to regulation as
insurance intermediaries. Under the applicable regulations, the intermediary
is responsible as a fiduciary for funds received for the account of the
parties to the insurance or reinsurance transaction and is required to hold
such funds in appropriate bank accounts subject to restrictions on withdrawals
and prohibitions on commingling. The Company's insurance intermediaries
include several MGAs. MGAs produce, underwrite, and manage claims or negotiate
reinsurance for a specific portion of an insurance company's business in
certain states, and they are subject to regulation under state law regarding
licensure, fiduciary obligations with respect to premium and concerning the
general management of the insurer's business.
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<PAGE>
The activities of Stirling Cooke Brown Insurance Brokers Limited as an
insurance broker in the U.K. require it to be authorized under the Insurance
Brokers (Registration) Act of 1977 by the Insurance Brokers Registration
Council (the "Council"). Authorization by this body involves continuing
compliance with rules made by the Council, which require, among other things,
that the Company maintain a minimum level of working capital, that it allocate
not more than a specified level of its business to any particular insurance
company or group of insurance companies, that it supply reports to the
Council, and that it conduct its business in accordance with the conduct of
business rules published by the Council. It is a condition to the
authorization from the Council that a majority of the directors of Stirling
Cooke Brown Insurance Brokers Limited are and remain registered as insurance
brokers in the U.K.
INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL
Realm is organized under the insurance laws of the State of New York (the
"Insurance Code of New York"). The Insurance Code of New York provides that
the acquisition or change of "control" of a domestic insurer or any person
that controls a domestic insurer cannot be consummated without the prior
approval of the relevant insurance regulatory authority. A person seeking to
acquire control, directly or indirectly, of a domestic insurance company or
any person controlling a domestic insurance company must generally file with
the relevant insurance regulatory authority an application for change of
control (commonly known as a "Form A") containing certain information required
by statute and published regulations and provide a copy of such Form A to the
domestic insurer. Under the Insurance Code of New York, control is presumed to
exist if any person, directly or indirectly, owns, controls, holds with power
to vote or holds proxies representing ten percent or more of the voting
securities of any other person.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a non-
domestic admitted insurance company in that state. While such pre-notification
statutes do not authorize the state agency to disapprove the change of
control, such statutes do authorize issuance of a cease and desist order with
respect to the non-domestic admitted insurer if certain conditions exist such
as undue market concentration.
The foregoing requirements may deter, delay or prevent certain transactions
affecting the control of the Company or the ownership of Ordinary Shares,
including transactions that could be advantageous to the shareholders of the
Company.
MEMBERSHIP IN INSOLVENCY FUNDS AND ASSOCIATIONS
Most states require property and casualty insurers licensed to transact
insurance in the state to become members of insolvency funds or associations
which generally protect policyholders against the insolvency of such insurers.
Members of the fund or association must contribute to the payment of certain
claims made against insolvent insurers. Maximum contributions required by law
in any one year vary between 1% and 2% of annual premiums written by a member
in that state. Assessments from insolvency funds paid by Realm were immaterial
in 1994, 1995, and 1996. The cost of most of these assessments is recoverable
through future policy surcharges and premium tax deductions.
Realm is also required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally designed to
provide insurance coverage for consumers who are unable to obtain insurance in
the voluntary insurance market. One such pool is the multi-state workers'
compensation pool operated by the National Council on Compensation Insurance.
These pools typically require all companies writing applicable lines of
insurance in the state for which the pool has been established to fund
deficiencies experienced by the pool based upon each company's relative
premium writings in that state, with any excess funding typically distributed
to the participating
39
<PAGE>
companies on the same basis. To the extent that these assessments are not
covered by Realm's reinsurance treaties, they may have an adverse effect on
Realm. Total assessments incurred by Realm from all such facilities for 1994,
1995, and 1996 were immaterial.
RESTRICTIONS ON DIVIDENDS
Realm is subject to various state statutory and regulatory restrictions,
generally applicable to each insurance company in its state of incorporation,
which limit the amount of dividends or distributions payable by an insurance
company to its shareholders. The restrictions are generally based on certain
levels of surplus, investment income, and operating income, as determined
under statutory accounting practices.
The Insurance Code of New York regulates the distribution of dividends and
other payments to the Company by Realm. Under the applicable New York statute,
unless prior regulatory approval is obtained, an insurer may not declare or
distribute any dividend to shareholders which, together with all dividends
declared or distributed by it during the preceding twelve months, exceeds the
lesser of (i) 10% of its surplus to policyholders as shown by its last
statement on file with the New York Department of Insurance, or (ii) 100% of
adjusted net investment income during such period. Such restrictions or any
additional subsequently imposed restrictions may in the future affect the
Company's ability to pay principal and interest on its debt, expenses, and any
cash dividends to its shareholders. Future dividends from the Company's
subsidiaries may also be limited by business considerations.
Additionally, CIRCL is subject to certain regulations that may restrict its
ability to pay dividends. See "--Bermuda Regulation".
NAIC FORMULAS
The National Association of Insurance Commissioners has adopted a
methodology for assessing the adequacy of statutory surplus of property and
casualty insurers which includes a risk-based capital requirement. Insurance
companies are required to calculate and report information under a risk-based
formula which attempts to measure statutory capital and surplus needs based on
the risks in a company's mix of products and investment portfolio. The formula
is designed to allow state insurance regulators to identify potential weakly
capitalized companies. Under the formula, a company determines its "risk-based
capital" ("RBC") by taking into account certain risks related to the insurer's
assets (including risks related to its investment portfolio and ceded
reinsurance) and the insurer's liabilities (including underwriting risks
related to the nature and experience of its insurance business). The RBC rules
provide for different levels of regulatory attention depending on the ratio of
a company's total adjusted capital to its "authorized control level" of RBC.
Under the formula, a higher ratio reflects a greater adequacy of capital.
Based on calculations made by the Company, the RBC level for the Company's
insurance subsidiaries exceeds levels that would trigger regulatory attention.
At December 31, 1996, Realm's RBC ratio was approximately 1,908%, and the
threshold requiring minimum regulatory involvement was 200%. Therefore, the
Company's capital exceeds all requirements of the Risk-Based Capital Model
Act. The NAIC has also developed an Insurance Regulatory Information System
("IRIS") to assist state insurance departments in their oversight of the
financial condition of insurance companies operating in their respective
states. IRIS identifies 11 industry ratios and specifies "usual values" for
each ratio. Departure from the usual values in four or more ratios generally
leads to inquiries from individual state insurance commissioners. Management
believes Realm's IRIS ratios are such as to not attract such regulatory
attention.
EFFECT OF FEDERAL LEGISLATION
Although the U.S. federal government does not directly regulate the business
of insurance, federal initiatives often affect the insurance industry in a
variety of ways. Current and proposed federal measures which may significantly
affect the insurance industry include federal government
40
<PAGE>
participation in asbestos and other product liability claims, pension
regulation (ERISA), examination of the taxation of insurers and reinsurers,
minimum levels of liability insurance, and automobile safety regulations.
BERMUDA REGULATION
THE INSURANCE ACT 1978, AS AMENDED, AND RELATED REGULATIONS. As a holding
company, the Company is not subject to Bermuda insurance regulations. However,
the Insurance Act 1978, as amended (the "Insurance Act"), which regulates the
insurance business of CIRCL, an insurance subsidiary of the Company, provides
that no person shall carry on insurance business in or from within Bermuda
unless registered as an insurer under the Insurance Act by the Minister of
Finance (the "Minister"). The registration of an applicant as an insurer is
subject to its complying with the terms of its registration and such other
conditions as the Minister may impose from time to time.
The Insurance Act provides a minimum liquidity ratio for general business.
An insurer engaged in general business is required to maintain the value of
its relevant assets at not less than 75% of the amount of its relevant
liabilities. Relevant assets include cash and time deposits, quoted
investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable,
reinsurance balances receivable and funds held by ceding reinsurers. There are
certain categories of assets which, unless specifically permitted by the
Minister, do not automatically qualify as relevant assets such as unquoted
equity securities, investments in and advances to affiliates, real estate and
collateral loans. The relevant liabilities are total general business
insurance reserves and total other liabilities less deferred income tax and
sundry liabilities (by interpretation, those not specifically defined),
letters of credit and guarantees.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda to oversee the
business of the insurer and to report to the Minister and the Registrar of
Companies in respect of certain events. Unless the approval of the Minister is
obtained, an insurer may not terminate the appointment of its principal
representative, and the principal representative may not cease to act as such,
unless 30 days' notice in writing to the Minister is given of the intention to
do so. Within 30 days of the principal representative's knowing or having
reason to believe that the insurer the representative represents is likely to
become insolvent or that an "event" has occurred, the principal representative
must provide a written report to the Minister setting out all the particulars
of the case that are available to the representative. Examples of such an
"event" include failure by the insurer to comply substantially with a
condition imposed upon the insurer by the Minister relating to a solvency
margin or a liquidity or other ratio.
The Minister may appoint an inspector with extensive powers to investigate
the affairs of an insurer if the Minister believes that an investigation is
required in the interest of the insurer's policyholders or persons who may
become policyholders. In order to verify or supplement information otherwise
provided to him, the Minister may direct an insurer to produce documents or
information relating to matters connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, the Minister may direct the insurer not to take on any new
insurance business; not to vary any insurance contract if the effect would be
to increase the insurer's liabilities; not to make certain investments; to
realize certain investments; to maintain in Bermuda, or transfer to the
custody of a Bermuda bank, certain assets; and to limit its premium income.
In general, the regulation of insurers in Bermuda relies heavily upon
auditors, loss reserve specialists, directors, and managers, who must certify
that an insurer meets minimum capital and solvency requirements. Every
registered insurer must appoint a government approved auditor who will
annually audit and report on the Statutory Financial Statements and the
Statutory Financial Return of the insurer.
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<PAGE>
CIRCL is registered as a Class 3 insurer and, as such: (i) is required to
maintain a minimum statutory capital and surplus equal to the greatest of: (a)
$1 million; (b) 20% of the first $6 million of its NET PREMIUMS WRITTEN plus
15% of its net premiums written over $6 million; and (c) 15% of its net
outstanding losses and loss expenses; (ii) is limited in declaring or paying
any dividends during any financial year with respect to a specified minimum
solvency margin or minimum liquidity ratio or if the declaration or payment of
such dividends would cause it to fail to meet such margin or ratio; (iii) is
prohibited, without the approval of the Minister, from reducing by 15% or more
its total statutory capital, as set out in its previous year's financial
statements; and (iv) is required to report its failure to meet its minimum
solvency margin to the Minister within 30 days after becoming aware of such
failure or having reason to believe that such failure has occurred. CIRCL is
also required to obtain an annual loss reserve opinion issued by a government
approved loss reserve specialist.
The Bermuda government actively encourages foreign investment in "exempted"
entities like CIRCL that are based in Bermuda but do not operate in
competition with local businesses. As well as having no restrictions on the
degree of foreign ownership, CIRCL is exempted from taxes on its income until
March 28, 2016 and is not subject to tax on its dividends or to any foreign
exchange controls in Bermuda. In addition, there currently is no capital gains
tax in Bermuda, and profits can be accumulated by CIRCL, as required, without
limitation.
EXTRATERRITORIAL REGULATION OF CIRCL
As indicated above, CIRCL is registered as an insurer and is subject to
regulation and supervision in Bermuda. CIRCL is not admitted or authorized to
do business in any jurisdiction except Bermuda. The insurance laws of the
various states of the United States do not directly regulate the sale of
reinsurance within their jurisdictions by alien insurers, such as CIRCL.
Nevertheless, the provision of reinsurance by alien reinsurers, such as CIRCL,
to insurance companies domiciled or licensed in United States jurisdictions is
indirectly regulated by state "credit for reinsurance" laws that operate to
deny financial statement credit to ceding insurers unless the non-admitted
alien reinsurer posts acceptable security for ceded liabilities and agrees to
certain contract provisions (e.g., insolvency and intermediary clauses).
Although the insurance laws of United States jurisdictions generally exempt
the business of reinsurance from "doing business" laws, CIRCL conducts its
business at its principal offices in Bermuda and does not maintain an office
in the United States, and its personnel do not solicit, advertise, settle
claims or conduct other insurance activities in the United States. All
policies are issued and delivered and premiums are received outside the United
States. CIRCL does not believe that it is subject to the insurance laws of any
state in the United States.
From time to time, there have been congressional and other initiatives in
the United States regarding the supervision and regulation of the insurance
industry, including proposals to supervise and regulate alien reinsurers.
While none of these proposals has been adopted to date on either the federal
or state level, there can be no assurance that federal or state legislation
will not be enacted subjecting CIRCL to supervision and regulation in the
United States, which could have a material adverse effect on the Company. In
addition, no assurance can be given that if CIRCL were to become subject to
any laws of the United States or any state thereof or of any other country at
any time in the future, it would be in compliance with such laws.
CIRCL does not intend to maintain an office or to solicit, advertise, settle
claims or conduct other insurance activities in any jurisdiction other than
Bermuda where the conduct of such activities would require that CIRCL be so
admitted. CIRCL is not registered as an insurer in England or in any other
jurisdiction. The Company believes that CIRCL is not required to be registered
as an insurance company in the United Kingdom.
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<PAGE>
RELATIONSHIPS WITH INDEPENDENT PRIMARY INSURANCE CARRIERS
The Company's MGAs market insurance products and programs developed by the
Company on behalf of independent insurance carriers, primarily Clarendon and
Legion. In addition, the Company's brokering and reinsurance brokering
operations, managing general underwriters, and claims and loss control
servicing operations provide additional business and services to Clarendon and
Legion in respect of these products and other insurance and reinsurance
policies. In 1996, fees received from Clarendon accounted for approximately
55% of the Company's total revenues, while fees received from Legion accounted
for less than 10% of the Company's total revenues. Although the loss of either
Clarendon or Legion could have a material adverse effect on the Company, the
Company believes that Realm and other independent primary insurance carriers
have sufficient underwriting capacity to reduce the impact of such a loss. See
"Risk Factors--Dependence on Relationships with Independent Primary Insurance
Carriers".
EMPLOYEES
As of June 30, 1997, the Company had 296 employees. The service nature of
the Company's business makes its employees an important corporate asset. While
the market for qualified personnel is extremely competitive, the Company
believes that its relationship with its employees is good. None of the
Company's employees are represented by a union.
FACILITIES
The Company's principal executive offices are located in Hamilton, Bermuda.
This facility currently serves as the headquarters for senior management, the
financial and administrative departments and the Company's Bermuda
subsidiaries. The following table sets forth additional information concerning
the Company's facilities:
<TABLE>
<CAPTION>
APPROXIMATE LEASE
PROPERTY SQUARE FEET EXPIRATION
-------- ----------- ----------
<S> <C> <C>
Hamilton, Bermuda......................... 5,900 March 31, 2000
London, England........................... 12,500 August 10, 2009
Dallas, Texas............................. 14,700 September 30, 2003
New York, New York........................ 7,900 October 3, 2003
Sarasota, Florida......................... 8,300 June 2, 1998
Orlando, Florida.......................... 3,400 June 30, 1999
Fort Lauderdale, Florida.................. 11,100 January 1, 2000
</TABLE>
All of the Company's facilities are leased. Aggregate lease payments for
1996 were $1.3 million. The Company anticipates that it will be able to extend
these leases as they expire or, if necessary or desirable, locate substitute
facilities on acceptable terms.
LEGAL PROCEEDINGS
The Company is not a party to any litigation, and is not aware of any
pending or threatened litigation, that could be expected to have a material
adverse effect on the Company or its business.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are listed below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Nicholas Mark Cooke. 40 Chairman, President, Chief Executive Officer and
Director(1)
Nicholas Brown...... 39 Director(2); Managing Director of Stirling Cooke
Brown Insurance Brokers Limited and Stirling Cooke
Brown Reinsurance Brokers Limited
George W. Jones..... 43 Chief Financial Officer and Director(3)
Warren W. Cabral.... 36 Director(3)
Reuben Jeffery III.. 44 Director(2)
Sanjay H. Patel..... 36 Director(1)
</TABLE>
- --------
(1) Term expires at annual shareholders meeting in 2001.
(2) Term expires at annual shareholders meeting in 2000.
(3)Term expires at annual shareholders meeting in 1999.
NICHOLAS MARK COOKE has been Chief Executive Officer of the Company or its
predecessors since 1990 and Chairman and President, and a Director of the
Company since it began operations in January 1996. Prior to 1990, Mr. Cooke
was a director of two Lloyds brokers and has had continuous employment in the
insurance and reinsurance industry in the London market since 1976.
NICHOLAS BROWN has been a Director of the Company since it began operations
in January 1996. Mr. Brown is Managing Director of Stirling Cooke Brown
Insurance Brokers Limited and of Stirling Cooke Brown Reinsurance Brokers
Limited, U.K. subsidiaries of the Company, and has been a Director of these
companies since 1992. Prior to 1992, Mr. Brown was a director of a Lloyds
broker and has had continuous employment in the insurance and reinsurance
industry in the London market since 1977.
GEORGE W. JONES has been Chief Financial Officer and a Director of the
Company since it began operations in January 1996, and Chief Financial Officer
and a Director of Stirling Cooke Brown (U.K.) Holdings Limited since 1992 and
its subsidiaries since 1988.
WARREN W. CABRAL has been a Director of the Company since it was founded in
December 1995. Mr. Cabral has been a partner in Appleby, Spurling & Kempe, a
Bermuda law firm that has provided legal services to the Company since 1992.
REUBEN JEFFERY III has been a Director of the Company since it began
operations in January 1996. Mr. Jeffery has been a member of Goldman, Sachs &
Co.'s Financial Institutions Group since its inception and was named a
Managing Director of such group in 1992. Since 1997, Mr. Jeffery has been a
Managing Director of Goldman Sachs Paris Inc. et Cie. Mr. Jeffery was
nominated to the Board by one of the GS Funds pursuant to the terms of a
shareholders agreement among the Company and all of its shareholders (the
"Shareholders Agreement"). See "Certain Relationships and Related Party
Transactions".
SANJAY H. PATEL has been a Director of the Company since it began operations
in January 1996. Mr. Patel has been a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co. since 1996. From 1987 to 1996, Mr.
Patel worked in the Leveraged Buyout Group of Goldman, Sachs & Co. Mr. Patel
also serves on the Advisory Committee and Board of Directors of Marcus Cable
Company, L.P. and Recovery Engineering, Inc., respectively. Mr. Patel was
nominated to the Board by one of the GS Funds pursuant to the terms of the
Shareholders Agreement. See "Certain Relationships and Related Party
Transactions".
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<PAGE>
PROVISIONS GOVERNING THE BOARD OF DIRECTORS
NUMBER AND TERMS OF DIRECTORS
The Board of Directors of the Company (the "Board") currently consists of
six members. Following completion of the Offering, the Company intends to add
an additional independent Director to the Board. Under the Bye-Laws, Directors
are segregated into three classes, with staggered terms whereby one class'
term expires at each annual shareholders meeting, beginning with Class I in
1999. Candidates for election to the Board will be nominated by the Board and,
subject to certain notice and other requirements, may be nominated by
shareholders.
The Bye-Laws provide for a minimum of three and a maximum of eight Directors
and empower the Board to fix the exact number of Directors within these limits
and to appoint persons to fill any vacancies on the Board. Vacancies on the
Board are filled by action of a majority of the Board remaining in office,
with each such appointed Director holding office until the next following
annual shareholders' meeting at which the Class to which such Director is
appointed stands for election, and at which he or his successor will be
elected. Shareholders are not entitled to fill vacancies except upon annual
election. Directors may take action by a majority of their number present at a
duly called and held meeting at which a quorum is present. The quorum
necessary for the transaction of business by the Board may be fixed by the
Board and, unless so fixed at any other number, is two Directors. A Director
who expects to be unable to attend any meeting of the Board or any committee
thereof for any reason may appoint any person as an alternate Director to
attend and act in his place. A Director also may be represented at any meeting
of the Board or any committee by a proxy appointed by him.
The foregoing summarizes certain provisions of the Bye-Laws, which are
subject to Bermuda law. See "Description of Capital Shares".
BOARD COMMITTEES
The Audit Committee is responsible for recommending to the Board the
appointment of independent auditors, reviewing and approving the scope of the
annual audit activities of the auditors, approving the audit fee payable to
the auditors, reviewing audit results and approving related party
transactions. Messrs. Jones, Patel and Cabral have been appointed as members
of the Audit Committee.
The Compensation Committee is responsible for reviewing and recommending to
the Board the compensation structure for the Company's directors, officers and
other managerial personnel, including salaries, bonuses, participation in
incentive compensation and benefit plans, fringe benefits, non-cash
perquisites and other forms of compensation, and will administer the Company's
1997 Equity Incentive Plan. Messrs. Jeffery, Patel and Cabral have been
appointed as members of the Compensation Committee.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth certain information for 1996 concerning
compensation paid to or earned by the Company's Chief Executive Officer and
the Company's other executive officers. The persons named in the table are
sometimes referred to herein as the "named executive officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 ANNUAL
COMPENSATION
----------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
--------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Nicholas Mark Cooke.................. $300,000 $300,000 $24,000
Chairman, President and Chief
Executive Officer
Nicholas Brown....................... 314,160 405,243 68,067
Managing Director of Stirling Cooke
Brown Reinsurance Brokers Limited
and Stirling Cooke Brown Insurance
Brokers Limited
George W. Jones...................... 152,109 -- 11,936
Chief Financial Officer
</TABLE>
- --------
(1) Reflects only amounts paid by the Company pursuant to defined contribution
pension plans.
STOCK OPTIONS
OPTION VALUES. The following table sets forth the aggregate value of
unexercised options at December 31, 1996 held by each of the named executive
officers. There were no option exercises during 1996 by any named executive
officer. All of the options listed in the table were exercisable at December
31, 1996 and were exercised on June 30, 1997 at an exercise price of $2.71 per
Ordinary Share. See "Certain Relationships and Related Party Transactions".
1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF DOLLAR VALUE
SHARES OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
NAME 1996 1996(1)
---- ------------ ------------
<S> <C> <C>
Nicholas Mark Cooke............................. 120,000
Nicholas Brown.................................. 319,800
George W. Jones................................. 40,200
</TABLE>
- --------
(1) Determined by subtracting the option exercise price per Ordinary Share
from an assumed initial public offering price per share of $ (the
mid-point of the range set forth on the cover page of this Prospectus) and
multiplying by the number of shares subject to purchase upon option
exercise.
DIRECTOR COMPENSATION
Prior to the Offering, the directors of the Company received no compensation
for service as members of either the Board or committees thereof, other than
reimbursement for out-of-pocket expenses. Effective after the Offering,
directors who are not officers of the Company will be entitled to
46
<PAGE>
receive an annual retainer fee of $ , in addition to reimbursement of
out-of-pocket expenses. Directors who are officers of the Company will not be
compensated for service as members of either the Board or committees thereof
after the Offering, but will be reimbursed for out-of-pocket expenses. Warren
W. Cabral, a Director of the Company, is a partner in a law firm that has
provided legal services to the Company in each year since 1992.
EMPLOYMENT CONTRACTS
Each of the named executive officers has an employment contract with a
subsidiary of the Company. Each employment contract runs through January 1,
1999, and thereafter for one-year terms unless terminated by either party on
twelve months prior written notice. The contracts provide for 1997 annual
salaries of $330,000, (Pounds)225,000 and (Pounds)95,000 for Messrs. Cooke,
Brown and Jones, respectively. Each contract also requires the applicable
subsidiary to pay for a car and for certain medical and pension benefits. Each
executive officer agrees to maintain the confidentiality of the Company's
business affairs both during and after his employment, to not solicit any
employees of the Company for one year after his termination, and to not
compete with the Company during his employment and for one year after his
termination. Each executive officer's employment automatically terminates if
he ceases to be a Director of the Company, and may be terminated by the
Company if, among other things, he becomes incapacitated, becomes of unsound
mind, is prohibited by law from being a Director of the Company, is guilty of
misconduct or commits a serious or persistent breach of his obligations to the
Company or fails to perform his duties competently as reasonably determined by
the Board.
1997 EQUITY INCENTIVE PLAN
GENERAL
The purpose of the Stirling Cooke Brown Holdings Limited 1997 Equity
Incentive Plan (the "Plan") is to promote the best interests of the Company
and its shareholders by providing key employees of the Company and its
subsidiaries with an opportunity to acquire a proprietary interest in the
Company. The Plan is intended to promote continuity of management and to
provide increased incentive and personal interest in the welfare of the
Company by those key employees who are primarily responsible for shaping and
carrying out the long-range plans of the Company and securing the Company's
continued growth and financial success.
ADMINISTRATION AND ELIGIBILITY
The Plan is required to be administered by a committee of the Company's
Board (the "Committee") consisting of no less than two "outside directors"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"). In the event that the Committee is not appointed, the
functions of the Committee will be exercised by those members of the Board who
qualify as "outside directors" within the meaning of Section 162(m), or if no
such members are so qualified, by the Board. The Compensation Committee has
been designated as the current administrator of the Plan. Among other
functions, the Committee has the authority to establish rules for the
administration of the Plan; to select the key employees of the Company and its
subsidiaries to whom awards will be granted; to determine the types of awards
to be granted to key employees and the number of shares covered by such
awards; and to set the terms and conditions of such awards. The Committee may
also determine whether the payment of any proceeds of any award shall or may
be deferred by a key employee participating in the Plan. Subject to the
express terms of the Plan, determinations and interpretations with respect
thereto will be in the sole discretion of the Committee, whose determinations
and interpretations will be binding on all parties.
Any key employee of the Company and its subsidiaries, including any
executive officer or employee-director of the Company who is not a member of
the Committee, is eligible to be granted awards by the Committee under the
Plan.
47
<PAGE>
AWARDS UNDER THE PLAN; AVAILABLE SHARES
The Plan authorizes the granting to key employees of: (a) stock options,
which may be either incentive stock options meeting the requirements of
Section 422 of the Code ("ISOs") or non-qualified stock options; (b) stock
appreciation rights ("SARs"); (c) restricted stock; and (d) performance
shares. The Plan provides that up to a total of 500,000 Ordinary Shares
(subject to adjustment as described below) will be available for the granting
of awards thereunder. No awards have been granted to date under the Plan.
If any Ordinary Shares subject to awards granted under the Plan, or to which
any award relates, are forfeited or if an award otherwise terminates, expires
or is canceled prior to the delivery of all of the Ordinary Shares or other
consideration issuable or payable pursuant to the award, such Ordinary Shares
will be available for the granting of new awards under the Plan. Any Ordinary
Shares delivered pursuant to an award may be either authorized and unissued
Ordinary Shares or treasury shares held by the Company.
TERMS OF AWARDS
OPTIONS. Options granted under the Plan to key employees may be either ISOs
or non-qualified stock options. No individual key employee may be granted
options to purchase in excess of 100,000 Ordinary Shares under the Plan
(subject to adjustment as described below).
The exercise price per Ordinary Share subject to options granted to key
employees under the Plan will be determined by the Committee, provided that
the exercise price may not be less than 100% of the fair market value of an
Ordinary Share on the date of grant. The term of any option granted to a key
employee under the Plan will be as determined by the Committee, provided that
the term of an ISO may not exceed ten years from the date of its grant.
Options granted to key employees under the Plan will become exercisable in
such manner and within such period or periods and in such installments or
otherwise as determined by the Committee. Options may be exercised by payment
in full of the exercise price, either (at the discretion of the Committee) in
cash or in whole or in part by tendering Ordinary Shares or other
consideration having a fair market value on the date of exercise equal to the
option exercise price. All ISOs granted under the Plan will also be required
to comply with all other terms of Section 422 of the Code.
SARS. An SAR granted under the Plan will confer on the key employee holder a
right to receive, upon exercise thereof, the excess of (a) the fair market
value of one Common Share on the date of exercise over (b) the grant price of
the SAR as specified by the Committee. The grant price of an SAR under the
Plan will not be less than 100% of the fair market value of an Ordinary Share
on the date of grant. The grant price, term, methods of exercise, methods of
settlement (including whether the holder of an SAR will be paid in cash,
Ordinary Shares or other consideration), and any other terms and conditions of
any SAR granted under the Plan will be determined by the Committee at the time
of grant. Pursuant to the terms of the Plan, no individual key employee may be
granted SARs thereunder with respect to in excess of 100,000 Ordinary Shares
(subject to adjustment as described below).
RESTRICTED STOCK. Restricted Ordinary Shares granted to key employees under
the Plan will be subject to such restrictions as the Committee may impose,
including any limitation on the right to vote such Ordinary Shares or receive
dividends thereon. The restrictions imposed on the Ordinary Shares may lapse
separately or in combination at such time or times, or in such installments or
otherwise, as the Committee may deem appropriate. Except as otherwise
determined by the Committee, upon termination of a key employee's employment
for any reason during the applicable restriction period, all Ordinary Shares
of restricted stock still subject to restriction will be subject to forfeiture
by the key employee.
48
<PAGE>
The Plan limits the total number of Ordinary Shares of restricted stock that
may be awarded thereunder to 150,000 Ordinary Shares. In addition, no
individual key employee may be granted in excess of 100,000 shares of
restricted stock under the Plan. The foregoing numerical limitations on the
issuance of shares of restricted stock are subject to adjustment as described
below.
PERFORMANCE SHARES. The Plan also provides for the granting of performance
shares to key employees. The Committee will determine the applicable
performance period, the performance goal or goals (and the performance level
or levels related thereto) to be achieved during any performance period, the
proportion of payments, if any, to be made for performance between the minimum
and full performance levels for any performance goal and, if applicable, the
relative percentage weighting given to each of the selected performance goals,
the restrictions applicable to shares of restricted stock received upon
payment of performance shares if payment is made in such manner, and any other
terms, conditions and rights relating to the grant of performance shares.
Under the terms of the Plan, the Committee may select from various performance
goals, including return on equity, return on investment, return on net assets,
economic value added, earnings from operations, pre-tax profits, net earnings,
net earnings per Ordinary Share, net cash provided by operating activities,
market price for the Ordinary Shares and total shareholder return. In
conjunction with selecting the applicable performance goal or goals, the
Committee will also fix the relevant performance level or levels which must be
achieved with respect to the goal or goals in order for the performance shares
to be earned by the key employee. The performance goals selected by the
Committee under the Plan may, to the extent applicable, relate to a specific
division or subsidiary of the Company or apply on a Company-wide basis.
Following completion of the applicable performance period, payment on
performance shares granted to and earned by key employees will be made in
Ordinary Shares (which, at the discretion of the Committee, may be shares of
restricted stock) equal to the number of performance shares payable. The
Committee may provide that, during a performance period, key employees will be
paid cash amounts with respect to each performance share granted to such key
employees equal to the cash dividend paid on a Ordinary Shares. Pursuant to
the terms of the Plan, no key employee may receive more than 100,000
performance shares thereunder (subject to adjustment as described below).
ADJUSTMENTS. If any dividend or other distribution, recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of Ordinary Shares or other
securities of the Company, issuance of warrants or other rights to purchase
Ordinary Shares or other securities of the Company, or other similar corporate
transaction or event affects the Ordinary Shares so that an adjustment is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee will generally have the authority to, in such manner as it deems
equitable, adjust (a) the number and type of shares subject to the Plan and
which thereafter may be made the subject of awards, (b) the number and type of
shares subject to outstanding awards, and (c) the grant, purchase or exercise
price with respect to any award, or may make provision for a cash payment to
the holder of an outstanding award.
LIMITS ON TRANSFERABILITY. Except as specifically provided for by the
Committee at the time an award is made, no award granted under the Plan (other
than an award of restricted stock on which the restrictions have lapsed) may
be assigned, sold, transferred or encumbered by any participant, otherwise
than by will, by designation of a beneficiary, or by the laws of descent and
distribution. Each award will be exercisable during the participant's lifetime
only by such participant or, if permissible under applicable law, by the
participant's guardian or legal representative.
AMENDMENT AND TERMINATION. The Board may amend, suspend or terminate the
Plan at any time, except that no such action may adversely affect any award
granted and then outstanding thereunder without the approval of the respective
participant. The Plan further provides that
49
<PAGE>
shareholder approval of any amendment thereto must also be obtained if
required by (a) the rules and/or regulations promulgated under Section 16 of
the Exchange Act (in order for the Plan to remain qualified under Rule 16b-3),
(b) the Code or any rules promulgated thereunder (in order to allow for ISOs
to be granted thereunder) or (c) the quotation or listing requirements of any
exchange or market on which the Ordinary Shares is then traded (in order to
maintain the trading of the Ordinary Shares on such exchange or market).
WITHHOLDING. Not later than the date as of which an amount first becomes
includable in the gross income of a key employee for United States federal
income tax purposes with respect to any award under the Plan, the key employee
will be required to pay to the Company or one of its subsidiaries, or make
arrangements satisfactory to the Company or one of its subsidiaries regarding
the payment of, any United States federal, state, local or other taxes of any
kind required by law to be withheld with respect to such amount. Unless
otherwise determined by the Committee, withholding obligations arising with
respect to awards under the Plan may be settled with Ordinary Shares (other
than shares of restricted stock), including Ordinary Shares that are part of,
or are received upon exercise of, the award that gives rise to the withholding
requirement. The obligations of the Company under the Plan are conditional on
such payment or arrangements, and the Company and its subsidiaries will, to
the extent permitted by law, have the right to deduct any such taxes from any
payment otherwise due to the key employee. The Committee may establish such
procedures as it deems appropriate for the settling of withholding obligations
with Ordinary Shares.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
STOCK OPTIONS. The grant of a stock option under the Plan will create no
United States income tax consequences to the key employee. A key employee who
is granted a non-qualified stock option will generally recognize ordinary
income at the time of exercise in an amount equal to the excess of the fair
market value of the Ordinary Shares at such time over the exercise price. The
Company will be entitled to a deduction in the same amount and at the same
time as ordinary income is recognized by the key employee. A subsequent
disposition of the Ordinary Shares will give rise to capital gain or loss to
the extent the amount realized from the sale differs from the key employee's
tax basis for the Ordinary Shares, i.e., the fair market value of the Ordinary
Shares on the date of exercise. This capital gain or loss will be a long-term
capital gain or loss if the Ordinary Shares have been held for more than one
year from the date of exercise.
In general, a key employee will recognize no United States income or gain as
a result of exercise of an ISO (except that the United States alternative
minimum tax may apply). Except as described below, any gain or loss realized
by the key employee on the disposition of the Ordinary Shares acquired
pursuant to the exercise of an ISO will be treated as a long-term capital gain
or loss and no deduction will be allowed to the Company. If the key employee
fails to hold the Ordinary Shares acquired pursuant to the exercise of an ISO
for at least two years from the date of grant of the ISO and one year from the
date of exercise, the key employee will recognize ordinary income at the time
of the disposition equal to the lesser of (a) the gain realized on the
disposition, or (b) the excess of the fair market value of the Ordinary Shares
on the date of exercise over the exercise price. The Company will be entitled
to a deduction in the same amount and at the same time as ordinary income is
recognized by the key employee. Any additional gain realized by the key
employee over the fair market value at the time of exercise will be treated as
a capital gain. This capital gain will be a long-term capital gain if the
Ordinary Shares have been held for more than one year from the date of
exercise.
STOCK APPRECIATION RIGHTS. The grant of an SAR will create no United States
income tax consequences for the key employee or the Company. Upon exercise of
an SAR, the key employee will recognize ordinary income equal to the amount of
any cash and the fair market value of any Ordinary Shares or other property
received, except that if the key employee receives an option or
50
<PAGE>
shares of restricted stock upon exercise of an SAR, recognition of income may
be deferred in accordance with the rules applicable to such other awards. The
Company will be entitled to a deduction in the same amount and at the same
time as income is recognized by the key employee.
RESTRICTED STOCK. A key employee will not recognize income for United States
income tax purposes at the time an award of restricted stock is made under the
Plan, unless the election described below is made. However, a key employee who
has not made such an election will recognize ordinary income at the time the
restrictions on the stock lapse in an amount equal to the fair market value of
the restricted stock at such time. The Company will be entitled to a
corresponding deduction in the same amount and at the same time as the key
employee recognizes income. Any otherwise taxable disposition of the
restricted stock after the time the restrictions lapse will result in capital
gain or loss (long-term or short-term depending on the length of time the
restricted stock is held after the time the restrictions lapse). Dividends
paid in cash and received by a participant prior to the time the restrictions
lapse will constitute ordinary income to the participant in the year paid. The
Company will be entitled to a corresponding deduction for such dividends. Any
dividends paid in stock will be treated as an award of additional restricted
stock subject to the tax treatment described herein.
A key employee may, within 30 days after the date of the award of restricted
stock, elect to recognize ordinary income as of the date of the award in an
amount equal to the fair market value of such restricted stock on the date of
the award. The Company will be entitled to a corresponding deduction in the
same amount and at the same time as the key employee recognizes income. If the
election is made, any cash dividends received with respect to the restricted
stock will be treated as dividend income to the key employee in the year of
payment and will not be deductible by the Company. Any otherwise taxable
disposition of the restricted stock (other than by forfeiture) will result in
capital gain or loss (long-term or short-term depending on the holding
period). If the key employee who has made an election subsequently forfeits
the restricted stock, the key employee will not be entitled to deduct any
loss. In addition, the Company would then be required to include as ordinary
income the amount of the deduction it originally claimed with respect to such
shares.
PERFORMANCE SHARES. The grant of performance shares will create no United
States income tax consequences for the key employee or the Company. Upon the
receipt of Ordinary Shares at the end of the applicable performance period,
the key employee will recognize ordinary income equal to the fair market value
of the Ordinary Shares received, except that if the key employee receives
shares of restricted stock in payment of performance shares, recognition of
income may be deferred in accordance with the rules applicable to such
restricted stock. In addition, the key employee will recognize ordinary income
equal to the dividend equivalents paid on performance shares prior to or at
the end of the performance period. The Company will be entitled to a deduction
in the same amount and at the same time as income is recognized by the key
employee.
PLAN BENEFITS. No awards have been made to date under the Plan and the
Company cannot currently determine the awards that may be granted in the
future to key employees thereunder. Such determinations will be made from time
to time by the Committee.
51
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Ordinary Shares as of July 31, 1997, and after
giving effect to the Offering, by (i) each of the Company's directors and
executive officers, (ii) all directors and executive officers as a group,
(iii) all selling shareholders, and (iv) each person known by the Company to
own beneficially more than 5% of the Ordinary Shares outstanding. Except as
otherwise noted, each of the holders listed below has sole voting and
investment power over the shares beneficially owned.
<TABLE>
<CAPTION>
PRIOR TO THE
OFFERING NUMBER OF AFTER THE OFFERING
-------------------- ORDINARY --------------------
SHARES SHARES SHARES
BENEFICIALLY BEING BENEFICIALLY
NAME OWNED(1) PERCENT OFFERED OWNED(1) PERCENT
---- ------------ ------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
The Goldman Sachs Group,
L.P.(2)................. 2,888,888 34.0
Nicholas Brown(3)........ 1,148,808 13.5
Penelope Atteline
Cooke(4)................ 1,036,204 12.2
Nicholas Mark Cooke(5)... 730,956 8.6
George William Jones(6).. 566,700 6.7
Jacques Georges Sacy(7).. 562,516 6.6
Mark Kerr-Smiley(8)...... 272,268 3.2
David Terrell Colley(8).. 265,032 3.1
Richard John Wells(8).... 153,468 1.8
Jeffrey Ronald Butler(8). 149,832 1.8
Paul Ian Pearson(8)...... 149,832 1.8
Orion Nominees Limited
a/c 703(9).............. 135,000 1.6
Christopher James Blois
Needham(8).............. 125,984 1.5
David Maxwell Tarsh(8)... 129,500 1.5
Dominic Hagger(8)........ 40,200 *
Duncan Vere Hopegood(8).. 40,200 *
Allan Cooper(8).......... 27,000 *
Paul Murray(8)........... 25,984 *
Sanjay H. Patel(10)...... -- *
Reuben Jeffery III(11)... -- *
Warren W. Cabral......... -- *
All executive officers
and directors as a group
(6 persons)............. 2,446,464 28.8
</TABLE>
- --------
*Less than 1%.
(1) In accordance with Securities and Exchange Commission rules, each
beneficial owner's holdings have been calculated assuming full exercise of
outstanding options exercisable by such owner within 60 days after the
date of this Prospectus, but no exercise of outstanding options held by
any other person. The table set forth above assumes that the over-
allotment option is not exercised by the Underwriters. For further
information about the calculation of beneficial ownership, see the
footnotes below.
(2) Represents shares owned by the GS Funds, which are affiliated with The
Goldman Sachs Group, L.P. (the "GS Group"). Includes 1,852,852 shares
beneficially owned by GS Capital Partners II, L.P.; 122,372 shares
beneficially owned by Bridge Street Fund 1995, L.P.; 108,740 shares
beneficially owned by Stone Street Fund 1995, L.P.; 736,588 shares
beneficially owned by GS Capital Partners II Offshore, L.P.; and 68,336
shares beneficially owned by GS Capital Partners II Germany Civil Law
Partnership. The GS Group disclaims beneficial ownership of the shares
owned by the GS Funds to the extent attributable to equity interests
therein held by persons other than the GS Group and its affiliates. Each
of the GS Funds shares voting and investment power with certain of its
respective affiliates. The address of the GS Group is 85 Broad Street,
New York, New York 10004.
(3) Mr. Brown is Managing Director of Stirling Cooke Brown Reinsurance
Brokers Limited and Stirling Cooke Brown Insurance Brokers Limited and a
Director of certain other subsidiaries of the Company and is a Director
of the Company. Mr. Brown's address is c/o Stirling Cooke Brown
Reinsurance Brokers Limited, 65 Leadenhall Street, London, EC3A 2AD,
England.
(Continued on following page)
52
<PAGE>
(4) Ms. Cooke is Secretary of the Company and her address is c/o the Company
at Victoria Hall, Third Floor, 11 Victoria Street, Hamilton, HM-11,
Bermuda. Ms. Cooke is married to Nicholas Mark Cooke.
(5) Mr. Cooke is the Chairman, President and Chief Executive Officer and a
Director of the Company and his address is c/o the Company at Victoria
Hall, Third Floor, 11 Victoria Street, Hamilton, HM-11, Bermuda. Mr.
Cooke is married to Penelope Atteline Cooke.
(6) Mr. Jones is Chief Financial Officer and a Director of the Company and
his address is c/o the Company at Victoria Hall, Third Floor, 11 Victoria
Street, Hamilton, HM-11, Bermuda.
(7) Mr. Sacy is an employee of the Company and his address is c/o Stirling
Cook Brown Insurance Brokers Limited, 65 Leadenhall Street, London EC3A
2AD, England.
(8) The indicated individual is an employee of the Company.
(9) Orion Nominees Limited a/c 703 holds such shares as nominee of Orion
Trust Limited as Trustee of the Nightingale Trust.
(10) Mr. Patel, who is a Managing Director of Goldman, Sachs & Co., disclaims
beneficial ownership of the 2,888,888 Ordinary Shares owned by the GS
Funds, except to the extent of his pecuniary interest therein.
(11) Mr. Jeffery, who is a Managing Director of Goldman, Sachs & Co.,
disclaims beneficial ownership of the 2,888,888 Ordinary Shares owned by
the GS Funds, except to the extent of his pecuniary interest therein.
53
<PAGE>
CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS
In January, 1996, the GS Funds purchased 2,000,000 newly issued Ordinary
Shares from the Company for a purchase price of $14.7 million and 600,000
outstanding Ordinary Shares from certain shareholders for an aggregate
purchase price of $4.6 million. As a result of those purchases, at December
31, 1996 the GS Funds held an aggregate of 2,600,000 Ordinary Shares,
representing 32.5% of the issued and outstanding Ordinary Shares. Pursuant to
that purchase the GS Funds obtained certain anti-dilution rights in the event
specified options (discussed below) were exercised. Such options have been
exercised with the result that the GS Funds received an additional 288,888
Ordinary Shares. As of the date hereof, the GS Funds hold an aggregate of
2,888,888 Ordinary Shares, representing 34.0% of the issued and outstanding
Ordinary Shares. After completion of the Offering, the GS Funds are expected
to own approximately % of the Outstanding Shares.
In connection with the subscription and purchase described above, the
Company and its shareholders entered into a Shareholders Agreement dated
January 24, 1996 (the "Shareholders Agreement") and the GS Funds, the Company
and all its other shareholders on such date entered into a Registration Rights
Agreement, also dated January 24, 1996 (the "Registration Rights Agreement").
Any person who acquires Ordinary Shares originally held by a signatory to the
Registration Rights Agreement, as well as any person who acquires Ordinary
Shares upon the exercise of options or other securities exchangeable for
Ordinary Shares, is deemed to be a party to the Registration Rights Agreement.
Pursuant to the Shareholders Agreement, the Board is to consist of a maximum
of six directors of which the GS Funds have the sole right to appoint, remove
and replace two directors. The other shareholders have the sole right to
appoint, remove and replace the other four directors. The GS Funds also have
the right, with certain limitations, to appoint one director to the Board of
each of the Company's subsidiaries. The Shareholders Agreement terminates on
the effective date of the Offering. Pursuant to the Registration Rights
Agreement, the GS Funds are entitled to certain rights with respect to the
registration of Ordinary Shares under the Securities Act. The Offering is not
being made pursuant to any demand under the Registration Rights Agreement. See
"Description of Capital Shares--Registration Rights".
Goldman, Sachs & Co. or certain of their affiliates maintain certain
contractual relationships with the Company and have provided, and currently
provide, investment banking services to the Company. Goldman, Sachs & Co. also
provide investment management services to Realm pursuant to a Corporate
Account Agreement dated December 24, 1996 and have received customary fees and
expenses of approximately $52,000 from January 1 through June 30, 1997 for
such services. See "Underwriting".
On June 29, 1995, the Company entered into Option Agreements with certain
officers and employees of the Company for the purchase of an aggregate of
600,000 Ordinary Shares at a subscription price of $2.71 per Ordinary Share.
The Option Agreements provided a six-year exercise period beginning on the
first anniversary of the date of the Option Agreements. Such options were
exercised in full in June 1997. Simultaneously with the exercise of the
options, a subsidiary of the Company loaned each officer an amount equal to
the aggregate exercise price of such officer's options. Such loans bear
interest at 7% per annum and mature in June 1998. Pursuant to such loans, the
named executive officers, Mr. Cooke, Mr. Brown and Mr. Jones, borrowed
$324,900, $865,858 and $108,841, respectively.
54
<PAGE>
DESCRIPTION OF CAPITAL SHARES
The following description of the capital shares of the Company summarizes
certain provisions of the Memorandum of Association and the Bye-Laws of the
Company. Such summary does not purport to be complete or to give full effect
to Bermuda statutory or common law and in all respects is qualified by
reference to the applicable provisions of the Bermuda Companies Act 1981 and
is subject to and qualified in its entirety by reference to all of the
provisions of the Memorandum of Association and the Bye-Laws. Copies of the
Memorandum of Association and the Bye-Laws are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
GENERAL
The authorized capital stock of the Company consists of 20,000,000 Ordinary
Shares, par value $0.25 per share, and 5,000,000 preference shares, par value
$0.01 per share, the rights, preferences and powers of which may be designated
by the Board. Upon completion of the Offering, there will be
Ordinary Shares outstanding. On June 30, 1997 there were 22 holders of record
of Ordinary Shares.
ORDINARY SHARES
Holders of the Ordinary Shares have no pre-emptive, redemption, conversion
or sinking fund rights. Holders of Ordinary Shares are generally entitled to
one vote per share on all matters submitted to a vote of holders of Ordinary
Shares and do not have any cumulative voting rights. The Bye-Laws restrict the
voting rights of Ordinary Shares held by certain holders of 10% or more of the
outstanding Ordinary Shares. See "--The Bye-Laws". In the event of a
liquidation, dissolution or winding-up of the Company, the holders of Ordinary
Shares are entitled to share equally and ratably in the assets of the Company,
if any, remaining after the payment of all debts and liabilities of the
Company. The outstanding Ordinary Shares are, and the Ordinary Shares offered
by the Company hereby when issued will be, fully paid and nonassessable.
Additional authorized but unissued Ordinary Shares may be issued by the Board
of the Company without the approval of the shareholders.
Holders of the Ordinary Shares will receive such dividends, if any, as may
be declared by the Board out of funds legally available for such purposes.
Under the Bermuda Companies Act 1981, dividends can only be paid out of the
profits of the Company available for that purpose. The Bermuda Companies Act
1981 defines the profits of a company available for the payment of dividends
as its accumulated, realized profits, so far as not previously utilized by
distribution or capitalization, less its accumulated realized losses, so far
as not previously written off in a reduction or reorganization of capital duly
made by the Company. Bermuda law currently imposes no restrictions on the
payment of dividends to residents of other countries. Tax and insurance
regulatory limitations on the payment of dividends by the Company's
subsidiaries might impair the ability of the Company to pay dividends in the
future. See "Business--Regulation--Restrictions on Dividends".
PREFERRED SHARES
The Board is authorized to provide for the issuance of preferred shares in
one or more series and to fix the designations, preferences, powers, and
relative, participating, optional or other rights and restrictions thereof
(including without limitation the dividend rate, conversion rights, voting
rights, redemption price and liquidation preference), to fix the number of
shares constituting any such series and to increase and decrease the number of
shares of any such series. The Company has no present plans to issue any
preferred shares.
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THE BYE-LAWS
The provisions of the Company's Bye-Laws summarized in the succeeding
paragraphs may be deemed to have an anti-takeover effect and may delay, defer,
or prevent a tender offer or takeover attempt that a shareholder might
consider in such shareholder's best interest, including those attempts that
might result in shareholders receiving a premium over the market price for the
shares.
The Board of the Company is divided into three classes that are elected for
staggered three-year terms. Shareholders may only remove a director at a
general meeting of shareholders and only if (i) such director has received
fourteen days prior written notice of such intended removal prior to such
general meeting and (ii) such removal is approved by shareholders holding not
less than 75% of the shares entitled to vote at such meeting.
Pursuant to the Company's Bye-Laws, the Company's Board may divide its
preferred shares into several classes and attach thereto preferences,
designations, relative voting rights, dividend rights, liquidation and other
rights, preferences and limitations as may be fixed by the Board without any
further shareholder approval. Such rights, preferences, powers and limitations
as may be established could have the effect of impeding or discouraging the
acquisition of control of the Company.
The Bermuda Companies Act 1981 provides that the Bye-Laws may only be
amended by a Board resolution that is subsequently approved by the Company's
shareholders. The Company's Bye-Laws provide that (i) the Board has the
authority to issue share purchase rights to specific classes of shareholders,
which may exclude certain persons or groups holding large blocks of Ordinary
Shares without the prior approval of the Board; (ii) no person or group (other
than the existing shareholders) may exercise the right to vote more than 10%
of the outstanding voting shares of the Company without receiving the approval
of the Board prior to the acquiring the shares in excess of 10%; and (iii)
certain "business combinations" (as defined below) with certain "interested
persons" (as defined below) require the favorable vote at a shareholders'
meeting of the holders of 75% or more of the shares entitled to vote at such
meeting, unless, among other things, such interested person enters into
certain agreements with the Company and a proxy statement meeting certain
requirements is mailed to holders of all shares carrying voting rights. A
"business combination" is (a) any scheme, arrangement, reconstruction,
amalgamation or similar business combination involving the Company or any of
its subsidiaries that is proposed or initiated by an interested person or an
affiliate of an interested person, (b) any sale, purchase, lease, exchange,
mortgage, pledge, transfer or other disposition or other encumbrance of assets
between the Company and an interested person involving in excess of 5% of the
consolidated book value of the Company prior to such transaction and (c)
certain other transactions or events, including certain issuances or transfers
of Company securities to an interested person, the liquidation or dissolution
of the Company, and certain reclassifications of the Company's securities
involving an interested person. An "interested person" is generally any
shareholder of the Company deemed to hold 10% or more of the outstanding
Ordinary Shares, except for the shareholders of the Company holding in excess
of such amount on July 30, 1997.
DIFFERENCES IN CORPORATE LAW
The Bermuda Companies Act 1981 (the "Act") differs in certain material
respects from laws generally applicable to United States corporations and
their shareholders. Set forth below is a summary of certain significant
provisions of the Act (including modifications adopted pursuant to the Bye-
Laws) applicable to the Company, which differ in certain respects from
provisions of Delaware corporate law. The following statements are summaries,
and do not purport to deal with all aspects of Bermuda law that may be
relevant to the Company and its shareholders.
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INTERESTED DIRECTORS
The Bye-Laws provide that any transaction entered into by the Company in
which a director has an interest is not voidable by the Company nor can such
director be liable to the Company for any profit realized pursuant to such
transaction provided the nature of the interest is disclosed at the first
opportunity at a meeting of directors, or in writing to the directors. Under
Delaware law, such transaction would not be voidable if (i) the material facts
as to such interested director's relationship or interests are disclosed or
are known to the board of directors and the board in good faith authorizes the
transaction by the affirmative vote of a majority of the disinterested
directors, (ii) such material facts are disclosed or are known to the
stockholders entitled to vote on such transaction and the transaction is
specifically approved in good faith by vote of the stockholders or (iii) the
transaction is fair as to the corporation as of the time it is authorized,
approved or ratified. Under Delaware law, such interested director could be
held liable for any transaction for which such director derived an improper
personal benefit.
MERGERS AND SIMILAR ARRANGEMENTS
The Company may acquire the business of another Bermuda company similarly
exempt from Bermuda taxes or a company incorporated outside Bermuda and carry
on such business when it is within the objects of its Memorandum of
Association. The Company may also amalgamate with another Bermuda company or
with a body incorporated outside Bermuda upon the approval of the board of
directors and the holders of 75% of the outstanding shares of the Company,
including any shares that would otherwise be non-voting shares. In the case of
an amalgamation, a shareholder may apply to a Bermuda court for a proper
valuation of such shareholder's shares if such shareholder is not satisfied
that fair value has been paid for such shares. The court ordinarily would not
set aside the transaction on that ground absent evidence of fraud or bad
faith. Under Delaware law, with certain exceptions, any merger, consolidation
or sale of all or substantially all the assets of a corporation must be
approved by the board of directors and the holders of a majority of the
outstanding shares entitled to vote. Under Delaware law, a stockholder of a
corporation participating in certain major corporate transactions may, under
varying circumstances, be entitled to appraisal rights pursuant to which such
stockholder may receive cash in the amount of the fair value of the shares
held by such stockholder (as determined by a court or by agreement of the
corporation and the stockholder) in lieu of the consideration such stockholder
would otherwise receive in the transaction. Delaware law does not provide
stockholders of a corporation with voting or appraisal rights when the
corporation acquires another business through the issuance of its stock or
other consideration (i) in exchange for the assets of the business to be
acquired, (ii) in exchange for the outstanding stock of the corporation to be
acquired or (iii) in a merger of the corporation to be acquired with a
subsidiary of the acquiring corporation.
TAKEOVERS
Bermuda law provides that where an offer is made for shares of another
company and, within four months of the offer, the holders of not less than 90%
of the shares which are the subject of the offer accept, the offeror may by
notice require the nontendering shareholders to transfer their shares on the
terms of the offer. Dissenting shareholders may apply to the court within one
month of the notice objecting to the transfer. The burden is on the dissenting
shareholders to show that the court should exercise its discretion to enjoin
the required transfer, which the court will be unlikely to do unless there is
evidence of fraud or bad faith or collusion between the offeror and the
holders of the shares who have accepted the offer as a means of unfairly
forcing out minority shareholders. Delaware law provides that a parent
corporation, by resolution of its board of directors and without any
stockholder vote, may merge with any 90% or more owned subsidiary. Upon any
such merger, dissenting stockholders of the subsidiary would have appraisal
rights.
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SHAREHOLDER'S SUIT
A shareholder who considers that the affairs of the Company are being
conducted in a manner which is unfairly prejudicial or oppressive to the
interests of some of the shareholders may apply to the Bermuda court for
relief under the Act. The court may grant such relief as it considers fit.
Class actions and derivative actions are generally not available to
shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily
would be expected to follow English case law precedent, which would permit a
shareholder to commence an action in the name of the Company to remedy a wrong
done to the Company where the act complained of is alleged to be beyond the
corporate power of the Company or is illegal or would result in the violation
of the Memorandum of Association or Bye-Laws. Furthermore, consideration would
be given by the court to acts that are alleged to constitute a fraud against
the minority shareholders or where an act requires the approval of a greater
percentage of the Company's shareholders than actually approved it. The
winning party in such an action generally would be able to recover a portion
of attorneys' fees incurred in connection with such action. Class actions and
derivative actions generally are available to stockholders under Delaware law
for, among other things, breach of fiduciary duty, corporate waste and actions
not taken in accordance with applicable law. In such actions, the court has
discretion to permit the winning party to recover attorneys' fees incurred in
connection with such action.
INDEMNIFICATION OF DIRECTORS
The Company may indemnify its directors or officers in their capacity as
such in respect of any loss arising or liability attaching to them by virtue
of any rule of law in respect of any negligence, default, breach of duty or
breach of trust of which a director or officer may be guilty in relation to
the Company other than in respect of his own fraud or dishonesty. Under
Delaware law, a corporation may adopt a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
breaches of the director's duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or knowing violations of law,
for improper payment of dividends or for any transaction from which the
director derived an improper personal benefit. Delaware law has provisions and
limitations similar to Bermuda regarding indemnification by a corporation of
its directors or officers, except that under Delaware law the statutory rights
to indemnification may not be as limited.
INSPECTION OF CORPORATE RECORDS
Members of the general public have the right to inspect the public documents
of the Company available at the office of the Registrar of Companies in
Bermuda, which will include the Memorandum of Association (including its
objects and powers) and any alteration to the Memorandum of Association and
documents relating to any increase or reduction of authorized capital. The
shareholders have the additional right to inspect or obtain copies of the Bye-
Laws, minutes of general meetings and audited financial statements of the
Company, which must be presented to the annual general meeting of
shareholders. The register of shareholders of the Company is also open to
inspection by shareholders without charge, and to members of the public for a
fee. The Company is required to keep at its registered office a register of
its directors and officers which is open for inspection by members of the
public without charge. Bermuda law does not, however, provide a general right
for shareholders to inspect or obtain copies of any other corporate records.
Delaware law permits any stockholder to inspect or obtain copies of a
corporation's stockholder list and its other books and records for any purpose
reasonably related to such person's interest as a stockholder. Delaware law
does not permit inspection by the public of the register of stockholders.
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REGISTRATION RIGHTS
After the Offering, the GS Funds, which will hold in the aggregate
Ordinary Shares, and certain executives and employees of the Company, who will
hold Ordinary Shares, are entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Certain
Relationships and Related Party Transactions". Under the terms of the
Registration Rights Agreement, the GS Funds may demand registration, on five
separate occasions, of all or any of their Ordinary Shares and all other
parties to the Registration Rights Agreement have piggy-back rights to such
demand registration. All registration rights are subject to certain conditions
and limitations. With certain exceptions, the Company is required to bear the
expenses of the first three of such registrations. The registration rights of
each of the holders expire at such time that all registrable Ordinary Shares
held by such holder have been effectively registered and disposed of pursuant
to such registration or sold pursuant to Rule 144. Goldman, Sachs & Co. have
the right to act as the lead managing underwriter in any registration pursuant
to the Registration Rights Agreement. The Offering is not being made pursuant
to any demand under the Registration Rights Agreement.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Ordinary Shares is
Firstar Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no public market for the Ordinary
Shares of the Company and no prediction can be made as to the effect, if any,
that market sales of shares or the availability of such shares for sale will
have on the market price of the Ordinary Shares prevailing from time to time.
Future sales of substantial numbers of Ordinary Shares in the public market,
however, could adversely affect prevailing market prices and impair the
Company's future ability to raise capital through the sale of its equity
securities.
Upon completion of the Offering, the Company will have outstanding
Ordinary Shares. Of these shares, the sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except for any Ordinary Shares purchased by
"affiliates" of the Company (as defined under the Securities Act). Ordinary
Shares purchased by affiliates may not be sold unless the sale is registered
under the Securities Act or unless they are sold pursuant to Rule 144 under
the Securities Act or another exemption from registration.
Of the Ordinary Shares outstanding at the date of this Prospectus,
are held by persons not deemed by the Company to be affiliates.
Of these Ordinary Shares, are subject to 180 day lock-up
agreements. See "Underwriting". These shares are "restricted securities"
within the meaning of Rule 144 and will be tradeable without restriction under
Rule 144(k) after the end of the 180 day lock-up. The remaining
outstanding Ordinary Shares are held by persons deemed to be affiliates, all
of whom have also entered into 180 day lock-up agreements with the
Underwriters. These shares will be available for sale in the public market
beginning 180 days after the date of this Prospectus (or earlier with the
consent of the Underwriters), subject to the restrictions imposed by Rule 144.
In general, under Rule 144 as in effect on the date of this Prospectus, an
affiliate of the Company, or person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year, will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding Ordinary Shares of the
Company (approximately shares immediately after the Offering) or
(ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned restricted shares for at least two years is entitled to
sell shares pursuant to Rule 144(k) without regard to the limitations above.
The GS Funds, which hold an aggregate of 2,888,888 Ordinary Shares, have
certain demand registration rights with respect to such shares and all other
current shareholders of the Company have piggy-back rights to such demand
registration. See "Description of Capital Shares--Registration Rights". Such
rights are not exercisable during the 180-day lockup period beginning on the
date of this Prospectus.
The Company has been advised by Goldman, Sachs & Co. that, subject to
applicable laws and regulations, Goldman, Sachs & Co. currently intend to make
a market in the Ordinary Shares. However, they are not obligated to do so and
any market-making may be discontinued at any time without notice. In addition,
such market-making activity will be subject to the limits imposed by the
Securities Act and the Exchange Act. The Company will maintain a registration
statement under the Securities Act as required in order to permit market-
making activities by Goldman, Sachs & Co. See "Underwriting".
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CERTAIN TAX CONSIDERATIONS
The following discussion of taxation of the Company and the taxation of
certain shareholders of the Company is based upon current law, and summarizes
the principal Bermuda, United Kingdom and United States federal income tax
consequences of the Company's operations and of the ownership and disposition
of the Company's Ordinary Shares by certain persons under United States tax
laws. Legislative, judicial or administrative changes may be forthcoming that
could affect this summary.
This summary does not purport to be a complete analysis of all of the tax
considerations that may be applicable to a decision to acquire Ordinary Shares
of the Company and, unless explicitly noted to the contrary, deals only with
investors who are U.S. Persons (as defined below) who will hold the Ordinary
Shares as "capital assets" within the meaning of Section 1221 of the Code. In
addition, except as explicitly provided below, the summary does not apply to a
10% U.S. shareholder (as defined below) of the Company. The tax treatment of
any particular shareholder may vary depending on such shareholder's particular
tax situation or status. Consequently, each prospective shareholder is urged
to consult his or its own tax advisors as to the particular tax consequences
of the ownership and disposition of the Ordinary Shares to such shareholder,
including the effect and applicability of federal, state, local and foreign
income and other tax laws.
Statements made below as to Bermuda tax law are the opinion of Appleby,
Spurling & Kempe, Bermuda counsel to the Company, and are subject to the
qualifications and assumptions set forth in such statements. Statements below
as to the United Kingdom tax law are the opinion of Richards Butler, United
Kingdom counsel to the Company, and are subject to the qualifications and
assumptions set forth in such statements. Statements made below as to United
States federal income tax law are the opinion of Foley & Lardner, U.S. counsel
to the Company ("U.S. Counsel"), and are subject to the qualifications and
assumptions set forth in such statements. The statements as to the Company's
beliefs and conclusions as to the application of such tax laws to the Company
represent the views of the Company's management as to the application of such
laws and do not represent legal opinions of the Company or its counsel.
BERMUDA
Under current Bermuda law, there is no Bermuda income tax, withholding tax,
capital gains tax or capital transfer tax levied on the Company or its
shareholders.
The Company and its Bermuda subsidiaries have obtained a written undertaking
from the Minister of Finance of Bermuda under the Exempted Undertakings Tax
Protection Act 1966 (as amended) that, in the event of there being enacted in
Bermuda any legislation imposing tax computed on profits or income, or
computed on any capital asset, gain or appreciation, or any tax in the nature
of estate duty or inheritance tax, such tax shall not, until March 28, 2016,
be applicable to the Company or any of its operations, or to the shares,
debentures or other obligations of the Company, except insofar as such tax
applies to persons ordinarily resident in Bermuda and holding such shares,
debentures or other obligations of the Company or to any land leased or let to
the Company.
UNITED KINGDOM
The following discussion is intended only as a general guide to the current
tax position under the tax legislation of the United Kingdom at the date of
this document of the consequences of the Company's operations carried on
through, and the ownership of, UK resident subsidiaries, and to the extraction
of profits therefrom. It does not purport to summarize the tax consequences of
the ownership and disposition of the Ordinary Shares. A shareholder who is in
any doubt as to his tax position should consult his professional advisers in
the jurisdiction in which he is resident.
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U.K. SUBSIDIARIES
Stirling Cooke Brown Holdings (U.K.) Limited and its U.K. resident
subsidiaries (the "U.K. Subsidiaries") are subject to corporation tax on their
worldwide income, profits and gains in the United Kingdom.
Under current U.K. legislation no tax is withheld from any dividend paid by
Stirling Cooke Brown Holdings (U.K.) Limited to the Company. However, when
dividends are paid Stirling Cooke Brown Holdings (U.K.) Limited must make a
prepayment of corporation tax to the Inland Revenue (advance corporation tax
or "ACT") at the rate of 20% of the aggregate of the dividend paid and the
ACT, equating to 25% of the cash dividend paid. Stirling Cooke Brown Holdings
(U.K.) Limited can set off this ACT against its mainstream corporation tax
liabilities subject to various limits and any excess may be carried back to be
set against earlier years' tax bills, carried forward to be set off against
future tax bills or surrendered to the U.K. Subsidiaries for utilization by
them.
Stirling Cooke Brown Holdings (U.K.) Limited may elect to pay a dividend as
a foreign income dividend ("FID"). In that event, ACT will still be payable to
the Inland Revenue, but the Company may be able to recover all or a portion of
that ACT if the FID can be matched with foreign source profits and the Company
so elects and further elects to have the ACT repaid to it. On July 2, 1997,
the Chancellor of the Exchequer announced the intention to abolish the FID
regime referred to above with effect from 6th April 1999.
The U.K. Subsidiaries must deduct tax at the specified rate (currently 20%)
from any payments of interest made by the U.K. Subsidiaries to the Company and
account to the Inland Revenue for such sums. If the amount of interest is
considered by the Inland Revenue to be excessive, they may treat the excess
over and above a reasonable commercial return or that which they consider
represents an amount which would not have been paid if the companies had been
companies between whom there was no relationship, arrangement or other
connection (whether formal or informal) as a distribution, in which case ACT
would be payable in respect of the amount of the distribution as set out
above.
The United Kingdom has not entered into a tax treaty with Bermuda.
UNITED KINGDOM INSURANCE PREMIUM TAX
The United Kingdom imposes an insurance premium tax ("IPT") on premiums paid
in respect of taxable insurance contracts. Premiums are taxed at a standard
rate of 4% but for some insurance contracts the rate is 17.5%. It is the duty
of the insurer to collect this tax and remit the IPT to the Inland Revenue.
UNITED STATES
The following discussion summarizes the principal United States federal tax
considerations relating to the taxation of the Company and its subsidiaries,
and to the ownership of Ordinary Shares. This discussion is based upon the
existing method of operations of the Company and its subsidiaries as described
in this Prospectus. It is also based on applicable provisions of the Code, the
regulations promulgated by the United States Treasury Department thereunder,
rulings of the United States Internal Revenue Service (the "Service") and
decisions of United States courts, all as currently existing and in effect.
The statements made below setting forth or summarizing the applicable
provisions of United States tax law and the current state of their application
and interpretation in general are the opinion of U.S. Counsel, subject to the
qualifications and assumptions set forth in such statements. The statements as
to the Company's beliefs and conclusions regarding the application of such tax
laws to the Company represent the views of the Company's management based upon
advice of the Company's legal counsel and independent accountants and do not
represent legal opinions of the Company or U.S. Counsel.
For purposes of this discussion, the term "Domestic Subsidiaries" means
those subsidiaries of the Company that are created or organized under the laws
of the United States or any state thereof, within the meaning of Section
7701(a)(4) of the Code, and the term "Foreign Subsidiaries" means those
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subsidiaries of the Company that are not Domestic Subsidiaries. The term "U.S.
Person" means (i) an individual who is a citizen or resident of the United
States or any political subdivision thereof, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any state
thereof, or (iii) an estate or trust the income of which is subject to United
States federal income taxation regardless of its source. The term "Foreign
Person" means a person other than a U.S. Person. The term "United States
corporation" means a corporation created or organized in or under the laws of
the United States or any state thereof, and the term "foreign corporation"
means a corporation other than a United States corporation.
The Company has not applied for, and does not intend to apply for, a ruling
from the Service with regard to any of the matters discussed below. The
opinion of U.S. Counsel is not binding on the Service.
FEDERAL TAXES IMPOSED ON THE COMPANY AND ITS SUBSIDIARIES
UNITED STATES TAXATION OF DOMESTIC SUBSIDIARIES. The Domestic Subsidiaries
are subject to United States federal income tax on their worldwide income. The
highest marginal federal income tax rate currently is 35% for corporations.
UNITED STATES TAXATION OF FOREIGN COMPANIES WITH INCOME EFFECTIVELY
CONNECTED WITH THE CONDUCT OF A TRADE OR BUSINESS IN THE UNITED STATES. If a
foreign corporation is engaged in a trade or business in the United States,
then, unless otherwise provided under the terms of an applicable income tax
treaty: (i) the income of the corporation that is effectively connected with
this trade or business is subject to United States federal income tax (at a
current maximum rate of 35%); and (ii) the corporation is subject to an
additional 30% United States "branch profits tax" on its effectively connected
earnings and profits (with certain adjustments) that are deemed repatriated.
Although the federal income tax and branch profits tax imposed on effectively
connected income are generally computed on a "net basis" (after allowance for
deductions), no deductions are allowed to a foreign corporation for a taxable
year unless a federal income tax return is filed on a timely basis for that
taxable year.
The Company believes that neither it nor any of the Foreign Subsidiaries is
engaged in a trade or business in the United States. The Company and the
Foreign Subsidiaries have not and do not intend to file United States income
tax returns. Current law does not provide a comprehensive definition of the
activities that constitute being engaged in a trade or business in the United
States, and the determination is essentially factual in nature. There can be
no assurance that the Service could not contend successfully that the Company
and/or one or more Foreign Subsidiaries are engaged in a trade or business in
the United States. If the Company and/or one or more Foreign Subsidiaries were
found to be engaged in a trade or business in the United States, deficiencies
for federal income taxes and branch profits taxes (together with penalties and
interest) could be assessed against such company. In addition, a failure to
file United States federal income tax returns on a timely basis would result
in a disallowance of deductions, as described above.
The United States has entered into a tax treaty with Bermuda (the "Bermuda
Treaty") relating to certain "enterprises of insurance". An enterprise of
insurance is defined to be an enterprise the predominant business activity of
which consists of issuing insurance contracts or acting as a reinsurer. An
entity that is a resident of Bermuda is not entitled to the benefits of the
Bermuda Treaty unless (i) more than 50% of the beneficial interests in such
entity are beneficially owned, directly or indirectly, by individuals who are
Bermuda residents or United States citizens or residents, and (ii) the
entity's income is not used in substantial part, directly or indirectly, to
make disproportionate distributions to, or to meet certain liabilities to,
persons who are not Bermuda residents or United States citizens or residents
(the "Bermuda Treaty Benefits Test").
A resident of Bermuda that is an "enterprise of insurance" and that is
entitled to the benefits of the Bermuda Treaty is not subject to United States
federal income tax or branch profits tax on its business profits, unless the
business profits are attributable to a United States permanent establishment
maintained by the resident. Because the Company is not itself engaged in an
insurance
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business, the Company is not an "enterprise of insurance" within the meaning
of the Bermuda Treaty. It is uncertain whether, upon completion of the
Offering or at any time thereafter, any Foreign Subsidiary that is
incorporated in Bermuda and that is an "enterprise of insurance" (such as
CIRCL) can satisfy the Bermuda Treaty Benefits Test. Even if a Foreign
Subsidiary (such as CIRCL) does satisfy the Bermuda Treaty Benefits Test and
even if the Foreign Subsidiary does not maintain a permanent establishment in
the United States, the Foreign Subsidiary may be subject to United States
federal income tax and branch profits tax on any investment income (whether
from United States sources or foreign sources) that is effectively connected
with a trade or business conducted in the United States. Furthermore, even if
a Foreign Subsidiary (such as CIRCL) does satisfy the Bermuda Treaty Benefits
Test, and even if this Foreign Subsidiary is exempt from United States tax on
its business profits (on the ground that the Foreign Subsidiary does not
maintain a United States permanent establishment), the Bermuda Treaty does not
prevent the United States from imposing a "second-tier" gross-basis tax on
dividends paid by this Foreign Subsidiary in the event that the Foreign
Subsidiary is engaged in a trade or business in the United States. In
particular, a portion of any dividends paid by CIRCL to CIRCL Holdings Ltd.
will be subject to the second-tier gross-basis United States tax (at a rate of
30%) if CIRCL is engaged in a trade or business in the United States but is
protected by the Bermuda Treaty from United States taxation on its business
profits.
Under the income tax treaty between the United Kingdom and the United States
(the "U.K. Treaty"), a Foreign Subsidiary that is resident in the United
Kingdom for United Kingdom tax purposes and that is entitled to the benefits
of the U.K. Treaty is not subject to United States federal income tax or
branch profits tax on its business profits, unless the business profits are
attributable to a permanent establishment maintained in the United States.
PERSONAL HOLDING COMPANY RULES. In general, a corporation is a "personal
holding company" (a "PHC") for a taxable year if (i) at any time during the
last half of the taxable year, more than 50% of its shares (by value) are
owned, directly or indirectly, by five or fewer individuals, and (ii) at least
60% of its "adjusted ordinary gross income" for the taxable year consists of
"personal holding company income" (such as dividends, interest, royalties and
certain other types of passive investment income). A corporation that is a PHC
for a taxable year is subject to a 39.6% federal tax on its undistributed
income for the taxable year, in addition to being subject to regular federal
income tax.
The Company believes that, for purposes of the PHC provisions, more than 50%
of the stock (by value) of the Company and of each subsidiary is likely to be
treated after the Offering as being owned, directly or indirectly, by five or
fewer individuals.
With respect to United States corporations (such as the Domestic
Subsidiaries) that are members of a group filing a consolidated federal income
tax return, the "60% income" test is generally applied to the group as a
whole, and no member of the group of United States corporations is considered
to meet the 60% income test unless the group meets the 60% income test. The
Company believes that the group of Domestic Subsidiaries has not met, and is
not expected to meet, the 60% income test. Accordingly, the Company believes
that no Domestic Subsidiary has been or is expected to be a PHC.
In determining the "adjusted ordinary gross income" of a foreign
corporation, the only income that is taken into account is income that is
effectively connected with the conduct of a trade or business in the United
States, and income from United States sources. For example, if the Company
receives a dividend from a Domestic Subsidiary, and if the Company does not
receive any other income that is effectively connected with a United States
trade or business or that is derived from United States sources, 100% of the
Company's "adjusted ordinary gross income" for the taxable year will consist
of "personal holding company income", and the Company will be subject to the
PHC tax in the taxable year unless it redistributes to its shareholders the
amount received as a dividend from the Domestic Subsidiary.
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The Company believes that, as a result of dividend distributions paid by it
and by its subsidiaries, neither the Company nor any subsidiary has had, or
will have, any "undistributed personal holding company income" for any taxable
year during which the respective corporation is a PHC.
UNITED STATES TAX ON U.S.-SOURCE INVESTMENT INCOME. If a foreign corporation
receives "fixed or determinable annual or periodical gains, profits and
income" (such as dividends and certain types of interest) from sources within
the United States, and if this income is not effectively connected with the
conduct of a United States trade or business (or is not attributable to a
United States permanent establishment, in the event that the recipient is
entitled to the benefits of a United States income tax treaty), such income is
generally subject to a "gross basis" United States tax. The rate of this tax
is 30%, unless the rate is reduced under an applicable tax treaty. The 30% tax
does not apply to "portfolio interest" (within the meaning of Sections 871(h)
and 881(c) of the Code). If a Domestic Subsidiary pays a dividend to the
Company, such dividend will be subject to the 30% United States tax.
UNITED STATES FEDERAL EXCISE TAX ON INSURANCE PREMIUMS. The United States
imposes a federal excise tax on premiums paid to foreign insurers or
reinsurers with respect to risks located in the United States. This excise tax
is imposed at the rate of 4% on premiums for direct coverage and 1% for
reinsurance coverage.
FEDERAL TAX CONSEQUENCES OF OWNERSHIP OF THE ORDINARY SHARES
This discussion summarizes the federal income tax consequences of the
ownership of Ordinary Shares that are held as capital assets within the
meaning of Section 1221 of the Code. It does not discuss all of the tax
consequences that may be relevant to holders in light of their particular
circumstances or to holders subject to special rules (such as financial
institutions, insurance companies, broker-dealers, tax-exempt organizations,
or persons who hold Ordinary Shares as part of a straddle or conversion
transaction).
Prospective purchasers of Ordinary Shares should consult their own tax
advisors with regard to the application of the United States federal income
tax laws to their particular situations and any other tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction.
U.S. PERSONS.
Dividends and Gains on Sale. Except as described below with respect to the
"controlled foreign corporation", "related person insurance income", and
"passive foreign investment company" rules, distributions by the Company to a
U.S. Person with respect to the Ordinary Shares will be treated as ordinary
dividend income to the extent of the Company's current and accumulated
earnings and profits. Such dividends will not be eligible for the dividend-
received deduction generally allowed under the Code to dividend recipients
that are United States corporations. The amount of any distribution in excess
of the Company's current and accumulated earnings and profits will first be
applied to reduce the holder's tax basis in the Ordinary Shares, and any
amount in excess of tax basis will be treated as gain from the sale or
exchange of the Ordinary Shares. Except as described below with respect to the
"controlled foreign corporation", "related person insurance income", and
"passive foreign investment company" rules, any gain recognized by a U.S.
Person on a sale or exchange of Ordinary Shares (or on a distribution treated
as a sale or exchange) will be treated as capital gain. Capital gains of
corporations are taxable at the same rate as ordinary income. With respect to
non-corporate taxpayers, the excess of net long-term capital gain over net
short term capital loss may be taxed at a substantially lower rate than
ordinary income. A capital gain or loss is long-term if the asset has been
held for more than one year and short-term if held for one year or less. As a
result of the enactment of the Taxpayer Relief Act of 1997, the tax rate that
applies to long-term capital gains on certain types of assets held for more
than 18 months is lower than the tax rate that applies to long-term capital
gains on assets held for more than one year but not more than 18 months. In
addition, the distinction between capital gain or loss and ordinary income or
loss is relevant for purposes of, among other things, limitations on the
deductibility of capital losses.
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Indirect Taxation of 10% Shareholders of Controlled Foreign Corporations.
With respect to any foreign corporation that is a "controlled foreign
corporation" (a "CFC") for an uninterrupted period of 30 days or more during a
taxable year, each U.S. Person that, on the last day of the corporation's
taxable year, is a "10% U.S. Shareholder" (as defined below) and owns,
directly or indirectly through foreign entities, any shares in the foreign
corporation must include in its gross income for United States federal income
tax purposes a pro rata share of the corporation's "Subpart F" income for such
taxable year, whether or not such income is distributed. A "10% U.S.
Shareholder" is a U.S. Person that owns, directly or indirectly, shares
possessing 10% or more of the voting power in the foreign corporation. Subpart
F income includes insurance income (underwriting income and investment income)
relating to risks located outside the country in which the foreign corporation
is incorporated ("Subpart F Insurance Income"), and also includes passive
investment income (such as interest and dividends).
If a U.S. Person recognizes gain from the sale or exchange of Ordinary
Shares, and if at any time during the five years preceding the sale or
exchange such person was a 10% U.S. Shareholder of the Company at a time when
the Company was classified as a CFC, a portion of the gain will be
recharacterized under Section 1248 of the Code as dividend income, rather than
as capital gain. The amount of the gain that is so recharacterized will depend
on the amount of accumulated earnings and profits of the Company and its
Foreign Subsidiaries.
In general, a foreign corporation is classified as a CFC if more than 50% of
the corporation's shares (by vote or value) are owned directly or indirectly
by 10% U.S. Shareholders. A foreign insurance corporation that is not a CFC
under this general rule is treated as a CFC, however, for the sole purpose of
taking into account the corporation's Subpart F Insurance Income if (i) more
than 25% of such corporation's shares (by vote or value) are owned directly or
indirectly by 10% U.S. Shareholders, and (ii) the foreign corporation realizes
in excess of 75% of its gross premium income from the insuring or reinsuring
of risks outside the country in which the foreign corporation is incorporated.
The Company anticipates that over 75% of CIRCL's gross premium income will be
written on risks outside of Bermuda.
The Company anticipates that, because of the dispersion of ownership of its
shares, the Company will not be a CFC after the Offering. In any event, the
characterization of the Company as a CFC does not give rise to a tax on the
Company, and is relevant only to a 10% U.S. Shareholder of the Company. No
assurance can be given, however, that relationships among holders of shares,
or future changes in ownership, will not cause the Company to be or become a
CFC, with the result that any 10% U.S. Shareholder of the Company or of a
Foreign Subsidiary would be required to include in its gross income its pro
rata share of any Subpart F income of the Company or the Foreign Subsidiary.
Even if the Company or a Foreign Subsidiary is determined to be a CFC, no
purchaser of Ordinary Shares will be responsible for the payment of United
States tax with respect to any Subpart F income earned by the Company and the
Foreign Subsidiaries, unless such purchaser is a 10% U.S. Shareholder. Any 10%
U.S. Shareholder of the Company should consult its own tax advisor.
Indirect Taxation Attributable to RPII. If a foreign corporation earns
"related person insurance income" ("RPII"), and if 25% or more (by vote or
value) of the shares of the foreign corporation are owned directly or
indirectly by U.S. Persons for an uninterrupted period of 30 days or more
during the relevant taxable year, then unless one of the exceptions described
below applies, each U.S. Person that owns, directly or indirectly through
foreign entities, any stock in the foreign corporation on the last day of the
taxable year must include in its gross income for United States federal income
tax purposes its allocable share (calculated as if the only stock outstanding
were the stock held by U.S. Persons) of the RPII, whether or not such income
is distributed. RPII consists of insurance income (underwriting and investment
income) relating to policies issued for the benefit of (i) any U.S. Person
that owns, directly or indirectly through foreign entities, any shares in the
foreign corporation, or (ii) any person related to such a U.S. Person.
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Under one exception to the RPII rules, no income inclusion is required if at
all times during the taxable year less than 20% of the voting power and value
of the shares in the foreign corporation are owned, directly or indirectly
through foreign entities, by persons who are, or who are related to persons
who are, directly or indirectly insured by the foreign corporation. Under
another exception to the RPII rules, no income inclusion is required if the
gross amount of RPII of the foreign corporation for the taxable year is less
than 20% of the gross insurance income of the foreign corporation.
The Company anticipates that in each taxable year ending after the Offering
the gross amount of any RPII earned by the Company and each Foreign Subsidiary
will be less than 20% of the gross insurance income earned by the respective
company. Nevertheless, there can be no assurance that RPII income inclusions
will be avoided with respect to holders of Ordinary Shares, particularly
because any Foreign Subsidiary that conducts a reinsurance business may not be
in a position to prove that the persons whose risks the Foreign Subsidiary
indirectly reinsures do not own, directly or indirectly, Ordinary Shares.
As described above with respect to the CFC rules, Section 1248 will apply on
a sale or exchange of Ordinary Shares by a U.S. Person (and will
recharacterize a portion of any gain on the sale or exchange as a dividend) if
at any time during the five years preceding the sale or exchange the U.S.
Person was a 10% U.S. Shareholder at a time when the Company was a CFC.
Section 953(c)(7) of the Code generally provides that Section 1248 also
applies if a U.S. Person sells or exchanges shares in a foreign corporation
that earns RPII and that, at any time in the five years preceding the sale or
exchange, was 25%-or-more owned (directly or indirectly) by U.S. Persons and
would have been taxed as an insurance company under Subchapter L of the Code
if the corporation were a domestic corporation. Section 1248 would apply in
such a case even if the RPII represents less than 20% of the corporation's
insurance income. Furthermore, it is possible that the Service could contend
successfully that Sections 953(c)(7) and 1248 also apply if the foreign
corporation whose shares are sold or exchanged by the U.S. Person has never
been engaged in the insurance business but is the parent of a foreign
corporation that is or has been engaged in an insurance business.
The Company itself has never been engaged, and does not anticipate being
engaged, in an insurance business. Assuming that the Company itself never
engages in an insurance business in the future, the provisions of Section
953(c)(7) should not apply under current law to any holder of Ordinary Shares.
This conclusion is not free from doubt, however. Because one or more of the
Foreign Subsidiaries are and will be engaged in an insurance business, it is
possible that the Service could contend successfully that Section 1248 should
apply to a sale or exchange of Ordinary Shares by a U.S. Person (which would
result in a portion of any gain on the sale or exchange being recharacterized
as a dividend) if, at any time during the five years preceding the sale or
exchange, this U.S. Person owned, directly or indirectly, shares in the
Company at a time when 25% or more (by vote or value) of shares in the Company
were owned, directly or indirectly, by U.S. Persons.
Passive Foreign Investment Company Rules. In general, a foreign corporation
is a "passive foreign investment company" ("PFIC") during a taxable year if
75% or more of its gross income for the taxable year constitutes "passive
income" or if 50% or more of its assets held during the taxable year produce,
or are held for the production of, passive income. In general, any U.S. Person
who holds, directly or indirectly, any Ordinary Shares will be subject to
penalty taxes (under Section 1291 of the Code) upon the disposition of, or
receipt of "excess distributions" with respect to, such Ordinary Shares if the
Company is a PFIC during the taxable year in which such income is realized by
the U.S. Person, or if the Company was a PFIC during any prior taxable year
that is included in whole or in part in the U.S. Person's "holding period"
(within the meaning of Section 1223 of the Code) for the Ordinary Shares. In
addition to the penalty taxes, there exist several other adverse tax
consequences to any U.S. Person that holds shares in a PFIC.
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The penalty taxes and these other adverse tax consequences do not apply,
however, if the U.S. Person makes a "qualified electing fund" ("QEF") election
with respect to its Ordinary Shares for the first taxable year included in
whole or in part in the U.S. Person's "holding period" in which the Company is
a PFIC. If a QEF election is made by the U.S. Person, then with respect to
each taxable year that the Company is a PFIC, the U.S. Person will have to
include in its gross income for United States federal income tax purposes its
allocable share of the Company's earnings for such taxable year, whether or
not these earnings are distributed.
For purposes of the PFIC rules, "passive income" generally includes
interest, dividends, and other investment income. The PFIC statutory
provisions contain an express exception for income "derived in the active
conduct of an insurance business by a corporation which is predominantly
engaged in an insurance business . . ." (the "Insurance Company Exception").
This exception is intended to ensure that income derived by a bona fide
insurance company is not treated as passive income. However, to the extent
such income is attributable to financial reserves in excess of the reasonable
needs of the insurance business, it may be treated as passive income for
purposes of the PFIC rules. The PFIC statutory provisions also contain a look-
through rule that states that, for purposes of determining whether a foreign
corporation is a PFIC, such foreign corporation shall be treated as if it
"received directly its proportionate share of the income . . ." and as if it
"held its proportionate share of the assets . . ." of any other corporation in
which it owns at least 25% of the value of the stock.
The Company believes that, as a result of the Insurance Company Exception,
CIRCL is not a PFIC. The Company anticipates that CIRCL will not have
financial reserves in excess of the reasonable needs of its insurance
business, and will continue to meet the requirements of the Insurance Company
Exception. The Company anticipates further that, as a result of the look-
through rules, the Company will not be classified as a PFIC. Nevertheless,
there can be no assurance that the Company will not be classified as a PFIC.
The United States Treasury has not yet promulgated final regulations regarding
the application of the Insurance Company Exception and the look-through rules,
and there exists substantial uncertainty regarding the interpretation of these
rules. In addition, it is unclear whether the coverages or services provided
under a rent-a-captive program are to be characterized as "passive" activities
(rather than as non-passive management and related services) for PFIC
purposes.
Foreign Personal Holding Company Rules. In general, a foreign corporation is
a "foreign personal holding company" (a "FPHC") during a taxable year if (i)
at any time during the taxable year, more than 50% of the shares (by vote or
value) of the corporation are owned, directly or indirectly, by five or fewer
individuals who are U.S. Persons, and (ii) at least 50% of the gross income of
the corporation for the taxable year consists of "foreign personal holding
company income" (such as dividends, interest, royalties, and certain other
types of passive investment income). If a foreign corporation is a FPHC for a
taxable year, each U.S. Person who owns, directly or indirectly through
foreign entities, any stock of the corporation is required to recognize, as a
dividend, the U.S. Person's share of the undistributed FPHC income of the
foreign corporation.
The Company believes that neither the Company nor any Foreign Subsidiary has
met or is expected to meet the stock ownership threshold requirement for
classification as a FPHC.
Foreign Tax Credit Treatment of Income Earned With Respect to Ordinary
Shares. If the Company is engaged in a trade or business in the United States
at any time during the three taxable years preceding the taxable year in which
it pays a dividend on its Ordinary Shares to a U.S. Person, and if 25% or more
of the Company's gross income during this three year period was effectively
connected with the United States trade or business, a portion of such dividend
will be treated as United States source income for purposes of computing the
foreign tax credit limitation of the U.S Person that receives the dividend.
Any portion of a dividend received by a U.S. Person that is not treated as
United States source income under the rule described above will nevertheless
be recharacterized in part as
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United States source income if U.S. Persons own, directly or indirectly, 50%
or more of the voting power or value of the shares of the Company. In such an
event, the amount that is so recharacterized will depend on the amount of
United States source income earned by the Company and its subsidiaries. (This
type of recharacterization will also apply to any income inclusion to a U.S.
Person under the CFC, RPII, and QEF rules with respect to the Company or its
Foreign Subsidiaries.) A substantial part of the income earned by the Company
and its subsidiaries is anticipated to be from United States sources.
With respect to the portion of the dividends, and income inclusions received
by a U.S. Person under the CFC, RPII, and QEF rules, that constitute foreign
source income, the Company anticipates that substantially all of this foreign
source income received by the U.S. Person will constitute either "passive"
income or "financial services" income for foreign tax credit limitation
purposes. Thus, it may not be possible for most U.S. Persons who hold Ordinary
Shares to utilize excess foreign tax credits to reduce United States tax on
such income.
Form 5471 Reporting. Any U.S. Person who owns, directly or indirectly, any
shares on the last day of a taxable year of a foreign corporation must
generally file an information report on Form 5471 with respect to such
person's interest in the foreign corporation if: (i) the U.S. Person is a 10%
U.S. Shareholder of the foreign corporation, and the foreign corporation is a
CFC for an uninterrupted period of 30 days or more during the taxable year; or
(ii) 25% or more (by vote or value) of the shares of the foreign corporation
are owned directly or indirectly by U.S. Persons for an uninterrupted period
of 30 days or more during the taxable year, and the gross amount of RPII
earned by the foreign corporation during the taxable year represents 20% or
more of the foreign corporation's gross insurance income. The filing of a Form
5471 is also required in other situations, including the acquisition by a U.S.
Person of 5% or more of the value of the shares of a foreign corporation. The
Company will provide information to assist in the completion of Form 5471 in
situations where such form is required. However, the Company will not itself
determine whether or when such filing is required.
Backup Withholding. Information reporting to the Service by paying agents
and custodians located in the United States will be required with respect to
payments of dividends on the Ordinary Shares to U.S. Persons. A U.S. Person
who holds Ordinary Shares may be subject to backup withholding at a 31% rate
with respect to dividends paid by paying agents or custodians, or proceeds
received on the sale or exchange of Ordinary Shares through a broker, unless
the holder (i) demonstrates that it qualifies for an applicable exemption
(such as the exemption for holders that are corporations), or (ii) provides a
taxpayer identification number and complies with certain other requirements.
Holders of Ordinary Shares should consult their own tax advisors regarding
their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption. The amount of any backup withholding from a
payment to a holder will generally be allowed as credit against such holder's
United States federal income tax liability and may entitle such holder to a
refund, provided that the required information is furnished to the Service.
FOREIGN PERSONS.
U.S. Income Tax. A holder of Ordinary Shares who is a Foreign Person (other
than a former United States citizen described in Section 877(a) of the Code or
a former resident of the United States described in Sections 877(e) or
7701(b)(10) of the Code) will not be subject to United States federal income
tax upon any dividend received on the Ordinary Shares, unless the dividend
income is effectively connected with a United States trade or business
conducted by the Foreign Person. In addition, such a Foreign Person will not
be subject to United States federal income tax upon any gain realized on the
sale or exchange of Ordinary Shares, unless (i) such gain is effectively
connected with a trade or business in the United States conducted by the
holder or (ii) in the case of an individual holder, the holder is present in
the United States for 183 days or more in the taxable year of the sale or
exchange, and either the holder has a "tax home" (as defined in Section
911(d)(3) of the Code) in
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the United States or the gain is attributable to an office or other fixed
place of business maintained in the United States by such holder.
Backup Withholding. If a Foreign Person sells Ordinary Shares through a
United States office of a broker, the broker is required to file an
information report and is required to withhold 31% of the sale proceeds unless
the Foreign Person certifies its non-United States status or otherwise
establishes an exemption. If a Foreign Person sells Ordinary Shares through a
foreign office of a broker, backup withholding is not required; but
information reporting is required if the broker does not have documentary
evidence that the holder is a Foreign Person and if (i) the broker is a U.S.
Person, (ii) the broker is a CFC, or (iii) the broker derives 50% or more of
its gross income for a specified three year period from the conduct of a trade
or business in the United States.
Foreign Persons holding Ordinary Shares should consult their own tax
advisors regarding the application of information reporting and backup
withholding in their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if available.
Any amount withheld from payment to a Foreign Person holding Ordinary Shares
under the backup withholding rules will generally be allowed as credit against
such holder's United States federal income tax liability, if any, and may
entitle such holder to a refund, provided that the required information is
furnished to the Service.
U.S. Estate Tax. Any Ordinary Shares held by an individual who is neither a
United States citizen, nor a former United States citizen, nor a resident
(within the meaning of Section 2101 of the Code) of the United States will be
exempt from the United States estate tax.
* * * * *
The foregoing discussion is based upon current law and is for general
information only. The tax treatment of a holder of Ordinary Shares may vary
depending on the holder's particular tax situation. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could be
retroactive and could affect the tax consequences to holders of Ordinary
Shares.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF ACQUIRING,
OWNING AND DISPOSING OF THE ORDINARY SHARES.
EXPERTS
The financial statements and schedules of Stirling Cooke Brown Holdings
Limited as of December 31, 1996 and 1995, and for each of the years in the
three year period ended December 31, 1996, have been included herein and in
the registration statement in reliance upon the reports of KPMG Peat Marwick,
independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Ordinary Shares under Bermuda law will be passed upon
for the Company by its Bermuda counsel, Appleby, Spurling & Kempe, Hamilton,
Bermuda. Warren Cabral, a Partner of Appleby, Spurling & Kempe, is a director
of the Company. See "Management". Certain legal matters in connection with the
Offering will be passed upon for the Company with respect to matters of United
States federal law by Foley & Lardner, Milwaukee, Wisconsin, and for the
Company and the Selling Shareholders by Appleby, Spurling & Kempe with respect
to matters of Bermuda law and Richards Butler, London, with respect to matters
involving the laws of the United Kingdom. Certain legal matters will be passed
upon for the Underwriters with respect to matters of United States federal law
by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York, and with respect to matters of
Bermuda law by Appleby, Spurling & Kempe.
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ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (herein, together with all
amendments thereto, called the "Registration Statement") under the Securities
Act with respect to the Ordinary Shares offered hereby. Reference is made to
the Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. This Prospectus,
which is a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect
to the Company and the Ordinary Shares offered hereby, reference is made to
the Registration Statement and to the financial statements, schedules, and
exhibits filed as a part thereof. The Registration Statement, including all
schedules and exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. and at the
Commission's regional offices at 7 World Trade Center, 13th floor, New York,
New York and 500 West Madison Street, Suite 1400, Chicago, Illinois. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates or may be accessed electronically by means of the Commission's home page
on the Internet at http://www.sec.gov.
Statements contained in this Prospectus concerning the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or otherwise with the Commission, each
such statement being qualified in all respects by such reference.
The Company is, and after the completion of the Offering expects to continue
to be, a "foreign private issuer" as defined in Rule 3b-4 promulgated under
the Exchange Act. As such, the Company will be exempt from certain rules and
reporting requirements under the Exchange Act, including the proxy rules under
Section 14 and the short-swing profit rules under Section 16.
The Company has also filed this Prospectus with the Bermuda Registrar of
Companies in compliance with Part III of the Bermuda Companies Act, 1981.
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GLOSSARY OF SELECTED INSURANCE TERMS
Alternative market...........
The segment of the insurance market that has
developed in response to volatility in the cost
and availability of traditional insurance
coverages. The alternative market consists of
retrospectively rated programs, deductible
policies and various risk financing mechanisms
including self insurance, captives, rent-a-
captives, risk retention groups and government
pools and trusts.
Assigned risk pool........... A state mandated workers' compensation
insurance program whereby all workers'
compensation insurers in such state are
required to share in the provision of workers'
compensation insurance to those employers in
the state who are unable to obtain such
insurance in the open market.
Captive......................
An insurance or reinsurance company that is
controlled by the insured or a group of
insureds, and is formed for the purpose of
insuring or reinsuring risks associated with
the activities of its shareholders or members.
Claims adjusting............. The service, provided on behalf of insurers, of
examining the circumstances giving rise to a
claim under a policy of insurance, determining
the validity or otherwise of the claim,
deciding the amount of benefits payable and
associated claim costs in accordance with
policy conditions as a result of the claims
events, paying valid claims, and calculating
the level of reserving required of an insurer
to pay future benefits and associated claim
costs as a result of valid claims.
Independent producing agent.. See definition of "retail agent".
Loss expense................. The expense of investigating, adjusting,
defending and settling claims including legal
and other fees and the portion of general
expenses allocated to claim settlement costs.
Loss reserves................ Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims payments that the insurer or reinsurer
ultimately will be required to pay in respect
of insurance or reinsurance it has written.
Reserves are estimated for losses and loss
expenses, and consist of case reserves for
specific known losses and incurred but not
reported (IBNR) reserves based on claims
history and statistical data.
Managing general agency
("MGA")..................... A person, firm or corporation that has
supervisory responsibility for the local agency
and field operations of an insurance company or
is authorized by an insurance company to accept
and process on its behalf insurance policies
sold by other agents. A managing general agency
may typically perform any of the following acts
for an insurance company: underwrite and accept
risks to be bound by the insurance company;
receive and process reports and accounts;
receive and be responsible for balances; adjust
claims; and appoint or direct other agents.
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Managing General Underwriter
("MGU").....................
A person, firm or corporation that is
authorized by a reinsurer to accept and process
on its behalf a reinsurance contract. A
managing general underwriter may typically
perform any of the following acts for a
reinsurer: underwrite and accept risks to be
bound by the reinsurer; receive and process
reports and accounts; receive and be
responsible for balances; perform claims
management.
Net premiums earned.......... The pro rata portion of the written premium
covering that part of the policy term that
expired during a specified accounting period
and therefore is recognized for accounting
purposes as income in that period less premiums
ceded to reinsurers with respect to such
period.
Net premiums written......... Gross premiums written during a given period
less premiums ceded to reinsurers during such
period.
Non-subscriber programs...... Programs designed for employers in the state of
Texas that have elected to opt out of or not
subscribe to the insurance provisions of the
Texas Workers' Compensation Act. It is not
mandatory for employers to purchase workers'
compensation insurance in Texas, and there are
a number of occupational accident insurance
coverages available in that state as
alternatives to workers' compensation
insurance.
Policy administration........ The performance of all the tasks surrounding
the production of policy documents, delivery of
policy documents to the insured at the
inception of a policy period, production and
delivery to the insured of any amendments to
the documents during the course of the policy
period, due performance of any undertakings in
the policy documents in connection with renewal
or cancellation of the policy, filing of policy
documents with state departments of insurance
or departments of labor as may be required, and
the maintenance of accurate records of all
policies for the insurer.
Premium accounting........... The reporting and remitting to the insurance
carrier of all premium monies and adjustments
due an insurer in respect of all insurance
policies for risks accepted on behalf of that
insurer.
Program business or Structured insurance products that are each
programs.................... designed for a particular group of insureds.
Each program has its own rates, underwriting
guidelines and reinsurance arrangements,
specialized for that program in order to meet
the particular needs of such group.
Reinsurance.................. A transaction in which one party ("reinsurer"),
in consideration of payment of a premium,
agrees to indemnify another party ("reinsured")
for a specified part or all of the reinsured's
risk under a policy or policies of insurance
written or assumed by the reinsured. The
reinsured may be referred to as the "ceding
company". The purchase of reinsurance does not
legally discharge the ceding company from its
liability to its
73
<PAGE>
insurers. Reinsurance of all or a portion of a
single insurance policy is known as
"facultative reinsurance"; reinsurance of all
or a portion of a specified group of policies
is known as "treaty reinsurance".
Reinsurance brokering........ The design and/or arranging, for a fee or
commission, of a program which transfers risk
and associated premium from an insurance
company or reinsurance company to another
reinsurance company.
Rent-a-captive...............
An insurance or reinsurance company formed for
the purpose of insuring risks associated with
the activities of a group of unrelated
shareholders and which is controlled not by its
insurers but by an insured, a broker or an
entity seeking to profit from operating the
rent-a-captive.
Retail agent or independent
producing agent.............
A person, firm or corporation appointed and
authorized by a managing general agent or
insurer to transact insurance business on
behalf of such managing general agent or
insurer. A retail agent typically deals
directly with the insured (i.e. retails the
insurance business) while a managing general
agent typically only deals through retail
agents (i.e., wholesales the insurance
business). An independent producing agent is an
unaffiliated retail agent producing insurance
business to a managing general agent.
Retained risk................ The portion of risk which is not transferred by
the insured or the reinsured to an insurer or
reinsurer.
Retrocessional reinsurance... A type of reinsurance whereby a reinsurer cedes
to another reinsurer, the retrocessionaire, all
or part of the reinsurance that the first
reinsurer has assumed. Retrocessional
reinsurance does not legally discharge the
ceding reinsurer from its liability with
respect to its obligations to the reinsured.
Reinsurance companies cede risks to
retrocessionaires for reasons similar to those
that cause primary insurers to purchase
reinsurance: to reduce net liability on
individual risks, to protect against
catastrophic losses, to stabilize financial
ratios and to obtain additional underwriting
capacity.
Soft insurance market........ The period of the insurance market cycle which
is characterized by excessive capital and
competition, resulting in an increased
availability of coverage and decreased prices.
Specialty casualty lines..... Insurance primarily intended to cover entities
against certain types of damages and economic
losses arising out of certain actions or
omissions. Specialty casualty lines typically
include certain types of property damage
coverage, combined general liability coverage
and various professional indemnity coverages.
Underwriting profit or loss..
The amount of earned premiums less all
associated losses and expenses (including
additions to reserves) for a given period.
Underwriting profit or loss does not include
investment income associated with the
investment of insurance premiums or realized
gains and losses.
74
<PAGE>
Workers' compensation........
Workers' compensation is a statutory system
that provides funds for medical treatment and
wage replacement for employees injured on the
job. Under workers' compensation laws,
employees do not have the right to sue
employers under common law for damages suffered
in workplace accidents, but in exchange receive
a specified and statutorily guaranteed set of
benefits, regardless of fault. It is mandatory
in all but two states (New Jersey and Texas)
for employers to provide workers' compensation,
which they generally do by purchasing workers'
compensation insurance from the commercial
insurance market, from a state fund, or from an
assigned risk pool, or by qualifying as self-
insurers.
75
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996............ F-3
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996.......................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1994, 1995 and 1996................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996.................................................... F-6
Notes to Consolidated Financial Statements for the Years Ended December
31, 1994, 1995 and 1996................................................ F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet as of June 30, 1997................ F-25
Unaudited Consolidated Statements of Income for the Six Months Ended
June 30, 1996 and 1997................................................. F-26
Unaudited Consolidated Statements of Changes in Shareholders' Equity for
the Six Months Ended June 30, 1996 and 1997............................ F-27
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1997................................................. F-28
Notes to Unaudited Consolidated Financial Statements.................... F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Stirling Cooke Brown Holdings Limited
We have audited the consolidated financial statements of Stirling Cooke
Brown Holdings Limited and subsidiaries as listed in the accompanying index.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stirling
Cooke Brown Holdings Limited and subsidiaries as at December 31, 1995 and 1996
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with United
States generally accepted accounting principles.
KPMG Peat Marwick
Chartered Accountants
Hamilton, Bermuda
April 23, 1997 except as to Note 18
which is as of June 30, 1997
F-2
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Marketable securities, at fair value (Note 6)
Debt securities (amortized cost--$18,982)................. $ -- $ 19,033
Equity securities (cost--$3,295).......................... -- 3,466
Short term investments (amortized cost--$120)............. -- 120
-------- --------
Total marketable securities................................. -- 22,619
Cash and cash equivalents................................... 7,581 15,602
Fiduciary funds--restricted (Notes 4 and 5)................. 31,891 50,240
Insurance and reinsurance balances receivable (Note 4)...... 69,977 103,755
Outstanding losses recoverable from reinsurers (Notes 9 and
10)........................................................ 806 16,588
Deferred acquisition costs.................................. 1,582 171
Deferred reinsurance premiums ceded (Note 9)................ 600 7,223
Deferred tax asset (Note 13)................................ 55 264
Other assets (Note 7)....................................... 4,680 7,477
Assets related to deposit liabilities (Note 8).............. 3,468 4,047
-------- --------
Total assets............................................ $120,640 $227,986
======== ========
LIABILITIES
Outstanding losses and loss expenses (Note 10).............. $ 2,076 $ 24,301
Unearned premiums........................................... 4,090 12,515
Deferred income............................................. 1,271 1,793
Insurance and reinsurance balances payable.................. 92,046 141,483
Funds withheld.............................................. -- 1,384
Accounts payable and accrued liabilities.................... 2,551 3,927
Income taxes payable (Note 13).............................. 2,735 2,176
Deposit liabilities (Note 8)................................ 3,468 4,047
-------- --------
Total liabilities....................................... 108,237 191,626
-------- --------
Ordinary shares subject to redemption (Note 11)............. -- 14,457
-------- --------
SHAREHOLDERS' EQUITY
Share capital
Authorized 8,048,000 ordinary shares of par value $0.25
each
Issued and fully paid 6,000,000 ordinary shares (Note 11). 1,500 1,500
Additional paid in capital.................................. 88 88
Unrealized gain on marketable securities (Note 6)........... -- 147
Retained earnings........................................... 10,815 21,106
-------- --------
12,403 22,841
Less: 202,784 ordinary shares in treasury, at cost (Note
11)........................................................ -- (938)
-------- --------
Total shareholders' equity.............................. 12,403 21,903
-------- --------
Total liabilities, ordinary shares subject to redemption
and shareholders' equity............................... $120,640 $227,986
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Risk management fees............................. $ 14,528 $ 24,093 $ 33,842
Net premiums earned (Note 9)..................... -- 3,154 8,754
Net investment income (Note 6)................... 770 2,388 3,405
Other income..................................... -- -- 841
--------- --------- ---------
Total revenues............................... 15,298 29,635 46,842
--------- --------- ---------
EXPENSES
Net losses and loss expenses incurred (Note 10).. -- 1,385 6,765
Acquisition costs................................ -- 1,345 1,618
Depreciation and amortization of capital assets.. 542 766 1,018
Amortization of goodwill......................... -- 55 50
Salaries and benefits............................ 4,872 8,026 13,106
Other operating expenses......................... 4,304 7,577 11,713
--------- --------- ---------
Total expenses............................... 9,718 19,154 34,270
--------- --------- ---------
Income before taxation........................... 5,580 10,481 12,572
Taxation (Note 13)............................... 1,298 2,603 2,281
--------- --------- ---------
Net income....................................... $ 4,282 $ 7,878 $ 10,291
========= ========= =========
Net income per share............................. $ 0.68 $ 1.25 $ 1.24
--------- --------- ---------
Weighted average number of shares and ordinary
share equivalents outstanding................... 6,288,888 6,304,078 8,306,610
--------- --------- ---------
</TABLE>
All per share data has been restated to reflect the four for one stock split
discussed in Note 18.
See accompanying notes to consolidated financial statements
F-4
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
ORDINARY SHARES OF PAR VALUE $0.25 EACH
Balance at beginning of year....................... $1,500 $ 1,500 $ 1,500
------ ------- -------
Balance at end of year............................. $1,500 $ 1,500 $ 1,500
------ ------- -------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year....................... $ -- $ 88 $ 88
Share capital subscription prior to reorganization. 88 -- --
------ ------- -------
Balance at end of year............................. $ 88 $ 88 $ 88
------ ------- -------
UNREALIZED GAIN ON MARKETABLE SECURITIES
Balance at beginning of year....................... $ -- $ -- $ --
Unrealized gain in year............................ -- -- 147
------ ------- -------
Balance at end of year............................. $ -- $ -- $ 147
------ ------- -------
RETAINED EARNINGS....................................
Balance at beginning of year....................... $1,559 $ 5,072 $10,815
Net income......................................... 4,282 7,878 10,291
Dividends.......................................... (769) (2,135) --
------ ------- -------
Balance at end of year............................. $5,072 $10,815 $21,106
------ ------- -------
TREASURY STOCK
Balance at beginning of year....................... $ -- $ -- $ --
Purchase of ordinary shares in treasury............ -- -- (938)
------ ------- -------
Balance at end of year............................. $ -- $ -- $ (938)
------ ------- -------
TOTAL SHAREHOLDERS' EQUITY........................... $6,660 $12,403 $21,903
====== ======= =======
</TABLE>
Dividends per share were $0.12, $0.34 and $0 for the years ended December
31, 1994, 1995 and 1996, respectively.
All per share data has been restated to reflect the four for one stock split
discussed in Note 18.
See accompanying notes to consolidated financial statements
F-5
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 4,282 $ 7,878 $10,291
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 542 766 1,018
Amortization of goodwill......................... -- 55 50
Equity in income of affiliates................... -- -- (282)
Changes in non cash operating assets and
liabilities:
Fiduciary funds.................................. (5,013) (13,741) (18,349)
Insurance and reinsurance balances receivable.... (46,234) (23,338) (31,023)
Outstanding losses recoverable from reinsurers... -- (806) (5,160)
Deferred acquisition costs....................... -- (1,582) 1,436
Deferred reinsurance premiums ceded.............. -- (600) (762)
Other assets..................................... 713 (592) (942)
Deferred tax asset............................... -- (55) 217
Assets related to deposit liabilities............ (687) (2,781) (579)
Outstanding losses and loss expenses............. -- 2,076 9,916
Unearned premiums................................ -- 4,090 938
Insurance and reinsurance balances payable....... 51,485 30,017 47,065
Funds withheld................................... -- -- (355)
Accounts payable and accrued liabilities......... (282) 968 894
Income taxes payable............................. 75 972 (559)
Deferred income.................................. 552 719 522
Deposit liabilities.............................. 687 2,781 579
------- ------- -------
Net cash provided by operating activities...... 6,120 6,827 14,915
------- ------- -------
INVESTING ACTIVITIES
Purchase of capital assets......................... (1,460) (1,384) (1,446)
Sale of capital assets............................. 213 -- 58
Purchase of debt securities........................ -- -- (13,837)
Purchase of equity securities...................... -- -- (39)
Purchase of short-term investments, net............ -- -- (120)
Proceeds on sale of debt securities................ -- -- 2,273
Proceeds on sale of equity securities.............. -- -- 15
Purchase of subsidiaries, net of cash acquired..... -- -- (7,183)
Investments in affiliates.......................... (282) (20) (134)
------- ------- -------
Cash used by investing activities.............. (1,529) (1,404) (20,413)
------- ------- -------
FINANCING ACTIVITIES
Dividends.......................................... (769) (2,135) --
Net proceeds of subscription to share capital
subject to redemption............................. -- -- 14,457
Share capital subscription prior to reorganization. 88 -- --
Purchase of common shares in treasury.............. -- -- (938)
------- ------- -------
Cash (used) provided by financing activities... (681) (2,135) 13,519
------- ------- -------
Increase in cash and cash equivalents.............. 3,910 3,288 8,021
Cash and cash equivalents at beginning of year..... 383 4,293 7,581
------- ------- -------
Cash and cash equivalents at end of year........... $ 4,293 $ 7,581 $15,602
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for income taxes..... $ 580 $ 1,718 $ 1,928
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE DATA)
1. GENERAL
Stirling Cooke Brown Holdings Limited (the "Company") was incorporated in
Bermuda on December 12, 1995. The Company is a holding company engaged,
through its subsidiaries, in providing insurance services primarily in the
United States, Bermuda and Europe. The Company's activities include insurance
and reinsurance brokering, underwriting management, risk management, claims
control, loss and safety prevention, third party administration and managed
care services. The Company also acquired, in September 1996, its own United
States domiciled insurance company which, together with the Company's Bermuda
based reinsurance company, writes insurance and reinsurance business. The
Company specializes in the North American occupational accident and workers'
compensation alternative risk transfer markets.
Stirling Cooke Brown Holdings (UK) Limited was incorporated in England on
February 5, 1990 and formerly acted as the ultimate holding company for a
number of United Kingdom subsidiaries involved in the insurance brokering
industry. Realm Investments Limited was incorporated in Bermuda on September
1, 1993 and formerly acted as the ultimate holding company for a number of
Bermuda and United States subsidiaries involved in the insurance industry. The
Company did not conduct any business from the date of its incorporation until
January 23, 1996. On January 23, 1996 under the terms of separate Share
Purchase Agreements, the Company exchanged 4,000,020 and 1,999,980 of its
newly issued common shares for 100% of the outstanding share capital of
Stirling Cooke Brown Holdings (UK) Limited and Realm Investments Limited,
respectively. Stirling Cooke Brown Holdings (UK) Limited and Realm Investments
Limited were companies under common control through common ownership of both
companies since the incorporation of Realm Investments Limited on September 1,
1993.
As the exchange of shares represents a business combination of companies
under common control, it has been recorded at historical cost as if it were a
pooling of interests. The consolidated financial statements have been restated
to include the accounts and operations of Stirling Cooke Brown Holdings (UK)
Limited and Realm Investments Limited for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared in
accordance with United States generally accepted accounting principles which
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The following are the significant
accounting policies adopted by the Company:
a) Basis of presentation
These consolidated financial statements include the financial statements of
the Company and all of its majority owned subsidiaries (collectively referred
to as the "Company"). All significant intercompany balances and transactions
have been eliminated on consolidation. The results of a number of subsidiaries
have been included from the dates of their acquisition.
b) Marketable securities
Marketable securities comprise investments in debt and equity securities and
short term investments. All investments are classified as available for sale
and are carried at fair value. The difference between fair value and cost is
included as a separate component of shareholders' equity, net of applicable
deferred income taxes. Bond discounts and premiums are amortized over the
remaining term of the securities. Such amortization is included as a component
of net investment income in the consolidated statements of income.
F-7
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Realized gains and losses are determined on the basis of specific
identification. Investment income is recorded as earned and accrued to the
balance sheet date.
c) Premiums written, assumed and ceded
Premiums written and assumed are recorded on the accruals basis and included
in income on a pro-rata basis over the life of the policies or reinsurance
agreements to which they relate, with the unearned portion deferred in the
consolidated balance sheets. Reinsurance premiums ceded are similarly pro-
rated over the terms of the reinsurance contract with the unearned portion
being deferred in the consolidated balance sheets as deferred reinsurance
premiums ceded.
d) Acquisition costs
Acquisition costs associated with the acquisition of new or renewal
business, including commissions and brokerage, are deferred and amortized to
income over the periods in which the premiums are earned. The method followed
in determining the deferred acquisition expenses limits the amount of the
deferral to its realizable value by giving consideration to losses and
expenses expected to be incurred as premiums are earned. Future investment
income is anticipated in determining whether a premium deficiency exists.
e) Losses and loss expenses
Losses and related loss adjustment expenses are charged to income as they
are incurred and are net of losses recovered and recoverable of $Nil, $806 and
$6,775 for the years ended December 31, 1994, 1995 and 1996 respectively.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the underlying liability associated with the reinsured policy. Outstanding
losses recoverable are shown separately on the consolidated balance sheets.
Reserves are established for losses and loss expenses relating to claims
which have been reported. In addition, reserves are established, in
consultation with the Company's independent actuaries, for losses which have
occurred but have not yet been reported to the Company and for adverse
development of reserves on reported losses. Management believes that the
resulting provision for outstanding losses and loss expenses is adequate to
cover the ultimate net cost of losses and loss expenses incurred, however,
such a provision is necessarily an estimate and may ultimately be settled for
a significantly greater or lesser amount. The Company has limited historical
loss experience available to serve as a reliable basis for the estimation of
ultimate losses. It is at least reasonably possible that management will
revise the estimate of outstanding losses and loss expenses significantly in
the near term. Any subsequent differences arising are recorded in the period
in which they are determined.
f) Risk management fees
The components of the Company's risk management fees are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Brokerage fees and commissions................... $11,670 $17,478 $20,117
Managing general agency fees..................... 578 2,724 6,016
Underwriting management fees..................... 2,280 3,467 4,045
Captive management and program fees.............. 0 424 1,625
Loss control and audit fees...................... 0 0 2,039
------- ------- -------
Total risk management fees..................... $14,528 $24,093 $33,842
======= ======= =======
</TABLE>
F-8
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(i) Brokerage fees and commissions are recorded and earned as premiums
are billed since substantially all placement services have been provided at
that time. Any subsequent adjustments, including adjustments due to policy
cancellations and premium rate adjustments, are recognized in risk
management fees when advised by the client.
(ii) Managing general agency fees are reported net of commission expense
to agents and are initially recorded as of the effective date of the
related insurance policy. Fee income on instalment premiums is recognized
periodically when the instalment is billed. Such fees are recognized in
income over the period that services are performed in accordance with the
Company's contractual obligations, typically ranging up to five years
depending on the type of service provided, in proportion to the expected
service requirements in each period. Any subsequent adjustments, including
adjustments due to policy cancellation and premium adjustments, are
recorded when advised by the client or agent. The portion that will be
earned in the future is deferred and reported as deferred income in the
consolidated balance sheets.
(iii) Underwriting management fees are initially recorded when premium is
billed in accordance with terms of trade. Fee income on instalment premiums
is recognized periodically when the instalment is billed. Fees are
recognized in income over the period that services are performed in
accordance with the Company's contractual obligations. Such fees are
recognized in income over the period that contractual services are
performed, typically up to five years, in proportion to the expected
service requirements in each period. Any subsequent adjustments, including
adjustments due to policy cancellations, and premium adjustments are
recorded when advised by the client or agent. The portion of recorded
management fees that will be earned in the future is deferred and reported
as deferred income in the consolidated balance sheets.
(iv) Captive management and program fees are initially recorded as of the
effective date of the insurance policy or, in the case of installment
premiums, when the installment is billed and are recognized in income over
the period of the underlying policy (which is typically one year) in
proportion to the level of services provided in accordance with the
Company's contractual obligations. Any subsequent adjustments are
recognized in income when advised by the client or agent. The portion of
recorded management fees that will be earned in the future is deferred and
reported as deferred income in the consolidated balance sheet.
(v) Loss control and audit fees comprise claims administration handling,
loss and safety control fees and premium audit fees. Such fees are recorded
as the fees are billed and are recognized in income over the period that
services are performed in accordance with the Company's contractual
obligations, typically ranging up to five years depending on the type of
service provided, in proportion to the expected service requirement in each
period. The proportion that will be earned in the future is deferred and
reported as deferred income in the consolidated balance sheet.
g) Cash and cash equivalents
The Company considers time deposits with original maturity dates of three
months or less to be equivalent to cash. Fiduciary funds are restricted from
use and are not considered cash equivalents.
h) Investments in affiliates
The Company's investments in affiliated companies which are not majority
owned or controlled are accounted for using the equity method if the Company
is able to exert significant influence. Other investments in affiliates are
carried at cost. Investments in affiliates of $111 and $526 for the years
ended December 31, 1995 and 1996, respectively, are recorded in other assets.
The Company's
F-9
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
equity share in the net income of affiliates, for the years ended December 31,
1994, 1995 and 1996 of $Nil, $Nil and $282 respectively is included in other
income. No dividends have been received from affiliates in the three year
period ended December 31, 1996.
i) Goodwill
Goodwill in the amount of $227 and $1,025 at December 31, 1995 and 1996
respectively is recorded in other assets and represents the excess of purchase
price over fair value of net assets acquired. Goodwill is amortized on a
straight-line basis over the expected periods to be benefitted, generally 5 to
15 years. Accumulated amortization at December 31, 1995 and 1996 is $55 and
$105, respectively. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment
of the recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved.
j) Capital assets and depreciation
Capital assets are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over four to five
years, which is the estimated useful lives of the related assets.
k) Earnings per share
Net income per common share is calculated by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding during the period. Stock options are considered common share
equivalents and are included in the computation of weighted average number of
common shares outstanding using the treasury stock method. Shares and options
issued within one year prior to the registration statement are deemed
outstanding for all periods presented. There is no material difference between
primary and fully diluted net income per common share.
l) Income taxes
Under the asset and liability method used by the Company, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the consolidated financial
statements carrying amounts of existing assets and liabilities and their
respective tax bases. A valuation allowance is provided for a portion or all
of the deferred tax assets when it is more likely than not that such portion
or all such deferred assets will not be realized.
m) Foreign exchange
The United States Dollar is the Company's functional currency. Foreign
currency monetary assets and liabilities are translated at exchange rates in
effect at the balance sheet date. Fixed assets and deferred income are
translated at their historical exchange rates. Foreign currency revenues and
expenses are translated at the exchange rates in effect at the date of the
transaction. There were no material exchange gains or losses for the years
ended December 1994 and 1995. Net exchange gains of $559 are included in other
income for the year ended December 1996. This is comprised of currency
translation losses of $76 net of realized and unrealized exchange gains of
$465 and $170, respectively, arising on the Company's forward exchange
contracts. See note 14(c).
n) Derivative financial instruments
The Company is party to certain derivative financial instruments, being
forward foreign exchange contracts which are used to manage foreign currency
exposures on non-U.S. dollar denominated assets and liabilities. The Company
does not engage in derivatives for any other purpose. Forward foreign exchange
contracts are recorded at their fair value. The fair values of open contracts
at the
F-10
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
balance sheet dates are based on the quoted market prices of forward contracts
with similar maturities. Changes in fair values are recognized in other income
as appropriate in the period in which the changes occur. Amounts receivable or
payable on open positions are recorded in other assets or accounts payable and
accrued liabilities as appropriate. See note 14(c).
o) Stock compensation plans
The Company adopted FASB Statement No. 123, "Accounting for Stock-Based
Compensation", on January 1, 1996. As permitted by the statement, the Company
has elected to continue to account for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees, and,
accordingly, recognizes compensation expense for stock option grants to the
extent that the fair value of the stock exceeds the exercise price of the
option at the measurement date. Any resulting compensation expense is recorded
over the shorter of the vesting or service period.
3. ACQUISITIONS
On September 5, 1996, the Company completed the acquisition of 100% of the
outstanding share capital of Lloyd's New York Insurance Company which
subsequently changed its name to Realm National Insurance Company ("Realm
National"). The total purchase price of $8,986 comprised a cash payment to the
former owners of $8,783 and legal and other costs associated with the
acquisition of $203. In connection with the reacquisition, the former owners
and the Company entered into a reserve indemnity agreement to guarantee the
reserves as of June 30, 1996. The agreement provides for amounts to be paid to
the purchaser or received by the seller in the event of any adverse or
favorable development on the June 30, 1996 reserves in the period of two years
from the date of purchase.
During the period September 5, 1996 through December 31, 1996 positive
development of $114,090 was experienced on the June 30, 1996 reserve balance.
These financial statements reflect the effect of the positive development and
the corresponding expense amount which would have to be paid to the seller
upon the two year termination date. This amount is subject to change over the
two year period.
The agreement also guarantees any change in unearned premium reserve,
deferred policy acquisition costs, premium receivables, reinsurance
recoverables and funds held assets, no material changes have occurred in these
balances subsequent to June 30, 1996 and therefore no amounts have been booked
through the September 5, 1996 to December 31, 1996 period.
During 1996 the Company incorporated a new subsidiary, North American Risk,
Inc., which effective July 1, 1996, acquired the assets and liabilities of
North American Risk Limited (a limited partnership) ("NAR") for a total cash
cost of $94.
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated to the
assets acquired and the liabilities assumed based on the estimated fair values
at the dates of acquisition. The excess of purchase price over the estimated
fair values of the net assets acquired has been recorded as goodwill, which is
being amortized over 15 years and 5 years for Realm National and NAR,
respectively.
F-11
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of assets acquired and liabilities assumed are
summarized as follows:
<TABLE>
<CAPTION>
REALM
NATIONAL NAR
-------- -----
<S> <C> <C>
Cash..................................................... $ 1,621 $ 276
Marketable securities.................................... 10,764 --
Insurance balances receivable............................ 2,485 270
Outstanding losses recoverable from reinsurers........... 10,623 --
Deferred acquisitions costs.............................. 26 --
Deferred reinsurance premiums ceded...................... 5,861 --
Other assets and prepayments............................. 112 12
Deferred tax asset....................................... 426 --
Capital assets........................................... 52 94
Intangible assets........................................ 766 83
Outstanding losses and loss expenses..................... (12,309) --
Unearned premiums........................................ (7,487) --
Funds held............................................... (1,739) --
Insurance and reinsurance balances payable............... (1,927) (445)
Other liabilities........................................ (288) (196)
------- -----
$ 8,986 $ 94
======= =====
</TABLE>
Operating results of Realm National and NAR are included in the Company's
consolidated results of operations from the effective dates of the
acquisitions.
Proforma financial information prepared as if the acquisitions had occurred
at the beginning of the periods presented has not been provided since the
effects would not be material due to the run-off nature of Realm's business
pending its sale. Realm National formerly provided property, marine and
agricultural coverages. Realm National is expected to be used in the future as
a policy issuing company in conjunction with the Company's workers'
compensation programs.
4. CONTINGENT LIABILITIES
In the normal course of reinsurance operations the Company's bankers have
issued letters of credit totaling $2,118 and $7,015 at December 31, 1995 and
1996 respectively in favor of the ceding insurance companies. At December 31,
1995 and 1996, $2,144 and $7,015 of cash and cash equivalents were pledged as
collateral for these letters of credit respectively.
One of the Company's subsidiaries is registered with the Society of Lloyd's
as a registered Lloyd's Broker. As required by Lloyd's Brokers Byelaw (No. 5
of 1998), the subsidiary has entered into a trust deed under which all
insurance broking account assets are subject to a floating charge held in
trust for the Society of Lloyd's for the benefit of the insurance creditors
which, at December 31, 1995 and 1996, amounted to $53,249 and $80,070
respectively including relevant creditors of other subsidiaries. The purpose
of the trust deed is to provide security to the Lloyds Broker's insurance
creditors in the event of the Broker's insolvency by creating a charge over
the Broker's insurance transaction assets. The charge only becomes enforceable
in the event the Lloyds Broker becomes insolvent or breaches
F-12
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lloyds solvency rules or regulations. The assets which were subject to this
floating charge at December 31, 1995 and 1996 were:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Fiduciary funds.......................................... $ 8,097 $13,925
Insurance and reinsurance balances receivable............ 51,670 67,749
------- -------
$59,767 $81,674
======= =======
</TABLE>
The charge had no impact on the Broker's operating statements or cash flows
during the periods.
5. FIDUCIARY FUNDS
In its various capacities as an insurance intermediary, the Company collects
premiums from insureds and other intermediaries, and after deducting its risk
management fee and, where appropriate, surplus lines taxes and stamping fees,
remits the premium to the respective insurance company or underwriter. Pending
the remittance of such funds to the insurance company or underwriter in
accordance with the applicable insurance contract, the Company holds collected
funds in its own segregated bank accounts and is entitled to any accrued
interest on such funds.
6. MARKETABLE SECURITIES
a) The cost/amortized cost and estimated fair value of marketable securities
held as available for sale at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------
COST/ GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
agencies............................ $ 6,963 $ 75 $-- $ 7,038
Foreign government................... 1,063 1 3 1,061
Obligations of states and political
subdivisions........................ 1,090 -- -- 1,090
Corporate securities................. 9,866 -- 22 9,844
------- ---- ---- -------
Debt securities...................... 18,982 76 25 19,033
Equity securities.................... 3,295 236 65 3,466
Short term investments............... 120 -- -- 120
------- ---- ---- -------
Total.............................. $22,397 $312 $ 90 $22,619
======= ==== ==== =======
</TABLE>
A deferred tax liability of $75 at December 31, 1996, has been provided
against unrealized gains on marketable securities held as "available for sale"
which has been presented net as a separate component of shareholders' equity.
F-13
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
b) The amortized cost and estimated fair value of debt securities at
December 31, 1996, by contractual maturity are shown in the following table.
Actual maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1996
-------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less............................... $ 4,180 $ 4,179
Due after one year through five years................. 14,261 14,300
Due after five years through ten years................ 541 554
------- -------
$18,982 $19,033
======= =======
</TABLE>
c) Proceeds from sales of investments in debt securities during 1996 were
$2,273. Proceeds from sales of investments in equity securities during 1996
were $15. There were no realized gains or losses on the sale of marketable
securities during 1996.
d) At December 31, 1996, debt securities having an amortized cost of $2,563
were on deposit with government authorities as required by law.
e) At December 31, 1996, there were no individual investments, other than
investments in U.S. Government securities, which exceeded 10% of shareholders'
equity.
f) Net investment income by source is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Bonds............................................... $ -- $ -- $ 134
Common stock........................................ -- -- 67
Cash, cash equivalents and short-term
investments........................................ 770 2,388 3,216
Other............................................... -- -- 1
------ ------ ------
Total investment income........................... 770 2,388 3,418
Less applicable expenses.......................... -- -- 13
------ ------ ------
Net investment income............................. $ 770 $2,388 $3,405
====== ====== ======
</TABLE>
7. OTHER ASSETS
Included within other assets are capital assets as follows:
<TABLE>
<CAPTION>
1995
----------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------ ------------ --------
<S> <C> <C> <C>
Furniture and fixtures....................... $ 819 $ 364 $ 455
Computer equipment........................... 1,909 771 1,138
Office equipment............................. 452 136 316
Motor vehicles............................... 945 357 588
------ ------ ------
Total...................................... $4,125 $1,628 $2,497
====== ====== ======
</TABLE>
F-14
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996
----------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
------ ------------ --------
<S> <C> <C> <C>
Furniture and fixtures...................... $1,217 $ 502 $ 715
Computer equipment.......................... 2,542 1,229 1,313
Office equipment............................ 649 256 393
Motor vehicles.............................. 1,092 500 592
------ ------ ------
Total..................................... $5,500 $2,487 $3,013
====== ====== ======
</TABLE>
8. DEPOSIT LIABILITIES AND RELATED ASSETS
Certain of the Company's reinsurance contracts, referred to as rent-a-
captive programs, do not satisfy the conditions for reinsurance accounting as
the maximum exposure to loss is fully funded by premium, cash and other
collateral and indemnity agreements. Accordingly, these contracts are
accounted for as deposit liabilities. The Company agrees to return the
underwriting and investment earnings realized on the programs to the insured.
Premiums and other consideration received, together with net investment income
earned on the underlying assets, are recorded as a deposit liability and loss
payments made under the contracts are recorded as a deduction from the
deposit. The assets related to these programs represent funds under management
as the insured retains the risks and rewards of ownership. Such assets are
recorded as assets related to deposit liabilities in the consolidated balance
sheets. These assets comprised cash and short-term deposits at December 31,
1995 and 1996. The Company receives a fee based on a percentage of premiums
written and investment income earned for structuring and providing ongoing
management of the programs.
In addition, deposit liabilities and related assets include $1,680 and
$2,216 of deposits received from customers as security for the timely payment
of premiums for workers' compensation insurance at December 31, 1995 and 1996,
respectively. The deposit is restricted from use by the Company, and is the
property of the customer. The deposit is refunded to the customer after the
policy expires or is canceled and all claims related to the insurance policy
have been settled. The interest income earned by these restricted deposit
accounts is the property of the customer, and is therefore excluded from the
Company's operating results.
9. REINSURANCE ASSUMED AND CEDED
The Company accounts for reinsurance assumed and ceded in accordance with
SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts".
Net premiums earned are the result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Premiums written................................ $ -- $ -- $ 4,009
Premiums assumed................................ -- 7,774 12,467
Change in unearned premiums..................... -- (4,090) (938)
------- ------- -------
Premiums earned................................. -- 3,684 15,538
------- ------- -------
Premiums ceded.................................. -- 1,130 7,546
Change in deferred reinsurance premiums ceded... -- (600) (762)
------- ------- -------
Net premiums ceded.............................. -- 530 6,784
------- ------- -------
Net premiums earned............................. $ -- $ 3,154 $ 8,754
======= ======= =======
</TABLE>
The Company, in the ordinary course of business, reinsures certain risks
with other companies. Such arrangements serve to enhance the Company's
capacity to write business and limit the Company's maximum loss on large or
unusually hazardous risks.
F-15
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers
to minimize its exposure to significant losses from reinsurer insolvencies.
At December 31, 1995 and 1996, there were no amounts due from any individual
reinsurer in excess of 10% of the Company's shareholders' equity.
The Company recognizes reinsurance recoveries when the associated loss is
booked.
Realm has purchased a standard property reinsurance program whereby Realm
retains 25% of the first $1,000 on any one risk and purchased facultative per
risk reinsurance for limits above $1,000. In addition, Realm's net retained
line is further protected by a per risk excess of loss cover which reduces the
maximum loss on any one risk to $125.
Comp Indemnity Reinsurance Company (CIRCL) assumes various quota shares of
workers' compensation, employers' liability on both a primary and excess basis,
bodily injury, difference in conditions and general liability risks written on
a treaty basis. CIRCL's exposure under the reinsurance contracts assumed is
limited in most instances to $250 and $1,000 per occurrence for workers'
compensation and employer's liability, respectively and is subject to an annual
aggregate limit based on various percentages of original gross written premium
income. CIRCL further limits its exposure through the purchase of reinsurance
protection for certain risks covering losses in excess of $10 and $50 per
occurrence for workers' compensation and employers' liability, respectively,
and on one particular program losses in excess of $3,000 per occurrence. In
addition, in 1996 CIRCL purchased aggregate reinsurance protection of $1,000 in
excess of the greater of $1,200 or a percentage of net premium written, for
certain risks assumed.
10. OUTSTANDING LOSSES AND LOSS EXPENSES
Outstanding losses and loss expenses relate to the insurance activities of
Comp Indemnity Reinsurance Company Limited ("CIRCL") and Realm National, which
was acquired on September 5, 1996.
The changes in outstanding losses and loss expenses are summarized as
follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Balance for CIRCL at start of year........................ $ -- $ 2,076
Less reinsurance recoverables............................. -- 806
------ -------
Net balance for CIRCL, at start of year................... -- 1,270
Net balance for Realm National, at acquisition............ -- 1,687
------ -------
-- 2,957
Incurred related to:
Current year............................................ 1,385 6,515
Prior years............................................. -- 250
------ -------
Total incurred........................................ 1,385 6,765
------ -------
Paid related to:
Current year............................................ 115 1,334
Prior years............................................. -- 675
------ -------
Total paid............................................ 115 2,009
------ -------
Net balance............................................... 1,270 7,713
Plus reinsurance recoverable.............................. 806 16,588
------ -------
Balance at end of year.................................... $2,076 $24,301
====== =======
</TABLE>
F-16
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL
The Company's authorized share capital at December 31, 1996, comprised
8,048,000 ordinary shares of par value $0.25 each and 25 Class "A' non-voting
shares, with a par value of $1.00 each, of which 6,000,000 and 8,000,000 of
the ordinary shares and nil and 25 Class "A' non-voting shares are issued and
fully paid at December 31, 1995 and 1996 respectively.
As discussed in note 1 to the consolidated financial statements, during
1996, the Company issued 4,000,020 and 1,999,980 shares in exchange for 100%
of the share capital of Stirling Cooke Holdings (UK) Limited and Realm
Investments Limited, respectively. The Company also issued 2,000,000 ordinary
shares and 25 Class "A' non-voting shares to a private investor group.
Contemporaneously, the private investor group also acquired additional
ordinary shares from existing shareholders on a pro-rata basis, such that the
private investor group's total ownership represented 32.5% of the total number
of issued ordinary share capital at that time.
The 2,000,000 ordinary shares and related 25 Class "A' shares issued to the
private investor group are subject to a put option whereby, after 2004, the
holders of such shares could request that the Company repurchase the shares
for fair market value at that date. As such shares are subject to redemption
at the option of the holder, the aggregate subscription price has been
classified outside of shareholders' equity. The put option expires upon
consummation by the Company of an initial public offering ("IPO").
The ordinary shares are entitled to one vote per share. The Class "A' non-
voting shares entitle the holder to such number of additional fully paid up
ordinary shares as will ensure that the holder retains 32.5% of the total
number of issued ordinary shares of the Company in the event that any of the
stock options discussed in note 12 to the consolidated financial statements
are exercised. The excess of the par value of the Ordinary Shares issued over
the par value of the Class A non-voting shares will be recorded as the
deduction from additional paid in capital. The Class "A' non-voting shares are
non-voting and are not entitled to any dividend or distribution of the
Company's assets in excess of their par value. Upon the issuance of the
additional ordinary shares to the holders of the Class "A' non-voting shares,
each Class "A' non-voting share will automatically convert into one deferred
share of par value $1. The deferred shares have no voting rights and are not
entitled to any dividend or distributions, except in the event of the winding
up of the Company each deferred share shall only be entitled to the par value
thereof. The Company has the right to redeem all of the outstanding deferred
shares for an aggregate of $.01.
During 1996 the Company repurchased 202,784 of its ordinary shares from one
of its founding shareholders. Treasury stock is recorded at cost as a
deduction from shareholders' equity. Under certain circumstances the Company
may purchase a further 40,000 shares. The purchase price for such shares
varies but will not be material to the Company.
The share amounts have been retroactively restated to reflect the four-for-
one stock split effective June 30, 1997 (see note 18).
12. STOCK OPTIONS
On June 29, 1995, the Company granted 600,000 options to certain employee
shareholders. The terms of the options were subsequently amended in 1996 to
reflect the share exchange factor in the Share Purchase Agreements discussed
in note 1.
The options have an exercise price of $2.71 per share, which reflects the
estimated fair value of the shares at the original grant date as updated for
the exchange factor. The options may be exercised at any time prior to January
23, 2003.
F-17
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In accordance with the provisions of FASB Statement No. 123, the Company has
elected to continue to account for stock option grants in accordance with APB
Opinion No. 25.
The fair value of each option grant is estimated at the date of grant using
the Minimum Value Method, assuming an expected dividend yield of 0%, a risk
free interest rate of 6% and an expected life of options of 3 years.
Had the Company elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by FASB Statement
No. 123, net income and net income per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Net income--as reported............................. $4,282 $7,878 $10,291
Net income--pro forma............................... $4,282 $7,620 $10,291
Net income per share--as reported................... $ 0.71 $ 1.31 $ 1.24
Net income per share--pro forma..................... $ 0.71 $ 1.27 $ 1.24
</TABLE>
13. TAXATION
Under current Bermuda law, the Company is not required to pay any taxes in
Bermuda on either income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda that in the event of any
such taxes being imposed the Company will be exempted from taxation until the
year 2016.
Total income tax expense for the years ended December 31, 1994, 1995 and
1996 was allocated as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Income from continuing operations................... $1,298 $2,603 $2,281
Shareholders' equity (for unrealized gains on
marketable securities)............................. -- -- 75
------ ------ ------
$1,298 $2,603 $2,356
====== ====== ======
</TABLE>
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Year ended December 31, 1994
US Federal and State........................... $ -- $ -- $ --
Foreign (UK)................................... 1,298 -- 1,298
------ ----- ------
$1,298 -- $1,298
====== ===== ======
Year ended December 31, 1995
US Federal and State........................... $ 98 $ (55) $ 43
Foreign (UK)................................... 2,560 -- 2,560
------ ----- ------
$2,658 $ (55) $2,603
====== ===== ======
Year ended December 31, 1996
US Federal and State........................... $ 572 $(284) $ 288
Foreign (UK)................................... 1,993 -- 1,993
------ ----- ------
$2,565 $(284) $2,281
====== ===== ======
</TABLE>
F-18
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense attributable to income from continuing operations was
$1,298, $2,603 and $2,281 for the years ended December 31, 1994, 1995 and 1996
respectively, and differed from the amounts computed by applying the US federal
income tax rate of 34% to income before taxation as a result of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Computed expected tax expense................... $1,897 $ 3,564 $ 4,274
Foreign income not subject to US taxes.......... (550) (1,131) (1,939)
Income subject to tax at foreign rates.......... (106) 138 (55)
Change in valuation allowance................... 57 6 127
Miscellaneous permanent differences............. -- 26 56
Acquired temporary difference................... -- -- (257)
State taxes..................................... -- -- 75
------ ------- -------
Actual tax expense.............................. $1,298 $ 2,603 $ 2,281
====== ======= =======
</TABLE>
The significant components of deferred income tax benefit attributable to
income from continuing operations are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax benefit (exclusive of effects of other
component listed below)............................... $57 $61 $221
Change in Valuation Allowance.......................... (57) (6) 63
--- --- ----
$ 0 $55 $284
=== === ====
</TABLE>
At December 31, 1996, the Company established a valuation allowance relating
to acquired deferred tax benefits. The realization of the tax benefits
attributable to these acquired temporary differences will be applied to reduce
the goodwill related to the acquisition.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred liabilities at December 31,
1995 and 1996, are presented below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred revenue........................................... $118 $339
Discount on unearned premiums and outstanding loss
reserves.................................................. -- 190
Valuation allowance........................................ (63) (190)
---- ----
55 339
Deferred tax liabilities:
Unrealized investment gains................................ -- (75)
---- ----
Net deferred tax asset....................................... $ 55 $264
==== ====
</TABLE>
Valuation allowances of $63 and $190 have been established against the
deferred tax asset as of December 31, 1995 and 1996 respectively. The ultimate
realization of this deferred tax asset depends on the ability of the Company
and its subsidiaries to generate sufficient taxable income during the periods
in which those temporary differences become deductible.
The Company has not recognized a deferred tax liability for the undistributed
earnings of its United States subsidiaries. (A 30% tax is generally imposed in
the United States on dividends paid by United
F-19
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
States corporations to non-United States shareholders). The Company does not
expect those unremitted earnings to become taxable in the foreseeable future.
A deferred tax liability will be recognized when the Company expects that it
will recover those undistributed earnings in a taxable manner, such as the
receipt of dividends.
The deferred tax liability relating to these unremitted earnings which is
not recognized by the Company is approximately $0, $0, $200 at December 31,
1994, 1995, 1996, respectively.
14. FINANCIAL INSTRUMENTS
a) Fair value
The carrying values of all financial instruments, as defined by SFAS 107 and
as recorded in the consolidated balance sheets approximate their fair value.
The Company does not have any significant off-balance sheet financial
instruments. The following methods and assumptions were used by the Company in
estimating fair values:
Cash and cash equivalents and fiduciary funds: The fair values for these
instruments approximate their carrying amounts because of the short
maturity of such instruments.
Marketable securities: The fair values of debt and equity securities are
based on quoted market prices and dealer quotes at the consolidated balance
sheet dates.
Deposit liabilities and related assets: Underlying assets comprise mainly
cash and deposits. The fair values of these assets and related liabilities
approximate their carrying value due to the short maturity of these
instruments.
Forward foreign exchange contracts: The fair values of such contracts are
based on quoted forward rates available for the remaining duration of the
contracts at the balance sheet dates.
Other assets and liabilities: The fair values of all other financial
instruments, as defined by SFAS 107, approximate their carrying values due
to their short-term nature.
The estimates of fair values presented herein are subjective in nature and
are not necessarily indicative of the amounts that the Company would actually
realize in a current market exchange. Any differences would not be expected to
be material. Certain instruments such as prepaid expenses, other assets,
goodwill and deferred expenses, deferred fee income and outstanding losses and
loss expenses are excluded from fair value disclosure. Thus the total fair
value amounts cannot be aggregated to determine the underlying economic value
of the Company.
b) Concentrations of credit risk and allowance for doubtful accounts
The Company's financial instruments exposed to possible concentrations of
credit risk consist primarily of its cash and cash equivalents, outstanding
losses recoverable from reinsurers and insurance and reinsurance balances
receivable.
The Company maintains a substantial portion of its cash and cash equivalents
in two financial institutions which the Company considers of high credit
quality.
Concentrations of credit risk with respect to other financial instruments
are limited due to the large number of reinsurers, agents and customers
comprising the Company's receivable base. Management does not anticipate
significant credit losses from such financial instruments. As at December 31,
1996 and 1995, there were no significant allowances for doubtful accounts.
F-20
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
c) Forward foreign exchange contracts
The Company's functional currency is the U.S. dollar; however, as the
Company operates internationally, it has exposure to changes in foreign
currency exchange rates. These exposures include net cash inflows on non-U.S.
dollar denominated transactions.
To manage the Company's exposure to these risks, the Company enters into
forward foreign exchange contracts in the currencies to which the Company is
exposed. These contracts generally involve the exchange of one currency for
another at some future date. The Company had a notional principal amount
outstanding of (Pounds)3,500 and (Pounds)2,000, at December 31, 1995 and 1996
respectively, relating to contracts to buy British Pounds Sterling in the
future. There were no significant unrealized gains or losses on forward
exchange contracts for the years ended December 31, 1994 and 1995. Net
unrealized gains on the forward exchange contracts for the year ended December
31, 1996 amounted to $170 and have been accrued in other income and included
in other assets in the consolidated balance sheets. A net realized gain of
$Nil, $Nil and $465 is included in other income in the consolidated statements
of income in respect of such contracts during the years ended December 31,
1994, 1995 and 1996 respectively.
15. SEGMENTAL INFORMATION
a) The Company's two business segments are Risk Management, which represents
the Company's fee income less operating expenses, and Underwriting which
represents the Company's income from underwriting risks it retains. Summarized
financial information by business segment for the years ended December 31,
1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994
-------------------------------------------------
ADJUSTMENTS
RISK AND
MANAGEMENT UNDERWRITING ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................ $ 15,298 $ -- $ -- $ 15,298
======== ======= ========= ========
Income before taxation.. $ 5,580 $ -- $ -- $ 5,580
======== ======= ========= ========
Identifiable assets..... $ 82,300 $ -- $ (9,025) $ 73,275
======== ======= ========= ========
<CAPTION>
1995
-------------------------------------------------
ADJUSTMENTS
RISK AND
MANAGEMENT UNDERWRITING ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................ $ 26,469 $ 3,233 $ (67) $ 29,635
======== ======= ========= ========
Income before taxation.. $ 9,982 $ 432 $ 67 $ 10,481
======== ======= ========= ========
Identifiable assets..... $179,095 $10,151 $ (68,606) $120,640
======== ======= ========= ========
<CAPTION>
1996
-------------------------------------------------
ADJUSTMENTS
RISK AND
MANAGEMENT UNDERWRITING ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues................ $ 37,448 $ 9,394 $ -- $ 46,842
======== ======= ========= ========
Income before taxation.. $ 12,589 $ 251 $ (268) $ 12,572
======== ======= ========= ========
Identifiable assets..... $303,890 $68,221 $(144,125) $227,986
======== ======= ========= ========
</TABLE>
F-21
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significantly all of the amounts charged for depreciation and amortization,
and capital expenditures relate to the Risk Management segment for all years.
The revenue of each industry segment includes revenues both from services to
unaffiliated customers and from intersegment sales. Interest income from
services outside the Company is included in revenue if the asset on which the
interest is earned is included among the segment's identifiable assets.
b) Summarized financial information by geographic location for the years
ended December 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994
---------------------------------------------------
ADJUSTMENTS
U.K. AND AND
BERMUDA EUROPE U.S.A. ELIMINATIONS CONSOLIDATED
------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................. $ 3,049 $ 11,655 $ 594 $ -- $ 15,298
======= ======== ======= ========= ========
Income before taxation... $ 1,805 $ 3,943 $ (168) $ -- $ 5,580
======= ======== ======= ========= ========
Identifiable assets...... $10,255 $ 66,908 $ 4,925 $ (8,813) $ 73,275
======= ======== ======= ========= ========
<CAPTION>
1995
---------------------------------------------------
ADJUSTMENTS
U.K. AND AND
BERMUDA EUROPE U.S.A. ELIMINATIONS CONSOLIDATED
------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................. $ 8,607 $ 17,851 $ 3,177 $ -- $ 29,635
======= ======== ======= ========= ========
Income before taxation... $ 3,392 $ 7,058 $ 31 $ -- $ 10,481
======= ======== ======= ========= ========
Identifiable assets...... $46,293 $133,935 $ 9,018 $ (68,606) $120,640
======= ======== ======= ========= ========
<CAPTION>
1996
---------------------------------------------------
ADJUSTMENTS
U.K. AND AND
BERMUDA EUROPE U.S.A. ELIMINATIONS CONSOLIDATED
------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................. $17,279 $ 18,248 $11,315 $ -- $ 46,842
======= ======== ======= ========= ========
Income before taxation... $ 5,759 $ 5,967 $ 846 $ -- $ 12,572
======= ======== ======= ========= ========
Identifiable assets...... $88,653 $185,401 $83,148 $(129,216) $227,986
======= ======== ======= ========= ========
</TABLE>
Income before taxation is total revenues less operating expenses. In
computing income before taxation by segment, income taxes have not been
deducted.
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment.
c) The Company's managing general agencies market insurance products and
programs developed by the Company on behalf of independent insurance carriers.
In addition, the Company through its brokering and reinsurance brokering
operations, managing general underwriters, claims and loss control servicing
operations provides additional business and services to certain of these
independent insurance carriers in respect of these products and other
insurance and reinsurance policies. For the year ended December 31, 1996, fees
received from one independent insurance carrier accounted for approximately
55% of the Company's total revenues. Although the loss of this
F-22
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
carrier could have a material adverse effect on the Company, the Company
believes that Realm National and other independent insurance carriers have
sufficient underwriting capacity to reduce the impact of such a loss.
16. COMMITMENTS
Future minimum lease payments under non-cancelable operating leases as at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
1997............................. $ 1,711
1998............................. 1,672
1999............................. 1,338
2000............................. 1,187
2001............................. 970
2002 and thereafter.............. 4,111
-------
$10,989
=======
</TABLE>
Total rental expense for the years ended December 31, 1994, 1995 and 1996,
was $649, $867 and $1,319, respectively.
Certain lease commitments are subject to annual adjustment under escalation
clauses, for real estate taxes and the landlord's operating expenses.
17. STATUTORY SURPLUS AND DIVIDEND RESTRICTIONS
The Company's ability to pay dividends is subject to certain restrictions
including the following:
a) The Company is subject to a 30% withholding tax on certain dividends and
interest received from its United States subsidiaries.
b) Under New York law, Realm National may pay cash dividends only from
earned surplus determined on a statutory basis. Further, Realm National is
restricted (on the basis of the lower of 10% of statutory surplus at the end
of the preceding twelve-month period or 100% of the adjusted net investment
income for the preceding twelve-month period) as to the amount of dividends it
may declare or pay in any twelve-month period without the approval of the
Insurance Department of the State of New York.
Realm National did not have any earned surplus available for the payment of
dividends in 1996 due to its statutory-basis accumulated deficit.
Additionally, $101 of statutory surplus has been segregated as special funds
as of December 31, 1996 and will not become available for dividend payments
until earned.
Realm National's total surplus and net income determined on a United States
statutory basis are as follows:
<TABLE>
<S> <C>
Total surplus at December 31, 1996............................... $19,924
Net income for year ended December 31, 1996...................... $ 154
</TABLE>
c) The NAIC has a model law which establishes certain minimum risk-based
capital (RBC) requirements for property-casualty insurance companies. The RBC
calculation serves as a benchmark for the regulation of insurance companies by
state insurance regulators. The calculation specifies
F-23
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
various formulas and weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk and are
set forth in the RBC requirements. The capital of Realm National as of
December 31, 1996 exceeds the amount calculated using the RBC requirements.
d) Realm National is licensed by the Insurance Department of the State of
New York (the "Department") to write Special Risk insurance. Special Risk
business represents business that is sold at rates that are not subject to
prior approval of the Department. The Department's rules and regulations limit
the amount of Special Risk business that a company may write based on the
aggregate writings of the Company. In 1994, Realm National disposed of its
agricultural and ocean marine books of business as a condition precedent to
the sale of Realm National to a prospective buyer. As a result, Realm National
was no longer in compliance with the Department's limitation on Special Risk
premium writings. Realm National has received a waiver of such limitations
from the Department through September 5, 1997.
e) The Company's Bermuda insurance subsidiary, CIRCL, is required by its
license to maintain capital and surplus greater than a minimum statutory
amount determined as the greater of a percentage of outstanding losses and
loss expenses (net of reinsurance recoverable) or a given fraction of net
written premiums. At December 31, 1995 and 1996, CIRCL was required to
maintain a minimum statutory capital and surplus of $1,297 and $1,520
respectively.
CIRCL's total surplus and net income determined on a Bermuda statutory basis
are as follows:
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Total surplus at December 31............................. $ (248) $2,319
Net income for year ended December 31.................... $(1,150) $1,688
</TABLE>
CIRCL is also required to maintain a minimum liquidity ratio whereby the
value of its relevant assets are not less than 75% of the amount of its
relevant liabilities. Certain categories of assets do not qualify as relevant
assets under the statute. At December 31, 1995 and 1996, CIRCL was required to
maintain relevant assets of at least $142 and $9,412 respectively. At these
dates relevant assets were approximately $5,277 and $14,932 respectively, and
the minimum liquidity ratio was therefore met.
18. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
On June 30, 1997, the Company effected a four for one stock split whereby
each of the Company's common shares of par value $1.00 each were divided into
four common shares of par value $0.25 each.
All share and per share data included in these consolidated financial
statements have been restated to reflect the stock split.
F-24
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA PROFORMA
JUNE 30, ADJUSTMENT JUNE 30,
1997 (NOTE 3) 1997
---------- ---------- --------
<S> <C> <C> <C>
ASSETS
Marketable securities, at fair value
Debt securities (amortized cost--$16,775).... $ 16,817 $ $ 16,817
Equity securities (cost--$631)............... 653 653
Short term investments (amortized cost--
$4,096)..................................... 4,096 4,046
-------- ------- --------
Total marketable securities.................... 21,566 21,566
Cash and cash equivalents...................... 11,209 11,209
Fiduciary funds--restricted.................... 60,314 60,314
Insurance and reinsurance balances receivable.. 208,030 208,030
Outstanding losses recoverable from reinsurers. 19,164 19,164
Deferred acquisition costs..................... 293 293
Deferred reinsurance premiums ceded............ 7,252 7,252
Deferred tax asset............................. 325 325
Other assets................................... 9,989 9,989
Assets related to deposit liabilities.......... 4,877 4,877
-------- ------- --------
Total assets............................... $343,019 $ -- $343,019
======== ======= ========
LIABILITIES
Outstanding losses and loss expenses........... $ 30,381 $ 30,381
Unearned premiums.............................. 12,455 12,455
Deferred income................................ 2,319 2,319
Insurance and reinsurance balances payable..... 243,789 243,789
Funds withheld................................. 552 552
Accounts payable and accrued liabilities....... 3,472 3,472
Income taxes payable........................... 3,491 3,491
Deposit liabilities............................ 4,877 4,877
-------- ------- --------
Total liabilities.......................... 301,336 -- 301,336
-------- ------- --------
Ordinary Shares subject to redemption (Note 3). 14,529 (14,529) 0
-------- ------- --------
SHAREHOLDERS' EQUITY
Share capital
Authorized 20,000,000 Ordinary Shares of par
value $0.25 each, issued and fully paid
6,200,000 Ordinary Shares (Note 2).......... 1,550 572 2,122
Additional paid in capital..................... 1,491 13,957 15,448
Notes receivable on exercise of options (Note
2)............................................ (1,625) (1,625)
Unrealized gain on marketable securities....... 42 42
Retained earnings.............................. 25,696 25,696
-------- ------- --------
Total shareholders' equity................. 27,154 14,529 41,683
-------- ------- --------
Total liabilities, ordinary shares subject
to redemption and shareholders' equity.... $343,019 $ -- $343,019
======== ======= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-25
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
REVENUES
Risk management fees..................................... $ 14,993 $ 21,577
Net premiums earned...................................... 3,603 6,147
Net investment income.................................... 1,349 2,910
Other income............................................. 607 389
---------- ----------
Total revenues....................................... 20,552 31,023
---------- ----------
EXPENSES
Net losses and loss expenses incurred.................... 2,421 5,480
Acquisition costs........................................ 1,103 295
Depreciation and amortization of capital assets.......... 465 602
Amortization of goodwill................................. 13 190
Salaries and benefits.................................... 5,064 8,869
Other operating expenses................................. 5,021 8,015
---------- ----------
Total expenses....................................... 14,087 23,451
---------- ----------
Income before taxation................................... 6,465 7,572
Taxation................................................. 1,319 1,394
---------- ----------
Net income............................................... $ 5,146 $ 6,178
========== ==========
Net income per share..................................... $ 0.63 $ 0.75
---------- ----------
Weighted average number of shares and common share
equivalents outstanding................................. 8,224,365 8,267,835
---------- ----------
</TABLE>
All per share data has been restated to reflect the four for one stock split
discussed in Note 2.
See accompanying notes to unaudited consolidated financial statements
F-26
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
ORDINARY SHARES OF PAR VALUE $0.25 EACH
Balance at beginning of period............................. $ 1,500 $ 1,500
Options exercised.......................................... -- 150
Cancellation of ordinary shares in treasury................ -- (100)
------- --------
Balance at end of period................................... $ 1,500 $ 1,550
------- --------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............................. $ 88 $ 88
Proceeds from exercise of options in excess of par......... -- 1,475
Issuance of shares (Note 2)................................ -- (72)
------- --------
Balance at end of period................................... $ 88 $ 1,491
------- --------
NOTES RECEIVABLE
Balance at beginning of period............................. $ -- $ --
Receivable on exercise of options.......................... -- ( 1,625)
------- --------
Balance at end of period................................... $ -- $ (1,625)
------- --------
UNREALIZED GAIN ON MARKETABLE SECURITIES
Balance at beginning of period............................. $ -- $ 147
Movement in unrealized gain in period...................... -- (105)
------- --------
Balance at end of period................................... $ -- $ 42
------- --------
RETAINED EARNINGS
Balance at beginning of period............................. $10,815 $ 21,106
Net income................................................. 5,146 6,178
Cancellation of ordinary shares in treasury................ -- (1,588)
------- --------
Balance at end of period................................... $15,961 $ 25,696
------- --------
TREASURY STOCK
Balance at beginning of period............................. $ -- $ (938)
Purchase of ordinary shares in treasury.................... -- (812)
Sale of ordinary shares in treasury........................ -- 61
Cancellation of ordinary shares in treasury................ -- 1,689
------- --------
Balance at end of period................................... $ -- $ --
------- --------
TOTAL SHAREHOLDERS' EQUITY................................... $17,549 $ 27,154
======= ========
</TABLE>
No dividends were paid for the periods ended June 30, 1996 and 1997. All per
share data has been restated to reflect the four for one stock split discussed
in Note 2.
See accompanying notes to unaudited consolidated financial statements
F-27
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 5,146 $ 6,178
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 465 602
Amortization of goodwill............................... 13 190
Amortization of marketable securities.................. -- 90
Equity in income of affiliates......................... (143) (349)
Net realized gain on sale of marketable securities..... -- (420)
Profit on disposal of capital assets................... -- (4)
Changes in non cash operating assets and liabilities:
Fiduciary funds........................................ (12,306) (10,074)
Insurance and reinsurance balances receivable.......... 7,445 (104,275)
Outstanding losses recoverable from reinsurers......... (2,154) (2,576)
Deferred acquisition costs............................. 1,173 (122)
Deferred reinsurance premiums ceded.................... (1,230) (29)
Other assets........................................... 209 (962)
Deferred tax asset..................................... (50) (7)
Assets related to deposit liabilities.................. (981) (830)
Outstanding losses and loss expenses................... 4,339 6,080
Unearned premiums...................................... 911 (60)
Insurance and reinsurance balances payable............. 1,422 102,306
Funds withheld......................................... -- (832)
Accounts payable and accrued liabilities............... (25) 227
Income taxes payable................................... 82 1,315
Deferred income........................................ 429 (157)
Deposit liabilities.................................... 981 830
-------- ---------
Net cash provided (used) by operating activities..... 5,726 (2,879)
-------- ---------
INVESTING ACTIVITIES
Purchase of capital assets............................... (599) (919)
Sale of capital assets................................... -- 132
Purchase of debt securities.............................. -- --
Purchase of equity securities............................ -- (3,976)
Purchase of short-term investments, net.................. -- (3,976)
Proceeds on sale of debt securities...................... -- 2,091
Proceeds on sale of equity securities.................... -- 7,087
Investments in affiliates................................ (116) --
Acquisition of business.................................. -- (1,202)
-------- ---------
Cash used by investing activities.................... (715) (763)
-------- ---------
FINANCING ACTIVITIES
Net proceeds of subscription to share capital subject to
redemption.............................................. 14,457 --
Sale of common shares in treasury........................ -- 61
Purchase of common shares in treasury.................... -- (812)
-------- ---------
Cash provided (used) by financing activities......... 14,457 (751)
-------- ---------
Increase (decrease) in cash and cash equivalents......... 19,468 (4,393)
Cash and cash equivalents at beginning of period......... 7,581 15,602
-------- ---------
Cash and cash equivalents at end of period............... $ 27,049 $ 11,209
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for income taxes........... $ 1,287 $ 139
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
F-28
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
1. INTERIM ACCOUNTING POLICY
In the opinion of management of Stirling Cooke Brown Holdings Limited (the
"Company"), the accompanying unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company and the
results of operations and cash flows for the six months ended June 30, 1996
and 1997. Although the Company believes that the disclosure in these financial
statements is adequate to make the information presented not misleading,
certain information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for the six
months ended June 30, 1997 are not necessarily indicative of what operating
results may be for the full year. In addition, these unaudited consolidated
financial statements and notes thereto should be read in conjunction with the
audited consolidated financial statements presented herein.
2. CAPITAL TRANSACTIONS
a) In April 1997, the Company purchased 213,732 of its common shares from a
founding shareholder for a total cost of $812. Such shares were recorded as
treasury stock at cost.
b) In June 1997, the Company reissued 16,000 common shares of its treasury
stock for a total subscription price of $61.
c) On June 30, 1997, the remaining 400,516 common shares held in treasury at
that date were canceled. The excess cost of treasury shares over their par
value was recorded as a deduction from retained earnings.
d) On June 30, 1997, the Company increased its authorized share capital to
20,000,000 common shares of par value $0.25 each.
e) On June 30, 1997, the shareholders exercised their options to purchase
600,000 common shares in the Company (see note 12 to the consolidated
financial statements) at an exercise price of $2.71 per share.
Contemporaneously, 288,888 common shares of par value of $0.25 each were
issued to the holders of the Class "A' shares pursuant to certain anti-
dilution rights, and the Class "A' shares were repurchased by the Company for
nominal consideration. As the 288,888 common shares are subject to a put
option, the aggregate subscription price of such shares is classified outside
of shareholders' equity. The $72 excess of the par value of the common shares
issued over the original par value of the Class "A' shares was recorded as a
deduction from additional paid in capital. On June 30, 1997 the Company loaned
the shareholders $1,625, an amount equal to the aggregate exercise price of
the options. Such loans are evidenced by promissory notes, bear interest at 7%
per annum and mature in June 1998. Notes receivable are recorded as a
deduction from shareholders' equity at June 30, 1997. Included within notes
receivable are $325, $866 and $109 due from Messrs. Cooke, Brown and Jones,
respectively.
f) On June 30, 1997, the Company effected a four for one stock split whereby
each of the Company's common shares of par value $1.00 each were divided into
four common shares of par value $0.25 each.
All share and per share data included in these unaudited consolidated
financial statements have been restated to reflect the stock split.
F-29
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE
DATA)
3. PRO FORMA ADJUSTMENT
2,288,888 of the Company's common shares are subject to a put option
whereby, after 2004, the holders of such shares can request that the Company
repurchase the shares at fair market value. As such shares are subject to
redemption at the option of the holder, the aggregate subscription price is
classified outside of shareholders' equity in the historical balance sheet at
June 30, 1997. The put option expires upon consummation of an IPO.
The pro forma consolidated balance sheet at June 30, 1997 reflects pro forma
adjustments assuming that the option had expired at that date. The excess of
the carrying value over the par value of the shares of $13,957 is recorded
through additional paid in capital.
F-30
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman,
Sachs & Co., Oppenheimer & Co., Inc. and SBC Warburg Dillon Read Inc. are
acting as representatives, has severally agreed to purchase from the Company
and the Selling Shareholders, the respective number of Ordinary Shares set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
ORDINARY
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Goldman, Sachs & Co.............................................
Oppenheimer & Co., Inc. ........................................
SBC Warburg Dillon Read Inc. ...................................
-------
Total.......................................................
=======
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Ordinary Shares
offered hereby, if any are taken. Pursuant to the Underwriting Agreement, the
representatives of the Underwriters will purchase, on an equal basis, the
Ordinary Shares offered on behalf of the GS Funds in the Offering immediately
following the execution of the Underwriting Agreement, in exchange for notes
of the representatives of the Underwriters. The notes to be issued to the GS
Funds will be payable on the earlier of the closing of the Offering and 15
days from the date of this Prospectus. The number of Ordinary Shares each
respective Underwriter is severally obligated to purchase, as set forth above,
will not be affected by the foregoing arrangements. Each of the GS Funds has
granted to the representatives of the Underwriters the right to require it to
purchase, in the event that the Offering is not consummated, the Ordinary
Shares being purchased by the representatives of the Underwriters from such GS
Fund in the Offering, for a purchase price consisting of the cancellation of
the note issued to such GS Fund.
The Underwriters propose to offer the Ordinary Shares in part directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus, and in part to certain securities dealers at such price less
a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the Ordinary Shares are released for sale
to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
Certain of the Selling Shareholders have granted the Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of additional Ordinary Shares to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of Ordinary Shares
to be purchased by each of them, as shown in the foregoing table, bears to the
Ordinary Shares offered.
The Company, the Selling Shareholders and each director and executive
officer of the Company have agreed that, during the period beginning from the
date of this Prospectus and continuing to and including the date 180 days
after the date of this Prospectus, they will not offer, sell, contract to sell
or otherwise dispose of any other securities of the Company that are
substantially similar to the Ordinary
U-1
<PAGE>
Shares, including but not limited to any securities of the Company that are
convertible into or exchangeable for, or that represent the right to receive,
Ordinary Shares or any substantially similar securities, without the prior
written consent of Goldman, Sachs & Co. on behalf of the Underwriters, except
for the Ordinary Shares offered in connection with the Offering and except, in
the Company's case, for the issuance of options pursuant to employee benefit
plans existing on the date of this Prospectus or the issuance of shares upon
the exercise of employee options outstanding on the date of this Prospectus.
The GS Funds which are affiliates of Goldman, Sachs & Co. will have
registration rights relating to the Ordinary Shares, but such rights will not
be exercisable until after such 180-day period. For a discussion of these
matters, see "Certain Relationships and Related Party Transactions",
"Description of Capital Shares--Registration Rights" and "Shares Eligible for
Future Sale".
The GS Funds, which are affiliates of Goldman, Sachs & Co., own 2,888,888
Ordinary Shares representing approximately 34.0% of the Ordinary Shares of the
Company and, upon completion of the Offering, will own approximately % of
the Ordinary Shares. See "Principal and Selling Shareholders". The GS Funds
are subject to the 180-day lock-up that applies to other shareholders as
described above. Notwithstanding such restriction, however, Goldman, Sachs &
Co. and their affiliates will be permitted to engage in stabilization,
brokerage and ordinary course of business transactions and will be permitted,
pursuant to a registration statement under the Securities Act maintained by
the Company, to sell Ordinary Shares and related securities in connection with
market-making transactions from time to time, both during and after the 180-
day period. See "Market for Ordinary Shares" and "Shares Eligible for Future
Sale".
Goldman, Sachs & Co. or certain of their affiliates maintain certain
contractual relationships with the Company and have provided, and currently
provide, investment banking services to the Company. Goldman, Sachs & Co. also
provide investment management services to Realm pursuant to a Corporate
Account Agreement dated December 24, 1996. See "Certain Relationships and
Related Party Transactions". In addition, two directors of the Company, Reuben
Jeffery III and Sanjay Patel, are Managing Directors of Goldman, Sachs & Co.,
and were elected as directors of the Company pursuant to the rights of one of
the GS Funds under the Shareholders Agreement. After consummation of the
Offering, such directors are expected to continue in office, but the
Shareholders Agreement will terminate and Goldman, Sachs & Co. and their
affiliates will not have any right to designate directors of the Company. See
"Management" and "Certain Relationships and Related Party Transactions".
Under Rule 2720 of the NASD, the Company may be deemed an affiliate of
Goldman, Sachs & Co. The Offering is being conducted in accordance with Rule
2720, which provides that, among other things, when an NASD member
participates in the underwriting of an affiliate's equity securities, the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter" meeting certain standards. In accordance
with this requirement, SBC Warburg Dillon Read Inc. will serve in such role
and will recommend a price in compliance with the requirements of Rule 2720.
In connection with the Offering, SBC Warburg Dillon Read Inc. in its role as
qualified independent underwriter (the "Independent Underwriter") has
performed due diligence investigations and reviewed and participated in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. In addition, the Underwriters may not confirm sales
to any discretionary account without the prior specific written approval of
the customer.
Prior to the Offering, there has been no public market for the Ordinary
Shares. The initial public offering price will be negotiated among the
Company, the Selling Shareholders and the representatives of the Underwriters.
Among the factors to be considered in determining the initial public offering
price of the Ordinary Shares, in addition to prevailing market conditions, are
the Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
Application has been made to have the Ordinary Shares quoted on the Nasdaq
National Market under the symbol "SCBHF".
U-2
<PAGE>
In connection with the Offering, the Underwriters may purchase and sell
Ordinary Shares in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover syndicate short
positions created in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Ordinary Shares; and syndicate
short positions involve the sale by the Underwriters of a greater number of
Ordinary Shares than they are required to purchase from the Company and the
Selling Shareholders in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the Offering for their
account may be reclaimed by the syndicate if such Ordinary Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Ordinary Shares, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be affected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The Company has been advised by Goldman, Sachs & Co. that, subject to
applicable laws and regulations, Goldman, Sachs & Co. currently intend to make
a market in the Ordinary Shares following completion of the Offering. However,
they are not obligated to do so and any market-making may be discontinued at
any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act.
There can be no assurance that an active trading market will develop or be
sustained following the completion of the Offering. See "Risk Factors--No
Prior Market for Ordinary Shares; Possible Volatility of Ordinary Shares Price
and the Securities Markets".
The Underwriting Agreement contains certain provisions with respect to such
market-making activities. Because Goldman, Sachs & Co. may be deemed to be an
affiliate of the Company, Goldman, Sachs & Co. will be required to deliver a
current prospectus to any purchaser in connection with any such market-making
transactions. The Company has agreed to make from time to time certain
amendments or supplements to the Prospectus and to pay certain expenses
relating to such amendments or supplements.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters and the Independent Underwriter against certain
liabilities, including liabilities under the Securities Act.
U-3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICI-
TATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECU-
RITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities Under United States Laws.............. 3
Forward-Looking Statements................................................ 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 11
The Company............................................................... 16
Use of Proceeds........................................................... 17
Market for Ordinary Shares................................................ 17
Dividend Policy........................................................... 18
Dilution.................................................................. 18
Capitalization............................................................ 19
Selected Consolidated Financial and Operating Data........................ 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 30
Management................................................................ 44
Principal and Selling Shareholders........................................ 52
Certain Relationships and Related Party Transactions...................... 54
Description of Capital Shares............................................. 55
Shares Eligible for Future Sale........................................... 60
Certain Tax Considerations................................................ 61
Experts................................................................... 70
Legal Matters............................................................. 70
Additional Information.................................................... 71
Glossary of Selected Insurance Terms...................................... 72
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
</TABLE>
-----------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE ORDINARY SHARES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
STIRLING COOKE BROWN
HOLDINGS LIMITED
ORDINARY SHARES
(PAR VALUE $.25 PER SHARE)
-----------
PROSPECTUS
-----------
GOLDMAN, SACHS & CO.
OPPENHEIMER & CO., INC.
SBC WARBURG DILLON READ INC.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997
STIRLING COOKE BROWN HOLDINGS LIMITED
ORDINARY SHARES
(PAR VALUE $.25 PER SHARE)
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE ORDINARY SHARES.
Application has been made for the quotation of the Ordinary Shares on the
Nasdaq National Market under the symbol "SCBHF".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
This Prospectus has been prepared for and is to be used by Goldman, Sachs &
Co. in connection with offers and sales of the Ordinary Shares related to
market-making transactions, at prevailing market prices, related prices or
negotiated prices. The Company will not receive any of the proceeds of such
sales. Goldman, Sachs & Co. may act as a principal or agent in such
transactions. The closing of the offering referred to herein, which will
constitute the initial public offering of the Ordinary Shares of the Company,
is expected to occur on , 1997. See "Plan of Distribution".
GOLDMAN, SACHS & CO.
-----------
The date of this Prospectus is , 1997.
<PAGE>
[ALTERNATE PAGE]
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Ordinary Shares after giving effect to the
Offering, by: (i) each of the Company's directors and executive officers; (ii)
all directors and executive officers as a group; and (iii) each person known
by the Company to own beneficially more than 5% of the Ordinary Shares
outstanding. Except as otherwise noted, each of the holders listed below has
sole voting and investment power over the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME OWNED(1) PERCENT
---- ------------ -------
<S> <C> <C>
The Goldman Sachs Group, L.P.(2)....................
Nicholas Mark Cooke(3)..............................
Nicholas Brown(4)...................................
George William Jones(5).............................
Penelope Atteline Cooke(6)..........................
Sanjay Patel(7).....................................
Reuben Jeffery III(8)...............................
Warren Cabral.......................................
All executive officers and directors as a group (6
persons)...........................................
</TABLE>
- --------
* Less than 1%.
(1) In accordance with Securities and Exchange Commission rules, each
beneficial owner's holdings have been calculated assuming full exercise of
outstanding options exercisable by such owner within 60 days after the
date of this Prospectus, but no exercise of outstanding options held by
any other person. The table set forth above assumes that the over-
allotment option is not exercised by the Underwriters. For further
information about the calculation of beneficial ownership, see the
footnotes below.
(2) Represents shares owned by the GS Funds, which are affiliated with The
Goldman Sachs Group, L.P. (the "GS Group"). Includes shares
beneficially owned by GS Capital Partners II, L.P.; shares
beneficially owned by Bridge Street Fund 1995, L.P.; shares
beneficially owned by Stone Street Fund 1995, L.P.; shares
beneficially owned by GS Capital Partners II Offshore, L.P.; and
shares beneficially owned by GS Capital Partners II Germany Civil Law
Partnership. The GS Group disclaims beneficial ownership of the shares
owned by the GS Funds to the extent attributable to equity interests
therein held by persons other than the GS Group and its affiliates. Each
of the GS Funds shares voting and investment power with certain of its
respective affiliates. The address of the GS Group is 85 Broad Street, New
York, New York 10004.
(3) Mr. Cooke is the Chairman, President and Chief Executive Officer and a
Director of the Company and his address is c/o the Company at Victoria
Hall, Third Floor, 11 Victoria Street, Hamilton, HM-11, Bermuda. Mr. Cooke
is married to Penelope Atteline Cooke.
(4) Mr. Brown is Managing Director of Stirling Cooke Brown Reinsurance Brokers
Limited and certain other subsidiaries of the Company and is a Director of
the Company. Mr. Brown's address is c/o Stirling Cooke Brown Reinsurance
Brokers Limited, 65 Leadenhall Street, London, EC3A 2AD, England.
(5) Mr. Jones is Chief Financial Officer and a Director of the Company and his
address is c/o the Company at Victoria Hall, Third Floor, 11 Victoria
Street, Hamilton, HM-11, Bermuda.
(6) Ms. Cooke is Secretary of the Company and her address is c/o the Company
at Victoria Hall, Third Floor, 11 Victoria Street, Hamilton, HM-11,
Bermuda. Ms. Cooke is married to Nicholas Mark Cooke.
(7) Mr. Patel, who is a Managing Director of Goldman, Sachs & Co., disclaims
beneficial ownership of the Ordinary Shares owned by the GS Funds,
except to the extent of his pecuniary interest therein.
(8) Mr. Jeffery, who is a Managing Director of Goldman, Sachs & Co., disclaims
beneficial ownership of the Ordinary Shares owned by the GS Funds,
except to the extent of his pecuniary interest therein.
<PAGE>
[ALTERNATE PAGE]
PLAN OF DISTRIBUTION
This Prospectus may be used by Goldman, Sachs & Co. in connection with
offers and sales related to market-making transactions in the Ordinary Shares
effected from time to time. Goldman, Sachs & Co. may act as principal or agent
in such transactions, including as agent for the counterparty when acting as
principal or as agent for both counterparties, and may receive compensation in
the form of discounts and commissions, including from both counterparties when
it acts as agent for both. Such sales will be made at prevailing market prices
at the time of sale, at prices related thereto or at negotiated prices.
For a description of certain relationships and transactions between Goldman,
Sachs & Co. and their affiliates and the Company, see "Management", "Certain
Relationships and Related Party Transactions" and "Principal Shareholders".
The Company has been advised by Goldman, Sachs & Co. that, subject to
applicable laws and regulations, Goldman, Sachs & Co. currently intend to make
a market in the Ordinary Shares following completion of the Offering. However,
they are not obligated to do so and may discontinue market-making at any time
without notice. In addition, such market-making activity will be subject to
the limits imposed by the Securities Act and the Exchange Act. There can be no
assurance that an active trading market will be sustained. See "Risk Factors--
No Prior Market for Ordinary Shares; Possible Volatility of Ordinary Shares
Price and the Securities Markets".
Goldman, Sachs & Co. have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority
without the prior specific written approval of such transactions by the
customer.
The Company has agreed to indemnify Goldman, Sachs & Co. against certain
liabilities in connection with this Prospectus, including liabilities under
the Securities Act.
<PAGE>
[ALTERNATE PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities Under
United States Laws........................................................ 3
Prospectus Summary......................................................... 5
Risk Factors............................................................... 11
The Company................................................................ 16
Use of Proceeds............................................................ 17
Dividend Policy............................................................ 18
Dilution................................................................... 18
Capitalization............................................................. 19
Selected Consolidated Financial and Operating Data......................... 20
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................................................. 22
Business................................................................... 30
Management................................................................. 44
Principal and Selling Shareholders......................................... 52
Certain Relationships and Related Party Transactions....................... 54
Description of Capital Shares.............................................. 55
Shares Eligible for Future Sale............................................ 60
Certain Tax Considerations................................................. 61
Experts.................................................................... 70
Legal Matters.............................................................. 70
Additional Information..................................................... 71
Glossary of Selected Insurance Terms....................................... 72
Index to Financial Statements.............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STIRLING COOKE BROWN
HOLDINGS LIMITED
ORDINARY SHARES
(PAR VALUE $.25 PER SHARE)
-----------
PROSPECTUS
-----------
GOLDMAN, SACHS & CO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF INSURANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee.................... $15,152
Nasdaq National Market listing fee............................... 39,000
NASD fees........................................................ 5,500
Blue sky fees (including legal fees) and expenses................ *
Transfer agent fees and expenses................................. *
Printing and engraving........................................... *
Accountants' fees and expenses................................... *
Legal fees and expenses.......................................... *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
*To be filed by amendment.
The foregoing costs and expenses will be paid by the Company. Other than the
Securities and Exchange Commission filing fee, the Nasdaq National Market
listing fee, and the NASD fee, all fees and expenses are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bye-Laws provide that the Company shall indemnify, subject to
the proviso below, every director, officer of the Company and member of a
committee thereof out of the funds of the Company against all civil
liabilities, loss, damage or expense (including but not limited to liabilities
under contract, tort and statute or any applicable foreign law or regulation
and all reasonable legal and other costs and expenses properly payable)
incurred or suffered by him as such director, officer or committee member and
any person acting as a director, officer or committee member in the reasonable
belief that he has been so appointed or elected notwithstanding any defect in
such appointment or election provided always that the indemnity contained by
the Bye-Laws shall not extend to any matter which would render it void
pursuant to the Bermuda Companies Act 1981. Every director, officer and member
of a committee thereof will be indemnified out of funds of the Company against
all liabilities incurred by him as such director, officer or committee member
in defending any proceedings, whether civil or criminal, in which judgment is
given in his favor, or in which he is acquitted, or in connection with any
application under the Bermuda Companies Act 1981 in which relief from
liability is granted to him by the court. To the extent that any director,
officer or member of a committee duly constituted under the Bye-Laws is
entitled to claim an indemnity pursuant to the Bye-Laws in respect of amounts
paid or discharged by him, the relative indemnity shall take effect as an
obligation of the Company to reimburse the person making such payment or
effecting such discharge.
The Company intends to provide insurance coverage for its directors and
officers that may extend to, among other things, liability arising under the
Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 23, 1996 the Company was capitalized and assumed its holding
company structure through the issuance of a total of 6,000,000 Ordinary Shares
to the shareholders of Stirling Cooke Brown Holdings (UK) Ltd. and Realm
Investments Limited in exchange for all of such shareholders' shares of such
corporations. Such exchanges occurred outside the United States among non-U.S.
corporations and persons and were therefore not subject to the Securities Act.
II-1
<PAGE>
On January 23, 1996 the Company sold 2,000,000 Ordinary Shares and 25 Class
"A" non-voting shares to certain investment funds affiliated with the Goldman
Sachs Group, L.P. for an aggregate consideration of $14,747,147. Such sales
were exempt from registration under the Securities Act pursuant to Section
4(2) thereof.
On May 16, 1997 the Company sold 8,000 Ordinary Shares to David M. Tarsh, an
existing shareholder of the Company, for an aggregate consideration of $30,600
plus a contingent payment of $12,850 due if the Company completes an initial
public offering of its Ordinary Shares within two years of such date. Such
sale was exempt from registration under the Securities Act pursuant to Section
4(2) thereof.
On June 30, 1997 the Company sold 8,000 Ordinary Shares to Paul Murray, an
existing shareholder of the Company, for an aggregate consideration of $30,600
plus a contingent payment of $12,850 due if the Company completes an initial
public offering of its Ordinary Shares within two years of such date. Such
sale was exempt from registration pursuant to Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The exhibits filed herewith are as specified on the Exhibit
Index included herein.
(b) Financial Statement Schedules. The schedules filed herewith are as
specified on the Index to Schedules included herein.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HAMILTON, IN BERMUDA, ON THIS 16TH DAY OF SEPTEMBER, 1997.
Stirling Cooke Brown Holdings
Limited
/s/ George Jones
By ___________________________
George Jones
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW AS OF THIS 16TH DAY OF
SEPTEMBER, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Nicholas Mark Cooke* Chairman, President, Chief Executive Officer
___________________________________________ and Director (Principal Executive Officer)
Nicholas Mark Cooke
/s/ George Jones* Chief Financial Officer and Director
___________________________________________ (Principal Financial and Accounting Officer)
George Jones
/s/ Nicholas Brown* Director
___________________________________________
Nicholas Brown
/s/ Warren Cabral* Director
___________________________________________
Warren Cabral
/s/ Reuben Jeffery III* Director
___________________________________________
Reuben Jeffery III
/s/ Sanjay Patel* Director
___________________________________________
Sanjay Patel
</TABLE>
Authorized Representative in the
United States:
Stirling Cooke Brown North American
Reinsurance Intermediaries Inc.
/s/ Patrick Whalen*
By___________________________________
Patrick Whalen
Senior Vice President
/s/ George Jones
* By ___________________________
George Jones
Attorney-in-Fact
II-3
<PAGE>
INDEX TO SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<C> <S> <C>
I Investments excluding investments in related parties as of
December 31, 1996.............................................. S-1
II Condensed Financial Information of Registrant as of and for the
years ended December 31, 1996, 1995 and 1994................... S-2
III Supplementary Insurance Information as of and for the years
ended December 31, 1996, 1995 and 1994......................... S-5
IV Reinsurance for the years ended December 31, 1996, 1995 and
1994........................................................... S-6
</TABLE>
Schedules other than those listed above are omitted for the reason that they
are not applicable.
S-1
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
SCHEDULE OF INVESTMENTS EXCLUDING INVESTMENTS IN RELATED PARTIES
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
FAIR BALANCE SHEET
COST VALUE DECEMBER 31, 1996
------- ------- -----------------
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and government
agencies and authorities................ $ 6,963 $ 7,038 $ 7,038
States, municipalities and political
subdivisions............................ 1,063 1,061 1,061
Foreign governments...................... 1,090 1,090 1,090
All other corporate bonds................ 9,866 9,844 9,844
------- ------- -------
Total fixed maturities................. 18,982 19,033 19,033
Equity securities
Common stocks:
Banks, trust and insurance companies..... 241 276 276
Industrial, miscellaneous and all other.. 2,290 2,410 2,410
Nonredeemable preferred stocks............. 764 780 780
------- ------- -------
Total equity securities................ 3,295 3,466 3,466
Short-term investments....................... 120 120 120
------- ------- -------
Total investments...................... $22,397 $22,619 $22,619
======= ======= =======
</TABLE>
S-2
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS--SCHEDULE II
DECEMBER 31, 1995 AND 1996
(Expressed in thousands of United States Dollars, except share and per share
data)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ -- $ 20
Due from subsidiaries....................................... -- 5,638
Investments in subsidiaries................................. 12,403 30,911
------- -------
Total Assets.............................................. $12,403 $36,569
======= =======
LIABILITIES
Accounts payable and accrued liabilities ................... -- 16
Due to subsidiaries......................................... -- 193
------- -------
Total Liabilities......................................... 0 209
------- -------
ORDINARY SHARES SUBJECT TO REDEMPTION......................... 0 14,457
SHAREHOLDERS' EQUITY
Share capital
Authorized 8,048,000 Ordinary Shares of par value $0.25
each issued and fully paid 6,000,000 Ordinary Shares..... 1,500 1,500
Additional paid in capital.................................. 88 88
Equity in unrealized gain on marketable securities of
subsidiaries............................................... -- 147
Retained earnings........................................... 10,815 21,106
------- -------
12,403 22,841
Less: 202,784 ordinary shares in treasury, at cost ......... -- (938)
------- -------
Total shareholder's equity................................ 12,403 21,903
------- -------
TOTAL LIABILITIES, ORDINARY SHARES SUBJECT TO REDEMPTION, AND
SHAREHOLDERS' EQUITY......................................... $12,403 $36,569
======= =======
</TABLE>
S-3
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF INCOME--SCHEDULE II
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Expressed in thousands of United States Dollars, except share and per share
data)
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- ------
<S> <C> <C> <C>
Revenues
Net income................................................. -- -- 489
Other income............................................... -- -- 465
----- ----- ------
Total Revenues............................................... 0 0 954
EXPENSES
Other operating expenses -- -- 59
----- ----- ------
Total Expenses............................................... 0 0 59
NET INCOME BEFORE EQUITY IN INCOME OF SUBSIDIARIES........... 0 0 895
Equity in income of subsidiaries............................. 4,282 7,878 9,396
----- ----- ------
NET INCOME................................................... 4,282 7,878 10,291
===== ===== ======
</TABLE>
S-4
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS--SCHEDULE II
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Expressed in thousands of United States Dollars, except share and per share
data)
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... 4,282 7,878 10,291
ITEMS NOT EFFECTING CASH
Equity in income of subsidiaries.................... (4,282) (7,878) (9,396)
Changes in non cash operating assets and liabilities
Accounts payable.................................. 0 0 16
Balances payable from affiliates.................. 0 0 193
------ ------ -------
Net cash provided by operating activities....... 0 0 1,104
------ ------ -------
INVESTING ACTIVITIES
Investments in subsidiaries......................... 0 0 (8,965)
Loans to subsidiaries............................... 0 0 (5,638)
Dividends received from subsidiaries................ 769 2,135 0
------ ------ -------
Cash provided (used) by investing activities.... 769 2,135 (14,603)
------ ------ -------
FINANCING ACTIVITIES
Dividends........................................... (769) (2,135) 0
Net proceeds of subscription to share capital
subject to redemption.............................. 0 0 14,457
Purchase of ordinary shares in treasury............. 0 0 (938)
------ ------ -------
Cash (used) provided by financing activities.... (769) (2,135) 13,519
------ ------ -------
INCREASE IN CASH AND CASH EQUIVALENTS................. 0 0 20
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ 0 0 0
------ ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. 0 0 20
====== ====== =======
</TABLE>
All dividends received were from consolidated subsidiaries.
S-5
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
SUPPLEMENTARY INSURANCE INFORMATION--SCHEDULE III
<TABLE>
<CAPTION>
FUTURE
POLICY AMORTISA-
BENEFITS, OTHER BENEFITS, TION OF
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED
POLICY CLAIMS AND CLAIMS NET LOSSES AND POLICY OTHER
ACQUISITION LOSS UNEARNED AND PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING
COSTS EXPENSES PREMIUMS BENEFITS REVENUE INCOME EXPENSES COSTS EXPENSES
----------- ----------- ----------- -------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1996
Underwriting ... $ 171,284 $24,301,325 $12,514,833 $ 0 $8,753,863 $ 640,028 $6,764,681 $1,617,870 $ 760,347
Risk/Management. 0 0 0 0 0 2,765,040 0 0 25,127,187
---------- ----------- ----------- --- ---------- ---------- ---------- ---------- -----------
$ 171,284 $24,301,325 $12,514,833 $ 0 $8,753,863 $3,405,068 $6,764,681 $1,617,870 $25,887,534
========== =========== =========== === ========== ========== ========== ========== ===========
Year ended
December 31, 1995
Underwriting.... $1,581,735 $ 2,076,175 $ 4,090,249 $ 0 $3,153,580 $ 79,034 $1,385,302 $1,344,489 $ 70,790
Risk Management. 0 0 0 0 0 2,309,071 0 0 16,353,173
---------- ----------- ----------- --- ---------- ---------- ---------- ---------- -----------
$1,581,735 $ 2,076,175 $ 4,090,249 $ 0 $3,153,580 $2,388,105 $1,385,302 $1,344,489 $16,423,963
========== =========== =========== === ========== ========== ========== ========== ===========
Year ended
December 31, 1994
Underwriting.... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Risk Management. 0 0 0 0 0 770,547 0 0 9,718,572
---------- ----------- ----------- --- ---------- ---------- ---------- ---------- -----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 770,547 $ 0 $ 0 $ 9,718,572
========== =========== =========== === ========== ========== ========== ========== ===========
<CAPTION>
PREMIUMS
WRITTEN
----------
<S> <C>
Year ended
December 31, 1996
Underwriting ... $8,930,142
Risk/Management. 0
----------
$8,930,142
==========
Year ended
December 31, 1995
Underwriting.... $6,643,910
Risk Management. 0
----------
$6,643,910
==========
Year ended
December 31, 1994
Underwriting.... $ 0
Risk Management. 0
----------
$ 0
==========
</TABLE>
S-6
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
REINSURANCE--SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996................... $4,493,011 $6,784,076 $11,044,928 $8,753,863 126%
Year ended December 31,
1995................... 0 530,437 3,684,017 3,153,580 117
Year ended December 31,
1994................... 0 0 0 0 0
</TABLE>
S-7
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement among the Company, the Selling
Shareholders and the Underwriters
*3.1 Memorandum of Association of the Company
*3.2 Bye-Laws of the Company
4.1 Shareholders Agreement, dated as of January 24, 1996, among the
Management Shareholders (as defined therein), Bridge Street Fund 1995,
L.P., Goldman Sachs & Co. Verwaltungs GmbH (for GS Capital Partners II
German Civil Law Partnership), GS Capital Partners II, L.P., GS
Capital Partners Offshore, L.P., Stone Street Fund 1995, L.P. and the
Company
4.2 Registration Rights Agreement, dated January 24, 1996, between the
Company, the Management Shareholders (as defined therein) and the
Investors (as defined therein)
5 Form of Opinion of Appleby, Spurling & Kempe
8.1 Opinion of Foley & Lardner with respect to U.S. tax matters
8.2 Form of Opinion of Appleby, Spurling & Kempe with respect to Bermuda
tax matters
8.3 Form of Opinion of Richards Butler with respect to U.K. tax matters
8.4 Assurance Certificate from the Bermuda Ministry of Finance under
Exempted Undertakings Tax Protection Act 1996 (as amended)
*10.1 Stirling Cooke Brown Holdings Limited 1997 Equity Incentive Plan
*10.2 Employment Agreement dated January 1, 1996 between Realm Investments
Limited and Nicholas Mark Cooke
*10.3 Employment Agreement dated January 14, 1996 between Stirling Cooke
Reinsurance Brokers Limited and Nicholas Brown
*10.4 Employment Agreement dated January 19, 1996 between Stirling Cooke
Insurance Brokers Limited and George W. Jones
*10.5 Agency Agreement dated as of June 1, 1995 between Clarendon National
Insurance Company and Stirling Cooke Insurance Services Inc.
*10.6 Amendment Number One to Agency Agreement dated as of June 1, 1995
between Clarendon National Insurance Company and Stirling Cooke
Insurance Services Inc.
*10.7 Amendment Number Two to Agency Agreement dated as of June 1, 1995
between Clarendon National Insurance Company and Stirling Cooke
Insurance Services Inc.
*10.8 Addendum dated April 1, 1997 to Agency Agreement dated as of June 1,
1995 between Clarendon National Insurance Company and Stirling Cooke
Insurance Services Inc.
*10.9 Agency Agreement dated as of October 1, 1995 between Clarendon
National Insurance Company and Stirling Cooke Texas, Inc.
*10.10 Management Agreement dated as of August 1, 1995 between Legion
Insurance Company and Stirling Cooke Insurance Services Inc.
**11 Statement Re Computation of Per Share Earnings
21 Subsidiaries of the Company
**23.1 Consents of Appleby, Spurling & Kempe (included in their opinions
filed as Exhibits 5 and 8.2)
23.2 Consent of KPMG Peat Marwick
**23.3 Consent of Richards Butler (included in their opinion filed as Exhibit
8.3)
23.4 Consent of Foley & Lardner (included in their opinion filed as Exhibit
8.1)
*24 Powers of Attorney (included on the signature page to the Registration
Statement)
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 1
STIRLING COOKE BROWN HOLDINGS LIMITED
Ordinary Shares
(par value $0.25 per share)
---------------
Underwriting Agreement
----------------------
, 1997
Goldman, Sachs & Co.
Oppenheimer & Co., Inc.
SBC Warburg Dillon Read Inc.
As representatives (the "Representatives")
of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Stirling Cooke Brown Holdings Limited, a Bermuda company (the "Company"),
proposes, subject to the terms and conditions stated herein, to sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of [
] shares of the Ordinary Shares, par value $0.25 per share ("Ordinary Shares"),
of the Company and the shareholders of the Company named in Schedule II hereto
(the "Selling Shareholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of _______ Ordinary Shares and,
at the election of the Underwriters, up to ______ additional Ordinary Shares.
The aggregate of ____ Ordinary Shares to be sold by the Company and the Selling
Shareholders is herein called the "Firm Shares" and the aggregate of ____
additional Ordinary Shares to be sold by certain of the Selling Shareholders is
herein called the "Optional Shares". The Firm Shares and the Optional Shares
that the Underwriters elect to purchase pursuant to Section 2 hereof are
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters and the Selling Shareholders that:
(i) A registration statement on Form S-1 (File No. 333-32995), as
amended prior to the effectiveness thereof (the "Initial Registration
Statement"), in respect of the Shares, and as part thereof the respective
forms of prospectus relating to the initial distribution of the Shares by
the Underwriters in an underwritten public offering and to offers and sales
of Ordinary Shares by Goldman, Sachs & Co. in secondary transactions, has
been filed with the Securities and Exchange Commission (the "Commission");
the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto, to you for each of the other Underwriters, have been
declared effective by the Commission in such form; other than a
registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), which was filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), and became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and
no stop order suspending the
<PAGE>
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has
been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to
Rule 424(a) of the rules and regulations of the Commission under the Act,
is hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration Statement,
if any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission
pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A under the Act to be part of the
Initial Registration Statement at the time it was declared effective, each
as amended at the time such part of the Initial Registration Statement
became effective or such part of the Rule 462(b) Registration Statement, if
any, became or hereafter becomes effective, are hereinafter collectively
called the "Registration Statement"; and such forms of final prospectus
relating to the initial distribution of the Shares by the Underwriters in
an underwritten public offering and to offers and sales of Ordinary Shares
by Goldman, Sachs & Co. in secondary transactions, each in the form first
filed pursuant to Rule 424(b) under the Act, are hereinafter called the
"Public Offering Prospectus" and the "Secondary Transactions Prospectus",
respectively, and collectively the "Prospectus"); and the Underwriters
acknowledge and agree that the Secondary Transactions Prospectus and any
amendment or supplement thereto is not to be used by any Underwriter except
Goldman, Sachs & Co. and Goldman, Sachs & Co. acknowledges and agrees that
it will use the Public Offering Prospectus and any amendment or supplement
thereto only in connection with offers and sales of the kind intended
herein to be made pursuant to such Prospectus and will use the Secondary
Transactions Prospectus and any amendment or supplement thereto only in
connection with offers and sales of the kind intended herein to be made
pursuant to such Prospectus;
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by a Selling Shareholder
expressly for use in the preparation of the answers therein to Items 7 and
11(l) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through
2
<PAGE>
Goldman, Sachs & Co. expressly for use therein or by a Selling Shareholder
expressly for use in the preparation of the answers therein to Items 7 and
11(l) of Form S-1;
(iv) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree, in
each case affecting its own properties, assets and operations, otherwise
than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the capital
stock or in the long-term debt of the Company or any of its subsidiaries or
any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, shareholders' equity or results of operations of the
Company and its subsidiaries, taken as a whole, in each case otherwise than
as set forth or contemplated in the Prospectus;
(v) The Company and its subsidiaries do not own any real property. The
Company and its subsidiaries have good and marketable title to all personal
property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially interfere with the use made and proposed to be
made of such property by the Company and its subsidiaries; and any real
property and buildings held under lease by the Company and its subsidiaries
are held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries;
(vi) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of Bermuda, with power and
authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject
to no material liability or disability by reason of the failure to be so
qualified in any such jurisdiction;
(vii) Each subsidiary of the Company identified on Schedule IV hereto
(each a "Material Subsidiary" and collectively, the "Material
Subsidiaries") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
organization, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and has
been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each jurisdiction in
which it owns or leases properties or conducts any business so as to
require such qualification, or is subject to no material liability or
disability by reason of the failure to be so qualified in any such
jurisdiction; and all the outstanding shares of capital stock of each
Material Subsidiary of the Company have been duly authorized and validly
issued, are fully-paid and non-assessable, and, except as indicated on
Schedule V are owned by the Company, directly or indirectly, free and clear
of all liens, encumbrances, security interests and claims; and, the Company
has no "significant subsidiaries," as such term is defined in Regulation S-
X under the Act, which are not included in the list of Material
Subsidiaries on Schedule IV;
3
<PAGE>
(viii) The Company and each Material Subsidiary of the Company is duly
licensed or admitted as an insurer or an insurance holding company, as
applicable, in each jurisdiction where it is required to be so licensed or
admitted to conduct its business as described in the Prospectus, except for
where the failure to be so licensed or admitted would not have a material
adverse effect on the Company and its subsidiaries taken as a whole; the
Company and each Material Subsidiary of the Company has all other consents,
authorizations, approvals, orders, certificates and permits of and from,
and has made all declarations and filings with, all insurance authorities,
commissions or other insurance regulatory bodies and all other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals, required to own, lease, license and use their respective
properties and assets and to conduct their respective businesses as
described in the Prospectus, except for where the failure to have such
consents, authorizations, approvals, orders, certificates and permits, or
to make such declarations or filings, would not have a material adverse
effect on the Company and its subsidiaries taken as a whole; all of such
consents, authorizations, approvals, orders, licenses, certificates and
permits are in full force and effect, except for where the failure to be in
full force and effect would not have a material adverse effect on the
Company and its subsidiaries taken as a whole; and neither the Company nor
any Material Subsidiary of the Company has received any notification from
any insurance authority, commission or other insurance regulatory body or
any other governmental authority in the United States, Bermuda, the United
Kingdom or elsewhere to the effect that any additional consent,
authorization, approval, order, license, certificate or permit from such
authority, commission or body is required to be obtained by the Company or
any of its Material Subsidiaries;
(ix) The Company is in compliance with the requirements of the Bermuda
Insurance Act 1978 and any applicable rules and regulations thereunder
(collectively, the "Insurance Act") and has filed all reports, documents or
other information required to be filed thereunder, except where the failure
to comply or file would not have a material adverse effect on the Company
and its subsidiaries taken as a whole; each of the Company and its Material
Subsidiaries is in compliance with the insurance laws and regulations of
each jurisdiction which is applicable to the Company or its Material
Subsidiaries, as the case may be, except where the failure to comply would
not have a material adverse effect on the Company and its subsidiaries
taken as a whole; and neither the Company nor its Material Subsidiaries has
received any notification from any insurance authority, commission or other
insurance regulatory body in the United States, Bermuda, the United Kingdom
or elsewhere to the effect that the Company or any Material Subsidiary is
not in compliance with any insurance law or regulation;
(x) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description of the Ordinary Shares contained
in the Prospectus; the unissued Shares to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein, will
be duly and validly issued and fully paid and non-assessable and will
conform to the description of the Shares contained in the Prospectus.
(xi) The issue and sale of the Shares to be sold by the Company
hereunder and the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
4
<PAGE>
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its Material Subsidiaries is a
party or by which the Company or any of its Material Subsidiaries is bound
or to which any of the property or assets of the Company or any of its
Material Subsidiaries is subject, except where such conflict, breach,
violation or default would not have a material adverse effect on the
Company and its subsidiaries taken as a whole, nor will such action result
in any violation of the provisions of the Memorandum of Association and
Bye-Laws of the Company in effect as of the time immediately preceding the
First Time of Delivery (as defined in Section 4 hereof), or any statute or
any order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or the Subsidiary or any of their
properties; and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act and the Securities Exchange Act of 1934, as
amended (the "1934 Act"), of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state insurance, securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters;
(xii) The Company is not in violation of its Memorandum of Association
or Bye-Laws as in effect on the date hereof and each Material Subsidiary of
the Company is not in violation of its organizational documents or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed
of trust, loan agreement, lease or other agreement or instrument to which
it is a party or by which it or any of its properties may be bound;
(xiii) The statements set forth in the Prospectus under the caption
"Business--Regulation", under the caption "Description of Capital Shares",
under the caption "Certain Tax Considerations", and under the caption
"Underwriting", insofar as they purport to describe the provisions of the
laws and documents referred to therein, are fair and accurate summaries
thereof;
(xiv) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
Material Subsidiaries is a party or of which any property of the Company or
any of its Material Subsidiaries is the subject which, if determined
adversely to the Company or any of its Material Subsidiaries, would
individually or in the aggregate have a material adverse effect on the
current or future consolidated financial position, shareholders' equity or
results of operations of the Company and its subsidiaries, taken as a
whole; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others;
(xv) Each of the Company and its subsidiaries is not and, after giving
effect to the offering and sale of the Shares, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act"); each of the Company and its
subsidiaries is not an "investment adviser" within the meaning of the
Investment Advisers Act of 1940, as amended;
(xvi) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
5
<PAGE>
(xvii) KPMG Peat Marwick, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(xviii) The only rights to require the Company to register securities
are set forth in the Shareholders' Agreement, dated January 4, 1996, among
the Company and its shareholders, and the Registration Rights Agreement,
dated January 4, 1996, among the Company and its shareholders;
(xix) There are no currency exchange control laws or taxes, levies,
imposts or charges, in each case of Bermuda or the United Kingdom (or any
political subdivision or taxing authority thereof), that would be
applicable to the payment of dividends (i) on the Shares by the Company
(other than in respect of residents of Bermuda for Bermuda exchange control
purposes) or (ii) by any subsidiary to the Company;
(xx) Neither the Underwriters nor any subsequent purchasers of the
Shares will be subject to any stamp duty, excise or similar tax imposed in
Bermuda in connection with the offering, sale or purchase of the Shares;
(xxi) It was not necessary to register under the Act any sales of
securities of the Company made by the Company since December 12, 1995,
because all such sales were either not subject to the Act or exempt from
registration under the Act; and
(xxii) The Company is not aware of any threatened or pending
downgrading in the ratings by A.M. Best Company, Inc. of any of the
Company's insurance subsidiaries.
(b) Each of the Selling Shareholders severally represents and warrants
to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Shareholder of this Agreement and in
the case of each of the Selling Shareholders other than the GS Selling
Shareholders (as defined below), the Power of Attorney and the Custody
Agreement hereinafter referred to and, in the case of GS Capital Partners
II, L.P., Bridge Street Fund 1995, L.P., Stone Street Fund 1995, L.P., GS
Capital Partners II Offshore, L.P. and GS Capital Partners II Germany Civil
Law Partnership (collectively, the "GS Selling Shareholders") the Put
Agreement to be entered into among each of the GS Selling Shareholders and
the Representatives (the "Put Agreement"), and for the sale and delivery of
the Shares to be sold by such Selling Shareholder hereunder, have been
obtained; and such Selling Shareholder has full right, power and authority
to enter into this Agreement, in the case of each Selling Shareholder other
than the GS Selling Shareholders, the Power of Attorney and the Custody
Agreement and, in the case of the GS Selling Shareholders, the Put
Agreement, and to sell, assign, transfer and deliver the Shares to be sold
by such Selling Shareholder hereunder (subject, in the case of each Selling
Shareholder other than the GS Selling Shareholders, to the Custody
Agreement and the Power of Attorney);
(ii) The sale of the Shares to be sold by such Selling Shareholder
hereunder and the compliance by such Selling Shareholder with all of the
provisions of this Agreement, in the case of each Selling Shareholder other
than the GS Selling Shareholders, the Power of Attorney and the Custody
Agreement and, in the case of the GS Selling Shareholders, the Put
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
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agreement or instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder is bound or to which any of the property or
assets of such Selling Shareholder is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Shareholder if such Selling Shareholder is a
corporation, the partnership agreement of such Selling Shareholder if such
Selling Shareholder is a partnership or any comparable organizational
documents if the Selling Shareholder is another form of organization, or
any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over such Selling Shareholder or the
property of such Selling Shareholder;
(iii) Such Selling Shareholder has, and immediately prior to each Time
of Delivery (as defined in Section 4 hereof) that such Selling Shareholder
is required to sell Shares pursuant to this Agreement such Selling
Shareholder will have, good and valid title to the Shares to be sold by
such Selling Shareholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and
payment therefor pursuant hereto, good and valid title to such Shares, free
and clear of all liens, encumbrances, equities or claims will pass to the
several Underwriters;
(iv) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, such
Selling Shareholder shall not exercise any registration rights relating to
the Ordinary Shares and shall not offer, sell, contract to sell or
otherwise dispose of, except as provided hereunder, any Ordinary Shares or
any securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Ordinary Shares
or any such substantially similar securities (other than pursuant to
employee stock options outstanding on the date of this Agreement or, in
respect of Goldman, Sachs & Co. and its affiliates, pursuant to
stabilization, brokerage, market-making and ordinary course of business
transactions in the Ordinary Shares and related securities), without your
prior written consent;
(v) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares, provided that the foregoing shall not apply
to any action by Goldman, Sachs & Co. and its affiliates (other than the GS
Selling Shareholders);
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Shareholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading (it being hereby expressly acknowledged that delivery of the
Power of Attorney and the statements contained therein (together with the
information set forth in the Selling Shareholder's Questionnaire signed and
delivered to the Custodian (as defined below) by such Selling Shareholder)
constitute (and in the absence of any such notice as is referred to in
[subclause (iii) of Section 2(f)] of such Power of Attorney constitute on a
continuing basis)
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written information furnished to the Company expressly for use in the
Registration Statement and any such Preliminary Prospectus, Prospectus,
amendment or supplement thereto);
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Shareholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
(viii) In the case of each Selling Shareholder other than the GS
Selling Shareholders, certificates in negotiable form representing all of
the Shares to be sold by such Selling Shareholder hereunder have been or
will be at or prior to the Note Time of Delivery (as defined in Section 4
hereof) placed in custody under a Custody Agreement, in the form heretofore
furnished to you (the "Custody Agreement"), duly executed and delivered by
such Selling Shareholder to Firstar Trust Company, as custodian (the
"Custodian"), and such Selling Shareholder has duly executed and delivered
a Power of Attorney, in the form heretofore furnished to you (the "Power of
Attorney"), appointing the persons indicated in Schedule II hereto, and
each of them, as such Selling Shareholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Shareholder, to determine the purchase price to
be paid by the Underwriters to the Selling Shareholders as provided in
Section 2 hereof, to authorize the delivery of the Shares to be sold by
such Selling Shareholder hereunder and otherwise to act on behalf of such
Selling Shareholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement; and
(ix) In the case of each Selling Shareholder other than the GS Selling
Shareholders, the Shares represented by the certificates held in custody
for such Selling Shareholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder; the arrangements made by such
Selling Shareholder for such custody, and the appointment by such Selling
Shareholder of the Attorneys-in-Fact by the Power of Attorney, are to that
extent irrevocable; the obligations of the Selling Shareholders hereunder
shall not be terminated by operation of law, whether by the death or
incapacity of any individual Selling Shareholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a partnership or
corporation, by the dissolution of such partnership or corporation, or by
the occurrence of any other event; if any individual Selling Shareholder or
any such executor or trustee should die or become incapacitated, or if any
such estate or trust should be terminated, or if any such partnership or
corporation should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Shareholders in
accordance with the terms and conditions of this Agreement and, in the case
of each Selling Shareholder other than the GS Selling Shareholders, the
Custody Agreement; and actions taken by the Attorneys-in-Fact pursuant to
the Powers of Attorney shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of
whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall
have received notice of such death, incapacity, termination, dissolution or
other event.
2. Subject to the terms and conditions herein set forth, (a) the Company
and each of the Selling Shareholders agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and each of the
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<PAGE>
Selling Shareholders, at a purchase price per share of $[ ], the number of Firm
Shares (to be adjusted by you so as to eliminate fractional shares) determined
by multiplying the aggregate number of Firm Shares to be sold by the Company and
each of the Selling Shareholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company and all of the Selling Shareholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, certain of the Selling Shareholders
agree, severally and not jointly, to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from each of
such Selling Shareholders, at the purchase price per share set forth in clause
(a) of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder. For purposes of facilitating the sale of Shares by the GS
Selling Shareholders pursuant to clause (a) of this Section 2 and subject to the
terms and conditions herein set forth, each of you agrees, severally and not
jointly, to purchase from each of the GS Selling Shareholders, at the purchase
price per share set forth in clause (a) of this Section 2, the number of Firm
Shares of each of the GS Selling Shareholders as set forth opposite your
respective names in Schedule III hereto (the "Note Shares") at the Note Time of
Delivery (as defined in Section 5 hereof) against payment by each of you of the
purchase price therefor by delivery of a promissory note (each, a "Note" and
collectively, the "Notes") in the form previously agreed by the GS Selling
Shareholders and each of you. The number of shares each respective Underwriter
is severally obligated to purchase, as set forth in Schedule I hereto, shall not
be affected by the foregoing arrangements.
Certain of the Selling Shareholders, as and to the extent indicated in
Schedule II hereto, hereby grant, severally and not jointly, to the Underwriters
the right to purchase at their election up to _________ Optional Shares, at the
purchase price per share set forth in the paragraph above, for the sole purpose
of covering over-allotments in the sale of the Firm Shares. Any such election
to purchase Optional Shares shall be made in proportion to the number of
Optional Shares to be sold by each such Selling Shareholder. Any such election
to purchase Optional Shares may be exercised only by written notice from you to
the Attorneys-in-Fact, given within a period of 30 calendar days after the date
of this Agreement and setting forth the aggregate number of Optional Shares to
be purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you, the Company and the Attorneys-in-
Fact otherwise agree in writing, earlier than two or later than ten business
days after the date of such notice.
The initial per share public offering price of the Shares, as set forth in
the Public Offering Prospectus, will not be higher than the price recommended to
the Company in writing by SBC Warburg Dillon Read Inc. ("Dillon Read"), acting
as "qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD").
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
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<PAGE>
4. (a) The Shares to be purchased by each of you hereunder in exchange for
the Notes, in definitive form, and in such authorized denominations and
registered in such names as Goldman, Sachs & Co. has requested by notice to the
Company and the GS Selling Shareholders, shall be delivered by or on behalf of
the GS Selling Shareholders to Goldman, Sachs & Co. for your accounts against
delivery by you or on your behalf of the Notes. The Shares to be purchased by
each Underwriter hereunder (other than Shares purchased in exchange for Notes),
in definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Shareholders, shall be delivered by or on
behalf of the Company and the Selling Shareholders to Goldman, Sachs & Co.
through the facilities of the Depository Trust Company ("DTC"), for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer or certified or official bank check or
checks, payable to the order of the Company and the Custodian in immediately
available (same day) funds. The Company will cause the certificates evidencing
the Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto at
the office of Goldman, Sachs & Co., 85 Broad Street, New York, New York 10004 or
DTC or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be (i) with respect to the Firm Shares to be
purchased in exchange for Notes, immediately following the execution of this
Agreement and the satisfaction of the conditions set forth in Section 8 hereof,
(ii) with respect to the Firm Shares, 9:30 a.m., New York time, on
_______________, 1997 or such other time and date as Goldman, Sachs & Co., the
Company and the Selling Shareholders may agree upon in writing, and (iii) with
respect to the Optional Shares, 9:30 a.m., New York time, on the date specified
by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other time
and date as Goldman, Sachs & Co. and the Selling Shareholders may agree upon in
writing. Such time and date for delivery of the Firm Shares to be purchased in
exchange for the Notes is herein called the "Note Time of Delivery," such time
and date for delivery of all other Firm Shares is herein called the "First Time
of Delivery," such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery," and each
such time and date for delivery is herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 8 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 8(n) hereof, will be delivered at the offices of Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004
(the "Closing Location"), and the Shares will be delivered at the Designated
Office, all at such Time of Delivery. A meeting will be held at the Closing
Location at 1:00 p.m., New York City time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday or Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Public Offering Prospectus in a form approved by you
and to file the Public Offering Prospectus pursuant to Rule 424(b) under
the Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under
the Act; to make no further amendment or any supplement to the Registration
Statement or the Public Offering Prospectus during the Public Offering
Period (as
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<PAGE>
defined below) which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective during such period or any supplement to the Public
Offering Prospectus or any amended Public Offering Prospectus has been
filed during such period and to furnish you with copies thereof; to advise
you, promptly after it receives notice thereof during the Public Offering
Period, of the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Public Offering Prospectus or for additional information; and, in the event
of the issuance of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or prospectus or suspending any such
qualification during the Public Offering Period, promptly to use its best
efforts to obtain the withdrawal of such order (the period beginning on the
date hereof and continuing for as long as the delivery of a prospectus is
required in connection with the initial offering and sale of the Shares by
the Underwriters as contemplated by the Public Offering Prospectus, or in
connection with any subsequent offer or sale of Ordinary Shares by a dealer
other than Goldman, Sachs & Co. during the period specified in Rule 174(d)
or (e) under the Act, is herein called the "Public Offering Period");
(b) Promptly during the Public Offering Period from time to time to take
such action as you may reasonably request to qualify the Shares for
offering and sale under the securities and insurance laws of such
jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such jurisdictions
during such period, provided that in connection therewith the Company shall
not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(c) Prior to 12:00 p.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Public Offering Prospectus in
New York City in such quantities as you may reasonably request during the
Public Offering Period and, if the delivery of a prospectus is required at
any time prior to the expiration of nine months after the time of issue of
the Public Offering Prospectus in connection with any offering or sale of
the Shares by the Underwriters, and if at such time any events shall have
occurred as a result of which the Public Offering Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made when such Public Offering Prospectus is delivered, not misleading, or,
if for any other reason it shall be necessary during such period to amend
or supplement the Public Offering Prospectus in order to comply with the
Act, to notify you and upon your request to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies
as you may reasonably request of an amended Public Offering Prospectus or a
supplement to the Public Offering Prospectus which will correct such
statement or omission or effect such compliance and in case any Underwriter
is required to deliver a prospectus in connection with any offering or sale
of any of the Shares by the Underwriters at any time nine months or more
after the time of issue of the Public Offering Prospectus, upon your
request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or
supplemented Public Offering Prospectus complying with Section 10(a)(3) of
the Act;
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(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder, any Ordinary Shares or any securities of the Company that are
substantially similar to the Shares, including, but not limited to, any
securities that are convertible into or exchangeable for, or that represent
the right to receive, Ordinary Shares or any such substantially similar
securities other than the issuance of options pursuant to employee benefit
plans existing on the date of this Agreement, and the issuance of Ordinary
Shares upon the exercise of employee options outstanding on the date of
this Agreement), without your prior written consent;
(f) To make available to its shareholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, shareholders' equity and cash flows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement to furnish to you copies of all reports or other
communications (financial or other) furnished to shareholders generally,
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the Commission
or any national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its shareholders generally or to the
Commission);
(h) To use its best efforts to have the Shares approved for quotation on
the Nasdaq Stock Market Inc.'s National Market ("Nasdaq");
(i) To use the net proceeds received by it from the sale of Shares by it
pursuant to this Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds";
(j) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of the filing either pay to
the Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act; and
(k) The Company will prepare and release quarterly financial results, in
the form of a press release, and file annual reports with the Commission,
on or prior to the times required for filings of Forms 10-Q. and 10-K,
respectively, by domestic United States securities issuers
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<PAGE>
which have securities registered under Section 12(b) or 12(g) of the
Exchange Act (a "U.S. Public Company").
6. The Company agrees with Goldman, Sachs & Co.:
(a) To prepare the Secondary Transactions Prospectus in a form approved
by Goldman, Sachs & Co. and to file such Prospectus pursuant to Rule 424(b)
under the Act not later than the Commission's close of business on the
second business day following the execution and delivery of this Agreement,
or, if applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or the Secondary Transactions Prospectus during the
Secondary Transactions Period (as defined below) which shall be disapproved
by Goldman, Sachs & Co. promptly after reasonable notice thereof (it being
understood that, when Form S-2 or S-3 under the Act is available to the
Company, the Company may amend the Registration Statement so as to be on
such form, or may file a new registration statement on such form (in which
case any reference herein to the Registration Statement or the Prospectus
shall include such new registration and the prospectus contained therein in
the form first filed pursuant to Rule 424(b) under the Act, respectively),
and thereafter any information required to be included in the Registration
Statement or the Secondary Transactions Prospectus may be incorporated
therein by reference as permitted by such form); to advise Goldman, Sachs &
Co., promptly after the Company receives notice thereof, of the time when
the Registration Statement, or any amendment thereto, has been filed or
becomes effective during the Secondary Transactions Period, or any
supplement to the Secondary Transactions Prospectus or any amended
Secondary Transactions Prospectus has been filed during such period, and to
furnish Goldman, Sachs & Co. with copies thereof; to advise Goldman, Sachs
& Co., promptly after the Company receives notice thereof during the
Secondary Transactions Period, of the issuance by the Commission of any
stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification during the Secondary Transactions Period,
to use promptly its reasonable efforts to obtain the withdrawal of such
order (the period beginning on the date hereof and continuing for as long
as may be required under applicable law, in the reasonable judgment of
Goldman, Sachs & Co. after consultation with the Company, in order to offer
and sell Ordinary Shares as contemplated by the Secondary Transactions
Prospectus, is herein called the "Secondary Transactions Period");
(b) Promptly from time to time to take such action as Goldman, Sachs &
Co. may reasonably request to qualify the Shares for offering and sale
during the Secondary Transactions Period under the securities and insurance
laws of such jurisdictions as Goldman, Sachs & Co. may request and to
comply with such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions during such period, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in
any jurisdiction;
(c) To furnish Goldman, Sachs & Co. with copies of the Secondary
Transactions Prospectus in such quantities as Goldman, Sachs & Co. may from
time to time reasonably request during the Secondary Transactions Period,
and, if at any time during such period any
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event shall have occurred as a result of which the Secondary Transactions
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made when such Prospectus is to be delivered during
such period, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Secondary
Transactions Prospectus or to amend the Registration Statement in order to
comply with the Act or to file under the 1934 Act any document incorporated
by reference in such Prospectus in order to comply with the Act or the 1934
Act, to notify Goldman, Sachs & Co. immediately and upon its request to
file such document and to prepare and furnish without charge to Goldman,
Sachs & Co. as many copies as it may from time to time during such period
reasonably request of an amended Secondary Transactions Prospectus or a
supplement to the Secondary Transactions Prospectus which will correct such
statement or omission or effect such compliance;
(d) During the Secondary Transactions Period, to furnish to Goldman,
Sachs & Co. copies of all reports or other communications (financial or
other) furnished to shareholders generally, and to deliver to Goldman,
Sachs & Co. (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as Goldman, Sachs & Co. may
from time to time reasonably request (such financial statements to be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its shareholders
generally or to the Commission); and
(e) To use its reasonable efforts to furnish or cause to be furnished to
Goldman, Sachs & Co. upon its request at reasonable intervals, when the
Registration Statement or the Secondary Transactions Prospectus shall be
amended or supplemented during the Secondary Transactions Period, written
opinions of counsel for the Company, a letter from the independent
accountants who have certified the financial statements included in the
Registration Statement as then amended and certificates of officers of the
Company, in each case in form and substance reasonably satisfactory to
Goldman, Sachs & Co., all to the effect specified in subsections (c), (d),
(e), (g) and (m), respectively, of Section 8 hereof (as modified to relate
to the Registration Statement and the Secondary Transactions Prospectus as
then amended or supplemented).
Notwithstanding the foregoing provisions, if at any time the Company
determines in the exercise of its reasonable judgment that it is in possession
of material, non-public information that it would not be required to disclose
publicly in the absence of a registration of Ordinary Shares under the Act, the
Company may, upon notice to Goldman, Sachs & Co., cease to comply with any of
its obligations under this Section 6, but only for a period or periods that the
Company reasonably determines are necessary in order to avoid such premature
disclosure and in any event not to exceed 90 days in the aggregate during any
period of 12 consecutive calendar months. Upon receipt of any such notice,
Goldman, Sachs & Co. shall cease using the Secondary Transactions Prospectus or
any amendment or supplement thereto until it receives notice from the Company
that it may resume using such document.
7. The Company and each of the Selling Shareholders covenant and agree
with one another and with the several Underwriters that (a) the Company will pay
or cause to be paid the following: (i) the fees, disbursements and expenses of
the Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the
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Prospectus and amendments and supplements thereto and the mailing and delivering
of copies thereof to the Underwriters and dealers; (ii) the cost of printing or
producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum and closing documents (including any compilations thereof) for the
sale of the Shares by the Underwriters pursuant to the Public Offering
Prospectus and any other documents in connection with the offering, purchase,
sale and delivery of the Shares; (iii) all expenses in connection with the
qualification of the Shares for offering and sale under state securities laws as
provided in Section 5(b) hereof, including the fees and disbursements of counsel
for the Underwriters in connection with such qualification and in connection
with the Blue Sky survey; (iv) all fees and expenses in connection with the
registration of the Shares under the 1934 Act and the listing of the Shares on
Nasdaq; (v) the filing fees incident to, and the fees and disbursements of
counsel for the Underwriters in connection with, securing any required review by
the National Association of Securities Dealers, Inc. of the terms of the sale of
the Shares by the Underwriters pursuant to the Public Offering Prospectus; (vi)
the cost of preparing certificates for the Shares; (vii) the cost and charges of
any transfer agent or registrar; (viii) the fees and expenses of the Attorneys-
in-Fact and the Custodian; (ix) all fees, disbursements and expenses of one
counsel for the Selling Shareholders selected by the Company (which may be
counsel for the Company); (x) all reasonable fees, disbursements and expenses
incurred pursuant to Sections 6(b) and (e) hereof; and (xi) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section 7; and (b) each Selling
Shareholder will pay or cause to be paid all costs and expenses incident to the
performance of such Selling Shareholder's obligations hereunder which are not
otherwise specifically provided for in this Section, including (i) any fees and
expenses of counsel for such Selling Shareholder (other than those specified in
clause (ix) above), and (ii) all expenses (other than the costs of preparing and
delivering stock certificates) and taxes incident to the sale and delivery of
the Shares to be sold by such Selling Shareholder to the Underwriters hereunder.
In connection with clause (b) of the preceding sentence, Goldman, Sachs & Co.
agrees to pay New York State stock transfer tax, and each Selling Shareholder
agrees to reimburse Goldman, Sachs & Co. for associated carrying costs if such
tax payment is not rebated on the day of payment and for any portion of such tax
payment not rebated. It is understood, however, that the Company shall bear, and
the Selling Shareholders shall not be required to pay or to reimburse the
Company for, the cost of any other matters not directly relating to the sale and
purchase of the Shares pursuant to this Agreement, and that, except as provided
in this Section, and Sections 9 and 12 hereof, the Underwriters will pay all of
their own costs and expenses, including the fees of their counsel, stock
transfer taxes on resale of any of the Shares by them, and any advertising
expenses connected with any offers they may make.
8. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Shareholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Shareholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 6(a)
hereof, except in the case of the Note Time of Delivery; and if the Company
has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have become effective by 10:00 p.m., Washington, D.C. time,
on the date of this Agreement; no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued
and no proceeding for that purpose shall have been initiated or threatened
by the Commission; and all requests for additional
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information on the part of the Commission shall have been complied with to
your reasonable satisfaction;
(b) Fried, Frank, Harris, Shriver & Jacobson, United States counsel for
the Underwriters, shall have furnished to you such opinion or opinions,
dated such Time of Delivery, with respect to certain of the matters covered
in paragraphs [ ] of Annex I hereto as well as such other related
matters as you may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable them
to pass upon such matters;
(c) Foley & Lardner, United States counsel for the Company, shall have
furnished to you their written opinion and letter, dated such Time of
Delivery, substantially in the form of Annex I attached hereto;
(d) Appleby, Spurling & Kempe, Bermuda counsel for the Company, shall
have furnished to you their written opinion, dated such Time of Delivery,
substantially in the form of Annex II attached hereto;
(e) Richards Butler, United Kingdom counsel for the Company, shall have
furnished to you their written opinion, dated such Time of Delivery,
substantially in the form of Annex III attached hereto;
(f) Counsel for each Selling Shareholder shall have furnished to you
their written opinion with respect to each of such Selling Shareholders,
dated the Note Time of Delivery with respect to the GS Selling Shareholders
and dated such Time of Delivery with respect to each other Selling
Shareholder, substantially in the form of Annex IV attached hereto;
(g) On the date of the Public Offering Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and during the
Public Offering Period and also at each Time of Delivery, KPMG Peat Marwick
shall have furnished to you a letter or letters, dated the respective dates
of delivery thereof, in form and substance satisfactory to you, to the
effect set forth in Annex V hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached hereto as
Annex V(a) and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex V(b)
hereto);
(h)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, in each case affecting its own properties, assets or operations,
otherwise than as set forth or contemplated in the Prospectus, and (ii)
since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or in
the long-term debt of the Company or any of its subsidiaries or any change,
or any development involving a prospective change, in or affecting the
general affairs, management, financial position, shareholders' equity or
results of operations of the Company and its subsidiaries taken as a whole,
otherwise than as set forth or contemplated in the Prospectus, the effect
of which, in any such case described in clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to
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<PAGE>
proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner
contemplated in the Public Offering Prospectus;
(i) On or after the date hereof, (i) no downgrading shall have occurred
in the rating accorded the Company's (or the Company's insurance
subsidiaries) financial strength or claims paying ability by any
"nationally recognized statistical rating organization", as that term is
defined by the Commission for purposes of Rule 436(g)(2) under the Act and
(ii) no such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its rating of
the Company's (or the Company's insurance subsidiaries) financial strength
or claims paying ability;
(j) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or Nasdaq; (ii) a suspension or
material limitation in trading in the Company's securities on Nasdaq; (iii)
a general moratorium on commercial banking activities in New York declared
by Federal or New York State authorities or in Bermuda declared by Bermuda
authorities; or (iv) the outbreak or escalation of hostilities involving
the United States or the declaration by the United States of a national
emergency or war, if the effect of any such event specified in this clause
(iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Public Offering Prospectus;
(k) The Shares to be sold by the Selling Shareholders at such Time of
Delivery shall have been duly approved for quotation on Nasdaq;
(l) The Company shall have used its best efforts to comply with the
provisions of Section 5(c) hereof with respect to the furnishing of
prospectuses on the New York Business Day next succeeding the date of this
Agreement;
(m) The Company and the Selling Shareholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of
officers of the Company and of the Selling Shareholders, respectively,
satisfactory to you as to the accuracy of the representations and
warranties of the Company and the Selling Shareholders, respectively,
herein at and as of such Time of Delivery, as to the performance by the
Company and the Selling Shareholders of all of their respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to
such other matters as you may reasonably request, and the Company shall
have furnished or caused to be furnished certificates as to the matters set
forth in subsections (a) and (h) of this Section;
(n) The Put Agreement shall have been validly executed and delivered by
the GS Selling Shareholders at or prior to the Note Time of Delivery;
(o) Each of the Selling Shareholders shall have delivered to the
Underwriters certificates required by Treasury Regulation section 1.1445-
2(b)(2) in order to avoid withholding of tax under Section 1445 of the
Internal Revenue Code of 1986, as amended; and
(p) The Shares shall have been registered pursuant to the Exchange Act
and the rules and regulations thereof, except in the case of the Note Time
of Delivery.
For purposes of this Section 8 references to the Prospectus shall mean
the most current Preliminary Prospectus if the Prospectus has not been
filed pursuant to Rule 424(b) under the Act at the Note Time of Delivery.
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9. (a) The Company, GS Capital Partners II, L.P. and the Selling
Shareholders listed on Schedule V hereto (collectively, the "Designated
Shareholders"), jointly and severally, will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company and the Designated
Shareholders shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; provided, further, that the liability of each
Designated Shareholder pursuant to this subsection (a) shall not exceed the
product of the number of Shares sold by such Designated Shareholder (including
any Optional Shares) and the initial public offering price as set forth in the
Public Offering Prospectus; and provided, further, that the Designated
Shareholders shall not be liable to any Underwriter (including Goldman, Sachs &
Co.) under the indemnity agreement in this subsection (a) with respect to any
Secondary Transactions Prospectus (or the Registration Statement insofar as it
relates to the Secondary Transactions Prospectus).
The Company will also indemnify and hold harmless Dillon Read and each
person, if any, who controls Dillon Read within the meaning of either Section 15
of the Act, or Section 20 of the 1934 Act, from and against any and all losses,
claims, damages, liabilities and judgments incurred as a result of Dillon Read's
participation as a "qualified independent underwriter" within the meaning of
Rule 2720 of the Rules of Conduct of the NASD in connection with the offering of
the Shares, except for any losses, claims, damages, liabilities and judgments
resulting from Dillon Read's or such controlling person's willful misconduct or
gross negligence.
(b) Each of the Selling Shareholders other than the Designated Shareholders
will indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement delivered in connection with an offer or sale during the Public
Offering Period in reliance upon and in conformity with written information
furnished to the Company by such Selling Shareholder expressly for use therein;
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however that the
liability of each of the Selling Shareholders pursuant to this subsection (b)
shall not
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exceed the product of the number of Shares sold by such Selling Shareholder
(including any Optional Shares) and the initial public offering price as set
forth in the Public Offering Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and each
Selling Shareholder against any losses, claims, damages or liabilities to which
the Company or such Selling Shareholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through Goldman, Sachs & Co. expressly for use therein; and will
reimburse the Company and each Selling Shareholder for any legal or other
expenses reasonably incurred by the Company or such Selling Shareholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against an indemnifying
party under such subsection, notify such indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation, and the indemnifying parties shall not be responsible
for the cost of more than one counsel for all indemnified parties (excluding any
necessary local counsel) in connection with any actions or claims arising from
the same facts; provided, that, if indemnity is sought pursuant to the second
paragraph of Section 9(a), then, in addition to such separate counsel for the
indemnified parties, the indemnifying party shall be liable for the reasonable
fees and expenses of not more than one separate counsel (in addition to any
necessary local counsel) for Dillon Read in its capacity as a "qualified
independent underwriter" and all persons, if any, who control Dillon Read within
the meaning of either Section 15 of the Act or Section 20 of the 1934 Act if, in
the reasonable judgment of Dillon Read, there may exist a conflict of interest
between Dillon Read in its capacity as a "qualified independent underwriter" and
the other indemnified parties. In the case of any such separate counsel for
Dillon Read in its capacity as "qualified independent underwriter" and such
control persons of Dillon Read, such counsel shall be designated in writing by
Dillon Read. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party
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from all liability arising out of such action or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act, by
or on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 9 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then in any such case each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Public Offering
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party on the one hand or the indemnified party on
the other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, the
Selling Shareholders and the Underwriters agree that Dillon Read will not
receive any additional benefits hereunder for serving as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Rules of Conduct
of the NASD in connection with the offering of the Shares. The Company, each of
the Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (e) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Shareholders under this
Section 9 shall be in addition to any liability which the Company and the
respective Selling Shareholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who
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controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 9 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and to
each person, if any, who controls the Company or any Selling Shareholder within
the meaning of the Act.
10. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company and the Selling Shareholders shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Shareholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Shareholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Shareholders shall have the right to postpone a Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Shareholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Shareholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company and the Selling Shareholders to sell
the Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company or the Selling Shareholders,
except for the expenses to be borne by the Company and the Selling Shareholders
and the Underwriters as provided in Section 7 hereof and the indemnity and
contribution agreements in Section 9 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
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11. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Shareholders, or any officer
or director or controlling person of the Company, or any controlling person of
any Selling Shareholder, and shall survive delivery of and payment for the
Shares.
Anything herein to the contrary notwithstanding, the indemnity agreement of
the Company in subsection (a) of Section 9 hereof, the agreement in subsection
(c) of Section 5 hereof, the representations and warranties in subsections
(a)(ii) and (a)(iii) of Section 1 hereof and any representation or warranty as
to the accuracy of the Registration Statement or the Prospectus contained in any
certificate furnished by the Company pursuant to Section 8 hereof, insofar as
they may constitute a basis for indemnification for liabilities (other than
payment by the Company of expenses incurred or paid in the successful defense of
any action, suit or proceeding) arising under the Act, shall not extend to the
extent of any interest therein of a controlling person or partner of an
Underwriter who is a director, officer or controlling person of the Company when
the Registration Statement has become effective, except in each case to the
extent that an interest of such character shall have been determined by a court
of appropriate jurisdiction as not against public policy as expressed in the
Act. Unless in the opinion of counsel for the Company the matter has been
settled by controlling precedent, the Company will, if a claim for such
indemnification is asserted, submit to a court of appropriate jurisdiction the
question of whether such interest is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
12. If this Agreement shall be terminated pursuant to Section 10 hereof,
neither the Company nor the Selling Shareholders shall then be under any
liability to any Underwriter except as provided in Sections 7, 9, 18 and 19
hereof; but, if for any other reason any Shares are not delivered by or on
behalf of the Company and the Selling Shareholders as provided herein, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company and
the Selling Shareholders shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Sections 7 and 9 hereof.
13. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Shareholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Shareholder made or given by any
or all of the Attorneys-in-Fact for such Selling Shareholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; if to any Selling Shareholder shall be delivered or sent by mail,
telex or facsimile transmission to such Selling Shareholder at its address set
forth in Schedule II hereto; and if to the Company shall be delivered or sent by
mail, telex or facsimile transmission to the address of the Company set forth in
the Registration Statement, Attention: Secretary; provided, however, that any
notice to an Underwriter pursuant to Section 9(d) hereof shall be delivered or
sent
22
<PAGE>
by mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company or the Selling
Shareholders by you on request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
14. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Shareholders and, to the
extent provided in Sections 9 and 11 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Shareholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
15. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
18. The Company irrevocably submits to the non-exclusive jurisdiction of
any New York State or Federal court sitting in the Borough of Manhattan, in The
City of New York over any suit, action or proceeding arising out of or relating
to this Agreement or the transactions contemplated hereby. To the fullest
extent it may effectively do so under applicable law, the Company irrevocably
waives and agrees not to assert, by way of motion, as a defense or otherwise,
any claim that it is not subject to the jurisdiction of any such court, any
objection that it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding brought in any such court and any claim that any
such suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. The Company agrees, to the fullest extent it may
effectively do so under applicable law, that a judgment in any suit, action or
proceeding of the nature referred to in this Section 18 brought in any such
court shall be conclusive and binding upon the Company subject to rights of
appeal, as the case may be, and may be enforced in the courts of the United
States of America or the State of New York (or any other court the jurisdiction
of which the Company is or may be subject) by a suit upon such judgment. The
Company irrevocably designates and appoints CT Corporation System, New York, New
York as its authorized agent upon whom process may be served in any suit, action
or proceeding of the nature referred to in this Section 18 by mailing a copy
thereof by registered or certified mail, postage prepaid, return receipt
requested, to the agent at its address set forth in the Registration Statement.
The Company agrees that such service (i) shall be deemed in every respect
effective service of process upon it in any such suit, action or proceeding and
(ii) shall, to the fullest extent permitted by law, be taken and held to be
valid personal service upon and personal delivery to the Company. Notices
hereunder shall be conclusively presumed received if evidenced by a delivery
receipt furnished by the United States Postal Service or any commercial delivery
service. Nothing in this Section 18 shall affect the right of any Underwriter
to serve process in any manner permitted by law, or limit any right to bring
proceedings against the Company or any Selling Shareholder in the courts of any
jurisdiction or to enforce in any lawful manner a judgment obtained in one
jurisdiction in any other jurisdiction.
19. In respect of any judgment or order given or made for any amount due
hereunder by the Company or the Selling Shareholders that is expressed and paid
in currency (the "judgment
23
<PAGE>
currency") other than United States dollars, the Company or the Selling
Shareholders, as the case may be, will indemnify each Underwriter against any
loss incurred by such Underwriter as a result of any variation as between (i)
the rate of exchange at which the United States dollar amount is converted into
the judgment currency for the purpose of such judgment or order and (ii) the
rate of exchange at which an Underwriter is able to purchase United States
dollars with the amount of the judgment currency actually received by such
Underwriter. The foregoing indemnity shall constitute a separate and independent
obligation of the Company and the Selling Shareholders and shall continue in
full force and effect notwithstanding any such judgment or order as aforesaid.
The term "rate of exchange" shall include any reasonable premiums and costs of
exchange payable in connection with the purchase of or conversion into United
States dollars.
* * * *
If the foregoing is in accordance with your understanding, please sign and
return to us 8 counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters, the Company and
each of the Selling Shareholders. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Shareholders for examination, upon
request, but without warranty on your part as to the authority of the signers
thereof.
24
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Shareholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing and
binding Power of Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
STIRLING COOKE BROWN HOLDINGS LIMITED
BY: _____________________________
NAME:
TITLE:
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE II TO THIS AGREEMENT OTHER THAN THE
GS SELLING SHAREHOLDERS
BY: _____________________________
NAME:
TITLE: ATTORNEY-IN-FACT
AS ATTORNEY-IN-FACT ACTING ON BEHALF OF
EACH OF THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE II TO THIS AGREEMENT OTHER THAN
THE GS SELLING SHAREHOLDERS.
GS CAPITAL PARTNERS II, L.P.
BY: _____________________________
NAME:
TITLE:
BRIDGE STREET FUND 1995, L.P.
BY: _____________________________
NAME:
TITLE:
STONE STREET FUND 1995, L.P.
BY: _____________________________
NAME:
TITLE:
25
<PAGE>
GS CAPITAL PARTNERS II OFFSHORE, L.P.
BY: _____________________________
NAME:
TITLE:
GS CAPITAL PARTNERS II GERMANY CIVIL
LAW PARTNERSHIP
BY: _____________________________
NAME:
TITLE:
ACCEPTED AS OF THE DATE HEREOF:
GOLDMAN, SACHS & CO.
OPPENHEIMER & CO., INC.
SBC WARBURG DILLON READ INC.
BY:
---------------------------------------
(GOLDMAN, SACHS & CO.)
On behalf of each of the Underwriters
26
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
- ---------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Goldman, Sachs & Co.......................................
Oppenheimer & Co., Inc....................................
SBC Warburg Dillon Read Inc...............................
________ ________
Total ________ ________
</TABLE>
27
<PAGE>
SCHEDULE II
NAME No. of Shares to Be Sold
- ---------------------------------------- ------------------------
GS Capital Partners II, L.P.
Bridge Street Fund 1995, L.P.
Stone Street Fund 1995, L.P.
GS Capital Partners II Offshore, L.P.
GS Capital Partners II Germany Civil
Law Partnership
Nicholas Brown
Penelope Atteline Cooke
Nicholas Mark Cooke
George W. Jones
Jacques Georges Sacy
Mark Kerr-Smiley
David Terrell Colley
Richard John Wells
Jeffrey Ronald Butler
Paul Ian Pearson
Orion Nominees Limited a/c 703
Christopher James Blois Needham
David Maxwell Tarsh
Dominic Hagger
Duncan Vere Hopegood
Allan Cooper
Paul Murrary
____________________
(1) Address:
(2) Counsel:
<PAGE>
SCHEDULE III
<TABLE>
<CAPTION>
FIRM SHARES
-----------------------
<S> <C> <C>
Goldman, Sachs & Co............
GS Capital Partners II, L.P.
Bridge Street Fund 1995, L.P.
Stone Street Fund 1995, L.P.
GS Capital Partners II Offshore, L.P.
GS Capital Partners II Germany Civil
Law Partnership
Oppenheimer & Co., Inc.
GS Capital Partners, L.P.
Bridge Street Fund 1995, L.P.
Stone Street Fund 1995, L.P.
GS Capital Partners II Offshore, L.P.
GS Capital Partners II Germany Civil
Law Partnership
SBC Warburg Dillon Read Inc.
GS Capital Partners, L.P.
Bridge Street Fund 1995, L.P.
Stone Street Fund 1995, L.P.
GS Capital Partners II Offshore, L.P.
GS Capital Partners II Germany Civil
Law Partnership
Total.......................
=========================
</TABLE>
2
<PAGE>
SCHEDULE IV
MATERIAL SUBSIDIARIES
3
<PAGE>
SCHEDULE V
DESIGNATED SHAREHOLDERS
4
<PAGE>
EXHIBIT 4.1
24 January 1996
MARK COOKE and others
BRIDGE STREET FUND 1995, LP.
GOLDMAN SACHS & CO. VERWALTUNGS GmbH
(for GS CAPITAL PARTNERS II GERMANY
CIVIL LAW PARTNERSHIP)
GS CAPITAL PARTNERS II, L.P.
GS CAPITAL PARTNERS II OFFSHORE, L.P.
STONE STREET FUND 1995, LP.
STIRLING COOKE BROWN HOLDINGS LIMITED
-----------------------------
SHAREHOLDERS AGREEMENT
relating to
STIRLING COOKE BROWN
HOLDINGS LIMITED
-----------------------------
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Clause Page
<S> <C>
1. INTERPRETATION......................................................... 1
2. DIRECTORS.............................................................. 5
3. CORPORATE GOVERNANCE................................................... 9
4. INFORMATION RIGHTS..................................................... 9
5. INSURANCE.............................................................. 10
6. TRANSFER OF EQUITY SECURITIES.......................................... 10
7. SALE OF CONTROL........................................................ 12
8. BRING-ALONG RIGHTS..................................................... 13
9. FUTURE ISSUES.......................................................... 13
10. PUT AND AUCTION RIGHTS................................................. 14
11. INITIAL PUBLIC OFFERING AND REGISTRATION RIGHTS........................ 14
12. INVESTMENT BANKING..................................................... 15
13. DECISIONS BY MANAGEMENT SHAREHOLDERS................................... 15
14. MEMORANDUM AND BYE-LAWS AND FURTHER ASSURANCE.......................... 15
15. TERMINATION............................................................ 16
16. CONFIDENTIALITY........................................................ 16
17. ANNOUNCEMENTS.......................................................... 18
18. ASSIGNMENT............................................................. 18
19. WAIVER OF RIGHTS....................................................... 18
20. AMENDMENTS............................................................. 19
21. INVALIDITY............................................................. 19
22. NO PARTNERSHIP OR AGENCY............................................... 19
23. ENTIRE AGREEMENT....................................................... 19
24. PURCHASE OF OWN SECURITIES............................................. 20
25. GOVERNING LAW.......................................................... 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
26. NOTICES................................................................ 20
SCHEDULE 1.................................................................. 21
Part A - Management Shareholders......................................... 21
Part B - Investors....................................................... 24
Part C - The Company..................................................... 25
SCHEDULE 2.................................................................. 26
Corporate Governance..................................................... 26
SCHEDULE 3.................................................................. 29
Right of first offer on sale or transfer of Equity Securities............ 29
SCHEDULE 4.................................................................. 34
Transfers on termination of employment of a Management Shareholder....... 34
SCHEDULE 5.................................................................. 40
Put and Auction rights................................................... 40
SCHEDULE 6.................................................................. 42
Transfer of Equity Securities............................................ 42
SCHEDULE 7.................................................................. 43
Part A................................................................... 43
Deed of Adherence........................................................ 43
Part B................................................................... 44
Permitted Transferee Undertaking......................................... 44
SCHEDULE 8.................................................................. 45
The Subsidiaries......................................................... 45
SCHEDULE 9.................................................................. 47
Form of Subsidiary Undertaking........................................... 47
SCHEDULE 10................................................................. 49
List of Exhibits......................................................... 49
</TABLE>
<PAGE>
THIS SHAREHOLDERS AGREEMENT is made on 24 January 1996
BETWEEN:
(1) THOSE PERSONS whose names and addresses are set out in Part A of Schedule I
(Management Shareholders);
(2) BRIDGE STREET FUND 1995, L.P. of c/o The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, DE 19801 U.S.A.(Bridge
Street),
(3) GOLDMAN SACHS & CO. VERWALTUNGS GmbH (for GS CAPITAL PARTNERS II GERMANY
CIVIL LAW PARTNERSHIP) of Messe Turm, 60308 Frankfurt am Main, Germany
(Germany);
(4) GS CAPITAL PARTNERS II, L.P. of c/o The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, DE 19801 U.S.A. (GS Capital
Partners);
(5) GS CAPITAL PARTNERS II OFFSHORE, L.P. of c/o Maples and Calder, P0 Box 309,
Grand Cayman, Cayman Islands, British West Indies (GS Offshore);
(6) STONE STREET FUND 1995, L.P. of c/o The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, DE 19801 U.S.A.(Stone
Street);
(7) STIRLING COOKE BROWN HOLDINGS LIMITED of Cedar House, 41 Cedar Avenue
Hamilton HMI2 Bermuda (the Company).
WHEREAS:
(A) On 23 December 1995 the parties entered into an agreement for the
subscription and purchase of shares in the Company by Bridge Street,
Germany, GS Capital Partners, GS Offshore, and Stone Street (the
Subscription Agreement).
(B) The parties now wish to enter into this agreement in order to regulate the
manner in which the Group will carry on business and the manner in which
the relationship between the Shareholders will be governed.
IT IS AGREED as follows:
INTERPRETATION
1.1 In this Agreement, the following terms shall (unless the context requires
otherwise) have the following respective meanings:
Auditors means KMPG or such other firm of auditors to be appointed by the
Company from time to time in accordance with this Agreement;
<PAGE>
Board means the board of directors of the Company;
Budget means in respect of the period to 30 June 1996, the budget for the Group
attached as Exhibit A, and in respect of any other period means a budget for the
Group for a particular Financial Year or part Financial Year (as appropriate) in
a format approved from time to time by the Board in accordance with this
Agreement;
Business Day means a day on which banks generally are open in London;
Business Plan means a rolling business plan for the Group as agreed by a Super-
Majority and to be updated annually in a manner approved from time to time by
the Board in accordance with this Agreement;
Bye-laws means the Bye-laws of the Company to be adopted pursuant to the
Subscription Agreement as they may subsequently be altered from time to time in
accordance with this Agreement;
company includes any body corporate, wherever incorporated;
Deed of Adherence means a deed of adherence to the provisions of this Agreement
to be executed by a proposed transferee of any Shares, substantially in the form
contained in Part A of Schedule 7;
Directors means the Management Shareholder Directors and the Goldman Sachs
Directors;
Equity Securities means Shares and any rights to subscribe for or to convert any
securities into or exchange any securities for Shares;
Financial Year means a financial period of the Company (commencing, other than
in the case of its initial financial period, on 1 January and ending on 31
December);
Further Financing Agreement means the agreement, in the agreed form, pursuant to
and on the terms and conditions of which CS Capital Partners and GS Offshore
agree to make further finance available to the Group;
Goldman Sachs means Bridge Street, Germany, CS Capital Partners, CS Offshore,
Stone Street, The Goldman Sachs Group, L.P. and the other Goldman Sachs
Affiliates (or, as the context requires, any one of them);
Goldman Sachs Affiliates means any subsidiary undertaking of; or any investment
vehicle, including any limited partnership, whether constituted under the laws
of England or otherwise, the general partner, managing general partner or
managing agent of which is under the control (directly or indirectly) of, The
Goldman Sachs Group L.P.;
Goldman Sachs Directors means the directors of the Company from time to time
nominated by
<PAGE>
Goldman Sachs in accordance with this Agreement;
Goldman Sachs Group means The Goldman Sachs Group L.P. and all Goldman Sachs
Affiliates;
Goldman Sachs Subsidiary Director shall have the meaning given in clause 2.4;
Group means the Company and the Subsidiaries for the time being;
Initial Public Offering means an offering of at least 15% of the ordinary share
capital of the Company (on a fully diluted basis) which is either (i) registered
under the Securities Act of 1933 (as amended); or (ii) which is made in
connection with an application for the said shares to be admitted to listing on
the London Stock Exchange; and which in either case generates net proceeds in
aggregate to the Company and Shareholders of at least US$15 million;
London Stock Exchange means the London Stock Exchange Limited;
Management Shareholder Directors means the directors of the Company from time to
time nominated by the Management Shareholders in accordance with this Agreement;
Management Shareholders means those persons listed in Part A of Schedule I
together with their Permitted Transferees from time to time;
Memorandum means the Memorandum of Association of the Company as it may
subsequently be altered from time to time in accordance with this Agreement;
Minority Interest means an undertaking in which any member of the Group has an
interest in at least 10% of the issued share or other capital of the
undertaking;
NASDAQ means the National Association of Security Dealers, Inc. Automated
Quotation System;
parties means the original signatories to this Agreement together with any
persons who agree to become bound by the provisions of this Agreement by
executing a Deed of Adherence or a deed of adherence in accordance with clause
9.3 (and party shall be construed accordingly);
Permitted Transfer has the meaning given to it in clause 6.4.1(c);
Permitted Transferee means any person to whom a Permitted Transfer is made in
accordance with this Agreement;
Registration Rights Agreement means the agreement, in the agreed form, between
the parties hereto which provides for certain registration rights in relation to
the Company's ordinary share capital;
securities means, in relation to the Company, securities of any kind whatsoever
issued by the Company;
Security Interest means any mortgage, charge, pledge, lien (other than a lien
arising by operation of law), right of set-off, encumbrance or any security
interest whatsoever, howsoever created or arising, including any analogous
security interest under local law;
<PAGE>
Shareholders means the parties to this Agreement other than the Company and
Shareholder shall mean any one of them;
Shares means shares in the capital of the Company;
Subscription Agreement shall have the meaning given to it in Recital (A);
Subsidiaries means subsidiary undertakings of the Company and the Minority
Interests of the Group (without requiring any party to procure any action by the
Minority Interests of the Group to the extent it is beyond its powers to do so)
including, but without limitation, those listed in Schedule 8, and Subsidiary
shall be construed accordingly;
subsidiary undertaking means, in relation to an undertaking (the holding
undertaking), any other undertaking in which the holding undertaking for the
time being directly or indirectly holds or controls either:
(a) a majority of the voting rights exercisable at general meetings of the
members of that undertaking on all, or substantially all, matters; or
(b) the right to appoint or remove directors having a majority of the voting
rights exercisable at meetings of the board of directors of that
undertaking on all, or substantially all, matters,
and any undertaking which is a subsidiary undertaking of another undertaking
shall also be a subsidiary undertaking of any further undertaking of which that
other is a subsidiary undertaking; and
Super-Majority means more than two thirds of the Directors acting as
representatives of the Shareholders in accordance with clause 3.4, including at
least one Goldman Sachs Director, provided that Goldman Sachs owns or controls
15% or more of the Shares;
undertaking means a company or partnership or an unincorporated association
carrying on trade or a business with or without a view to profit (and, in
relation to all undertaking which is not a company, expressions in this
Agreement appropriate to companies shall be construed as references to the
corresponding persons, officers, documents or organs (as the case may be)
appropriate to undertakings of that description).
1.2 Except where the context requires otherwise, references to clauses and
Schedules are to clauses of and Schedules to this Agreement and references to
sub-clauses are to sub-clauses of the clause in which the reference appears.
1.3 Any reference in this Agreement to an amount in pounds sterling shall also
be a reference to the then equivalent amount in any other currency or
combination of currencies and references to "US$" are to United States Dollars.
1.4 Headings are inserted for convenience only and shall not affect the
construction of this Agreement or the Schedules.
<PAGE>
1.5 Any reference to an agreed form is to the form of the relevant document
agreed between the parties and signed on their behalf for the purpose of
identification before the signature of this Agreement (with such amendments, if
any, as may subsequently be agreed in writing between the parties).
1.6 The Exhibits which have been initialled on behalf of the parties and the
Recitals and the Schedules shall be deemed to be incorporated in this Agreement.
1.7 Where any obligation pursuant to this Agreement is expressed to be
undertaken or assumed by any party, such obligation shall be construed as
requiring the party concerned to exercise all rights and powers of control over
the affairs of any other person which that party is able to exercise (whether
directly or indirectly) in order to secure performance of such obligation.
1.8 Neither the Company nor any Subsidiary shall be bound by any provision of
this Agreement to the extent that it would constitute an unlawful fetter on any
statutory power of the Company or the Subsidiary (as the case may be), but that
provision shall remain valid and binding as regards all other parties to which
it is expressed to apply and such provision shall take effect so as to include
all obligation on the part of the Shareholders to exercise all their respective
powers and rights so as to procure, so far as they are able, that the Company or
the Subsidiary (as the case may be) complies with such provision notwithstanding
that it is not bound by it.
1.9 Wherever in this Agreement Goldman Sachs is provided with any right or
entitlement, such right or entitlement may be exercised by any one member from
time to time of the Goldman Sachs Group.
DIRECTORS
2.1(a) Unless otherwise agreed by the Board in accordance with this Agreement
the Board shall consist of a maximum of six Directors, of which four
shall be Management Shareholder Directors. The number of Goldman Sachs
Directors shall be as specified in clause 2.1(b). Subject to clause 2.9,
the Management Shareholders shall have the sole right (exercisable from
time to time) to appoint and remove and replace any of the Management
Shareholder Directors and, subject to clause 2.10, Goldman Sachs shall
have the sole right (exercisable from time to time) to appoint and
remove and replace any of the Goldman Sachs Directors. The initial
appointments to the Board shall be as follows:
Management Shareholder Goldman Sachs Directors
Directors
Mark Cooke Reuben Jeffery III
Nicholas Brown Sanjay Patel
George Jones
Warren Cabral
<PAGE>
(b) Goldman Sachs shall have the following rights to appoint the following
numbers of Directors of the Company:
(i) if Goldman Sachs owns, in total, 15% or more of the issued Shares in
the Company, 2 Directors;
(ii) if Goldman Sachs owns, in total, 5% or more but less than 15% of the
issued Shares in the Company, 1 Director;
(iii) if Goldman Sachs Owns, in total, less than 5% of the issued Shares
in the Company, it shall have no right to appoint a Director.
(c) If at any time the shareholding of Goldman Sachs decreases to such a level
that Goldman Sachs has more Directors on the Board than it is entitled to
appoint pursuant to clause 2.1 ~) above, it shall procure that the excess
Director(s) resign(s) as soon as reasonably practicable thereafter.
(d) A Management Shareholder Director who is also a Management Shareholder
shall resign as a Director immediately on ceasing to be a Shareholder or
employee of any member of the Group.
(e) The Management Shareholders shall procure that, at all times, at least two
Management Shareholder Directors shall be ordinarily resident in Bermuda.
2.2. Any appointment or removal of a Director shall be effected by notice in
writing to the Company signed by or on behalf of the Shareholder(s) in question
and shall take effect, subject to any contrary intention expressed in the
notice, when the notice is delivered.
2.3 Except where failure to act would result in the breach of a statutory
requirement, in the event that there is a vacancy on the Board no action shall
be taken by the Board until that vacancy is filled by the Shareholder(s)
entitled to fill it, provided that if a vacancy remains unfilled for a period of
30 days from its arising, this provision shall cease to have effect in relation
to that vacancy and shall have no effect in relation to any further vacancy
arising during the period of the first vacancy which the person entitled to fill
the first vacancy is also entitled to fill.
2.4 Subject to clause 2.10, and subject to Goldman Sachs owning, in total, 5%
or more of the issued Shares of the Company, Goldman Sachs shall be entitled to
appoint (and remove and replace) one director to the board of directors of each
of the Subsidiaries by notice in writing to the board of the relevant Subsidiary
(each such director being a Goldman Sachs Subsidiary Director). The Goldman
Sachs Subsidiary Director shall be appointed as soon as practicable after notice
of such appointment is received by the relevant Subsidiary and shall not be
removed from such appointment without Goldman Sachs' prior written consent. In
the event that Goldman Sachs ceases to own, in total, 5% or more of the issued
Shares in the Company it shall procure that each Goldman Sachs Subsidiary
Director shall resign
<PAGE>
as soon as reasonably practicable thereafter.
2.5 At least one of the Goldman Sachs Directors shall be a member of all
committees of the Board and each Goldman Sachs Subsidiary Director shall be a
member of all committees of the board of directors of the Subsidiary of which he
is a director.
2.6 To the extent lawful, the quorum for the transaction of business at any
meeting of the Board or any committee of the Board shall be three Directors (or
their alternates), at least one of whom must be a Goldman Sachs Director (or his
alternate), otherwise, the quorum for the transaction of business at any meeting
of the Board or any committee of the Board shall be two Directors. The quorum
for the transaction of business at any meeting of the board of directors, or any
committee of the board of directors, of a Subsidiary shall, to the extent
lawful, also be three directors (or their alternates), at least one of whom must
be the Goldman Sachs Subsidiary Director (or his alternate) (but only if the
board or committee of the board is convened to consider, or otherwise considers,
whether on its own or in conjunction with any other action, the taking of any of
the actions listed in Schedule 2 by that Subsidiary), otherwise, the quorum
shall be two directors. Each Shareholder which has appointed a Director shall
use its reasonable endeavours to procure that a quorum is present at any meeting
of the Board. In the event that a quorum is not present within 30 minutes of the
time for which a meeting of the Board has been called, that Meeting shall be
adjourned until the same time on the date 14 days following (or the Business Day
nearest to it). Every Director shall be given at least 7 days' written notice of
such adjourned meeting, at which any 2 Directors (or their alternates) shall
constitute a quorum.
2.7 Other than as provided for in clause 2.6 in respect of an adjourned meeting
of the Board, at least 14 days written notice shall be given to each Director of
any meeting of the Board or committee of the Board, provided always that a
shorter period of notice may be given with the written approval of at least one
Goldman Sachs Director (or his alternate). Any such notice shall include an
agenda identifying in reasonable detail the matters to be discussed at the
meeting and shall be accompanied by copies of any relevant papers to be
discussed at the meeting. Any matter which is to be submitted to the meeting for
a decision which is not identified in reasonable detail as aforesaid shall not
be decided upon, unless otherwise agreed by all of those present.
2.8 Except in relation to the action specified in Schedule 2, when the
provisions of clause 3.2 shall apply, matters for decision by the Board or
committee of the Board shall be decided by simple majority vote. Each Director
shall, subject to any provision of the Bye-laws precluding a Director from
voting as a result of any other interest of the Director, be entitled to cast
one vote on each issue put to a vote. Any Director who is unable to attend any
meeting may nominate any other Director or, in the case of a Goldman Sachs
Director, any other person, to act as his alternate for the purposes of that
meeting (by depositing written notice to that effect with the Company Secretary
at any time prior to the meeting) and, in addition to any other vote which he
already may be entitled to cast, to vote in his place at the meeting, and such
alternate Director shall count towards the quorum for the purposes of clause
2.6. The provisions of this clause shall, mutatis mutandis, also apply to
Subsidiaries.
2.9 Unless a proposed Management Shareholder Director is a Management
Shareholder, the Management Shareholders shall not be entitled to appoint that
person as a Management Shareholder Director pursuant to clause 2.1 or as an
alternate pursuant to clause 2.8 without having first obtained the prior written
approval of the Goldman Sachs Directors to the appointment, such approval not to
<PAGE>
be unreasonably withheld or delayed.
2.10 Unless a proposed Goldman Sachs Director or Goldman Sachs Subsidiary
Director is a partner or an employee of a member of Goldman Sachs Group, Goldman
Sachs shall not be entitled to appoint that person as a Goldman Sachs Director
or a Goldman Sachs Subsidiary Director pursuant to clause 2.1 or 2.4 (as the
case may be), or as an alternate of either pursuant to clause 2.8, without
having first obtained the prior written approval of a majority of the Management
Shareholder Directors to the appointment, such approval not to be unreasonably
withheld or delayed.
2.11 Each Director (including for this purpose a Goldman Sachs Subsidiary
Director) shall be reimbursed by the Group for reasonable travel and other out
of pocket expenses incurred by him in performing his obligations and carrying
out his duties hereunder.
2.12 Meetings of the Board shall be held at least once every two months unless
agreed otherwise by a Super-Majority. A director (or a duly appointed alternate)
of the Company or a Subsidiary will be regarded as present at a meeting if he is
in communication with the meeting by telephone or other communication equipment
permitting all those attending the meeting to hear one another.
2.13 The Management Shareholders shall procure that each Subsidiary which is an
exempted company within the meaning of section 127 of the Bermuda Companies Act
1981 shall, at all times, have a sufficient number of directors (other than
alternate directors) ordinarily resident in Bermuda so as to be able to form a
quorum at a meeting of directors of that Subsidiary.
CORPORATE GOVERNANCE
3.1 Subject to the provisions of this clause 3, the management of the affairs
of each member of the Group shall be controlled by its board of directors in
accordance with its constitutional documents and applicable law.
3.2 The actions listed in Schedule 2 shall not be taken either by the
Company or by any other member of the Group, nor shall the Company
approve the taking of any of the said actions by any other member of the
Group, without the prior approval of a Super-Majority.
3.3 The Management Shareholders agree to procure undertakings from each of the
Subsidiaries to adhere to the terms of this clause 3 in the form of the letter
attached as Schedule 9 and supply certified copies of such undertakings to
Goldman Sachs within the period of three months from the date hereof
3.4 The parties agree that Super-Majority votes shall be taken by the
Management Directors acting solely as representatives of the Management
Shareholders and by the Goldman Sachs Directors acting solely as representatives
of Goldman Sachs, and not as directors of the Company nor in any other capacity
which owes a fiduciary duty to the Company.
INFORMATION RIGHTS
<PAGE>
4.1 The Company shall provide Goldman Sachs (at the address given to the
Company from time to time for such purpose) with the following information:
(a) within 30 days of the end of each month, a monthly management letter,
containing summary details of the revenues and operations of and a balance
sheet for, the Group and, in particular, summary financial information for
that month in respect of each of the company and the Subsidiaries, together
with an officer's written confirmation that in his opinion the same have
been prepared (on an unaudited basis) so as fairly and accurately to
reflect the trading and financial positions of the Company and the
Subsidiaries for that period;
(b) within 90 days of the end of each Financial Year, annual accounts, audited
by the Auditors accompanied by a management letter summarising the revenues
and Operations of the Company and each of the Subsidiaries, for that
Financial Year;
(c) within 5 days of filing, copies of all filings made, if any, with the
Securities and Exchange Commission or any stock exchange; and
(d) before the end of each Financial Year the Budget for the next Financial
Year and an updated Business Plan.
(e) any other information which Goldman Sachs may from time to time reasonably
request.
4.2 The Goldman Sachs Directors shall be provided with copies of all
information (if any) made available to all or any of the Management Shareholder
Directors in connection with the Group, at the same time as such information is
made available to the Management Shareholder Directors.
INSURANCE
5. The Management Shareholders shall, in the case of (a), procure and shall,
in the case of (b), use their reasonable endeavours to procure that so long as
Goldman Sachs owns any Shares, the Group maintains:
(a) such cover in respect of directors' and officers' liability insurance as may
reasonably be regarded as prudent in relation to the size and nature of the
business of the Group; and
(b) in respect of "key man" life insurance, at least (Pounds)5 million of cover
on the life of Mark Cooke and at least (Pounds)5 million of cover on the
life of Nick Brown, or in either case, such other amounts as a Super-
Majority may agree.
TRANSFER OF EQUITY SECURITIES
6.1 The Shareholders shall use their respective powers to procure that:
(a) the Directors shall not approve the transfer of any Equity Securities to
any person who is not already a party to this Agreement unless that person
has delivered to the Company a duly executed Deed of Adherence;
<PAGE>
(b) all share certificates issued by the Company shall bear the following
legend:
"No person shall acquire all interest in any shares of the Company or be
registered as a shareholder in the Company without having first delivered to the
Company a Deed of Adherence to the Shareholders' Agreement and Registration
Rights Agreement relating to the Company each dated *January 1996 (in the form
specified by the Company)."
6.2 Other than pursuant to a sale or transfer of the legal and beneficial
interest in its Equity Securities which is expressly permitted by this
Agreement, no Shareholder may:
(a) grant, declare, create or dispose of any right or interest in any Equity
Securities; or
(b) create or permit to exist any pledge, lien, charge (whether fixed or
floating) or other encumbrance over any Equity Securities.
6.3 Subject to clauses 6.4, 6.5 and 6.7 and to clauses 7, 8 and 10:
(a) none of the Shareholders may sell or transfer all or any Equity Securities
other than in compliance with the provisions of Schedule 3;
(b) none of the Management Shareholders may sell or transfer any Equity
Securities within three years from the date of this Agreement; and
(c) Goldman Sachs may not sell or transfer any Equity Securities within
eighteen months from the date of this Agreement.
6.4.1 The restrictions in clause 6.3 shall not apply to any sale or transfer:
(a) on an Initial Public Offering;
(b) in the case of Goldman Sachs, to any Member of the Goldman Sachs Group;
(c) pursuant to clause 4 of the Subscription Agreement; or
(d) in the case of a Management Shareholder, provided that the conditions set
out in clause 6.4.2 are observed prior to the transfer, by a Permitted
Transfer to a Permitted Transferee, a Permitted Transfer being one of the
following:
(i) in relation to a Management Shareholder, a transfer or transmission to
that Management Shareholder's spouse, or that Management Shareholder's
child or grandchild (in either case under the age of 18 years) or the
trustee or trustees of a trust the beneficiaries of which are limited to
that Management Shareholder and/or chat Management Shareholder's spouse,
that Management Shareholder's children and/or grandchildren (in either case
under the age of 18 years) (a family trust) or a transfer between (an)
existing trustee(s)and (a) new trustee(s) of a family Crust or a transfer
or transmission back to that Management Shareholder from any of such
persons;
<PAGE>
(ii) in relation to a Management Shareholder, a transfer in accordance with
the provisions of Schedule 4 following termination of that Management
Shareholder's employment; or
(iii) a transfer or transmission approved by a Super-Majority.
6.4.2 The conditions referred to in clause 6.4.1(d) are as follows:
(a) The proposed Permitted Transferee must enter into a Deed of Adherence prior
to the transfer taking place; and
(b) In the case of a transfer pursuant to clauses 6.4.1. (d) to a Permitted
Transferee, the proposed Permitted Transferee must undertake to the
Shareholders (in the form of the undertaking Set Out in Part B of Schedule
7) that if it ceases (for any reason) to be a Permitted Transferee it shall
immediately transfer its Equity Securities back to the Management
Shareholder from whom the Equity Securities were transferred to that
Permitted Transferee.
6.5 In the event that a member of the Goldman Sachs Group which holds
securities of the Company ceases to be a member of the Goldman Sachs Group, that
person shall, immediately on ceasing to be a member of the Goldman Sachs Group,
transfer its securities to another member of the Goldman Sachs Group.
6.6 Goldman Sachs may agree with a person to whom it proposes to transfer
Equity Securities that the proposed transferee is to be treated for all
purposes, following such transfer, as if it had been named in this Agreement
with the name of Goldman Sachs.
6.7 In the event that any Management Shareholder who is an employee of the
Group ceases to be so employed, the provisions of Schedule 4 shall apply.
SALE OF CONTROL
7. Without prejudice to clause 6, each Shareholder agrees that it will not,
whether acting alone, or together with any other Shareholder or Shareholders
pursuant to any agreement or arrangement, sell or transfer any Equity Securities
to any person (or group) if, as a result of that sale or transfer and any other
transactions, such person (or group) would become the beneficial owner, directly
or indirectly, of Equity Securities representing 40% or more of the total votes
which would be capable of being exercised at general meetings of the Company,
based either on the Shares then in issue or on a fully diluted basis, unless
such person (or group) agrees to offer to purchase all of the outstanding Equity
Securities then in issue from all Shareholders for the same consideration and on
the same terms provided that such consideration (on a security by security
basis) shall in no event be less than the highest price paid (or other
consideration given) in the last 12 months by such person (or group) for any
Equity Securities.
BRING-ALONG RIGHTS
8.1 Subject to the provisions of Schedule 3 (which shall apply unless agreed
otherwise by a Super-Majority), each Shareholder agrees that, in the event that
Shareholders owning at least 70% of Equity Securities (Proposing Shareholders)
elect to sell all of the Equity Securities then held by them
<PAGE>
to a third parry in a bona fide, arm's length transaction or series of
transactions reflecting the fair value of such securities (as determined by a
Super-Majority), all remaining Shareholders shall be required, within thirty
days of the receipt of a written notice signed by all Proposing Shareholders, to
sell all of the Equity Securities then held (whether legally or beneficially) by
such remaining Shareholders to that third party for the same consideration and
upon the same terms (on a security by security basis) as the sale by the
Proposing Shareholders.
8.2 Completion of the sale and purchase of the Equity Securities under clause
8.1 shall take place at the registered office of the Company and the provisions
of Schedule 6 shall apply thereto.
FUTURE ISSUES
9.1 Subject to clause 9.2, each Shareholder shall be invited by the Company to
participate in all future allotments and issues by the Company of Equity
Securities to the extent necessary to maintain its proportionate interest in the
Company on a fully diluted basis, on the same terms as offered to any other
person.
9.2 The Company shall not be required to make the invitation set out in clause
9.1 in relation to Equity Securities proposed to be allotted or issued:
(i) pursuant to an employee stock or share option plan, stock or share
purchase plan, or singular benefit programme or agreement approved by a
Super-Majority, where the primary purpose is not to raise additional
equity capital for the Company; or
(ii) in direct consideration for the acquisition by the Company of another
business entity or the merger of any business entity with or into the
Company;
(iii) pursuant to the rights attaching to the A Shares as defined in the
Subscription Agreement.
9.3 No allotment of issue of Equity Securities by the Company shall be made or
be agreed to unless the person whose favour the allotment, issue or agreement is
made agrees to enter into a deed of adherence to this Agreement and the
Registration Rights Agreement prior to the issue of the relevant Equity
Securities.
PUT AND AUCTION RIGHTS
10. The provisions of Schedule 5 shall apply in the event that, within eight
years of the date of this Agreement.
(a) the Company shall not have made a firm commitment underwritten initial
public offering of at least 15% of its ordinary share capital (on a fully
diluted basis); or
(b) the events contemplated by clause 7 or clause 8 shall not have arisen.
INITIAL PUBLIC OFFERING AND REGISTRATION RIGHTS
<PAGE>
11.1 At any time after three years following the date of this Agreement,
Goldman Sachs shall have the right to require the Company to procure one of the
following (as may be nominated by Goldman Sachs following discussion with the
Board): (A) a listing of the Company on the London Stock Exchange; (B) a listing
of the Company on the New York Stock Exchange; or (C) designation of the
ordinary share capital of the Company as a NASDAQ National market system
security, in each case subject to the following conditions:
(a) on an initial public offering on the New York Stock Exchange or NASDAQ:
(i) at least 15% of the ordinary share capital of the Company (on a fully
diluted basis) is registered pursuant to the demand
(ii) the shares that are registered have an aggregate offering price of at
least US$ 15 million based on the then current market price or fair value
estimated by the Company's underwriters); and
(iii) it is a firm commitment underwriting; and
(b) on an initial public offering on the London Stock Exchange:
(i) the Company's ordinary share capital is admitted to listing; and
(ii) the ordinary share capital of the Company sold on the admission to
listing has an aggregate offering price of at least (Pounds)10 million
based on the then current market price or fair value estimated by the
Company's underwriters).
11.2 On or following an initial public offering or otherwise at any time after
three years of the date of this Agreement, Goldman Sachs shall have the right to
require the Company:
(a) in the United States, to register the sale of any new or existing ordinary
share capital of the Company pursuant to the Securities Act of 1933,
provided that the Company shall nor be required to effect any registration
within six months of the effective date of any other registration of
ordinary share capital (other than under Form 5-8) on such terms as are
contained in the Registration Rights Agreement.
(b) in the United Kingdom to authorize and prepare (or assist in the
preparation of) any prospectus which may be required in order to make an
offer of ordinary share capital of the Company under the Public Offers of
Securities Regulations 1995.
11.3 The Company shall, to the extent lawful under Bermuda law, bear all
expenses (other than commissions and underwriting discounts) including legal and
accounting fees and expenses incurred pursuant to clauses 11.1 and 11.2 above,
save that in the case of clause 11.2(a), after the first three registrations the
Holders requesting registration shall bear all such expenses, as provided for in
the Registration Rights Agreement
INVESTMENT BANKING
12. The Goldman Sachs Group shall have the right to perform all investment
banking services for the
<PAGE>
Company, including any sale of the Company, for customary compensation and other
terms consistent with all arm's length transaction. If the Company and Goldman
Sachs cannot agree upon terms of such appointment, the Company shall be at
liberty to hire another investment banker, provided that any member of The
Goldman Sachs Group will then be entitled to be a member of the management group
in connection with any underwriting.
DECISIONS BY MANAGEMENT SHAREHOLDERS
13. In any case where this Agreement provides for a decision to be made by the
Management Shareholders collectively, Goldman Sachs shall be entitled to assume
that such decision has been agreed upon by all Management Shareholders if
communicated to Goldman Sachs by any of Mark Cooke, George Jones or Nick Brown
or such other person as the Management Shareholders may notify to Goldman Sachs
in writing from time to time.
MEMORANDUM AND BYE-LAWS AND FURTHER ASSURANCE
14.1 As between the parties, if any of provisions of this Agreement are
inconsistent with any of the provisions of the Memorandum and Bye-laws, the
provisions of this Agreement shall prevail and the Shareholders shall exercise
all voting and other rights and powers legally available to them (whether as
members of the Company or otherwise), including for the purpose of amending the
Memorandum and Bye-laws of the Company and the constitutional documents of the
Subsidiaries, to the extent necessary from time to time to give effect to the
provisions of this Agreement
14.2 In addition and without limitation to clause 14.1, the parties agree to
take all such further and other actions, and enter into an additional agreements
that may be necessary to give full effect to the terms of this Agreement and all
other documents and all transactions referred to in it.
TERMINATION
15.1 This Agreement shall terminate:
(a) upon an Initial Public Offering; or
(b) upon the completion of the acquisition of all of the Equity Securities in
the Company by one person (or persons acting in concert with that person);
or
(c) upon a sale of all or substantially all of the Company's assets and
undertaking to an unrelated party (being a party not already a party to
this Agreement);
save that termination of this Agreement for whatsoever reason shall not:
(i) relieve any party from any liability or obligation in respect of any
matters, undertakings or conditions which shall not have been done,
observed or performed by that party prior to such termination or
(ii) affect the terms of any agreement entered into between any of the
parties to replace this
<PAGE>
Agreement.
15.2 The provisions of clause 11 shall not be affected by the termination of
this Agreement pursuant to clause 15.1(a).
CONFIDENTIALITY
16.1 Each party undertakes with the other that it shall use all reasonable
endeavours to keep confidential (and to ensure that its officers, employees,
agents and professional and other advisers keep confidential) any information:
(a) which it may have or acquire (whether before or after the date of this
Agreement) in relation to the customers, business, assets or affairs of any
member of the Group;
(b) which, in consequence of the negotiations relating to this Agreement or
being a Shareholder or having appointees on the Board or the exercise of
its rights or performance of its obligations under this Agreement, it may
have or acquire (whether before or after the date of this Agreement) in
relation to the customers, business, assets or affairs of any other
Shareholder; or
(c) which relates to the contents of this Agreement (or any agreement or
arrangement entered into pursuant to this Agreement).
No party shall use for its own business purposes or disclose to any third party
any such information (collectively, Confidential Information) without the
consent of the other parties.
16.2 The obligation of confidentiality under clause 16.1 shall not apply to:
(a) the disclosure of information (subject to clause 16.3) on a "need to know"
basis to a member of the Goldman Sachs Group or an alternate director of
either a Management Shareholder Director or a Goldman Sachs Director or by
a Management Shareholder Director to a Management Shareholder or vice versa
where such disclosure is for a purpose reasonably incidental to this
Agreement;
(b) the disclosure of information to any general or limited partner in any of
Bridge Street, GS Capital Partners, GS Offshore or Stone Street;
(c) the disclosure of information to a person or persons (Potential Purchaser)
whom the party disclosing such information reasonably believes may wish to
purchase all or any part of that party's Equity Securities provided that
such Potential Purchaser provides to the Company, on terms and in a form
reasonably satisfactory to the Company, an undertaking to keep such
information confidential;
(d) information which is independently developed by the relevant party or
acquired from a third party to the extent that it is acquired with the
right to disclose the same;
(e) the disclosure of information to the extent required to be disclosed by
law, any stock exchange regulation or any binding judgment, order or
requirement of any court or other competent authority;
<PAGE>
(f) the disclosure of information to any tax authority to the extent reasonably
required for the purposes of the tax affairs of the party concerned or any
member of its Group;
(g) the disclosure (subject to clause 16.3) in confidence to a party's
professional advisers of information reasonably required to be disclosed
for a purpose reasonably incidental to this Agreement;
(h) information which becomes within the public domain (otherwise than as a
result of a breach of this clause 16); or
(i) any announcement made in accordance with the terms of clause 17.
16.3 Each party shall inform any officer, employee or agent or any professional
or other adviser advising it in relation to the matters referred to in this
Agreement, or to whom it provides Confidential information, that such
information is confidential and shall instruct them:
(a) to keep it as confidential; and
(b) not to disclose it to any third party (other than those persons to whom
it has already been disclosed in accordance with the terms of this
Agreement).
16.4 The Company shall (and the Company shall procure that each other member of
the Group shall) observe a similar obligation of confidence in favour of the
parties and each of their Subsidiaries.
16.5 The provisions of this clause 16 shall survive any termination of this
Agreement.
ANNOUNCEMENTS
17. No announcement shall be made concerning this Agreement or the Subscription
Agreement nor shall either of these be publicised in any other way, unless both
the proposal to announce or otherwise publicise the Agreement and/or the
Subscription Agreement and the form and content of the announcement or other
publicity have been approved by Goldman Sachs and the Management Shareholders.
ASSIGNMENT
18.1 Subject to clause 6.6, 110 Shareholder may assign any of its rights or
obligations under this Agreement in whole or in part otherwise than pursuant to
a sale or transfer of Equity Securities to a third party in accordance with the
terms of this Agreement.
18.2 This Agreement shall enure for the benefit of the successors in title and
expressly permitted assigns of each of the parties.
WAIVER OF RIGHTS
19. No waiver by a party of a failure by another party to perform any provision
of this Agreement shall
<PAGE>
operate or be construed as a waiver in respect of any other or further failure
whether of a like or different character.
AMENDMENTS
20. This Agreement may be amended only by an instrument in writing signed by
duly authorised representatives of each of the parties, provided that the
amendment of any provision of this Agreement solely affecting any of the
respective rights or obligations of the Shareholders or any of them inter se
shall not require the agreement of the Company.
INVAlIDITY
21. If any of the provisions of this Agreement is or becomes invalid, illegal
or unenforceable, the validity, legality or enforceability of the remaining
provisions shall not in any way be affected or impaired. The parties shall
nevertheless negotiate in good faith in order to agree to terms of a mutually
satisfactory provision, achieving so nearly as possible the same commercial
effect, to be substituted for the provision so found to be void or
unenforceable.
NO PARTNERSHIP OR AGENCY
22.1 Nothing in this Agreement (or any of the arrangements contemplated
hereby) shall be deemed to constitute a partnership between the parties nor,
save as may be expressly set out herein, constitute any party the agent of any
other party for any purpose.
22.2 In addition, unless otherwise agreed in writing between the parties, none
of them shall enter into contracts with third parties as agent for any member of
the Group or for any other party nor shall any party describe itself as agent as
aforesaid or in any way hold itself out as being an agent as aforesaid.
ENTIRE AGREEMENT
23. This Agreement taken with the Subscription Agreement and all other
agreements referred to in each document constitutes the entire agreement and
understanding of the parties with respect to the subject matter hereof and none
of the parties has entered into this Agreement in reliance upon any
representation, warranty or undertaking by or on behalf of any other party which
is not expressly set out in this Agreement or the Subscription Agreement. No
party shall have any remedy in respect of any misrepresentation or untrue
statement made by any other party hereto unless and to the extent that a claim
lies for breach of warranty under the Subscription Agreement (save that this
clause shall not exclude any liability for fraudulent misrepresentation).
PURCHASE OF OWN SECURITIES
24. To the extent that the Company has the right to purchase its own Equity
Securities pursuant to the provisions of Schedules 3, 4 and 5, it shall only do
so to the extent so permitted by Bermuda law.
<PAGE>
GOVERNING LAW
25. This agreement shall be governed by English law and each of the parties
hereby irrevocably submits to the non-exclusive jurisdiction of the English
Courts as to any claim, dispute or matter arising out of or relating to this
agreement or any of the documents to be executed pursuant to it, and waives any
objection on the ground of venue or forum non conveniens or any similar ground.
Each of the parties shall, unless it is a company incorporated in England and
Wales, at all times maintain an agent for service of process in England, the
identity and address of such agent to be notified to each of the other parties
forthwith upon execution of this agreement and each party appointing an agent
for service of process undertakes not to revoke the authority of such agent. If,
for any reason, any such agent no longer serves as agent of its appointor to
receive service of process, the appointor shall promptly appoint another such
agent and advise each of the parties thereof immediately.
NOTICES
26. Any notice, instruction, consent or other document to be given under this
Agreement shall be in writing and delivered personally or by pre-paid recorded
delivery or facsimile (provided that, in the case of facsimile, the notice is
confirmed by being delivered by hand or sent by first class post within 72 hours
thereafter) to the recipient party at the address shown in Schedule 1 to this
Agreement or to such other address, or to a facsimile number, as is notified in
writing from time to time by such party to each of the other parties. Any notice
delivered personally shall be deemed to be received when delivered, any notice
sent by pre-paid recorded delivery post shall be deemed to have been received 5
Business Days after posting and any notice sent by facsimile, at the time of
transmission (provided that if transmission occurs after 6 p.m. on a Business
Day, or not on a Business Day, delivery will be deemed to occur at 9 a.m. on the
next Business Day). References to time in this clause are references to local
time in the country of the recipient of the notice.
IN WITNESS WHEREOF this agreement has been executed by the parties the day and
year first before written.
<PAGE>
SCHEDULE 1
Part A - Management Shareholders
Name Address Address for service of notices
and fax number
Nicholas Mark Cooke "Tunbridge Wells" Richards Butler
97 Harrington Sound Beaufort House
Road 15 St. Botolph Street
Smiths H502 London EC3A 7EE
Bermuda Fax: 0170 247 5091
For the attention of
Peter Michelmore
Alan Albert Fairs 47 Elmfield Road Richards Butler
Chingford Beaufort House
London E4 7HT 15 St. Botolph Street
London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Mark Kerr-Smiley 50 Granard Road Richards Butler
London SW12 8UJ Beaufort House
15 St. Botolph Street
London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Nicholas Brown Redcroft Richards Butler
East End Beaufort House
Pagglesham 15 St. Botolph Street
Rochford London EC3A 7EE
Essex SS4 2EF Fax: 0170 247 5091
For the attention of
Peter Michelmore
John Anthony Lambert 30 Wakefield Close Richards Butler
Emerson Park Beaufort House
Hornchurch 15 St. Botolph Street
Essex RM11 London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
<PAGE>
Jeffrey Ronald Butler 10 Mossbank Richards Butler
Grays Beaufort House
Essex RM17 7EF 15 St. Botolph Street
London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Paul Ian Pearson Fishermans Cottages Richards Butler
16 Silver Road Beaufort House
Burnham on Crouch 15 St. Botolph Street
Essex CMO 8LA London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Jacques Georges Sacy 42 Scarsdale Villas Richards Butler
London W8 6PP Beaufort House
15 St. Botolph Street
London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
David Terrell Colley 2 Gainsborough Court Richards Butler
College Road Beaufort House
London SE21 7LT 15 St. Botolph Street
London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
George William Jones 29 Western Gardens Richards Butler
London W5 3RS Beaufort House
15 St. Botolph Street
London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Christopher James Blois Snode Hill House Richards Butler
Needham Beech Beaufort House
Alton 15 St. Botolph Street
Hampshire GU34 4AX London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
<PAGE>
Richard John Wells Thollon Richards Butler
56 Kevington Drive Beaufort House
Chislehurst 15 St. Botolph Street
Kent BR6 7RN London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
David Maxwell Tarsh 4 Harvey Lodge Richards Butler
Admiral Walk Beaufort House
Carlton Gate 15 St. Botolph Street
London W9 London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Penelope Atteline 97 Harrington Sound Richards Butler
Cooke Road Beaufort House
Smiths H502 15 St. Botolph Street
Bermuda London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Allan Cooper 14 Wilmington Richards Butler
Avenue Beaufort House
London 15 St. Botolph Street
W4 3HA London EC3A 7EE
Fax: 0170 247 5091
For the attention of
Peter Michelmore
Paul Murray Apartment 23 Richards Butler
Mizzentop Longford Beaufort House
Road 15 St. Botolph Street
Warwick WK06 London EC3A 7EE
Bermuda Fax: 0170 247 5091
For the attention of
Peter Michelmore
Part B - Investors
Name Address Address for service of notices
and fax number
<PAGE>
Bridge Street Fund c/o The Corporation Goldman Sachs International
1995, L.P. Trust Company, Peterborough Court
Corporation Trust 133 Fleet Street
Center, 1209 Orange London EC4A 2BB
Street, DE 19801 For the attention of
U.S.A. Monique Stein
Fax no. 0170 774 4123
GS Capital Partners II, c/o The Corporation Goldman Sachs International
L.P. Trust Company, Peterborough Court
Corporation Trust 133 Fleet Street
Center, 1209 Orange London EC4A 2BB
Street, DE 19801 For the attention of
U.S.A. Monique Stein
Fax no. 0170 774 4123
GS Capital Partners II c/o Maples and Goldman Sachs International
Offshore, L.P. Calder, Peterborough Court
PO Box 309, 133 Fleet Street
Grand Cayman, London EC4A 2BB
Cayman Islands, For the attention of
British West Indies Monique Stein
Fax no. 0170 774 4123
Stone Street Fund 1995, c/o The Corporation Goldman Sachs International
L.P. Trust Company, Peterborough Court
Corporation Trust 133 Fleet Street
Center, 1209 Orange London EC4A 2BB
Street, DE 19801 For the attention of
U.S.A. Monique Stein
Fax no. 0170 774 4123
Goldman Sachs & Co. Messe Turm Goldman Sachs International
Verwaltungs GmbH as 60308 Frankfuram Peterborough Court
general partner of GS Main 133 Fleet Street
Captial Partners I Germany London EC4A 2BB
German Civil Law For the attention of
Partnership (with Monique Stein
limited liability) Fax no. 0170 774 4123
Part C - The Company
Name Address Address for service of notices
and fax number
<PAGE>
Stirling Cooke Browne Cedar House Richards Butler
Holdings Limited 41 Cedar Avenue Beaufort House
Hamilton HM12 15 St. Botolph Street
Bermuda London EC3A 7EE
For the attention of
Peter Michelmore
Fax No. 0170 247 5091
with a copy to
Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB
For the attention of
Monique Stein
Fax No. 0170 774 4123
<PAGE>
SCHEDULE 2
Corporate Governance
The actions referred to in clause 3.2 are the following:
l. A merger, consolidation or liquidation.
2. The acquisition of another business entity.
3. The establishment of any joint venture or partnership which is either
material in the context of the business of the Group or outside the ordinary
course of the Group's business or the establishment of any non-wholly owned
subsidiary undertaking.
4. Any entry into a business:
(a) (i) other than a business which is ancillary to an existing business of the
Group; or
(ii) which involves a member of the Group in underwriting for its own
account, the provision of reinsurance or the assumption of risk in relation
to any policy of insurance; or
(b) (in the case of any business which does not come within the ambit of
business for which approval is required pursuant to paragraph 4(a) above)
which is either
(i) material in the context of the Group taken as a whole; or otherwise
(ii) requires future commitments or capital expenditure in excess of
US$200,000 on any single occasion or in excess of US$350,000 in aggregate in
any Financial Year in either case other than as expressly approved in the
Budget or Business Plan.
5. The approval of any underwriting guidelines or any significant change in or
departure from such guidelines.
6. Approval of the Budget and Business Plan (including the constituent elements
of each) and any material amendments to either of them.
7. Other than as approved as part of the Budget or Business Plan or any
material amendment to either of them above, any:
(a) asset sales in excess of US$200,000;
(b) incurrence of indebtedness in excess of US$200,000 on any single
occasion and in excess of US$350,000 in aggregate for the Group in any
Financial Year;
(c) liens on or encumbrances of assets in excess of US$200,000 on any single
occasion and in excess
<PAGE>
of US$350,000 in aggregate for the Group in any Financial Year; and
(d) capital expenditure in excess of US$200,000 on any single occasion and
in excess of US$350,000 in aggregate by the Group in any Financial Year.
8. Entering into or amending any contract which is material in the context of
the business of the Group as a whole, other than amending any contract
entered into in the ordinary course of business where such amendments are
part of the ordinary course of business and the particular amendment is not
material in the context of the Group as a whole.
9. Any issue or sale of Equity Securities.
10. Any payment or declaration of any dividend or other distribution (other than
a dividend representing, in total, not more than the lesser of:
(i) (Pounds)1 million; and
(ii) 20 percent of the after-tax profits of the Company of the Financial
Year in respect of which the dividend is declared or paid
in each case provided that the same may be accommodated within (A) the Group's
working capital and cash flow requirements as set out in the relevant Budget;
and (B) the Company's obligations and commitments (if any) pursuant to the
Further Financing Agreement.
11. Any repurchase or redemption of any securities or debt (except to the extent
such debt is due in accordance with its terms).
12. Any registrations of securities under the Securities Act of 1933 (as
amended) or a proposed listing of securities on any stock exchange or the
granting of registration rights.
13. Any transaction with a related party (related party having the meaning given
it in paragraph 1 of Chapter 11 of the London Stock Exchange's Listing Rules
in force at the date hereof, except that references to "substantial
shareholders" should be read as references to any Shareholder) other than in
accordance with the Agreement.
14. Any appointment or removal of any senior management of any member of the
Group, being any person, whether or not a director of any such member, who
is acknowledged as having a material role or influence in the conduct of the
affairs of the Group taken as a whole, or any individual member of the Group
(Senior Management) including, but not limited to, the removal of any of the
following persons: Mark Cooke, Nick Brown, George Jones.
15. Any amendment to the constitutional documents of any member of the Group
16. Any change in the size of, or to the maximum permitted number of directors
on, the Board of Directors.
<PAGE>
17. Any appointment or removal of the Auditor.
18. Any adoption of or changes to any accounting policies other than such
changes as are necessary to comply with generally accepted accounting
principles applicable in the jurisdiction concerned.
19. Any adoption or material amendment of employment contracts of Senior
Management or any benefit plans or pension arrangements.
20. Entering into any guarantee, indemnity or suretyship other than in respect
of the obligations of the Company and/or the Subsidiaries in the ordinary
course of business.
21. The commencement and settlement of any litigation which is material to the
business of the Group taken as a whole.
<PAGE>
SCHEDULE 3
Right of first offer on sale or transfer of Equity Securities
1. Subject to Clause 6.3, in the event that a Shareholder (a Selling
Shareholder) wishes to sell or transfer any or all of its Equity Securities (the
Offered Securities) it must first follow the procedure set out in paragraph 2.
2(a) The Selling Shareholder must offer the Offered Securities to the Company
and the Shareholders other than the Selling Shareholder (the Other
Shareholders) for purchase (described in this Schedule as the First Offer).
(b) The First Offer shall be made by the Selling Shareholder to the Company and
the Other Shareholders by written notice to the registered office (the
First Offer Notice) giving details of
(i) the number of Offered Securities;
(ii) the proposed consideration for each of the Offered Securities and
where the whole of such consideration is not to be satisfied by the payment
of cash, a figure which the Selling Shareholder reasonably considers to be
equal to the monetary value of the whole of such consideration (which, in
the case of consideration in the form of publicly quoted securities, shall
be the average mid-market price of each such security on the five Business
Days immediately preceding the date of the First Offer Notice) on a per
security basis;
(iii) a list of persons (not exceeding 100 in number) to whom the Selling
Shareholder may wish to offer the Offered Securities (the List). Where
appropriate, the List shall specify the entity which, so far as the Selling
Shareholder is aware, is the ultimate holding company of the persons named.
(iv) any other material terms and conditions on which the Offered
Securities are proposed to be sold.
(c) (i) The Company (if so decided by a Super-Majority) and the Other
Shareholders may each elect to purchase within 14 days of receipt of the
First Offer Notice, by notice to the Selling Shareholder and the Company
(or, in the case of the Company, to the Other Shareholders), all or
whatever proportion of the Offered Securities as they may apply for on the
same terms as are set out in the First Offer Notice.
(ii) If the Company elects to purchase Offered Securities in accordance
with paragraph 2(c)(i) and is subsequently entitled to purchase any or all
of those Offered Securities in accordance with the remainder of this
paragraph 2 and may do so as a matter of law and is not prohibited from
doing so by any loan or other agreement, each of the Shareholders shall
take all such action as is necessary to procure that such purchase takes
place.
(d) (i) Where, in total, elections are made by the Management Shareholders to
purchase all of, but not more than, the total number of the Offered
Securities, the Offered Securities shall be allocated
<PAGE>
between those Management Shareholders making elections in the amounts for
which they have applied and the remainder of this paragraph shall not
apply; and
(ii) Where, in total, elections are made by the Management Shareholders and
the Company and the Other Shareholders to purchase all of, but not more
than, the total number of the Offered Securities, the Offered Securities
shall be allocated between those persons making elections in the amounts
for which they have applied and the remainder of this paragraph shall not
apply.
(e) Subject to paragraph 2(d) above, where the Selling Shareholder is also a
Management Shareholder, in the event that the Company and/or the Other
Shareholders elect to purchase, in aggregate, more than the total number of
Offered Securities, the following procedure shall apply:
(i) the Offered Securities shall be allocated between the Management
Shareholders other than the Selling Shareholder (the Other Management
Shareholders) who have elected to purchase Offered Securities pro rata to
their then existing holdings of Equity Securities or in the case of a
Management Shareholder who has applied for fewer Offered Securities than
the pro rata amount attributable to him, the amount for which he has
applied. To the extent that any of the Offered Securities then remain
unallocated and any Other Management Shareholder has made an election in
respect of more than his pro rata entitlement, the excess shall be
allocated (as nearly as may be) pro rata to the then existing holdings of
such of the Other Management Shareholders who have made such an election,
provided that such apportionment shall not be made so as to result in any
Other Management Shareholder being allocated more Equity Securities than he
applied for, any remaining excess being apportioned by applying this
paragraph 2(e)(i) without taking account of any such Other Management
Shareholders.
(ii) To the extent that any of the Offered Securities then remain
unallocated and the Company has made an election to purchase, those Offered
Securities shall be applied in satisfying the Company's election (to the
extent lawful and not prohibited from doing so by any loan or other
agreement), save that the Company shall not be allocated more Offered
Securities than it has elected to purchase.
(iii) To the extent that any of the Offered Securities then remain
unallocated those Offered Securities shall be allocated between such Other
Shareholders other than all Other Management Shareholder (Other Non-
Management Shareholders) who have elected to purchase Offered Securities
pro rata to their then existing holdings of Equity Securities or, in the
case of a Non-Management Other Shareholder who has applied for fewer
Offered Securities than the pro rata amount attributable to him, the amount
for which he has applied. To the extent that any of the Offered Securities
then remain unallocated and any Other Non-Management Shareholder has made
an election in respect of more than his pro rata entitlement, the excess
shall be allocated (as nearly as may be) pro rata to the then existing
holdings of such of the Other Non-Management Shareholders who have made
such an election, provided that such apportionment shall not be made so as
to result in any Other Non-Management Shareholder being allocated more
Equity Securities than he applied for, any remaining excess being
apportioned by applying this paragraph 2(e)(iii) without taking account of
any such Other Non-Management Shareholders.
(f) Where the Selling Shareholder is not also a Management Shareholder, in the
event that the Company and/or the Other Shareholders elect, in aggregate,
for more than the total number of Offered
<PAGE>
Securities, the Company's election will be satisfied in full (to the extent
lawful and not prohibited from doing so by any ban or other agreement) and
the remaining Offered Securities (if any) will be allocated between the
Other Shareholders who have elected to purchase Offered Securities pro rata
to their then existing holdings of Equity Securities or, in the case of a
Other Shareholder who has applied for fewer Offered Securities than the pro
rata amount attributable to him, the amount for which he has applied. To
the extent that any of the Offered Securities then remain unallocated and
any Other Shareholder had served an Offer Notice in respect of more than
his pro rata entitlement, the excess shall be allocated (as nearly as may
be) pro rata to the then existing holdings of such of the Other
Shareholders who have applied for any part of such excess, provided that
such apportionment shall not be made so as to result in any Other
Shareholder being allocated more Equity Securities than he applied for, any
remaining excess being apportioned by applying this paragraph 2(f) without
taking account of any such Other Shareholders.
3. In the event that the Company and the Other Shareholders together do not
elect to purchase all of the Equity Securities included in the First Offer
within 14 days of the First Offer having being made, the Selling Shareholder
shall have the right for 90 days from the expiry of that 14 day period to sell
the Offered Securities to any person whose name appears on the List other than a
Prohibited Person (as defined in paragraph 4 below), for consideration not less
than and on other terms and conditions that are no more favourable to that
person than were set out in the First Offer Notice.
4. An Other Shareholder shall have the right to object to any person whose
name appears on the List who, in the reasonable opinion of that Other
Shareholder, would be materially detrimental for the Company to have as a
shareholder. The Other Shareholder must notify to the Selling Shareholder, the
remaining Other Shareholders and the Company the name of such person within 14
days of receipt of the List (or, in the case of a person added pursuant to
paragraph 5 below, within 7 days of receiving notice of such person), and such
notification is to be accompanied by a written explanation of the grounds on
which it is made. If a simple majority of the Board of Directors of the Company
reasonably considers that the Other Shareholder has provided satisfactory
grounds, the person to whom the Other Shareholder objects shall be a Prohibited
Person.
5. The Selling Shareholder may, at any time prior to the date 15 days prior to
the expiry of the 90 day time period specified in paragraph 3 above, and
provided that the Offered Securities have not all been acquired by the Other
Shareholders and/or the Company, notify the Company and Other Shareholders of
the names of further persons (and, if applicable, so far as the Selling
Shareholder is aware, their ultimate holding companies) to add to the List,
provided that the total number of persons included on the List (excluding any
Prohibited Persons) shall not exceed 150. The Company and Other Shareholders
shall be entitled to object to such further persons in accordance with the
provisions of paragraph 4 above.
6. In the event that Offered Securities are allocated pursuant to paragraph 2
above, the Company shall notify each of the persons who have been allocated
Offered Securities of the number of Offered Securities that he or it has been
allocated and the consideration payable for them and the transfer of the Offered
Securities so allocated shall take place on the date which is ten Business Days
from the Company making such notification.
7. Transfers of Offered Securities pursuant to this Schedule 3 shall take
place in accordance with the provisions of Schedule 6.
<PAGE>
8. To the extent that an Other Shareholder to whom Offered Securities have
been allotted pursuant to this Schedule fails to complete the purchase of those
Offered Securities in accordance with Schedule 6, those Offered Securities shall
be treated as having been re-offered by the Selling Shareholder in accordance
with the provisions of this Schedule save that such defaulting Other Shareholder
shall not be entitled to apply to acquire such Offered Securities.
<PAGE>
SCHEDULE 5
Put and Auction rights
1. Provided that none of the events specified in clause 10 of the Agreement
shall have taken place prior to the date specified in that clause, the provision
of this Schedule 5 shall apply.
2. Goldman Sachs shall have the right, exercisable on one occasion only,
following the date specified in clause 10 to require that a valuation of the
fair market value (FMV) of the Equity Securities of the Company be performed by
an international investment bank, agreed to by the Company and Goldman Sachs,
such bank acting as an expert and not an arbitrator and whose decision shall,
save in the case of manifest error, be final and binding on all the parties. In
the event that no international investment bank can be agreed upon by Goldman
Sachs and the Company, either party may apply to the President for the time
being of the London Investment Banks Association for the nomination of an
independent investment bank and the parties agree to accept any firm so
nominated.
3. Once the FMV has been established in accordance with clause 1 and notified
to all of the Shareholders, Goldman Sachs shall have the right for 90 days
following receipt of such notification to require the Company, exercisable by
notice in writing to the Company, subject to clause 4 of this Schedule, to
purchase the Equity Securities in the Company then held by Goldman Sachs for FMV
(without any deduction by virtue of its being a minority interest).
4. In the event that the Company cannot lawfully purchase or is otherwise
prohibited from purchasing the Equity Securities pursuant to paragraph 3,
Goldman Sachs shall have the right to require the Company to be auctioned and
sold in a merger, stock or asset sale, or otherwise. Goldman Sachs shall have
the right to conduct such an auction and accept such terms for the Company or
its assets (as the case may be) as it may elect, provided that all Shareholders
shall be entitled to receive consideration on the same basis, and participate in
such transaction on the same terms, as Goldman Sachs. The Management
Shareholders other than Goldman Sachs shall have the right to bid in the
auction, and to the extent that any of them so does, they agree to abide by the
reasonable terms of the auction.
5. In the event that Goldman Sachs requires an auction pursuant to paragraph
4, the Shareholders agree that they shall (and shall procure that their
respective agents, representatives and Subsidiaries shall):
(a) in the case of a share sale, (to the extent that the Equity Securities held
by Goldman Sachs are not sold to the Management Shareholders), sell their
Equity Securities on the same terms as Goldman Sachs as part of the
resulting transaction and in all other cases take such other action as may
be necessary or desirable to facilitate such transaction;
(b) procure that the Directors (or, if necessary, the shareholders in general
meeting) agree to vote in favour of the transaction resulting from the
auction and take such other action as may be necessary or desirable to
facilitate such transaction; and
(c) provide such co-operation in the auction process as Goldman Sachs may from
time to time reasonably request.
<PAGE>
SIGNED by )
NICHOLAS MARK COOKE ) /s/ Nicholas Mark Cooke
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
ALAN ALBERT FAIRS ) /s/ Alan Albert Fairs
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
MARK KERR-SMILEY ) /s/ Mark Kerr-Smiley
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
<PAGE>
SIGNED by )
NICHOLAS BROWN ) /s/ Nicholas Brown
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
JOHN ANTHONY LAMBERT ) /s/ John Anthony Lambert
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
JEFFREY RONALD BUTLER ) /s/ Jeffrey Ronald Butler
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
PAUL IAN PEARSON ) /s/ Paul Ian Pearson
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
JACQUES GEORGE SACY ) /s/ Jacques George Sacy
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
DAVID TERRELL COLLEY ) /s/ David Terrell Colley
in the presence of: ) as power of attorney
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
GEORGE WILLIAM JONES ) /s/ George William Jones
in the presence of: ) as power of attorney
Witness- Signature:
Name:
Address:
SIGNED by )
CHRISTOPHER JAMES ) /s/ Christopher James Blois Needham
BLOIS NEEDHAM ) as power of attorney
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
RICHARD JOHN WELLS ) /s/ Richard John Wells
in the presence of: ) as power of attorney
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
DAVID MAXWELL TARSH ) /s/ David Maxwell Tarsh
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
PENELOPE ATTELINE COOKE ) /s/ Penelope Atteline Cooke
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
PAUL MURRAY ) /s/ Paul Murray
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
ALLAN COOPER ) /s/ Allan Cooper
by GEORGE WILLIAM JONES ) as power of attorney
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General ) /s/ Bridge Street Fund 1995, L.P.
Partner of BRIDGE STREET ) as power of attorney
FUND 1995, L.P. )
in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by JEAN de POURTALES )
as attorney on behalf of GOLDMAN ) /s/ Goldman Sachs & CO Verwaltungs
SACHS & CO VERWALTUNGS ) as power of attorney
GmbH as General Partner of )
GS CAPITAL PARTNERS II )
GERMANY CIVIL LAW )
PARTNERSHIP (with limited )
liability) in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General ) /s/ GS Capital Partners II, L.P.
Partner of GS CAPITAL ) as power of attorney
PARTNERS II, L.P. in the presence )
of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General ) /s/ GS Capital Partners II Offshore, L.P.
Partner of GS CAPITAL ) as power of attorney
PARTNERS II OFFSHORE, L.P. )
in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General ) /s/ Stone Street Fund 1995, L.P.
Partner of STONE STREET ) as power of attorney
FUND 1995, L.P. )
in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
STIRLING COOKE BROWN ) /s/ Stirling Cooke Brown Holdings Limited
HOLDINGS LIMITED ) as power of attorney
acting by: )
Director:
Secretary:
<PAGE>
EXHIBIT 4.2
January 1996
STIRLING COOKE BROWN HOLDINGS LIMITED
MARK COOKE and others
BRIDGE STREET FUND 1995, L.P.
G S CAPITAL PARTNERS II, L.P.
GOLDMAN SACHS & Co. VERWALTUNGS GmbH
(for GS CAPITAL PARTNERS II GERMANY
CIVIL LAW PARTNERSHIP)
G S CAPITAL PARTNERS II OFFSHORE, L.P.
STONE STREET FUND 1995, L.P.
______________________________
REGISTRATION RIGHTS
AGREEMENT
______________________________
<PAGE>
CONTENTS
Clause Page
-i-
<PAGE>
THIS REGISTRATION RIGHTS AGREEMENT is made on ___ January, 1996.
BETWEEN:
(1) STIRLING COOKE BROWN HOLDINGS LIMITED of Cedar House, 41 Cedar Avenue,
Hamilton, Bermuda (the Company);
(2) THOSE PERSONS whose names and addresses are set out in Part A of Schedule 1
(the Management Shareholders); and
(3) THOSE PERSONS whose names and addresses are set out in Part B of Schedule 2
(the Investors).
WHEREAS:
(A) The Company, the Management Shareholders and the Investors have together
entered into an agreement of even date hereof regulating the manner in
which the Company and its subsidiaries will carry on business and the
manner in which the relationship between the Management Shareholders and
the Investors will be governed (the Shareholders' Agreement).
(B) Pursuant to the Shareholders' Agreement, the Company, the Management
Shareholders and the Investors have agreed to the provision of certain
registration rights with respect to the ordinary share capital of the
Company as are contained in this Agreement.
IT IS AGREED as follows:
DEFINITIONS AND INTERPRETATION
1.1 In this Agreement the following terms shall (unless the context otherwise
requires) have the following respective meanings:
Business Day means a day on which banks generally are open in New York and
London;
Commission means the United States Securities and Exchange Commission;
Holder or Holders means any party who is a signatory to this Agreement and any
party who shall hereafter acquire and hold Registrable Securities;
IPO means an offering of at least 15% of the Ordinary Share Capital of the
Company (on a fully diluted basis), whether in the United States or the United
Kingdom, which generates net proceeds in aggregate to the Company and/or Holders
(at that time) of at least USS$15 million (or the equivalent in United Kingdom
pounds sterling) and pursuant to which all or any of the Ordinary Shares become
registered under section 12 of the Securities Exchange Act of 1934, as amended
(the Exchange Act);
Ordinary Share Capital and Ordinary Shares mean the ordinary shares of US$1 each
in the
<PAGE>
Company, from time to time in issue;
Ordinary Share Equivalents mean any securities convertible, exercisable or
exchangeable into ordinary shares;
Registrable Securities means any Ordinary Shares of the Company in issue and any
Ordinary Shares issuable on conversion, exercise or exchange of any Ordinary
Share Equivalents provided that any particular Registrable Securities shall
cease to be Registrable Securities when:
(i) a registration statement with respect to the sale of such securities
shall have been declared effective under the Securities Act and such
securities shall have been disposed of in accordance with such
registration statement; or
(ii) such securities shall have been sold (other than in a privately
negotiated sale) pursuant to Rule 144 (or any successor provision)
under the Securities Act and in compliance with the requirements of
paragraphs (f) and (g) of Rule 144 (notwithstanding the provisions of
paragraph (k) of such Rule); and
Securities Act means the United States Securities Act of 1933, as amended.
1.2 Except where the context requires otherwise, references to clauses and
Schedules are to clauses of and Schedules to this Agreement.
1.3 References in this Agreement to statutory provisions shall (where the
context so admits and unless otherwise expressly provided) be construed as
references to those provisions which are in force at any time prior to the date
of this Agreement as respectively amended, consolidated, extended or re-enacted
from time to time (whether before or after the date of this Agreement), and to
any orders, regulations, instruments or other subordinate legislation made under
such statutory provisions.
1.4 Headings are inserted for convenience only and shall not affect the
construction of this Agreement or the Schedules.
1.5 References to persons shall be deemed to include references to natural
persons, to firms, to partnerships (whether or not limited partnerships), to
companies, to corporations, to associations, to organisations and to trusts (in
each case whether or not having separate legal personality), but references to
individuals shall be deemed to be references to a natural person only;
1.6 Any references in this Agreement to 'US$' are to United States Dollars.
1.7 Wherever in this Agreement the Investors are expressed to be provided with
any right or entitlement, such right or entitlement may be exercised by any one
or all of the Investors, The Goldman Sachs Group, L.P., or any other subsidiary
undertaking of, or any investment vehicle,
-2-
<PAGE>
including any limited partnership, the general partner, managing general partner
or managing agent of which is under the control (directly or indirectly) of, The
Goldman Sachs Group L.P.
DEMAND REGISTRATIONS
2.1(a) Subject to clauses 2.2 and 3 below, at any time and from time to time
after the earlier of
(i) the closing of an IPO; and
(ii) three years following the date of the Shareholders'
Agreement
the Investors shall have the right to require the Company to file a
registration statement under the Securities Act covering all or any
part of their Registrable Securities, by delivering a written request
therefor to the Company specifying the number of Registrable
Securities to be included in such registration by each Investor and
the intended method of distribution thereof, such requests by the
Investors being Demand Registration Requests and the registrations so
requested being Demand Registrations.
(b) As promptly as practicable, but no later than ten days after receipt
of a Demand Registration Request, the Company shall give written
notice (the Demand Exercise Notice) of such Demand Registration
Request to all Holders of record of Registrable Securities.
(c) The Company, subject to clauses 3 and 6, shall include in a Demand
Registration:
(i) the Registrable Securities in respect of which the Investors
requested such registration; and
(ii) the Registrable Securities of any Holder which shall have
made a written request to the Company for registration
thereof (which request shall specify the maximum number of
Registrable Securities intended to be disposed of by such
Holder(s)) within 30 days after the receipt by the Holder of
the Demand Exercise Notice (or 15 days if, at the request of
the Holder(s) which requested such registration, the Company
states in such written notice or gives telephonic notice to
all Holders, with written confirmation to follow promptly
thereafter, that such registration will be on Form F-3).
(d) The Company shall, as expeditiously as possible following a Demand
Registration Request, use its best efforts to:
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(i) effect such registration under the Securities Act
(including, without limitation, by means of a shelf
registration pursuant to Rule 415 under the Securities Act,
if so requested and if the Company is then eligible to use
such a registration) of the Registrable Securities which the
Company has been so requested to register, for distribution
in accordance with such intended method of distribution; and
(ii) if requested by the Investors, obtain acceleration of the
effective date of the registration statement relating to
such registration.
(e) The Investors may make Demand Registration Requests on a maximum of
five separate occasions, but in calculating how many requests the
Investors have made for the purposes of this clause 2.1(e), Demand
Registration Requests which are not effected (for any reason) shall
not be included.
2.2 The Company shall not be required to cause a registration pursuant to
clause 2.1 (a) to be declared effective:
(a) within a period of 180 days after the effective date of any other
registration statement of the Company other than a registration under
Form S-8.
(b) in accordance with clause 2.5, in the event that a Valid Business
Reason (as defined in clause 2.5 (a)) exists.
2.3 The Company, subject to clauses 3 and 6, may elect to include in any
registration statement and offering made pursuant to clause 2.1:
(a) authorised but unissued Ordinary Shares; and
(b) any other Ordinary Shares which are requested to be included in such
registration pursuant to the exercise of piggyback registration rights
granted by the Company after the date hereof in accordance with the
terms of this Agreement (Additional Piggyback Rights) provided,
however, that such inclusion shall be permitted only to the extent
that it is pursuant to and subject to the terms of the underwriting
agreement or arrangements, if any, entered into by the Investors on
the Demand Registration.
2.4 Goldman, Sachs & Co. (GS & Co.) shall have the right to act as the lead
managing underwriter in any registration of Registrable Securities. If GS & Co.
acts as managing underwriter in any such registered offering, to the extent
required by applicable law, a Qualified Independent Underwriter (as defined in
Schedule E to the National Association of Securities Dealers, Inc. By-Laws), as
approved by GS & Co. (whose approval shall not be unreasonably withheld), shall
be retained by the Company, and the Company shall pay all fees and expenses
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(other than underwriting discounts and commissions) of such Qualified
Independent Underwriter.
2.5(a) If the Board of Directors of the Company, in its good faith judgement,
determines that any registration of Registrable Securities should not be made or
continued because it would materially interfere with any material financing,
acquisition, corporate reorganisation or merger or other transaction involving
the Company or any of its subsidiaries (a Valid Business Reason), the Company
may postpone filing a registration statement relating to a Demand Registration
Request until such Valid Business Reason no longer exists, but in no event for
more than six months, and, in case a registration statement has been filed
relating to a Demand Registration Request, if the Valid Business Reason has not
resulted from actions taken by the Company, the Company may cause such
registration statement to be withdrawn and its effectiveness terminated or may
postpone amending or supplementing such registration statement. The Company
shall give written notice of its determination to postpone or withdraw a
registration statement and of the fact that the Valid Business Reason for such
postponement or withdrawal no longer exists, in each case, promptly after the
occurrence thereof. If the Company shall give any notice of withdrawal or
postponement of a registration statement, the Company shall, at such time as the
Valid Business Reason that caused such withdrawal or postponement no longer
exists (but in no event later than six months after the date of the
postponement), use its best efforts to effect the registration under the
Securities Act of the Registrable Securities covered by the withdrawn or
postponed registration statement in accordance with this Agreement (unless the
Investor(s) making the Demand Registration Request shall have withdrawn such
request, in which case the Company shall not be considered to have effected an
effective registration for the purposes of this Agreement), and such
registration shall not be withdrawn or postponed pursuant to clauses 2.2(a) or
2.2(b).
2.5(b) If the Company shall give any notice of postponement or withdrawal of
any registration statement, the Company shall not, during the period of
postponement or withdrawal, register any Registrable Securities, other than
pursuant to a registration statement on Form F4 or S-8 (or an equivalent
registration form then in effect). Each Holder of Registrable Securities agrees
that, upon receipt of any notice from the Company that the Company has
determined to withdraw any registration statement pursuant to clause 2.5(a)
above, such Holder will discontinue its disposition of Registrable Securities
pursuant to such registration statement and, if so directed by the Company, will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such Holder's possession of the prospectus
covering such Registrable Securities that was in effect at the time of receipt
of such notice. If the Company shall have withdrawn or prematurely terminated a
registration statement filed pursuant to a Demand Registration Request (whether
pursuant to clause 2.5(a) above or as a result of any stop order, injunction or
other order or requirement of the Commission or any other governmental agency or
court), the Company shall not be considered to have effected an effective
registration for the purposes of this Agreement until the Company shall have
filed a new registration statement covering the Registrable Securities covered
by the withdrawn registration statement and such registration statement shall
have been declared effective and shall not have been withdrawn.
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2.6. If, at any time, the Company proposes or is required to register any of
its equity securities under the Securities Act (other than pursuant to (i)
registrations on such form or similar form(s) solely for registration of
securities in connection with an employee benefit plan or dividend reinvestment
plan or a merger or consolidation or (ii) a Demand Registration under Section
2.1(a)) the Company shall give prompt written notice of its intention to do so
to each of the Investors. Upon the written request of any Investor, made within
30 days following the receipt of any such written notice from the company (which
request shall specify the maximum number of Registrable Securities intended to
be disposed of by such Investor and the intended method of distribution thereof)
the Company shall use its best efforts to cause all such Registrable Securities
specified in the notice to be registered under the Securities Act (with the
securities which the Company at the time proposes to register) to permit the
sale or other disposition by the Investors (in accordance with the intended
method of distribution thereof) of the Registrable Securities to be so
registered. There is no limitation on the number of such piggyback
registrations which the Company is obligated to effect pursuant to this clause
2.6. No registration effected under this Section 2.1(b) shall relieve the
Company of its obligations to effect Demand Registrations.
ALLOCATION OF SECURITIES
3.1 If any Demand Registration pursuant to clause 2.1 involves an underwritten
offering and the managing underwriter advises the Company that, in its view, the
number of securities requested to be included in such registration by the
Holders or any other persons (including those securities requested by the
Company or by Holders exercising Additional Piggyback Rights to be included in
such registration) exceeds the largest number (the Demand Registration Sale
Number) that can be sold in an orderly manner in such offering within a price
range acceptable to the Investors, the Company shall include in such
registration:
(a) first, all Registrable Securities requested to be included in such
registration by Holders of Registrable Securities provided that, if
the number of such Registrable Securities exceeds the Demand
Registration Sale Number, the number of such Registrable Securities
(not to exceed the Demand Registration Sale Number) to be included in
such registration shall be allocated:
(i) first to the Investors up to the number of shares requested
to be included in the Demand Registration Request; and
(ii) thereafter on a pro rata basis among all Holders other than
the Investors requesting that Registrable Securities be
included in such registration, based on the number of
Registrable Securities then owned by each other Holder
requesting inclusion in relation to the number of
Registrable Securities owned by all Holders requesting
inclusion, provided, however, that such ratio will be
calculated after giving effect to the sale of Registrable
Securities by the Investors pursuant to clause 3(a)(i);
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(b) second, to the extent that the number of Registrable Securities to be
included by all Holders is less than the Demand Registration Sale
Number, the Registrable Securities that the Company proposes to
register; and
(c) third, to the extent that the number of Registrable Securities to be
included by all Holders and the number of securities to be included by
the Company is less than the Demand Registration Sale Number, any
other securities that the holders thereof propose to register pursuant
to the exercise of Additional Piggyback Rights.
3.2 If, as a result of the proportion provisions of clause 3.1 any Holder shall
not be entitled to include all Registrable Securities in a registration that
such Holder has requested be included, such Holder may elect to withdraw his
request to include Registrable Securities in such registration or may reduce the
number requested to be included provided that:
(a) such request must be made in writing prior to the earlier of the
execution of the underwriting agreement or the execution of the
custody agreement with respect to such registration; and
(b) such withdrawal shall be irrevocable and, after making such
withdrawal, a Holder shall no longer have any right to include
Registrable Securities in the registration as to which such withdrawal
was made.
REGISTRATION PROCEDURES
4.1 If and whenever the Company is required by the provisions of this Agreement
to use its best efforts to effect or cause the registration of any Registrable
Securities under the Securities Act as provided in this Agreement, the Company
shall, as expeditiously as possible:
(a) Prepare and file with the Commission a registration statement on an
appropriate registration form of the Commission for the disposition of
such Registrable Securities in accordance with the intended method of
disposition thereof, which form:
(i) shall be selected by the Company; and
(ii) shall, in the case of a shelf registration, be available for the
sale of the Registrable Securities by the selling Holders thereof
and such registration statement shall comply as to form in all
material respects with the requirements of the applicable form and
include all financial statements required by the Commission to be
filed therewith, and the Company shall use its best efforts to cause
such registration statement to become and remain effective (provided,
however, that before filing a registration statement or prospectus or
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any amendments or supplements thereto, or comparable statements under
securities or "blue sky" laws of any jurisdiction, the Company will
furnish to counsel for the Investors and the underwriters, if any,
copies of all such documents proposed to be filed (including all
exhibits thereto), which documents will be subject to the reasonable
review and reasonable comment of such counsel, and the Company shall
not file any registration statement or amendment thereto or any
prospectus or supplement thereto to which the Investors or the
underwriters, if any, shall reasonably object in writing);
(b) Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for such period (which shall not be required to exceed 180
days) as any seller of Registrable Securities pursuant to such
registration statement shall request and to comply with the provisions
of the Securities Act with respect to the sale or other disposition of
all Registrable Securities covered by such registration statement in
accordance with the intended methods of disposition by the seller or
sellers thereof set forth in such registration statement;
(c) Furnish, without charge, to each seller of such Registrable Securities
and each underwriter, if any, of the securities covered by such
registration statement such number of copies of such registration
statement, each amendment and supplement thereto (in each case
including all exhibits), and the prospectus included in such
registration statement (including each preliminary prospectus) in
conformity with the requirements of the Securities Act, and other
documents, as such seller and underwriter may reasonably request in
order to facilitate the public sale or other disposition of the
Registrable Securities owned by such seller (the Company hereby
consenting to the use in accordance with all applicable law) of each
such registration statement (or amendment or post-effective amendment
thereto) and each such prospectus (or preliminary prospectus or
supplement thereto) by each such seller of Registrable Securities and
the underwriters, if any, in connection with the offering and sale of
the Registrable Securities covered by such registration statement or
prospectus);
(d) Use its best efforts to register or qualify the Registrable Securities
covered by such registration statement under such other securities or
laws of such jurisdictions as any sellers of Registrable Securities or
any managing underwriter, if any, shall reasonably request, and do any
and all other acts and things which may be reasonably necessary or
advisable to enable such sellers or underwriter, if any, to consummate
the disposition of the Registrable Securities in such jurisdictions
provided, however, that the Company shall not for any purpose be
required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not already so qualified
or to consent to general service of process in any such jurisdiction;
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<PAGE>
(e) Promptly notify each Holder selling Registrable Securities covered
by such registration statement and each managing underwriter, if any:
(i) when the registration statement, any pre-effective amendment,
the prospectus or any prospectus supplement related thereto or
post-effective amendment to the registration statement has been
filed and, with respect to the registration statement or any
post effective amendment, when the same has become effective;
(ii) of any request by the Commission or state securities authority
for amendments or supplements to the registration statement or
the prospectus related thereto or for additional information;
(iii) of the issuance by the Commission of any stop order suspending
the effectiveness of the registration statement or the
initiation of any proceedings for that purpose;
(iv) of the receipt by the Company of any notification with respect
to the suspension of the qualification of any Registrable
Securities for sale under the securities or "blue sky" laws of
any jurisdiction or the initiation of any proceeding for such
purpose;
(v) of the existence of any fact of which the Company becomes aware
which results in the registration statement, the prospectus
related thereto or any document incorporated therein by
reference containing an untrue statement of a material fact or
omitting to state a material fact required to be stated therein
or necessary to make any statement therein not misleading; and
(vi) if at any time the representations and warranties contemplated
by clauses 10.1 and 10.2 below cease to be true and correct in
all material respects; and, if the notification relates to an
event described in clause 4.1(e)(v), the Company shall promptly
prepare and furnish to each such seller and each underwriter, if
any, a reasonable number of copies of a prospectus supplemented
or amended so that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus shall not include
an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein in the light of the circumstances under
which they were made not misleading;
(f) Comply with all applicable rules and regulations of the Commission,
and make generally available to its security holders, as soon as
reasonably practicable after the effective date of the registration
statement (and in any event within 16 months thereafter), an earnings
statement (which need not be audited) covering the period of at least
twelve consecutive months beginning with the first day of the
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Company's first calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the
provisions of section 11(a) of the Securities Act and Rule 158
thereunder;
(g) (i) Cause all such Registrable Securities covered by such
registration statement to be listed on the principal securities
exchange on which similar securities issued by the Company are
then listed (if any), if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or
(ii) if no similar securities are then so listed, and the requirements
set out in clause 11.1(a) of the Shareholders' Agreement are
satisfied and provided it has been so determined in accordance
with the Shareholders' Agreement, to cause all such Registrable
Securities to be listed on the New York Stock Exchange or to
secure designation of all such Registrable Securities as a
National Association of Securities Dealers, Inc. Automated
Quotation System (NASDAQ) national market system security within
the meaning of Rule 11Aa2-1 of the Commission or, failIng that,
but subject to the consent of the Investors, secure NASDAQ
authorisation for such shares, and, without limiting the
generality of the foregoing, take all actions that may be
required by the Company as the issuer of such Registrable
Securities in order to facilitate the managing underwriter's
arranging for the registration of at least two market makers as
such with respect to such shares with the National Association of
Securities Dealers, Inc. (the NASD);
(h) Provide and cause to be maintained a transfer agent and registrar for
all such Registrable Securities covered by such registration statement
not later than the effective date of such registration statement;
(i) Enter into such customary agreements (including, if applicable, an
underwriting agreement) and take such other actions as the Investors
shall reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities. The Investors shall be
parties to such underwriting agreement and may, at their option,
require that the Company make to and for the benefit of the Investors
the representations, warranties and covenants of the Company which are
being made to and for the benefit of such underwriters and which are
of the type customarily provided to institutional investors in
secondary offerings;
(j) Use its best efforts to obtain an opinion from the Company's counsel
and a "cold comfort" letter from the Company's independent public
accountants in customary form and covering such matters as are
customarily covered by such opinions and "cold comfort" letters
delivered to underwriters in underwritten public offerings, which
opinion and letter shall be reasonably satisfactory to the
underwriter, if
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any, and to the Investors and furnish to each Holder participating in
the offering and to each underwriter, if any, a copy of such opinion
and letter addressed to such Holder or underwriter;
(k) Deliver promptly to each Holder participating in the offering and each
underwriter, if any, copies of all correspondence between the
Commission and the Company, its counsel or auditors and all memoranda
relating to discussions with the Commission or its staff with respect
to the registration statement, other than those portions of any such
correspondence and memoranda which contain information subject to
attorney-client privilege with respect to the Company, and, upon
receipt of such confidentiality agreements as the Company may
reasonably request, make reasonably available for inspection by any
seller of such Registrable Securities covered by such registration
statement, by any underwriter, if any, participating in any
disposition to be effected pursuant to such registration statement and
by any attorney, accountant or other agent retained by any such seller
or any such underwriter, all pertinent financial and other records,
pertinent corporate documents and properties of the Company, and cause
all of the Company's officers, directors and employees to supply all
information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration
statement;
(l) Use its best efforts to obtain the withdrawal of any order suspending
the effectiveness of the registration statement;
(m) Provide a CUSIP number for all Registrable Securities, not later than
the effective date or the registration statement:
(n) Make reasonably available its employees and personnel and otherwise
provide reasonable assistance to the underwriters (taking into account
the needs of the Company's businesses and the requirements of the
marketing process) in the marketing of Registrable Securities in any
underwritten offering;
(o) Promptly prior to the filing of any document which is to be
incorporated by reference into the registration statement or the
prospectus (after the initial filing of such registration statement)
provide copies of such document to counsel for the selling holders of
Registrable Securities and to the managing underwriter, if any, and
make the Company's representatives reasonably available for discussion
of such document and make such changes in such document concerning the
selling holders prior to the filing thereof as counsel for such
selling holders or underwriters may reasonably request;
(p) Furnish to each Holder participating in the offering and the managing
underwriter, without charge, at least one signed copy of the
registration statement and any post-effective amendments thereto,
including financial statements and
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schedules, all documents incorporated therein by reference and all
exhibits (including those incorporated by reference);
(q) Cooperate with the selling holders of Registrable Securities and the
managing underwriter, if any, to facilitate the timely preparation and
delivery of certificates not bearing any restrictive legends
representing the Registrable Securities to be sold, and cause such
Registrable Securities to be issued in such denominations and
registered in such names in accordance with the underwriting agreement
prior to any sale of Registrable Securities to the underwriters or, if
not an underwritten offering, in accordance with the instructions of
the selling holders of Registrable Securities at least three business
days prior to any sale of Registrable Securities; and
(r) Take all such other commercially reasonable actions as are necessary
or advisable in order to expedite or facilitate the disposition of
such Registrable Securities.
4.2 The Company may require as a condition precedent to the Company's
obligations under clauses 4.1(a) to 4.1(r) that each seller of Registrable
Securities as to which any registration is being effected furnish the Company
such information regarding such seller and the distribution of such securities
as the Company may from time to time reasonably request provided that such
information shall be used only in connection with such registration.
4.3 Each Holder of Registrable Securities agrees that upon receipt of any
notice from the Company of the happening of any event of the kind described in
clause 4.1(e)(v), such Holder will discontinue such Holder's disposition of
Registrable Securities pursuant to the registration statement covering such
Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by clause 4.1(e) and, if so
directed by the Company, will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies, then in such Holder's possession
of the prospectus covering such Registrable Securities that was in effect at the
time of receipt of such notice. In the event the Company shall give any such
notice, the applicable period mentioned in clause 4.1(b) shall be extended by
the number of days during such period from and including the date of the giving
of such notice to and including the date when each seller of any Registrable
Securities covered by such registration statement shall have received the copies
of the supplemental or amended prospectus contemplated by clause 4.1(e).
4.4 If any such registration statement or comparable statement under "blue sky"
laws refers to any Holder by name or otherwise as the Holder of any securities
of the Company, then such Holder shall have the right to require:
(a) the insertion therein of language, in form and substance satisfactory
to such Holder and the Company, to the effect that the holding by such
Holder of such securities is not to be construed as a recommendation
by such Holder of the investment quality of the Company's securities
covered thereby and that such
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holding does not imply that such Holder will assist in meeting any
future financial requirements of the Company; or
(b) in the event that such reference to such Holder by name or otherwise
is not in the judgment of the Company, as advised by counsel, required
by the Securities Act or any similar federal statute or any state
"blue sky" or securities law then in force, the deletion of the
reference to such Holder.
REGISTRATION EXPENSES
5.1 Expenses shall mean any and all fees and expenses incident to the Company's
performance of or compliance with this Agreement, including, without limitation:
(a) Commission, stock exchange or NASD registration and filing fees and all
listing fees and fees with respect to the inclusion of securities in
NASDAQ;
(b) fees and expenses of compliance with state securities or "blue sky" laws
and in connection with the preparation of a "blue sky" survey, including
without limitation, reasonable fees and expenses of "blue sky" counsel;
(c) printing and copying expenses;
(e) messenger and delivery expenses;
(f) fees and disbursements of counsel for the Company;
(g) with respect to each registration, the reasonable fees and disbursements of
one counsel for the Investors;
(h) fees and disbursements of all independent public accountants (including the
expenses of any audit and/or "cold comfort" letter) and fees and expenses
of other persons, including special experts, retained by the Company;
(i) fees and expenses payable to a Qualified Independent Underwriter; and
(j) any other fees and disbursements of underwriters, if any, customarily paid
by issuers or sellers of securities.
5.2 Subject to clause 5.7, the Company shall pay all Expenses with respect to
any Demand Registration Request that is not effected, for whatever reason.
5.3 Subject to clause 5.7, with respect to any Demand Registration effected
pursuant to clause 2.1;
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(a) the Company shall pay all Expenses related to the first three Demand
Registrations; and
(b) the Holders of Registrable Securities (together with the Company, if the
Company participates in any Demand Registration pursuant to clause 2.3)
shall pay all Expenses related to any other Demand Registration (such
Expenses shall be allocated among the persons (including the Company, if
applicable) participating in a Demand Registration on a pro rata basis
based on the number of Registrable Securities included in such offering by
a person relative to the number of Registrable Securities included in such
offering by all persons, except to the extent Expenses are specifically
attributable to a person or to securities included in an offering by a
person).
5.4 The provisions of this clause 5 shall be deemed amended to the extent
necessary to cause these expense provisions to comply with "blue sky" laws of
each state in which the offering is made.
5.5 In connection with any registration hereunder, each Holder of Registrable
Securities being registered shall pay all underwriting discounts and commissions
and any transfer taxes, if any, attributable to the sale of such Registrable
Securities, pro rata with respect to payments of discounts and commissions in
accordance with the number of shares sold in the offering by such Holder. Any
obligation on the Company to pay monies pursuant to this clause shall be subject
to clause 5.7.
5.6 Subject to clause 5.7, the Company shall, in the case of all registrations
under this Agreement be responsible for all its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties).
5.7(a) The obligation on the Company pursuant to this clause 5 to pay any
Expenses or bear the cost of any other payments or expenses pursuant to
clauses 5.5 or 5.6 (the Other Costs) shall apply only to the extent that
payment of such Expenses or Other Costs is lawful under Bermuda law.
(b) To the extent that the Company may only pay Expenses or Other Costs
lawfully under Bermuda law pursuant to this clause 5 if payment of such
Expenses or Other Costs is approved in accordance with the procedure set
out in section 39B and section 39C of the Bermuda Companies Act 1981
(respectively, the Procedure and the Sections), each of the Holders
agrees:
(i) to use all reasonable endeavours to procure that, at the appropriate
time and in accordance with the time periods set out in the Sections,
the Procedure is undertaken by the Holders, the Company and its
Directors and that all conditions applicable to the Procedure are
fulfilled; and
(ii) to consent to or vote in favour of any resolution proposed to the
Holders in relation to the Procedure.
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(c) To the extent that the Company may not lawfully pay any Expenses or Other
Costs and such payment has not been approved in accordance with the
Procedure at such time as such expense would otherwise fall due for
payment, the Holders agree that all such Expenses and Other Costs shall be
borne by the Holders (other than the Company) in the same proportions as
represent their respective pro rata percentage share of the Registrable
Securities then in issue.
CERTAIN LIMITATIONS ON REGISTRATION RIGHTS
6. In the case of any Demand Registrations pursuant to an underwritten
offering, if the Company (with the approval of the Investors) has determined to
enter into an underwriting agreement in connection therewith, all securities to
be included in such registration shall be subject to an underwriting agreement
and no person may participate in such registration unless such person agrees to
sell such person's securities on the basis provided therein and completes and
executes all reasonable questionnaires, and other documents (other than powers
of attorney) which must be executed in connection therewith, and provides such
other information to the Company or the underwriter as may be necessary to
register such person's securities.
LIMITATIONS ON SALE OR DISTRIBUTION OF OTHER SECURITIES
7.1 Each Holder of Registrable Securities agrees, if requested in writing by
the Company or the managing underwriter, if any, of any registration effected
pursuant to clause 2.1, not to effect any public sale or distribution (including
any sale pursuant to Rule 144 under the Securities Act) of any Registrable
Securities, of any other equity security of the Company or of any security
convertible into or exchangeable or exercisable for any equity security of the
Company other than as part of such underwritten public offering during the time
period reasonably requested by the managing underwriter, not to exceed 180 days
and the Company hereby also so agrees (except that the Company may effect any
sale or distribution of any such securities pursuant to a registration on Form
F4 (if reasonably acceptable to the managing underwriter) or Form S-8, or any
successor or similar form which is then in effect) and agrees to use its
reasonable best efforts to cause each holder of any equity security or of any
security convertible into or exchangeable or exercisable for any equity security
of the Company purchased from the Company at any time other than in a public
offering so to agree.
7.2 The Company hereby agrees that, if it shall previously have received a
request for registration pursuant to clause 2.1, and if such previous
registration shall not have been withdrawn or abandoned, the Company shall not
effect any registration of any of its securities under the Securities Act (other
than a registration on Form F-4 or Form S-8 or any successor or similar form
which is then in effect), whether or not for sale for its own account, until a
period of 180 days shall have elapsed from the effective date of such previous
registration, and the Company shall so provide in any registration rights
agreements hereafter entered into with respect to any of its securities.
NO REQUIRED SALE
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9. Nothing in this Agreement shall be deemed to create an independent
obligation on the part of any Holder to sell any Registrable Securities pursuant
to any effective registration statement.
INDEMNIFICATION
9.1 Subject to clause 9.2, in the event of any registration of any securities
of the Company under the Securities Act pursuant to this Agreement, the Company
will, and hereby does, indemnify and hold harmless, to the fullest extent
permitted by law, each Holder of Registrable Securities, its directors,
officers, fiduciaries, employees and stockholders or general and limited
partners (and the directors, officers, employees, stockholders and general and
limited partners thereof, each other individual, partnership, joint venture,
corporation, trust, unincorporated organisation or government or any department
or agency thereof (each, a Person) who participates as an underwriter or a
Qualified Independent Underwriter, if any, in the offering or sale of such
securities, each officer, director, employee, stockholder or general or limited
partner of such underwriter or Qualified Independent Underwriter, and each other
Person, if any, who controls such seller or any such underwriter within the
meaning of the Securities Act, against any and all losses, claims, damages or
liabilities, joint or several, actions or proceedings (whether commenced or
threatened) in respect thereof (Claims) and expenses (including reasonable fees
of counsel and any amounts paid in any settlement effected with the Company's
consent, which consent shall not be unreasonably withheld or delayed) to which
each such indemnified party may become subject under the Securities Act or
otherwise, insofar as such Claims or expenses arise out of or are based upon:
(a) any untrue statement or alleged untrue statement of a material fact
contained in any registration statement under which such securities were
registered under the Securities Act or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading;
(b) any untrue statement or alleged untrue statement of a material fact
contained in any preliminary, final or summary prospectus or any amendment
or supplement thereto, together with the documents incorporated by
reference therein, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; or
(c) any violation by the Company of any federal, state or common law rule or
regulation applicable to the Company and relating to action required of or
inaction by the Company in connection with any such registration
and the Company will reimburse any such indemnified party for any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such Claim as such expenses are incurred.
9.2 The Company shall not be liable to a Person otherwise indemnified pursuant
to clause
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<PAGE>
9.1 to the extent a Claim or expense arises out of or is based upon any untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission of a material fact made in a registration statement or amendment
thereof or supplement thereto or in a prospectus or a preliminary, final or
summary prospectus in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Person specifically for use
therein.
9.3 Subject to clause 9.4, each Holder of Registrable Securities that are
included in the securities as to which any Demand Registration is being effected
(and, if the Company, with the approval of the Investors, so requires as a
condition to including any Registrable Securities in any Demand Registration
Statement, any underwriter and Qualified Independent Underwriter, if any) shall,
severally and not jointly, indemnify and hold harmless (in the same manner and
to the same extent as set forth in clause 9.1) to the extent permitted by law
the Company, its officers and directors, each Person controlling (within the
meaning of the Securities Act) the Company and all other prospective sellers and
their directors, officers, general and limited partners and respective
controlling Persons with respect to any untrue statement or alleged untrue
statement of any material fact in, or omission or alleged omission of any
material fact from, such registration statement, any preliminary, final or
summary prospectus contained therein, or any amendment or supplement thereto, if
such statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company or its representatives by or on behalf of such Holder or underwriter or
Qualified Independent Underwriter, if any, specifically for use therein and
reimburse such indemnified party for any legal or other expenses reasonably
incurred in connection with investigating or defending any such Claim as such
expenses are incurred. Such indemnity and reimbursement of expenses shall
remain in full force and effect regardless of any investigation made by or on
behalf of such indemnified party and, where applicable, shall survive the
transfer of securities by the Holder.
9.4 The aggregate amount which any such Holder shall be required to pay
pursuant to clauses 9.3, 9.5 and 9.7 shall in no case be greater than the amount
of the net proceeds received by such person upon the sale of the Registrable
Securities pursuant to the registration statement giving rise to such claim.
9.5 Indemnification similar to that specified in clauses 9.1 and 9.3 (with
appropriate modifications) shall be given by the Company (to the fullest extent
permitted by law) and each seller of Registrable Securities with respect to any
required registration or other qualification of securities under any state
securities and "blue sky" laws.
9.6 Any person entitled to indemnification under this Agreement shall notify
promptly the indemnifying party in writing of the commencement of any action or
proceeding with respect to which a claim for indemnification may be made clauses
9.1, 9.3 and 9.5, but the failure of any indemnified party to provide such
notice shall not relieve the indemnifying party of its obligations under those
clauses, except to the extent the indemnifying party is materially
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<PAGE>
prejudiced thereby and shall not relieve the indemnifying party from any
liability which it may have to any indemnified party otherwise than under this
Agreement. In case any action or proceeding is brought against an indemnified
party and it shall notify the indemnifying party of the commencement thereof,
and the indemnifying party shall be entitled to participate therein and, unless
in the reasonable opinion of outside counsel to the indemnified party a conflict
of interest between such indemnified and indemnifying parties may exist in
respect of such claim, to assume the defence thereof jointly with any other
indemnifying party similarly notified, to the extent that it chooses, with
counsel reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
that it so chooses, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defence thereof other than reasonable
costs of investigation, provided that:
(a) if the indemnifying party fails to take reasonable steps necessary to
defend diligently the action or proceeding within 20 days after receiving
notice from such indemnified party that the indemnified party believes it
has failed to do so; or
(b) if such indemnified party who is a defendant in any action or proceeding
which is also brought against the indemnifying party reasonably shall have
concluded that there may be one or more legal defences available to such
indemnified party which are not available to the indemnifying party; or
(c) if representation of both parties by the same counsel is otherwise
inappropriate under applicable standards of professional conduct
then, in any such case, the indemnified party shall have the right to assume or
continue its own defence as set forth above (but with no more than one firm of
counsel for all indemnified parties in each jurisdiction, except to the extent
any indemnified party or parties reasonably shall have concluded that there may
be legal defences available to such party or parties which are not available to
the other indemnified parties or to the extent representation of all indemnified
parties by the same counsel is otherwise inappropriate under applicable
standards of professional conduct) and the indemnifying party shall be liable
for any expenses therefor. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(A) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (B) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
9.7 If for any reason the foregoing indemnity is unavailable or is
insufficient to hold harmless an indemnified party under clauses 9.1, 9.3 and
9.5 then each indemnifying party shall contribute to the amount paid or payable
by such indemnified party as a result of any
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<PAGE>
Claim in such proportion as is appropriate to reflect the relative fault of the
indemnifying party, on the one hand, and the indemnified party, on the other
hand, with respect to such offering of securities. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. If, however, the allocation provided in the second preceding sentence
is not permitted by applicable law, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative faults but also
the relative benefits of the indemnifying party and the indemnified party as
well as any other relevant equitable considerations. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this clause
9.7 were to be determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the preceding sentences of this clause 9.7. The amount paid or payable in
respect of any Claim shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such Claim. No person guilty of fraudulent misrepresentation
(within the meaning of section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding anything in this clause 9.7 to the contrary,
no indemnifying party (other than the Company) shall be required pursuant to
this clause 9.7 to contribute any amount in excess of the net proceeds received
by such indemnifying party from the sale of Registrable Securities in the
offering to which the losses, claims, damages or liabilities of the indemnified
parties relate, less the amount of any indemnification payment made by such
indemnifying party pursuant to clauses 9.3 and 9.5.
9.8 The indemnity agreements contained herein shall be in addition to any other
rights to indemnification or contribution which any indemnified party may have
pursuant to law or contract and shall remain operative and in full force and
effect regardless of any investigation made or omitted by or on behalf of any
indemnified party and shall survive the transfer of the Registrable Securities
by any such party.
9.9 The indemnification and contribution required by this clause 9 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defence, as and when bills are received or expense, loss,
damage or liability is incurred.
9.10 To the extent that the Company may only comply lawfully under Bermuda law
with its obligations pursuant to this clause 9 if such compliance is approved in
accordance with the Procedure (as that term is defined in clause 5.7 hereof),
each of the Holders agrees:
(a) to use all reasonable endeavours to procure that, at the appropriate time
and in accordance with the time periods set out in the Sections (as that
term is defined in clause 5.7 hereof), the Procedure is undertaken by the
Holders, the Company and its Directors and that all conditions applicable
to the Procedure are fulfilled; and
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<PAGE>
(b) to consent to or vote in favour of any resolution proposed to the Holders
in relation to the Procedure.
REQUESTED UNDERWRITTEN OFFERINGS
- --------------------------------
10.1 Subject to clause 10.2, if requested by the underwriters for any
underwritten offering by Holders pursuant to a Demand Registration Request, the
Company shall enter into a customary underwriting agreement with the
underwriters. Such underwriting agreement shall be satisfactory in form and
substance to the Investors and shall contain such representations and warranties
by, and such other agreements on the part of, the Company and such other terms
as are generally prevailing in agreements of that type, including, without
limitation, indemnities and contribution agreements. Any Holder participating
in the offering shall be a party to such underwriting agreement and may, at its
option, require that any or all of the representations and warranties by, and
the other agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such Holder and that
any or all of the conditions precedent to the obligations of such underwriters
under such underwriting agreement be conditions precedent to the obligations of
such Holder.
10.2 The underwriting agreement referred to in clause 10.1 shall contain such
representations and warranties by the participating Holders as are customary in
agreements of that type.
ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES
11.1 Subject to clause 11.2, the Company agrees that it shall not effect or
permit to occur any combination or subdivision of shares which would adversely
affect the ability of the Holder of any Registrable Securities to include such
Registrable Securities in any registration contemplated by this Agreement or the
marketability of such Registrable Securities in any such registration.
11.2 The Company agrees that it will take all reasonable steps necessary to
effect a subdivision of shares if in the reasonable judgment of:
(a) the Investors, on making a Demand Registration Request; and
(b) the managing underwriter for the offering in respect of such Demand
Registration Request
such subdivision would enhance the marketability of the Registrable Security and
each Holder agrees to vote all of its share of capital stock in a manner, and to
take all other actions necessary, to permit the Company to carry out the intent
of the preceding sentence.
RULE 144
- --------
12.1 If the Company shall have filed a registration statement pursuant to the
requirements
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<PAGE>
of section 12 of the Exchange Act or a registration statement pursuant to the
requirement of the Securities Act in respect of the Ordinary Shares or Ordinary
Share Equivalents, the Company covenants that:
(a) so long as it remains subject to the reporting provisions of the Exchange
Act, it will timely file the reports required to be filed by it under the
Securities Act or the Exchange Act (including, but not limited to, the
reports under sections 13 and 15(d) of the Exchange Act referred to in
subparagraph (c)(1) of Rule 144 under the Securities Act); and
(b) it will take such further action as any Holder of Registrable Securities
may reasonably request,
all to the extent required from time to time to enable such Holder to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (A) Rule 144 under the Securities Act,
as such Rule may be amended from time to time or (B) any similar rule or
regulation hereafter adopted by the Commission.
12.2 Upon the request of any Holder of Registrable Securities, the Company will
deliver to such Holder a written statement as to whether it has complied with
the requirements set out in clause 12.1.
UNITED KINGDOM PUBLIC OFFERINGS
- -------------------------------
13. The Investors shall have the right, at any time during which they have the
right to require a Demand Registration pursuant to clause 2.1, to require the
Company:
(a) to authorise and prepare (or assist in the preparation of) any prospectus
which may be required in order to make an offer of Ordinary Shares under
the Public Offers of Securities Regulations; and
(b) to take such other steps as are necessary for the Company to take to
facilitate the sale or offer of Ordinary Shares to the public in the United
Kingdom.
NOMINEES FOR BENEFICIAL OWNERS
- ------------------------------
14. If Registrable Securities are held by a nominee for the beneficial owner
thereof, the beneficial owner thereof may, at its option, be treated as the
Holder of such Registrable Securities for purposes of any request or other
action by any Holder or Holders of Registrable Securities pursuant to this
Agreement (or any determination of any number or percentage of shares
constituting Registrable Securities held by any Holder or Holders of Registrable
Securities contemplated by this Agreement), provided that the Company shall have
received assurances reasonably satisfactory to it of such beneficial ownership.
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<PAGE>
AMENDMENTS AND WAIVERS
- ----------------------
15. This Agreement may be amended, modified, supplemented or waived only upon
the written agreement of the party against whom enforcement of such amendment,
modification, supplement or waiver is sought.
MISCELLANEOUS
- -------------
16.1 This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and the respective successors, personal
representatives and assigns of the parties hereto, whether so expressed or not.
No person other than a Holder shall be entitled to any benefits under this
Agreement, except as otherwise expressly provided herein.
16.2 This Agreement and the rights of the parties hereunder may be assigned by
any of the parties hereto in whole or in part to any transferee of Registerable
Securities provided that upon the consummation of, and as a condition to, any
such assignment the transferee assumes the obligations of the assignor under,
and agrees to be bound by the terms of, this Agreement.
16.3 This Agreement (with the documents referred to herein or delivered
pursuant hereto) embodies the entire agreement and understanding between the
parties hereto and supersedes all prior agreements and understandings relating
to the subject matter hereof.
16.4 This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of New York without giving effect to the
conflicts of law principles thereof.
16.5 This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
16.6 Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or affecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction.
16.7 It is hereby agreed and acknowledged that it will be impossible to measure
in money the damages that would be suffered if the parties fail to comply with
any of the obligations herein imposed on them and that in the event of any such
failure, an aggrieved person will be irreparably damaged and will not have an
adequate remedy at law. Any such person, therefore, shall be entitled to
injunctive relief, including specific performance, to enforce such obligations,
without the posting of any bond, and, if any action should be brought in equity
to enforce any of the provisions of this Agreement, none of the parties hereto
shall raise the defence that there is an adequate remedy at law.
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<PAGE>
16.8 Each party hereto shall do and perform or cause to be done and performed
all such further acts and things and shall execute and deliver all such other
agreements, certificates, instruments, and documents as any other party hereto
reasonably may request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
NO INCONSISTENT AGREEMENTS
- --------------------------
17. The Company shall not grant any registration rights to any person without
the prior written consent of the Investors and neither the Company nor any
Holder will, without the prior written consent of the Investors, on or after the
date of this Agreement, enter into any agreement with respect to its securities
which is inconsistent with the rights granted in this Agreement or otherwise
conflicts with the provisions hereof, other than any lock-up hereunder, pursuant
to which the Company shall agree not to register for sale, and not to sell or
otherwise dispose of, Ordinary Shares or any Ordinary Share Equivalents, for a
specified period following the registered offering.
NOTICES
- -------
18.1 Any notice, instruction, consent or other document to be given under this
Agreement shall be in writing and delivered personally or by pre-paid recorded
delivery or facsimile (provided that, in the case of facsimile, the notice is
confirmed by being delivered by hand or sent by first class post within 72 hours
thereafter) to the recipient party at the address shown in Schedule 1 to this
Agreement (for the Management Shareholders) at the address shown in Schedule 2
(for the Investors) and in Schedule 3 (for the Company) or to such other
address, or to a facsimile number, as is notified in writing from time to time
by such party to each of the other parties.
18.2 Any notice delivered personally shall be deemed to be received when
delivered, any notice sent by pre-paid recorded delivery post shall be deemed to
have been received 5 Business Days after posting and any notice sent by
facsimile, at the time of transmission (provided that if transmission occurs
after 6 p.m. on a Business Day, or not on a Business Day, delivery will be
deemed to occur at 9 a.m. on the next Business Day). References to time in this
clause are references to local time in the country of the recipient of the
notice.
18.3 Each of the parties to this Agreement agrees, on the written request of
any Holder, forthwith to appoint, and to notify all other parties to this
Agreement of the identity and address of, an agent for service in either or both
of Bermuda and the state of New York.
IN WITNESS WHEREOF this Agreement has been executed by the parties the day and
- ------------------
year first before written.
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<PAGE>
SCHEDULE 1
THE MANAGEMENT SHAREHOLDERS
Name Address Address for service of
notices and fax
numbers
Nicholas Mark Cooke "Tunbridge Wells" Richards Butler
97 Harrington Sound Road Beaufort House
Smiths H502 15 St. Botolph Street
Bermuda London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Alan Albert Fairs 47 Elmfield Road Richards Butler
Chingfor Beaufort House
London E4 7HT 15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Mark Kerr-Smiley 50 Granard Road Richards Butler
London SW12 8UJ Beaufort House
15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Nicholas Brown Redcroft Richards Butler
East End Beaufort House
Pagglesham 15 St. Botolph Street
Rochford London
Essex SS4 2EF EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
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<PAGE>
John Anthony Lambert 30 Wakefield Close Richards Butler
Emerson Park Beaufort House
Hornchurch 15 St. Botolph Street
Essex RM11 London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Jeffrey Ronald Butler 10 Mossbank Richards Butler
Grays Beaufort House
Essex RM17 7EF 15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Paul Ian Pearson Fishermans Cottages Richards Butler
16 Silver Road Beaufort House
Burnham on Crouch 15 St. Botolph Street
Exssex CMO 8LA London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Jaques Georges Sacy 42 Scarsdale Villas Richards Butler
London W8 6PP Beaufort House
15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
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<PAGE>
David Terrell Colley 2 Gainsborough Court Richards Butler
College Road Beaufort House
London SE21 7LT 15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
George William Jones 29 Western Gardens Richards Butler
London W5 3RS Beaufort House
15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Christopher James Blois Snode Hill House Richards Butler
Needham Beech Beaufort House
Alton 15 St. Botolph Street
Hampshire GU34 4AX London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Richard John Wells Thollon Richards Butler
56 Kevington Drive Beaufort House
Chislehurst 15 St. Botolph Street
Ken BR6 7RN London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
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<PAGE>
David Maxwell Tarsh 4 Harvey Lodge Richards Butler
Admiral Walk Beaufort House
Carlton Gate 15 St. Botolph Street
London W9 London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Penelope Atteline 97 Harrington Sound Road Richards Butler
Cooke Smiths H502 Beaufort House
Bermuda 15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Allan Cooper 14 Wilmington Avenue Richards Butler
London W4 3HA Beaufort House
15 St. Botolph Street
London
EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
Paul Murray c/o Victoria Hall Richards Butler
3rd Floor Beaufort House
11 Victoria Street 15 St. Botolph Street
Hamilton HM11 London
Bermuda EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
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<PAGE>
SCHEDULE 2
THE INVESTORS
Name Address Address for service of
notice and fax number
Bridge Street Fund c/o The Corporation Goldman Sachs
1995, L.P. Trust Company, International
Corporation Trust Center, Petersborough Court
1209 Orange Street, 133 Fleet Street
DE 19801 London EC4A 2BB
U.S.A. For the attention of
Monique Stein
Fax no. 0171 774 4123
GS Capital c/o The Corporation Goldman Sachs
Partners II, L.P. Trust Company, International
Corporation Trust Center, Petersborough Court
1209 Orange Street, 133 Fleet Street
DE 19801 London EC4A 2BB
U.S.A. For the attention of
Monique Stein
Fax no. 0171 774 4123
Goldman Sachs & Messe Turm Goldman Sachs
Co. Verwaltungs 60308 Frankfurt am Main International
GmbH as general Germany Petersborough Court
partner of GS 133 Fleet Street
Capital Partners II London EC4A 2BB
Germany Civil For the attention of
Law Partnership Monique Stein
(with limited Fax no. 0171 774 4123
liability)
GS Capital c/o Maples and Calder, Goldman Sachs
Partners II PO Box 309, International
Offshore, L.P. Grand Cayman, Petersborough Court
Cayman Islands, 133 Fleet Street
British West Indies London EC4A 2BB
For the attention of
Monique Stein
Fax no. 0171 774 4123
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<PAGE>
Stone Street Fund c/o The Corporation Goldman Sachs
1995. L.P. Trust Company, International
Corporation Trust Center, Petersborough Court
1209 Orange Street, 133 Fleet Street
DE 19801 London EC4A 2BB
U.S.A. For the attention of
Monique Stein
Fax no. 0171 774 4123
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<PAGE>
SCHEDULE 3
THE COMPANY
Name Address Address for service of
notice and fax number
Stirling Cooke Cedar House Richards Butler
Brown Holdings 41 Cedar Avenue Beaufort House
Limited Hamilton 15 St. Botolph Street
HM12 London
Bermuda EC3A 7EE
Fax: 0171 247 5091
For the attention of
Peter Michelmore
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<PAGE>
SIGNED by )
NICHOLAS MARK COOKE )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
ALAN ALBERT FAIRS )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
MARK KERR-SMILEY )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
NICHOLAS BROWN )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
JOHN ANTHONY LAMBERT )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
JEFFREY RONALD BUTLER )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
PAUL IAN PEARSON )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
JACQUES GEORGE SACY )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
DAVID TERRELL COLLEY )
in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
GEORGE WILLIAM JONES )
in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
CHRISTOPHER JAMES )
BLOIS NEEDHAM )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
RICHARD JOHN WELLS )
in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
DAVID MAXWELL TARSH )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
PENELOPE ATTELINE COOKE )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
PAUL MURRAY )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by )
ALLAN COOPER )
by GEORGE WILLIAM JONES )
his attorney in the presence of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General )
Partner of BRIDGE STREET )
FUND 1995, L.P. )
in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by JEAN de POURTALES )
as attorney on behalf of GOLDMAN )
SACHS & CO VERWALTUNGS )
GmbH as General Partner of )
GS CAPITAL PARTNERS II )
GERMANY CIVIL LAW )
PARTNERSHIP (with limited )
liability) in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General )
Partner of GS CAPITAL )
PARTNERS II, L.P. in the presence )
of: )
Witness- Signature:
Name:
Address:
<PAGE>
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General )
Partner of GS CAPITAL )
PARTNERS II OFFSHORE, L.P. )
in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by JEAN de POURTALES )
as attorney on behalf of the General )
Partner of STONE STREET )
FUND 1995, L.P. )
in the presence of: )
Witness- Signature:
Name:
Address:
SIGNED by )
STIRLING COOKE BROWN )
HOLDINGS LIMITED )
acting by: )
Director:
Secretary:
<PAGE>
EXHIBIT 5
[LETTERHEAD OF APPLEBY, SPURLING & KEMPE]
HG/w
[_] September 1997
Stirling Cooke Brown Holdings Limited
Cedar House,
41 Cedar Avenue
Hamilton HM 12,
Bermuda
Dear Sirs:
RE: STIRLING COOKE BROWN HOLDINGS LIMITED ("SCBH")
- ----------------------------------------------------
We have acted as Bermuda counsel to SCBH, a Bermuda company, and for certain
shareholders of the Company (the "Selling Shareholders") in connection with the
proposed issue and sale by the Company of [ ] ordinary shares ("Ordinary
Shares"), par value $0.25 per share of SCBH, together with up to [ ]
additional Ordinary Shares which are being registered to cover the
over-allotment option granted by the Company to the Underwriters.
In our capacity as Bermuda counsel to SCBH, we participated in the preparation
of the Registration Statement ("Registration Statement") on Form S-1
(Registration No. 333-32995) with respect to the Ordinary Shares, which was
filed with the Securities and Exchange Commission (the "Commission") under The
Securities Act of 1933, as amended ("Act"), of the United States of America on
6 August 1997 together with all amendments thereto duly filed in accordance with
the Act.
For the purposes of this opinion, we have examined originals or certified copies
of:(a) the Registration Statement, including the Prospectus; (b) the Memorandum
of Association and Bye-Laws of SCBH; and (c) resolutions of the Board of
Directors of the Company relating to the authorisation of the issuance of the
securities subject to the Registration Statement, including the delegation to a
special committee of the Board of Directors (the "Special Committee") of certain
pricing authority with respect to the issuance of the shares to be offered and
sold by the Company. We have also examined such certificates of the directors
and officers of SCBH and such other certificates, agreements, instruments and
documents as we have deemed necessary of advisable for
<PAGE>
the purpose of this opinion. We have relied, as to factual matters only, upon
such certificates and the representations and warranties made in such
agreements, instruments and other documents.
Terms used in the Registration Statement not otherwise defined herein shall
have the same meanings herein as those terms bear in the Registration
Statement.
We have assumed:-
(1) The genuineness of all signatures on the documents which we have examined;
and
(2) The conformity to originals of all documents submitted to us as copies and
the authenticity of all original documents which, or copies of which,
have been submitted to us.
Based upon and subject to the foregoing, and relying, where appropriate, upon
the representations made by the officers of SCBH as referred to above and
subject to the reservations mentioned below, we are of the opinion that as at
the date hereof:
1. SCBH is a company duly incorporated and validly existing under the laws
of Bermuda.
2. The Ordinary Shares to be sold by SCBH pursuant to the terms of the
Registration Statement have been duly authorised and, when the price
thereof has been determined by action of the Special Committee and when
issued and paid for, will be validly issued, fully paid and non-
assessable. No personal liability attaches to the holders thereof solely
by reason of the ownership thereof.
3. The Ordinary Shares to be sold by the Selling Shareholders pursuant to the
terms of the Registration Statement have been, and when sold in the manner
contemplated in the Registration Statement and Prospectus will continue to
be, duly authorised, validly issued, fully paid and non-assessable. No
personal liability attaches to the holders thereof solely by reason of the
ownership thereof.
Our reservations with respect to the foregoing opinion are as follows:-
A. Where an obligation is to be performed in a jurisdiction other than
Bermuda, a Bermudian court may refuse to enforce it to the extent that
such performance
2
<PAGE>
would be illegal or contrary to public policy under the laws of such
other jurisdictions.
B. "Non-Assessability" is not a legal concept under Bermuda law, but when
we described shares as being "non-assessable" in paragraphs 2 and 3
above, we mean with respect to the shareholders of the company, in
relation to fully paid shares of the company and subject to any contrary
provision in any agreement in writing between that company and any one
of its shareholders holding such shares but only with respect to such
shareholder, that such shareholder shall not be bound by an alteration
to the Memorandum of Association or the Bye-Laws of that company after
the date upon which they became such shareholders, if and insofar as the
alteration requires them to take, or subscribe for additional shares, or
in any way increases their liability to contribute to the share capital
of, or otherwise pay money to, such company.
We hereby consent to the filing of this opinion with the Commission and as an
exhibit to the Registration Statement and to the references to this Firm in the
Registration Statement. As Bermuda attorneys, however, we are not qualified to
opine on matters of law of any jurisdiction other than Bermuda. Accordingly, we
do not admit to being an expert within the meaning of the Act.
This opinion is to be governed by and construed in accordance with Bermuda law.
Yours faithfully,
3
<PAGE>
Exhibit 8.1
F O L E Y & L A R D N E R
<TABLE>
<CAPTION>
<S> <C> <C>
A T T O R N E Y S A T L A W
CHICAGO FIRSTAR CENTER SAN DIEGO
JACKSONVILLE 777 EAST WISCONSIN AVENUE SAN FRANCISCO
LOS ANGELES MILWAUKEE, WISCONSIN 53202-5367 TALLAHASSEE
MADISON TELEPHONE (414) 271-2400 TAMPA
ORLANDO FACSIMILE (414) 297-4900 WASHINGTON, D.C.
SACRAMENTO WEST PALM BEACH
</TABLE>
September 16, 1997
Stirling Cooke Brown Holdings Limited
Victoria Hall
Third Floor
11 Victoria Street
Hamilton HM 11, Bermuda
Re: Stirling Cooke Brown Holdings Limited
-------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Stirling Cooke Brown Holdings Limited, a
Bermuda corporation (the "Company"), in connection with the corporate
proceedings taken and to be taken relating to the public offering of
Ordinary Shares (the "Ordinary Shares") of the Company. We have also
participated in the preparation and filing with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, of a registration
statement on Form S-1 (the "Registration Statement") relating to the
Ordinary Shares. In this connection, we have examined such corporate and
other records, instruments, certificates and documents as we considered
necessary to enable us to express this opinion.
In rendering the opinion set forth in the paragraph below, we have
relied upon the Internal Revenue Code of 1986, as amended (the "Code"),
legislative history, Treasury regulations, judicial authorities, published
positions of the Internal Revenue Service (the "IRS") and such other
authorities as we have considered to be relevant. No tax rulings will be
sought from the IRS with respect to any of the matters discussed herein.
Based on the foregoing, it is our opinion that, subject to the
limitations set forth therein, the discussion set forth under the captions
"Risk Factors -- Taxation of the Company and Certain of its Subsidiaries"
and "Certain Tax Considerations -- United States" accurately summarizes
the material U.S. federal income tax consequences that could result from
the purchase, ownership and disposition of the Ordinary Shares, and the
material U.S. federal income tax consequences applicable to the operations
of the Company and its subsidiaries.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the captions
"Certain Tax Considerations" and "Legal Matters".
<PAGE>
Stirling Cooke Brown Holdings Limited
September 16, 1997
Page 2
We are admitted to practice law in the State of Wisconsin. In connection
with the public offering of Ordinary Shares, we express no opinion as to
matters under or involving any laws other than the federal law of the
United States of America.
Very truly yours,
/s/ FOLEY & LARDNER
FOLEY & LARDNER
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF APPLEBY, SPURLING & KEMPE]
HG/w
__ September, 1997
Stirling Cooke Brown Holdings Limited
Cedar House,
41 Cedar Avenue,
Hamilton HM 12,
Bermuda
Dear Sirs:
RE: STIRLING COOKE BROWN HOLDINGS LIMITED ("SCBH")
- --------------------------------------------------
We have acted as Bermuda counsel to SCBH, a Bermuda company, in connection with
the proposed issue and sale of [number] ordinary shares ("Ordinary Shares"), par
value $0.25 per share of SCBH.
In our capacity as Bermuda counsel to SCBH, we participated in the preparation
of the Registration Statement ("Registration Statement") on Form S-1
(Registration No. 333-32995) with respect to the Ordinary Shares, which was
filed with the Securities and Exchange Commission (the "Commission") under The
Securities Act of 1933, as amended ("Act"), of the United States of America on 6
August, 1997 together with all amendments thereto duly filed in accordance with
the Act.
Under current Bermuda law, there is no Bermuda income tax, withholding tax,
capital gains tax or capital transfer tax levied on SCBH or its shareholders.
SCBH and its Bermuda subsidiaries have obtained a written undertaking from the
Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection
Act 1966 (as amended) that, in the event of there being enacted in Bermuda any
legislation imposing tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, such tax shall not, until March 28, 2016, be applicable to SCBH
or any of its operations, or to the shares, debentures or other obligations of
SCBH, except insofar as such tax applies to persons ordinarily resident in
Bermuda and holding such shares, debentures or other
<PAGE>
obligations of SCBH or to any land leased or let to SCBH.
We hereby consent to the filing of this opinion with the Commission and as an
exhibit to the Registration Statement and to the references to this Firm in the
Registration Statement. As Bermuda attorneys, however, we are not qualified to
opine on matters of law of any jurisdiction other than Bermuda. Accordingly,
we do not admit to being an expert within the meaning of the Act.
This opinion is to be governed by and construed in accordance with Bermuda law.
Yours faithfully,
2
<PAGE>
EXHIBIT 8.3
[LETTERHEAD OF RICHARDS BUTLER]
DRAFT
[ SEPTEMBER 1997]
Stirling Cooke Brown Holdings Limited
Victoria Hall
3rd Floor
11 Victoria Street
Hamilton HM11
BERMUDA
Ladies and Gentlemen,
Stirling Cooke Brown Holdings Limited
We are qualified to practice law in England and have acted as solicitors in
England to Stirling Cooke Brown Holdings Limited, a Bermuda Corporation (the
"Company"), in connection with the corporate proceedings taken and to be taken
relating to the public offering of Ordinary Shares (the "Ordinary Shares") of
the Company.
In rendering the opinion set forth in the paragraph below, we have relied upon
United Kingdom tax legislation, legislative history, United Kingdom statutory
instruments, judicial authority, Inland Revenue extra statutory concessions,
statements of practice and press releases and other such authorities as we have
considered to be relevant.
Based on the foregoing, it is our opinion that, subject to the limitations set
forth therein, the discussions set forth under the caption "Certain Tax
Considerations -- United Kingdom" accurately summarise the material UK
Corporation Tax and Income Tax consequences of the Company's operations carried
on through and the ownership of UK resident subsidiaries and the extraction of
profits therefrom.
We consent to the filing of this opinion as an exhibit to the Registration
Statement in respect of the public offering of Ordinary Shares of the Company on
the Nasdaq National Market and to the reference to us under the caption "Certain
Tax Considerations".
<PAGE>
The opinion set out in this letter is given subject to the following
reservations -
(a) it relates only to matters as at today's date;
(b) we have made no investigation of the laws of any jurisdiction
outside England;
(c) it relates only to English law as in force as at today's date.
This opinion is given for the sole benefit of you filing this opinion as an
exhibit to the Registration Statement, and may not be relied upon by anyone
else, and this opinion is limited to the matters expressly stated herein and
does not extend to, and is not to be read as extending by implication to, any
other matter, nor is it to be quoted or made public in any way without our prior
written consent.
This opinion will be governed by and construed in accordance with the law of
England.
Yours faithfully
Richards Butler
Page 2
<PAGE>
Exhibit 8.4
(SEAL)
BERMUDA
THE EXEMPTED UNDERTAKINGS
TAX PROTECTION ACT, 1966
ASSURANCE
BY VIRTUE of the powers conferred upon him by Section 2 of the above Act, the
Minister of Finance on the application made by the undertaking below mentioned
hereby grants to that Undertaking an assurance that, in the event of there being
enacted in these Islands any legislation imposing tax computed on profits or
income, or computed on any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance tax, then the imposition of any such
tax shall not be applicable to
STIRLING COOKE BROWN HOLDINGS LIMITED
(herein referred to as "the Undertaking") or to any of its operations or the
shares, debentures or other obligations of the said Undertaking:
PROVIDED THAT this assurance shall not be construed so as to
(i) prevent the application of any such tax or duty to such persons as are
ordinarily resident in these Islands;
(ii) prevent the application of any tax payable in accordance with the
provisions of the Land Tax Act, 1967 or otherwise payable in relation
to the land leased or let to the said Undertaking.
THIS ASSURANCE shall be of effect until the twenty-eighth day of March, 2016.
Given under my hand this 12TH day of JANUARY 1996.
/s/ Tyler G. Moniz
(for) MINISTER OF FINANCE
<PAGE>
EXHIBIT 21
STIRLING COOKE BROWN HOLDINGS LIMITED
Subsidiaries
The following subsidiaries are incorporated in Bermuda:
Realm Investments Ltd.
Raydon Underwriting Management Company Limited
Realm Captive Management Company Limited
Realm Underwriting Management Ltd.
Stirling Cooke Brown Insurance Brokers (Bermuda) Limited
CIRCL Holdings Ltd.
Comp Indemnity Reinsurance Company Limited
Realm Insurance Services Limited
The following subsidiaries are incorporated in the United Kingdom:
Stirling Cooke Brown Holdings (UK) Limited
Stirling Cooke Brown Insurance Brokers Limited
Stirling Cooke Brown Reinsurance Brokers Limited
Stirling Cooke International Insurance Brokers Limited
The following subsidiaries are incorporated in the United States:
Stirling Cooke North American Holdings Ltd., a Delaware corporation
Stirling Cooke Insurance Services Inc., a Florida corporation
Stirling Cooke (Texas) Inc., a Texas corporation
Stirling Cooke Risk Management Services, Inc., a Florida corporation
Stirling Cooke Brown North American Reinsurance Intermediaries, Inc., a New York
corporation
Employers & Providers Resource Group, Inc., a Delaware corporation
North American Risk Inc., a Texas corporation
Realm National Insurance Company, a New York insurance corporation
<PAGE>
Exhibit 23.2
The Board of Directors
of Stirling Cooke Brown Holdings Limited
The audits referred to in our report dated April 23, 1997, except as to Note 18
which is dated June 30, 1997, included the related financial statements
schedules as of December 31, 1996, and for each of the years in the three-year
period ended December 31, 1996, included in the registration statement. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick
KPMG Peat Marwick
Hamilton, Bermuda
September 16, 1997
