AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION NO. 333-7944
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CGA GROUP, LTD.
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(Exact name of registrant as specified in its charter)
BERMUDA 6351 98-0173536
- ---------------------------- ------------------------- ------------------
(State or other jurisdiction (Primary Standard (I.R.S.
of incorporation or Industrial Classification Employer
organization) Code Number) Identification No.)
-------------------
CRAIG APPIN HOUSE
8 WESLEY STREET
HAMILTON HM11 BERMUDA
(441) 296-5144
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(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 664-1666
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
-------------------
Copies to:
WILLIAM W. ROSENBLATT, ESQ.
DEWEY BALLANTINE LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6092
(212) 259-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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: [ ]
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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>
SUBJECT TO COMPLETION, DATED APRIL 17, 1998
PROSPECTUS
OFFER TO EXCHANGE 2,703,598 SHARES OF
NEW SERIES A CUMULATIVE VOTING PREFERENCE SHARES
FOR
2,703,598 SHARES OF SERIES A CUMULATIVE VOTING PREFERENCE SHARES
OF
CGA GROUP, LTD.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON _________, 1998, UNLESS EXTENDED
CGA Group, Ltd., a company incorporated in Bermuda with limited liability
("CGA Group" or the "Company"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal," and together with this Prospectus, the
"Exchange Offer"), to exchange 2,703,598 Series A Cumulative Voting Preference
Shares, par value $0.01 per share (the "New Series A Preferred Stock"), for any
and all of the 2,703,598 outstanding shares of Series A Cumulative Voting
Preference Shares, par value $0.01 per share (the "Series A Preferred Stock"),
of the Company (on a share for share basis, including additional shares issued
pursuant to paid-in-kind dividends). The terms of the New Series A Preferred
Stock are substantially identical to the terms of the Series A Preferred Stock,
except that the shares of New Series A Preferred Stock will have been registered
under the Securities Act of 1933, as amended (the "Securities Act") and will not
contain terms restricting the transfer of such shares other than with respect to
the transfer restrictions set forth in the Company's Bye-laws. See "Description
of Securities - New Series A Preferred Stock."
The Company will accept for exchange any and all shares of Series A
Preferred Stock that are validly tendered on or prior to 5:00 p.m., New York
City time, on the date the Exchange Offer expires, which will be __________,
1998, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of
shares of Series A Preferred Stock may be withdrawn at any time prior to 5:00
p.m., New York City time, on the business day prior to the Expiration Date. The
Exchange Offer is not conditioned upon any minimum number of shares of Series A
Preferred Stock being tendered for exchange. However, the Exchange Offer is
subject to certain conditions which may be waived by the Company and to the
terms and provisions of the Subscription Agreement (as defined herein). See
"Exchange Offer." The Company has agreed to pay the expenses of the Exchange
Offer.
(Continued on next page)
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SERIES A PREFERRED STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
CONSENT UNDER THE EXCHANGE CONTROL ACT 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND TRANSFER
OF THE SECURITIES BEING OFFERED PURSUANT TO THE EXCHANGE OFFER. 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, RESPECTIVELY, ACCEPT NO
RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF ANY PROPOSAL OR FOR THE
CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS EXPRESSED HEREIN.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE NEW SERIES A PREFERRED STOCK.
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.
--------------------
THE DATE OF THIS PROSPECTUS IS __________, 1998.
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.
<PAGE>
(Continued from previous page)
Holders of shares of Series A Preferred Stock whose shares of Series A
Preferred Stock are not tendered and accepted in the Exchange Offer will
continue to hold such shares of Series A Preferred Stock. Following consummation
of the Exchange Offer, the holders of shares of Series A Preferred Stock will
continue to be subject to the existing restrictions upon transfer thereof and
except as provided herein, the Company will have no further obligation to such
holders to provide for the registration under the Securities Act of the shares
of Series A Preferred Stock held by them.
Dividend calculation of the New Series A Preferred Stock shall be identical
to that of the Series A Preferred Stock. Cumulative dividends on the New Series
A Preferred Stock, accruing from June 17, 1997, compounding quarterly, equal to
13.75% per annum, based upon a $25 stated value, are payable quarterly in
arrears on January 1, April 1, July 1 and October 1 of each year (each, a
"Dividend Payment Date"), commencing on June 30, 1997 (the "First Dividend
Payment Date"). If after June 17, 2002 the New Series A Preferred Stock is rated
investment grade by Duff & Phelps Credit Rating Company ("DCR"), a nationally
recognized statistical rating organization, the dividend rate will decrease by
200 basis points. New Series A Preferred Stock will not be entitled to any other
dividends of the Company. The New Series A Preferred Stock dividends accrued
prior to June 17, 2002 will be paid in kind and the New Series A Preferred Stock
dividends accruing thereafter will be paid in cash at a rate of 11.75% per
annum, and, to the extent such dividends accrue in excess of a rate of 11.75%
per annum, such excess, if any, will be paid in cash to the extent the Company
receives assurance from DCR that such cash payment will not adversely affect CGA
Group's AAA rating from DCR; otherwise such excess will be paid in kind or in
cash as determined by the Company. Consequently, holders who exchange their
shares of Series A Preferred Stock for New Series A Preferred Stock will receive
the same dividends on the New Series A Preferred Stock that holders of the
Series A Preferred Stock who do not accept the Exchange Offer will receive on
the Series A Preferred Stock. Dividends on the New Series A Preferred Stock may
be paid in cash or by issuing fully paid and nonassessable shares of New Series
A Preferred Stock as described herein.
Prior to this Exchange, there has been no public market for New Series A
Preferred Stock and there can be no assurance that an active public or private
market for the New Series A Preferred Stock will develop. Whether or not a
market for the New Series A Preferred Stock should develop, the shares of New
Series A Preferred Stock could trade at a discount from their aggregate
liquidation preference. The Company does not intend to list the New Series A
Preferred Stock on a national securities exchange or to apply for quotation of
the New Series A Preferred Stock through the National Association of Securities
Dealers Automated Quotation System ("Nasdaq"). To the extent shares of Series A
Preferred Stock are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted shares of Series A Preferred
Stock could be adversely affected.
The Company is a holding company. As such, the Company's ability to pay
dividends on the New Series A Preferred Stock offered pursuant to this Exchange
Offer is dependent on distributions from its operating subsidiaries, including
its wholly-owned subsidiary Commercial Guaranty Assurance, Ltd. See "Risk
Factors--Holding Company Structure; Dividend Restriction."
This Exchange Offer is being made by the Company in reliance on the
position of the staff of the Division of Corporation Finance of the Securities
and Exchange Commission (the "Commission") as set forth in certain interpretive
letters addressed to third parties in other transactions. The Company will not
pay any commission or other remuneration to any broker, dealer, salesman or
other person for soliciting tenders of the Series A Preferred Stock. Employees
of the Company, who will not receive additional compensation therefor, may
solicit tenders from holders of Series A Preferred Stock.
Based on an interpretation by the staff of the Commission issued to an
unaffiliated third party, the Company believes that the New Series A Preferred
Stock to be issued pursuant to the Exchange Offer in exchange for Series A
Preferred Stock may be issued for resale, resold or otherwise transferred by a
holder thereof (other than (i) a broker-dealer or (ii) a person that is an
"affiliate" of the Company (within the meaning of Rule 405 under the Securities
Act)), without complying with the registration and prospectus delivery
provisions of the Securities Act, provided that the holder is acquiring such New
Series A Preferred Stock in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Series A Preferred Stock to be
received in the Exchange Offer. Holders of New Series A Preferred Stock wishing
to accept the Exchange Offer must represent to the Company that such conditions
have been met.
Each broker-dealer that receives New Series A Preferred Stock pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Series A Preferred Stock. Any
broker-dealer that acquired shares of Series A Preferred Stock as a result of
market making or other trading activities may use this Prospectus for the
Exchange Offer, as supplemented or amended, in connection with resales of the
New Series A Preferred Stock.
The Company will not receive any proceeds from this Exchange Offer.
2
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES
As a Bermuda corporation, substantially all the assets of the Company are
located outside the United States. Accordingly, any judgment obtained in the
United States against the Company may not be collectible within the United
States. The Company will consent to service of process in the City of New York,
Borough of Manhattan, for claims relating to the validity, or seeking
enforcement, of the Company's obligations under the terms of the New Series A
Preferred Stock. The Company has appointed CT Corporation System as its
authorized agent upon which process may be served in any such action. See
"Description Of Securities--Governing Law; Consent To Service." Accordingly, it
may be difficult for investors to effect service within the United States upon
the Company with respect to other claims pertaining to the New Series A
Preferred Stock, including claims predicated upon the civil liability provisions
of the securities laws of the United States. Moreover, it may be difficult for
investors to enforce outside the United States judgments against the Company
obtained in the United States in any actions pertaining to the New Series A
Preferred Stock, particularly with respect to actions to which the Company has
not consented to service of process in the United States such as those
predicated upon the civil liability provisions of the securities laws of the
United States. In addition, some of the Company's directors and executive
officers, and certain of the experts named herein, are residents of Bermuda. As
a result, it may be difficult for investors to effect service within the United
States upon such persons or to realize in the United States upon judgments of
courts in the United States, including judgments predicated upon civil liability
under United States securities laws. The Company has been informed by its
Bermuda counsel, Conyers Dill & Pearman, that the United States and Bermuda do
not currently have a treaty providing for reciprocal recognition and enforcement
of judgments of U.S. courts in civil and commercial matters and that 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, therefore, not be automatically
enforceable in Bermuda. The Company has also been advised by Conyers Dill &
Pearman 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 U.S. federal
securities laws, provided that the facts surrounding such violation would
constitute or give rise to a cause of action under Bermuda law.
ADDITIONAL INFORMATION
CGA Group has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act, a registration statement (the
"Registration Statement"), of which this Prospectus (the "Prospectus") is a
part, with respect to the New Series A Preferred Stock offered hereby. This
Prospectus does not contain all the information set forth in or annexed as an
exhibit to the Registration Statement. Such additional information, and other
information filed by the Company, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission maintained at Suite 1300, 7 World Trade Center, New York, New York
10048 and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661 2511, at prescribed rates. Statements contained in this
Prospectus describing the contents of any contract or other document referred to
herein do not necessarily describe such documents in their entirety, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. See
"Glossary of Selected Insurance Terms" for definitions of certain insurance
terms used herein.
All financial information in this Prospectus is presented in accordance
with generally accepted accounting principles ("GAAP"), unless otherwise
specified. Financial information presented in accordance with statutory
accounting practices ("SAP") is identified as such.
THE COMPANY
The Company is a newly formed holding company which, through its primary
and wholly-owned subsidiary, Commercial Guaranty Assurance, Ltd., a company
incorporated in Bermuda with limited liability ("CGA"), provides financial
guaranty insurance of structured securities, including commercial real estate
securities and asset-backed securities. The Company also provides financial
guaranty insurance of other securities, where the Company's founders and senior
management team have expertise, and credit enhancement opportunities are deemed
attractive. The Company and its subsidiaries are new companies without any
previous operating history.
The Company's capitalization totals $210.5 million of committed equity
capital, which has enabled it to fund CGA in order for CGA to receive a AAA
claims paying ability rating ("AAA rating" or "AAA rated") by Duff & Phelps
Credit Rating Company ("DCR"). CGA will use its AAA rated insurance policy,
which is functionally equivalent to a direct pay letter of credit, to guaranty
payment of principal and interest on securities and other financial obligations.
Management (as defined below) expects issuers of securities rated lower than AAA
to purchase financial guaranty insurance from CGA to enhance the ratings of
those securities, thereby reducing their financing costs. In turn, CGA would
collect a premium equal to a significant portion of the savings resulting from
the improved trading value levels of the guaranteed securities.
The Company was formed with a view to becoming the market leader in the
commercial real estate segment of the financial guaranty industry. To date,
existing AAA rated financial guarantors have not established a meaningful
presence in this market segment. Initially, as the only AAA rated financial
guarantor in this market, the Company anticipates being a prime beneficiary of
the growth in the continued securitization of commercial real estate backed
obligations in that its policies may be seen as an attractive alternative to
traditional external credit support with respect to such securities. The Company
intends to utilize its structured finance and real estate expertise to
underwrite financial guaranties for commercial real estate and other securities
to a zero loss standard.
The Company also targets select segments of the private asset-backed
securities ("ABS") market. Private ABS issued in 1996 exceeded $18 billion and
in 1997 jumped to over $56 billion. (Source--asset-backed Alert, January 19,
1998 and January 20, 1997). The Company has identified several segments of the
private ABS market which Management believes are attractive and plans to
evaluate new opportunities as additional asset types are securitized. See "The
Company--Underwriting."
The Company's founders and senior management team (the "Founders" or
"Management") are nationally recognized for their commercial real estate and
structured finance expertise as well as their ability to apply financial
guaranty technology to the commercial real estate and asset-backed securities
markets. See "Management--Biographical Information."
The Company will also provide investment management services to third party
investment vehicles and provide investment advisory services, all in connection
with transaction structures and assets of the types described above. These
services will be provided through the Company's subsidiary, CGA Investment
Management, Inc., a Delaware corporation ("CGAIM"), which is a registered
investment advisor under the United States Investment Advisors Act of 1940, as
amended.
The Company's primary target market is structured securities backed by U.S.
commercial real estate. Similar to originators of residential mortgages in the
1970s and automobile loans in the 1980s, the traditional providers of finance
for commercial mortgages are being displaced by increasingly efficient capital
markets-based executions. This change has been driven by two major forces: (i) a
standardization of rating agency guidelines for both securities
4
<PAGE>
backed by mortgages on commercial real estate and the underlying mortgages
themselves, which has led to increased market acceptance of structured real
estate securities and (ii) an increased focus on risk-based capital by various
regulators and rating agencies causing insurance companies, banks and other
traditional lenders to increasingly securitize portfolios of commercial
mortgages to reduce their holdings of commercial mortgage loan assets subject to
high capital charges.
The Company's executive offices are located at Craig Appin House, 8 Wesley
Street, Hamilton HM11 Bermuda. Its telephone number at that address is (441)
296-5144.
THE EXCHANGE OFFER
Securities Offered ....... 2,703,598 shares of New Series A Preferred Stock
with par value of $.01 per share, subject to
mandatory redemption on June 17, 2007 and
optional redemption from June 17, 2002, and
entitled initially to seven votes per share. The
terms of the New Series A Preferred Stock are
substantially identical to the terms of the
Series A Preferred Stock except that the New
Series A Preferred Stock will have been
registered under the Securities Act and will not
contain terms restricting the transfer of such
stock other than with respect to restrictions set
forth in the Company's Bye-laws. See "Description
of Securities--New Series A Preferred Stock."
Dividends ................ Cumulative dividends, compounding quarterly, equal
to 13.75% per annum, based upon a $25 stated
value, which will accrue quarterly. If after June
17, 2002 the New Series A Preferred Stock is
rated investment grade by DCR, the dividend rate
will decrease by 200 basis points. New Series A
Preferred Stock will not be entitled to any other
dividends of the Company. The New Series A
Preferred Stock dividends accruing thereafter
will be paid in cash at a rate of 11.75% per
annum, and, to the extent such dividends accrue
in excess of a rate of 11.75% per annum, such
excess, if any, will be paid in cash to the
extent the Company receives assurance from DCR
that such cash payment will not adversely affect
CGA's AAA rating; otherwise such excess will be
paid in kind or in cash as determined by the
Company. If this (i) Registration Statement is
not declared effective on or prior to December
15, 1997 or (ii) this Exchange Offer is not
consummated on or prior to January 13, 1998 and a
shelf registration statement (the "Shelf
Registration Statement ") covering all the Series
A Preferred Stock is not declared effective on or
prior to such date, then the annual dividend rate
of the New Series A Preferred Stock will be
increased by 50 basis points, which rate will be
effective from that date forward until the
earlier of (i) the consummation of the Exchange
Offer, (ii) the effectiveness of the Shelf
Registration Statement and (iii) the second
anniversary of June 17, 1997.
If an Event of Non-Compliance (as defined under
"Description of Securities--Series A Preferred
Stock ") occurs, the New Series A Preferred Stock
dividend rate shall be increased by 250 basis
points so long as such Event of Non-Compliance is
continuing.
So long as any New Series A Preferred Stock
remains outstanding, no dividends (other than
dividends payable in shares of stock ranking
junior to the Series A Preferred Stock) may be
declared or paid or set apart for payment on, nor
may any distribution be made to, any class of
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<PAGE>
stock of the Company ranking junior to or on
parity with the New Series A Preferred Stock (See
"Description of Securities--Dividends. ")
Exchange Agent ........... The exchange agent with respect to the Exchange
Offer is the Bank of Bermuda Limited (the
"Exchange Agent"). The addresses, and telephone
and facsimile numbers of the Exchange Agent are
set forth in "The Exchange Offer--Exchange Agent"
and in the accompanying Letter of Transmittal.
The Exchange Offer ....... Shares of New Series A Preferred Stock are being
offered in exchange for any and all of the
outstanding shares of Series A Preferred Stock
(on a share for share basis). As of the date
hereof, 2,892,660 shares of Series A Preferred
Stock are issued and outstanding, representing
2,703,598 shares issued and outstanding as of
November 12, 1997, the date of the original
filing of the Registration Statement of which
this Prospectus is a part, and 189,062 additional
shares issued and outstanding as a result of
paid-in-kind dividends paid on December 31, 1997
and March 31, 1998. Pursuant to Rule 416 under
the Securities Act of 1933, as amended, such
189,062 additional shares, and shares issued in
the future pursuant to such paid-in-kind
dividends, shall be deemed registered pursuant to
the Registration Statement of which this
Prospectus is a part. The Company has agreed to
make the Exchange Offer in order to satisfy its
obligations under the Series A Preferred Stock
Subscription Agreement, dated as of June 9, 1997,
by and between the Company and the signatories to
the agreement (the "Subscription Agreement ").
For a description of the procedures for
tendering, see "Exchange Offer--Procedures for
Tendering Series A Preferred Stock."
Expiration Date;
Withdrawal ............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on 1998, or such
later date and time to which it may be extended
in the sole discretion of the Company (the
"Expiration Date "). Tenders of shares of Series
A Preferred Stock may be withdrawn at anytime
prior to 5:00 p.m., New York City time, or the
business day prior to the Expiration Date. Any
shares of Series A Preferred Stock not accepted
for exchange for any reason will be returned
without expense to the tendering holders thereof
as promptly as practicable after the expiration
or termination of the Exchange Offer. See
"Exchange Offer--Terms of the Exchange Offer" and
"Exchange Offer--Withdrawal Rights."
Conditions to Exchange
Offer .................. The Exchange Offer is subject to certain conditions.
See "Exchange Offer--Certain Conditions to the
Exchange Offer." The Exchange Offer is not
conditioned upon any minimum number of shares of
Series A Preferred Stock being tendered for
exchange.
Certain U.S. Federal
Income Tax
Considerations ......... The exchange of the Series A Preferred Stock for the
New Series A Preferred Stock will not be a
taxable event to the holder for U.S. federal
income tax purposes and, thus, the holder should
not recognize any taxable gain or loss as a
result of such exchange. See "Certain Tax
Considerations."
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<PAGE>
Use of Proceeds .......... Neither the Company nor the holders of Series A
Preferred Stock will receive any cash proceeds
from the issuance of the New Series A Preferred
Stock offered hereby.
Untendered Series A
Preferred Stock ........ Upon consummation of the Exchange Offer, the holders
of Series A Preferred Stock, if any, will have no
further registration or other rights under the
Subscription Agreement, except as described
herein. Holders of shares of Series A Preferred
Stock who do not tender their shares of Series A
Preferred Stock in the Exchange Offer or whose
shares of Series A Preferred Stock are not
accepted for exchange will continue to hold such
shares of Series A Preferred Stock and will be
entitled to all the rights and preferences
thereof and subject to all the limitations
applicable thereto, except for any such rights or
limitations which, by their terms, terminate or
cease to be effective as a result of this
Exchange Offer. All untendered and tendered but
unaccepted shares of Series A Preferred Stock
will continue to be subject to the restrictions
on transfer provided therein. To the extent that
shares of Series A Preferred Stock are tendered
and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted
shares of Series A Preferred Stock could be
adversely affected.
RISK FACTORS
Prospective investors should carefully evaluate the matters set forth under
"Risk Factors", beginning on page 9. Factors to be considered include, among
other things, the Company's limited operating history, holding company structure
and dividend restriction, the risk of United States taxation or of changes in
its United States or Bermuda regulatory status, the Company's dependence on
maintaining its "AAA" claims paying ability rating from DCR, risks relating to
competition in the financial guaranty insurance industry and risks relating to
commercial mortgage loans and securities.
7
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
NINE MONTHS 21-JUNE-96
ENDED TO
31-DEC-97 31-MAR-97
----------- ----------
INCOME STATEMENT DATA:
Revenues:
Net premiums earned ....................... $ 502,995 $ --
Net investment income ..................... 2,955,601 801
Net realized gains on sale
of fixed maturities ..................... 885,422 --
------------- --------
Total revenues ........................... 4,344,018 801
Expenses:
Operating expenses ........................ 5,018,999 11
Acquisition costs ......................... 157,242 --
Commitment fees ........................... 323,836 --
Excess of loss facility ................... 107,671 --
Loss adjustment expenses .................. 55,000 --
------------- --------
Total expenses ........................... 5,662,748 11
------------- --------
Net income (loss) .......................... (1,318,730) 790
------------- --------
Series A pay in kind
dividends paid ........................... (4,911,381) --
Series B pay in kind
dividends accrued ........................ (4,439,231) --
Series A accretion to
redemption value ......................... (190,472) --
Series B accretion to
redemption value ......................... (83,561) --
------------- --------
Earnings (loss) available
to common shareholders ................... $ (10,943,375) $ 790
============= ========
Basic and fully diluted
earnings (loss) per
common share ............................. $ (1.68) $ 0.07
Weighted average shares
outstanding .............................. 6,522,313 12,000
BALANCE SHEET DATA:
Fixed maturities available
for sale (at fair value) ................. $ 123,302,763 $ --
Cash and short term investments ............ 7,199,106 121,742
Total assets ............................... 144,108,638 133,790
Total liabilities .......................... 3,916,609 121,000
Total mezzanine equity ..................... 107,047,101 --
Total shareholders' equity ................. 33,144,928 12,790
Total liabilities, mezzanine
equity, and shareholders'
equity ................................... 144,108,638 133,790
8
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RISK FACTORS
In addition to the information set forth elsewhere in this Prospectus,
prospective investors should carefully evaluate the following risk factors
before purchasing the shares offered hereby.
NEWLY FORMED COMPANIES; NO PREVIOUS OPERATING HISTORY
The Company, CGA and CGAIM (CGA and CGAIM, collectively, the
"Subsidiaries") commenced operations as of June 17, 1997, upon receipt by the
Company of the proceeds of the sale of Series A Preferred Stock and investment
units representing shares of Series B Preferred Stock, Common Stock and a
commitment to purchase additional shares of Series B Preferred Stock (the
"Investment Units"), and upon receipt by CGA of a AAA rating from DCR. The
Company is a new company without any previous operating history. It has recently
begun to develop business relationships for its products, establish operating
procedures, hire additional staff, and complete other tasks appropriate to the
conduct of its business. For a more detailed description of the Company and its
subsidiaries, see "The Company."
DEPENDENCE ON KEY EMPLOYEES AND NON-BERMUDIAN EMPLOYEES
The Company's success depends in part upon the continued services of
certain key employees, including Richard A. Price, Chief Executive Officer and
President of the Company, James R. Reinhart, Chief Financial Officer of the
Company and CGA, Geoffrey N. Kauffman, Chief Underwriting Officer of CGA, Kem H.
Blacker, Chief Operating Officer of CGAIM and Jean-Michel Wasterlain, Managing
Director of CGAIM, and the Company's ability to retain certain other executives.
The Company has approximately 28 full-time employees and depends on a very small
number of key employees for the production and servicing of almost all of its
business. Mr. Price and several key employees have entered into employment
agreements, but there can be no assurance that the Company can retain the
services of these key employees. Although the Company believes that it could
replace these key employees, it can give no assurance as to how long it would
take to secure the services of appropriate replacement employees. The Company
does not currently maintain key man life insurance policies with respect to any
of its employees. For more detailed information regarding the key employees of
the Company, see "Management."
Under Bermuda law, Non-Bermudians (other than certain spouses of
Bermudians) may not engage in any gainful occupation in Bermuda without the
specific permission of the appropriate governmental authority. Such permission
may be granted or extended upon showing that, after proper public advertisement,
no Bermudian (or spouse of a Bermudian) is available who meets the minimum
standards for the advertised position. Although none of the Company's or CGA's
executive officers based in Bermuda will be Bermudian, all of the officers have
received work permits. While the Company is not currently aware of any reasons
why the work permits for these officers and employees will not be renewed, there
can be no assurance that they will be.
RISKS RELATING TO RATINGS
CGA's AAA claims paying ability rating is based upon factors relevant to
the insurance provided by CGA and is not directed to the protection of
investors. The rating reflects DCR's current opinion of CGA's claims paying
ability, financial and operating performance and ability to meet its obligations
to policyholders and is not an evaluation directed toward the protection of
investors in Series A Preferred Stock or New Series A Preferred Stock.
Although CGA has received a "AAA" claims paying ability rating from DCR,
the highest such rating available from DCR, there can be no assurances that DCR
will not in the future change its rating requirements or that CGA will continue
to meet such requirements and, thus, DCR may downgrade or withdraw its AAA
rating of CGA. Such downgrading or withdrawal would affect the sales of CGA's
products and would have a material adverse effect on the Company.
Pursuant to DCR requirements, the Company has entered into a letter
agreement with DCR that provides that CGA and the Company may not take certain
actions, including the payment of dividends from CGA to the Company, without
obtaining a Ratings Confirmation from DCR (the "Letter Agreement"). The Letter
Agreement specifically lists the protocol CGA must follow in connection with its
issuance of surety bonds or other similar agreements or instruments to maintain
its current AAA rating.
RISK OF UNITED STATES TAXATION
The Company and CGA are organized and operate in such a manner so that
neither should be subject to U.S. federal income taxation and so that U.S.
persons owning New Series A Preferred Stock should not be subject to U.S.
9
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federal income taxation on the Company's undistributed earnings. Notwithstanding
such organization and operation, CGA may be considered to be engaged in a U.S.
trade or business, in which case some or all of its investment income could be
subject to taxation on a net basis at regular corporate income tax rates
(generally 35%) and it could be subject to the branch profits tax (30%) on the
amount of net income deemed to have been withdrawn from the U.S. In light of
this risk, CGA will file protective tax returns reporting no U.S. income to
preserve its ability to deduct its ordinary and necessary expenses should the
Internal Revenue Service successfully challenge CGA's position. In addition, the
Company and/or CGA could be considered or in the future could become "Controlled
Foreign Corporations" and CGA could generate Related Person Insurance Income
("RPII"), any of which results could subject U.S. persons owning New Series A
Preferred Stock to current U.S. federal income taxation on all or a portion of
the Company's and/or CGA's undistributed earnings and could subject any such
investors which are allocated such income and are tax-exempt organizations to
unrelated business taxable income ("UBTI"). For a more detailed description of
the tax status of the Company and its subsidiaries, and the taxation of holders
of Series A Preferred Stock and New Series A Preferred Stock, see "Certain Tax
Considerations."
RISK OF CHANGE IN U.S. OR BERMUDA REGULATORY STATUS
CGA does not write insurance in the U.S. CGA conducts its business so that
it will not be subject to licensing requirements or insurance regulations in the
U.S. or elsewhere other than in Bermuda. The insurance laws of each state of the
U.S. and of many non-U.S. jurisdictions regulate the sale of insurance within
that jurisdiction by alien insurers, such as CGA, which are not authorized or
admitted to do business within such jurisdiction. CGA does not maintain any
offices to solicit, advertise, settle claims or conduct other insurance
activities in any jurisdiction other than Bermuda where the conduct of such
activities would require it be so authorized or admitted. The Company has
operating guidelines to assist its personnel in conducting business in
conformity with the laws of U.S. jurisdictions which include a requirement that
business only be accepted through insurance brokers not resident in the U.S. To
the extent that these operating guidelines are followed, Management believes
that Company's activities will comply with applicable insurance laws and
regulations. Nonetheless, there can be no assurance that insurance regulators in
the U.S. or elsewhere will not review the activities of CGA and be successful in
claiming that CGA is subject to such jurisdictions' licensing requirements. In
such event, the Company may consider various alternatives to its operations,
including modifying or restricting the manner of conducting its business, in
order to avoid the necessity of meeting such licensing requirements or complying
with such laws and regulations.
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny in many jurisdictions, including the U.S. and
various states in the U.S. It is not possible to predict the future impact on
the operations of CGA of changes in the laws and regulations to which CGA is or
may become subject.
In general, the Bermuda statutes and regulations applicable to CGA are less
restrictive than those that would be applicable to CGA were it subject to the
insurance laws and regulations of any state in the U.S. No assurances can be
given that if CGA were to become subject to the laws or regulations of any such
state or to the laws of the U.S. or of any other country at any time in the
future, it would be in compliance with any such laws. For a more detailed
description of the regulatory systems of Bermuda and the United States
applicable to the Company and its subsidiaries, see "Regulation."
CGA's becoming subject to regulation as an insurer in the U.S. or modifying
the manner of conducting its business, and changes in any of the foregoing,
could have a material adverse effect on the Company, including the imposition of
fines and penalties.
COMPETITION
CGA faces potential competition from other financial guarantors, though
none are currently active in the commercial real estate obligations market. In
markets where the financial guarantors currently write insurance, especially the
municipal bond market, CGA is at a significant disadvantage without AAA and Aaa
claims paying ability ratings from Standard & Poor's ("S&P") and Moody's
Investors Service, Inc. ("Moody's") respectively. Many institutional investors
require such dual ratings from financial guaranty investors. Furthermore, CGA's
inability to negotiate and conclude its policies in the U.S. may be a
competitive disadvantage, in that potential clients, including issuers and
investment banks located in the United States, might not be willing to travel to
Bermuda to do business with the Company. For a more detailed discussion of the
financial guaranty bond insurance industry, see "Financial Guaranty Bond
Insurance Industry."
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CGA also faces competition from other providers of third party credit
enhancement and alternative solutions to third party credit enhancement.
Commercial real estate obligations, for example, are generally sold without
third party credit enhancement. Accordingly, for each transaction that CGA
proposes to insure, CGA must generally compete against other providers of third
party credit enhancement and alternative solutions which do not employ third
party credit enhancement. In addition, traditional insurance company lenders
represent another form of competition. If insurance company lenders were to
retain mortgages in their portfolios and thus reduce the number of mortgages
available to be securitized, such activity would negatively impact the creation
of Commercial Mortgage-Backed Securities ("CMBS") and could have a material
adverse effect on the operations of the Company.
ILLIQUID INVESTMENT
There is no established market for the New Series A Preferred Stock and
they are subject to substantial legal restrictions under applicable securities
laws. The Company's Bye-laws, as in effect as of June 17, 1997, also contain
significant transfer restrictions on all shares of the Company's capital stock
and all shares of the Company's capital stock will contain legends to this
effect at all times, even after such shares are freely tradable under applicable
securities laws. In view of the risks associated with an investment in the New
Series A Preferred Stock, investors should make their investment in the New
Series A Preferred Stock with the assumption that they may have to bear the
economic risk of an investment in the New Series A Preferred Stock for an
indefinite period of time. For a description of the terms of the Series A
Preferred Stock and the New Series A Preferred Stock, see "Description of
Securities."
UNCERTAINTY OF RESERVES
Due to its recent commencement of operations, the Company has no operating
history or losses from which to directly extrapolate reserves. Reserves are
estimates at a given time of what the insurer ultimately expects to pay on
claims, based on facts and circumstances then known. If CGA's claim reserves are
subsequently determined to be inadequate, the Company will be required to
increase claim reserves with a corresponding reduction in the Company's net
income in the period in which the deficiency is identified. There can be no
assurance that claims will not exceed the Company's claim reserves and have a
material adverse effect on the Company's financial condition or results of
operations in a particular period. See "The Company--Commercial Guaranty
Assurance, Ltd.--Reserves."
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTION
The Company is a holding company with no operations or significant assets
other than its ownership of all of the capital stock of the Subsidiaries. Other
than the dividends required to be paid on the Series A Preferred Stock and the
New Series A Preferred Stock which will be paid in kind for the next five years
and the Series B Cumulative Voting Preference Shares which will be paid in kind
for the next ten years, the Company does not expect to pay dividends to its
shareholders. If at any time after June 17, 2002, the Series A Preferred Stock
and/or the New Series A Preferred Stock is rated investment grade (a rating of
BBB- or higher from DCR, or the then-equivalent rating in the event DCR changes
its ratings designations), the dividend rate or such stock will decrease by 200
basis points. See "Description of Securities--Series A Preferred
Stock--Dividends." CGA's Board of Directors (the "Board") has passed a
resolution that CGA will not declare or pay cash dividends for a period of five
years after June 17, 1997. After such five-year period, the Company intends to
comply with the dividend restrictions imposed by DCR in order to maintain its
AAA claims paying ability rating. Management expects that compliance with such
dividend restrictions will cause the Company's financial condition to be
consistent with those financial requirements imposed by the New York State
Insurance Department under Regulation 69 of the New York Insurance Regulations
("Regulation 69"). Regulation 69 governs the method of reporting of a company's
financial condition under generally accepted accounting principles. In addition,
pursuant to a letter dated June 17, 1997 from the Company, CGA and CGAIM to DCR,
CGA has agreed that it will not declare, pay or distribute any dividend,
including non-cash dividends, without first giving DCR 20 business days prior
written notice thereof, and receiving a written confirmation from DCR that such
event will not affect the AAA claims paying ability of CGA. The ability of the
Company to make cash distributions and dividends, and to redeem its preferred
stock, will be dependent primarily upon receiving dividends and distributions
from CGA. Bermuda insurance regulations impose restrictions on dividends and
cash distributions to the Company by CGA. These restrictions may prevent the
Board from making distributions and redemptions, or limit the amount thereof,
following an Event of Non-Compliance (as defined in "Description of
Securities--Series A Preferred Stock--Events of Non-Compliance") or otherwise.
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In addition, Board members' fiduciary obligations to creditors,
policyholders and shareholders apply to their votes in respect of dividends,
distributions and redemptions.
The aforementioned restrictions on distributions by CGA to the Company will
restrict the ability of the Company to use the proceeds of commitments to
purchase 2,400,000 shares of Series B Preferred Stock (the "Commitments") to pay
dividends to holders of the Company's securities, because all proceeds from the
Commitments will be contributed by the Company to CGA. See "Description of
Securities--Commitments."
FOREIGN CORPORATION; SERVICE OF PROCESS; AND ENFORCEMENT OF JUDGMENTS
The Company is a Bermuda company, and certain of its officers and directors
may be residents of countries other than the U.S. All or a substantial portion
of the assets of the Company and such officers and directors are located outside
the U.S. Therefore, it may be difficult for investors to effect service of
process within the U.S. on any of these parties who reside outside the U.S. or
to recover against them or their assets in the event of any judgments obtained
in U.S. courts. The United States and Bermuda do not currently have a treaty
providing for reciprocal recognition and enforcement of judgments of U.S. courts
in civil and commercial matters and, 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 Bermuda. Thus 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 U.S. federal securities laws, provided that the facts surrounding
such violation would constitute or give rise to a cause of action under Bermuda
law. See "Description of Securities--Enforceability of Judgments."
INTERDEPENDENCE OF CGA AND CGAIM WITH ST. GEORGE AND COBALT
CGAIM has entered into asset management agreements with several investment
company subsidiaries of St. George Holdings, Ltd. ("St. George Holdings" and,
collectively with such subsidiaries, "St. George") and Cobalt Holdings, Ltd.
("Cobalt Holdings" and, collectively with such subsidiaries, "Cobalt"), none of
which are affiliates of the Company. See "CGA Investment Management, Inc.--St.
George and Cobalt." CGA has issued insurance policies which guaranty the payment
obligations of such subsidiaries in respect of their financing arrangements,
including any derivative contracts entered into by these subsidiaries from time
to time. Such guaranteed financing arrangements provide St. George and Cobalt
with financing to acquire the assets which comprise their respective investment
portfolios. Such insurance policies are expected to constitute more than 30% of
CGA's cumulative gross par insured (the outstanding principal amount, or "face
value" of obligations insured) at the end of the first year of its operations
and to constitute a declining percentage thereafter.
The ability of St. George and Cobalt to pay their respective fees and
expenses, including premiums payable to CGA and any fees payable to CGAIM,
depends on such companies' general ability to finance their investment
activities and to generate sufficient cash flow from such activities. The
ability of St. George and Cobalt to obtain financing is, in turn, dependent upon
such companies' ability to obtain financial guaranty insurance policies of CGA
guarantying their respective repayment obligations under such financing
arrangements, and the continued availability of such financing arrangements is
conditioned upon, among other things, the maintenance of the rating of CGA's
claims-paying ability. A downgrade of the claims-paying ability rating of CGA
will cause the termination and/or acceleration of such arrangements. Although in
such event CGAIM as asset manager would attempt to obtain alternative sources of
financing for St. George and Cobalt, its ability to do so would be significantly
impaired were such a downgrade event to occur. See "The Company--St. George and
Cobalt."
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INVESTMENT PORTFOLIO RISKS
The investment portfolio of CGA is invested primarily in foreign corporate
and government debt securities, the fair value of which varies depending upon
economic and market conditions and the level of interest rates. In addition,
these investments are subject to credit risk relating to the uncertainty
associated with the continued ability of debtors to make timely payments
pursuant to the contractual terms underlying such investments.
Approximately 11% of CGA's investment portfolio was invested in non-U.S.
dollar denominated currencies. Each of these foreign currency exposures was
hedged with specific forward contracts to manage the currency risk. The Company
may, from time to time, for business or regulatory reasons, be required to sell
certain of its investments at a time when their market value is less than the
carrying value of such investments. For a more detailed description of the
Company's investment guidelines and investment portfolio, see "The
Company--Investment Portfolio."
RISKS RELATING TO COMMERCIAL MORTGAGE LOANS AND SECURITIES
Generally. It is expected that a substantial portion of the initial insured
portfolio of the Company will consist of commercial real estate whole loans and
securities or obligations of entities backed by such commercial real estate
whole loans. Commercial mortgage loans are typically non-recourse to the
borrower (or recourse to a special purpose borrower holding the mortgaged
property as its only significant asset) and, consequently, are dependant upon
the successful operation of the related real estate project, which in turn is
affected by general or local economic conditions and property risks, such as
structural defects, natural disasters, the conditions of specific industry
segments, the degree to which such project competes with other projects in the
area, the operating costs of such project and the performance of the management
agent, if any. Compliance with laws, such as zoning and environmental laws and
the Americans With Disabilities Act, may be costly and adversely affect the
returns on a project.
Risks Relating to Environmental Laws. Commercial real estate properties,
especially industrial and warehouse properties, may involve the burdens and
costs of compliance with environmental laws and regulations. Under the strict
liability standards of the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended (CERCLA), and other U.S. federal and state
environmental laws, a secured lender and holders of debt securities secured by
real property may be held liable as an "owner" or "operator" for the costs of
responding to a release or threat of a release of hazardous substances on or
from a borrower's property, regardless of whether a previous owner caused the
environmental damage.
Risks Relating to Commercial Mortgage Loans. Commercial mortgage loans
usually have substantial principal amounts due at their stated maturities
("Balloon Payments"), the payment of which will depend upon the borrower's
ability to either refinance the loan or sell the related mortgaged property at a
price sufficient to permit the borrower to make such Balloon Payment. The rate
of principal payments on most mortgage-related securities is directly related to
the interest rate of the underlying mortgage loans. The yield to maturity of
mortgage-related securities, including commercial mortgage securities, is
affected by, among other things, any prepayment or extension in the payment of
principal. The effect of such prepayment or extension may vary depending upon
whether such securities were bought at a premium or at a discount. Certain of
the underlying loans may have features discouraging voluntary prepayment such as
a lockout period during which loans may not be voluntarily prepaid and/or
provisions for the payment of a prepayment premium during certain specified
periods.
Risks Relating to Fluctuations in Interest Rates. The Company cannot
predict the effect on its commercial real estate securitization business from
changing interest rates. It is Management's opinion that lower interest rates
will generally increase the volume of securitization but lower rates are also
likely to lead to lower insurance premium rates and higher prepayment rates of
existing insured securities. Higher interest rates will likely have the opposite
effect. On balance it is Managements's view that insurance opportunities for CGA
will exist regardless of changes in interest rates.
For a more detailed description of the relationship between the financial
guaranty bond insurance industry and the commercial real estate related,
asset-backed and municipal securities industries, see "Financial Bond Insurance
Industry."
RISKS CONCERNING MARKET FACTORS
The demand for financial guarantee insurance depends on many factors--most
of which are beyond the control of the Company--including prevailing interest
rates and investors' perception of the strength of financial guarantee
providers. The ability of issuers of debt obligations to obtain a lower total
cost in respect of insured debt instruments is affected by a variety of factors,
including the general perception of the financial strength of the providers of
financial guarantee insurance and the interest rates borne by uninsured
obligations. See "Financial Bond Insurance Industry."
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EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
On June 17, 1997, the Company sold the Series A Preferred Stock to the
initial purchasers pursuant to the Series A Preferred Stock Subscription
Agreement dated as of June 9, 1997 (the "Subscription Agreement"). In the
Subscription Agreement, the Company agreed that it would file a Registration
Statement with the Commission within 180 days after the closing date on June 17,
1997. In addition, the Company agreed to issue and exchange New Series A
Preferred Stock for Series A Preferred Stock that is validly tendered and not
withdrawn on the Business Day before the expiration of the Exchange Offer
pursuant to the Registration Statement. A copy of the Subscription Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The Registration Statement is intended to satisfy the Company's
obligations under the Subscription Agreement.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING SERIES A PREFERRED STOCK
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange shares of Series A
Preferred Stock which are properly tendered on or prior to the Expiration Date
and not withdrawn as permitted below. Pursuant to this Exchange Offer, shares of
New Series A Preferred Stock are being offered in exchange for any and all of
the outstanding shares of Series A Preferred Stock (on a share for share basis).
As of the date hereof, 2,703,598 shares of Series A Preferred Stock are issued
and outstanding, representing 2,703,598 shares issued and outstanding as of
November 12, 1997, the date of the original filing of the Registration Statement
of which this Prospectus is a part, and 189,062 additional shares issued and
outstanding as a result of paid-in-kind dividends paid on December 31, 1997 and
March 31, 1998. Pursuant to Rule 416 under the Securities Act of 1933, as
amended, such 189,062 additional shares, and shares issued in the future
pursuant to such paid-in-kind dividends, shall be deemed registered pursuant to
the Registration Statement of which this Prospectus is a part. For a description
of the procedures for tendering, see "Exchange Offer--Procedures for Tendering
Series A Preferred Stock." The terms of the New Series A Preferred Stock are
substantially identical to the terms of the Series A Preferred Stock except that
the New Series A Preferred Stock will have been registered under the Securities
Act and will not contain terms restricting the transfer of such stock other than
with respect to transfer restrictions set forth in the Bye-laws. See
"Description of Securities--New Series A Preferred Stock." THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____________, 1998, UNLESS
EXTENDED. As used herein, the term "Expiration Date" means 5:00 p.m., New York
City time, on 1998; provided, however, that if the Company has extended the
period of time for which the Exchange Offer is open, the term "Expiration Date"
means the latest time and date to which the Exchange Offer is extended.
This Prospectus, together with the accompanying Letter of Transmittal, is
first being sent on or about ___________, 1998, to all holders of Series A
Preferred Stock known to the Company. The Company's obligation to accept the
Series A Preferred Stock for exchange pursuant to the Exchange Offer is subject
to certain conditions as set forth under "--Certain Conditions to the Exchange
Offer" below.
Subject to the terms of the Subscription Agreement, the Company expressly
reserves the right, at any time or from time to time, to extend the period of
time during which the Exchange Offer is open, and thereby delay acceptance for
any exchange of any Series A Preferred Stock, by giving notice of such extension
to the holders thereof. During any such extension, all Series A Preferred Stock
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Series A Preferred Stock not accepted
for exchange for any reason will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration or termination of
the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Series A Preferred Stock not
theretofore accepted for exchange, upon the occurrence of any of the conditions
of the Exchange Offer specified below under "--Certain Conditions to the
Exchange Offer." The Company will give notice of any extension, amendment,
non-acceptance or termination to the holders of the Series A Preferred Stock as
promptly as practicable. Notice of any extension shall be issued no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
PROCEDURES FOR TENDERING SERIES A PREFERRED STOCK
The tender to the Company of Series A Preferred Stock by a holder thereof
as set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering holder and the Company upon the
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terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a holder who
wishes to tender Series A Preferred Stock for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Bank of Bermuda Limited at one of the addresses set forth
below under "Exchange Agent" on or prior to the Expiration Date. In addition,
certificates for such Series A Preferred Stock must be received by the Exchange
Agent along with the Letter of Transmittal. THE METHOD OF DELIVERY OF THE SERIES
A PREFERRED STOCK, LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR SERIES A PREFERRED STOCK SHOULD BE
SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Series A Preferred Stock surrendered
for exchange pursuant thereto are tendered (i) by a registered holder of the
Series A Preferred Stock who has not completed the box entitled "Special Payment
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution (as defined below). If Series A
Preferred Stock are registered in the name of a person other than a signer of
the Letter of Transmittal, the Series A Preferred Stock surrendered for exchange
must be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Company in its
sole discretion. Such written instrument must be duly executed by the registered
holder with the signature thereon guaranteed by an Eligible Institution.
"Eligible Institution" means a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as "an eligible guarantor institution," including (as
such terms are defined therein) (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Series A Preferred Stock tendered for exchange will
be determined by the Company in its reasonable discretion, which determination
shall be final and binding. The Company reserves the absolute right to reject
any and all tenders of any particular Series A Preferred Stock not properly
tendered or to not accept any particular Series A Preferred Stock which
acceptance might, in the judgment of the Company or its counsel, be unlawful.
The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to any Series A Preferred
Stock either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender Series A Preferred Stock in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) as to any particular share of Series A Preferred Stock either before or
after the Expiration Date by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Series A Preferred Stock for exchange must be cured within such reasonable
period of time as the Company shall determine. Neither the Company, the Exchange
Agent nor any other person shall be under any duty to give notification of any
defect or irregularity with respect to any tender of Series A Preferred Stock
for exchange, nor shall any of them incur any liability for failure to give such
notification.
If the Letter of Transmittal or any Series A Preferred Stock or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
ACCEPTANCE OF SERIES A PREFERRED STOCK FOR EXCHANGE; DELIVERY OF NEW SERIES A
PREFERRED STOCK
For each Series A Preferred Stock accepted for exchange, the holder of such
Series A Preferred Stock will receive New Series A Preferred Stock on a share
for share basis. For purposes of the Exchange Offer, the Company shall be deemed
to have accepted properly tendered Series A Preferred Stock for exchange when,
as and if the Company has given oral and written notice thereof to the Exchange
Agent.
In all cases, issuance of New Series A Preferred Stock for Series A
Preferred Stock that are accepted for exchange pursuant to the Exchange Offer
will be made only after timely receipt by the Exchange Agent of certificates
15
<PAGE>
for such Series A Preferred Stock, a properly completed and duly executed Letter
of Transmittal and all other required documents. If any tendered Series A
Preferred Stock are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Series A Preferred Stock are submitted
for a greater amount than the holder desires to exchange, such accepted or
exchanged Series A Preferred Stock will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration of the
Exchange Offer.
UNTENDERED SERIES A PREFERRED STOCK
Upon consummation of the Exchange Offer, the holders of Series A Preferred
Stock, if any, will have no further registration or other rights under the
Subscription Agreement, except as provided herein. Holders of shares of Series A
Preferred Stock who do not tender their shares of Series A Preferred Stock in
the Exchange Offer or whose shares of Series A Preferred Stock are not accepted
for exchange will continue to hold such shares of Series A Preferred Stock and
will be entitled to all the rights and preferences thereof and will be subject
to all the limitations applicable thereto, except for any such rights or
limitations which, by their terms, terminate or cease to be effective as a
result of this Exchange Offer. All untendered and tendered but unaccepted shares
of Series A Preferred Stock will continue to be subject to the restrictions on
transfer provided therein. To the extent that shares of Series A Preferred Stock
are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted shares of Series A Preferred Stock could
be adversely affected.
WITHDRAWAL RIGHTS
Tenders of Series A Preferred Stock may be withdrawn at any time prior to
5:00 p.m., New York City time, on the business day prior to the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Series A Preferred Stock to be withdrawn, identify
the Series A Preferred Stock to be withdrawn (including the principal amount of
such Series A Preferred Stock), and (where certificates for Series A Preferred
Stock have been transmitted) specify the name in which such Series A Preferred
Stock are registered, if different from that of the withdrawing holder. If
certificates for Series A Preferred Stock have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Series A
Preferred Stock so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Series A Preferred Stock
which have been tendered for exchange but which are not exchanged for any reason
will be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Series A Preferred Stock may be retendered by
following one of the procedures described under "--Procedures for Tendering
Series A Preferred Stock" above at any time on or prior to the Expiration Date.
CONSEQUENCES OF THE EXCHANGE; RESALES
The Company is making the Exchange Offer for the New Series A Preferred
Stock in reliance on the position of the staff of the Division of Corporation
Finance of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought its
own interpretive letter and there can be no assurance that the staff of the
Division of Corporation Finance of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the staff of the
Division of the Corporation Finance of the Commission and subject to the two
immediately following sentences, the Company believes that New Series A
Preferred Stock issued pursuant to this Exchange Offer in exchange for Series A
Preferred Stock may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act provided that such New Series A Preferred Stock is acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of such
New Series A Preferred Stock. However, any holder of Series A Preferred Stock
who is an Affiliate of the Company or who intends to participate in the Exchange
Offer for the purpose of distributing New Series A Preferred Stock, or any
16
<PAGE>
broker-dealer who purchased Series A Preferred Stock from the Company for resale
pursuant to Rule 144A or any other available exemption under the Securities Act
(a) will not be able to rely on the interpretations of the staff of the Division
of Corporation Finance of the Commission set forth in the above-mentioned
interpretive letters, (b) will not be permitted or entitled to tender such
Series A Preferred Stock in the Exchange Offer and (c) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Series A Preferred Stock
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds Series A Preferred
Stock acquired for its own account as a result market-making or other trading
activities and exchanges such Series A Preferred Stock for New Series A
Preferred Stock then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Series A Preferred Stock. See "--Plan of Distribution."
PLAN OF DISTRIBUTION
Each holder of Series A Preferred Stock who wishes to exchange Series A
Preferred Stock for New Series A Preferred in the Exchange Offer will be
required to represent that (i) it is not an Affiliate of the Company, (ii) any
New Series A Preferred Stock to be received by it is being acquired in the
ordinary course of its business (iii) it has no arrangement or understanding
with any person to participate in a distribution (within the meaning of the
Securities Act) of such New Series A Preferred Stock, and (iv) if such holder is
not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such New
Series A Preferred Stock. In addition, the Company may require such holder, as a
condition to such holder's eligibility to participate in the Exchange Offer, to
furnish to the Company in writing information as to the number of "beneficial
owners" (within the meaning of Rule 13d-3 under the Exchange Act) on behalf of
whom such holder holds the Series A Preferred Stock to be exchanged in the
Exchange Offer. Each broker-dealer that receives New Series A Preferred Stock
for its own account pursuant to the Exchange Offer must acknowledge that it
acquired the Series A Preferred Stock for its own account as the result of
market requirements of the Securities Act in connection with any resale of any
New Series A Preferred Stock. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based upon the position taken by the staff of the Division of Corporation
Finance of the Commission in the interpretive letters referred to above, the
Company believes that Participating Broker-Dealers who acquired Series A
Preferred Stock for their own accounts as a result of market-making activities
or other trading activities may fulfill their prospectus delivery requirements
with respect to the New Series A Preferred Stock received upon exchange of such
Series A Preferred Stock (other than Series A Preferred Stock which represents
an unsold allotment from the original sale of the Series A Preferred Stock) with
a prospectus meeting the requirements of the Securities Act, which may be the
prospectus prepared for an exchange offer so long as it contains a description
of the plan of distribution with respect to the resale of such New Series A
Preferred Stock. Accordingly, this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer
during the period referred to below in connection with resales of New Series A
Preferred Stock received in exchange for Series A Preferred Stock where such
Series A Preferred Stock was acquired by such Participating Broker-Dealer for
its own account as result of market-making or other trading activities. Subject
to certain provisions set forth in the Subscription Agreement, the Company has
agreed that this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
such New Series A Preferred Stock for a period ending 365 days after the
Expiration Date (subject to extension under certain limited circumstances
described below) or, if earlier, when all such New Series A Preferred Stock has
been disposed of by such Participating Broker-Dealer. However, a Participating
Broker-Dealer who intends to use this Prospectus in connection with the resale
of New Series A Preferred Stock received in exchange for Series A Preferred
Stock pursuant to the Exchange Offer must notify the Company, or cause the
Company to be notified, on or prior to the Expiration Date, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the Letter of Transmittal or may be delivered to the Exchange
Agent at one of the addresses set forth herein under "--Exchange Agent." For a
period of 365 days after the Expiration Date, the Company will promptly send
copies of this Prospectus to any Participating Broker-Dealer that requests such
documents in the Letter of Transmittal. Any Participating Broker-Dealer who is
an Affiliate of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
In that regard, each Participating Broker-Dealer who tenders Series A
Preferred Stock pursuant to the Exchange Offer will be deemed to have agreed, by
execution of the Letter of Transmittal, that upon receipt of notice from the
17
<PAGE>
Company of the occurrence of any event or the discovery of any fact which makes
any statement contained or incorporated by reference in this Prospectus untrue
in any material respect or which causes this Prospectus to omit to state a
material fact necessary in order to make the statements contained or
incorporated by reference herein, in light of the circumstances under which they
were made, not misleading or of the occurrence of certain other events specified
in the Subscription Agreement, such Participating Broker-Dealer will suspend the
sale of New Series A Preferred Stock pursuant to this Prospectus until the
Company has amended or supplemented this Prospectus to correct such misstatement
or omission and has furnished copies of the amended or supplemented Prospectus
to such Participating Broker-Dealer or the Company has given notice that the
sale of the New Series A Preferred Stock may be resumed, as the case may be. If
the Company gives such notice to suspend the sale of the New Series A Preferred
Stock, it shall extend the 365-day period referred to above during which
Participating Broker-Dealer are entitled to use this Prospectus in connection
with the resale of New Series A Preferred Stock by the number of days during the
period from and including the date of the giving of such notice to and including
the date when Participating Broker-Dealer shall have received copies of the
amended or supplemented Prospectus necessary to permit resales of the New Series
A Preferred Stock or to and including the date on which the Company has given
notice that the sale of New Series A Preferred Stock may be resumed, as the case
may be.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Series A Preferred
Stock in exchange for, any Series A Preferred Stock and may terminate or amend
the Exchange Offer if at any time before the Expiration Date, the Company
determines that the Exchange Offer violates applicable law, any applicable
interpretation of the staff of the Commission or any order of any governmental
agency or court of competent jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
EXCHANGE AGENT
The Bank of Bermuda Limited has been appointed as the Exchange Agent for
the Exchange Offer. All executed Letters of Transmittal should be directed to
the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal should be directed to the Exchange Agent addressed as
follows:
BY REGISTERED OR CERTIFIED MAIL: BY HAND OR OVERNIGHT DELIVERY:
-------------------------------- ------------------------------
The Bank of Bermuda Limited Carol Ansaldi
Bank of Bermuda Building The Bank of Bermuda Limited
6 Front Street Bank of Bermuda Building
P.O. Box HM 1020 6 Front Street
Hamilton HM DX Hamilton HM 11
Bermuda Bermuda
VIA FACSIMILE:
(441) 299-6565
CONFIRM BY TELEPHONE:
(441) 299-527
FOR INFORMATION CALL:
Carol Ansaldi, Account Manager, Corporate Trust
DELIVERY OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE
A VALID DELIVERY.
18
<PAGE>
FEES AND EXPENSES
Except for fees sent to brokers who send information in connection with the
Exchange Offer to their clients, the Company will not make any other payments to
brokers, dealers or other soliciting acceptances of the Exchange Offer. The
principal solicitation is being made by mail; however, additional solicitations
may be made in person or by telephone by officers and employees of the Company.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses will include the fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
ACCOUNTING TREATMENT
The New Series A Preferred Stock will be recorded at the same carrying
value on a share for share basis as the Series A Preferred Stock which is
reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer will be expensed for accounting purposes.
TRANSFER TAXES
Holders who tender their Series A Preferred Stock for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register New Series A Preferred Stock in the name
of, or request that Series A Preferred Stock not tendered or not accepted in the
Exchange Offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW SERIES A PREFERRED STOCK
Holders of Series A Preferred Stock who do not exchange their Series A
Preferred Stock for New Series A Preferred Stock pursuant to the Exchange Offer
will continue to be subject to the restrictions on transfer of such Series A
Preferred Stock as set forth in the legend thereon as a consequence of the
issuance of the Series A Preferred Stock pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of, the Securities
Act and applicable state securities laws. Series A Preferred Stock not exchanged
pursuant to the Exchange Offer will continue to accrue dividends in accordance
with the Subscription Agreement and the Bye-laws. In general, the Series A
Preferred Stock may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The Company
does not currently anticipate that it will register the Series A Preferred Stock
under the Securities Act.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Subscription Agreement. The Company will not receive any
proceeds from the issuance of the New Series A Preferred Stock offered hereby
and has agreed to pay the expenses of the Exchange Offer.
19
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following selected financial and operating data should be read in
conjunction with the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and its Subsidiaries and the notes thereto
included elsewhere in
NINE MONTHS 21-JUNE-96
ENDED TO
31-DEC-97 31-MAR-97
------------ ----------
Income Statement Data:
Revenues:
Gross premiums written ........................... $ 773,571 $ --
------------ --------
Net premiums written ............................. 773,571 0
Change in unearned premiums ...................... (270,576) 0
------------ --------
Net premiums earned .............................. 502,995 --
Net investment income ............................ 2,955,601 801
Net realized gains on sale of fixed maturities ... 885,422 --
------------ --------
Total revenues ............................... 4,344,018 801
Expenses:
Operating expenses ............................... 5,018,999 11
Acquisition costs ................................ 157,242 --
Commitment fees .................................. 323,836 --
Excess of loss facility .......................... 107,671 --
Loss adjustment expenses ......................... 55,000 --
------------ --------
Total expenses ............................... 5,662,748 11
------------ --------
Net income (loss) .................................. (1,318,730) 790
------------ --------
Series A pay-in-kind dividends paid ................ (4,911,381) --
Series B pay-in-kind dividends accrued ............. (4,439,231) --
Series A accretion to redemption value ............. (190,472) --
Series B accretion to redemption value ............. (83,561) --
------------ --------
Earnings (loss) available to common shareholders ... $(10,943,375) $ 790
============ ========
Basic and fully diluted earnings (loss)
per common share ................................. $ (1.68) $ 0.07
Weighted average shares outstanding ................ 6,522,313 12,000
BALANCE SHEET DATA:
Fixed maturities available for sale
(at fair value) ................................ $123,302,763 $ --
Cash and short term investments .................. 7,199,106 121,742
Total assets ..................................... 144,108,638 133,790
Total liabilities ................................ 3,916,609 121,000
Total mezzanine equity ........................... 107,047,101 --
Total shareholders' equity ....................... 33,144,928 12,790
Total liabilities, mezzanine equity,
and shareholders' equity ....................... 144,108,638 133,790
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
GENERAL
The Company's financial statements for all periods prior to completion of
the Exchange Offer, including all financial statements as of and through the
nine months ended December 31, 1997 and for the period from June 21, 1996 to
March 31, 1997 included herein, are presented as the consolidated financial
statements of the Company.
The Company is a holding company, which was incorporated in Bermuda on June
21, 1996. The Company has two wholly-owned subsidiaries. CGA was incorporated in
Bermuda on October 22, 1996. CGA is licensed as a class 3 insurer under the
Insurance Act 1978 of Bermuda which authorizes it to carry on insurance business
of all classes in or from within Bermuda subject to its compliance with the
solvency margin, liquidity ratio and other requirements imposed on it by the
Act. Additional information regarding the Act may be found in this Prospectus
under "Regulation." CGA has a AAA "claims paying ability" rating from DCR. CGA
provides financial guaranty insurance of structured securities, including
commercial real estate, asset-backed, and other securities. CGAIM, Inc. was
incorporated in Delaware, U.S.A. in July 1996 by the founders of the Company and
was acquired at nominal cost by the Company on June 9, 1997. CGAIM acts as an
investment advisor and provides financial advisory services to a variety of
clients.
RESULTS OF OPERATIONS
The Company and CGA were inactive until June 17, 1997 when the Company's
private placement offering was completed. The Company was recapitalized with two
classes of preferred stock totaling $105 million, common stock totaling $45.5
million, and commitments for $60 million of additional preferred stock upon the
occurrence of certain events. Accordingly, the December 31, 1997 financial
statements reflect only six and one-half months of operations. Efforts during
this period were focused primarily on post closing matters, personnel, office
relocations, operating systems, and marketing.
Total revenues for the period ended December 31, 1997 were $4.3 million of
which $.5 million was derived from financial guarantee insurance premiums and
$3.8 million was derived from investments. Premium income was derived from $.8
million of premiums written, of which $.3 million was unearned at year-end,
resulting in net premiums earned of $.5 million. None of the Company's revenues
were from Cobalt for the period ended December 31, 1997. Of the $.5 million of
net premiums earned, 51% was from St. George, 49% was from other clients and
none was from Cobalt. The following table shows the net par outstanding insured
obligations at December 31, 1997 by asset type (all of which except "Sovereign
securities" represent "fund guaranty obligations", as such product application
is described below under "The Company--Markets, Customers and Applications"):
<TABLE>
<CAPTION>
CREDIT RATINGS OF ASSETS
------------------------
IN THOUSANDS A BBB BB TOTAL
------------ --- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Sovereign securities ......................... $120,000 0% 42% 58% 100%
Commercial real estate securities ............ 101,284 0% 86% 14% 100%
Consumer asset backed securities ............. 52,300 44% 49% 7% 100%
Corporate asset backed securities ............ 46,879 0% 100% 0% 100%
-------
$320,463
========
</TABLE>
Non investment grade exposure as of February 28, 1998 was $169.7 million,
representing 30% of the Company's exposure.
Based on net par outstanding, the credit ratings of the above assets were
7% "A", 66% "BBB" and 27% "BB". As the insured portfolio grows, the percentage
of non-investment grade exposure is expected to decrease.
The financial guarantees in force at December 31, 1997 which cover the
commercial real estate and asset backed securities in the table above, provide
for quarterly premium payments to CGA as long as such assets remain in the
21
<PAGE>
insured portfolios of CGA's customers. Accordingly, CGA will continue to earn
revenues from and have exposure to the performance of those assets provided that
CGA and the customers mutually agree to retain such assets in the portfolio. CGA
monitors the performance of the assets in the portfolios and can require the
removal of any assets that do not meet CGA's underwriting criteria. CGA will
build upon the current book of business as its underwriting volume and risk in
force grow, thereby layering new business on top of a base of prior business
that creates an increasing annuity-like stream of revenue. This line of business
provided earned premiums of $31,822 in the quarter ended September 30, 1997, and
$199,096 in the quarter ended December 31, 1997.
The financial guarantees in force on the sovereign securities represent
eight transactions with terms ranging from two to five years and also provide
for quarterly premium payments to CGA. This line of business provided earned
premiums of $248,075 in the quarter ended December 31, 1997 and the sovereign
securities in the table above are projected to provide annual premiums of
approximately $1.7 million in 1998. This line of business is expected to
increase to provide a portfolio that is diversified by country, credit and term.
CGA monitors its exposure on a routine basis and stays in close contact
with DCR to ensure that its AAA rating is maintained. CGA has a $20 million
excess of loss reinsurance facility agreement and can also arrange reinsurance
on an as needed basis to manage its exposure. The Company also has commitments
from certain institutional shareholders which expire June 17, 2002 to purchase
$60 million of additional Series B Preferred Stock. Should those commitments be
called upon, the proceeds would be used to increase the capital of CGA. The
commitments must be funded in the event that DCR notifies the Company at least
45 days prior to June 17, 2002 that CGA's rating will otherwise be downgraded
below a AAA rating. See "Description of Securities--Commitments."
CGAIM is projected to generate structuring and investment advisory fees in
1998. CGAIM waived its fees in 1997 and will waive them through March 1998 as an
incentive to its clients.
Net investment income was comprised of $2.9 million of interest earned on
debt securities and short-term investments, and $.9 million of net capital
gains. Net investment income is presented after deducting the cost of external
investment management fees which totaled $.2 million. The total market value of
the fixed maturity portfolio at December 31, 1997 including accrued interest
receivable was $127.4 million. The average yield on the investment portfolio was
6.3%.
The Company's expenses are primarily personnel related. Substantial
personnel recruiting costs were incurred due to the need to quickly recruit
highly qualified and experienced individuals. In addition, a full year of
incentive compensation was paid to a large number of personnel who commenced
employment in the quarter ended September 30, 1997. These payments were
contractual per specific employment agreements.
LIQUIDITY AND CAPITAL RESOURCES
The Company capitalized CGA with $125 million and engaged J.P. Morgan
Investment Management, Inc. and Alliance Capital Management Corporation as
investment managers. The funds are invested in foreign corporate and government
debt securities, which are primarily rated AA. Approximately 11% of the
investment portfolio was invested in non-U.S. dollar denominated currencies.
Each of these foreign currency exposures was hedged with specific forward
contracts to manage the currency risk. In addition, the investment managers are
required to maintain the foreign currency investments at less than 50% of the
portfolio. The portfolio maintains a weighted average duration of two to five
years. Upon a default CGA is generally obligated only to pay principal and
interest as originally required by the security in default. Since there is no
acceleration, CGA can monitor its liquidity requirements in connection with
possible claims. The relatively short duration of the portfolio limits
volatility due to interest rate fluctuations while the high quality of
investments provides for liquidity.
22
<PAGE>
The following table sets forth the amount of the Company's investments in
foreign corporate and government debt securities:
COUNTRY AMORTIZED COST MARKET VALUE
------- -------------- ------------
UK ........................... $ 22,906,273 $ 23,925,361
France ....................... 21,166,400 21,358,235
Japan ........................ 8,642,512 8,709,663
Canada ....................... 17,138,908 17,384,750
Finland ...................... 5,990,342 6,139,000
Germany ...................... 15,486,467 15,572,297
Belgium ...................... 2,999,889 3,016,290
Australia .................... 7,201,815 7,085,911
Italy ........................ 1,992,601 1,994,360
Ireland ...................... 8,195,841 8,280,588
New Zealand .................. 3,946,406 3,814,201
Sweden ....................... 5,997,209 6,022,290
------------ ------------
Total ........................ $121,664,663 $123,302,946
============ ============
COUNTRY AMORTIZED COST MARKET VALUE
------- -------------- ------------
Foreign Government ........... $ 52,514,059 $ 52,788,537
Foreign Corporate ............ 69,150,604 70,514,409
------------ ------------
Total ........................ $121,664,663 $123,302,946
============ ============
All securities are rated either "AAA" or "AA".
CGAIM was capitalized with $3 million. It required additional funding
during 1997 of $3.5 million from the Company to cover the startup phase of its
operations and capital expenditures for office furniture and equipment,
information systems, and leasehold improvements. The Company and CGAIM intend to
establish a credit facility to provide additional liquidity for CGAIM in 1998.
By the terms of the Series A Preferred Stock, CGAIM is permitted to borrow up to
$12.5 million, an amount which the Company expects to be sufficient to meet
CGAIM's cash flow needs. On a consolidated basis the Company is projected to
generate positive cash flow in 1998.
The Company does not expect to pay cash dividends to its shareholders.
CGA's Board of Directors has passed a resolution that CGA will not declare or
pay cash dividends during the first five years of operations. After such
five-year period, CGA intends to comply with dividend restrictions, if any,
imposed by DCR in order to maintain its AAA rating. Future cash dividend
payments will be subject to covenants contained in the shareholder agreements
for the various classes of the Company's stock. Additional information regarding
this matter may be found in the Prospectus under "Limitation on Dividends and
Other Payment Restrictions Affecting Restricted Subsidiaries." In addition,
CGA's dividend payments are subject to certain limitations under Bermundian
insurance regulations that require minimum solvency margins and liquidity
ratios.
23
<PAGE>
THE COMPANY
Organized on June 21, 1996 and operating since June 17, 1997, the Company
is a holding company that provides financial guaranty insurance of structured
securities, including commercial real estate securities and asset-back
securities through its primary subsidiary, CGA.
OVERVIEW
Management believes that, with the evolution and global integration of
financial service providers, a AAA-rated financial guarantor that can maintain
its AAA claims paying ability rating is a valued purveyor of credit. Management
further believes that CGA, as a AAA-rated guarantor structured to utilize the
advantages of a Bermuda domicile while applying a wide spectrum of credit
enhancement technologies to high margin, markets, will be very successfulin its
businesses.
The Company focuses on the large U.S. and underserved commercial real
estate mortgage market. This $1 trillion domestic market (source: "CMBS Market
Review," J.P. Morgan Securities Inc. Credit Research, May 16, 1995) continues to
undergo a structural transition as capital market-based financings challenge the
role of traditional lenders. CMBS, an important component of the broader
commercial real estate mortgage market, have grown significantly in recent
years, from annual issuance of approximately $6.0 billion in 1990 to annual
issuance during 1996 of approximately $30 billion and annual issuance during
1997 in excess of $44 billion. (Source: "Commercial Mortgage Alert," Morgan
Stanley, February 9, 1998). Management believes current credit spreads in
certain sectors of commercial real estate obligations remain large relative to
similarly-rated securities and in many cases do not accurately price the
underlying risk, and attributes this spread disparity to the complexity and
diversity of financing structures and certain misperceptions about risks and
levels of losses associated with these types of securities. As in the private
ABS market, where the Company also intends to do business, it is this complexity
which makes credit enhancement valuable to both issuers and investors.
Management's extensive underwriting and structuring experience within CGA's
target markets will be critical to the long-term success of the Company.
The Company also targets select segments of the private asset-backed
securities ("ABS") market. Private ABS issued in 1996 exceeded $18 billion and
jumped to over $56 billion in 1997. (Source: Asset-Backed Alert, January 19,
1998 and January 20, 1997). The Company has identified several segments of the
private ABS market which Management believes are attractive and plans to
evaluate new opportunities as additional asset types are securitized. See
"--Underwriting."
As part of its business strategy to enter the commercial real estate and
asset-backed insurance markets, the Company functions through its subsidiaries
as both financial guarantor and as an investment manager to St. George, Cobalt
and other investment companies. St. George and Cobalt purchase securities of the
type that CGA would be willing to insure, and thus it is expected that by
guaranteeing such investment vehicles' financing obligations secured by the
securities purchased by St. George and Cobalt in the secondary market, CGA will
be able to grow its insured book of business. CGA has issued insurance policies
which guarantee the payment obligations of St. George and Cobalt under their
respective financing arrangements. See "--CGA Investment Management, Inc.--St.
Georgeand Cobalt."
CGA's insurance is available via unaffiliated non-U.S. insurance brokers to
a customer base that is expected to consist primarily of investment and
commercial banks with significant real estate and asset-backed advisory
businesses, and commercial mortgage loan origination and asset-backed
repackaging operations. Other real estate market participants, including life
insurance companies and real estate owner-operators and developers, are expected
to provide the balance of CGA's customer base.
MARKETS, CUSTOMERS AND APPLICATIONS
The Company intends to seek out underserved sectors of commercial real
estate and asset-backed markets which can support above average risk-adjusted
premiums. CGA offers five defined product applications within its primary
markets. Within the commercial real estate and asset-backed markets, the Company
has identified specific market opportunities in which one or more of its five
programs can be applied.
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Each of the product applications is described as follows:
o Residual Guaranty--CGA will insure against a major decline in value of
a properly maintained asset, particularly commercial real estate and
leased equipment. CGA's policy, known as a residual value guaranty, is
generally exercisable on a future date specified in the policy. The
primary benefit to the insured is the ability either to increase
proceeds in a financing or to change the accounting treatment of
owning leased assets.
o Portfolio Guaranty--CGA will provide insurance for portfolios of
seasoned commercial mortgages--whole loans, net leases and other
assets. This guaranty may be used by the insured to facilitate an
internal securitization of the portfolio. When the insured is a
regulated lender, such as a life insurance company, the result can be
a lowering of its regulatory capital charge.
o New Issue Guaranty--CGA is involved in the structuring and
guaranteeing of new debt securities including commercial real estate,
ABS, corporate and government obligations. As securities insured by
CGA are rated AAA, this guaranty should lower the all-in cost of the
financing and/or increase proceeds to the issuer.
o Fund Guaranty--CGA insures securities owned by investment companies
(including St. George and Cobalt), trusts, conduits or other funds,
providing the insured with the ability to efficiently finance its
operations at AAA rates.
o Secondary Market Guaranty--CGA, on a selective basis, will guarantee
existing individual securities in the secondary markets. This
guaranty, used in conjunction with the Fund Guaranty, creates added
liquidity for funds, investment vehicles, or other CGA-insured
security holders.
UNDERWRITING
The Company's underwriting guidelines for CGA intend for CGA to insure
commercial real estate obligations, ABS, corporate and government obligations to
a zero loss standard. That is, without regard to the premium collected thereon
or the investment income related thereto, obligations insured by CGA are
required to be structured with sufficient levels of excess collateral or other
forms of security so that CGA, to a high degree of certainty, anticipates no
losses on each risk insured.
To this end the Company's Board of Directors has established an
Underwriting Committee, which has established underwriting guidelines, which
guidelines have been adopted by CGA's Board of Directors. Each policy written by
CGA is required to meet the criteria set out in these guidelines. On a quarterly
basis, the Underwriting Committee reviews completed transactions to assure
conformity with underwriting guidelines and standards. CGA is able to deviate
from such guidelines and standards only with the approval of CGA's Board of
Directors or the Underwriting Committee on a case-by-case basis.
CGA's underwriting guidelines are built on the concept of multiple layers
of protection. Commercial real estate obligations and ABS obligations insured by
CGA are generally backed by pools of assets having reasonably predictable cash
flows. CGA insures commercial real estate obligations and ABS obligations that
provide for one or more forms of overcollateralization (such as excess
collateral, excess cash flow, excess "spread" or reserves) or third-party
protections (such as bank letters of credit, guaranties, net worth maintenance
agreements or reinsurance policies). Overcollateralization or third-party
protections need not indemnify CGA against all loss, but generally is intended
to assume the primary risk of financial loss. Overcollateralization or
third-party protections may not, however, be required in transactions in which
CGA is insuring the obligations of certain highly rated issuers that typically
are regulated or have implied or explicit government support.
During CGA's start-up phase, each obligation is reviewed by DCR prior to
the issuance of insurance by CGA. Management believes that this independent
deal-by-deal review performed by DCR further strengthens CGA's underwriting
process.
INVESTMENT PORTFOLIO
Management's investment objectives are to protect CGA's claims-paying
ability rating, maintain a high level of liquidity, make investments
predominantly in U.S. dollar denominated securities which generate non-U.S.
source income, and within these constraints, obtain a superior long-term total
return.
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The investment guidelines of CGA are consistent with these objectives.
Investments are made predominantly in U.S. dollar denominated foreign (non-U.S.)
securities and, in certain non-U.S. dollar denominated foreign (non-U.S.)
securities with U.S. dollar currency hedge protection. No investment is allowed
if such investment would generate U.S. source income to CGA. The minimum rating
level for an investment is at least BBB ("investment grade") by DCR. The
portfolio consists of AA rated investments on average. Investments falling below
the minimum quality level are required to be disposed of at the earliest
opportunity that such disposition will not adversely affect the investment
portfolio. For liquidity purposes, the policy of CGA is to invest only in
investments which are readily marketable with no legal or contractual
restrictions on resale.
All of the investments of CGA are supervised by its Board of Directors
pursuant to investment guidelines promulgated by the Investment Committee of the
Board of Directors of the Company. Such guidelines are further designed to
ensure compliance with applicable legal and regulatory requirements. Bermuda law
currently does not impose restrictions on the investments of CGA except to the
extent investments affect compliance with the liquidity or capital and surplus
requirements under Bermuda law. See "Regulation and Monitoring--Bermuda
Insurance Regulations."
The investment managers (the "Investment Managers") for CGA are J.P. Morgan
Investment Management, Inc. and Alliance Capital Management Corporation. Subject
to the investment guidelines determined by the Investment Committee, the
Investment Managers have complete discretion to, among other things, buy, sell,
retain, or exchange investments of any nature. The Investment Managers have
entered into investment management agreements with CGA, which are subject to
termination by either party upon 30 days' written notice. The maximum annual
fees charged by the Investment Managers in the aggregate are based on the market
value of the assets under management at the following rates: .30 of 1% per annum
on the first $75 million, .25 of 1% per annum on the next $75 million and .20 of
1% per annum on the excess over $150 million.
OVERVIEW OF THE SUBSIDIARIES
The Subsidiaries have been structured by Management to effectively and
efficiently operate within the marketplace. CGA focuses on the Company's primary
business of issuing financial guaranty insurance policies, while CGAIM provides
services of investment and collateral management and financial advisory services
including transaction structuring.
The main office address of the Company and CGA is Craig Appin House, 8
Wesley Street, Hamilton HM 11 Bermuda. The main office address of CGAIM is 17
State Street, New York, New York 10004.
COMMERCIAL GUARANTY ASSURANCE, LTD.
GENERATION OF CREDIT ENHANCEMENT BUSINESS
CGA's guaranty business is generated from investment bankers, holders of
securities eligible for credit enhancement and issuers, with advice from
unaffiliated non-U.S. brokers and consultants, on a direct placement basis. CGA
responds to submissions by applicants, submitted through unaffiliated non-U.S.
insurance brokers.
These insurance brokers are engaged by their clients to obtain financial
guaranty insurance products. If a client would like to procure insurance from
CGA the insurance broker advises its client with respect to how to obtain such
insurance including providing advice with respect to completing the requisite
due diligence required by CGA's application, as well as participating in
negotiating the terms of the policy. All negotiations with, and issuances of
policies by, CGA take place in Bermuda and other locations outside of the United
States.
CLAIMS
CGA's claims operations include the review and investigation of loss
reports, creation and maintenance of claim files, establishment of proper
reserves and payment of claims. CGA monitors the progress and ultimate outcome
of claims to ensure that subrogation, salvage and other cost recovery
opportunities are fully explored. CGA may become actively involved in the
financial restructuring of a transaction if Management concludes that losses are
minimized in so doing. When and as appropriate, CGA may supplement its in-house
capabilities in this regard with services available from other sources.
RESERVES
CGA will maintain a general loss reserve for all risks insured. A general
loss reserve is an estimate of potential losses and loss adjustment expenses. To
determine the general loss reserve, Management will review historical
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default rates and loss severity on corporate bonds with ratings similar to those
held by CGA. Expected losses on insured obligations are the product of the
probability of default and the loss severity on each obligation insured. Case
basis reserves will be established for insured risks at such time as the
likelihood of a future loss is probableor determinable.
Reserves are estimates at a given time of what the insurer ultimately
expects to pay on claims, based on facts and circumstances then known. It is
possible that the ultimate liability may exceed or be less than such estimates.
CGA will review its estimates continually and, as experience develops and new
information becomes known, CGA will adjust the reserves as necessary.
CONTINGENCY RESERVE
As a Bermuda based Class 3 insurer (as defined herein), CGA is generally
not required to establish contingency reserves. If CGA assumes reinsurance from
a U.S. domiciled financial guaranty insurer, then CGA is required to maintain
contingency reserves, which are maintained as part of CGA's general reserves.
See "Regulation."
REINSURANCE
On a case by case basis, CGA can arrange reinsurance on a proportional
basis with high quality and financially strong reinsurers or other forms of
reinsurance. To the extent CGA utilizes reinsurance, CGA has given Capital
Reinsurance Company ("Cap Re"), a financial guarantor rated "AAA" for claims
paying ability by Standard & Poor's Corporation and Moody's Investor Service,
Inc. (the highest rating available from such rating agencies), a right of first
offer to provide such reinsurance.
CGA has entered into an excess of loss reinsurance facility agreement dated
as of June 12, 1997 with KRE Reinsurance Ltd. (the "Reinsurer"), an affiliate of
Cap Re. The agreement provides for a $20 million limit of liability during the
nine year term of the Agreement, with no reinstatement of the limit in the event
of loss payments. The Agreement covers all policies and guarantees written and
reinsurance assumed by CGA from the inception of CGA.
ADMINISTRATIVE SERVICES
Certain administrative and insurance management services are provided to
CGA by Marsh & McLennan Management Services (Bermuda) Limited (the "Principal
Representative"). CGA has entered into a service agreement with the Principal
Representative to provide such service. In exchange for a fee, the services
required to be provided by the Principal Representative under the agreement, if
so instructed by CGA, include policyholder services, claims processing,
consulting, assistance with regulatory compliance, and other administrative and
systems support services. The service agreement is renewable annually with
cancellation by either party upon 90 days' notice.
CGA INVESTMENT MANAGEMENT, INC.
CGAIM provides financial advisory and investment management services
primarily for the U.S. and international structured finance markets, and for
specialized investment vehicles. CGAIM's advisory team currently includes
sixteen experienced professionals in the areas of asset backed and structured
finance, real estate finance and risk management. For more detailed information
regarding the senior management of CGAIM, see "Management--Biographical
Information."
INITIAL CLIENTS
CGAIM's initial clients are St. George Holdings and its subsidiaries and
Cobalt Holdings, LLC, none of which are affiliates of the Company (see below
under "--St. George and Cobalt"). Investment management services provided by
CGAIM to St. George and Cobalt include advice regarding the purchase and sale of
assets, in particular CMBS and ABS, treasury advice, including funding and
market risk management, and certain reporting and accounting functions. CGAIM is
currently marketing its services to other investment companies and major
institutional investors.
INVESTMENT ADVISOR/COLLATERAL MANAGEMENT SERVICES
CGAIM acts as investment manager and/or collateral manager to St. George
and is seeking to act for other third party sponsored investment vehicles.
CGAIM's duties include some or all of the following:
(i) Identifying assets on behalf of its clients, including (1)
analyzing credit, legal and market/optionability (i.e. interest rate,
currency, prepayment) risks and (2) negotiating the price, covenants,
rights, remedies and all documentation relating thereto.
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(ii) Identifying swaps, financial hedges and other derivative
contracts on behalf of the client in order to manage the portfolio within
prudent market risk limits.
(iii) Negotiating financing arrangements on behalf of its clients.
(iv) Preparing valuations, reports and other documents as may be
required from time to time by the clients and others in order to determine
compliance with the clients' policies and procedures.
(v) Analyzing the performance of assets including recommending the
sales of investments when appropriate.
Initial and ongoing credit reviews are performed by CGAIM on (1) the assets
which CGAIM recommends for purchase to its investment management clients and (2)
the counterparties with which CGAIM negotiates financial hedges or derivative
contracts on behalf of its clients.
Market risk management (i.e., interest rate and currency risk) and
operations are performed using systems which integrate front, middle and back
office applications with live feeds from market information services. Policies
and procedures are developed to ensure that CGAIM manages its clients' assets
pursuant to agreed upon guidelinesand limits.
FINANCIAL ADVISORY SERVICES
CGAIM works as a financial advisor for its clients, which include financial
asset issuers and investment banks, in evaluating structured finance
alternatives, including the use of credit enhanced and unenhanced financing
structures. CGAIM charges advisory fees to its clients for its services. CGAIM's
services as financial advisor include either or both of the following:
(i) providing assistance in evaluating, structuring and documenting
structured finance transactions (which could include the purchase of CGA
credit enhancement); and
(ii) providing assistance in organizing and performing due diligence
relating to financial assets and structured transactions.
REGULATORY STATUS
CGAIM is a registered investment advisor under the United States Investment
Advisers Act of 1940, as amended, which requires registration of all non-exempt
advisors to conform their conduct to statutory norms. The Act, among other
things, addresses fee arrangements between advisors and clients, prohibits
fraudulent practices, precludes assignment of an investment advisory contract
without the client's consent, requires advisors to maintain books and records
consistent with rules that may be promulgated by the Securities and Exchange
Commission, and authorizes the Commission to inspect such books and records.
ST. GEORGE AND COBALT
St. George Holdings, Ltd. was incorporated in the Cayman Islands as a
limited liability corporation, for the purpose of forming subsidiaries which
will invest in a wide range of assets, including CMBS, mortgage-backed
securities ("MBS"), ABS and corporate securities. Cobalt Holdings, LLC was
organized as a Delaware limited liability company for the purpose of forming
subsidiaries which will invest in certain types of securities, primarily
preferred stock issued by real estate investment trusts, certain classes of
asset backed securities backed by portfolios of credit card receivables and
certain other fixed income securities. St. George and Cobalt intend to fund
their respective investment portfolios through lending facilities provided by
banks, loans provided by commercial paper conduit vehicles, the direct issuance
of securities in the capital markets, and through synthetic purchase
arrangements such as total rate of return swaps, default swaps and repurchase
agreements. CGAIM will act as asset manager for each such subsidiary. CGA has
issued insurance policies which guarantee the payment obligations of St. George
and Cobalt under their respective financing arrangements. Such policies
generally insure the prompt payment of interest when due, and principal on
maturity, of the respective security. It is expected that the payment
obligations of any other subsidiaries of St. George Holdings and Cobalt Holdings
under their respective financing arrangements will similarly be guaranteed by
CGA.
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FINANCIAL GUARANTY BOND INSURANCE INDUSTRY
BACKGROUND
The financial guaranty bond insurance industry consists principally of nine
firms whose major focus is guaranteeing municipal financial obligations and
asset-backed securities. CGA will operate as a financial guarantor, but will
have as its primary focus the guaranteeing of securities relating to commercial
real estate transactions as well as asset-backed securities.
The inception of the financial guaranty industry was in 1971 when AMBAC
Indemnity Corporation ("AMBAC") insured its first municipal bond. Since 1971, a
number of financial guarantors have been created to provide credit enhancement
for municipal, asset-backed and commercial real estate related securities. The
AAA-rated bond insurers which make up the industry include eight U.S. based
companies that are members of the Association of Financial Guaranty Insurers and
consist of five primary insurers and three reinsurors:
INSURERS REINSURORS
-------- ----------
o AMBAC Indemnity Corporation o Capital Reinsurance Company
o Connie Lee Insurance Company o Enhance Reinsurance Company
o Financial Guaranty Insurance Company ("Enhance")
("FGIC") o Axa Re Finance ("Axa Re")
o Financial Security Assurance Inc.
("FSA")
o Municipal Bond Investor Assurance
Corporation ("MBIA")
The claims paying ability of all U.S. financial guarantors is rated AAA by
two or more of the nationally recognized statistical rating organizations
("NRSROs" or "Rating Agencies"). The four Rating Agencies currently rating
financial guarantors are:
o Duff and Phelps Credit Rating Company
o Fitch Investors Service, Inc.
o Moody's Investors Service, Inc.
o Standard & Poor's Corporation
Moody's and S&P rate all eight financial guarantors. Fitch Investors
Service, Inc. rates AMBAC, FGIC, FSA, MBIA and Axa Re and DCR rates Enhance. A
claims paying rating is an opinion of a rating agency as to the financial
capacity of an insurance company to meet the obligations set forth in its
insurance policies. The rating is not specific to any individual policy but is
applicable to all policies of the insurance company.
Given the fundamental importance of AAA ratings, NRSROs play a critical
role in the financial guaranty industry. The Company believes that a financial
guarantor would do whatever possible to prevent a downgrading by a NRSRO because
the loss of a AAA rating, and the resulting widening of a financial guarantor's
trading level, would make it impossible for a financial guarantor to compete
effectively in the highly competitive municipal bond or asset-backed insurance
market.
A financial guaranty insurance policy is used in the capital markets as a
credit enhancement instrument to guaranty to the holder of a previously
uninsured security payment of principal and interest in accordance with the
original debt service schedule of the security. In the event that the issuer of
the security defaults on its payment obligations, the financial guarantor makes
the scheduled payments. In such an instance, the insurer generally has the
option, but not the obligation, to repay the security on an accelerated basis.
The financial guaranty insurance policy is unconditional, irrevocable and
noncancellable.
Because the credit rating of all U.S. financial guarantors is AAA,
securities guaranteed by them are rated AAA. The fundamental business
proposition of all guarantors is to elevate to a AAA level securities which
would otherwise have a lower rating. Although all securities guaranteed by the
financial guarantors are rated AAA, insured bonds tend to trade at levels that
approximate uninsured AA bonds.
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Generally, the issuer of a security arranges to purchase a financial
guaranty policy at the time a security is issued. Financial guarantors also
offer investors and secondary market traders the opportunity to purchase credit
enhancement for previously issued securities. Although premiums are frequently
measured as a component of the yield of the security, financial guaranty policy
premiums are generally non-refundable and payable in full on the date the policy
is written. However, premiums for asset-backed securities may be paid over the
life of the securities.
An issuer purchases a financial guaranty policy to reduce its borrowing
cost. Accordingly, the purchase of such credit enhancement will be economically
justified only if the yield of an uninsured security exceeds the sum of (i) the
annual premium charged to upgrade the security to AAA, plus (ii) the yield on
the same security when enhanced to a AAA level. Therefore, the ability of a
financial guarantor to sell its credit enhancement is a function both of the
credit spreads available in a market (the difference, for example, in the yield
of a general obligation bond rated AAA without insurance and the yield of a
similar general obligation bond rated BBB) and the trading level achieved as a
result of the AAA guaranty policy.
BOND INSURERS' ELEMENTS OF PROFITABILITY
The income of financial guarantors has two primary components--underwriting
income and investment income. Underwriting income is the recognition of
insurance premiums over the term of the risk insured. Although loss history with
respect to insured risks is favorable for the industry, losses are generally
regarded as the most unpredictable variable in forecasting underwriting income
and the long-term profitability of a financial guaranty company. Investment
income has two components--ordinary income and capital gains. Under the NRSRO
"stress test," an analysis designed to assess capital adequacy of the financial
guarantor, lower rated investments are assumed to experience significantly
greater defaults. Therefore, because of NRSRO increased capital requirements to
offset these assumed investment losses, the financial guarantors are financially
motivated to maintain highly rated fixed-income investment portfolios.
Another important factor for the domestic financial guaranty industry is
financial leverage, most frequently expressed as net insurance in-force (i.e.,
insured principal and interest payments net of reinsurance) divided by statutory
capital. At June 30, 1997, $1,013 billion of net insurance in-force was
supported by $6.87 billion of statutory capital, an industry-wide leverage ratio
of 147.4x. (Source: Fitch Investors Service, L.P., report dated November 11,
1997).
Financial leverage is effectively capped for each insurer by the NRSRO.
This limit is derived from the NRSRO stress tests for each insurer. Maximum
permitted leverage is unique to each financial guarantor, because the important
factors that are used in a stress test model (i.e., credit quality mix of
insurance in-force, type of issuer, largest single risk, etc.) are specific to
each insurer. When an insurer's leverage ratio increases to a level that the
insurer's AAA rating comes under pressure, the insurer can reduce its leverage
ratio by raising capital, curtailing the volume of new business written, or
seeking reinsurance.
INDUSTRY TRENDS
The financial guarantors first began to credit enhance non-municipal
securities in 1985 when FSA entered the market with a strategy to guaranty
structured finance issues. CapMac adopted a similar strategy when it entered the
market in 1987. Today, the three largest insurers, MBIA, AMBAC and FGIC, all
insure non-municipal securities.
The non-municipal business of the financial guarantors generally involves
the credit enhancement of either MBS or ABS. During the late 1980's and early
1990's, two of the major guarantors insured commercial real estate securities.
Both firms exited this business in 1992 when one guarantor experienced losses.
The volume of non-municipal insured par has grown rapidly in recent years,
from $20.5 billion and $27.3 billion in 1993 and 1994, respectively, to $47.2
billion and $76.5 billion in 1995 and 1996, respectively. (Source: Fitch
Investors Service, L.P., reports dated November 11, 1997 and May 6, 1996).
Insured MBS are pools of residential first and second mortgage loans. The ABS
market segment is far more diverse. Major ABS asset categories guaranteed
include pools of credit card receivables, automobile loans, trade receivables,
equipment leases, student loans, home equity loans, and corporate loans. When
enhancing ABS and MBS transactions, the financial guarantors structure
transactions so that they do not expect to be in a position where the first loss
on the securities results in a claim on the insurance. Protection against first
loss may include overcollateralization, cash collateral, excess spread, reserve
funds, bank letters of credit, corporate guaranties or senior/subordinate
structures ("First Loss Protection"). Guaranteed ABS and MBS securities are
typically structured to an investment grade level without regard to the
insurance.
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INTERNATIONAL EXPANSION
Financial guaranty insurers increasingly are developing new products and
services and entering new markets. Seeking new markets to grow their businesses,
the financial guarantors began insuring securities in the international markets.
About 6% of the Net Par Insured by the U.S. financial guaranty insurers in the
first six months of 1997 was non-U.S. securities. (Source: Fitch Investors
Service, L.P., report dated November 11, 1997).
Recently, Asian Securitization & Infrastructure Assurance (Pte) Ltd. was
established by CapMac. It is the first financial guarantor organized exclusively
to provide credit enhancement for securitized transactions and infrastructure
debt issued in emerging Asian debt markets. Several financial guarantors have
joint venture agreements with Japanese insurance companies. Additionally, most
of the financial guarantors now have one or more offices in Europe.
REGULATION
BERMUDA
THE INSURANCE ACT 1978 AND RELATED REGULATIONS
The Insurance Act 1978 of Bermuda, amendments thereto and related
regulations (the "Act"), which regulates the business of CGA, provides that no
person shall carry on an insurance business in or from within Bermuda unless
registered as an insurer under the Act by the Minister of Finance (the
"Minister"). The Minister, in deciding whether to grant registration, has broad
discretion to act as he thinks fit in the public interest. The Minister is
required by the Act to determine whether the applicant is a fit and proper body
to be engaged in insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise. In connection with
registration, the Minister may impose conditions relating to the writing of
certain types of insurance. 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 at any time.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions, and sub-committees
thereof supervise and review the law and practice of insurance in Bermuda,
including reviews of accounting and administrative procedures.
The Act imposes on Bermuda insurance companies solvency and liquidity
standards and auditing and reporting requirements and grants to the Minister
powers to supervise, investigate and intervene in the affairs of insurance
companies. Significant aspects of the Bermuda insurance regulatory framework, as
it applies to Class 3 insurers such as CGA, are set forth below.
CLASSIFICATION OF INSURERS
The Act provides for four classes of registration of insurers carrying on
general business (as defined in the Act). CGA will be registered and licensed as
a Class 3 insurer. Class 3 insurers are considered to be subject to a higher
degree of regulation than Classes 1 and 2 insurers, which are primarily
concerned with underwriting related or parent's risks. In addition, minimum
capital and surplus for a Class 3 insurer is $1 million, whereas the minimum
capital and surplus for Class 2 and Class 1 insurers is $250,000 and $120,000
respectively. There is also a Class 4 insurer classification which is used for
property catastrophe reinsurance companies and companies involved in the excess
liability business. By virtue of its class 3 license, CGA is authorized to carry
on insurance business of all classes in or from within Bermuda subject to its
compliance with the solvency margin, liquidity ratio and other requirements
imposed on it by the Act.
CANCELLATION OF INSURER'S REGISTRATION
An insurer's registration may be canceled by the Minister on certain
grounds specified in the Act, including failure of the insurer to comply with
its obligations under the Act or if, in the opinion of the Minister after
consultation with the Insurance Advisory Committee, the insurer has not been
carrying on business in accordance with sound insurance principles.
INDEPENDENT APPROVED AUDITOR
Every registered insurer must appoint an independent auditor who will
annually audit and report on the Statutory Financial Statements and the
Statutory Financial Return of the insurer, which are required to be filed
annually with the
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Registrar of Companies (the "Registrar"), who is the chief administrative
officer under the Act. The auditor must be approved by the Minister as the
independent auditor of the insurer. The approved auditor may be the same person
or firm which audits the insurer's financial statements and reports for
presentation to its shareholders.
LOSS RESERVE SPECIALIST
Each Class 3 insurer is required to submit an annual loss reserve opinion
by the approved loss reserve specialist when filing its Statutory Financial
Statements and Statutory Financial Return. The loss reserve specialist, who will
normally be a qualified property/casualty actuary, must be approved by the
Minister. CGA has received an exemption from having to appoint a loss reserve
specialist and to file the annual loss reserve opinion on the condition that CGA
maintains its claims-paying ability rating of not less than AAA by DCR.
STATUTORY FINANCIAL STATEMENTS
An insurer must prepare annual Statutory Financial Statements. The Act
prescribes rules for the preparation and substance of such Statutory Financial
Statements (which include, in statutory form, a balance sheet, an income
statement, and a statement of capital and surplus, and detailed notes thereto).
The insurer is required to give detailed information and analyses regarding
premiums, claims, reinsurance and investments. The Statutory Financial
Statements are not prepared in accordance with U.S. GAAP and are distinct from
the financial statements prepared for presentation to the insurer's shareholders
under The Companies Act 1981 of Bermuda, which financial statements may be
prepared in accordance with U.S. GAAP. CGA, within a specified time, must file
its Statutory Financial Statements with the Registrar. The Statutory Financial
Statements must be maintained at the principal office of the insurer for a
period of five years.
MINIMUM SOLVENCY MARGIN
The Act provides that the statutory assets of an insurer must exceed its
statutory liabilities by an amount greater than the prescribed minimum solvency
margin which varies with the class of the insurer and the insurer's net premiums
written and loss reserve level.
MINIMUM LIQUIDITY RATIO
The 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, mortgages secured by first liens on real estate, investment income
due and accrued, accounts and premiums receivable and reinsurance balances
receivable. 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.
RESTRICTION ON DIVIDENDS
The payment of dividends or other distributions by CGA is limited under
Bermuda insurance regulations. In accordance therewith, CGA is prohibited from
paying dividends or other distributions unless after such payment the amount by
which its general business assets exceed its general business liabilities is the
greater of the following amounts:
(i) $1,000,000; or
(ii) the amount determined by applying the rate of 20% to net premiums
written in the subject year up to $6,000,000 plus the rate of 15%
applied to net premiums written in the subject year in excess of
$6,000,000; or
(iii) the amount determined by applying the rate of 15% to reserves for
losses and loss adjustment expenses reflected in the balance sheet at
the date of determination.
CGA may declare and pay a dividend or make a distribution out of
contributed surplus or other assets legally available for distribution provided
that after the payment of such dividend or distribution CGA will continue to
meet its minimum solvency margin and minimum liquidity ratio as detailed above.
Further, in accordance with Bermuda insurance regulations, before reducing by
15% or more its total statutory capital as set out in its previous year's
financial statements, a Class 3 insurer such as CGA must apply to the Minister
for his approval and is obliged to provide such information in connection
therewith as the Minister may require.
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In addition, Board members' fiduciary obligations to creditors,
policyholders and shareholders apply to their votes in respect of dividends,
distributions and redemptions.
The aforementioned restrictions on distributions by CGA to the Company will
restrict the ability of the Company to use the proceeds of the Commitments to
pay dividends to holders of the Company's securities, because all proceeds from
the Commitments will be contributed by the Company to CGA.
As an insurance holding company, the Company depends for the payment of
cash dividends to stockholders in large part on dividends and other payments
from its subsidiaries. In the case of CGA, such payments are restricted by the
insurance laws of Bermuda, and insurance regulators have authority in certain
circumstances to prohibit payments of dividends and other amounts by insurance
subsidiaries that would otherwise be permitted without regulatory approval. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ANNUAL FINANCIAL RETURN
CGA is required to file with the Registrar its Statutory Financial Return
no later than four months from its financial year end (unless specifically
extended). The Statutory Financial Return includes, among other matters, a
report of the approved independent auditor on the Statutory Financial Statements
of the insurer; a declaration of the statutory ratios; and a solvency
certificate. Where an insurer's accounts have been audited for any purpose other
than compliance with the Act, a statement to the effect must be filed with the
Statutory Financial Return.
SUPERVISION, INVESTIGATION AND INTERVENTION
The Minister may appoint an inspector with extensive powers to investigate
the affairs of an insurer if the Minister is satisfied 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 and others to produce
documents or information relating to matters connected with the insurer's
business.
If it appears to the Minister that there is a significant 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.
Further, in such circumstances, the Minister may direct that no dividends be
paid.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. The principal office
of CGA is at Craig Appin House, 8 Wesley Street, Hamilton HM 11 Bermuda and
Marsh & McLennan Management Services (Bermuda) Limited is the principal
representative of CGA, with an address at Victoria Hall, 11 Victoria Street,
Hamilton HM 11 Bermuda. Without a reason acceptable to the Minister, 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. It is the duty of
the principal representative, within 30 days of his reaching the view that there
is a likelihood of the insurer for which he acts becoming insolvent or its
coming to his knowledge, or his having reason to believe, that an "event" has
occurred, to make a report in writing to the Minister setting out all the
particulars of the case that are available to him. 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.
CERTAIN OTHER BERMUDA LAW MATTERS
Although the Company and CGA are incorporated in Bermuda, each is
classified as non-resident of Bermuda for exchange control purposes by the
Bermuda Monetary Authority, Foreign Exchange Control, whose permission for the
issue and transfer of shares of New Series A Preferred Stock has been obtained.
Pursuant to its non-resident status, the Company may hold any currency other
than Bermuda dollars and convert that currency into any other currency (other
than Bermuda dollars) without restriction.
As "exempted" companies, the Company and CGA may not, without the express
authorization of the Bermuda legislature or under a license granted by the
Minister, participate in certain business transactions, including:
(i) the acquisition or holding of land in Bermuda (except as required
for its business and held by way of lease or tenancy agreement for a term
not exceeding 21 years);
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<PAGE>
(ii) the taking of mortgages on land in Bermuda in excess of $50,000;
or
(iii) the carrying on of business of any kind in Bermuda, except in
furtherance of the business of the Company carried on outside Bermuda.
The Bermuda government actively encourages foreign investment in "exempted"
entities like the Company 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, the Company and CGA are not currently subject to
taxes on their income or dividends or to any foreign exchange controls in
Bermuda. In addition there currently is no capital gains tax in Bermuda.
Prior to the Offering, this Prospectus will be filed with the Registrar of
Companies in Bermuda in accordance with Bermuda law.
CONSENT UNDER THE EXCHANGE CONTROL ACT, 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND TRANSFER
OF THE SECURITIES BEING OFFERED PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, A
COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF COMPANIES IN
BERMUDA 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,
RESPECTIVELY, ACCEPT NO RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF ANY
PROPOSAL, OR FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINIONS
EXPRESSED HEREIN.
The transfer of shares of New Series A Preferred Stock between persons
regarded as non-resident in Bermuda for exchange control purposes and the issue
of shares after the completion of the Offering to such persons may be effected
without specific consent under the Exchange Control Act of 1972 and regulations
thereunder. Issues and transfers of shares to any person regarded as resident in
Bermuda for exchange control purposes require specific prior approval under the
Exchange Control Act of 1972.
There are no limitations on the rights of persons regarded as non-resident
of Bermuda for foreign exchange control purposes owning shares of New Series A
Preferred Stock to hold or vote their Common Shares. Because the Company has
been designated as a non-resident for Bermuda exchange control purposes, there
are no restrictions on its ability to transfer funds in and out of Bermuda or to
pay dividends to U.S. residents who are holders of shares of New Series A
Preferred Stock, other than in respect of local Bermuda currency. In addition,
because the Company has been designated as a non-resident for Bermuda exchange
control purposes, it does not intend to maintain Bermuda dollar deposits and,
accordingly, will not pay dividends on the shares of New Series A Preferred
Stock in Bermuda currency.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, the Company
is not bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. The Company will take no notice of
any trust applicable to any of its shares of New Series A Preferred Stock
whether or not it had notice of such trust.
U.S. AND OTHER
CGA will not be admitted to do business in any jurisdiction except Bermuda.
The insurance laws of each state of the U.S. and of many foreign countries
regulate the sale of insurance within their jurisdictions by alien insurers,
such as CGA, which are not authorized or admitted to do business within each
jurisdiction. With some exceptions, such sale of insurance within a jurisdiction
where the insurer is not admitted to do business is prohibited. It is not
intended for CGA 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 CGA be so authorized or
admitted.
It is intended that CGA will not write insurance in the U.S. It is intended
for CGA to conduct its business so as not to be subject to the licensing
requirements of insurance regulations in the U.S. or elsewhere (other than
Bermuda).
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<PAGE>
Many aspects of the activities of CGA are similar to those employed by other
non-admitted insurers. The Company has developed operating guidelines, which
include the acceptance of business through insurance brokers not resident in the
U.S., to assist its personnel in conducting business in conformity with the laws
of U.S. jurisdictions. The Company intends to follow these guidelines and
expects that to the extent that these operating guidelines are followed, its
activities will comply with applicable insurance laws and regulations. There can
be no assurance, however, that insurance regulators in the U.S. or elsewhere
will not review the activities of CGA and claim that CGA is subject to such
jurisdiction's licensing requirements.
Many states impose a premium tax (typically 2--4% of gross premiums) on
U.S. insureds obtaining insurance from unlicensed foreign insurers, such as CGA,
by direct placement. The premiums charged by CGA do not include any state
premium tax. Each insured is responsible for determining whether it is subject
to any such tax and for paying such tax as may be due.
The U.S. also imposes an excise tax on insurance and reinsurance premiums
paid to foreign insurers or reinsurers by insureds who are U.S. persons with
respect to risks located in the U.S. The rates of tax applicable to premiums
paid to CGA are currently 4% for insurance premiums and 1% for reinsurance
premiums.
CGAIM has been registered under the United States Investment Advisers Act
of 1940, as amended.
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<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY AND THE SUBSIDIARIES
The table below sets forth the names, ages and titles of the persons who
are the members of the board of directors of CGA Group and the executive
officers of the Company and the Subsidiaries.
NAME AGE POSITION
---- --- --------
Richard A. Price ................... 50 Director, Chief Executive Officer
and President, CGA Group
James R. Reinhart .................. 41 Vice President and Chief Financial
Officer, CGA Group and CGA
Geoffrey N. Kauffman ............... 39 Chief Underwriting Officer, CGA
Anthony R. Montemurno .............. 53 President, CGA
Kem H. Blacker ..................... 42 President and Chief Operating
Officer, CGAIM
Michael M. Miran ................... 44 Managing Director and General
Counsel, CGAIM
Jean-Michel Wasterlain ............. 40 Managing Director, CGAIM
Thomas S. Wickwire ................. 33 Managing Director, CGAIM
Jay H. Shidler ..................... 51 Chairman of the Board of Directors
David M. Barse ..................... 35 Director
Robert L. Denton ................... 45 Director
Richard S. Frary ................... 50 Director
Eric A. Gritzmacher ................ 49 Director
Donald Kramer ...................... 59 Director
Jeffrey P. Krasnoff ................ 42 Director
Michael J. Morrissey ............... 50 Director
Jerome F. Jurschak ................. 49 Director
Paul A. Rubin ...................... 34 Director
Richard G. Schoninger .............. 39 Director
Jay S. Sugarman .................... 35 Director
The Company's Board consists of thirteen members. The Board has been
elected in accordance with the Company's Bye-laws and the Board will hold office
until the first annual general meeting of the shareholders of the Company.
Pursuant to the Company's Bye-laws, the Board of Directors of the Company has
the following composition: the Chairman, the CEO Member, the Management Member
and ten Members elected by the Eligible Investment Units Investors (as defined
in the Bye-laws). The quorum necessary for the transaction of business at a
meeting of the Board is a majority of the number of Directors constituting the
Board.
Pursuant to the Bye-laws, the Board has established four committees. The
Compensation Committee is comprised of Eric A. Gritzmacher (as Chairman), Donald
Kramer, Jerome F. Jurschak, Paul A. Rubin and Richard G. Schoninger. The Audit
Committee will review the adequacy and effectiveness of the external auditors
and the audit report and is composed of Jeffrey P. Krasnoff (as Chairman),
Michael J. Morrissey, Richard S. Frary, Paul A. Rubin and David M. Barse. The
Underwriting Committee is responsible for approving the credit underwriting
guidelines for CGA and is composed of Jerome F. Jurschak (as Chairman), Donald
Kramer, Jay H. Shidler, Jeffrey P. Krasnoff, Eric A. Gritzmacher, Richard G.
Schoninger, and Jay S. Sugarman. The Investment Committee is responsible for
recommending investment asset allocations, approving the investment guidelines
which provide standards to ensure portfolio liquidity and safety, recommending
to the Board investment managers and custodians for portfolio assets. The
Investment Committee is composed of David M. Barse (as Chairman), Michael J.
Morrissey, Robert L. Denton, Richard S. Frary and Jay S. Sugarman.
Under certain circumstances, two additional members of the Board may be
elected by the holders of the Series A Preferred Stock as a class. See
"Description of Securities."
The Company's Bye-Laws contain provisions for the election of alternate
directors.
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BIOGRAPHICAL INFORMATION
RICHARD A. PRICE--Director, Chief Executive Officer and President of the
Company since July 5, 1996. Until July, 1996, Mr. Price was one of the top
executives at FGIC, which he joined in 1985. Most recently, Mr. Price was
President of FGIC Capital Markets Services, a wholly-owned subsidiary of General
Electric Capital Corporation ("GE Capital"). The FGIC Capital Market Services
companies provide various capital market services to municipalities and public
finance bankers including investment advice, investment contracts and liquidity
for tax-exempt variable rate debt issues. Mr. Price was responsible to GE
Capital for forming these companies, marketing these products and services and
establishing market, credit and operating risk controls. In 1988, Mr. Price led
FGIC's entry into the structured finance markets, establishing FGIC's ABS, MBS
and commercial real estate securitization activities. Recognized for his broad
credit abilities, Mr. Price was a member of FGIC's three person Credit Policy
Committee, along with FGIC's Chief Executive Officer and FGIC's Chief Credit
Officer.
Prior to FGIC, Mr. Price spent 11 years with Chemical Bank in a number of
areas including Chemical's commercial real estate division where he was Vice
President. He also spent several years at Bankers Trust with the responsibility
of expanding Bankers' third party commercial paper dealer activities.
Mr. Price received a bachelor's degree from Cornell University and a MBA
from the Wharton School of Business.
JAMES R. REINHART--Chief Financial Officer of the Company and CGA since
January 1, 1997. Mr. Reinhart served as Chief Financial Officer and Executive
Vice President of TriNet Corporate Realty Trust, Inc. since its inception in May
1993 and was instrumental in the initial public offering of TriNet and its
subsequent follow-on equity and securitized debt offerings. Mr. Reinhart was
previously Chief Financial Officer at Holman/Shidler Corporate Capital, TriNet's
predecessor company and an affiliate company of The Shidler Group, which he
joined in 1986. Prior to joining The Shidler Group, Mr. Reinhart was a Division
Controller for Coldwell Banker Real Estate Group, a staff auditor at the
accounting firm of McKeehan, Hallstein, Kendall & Warner and served as an
officer in the U.S. Marine Corps.
Mr. Reinhart is a CPA and received a bachelor's degree in accounting from
Bryant College and a MBA from National University.
GEOFFREY N. KAUFFMAN--Chief Underwriting Officer of CGA since January 1,
1997. Prior to joining CGA, Mr. Kauffman worked at AMBAC, where he was a First
Vice President in the Structured Finance & International Department. Mr.
Kauffman and his team will focus on structured transactions involving CBOs,
Perpetual Notes, Emerging Markets, ABS, Repackagings, Sub-Prime Autos and
Equipment Leases.
Mr. Kauffman joined AMBAC's Structured Finance & International Department
in March of 1995 to help the group build a presence in international structured
finance. While at AMBAC, Mr. Kauffman was responsible for several firsts,
including AMBAC's first transaction backed by perpetual notes, and AMBAC's first
wrap of a Guaranteed Investment Contract. Mr. Kauffman was also involved in the
MBIA/AMBAC International joint venture, launched in October of 1995, and
represented the joint venture in the newly opened London office from April to
August of 1996.
Prior to joining AMBAC, Mr. Kauffman was the Acting Director of the Asset
Backed Securities Group at FGIC and a member of FGIC's European Strategy Team.
Mr. Kauffman joined FGIC in 1989 to help establish their presence in the asset
backed securities market. During his tenure with FGIC, Mr. Kauffman evaluated
and structured asset backed securities in the consumer and corporate debt
markets in the U.S., Europe and Japan. He was also responsible for new product
development efforts in a variety of areas including trade receivables conduits,
high-yield debt securitization and derivative products.
Mr. Kauffman received a bachelor's degree from Vassar College and a MBA
from Carnegie Mellon University.
ANTHONY R. MONTEMURNO--President of CGA since January 1, 1997. Prior to
joining CGA, Mr. Montemurno served in a number of positions at the Barclays
Group and its investment banking division, Barclays de Zoete Wedd ("BZW"). Mr.
Montemurno served as Managing Director at BZW managing its insurance industry
activities from 1993 to 1997. While at BZW, he underwrote over $1.8 billion of
bonds, notes and commercial paper puts for transactions guaranteed by CapMac,
FGIC and FSA. From 1987 to 1993 Mr. Montemurno was Senior Vice President in the
Financial Institutions Group of Barclays Bank where he formed, developed and
managed its insurance industry
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<PAGE>
arm, and in the World Corporate Group where he managed a team of professionals
dealing with large, diverse corporate clients.
From 1970 to 1987, Mr. Montemurno held various key positions at Bankers
Trust Company. Mr. Montemurno was Vice President in the Securities Market
Division and had several overseas assignments including the European Trade
Finance Division based out of London and as General Manager of Bankers Trust
GmbH in Frankfurt.
Mr. Montemurno received a bachelor's degree in Political Science and
International Relations from St. John's University.
KEM H. BLACKER--Chief Operating Officer of CGAIM since January 1, 1997. For
the twelve years prior to joining CGAIM, Mr. Blacker served in various key
positions at FGIC. As Senior Product Manager at FGIC Capital Markets Services
Group, Mr. Blacker invested in structured assets sourced in the Euromarkets for
the municipal GIC business and organized off-balance sheet vehicles. From 1990
to 1993, he served as FGIC's Director of Marketing & Product Development in
London, launching the firm's expansion into the Euromarkets.
Prior to his time at FGIC, Mr. Blacker held Vice President positions with
J.J. Lowry & Company and with E.F. Hutton in both its San Francisco and New York
offices.
Mr. Blacker received a bachelor's degree in economics from the University
of California.
MICHAEL M. MIRAN--Managing Director and General Counsel of CGAIM since June
30, 1997. Previously, Mr. Miran was Vice President and Senior Counsel at FGIC.
After joining FGIC in 1990, Mr. Miran was responsible for structuring,
negotiating and documenting a wide range of commercial real estate, MBS and ABS
transactions, including all of FGIC's international ABS transactions. More
recently, Mr. Miran also served as FGIC's Chief Compliance Officer, with
responsibility over regulatory and corporate compliance.
Before joining FGIC, Mr. Miran was an attorney for seven years with Weil,
Gotshal and Manges in New York, where his practice covered a broad range of
commercial transactions, including mergers and acquisitions, secured financings,
debt restructurings and workouts, and capital markets and securities
transactions.
Mr. Miran received a bachelor of arts degree from New York University, and
a juris doctorate degree from Fordham University School of Law.
JEAN-MICHEL WASTERLAIN--Managing Director of CGAIM since June 1, 1997. He
is responsible for the real estate group. Prior to joining CGAIM, Mr. Wasterlain
was responsible for real estate lending and securitization at ING Barings. At
ING, he created a commercial mortgage conduit which originated time sensitive
and complex real estate loans, and participated in $700 million of commercial
mortgage loan securitizations. Other responsibilities at ING included
establishing and managing a $300 million commercial mortgage securities
investment portfolio, and securing third party financing for ING's other real
estate assets.
Mr. Wasterlain also has previous experience in the financial guaranty
business, at FGIC, and in investment banking, at Lehman Brothers. At FGIC, from
1990 to 1993, he was responsible for credit enhancing over $1 billion of
commercial mortgage securities. At Lehman Brothers, from 1985 to 1990, he was
involved in residential and commercial mortgage-backed securities, as well as
providing investment banking coverage to financial institutions.
Mr. Wasterlain received a bachelors degree in economics from Stanford
University and a MBA from the Wharton Graduate School of Business.
THOMAS S. WICKWIRE--Managing Director of CGAIM since August 18, 1997. Prior
to joining CGAIM, Mr. Wickwire worked at Chase where he was a Managing Director
responsible for global distribution of structured securities (ABS, CMBS, MBS and
CBOs). Before Chase, Mr. Wickwire worked at UBS in New York as Vice President,
Global Financing and New Issues on the fixed income syndicate desk responsible
for the underwriting and distribution of structured securities on a global
basis. Prior to relocating to New York, Mr. Wickwire held a similar position
with UBS in London.
Before joining UBS, Mr. Wickwire was Senior Vice President, mortgage trader
at Kidder Peabody Securities in London responsible for all structured products.
Prior to Kidder Peabody Securities, Mr. Wickwire was a portfolio manager at
Ocwen Financial managing a $3 billion mortgage and structured asset portfolio
for Ocwen and an offshore hedge fund. Mr. Wickwire held similar portfolio
management positions at Nomura Securities and Ryland Asset Management.
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<PAGE>
Mr. Wickwire received a bachelor's degree in accounting and finance and an
MS in finance from Loyola College.
JAY H. SHIDLER--Chairman of the Board of Directors of the Company since
June 21, 1996. Mr. Shidler is the Founder and Managing Partner of The Shidler
Group, founder and director of TriNet Corporate Realty Trust, Inc. (NYSE: TRI)
and founder and Chairman of First Industrial Realty Trust, Inc. (NYSE: FR).
DAVID M. BARSE--Director of the Company since June 18, 1997. Mr. Barse is
President, Chief Operating Officer and Director of Danielson Holding
Corporation.
ROBERT L. DENTON--Director of the Company since July 5, 1996. Mr. Denton is
a Managing Partner of The Shidler Group and resident principal in its New York
office.
RICHARD S. FRARY--Director of the Company since June 18, 1997. Mr. Frary
works in Investment Banking and Real Estate Investment at Tallwood Associates.
ERIC A. GRITZMACHER--Director of the Company since June 18, 1997. Mr.
Gritzmacher is Vice President of Investments for Pacific Life Insurance Company
(formerly Pacific Mutual Life Insurance Company).
DONALD KRAMER--Director of the Company since June 18, 1997. Mr. Kramer is
President and Chief Executive Officer of Tempest Reinsurance Company, Ltd. and
Vice Chairman of ACE Ltd.
JEFFREY P. KRASNOFF--Director of the Company since June 18, 1997. Mr.
Krasnoff is a Vice President at Lennar Corporation.
MICHAEL J. MORRISSEY--Director of the Company since June 18, 1997. Mr.
Morrissey is the Chairman and CEO of the Firemark Group.
JEROME F. JURSCHAK--Director of the Company since September 11, 1997. Mr.
Jurschak is Executive Vice President and Chief Underwriting Officer for Capital
Re Corporation.
PAUL A. RUBIN--Director of the Company since June 18, 1997. Mr. Rubin is a
partner at Olympus Partners.
RICHARD G. SCHONINGER--Director of the Company since June 18, 1997. Mr.
Schoninger is managing director and head of Real Estate Investment Banking at
Prudential Securities, a wholly owned subsidiary of Prudential Securities Group,
Inc.
JAY S. SUGARMAN--Director of the Company since June 18, 1997. Mr. Sugarman
is President of Starwood Mezzanine Investors, L.P., a real estate fund.
EXECUTIVE COMPENSATION
The aggregate amount of compensation paid by the Company during the fiscal
year ended December 31, 1997 to all officers as a group was $2.3 million. All of
the compensation referred to above was paid pursuant to employment contracts
which provided for certain base salaries and guaranteed bonuses for the first
year of employment. The guaranteed bonuses were accrued for as of December 31,
1997 and paid to the officers in January, 1998. Incentive compensation in future
years will generally be determined by the Compensation Committee of the Board of
Directors and will vary depending upon individual and Company performance.
The Company maintains a qualified retirement plan (401-K plan) for all its
employees. The amounts contributed by the Company for the officers in the above
group during the fiscal year ended December 31, 1997 was $38,000.
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<PAGE>
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the other four most highly
compensated executive officers of the Company for services rendered during the
fiscal year ended December 31, 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------------------------------------------------- ------------
(A) (B) (C) (D) (E) (F) (G)
OTHER ANNUAL
COMPENSATION ALL OTHER
NAME AND SALARY BONUS (1), (2), (3) LTIP PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
------------------ ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Price 1997 162,500 160,274 45,061 0 0
Chief Executive Officer,
President and Director, CGA
Group, Ltd.
Geoffrey N. Kauffman 1997 94,792 175,000 239,090 0 0
Chief Underwriting Officer,
CGA
Anthony R. Montemurno 1997 121,875 225,000 101,179 0 0
President, CGA
Kem H. Blacker 1997 121,875 200,000 73,745 0 0
Chief Operating Officer,
CGAIM
Jean-Michel Wasterlain 1997 94,792 225,000 179,994 0 0
Managing Director, CGAIM
</TABLE>
- ----------
(1) Amounts include payments by the Company of $43,683, $50,244, $50,244 and
$68,995 made to Messrs. Montemurno, Kauffman, Wasterlain and Blacker,
respectively, for services rendered prior to June 17, 1997, pursuant to the
Company's assumption of such individuals' employment agreements with CGA
Funding, L.P.
(2) Amounts include payments by the Company of $115,000 and $125,000 made to
Messrs. Kauffman and Wasterlain, respectively, as buyouts of their bonus
arrangements with previous employers.
(3) Amounts include payments by the Company of housing allowances of $36,750,
$48,246 and $63,000 made to Messrs. Price, Montemurno and Kauffman,
respectively.
DIRECTOR COMPENSATION AND BENEFITS
The Chairman and the Directors do not receive compensation in connection
with their service as members of the Company's Board. All members of the
Company's Board are reimbursed by the Company for transportation to all meetings
of the Board or a committee thereof as well as all reasonable expenses in
connection with such service.
DIRECTORS AND OFFICERS INSURANCE
Management maintains insurance to insure against liabilities asserted
against any director, officer, employee or agent of the Company arising out of
the performance of such duties.
REMUNERATION AND EMPLOYEE AGREEMENTS
The compensation program for the Company was developed using the services
of Johnson Associates, New York based compensation consultants with experience
in the financial guaranty industry.
CASH COMPENSATION
Salaries established for each position are set in reference to similar
positions at other financial service companies, especially the financial
guarantors. Bonus plans have been established at CGA and CGAIM. Payouts under
these plans are based on Company and individual performance in addition to the
performance of each of the two Subsidiaries. Performance measures include actual
performance versus business plan, present value of premiums written and the
contribution toward growth in the value of the Company. The bonus pool is set
each year by the Board.
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LONG-TERM INCENTIVE PLANS
The Company adopted a stock warrant plan (the "Stock Warrant Plan") to
promote equity ownership of the Company by elected employees, Founders of the
Company and Sponsoring Investors of the Company and its Subsidiaries, to
increase their proprietary interest in the success of the Company and/or to
encourage them to remain in the employ of the Company and the Subsidiaries. On
June 17, 1997, 2,342,500 warrants were issued. Each warrant represents a right
to purchase, on or prior to the tenth anniversary of the closing date, one share
of Common Stock at an exercise price of $5.00 per share. The warrants issued to
employees vest ratably over a four-year period. All warrants issued to the
Founders and Sponsoring Investors pursuant to the Stock Warrant Plan vested
immediately. In addition, the warrants contain certain adjustments for dilutive
events and certain protections for reorganization, and consolidations or
mergers.
In addition to the Stock Warrant Plan, the Company may in the future
establish other equity-based incentive programs for employees and directors as
the Board deems advisable.
EMPLOYEE BENEFITS
The Company provides a standard employee benefits program. There are no
additional benefits for executives in excess of the basic employee plan except
for those executives residing in Bermuda, where certain customary relocation
benefits and perquisites have been given.
MANAGEMENT CONTRACTS
As of January 1, 1997, the Company has entered into an employment agreement
with Richard A. Price, as CEO and President of the Company, for a term of three
years. The Company has entered into an employment agreement with James R.
Reinhart, and CGA has entered into employment agreements with Anthony R.
Montemurno and Geoffrey N. Kauffman, in each case for a term of two years.
CGAIM has entered into employment agreements with Kem H. Blacker, Thomas S.
Wickwire and Michael M. Miran, in each case for a term of one year.
Such contracts contain provisions relating to exclusivity of services,
noncompetition and confidentiality. The Directors and Officers shall be
indemnified and secured harmless out of the assets of the Company from and
against all actions, costs and charges that they may incur or sustain by or by
reason of any act done in or about execution of their duty. The Company has also
purchased insurance for its business obligations.
BERMUDA-BASED EMPLOYEES
Richard A. Price, Anthony R. Montemurno, James R. Reinhart and Geoffrey N.
Kauffman are based in Bermuda. Since none of the key employees based in Bermuda
are Bermudian, their employment in Bermuda is subject to the specific permission
of the appropriate governmental authority. See "Risk Factors--Dependence on Key
Employees and Non-Bermudian Employees."
CONFLICTS
The Company's Board has adopted a resolution to the effect that future
transactions between the Company or any of its Subsidiaries or affiliates and
Jay Shidler, The Shidler Group or any affiliates of The Shidler Group, is
restricted. Management believes that Mr. Shidler's real estate investments do
not pose a conflict of interest with the business of the Company. However, to
eliminate any appearance of a conflict, the Company, its Subsidiaries and its
affiliates, have established a policy of not providing insurance guaranties or
investment services to Mr. Shidler or his affiliates. In addition, Mr. Shidler
does not receive any compensation while he serves as Chairman or otherwise as a
director of the Company except reimbursements for travel expenses.
Except for the reinsurance agreements entered into with Capital Reinsurance
Company ("Cap Re") or its affiliates pursuant to Cap Re's right of first offer
in this regard (see "Certain Transactions"), the Company does not, and does not
permit any of its Restricted Subsidiaries to, directly or indirectly, conduct
any business with any of the Directors or any of the affiliates of such Person,
unless such transaction or series of transactions are (i) in the best interests
of the Company as determined by the disinterested members of the Board and (ii)
entered into on an arms-length basis.
CGA may not insure risks of stockholders or their affiliates without
bringing such proposed action to the attention of the Board. The decision
whether CGA may insure such risks will be determined by a vote by the Board.
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CERTAIN TRANSACTIONS
CGA and Cap Re have entered into an agreement as of June 4, 1997 which
grants Cap Re the right to make the first offer to provide reinsurance for all
insurance contracts, including contracts of financial guaranty as reinsurance,
issued by CGA ("Right of First Offer Agreement"). Cap Re's rights under the
right to first offer agreement terminate on the earlier of (x) the date that Cap
Re no longer owns 5% of the common stock of the Company or (y) a Qualified
Public Offering (as defined in the CGA Group Bye-laws) by CGA Group.
CGAIM has entered into asset management agreements with each of the
existing subsidiaries of St. George. Pursuant to such agreements, CGAIM will
perform advisory, asset management and related services for such companies. CGA
has guaranteed the payment obligations of such subsidiaries of St. George under
their financing arrangements, and is expected to guarantee the payment
obligations of any other St. George investment subsidiaries which may be
established in the future in respect of their financing obligations. See "CGA
Investment Management, Inc.--St. George."
OWNERSHIP OF SECURITIES
The following tables reflect the percentage of ownership of the Company's
securities:
SERIES A PREFERRED STOCK (as of June 17, 1997; share amounts do not include
paid-in-kind (PIK) dividends)
NUMBER OF SHARES
OF SERIES A
NAME PREFERRED STOCK PERCENT OF CLASS
- ---- --------------- ----------------
Putnam Investments (10 funds)(1)(2) ......... 686,837 25.4
Oppenheimer (6 funds)(1)(3) ................. 519,923 19.2
Mutual Discovery Fund ....................... 249,563 9.2
Mutual Qualified Fund ....................... 249,563 9.2
Lennar Financial Services, Inc. ............. 332,750 12.3
ACE Limited ................................. 207,969 7.7
Pacific Mutual Life Insurance
Company (2 funds)(1)(4) ................... 207,969 7.7
Third Avenue Trust on behalf of the
Third Avenue Value Fund Series ............. 207,969 7.7
Capital Reinsurance Company ................. 41,593 1.5
- ----------
(1) These parties are investment managers with discretion for various funds
under their control.
(2) The ten funds are: The Putnam Fiduciary Trust Company on behalf of Putman
High Yield Fixed Income Trust (DBT) and Putnam High Yield Managed Trust,
Putnam Diversified Income Trust, Putnam Diversified Income Trust II, Putnam
Funds Trust-Putnam High Yield Total Return Fund, Putnam High Yield
Advantage Fund, Putnam High Yield Trust, Putnam Managed High Yield Trust,
Putnam Variable Trust-Putnam VT Diversified Income Fund, Putnam Variable
Trust-Putnam VT High Yield Fund.
(3) The six funds are: Oppenheimer Champion Income Fund, Oppenheimer High Yield
Fund, Oppenheimer Multi-Sector Income Trust, Oppenheimer Strategic Income
Fund, Oppenheimer Variable Account Funds for the account of Oppenheimer
High Income Fund.
(4) The two funds are: Pacific Mutual Life Insurance Company and PM Group Life
Insurance Company.
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SERIES B PREFERRED STOCK (as of June 17, 1997; share amounts do not include
paid-in-kind (PIK) dividends)
NUMBER OF SHARES
OF SERIES B
NAME PREFERRED STOCK PERCENT OF CLASS
- ---- --------------- ----------------
Capital Reinsurance Company ................. 200,000 12.5
Pacific Mutual Life Insurance Company ....... 200,000 12.5
Morgan Guaranty Trusts (2 trusts)(1)(2) ..... 177,142 11.1
Third Avenue Trust .......................... 171,429 10.7
Olympus Partners (2 funds)(1)(3) ............ 171,429 10.7
ACE Limited ................................. 171,429 10.7
Lennar CGA Holdings, Inc. ................... 137,142 8.6
The Equitable Life Assurance Society
of the United States ...................... 114,286 7.1
CGA Firemark Venture Fund I, LLC ............ 85,714 5.4
Starwood CGA, LLC ........................... 57,143 3.6
Mutual Discovery Fund ....................... 28,572 1.8
Mutual Qualified Fund ....................... 28,571 1.8
Prudential Securities Group, Inc. ........... 57,143 3.6
- ----------
(1) These parties are investment managers with discretion for various funds
under their control.
(2) The two trusts are: Morgan Guaranty Trust Company of New York as Trustee of
the Multi-market Special Investment Trust Fund of Morgan Guaranty Trust
Company of New York and Morgan Guaranty Trust Company of New York as
Trustee of the Commingled Pension Trust Fund (Multi-market Special
Investment Fund II) of Morgan Guaranty Trust Company of New York.
(3) The two funds are: Olympus Growth Fund II, L.P. and Olympus Executive Fund,
L.P.
COMMON STOCK
NUMBER OF SHARES
NAME OF COMMON STOCK PERCENT OF CLASS
- ---- --------------- ----------------
Capital Reinsurance Company ................. 978,495 10.8
Pacific Mutual Life Insurance Company ....... 978,495 10.8
Morgan Guaranty Trust (2 trusts)(1)(2) ...... 866,666 9.5
Third Avenue Trust .......................... 838,710 9.2
Olympus Partners (2 funds)(1)(3) ............ 838,710 9.2
ACE Limited ................................. 838,710 9.2
Lennar CGA Holdings, Inc. ................... 670,967 7.4
The Equitable Life Assurance Society
of the United States ...................... 559,140 6.1
CGA Firemark Venture Fund I, LLC ............ 419,354 4.6
Starwood CGA, LLC ........................... 279,570 3.1
Mutual Discovery Fund ....................... 139,785 1.6
Mutual Qualified Fund ....................... 139,785 1.5
Prudential Securities Group, Inc. ........... 279,570 3.1
Founders, Sponsoring Investors and
Management, as a whole (4) ................ 1,272,043 14.0
OFFICERS AND DIRECTORS, AS A GROUP .......... 927,552 10.1
- ----------
(1) These parties are investment managers with discretion for various Funds
under their control.
(2) The two trusts are: Morgan Guaranty Trust Company of New York as Trustee of
the Multi-market Special Investment Trust Fund of Morgan Guaranty Trust
Company of New York and Morgan Guaranty Trust Company of New York as
Trustee of the Commingled Pension Trust Fund (Multi-market Special
Investment Fund II) of Morgan Guaranty Trust Company of New York.
(3) The two funds are: Olympus Growth Fund II, L.P. and Olympus Executive Fund,
L.P.
(4) Sponsoring Investors consist of Founders, other management of the Company
and parties related to the Founders.
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DESCRIPTION OF SECURITIES
CGA Group's authorized capital stock consists of 20,000,000 shares of
Common Stock, par value $.01 per share (the "Common Stock"), 10,000,000 shares
of Series A Preferred Stock, par value $.01 per share and 10,000,000 shares of
Series B Preferred Stock, par value $.01 per share.
NEW SERIES A PREFERRED STOCK
The terms of the New Series A Preferred Stock are identical in all material
respects to the Series A Preferred Stock (including without limitation, with
respect to a holder's rights, preferences, immunities and obligations), except
that the New Series A Preferred Stock shall contain no restrictive legend
thereon other than with respect to transfer restrictions set forth in the
Bye-laws. See below under "--Series A Preferred Stock." Since the New Series A
Preferred Stock will be publicly registered, the New Series A Preferred Stock
shall contain no restrictive legend thereon other than with respect to transfer
restrictions set forth in the Bye-laws. The New Series A Preferred Stock may be
offered or sold pursuant to the Securities Act and applicable state securities
laws and the restrictions of the Bye-laws.
SERIES A PREFERRED STOCK
GENERAL
The Company has issued 2,892,660 shares of its Series A Preferred Stock,
each share having a $.01 par value. As described below, the Series A Preferred
Stock have a mandatory redemption period of ten years. The Company also has an
optional redemption after June 17, 2002 as described more fully herein. See
"--Optional Redemption." The Series A Preferred Stock ranks senior to all other
classes of stock.
DIVIDENDS
Each share of Series A Preferred Stock is entitled to dividends (the
"Series A Preferred Dividends") in an amount equal to 13.75% per annum (the
"Dividend Rate") based on a $25 stated value (the "Series A Preferred Stated
Value"). In addition, if any time after June 17, 2002, the Series A Preferred
Stock is rated investment grade (a rating of BBB- or higher from DCR, or the
then-equivalent rating in the event DCR changes its rating designations), the
Dividend Rate will decrease by 200 basis points. The Series A Preferred
Dividends will be fully cumulative, compound quarterly and accrue quarterly
(based on the actual number of days elapsed over a year of 360 days) until
redemption. Subject to Bermuda law, the payment of accrued Series A Preferred
Dividends will be as, if and when such dividends are declared by the Company's
Board of Directors. The Series A Preferred Dividends accrued prior to June 17,
2002 will be paid in kind, and the Series A Preferred Dividends accruing
thereafter will be paid in cash at a rate of 11.75% per annum, and, to the
extent such dividends accrue in excess of a rate of 11.75% per annum, such
excess, if any, will be paid in cash to the extent the Company receives
assurance from DCR that such cash payment will not adversely affect CGA's AAA
rating; otherwise such excess will be paid in kind or in cash as determined by
the Company. See "Risk Factors--Holding Company Structure."
If this (i) Registration Statement is not declared effective on or prior to
December 15, 1997 or (ii) this Exchange Offer is not consummated on or prior to
January 3, 1998 and a shelf-registration statement (the "Shelf Registration
Statement") covering all the Series A Preferred Stock is not declared effective
on or prior to such date, then the annual dividend rate of the New Series A
Preferred Stock will be increased by 50 basis points, which rate will be
effective from that date forward until the earliest of (i) the consummation of
the Exchange Offer, (ii) the effectiveness of the Shelf Registration Statement
and (iii) June 17, 1999.
If an Event of Non-Compliance (as defined under "--Events of
Non-Compliance" below) occurs, the Dividend Rate shall be increased by 250 basis
points so long as such Event of Non-Compliance is continuing.
DIVIDEND PREFERENCE
So long as any Series A Preferred Stock remains outstanding, no dividends
(other than dividends payable in shares of stock ranking junior to the Series A
Preferred Stock) may be declared or paid or set apart for payment on, nor may
any distribution be made to, any class of stock of the Company ranking junior to
or on parity with the Series A Preferred Stock.
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MANDATORY REDEMPTION
The Company will be obligated to redeem the Series A Preferred Stock, in
whole, on June 17, 2007 at a redemption price per share equal to 100% of the
Series A Preferred Stated Value, together with accrued and unpaid Series A
Preferred Dividends thereon, if any.
After June 17, 1997, each holder of Series A Preferred Stock has the right
to require the Company to redeem all of such holder's shares of Series A
Preferred Stock upon the occurrence of a Change of Control (as defined in the
Glossary below) of the Company at a redemption price equal to the sum of (i)
101% of the sum of (x) the Series A Preferred Stated Value and (y) accrued and
unpaid non-cash dividends thereon (including as a result of the quarterly
compounding) through the date of such redemption, and (ii) accrued and unpaid
cash dividends thereon (including as a result of the quarterly compounding)
through the date of such redemption.
OPTIONAL REDEMPTION
The Series A Preferred Stock is redeemable in cash at the election of the
Company, in whole or in part from time to time, at any time on or after June 17,
2002 and upon ten days' prior written notice to the holders, at the redemption
prices (expressed in percentages of the sum of (x) the Series A Preferred Stated
Value, and (y) accrued and unpaid non-cash dividends thereon through the date of
such redemption) set forth below plus any accrued and unpaid cash dividends.
REDEMPTION DATE PERCENTAGES
--------------- -----------
June 17, 2002 to June 16, 2003 ................................ 111%
June 17, 2003 to June 16, 2004 ................................ 108%
June 17, 2004 to June 16, 2005 ................................ 106%
June 17, 2005 to June 16, 2006 ................................ 104%
June 17, 2006 to June 16, 2007 ................................ 102%
The Company will be obligated to redeem the Series A Preferred Stock, in
whole, on June 17, 2007 at a redemption price per share equal to 100% of the
Series A Preferred Stated Value, together with accrued and unpaid Series A
Preferred Dividends thereon, if any.
Notwithstanding the foregoing, at any time prior to June 17, 2000 and upon
ten days' prior written notice to the holders, up to 35% of the Series A
Preferred Stock is redeemable in cash at the election of the Company with the
proceeds of one or more public offerings of the Company's capital stock
registered with the Commission, at any time or from time to time, at a
redemption price equal to the sum of (i) 120% of the sum of (x) the Series A
Preferred Stated Value and (y) accrued and unpaid non-cash dividends thereon
(including as a result of the quarterly compounding) through the date of such
redemption and (ii) accrued and unpaid cash dividends thereon (including as a
result of the quarterly compounding) through the date of such redemption.
LIQUIDATION PREFERENCE
If the Company voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the Series A Preferred Stock will be entitled to
receive, after all creditors of the Company have been paid, a liquidation
preference per share equal to the Series A Preferred Stated Value, together with
all accrued and unpaid Series A Preferred Dividends thereon (including as a
result of the quarterly compounding) through the date of such liquidation,
dissolution or winding up (the "Series A Preferred Liquidation Preference"), out
of the assets of the Company before any distribution is made to the holders of
any security ranking junior to or on parity with the Series A Preferred Stock.
VOTING RIGHTS AND BOARD REPRESENTATION
The holders of Series A Preferred Stock will be entitled to exercise seven
votes per share, constituting an aggregate of 18.2 million votes (representing,
as of June 17, 1997, approximately 41% of the total number of votes that the
holders of the Company's voting capital stock may cast). Each additional
issuance of Series A Preferred Stock in excess of 2,600,000 shares will
proportionally dilute such per share voting rights attributable to the
then-outstanding shares of Series A Preferred Stock for so long as such excess
exists.
The holders of the Series A Preferred Stock will not be entitled to elect
any members of the Company's Board of Directors, except as provided in
"--Penalties for Non-Compliance" below.
The Company's Bye-laws limit the direct and indirect voting power of each
U.S. person so that, unless an Event of Non-Compliance has occurred and is
continuing, no U.S. person will own, directly or indirectly, stock that controls
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote.
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LIMITATION ON COMPANY INDEBTEDNESS AND PREFERRED STOCK
The Company will not, directly or indirectly, Incur any Indebtedness or
issue any Preferred Stock unless (i) no Event of Non-Compliance (and no event
that, with notice, lapse of time or both, would be an Event of Non-Compliance)
shall have occurred and be continuing at the time or would occur as a
consequence of the Incurrence of such Indebtedness or issuance of such Preferred
Stock and (ii) such Indebtedness or Preferred Stock constitutes Permitted
Company Indebtedness And Preferred Stock. This covenant will not restrict the
Company's ability to Incur (a) obligations under insurance, reinsurance or
retrocession contracts or other arrangements by which a person guarantees
financial or credit risks in each case entered into in the ordinary course of
business and (b) obligations with respect to letters of credit or similar
instruments or credit facilities for the purpose of securing insurance,
reinsurance or retrocessional obligations entered into in the ordinary course of
business, to the extent that such letters of credit or similar instruments or
credit facilities are not drawn upon, or if and to the extent drawn upon, such
drawing is reimbursed not later than the 30th business day following a demand
for reimbursement ((a) and (b) together, "Insurance Obligations," it being
understood that the obligations described in (b) shall no longer be deemed
Insurance Obligations upon such 30th business day). This covenant also will not
restrict the Company's ability to issue the Series B Preferred Stock pursuant to
the Commitments or additional shares of Series B Preferred Stock as preferred in
kind dividends.
LIMITATION ON RESTRICTED SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK
The Company will not permit any of its Restricted Subsidiaries (as
described under Restricted and Unrestricted Subsidiaries below) to Incur,
directly or indirectly, any Indebtedness or to issue any Preferred Stock unless
(i) no Event of Non-Compliance (and no event that, with notice, lapse of time or
both, would be an Event of Non-Compliance) shall have occurred and be continuing
at the time or would occur as a consequence of the Incurrence of such
Indebtedness or issuance of such Preferred Stock and (ii) such Indebtedness or
Preferred Stock is Permitted Restricted Subsidiary Indebtedness And Preferred
Stock. This covenant will not restrict any Restricted Subsidiary's ability to
Incur, directly or indirectly, Insurance Obligations.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make, directly or indirectly, any Restricted Payment if, at the
time of or after giving effect to the proposed Restricted Payment, (i) any Event
of Non-Compliance (or any event that, with notice or lapse of time or both,
would be an Event of Non-Compliance) shall have occurred or is continuing or
(ii) the aggregate amount expended or declared for all Restricted Payments after
June 17, 1997 exceeds the sum of (A) 50% of the Consolidated Net Income of the
Company (or, if Consolidated Net Income shall be a deficit, minus 100% of such
deficit) beginning on June 17, 1997 and ending on the last day of the fiscal
quarter immediately preceding the date of such Restricted Payment plus (B) 100%
of the aggregate net cash proceeds received by the Company subsequent to June
17, 1997 from (without duplication) (1) capital contributions from stockholders
(other than pursuant to the Commitments) and (2) the issuance or sale (other
than to a Subsidiary) of capital stock (other than pursuant to the Commitments,
including capital stock issued upon conversion of convertible debt and from the
exercise of options, warrants or rights to purchase capital stock, but excluding
Redeemable Stock.
The foregoing limitations will not prevent (i) the Company from paying any
dividend on its capital stock within 60 days after the declaration thereof if,
on the declaration date, the Company could have paid such dividend in compliance
with the preceding paragraph, (ii) the making of any dividend or redemption
payments in respect of the Series A Preferred Stock and (iii) the making of
Permitted Investments.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause to exist or become effective or enter into any
encumbrance or restriction (other than pursuant to law or regulation) on the
ability of any Restricted Subsidiary (i) to pay dividends, make redemption
payments, make any other distributions in respect of its capital stock or repay
any Indebtedness or other obligation owed to the Company or any other Restricted
Subsidiary of the Company, (ii) to make loans or advances to the Company or any
other Restricted Subsidiary of the Company, or (iii) to transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for:
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(a) any encumbrance or restriction pursuant to an agreement relating
to an acquisition of assets or property, so long as the encumbrances or
restrictions in any such agreement relate solely to the assets or
property so acquired;
(b) any encumbrance or restriction relating to any Restricted
Subsidiary's Indebtedness in effect as of the date on which such Restricted
Subsidiary was acquired by the Company or any other Restricted Subsidiary
of the Company (other than Indebtedness Incurred by such Restricted
Subsidiary in connection with or in anticipation of such acquisition);
(c) any encumbrance (i) by direct lien on assets, through a trust or
otherwise, to the extent such lien has not been foreclosed upon, or (ii)
securing obligations to reimburse letters of credit and similar
instruments, permitted by clause (b) of Limitations on Company Indebtedness
and Preferred Stock above, in either case, securing insurance, reinsurance
or retrocessional obligations entered into in the ordinary course of
business;
(d) any encumbrance under employee pension plans or employee health
insurance plans (provided that any such pension or health benefits granted
to employees are in compliance with clauses (i) through (iv) of Limitation
on Transactions with Affiliates), workmen's compensation laws, unemployment
insurance laws or similar legislation, or good faith encumbrances Incurred
in connection with bids, tenders or contracts, excluding contracts for the
payment of Indebtedness, but including insurance and reinsurance contracts,
or with or for the benefit of regulatory authorities, insureds or
reinsureds, in each case Incurred in the ordinary course of business;
(e) any encumbrance to secure public or statutory obligations
(including under insurance regulations) or contested taxes and import
duties, in each case Incurred in the ordinary course of business;
(f) any encumbrance or restriction securing a refinancing of
Indebtedness secured pursuant to an encumbrance or restriction referred to
in the foregoing clauses so long as the encumbrances and restrictions
securing such refinancing are no more restrictive and are with respect to
no greater principal amount than the encumbrances and restrictions securing
the Indebtedness being refinanced;
(g) customary provisions restricting subletting or assignment of any
lease of the Company or any Restricted Subsidiary or provisions in
agreements that restrict the assignment of such agreement or any rights
thereunder; and
(h) any encumbrance or restriction of Permitted Company Indebtedness
And Preferred Stock or Permitted Restricted Subsidiary Indebtedness And
Preferred Stock.
LIMITATION ON SALES OF ASSETS AND CAPITAL STOCK
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Specified Asset Sale unless (i) the Company or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such
Specified Asset Sale at least equal to the Fair Market Value (as evidenced by a
Certified Resolution of the Board of Directors of the Company) of the property
sold or otherwise disposed of, (ii) at least 85% of the consideration received
by the Company or such Restricted Subsidiary, as the case may be, for such
property consists of cash and cash equivalents and (iii) the Company or such
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds in the
manner set forth in the next paragraph if permissible under applicable laws or
regulations.
Within 270 days after any Specified Asset Sale, the Company or such
Restricted Subsidiary, as the case may be, may at its option (a) reinvest up to
an amount equal to the Net Cash Proceeds from such disposition in additional
assets related to the Company's principal lines of business ("Replacement
Assets") and/or (b) apply up to an amount equal to such Net Cash Proceeds to the
reduction of the Indebtedness of the Company or of any Restricted Subsidiaries
of the Company. Any Net Cash Proceeds from any Specified Asset Sale that are not
used either to reinvest in Replacement Assets or repay Indebtedness of the
Company or of the Company's Restricted Subsidiaries will constitute "Excess
Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5 million, the
Company shall make an offer to repurchase in exchange for a cash amount equal to
the Excess Proceeds, on a pro rata basis from all holders of the Series A
Preferred Stock, an aggregate number of shares of Series A Preferred Stock for
which 100% of the Series A Preferred Stated Value, together with accrued and
unpaid dividends thereon through the repurchase date, if any, equals the
aggregate amount of Excess Proceeds. To the extent that any amount of Excess
Proceeds remains after completion of such offer to repurchase, the Company or
such Restricted Subsidiary shall use such remaining amount for general corporate
purposes and the amount of Excess Proceeds shall be reset to zero.
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LIMITATION ON RELEASE OF COMMITMENTS
The Company shall not amend, modify, fail to comply with, waive or fail to
enforce any provision of, or assign (other than with respect to a Restricted
Subsidiary which shall comply with this covenant), any of its rights or
obligations in respect of the Commitments without the written consent of the
holders of 90% of the issued and outstanding shares of Series A Preferred Stock.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
Except for reinsurance agreements entered into with Cap Re or its
Affiliates pursuant to Cap Re's first offer right in this regard, the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, conduct any business or enter into any transaction or series or
transactions, with or for the benefit of any Affiliate of the Company, unless
(i) such transaction or series of transactions is in the best interest of the
Company or such Restricted Subsidiary, (ii) such transaction or series of
transactions is on terms no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained in a comparable arms-length
transaction with an unrelated third party, (iii) with respect to a transaction
or series of transactions involving aggregate payments or value in excess of $1
million (other than transactions in the ordinary course of business involving
the insurance or reinsurance of risks, involving the brokering of insurance or
reinsurance, or as otherwise contemplated in this Prospectus), the Company's
Board of Directors (including a majority of the disinterested directors thereof)
approves such transaction or series of transactions and in its good faith
judgment believes that such transaction or series of transactions complies with
clauses (i) and (ii) of this paragraph, as evidenced by a Certified Resolution,
and (iv) with respect to a transaction or series of transactions involving
aggregate payments or value in excess of $3 million (other than transactions in
the ordinary course of business involving the insurance or reinsurance of risks,
involving the brokering of insurance or reinsurance, or as otherwise
contemplated in this Prospectus), the Company, in addition to complying with
clause (iii) of this paragraph, obtains an opinion from an internationally
recognized expert with experience in appraising the terms and conditions of the
relevant type of transaction stating that the transaction is fair from a
financial point of view to the Company or such Restricted Subsidiary. In
addition, the Company will not and will not permit the Restricted Subsidiaries
to enter into any transaction or series of transactions (other than the
agreements with Capital Reinsurance Company or its Affiliates referred to above)
with any Person who holds the right to designate any voting member of the
Company's Board of Directors or any Affiliate of such a Person. unless such
transaction or series of transactions is (i) in the best interests of the
Company as determined by the disinterested members of the Board and (ii) entered
into on an arms-length basis.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not, and will not permit any Restricted Subsidiary to,
merge, amalgamate or consolidate with any other entity (other than a merger or
amalgamation of a Restricted Subsidiary into the Company or a merger or
amalgamation of a Restricted Subsidiary with another Restricted Subsidiary) or,
sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of its assets unless (a) if the Company is a party to the
transaction and is not the surviving entity, the entity formed by or surviving
any such consolidation, amalgamation or merger or to which such sale, transfer
or conveyance is made shall be a corporation organized and existing under the
laws of Bermuda, the United States of America or a State thereof or the District
of Columbia and such corporation expressly assumes the terms and conditions of
the Series A Preferred Stock Subscription Agreement; (b) immediately before and
after giving effect to such transaction or series of transactions on a pro forma
basis, no Event of Non-Compliance (and no event that, after notice or lapse of
time, or both, would become an Event of Non-Compliance) shall have occurred and
be continuing; and (c) immediately after giving effect to such transaction or
series of transactions on a pro forma basis (including, without limitation, any
Indebtedness Incurred or anticipated to be Incurred, or Preferred Stock issued
or anticipated to be issued in connection with such transaction or series of
transactions), the Company or the surviving entity, as the case may be, would
have a Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of the Company immediately prior to the transaction or series of
transactions giving rise to the need to calculate Consolidated Net Worth.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The Company's Restricted Subsidiaries are CGA and CGAIM. The Company may
designate a Subsidiary (including a newly formed or newly acquired Subsidiary,
but excluding CGA and CGAIM) of the Company or any of its Restricted
Subsidiaries as an "Unrestricted Subsidiary" if (i) both (a) such Subsidiary
does not have any obligations which, if an event of default occurred thereunder,
would result, with notice or lapse of time or both, in a
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cross-default on Indebtedness of any of the Company's Restricted Subsidiaries
and (b) such Subsidiary has less than $1,000 of assets or (ii) such designation
is effective immediately upon such Person becoming a Subsidiary of either the
Company or any of its Restricted Subsidiaries. Unless so designated as an
Unrestricted Subsidiary, any Person that is or becomes a Subsidiary of the
Company or any of its Restricted Subsidiaries shall be classified as a
Restricted Subsidiary of the Company. At all times the Company or a Wholly Owned
Restricted Subsidiary thereof shall own all of the capital stock (other than the
directors' qualifying shares) of the Restricted Subsidiaries of the Company.
Except as provided in this paragraph, no Restricted Subsidiary may be
redesignated as an Unrestricted Subsidiary. Subject to the next succeeding
paragraph, an Unrestricted Subsidiary may be redesignated as a Restricted
Subsidiary. The designation of an Unrestricted Subsidiary or removal of such
designation in compliance with the next succeeding paragraph shall be made by
the Company's Board of Directors pursuant to a Certified Resolution and shall be
effective as of the date specified in such Certified Resolution, which shall not
be prior to the date of such Certified Resolution.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person becoming a Restricted Subsidiary
(whether through an acquisition, the redesignation of an Unrestricted Subsidiary
or otherwise) unless, after giving effect to such action, transaction or series
of transactions, on a pro forma basis the Company would have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company prior
to the transaction giving rise to the need to make such calculation.
EVENTS OF NON-COMPLIANCE
Events of Non-Compliance with respect to the Series A Preferred Stock
includes each one of the following:
(i) failure by the Company to pay (a) prior to June 17, 2002 a
quarterly dividend in the form of Series A Preferred Stock on each share of
Series A Preferred Stock then outstanding and (b) from June 17, 2002, a
quarterly cash dividend at the applicable Series A Preferred Dividend Rate
(as defined in the By-laws) on each share of Series A Preferred Stock then
outstanding, and, in the event that there are any undistributed dividends
payable in the form of Series A Preferred Stock, on each such undistributed
share of Series A Preferred Stock, provided that such failure shall not be
an "Event of Non-Compliance" unless the unpaid cash amount is, in the
aggregate, in excess of U.S. $5 million;
(ii) failure by the Company to pay the redemption price and premium,
if any, in respect of any of the shares of Series A Preferred Stock when
due upon mandatory or optional redemption, required purchase or otherwise;
(iii) failure by the Company or any Restricted Subsidiary of the
Company to comply with any of the applicable restrictions and limitations
and covenants and agreements described above (other than the obligations
specified in clauses (i) and (ii) above) for a period of 60 days following
notice of such failure from the holders of 25% or more of the outstanding
aggregate Liquidation Value of the Series A Preferred Stock unless such
compliance has been waived by the holders of a majority of the outstanding
aggregate Liquidation Value of the Series A Preferred Stock;
(iv) failure by the Company or any Restricted Subsidiary of the
Company to pay any amounts in respect of Indebtedness or Preferred Stock
when due within any applicable grace period or the acceleration of any such
payment obligations and, in either case, the total amount of such unpaid or
accelerated amount exceeds, individually or in the aggregate, $5 million;
(v) any default (other than under clauses (i), (ii), (iii) and (iv))
in the performance of or compliance with any obligation, or any defined
event of default, which is not cured or waived by all relevant parties
within the applicable cure period (if any) and arises under the terms of
contracts and instruments pursuant to which the Company or any Restricted
Subsidiary of the Company has Incurred any Indebtedness or issued any
Preferred Stock to any Person under which the amount unpaid, individually
or in the aggregate, exceeds $5 million;
(vi) the entry by a court of competent jurisdiction of one or more
judgments or orders against the Company or any of its Restricted
Subsidiaries in an uninsured aggregate amount in excess of $10 million and
such judgment or order is (i) not discharged, waived, stayed or satisfied
for a period of 45 consecutive days or (ii) the subject of an ongoing
appeal and the Company is not obligated to pay such amount while such
appeal is pending;
(vii) if the Company or any Restricted Subsidiary shall make a general
assignment for the benefit of, or enter into any composition or arrangement
with, creditors; apply for, or consent (by admission of material
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allegations of a petition or otherwise) to the appointment of a receiver,
trustee, custodian, liquidator (or similar official) of the Company or any
Restricted Subsidiary or of a substantial part of any of such corporation's
assets, or authorize such application or consent; file a petition under
Title 11 of the United States Code (or similar law of the United States or
any other jurisdiction which relates to the liquidation or reorganization
of companies or to the modification or alteration of the rights of
creditors); or permit or suffer all or any substantial part of its property
to be sequestered or attached by court order and such order shall remain
undismissed for 60 days;
(viii) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any Restricted Subsidiary; or
(ix) a downgrade of CGA's claims paying ability rating below a AA-
rating by DCR (or the then equivalent rating by DCR in the event DCR
changes its rating designations) for a period of 45 consecutive days.
PENALTIES FOR NON-COMPLIANCE
If any Event of Non-Compliance shall have occurred, then (if such Event of
Non-Compliance by its nature can be cured, for so long as such Event of
Non-Compliance remains uncured): (a) the size of the Board of Directors shall be
increased by two members, and the holders of Series A Preferred Stock as a class
shall be entitled to appoint at least two members of the Company's Board; (b)
the dividend rate on the Series A Preferred Stock shall increase as described
under "Dividends" above; and (c) no class of stock ranking junior to or on
parity with Series A Preferred Stock may be redeemed.
REPORTING
So long as the Company is neither subject to Section 13 or 15(d) of the
Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) under the
Exchange Act, the Company will furnish to the holders of the Series A Preferred
Stock, to prospective investors, and to securities analysts the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
In addition, prior to the effectiveness of a registration statement relating to
the Series A Preferred Stock, the Company will furnish to the holders of the
Series A Preferred Stock the quarterly and annual financial statements and
related notes, an accompanying Management's Discussion and Analysis of Financial
Condition and Results of Operations and the information, documents and other
reports in the format that would be required to be included in the Company's
periodic reports filed with the Commission if the Company were required to file
such reports with the Commission. The Company will furnish such information to
the holders of the Series A Preferred Stock within 15 days after the date on
which the Company would have been required to file such reports with the
Commission. Following the effectiveness of this Registration Statement, the
Company will furnish to the holders of the Series A Preferred Stock, within 15
days after it files them with the Commission, copies of the annual and quarterly
reports and the information, documents and other reports that the Company is
required to file with the Commission pursuant to Sections 13 and 15(d) of the
Exchange Act. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 and 15(d) of the Exchange
Act, to the extent permitted by the Exchange Act, the Company shall continue to
file with the Commission and provide the holders of the Series A Preferred Stock
with the annual reports and the information, documents and other reports that
are specified in Section 13 and 15(d) of the Exchange Act. In the event that the
Company is not permitted to file such reports, documents and information with
the Commission, the Company will provide substantially similar information with
respect to itself and its Subsidiaries to the holders of the Series A Preferred
Stock as if the Company were subject to the reporting requirements of the
Section 13 and 15(d) of the Exchange Act.
WAIVER AND AMENDMENT
The consent of the holders of a majority of the outstanding shares of the
Series A Preferred Stock will be required with respect to waivers and amendments
which do not affect the payment terms of the Series A Preferred Stock or the
amount of Series A Preferred Stock holders who must consent to any amendment or
the relative ranking of the Series A Preferred Stock. The latter waiver and
amendments may be made only with the consent of the holders of 90% of the
outstanding aggregate Liquidation Value of Series A Preferred Stock.
WARRANTS
In addition to Series A Preferred Stock, the purchaser of each of the
2,600,000 shares of Series A Preferred Stock issued on June 17, 1997 acquired
for no additional consideration, one Warrant for each share of Series A
Preferred Stock purchased. Each Warrant represents a right to purchase, on or
prior to June 17, 2007, .1038462 shares of
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Common Stock at an exercise price of $.01 per share of Common Stock; for an
aggregate total of 270,000 shares of Common Stock. The Warrants contain certain
adjustments for dilutive events and certain protections for reorganizations,
consolidations, or mergers.
SERIES B PREFERRED STOCK
GENERAL
Pursuant to an Investment Units Subscription Agreement, dated as of June 4,
1997 (the "Investment Units Subscription Agreement"), the Company issued
1,600,000 Investment Units. Each Investment Unit consists of 1 share of Series B
Preferred Stock, 4.8925 shares of Common Stock and a Commitment to purchase 1.5
additional shares of Series B Preferred Stock. Accordingly, the Company issued
1,600,000 shares of its Series B Cumulative Voting Preference Shares, with a par
value of $.01 per share. The Company also obtained commitments to purchase an
additional 2,400,000 shares of Series B Preferred Stock, as described below
under "Commitments." As described below, the Series B Preferred Stock is subject
to mandatory redemption on June 17, 2012, or an earlier date upon the occurrence
of certain events; provided, however, that so long as the Company is in default
in respect of any obligation to redeem or pay dividends in respect of the Series
A Preferred Stock, the Company shall not redeem any Series B Preferred Stock.
The Series B Preferred Stock ranks junior to the Series A Preferred Stock and
senior to the Common Stock.
DIVIDENDS
The Series B Preferred Stock is entitled to dividends (the "Series B
Preferred Dividends") in an amount equal to 20% per annum based on a $25 stated
value (the "Series B Preferred Stated Value"). The Series B Preferred Dividends
are fully cumulative, compound quarterly and accrue quarterly (based on the
actual number of days elapsed over a year of 360 days) until redemption. Subject
to Bermuda law, the payment of accrued Series B Preferred Dividends is payable
in cash or in kind as, if and when dividends are declared by the Board, provided
that, so long as any Series A Preferred Stock is outstanding, no dividends other
than dividends payable in shares of Series B Preferred Stock may be declared or
paid or set apart for payment on the Series B Preferred Stock. See "Risk
Factors--Holding Company Structure."
DIVIDEND PREFERENCE
Any obligation of the Company with regard to the Series B Preferred
Dividends does not affect the payment by the Company of the Series A Preferred
Dividends when such dividends become due. As long as any Series B Preferred
Stock remains outstanding, no dividends (other than dividends payable in shares
of stock ranking junior to the Series B Preferred Stock) may be declared as paid
or set apart for payment on, nor may any distribution be made to, any class of
stock that ranks junior to the Series B Preferred Stock.
MANDATORY REDEMPTION
The Company is obligated to redeem the Series B Preferred Stock, in whole,
at a redemption price per share equal to 100% of the Series B Preferred Stated
Value, together with accrued and unpaid dividends thereon (including as a result
of quarterly compounding), if any, upon the earliest of June 17, 2012, a sale,
merger or amalgamation of the Company and a Qualified Public Offering; provided,
however, that so long as the Company is in default in respect of any obligation
to redeem or pay dividends in respect of the Series A Preferred Stock, the
Company shall not redeem any Series B Preferred Stock.
REDEMPTION PREFERENCE
If the Company defaults on any payment due upon the mandatory redemption of
the Series B Preferred Stock and such default is not cured, (i) no class of
stock ranking junior to the Series B Preferred Stock may be redeemed; (ii) no
dividends (other than dividends payable in stock ranking junior to the Series B
Preferred Stock) may be declared or paid or set apart for payment on, nor may
any distribution be made, to, any class of stock ranking junior to the Series B
Preferred Stock; and (iii) no dividends on shares ranking on parity with the
Series B Preferred Stock may be paid or set apart for payment.
LIQUIDATION PREFERENCE
If the Company voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the Series B Preferred Stock will be entitled to
receive, after all creditors of the Company have been paid and the Series A
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Preferred Liquidation Preference has been satisfied, a liquidation preference
per share equal to the Series B Preferred Stated Value, plus all accrued and
unpaid dividends thereon (including as a result of semi-annual compounding) to
the date of such liquidation, dissolution or winding up (the "Series B Preferred
Liquidation Preference"), out of the assets of the Company before any
distribution is made to the holders of any stock of the Company ranking junior
to the Series B Preferred Stock.
In the event that the assets available for distribution to the holders of
the Series B Preferred Stock and stock ranking on a parity with the Series B
Preferred Stock are insufficient to pay the respective preferential amounts in
full, such assets will be distributed ratably in proportion to the preferential
amounts payable thereon.
VOTING RIGHTS
Except as otherwise provided in the Bye-laws of the Company and otherwise
required by Bermuda law, the holders of the Series B Preferred Stock are
entitled to exercise five votes per share on all matters presented to the
Company's shareholders. The Bye-laws of the Company provide that the holders of
the Series B Preferred Stock, as a class, are entitled to an aggregate 8,000,000
votes and that any additional issuance of Series B Preferred Stock in excess of
1,600,000 shares, including pursuant to the Commitments, will proportionately
dilute the per share voting rights attributable to the then-outstanding shares
of Series B Preferred Stock for so long as such excess exists.
BOARD REPRESENTATION RIGHTS
Prior to a Qualified Public Offering, the holders of Series B Preferred
Stock will be entitled to elect at least eight directors to the Company's Board.
Following a Qualified Public Offering, certain holders of Series B Preferred
Stock may maintain special rights to designate members of the Board.
REGISTRATION RIGHTS
The holders of the Series B Preferred Stock do not have any separate demand
or piggyback registration rights.
COMMON STOCK
GENERAL
Pursuant to the Investment Units Subscription Agreement, the Company has
issued 9,100,000 shares of its Common Stock, each share having a $.01 par value,
7,827,957 to the Unit Investors and 1,272,043 to the Sponsoring Investors. The
Common Stock is perpetual.
DIVIDENDS
The Common Stock is not entitled to dividends as long as any shares of
Series A Preferred Stock or Series B Preferred Stock remain outstanding.
Thereafter, the Common Stock is entitled to any net profits of the Company,
when, as and if declared as dividends by the Board. See "Risk Factors--Holding
Company Structure."
LIQUIDATION
If the Company voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the Common Stock are entitled, after all creditors of
the Company have been paid and the Series A Preferred Liquidation Preference and
the Series B Preferred Liquidation Preference have been satisfied, to share
ratably in the remaining assets of the Company together with the Common Stock.
VOTING RIGHTS
Except as otherwise provided in the Bye-laws of the Company and otherwise
required by Bermuda law, the Common Stock holders are entitled to exercise two
votes per share on all matters presented to the Company's shareholders.
OTHER RIGHTS
The holders of the Common Stock have certain registration rights,
preemption rights, first refusal rights, tag-along rights and drag-along rights
as set forth in the Company Shareholders Agreement.
INVESTOR WARRANTS
The Sponsoring Investors and Founders hold 785,229 warrants ("Investor
Warrants"). Each Investor Warrant represents a right to purchase, on or prior to
June 16, 2007, one share of Common Stock at an exercise price of $5.00
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per share. The Investor Warrants contain certain adjustments for dilutive events
and certain protections for reorganizations, consolidations, or mergers.
COMMITMENTS
GENERAL
By the terms of the Investment Units Subscription Agreement, the Unit
Investors irrevocably committed to purchase, upon the occurrence of a Funding
Event (as defined below), such number of shares of Series B Preferred Stock as
set forth in such Investment Units Subscription Agreement at a purchase price of
$25 per share. The aggregate amount of these Commitments is $60 million. Each
Investment Unit represents a Commitment to purchase one and a one-half
additional shares of Series B Preferred Stock. Each Commitment has a term that
expires upon the earliest of (v) the latest of (1) June 17, 2002, (2)
immediately after the final Funding Event occurring after June 17, 2002 with
respect to a Downgrade Notice delivered prior to June 17, 2002, and (3) the date
of withdrawal of the final Downgrade Notice which was delivered prior to June
17, 2002, (w) the closing of a Qualified Public Offering, (x) the closing of an
acquisition of a majority of the issued and outstanding shares of the Common
Stock at the time of such acquisition by one or more purchasers acting in
concert in a single transaction or in a series of related transactions
(including, without limitation, acquisitions pursuant to an amalgamation,
exchange offer, business combination, consolidation or corporation
reorganization) resulting in the ultimate beneficial ownership of such acquired
Common Stock being different than before such acquisition, (y) the sale of all
or substantially all of the assets of the Company unless the ultimate beneficial
owners of a majority of the ownership interests in the acquiror of such assets
were the ultimate beneficial owners of a majority of the issued and outstanding
shares of Common Stock at the time immediately before such sale and (z) in
certain circumstances, the establishment of either a bank stand-by credit
facility or an excess of loss reinsurance treaty for the benefit of the Company
or its Restricted Subsidiaries for a principal amount equal to or exceeding the
aggregate amount of the Commitments upon which the Company has not drawn (each
of (v), (w), (x), (y) and (z) a "Commitment Termination Event"); provided,
however, that, with respect to clauses (x), (y) and (z), such Commitment
Termination Event shall occur only if (i) at such time (a) the sum of retained
earnings, determined in accordance with GAAP, of CGA, plus equity capital (in
excess of the capital required to be contributed on or prior to June 17, 1997)
contributed to CGA is equal to or greater than $60,000,000 or (b) the Series A
Preferred Stock is rated investment grade (a rating of BBB- or higher from DCR
or the then-equivalent rating in the event DCR has changed its rating
designations) and (ii)(a) the Company receives notification from DCR that such
Commitment Termination Event will not result in a downgrading, termination,
withdrawal or suspension of CGA's claims paying ability rating and (b) a
Downgrade Notice is not in effect at such time. A "Funding Event" means the 45th
consecutive day on which a Downgrade Notice has been in effect and not been
withdrawn. "Downgrade Notice" means written notice that CGA's claims paying
ability rating will be reduced by DCR below AAA (or the then-equivalent rating
designation).
COMMITMENT FEE
The Investment Units Subscription Agreement requires the Company to pay
annually in advance a commitment fee to each Unit Investor equal to one percent
of the then-aggregate Commitment amount of such Unit Investor under such
agreement.
COMMITMENT SUPPORT
In order to secure its Commitment made pursuant to the terms of the
Investment Units Subscription Agreement, each Unit Investor not rated AA or
higher delivered to the Company a five-year letter of credit from a bank rated
at least AA or a one-year letter of credit from a bank rated at least AA to be
renewed annually for five years, in the form attached to the Investment Units
Subscription Agreement, or other such form of credit support as will not give
rise to a downgrading of CGA's rating by DCR. Each Unit Investor shall also be
subject to certain maintenance requirements with respect to its rating on the
letter of credit. Failure to renew a one-year letter of credit prior to
expiration will give rise to the right of the Company to draw down on the letter
of credit.
COMMITMENT BY THE COMPANY TO CGA
On June 17, 1997, the Company entered into a commitment agreement with CGA
to contribute to CGA, through the purchase of equity securities of CGA or
otherwise, the proceeds of the sale of any Series B Preferred Stock to the
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Unit Investors pursuant to the Commitments. The Company has assigned its rights
to the Unit Investors' Commitments to support such commitment to CGA.
VOTING RIGHTS
The Unit Investors are not entitled to any rights, including voting or
consent rights, of a shareholder of the Company with respect to such standby
Commitment. Each share of Series B Preferred Stock issued pursuant to the
Commitments will have proportional voting rights based on the number of shares
of Series B Preferred Stock issued and outstanding at such time. See
"Description of Securities--Series B Preferred Stock--Voting Rights."
SUBSCRIPTION AGREEMENT
EXCHANGE OFFER; REGISTRATION RIGHTS
The Subscription Agreement provides that the Company will, for the benefit
of the holders of the Series A Preferred Stock, at the Company's cost, (i) use
its best efforts to cause a registration statement to be declared effective
under the Securities Act within 180 days after June 17, 1997, with respect to a
registered offer to exchange such Series A Preferred Stock for the New Series A
Preferred Stock (on a share by share basis) which will have the same aggregate
stated value as, and with terms which will be identical in all respects to, the
Series A Preferred Stock (except that the New Series A Preferred Stock will not
contain certain terms with respect to transfer restrictions and the dividend
rate step-up provision above in respect of a failure to comply with certain
registration obligations (see Dividends)), and (ii) use its best efforts to
consummate the Exchange Offer within 210 days after June 17, 1997. Promptly
after this Registration Statement's being declared effective, the Company will
offer the New Series A Preferred Stock in exchange for surrender of the Series A
Preferred Stock. The Company will keep this Exchange Offer open for not less
than 30 days (or longer if required by applicable law) after the date on which
notice of this Exchange Offer is mailed to the holders of the Series A Preferred
Stock. For each share of Series A Preferred Stock tendered to the Company
pursuant to this Exchange Offer and not validly withdrawn by the holder thereof,
the holder of such share of Series A Preferred Stock will receive a share of New
Series A Preferred Stock.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to the immediately following sentence, the Company believes that the New Series
A Preferred Stock that will be issued pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by the holders thereof
without further compliance with the registration and prospectus delivery
provisions of the Securities Act. However, any purchaser of New Series A
Preferred Stock who is an affiliate (for purposes of the Securities Act) of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the New Series A Preferred Stock (i) will not be able to rely on
the interpretation by the staff of the Commission set forth in the
above-mentioned no-action letters, (ii) will not be able to tender its Series A
Preferred Stock in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Series A Preferred Stock unless such
sale or transfer is made pursuant to an exemption from such requirements.
Each holder of the Series A Preferred Stock (other than certain specified
holders) who wishes to exchange Series A Preferred Stock for New Series A
Preferred Stock in the Exchange Offer will be required to represent that (i) it
is not an affiliate (for purposes of the Securities Act) of the Company, (ii)
any New Series A Preferred Stock to be received by it was acquired in the
ordinary course of its business and (iii) at the time of commencement of the
Exchange Offer, it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Series A
Preferred Stock. In addition, in connection with any resales of New Series A
Preferred Stock, any broker-dealer who acquired the Series A Preferred Stock for
its own account as a result of market-making activities or other trading
activities must deliver a prospectus meeting the requirements of the Securities
Act. The Commission has taken the position that brokers and dealers may fulfill
their prospectus delivery requirements with respect to the New Series A
Preferred Stock (other than a resale of an unsold allotment from the original
sale of the Series A Preferred Stock) with the prospectus contained in the
Registration Statement. Under the Subscription Agreement, the Company is
required to allow any persons, subject to similar prospectus delivery
requirements, to use the prospectus contained in the Registration Statement in
connection with the resale of such New Series A Preferred Stock.
GOVERNING LAW
The New Series A Preferred Stock are governed by the laws of Bermuda,
without regard to the principles of conflicts of law.
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ENFORCEABILITY OF JUDGMENTS
As a Bermuda corporation, substantially all the assets of the Company are
located in Bermuda and any judgment obtained in the United States against the
Company may not be collectible within the United States. The Company will
consent to service of process in the City of New York, Borough of Manhattan, for
claims relating to the validity, or seeking enforcement, of the Company's
obligations under the terms of the New Series A Preferred Stock. The Company has
appointed C T Corporation System as its authorized agent upon which process may
be served in any such action. See "Description Of Securities--Governing Law;
Consent To Service." Accordingly, it may be difficult for investors to effect
service within the United States upon the Company with respect to other claims
pertaining to the New Series A Preferred Stock, including claims predicated upon
the civil liability provisions of the securities laws of the United States.
Moreover, it may be difficult for investors to enforce outside the United States
judgments against the Company obtained in the United States in any actions
pertaining to the New Series A Preferred Stock, particularly with respect to
actions to which the Company has not consented to service of process in the
United States such as those predicated upon the civil liability provisions of
the securities laws of the United States. In addition, some of the Company's
directors and executive officers, and certain of the experts named herein, are
residents of Bermuda. As a result, it may be difficult for investors to effect
service within the United States upon such persons or to realize in the United
States upon judgments of courts in the United States, including judgments
predicated upon civil liability under United States securities laws. The Company
has been advised by its Bermudian counsel, Conyers Dill & Pearman, that under
Bermuda law a judgment rendered by a foreign court is enforceable in Bermuda
through an independent action filed to enforce such judgment. The foreign
judgment may not be enforced, however, if there is, with respect to the action
in which the foreign judgment was rendered, evidence of want of jurisdiction,
want of notice to the party against whom enforcement is sought, collusion,
fraud, or clear mistake of law or fact, or if the foreign judgment is found to
be contrary to the laws, customs and public policy of Bermuda. The Bermuda
courts would, in such counsel's opinion, entertain actions to enforce judgments
of courts in the United States predicated upon civil liabilities under United
States securities laws, but there is doubt that the Bermudian courts would
entertain original actions predicated upon such liabilities.
CONSENT TO JURISDICTION AND SERVICE
The Company has appointed CT Corporation System as the Company's agent for
service of process in any suit, action or proceeding with respect to the New
Series A Preferred Stock and for actions brought under the United States federal
or state securities laws brought in any United States federal or state court
located in the City of New York and submit to such jurisdiction.
CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of the Company, CGA, CGAIM and the
taxation of shareholders of the Company describes the material U.S. federal and
Bermuda tax consequences as of the date of this Prospectus and is for general
information only. The tax treatment of a holder of securities for U.S. federal,
state, local and non-U.S. tax purposes may vary depending on the holder's
particular status. The description of U.S. federal income tax law set forth
below with respect to the taxation of the Company, CGA, CGAIM, and shareholders
of the Company is based upon the advice of Dewey Ballantine LLP ("Dewey
Ballantine"). The description of Bermuda tax law set forth below is based upon
the advice of Conyers Dill & Pearman, Bermuda. Because of their inherently
factual nature, no opinion has been given by Dewey Ballantine to investors with
respect to (i) whether the Company or CGA will have a permanent establishment in
the U.S. or will be engaged in a U.S. trade or business, (ii) any factual or
accounting matters or (iii) the existence or amounts of Related Person Insurance
Income ("RPII"). All statements herein with respect to such matters and
information with respect to facts, determinations or conclusions relating to the
business or activities of CGA and CGAIM have been provided by the management of
the Company.
Investors have been advised and again are urged to consult their own tax
advisors concerning the U.S. federal, state, and local and non-U.S. tax
consequences to them of owning securities.
There is a limited income tax treaty between Bermuda and the United States
(the Bermuda Insurance Enterprises and Mutual Assistance Tax Treaty (the
"Treaty")), which affects the taxation of insurance company income only. In form
the Treaty provides for reciprocal waiver of taxation by both countries with
respect to certain income derived by an insurance company. However, since
Bermuda does not currently tax such income, the Treaty, in effect, currently
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operates unilaterally with respect to the imposition of taxes. The Treaty is,
however, reciprocal with respect to mutual assistance in tax matters.
TAXATION OF THE COMPANY AND ITS SUBSIDIARIES
BERMUDA
The Company and CGA. The Company and CGA have received from the Minister of
Finance of Bermuda an assurance under The Exempted Undertakings Tax Protection
Act, 1966 of Bermuda (the "Act"), to the effect 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, then the imposition of any such tax shall not
be applicable to the Company or CGA or to any of their operations or the shares,
debentures or other obligations of the Company and CGA until March 28, 2016.
This assurance does not prevent the application of any such tax payable in
accordance with the provisions of the Land Tax Act 1967 of Bermuda or otherwise
payable in relation to the property leased to the Company or CGA. CGA will be
required to pay certain registration fees as an insurer under the Act and each
of CGA and the Company will be required to pay certain annual Bermuda government
fees. In addition, all entities employing individuals in Bermuda are required to
pay a payroll tax to the Bermuda government.
Currently there is no Bermuda withholding tax on dividends paid by the
Company or CGA.
U.S.
The Company and CGA. The Company will be a pure holding company and will
not engage in any business activity; hence, it will not be engaged in a trade or
business in the U.S. CGA operates its business in a manner that should not
result in its being treated as engaged in a trade or business within the U.S.
Consequently, management does not expect CGA to be obligated to pay U.S. federal
income tax. However, because the determination of whether a foreign corporation
is engaged in a trade or business in the U.S. is inherently factual and there
are no definitive standards for making such determination, there can be no
assurance that the Internal Revenue Service (the "IRS") will not contend that
CGA is engaged in a trade or business in the U.S.
Ordinarily, a foreign corporation deemed to be engaged in a trade or
business in the U.S. will be subject to U.S. income tax, including, potentially,
the branch profits tax, on its net income that is effectively connected with the
conduct of that trade or business, unless the corporation is entitled to relief
under an income tax treaty. Such income tax would be imposed on effectively
connected net income and would be computed in a manner generally analogous to
that applied to the net income of a domestic corporation. However, if a foreign
corporation does not timely file a U.S. federal income tax return, even if its
failure to do so is based upon a good faith determination that it was not
engaged in a trade or business in the U.S., it is not entitled to deductions and
credits allocable to its effectively connected income. Moreover, penalties may
be assessed for failure to file such tax returns. CGA intends to file a
"protective" U.S. federal income tax return so that if it is held to be engaged
in a trade or business in the U.S., it would be allowed to deduct expenses and
utilize credits allocable to income determined to be effectively connected with
such trade or business and would not be subject to a failure to file penalty.
The maximum U.S. income tax rates currently are 35% for a corporation's
effectively connected net income and 30% for the branch profits tax. The branch
profits tax, which is based on net income after subtracting the regular
corporate tax and making certain other adjustments, is imposed on the amount of
net income deemed to have been withdrawn from the U.S. The maximum combined
corporate net income and branch profits tax rate is approximately 54.5%.
Under the Treaty, a Bermuda corporation that meets certain eligibility
requirements (described below) and that is predominantly engaged in the
insurance business will not be subject to U.S. federal income tax on its
business profits effectively connected with a U.S. federal trade or business
provided such trade or business is not conducted through a permanent
establishment in the U.S. (the "No PE Exemption"). Management believes that CGA
qualifies for the No PE Exemption; however, because the determination of whether
a trade or business is being conducted through a permanent establishment is
inherently factual, management cannot assure the exemption's availability. In
order to meet the eligibility requirements of the Treaty, (i) more than 50% of
CGA's stock must be beneficially owned, directly or indirectly, by individuals
who are Bermuda residents or U.S. citizens or residents, and (ii) CGA's income
must not be used in substantial part, directly or indirectly, to make
disproportionate distributions to, or to meet certain liabilities to,
individuals who are not Bermuda residents or U.S. citizens or residents.
Management monitored the sale of securities made pursuant to the offering of the
Series A Preferred Stock and Warrants and the offering of the
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Investment Units to insure that CGA would meet the Treaty's eligibility
requirement after the completion of both offerings. Thus, absent a
misrepresentation by any of the purchasers of the Company Securities, the
Company, and hence CGA, shall continue to meet the eligibility requirements of
the Treaty upon completion of the Exchange Offer. However, there can be no
assurance that CGA will continue to meet such requirements in the future.
The No PE Exemption may only apply to net premium income; thus, reliance on
the No PE Exemption may not preclude the U.S. from taxing a Bermuda corporation
that is predominantly engaged in the insurance business in the U.S. on its
non-premium effectively connected income. Accordingly, even if the No PE
Exemption is available to CGA, if CGA is determined to be engaged in a trade or
business in the U.S., the U.S. may be able to tax any of its income (other than
net premium income) that is effectively connected with the conduct of such trade
or business. In general, income is effectively connected with the conduct of a
U.S. trade or business only if it is derived from U.S. sources. However, under
special rules applicable to foreign insurance companies engaged in an insurance
business in the U.S., a minimum amount of investment income (whether or not
derived from U.S. sources), determined by a formula, is deemed to be effectively
connected with the conduct of such U.S. trade or business (and, as previously
indicated, may not be protected from U.S. taxation by the No PE Exemption).
Thus, if CGA is determined to be engaged in a trade or business in the U.S., a
portion of its investment income may be subject to U.S. taxation, and this could
be so even though CGA does not and does not intend in the future to invest in
securities that generate U.S. source income and, accordingly, all of its
investment income should be derived from non-U.S. sources.
A foreign corporation not engaged in a trade or business in the U.S. is
subject to U.S. federal income tax at the rate of 30% on its "fixed or
determinable annual or periodical gains, profits and income" ("FDAP income")
derived from sources within the U.S. (for example, dividends and certain
interest income). Thus, even if CGA is not engaged in a trade or business in the
U.S., it could be subject to the 30% tax on certain FDAP income, depending upon
the types of instruments in which it invests. As noted above, however, CGA does
not invest and does not intend in the future to invest in securities that
generate U.S. source income.
The U.S. also imposes an excise tax on insurance and reinsurance premiums
paid to foreign insurers or reinsurors by insureds who are U.S. persons with
respect to risks located in the U.S. The rates of tax currently applicable to
such premiums are four percent for direct insurance premiums and one percent for
reinsurance premiums. Management anticipates that a substantial portion of CGA's
premium income will be U.S. source income and therefore subject to the excise
tax. The excise tax would not apply, however, if CGA were determined to be
engaged in a trade or business in the U.S. and ineligible for the No PE
Exemption.
CGAIM. As a U.S. corporation, CGAIM is subject to U.S. taxation at regular
corporate tax rates, generally 35%. If CGAIM were to distribute dividends to the
Company, such dividends would be subject to a 30% withholding tax. Because CGA
and CGAIM are related parties for purposes of the Code's transfer pricing rules,
under these rules the IRS could allocate additional income to CGAIM if it were
to determine that under circumstances involving unrelated parties dealing at
arms length CGAIM would have earned income in connection with CGA policies
issued to CGAIM's customers, which was instead being shifted to CGA. In such
case, the reallocated income would be taxed as income to CGAIM at regular
corporate rates and also might be subject to a 30% withholding tax. Nonetheless,
there is no reason to believe that the various fees are not at arm's length.
TAXATION OF HOLDERS OF SERIES A PREFERRED STOCK
BERMUDA TAXATION
Under current Bermuda law, dividends paid by CGA to the Company and by the
Company to the holders of the Securities are not subject to Bermuda withholding
tax. If Bermuda were to enact a withholding tax on dividends, which is not
expected to be the case, the Treaty as currently written would not protect U.S.
holders from the imposition of such tax with respect to distributions from the
Company.
U.S. TAXATION
The following summary addresses only certain U.S. federal income tax
consequences with respect to New Series A Preferred Stock acquired by investors
in the Exchange Offer and held as capital assets and does not deal with the tax
consequences applicable to all categories of investors, some of which (such as
broker-dealers, investors who hold New Series A Preferred Stock as part of
hedging or conversion transactions and investors whose functional currency is
not the U.S. dollar) may be subject to special rules. Investors in Series A
Preferred Stock have been advised and
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prospective investors in New Series A Preferred Stock are again advised to
consult their own tax advisers with respect to their particular circumstances
and with respect to the effects of U.S. federal, state, local or other
countries' tax laws to which they may be subject.
U.S. HOLDERS
The following discussion summarizes certain U.S. federal income tax
consequences relating to the acquisition, ownership and disposition of New
Series A Preferred Stock by a beneficial owner thereof that is (i) a citizen or
resident of the U.S., (ii) a U.S. domestic corporation or (iii) otherwise
subject to U.S. federal income taxation on a net income basis.
Exchange of the Series A Preferred Stock. The exchange of the Series A
Preferred Stock for the New Series A Preferred Stock should not be a taxable
event to the holder for U.S. federal income tax purposes and, thus, the holder
should not recognize any taxable gain or loss as a result of such exchange.
Initial Tax Basis and Holding Period. Each initial holder's tax basis in
its shares of the New Series A Preferred Stock will be equal to such holder's
basis in the Series A Preferred Stock exchanged therefor, and such person's
holding period will trace back to the date of purchase of the Series A Preferred
Stock.
Dividends. Distributions with respect to the New Series A Preferred Stock,
whether in cash or in additional shares, will be treated as ordinary dividend
income to the extent of the Company's current or accumulated earnings and
profits as determined for U.S. federal income tax purposes. Except in limited
circumstances not expected to be applicable here, such dividends will not be
eligible for the dividends received deduction generally allowed to U.S.
corporations. Distributions 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 New Series A Preferred Stock, and any amounts distributed in excess of such
tax basis will be treated as gain from the sale or exchange of New Series A
Preferred Stock. However, as discussed below, the foregoing treatment would be
subject to certain modifications if the Company is considered a "controlled
foreign corporation" ("CFC").
Under existing rules and regulations, undeclared dividends are not taxable
until declared even if those dividends are cumulative and must be paid when the
shares are redeemed, pursuant to a call, put or mandatory redemption obligation.
It is possible, however, that this rule could be changed so that in some
circumstances such undeclared dividends would be currently taxable. If such
change were to occur, it is not possible to say whether it would apply to the
New Series A Preferred Stock, although if it were to apply it is likely that it
would apply prospectively. This change could be made by regulation and therefore
does not require Congressional action.
Redemption of Preferred Stock. A redemption of New Series A Preferred Stock
for cash will be taxable as a distribution in exchange for the stock. Generally,
a redemption will result in capital gain or loss equal to the difference between
the amount of cash received and the stockholder's tax basis in the stock
redeemed and will be long-term if the stock was owned for more than one year.
However, any portion of the redemption price attributable to declared but unpaid
dividends or dividend arrearages will be taxable as a dividend to the extent of
earnings and profits.
Under certain circumstances, cash received in redemption of preferred stock
that is not attributable to dividend arrearages or declared but unpaid dividends
may nevertheless also be taxable as a dividend, rather than as an exchange. Such
a result could obtain in the event that the Company exercises or redeems less
than the full amount of a stockholder's shares of New Series A Preferred Stock
pursuant to one of its early redemption options. However, when, taking into
account all classes of stock in the Company, a stockholder either (1) completely
terminates its interest (other than as a creditor) in the redeeming company
(taking into account the attribution rules prescribed by the Code), (2)
experiences a substantial reduction in its interest in corporate management and
earnings as a result of the redemption and is a minority shareholder after the
redemption or (3) is a less than one percent stockholder and experiences any
reduction in its interest, the redemption proceeds will instead be treated as an
exchange and generally will give rise to capital gain or loss.
Redemption Premium. The Code requires that in certain circumstances the
excess of the redemption price of preferred stock over its issue price (a
redemption premium) be included in income, prior to receipt, as a constructive
dividend. However, this premium should not apply to the New Series A Preferred
Stock because the redemption price is not expected to exceed the issue price by
more than a de minimis amount, which will be the case if redemption occurs at
maturity. These rules could, however, apply in the event that the fair market
value of any distributed shares of New Series A Preferred Stock is less than
$25.00 on the date of distribution. While a redemption premium may be paid
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in the event that the New Series A Preferred Stock is redeemed prior to maturity
pursuant to one of the issuer call options or the holder redemption option,
under current regulations any such redemption premium would not be taxable prior
to receipt.
Controlled Foreign Corporations. Each U.S. 10% Shareholder (as described
below) of a CFC must include in gross income for U.S. federal income tax
purposes its pro rata share of the CFC's "subpart F income," whether or not such
income is distributed by the CFC to such shareholder. Any U.S. corporation,
citizen, resident, partnership, estate or trust that owns, directly or
indirectly through foreign persons, or is considered to own 10 percent or more
of the total combined voting power of all classes of stock of the foreign
corporation will be considered to be a "U.S. 10% Shareholder." Subpart F income
includes insurance income and FDAP income. A foreign insurance company, such as
CGA, will be treated as a CFC only if U.S. 10% Shareholders collectively own
more than 25 percent of the total combined voting power or total value of the
corporation's stock for an uninterrupted period of 30 days or more during any
tax year. In the case of all other foreign corporations, such as the Company,
the test is generally the same except that more than 50 percent is substituted
for more than 25 percent.
Except as provided below, the Company's By-laws will attempt to limit the
direct and indirect voting power of each holder of the Company's stock so that
no U.S. person, other than a holder of New Series A Preferred Stock or Series A
Preferred Stock during an Event of Non-Compliance, will be entitled to votes
representing 10 percent or more of the Company's voting power. In addition, the
Company's Bye-laws will provide that the Company's voting rights in CGA will be
exercised in accordance with the proportional voting rights of the shareholders
of the Company so that no U.S. person will be entitled indirectly to votes
representing 10% or more of CGA's voting power. Accordingly, Management expects
that neither the Company nor CGA is or will become a CFC. However, given the
Code's broad constructive ownership rules, it is possible that stock in the
Company owned by one or more persons will be attributed to another person that
also owns stock in the Company and could result in a person inadvertently
becoming a U.S. 10% shareholder and/or the Company becoming a CFC, which in turn
could cause CGA to also become a CFC. In addition, if an Event of Non-Compliance
occurs, one or more holders of the New Series A Preferred Stock or the Series A
Preferred Stock could become a U.S. 10% Shareholder because upon the happening
of one of these events, the holders of the New Series A Preferred Stock and the
Series A Preferred Stock as a class have the right to appoint additional
directors to the Board. Accordingly, in such case, it is possible that each of
the Company and CGA could become a CFC. Nonetheless, so long as a shareholder of
the Company is not itself a U.S. 10% Shareholder and, as expected (and explained
below), CGA does not have RPII that is currently taxable to U.S. shareholders,
the classification of the Company or CGA as a CFC will have no adverse effect on
such shareholder. Therefore, U.S. persons who might directly or through
attribution acquire stock possessing 10 percent or more of the combined voting
power of the Company should consider the possible application of the CFC rules.
Related Person Insurance Income Rules. Certain provisions of the Code will
apply to off-shore insurance companies such as CGA, if both (A) at least 25% of
the value or voting power of an insurance company's stock is held (directly or
indirectly through foreign entities) by U.S. persons (which includes all U.S.
shareholders, not just U.S. 10% Shareholders), and (B) (i) at least 20% of an
insurance company's gross insurance income is RPII (as described below) and (ii)
at least 20% of the voting power or the value of an insurance company's stock is
owned, directly or indirectly, by U.S. persons or persons related thereto which
are insured or reinsured (directly or indirectly) by the insurance company or
persons "related" to such insureds or reinsureds (the "RPII CFC Rule"). RPII is
income (investment income and premium income) from the direct or indirect
insurance or reinsurance of any U.S. person who holds (directly or indirectly
through foreign entities) such insurance company's stock or a person "related"
to such a U.S. holder of such insurance company's stock. Generally, the term
"related" person for this purpose means someone who controls or is controlled by
the U.S. person or someone who is controlled by the same person or persons that
control such U.S. person. "Control" exists where a person owns more than 50% in
value or voting power of a corporation's stock, after applying certain
constructive ownership rules.
Management expects that CGA will take such steps as are necessary to ensure
that less than 20% of CGA's gross insurance income is RPII or that less than 20%
of the voting power or value of the Company's stock is owned by persons insured
or reinsured (directly or indirectly) by CGA or "related" to such insureds or
reinsureds.
CGA may insure risks on behalf of St. George without creating RPII,
provided no U.S. person owns directly or constructively more than 50% of the
vote or value of St. George's, and hence St. George I's, stock. Upon the initial
distribution of the St. George Securities, no U.S. person owned directly or
constructively more than 50% of the vote or value of St. George stock. Moreover,
St. George's Articles of Association contain restrictions on the sale of the St.
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George securities that should effectively preclude any U.S. person from owning
more than 50% of the vote or value of the St. George stock. Therefore,
Management expects that no RPII will result from insuring investments of St.
George I.
In light of the foregoing, management believes that less than 20% of the
gross insurance income of CGA for any taxable year will constitute RPII.
However, if 20% or more of the gross insurance income of CGA for any taxable
year were to constitute RPII and 20% or more of the voting power or value of CGA
stock is held, directly or indirectly, by U.S. insureds or reinsureds or by
persons related thereto, each direct and indirect U.S. holder of securities
would be taxable currently on its allocable share of CGA's RPII regardless of
whether such holder is a "U.S. 10% Shareholder" and regardless of whether such
holder is an insured or related to an insured. For this purpose, all of CGA's
RPII would be allocated solely to U.S. holders, but no holder would be allocated
RPII in excess of its ratable share of CGA's total income.
In order to determine how much RPII, if any, CGA has earned in each fiscal
year, Management expects to ask its policyholders whether they or any persons
related to them own shares of the Company and are U.S. persons. In addition,
after each fiscal year ends, CGA will send a letter to each person who was a
policyholder during that year asking the policyholder to represent whether
during the year it was a U.S. person owning stock of the Company or was related
to such a person. There can be no assurance that this procedure will enable the
Company to identify all of CGA's income which may be considered RPII. For any
taxable year in which the Company determines that CGA's gross RPII is 20% or
more of CGA's gross insurance income for the year, the Company may also seek
information from its shareholders as to whether beneficial owners of its shares
at the end of the year are U.S. persons. To the extent the Company is unable to
determine whether a beneficial owner of shares is a U.S. person, the Company may
assume that such owner is not a U.S. person for purposes of apportioning RPII,
thereby increasing the per share RPII amount for all other shareholders who are
known to be U.S. persons.
Information Reporting. If CGA meets the RPII CFC Rule in a given tax year,
each U.S. person who is a shareholder of the Company on the last day of the
Company's fiscal year must attach a Form 5471 to such shareholder's income tax
or information return for the period which includes that date. In the event that
CGA's gross RPII constitutes 20% or more of its gross insurance income (which is
not anticipated) and no other exception applies that would prevent CGA from
being subject to the RPII CFC Rule, the Company intends to provide Form 5471 to
its U.S. shareholders for attachment to their returns. The amount of the RPII
inclusions may be subject to adjustment based upon subsequent IRS examination. A
tax-exempt organization will be required to attach Form 5471 to its information
return in the circumstances described above. See "Unrelated Business Taxable
Income of tax-exempt Shareholders" below. Failure to file Form 5471 may result
in penalties.
In addition, U.S. persons who at any time own 5% or more in value of the
total outstanding shares of the Company have an independent obligation to file
Form 5471 with respect to such shares, and should consult with their tax advisor
regarding this and other possible reporting requirements.
Unrelated Business Taxable Income of Tax-Exempt Shareholders. Subpart F
insurance income (which includes RPII) allocable to U.S. tax-exempt
organizations is likely to be treated as unrelated business taxable income
("UBTI"). Under a look-through rule, such income is treated as if it were
directly received by the tax-exempt organization and therefore will be
considered income from an unrelated business. While the look through rule
generally will not apply to subpart F insurance income attributable to insurance
of the tax-exempt organization's own risks or those of certain of its affiliates
("Exempt Subpart F Insurance Income"), it is unlikely that such subpart F
insurance income will be so traced. Rather, since subpart F insurance income is
allocated to all U.S. 10% Shareholders, and RPII, if there is any, is allocated
to all U.S. persons who own stock, it is likely that any subpart F insurance
income that is allocated to a tax exempt shareholder, will be attributable to
risks other than its own or those of its affiliates. Nonetheless, to the extent
any tax-exempt shareholder is allocated Exempt Subpart F Insurance Income and
such income is so traceable, the income should not be UBTI. Investors are
advised to consult their own tax advisors regarding the application of this
rule.
Dispositions of New Series A Preferred Stock by U.S. Persons, Generally.
Subject to the discussions below relating to "Disposition of New Series A
Preferred Stock by U.S. Persons Who are Not U.S. 10% Shareholders" and
"Disposition of New Series A Preferred Stock by U.S. 10% Shareholders," U.S.
persons will, upon the sale or exchange of New Series A Preferred Stock,
generally recognize gain or loss for federal income tax purposes equal to the
excess of the amount realized upon such sale or exchange over such person's
federal income tax basis for such Series A Preferred Stock. However, in certain
circumstances described below, gain may be recharacterized, in whole or in part,
as a dividend.
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Disposition of New Series A Preferred Stock by U.S. Persons Who are Not
U.S. 10% Shareholders. As noted above, in the case of a U.S. person who owns New
Series A Preferred Stock but is not a U.S. 10% Shareholder, RPII may be
allocable to such holder's Securities in the Company during the period of
ownership but not taxed to him because less than 20 percent of the Company's
Securities are owned by persons generating RPII or less than 20 percent of CGA's
gross insurance income is RPII. Upon such holder's sale or exchange of New
Series A Preferred Stock at a gain, however, there is a reasonable likelihood
that an amount of such gain equal to such holder's allocable share of untaxed
RPII will be taxable as a dividend. Moreover, the IRS has an arguable position
that the amount of gain so taxed as a dividend will be equal to all the earnings
and profits allocable to the U.S. holder during the period that such holder held
the New Series A Preferred Stock (whether or not CGA has RPII). Dewey Ballantine
believes that this position would not be correct, but due to the absence of
clarifying regulations, there can be no assurance that the IRS will not take
this position. If the IRS were to take this position and were to prevail, for
individuals, this would mean that the amount of gain taxed as a dividend would
bear tax at the rates applicable to ordinary income rather than at the currently
lower rates applicable to long-term capital gain. The rates applicable to
corporate shareholders would not be affected, however, since corporations pay
tax on capital gains at the same rates as they pay on ordinary income.
If, as Dewey Ballantine believes, only the untaxed RPII would be subject to
dividend characterization, the selling shareholder nevertheless has the burden
of showing the amount of untaxed RPII allocable to the New Series A Preferred
Stock sold. The Company will keep records showing what it believes to be the
untaxed RPII allocable to each share of New Series A Preferred Stock and will,
upon reasonable request, provide any owner or prior owner of New Series A
Preferred Stock with such information.
Disposition of New Series A Preferred Stock by U.S. 10% Shareholders. To
the extent that the income of CGA is taxable currently to a U.S. 10% Shareholder
as subpart F income (which includes RPII), gain from the sale of Series A
Preferred Stock by such U.S. 10% Shareholder will not be recharacterized as a
dividend, except to the extent of such U.S. 10% Shareholder's allocable share of
subpart F income in the year of sale.
Uncertainty as to application of RPII. Regulations interpreting the RPII
provisions of the Code exist only in proposed form. It is not certain whether
these regulations will be adopted in their proposed form or what changes might
ultimately be made thereto when they are finalized, or whether any such changes,
as well as any interpretation or application of the RPII rules by the IRS, the
courts or otherwise, might have retroactive effect. In addition, there can be no
assurance that the IRS will not challenge any determinations by the Company or
CGA as to the amount, if any, of RPII that should be includible in the income of
a holder of Series A Preferred Stock or that the amounts of the RPII inclusions
will not be subject to adjustment based upon subsequent IRS examination.
Accordingly, the meaning of the RPII provisions and the application thereof to
the Company and its Subsidiaries is uncertain. Each U.S. person which owns
Series A Preferred Stock has been advised and each such person which is
considering an investment in New Series A Preferred Stock is again advised to
consult a tax advisor as to the implications of RPII on its investment.
Foreign Tax Credit. Because it is believed that currently U.S. persons own
at least 50 percent of the Company's stock and such ownership distribution is
anticipated to continue in the future, only a portion of both the dividends paid
by the Company (including any gain from the sale of New Series A Preferred Stock
that is treated as a dividend) and any subpart F income of its Subsidiaries
(including RPII of CGA) may be treated as foreign source income for purposes of
computing a shareholder's U.S. foreign tax credit limitation. The Company will
consider providing shareholders with information regarding the portion of such
subpart F income or dividend inclusions constituting foreign source income to
the extent such information is reasonably available. It is likely that
substantially all of such income that is foreign source will constitute either
"passive" or "financial services" income for foreign tax credit limitation
purposes. Thus, U.S. shareholders with excess foreign tax credits may not be
able to utilize such excess foreign tax credits to reduce U.S. tax on such
income.
Passive Foreign Investment Companies. Special U.S. federal income tax rules
apply to foreign corporations that are "passive foreign investment companies."
In general, a foreign corporation will be a PFIC if 75 percent or more of its
income constitutes "passive income" or 50 percent or more of its assets produce
passive income. In the case of a company that is a PFIC, its shareholders who
are U.S. persons would be subject to a penalty tax at the time of their sale of,
or receipt of an "excess distribution" with respect to their Securities unless
they elected to be treated as a "qualified electing fund" (or "QEF"), in which
case they would be currently taxable on their share of each year's income. In
general, a shareholder receives an "excess distribution" if the amount of the
distribution is more than 125 percent of the average distribution with respect
to their stock during the three preceding taxable years (or shorter period
during which the taxpayer held the stock). In general, the penalty tax is
equivalent to an interest charge on taxes
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that are deemed due but not paid during the period that the shareholder owned
the shares, computed by assuming that the excess distribution or gain (in the
case of a sale) with respect to the securities was received in equal portions
and taxed at the highest applicable tax rate throughout the holder's period of
ownership. The interest charge is equal to the applicable rate imposed on
underpayments of U.S. federal income tax for such period.
The PFIC statutory provisions contain an express exception from the
definition of passive income for income "derived in the active conduct of an
insurance business by a corporation which is predominantly engaged in an
insurance business." This exception is intended to ensure that income derived by
a bona fide insurance company is not treated as passive income, except to the
extent such income is attributable to financial reserves in excess of the
reasonable needs of the insurance business.
The PFIC statutory provisions contain a look-through rule which 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 percent of the value of its
stock. Because the Company is expected to own all of the outstanding stock of
CGA and CGAIM, the look-through rule should apply to treat the Company as owning
the assets and receiving the income of CGA and CGAIM directly for purposes of
determining whether the Company is a PFIC in any given year.
In Management's view, the Company, through its principal subsidiary, CGA,
will be predominantly engaged in an insurance business and will not have
financial reserves in excess of the reasonable needs of CGA's insurance
business. While no explicit guidance is provided by the statutory language and
regulations on these provisions have not been issued, Dewey Ballantine believes
that under the look-through rule the Company should be deemed to own the assets
and to have received the income of CGA, its insurance subsidiary, directly for
purposes of determining whether the Company qualifies for the aforementioned
insurance exception. This interpretation of the look-through rule is consistent
with the legislative intention generally to exclude bona fide insurance
companies from the application of the PFIC provisions; however, until definitive
regulations are issued there can be no assurance that the look through rule will
be applied in this fashion.
If, however, the look-through rule does not apply to the Company with
respect to the income and assets of CGA in the manner described above, then the
Company might be a PFIC. Moreover, there is a risk that the CGA Fund Guaranty
would be viewed as equity in St. George, in which event CGA would be viewed as
owning virtually all of St. George I's equity. This risk arises due to the fact
that St. George I intends the Loan Facility and other borrowings to provide 99%
of the funds used to acquire its investment portfolio and for the collateral
value of the investment portfolio and CGA's Fund Guaranty to represent the
principal credit support for the Loan Facility lenders. If the CGA Fund Guaranty
were to be viewed as equity, the "look through" rule would apply to treat CGA as
if it owned virtually all of St. George I's assets and earned virtually all of
its income, and since both such assets and income would be passive, this might
result in the Company becoming a PFIC. Moreover, if CGA were considered to own
substantially all of St. George I's equity, there is also a risk that CGA's
premium income from St. George I would not be viewed as insurance income.
Nonetheless, there are substantial arguments against treating CGA as owning
substantially all of St. George I's equity by reason of the insurance that it
writes for St. George I, with one of the strongest being that the premiums that
CGA will charge St. George I for insurance will be based upon the same criteria
as that used to determine the premium charged to unrelated third parties and
therefore should be viewed as an arm's length premium. It is the opinion of
Dewey Ballantine that CGA should not be viewed as holding equity in St. George I
and therefore the look through rules should not apply with respect to St. George
I's assets or income and the premiums derived by CGA from St. George I should be
viewed as active income derived from the insurance business. However, given the
relatively small amount of equity in St. George I, the importance of the CGA
Fund Guaranty to the availability of the Loan Facility, the fact that initially
the St. George Securities will be held by shareholders of the Company and the
absence of authority directly on point, there is some risk that the IRS could
successfully treat CGA as owning most of St. George I's equity and apply the
look-through rule to cause CGA to be characterized as a PFIC. Therefore, each
U.S. person which owns Series A Preferred Stock and each U.S. person which is
considering an investment in the New Series A Preferred Stock and is not a
tax-exempt entity (which is unaffected by the PFIC rules under existing law) is
again advised to consult a tax advisor as to the effects of the PFIC rules.
NON-U.S. HOLDERS
Subject to certain exceptions, persons that are not U.S. persons will be
subject to U.S. federal income tax on dividend distributions with respect to,
and gain realized from the sale or exchange of, Series A Preferred Stock only if
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such dividends or gains are effectively connected with the conduct of a trade or
business within the U.S. As described above, the exchange of the Series A
Preferred Stock for the New Series A Preferred Stock should not be a taxable
event. Management believes that nonresident alien individuals will not be
subject to U.S. federal income estate tax with respect to New Series A Preferred
Stock of the Company.
ALL HOLDERS OF SERIES A PREFERRED STOCK
Management does not expect the Company to pay dividends on the New Series A
Preferred Stock through paying agents or custodians located in the U.S., but if
such were the case, the U.S. custodian or payor would be required to satisfy
certain information reporting requirements. In addition, in such case, a holder
of New Series A Preferred Stock could be subject to backup withholding at the
rate of 31 percent with respect to dividends paid to such persons, unless such
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
The backup withholding tax is not an additional tax and may be credited against
a holder's regular U.S. federal income tax liability. No backup withholding
would occur if the Company were to directly pay any dividends on the New Series
A Preferred Stock or were to use a non-U.S. paying agent or custodian to do so.
Except as discussed above with respect to backup withholding, dividends
paid by the Company will not be subject to a U.S. withholding tax.
The tax considerations could be different if certain of the structures
described above that are intended to mitigate negative tax consequences were to
be modified or eliminated, as the Board and shareholders will have the
authority to do.
LEGAL MATTERS
The validity of the New Series A Preferred Stock will be passed upon for
the Company, as to certain matters of Bermuda law by Conyers, Dill & Pearman,
and as to certain matters of United States tax law, by Dewey Ballantine LLP, New
York, New York.
EXPERTS
The Financial Statements of the Company as of and for the nine months ended
December 31, 1997 and for the period from June 21, 1996 to March 31, 1997
included in this Prospectus and elsewhere in this registration statement have
been audited by Coopers & Lybrand, independent public accountants as indicated
in their report with respect thereto and are included herein in reliance upon
the authority of said firm as experts in giving said report.
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GLOSSARY
CERTAIN DEFINITIONS
Capitalized terms used in the foregoing description of the Series A
Preferred Stock, but not otherwise defined herein, have the meanings set forth
below.
"AAA Investment" means any investment in:
(i) U.S. Government Obligations or securities that would be U.S.
Governmental Obligations if such securities were not callable or redeemable
at the option of the issuer thereof;
(ii) debt securities or debt instruments or Redeemable Stock with a
rating of AA or higher by S&P, AAA or higher by Moody's or the equivalent
of such rating by S&P and Moody's or the equivalent of such rating by any
other nationally recognized securities rating agency; or
(iii) debt securities or debt instruments or Redeemable Stock with a
rating of Class 1 or higher by the NAIC and issued or guaranteed by the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, the Governmental National Mortgage Association, the Student
Loan Marketing Association or the Federal Home Loan Bank.
"Affiliate" of any specified Person means:
(i) any other Person, directly or indirectly, controlling or
controlled by or under direct or indirect common control with such
specified Person;
(ii) any other Person who is a director or officer (a) of such
specified Person, (b) of any Subsidiary of such specified Person or (c) of
any Person described in clause (i) above; or
(iii) any beneficial owner of shares representing 10% or more of the
total voting power of the Voting Stock of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof. For the purposes of
this definition, "control" when used with respect to any Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling: and "controlled" have meanings
correlative to the foregoing.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP; and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Certified Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such by the Secretary or an Assistant Secretary of the Company.
"Change of Control" means an event of series of events by which (a) any
"person" or "group" (as defined in Section 13(d)(3) and 14(d) of the Exchange
Act), other than one or more Specified Holders, is or becomes the "beneficial
owner" (as defined under Rule 13d-3 of the Exchange Act), directly or
indirectly, of at least 35% of the total voting power of the Voting Stock of the
Company; (b) after June 17, 1997 and the election of the first full Board of
Directors, during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved by
a vote of 66-2/3% of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) shall cease for any reason to
constitute 66-2/3% of the members of the Board of Directors of the Company then
still in office, provided that, in the event that a "person" or "group" (as
defined in Section 13(d)(3) and 14(d) of the Exchange Act), other than Specified
Holders, that is the "beneficial owner" (as defined under Rule 13d-3 of the
Exchange Act), directly or indirectly, of less than 35% of the Voting Stock of
the Company is able to elect a majority of the Board of Directors of the Company
pursuant to an agreement with the
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company or any of its Subsidiaries, a Change of Control shall be deemed to have
occurred; or (c) the Company consolidates with or merges or amalgamates into, or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any Person consolidates with or mergers or amalgamates into the
Company, in either event pursuant to a transaction in which any Voting Stock of
the Company outstanding immediately prior to the effectiveness thereof is
reclassified or changed into or exchanged for cash, securities or property,
unless (i) such Change of Control arises from a transaction between the Company
and a Restricted Subsidiary thereof, or (ii) such Change of Control arises from
a transaction involving an exchange of Voting Stock by the holders of the Voting
Stock of the company at such time for Voting Stock of a surviving entity
immediately following which such holders own at least 50% of the outstanding
Voting Stock of such surviving entity and upon consummation of which none of the
events described in clause (a) or (b) shall have occurred in respect of such
surviving entity.
"Consolidated Net Income" means, for any period, the net income or loss of
the Company and its consolidated Subsidiaries as determined in accordance with
GAAP; provided, that there shall not be included in such Consolidated Net
Income:
(i) any net income of any Person if such Person is not a Restricted
Subsidiary, except that, subject to the limitations contained in (iv)
below, the Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to a
Restricted Subsidiary, to the limitations contained in clause (iii) below),
(ii) any net income or loss of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition,
(iii) any net income or loss of any Restricted Subsidiary if such
Subsidiary is subject to restriction, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that subject to
the limitations contained in (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that
could have been distributed (whether or not actually distributed) by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution to another Restricted Subsidiary,
to the limitation contained in this clause),
(iv) any gain or loss realized upon the sale or other disposition of
any asset of the Company or its consolidated Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise
disposed of in the ordinary course of business and any gain or loss
realized upon the sale or other disposition of any capital stock of any
Person,
(v) any extraordinary gain or loss and
(vi) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i)the par
or stated value of all outstanding capital stock of the Company plus (ii)
paid-in capital or capital surplus relating to such capital stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Redeemable Stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person,
including any such obligation, direct or indirect, contingent or otherwise, of
such Person:
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(i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person
(whether arising by agreement to purchase assets, goods, securities or
services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or
(ii) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in
part); provided, that the term "Guarantee" shall not include guarantees or
indemnities required to be given in connection with obtaining services in
the ordinary course of business, endorsements for collection or deposit in
the ordinary course of business or guarantees of lease obligations not
exceeding $1 million in the aggregate. The terms "Guarantee," "Guaranteed,"
"Guaranteeing" and "Guarantor" shall each have a correlative meaning.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, that any Indebtedness or capital stock of a Person existing at
the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary, provided, further, that neither the accrual of
interest not the accretion of original issue discount shall be considered an
Incurrence of Indebtedness. The terms "Incurable," "Incurred," "Incurrence" and
"Incurring" shall each have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal (accredited value in the case of Indebtedness
incurred with original issue discount) of and premium (if any) in respect
of indebtedness of such Person for borrowed money;
(ii) the principal of and premium (if any) in respect of obligations
of such Person evidenced by bonds, debentures, notes or other similar
instruments;
(iii) all Capitalized Lease Obligations of such Person;
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than one year after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services;
(v) all obligations of such Person in respect of letters of credit,
bankers' acceptances or other similar instruments or credit transactions
(including reimbursement obligations with respect thereto);
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Redeemable Stock of such
Person or any Redeemable Stock or Preferred Stock of such Person's
Subsidiaries (but excluding, in each case, any accrued dividends);
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, that if such Indebtedness is not assumed by such Person, the
amount of such Indebtedness shall be the lesser of (a) the Fair Market
Value of such asset at such date of determination and (b) the amount of
such Indebtedness of such other Person;
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person; and
(ix) to the extent not otherwise included in this definition, net
payment obligations in respect of interest rate agreements and currency
exchange protection agreements.
For purposes of this definition, the maximum fixed redemption, repayment or
repurchase price of any Redeemable Stock that does not have a fixed redemption,
repayment or repurchase price shall be calculated in accordance with the terms
of such Redeemable Stock as if such Redeemable Stock were redeemed, repaid or
repurchased on any date on which Indebtedness shall be required to be
determined; provided, that if such Redeemable Stock is not then permitted to be
redeemed, repaid or repurchased, the redemption, repayment or repurchase price
shall be the book value of such Redeemable Stock as reflected in the most recent
financial statements of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date. This definition is not meant to include the commitment of the Company
to acquire equity securities of CGA with the proceeds of the sale of any Series
B Preferred Stock pursuant to a Commitment Termination Event.
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"Invested Assets" means:
(i) with respect to any Person which is an insurance company that
files statutory financial statements with a governmental agency or
authority, the amount shown as the line item "Cash and Invested Assets" (or
any equivalent line item(s) setting forth the type of assets which would be
reflected in the line item "Cash and Invested Assets" on June 17, 1997) in
such insurance company's balance sheet included in its most recent
statutory financial statements filed with such governmental agency or
authority; and
(ii) with respect to any other Person, the amount on a consolidated
basis of its investments as reflected on such Person's most recent balance
sheet.
"Investment Grade Securities" means:
(i) U.S. Government Obligations;
(ii) any certificate of deposit, maturing not more than 270 days after
the date of acquisition, issued by, or time deposit of, a commercial
banking institution that has combined capital and surplus of not less than
$100 million or its equivalent in foreign currency, whose debt is rated at
the time as of which any investment therein is made, "A" (or higher)
according to S&P or Moody's, or the equivalent of such rating by any other
nationally recognized securities rating agency;
(iii) commercial paper, maturing not more than 270 days after the date
of acquisition, issued by a corporation with a rating, at the time as of
which any investment therein is made, of "A-1" (or higher) according to S&P
or "P-1" (or higher) according to Moody's, or the equivalent of such rating
by any other nationally recognized securities rating agency;
(iv) any bankers acceptances or any money market deposit accounts, in
each case, issued or offered by any commercial bank having capital and
surplus in excess of $100 million or its equivalent in foreign currency,
whose debt is rated at the time as of which any investment therein is made,
"A" (or higher) according to S&P or Moody's, or the equivalent of such
rating by any other nationally recognized securities rating agency;
(v) any other debt securities or debt instruments with a rating of
"BBB-" or higher by S&P, "Baa-3" or higher by Moody's Class "2" or higher
by the NAIC or the equivalent of such rating by S&P, Moody's or the NAIC,
or the equivalent of such rating by any other nationally recognized
securities rating agency;
(vi) any fund investing exclusively in investments of the types
described in clauses (i) through (v) above.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Liquidation Value" for each outstanding share of Series A Preferred Stock
is the Series A Preferred Stated Value for such share plus any accrued and
unpaid dividends thereon.
"Majority Controlled Affiliate" of any specified Person means (A) any other
Person (i) who beneficially owns a majority of the Voting Stock of such
specified Person or (ii) a majority of whose Voting Stock is beneficially owned
by (a) such specified Person or (b) a Person that beneficially owns a majority
of such specified Person's Voting Stock or (B) in the case of specified Persons
who are natural Persons, any relatives or structures for the benefit of
relatives of such specified Person.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"NAIC" means the National Association of Insurance Commissioners and its
successors.
"Net Cash Proceeds" of a Specified Asset Sale means the cash proceeds of
such sale net of attorney's fees and other fees actually incurred in connection
with such sale and net of taxes paid or payable as a result thereof.
"Permitted Company Indebtedness And Preferred Stock" means:
(a) Preferred Stock issued as of June 17, 1997 under the Investment
Units Subscription Agreement and the Series A Preferred Stock Subscription
Agreement, each as in effect on June 17, 1997 and not as amended
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thereafter, Preferred Stock issued pursuant to the Commitments and
Preferred Stock issued in payment of dividends in respect of such Preferred
Stock's terms as in effect on June 17, 1997 and not as amended thereafter
(for the avoidance of doubt, the foregoing includes, without limitation,
Preferred Stock issued as dividends on such dividends);
(b) Indebtedness or Preferred Stock Incurred in exchange for, or the
proceeds of which are used to, redeem Preferred Stock referred to in clause
(a) of this definition or refinance the Indebtedness or redeem Preferred
Stock referred to in this clause (b), provided that (i) the aggregate
principal amount of such Indebtedness or the aggregated stated value of
such Preferred Stock is not in excess of the aggregate stated value of
Preferred Stock being redeemed or the aggregate principal amount of the
Indebtedness being refinanced, (ii) such Indebtedness or Preferred Stock
has a final maturity or redemption no earlier than the Indebtedness being
refinanced or Preferred Stock being redeemed, and (iii)such Indebtedness or
Preferred Stock has an Average Life at the time such Indebtedness or
Preferred Stock is Incurred that is equal to or greater than the Average
Life of the Indebtedness being refinanced or Preferred Stock being
redeemed; provided, further, that, in the case of Preferred Stock, such
Preferred Stock is at least as subordinated to the Series A Preferred Stock
as the Preferred Stock being redeemed and, in the case of both Preferred
Stock and Indebtedness, the covenants relating to such Indebtedness or
Preferred Stock are no more restrictive in the aggregate than those of the
Preferred Stock being redeemed or the Indebtedness being refinanced;
(c) Permitted Restricted Subsidiary Indebtedness And Preferred Stock
Incurred indirectly through a Restricted Subsidiary and Guarantees of
Permitted Restricted Subsidiary Indebtedness And Preferred Stock;
(d) Insurance Obligations;
(e) Indebtedness of the Company (other than pursuant to the foregoing
clauses) in an amount which, together with the amount of outstanding
Indebtedness under clause (e) of "Permitted Restricted Subsidiary
Indebtedness And Preferred Stock," is less than or equal to $12.5 million.
"Permitted Investment" means:
(i) any investment in any Person that is a Restricted Subsidiary of
the Company at the time, or becomes a Restricted Subsidiary (under
Restricted and Unrestricted Subsidiaries above) as a result of, such
investment;
(ii) any investment in Investment Grade Securities;
(iii) any investment not permitted under clauses (i), (ii) and (iv),
provided that at the date such investment under this clause (iii) is made
and after giving effect thereto, such investment, together with all other
investments under this clause (iii), does not exceed 5% of the total
Invested Assets of the Company and its Restricted Subsidiaries under
clauses (ii) and (iii); and
(iv) receivables owing to any Restricted Subsidiary or the Company in
the ordinary course of business.
"Permitted Restricted Subsidiary Indebtedness And Preferred Stock" means:
(a) Indebtedness under interest rate or currency exchange protection
agreements, provided that (i) the obligations under such agreements are
related to payment obligations on Indebtedness permitted under Limitation
on Restricted Subsidiary Indebtedness and Preferred Stock above, (ii) such
agreements are entered into in the ordinary course of business and not for
speculative purposes and (iii) the notional amount of any such agreement
does not exceed the principal amount of the Indebtedness to which such
agreement relates;
(b) Indebtedness and Preferred Stock issued to and held by the Company
or a Restricted Subsidiary of the Company (but only so long as such
indebtedness and Preferred Stock are held or owned by the Company or a
Restricted Subsidiary of the Company);
(c) Indebtedness and Preferred Stock permitted by clause (a) or (b) of
Limitations on Restricted Subsidiary Indebtedness and Preferred Stock
above;
(d) Indebtedness Incurred by CGA through the sale of a promissory note
to St. George in exchange for the cash proceeds of the issuance of
Preferred Stock by St. George, provided that (i) such cash proceeds consist
of an amount equal to the principal amount of such promissory note and
(ii) CGA invests such cash proceeds in Investment Grade Securities; and
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(e) Indebtedness of Restricted Subsidiaries (other than pursuant to
the foregoing clauses) which, together with the amount of outstanding
Indebtedness under clause (e) of "Permitted Company Indebtedness And
Preferred Stock," is less than or equal to $12.5 million.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated association, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the capital stock of any corporation,
means capital stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of capital stock of any other class of such
corporation.
"Redeemable Stock" means, with respect to any Person, any capital stock
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness (other than Preferred
Stock) or (iii) is redeemable at the option of the holder thereof, in whole or
in part.
"Restricted Payment" by the Company or any Restricted Subsidiary means:
(i) any declaration or payment of any dividend or making of any
distribution on or in respect of its capital stock (including any payment
in connection with any merger or consolidation involving the Company or any
Restricted Subsidiary thereof) except dividends or distributions payable
solely in capital stock (other than Redeemable Stock) of the Company or in
options, warrants or other rights to purchase such capital stock and except
dividends or distributions payable solely to the Company or a Restricted
Subsidiary thereof,
(ii) any purchase, repurchase, redemption, retirement or other
acquisition for value of any capital stock of the Company or any Restricted
Subsidiary thereof held by Persons other than the Company or a Restricted
Subsidiary thereof, or
(iii) making of any investment other than a Permitted Investment in
any Person.
"S&P" means Standard & Poor's Corporation and its successors.
"Sale/Leaseback Transactions" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"Specified Asset Sale" means any sale, lease, transfer, issuance or other
disposition of shares of capital stock of the Company or any Restricted
Subsidiary of the Company (other than shares issued under the Stock Warrant
Plans, property or assets (each referred to for purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries (including
any disposition by means of a merger, amalgamation, consolidation or similar
transaction) other than (i) a disposition to a Restricted Subsidiary, (ii) a
disposition of property or assets (including Permitted Investments) in the
ordinary course or (iii) a disposition that is permitted by the provisions of
Merger, Consolidation and Sale of Assets above.
"Specified Holders" means the holders of capital stock of the Company as of
June 17, 1997 and their Majority Controlled Affiliates.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of capital stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Trade Payables" means, with respect to any Person, any accounts payable or
any Indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business of such
Person in connection with acquisition of goods or services.
69
<PAGE>
"U.S. Government Obligations" means securities that are:
(i) direct obligations of the United States of America for the timely
payment of which its full faith and credit is pledged or
(ii) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the United States of America the timely
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such
U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided, that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal of or interest on the U.S. Government
Obligation evidenced by such depository receipt.
"Voting Stock" of any Person means all classes of capital stock of such
Person then outstanding and entitled to vote in the election of directors.
"Wholly-Owned Restricted Subsidiary" means a Restricted Subsidiary of the
Company, all the capital stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly Owned Restricted Subsidiary of
the Company.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CGA Group, Ltd. and Subsidiaries
Report of Independent Accountants ....................................... F-2
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1997 .................................................... F-3
Consolidated Statements of Operations for the Nine Months
Ended December 31, 1997 and for the period from June 21,
1996 to March 31, 1997 ................................................. F-4
Consolidated Statement of Mezzanine and Shareholders'
Equity for the Nine Months Ended December 31, 1997
and for the period from June 21, 1996 to March 31, 1997 ................ F-5
Consolidated Statement of Cash Flows for the Nine Months
Ended December 31, 1997 and for the period from
June 21, 1996 to March 31, 1997 ........................................ F-7
Consolidated Statement of Cash Flows From Operating
Activities for the Nine Months Ended December 31, 1997
and for the period from June 21, 1996 to March 31, 1997 ................ F-8
Notes to Consolidated Financial Statements .............................. F-9
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Directors and Shareholders of CGA Group, Ltd.
We have audited the consolidated balance sheets of CGA Group, Ltd. and
Subsidiaries as of December 31, 1997 and March 31, 1997 and the related
consolidated statements of Mezzanine and shareholders' equity, operations and
cash flows for the nine months ended December 31, 1997 and the period from June
21, 1996, (the date of incorporation), to March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CGA Group Ltd.
and Subsidiaries as of December 31, 1997 and March 31, 1997, and the
consolidated results of their operations and their cash flows for the nine
months ended December 31, 1997 and the period from June 21, 1996, (the date of
incorporation), to March 31, 1997, in conformity with accounting principles
generally accepted in the United States of America.
COOPERS & LYBRAND
Chartered Accountants
January 31, 1998
F-2
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997 AND MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
Fixed maturities available for sale (at fair value)
(amortized cost--$121,664,671) ................................. $ 123,302,763 $ 0
Cash and short-term investments ................................. 7,199,106 121,742
Note receivable ................................................. 250,000 0
Premiums receivable ............................................. 447,172 0
Accrued interest receivable ..................................... 4,080,600 0
Deferred acquisition costs ...................................... 1,001,883 0
Client acquisition cost ......................................... 1,387,452 0
Other assets .................................................... 2,018,309 68
Organization costs .............................................. 4,421,353 11,980
------------- -------------
Total assets .................................................... $ 144,108,638 $ 133,790
============= =============
LIABILITIES
Unearned premiums ............................................... $ 270,576 $ 0
Provision for losses and loss adjustment expenses ............... 55,000 0
Accrued costs and expenses ...................................... 3,591,033 0
Loan payable .................................................... 0 121,000
------------- -------------
Total liabilities ............................................... 3,916,609 121,000
------------- -------------
MEZZANINE EQUITY
Preferred stock, $.01 par value, 20,000,000 shares authorized:
Series A ....................................................... 65,532,499 0
Series B ....................................................... 37,075,371 0
Dividends accrued on Series B .................................. 4,439,231 0
------------- -------------
Total mezzanine equity .......................................... 107,047,101 0
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 and $1 par value, 20,000,000 and 12,000 shares
authorized ..................................................... 91,000 12,000
Additional paid-in-capital ...................................... 42,086,353 0
Unrealized appreciation of investments .......................... 1,638,092 0
Retained earnings (deficit) ..................................... (10,670,517) 790
------------- -------------
Total shareholders' equity ...................................... 33,144,928 12,790
------------- -------------
Total liabilities, mezzanine and shareholders' equity ........... $ 144,108,638 $ 133,790
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
NINE MONTHS JUNE 21, 1996
ENDED TO
DECEMBER 31, MARCH 31,
1997 1997
--------------- ---------------
UNDERWRITING INCOME
Gross premiums written ....................... $ 773,571 $ 0
Unearned premiums ............................ (270,576) 0
------------ ------------
Net premiums earned .......................... 502,995 0
------------ ------------
INVESTMENT INCOME
Net investment income ........................ 2,955,601 801
Net realized gains on sale of fixed maturities 885,422 0
------------ ------------
3,841,023 0
------------ ------------
TOTAL REVENUES ............................... 4,344,018 801
------------ ------------
EXPENSES
Operating expenses ........................... 5,018,999 11
Acquisition costs ............................ 157,242 0
Commitment fees .............................. 323,836 0
Excess of loss facility ...................... 107,671 0
Losses and loss adjustment expenses .......... 55,000 0
------------ ------------
TOTAL EXPENSES ............................... 5,662,748 11
------------ ------------
NET INCOME (LOSS) FOR THE PERIOD ............. $ (1,318,730) $ 790
============ ============
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $(10,945,340) $ 790
BASIC AND FULLY DILUTED EARNINGS (LOSS)
PER COMMON SHARE ............................ $ (1.68) $ 0.07
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING .......... 6,522,313 12,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEZZANINE AND SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS JUNE 21, 1996
ENDED TO
DECEMBER 31, MARCH 31,
1997 1997
------------- -------------
<S> <C> <C>
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
Balance--beginning of period ...................................... $ 0 $ 0
Stock issued (2,600,000 shares) ................................... 26,000 0
Pay-in-kind dividends (196,534 shares) ............................ 1,965 0
------------- -------------
Balance--end of period ............................................ 27,965 0
------------- -------------
ADDITIONAL PAID-IN CAPITAL--SERIES A PREFERRED STOCK
Issuance of preferred stock ....................................... 64,974,000 0
Issuance costs .................................................... (4,571,319) 0
Pay-in-kind dividends paid ........................................ 4,911,381 0
Accretion to redemption value ..................................... 190,472 0
------------- -------------
Balance--end of period ............................................ 65,504,534 0
------------- -------------
TOTAL SERIES A .................................................... 65,532,499 0
------------- -------------
SERIES B PREFERRED STOCK
Balance--beginning of period ...................................... 0 0
Stock issued (1,600,000 shares) ................................... 16,000 0
------------- -------------
Balance--end of period ............................................ 16,000 0
------------- -------------
ADDITIONAL PAID-IN CAPITAL--SERIES B PREFERRED STOCK
Issuance of preferred stock ....................................... 39,984,000 0
Issuance costs .................................................... (3,008,190) 0
Accretion to redemption value ..................................... 83,561 0
------------- -------------
Balance--end of period ............................................ 37,059,371 0
------------- -------------
TOTAL SERIES B .................................................... 37,075,371 0
------------- -------------
Series B pay-in-kind dividends accrued in period .................. 4,439,231 0
------------- -------------
TOTAL MEZZANINE EQUITY ............................................ $ 107,047,101 $ 0
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEZZANINE AND SHAREHOLDERS' EQUITY--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS JUNE 21, 1996
ENDED TO
DECEMBER 31, MARCH 31,
1997 1997
------------- -------------
<S> <C> <C>
SHAREHOLDER'S EQUITY
COMMON STOCK
Balance--beginning of period ...................................... $ 12,000 $ 0
Stock redeemed (12,000 shares) .................................... (12,000) 0
Stock issued (9,100,000 and 12,000 shares) ........................ 91,000 12,000
------------- -------------
Balance--end of period ............................................ 91,000 12,000
------------- -------------
ADDITIONAL PAID-IN CAPITAL--COMMON
Issuance of Common Stock .......................................... 45,409,000 0
Issuance costs .................................................... (3,048,614) 0
Accretion of Series A Preferred Stock to redemption value ......... (190,472) 0
Accretion of Series B Preferred Stock to redemption value ......... (83,561) 0
------------- -------------
Balance--end of period ............................................ 42,086,353 0
------------- -------------
UNREALIZED APPRECIATION OF INVESTMENTS
Balance--beginning of period ...................................... 0 0
Unrealized appreciation of investments ............................ 1,638,092 0
------------- -------------
Balance--end of period ............................................ 1,638,092 0
------------- -------------
RETAINED EARNINGS (DEFICIT)
Balance--beginning of period ...................................... 790 0
Net income (loss) for the period .................................. (1,318,730) 790
Series A pay-in-kind dividends paid ............................... (4,913,346) 0
Series B pay-in-kind dividends accrued ............................ (4,439,231) 0
------------- -------------
Balance--end of period ............................................ (10,670,517) 790
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ........................................ $ 33,144,928 $ 12,790
============= =============
TOTAL MEZZANINE AND SHAREHOLDERS' EQUITY .......................... $ 140,192,029 $ 12,790
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS JUNE 21, 1996
ENDED TO
DECEMBER 31, MARCH 31,
1997 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
New cash used in operating activities ............................ $ (9,407,359) $ (11,258)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Purchases and sales of investments ........................... (122,094,014) 0
Purchase of fixed assets ......................................... (910,140) 0
Note receivable .................................................. (250,000) 0
------------- -------------
Net cash used in investing activities ............................ (123,254,154) 0
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Common Stock ....................................... (12,000) 0
Proceeds of issue of Series A Preferred Stock .................... 65,000,000 0
Issuance costs of Series A Preferred Stock ....................... (4,571,319) 0
Proceeds of issue of Series B Preferred Stock .................... 40,000,000 0
Issuance costs of Series B Preferred Stock ....................... (3,008,190) 0
Proceeds of issue of Common Stock ................................ 45,500,000 12,000
Issuance costs of Common Stock ................................... (3,048,614) 0
Loan (repaid) received ........................................... (121,000) 121,000
------------- -------------
Net cash provided by financing activities ........................ 139,738,877 133,000
------------- -------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS .................. 7,077,364 121,742
CASH AND SHORT-TERM INVESTMENTS--BEGINNING OF PERIOD ............. 121,742 0
------------- -------------
CASH AND SHORT-TERM INVESTMENTS--END OF PERIOD ................... $ 7,199,106 $ 121,742
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF CASH FLOWS FROM OPERATING ACTIVITIES
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS JUNE 21, 1996
ENDED TO
DECEMBER 31, MARCH 31,
1997 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) for the period ............................. $(1,318,730) $ 790
Changes in non-cash items:
Amortization of investments ................................. 1,314,765 0
Depreciation expense ........................................ 51,076 0
Realized gains on sale of investments ....................... (885,422) 0
Premiums receivable ......................................... (447,172) 0
Other receivables ........................................... (430,785) 0
Accrued interest ............................................ (4,080,600) 0
Prepaid expenses ............................................ (424,833) 0
Deferred acquisition costs .................................. (2,389,335) 0
Organization costs .......................................... (4,409,373) (11,980)
Other assets ................................................ (303,559) (68)
Unearned premiums ........................................... 270,576 0
Loss adjustment expenses .................................... 55,000 0
Accrued costs and expenses .................................. 3,591,033 0
----------- -----------
(8,088,629) (12,048)
----------- -----------
Net cash used in operating activities ........................ $(9,407,359) $ (11,258)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
1. BUSINESS AND ORGANIZATION
CGA Group, Ltd. (the "Company") is a holding company, which was
incorporated in Bermuda on June 21, 1996. The Company has two wholly-owned
subsidiaries. Commercial Guaranty Assurance, Ltd. ("CGA") was incorporated in
Bermuda on October 22, 1996. CGA is licensed as a class 3 insurer under the laws
of Bermuda with an AAA claims paying ability rating from Duff & Phelps Credit
Rating Company ("DCR"). CGA provides financial guaranty insurance of structured
securities, including commercial real estate, asset-backed, and other
securities. The Company, CGA and all of their employees are based in Hamilton,
Bermuda. CGA Investment Management, Inc. ("CGAIM") was incorporated in Delaware,
U.S.A. in July 1996 by the founders of the Company and was acquired at nominal
cost to the Company on June 9, 1997. The purchase method of accounting for the
CGAIM acquisition was used. There was no goodwill acquired and no contingent
payments, options, or commitments exist. CGAIM had not commenced operations
prior to its acquisition by the Company. CGAIM is an investment advisor and
provides financial advisory services to a variety of clients. CGAIM and its
employees are based in New York City, New York.
The Company's first fiscal year end was March 31, 1997. The Company
subsequently changed its fiscal year end to December 31.
Operations commenced following the completion of the Company's private
placement offering which occurred on June 17, 1997 (the "Recapitalization").
Accordingly, the December 31, 1997 financial statements reflect approximately
six and one half months of operations under the Company's new capital structure.
Much of the Company's focus during this period was on post closing matters,
personnel, office relocations, operating systems, and marketing. Revenues during
the period were derived primarily from the Company's investment portfolio.
The initial capitalization of the Company consisted of 12,000 common shares
with a par value of $1.00 per share. All 12,000 shares were redeemed on June 17,
1997 at which time the Company completed its Recapitalization.
The Company issued 2.6 million shares of Series A Preferred Stock with a
par value of $.01 per share at a price of $25 per share, with a 13.75% quarterly
compounding dividend paid in additional shares of Series A Preferred Stock. The
Series A Preferred Stockholders also received warrants, which are transferable
separately from the Series A Preferred Stock, which represent the right to
purchase on or prior to June 17, 2007 at an exercise price of $.01 per share a
total of 270,000 shares of Common Stock. The warrants do not have any fair value
and accordingly are not valued separately and accounted for as paid-in-capital.
The Company also issued 1.6 million shares of Series B Cumulative Voting
Preference Shares with a par value of $.01 at a price of $25 per share, with a
20% quarterly compounding dividend paid in additional shares of Series B
Cumulative Voting Preference Shares. The Series B Cumulative Voting Preference
Shares were sold to investors in the form of Investment Units which included
commitments to purchase an additional $60 million of Series B Preferred Stock
upon the occurrence of certain funding events, in order to maintain CGA's AAA
rating from DCR. The Company pays a $600,000 annual fee to the Unit Investors
for their commitments. The Investment Units also included 7,827,957 shares out
of a total of 9,100,000 shares of Common Stock issued with a par value of $.01
per share at a price of $5 per share.
The remaining 1,272,043 shares of Common Stock were sold to the sponsoring
investors and certain members of management who also received 847,729 warrants,
which each represent the right to purchase one share of Common Stock on or prior
to June 17, 2007 at an exercise price of $5 per share. An additional 1,494,771
warrants have been granted to certain employees which each represent the right
to purchase one share of Common Stock on or prior to June 17, 2007 at an
exercise price of $5 per share. The employees' warrants will vest ratably over a
four-year period and expire if not exercised within thirty days of the
employee's termination of employment.
F-9
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("GAAP") and include the accounts of the Company, CGA, and CGAIM. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the 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 significant accounting policies are:
a) PREMIUMS
Premiums are recognized as written upon inception of the multi-year
policies. Premiums are earned in proportion to the amount of risk
retired over the expected period of coverage. Premiums may be
collected up-front or on a periodic basis, such as quarterly. Policy
durations vary and can be either long or short.
b) DEFERRED ACQUISITION COSTS
Deferred acquisition costs are expenses that vary with and are
primarily related to the production of business. These costs include
compensation and related costs of underwriting and marketing, certain
rating agency fees, and administrative expenses. Policy acquisition
costs are amortized over seven years.
c) CLIENT ACQUISITION COSTS
Client acquisition costs include legal expenses, organization costs,
credit facility structuring expenses and financing fees incurred in
connection with setting up investment companies and programs for CGAIM
clients. Client acquisition costs are amortized over five years.
d) PROVISION FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
A case basis reserve for unpaid losses and loss adjustment expenses
may be recorded at the present value of the estimated loss when, in
management's opinion, the likelihood of a future loss is probable and
determinable at the balance sheet date. A general reserve is
calculated by applying a loss factor to the total net par amount
outstanding of CGA's insured obligations over the expected term of
such insured obligations.
Management believes that the current level of the provision is
adequate to cover the ultimate net cost of claims. The provision is
necessarily an estimate and there can be no assurance that the
ultimate liability will not differ from such estimates. The Company
will on an ongoing basis monitor the provision and may periodically
adjust the provision based on actual loss experience, future mix of
business and economic conditions.
e) INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," investments in debt securities designated
as available-for-sale are recorded at fair value. Any resulting
unrealized gains or losses are reflected as a separate component of
shareholders' equity until realized.
F-10
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
e) INVESTMENTS--(CONTINUED)
Bond discounts and premiums are accreted or amortized on the effective
interest method over the term of the related securities. Short-term
investments, which are those investments with a maturity of less than
one year at time of purchase, are carried at cost, which approximates
fair value. Realized gains or losses on sale of investments are
determined on the basis of specific identification. Investment income
is recognized when earned.
The Company utilizes foreign currency forward contracts for the
purpose of managing certain investment portfolio exposures (see note
7(a) for additional discussion of the objectives and strategies
employed).
Unrealized gains and losses on forward currency contracts which are
designated as specific hedges are recognized in the financial
statements as a component of shareholders' equity. Gains and losses
resulting from currency fluctuations on transactions which are not
designated as specific hedges against any single security or group of
securities are recognized as a component of income in the period in
which the fluctuations occur.
f) ORGANIZATION EXPENSES
Organization costs include legal, accounting, consulting, travel,
employee relocation and miscellaneous other costs incurred to form the
Company. Organization costs are amortized over a five-year period
starting from the date of commencement of operations using the
straight-line method.
g) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, short-term deposits are
composed of deposits with original maturities which are less than
three months.
h) LOSS PER COMMON SHARE
Loss per share is calculated using net loss for the period adjusted
for preference dividends and accretion of preference stock to
redemption value divided by the weighted average number of common
shares outstanding and, if dilutive, shares issuable under outstanding
warrants.
3. NOTE RECEIVABLE
The Company held a note receivable from the Company's Chief Executive
Officer (the "CEO") for $1.25 million which was issued in connection with the
Recapitalization in exchange for 250,000 shares of the Company's common stock.
The note bears interest at 7% compounded semi-annually. On October 8, 1997 the
CEO repaid $1 million of the note along with the accrued interest thereon. The
loan was then repaid in full on January 31, 1998.
F-11
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
4. INVESTMENTS
a) FIXED MATURITIES
The fair values and amortized cost of fixed maturities at December 31,
1997 are as follows:
FAIR VALUE AMORTIZED COST
---------- --------------
Non-U.S. governments ............ $ 52,788,537 $ 52,514,059
Corporate securities ............ 70,514,226 69,150,612
------------ ------------
Fixed maturities ................ $123,302,763 $121,664,671
============ ============
The gross unrealized gains and losses related to fixed maturities at
December 31, 1997 are as follows:
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
---------- ----------
Non-U.S. governments ............ $1,382,523 $(308,775)
Corporate securities ............ 583,353 (19,009)
---------- ----------
Fixed maturities ................ $1,965,876 $(327,784)
========== ==========
Fixed maturities at December 31, 1997, by contractual maturity, are
shown below. Expected maturities could differ from contractual
maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties.
FAIR VALUE AMORTIZED COST
---------- --------------
MATURITY PERIOD
Less than 1 year ................ $ 16,443,261 $ 15,634,565
1-5 years ....................... 87,997,633 87,641,105
5-10 years ...................... 18,861,869 18,389,001
Greater than 10 years ........... 0 0
------------ ------------
Total fixed maturities .......... $123,302,763 $121,664,671
============ ============
Net realized gains and losses for the period were $885,422.
Investments are made predominately in U.S. dollar denominated foreign
corporate and government securities and, in certain non-U.S. dollar
denominated foreign debt securities with U.S. dollar currency hedge
protection. The minimum rating level for an investment is at least BBB
by DCR. The portfolio consists of AA rated investments on average. The
portfolio managers operate under guidelines to maintain a weighted
average duration of two to five years.
F-12
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
4. INVESTMENTS--(CONTINUED)
B) NET INVESTMENT INCOME
New investment income for the periods ended December 31, 1997 and
March 31, 1997 was derived from the following sources:
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
Fixed maturities ................ $2,849,428 $ 0
Other ........................... 331,297 801
---------- ----
Gross investment income ......... 3,180,725 801
Investment expense .............. (225,124) 0
---------- ----
Net investment income ........... $2,955,601 $801
========== ====
5. LOAN PAYABLE
The sponsoring investor in the Company was CGA Funding, L.P., which, in
addition to advancing the initial legal, equity raising and start-up costs of
the Company, loaned it $121,000 to provide cash for the initial capitalization
of CGA. The loan was non-interest bearing and along with the advances was
exchanged for Common Stock and warrants upon the Company's Recapitalization.
6. MEZZANINE EQUITY
Mezzanine equity comprise:
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
Series A: 2,796,534 and Nil
shares issued outstanding ..... $ 27,965 $ 0
Additional paid in capital ...... 65,504,534 0
----------- ---
Total Series A preferred stock .. 65,532,499 0
=========== ===
Series B: 1,600,000 and Nil
shares issued and outstanding . 16,000 0
Additional paid in capital ...... 37,059,371 0
----------- ---
Total Series B preferred stock .. $37,075,371 $ 0
=========== ===
The Company's Preferred Stock has mandatory redemption features. The Series
A Preferred Stock ("Series A") is subject to mandatory redemption including all
unpaid dividends thereon, on June 17, 2007. Series A will be redeemable in cash
at the election of the Company at any time after June 17, 2002 and subject to
redemption premiums ranging from 11% initially which decline by 2% annually
until June 17, 2007. The Series B Preferred Stock ("Series B") is subject to
mandatory redemption including all accrued and unpaid dividends thereon, on June
17, 2012. Series A and Series B are carried on the balance sheet at their
redemption values, exclusive of any redemption premiums.
The dividends on Series A are declared quarterly by the Board of Directors
and paid in additional shares of Series A. The Company is currently in
registration with the Securities and Exchange Commission to register Series A.
The
F-13
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
6. MEZZANINE EQUITY--(CONTINUED)
Company is obligated to pay an additional pay-in-kind dividend of .5% on
Series A from December 15, 1997 to the effective date of the registration
statement. The additional dividend for the sixteen-day period in December totals
approximately $15,000 and has not yet been declared or accrued as of December
31, 1997. The dividend on the Series B is not declared quarterly, however, the
mandatory redemption provision requires that at redemption the Company is
obligated to pay 100% of the stated value of the shares plus accrued and unpaid
dividends thereon. Accordingly, the liability for dividends payable on Series B
is accrued and the charge against retained earnings is recorded.
Both Series A and Series B were recorded at fair value, being the net
proceeds received. The difference between fair value and the redemption value
(excluding pay-in-kind dividends) is being accreted over the mandatory
redemption period by a charge to retained earnings or if no retained earnings
are available by a charge against additional paid in capital.
Both the Series A and Series B are voting with Series A carrying 7 votes
per share and Series B carrying 5 votes per share. Series A comes first in
preference in a liquidation of the Company followed by Series B and then the
Company's Common Stock.
7. COMMON STOCK
Movement on Common Stock during the periods ended December 31, 1997 and
March 31, 1997 was as follows:
NUMBER OF
SHARES
---------
Issued on incorporation of company ........ 12,000
---------
BALANCE AS AT MARCH 31, 1997 .............. 12,000
Redeemed prior to recapitalization
of company .............................. (12,000)
Issued in recapitalization ................ 9,100,000
---------
BALANCE AS AT DECEMBER 31, 1997 ........... 9,100,000
=========
The Common Stock of the Company carries 2 votes per share. During the
nine months ended December 31, 1997, 9,100,000 shares were issued for
cash proceeds of $45,500,000.
The weighted average number of shares outstanding as at December 31,
1997 and March 31, 1997 is calculated as follows:
DECEMBER 31, MARCH 31,
1997 1997
---------- -------
Issued and outstanding .............. $9,100,000 $12,000
Less reduction due to shares
not being in issue for
whole period ...................... (2,577,687) 0
---------- -------
Weighted average number of
shares ............................ $6,522,313 $12,000
========== =======
8. CONTINGENCIES AND COMMITMENTS
A) FOREIGN CURRENCY EXPOSURE MANAGEMENT
The Company uses foreign currency forward contracts to minimize the
effect of fluctuating foreign currencies on the value of specific
non-U.S. dollar securities currently held in the portfolio.
Approximately $13.4 million is invested in non-U.S. dollar fixed
maturity securities. The forward currency contracts purchased are
specifically identifiable against single securities or group of
securities
F-14
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM JUNE 21, 1996 TO MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
8. CONTINGENCIES AND COMMITMENTS--(CONTINUED)
denominated in those currencies and therefore qualify as hedges for
financial reporting purposes. All contract realized gains and losses
are reflected in operations. Any unrealized contract gains or losses
are recognized as a separate component of shareholders equity. At
December 3l, 1997, no foreign currency forward contract had a maturity
of more than six months The table below summarizes the notional
amounts, the current fair values and the unrealized gain or loss of
the Company's foreign currency forward contracts as at December 31,
1997.
CONTRACTUAL/ UNREALIZED
NOTIONAL FAIR GAINS/
AMOUNT VALUE (LOSSES)
------- ------- --------
(IN THOUSANDS)
Forward contracts ............. $14,700 $13,900 $800
======= ======= ====
The fair value of the forward contracts represents the estimated cost
to the Company at December 31, 1997, of obtaining the specified
currency to meet the obligation of the contracts. The unrealized gain
is a measure of the net exposure to the Company of its use of forward
contracts.
The credit risk associated with the above derivative financial
instruments relates to the potential for non-performance by
counterparties. Non-performance is not anticipated; however, in order
to minimize the risk of loss, management monitors the creditworthiness
of its counterparties. For forward contracts, the counterparties are
principally banks which must meet certain criteria according to the
Company's investment guidelines.
B) LEASE COMMITMENTS
The Company rents office space in Hamilton, Bermuda under an operating
lease which expires in 2000. CGAIM rents office space in New York,
under an operating lease which expires in 2003 with one optionally
renewal period of five years. Total rent expense was approximately
$300,000 in 1997. Future minimum rental commitments under the leases
are expected to be approximately $500,000 per annum.
9. TAXATION
The Company and CGA, which are domiciled in Bermuda, have received from the
Minister of Finance of Bermuda an assurance under The Exempted Undertakings Tax
Protection Act, 1966 of Bermuda, that generally protects them from incurring
taxation by Bermuda tax authorities until March 2016. Since the Company and CGA
are not engaged in a trade or business in the U.S. there should be no U.S.
income taxes due, however, CGA intends to file protective U.S. income tax
returns. CGAIM is subject to U.S. taxation at regular corporate tax rates but
has tax losses carried forward of approximately $3,900,000 as at December 31,
1997.
10. STATUTORY FINANCIAL DATA
Under The Insurance Act 1978, amendments thereto and related regulations
CGA is required to file an annual Statutory Financial Return and Statutory
Financial Statements and to maintain certain measures of solvency and liquidity
during the period. The statutory capital and surplus of CGA at December 3l, 1997
was $207,784,909. Statutory net income for the nine months ended December 31,
1997 was $3,476,369. The principal differences between capital and surplus and
statutory net income of CGA and shareholders' equity and income as reported on
conformity with GAAP relates to deferred acquisition costs and prepaid expenses
of CGA. There were no statutory restrictions on payment of dividends from the
retained earnings of CGA as the required level of solvency was met by the common
stock in issue.
F-15
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER 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 THIS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
--------------------
TABLE OF CONTENTS
PAGE
----
ENFORCEABILITY OF CIVIL LIABILITIES ....................................... 3
ADDITIONAL INFORMATION .................................................... 3
PROSPECTUS SUMMARY ........................................................ 4
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA ............................ 8
RISK FACTORS .............................................................. 9
EXCHANGE OFFER ............................................................ 14
USE OF PROCEEDS ........................................................... 19
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA ........................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................ 21
THE COMPANY ............................................................... 24
FINANCIAL GUARANTY BOND INSURANCE INDUSTRY ................................ 29
REGULATION ................................................................ 31
MANAGEMENT ................................................................ 36
CERTAIN TRANSACTIONS ...................................................... 42
OWNERSHIP OF SECURITIES ................................................... 42
DESCRIPTION OF SECURITIES ................................................. 44
CERTAIN TAX CONSIDERATIONS ................................................ 55
GLOSSARY .................................................................. 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ................................ F-1
================================================================================
================================================================================
2,703,598 SHARES
CGA GROUP, LTD.
NEW SERIES A
PREFERRED STOCK
-------------
PROSPECTUS
-------------
_____________ __, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bye-laws of the Company provide that directors, alternate directors and
other officers for the time being acting in relation to any of the affairs of
the Company, as well as their heirs, executors and administrators, shall be
indemnified and secured harmless out of the assets of the Company from and
against all actions, costs, charges, losses, damages and expenses which they or
any of them, their heirs, executors or administrators, shall or may incur or
sustain by or by reason of any act done, concurred in or omitted in or about the
execution of them duty, or supposed duty, or in their respective offices or
trusts, and none of them shall be answerable for the acts, receipts, neglects or
defaults of the others of them or for joining in any receipts for the sake of
conformity, or for any bankers or other persons with whom any money or effects
belonging to the Company shall or may be lodged or deposited for safe custody,
or for insufficiency or deficiency of any security upon which any moneys of or
belonging to the Company shall be placed out on or invested, or for any other
loss, misfortune or damage which may happen in the execution of their respective
offices or trusts, or in relation thereto, provided that the indemnity shall not
extend to any matter in respect of any fraud or dishonesty which may attach to
any of said Persons.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1* Memorandum of Association and Certificate of Incorporation of
CGA Group, Ltd.
3.2* Bye-laws of CGA Group, Ltd.
3.3* Appendices to Bye-laws of CGA Group, Ltd.
4.1* CGA Group, Ltd. Shareholders Agreement
5.1* Opinion of Dewey Ballantine LLP as to certain United States
tax matters
5.2* Opinion of Conyers Dill & Pearman as to the legality of the
securities being registered and as to certain matters of
law of Bermuda
10.1* Series A Subscription Agreement dated as of June 9, 1997, by
and among CGA Group, Ltd. and the holders of the Series A
Preferred Stock
10.2* Common Stock Warrant Acquisition Agreement, dated as of June
9, 1997 by and among CGA Group, Ltd. and the holders of the
Series A Preferred Stock.
10.3* Investment Units Subscription Agreement dated as of June 4,
1997, by and among CGA Group, Ltd. and the holders of the
Investment Units
10.4* Right of First Refusal Agreement dated as of June 17, 1997,
by and between CGA Group, Ltd. and Capital Reinsurance
Company
10.5* Discretionary Investment Advisory Agreement, dated as of
December 18, 1996 between Alliance Capital Management L.P.
and Commercial Guaranty Assurance, Ltd.
10.6* Investment Management Agreement dated as of December 27,
1996, between J.P. Morgan Investment Management Inc. and
Commercial Guaranty Assurance, Ltd.
10.7* Letter Agreement, dated June 17, 1997 between CGA Group, Ltd.
and DCR (and attachments)
10.8* Employee Warrant Agreement
10.9* CGA Group, Ltd. Employee Stock Warrant Plan
10.10* CGA Group, Ltd. Sponsoring Investors and Founders Stock
Warrant Plan
10.11* Excess of Loss Agreement, dated as of June 12, 1997, by and
between CGA Group, Ltd. and KRE Reinsurance Ltd.
II-1
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.12* Employment Agreement, as of January 1, 1997, by and between
CGA Group, Ltd. and Richard A. Price
10.13* Employment Agreement, as of January 1, 1997, by and between
CGA Group, Ltd. and James R. Reinhart.
10.14* Employment Agreement, as of January 1, 1997, by and between
Commercial Guaranty Assurance, Ltd. and Anthony Montemurno.
10.15* Employment Agreement, as of January 1, 1997, by and between
Commercial Guaranty Assurance, Ltd. and Geoffrey N.
Kauffman.
10.16* Employment Agreement, as of January 1, 1997, by and between
CGA Investment Management, Inc. and Kem H. Blacker.
10.17* Employment Agreement, as of August 1, 1997, by and between
CGA Investment Management, Inc. and Thomas S. Wickwire.
10.18* Employment Agreement, as of June 30, 1997, by and between CGA
Investment Management, Inc. and Michael Miran.
10.19* CGA Group, Ltd. Founders' Common Stock Subscription
Agreement, dated as of June 12, 1997, among CGA Group,
Ltd., CGA Funding, L.P., and certain Founders of CGA Group,
Ltd.
23.1** Consent of Dewey Ballantine LLP
23.2** Consent of Conyers Dill & Pearman
23.3 Consent of Coopers & Lybrand
24.1 Power of Attorney (included in signature page to Registration
Statement)
99.1* Form of Letter of Transmittal for the exchange of New Series
A Preferred Stock for Series A Preferred Stock
- ----------
* To be filed by amendment.
** Included in the respective opinions.
ITEM 22. UNDERTAKINGS
(1) The undersigned registrants hereby undertake that 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.
(2) The undersigned registrants hereby undertake: (i) to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means; and (ii) to
arrange or provide for a facility in the U.S. for the purposes of
responding to such requests. The undertaking in paragraph (i) above
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(3) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is part of this registration statement by
any person or party who is deemed to be an underwriter within the meaning
of Rule 145(c), the issuer undertakes that
II-2
<PAGE>
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(4) The undersigned registrant undertakes that every prospectus (i)
that is filed pursuant to paragraph(4) immediately preceding or that (ii)
that purports to meeting the requirements of section 10(a)(3) of the Act
and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment 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.
(5) The undersigned Registrant hereby undertake as follows: 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.
(6) 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 to be 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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Hamilton, Bermuda, on April 17, 1998.
CGA GROUP, LTD.
By: /s/ RICHARD A. PRICE
----------------------------
RICHARD A. PRICE
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below on April 17, 1998 by the
following persons in the capacities indicated. Each person whose signature
appears below hereby appoints and constitutes Richard A. Price or James R.
Reinhart, and each of them, as his attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to execute in the name
and on behalf of such person any amendment to this Registration Statement
(including any post-effective amendment) and to file the same, with exhibits
thereto, and other documents in connection therewith, making such changes in
this Registration Statement as the person so acting deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his or her
substitute may do or cause to be done by virtue hereof.
SIGNATURE TITLE
--------- -----
/s/ RICHARD PRICE Chief Executive Officer, President
- ------------------------------ and Director
RICHARD PRICE
/s/ JAY SHIDLER* Chairman
- ------------------------------
JAY SHIDLER
/s/ JAMES REINHART* Chief Financial Officer
- ------------------------------
JAMES REINHART
/s/ ROBERT DENTON* Director
- ------------------------------
ROBERT DENTON
/s/ DAVID BARSE* Director
- ------------------------------
DAVID BARSE
/s/ RICHARD FRARY* Director
- ------------------------------
RICHARD FRARY
/s/ ERIC GRITZMACHER* Director
- ------------------------------
ERIC GRITZMACHER
/s/ DONALD KRAMER* Director
- ------------------------------
DONALD KRAMER
II-4
<PAGE>
SIGNATURE TITLE
--------- -----
/s/ JEFF KRASNOFF* Director
- ------------------------------
JEFF KRASNOFF
/s/ MICHAEL MORRISSEY* Director
- ------------------------------
MICHAEL MORRISSEY
/s/ JEROME JURSCHAK* Director
- ------------------------------
JEROME F. JURSCHAK
/s/ PAUL RUBIN* Director
- ------------------------------
PAUL RUBIN
/s/ RICHARD SCHONINGER* Director
- ------------------------------
RICHARD SCHONINGER
/s/ JAY SUGARMAN* Director
- ------------------------------
JAY SUGARMAN
*By: /s/ RICHARD PRICE
- ------------------------------
(RICHARD PRICE,
ATTORNEY-IN-FACT**)
** By authority of Power of Attorney filed with this Registration Statement on
Form S-4.
II-5
EXHIBIT 23.3
Directors
CGA Group of Companies
Craig Appin House
8 Wesley Street
Hamilton
CONSENT OF INDEPENDENT AUDITORS
Dear Sirs,
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated, January 31, 1998 with respect to the consolidated
financial statements and schedules of CGA Group, Ltd. included in the
Registration Statement and related Prospectuses of CGA Group, Ltd. for the
registration of 2,703,598 shares of its New Series A Preferred Stock.
/s/ COOPERS & LYBRAND
-----------------------------
COOPERS & LYBRAND
Hamilton, Bermuda
March 2, 1998
