As filed with the Securities and Exchange Commission on July 30, 1998
Registration No. 333-7944
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 4
to
FORM S-1
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
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(State or other jurisdiction (Primary Standard (I.R.S.
of incorporation or Industrial Classification Employer
organization) Code Number) Identification No.)
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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
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(Name, address, including zip code, and telephone number,
including area code, of agents for service)
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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: [X]
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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 JULY 30, 1998
PROSPECTUS
2,992,109 SHARES OF
SERIES A CUMULATIVE VOTING PREFERENCE SHARES
CGA GROUP, LTD.
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This Prospectus relates to 2,992,109 Series A Cumulative Voting Preference
Shares, par value $0.01 per share (the "Series A Preferred Stock"), of CGA
Group, Ltd., a company incorporated in Bermuda with limited liability ("CGA
Group" or the "Company"). The Series A Preferred Stock was originally issued by
CGA Group to a limited number of institutional "accredited investors" (as
defined in Rule 501(a) promulgated under the Securities Act of 1933, as amended
(the "Securities Act")), pursuant to Section 4(2) of the Securities Act. See
"Description of Securities--Series A Preferred Stock."
There is no public market for Series A Preferred Stock and there can be no
assurance that an active public or private market for the Series A Preferred
Stock will develop. Whether or not a market for the Series A Preferred Stock
should develop, the shares of Series A Preferred Stock could trade at a discount
from their aggregate liquidation preference. The Company does not intend to list
the Series A Preferred Stock on a national securities exchange or to apply for
quotation of the Series A Preferred Stock through the National Association of
Securities Dealers Automated Quotation System ("Nasdaq").
The Series A Preferred Stock has been registered for sale by Selling
Stockholders (as defined herein) and may be offered by Selling Stockholders from
time to time in transactions in the over-the-counter market, in negotiated
transactions or a combination of such methods of sale, in each such case, at
fixed prices which may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices, or at negotiated prices.
The Selling Stockholders may effect such transactions by selling shares of the
Series A Preferred Stock to or through broker-dealers, and such broker-dealers
may receive compensation in the form of discounts, concessions or commissions
from Selling Stockholders and/or purchasers of the Series A Preferred Stock for
whom such broker-dealers may act as agents or to whom they sell as principals,
or both (which compensation as to a particular broker-dealer might be in excess
of customary commissions). Such broker-dealer(s) may be affiliated with, be
customers of, or engage in transactions with or perform services for one or more
of the Selling Stockholders and/or the Company in the ordinary course of
business. To the extent required, shares of the Series A Preferred Stock, the
name of the Selling Stockholder, the public offering price, the names of any
such agent, dealer or underwriter, and any applicable commission or discount
with respect to any particular offer will be set forth in a post-effective
amendment to this Prospectus. See "Selling Stockholders" and "Plan of
Distribution".
The Company is a holding company. As such, the Company's ability to pay
dividends on the Series A Preferred Stock 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."
None of the proceeds from the sale of the Series A Preferred Stock will be
received by the Company. The Company has agreed, among other things, to bear all
expenses (other than underwriting discounts and commissions) incurred in
connection with the registration and sale of the Series A Preferred Stock
covered by this Prospectus.
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 HERETO. 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 6 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE 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.
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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>
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 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 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 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 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.
2
<PAGE>
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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
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3
<PAGE>
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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.
RISK FACTORS
Prospective investors should carefully evaluate the matters set forth under
"Risk Factors", beginning on page 6. 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.
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4
<PAGE>
<TABLE>
<CAPTION>
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SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
THREE MONTHS NINE MONTHS 21-JUNE-96
ENDED ENDED TO
31-MAR-98 31-DEC-97 31-MAR-97
------------ ----------- ----------
UNAUDITED AUDITED AUDITED
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net premiums earned ................................... $ 1,071,135 $ 502,995 $ --
Net investment income ................................. 1,888,255 2,955,601 801
Net realized gains (losses) on sale of fixed maturities (242,194) 885,422 --
Management fee income ................................. 189,056 -- --
------------ ------------ --------
Total revenues ....................................... 2,906,252 4,344,018 801
Expenses:
Operating expenses .................................... 3,063,863 6,510,103 11
Acquisition costs ..................................... 53,245 53,590 --
Commitment fees ....................................... 147,945 323,836 --
Excess of loss facility ............................... 50,000 107,671 --
Loss adjustment expenses .............................. 195,000 55,000 --
------------ ------------ --------
Total expenses ....................................... 3,510,053 7,050,200 11
------------ ------------ --------
Net income (loss) ...................................... (603,801) (2,706,182) 790
Other comprehensive income ............................. 607,868 1,638,092 --
------------ ------------ --------
Comprehensive income (loss) ............................ $ 4,067 $ (1,068,090) $ 790
============ ============ ========
Earnings (loss) available to common shareholders
Net income (loss) .................................... $ 603,801 $ (2,706,182) $ 790
Series A pay-in-kind dividends ......................... (2,504,079) (4,913,346) --
Series B pay-in-kind dividends ......................... (2,221,961) (4,439,231) --
Series A accretion ..................................... (278,085) (190,472) --
Series B accretion ..................................... (75,204) (83,561) --
------------ ------------ --------
Earnings (loss) available to common shareholders ....... $ (5,683,130) $(12,332,792) $ 790
============ ============ ========
Basic and fully diluted earnings (loss)
per common share ...................................... $ (0.62) $ (1.89) $ 0.07
Weighted average shares outstanding .................... 9,100,000 6,522,313 12,000
BALANCE SHEET DATA:
Fixed maturities available for sale (at fair value) .... $126,580,195 $123,302,763 $ --
Cash and short-term investments ........................ 4,020,716 7,199,106 121,742
Total assets ........................................... 142,385,071 142,721,186 133,790
Total liabilities ...................................... 3,576,427 3,916,609 121,000
Total mezzanine equity ................................. 110,779,130 107,047,101 --
Total shareholders' equity ............................. 28,029,514 31,757,476 12,790
Total liabilities, mezzanine equity, and
shareholders' equity .................................. 142,385,071 142,721,186 133,790
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</TABLE>
5
<PAGE>
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 35 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.
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
6
<PAGE>
income taxation and so that U.S. persons owning Series A Preferred Stock should
not be subject to U.S. 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 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 insurers. 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."
7
<PAGE>
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 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
Series A Preferred Stock, investors should make their investment in the Series A
Preferred Stock with the assumption that they may have to bear the economic risk
of an investment in the Series A Preferred Stock for an indefinite period of
time. For a description of the terms of the 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 claimswill 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 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 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.
In addition, Board members' fiduciary obligations to creditors,
policyholders and shareholders apply to their votes in respect of dividends,
distributions and redemptions.
8
<PAGE>
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. and
its subsidiaries ("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 directly or indirectly 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."
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.
9
<PAGE>
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 a decrease in 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. An increase in interest rates will likely have
the opposite effect. On balance it is Management'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 guaranty 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 guaranty insurance and the interest rates borne by uninsured
obligations. See "Financial Bond Insurance Industry."
USE OF PROCEEDS
This Registration Statement is intended to satisfy certain obligations of
the Company under the Subscription Agreement. The Company will not receive any
proceeds from sales of Series A Preferred Stock effected hereby and has agreed
to pay the expenses of the performance of its obligations under the Subscription
Agreement with respect to the Registration Statement.
10
<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 this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS 21-JUNE-96
ENDED ENDED TO
31-MAR-98 31-DEC-97 31-MAR-97
------------- ------------ ----------
UNAUDITED AUDITED AUDITED
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gross premiums written .................................... $ 1,949,993 $ 773,571 $ --
------------ ------------ --------
Net premiums written ...................................... 1,949,993 773,571 0
Change in unearned premiums ............................... (878,858) (270,576) 0
------------ ------------ --------
Net premiums earned ....................................... 1,071,135 502,995 --
Net investment income ..................................... 1,888,255 2,955,601 801
Net realized gains (losses) on sale of fixed maturities ... (242,194) 885,422 --
Management fee income ..................................... 189,056 -- --
------------ ------------ --------
Total revenues .......................................... 2,906,252 4,344,018 801
Expenses:
Operating expenses ........................................ 3,063,863 6,510,103 11
Acquisition costs ......................................... 53,245 53,590 --
Commitment fees ........................................... 147,945 323,836 --
Excess of loss facility ................................... 50,000 107,671 --
Loss adjustment expenses .................................. 195,000 55,000 --
------------ ------------ --------
Total expenses .......................................... 3,510,053 7,050,200 11
Net income (loss) ........................................... (603,801) (2,706,182) 790
Other comprehensive income .................................. 607,868 1,638,092 --
------------ ------------ --------
Comprehensive income (loss) ................................. $ 4,067 $ (1,068,090) $ 790
============ ============ ========
Earnings (loss) available to common shareholders
Net income (loss) ......................................... $ 603,801 $ (2,706,182) $ 790
Series A pay-in-kind dividends .............................. (2,504,079) (4,913,346) --
Series B pay-in-kind dividends .............................. (2,221,961) (4,439,231) --
Series A accretion .......................................... (278,085) (190,472) --
Series B accretion .......................................... (75,204) (83,561) --
------------ ------------ --------
Earnings (loss) available to common shareholders ............ $ (5,683,130) $(12,332,792) $ 790
============ ============ ========
Basic and fully diluted earnings (loss) per common share .... $ (0.62) $ (1.89) $ 0.07
Weighted average shares outstanding ......................... 9,100,000 6,522,313 12,000
BALANCE SHEET DATA:
Fixed maturities available for sale (at fair value) ....... $126,580,195 $123,302,763 $ --
Cash and short term investments ........................... 4,020,716 7,199,106 121,742
Total assets .............................................. 142,385,071 142,721,186 133,790
Total liabilities ......................................... 3,576,427 3,916,609 121,000
Total mezzanine equity .................................... 110,779,130 107,047,101 --
Total shareholders' equity ................................ 28,029,514 31,757,476 12,790
Total liabilities, mezzanine equity, and
shareholders' equity ..................................... 142,385,071 142,721,186 133,790
</TABLE>
11
<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 the effective
date of the Registration Statement of which this Prospectus is a part, including
all financial statements as of and through the three months ended March 31, 1998
and 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. 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.
RESULTS OF OPERATIONS
March 31, 1998
Total revenues for the quarter were $2.9 million of which $1.1 million was
derived from financial guaranty insurance premiums, $0.2 million was derived
from investment management fees, and $1.6 million was derived from investments.
Premium income was derived from $1.9 million of premiums written, offset by an
increase in unearned premiums of $0.9 million, resulting in net premiums earned
of $1.1 million. St. George Investments I, Ltd. comprised 20% of premiums
written, St. George Investments II, Ltd. comprised 4%, Cobalt Capital, LLC,
comprised 6%, and other clients comprised the remaining 70%. The following table
shows the net par outstanding of insured obligations at March 31, 1998 by asset
type:
<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 .............. 267,663 0% 64% 36% 100%
Consumer asset backed securities ............... 260,179 44% 53% 2% 100%
Corporate asset backed securities .............. 64,476 23% 77% 0% 100%
--------
$712,318
========
</TABLE>
Based on net par outstanding, the credit ratings of the above assets were
18% "A", 58% "BBB" and 24% "BB". Securities with credit ratings of "BB" are
classified as non-investment grade. Non-investment grade exposure as a
percentage of total exposure decreased 3% during the quarter. Exposure is
defined as insured risk in force based on the par amount of the insured
securities. Non-investment grade securities have credit ratings below "BBB-". In
accordance with CGA's underwriting policies, insurance will not be written on
securities rated below "BB".
Net investment income was comprised of $1.9 million of interest earned on
debt securities and short-term investments, and $0.2 million of net capital
losses. The total market value of the fixed maturity portfolio at March 31, 1998
including accrued interest receivable was $129.7 million.
12
<PAGE>
Operating expenses were $3 million and other costs, fees, and reserves
comprised $0.5 million, bringing total expenses to $3.5 million, resulting in a
net loss for the quarter of $0.6 million. No comparative quarterly financial
information is available due to the Company's June 17, 1997 commencement of
operations.
December 31, 1997
The December 31, 1997 financials 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>
Based on net par outstanding, the credit ratings of the above assets were
7% "A ", 66% "BBB" and 27% "BB ".
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
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.
13
<PAGE>
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 as
of December 31, 1997 and March 31, 1998. 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.
The following table sets forth the amount of the Company's investments in
foreign corporate and government debt securities as of December 31, 1997:
COUNTRY AMORTIZED COST MARKET VALUE
- ------- -------------- ------------
UK ......................................... $ 22,906,281 $ 23,925,178
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 ...................................... $121,664,671 $123,302,763
============ ============
COUNTRY AMORTIZED COST MARKET VALUE
- ------- -------------- ------------
Foreign Government ......................... $ 52,514,059 $ 52,788,537
Foreign Corporate .......................... 69,150,612 70,514,226
------------ ------------
Total ...................................... $121,664,671 $123,302,763
============ ============
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 operating cash flow in 1998.
14
<PAGE>
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 Bermudian
insurance regulations that require minimum solvency margins and liquidity
ratios.
The Company is reviewing the effect that the Year 2000 will have on its
essential computer systems, especially those related to its ongoing operations
and its internal controls systems, including the preparation of financial
information. The Company has developed plans to minimize any potential adverse
effect on its operations, systems or accounting records related to the Year
2000. Since the Company commenced operations within the last year, it has only
purchased or contracted for systems the Company believes that were already Year
2000 compliant.
ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997. This
statement requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components. The Company has
adopted this Statement in the consolidated financial statements for the three
months ended March 31, 1998. Comprehensive income for the Company is comprised
solely of unrealized gains or losses on investments.
FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information",
which the company will be required to adopt for fiscal year 1998. This statement
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders. It also
established standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The company has not determined the impact of the adoption of this
new accounting standard on its consolidated financial statement disclosures.
The Accounting Standards Executive issued Statement of Position 98-5,
"Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998. This Statement will require the Company to
expense organization costs as incurred. The Company will need to expense the
remaining unamortized costs as a change in accounting principle when it applies
this SOP later this fiscal year.
15
<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 successful in 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.
George and 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 ensure
compliance with these underwriting guidelines and standards. CGA is able to
deviate from such guidelines and standards on a case-by-case basis only in
accordance with procedures established by the Underwriting Committee.
CGA's underwriting guidelines are intended to provide multiple layers of
loss 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). On a transaction by transaction basis,
overcollateralization or third-party protections which assume the primary risk
of financial loss are used to protect CGA against losses. 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, or
sovereign credits.
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
CGA invests its capital, premiums received from its insurance business, and
earnings thereon in an investment portfolio. This investment portfolio is CGA's
primary source of claims-paying ability. CGA manages its investment portfolio
with the objectives of protecting its claims-paying ability rating, maintaining
a high level of liquidity,
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making investments predominantly in U.S. dollar denominated securities which
generate non-U.S. source income, and within these constraints, obtaining
superior long-term total returns.
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 "AA*". 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. CGA's
policy is to invest only in investments which are readily marketable with no
legal or contractual restrictions on resale.
All of CGA's investments must comply with investment guidelines promulgated
by the Investment Committee of the Board of Directors of the Company, which
guidelines have been adopted by CGA's Board of Directors. 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 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
Even though all risks insured by CGA are underwritten to a "zero loss"
standard, CGA is prepared to deal with claims if any should materialize. CGA's
actions in respect of a potential claim would include the review and
investigation of loss reports, creation and maintenance of claim files,
establishment of proper reserves and payment of claims. CGA would monitor 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 would be minimized by so doing. When and as appropriate, CGA may
supplement its in-house capabilities in this regard with services available from
other sources.
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RESERVES
CGA maintains 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 reviews historical default rates
and loss severity on securities with ratings similar to the securities insured
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 probable or determinable.
Reserves are estimates of potential claims at a given time, based on facts
and circumstances then known to the insurer. It is possible that the ultimate
liability may exceed or be less than such estimates. CGA reviews its estimates
on an ongoing basis 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 may arrange reinsurance with high quality and
financially strong reinsurers. 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 ("S&P") and Moody's
Investor Service, Inc. ("Moody's") (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 rated "AA" by S&P. 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 its inception.
ADMINISTRATIVE SERVICES
Certain administrative and insurance management services are provided to
CGA by Marsh & McLennan Management Services (Bermuda) Limited (the "Principal
Representative") pursuant to a service agreement. In exchange for a fee, the
services required to be provided by the Principal Representative under such
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 investment management and financial advisory services
primarily to specialized investment vehicles and for the U.S. and international
structured finance markets. CGAIM's advisory team currently includes more than
twenty 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 and its subsidiaries, 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 Cobalt and is seeking to act for other third party sponsored investment
vehicles. CGAIM's duties include some or all of the following:
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(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.
(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 guidelines and 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 four primary insurers and three reinsurors:
INSURERS REINSURORS
-------- ----------
o AMBAC Indemnity Corporation o Capital Reinsurance Company
o Financial Guaranty Insurance Company o Enhance Reinsurance Company
("FGIC") ("Enhance")
o Financial Security Assurance Inc. o Axa Re Finance ("Axa Re")
("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. 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, a financial guaranty insurer which has since been
acquired by MBIA. 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 HM11 Bermuda and Marsh
& McLennan Management Services (Bermuda) Limited is the principal representative
of CGA, with an address at Victoria Hall, 11 Victoria Street, Hamilton HM11
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 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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(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 HERETO. 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 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 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 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 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 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). Many aspects of the activities of CGA are similar to those employed by
other non-admitted insurers. The Company
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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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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 .............. 51 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,
President, CGA (effective June 30,
1998)
Anthony R. Montemurno ......... 53 President, CGA (until June 30, 1998)
Kem H. Blacker ................ 42 Managing Director 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 and Chief Investment
Officer, CGAIM
Jay H. Shidler ................ 52 Chairman of the Board of Directors
David M. Barse ................ 36 Director
Robert L. Denton .............. 46 Director
Richard S. Frary .............. 50 Director
Eric A. Gritzmacher ........... 49 Director
Jerome F. Jurschak ............ 50 Director
Donald Kramer ................. 60 Director
Jeffrey P. Krasnoff ........... 43 Director
Michael J. Morrissey .......... 50 Director
Paul A. Rubin ................. 35 Director
Richard G. Schoninger ......... 39 Director
Jay S. Sugarman ............... 36 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, and President of CGA effective June 30, 1998. Prior to joining CGA, Mr.
Kauffman worked at AMBAC, where he was a First Vice President in the Structured
Finance & International Department. Mr. Kauffman joined AMBAC's Structured
Finance & International Department in March of 1995 to help the group build a
presence in international structured finance, and joined the MBIA/AMBAC
International joint venture upon its inception in the fourth quarter of 1995.
When the joint venture opened its London office in April 1996, Mr. Kauffman
transferred temporarily to London to launch the joint venture's structured
finance effort in London. 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 ("GIC").
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 from January 1, 1997 until June 30,
1998. Mr. Montemurno has ceased to work for the Company or any of its
subsidiaries, effective as of June 30, 1998. Effective as of such date, Mr.
Kauffman has become President of CGA. 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 arm, and in the World Corporate Group where he managed a team of
professionals dealing with large, diverse corporate clients.
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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--Managing Director and 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. Prior to joining CGAIM, Mr. Miran was Vice President and Senior
Counsel at FGIC. Since 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 ("MITCH") 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 and Chief Investment Officer of CGAIM
since August 18, 1997. Prior to joining CGAIM, Mr. Wickwire worked at Chase
Securities where he was a Managing Director responsible for global distribution
of structured securities (ABS, CMBS, MBS and CBOs). Before Chase, Mr. Wickwire
worked at Union Bank of Switzerland 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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Mr. Wickwire received a bachelor's degree in accounting and finance and an
MS 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. Mr. Shidler is a founder of, and since June 1994, Chairman of, First
Industrial Realty Trust, Inc. (NYSE: FR). Since October 1997, Mr. Shidler has
served as Chairman of Corporate Office Properties Trust (NYSE: OSC).
DAVID M. BARSE--Director of the Company since June 18, 1997. Mr. Barse is
President, Chief Operating Officer and Director of Danielson Holding
Corporation. Since July 1996, Mr. Barse has served as the President, Chief
Operating Officer and as a Director of Danielson Holding Corporation, a holding
company with financial services subsidiaries. Since June 1995, Mr. Barse has
been the President of M.J. Whitman, Inc., a registered broker-dealer, and of
M.J. Whitman Holding Corp. Since May 1998, he has served as President and Chief
Operating Officer of Third Avenue Trust, an open-end management investment
company, where he served as Vice-President and Chief Operating Officer from June
1995 until his election as President. From April 1995 until February 1998, Mr.
Barse served as Vice-President and Chief Operating Officer of EQSF Advisors,
Inc., Third Avenue's investment advisor, where he currently serves as President
and Chief Operating Officer.
ROBERT L. DENTON--Director of the Company since July 5, 1996. Since January
1995, Mr. Denton has served as a Managing Partner of The Shidler Group and
resident principal in its New York office. Prior to his affiliation with The
Shidler Group, Mr. Denton was employed as an investment banker at Providence
Capital, Inc., which he co-founded, and as a management consultant for Booz,
Allen & Hamilton, Inc.
RICHARD S. FRARY--Director of the Company since June 18, 1997. Since 1990,
Mr. Frary has worked in Investment Banking and Real Estate Investment at
Tallwood Associates, which he co-founded and for which he serves as President.
Mr. Frary is also a director of Washington Homes, Inc.
ERIC A. GRITZMACHER--Director of the Company since June 18, 1997. Since
1987, Mr. Gritzmacher has served as Vice President, Investments for Pacific Life
Insurance Company (formerly Pacific Mutual Life Insurance Company).
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.
DONALD KRAMER--Director of the Company since June 18, 1997. Mr. Kramer is
currently a Director and, since July 1996, Vice Chairman of ACE Limited and its
affiliated companies ACE Insurance Company Limited, ACE US, ACE London
Underwriting Limited, Methuen Underwriting Limited, ACE Europe Limited, Tempest
Reinsurance Company Limited and Corporate Officers and Directors Assurance Ltd.
Mr. Kramer serves as a director of National Benefit Life Insurance Company of
New York City, a subsidiary of the Travelers Group, and of Rosgal Insurance
Company, Moscow. Mr. Kramer is President and CEO of Tempest Reinsurance Company
Limited, where he has served since 1993. From March until September 1993, he was
President of the Kramer Capital Corporation.
JEFFREY P. KRASNOFF--Director of the Company since June 18, 1997. Mr.
Krasnoff became the President of LNR Property Corporation when it was formed in
June, 1997 and he became a director in December 1997. From 1987 until June 1997,
he was a Vice President of Lennar Corporation. From 1990 until he became the
President of LNR, Mr. Krasnoff was involved almost entirely in Lennar's real
estate investment and management division.
MICHAEL J. MORRISSEY--Director of the Company since June 18, 1997. Mr.
Morrissey has served as the Chairman and CEO of The Firemark Group for the past
fifteen years. He also serves as a director of NewCap Re, ONYX, Health Care
First, FinPac and Post Acute Care.
PAUL A. RUBIN--Director of the Company since June 18, 1997. Since April
1995, Mr. Rubin has served as a partner of Olympus Partners. Prior to joining
Olympus Partners in April 1995, Mr. Rubin worked at Summit Partners, a venture
capital firm in Boston, where he was Vice President.
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.
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JAY S. SUGARMAN--Director of the Company since June 18, 1997. Mr. Sugarman
is currently President and since November 1997, Chief Executive Officer, of
Starwood Financial Trust, a commercial mortgage REIT. Prior to his arrival in
1993 at Starwood Capital Group, a real estate fund, where he has served as
Senior Managing Director, Mr. Sugarman managed a diversified, privately-owned,
investment 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 $38,000.
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the other four most highly
compensated executive officers of the Company for services rendered during the
fiscal year ended December 31, 1997 (the "Named Executive Officers").
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------------------------------- ------------
(a) (b) (c) (d) (e) (f) (g)
OTHER ANNUAL
COMPENSATION ALL OTHER
NAME AND SALARY BONUS (1), (2), (3) LTIP PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
------------------ ---- ------- ------- ------------- ------------ ------------
<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 (4) ........ 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 $63,000 made to Messrs. Price, Montemurno and Kauffman,
respectively.
(4) Effective June 30, 1998, Mr. Montemurno is no longer an employee of the
Company or any of its subsidiaries.
WARRANT GRANTS
The following table summarizes warrants granted during the year ended
December 31, 1997 to the Named Executive Officers.
32
<PAGE>
<TABLE>
WARRANT/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
INDIVIDUAL STOCK PRICE APPRECIATION
GRANTS FOR WARRANT TERM(1)
------------------------------------------------------------------------------ -----------------------------
(a) (b) (c) (d) (e) (f) (g)
% OF
NUMBER OF TOTAL
SECURITIES WARRANTS EXERCISE
UNDERLYING GRANTED TO OR BASE
WARRANTS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
-------- ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Price ................ 629,035 42% $5.00 6/16/07 $1,977,984 $5,012,599
Geoffrey N. Kauffman ............ 154,959 10 5.00 6/16/07 487,264 1,234,824
Anthony R. Montemurno ........... 34,953 2 5.00 6/16/07 109,909 278,530
Kem H. Blacker .................. 209,212 14 5.00 6/16/07 657,862 1,667,150
Jean-Michel Wasterlain .......... 154,959 10 5.00 6/16/07 487,264 1,234,824
</TABLE>
- ----------
(1) Amounts represent hypothetical gains that could be achieved for the
respective warrants if exercised at the end of the warrant term. The 5% and
10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. These amounts represent certain assumed rates of
appreciation in value of the Company's Common Stock from the fair market
value at the date of grant. Actual gains, if any, on warrant exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in the table may not necessarily
be achieved.
AGGREGATED WARRANT EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END WARRANT
VALUES
The following table shows the number of shares covered by both exercisable
and unexercisable warrants held by the Named Executive Officers as of the fiscal
year ended on December 31, 1997, and the values for exercisable and
unexercisable warrants. No warrants were exercised during such fiscal year by
the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
WARRANTS AT IN-THE-MONEY WARRANTS
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Price ............................... 0 629,035 $0 $0
Geoffrey N. Kauffman ........................... 0 154,959 0 0
Anthony R. Montemurno .......................... 0 34,953 0 0
Kem H. Blacker ................................. 0 209,212 0 0
Jean-Michel Wasterlain ......................... 0 154,959 0 0
</TABLE>
- ----------
(1) Warrants are in-the-money if the market value of the shares covered thereby
is greater than the warrant exercise price. This calculation is based on
the fair market value at December 31, 1997 of $5 per share of Common Stock,
less the exercise price.
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.
33
<PAGE>
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.
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. Mr.
Montemurno has ceased to work for the Company or any of its subsidiaries
effective as of June 30, 1998.
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, 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,
34
<PAGE>
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.
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 (a) the date that Cap
Re no longer owns 5% of the common stock of the Company or (b) 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."
SELLING STOCKHOLDERS
The Registration Statement has been filed pursuant to Rule 415 under the
Securities Act to afford the holders of Series A Preferred Stock (the
"Securities") listed in the table below the opportunity to sell such Securities
in a public transaction. By virtue of their ownership of Investment Units of the
Company, certain of the Selling Stockholders, as Eligible Investment Unit
Investors (as defined in the Bye-laws), have elected designees to the Board of
Directors of the Company. See "Management--Directors and Officers of the Company
and the Subsidiaries" and "Security Ownership of Certain Beneficial Owners and
Management." Share numbers and percentages listed below are as of June 30, 1998.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
ON THE DATE HEREOF AFTER SALE*
-------------------- ---------------------
NUMBER OF
NUMBER OF PERCENT SERIES A NUMBER OF PERCENT
SERIES A OF SHARES SERIES A OF
NAME SHARES CLASS TO BE OFFERED SHARES CLASS
---- --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Putnam Investments (10 funds)(1)(2) .............. 759,536 25.4 759,536 0 0
Oppenheimer (6 funds)(1)(3) ...................... 575,407 19.2 575,407 0 0
Mutual Discovery Fund, (5) ....................... 276,195 9.2 276,195 0 0
Mutual Qualified Fund (5)......................... 276,195 9.2 276,195 0 0
Lennar Capital Services, Inc.(5) ................. 368,257 12.3 368,257 0 0
ACE Limited(5) ................................... 230,162 7.7 230,162 0 0
Pacific Life Insurance Company
(2 companies)(1)(4)(5) .......................... 230,162 7.7 230,162 0 0
Third Avenue Trust on behalf of the
Third Avenue Value Fund Series(5) ............... 230,162 7.7 230,162 0 0
Capital Reinsurance Company(5)(6) ................ 46,033 1.5 46,033 0 0
</TABLE>
- ----------
* Assumes the sale of all shares of Series A Preferred Stock offered by the
Registration Statement of which this Prospectus is a part. The Selling
Stockholders may offer all or only some of such shares.
(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 Putnam
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.
35
<PAGE>
(4) The two companies are: Pacific Life Insurance Company and PM Group
Life Insurance Company.
(5) Pursuant to the Company's Bye-Laws, each of these Selling Stockholders, by
virtue of its ownership of Investment Units of the Company, shall have the
right to appoint one Director of the Company so long as such Selling
Stockholder together with its affiliates owns the lesser of (i) at least 5%
of the shares of Common Stock then outstanding or (ii) the number of shares
of Common Stock acquired by such Selling Stockholder pursuant to the
Investment Unit Subscription Agreement. See "Management--Directors and
Executive Officers of the Company and the Subsidiaries."
(6) 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
insurance or 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 (a) the date that Cap Re no longer owns 5% of the common stock
of the Company or (b) a Qualified Public Offering (as defined in the CGA
Group Bye-laws) by CGA Group.
PLAN OF DISTRIBUTION
The shares of Series A Preferred Stock ("Securities") offered hereby are
being offered directly by the Selling Stockholders. The sale of the Securities
may be effected by the Selling Stockholders from time to time in transactions in
the over-the-counter market, in negotiated transactions or a combination of such
methods of sale, in each such case, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices, or at negotiated prices. The Selling Stockholders may effect such
transactions by selling Securities to or through broker dealers, and such
broker-dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from Selling Stockholders and/or purchasers of
Securities for whom such broker-dealers may act as agents or to whom they sell
as principals, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). Such broker-dealer(s) may be affiliated
with, be customers of, or engage in transactions with or perform services for
one or more of the Selling Stockholders and/or the Company in the ordinary
course of business. The Company will keep the Registration Statement of which
this Prospectus is a part or a similar registration statement (the "Registration
Statement") effective until the earliest to occur of (i) the date that all
Securities registered pursuant to the Registration Statement have been disposed
of in accordance with the plan of disposition indicated herein, (ii) the date
that all Securities registered pursuant to the Registration Statement have
become saleable pursuant to Rule 144 under the Securities Act, or (iii) three
years from the date the Registration Statement is declared effective.
At the time a particular offer of the Securities is made, to the extent
required, a post-effective amendment will be distributed which will set forth
the number of Securities being offered and the terms of the offering including
the name or names of any underwriters, dealers or agents, the purchase price
paid by any underwriter for the Securities purchased from the Selling
Stockholders, any discounts, commissions and other items constituting
compensation from the Selling Stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers.
In order to comply with certain state securities laws, if applicable, the
Securities will be sold in such jurisdictions only through registered or
licensed brokers or dealers to the extent required by such laws. In addition, in
certain states the Securities may not be sold unless they have been registered
or qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with by
the Company and the Selling Stockholder.
The Selling Stockholders and any broker-dealers, agents or underwriters
that participate with Selling Stockholders in the distribution of Securities may
be deemed to be "underwriters" as defined in the Securities Act, in which event
all brokerage commissions or discounts and other compensation received by such
Selling Stockholders, brokers-dealers, agents or underwriters may be deemed
underwriting compensation under the Securities Act. In addition, any of the
Securities that qualify for sale pursuant to Rule 144 may be sold under Rule 144
rather than pursuant to the Prospectus.
In addition, the Selling Stockholder and any others engaged in
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which provisions may limit the timing of purchases and
sales of Securities by the Selling Stockholders.
36
<PAGE>
The Company agreed to register the Securities under the Securities Act and
to indemnify and hold the Selling Stockholders harmless against certain
liabilities under the Securities Act that could arise in connection with the
sale by the Selling Stockholders of the Securities.
See "Selling Stockholders".
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding the ownership
of the Company's securities of (i) each person known by the Company to own
beneficially five percent or more of the outstanding shares of any class of the
Company's voting securities; (ii) each of the Company's directors; (iii) each of
the Company's executive officers; and (iv) all directors and executive officers
of the Company as a group. None of the directors or executive officers of the
Company own beneficially any shares of the Company's Series A Preferred Stock or
Series B Preferred Stock.
SERIES A PREFERRED STOCK (as of June 30, 1998).
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------------------ ------------------ ----------------
<S> <C> <C>
Putnam Investments (10 funds)(1)(2)
One Post Office Square, Boston, MA 02109 ................................. 759,536 25.4
Oppenheimer (6 funds)(1)(3)
Two World Trade Center, 34th Floor, New York, NY 10048 ................... 575,407 19.2
Lennar Capital Services, Inc.
760 N.W. 107th Ave., Suite 300, Miami, FL 33172 .......................... 368,257 12.3
Mutual Discovery Fund
51 John F. Kennedy Parkway, Short Hills, NJ 07078 ........................ 276,195 9.2
Mutual Qualified Fund
51 John F. Kennedy Parkway, Short Hills, NJ 07078 ........................ 276,195 9.2
ACE Limited
Suite 653, 48 Par-La Ville Road, Hamilton, HM11, Bermuda ................. 230,162 7.7
Pacific Life Insurance Company (2 companies)(1)(4)
700 Newport Center Drive, Newport Beach, CA 92660 ........................ 230,162 7.7
Third Avenue Trust on behalf of the
Third Avenue Value Fund Series
767 Third Ave., New York, NY 10017 ....................................... 230,162 7.7
</TABLE>
- ----------
(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 companies are: Pacific Life Insurance Company and PM Group Life
Insurance Company.
37
<PAGE>
SERIES B PREFERRED STOCK (as of June 30, 1998; share amounts do not include
accrued pay-in-kind (PIK) dividends)
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT OF CLASS
- ------------------------------------ ---------------- ----------------
<S> <C> <C>
Capital Reinsurance Company
1325 Avenue of the Americas, New York, NY 10019 .......................... 200,000 12.5
Pacific Life Insurance Company
700 Newport Center Drive, Newport Beach, CA 92660 ........................ 200,000 12.5
Morgan Guaranty Trusts (2 trusts)(1)(2)
522 Fifth Avenue, New York, NY 10036 ..................................... 177,142 11.1
Third Avenue Trust
767 Third Ave., New York, NY 10017 ....................................... 171,429 10.7
Olympus Partners (2 funds)(1)(3)
Metro Centre, One Station Place, Stamford, CT 06902 ...................... 171,429 10.7
ACE Limited
Suite 653, 48 Par-La Ville Road, Hamilton, HM11, Bermuda ................. 171,429 10.7
Lennar CGA Holdings, Inc.
760 N.W. 107th Ave., Suite 400, Miami, FL 33172 .......................... 137,142 8.6
The Equitable Life Assurance Society of the United States
1290 Avenue of the Americas, New York, NY 10104 .......................... 114,286 7.1
CGA Firemark Venture Fund I, LLC
67 Park Place, Morristown, NJ 07960 ...................................... 85,714 5.4
</TABLE>
- ----------
(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.
38
<PAGE>
<TABLE>
COMMON STOCK
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------ ------------------ ----------------
<S> <C> <C>
Pacific Life Insurance Company(1)
700 Newport Center Drive, Newport Beach, CA 92660 ......................... 999,264 11.0
Capital Reinsurance Company(2)
1325 Avenue of the Americas, New York, NY 10019 ........................... 982,649 10.8
Morgan Guaranty Trust (2 trusts)(3)(4)
522 Fifth Avenue, New York, NY 10036 ...................................... 866,666 9.5
ACE Limited(5)
Suite 653, 48 Par-La Ville Road, Hamilton, HM11, Bermuda .................. 859,479 9.4
Third Avenue Value Fund(6)
767 Third Avenue, New York, NY 10017 ...................................... 859,479 9.4
Olympus Partners (2 funds)(3)(7)
Metro Centre, One Station Place, Stamford, CT 06902 ....................... 838,710 9.2
Lennar CGA Holdings, Inc.(8)
760 N.W. 107th Ave., Suite 400, Miami, FL 33172 ........................... 704,198 7.7
The Equitable Life Assurance Society of the United States
1290 Avenue of the Americas, New York, NY 10104 ........................... 559,140 6.1
DIRECTORS AND EXECUTIVE OFFICERS
David M. Barse (9) .......................................................... 0 0
Robert L. Denton (10) ....................................................... 165,607 1.8
Richard S. Frary ............................................................ 0 0
Eric A. Gritzmacher (11) .................................................... 0 0
Jerome F. Jurschak (12) ..................................................... 0 0
Donald Kramer (13) .......................................................... 0 0
Jeffrey P. Krasnoff (14) .................................................... 0 0
Michael J. Morissey (15) .................................................... 0 0
Richard A. Price (16) ....................................................... 386,157 4.1
Paul A. Rubin (17) .......................................................... 0 0
Richard G. Schoninger (18) .................................................. 0 0
Jay H. Shidler (19) ......................................................... 937,913 9.9
Jay S. Sugarman (20) ........................................................ 0 0
Geoffrey N. Kauffman (21) ................................................... 71,111 *
Anthony R. Montemurno (22) .................................................. 22,312 *
Kem H. Blacker (23) ......................................................... 68,969 *
Jean-Michel Wasterlain (24) ................................................. 59,990 *
DIRECTORS AND OFFICERS AS A GROUP ........................................... 1,712,059 14.6
</TABLE>
- ----------
* Less than one percent.
(1) Includes 978,465 shares of Common Stock and warrants to purchase 20,769
shares of Common Stock.
(2) Includes 978,495 shares of Common Stock and warrants to purchase 4,154
shares of Common Stock.
(3) These parties are investment managers with discretion for various Funds
under their control.
(4) 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.
(5) Includes 838,710 shares of Common Stock and warrants to purchase 20,769
shares of Common Stock.
(6) Includes 838,710 shares of Common Stock and warrants to purchase 20,769
shares of Common Stock.
(7) The two funds are: Olympus Growth Fund II, L.P. and Olympus Executive Fund,
L.P.
(8) Includes 670,967 shares of Common Stock and warrants to purchase 33,231
shares of Common Stock.
(9) Excludes 838,710 shares of Common Stock, warrants to purchase 20,769 shares
of Common Stock, 230,162 shares of Series A Preferred Stock and 171,429
shares of Series B Preferred Stock held of record by Third Avenue Trust,
for which Mr. Barse, a Director of the Company, serves as President and
Chief Operating Officer. Mr. Barse disclaims beneficial ownership of such
securities held by Third Avenue Trust.
39
<PAGE>
(10) Includes 68,511 and 17,024 shares of Common Stock and warrants to purchase
64,135 and 15,937 shares of Common Stock held of record by Mr. Denton and
Mr. Denton's wife, Doreen A. Denton, respectively.
(11) Excludes 978,495 shares of Common Stock, warrants to purchase 20,769 shares
of Common Stock, 230,162 shares of Series A Preferred Stock and 200,000
shares of Series B Preferred Stock held of record by Pacific Life Insurance
Company for which Mr. Gritzmacher, a Director of the Company, serves as
Vice President, and its affiliates. Mr. Gritzmacher disclaims beneficial
ownership of such securities held of record by such entities.
(12) Excludes 978,495 shares of Common Stock, warrants to purchase 4,154 shares
of Common Stock, 46,033 shares of Series A Preferred Stock and 200,000
shares of Series B Preferred Stock held of record by Capital Reinsurance
Company, for which Mr. Jurschak, a Director of the Company, is Executive
Vice President and Chief Underwriting Officer. Mr. Jurschak disclaims
beneficial ownership of such securities held of record by Capital
Reinsurance Company.
(13) Excludes 838,710 shares of Common Stock, warrants to purchase 20,769 shares
of Common Stock, 230,162 shares of Series A Preferred Stock and 171,429
shares of Series B Preferred Stock held of record by ACE Limited, for which
Mr. Kramer, a Director of the Company, serves as director. Mr. Kramer
disclaims beneficial ownership of such securities held of record by ACE
Limited.
(14) Excludes 670,967 shares of Common Stock, warrants to purchase 33,231 shares
of Common Stock and 137,142 shares of Series B Preferred Stock held of
record by Lennar CGA Holdings Inc. and 368,257 shares of Series A Preferred
Stock held of record by Lennar Capital Services, Inc. Mr. Krasnoff serves
as President of LNR Property Corporation, an affiliate of Lennar CGA
Holdings, Inc. and of Lennar Capital Services, Inc. Mr. Krasnoff disclaims
beneficial ownership of such securities held of record by Lennar CGA
Holdings, Inc.
(15) Excludes 419,354 shares of Common Stock and 85,714 shares of Series B
Preferred Stock held of record by CGA Firemark Venture Fund I, LLC. Mr.
Morrissey, a Director of the Company, serves as Chairman and Chief
Executive Officer of the Firemark Group, an affiliate of CGA Firemark
Venture Fund I, LLC. Mr. Morrissey disclaims beneficial ownership of such
securities held of record by CGA Firemark Venture Fund I, LLC.
(16) Includes 164,211 shares of Common Stock and warrants to purchase 221,946
shares of Common Stock.
(17) Excludes 838,710 shares of Common Stock and 171,429 shares of Series B
Preferred Stock held of record by Olympus Growth Fund II, L.P. and Olympus
Executive Fund, L.P. Mr. Rubin, a Director of the Company, is a partner of
Olympus Partners, an affiliate of these two funds. Mr. Rubin disclaims
beneficial ownership of such securities held of record by such entities.
(18) Excludes 279,570 shares of Common Stock and 57,143 shares of Series B
Preferred Stock held of record by Prudential Securities Group, Inc., for
which Mr. Schoninger, a Director of the Company, serves as managing
director. Mr. Schoninger disclaims beneficial ownership of such securities
held of record by Prudential Securities Group, Inc.
(19) Includes 7,720 shares of Common Stock and warrants to purchase 7,227 shares
of Common Stock held of record by Shidler/CGA Corp., 3,741 shares of Common
Stock and warrants to purchase 3,502 shares of Common Stock held of record
by Shidler Equities Corp., and 529,869 shares of Common Stock and warrants
to purchase 385,854 shares of Common Stock held by Shidler Equities, L.P.
(20) Excludes 279,570 shares of Common Stock and 57,143 shares of Series B
Preferred Stock held of record by Starwood CGA, LLC. Mr. Sugarman, a
Director of the Company, is President and Chief Executive Officer of
Starwood Financial Trust, an affiliate of Starwood CGA, LLC. Mr. Sugarman
disclaims beneficial ownership of such securities held of record by
Starwood CGA, LLC.
(21) Includes 23,289 shares of Common Stock and warrants to purchase 47,823
shares of Common Stock.
(22) Includes 8,251 shares of Common Stock and warrants to purchase 14,061
shares of Common Stock.
(23) Includes 13,333 shares of Common Stock and warrants to purchase 55,636
shares of Common Stock.
(24) Includes 17,000 shares of Common Stock and warrants to purchase 42,990
shares of Common Stock.
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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.
SERIES A PREFERRED STOCK
A glossary of certain capitalized terms used but not defined in the
following description of the Series A Preferred Stock is set forth beginning on
page 60 of this Prospectus.
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."
Pursuant to the terms of the Subscription Agreement, because this (i) Shelf
Registration Statement was not declared effective on or prior to December 15,
1997, the annual dividend rate of the New Series A Preferred Stock has been
increased by 50 basis points, which rate will be effective from that date
forward until the earlier of (i) the effectiveness of the Shelf Registration
Statement and (ii) 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.
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.
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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 unpaidcash 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.
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)
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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:
(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
propertyso 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,
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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.
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,
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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 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
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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 shallbe
effective as of the date specified in such Certified Resolution, which shall not
be prior to the date of suchCertified 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
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
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(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 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
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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
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.
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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 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
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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 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."
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GOVERNING LAW
The shares of Series A Preferred Stock are governed by the laws of Bermuda,
without regard to the principles of conflicts of law.
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 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 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 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 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.
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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
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 management
believes 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,
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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 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, meets the eligibility requirements of the Treaty.
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.
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 Series A Preferred Stock acquired by investors and
held as capital assets and does not deal with the tax consequences
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applicable to all categories of investors, some of which (such as
broker-dealers, investors who hold 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. Current investors in Series A
Preferred Stock have been advised and prospective investors in 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 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.
Dividends. Distributions with respect to the 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 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 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
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 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 redeems less
than the full amount of a stockholder's shares of 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 provision should not apply to the 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 Series A Preferred Stock is less than $25.00
on the date of distribution. While a redemption premium may be paid in the event
that the 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
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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 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
Series A Preferred Stock could become a U.S. 10% Shareholder because upon the
happening of one of these events, the holders of 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 and 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.
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
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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'stotal 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 Series A Preferred Stock by U.S. Persons, Generally.
Subject to the discussions below relating to "Disposition of Series A Preferred
Stock by U.S. Persons Who are Not U.S. 10% Shareholders" and "Disposition of
Series A Preferred Stock by U.S. 10% Shareholders," U.S. Persons will, upon the
sale or exchange of 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.
Disposition of 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 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 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
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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
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 Series A Preferred Stock
sold. The Company will keep records showing what it believes to be the untaxed
RPII allocable to each share of Series A Preferred Stock and will, upon
reasonable request, provide any owner or prior owner of 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 currently
owns Series A Preferred Stock has been advised, and each such person which is
considering an investment in 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 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 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
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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 because 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 those 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
such dividends or gains are effectively connected with the conduct of a trade or
business within the U.S. Management believes that nonresident alien individuals
will not be subject to U.S. federal income or estate tax with respect to 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 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
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satisfy certain information reporting requirements. In addition, in such case, a
holder of 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 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 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 PricewaterhouseCoopers, 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 accounting and auditing.
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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 662 @ 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 662 @ 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
60
<PAGE>
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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<PAGE>
(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.
62
<PAGE>
"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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<PAGE>
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
64
<PAGE>
(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 oin
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.
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<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.
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<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
----
<S> <C>
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
Consolidated Balance Sheet as of March 31, 1998 ..................................................... F-17
Consolidated Statement of Operations for the Three Months Ended March 31, 1998 ................... F-18
Consolidated Statement of Mezzanine and Shareholders' Equity for the Three Months Ended
March 31, 1998 ...................................................................................... F-19
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1998 ....................... F-20
Notes to Consolidated Financial Statements for the Three Months Ended March 31, 1998 ................. F-21
</TABLE>
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 operations, mezzanine and shareholders' equity, 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.
PRICEWATERHOUSECOOPERS
Chartered Accountants
Hamilton, Bermuda
January 31, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997 AND MARCH 31, 1997
(EXPRESSED IN U.S. DOLLARS)
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
Other assets ............................................................... 2,018,309 68
Organization costs ......................................................... 4,421,353 11,980
------------ --------
Total assets ............................................................... $142,721,186 $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) ................................................ (12,057,969) 790
------------ --------
Total shareholders' equity ................................................. 31,757,476 12,790
------------ --------
Total liabilities, mezzanine and shareholders' equity ...................... $142,721,186 $133,790
============ ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
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
------------ -------
<S> <C> <C>
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 ........................................................ 6,510,103 11
Acquisition costs ......................................................... 53,590 0
Commitment fees ........................................................... 323,836 0
Excess of loss facility ................................................... 107,671 0
Losses and loss adjustment expenses ....................................... 55,000 0
------------ -------
TOTAL EXPENSES ............................................................ 7,050,200 11
------------ -------
NET INCOME (LOSS) FOR THE PERIOD .......................................... $ (2,706,182) $ 790
============ =======
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ............................ $(12,332,792) $ 790
------------ -------
BASIC AND FULLY DILUTED EARNINGS (LOSS)
PER COMMON SHARE ......................................................... $ (1.89) $ 0.07
============ =======
WEIGHTED AVERAGE SHARES OUTSTANDING ....................................... 6,522,313 12,000
============ =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
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)
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>
<TABLE>
<CAPTION>
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)
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 ......................................... (2,706,182) 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 ................................................... (12,057,969) 790
------------ -------
TOTAL SHAREHOLDERS' EQUITY ............................................... $ 31,757,476 $12,790
============ =======
TOTAL MEZZANINE AND SHAREHOLDERS' EQUITY ................................. $138,804,577 $12,790
============ =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
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)
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 .......................................... $(2,706,182) $ 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 ............................................... (1,001,883) 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
----------- --------
(6,701,177) (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
NOTES TO CONSOLIDATED 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
NOTES TO CONSOLIDATED 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
CGA's insurance contracts are classified as long-duration contracts
for accounting purposes as the contracts are expected to remain in
force for an extended period. The contracts generally are not subject
to unilateral changes in their provisions and require insurance
protection for extended periods. Premium rates generally are level
throughout the period of coverage. Premiums are recognized as written
upon inception of multi-year policies. Up-front premiums are earned
pro-rata over the period of risk. Installment premiums are earned over
each installment period.
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 on a straight-line basis over the estimated term
of the related insured risks.
c) 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.
d) 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
NOTES TO CONSOLIDATED 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)
d) 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.
e) 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. (See footnote h).
f) 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.
g) 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.
h) ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting
Comprehensive Income", effective for fiscal years beginning after
December 15, 1997. This statement requires the Company to report in
the financial statements, in addition to net income, comprehensive
income and its components. The Company has adopted this Statement in
the consolidated financial statements for the three months ended March
31, 1998. Comprehensive income for the Company is comprised solely of
unrealized gains or losses on investments.
FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related
Information", which the company will be required to adopt for fiscal
year 1998. This statement established standards for reporting
information about operating segments in annual financial statements
and requires selected information about operating segments in interim
financial reports issued to shareholders. It also established
standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS 131, operating
segments are to be determined consistent with the way that management
organizes and evaluates financial information
F-11
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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)
h) ACCOUNTING STANDARDS--(CONTINUED)
internally for making operating decisions and assessing performance.
The Company has not determined the impact of the adoption of this new
accounting standard on its consolidated financial statement
disclosures.
The Accounting Standards Executive issued Statement of Position 98-5,
"Reporting on Costs of Start-Up Activities", effective for fiscal
years beginning after December 15, 1998. This Statement will require
the Company to expense organization costs as incurred. The Company
will need to expense the remaining unamortized costs as a change in
accounting principle when it applies this SOP later this fiscal year.
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.
4. INVESTMENTS
a) FIXED MATURITIES
The fair values and amortized cost of fixed maturities at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
FAIR VALUE AMORTIZED COST
------------ --------------
<S> <C> <C>
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
============ ============
</TABLE>
The gross unrealized gains and losses related to fixed maturities at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
GAINS LOSSES
------------ ----------
<S> <C> <C>
Non-U.S. governments ....................................... $1,382,523 $(308,775)
Corporate securities ....................................... 583,353 (19,009)
------------ ----------
Fixed maturities ........................................... $1,965,876 $(327,784)
============ ==========
</TABLE>
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.
<TABLE>
<CAPTION>
FAIR VALUE AMORTIZED COST
------------ --------------
<S> <C> <C>
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
============ ============
</TABLE>
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
F-12
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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)
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.
b) NET INVESTMENT INCOME
New investment income for the periods ended December 31, 1997 and
March 31, 1997 was derived from the following sources:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
---------- ---------
<S> <C> <C>
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
========== ====
</TABLE>
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
<TABLE>
<CAPTION>
Mezzanine equity comprise:
DECEMBER 31, MARCH 31,
1997 1997
----------- ---------
<S> <C> <C>
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
=========== ===
</TABLE>
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
F-13
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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)
A and Series B are carried on the balance sheet at their redemption values, less
issuance costs plus accretion to 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 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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
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
=========
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
----------- ---------
<S> <C> <C>
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
========== ======
</TABLE>
F-14
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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
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
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.
<TABLE>
<CAPTION>
CONTRACTUAL/ UNREALIZED
NOTIONAL FAIR GAINS/
AMOUNT VALUE (LOSSES)
------------ ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Forward contracts ............................... $14,700 $13,900 $800
======= ======= ====
</TABLE>
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, for which no benefit has been recorded in the financial statements. These
tax loss carry-forwards expire in the year 2012.
F-15
<PAGE>
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 $127,041,276. Statutory net income for the nine months ended December 31,
1997 was $3,152,533. 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-16
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
MARCH 31
1998
--------
ASSETS
Fixed maturities available for sale, (at fair value)
(Amortized cost $124,334,235) ................................. $126,580,195
Cash and short-term investments ................................ 4,020,716
Premiums receivable ............................................ 1,025,623
Accrued interest receivable .................................... 3,106,826
Deferred acquisition costs ..................................... 1,384,064
Other assets ................................................... 2,092,106
Organization costs ............................................. 4,175,541
------------
Total assets ................................................ $142,385,071
============
LIABILITIES
Unearned premiums .............................................. $ 1,149,435
Provision for losses and loss adjustment expenses .............. 250,000
Deferred compensation payable .................................. 224,449
Accrued costs and expenses ..................................... 1,952,543
------------
Total liabilities ........................................... 3,576,427
------------
MEZZANINE EQUITY
Preferred stock, $.01 par value, 20,000,000 shares authorized:
Series A ...................................................... 66,866,439
Series B ...................................................... 37,150,575
Dividends accrued on Series A ................................. 100,924
Dividends accrued on Series B ................................. 6,661,192
------------
Total mezzanine equity ...................................... 110,779,130
------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 20,000,000 shares authorized ..... 91,000
Additional paid-in-capital ..................................... 43,080,364
Accumulated other comprehensive income ......................... 2,245,960
Retained deficit ............................................... (17,387,810)
------------
Total shareholders' equity .................................. 28,029,514
------------
Total liabilities and equity ................................ $142,385,071
============
F-17
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
1998
------------
UNDERWRITING INCOME
Net premiums written ........................................... $ 1,949,993
Unearned premiums .............................................. (878,858)
-----------
Net premiums earned ............................................ 1,071,135
-----------
INVESTMENT INCOME
Net investment income .......................................... 1,888,255
Net realized losses on sale of fixed maturities ................ (242,194)
-----------
Total investment income ..................................... 1,646,061
-----------
OTHER REVENUE
Management fee revenue ......................................... 189,056
-----------
TOTAL REVENUES .................................................. 2,906,252
-----------
EXPENSES
Operating expenses ............................................. 3,063,863
Acquisition costs .............................................. 53,245
Commitment fees ................................................ 147,945
Excess of loss facility ........................................ 50,000
Losses and loss adjustment expenses ............................ 195,000
-----------
Total expenses .............................................. 3,510,053
-----------
NET LOSS FOR THE PERIOD ......................................... (603,801)
Other comprehensive income ...................................... 607,868
Comprehensive income ............................................ $ 4,067
Net loss available to common shareholders ....................... $(5,683,130)
Basic and fully diluted loss per common share ................... $ 0.62
===========
Weighted average shares outstanding ............................. 9,100,000
===========
F-18
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEZZANINE AND SHAREHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
MARCH 31,
1998
-------------
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
Balance--beginning of period ............................... $ 27,965
Pay-in-kind dividends ...................................... 962
-------------
Balance--end of period ..................................... 28,927
-------------
ADDITIONAL PAID-IN CAPITAL--SERIES A PREFERRED STOCK
Balance--beginning of period ............................... 65,504,534
Fair value of warrants ..................................... (1,347,300)
Pay-in-kind dividends paid ................................. 2,402,193
Accretion to redemption value .............................. 171,424
Accretion on warrants ...................................... 106,661
-------------
Balance--end of period ..................................... 66,837,512
Pay-in-kind dividends accrued--Series A .................... 100,924
-------------
Series A Preferred Stock ................................... 66,967,363
-------------
SERIES B PREFERRED STOCK
Balance--beginning of period ............................... 16,000
Balance--end of period ..................................... 16,000
-------------
ADDITIONAL PAID-IN CAPITAL--SERIES B PREFERRED STOCK
Balance--beginning of period ............................... 37,059,371
Accretion to redemption value .............................. 75,204
-------------
Balance--end of period ..................................... 37,134,575
-------------
Pay-in-kind dividends accrued--Series B .................... 6,661,192
-------------
Series B Preferred Stock ................................... 43,811,767
-------------
Total Mezzanine Equity ..................................... 110,779,130
-------------
SHAREHOLDERS' EQUITY
COMMON STOCK
Balance--beginning of period ............................... 91,000
-------------
Balance--end of period ..................................... 91,000
-------------
ADDITIONAL PAID-IN CAPITAL--COMMON
Balance--beginning of period ............................... 42,086,353
Fair value of warrants ..................................... 1,347,300
Accretion of Series A Preferred Stock to redemption value .. (171,424)
Accretion of Series B Preferred Stock to redemption value .. (75,204)
Accretion on warrants ...................................... (106,661)
-------------
Balance--end of period ..................................... 43,080,364
-------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance--beginning of period ............................... 1,638,092
Net increase during the period.............................. 607,868
-------------
Balance--end of period ..................................... 2,245,960
-------------
RETAINED EARNINGS (DEFICIT)
Balance--beginning of period ............................... (12,057,969)
Net loss ................................................... (603,801)
Series A pay-in-kind dividends paid ........................ (2,403,154)
Series A pay-in-kind dividends accrued ..................... (100,924)
Series B pay-in-kind dividends accrued ..................... (2,221,962)
-------------
Balance--end of period ..................................... (17,387,810)
-------------
Total Shareholders' Equity ................................. 28,029,514
-------------
Total Mezzanine and Shareholders' Equity ................... $ 138,808,644
=============
F-19
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED
THREE MONTHS
ENDED
MARCH 31,
1998
------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ....................................................... $ (603,801)
----------
CHANGES IN NON-CASH ITEMS:
Amortization of investments .................................... 1,374,914
Depreciation expense ........................................... 81,415
Realized loss on sale of investments ........................... 242,194
Realized loss on sale of fixed assets .......................... 26,282
Premiums receivable ............................................ (578,451)
Other receivables .............................................. 85,114
Accrued interest ............................................... 973,774
Prepaid expenses ............................................... (44,117)
Deferred acquisition costs ..................................... (382,181)
Organization costs ............................................. 245,812
Other assets ................................................... 198,279
Unearned premiums .............................................. 878,859
Loss adjustment expenses ....................................... 195,000
Deferred compensation payable .................................. 224,449
Accrued costs and expenses ..................................... (1,638,490)
----------
Total adjustments .............................................. 1,882,853
----------
Net cash provided by operating activities ...................... 1,279,052
----------
Net purchases and sales of investments ......................... (4,286,671)
Net purchase of fixed assets ................................... (420,771)
Note receivable ................................................ 250,000
----------
Net cash used in investing activities .......................... (4,457,442)
----------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS ................ (3,178,390)
CASH AND SHORT-TERM INVESTMENTS--BEGINNING OF PERIOD ........... 7,199,106
----------
CASH AND SHORT-TERM INVESTMENTS--END OF PERIOD ................. $4,020,716
==========
F-20
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
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"). 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 are valued at $4.99 per
share and are accounted for as additional paid-in-capital to the Common Stock.
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. An annual fee of $600,000 is paid 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.
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
F-21
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The results of operations and cash flows for this period are not
necessarily indicative of results for the full year. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements as of December 31, 1997, and related notes thereto,
included in this Registration Statement.
a) PREMIUMS
CGA's insurance contracts are classified as long-duration contracts
for accounting purposes as the contracts are expected to remain in
force for an extended period. The contracts generally are not subject
to unilateral changes in their provisions and require insurance
protection for extended periods. Premium rates generally are level
throughout the period of coverage. Premiums are recognized as written
upon inception of multi-year policies. Up-front premiums are earned
pro-rata over the period of risk. Installment premiums are earned over
each installment period.
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 on a straight-line basis over the estimated term
of the related insured risks.
c) 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.
d) 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. 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
F-22
<PAGE>
CGA GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
when earned. The Company utilizes foreign currency forward contracts
for the purpose of managing certain investment portfolio exposures.
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.
e) 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. (See footnote i regarding Statement of Position
98-5).
f) 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.
g) LOSS PER COMMON SHARE
Loss per common share is calculated using net loss for the period
adjusted for preference dividends and accretion of preference stock to
redemption value and accretion on warrants divided by the weighted
average number of common shares outstanding and, if dilutive, shares
issuable under outstanding warrants.
h) 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 will be subject to U.S. taxation at regular
corporate tax rates.
i) ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting
Comprehensive Income", effective for fiscal years beginning after
December 15, 1997. This statement requires the Company to report in
the financial statements, in addition to net income, comprehensive
income and its components. The Company has adopted this Statement in
the consolidated financial statements for the three months ended March
31, 1998.
FASB issued Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related
Information", which the Company will be required to adopt for fiscal
year 1998. This statement established standards for reporting
information about operating segments in annual financial statements
and requires selected information about operating segments in interim
financial reports issued to shareholders. It also established
standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS 131, operating
segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making
operating decisions and assessing performance. The Company has not
determined the impact of the adoption of this new accounting standard
on its consolidated financial statement disclosures. Comprehensive
income for the Company is comprised solely of unrealized gains or
losses on investments.
F-23
<PAGE>
The Accounting Standards Executive issued Statement of Position 98-5,
"Reporting on Costs of Start-Up Activities", effective for fiscal
years beginning after December 15, 1998. This Statement will require
the Company to expense organization costs as incurred. The Company
will need to expense the remaining unamortized costs as a change in
accounting principle when it applies this SOP later this fiscal year.
3. MEZZANINE EQUITY
The Company's Series A Preferred Stock is subject to mandatory redemption
including all accrued and unpaid dividends thereon, on June 17, 2007. The Series
A Preferred Stock is also redeemable at the election of the Company at any time
after June 17, 2002, subject to the payment of early redemption premiums
starting at 11% initially and declining by 2% annually through June 16, 2007.
The Series B Preferred Stock is subject to mandatory redemption including all
accrued and unpaid dividends thereon, on June 17, 2012.
The dividends on the Series A Preferred Stock are declared quarterly by the
Board of Directors and paid in additional shares of Series A Preferred Stock.
The Company is currently in registration with the Securities and Exchange
Commission to register the Series A Preferred Stock. The Company is obligated to
pay an additional pay-in-kind dividend of .5% on the Series A Preferred Stock
from December 15, 1997 to the effective date of the registration statement. The
Board of Directors has not declared dividends on the Series B Preferred Stock,
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 the Series B Cumulative Voting Preference Shares is accrued and the charge
against retained earnings is recorded.
4. COMPARATIVE FIGURES
No comparative numbers are shown on the Statement of Operations as the
Company had not commenced operations prior to March 31, 1997.
F-24
<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 ........... 2
ADDITIONAL INFORMATION ........................ 2
PROSPECTUS SUMMARY ............................ 3
SUMMARY CONSOLIDATED HISTORICAL
FINANCIAL DATA ............................... 5
RISK FACTORS .................................. 6
USE OF PROCEEDS ............................... 11
SELECTED CONSOLIDATED HISTORICAL
FINANCIAL DATA ............................... 11
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................... 12
THE COMPANY ................................... 16
FINANCIAL GUARANTY BOND
INSURANCE INDUSTRY ........................... 21
REGULATION .................................... 23
MANAGEMENT .................................... 28
CERTAIN TRANSACTIONS .......................... 35
SELLING STOCKHOLDERS .......................... 35
PLAN OF DISTRIBUTION .......................... 36
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT ................................... 37
DESCRIPTION OF SECURITIES ..................... 41
CERTAIN TAX CONSIDERATIONS .................... 51
GLOSSARY ...................................... 60
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS ......................... F-1
====================================================
====================================================
2,992,109 SHARES
CGA GROUP, LTD.
SERIES A
PREFERRED STOCK
----------
PROSPECTUS
----------
_______ __, 1998
===================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table lists the expenses incurred in connection with the
distribution of the securities being registered hereby, all of which shall be
borne by the Company:
Commission Registration Fees ............... $ 22,610
Transfer Agent Fees ........................ --
Printing Costs ............................. 50,000
Legal Fees and Expenses .................... 150,000
Accounting Fees and Expenses ............... 20,000
Miscellaneous .............................. 10,000
Total .................................. $252,610
Other than the Commission registration fees, all of the foregoing are
estimates and subject to future contingencies.
ITEM 14. 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 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued the following equity
securities that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"):
On June 17, 1997, the Registrant redeemed its initial capitalization of
12,000 shares of common stock, par value of $1.00 per share, and effected the
following transactions:
(i) The Registrant issued to accredited investors 2.6 million shares
of Series A Preferred Stock for aggregate cash consideration of
$65,000,000. In addition, for no additional consideration, the Registrant
issued to the Series A Preferred Stockholders warrants which represent the
right to purchase a total of 270,000 shares of common stock, par value $.01
per share, of the Company ("Common Stock"). The principal underwriter for
this offering of the Series A Preferred Stock was Donaldson, Lufkin &
Jenrette Securities Corporation.
(ii) The Registrant issued to accredited investors 1.6 million
Investment Units for aggregate consideration of $140 million, consisting of
$80 million in cash and $60 million in commitments. Each Investment Unit
consists of one share of Series B Preferred Stock, 4.8925 shares of Common
Stock and a commitment to purchase 1.5 additional shares of Series B
Cumulative Voting Preference Shares upon the occurrence of certain events.
The principal underwriter for the offering of the Investment Units was
Salomon Brothers Inc.
(iii) The Registrant sold 1,272,043 shares of Common Stock to the
Sponsoring Investors and certain members of management for an aggregate
consideration of $6,360,215. The Registrant issued to such investors, for
no additional consideration, 847,729 warrants, which each represent the
right to purchase one share of Common Stock on or prior to June 16, 2007,
at an exercise price of $5 per share.
II-1
<PAGE>
(iv) The Registrant issued an additional 1,494,771 warrants, for no
consideration, to certain employees of the Company, which each represent
the right to purchase one share of Common Stock 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are either not
applicable, not required, or because the information required therein is
included in the financial statements or the notes thereto.
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.
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.
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 PricewaterhouseCoopers
24.1 Power of Attorney (included in signature page to Registration
Statement)
- ----------
* Included in the respective opinions.
** To be filed by amendment.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) 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;
(3) 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.
II-3
<PAGE>
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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; and
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<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 July 30,
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 July 30, 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-5
<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-1.
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
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.
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 PricewaterhouseCoopers
24.1 Power of Attorney (included in signature page to Registration
Statement)
- ----------
* Included in the respective opinions.
** To be filed by amendment.
FORM NO.2
EXHIBIT 3.1
[LOGO]
BERMUDA
THE COMPANIES ACT 1981
MEMORANDUM OF ASSOCIATION OF
COMPANY LIMITED BY SHARES
(Section 7(1) and (2))
MEMORANDUM OF ASSOCIATION
OF
CGA Group, Ltd.
(hereinafter referred to as "the Company")
1. The liability of the members of the Company is limited to the amount (if
any) for the time being unpaid on the shares respectively held by them.
2. We, the undersigned, namely,
BERMUDIAN NUMBER OF
STATUS SHARES
NAME ADDRESS (Yes/No) NATIONALITY SUBSCRIBE
---- ------- -------- ----------- ---------
Graham Collis Clarendon House Yes British One
Church Street
Hamilton
Bermuda
Edwin S. Mortimer " Yes British One
Anthony D. Whaley " Yes British One
do hereby respectively agree to take such number of shares of the Company as may
be allotted to us respectively by the provisional directors of the Company, not
exceeding the number of shares for which we have respectively subscribed, and
to satisfy such calls as may be made by the directors, provisional directors or
promoters of the Company in respect of the shares allotted to us respectively.
<PAGE>
3. The Company is to be an exempted Company as defined by the Companies Act
1981.
4. The Company has power to hold land situated in Bermuda not exceeding in
all, induding the following parcels-
N/A
5. The authorised share capital of the Company is US$12,000 divided into
shares of US$1.00 each. The minimum subscribed share capital of the
Company is US$12,000.
6. The objects for which the Company is formed and incorporated are -
1. as set out in paragraphs (b) to (n) and (p) to (u) inclusive of the
Second Schedule to the Act.
2. to provide and or procure financing and financial investment,
management and advisory services and administrative services to all or
any of the following: (i) any subsidiary company and affiliated
company (as such expressions are understood in the Companies Act 1981)
of the Company, wherever incorporated; (ii) any entity controlled,
directly or indirectly, by the Company; (iii) any entity in which the
Company owns, directly or indirectly, an equity interest of not less
than twenty percent of the total equity issued and outstanding in that
entity; and, in connection with any of the foregoing, to provide and
or procure credit, financial accommodation, loans and or advances with
or without interest to any such subsidiary or affiliate or entity and
to lend to and or deposit with any financial institution, fund and or
trust, all or any property of the Company and or any interest therein
to provide collateral for loans or other forms of financing provided
to any such subsidiary company or affiliate company or entity.
7. Powers of the Company
1. The Company shall, pursuant to Section 42 of the Companies Act 1981,
have the power to issue preference shares which are, at the option of
the holder, liable to be redeemed.
2. The Company shall, pursuant to Section 42A of the Companies Act 1981,
have the power to purchase its own shares.
<PAGE>
Signed by each subscriber in the presence of at least one witness attesting the
signature thereof -
/s/ GRAHAM COLLIS
- -------------------------------------- --------------------------------------
Graham Collis
/s/ EDWIN S. MORTIMER
- -------------------------------------- --------------------------------------
Edwin S. Mortimer
/s/ ANTHONY D. WHALEY
- -------------------------------------- --------------------------------------
Anthony D. Whaley
- -------------------------------------- --------------------------------------
(Subscribers) (Witnesses)
SUBSCRIBED this 23rd day of April, 1996.
<PAGE>
STAMP DUTY (To be affixed)
RC3
<PAGE>
THE COMPANIES ACT 1981
FIRST SCHEDULE
A company limited by shares may exercise all or any of the following powers
subject to any provision of the law or its memorandum:
1. [Deleted]
2. to acquire or undertake the whole or any part of the business, property and
liabilities of any person carrying on any business that the company is
authorised to carry on;
3. to apply for register, purchase, lease, acquire, hold, use, control,
licence, sell, assign or dispose of patents, patent rights, copyrights,
trade makers, formulae, licences, inventions, processes, distinctive makers
and similar rights;
4. to enter into partnership or into any arrangement for sharing of profits,
union of interests, co-operation, joint venture, reciprocal concession or
otherwise with any person carrying on or engaged in or about to carry on or
engage in any business or transaction that the company is authorised to
carry on or engage in or any business or transaction capable of being
conducted so as to benefit the company;
5. to take or otherwise acquire and hold securities in any other body
corporate having objects altogether or in part similar to those of the
company or carrying on any business capable of being conducted so as to
benefit the company;
6. subject to section 96 to lend money to any employee or to any person having
dealings with the company or with whom the company proposes to have
dealings or to any other body corporate any of those shares are held by the
company;
7. to apply for, secure or acquire by grant, legislative enactment,
assignment, transfer, purchase or otherwise and to exercise, carry out and
enjoy any charter, licence, power, authority, franchise, concession, right
or privilege, that any government or authority or any body corporation or
other public body may be empowered to grant, and to pay for, aid in and
contribute toward carrying it into effect and to assume any liabilities or
obligations incidental thereto;
8. to establish and support or aid in the establishment and support of
associations, institutions, funds or trusts for the benefit of employees or
former employees of the company or its predecessors, or the dependants or
connections of such employees or former employees, and grant pensions and
allowances, and make payments towards insurance or for any object similar
to those set forth in this paragraph, and to subscribe or guarantee money
for charitable, benevolent, educational and religious objects or for any
exhibition or for any public, general or useful objects;
9. to promote any company for the purpose of acquiring or taking over any of
the property and liabilities of the company or for any other purpose that
may benefit the company;
<PAGE>
-2-
10. to purchase, lease, take in exchange, hire or otherwise acquire any
personal property and any rights or privileges that the company considers
necessary or convenient for the purposes of its business;
11. to construct, maintain, alters, renovate and demolish any buildings or
works necessary or convenient for its objects;
12. to take land in Bermuda by way of lease or letting agreement for a term not
exceeding twenty-one years, being land "bona fide" required for the
purposes of the business of the company and with the consent of the
Minister granted in his discretion to take land in Bermuda by way of lease
or letting agreement for a similar period in order to provide accommodation
or recreational facilities for its officers and employees and when no
longer necessary for any of the above purposes to terminate or transfer the
lease or letting agreement;
13. except to the extent, if any, as may be otherwise expressly provided in its
incorporating Act or memorandum and subject to the provisions of this Act
every company shall have power to invest the moneys of the Company by way
of mortgage of real or personal property of every description in Bermuda or
elsewhere and to sell, exchange, vary, or dispose of such mortgage as the
company shall from time to time determine;
14. to construct, improve, maintain, work, manage, carry out or control any
roads, ways, tramways, branches or sidings, bridges, reservoirs,
watercourses, wharves, factories, warehouses, electric works, shops, stores
and other works and conveniences that may advance the interests of the
company and contribute to, subsidise or otherwise assist or take part in
the construction, improvement, maintenance, working, management, carrying
out or control thereof;
15. to raise and assist in raising money for, and aid by way of bonus, loan,
promise, endorsement, guarantee or otherwise, any person and guarantee the
performance or fulfilment of any contracts or obligations of any person,
and in particular guarantee the payment of the principal of and interest on
the debt obligations of any such person;
16. to borrow or raise or secure the payment of money in such manner as the
company may think fit;
17. to draw, make, accept, endorse, discount, execute and issue bills of
exchange, promissory notes, bills of lading, warrants and other negotiable
or transferable instruments;
18. when properly authorised to do so, to sell, lease, exchange or otherwise
dispose of the undertaking of the company or any part thereof as an
entirety or substantially as an entirety for such consideration as the
company thinks fit;
19. to sell, improve, manage, develop, exchange, lease, dispose of, turn to
account or otherwise deal with the property of the company in the ordinary
course of its business;
<PAGE>
-3-
20. to adopt such means of making known the products of the company as may seem
expedient, and in particular by advertising, by purchase and exhibition of
works of art or interest, by publication of books and periodicals and by
granting prizes and rewards and making donations;
21. to cause the company to be registered and recognised in any foreign
jurisdiction, and designate persons therein according to the laws of that
foreign jurisdiction or to represent the company and to accept service for
and on behalf of the company of any process or suit;
22. to allot and issue fully-paid shares of the company in payment or part
payment of any property purchase or otherwise acquired by the company or
for any past services performed for the company;
23. to distribute among the members of the company in cash, kind, specie or
otherwise as may be resolved, by way of dividend, bonus or in any other
manner considered advisable, any property of the company, but not so as to
decrease the capital of the company unless the distribution is made for the
purpose of enabling the company to be dissolved or the distribution, apart
from this paragraph, would be otherwise lawful;
24. to establish agencies and branches;
25. to take or hold mortgages, hypothecs, liens and charges to secure payment
of the purchase price, or of any unpaid balance of the purchase price, of
any part of the property of the company of whatsoever kind sold by the
company, or for any money due to the company from purchasers and others and
to sell or otherwise dispose of any such mortgage, hypothec, lien or
charge;
26. to pay all costs and expenses of or incidental to the incorporation and
organisation of the company;
27. to invest and deal with the moneys of the company not immediately required
for the objects of the company in such manner as may be determined;
28. to do any of the things authorised by this subsection and all things
authorised by its memorandum as principals, agents, contractors, trustees
or otherwise, and either alone or in conjunction with others;
29. to do all such other things as are incidental or conducive to the
attainment of the objects and the exercise of the powers of the company.
Every company may exercise its powers beyond the boundaries of Bermuda to
the extent to which the laws in force where the powers are sought to be
exercised permit.
<PAGE>
THE COMPANIES ACT 1981
SECOND SCHEDULE
A company may by reference include in its memorandum any of the following
objects that is to say the business of:
(b) packaging of goods of all kinds;
(c) buying, selling and dealing in goods of all kinds;
(d) designing and manufacturing of goods of all kinds;
(e) mining and quarrying and exploration for metals, minerals, fossil fuels and
precious stones of all kinds and their preparation for sale or use;
(f) exploring for, the drilling for, the moving, transporting and re-fining
petroleum and hydro carbon products including oil and oil products;
(g) scientific research including the improvement, discovery and development
of processes, inventions, patents and designs and the construction,
maintenance and operation of laboratories and research centres;
(h) land, sea and air undertakings including the land, ship and air carriage of
passengers, mails and goods of all kinds;
(i) ships and aircraft owners, managers, operators, agents, builders and
repairers;
(j) acquiring, owning, selling, chartering, repairing or dealing in ships and
aircraft;
(k) travel agents, freight contractors and forwarding agents;
(1) dock owners, wharfingers, warehousemen;
(m) ship chandlers and dealing in rope, canvas oil and ship stores of all
kinds;
(n) all forms of engineering;
(p) farmers, livestock breeders and keepers, graziers, butchers, tanners and
processors of and dealers in all kinds of live and dead stock, wool, hides,
tallow, grain, vegetables and other produce;
<PAGE>
-2-
(q) acquiring by purchase or otherwise and holding as an investment inventions,
patents, trade marks, trade names, trade secrets, designs and the like;
(r) buying, selling, hiring, letting and dealing in conveyances of any sort;
and
(s) employing, providing, hiring out and acting as agent for artists, actors,
entertainers of all sorts, authors, composers, producers, engineers and
experts or specialists of any kind.
(t) to acquire by purchase or otherwise hold, sell, dispose of and deal in real
property situated outside Bermuda and in personal property of all kinds
wheresoever situated.
(u) to enter into any guarantee, contract of indemnity or suretyship and to
assure, support or secure with or without consideration or benefit the
performance of any obligations of any person or persons and to guarantee
the fidelity of individuals filling or about to fill situations of trust or
confidence.
<PAGE>
FORM NO.6 Registration No. EC22059
[LOGO]
BERMUDA
CERTIFICATE OF INCORPORATION
I hereby in accordance with section 14 OF THE COMPANIES ACT 1981 issue this
Certificate of Incorporation and do certify that on the 21st day of JUNE, 1996
CGA Group, Ltd.
was registered by me in the Register maintained by me under the provisions of
the said section and that the status of the said company is that of an EXEMPTED
company.
Given under my hand and the Seal of
[SEAL] the REGISTRAR OF COMPANIES
this 26TH day of June, 1996.
for REGISTRAR OF COMPANIES
B Y E - L A W S
OF
CGA GROUP, LTD.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Bye-Laws Page
----
<S> <C> <C>
1. Interpretation................................................................................ 1
2. Board of Directors............................................................................ 8
3. Management of the Company..................................................................... 8
4. Power to appoint Chief Executive Officer...................................................... 9
5. Power to appoint manager...................................................................... 9
6. Power to authorise specific actions........................................................... 9
7. Power to appoint attorney..................................................................... 9
8. Power to delegate to a committee.............................................................. 10
9. Power to appoint and dismiss employees........................................................ 11
10. Power to borrow and charge property........................................................... 11
11. Exercise of power to redeem or purchase shares of or discontinue the Company.................. 12
12. Election of Directors......................................................................... 12
13. Defects in appointment of Directors........................................................... 14
14. Alternate Directors........................................................................... 15
15. Removal of Directors.......................................................................... 16
16. Vacancies on the Board ....................................................................... 17
17. Notice of meetings of the Board............................................................... 18
18. Quorum at meetings of the Board .............................................................. 18
19. Meetings of the Board ........................................................................ 18
20. Unanimous written resolutions................................................................. 19
21. Contracts and disclosure of Directors' interests.............................................. 19
22. Remuneration of Directors..................................................................... 20
23. Officers of the Company....................................................................... 20
24. Appointment and Removal of Officers........................................................... 21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
25. Remuneration of Officers...................................................................... 21
26. Duties of Officers; Exercise of Executive Authority........................................... 21
27. Chairman of meetings.......................................................................... 21
28. Register of Directors and Officers............................................................ 22
29. Obligations of Board to keep minutes.......................................................... 22
30. Indemnification of Directors and Officers of the Company...................................... 22
31. Waiver of claim by Member..................................................................... 23
32. Notice of annual general meeting.............................................................. 24
33. Notice of special general meeting............................................................. 24
34. Accidental omission of notice of general meeting.............................................. 24
35. Meeting called on requisition of Members...................................................... 25
36. Short notice.................................................................................. 25
37. Postponement of meetings...................................................................... 25
38. Quorum for general meeting.................................................................... 25
39. Adjournment of meetings....................................................................... 26
40. Attendance at meetings........................................................................ 26
41. Written resolutions........................................................................... 26
42. Attendance of Directors....................................................................... 28
43. Voting at meetings............................................................................ 28
44. [Intentionally omitted]....................................................................... 29
45. Decision of chairman.......................................................................... 29
46. Voting by poll................................................................................ 29
47. Seniority of joint holders voting............................................................. 30
48. Instrument of proxy........................................................................... 30
49. Representation of corporations or other non-natural Person at meetings........................ 30
</TABLE>
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<TABLE>
<S> <C> <C>
50. Rights of shares; Votes of Members; Special Votes of Members Relating to Insurance
Subsidiary.................................................................................... 31
51. Power to issue shares......................................................................... 33
52. Variation of rights, alteration of share capital and purchase of shares of the Company........ 34
53. Registered holder of shares................................................................... 36
54. Death of a joint holder....................................................................... 36
55. Share certificates............................................................................ 36
56. Calls on shares............................................................................... 37
57. Forfeiture of shares.......................................................................... 37
58. Contents of Register of Members............................................................... 38
59. Inspection of Register of Members............................................................. 38
60. Determination of record dates................................................................. 38
61. Instrument of transfer........................................................................ 39
62. Restriction on transfer....................................................................... 39
63. Transfers by joint holders.................................................................... 40
64. Representative of deceased Member............................................................. 41
65. Registration on death or bankruptcy........................................................... 41
66. Declaration of dividends by the Board......................................................... 42
67. Other distributions........................................................................... 42
68. Reserve fund.................................................................................. 42
69. Deduction of Amounts due to the Company....................................................... 42
70. Issue of bonus shares......................................................................... 42
71. Records of account............................................................................ 43
72. Financial year end............................................................................ 43
73. Financial statements.......................................................................... 44
74. Appointment of Auditor........................................................................ 44
75. Remuneration of Auditor....................................................................... 44
</TABLE>
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<TABLE>
<S> <C> <C>
76. Vacation of office of Auditor................................................................. 44
77. Access to books of the Company................................................................ 44
78. Report of the Auditor......................................................................... 45
79. Notices to Members of the Company............................................................. 45
80. Notices to joint Members...................................................................... 45
81. Service and delivery of notice................................................................ 45
82. The seal...................................................................................... 46
83. Manner in which seal is to be affixed......................................................... 46
84. Winding-up/distribution by liquidator......................................................... 46
85. Alteration of Bye-laws........................................................................ 47
</TABLE>
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Appendices:
Appendix A - Designations, Number, Voting Powers, Preferences and
Rights of Series A Cumulative Voting Preference Shares
Appendix B - Designations, Number, Voting Powers, Preferences and
Rights of Series B Cumulative Voting Preference Shares
Appendix C - Designations, Number, Voting Powers and Rights of
Common Shares
Exhibit:
Exhibit I - Series A Preferred Stock Subscription Agreement
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INTERPRETATION
1. Interpretation
(1) In these Bye-laws the following words and expressions shall, where not
inconsistent with the context, have the following meanings respectively:
(a) "Act" means the Companies Act 1981 as amended from time to time;
(b) "Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person and
includes each officer, director, trustee or general partner of
such Person, and each owner of 10% or more of any class of voting
stock or interests of such Person. For the purposes of this
definition, "control" when used with respect to any specified
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. A Person shall not be deemed an Affiliate of the
Company solely through possession of the right to elect one
director;
(c) "Affiliated Member" means with respect to any other Member a
Member who is an Affiliate of such other Member;
(d) "Alternate Director" means an alternate Director appointed in
accordance with these Bye-laws;
(e) "Auditor" means the independent representative of the Members
appointed to audit the accounts of the Company pursuant to the
Act;
(f) "Board" means the Board of Directors appointed or elected
pursuant to these Bye-laws and acting by resolution in accordance
with the Act and these Bye-laws or the Directors present at a
meeting of Directors at which there is a quorum;
(g) "Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in the City of New York or
<PAGE>
Bermuda are authorised by law or executive order to close;
(h) "Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations
or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible or exchangeable into
such equity;
(i) "Cause" means, with respect to any Person exercising his powers
and discharging his duties as a Director or Officer, as the case
may be, (i) a failure of such Person to act honestly and in good
faith with a view to the best interests of the Company or (ii) a
determination by a majority of the Board that such Person has
failed to exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable
circumstances;
(j) "CEO Director" has the meaning ascribed to such term in Bye-law
12;
(k) "Chairman" has the meaning ascribed to such term in Bye-law 12;
(l) "Closing Date" means June __, 1997;
(m) "Code" means the United States Internal Revenue Code of 1986, as
amended;
(n) "Commitment Draw" means the purchase of Series B Preference
Shares by certain Members pursuant to Section 1.3 of the
Investment Unit Subscription Agreement;
(o) "Common Shares" has the meaning ascribed to such term in Bye-law
50;
(p) "Company" means the company for which these Bye-laws are approved
and confirmed;
(q) "Controlled Shares" in reference to any Person means all shares
of the Company that such Person is deemed to own directly,
indirectly or by attribution (within the meaning of Section 958
of the Code);
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(r) "day" means any calendar day, whether or not such day is a
Business Day;
(s) "Director" means a director of the Company and shall include an
Alternate Director;
(t) "Designating Member(s)" means any Member(s) or class of Members
entitled to designate a Director pursuant to the provisions of
subparagraphs (2) or (3) of Bye-law 12 and, with respect to the
CEO Director, means the Chief Executive Officer of the Company;
(u) "Eligible Investment Unit Investor" means (i) each of the
following Members for so long as such Member, together with its
Affiliates, owns (either separately or as part of Investment
Units) the lesser of (A) at least 5% of the Common Shares then
outstanding or (B) the number of Common Shares acquired by such
Member pursuant to the Investment Unit Subscription Agreement:
Capital Reinsurance Company, Pacific Mutual Life Insurance
Company, J.P. Morgan Investment Management, Inc., Third Avenue
Trust, Olympus Growth Fund, II L.P., ACE Limited, Lennar CGA
Holdings, Inc., Starwood CGA, LLC, CGA Firemark Venture Fund I,
LLC, Mutual Discovery Fund, Inc., and Prudential Securities Group
Inc. and (ii) any transferee of an Eligible Investment Unit
Investor if and for so long as such transferee, or a transferee
of such transferee, together with its Affiliates, owns as a
result of an acquisition of shares from a single Eligible
Investment Unit Investor (either separately or as part of
Investment Units) at least 5% (or, in the case of a transferee of
CGA Firemark Venture Fund I, LP, or a transferee of such
transferee, at least 4.6%) of the Common Shares then outstanding;
provided that, no group of Affiliated Members shall be deemed to
be more than one Eligible Investment Unit Investor, provided
further, that, with respect to Affiliated Members which together
own (either separately or as part of Investment Units) sufficient
Common Shares to qualify as an Eligible Investment Unit Investor,
(x) if one such Affiliated Member owns (either separately or as
part of Investment Units) a larger percentage of Common Shares
than the other such Affiliated Members, such Affiliated Member
shall be deemed the Eligible Investment Unit Investor
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<PAGE>
and (y) if no such Affiliated Member owns (either separately or
as part of Investment Units) a larger percentage of Common Shares
than the other such Affiliated Members, the Affiliated Member
designated by such Affiliated Members shall be deemed the
Eligible Investment Unit Investor;
(v) "Event of Non-Compliance" means an Event of Non-Compliance as
such term is defined in the Series A Preferred Stock Subscription
Agreement as in effect on the Closing Date;
(w) "Independent Director" means a director who is neither an officer
of the Company nor an officer, director, employee or Affiliate of
any Member;
(x) "Insurance Subsidiary" means Commercial Guaranty Assurance, Ltd.,
a Bermuda exempted company with limited liability (and its
successors);
(y) "Investment Unit Directors" shall have the meaning ascribed to
such term in Bye-law 12;
(z) "Investment Unit Subscription Agreement" means the Company's
Investment Units Subscription Agreement, dated as of the Closing
Date, among the Company and certain Members;
(aa) "Majority Controlled Affiliates" 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 the relatives, of such specified Person;
(ab) "Management Director" shall have the meaning ascribed to such
term in Bye-law 12;
(ac) "Maximum Percentage" means, with respect to any Person, ten
percent (10%) or, if applicable, such other percentage as the
Board shall have previously approved for such Person;
4
<PAGE>
(ad) "Member" means the Person registered in the Register of Members
as the holder of shares in the Company and, when two or more
Persons are so registered as joint holders of shares, means the
Person whose name stands first in the Register of Members as one
of such joint holders or all of such Persons as the context so
requires;
(ae) "notice" means written notice as further defined in these
Bye-laws unless otherwise specifically stated;
(af) "Officer" means any person appointed by the Board to hold an
office in the Company;
(ag) "Person" means an individual, a partnership, a joint-stock
company, a corporation, a trust or unincorporated organization, a
limited liability company or a government or an agency or
political subdivision thereof;
(ah) "Preference Shares" has the meaning ascribed to such term in
Bye-law 50;
(ai) "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;
(aj) "Qualified Public Offering" means the completion of an
underwritten public offering for Common Shares pursuant to a
registration statement under the United States Securities Act of
1933, as amended, resulting in net proceeds to the Company of at
least U.S. $50,000,000;
(ak) "Register of Directors and Officers" means the Register of
Directors and Officers referred to in these Bye-laws;
(al) "Register of Members" means the Register of Members referred to
in these Bye-laws;
(am) "Resident Representative" means any Person appointed to act as
resident representative
5
<PAGE>
under the Act and includes any deputy or assistant resident
representative;
(an) "Restricted Subsidiary" means those subsidiaries designated or
classified as Restricted Subsidiaries pursuant to Section 7.9 of
the Series A Preferred Stock Subscription Agreement;
(ao) "Secretary" means the person appointed to perform any or all the
duties of secretary of the Company and includes any deputy or
assistant secretary;
(ap) "Series A Preference Shares" has the meaning ascribed to such
term in Appendix A hereto;
(aq) "Series A Preferred Directors" has the meaning ascribed to such
term in Bye-law 12;
(ar) "Series A Preferred Stock Subscription Agreement" means that
certain Series A Preferred Stock Subscription Agreement, attached
hereto (without the attached schedules or annexes (other than
Annex VII)) as Exhibit I;
(as) "Series B Preference Shares" has the meaning ascribed to such
term in Appendix B hereto;
(at) "Shareholders Agreement" means that certain Shareholders
Agreement, dated as of the Closing Date, among the Company and
certain Members, as such agreement may be amended, supplemented,
restated or otherwise modified from time to time;
(au) "Shidler" means Jay H. Shidler and his Majority Controlled
Affiliates (except with respect to the use of this term in
Bye-law 12, where "Shidler" shall mean Jay H. Shidler and his
Majority Controlled Affiliates other than his relatives or any
trust, corporation or other entity for the benefit of his
relatives);
(av) "Shidler Director" has the meaning ascribed to such term in
Bye-law 12;
(aw) "Specified Holders" means the holders of the shares of the
Company as of the Closing Date and their Majority Controlled
Affiliates;
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(ax) "Sponsoring Investors" means the Specified Holders who acquired
shares of the Company pursuant to the Founders' Common Stock
Subscription Agreement, among the Company and certain Members,
and the Transferees of such Specified Holders;
(ay) "Transferee" shall have the meaning ascribed to such term in
Schedule - Form D hereto;
(az) "United States" means the United States of America, its
territories, possessions and areas subject to its jurisdiction;
(ba) "U.S. Person" means an individual who is a citizen or resident of
the United States, a company, corporation or partnership created
or organized under the laws of the United States or any state
thereof, an estate, the income of which, from non-United States
sources and not effectively connected with the conduct of a trade
or business in the United States, is includable in gross income
for United States federal income tax purposes, or a trust, if (i)
a court within the United States may exercise primary supervision
of the trust, and (ii) one or more United States fiduciaries have
the authority to control all substantial decisions of the trust;
and
(bb) "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 of such Person, or Persons performing
similar functions.
(2) In these Bye-laws, where not inconsistent with the context:
(a) words denoting the plural number include the singular number and
vice versa;
(b) words denoting the masculine gender include the feminine gender;
(c) the word:
(i) "may" shall be construed as permissive;
(ii) "shall" shall be construed as imperative; and
7
<PAGE>
(d) unless otherwise provided herein words or expressions defined in
the Act shall bear the same meaning in these Bye-laws.
(3) Expressions referring to writing or written shall, unless the contrary
intention appears, include facsimile, printing, lithography, photography and
other modes of representing words in a visible form.
(4) Headings used in these Bye-laws are for convenience only and are not to
be used or relied upon in the construction hereof.
(5) Appendices A, B and C are each a part of these Bye-laws and all
references to these Bye-laws shall include such Appendices and, where conflicts
exist between the terms of any such Appendix and these Bye-laws (not including
the Appendices), the terms of such Appendix shall prevail.
(6) The Exhibit to these Bye-laws is not to be construed as part of these
Bye-laws.
(7) All references herein to "$", "US$", "dollar" or "cash" are to
United States dollars in immediately available funds.
BOARD OF DIRECTORS
2. Board of Directors
The business of the Company shall be managed and conducted by the Board.
3. Management of the Company
(1) In managing the business of the Company, the Board may exercise all
such powers of the Company as are not, by statute or by these Bye-laws, required
to be exercised by the Company in general meeting, subject, nevertheless, to
these Bye-laws, the provisions of any statute and to such directions as may be
prescribed by the Company in general meeting.
(2) No regulation or alteration to these Bye-laws made by the Company in
general meeting shall invalidate any prior
8
<PAGE>
act of the Board which would have been valid if that regulation or alteration
had not been made.
(3) The Board may procure that the Company pays all expenses incurred in
promoting and incorporating the Company.
4. Power to appoint Chief Executive Officer
The Board shall appoint a natural person to the office of Chief Executive
Officer of the Company who shall, subject to the control of the Board, supervise
and administer all of the general business and affairs of the Company, PROVIDED
THAT, prior to a Qualified Public Offering, such person shall be a Member while
such person serves as Chief Executive Officer.
5. Power to appoint manager
The Board may appoint a person to act as manager of the Company's day to
day business and may entrust to and confer upon such manager such powers and
duties as it deems appropriate for the transaction or conduct of such business.
6. Power to authorise specific actions
The Board may from time to time and at any time authorise any non-United
States Person or body of Persons to act on behalf of the Company for any
specific purpose and in connection therewith to execute any agreement, document
or instrument on behalf of the Company. The Board may revoke any authorisation
at any time.
7. Power to appoint attorney
The Board may from time to time and at any time by power of attorney
appoint any company, firm, Person or body of Persons, whether nominated directly
or indirectly by the Board, to be an attorney of the Company for such purposes
and with such powers, authorities and discretions (not exceeding those vested in
or exercisable by the Board) and for such period and subject to such conditions
as it may think fit and any such power of attorney may contain such provisions
for the
9
<PAGE>
protection and convenience of Persons dealing with any such attorney as the
Board may think fit and may also authorise any such attorney to sub-delegate all
or any of the powers, authorities and discretions so vested in the attorney.
Such attorney may, if so authorised under the seal of the Company, execute any
deed or instrument under such attorney's personal seal with the same effect as
the affixation of the seal of the Company. The Board may revoke any power of
attorney at any time.
8. Power to delegate to a committee
(1) The Board may delegate any of its powers to one or more committees
appointed by the Board, which committee(s) shall consist only of Directors,
unless otherwise set forth in these Bye-laws, and every such committee shall
conform to such directions as the Board shall impose on them. No committee
appointed by the Board shall consist entirely of non-directors.
(2) The following committees shall be established by the Board:
(a) A Compensation Committee consisting of at least five (5) members.
None of the members of the Compensation Committee shall be officers or
employees of the Company.
(b) An Audit Committee consisting of at least five (5) members.
(c) An Underwriting Committee consisting of at least seven (7)
members.
(d) An Investment Committee consisting of at least five (5) members.
(3) The Board shall, by resolution adopted by the affirmative vote of a
majority of the Board, in accordance with these Bye-laws, elect and designate
the members of any committees established by the Board. Any member of any
committee may be removed from such committee either with or without cause, at
any time, by resolutions adopted by the
10
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affirmative vote of a majority of the Board at any meeting thereof.
(4) Meetings of each committee shall be held upon call of the chairperson
of such committee or of two members of such committee. Meetings of each
committee may also be held at such other times as such committee may determine.
Meetings of a committee shall be held at such places (outside the United States)
and upon such notice as such committee may determine or as may be specified in
the calls of such meetings. Any such chairperson, if present, or such member or
members of each committee as may be designated by the Board, shall preside at
meetings thereof or, in the event of the absence or disability of any such
chairperson or failing such designation, the committee shall select from among
its members present a presiding committee member as chairperson.
(5) At each meeting of any committee there shall be present to constitute a
quorum for the transaction of business at least a majority of the members of
such committee. Any alternate member who is replacing an absent member shall be
counted in determining whether a quorum is present. The vote of a majority of
the members present at a meeting of any standing committee at the time of the
vote, if a quorum is present at such time, shall be the act of such committee.
(6) Each of the committees shall keep minutes of its meetings, which shall
be reported to the Board at its regular meetings, and if called for by the
Board, at any special meeting.
9. Power to appoint and dismiss employees
The Board may appoint, suspend or remove any manager, secretary, clerk,
agent or employee of the Company and may fix their remuneration and determine
their duties.
10. Power to borrow and charge property
The Board may exercise all the powers of the Company to borrow money and to
mortgage or charge its undertaking,
11
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property and uncalled capital, or any part thereof, and may issue debentures,
debenture stock and other securities whether outright or as security for any
debt, liability or obligation of the Company or any third party.
11. Exercise of power to redeem or purchase shares of or discontinue the Company
(1) The Board may exercise all the powers of the Company to redeem or
purchase all or any part of its own shares pursuant to Section 42 and Section
42A of the Act and these Bye-laws. No vote of the Members shall be required in
this regard.
(2) The Board may exercise all the powers of the Company to discontinue the
Company under the Act and to continue the Company in a named country or
jurisdiction outside Bermuda pursuant to Section 132G of the Act.
12. Election of Directors
(1) The Board shall consist of at least eleven Directors or such number in
excess thereof as may be necessary to comply with the other provisions of this
Bye-law 12 or, after a Qualified Public Offering, such number as the Members may
from time to time determine, who shall be elected or appointed at the annual
general meeting, at any special general meeting called for the purpose or in
accordance with these Bye-laws, in particular this Bye-law 12, and who shall
hold office for such term as the Members may determine or, in the absence of
such determination, until the next annual general meeting or until their
successors are elected or appointed or their office is otherwise vacated, and
any general meeting may authorise the Board to fill any vacancy in their number
left unfilled at a general meeting.
(2) Notwithstanding the provisions of subparagraph (1) of this Bye-law and
except as otherwise provided in this Bye-law, at any time the Board shall
consist of: one Director (the "Shidler Director") designated by Shidler, for so
long as
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Shidler is a Member and holds at least 2.5% of the issued and outstanding Common
Shares or, if Shidler no longer holds such shares, designated by a majority of
the Common Shares held by Sponsoring Investors voting as a class; one Director
(the "CEO Director") who is the Chief Executive Officer of the Company
(provided, that such Director shall no longer be a Director immediately after he
or she ceases to be a Member or ceases to serve as the Chief Executive Officer);
a number of Directors (the "Investment Unit Directors") equal to the greater of
eight and the number of Eligible Investment Unit Investors existing at such
time, designated as follows: each Eligible Investment Unit Investor shall
appoint one Director and, if the number of Eligible Investment Unit Investors is
at any time less than eight, such number of Directors as is necessary to
increase the total number of Investment Unit Directors to eight shall be
designated by a majority of the holders of the Common Shares other than (i) the
Sponsoring Investors and (ii) the Eligible Investment Unit Investors other than
ACE Limited (as long as ACE Limited is not a U.S. Person), PROVIDED THAT, if
necessary, the voting power of any U.S. Person which is a holder of Common
Shares eligible to vote to designate such additional Investment Unit Directors
shall be diluted such that such U.S. Person cannot in effect designate more than
one Director; one Director (the "Management Director") designated by a majority
of the Common Shares held by Sponsoring Investors voting as a class other than
Common Shares held by the Chief Executive Officer and Shidler and any Persons
treated as "related" to either of such Persons under the attribution rules set
forth in Section 958 of the Code.
(3) Notwithstanding subparagraphs (1) and (2) of this Bye-law, upon the
occurrence of an Event of Non-Compliance (unless at such time another Event of
Non-Compliance has occurred previously and is continuing), the Board shall be
increased by two additional Directors (the "Series A Preferred Directors") and
each such additional Director shall be designated exclusively by the holders of
at least a majority
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of the Series A Preference Shares voting separately as a class, provided that
such increases in the size of the Board shall be effective, and each such
Director so designated shall be a Director, only until such time as no Event of
Non-Compliance is continuing and, upon all Events of Non-Compliance ceasing to
continue, each such additional Director shall automatically vacate and be deemed
to have resigned from the office of Director and shall no longer be a Director.
There shall never be more than two (2) Series A Preferred Directors. The rights
of the holders of Series A Preference Shares shall exist even if such rights
shall cause the holders of the Series A Preference Share to exceed the
percentage limitation that no Person shall hold 10% or more of the combined
voting power of the capital stock of the Company.
(4) The rights and obligations provided by subparagraph (2) of this Bye-law
shall terminate upon a Qualified Public Offering for all members, except that
(a) Shidler, if and for so long as he continues to hold, on a fully diluted
basis, at least 5% of the Common Shares outstanding following a Qualified Public
Offering and (b) any Eligible Investment Unit Investor that continues to hold,
on a fully diluted basis, at least 5% of the Common Shares outstanding following
a Qualified Public Offering will retain the right to designate one Director
(notwithstanding any other provision of these Bye-laws to the contrary, Shidler
or any such Eligible Investment Unit Investor that so designates a Director
shall not be entitled to participate with the other Members in voting for other
Directors to the extent that such participation would result in Shidler or such
Eligible Investment Unit Investor holding the Maximum Percentage in terms of
voting power of the Controlled Shares).
13. Defects in appointment of Directors
All acts done bona fide at any meeting of the Board or by a committee of
the Board duly authorised to take such action or by any person acting as a
Director shall, notwithstanding
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that it be afterwards discovered that there was some defect in the appointment
of any Director or person acting as aforesaid, or that they or any of them were
disqualified, be as valid as if every such person had been duly appointed and
was qualified to be a Director.
14. Alternate Directors
(1) (a) Prior to a Qualified Public Offering, any Designating Member(s) may
designate a Person to act as an Alternate Director in the alternative to the
Director designated by such Designating Member(s). After a Qualified Public
Offering, any general meeting of the Company may elect a person or persons to
act as an Alternate Director in the alternative to any one or more of the
Directors of the Company or may authorise the Board to appoint such Alternate
Directors; PROVIDED THAT only the holders of a majority of the Series A
Preference Shares may designate Alternate Directors for the Series A Preferred
Directors.
(b) Unless the Designating Member(s) otherwise indicate objection thereto
by notice in writing deposited with the Secretary or the Members otherwise
resolve, as the case may be, any Director may appoint a person or persons to act
as an Alternate Director in the alternative to himself or herself by notice in
writing deposited with the Secretary.
(c) Any person so appointed as an Alternate Director shall have all the
rights and powers of the Director or Directors for whom such person is appointed
in the alternative provided that such person shall not be counted more than once
in determining whether or not a quorum is present.
(2) An Alternate Director shall be entitled to receive notice of all
meetings of the Board and to attend and vote at any such meeting at which a
Director for whom such Alternate Director was appointed in the alternative is
not personally present and generally to perform at such meeting all the
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functions of such Director for whom such Alternate Director was appointed.
(3) An Alternate Director shall cease to be such if (x) the Director for
whom such Alternate Director was appointed ceases for any reason to be a
Director but may be re-appointed by the Designating Member(s), the Members or
the Board, as the case may be, in accordance with subparagraph 1(a) of this
Bye-law, as alternate to the person appointed to fill the vacancy in accordance
with these Bye-laws or (y) such Alternate Director is removed by the Designating
Member(s), the Members, the Board or the Director, as the case may be, which
appointed such Alternate Director.
15. Removal of Directors
(1) The Designating Member(s) may remove the Director appointed by it
(them) pursuant to Bye-law 12, with or without Cause, and the Board may remove
any Director, for Cause only, at any time without notice or a special general
meeting and a vacancy on the Board created by the removal of a Director under
the provisions of this subparagraph may be filled by such Designating Member(s)
in accordance with Bye-law 12, PROVIDED THAT the rights and obligations provided
by this subparagraph, other than with respect to a Series A Preferred Director
designated pursuant to subparagraph (3) of Bye-law 12, shall terminate upon a
Qualified Public Offering.
(2) Following a Qualified Public Offering, other than with respect to a
Series A Preferred Director designated pursuant to subparagraph (3) of Bye-law
12, the Members may, at any special general meeting convened and held in
accordance with these Bye-laws, remove a Director, with or without Cause,
provided that the notice of any such meeting convened for the purpose of
removing a Director shall contain a statement of the intention so to do and be
served on such Director not less than 14 days before the meeting and at such
meeting such Director shall be entitled to be heard on the motion for such
Director's removal.
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(3) A vacancy on the Board created by the removal of a Director under the
provisions of subparagraph (2) of this Bye-law may be filled by the Members at
the meeting at which such Director is removed and, in the absence of such
election or appointment, the Board may fill the vacancy.
16. Vacancies on the Board
(1) The Designating Member(s) shall have the power from time to time and at
any time to appoint any person as a Director to fill a vacancy on the Board
occurring with respect to the Director such Designating Member(s) is (are)
entitled to designate and to appoint an Alternate Director to such Director so
appointed, PROVIDED THAT the rights and obligations provided by this
subparagraph, other than with respect to a Series A Preferred Director
designated pursuant to subparagraph (3) of Bye-law 12, of this Bye-law shall
terminate upon a Qualified Public Offering.
(2) Following a Qualified Public Offering, the Board shall have the power,
other than with respect to a Series A Preferred Director designated pursuant to
subparagraph (3) of Bye-law 12, from time to time and at any time to appoint any
person as a Director to fill a vacancy on the Board, unless filled by the
Members pursuant to subparagraph (3) of Bye-law 15, and to appoint an Alternate
Director to any Director so appointed.
(3) The Board may act notwithstanding any vacancy in its number but, if and
for so long as its number is reduced below the number fixed by these Bye-laws as
the quorum necessary for the transaction of business at meetings of the Board,
the continuing Directors or Director may act only for the purpose of:
(a) summoning a general meeting of the Company; or
(b) preserving the assets of the Company.
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(4) The office of Director shall be vacated by a Director if such Director:
(a) is removed from office pursuant to these Bye-laws or is
prohibited from being a Director by law;
(b) is or becomes bankrupt or makes any arrangement or composition
with his creditors generally;
(c) is or becomes of unsound mind or dies;
(d) resigns his or her office by notice in writing to the Company.
17. Notice of meetings of the Board
(1) A Director may, and the Secretary on the requisition of a Director
shall, at any time summon a meeting of the Board
.
(2) Notice of a meeting of the Board shall be deemed to be duly given
to a Director if it is given, not less than five (5) Business Days prior to such
meeting, to such Director verbally in person or by telephone or otherwise
communicated (provided that a written confirmation thereof is delivered to such
Director prior to the meeting date) or sent to such Director by post, cable,
telex, telecopier, facsimile or other mode of representing words in a legible
and non-transitory form reasonably expected to be received at least five
Business Days prior to such meeting at such Director's last known address or any
other address given by such Director to the Company for this purpose.
18. Quorum at meetings of the Board
The quorum necessary for the transaction of business at a meeting of the
Board shall be a majority of the number of Directors constituting the Board.
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19. Meetings of the Board
(1) The Board may meet for the transaction of business, adjourn and
otherwise regulate its meetings as it sees fit.
(2) Directors may participate in any meeting of the Board by means of such
telephone, electronic or other communication facilities as permit all persons
participating in the meeting to communicate with each other simultaneously and
instantaneously, and participation in such a meeting shall constitute presence
in person at such meeting, except that Directors may not participate in any
meeting of the Board while present in the United States.
(3) A resolution put to the vote at a meeting of the Board shall be carried
by the affirmative votes of a majority of the votes cast and in the case of an
equality of votes the resolution shall fail; PROVIDED THAT no resolution passed
at a meeting of the Board shall be the act of the Board unless a majority of the
Directors voting on such resolution are Investment Unit Directors; PROVIDED THAT
the rights and obligations provided by the foregoing proviso of this Bye-law
shall (i) not be in effect during an Event of Non-Compliance and (ii) terminate
upon a Qualified Public Offering.
20. Unanimous written resolutions
A resolution in writing signed by all the Directors, which may be in
counterparts, shall be as valid as if it had been passed at a meeting of the
Board duly called and constituted, such resolution to be effective on the date
on which the last Director signs the resolution; PROVIDED THAT at such time no
Director has revoked his signature; AND FURTHER PROVIDED THAT no such resolution
shall be valid unless the last signature of a Director is affixed outside the
United States. Such resolution shall be deemed to be adopted, as an act of the
Board, at the place where, and at the time when, the last signature of a
Director is affixed thereto.
21. Contracts and disclosure of Directors' interests
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(1) Any Director, any Director's firm, or partner or any company or other
Person with whom any Director is associated, may act in a professional capacity
for the Company and such Director or such Director's firm or partner or such
company or other Person shall be entitled to remuneration for professional
services as if such Director were not a Director, provided that nothing herein
contained shall authorise a Director or Director's firm or partner or such
company or other Person to act as Auditor of the Company.
(2) A Director who is directly or indirectly interested in a contract or
proposed contract or arrangement with the Company shall declare the nature of
such interest as required by the Act.
(3) Following a declaration being made pursuant to this Bye-law, and unless
disqualified by the chairman of the relevant Board meeting, a Director may vote
in respect of any contract or proposed contract or arrangement in which such
Director is interested and may be counted in the quorum at such meeting.
22. Remuneration of Directors
No Directors, other than Independent Directors, shall receive any
remuneration for their services as Directors. The remuneration (if any) of
Independent Directors shall be determined by the Company in general meeting and
shall be deemed to accrue from day to day. The Directors shall also be paid all
reasonable (such reasonableness to be determined by the Board) travel, hotel and
other expenses properly incurred by them in attending and returning from
meetings of the Board, any committee appointed by the Board, general meetings of
the Company, or in connection with the business of the Company or their duties
as Directors generally.
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OFFICERS
23. Officers of the Company
The Officers of the Company shall consist of a Chairman, a Deputy Chairman,
a Chief Executive Officer, a Secretary and such additional Officers as the Board
may from time to time determine, all of whom shall be deemed to be Officers for
the purposes of these Bye-laws.
24. Appointment and Removal of Officers
(1) The Board shall, as soon as possible after each annual general meeting,
appoint a Chairman and a Deputy Chairman; provided that the initial Chairman
shall be the Shidler Director who shall serve as Chairman at least one year
after his appointment as Chairman unless he is removed for Cause or he resigns
such office prior thereto
(2) The Secretary and additional Officers, if any, shall be appointed by
the Board from time to time.
(3) Notwithstanding anything to the contrary contained herein, the Board
may suspend or remove any Officer with or without Cause at any time.
25. Remuneration of Officers
The Officers shall receive such remuneration as the Board may from time to
time determine in accordance with their employment contracts, if any, or
otherwise.
26. Duties of Officers; Exercise of Executive Authority
(1) The Officers shall have such powers and perform such duties in the
management, business and affairs of the Company as may be delegated to them by
the Board from time to time or as may otherwise be provided to them in these
Bye-laws.
(2) No Officer and no Person appointed to any position or granted any
authority in accordance with Bye-law 4, 5, 6 or 7 shall have authority to
conduct any business of the Company in the United States, including, without
limitation, entering
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into any contracts or compromising or settling any claim against the Company.
27. Chairman of meetings
The Chairman shall act as chairman at all meetings of the Members and of
the Board at which such person is present. In his or her absence the Deputy
Chairman, if present, shall act as chairman and in the absence of both of them a
chairman shall be appointed or elected by those present at the meeting and
entitled to vote.
28. Register of Directors and Officers
The Board shall cause to be kept in one or more books at the registered
office of the Company a Register of Directors and Officers and shall enter
therein the particulars required by the Act.
MINUTES
29. Obligations of Board to keep minutes
(1) The Board shall cause minutes to be duly entered in books provided for
the purpose:
(a) of all elections and appointments of Officers;
(b) of the names of the Directors present at each meeting of the
Board and of any committee appointed by the Board; and
(c) of all resolutions and proceedings of general meetings of the
Members, meetings of the Board, meetings of managers and meetings
of committees appointed by the Board.
(2) Minutes prepared in accordance with the Act and these Bye-laws shall be
kept by the Secretary at the registered office of the Company.
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INDEMNITY
30. Indemnification of Directors and Officers of the Company
The Directors, Alternate Directors, Secretary and other Officers (such term
to include, for the purposes of Bye-laws 30 and 31, any person appointed to any
committee by the Board) for the time being acting in relation to any of the
affairs of the Company and the liquidator or trustees (if any) for the time
being acting in relation to any of the affairs of the Company and every one of
them, and 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
their 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 moneys 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 this indemnity shall
not extend to any matter in respect of any fraud or dishonesty which may attach
to any of said Persons.
31. Waiver of claim by Member
To the extent permitted by applicable law, each Member agrees to waive any
claim or right of action such Member might have, whether individually or by or
in the right of the Company, against any Director, Alternate Director or Officer
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on account of any action taken by such Director, Alternate Director or Officer
on or after the Closing Date, or the failure of such Director, Alternate
Director or Officer to take any action on or after the Closing Date, in such
Person's capacity as Director, Alternate Director or Officer, PROVIDED THAT such
waiver shall not extend to any matter in respect of any gross negligence,
willful misconduct, fraud or dishonesty which may attach to such Director,
Alternate Director or Officer.
MEETINGS
32. Notice of annual general meeting
The annual general meeting of the Company shall be held in each year at
such time and place outside the United States as the Chairman or any two
Directors or any Director and the Secretary or the Board shall determine.
Written notice of such meeting stating the date, place and time at which the
meeting is to be held, that the election of Directors will take place thereat
and, as far as practicable, the other business to be conducted at the meeting
shall be given to each Person that is a Member as of the record date not less
than 10 nor more than 60 days before the date of such meeting.
33. Notice of special general meeting
The Chairman or any two Directors or any Director and the Secretary or the
Board may convene a special general meeting of the Company whenever in their
judgment such a meeting is necessary. Written notice of such meeting stating the
date, time, place (which shall not be a place in the United States) and the
general nature of the business to be considered at the meeting shall be given to
each Person that is a Member as of the record date not less than 10 nor more
than 60 days before the date of such meeting.
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34. Accidental omission of notice of general meeting
The accidental omission to give notice of a general meeting to, or the
non-receipt of notice of a general meeting by, any Person entitled to receive
notice shall not invalidate the proceedings at that meeting.
35. Meeting called on requisition of Members
Notwithstanding anything herein, the Board shall, on the requisition of
Members holding at the date of the deposit of the requisition not less than
one-tenth of such of the paid-up share capital of the Company as at the date of
the deposit carries the right to vote at general meetings of the Company,
forthwith proceed to convene a special general meeting of the Company and the
provisions of Section 74 of the Act shall apply.
36. Short notice
A general meeting of the Company shall, notwithstanding that it is called
by shorter notice than that specified in these Bye-laws, be deemed to have been
properly called if it is so agreed by (i) all the Members entitled to attend and
vote thereat in the case of an annual general meeting; and (ii) by a majority in
number of the Members having the right to attend and vote at the meeting, being
a majority together holding not less than 95% in nominal value of the shares
having a right to attend and vote thereat in the case of a special general
meeting.
37. Postponement of meetings
The Secretary, at the direction of the Person or Persons calling the
Meeting, may postpone any general meeting called in accordance with the
provisions of these Bye-laws (other than a meeting requisitioned under these
Bye-laws) provided that notice of postponement is given to each Member before
the time for such meeting. Fresh notice of the date, time and
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place for the postponed meeting shall be given to each Member in accordance with
the provisions of these Bye-laws.
38. Quorum for general meeting
At any general meeting of the Company two or more persons present in person
and representing in person or by proxy in excess of 50% of the total issued
shares in the Company entitled to vote at the meeting shall form a quorum for
the transaction of business, PROVIDED THAT if the Company shall at any time have
only one Member, one Member present in person or by proxy shall form a quorum
for the transaction of business at any general meeting of the Company held
during such time. If within half an hour from the time appointed for the meeting
a quorum is not present, the meeting shall stand adjourned to the same day one
week later, at the same time and place or to such other day, time or place as
the Secretary may determine and as to which the Secretary shall give notice in
compliance with these Bye-laws.
39. Adjournment of meetings
The chairman of a general meeting may, with the consent of the Members at
any general meeting at which a quorum is present (and shall if so directed),
adjourn the meeting. Unless, at the time of the adjournment, the meeting is
adjourned to a specific date and time, fresh notice of the date, time and place
for the resumption of the adjourned meeting shall be given to each Member in
accordance with the provisions of these Bye-laws.
40. Attendance at meetings
Members may participate in any general meeting by means of such telephone,
electronic or other communication facilities as permit all persons participating
in the meeting to communicate with each other simultaneously and
instantaneously, and participation in such a meeting shall constitute presence
in person at such meeting except that no
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Member may participate by such means of communication where such Member is
present at the time of the meeting in the United States.
41. Written resolutions
(1) Subject to subparagraph (6), anything which may be done by resolution
of the Company in general meeting or by resolution of a meeting of any class of
the Members of the Company, may, without a meeting and without any previous
notice being required, be done by resolution in writing signed by, or, in the
case of a Member that is a corporation or another non-natural Person, whether or
not a company within the meaning of the Act, on behalf of, all of the Members
who at the date of the resolution would be entitled to attend the meeting and
vote on the resolution.
(2) A resolution in writing may be signed by, or, in the case of a Member
that is a corporation or another non-natural Person, whether or not a company
within the meaning of the Act, on behalf of, all the Members, or any class
thereof, in as many counterparts as may be necessary.
(3) For the purposes of this Bye-law, the date of the resolution is the
date when the resolution is signed by, or, in the case of a Member that is a
corporation or another non-natural Person, whether or not a company within the
meaning of the Act, on behalf of, the last Member to sign and any reference in
any Bye-law to the date of passing of a resolution is, in relation to a
resolution made in accordance with this Bye-law, a reference to such date.
(4) A resolution in writing made in accordance with this Bye-law is as
valid as if it had been passed by the Company in general meeting or by a meeting
of the relevant class of Members, as the case may be; PROVIDED THAT no such
resolution shall be valid unless the last signature of a Member is affixed
outside the United States. Any reference in any Bye-law to a meeting at which a
resolution is passed or to
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Members voting in favour of a resolution shall be construed accordingly.
(5) A resolution in writing made in accordance with this Bye-law shall
constitute minutes for the purposes of Sections 81 and 82 of the Act.
(6) This Bye-law shall not apply to:
(a) a resolution passed pursuant to Section 89(5) of the Act; or
(b) a resolution passed for the purpose of removing a Director before
the expiration of his term of office under these Bye-laws.
42. Attendance of Directors
The Directors of the Company shall be entitled to receive notice of and to
attend and be heard at any general meeting.
43. Voting at meetings
(1) Subject to the provisions of the Act and these Bye-laws, any question
proposed for the consideration of the Members at any general meeting duly called
and convened shall be decided by the affirmative votes of a majority of the
votes cast after giving effect to any reduction in voting power required under
Bye-law 50 in accordance with the provisions of these Bye-laws and in the case
of an equality of votes the resolution shall fail; PROVIDED THAT, any of the
following shall require the affirmative votes of not less than two-thirds (2/3)
of the votes of the Members entitled to vote at a general meeting after giving
effect to any reduction in voting power required under Bye-law 50 in accordance
with the provisions of these Bye-laws: (i) any material change or changes in the
Company's business; (ii) any amendment of the Memorandum of Association; (iii)
any voluntary liquidation, dissolution or winding up of the Company or similar
procedures affecting the Company; (iv) the authorisation of a new class or
classes of share capital of the Company; (v) any increase in the number of
authorised shares of the Company; (vi) the
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merger or amalgamation of the Company into or with another company or
corporation, the merger or amalgamation of any other company or corporation into
or with the Company, or the sale, conveyance, mortgage, pledge or lease of all
or substantially all the assets of the Company; or (vii) the acquisition of 50%
or more of the issued and outstanding shares of the Company's Common Shares by
one or more purchasers acting in concert in a single transaction or in a series
of related transactions, including, without limitation, acquisitions occasioned
by a purchase or exchange.
(2) No Member shall be entitled to vote at any general meeting unless such
Member has paid all the calls on all shares held by such Member.
44. [Intentionally omitted]
45. Decision of chairman
At any general meeting a declaration by the chairman of the meeting that a
question proposed for consideration has been carried, or carried unanimously, or
by a particular majority, or lost, and an entry to that effect in a book
containing the minutes of the proceedings of the Company shall, subject to the
provisions of these Bye-laws, be conclusive evidence of that fact.
46. Voting by poll
At any general meeting of the Company, a resolution put to the vote of the
meeting shall be voted upon by a poll and, subject to any rights or restrictions
at such time being lawfully attached to any class of shares, every Person
present at such meeting shall have one vote for each share of which such Person
is the holder or for which such Person holds a proxy (subject to Bye-law 50(2))
and such vote shall be counted in the manner set out below in this Bye-law or in
the case of a general meeting at which one or more Members are present by
telephone in such manner as the chairman of the
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meeting may direct, and the result of such poll shall be deemed to be the
resolution of the meeting at which the poll was demanded. Each person present
and entitled to vote shall be furnished with a ballot paper on which such person
shall record his or her vote in such manner as shall be determined at the
meeting having regard to the nature of the question on which the vote is taken,
and each ballot paper shall be signed or initialled or otherwise marked so as to
identify the voter and the registered holder in the case of a proxy. At the
conclusion of the poll, the ballot papers shall be examined and counted by a
committee of not less than two Members or proxy holders appointed by the
chairman for that purpose and the result of the poll shall be declared by the
chairman.
47. Seniority of joint holders voting
In the case of joint holders the vote of the senior who tenders a vote,
whether in person or by proxy, shall be accepted to the exclusion of the votes
of the other joint holders, and for this purpose seniority shall be determined
by the order in which the names stand in the Register of Members.
48. Instrument of proxy
The instrument appointing a proxy shall be in writing in the form, or as
near thereto as circumstances admit, of Form "A" in the Schedule hereto, under
the hand of the appointor or of the appointor's attorney duly authorised in
writing, or if the appointor is a corporation, either under its seal, or under
the hand of a duly authorised officer or attorney. The decision of the chairman
of any general meeting as to the validity of any instrument of proxy shall be
final.
49. Representation of corporations or other non-natural Person at meetings
A corporation or other non-natural Person which is a Member may, by written
instrument, authorise such person as it thinks fit to act as its representative
at any meeting of the
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Members and the person so authorised shall be entitled to exercise the same
powers on behalf of the corporation or other non-natural Person which such
person represents as that corporation or other non-natural Person could exercise
if it were an individual Member. Notwithstanding the foregoing, the chairman of
the meeting may accept such assurances as he or she thinks fit as to the right
of any person to attend and vote at general meetings on behalf of a corporation
or other non-natural Person which is a Member.
SHARE CAPITAL AND SHARES
50. Rights of shares; Votes of Members; Special Votes of Members Relating to
Insurance Subsidiary
(1) Subject to any resolution of the Members to the contrary and without
prejudice to any special rights previously conferred on the holders of any
existing shares or class of shares, the share capital of the Company shall be
divided into shares of two classes, Preference Shares ("Preference Shares") and
Common Shares ("Common Shares"). Preference Shares shall be divided into two
series, Series A Preference Shares and Series B Preference Shares. Holders of
Preference Shares and Common Shares shall, subject to the provisions of these
Bye-laws:
(a) be entitled to such dividends as the Board may from time to time
declare;
(b) in the event of a winding-up or dissolution of the Company,
whether voluntary or involuntary or for the purpose of a
reorganization or otherwise or upon any distribution of capital,
be entitled to the surplus assets of the Company; and
(c) generally be entitled to enjoy all of the rights attaching to
shares.
In addition to the above described rights and subject to the below
described limitations, the holders of the Preference
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Shares and Common Shares shall have the rights described in the relevant
Appendix A, Appendix B and Appendix C hereto.
(2) At any meeting of Members (or in connection with any written resolution
in lieu of such a meeting), each Member holding shares of the Company, in the
case of a meeting, present in person or by proxy, shall be entitled to such
number of votes as otherwise indicated in these Bye-laws with respect to such
shares, on a non-cumulative basis, for each such share registered in such
Member's name in the Register of Members, provided that if and for so long as
the votes conferred by the Controlled Shares of any Person shall equal or exceed
the Maximum Percentage applicable to such Person of the votes conferred by all
of the issued and outstanding shares of the Company, each share comprised in
such Controlled Shares shall confer only a fraction of a vote, including,
without limitation, at any election of Directors, according to the following
formula:
(T x Maximum Percentage) - 1
----------------------------
C
Where:
"T" is the aggregate number of votes conferred by all of the issued
and outstanding shares of the Company, and
"C" is the number of votes conferred by the Controlled Shares of such
Person.
(3) If, as a result of giving effect to the foregoing provisions of this
Bye-law 50 or otherwise, the votes conferred by the Controlled Shares of a
Person would otherwise represent an amount equal to or greater than the Maximum
Percentage applicable to such Person, the votes conferred by the Controlled
Shares of such Person shall be reduced in accordance with the foregoing
provisions of this Bye-law 50. Such process shall be repeated until the votes
conferred by the Controlled Shares of each Person represent less than the
Maximum Percentage applicable to such Person. The limitations described in this
subparagraph shall not apply to the
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designation of Directors by certain Members or classes of Members pursuant to
subparagraphs (2) and (3) of Bye-law 12, subparagraph (1) of Bye-law 15 and
subparagraph (1) of Bye-law 16.
(4) Notwithstanding any other provisions of these Bye-laws to the contrary,
with respect to any matter required to be submitted to a vote of the members of
the Insurance Subsidiary, the Company shall be required to submit a proposal
relating to such matters to the Members who shall vote at a meeting in
accordance with these Bye-laws and shall vote all the shares of the Insurance
Subsidiary held by the Company in accordance with and proportional to such vote
of the Members; PROVIDED THAT the Board shall not be required to submit such a
proposal contemplated by this Bye-law 50(4) to the Members at such time as the
Insurance Subsidiary shall no longer be a subsidiary of the Company.
51. Power to issue shares
(1) Subject to these Bye-laws and to any resolution of the Members to the
contrary and without prejudice to any special rights previously conferred on the
holders of any existing shares or class of shares, including, without
limitation, the rights of preemption contained in the Shareholders Agreement,
the Board shall have power to issue any unissued and authorised shares of the
Company on such terms and conditions as it may determine and any such shares or
class of shares may be issued with such preferred, deferred or other special
rights or such restrictions, whether in regard to dividend, voting, return of
capital or otherwise as the Company may from time to time by resolution of the
Members prescribe; PROVIDED THAT the Board shall have used its best efforts to
assure that upon consummation of any such issuance or determination no Person
shall hold the Maximum Percentage applicable to such Person in terms of voting
power of the Controlled Shares.
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(2) The Board shall, in connection with the issue of any share, have
the power to pay such commission and brokerage as may be permitted by law.
(3) The Company shall not give, whether directly or indirectly, whether by
means of loan, guarantee, provision of security or otherwise, any financial
assistance for the purpose of a purchase or subscription made or to be made by
any Person of or for any shares in the Company, but nothing in this Bye-Law
shall prohibit transactions mentioned in Sections 39A and 39B of the Act.
(4) Subject to the rights of the holders of any existing classes of shares,
the Company may from time to time do any one or more of the following things:
(a) make arrangements on the issue of shares for a difference between
the Members in the amounts and times of payments of calls on
their shares;
(b) accept from any Member the whole or a part of the amount
remaining unpaid on any shares held by him, although no part of
that amount has been called up;
(c) pay dividends in proportion to the amount paid up on each share
where a larger amount is paid up on some shares than on others;
and
(d) issue its shares in fractional denominations and deal with such
fractions to the same extent as its whole shares and shares in
fractional denominations shall have in proportion to the
respective fractions represented thereby all of the rights of
whole shares including (but without limiting the generality of
the foregoing) the right to vote, to receive dividends and
distributions and to participate in a winding up.
52. Variation of rights, alteration of share capital and purchase of shares
of the Company
(1) Subject to the provisions of Sections 42 and 43 of the Act and the
terms of the Preference Shares, any preference shares may be issued or converted
into shares that, at a
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determinable date or at the option of the Company, are liable to be redeemed on
such terms and in such manner as the Company before the issue or conversion may
by resolution of the Members determine.
(2) If at any time the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by the terms
of issue of the shares of that class) may, whether or not the Company is being
wound up, be varied, subject to the terms of such shares and, in the case of the
Preference Shares, the Appendices hereto, with the consent in writing of the
holders of three-fourths of the issued shares of that class or with the sanction
of a resolution passed by a majority of the votes cast at a separate general
meeting of the holders of the shares of the class in accordance with Section 47
(7) of the Act. The rights conferred upon the holders of the shares of any class
issued with preferred or other rights shall not, unless otherwise expressly
provided by the terms of issue of the shares of that class, be deemed to be
varied by the creation or issue of further shares ranking pari passu therewith.
(3) The Company may from time to time by resolution of the Members change
the currency denomination of, increase, alter or reduce its share capital in
accordance with the provisions of Sections 45 and 46 of the Act, subject to the
terms of such shares and, in the case of the Preference Shares, the Appendices
hereto. Where, on any alteration of share capital, fractions of shares or some
other difficulty would arise, the Board may deal with or resolve the same in
such manner as it thinks fit including, without limiting the generality of the
foregoing, the issue to Members, as appropriate, of fractions of shares and/or
arranging for the sale or transfer of the fractions of shares of Members.
(4) The Company may from time to time redeem or purchase its own shares in
accordance with Bye-law 11 or otherwise and the provisions of Sections 42 and
42A of the Act; PROVIDED THAT, except in the case of a redemption or purchase of
Series
35
<PAGE>
A Preference Shares during an Event of Non-Compliance, the Company shall have
used its best efforts to ensure that upon consummation of any such redemption or
purchase no Person shall hold the Maximum Percentage applicable to such Person
in terms of voting power of the Controlled Shares.
53. Registered holder of shares
(1) The Company shall be entitled to treat the registered holder of any
share as the absolute owner thereof and accordingly shall not be bound to
recognize any equitable or other claim to, or interest in, such share on the
part of any other Person.
(2) Any dividend, interest or other moneys payable in cash in respect of
shares may be paid by cheque or draft sent through the post directed to the
Member at such Member's address in the Register of Members or, in the case of
joint holders, to such address of the holder first named in the Register of
Members, or to such Person and to such address as the holder or joint holders
may in writing direct. If two or more Persons are registered as joint holders of
any shares any one can give an effectual receipt for any dividend paid in
respect of such shares.
54. Death of a joint holder
Where two or more Persons are registered as joint holders of a share or
shares then in the event of the death of any joint holder or holders the
remaining joint holder or holders shall be absolutely entitled to the said share
or shares and the Company shall recognize no claim in respect of the estate of
any joint holder except in the case of the last survivor of such joint holders.
55. Share certificates
(1) Every Member shall be entitled to a certificate under the seal of the
Company (or a facsimile thereof) specifying the number and, where appropriate,
the class of
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<PAGE>
shares held by such Member and whether the same are fully paid up and, if not,
how much has been paid thereon. The Board may by resolution determine, either
generally or in a particular case, that any or all signatures on certificates
may be printed thereon or affixed by mechanical means.
(2) The Company shall be under no obligation to complete and deliver a
share certificate unless specifically called upon to do so by the Person to whom
such shares have been allotted.
(3) If any such certificate issued to a Member shall be proved to the
satisfaction of the Board to have been worn out, lost, mislaid or destroyed the
Board may cause a new certificate to be issued and request an indemnity from
such Member for the lost certificate if it sees fit.
56. Calls on shares
(1) The Board may from time to time make such calls as it thinks fit upon
the Members in respect of any monies unpaid on the shares allotted to or held by
such Members and, if a call is not paid on or before the day appointed for
payment thereof, the Member may at the discretion of the Board be liable to pay
the Company interest on the amount of such call at such rate as the Board may
determine, from the date when such call was payable up to the actual date of
payment. The joint holders of a share shall be jointly and severally liable to
pay all calls in respect thereof.
(2) The Board may, on the issue of shares, differentiate between the
holders as to the amount of calls to be paid and the times of payment of such
calls.
57. Forfeiture of shares
(1) If any Member fails to pay, on the day appointed for payment thereof,
any call in respect of any share allotted to or held by such Member, the Board
may, at any time thereafter during such time as the call remains unpaid, direct
the Secretary to forward to such Member a notice in the form, or
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<PAGE>
as near thereto as circumstances admit, of Form "B" in the Schedule hereto.
(2) If the requirements of such notice are not complied with, any such
share may at any time thereafter before the payment of such call and the
interest due in respect thereof be forfeited by a resolution of the Board to
that effect, and such share shall thereupon become the property of the Company
and may be disposed of as the Board shall determine.
(3) A Member whose share or shares have been forfeited as aforesaid shall,
notwithstanding such forfeiture, be liable to pay to the Company all calls owing
on such share or shares at the time of the forfeiture and all interest due
thereon.
REGISTER OF MEMBERS
58. Contents of Register of Members
The Board shall cause to be kept in one or more books a Register of Members
and shall enter therein the particulars required by the Act.
59. Inspection of Register of Members
The Register of Members shall be open to inspection at the registered
office of the Company on every Business Day, subject to such reasonable
restrictions as the Board may impose, so that not less than two hours in each
Business Day be allowed for inspection. The Register of Members may, after
notice has been given by advertisement in an appointed newspaper to that effect,
be closed for any time or times not exceeding in the whole thirty days in each
year.
60. Determination of record dates
Notwithstanding any other provision of these Bye-laws the Board may fix any
date (except that if such date is with respect to the payment of dividends as
provided in Appendices A and B, such date shall always be on the first day of
the
38
<PAGE>
month during which such payment is scheduled to be made) as the record date for:
(a) determining the Members entitled to receive any dividend; and
(b) determining the Members entitled to receive notice of and to vote
at any general meeting of the Company.
TRANSFER OF SHARES
61. Instrument of transfer
(1) An instrument of transfer shall be in the form or as near thereto as
circumstances admit of Form "C" in the Schedule hereto or in such other common
form as the Board may accept. Such instrument of transfer shall be signed by or
on behalf of the transferor and transferee provided that, in the case of a fully
paid share, the Board may accept the instrument signed by or on behalf of the
transferor alone. The transferor shall be deemed to remain the holder of such
share until the same has been transferred to the transferee in the Register of
Members.
(2) The Board may refuse to recognize any instrument of transfer unless it
is accompanied by the certificate in respect of the shares to which it relates
and by such other evidence as the Board may reasonably require to show the right
of the transferor to make the transfer.
62. Restriction on transfer
(1) The Board shall refuse to register a transfer unless (x) all applicable
consents, authorisations and permissions of any governmental body or agency in
Bermuda have been obtained and (y) the Board or its transfer agent determines
that such transfer would not cause the transferee or any U.S. Person to become a
"United States Shareholder" of the Company or the Insurance Subsidiary, as such
term is defined under Section 951(b) of the Code, as amended; PROVIDED FURTHER,
that a
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<PAGE>
request to transfer shall not be unreasonably refused. A refusal shall not be
deemed unreasonable based upon the failure of the Board to receive evidence of
satisfaction of condition (x) or (y) above. The Board may reasonably require the
transferor to show that such transferor has complied with the terms regarding
transfers in the Shareholders' Agreement to make the transfer, to the extent
such terms are applicable to such transfer. If a transferor is not negligent in
providing information to the Board or its agent in response to a request for
such information in connection with a transfer, the Company shall indemnify and
hold harmless such transferor in respect of any and all liabilities to the
Company, its affiliates, holders of Capital Stock of the Company and their
respective affiliates in connection with such transfer causing the transferee or
any U.S. Person to become a United States Shareholder.
(2) If the Board refuses to register a transfer of any share the Secretary
shall, as soon as practicable but in no event later than five days after the
date on which the transfer request was lodged with the Company or its agent,
send to the transferor and transferee notice of the refusal or acceptance.
(3) Unless a transferor or transferee knowingly provides incorrect
information to the Board or its agent in connection with a proposed transfer,
such transferor or transferee shall have no liability to the Company, its
affiliates, other holders of Capital Stock of the Company and their respective
affiliates in connection with such transfer.
63. Transfers by joint holders
The joint holders of any share or shares may transfer such share or shares
to one or more of such joint holders, and the surviving holder or holders of any
share or shares previously held by them jointly with a deceased Member may
transfer any such share to the executors or administrators of such deceased
Member.
40
<PAGE>
TRANSMISSION OF SHARES
64. Representative of deceased Member
In the case of the death of a Member, the survivor or survivors where the
deceased Member was a joint holder, and the legal personal representatives of
the deceased Member where the deceased Member was a sole holder, shall be the
only persons recognized by the Company as having any title to the deceased
Member's interest in the shares. Nothing herein contained shall release the
estate of a deceased joint holder from any liability in respect of any share
which had been jointly held by such deceased Member with other persons. Subject
to the provisions of Section 52 of the Act, for the purpose of this Bye-law,
legal personal representative means the executor or administrator of a deceased
Member or such other person as the Board may in its absolute discretion decide
as being properly authorised to deal with the shares of a deceased Member.
65. Registration on death or bankruptcy
Any Person becoming entitled to a share in consequence of the death or
bankruptcy of any Member may be registered as a Member upon such evidence as the
Board may deem sufficient or may elect to nominate some Person to be registered
as a transferee of such share, and in such case the Person becoming entitled
shall execute in favour of such nominee an instrument of transfer in the form,
or as near thereto as circumstances admit, of Form "D" in the Schedule hereto.
On the presentation thereof to the Board, accompanied by such evidence as the
Board may require to prove the title of the transferor, the transferee shall be
registered as a Member but the Board shall, in either case, have the same right
to decline or suspend registration as it would have had in the case of a
transfer of the share by that Member before such Member's death or bankruptcy,
as the case may be.
41
<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS
66. Declaration of dividends by the Board
The Board may, subject to these Bye-laws, including, without limitation,
the terms of the Preference Shares, and in accordance with Section 54 of the Act
and any restrictions contained in Bye-law 51, declare a dividend to be paid to
the Members, in proportion to the number of shares held by them, and such
dividend may be paid in cash or wholly or partly in specie in which case the
Board may fix the value for distribution in specie of any assets.
67. Other distributions
The Board may declare and make such other distributions (in cash or in
specie) to the Members as may be lawfully made out of the assets of the Company.
68. Reserve fund
The Board may from time to time before declaring a dividend set aside, out
of the surplus or profits of the Company, such sum as it thinks proper as a
reserve fund to be used to meet contingencies or for equalizing dividends or for
any other special purpose.
69. Deduction of Amounts due to the Company
The Board may deduct from the dividends or distributions payable to any
Member all monies due, if uncontested, from such Member to the Company on
account of calls.
CAPITALIZATION
70. Issue of bonus shares
(1) The Board may resolve to capitalise any part of the amount for the time
being standing to the credit of any of the Company's share premium or other
reserve accounts or to the credit of the profit and loss account or otherwise
available
42
<PAGE>
for distribution by applying such sum in paying up unissued shares to be
allotted as fully paid bonus shares pro rata to the Members.
(2) The Company may capitalise any sum standing to the credit of a reserve
account or sums otherwise available for dividend or distribution by applying
such amounts in paying up in full partly paid shares of those Members who would
have been entitled to such sums if they were distributed by way of dividend or
distribution.
ACCOUNTS AND FINANCIAL STATEMENTS
71. Records of account
The Board shall cause to be kept proper records of account with respect to
all transactions of the Company in accordance with the requirements of the Act
and Section 4 of the Shareholders Agreement, and, in particular, without
limitation, with respect to:
(a) all sums of money received and expended by the Company and the
matters in respect of which the receipt and expenditure relates;
(b) all sales and purchases of goods by the Company; and
(c) the assets and liabilities of the Company.
Such records of account shall be kept at the registered office of the Company
or, subject to Section 83 (2) of the Act, at such other place as the Board
thinks fit and shall be available for inspection by the Directors during normal
business hours.
72. Financial year end
The financial year end of the Company may be determined by resolution of
the Board and failing such resolution shall be 31st December in each year.
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<PAGE>
73. Financial statements
Subject to any rights to waive laying of accounts pursuant to Section 88 of
the Act, financial statements as required by the Act shall be laid before the
Members in general meeting.
AUDIT
74. Appointment of Auditor
Subject to Section 88 of the Act, at the annual general meeting or at a
subsequent special general meeting in each year, an independent representative
of the Members shall be appointed by them as Auditor of the accounts of the
Company. Such Auditor may be a Member but no Director, Officer or employee of
the Company shall, during his or her continuance in office, be eligible to act
as an Auditor of the Company.
75. Remuneration of Auditor
The remuneration of the Auditor shall be fixed by the Company in general
meeting or in such manner as the Members may determine.
76. Vacation of office of Auditor
If the office of Auditor becomes vacant by the resignation or death of the
Auditor, or by the Auditor becoming incapable of acting by reason of illness or
other disability at a time when the Auditor's services are required, the Board
shall, as soon as practicable, convene a special general meeting to fill the
vacancy thereby created.
77. Access to books of the Company
The Auditor shall at all reasonable times have access to all books kept by
the Company and to all accounts and vouchers relating thereto, and the Auditor
may call on the Directors or Officers of the Company for any information in
their possession relating to the books or affairs of the Company.
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<PAGE>
78. Report of the Auditor
(1) Subject to any rights to waive laying of accounts or appointment of an
Auditor pursuant to Section 88 of the Act, the accounts of the Company shall be
audited at least once in every year.
(2) The financial statements provided for by these Bye-laws shall be
audited by the Auditor in accordance with generally accepted auditing standards.
The Auditor shall make a written report thereon in accordance with United States
generally accepted auditing standards and the report of the Auditor shall be
submitted to the Members in general meeting.
NOTICES
79. Notices to Members of the Company
A notice may be given by the Company to any Member either by delivering it
to such Member in person or by sending it to such Member's address in the
Register of Members or to such other address given for the purpose. For the
purposes of this Bye-law, a notice may be sent by mail, courier service, cable,
telex, telecopier, facsimile or other mode of representing words in a legible
and non-transitory form.
80. Notices to joint Members
Any notice required to be given to a Member shall, with respect to any
shares held jointly by two or more Persons, be given to whichever of such
Persons is named first in the Register of Members and notice so given shall be
sufficient notice to all the holders of such shares.
81. Service and delivery of notice
Any notice shall be deemed to have been served at the time when the same
would be delivered in the ordinary course of transmission and, in proving such
service, it shall be sufficient to prove that the notice was properly addressed
and prepaid, if posted, and the time when it was posted, delivered
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<PAGE>
to the courier or to the cable company or transmitted by telex, facsimile or
other method, as the case may be.
SEAL OF THE COMPANY
82. The seal
The seal of the Company shall be in such form as the Board may from time to
time determine. The Board may adopt one or more duplicate seals for use outside
Bermuda, other than in the United States of America.
83. Manner in which seal is to be affixed
The seal of the Company shall not be affixed to any instrument except
attested by the signature of a Director and the Secretary or any two Directors,
or any person appointed by the Board for the purpose, provided that any
Director, Officer or Resident Representative, may affix the seal of the Company
attested by such Director, Officer or Resident Representative's signature to any
authenticated copies of these Bye-laws, the incorporating documents of the
Company, the minutes of any meetings or any other documents required to be
authenticated by such Director, Officer or Resident Representative.
WINDING-UP
84. Winding-up/distribution by liquidator
If the Company shall be wound up the liquidator may, with the sanction of a
resolution of the Members and subject to the rights of the holders of the
Preference Shares, divide amongst the Members in specie or in kind the whole or
any part of the assets of the Company (whether they shall consist of property of
the same kind or not) and may, for such purpose, set such value as he or she
deems fair upon any property to be divided as aforesaid and may determine how
such division shall be carried out as between the Members or different classes
of
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<PAGE>
Members. The liquidator may, with the like sanction, vest the whole or any
part of such assets in trustees upon such trusts for the benefit of the Members
as the liquidator shall think fit, but so that no Member shall be compelled to
accept any shares or other securities or assets whereon there is any liability.
ALTERATION OF BYE-LAWS
85. Alteration of Bye-laws
Notwithstanding anything to the contrary contained herein and except as
otherwise provided in the Appendices, no Bye-law shall be rescinded, altered or
amended and no new Bye-law shall be made until the same has been approved by a
resolution of the Board and by a resolution of the holders of a majority of each
of the Series A Preference Shares, the Series B Preference Shares, and the
Common Shares.
******
***
*
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SCHEDULE - FORM A (Bye-law 48)
P R O X Y
I/We
of
the holder(s)of ________________________share(s)in the
above-named company hereby appoint_____________________________ or
failing him/her____________________________ or failing
him/her_______________________________ as my/our proxy to
vote on my/our behalf at the general meeting of the Company to
be held on the day of , 19 , and
at any adjournment thereof.
Dated this day of , 19
*GIVEN under the seal of the Company
*Signed by the above-named
- ---------------------------------
- ---------------------------------
Witness
*Delete as applicable.
48
<PAGE>
SCHEDULE - FORM B (Bye-law 57)
NOTICE OF LIABILITY TO FORFEITURE FOR NON PAYMENT OF CALL
You have failed to pay the call of [amount of call] made on the ...... day of
........, 19.. last, in respect of the [number] share(s) [numbers in figures]
standing in your name in the Register of Members of the Company, on the ......
day of ........., 19.. last, the day appointed for payment of such call. You are
hereby notified that unless you pay such call together with interest thereon at
the rate of .......... per annum computed from the said ....... day of
........., 19... last, on or before the ....... day of ........., 19... next at
the place of business of the Company the share(s) will be liable to be
forfeited.
Dated this ....... day of .............., 19...
[Signature of Secretary]
By order of the Board
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<PAGE>
SCHEDULE - FORM C (Bye-law 61)
TRANSFER OF A SHARE OR SHARES
FOR VALUE RECEIVED ...................................................[amount]
..................................................................[transferor]
hereby sells, assigns and transfers unto..........................[transferee]
of...................................................................[address]
..................................................[number and type of shares]
shares of....................................................[name of Company]
Dated .......................
...........................
(Transferor)
In the presence of:
.............................
(Witness)
...........................
(Transferee)
In the presence of:
.............................
(Witness)
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<PAGE>
SCHEDULE - FORM D (Bye-law 65)
TRANSFER BY A PERSON BECOMING ENTITLED ON DEATH/BANKRUPTCY
OF A MEMBER
I/We having become entitled in consequence of the [death/bankruptcy] of [name of
the deceased Member] to [number and type] share(s) standing in the register of
members of [Company] in the name of the said [name of deceased Member] instead
of being registered myself/ourselves elect to have [name of transferee] (the
"Transferee") registered as a transferee of such share(s) and I/we do hereby
accordingly transfer the said share(s) to the Transferee to hold the same unto
the Transferee his or her executors administrators and assigns subject to the
conditions on which the same were held at the time of the execution thereof; and
the Transferee does hereby agree to take the said share(s) subject to the same
conditions.
WITNESS our hands this ........ day of ..........., 19...
Signed by the above-named )
[person or persons entitled] )
in the presence of: )
Signed by the above-named )
[transferee] )
in the presence of: )
51
APPENDIX A
TO THE BYE-LAWS
DESIGNATIONS, NUMBER, VOTING POWERS,
PREFERENCES AND RIGHTS OF SERIES A
CUMULATIVE VOTING PREFERENCE SHARES
1. DESIGNATION AND NUMBER. The shares of Series A Preference Shares shall
be for the purposes of the Act designated as a separate class of shares in the
Company and shall be designated the Series A Cumulative Voting Preference
Shares, par value U.S.$.01 per share (the "Series A Preference Shares"); and the
number of shares designated as the Series A Preference Shares shall be initially
10,000,000; provided, that no such shares may be issued in excess of 2,600,000
shares other than as either dividends on the Series A Preference Shares or in
exchange for outstanding Series A Preference Shares.
2. DIVIDENDS.
(a) (i) Subject to the provisions of Section 2(b) of this Appendix A, the
holders of Series A Preference Shares shall be entitled to receive, when and as
declared, out of the net profits or surplus of the Company legally available
therefor, dividends per share at the rate of 13.75% (subject to adjustments as
subsequently provided, the "Series A Preferred Dividend Rate") per annum based
on the Series A Preferred Stated Value (as defined below), payable as the Board
may determine; provided that, (A) such dividends accruing on or prior to the
fifth anniversary of the Closing Date shall be payable only in Series A
Preference Shares and (B) such dividends accruing thereafter shall be payable
only 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 (the "Excess Dividend Rate"),
such Excess Dividend Rate shall be payable in cash or in Series A Preference
Shares, or cash in part and Series A Preference Shares in part (such option
shall be in the Company's sole discretion, except that the Company shall use its
best efforts to obtain written assurance from Duff & Phelps Credit Rating
Company that the payment in cash of such Excess Dividend Rate will not adversely
affect the AAA claims paying ability rating of the Insurance Subsidiary and if
such assurance is obtained with respect to all or a portion of such Excess
Dividend Rate, then the entire Excess Dividend Rate or, if such assurance is
only with respect to a portion of the Excess Dividend Rate, such portion, if
any, shall be payable only in cash). The Board shall determine
<PAGE>
to pay, and shall set apart for or pay, such dividends to the holders of the
Series A Preference Shares before any dividends (other than the dividends
payable in Shares Junior to the Series A Preferred (as defined below)) shall be
set apart for or paid upon the Series B Preference Shares, the Common Shares or
any other shares of Capital Stock ranking on liquidation junior to the Series A
Preference Shares (such shares being referred to hereinafter collectively as
"Shares Junior to the Series A Preferred"). All dividends declared upon Series A
Preference Shares shall be declared pro rata per share.
(ii) Notwithstanding the foregoing, the Series A Preferred Dividend Rate
shall be adjusted as follows (such adjustments being cumulative):
(A) if at any time after the fifth anniversary of the Closing Date,
the Series A Preference Shares are rated investment grade (a
rating of BBB- or higher from Duff & Phelps Credit Rating Company
(or any successor thereto) ("DCR") or the then-equivalent rating
in the event that DCR changes its rating designations after the
Closing Date), the Series A Preferred Dividend Rate shall be
decreased by 200 basis points for the period from such time until
redemption;
(B) if either (a) the Exchange Offer Registration Statement (as
defined in the Series A Preferred Stock Subscription Agreement)
is not declared effective prior to the 180th day following the
Closing Date or (b) the Exchange Offer (as defined in the Series
A Preferred Stock Subscription Agreement) is not consummated or a
shelf registration statement (the "Shelf Registration
Statement"), covering the resale of all or such portion, as
provided for in the Series A Preferred Stock Subscription
Agreement, of the Series A Preference Shares under the United
States Securities Act of 1933, as amended (the "Securities Act"),
has not been declared effective by the United States Securities
and Exchange Commission (the "Commission") on or prior to the
210th day following the Closing Date, then the Dividend Rate
shall be increased or, to the extent previously increased as
provided below in clause (C) of this Section 2(a)(ii), further
increased by 50 basis points from the last day of (i) such
180-day period in the case of clause (a) above and (ii) such
210-day period in the case of clause (b) above, until the
earliest of (x) in the case of Series A Preference Shares whose
holders are eligible to participate in the Exchange Offer, the
date on which the Exchange Offer is consummated,
2
<PAGE>
(y) the date on which the Shelf Registration Statement is
declared effective and (z) the second anniversary of the Closing
Date; provided, however, that in the event the Shelf Registration
is declared effective by the Commission and the Company fails to
keep such Shelf Registration Statement effective continuously
until the second anniversary of the Closing Date or such shorter
period that will terminate when all the Series A Preference
Shares required by the Series A Preferred Stock Subscription
Agreement to be covered by such Shelf Registration Statement have
been sold pursuant to such registration statement, then the
Series A Preferred Dividend Rate shall be increased or, to the
extent previously increased as provided below in clause (C) of
this Section 2(a)(ii), further increased, as the case may be, by
50 basis points for the period from the date that the Shelf
Registration Statement is no longer effective until the earlier
of the date the Shelf Registration Statement is again deemed
effective and the second anniversary of the Closing Date; and
(C) if an Event of Non-Compliance occurs, the Series A Preferred
Dividend Rate shall be increased or further increased, as the
case may be, by 250 basis points for the period from the date of
such event until the date that no Event of Non-Compliance is
continuing.
(b) Dividends on the Series A Preference Shares shall be fully cumulative,
whether or not in any fiscal year there shall be net profits or surplus
available for the payment of dividends in such fiscal year, so that, if in any
fiscal year or years, dividends in whole or in part are not paid upon the Series
A Preference Shares, unpaid dividends shall accrue quarterly at the Series A
Preferred Dividend Rate and be compounded quarterly. Dividends on shares of the
Series A Preference Shares shall accrue at the Series A Preferred Dividend Rate
based on the actual number of days elapsed over a year of 360 days from the
Closing Date through and until the redemption of such shares.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company or similar procedures affecting the Company, and
after the Company has paid or set aside all amounts due to creditors and any
dividends accrued but unpaid on the Series A Preference Shares pursuant to
Sections 2(a) and (b) above (and any dividends accrued but unpaid with respect
to any such accrued but unpaid dividends as a result of compounding
3
<PAGE>
at a quarterly rate) through the date of such liquidation, dissolution or
winding up or similar procedure, the holders of shares of Series A Preference
Shares then issued and outstanding shall be entitled, on a pro rata per share
basis, to be paid out of the assets of the Company available for distribution to
its Members, before any payment shall be made to the holders of Shares Junior to
the Series A Preferred, an amount equal to US $25.00 (the "Series A Preferred
Stated Value") per share, subject to adjustment in the event of any share split
or combination with respect to such shares. The aggregate of all liquidation
payments to which the holder of a Series A Preference Share shall become
entitled under this Section 3 with respect to each Series A Preference Share
held by it shall be referred to as its "Series A Liquidation Value."
(b) If upon any such liquidation, dissolution or winding up of the Company
(or similar procedure affecting the Company) the remaining assets of the Company
available for the distribution to its shareholders shall be insufficient to pay
the holders of Series A Preference Shares the full Series A Liquidation Value
for each Series A Preference Share held by such holders, the holders of Series A
Preference Shares and the holders of any class of shares ranking on liquidation
on parity with the Series A Preference Shares shall share ratably in any
distribution of the remaining assets and funds of the Company in proportion to
the respective amounts which would otherwise be payable in respect of the shares
held by them upon such distribution if all amounts payable on or with respect to
said shares were paid in full.
(c) The holders of Series A Preference Shares shall not participate with
the holders of the Shares Junior to the Series A Preferred in the distribution
of any assets of the Company in excess of the aggregate Series A Liquidation
Value of the outstanding Series A Preference Shares.
(d) The amalgamation of the Company into or with another company or
corporation, the amalgamation of any other company or corporation into or with
the Company, or the sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Company shall not be deemed to be a
liquidation, dissolution or winding up (or similar procedure) of the Company for
purposes of this Section 3.
4. VOTING.
(a) Except as otherwise provided by the Bye-laws (including Bye-law 12(3))
or as set forth below, each issued and outstanding Series A Preference Share
shall entitle the holder thereof to seven votes at each general meeting of the
4
<PAGE>
Company with respect to any and all matters presented to the Members of the
Company for their action or consideration; provided that if at any time at which
a vote is taken by the shareholders there are greater than 2,600,000 Series A
Preference Shares outstanding, each Series A Preference Share shall entitle the
holder thereof to such number of votes as determined by dividing 18,200,000 by
the number of issued and outstanding Series A Preference Shares. Except as
provided by law or by the provisions of paragraph (b) below or by the Bye-laws,
the holders of Series A Preference Shares and of any other outstanding
preference shares shall vote together with the holders of Common Shares as a
single class.
(b) Notwithstanding anything in the Bye-laws to the contrary, the Company
shall not (i) amend, alter or repeal the preferences or special rights attached
to the Series A Preference Shares as set out in the Bye-laws, including this
Appendix A, or (ii) authorize or issue shares of any class or series having any
preference or priority as to dividends or redemption or upon liquidation
superior to or on parity with the Series A Preference Shares, in each case,
without the written consent of the holders of at least 90% of the then issued
and outstanding Series A Preference Shares, given in writing, consenting
separately as a class.
5. REDEMPTION.
(a) Each issued and outstanding Series A Preference Share shall be redeemed
in full for an amount equal to the Series A Preferred Stated Value per share
plus dividends accrued but unpaid thereon pursuant to Sections 2(a) and (b)
above (and any dividends accrued but unpaid with respect to any such accrued but
unpaid dividends as a result of compounding at a quarterly rate) through the
date of such redemption, subject to adjustment in the event of any share split
or combination with respect to such shares, payable in cash on the date which is
the tenth anniversary of the Closing Date.
(b) Upon the occurrence of a Change In Control Event, any holder of
outstanding Series A Preference Shares may elect to have all of his Series A
Preference Shares redeemed by giving written notice to the Company no later than
thirty (30) calendar days after written notice to such holder of such Change In
Control Event, and each Series A Preference Share as to which a holder has
elected redemption shall be redeemed in full for the sum of (i) 101% of the sum
of (A) the Series A Preferred Stated Value per share and (B) any non-cash
dividends accrued but unpaid thereon pursuant to Sections 2(a) and (b) above
(and any non-cash dividends accrued but unpaid with respect to any such accrued
but unpaid dividends as a result of compounding at a quarterly rate) through the
date of such redemption and (ii) any cash
5
<PAGE>
dividends accrued but unpaid thereon pursuant to Section 2(a) and (b) above (and
any cash dividends accrued but unpaid with respect to any such accrued but
unpaid dividends as a result of compounding at a quarterly rate) through the
date of such redemption, subject to adjustment in the event of any share split
or combination with respect to such shares. For purposes of this Section 5(b),
"Change in Control Event" means an event or series of events by which (A) any
"person" or "group" (as defined in Sections 13(d)(3) and 14(d) of the United
States Securities Exchange Act of 1934, as amended (the "Exchange Act"), other
than one or more Specified Holders or an underwriter engaged in a firm
commitment underwriting in connection with a public offering of the Voting Stock
(as defined below) of the Company, 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)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board (together with any new Directors (x) whose
election by the Board or whose nomination for election by the Members of the
Company was approved by a vote of 66_% 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 or (y) were
designated by one or more Specified Holders (provided that, in the case of a
designation by other holders in addition to Specified Holders, such new Director
was designated by Specified Holders sufficient to make such designation without
the approval or votes of such other holders) pursuant to Bye-law 12(2) or 12(3))
shall cease for any reason to constitute 66_% of the 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 one or
more Specified Holders acting pursuant to Bye-Law 12(2) or 12(3), 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 Company, a Change In Control Event shall be deemed to have
occurred; or (C) the Company consolidates with or amalgamates into, or conveys,
transfers or leases all or substantially all of its assets to any Person, or any
Person consolidates with or amalgamates into the Company, in either event
pursuant to a transaction in which any Voting Stock of the Company issued and
outstanding immediately prior to the effectiveness thereof is reclassified or
changed into or exchanged for cash, securities or property, unless (i) such
Change In Control Event arises from a transaction between the Company and a
Restricted Subsidiary thereof, or (ii) such Change In Control Event arises from
a transaction involving an exchange of Voting Stock by the holders of the Voting
Stock
6
<PAGE>
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.
(c) On or after the date which is the fifth anniversary of the Closing
Date, all or a portion of the issued and outstanding Series A Preference Shares
may be redeemed in cash, at the Company's option and in its sole discretion, at
any time or from time to time (provided such time is during a Business Day) upon
ten calendar days' prior written notice to the holders thereof, and each Series
A Preference Share so redeemed shall be redeemed for the sum of (i) the
applicable redemption percentage (as set forth below) of the sum of (A) the
Series A Preferred Stated Value per share and (B) any non-cash dividends accrued
but unpaid thereon pursuant to Sections 2(a) and (b) above (and any non-cash
dividends accrued but unpaid with respect to any such accrued but unpaid
dividends as a result of compounding at a quarterly rate) through the date of
redemption and (ii) any cash dividends accrued but unpaid thereon pursuant to
Section 2(a) and (b) above (and any cash dividends accrued but unpaid with
respect to any such accrued but unpaid dividends as a result of compounding at a
quarterly rate) through the date of such redemption, subject to adjustment in
the event of any share split or combination with respect to such shares.
7
<PAGE>
Redemption Date Redemption
Percentages
- ----------------------------------------------- -------------------------
June 15, 2002 to June 14, 2003 111%
June 15, 2003 to June 14, 2004 108%
June 15, 2004 to June 14, 2005 106%
June 15, 2005 to June 14, 2006 104%
June 15, 2006 to June 14, 2007 102%
(d) Notwithstanding the foregoing, on and prior to the third anniversary of
the Closing Date, up to 35% of the issued and outstanding Series A Preference
Shares may be redeemed in cash, at the Company's option and in its sole
discretion, at any time or from time to time (provided such time is during a
Business Day) upon ten calendar days' prior written notice to the holders
thereof, and each Series A Preference Share so redeemed shall be redeemed for
the sum of (i) 120% of the sum of (A) the Series A Preferred Stated Value per
share and (B) any non-cash dividends accrued but unpaid thereon pursuant to
Sections 2(a) and (b) above (and any non-cash dividends accrued but unpaid with
respect to any such accrued but unpaid dividends as a result of compounding at a
quarterly rate) through the date of such redemption and (ii) any cash dividends
accrued but unpaid thereon pursuant to Section 2(a) and (b) above (and any cash
dividends accrued but unpaid with respect to any such accrued but unpaid
dividends as a result of compounding at a quarterly rate) through the date of
such redemption, subject to adjustment in the event of any share split or
combination with respect to such shares, provided that any redemption made by
the Company pursuant to this Section 5(d) shall only be made with the net
proceeds from one or more public offerings in the United States of the Company's
shares registered with the Commission.
(e) Any redemption of Series A Preference Shares pursuant to this Section
5, other than Section 5(b), shall be made pro rata from among the registered
holders of such shares then issued and outstanding and with ten calendar days'
prior notice to such registered holders.
(f) Notwithstanding any other provision of this Section 5, any redemption
pursuant to this Section 5 shall be subject to the Company being in compliance
with the Act as determined by the Board. If the Company is unable, as determined
by the Board, to redeem any Series A Preference Shares pursuant to this Section
5 because such redemption would violate the applicable laws of Bermuda, then the
Company shall redeem such Series A Preference Shares as soon thereafter as
redemption would not violate such laws. Any
8
<PAGE>
Series A Preference Shares that are redeemed shall be permanently retired and
shall no longer be deemed issued and outstanding and shall not under any
circumstances be reissued, and the Company may from time to time take such
appropriate corporate action as may be necessary to reduce the number of
authorized Series A Preference Shares accordingly.
6. DIVIDEND AND REDEMPTION PREFERENCES
(a) For so long as any of the Series A Preference Shares remains
outstanding, the Company shall not (i) purchase, redeem or otherwise acquire any
Shares Junior to the Series A Preferred (other than (1) Series B Preference
Shares in accordance with the terms thereof in effect as of the Closing Date
(and not as amended thereafter) and (2) redemptions or repurchases of any Common
Shares held by directors, officers or employees of the Company and its
Subsidiaries which shares are subject to redemption or repurchase upon any such
person ceasing to be a director, officer or employee, as the case may be, of the
Company, each in accordance with the terms of any applicable agreement between
the Company and any such person or the terms of any agreement or plan pursuant
to which such shares were issued, provided that such repurchases and
redemptions, in the aggregate, are in respect of no more than 10% of the number
of Common Shares issued and outstanding on the Closing Date (or the equivalent
number of any other securities into which or for which the Common Shares may be
converted or exchanged as set forth in the Bye-laws) and are redeemed or
repurchased for an amount not in excess of the fair market value at the time of
redemption or repurchase) or (ii) declare or pay or set apart for payment any
dividend on or make any distribution to Shares Junior to the Series A Preferred,
whether in cash or other property, other than dividends payable in shares of
Shares Junior to the Series A Preferred.
(b) For so long as (i) on or after the tenth anniversary of the Closing
Date, the Company shall have failed to redeem Series A Preference Shares
pursuant to Section 5(a) (notwithstanding Section 5(f)) or (ii) there are any
unpaid (cash or non-cash) dividends which have accrued in respect of any Series
A Preference Shares, the Company shall not (A) purchase, redeem or otherwise
acquire any Shares Junior to the Series A Preferred (other than under Section
6(a)(i)(2) above) or (B) declare or pay or set apart for payment dividends on or
make distributions to shares ranking on parity with the Series A Preference
Shares (for avoidance of doubt, this clause (B) shall not apply to Series B
Preference Shares).
<PAGE>
APPENDIX B
TO THE BYE-LAWS
DESIGNATIONS, NUMBER, VOTING POWERS
PREFERENCES AND RIGHTS OF SERIES B
CUMULATIVE VOTING PREFERENCE SHARES
1. DESIGNATION AND NUMBER. The shares of Series B Preference Shares shall
be a separate class of shares in the Company and shall be designated the Series
B Cumulative Voting Preference Shares, par value US $0.01 per share (the "Series
B Preference Shares"); and the number of shares designated the Series B
Preference Shares shall be initially 10,000,000; provided, that no such shares
may be issued in excess of 1,600,000 shares other than as dividends on the
Series B Preference Shares, in connection with a Commitment Draw or in exchange
for outstanding Series B Preference Shares.
2. DIVIDENDS.
(a) Subject to the provisions of Section 2(b) of this Appendix B and
Section 6(a)(ii) of Appendix A to the Bye-laws, the holders of Series B
Preference Shares shall be entitled to receive, when and as declared, out of the
net profits or surplus of the Company legally available therefor, dividends per
share at the rate of 20.00% (the "Series B Preferred Dividend Rate") per annum
based on the Series B Preferred Stated Value (as defined below), payable as the
Board may determine; provided, that such dividends accruing on or prior to the
tenth anniversary of the Closing Date and so long as any Series A Preference
Shares are outstanding shall be payable only in Series B Preference Shares and
such dividends accruing thereafter shall be payable only in cash. Subject to
Section 6(a)(ii) of Appendix A to the Bye-laws, the Board shall determine to
pay, and shall set apart for or pay, such dividends to holders of the Series B
Preference Shares after any dividends then due upon the Series A Preference
Shares and any other shares ranking on liquidation senior to the Series B
Preference Shares (such shares being referred to hereinafter collectively as
"Senior Shares") shall be set apart for or paid upon the Senior Shares and
before any dividends (other than dividends payable in Shares Junior to the
Series B Preferred (as defined below)) shall be set apart for or paid upon the
Common Shares or any other shares ranking on liquidation junior to the Series B
Preference Shares (such shares being referred to hereinafter collectively as
"Shares Junior to the Series B Preferred") in any year. All dividends declared
upon Series B Preference Shares shall be declared pro rata per share.
<PAGE>
(b) Dividends on the Series B Preference Shares shall be fully cumulative,
whether or not in any fiscal year there shall be net profits or surplus
available for the payment of dividends in such fiscal year, so that, if in any
fiscal year or years, dividends in whole or in part are not paid upon the Series
B Preference Shares, unpaid dividends shall accrue quarterly at the Series B
Preferred Dividend Rate and be compounded quarterly. Dividends on shares of the
Series B Preference Shares shall accrue at the Series B Preferred Dividend Rate
based on the actual number of days elapsed over a year of 360 days from the
Closing Date through and until the redemption of such shares.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company or similar procedures affecting the Company, and
after the Company has paid or set aside all amounts due to creditors and the
holders of the Senior Shares and any dividends accrued but unpaid on the Series
B Preference Shares pursuant to Sections 2(a) and (b) above (and any dividends
accrued but unpaid thereon with respect to any such accrued but unpaid dividends
as a result of compounding at a quarterly rate) through the date of such
liquidation, dissolution or winding up (or similar procedure), the holders of
shares of Series B Preference Shares then issued and outstanding shall be
entitled, on a pro rata per share basis, to be paid out of the assets of the
Company available for distribution to its Members, after the Company has paid or
set apart for payment all amounts due to creditors and the holders of Senior
Shares and before any payment shall be made by the Company to the holders of
Shares Junior to the Series B Preferred, an amount equal to U.S.$25.00 (the
"Series B Preferred Stated Value") per share, subject to adjustment in the event
of any share split or combination with respect to such shares. The aggregate of
all liquidation payments to which the holder of a Series B Preference Share
shall become entitled under this Section 3 with respect to each Series B
Preference Share held by it shall be referred to as its "Series B Liquidation
Value."
(b) If upon any such liquidation, dissolution or winding up of the Company
(or similar procedure affecting the Company) the remaining assets of the Company
available for the distribution to its Members shall be insufficient to pay the
holders of Series B Preference Shares the full Series B Liquidation Value for
each Series B Preference Share held by such holders, the holders of Series B
Preference Shares and the holders of any class of shares ranking on liquidation
on parity with the Series B Preference Shares shall share ratably in any
distribution of the remaining assets and funds of the Company in proportion to
the respective amounts which would otherwise be payable
2
<PAGE>
in respect of the shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full.
(c) The holders of Series B Preference Shares shall not participate with
the holders of the Shares Junior to the Series B Preferred in the distribution
of any assets of the Company in excess of the aggregate Series B Liquidation
Value of the outstanding Series B Preference Shares to the Members.
(d) The amalgamation of the Company into or with another company or
corporation, the amalgamation of any other company or corporation into or with
the Company, or the sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Company shall not be deemed to be a
liquidation, dissolution or winding up (or similar procedure) of the Company for
purposes of this Section 3.
4. VOTING.
(a) Except as otherwise provided in the Bye-laws or as set forth below,
each issued and outstanding Series B Preference Share shall entitle the holder
thereof to five votes at each general meeting of shareholders of the Company
with respect to any and all matters presented to the Members of the Company for
their action or consideration; provided that if at any time at which a vote is
taken by the Members there are greater than 1,600,000 Series B Preference Shares
issued and outstanding, each Series B Preference Share shall entitle the holder
thereof to such number of votes as determined by dividing 8,000,000 by the
number of issued and outstanding Series B Preference Shares. Except as provided
by law or by the provisions of paragraph (b) below or by the Bye-laws, holders
of Series B Preference Shares and of any other issued and outstanding preference
shares shall vote together with the holders of Common Shares as a single class.
(b) Notwithstanding anything in the Bye-laws to the contrary, the Company
shall not (i) amend, alter or repeal the preferences or special rights attached
to the Series B Preference Shares as set out in the Bye-laws, including this
Appendix B, or (ii) authorize or issue shares of any class or series having any
preference or priority as to dividends or redemption or upon liquidation
superior to or on parity with the Series B Preference Shares (other than the
Series A Preference Shares), in each case, without the written consent of the
holders of at least 90% of the then outstanding Series B Preference Shares,
given in writing, consenting separately as a class.
5. REDEMPTION.
3
<PAGE>
(a) Subject to Section 6 of Appendix A to the Bye-laws, each issued and
outstanding Series B Preference Share shall be redeemed in full for an amount
equal to the Series B Preferred Stated Value per share plus dividends accrued
but unpaid thereon pursuant to Sections 2(a) and (b) above (and any dividends
accrued but unpaid with respect to any such accrued but unpaid dividends as a
result of compounding at a quarterly rate) through the date of such redemption,
subject to adjustment in the event of any share split or combination with
respect to such shares, payable in cash on the date that is the earliest to
occur of (i) the fifteenth anniversary of the Closing Date, (ii) the Qualified
Public Offering, (iii) the acquisition of a majority of the issued and
outstanding shares of the Common Shares 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 occasioned by
a purchase or exchange, or an amalgamation, consolidation, share acquisition or
other form of corporate reorganization in which Persons who were holders of
Common Shares immediately prior to such corporate reorganization do not,
immediately thereafter, own more than 50% of the Common Shares previous voting
power, measured immediately prior to such corporate reorganization, in the
acquiring, amalgamated, consolidated or otherwise reorganized company with
respect to its issued and outstanding voting securities.
(b) Any redemption of Series B Preference Shares pursuant to this Section 5
shall be made pro rata from among the registered holders of such shares then
issued and outstanding and with ten calendar days' prior notice to such holders.
(c) Notwithstanding any other provision of this Section 5 and subject to
Section 6 of Appendix A to the Bye-laws, any redemption pursuant to this Section
5 shall be subject to the Company being in compliance with the Act, as
determined by the Board. If the Company is unable, as determined by the Board,
to redeem any Series B Preference Shares pursuant to this Section 5 because such
redemption would violate the applicable laws of Bermuda, then the Company shall
redeem such Series B Preference Shares as soon thereafter as redemption would
not violate such laws. Any Series B Preference Shares that are redeemed shall be
permanently retired, shall no longer be deemed outstanding and shall not under
any circumstances be reissued, and the Company may from time to time take such
appropriate corporate action as may be necessary to reduce the number of
authorized Series B Preference Shares accordingly.
6. DIVIDEND AND REDEMPTION PREFERENCES
4
<PAGE>
(a) For so long as any of the Series B Preference Shares remains issued and
outstanding, the Company shall not (i) purchase, redeem or otherwise acquire any
Shares Junior to the Series B Preferred (other than redemptions or repurchases
of any Common Shares held by directors, officers or employees of the Company and
its Subsidiaries which shares are subject to redemption or repurchase upon any
such person ceasing to be a director, officer or employee, as the case may be,
of the Company, each in accordance with the terms of any applicable agreement
between the Company and any such person or the terms of any agreement or plan
pursuant to which such shares were issued, provided that such repurchases and
redemptions, in the aggregate, are in respect of no more than 10% of the number
of Common Shares issued and outstanding on the Closing Date (or the equivalent
number of any other securities into which or for which the Common Shares may be
converted or exchanged as set forth in the Bye-laws) and are redeemed or
repurchased for an amount not in excess of the fair market value at the time of
redemption or repurchase) or (ii) declare or pay or set apart for payment any
dividend on or make any distribution to Shares Junior to the Series B Preferred,
whether in cash or other property, other than dividends payable in shares of
Shares Junior to the Series B Preferred.
(b) For so long as (i) the Company shall fail to redeem Series B Preference
Shares pursuant to Section 5(a) (notwithstanding Section 5(c)) or (ii) there are
any unpaid (cash or non-cash) dividends in respect of any Series B Preference
Shares, the Company shall not declare or pay or set apart for payment dividends
(other than dividends payable in Shares Junior to the Series B Preferred) on or
make distributions to shares ranking on parity with the Series B Preference
Shares.
5
<PAGE>
APPENDIX C
TO THE BYE-LAWS
DESIGNATIONS, NUMBER, VOTING POWERS
AND RIGHTS OF COMMON SHARES
1. DESIGNATION AND NUMBER. The shares of such class of Common Shares shall
be a separate class of shares in the Company and shall be designated the Common
Shares, par value U.S.$.01 per share (the "Common Shares"). The number of shares
constituting the Common Shares shall initially be 20,000,000.
2. DIVIDENDS. Subject to the rights and preferences of the Series A
Preference Shares, the Series B Preference Shares or any other shares ranking on
liquidation senior to the Common Shares (such shares being referred to
hereinafter collectively as "Senior Shares"), the holders of the Common Shares
shall be entitled to receive, if, when and as declared, out of net profits or
surplus of the Company legally available therefor, such dividends per share as
the Board shall determine. All dividends declared upon Common Shares shall be
declared pro rata per share.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company or similar procedures affecting the Company, and
after the Company has paid or set aside all amounts due to creditors and the
holders of the Senior Shares and any dividends accrued but unpaid on the Common
Shares, the holders of shares of Common Shares then outstanding shall be
entitled, on a pro rata per share basis, to the remaining assets of the Company
available for distribution to its shareholders.
(b) The amalgamation of the Company into or with another company or
corporation, the amalgamation of any other company or corporation into or with
the Company, or the sale, conveyance, mortgage, pledge or lease of all or
substantially all the assets of the Company shall not be deemed to be a
liquidation, dissolution or winding up (or similar procedure) of the Company for
purposes of this Section 3.
4. VOTING.
(a) Except as otherwise provided in the Bye-laws or set forth below, each
issued and outstanding Common Share shall entitle the holder thereof to two
votes at each general meeting of the Company with respect to any and all matters
presented to the Members of the Company for their
<PAGE>
action or consideration. Except as provided by law or by the provisions of
paragraph (b) below or by the Bye-laws, holders of Common Shares and of any
issued and outstanding preference shares shall vote together as a single class.
(b) The Company shall not amend, alter or repeal the special rights of the
Common Shares as set out in the Bye-laws, including Section 4 of this Appendix
C, without the written consent of the holders of at least 90% of the then
outstanding Common Shares, given in writing, consenting separately as a class.
2
EXHIBIT 4.1
CGA GROUP, LTD.
SHAREHOLDERS AGREEMENT
Dated as of June 12, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
1. TRANSFERS........................................................... 2
(a) Separation of Investment Units and Resale of Securities ....... 2
(b) Right of First Offer .......................................... 4
(c) Drag Along Right .............................................. 6
(d) Tag Along Right ............................................... 7
(e) Preemption Right .............................................. 8
(f) Regulatory Transfer ........................................... 10
(g) Exception...................................................... 10
(h) Termination of Rights.......................................... 10
2. RESTRICTIONS ON STOCK OWNERSHIP..................................... 10
(a) Share Ownership Limitations ................................... 10
(b) Prompt Disposition of Shares................................... 11
(c) Manner of Disposition.......................................... 11
3. REGISTRATION RIGHTS................................................. 12
(a) Definitions.................................................... 12
(b) Demand Registration ........................................... 13
(c) Piggyback Registration......................................... 17
(d) Expenses of Registration....................................... 18
(e) Registration Procedures........................................ 19
(f) Indemnification ............................................... 23
(g) Information by the Holders..................................... 27
(h) Rule 144 Reporting............................................. 27
(i) "Market Stand-off" Agreement................................... 28
(j) Assignability.................................................. 29
(k) Termination.................................................... 29
4. INFORMATION AS TO COMPANY AND RELATED COVENANTS..................... 30
(a) Auditors....................................................... 30
(b) Financial Information.......................................... 30
(c) Business Report................................................ 30
(d) Inspection..................................................... 31
5. DEFINITIONS......................................................... 31
(a) Terms Defined.................................................. 31
6. MISCELLANEOUS....................................................... 33
(a) Legends........................................................ 33
(b) Waiver; Amendments ............................................ 33
(c) Amendment of Schedule I to this Agreement ..................... 34
(d) Recapitalization, Exchanges, Etc. ............................. 34
i
<PAGE>
(e) Specific Performance ..................................... 34
(f) Notices .................................................. 34
(g) Successors and Assigns.................................... 34
(h) Counterparts.............................................. 35
(i) Entire Agreement.......................................... 35
(j) Applicable Law ........................................... 35
(k) Section Headings.......................................... 35
(l) Holders of Warrant Shares................................. 35
ii
<PAGE>
SHAREHOLDERS AGREEMENT
Shareholders Agreement, dated as of June 12, 1997 (this "Agreement") among
CGA Group, Ltd., a company with limited liability organized under the laws of
Bermuda (the "Company") and each of the persons whose names and addresses appear
on Schedule I hereto, as such Schedule I may be amended from time to time in
accordance with the terms hereof (the "Common Holders"). Each of the foregoing
defined terms shall include such persons' successors and assigns as permitted by
this Agreement. Certain capitalized terms used in this Agreement have the
meanings set forth in Section 5 of this Agreement.
RECITALS
WHEREAS, the Company has issued or has agreed to issue the following
classes of shares: (i) an aggregate of 2,600,000 shares of Series A Cumulative
Voting Preference Shares, par value $.01 per share, of the Company ("Series A
Preferred Stock"), (ii) 1,600,000 shares of Series B Cumulative Voting
Preference Shares, par value of $.01 per share, of the Company ("Series B
Preferred Stock"), and (iii) 9,100,000 shares of common stock, par value of $.01
per share, of the Company ("Common Stock") (the Series A Preferred Stock, the
Series B Preferred Stock, the Common Stock and any other shares of the Company
are referred to herein as "Company Stock");
WHEREAS, certain investors have (i) agreed, pursuant to the terms of the
Series A Preferred Stock Subscription Agreement, dated as of June 9, 1997 (the
"Series A Preferred Stock Subscription Agreement"), to purchase the Series A
Preferred Stock and (ii) pursuant to the terms of the Warrant Acquisition
Agreement, dated as of June 9, 1997 (the "Warrant Acquisition Agreement"),
acquired or agreed to purchase warrants ("Warrants") to purchase Common Stock
(or such shares of other stock into which such Common Stock may have been
converted prior to the exercise of the Warrant);
WHEREAS, certain initial Common Holders have agreed pursuant to the terms
of the Investment Units Subscription Agreement, dated as of June 4, 1997 (the
"Investment Units Subscription Agreement"), to purchase an aggregate of
1,600,000 investment units (the "Investment Units"), each such Investment Unit
consisting of (i) one share of Series B Preferred Stock, (ii) 4.8925 shares of
Common Stock, and (iii) upon the occurrence of certain events described in such
subscription agreement, one and one-half (1.5)
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additional shares of Series B Preferred Stock (the "Commitment"); and
WHEREAS, the Sponsoring Investors (as defined in the Private Placement
Memorandum) have (i) agreed pursuant to the Founders' Subscription Agreement,
dated as of June 12, 1997 (the "Founders' Subscription Agreement"), to purchase
an aggregate of 1,272,043 shares of Common Stock and (ii) pursuant to the terms
of the Sponsoring Investors' and Founders' Stock Warrant Plan, dated as of June
17, 1997 (the "Sponsoring Investors' and Founders' Stock Warrant Plan") acquired
or agreed to purchase an aggregate of 847,729 Warrants ("Sponsoring Investors'
and Founders' Warrants");
WHEREAS, the management employees of the Company (as defined in the Private
Placement Memorandum) will receive the right to purchase, over the prescribed
vesting period, an aggregate of 1,494,771 warrants to purchase Common Stock (or
such shares of other stock into which such Common Stock may have been converted
prior to the exercise of the warrants) ("Employee Warrants") pursuant to the
terms of the Employee Stock Warrant Plan dated of June 17, 1997 (the "Employee
Stock Warrant Plan") (the Warrants, Sponsoring Investors' and Founders' Warrants
and Employee Warrants, collectively the "Warrant Shares");
WHEREAS, the Common Holders and the Company desire to enter into the
agreements contained herein with respect to certain matters relating to the
operations of the Company and the disposition of Company Stock.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto hereby agree as follows:
1. TRANSFERS
(a) Seperation of investment Units and Resale of Securities. (i) Prior to
the occurrence of a Separation Event (as defined below), no Common Holder may
transfer any Company Stock constituting a part of an Investment Unit other than
collectively as a unit with the other Common Stock, Series B Preferred Stock and
the Commitment constituting a part of such Investment Unit. Upon the occurrence
of a Separation Event, a Common Holder may transfer some or all of the Common
Stock, the Series B Preferred Stock and the Commitment constituting an
Investment Unit other than collectively as a unit, subject to applicable
restrictions on transfers of Company Stock or Units set forth in this Agreement,
the Investment Units Subscription Agreement and the bye-laws of the Company (the
"Company's Bye-Laws"). The non-collective transfers described in the immediately
preceding sentence are referred
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to herein as the "Separate Transfers". As used herein, the phrase "Separation
Event" means the earlier to occur of (x) a Trigger Event, provided that the
Company receives written notification from Duff & Phelps Credit Rating Company
("DCR") that neither such Trigger Event nor the Separate Transfers will cause
the claims paying ability rating of Commercial Guaranty Assurance, Ltd. to be
downgraded by DCR or (y) receipt by the Company of written notification from DCR
that the Separate Transfers will not cause DCR to downgrade CGA's claims paying
ability. Within 10 days prior to the occurrence of each Trigger Event, the
Company shall request in writing that DCR deliver the written notification
referred to in the proviso to clause (x) above. Upon the request of any
Investment Unit holder, the Company shall request in writing that DCR deliver
the written notification specified in clause (y) above. Notwithstanding the
foregoing, prior to a Separation Event, Commitments with an aggregate value
(which value shall be determined based on the product of (x) the maximum number
of shares of Series B Preferred Stock required to be purchased pursuant to such
Commitments and (y) $25) of up to $7.5 million may be transferred separately
from the Common Stock and Series B Preferred Stock constituting the Investment
Units held by a Common Holder without receipt from DCR of the notices provided
above; provided, further, that Olympus Growth Fund II, L.P. and Olympus
Executive Fund, L.P. shall have the first right, prior to any other Common
Holder, to so transfer all or any portion of the Commitments that it, or its
Affiliates, own; provided, further, that if Olympus Growth Fund II, L.P. and
Olympus Executive Fund, L.P. notifies the Company prior to the occurrence of a
Separation Event that it will not exercise such first right or that it will not
exercise such first right with respect to Commitments with an aggregate value of
$7.5 million, Commitments with an aggregate value equal to the difference
between $7.5 million and the aggregate value of the Commitments so transferred
by Olympus Growth Fund II, L.P. and Olympus Executive Fund, L.P. may be
transferred by such Common Holders as shall request such right on a pro rata
basis based on the amount of shares of Common Stock owned by each such
requesting Common Holder, as compared to the aggregate of all of the shares of
Common Stock owned by all of the requesting Common Holders, and as shall be
approved by the Board of the Company in its sole discretion.
(ii) No Common Holder shall transfer, prior to a Separation Event, any
Investment Units or Common Stock and, after a Separation Event, any Common Stock
held by such Common Holder, whether held separately or as part of one or more
Investment Units, other than, in each case, (x) in accordance with the Company's
Bye-Laws and the provisions of this Section 1 and Section 2 hereof and (y) in
accordance with Article VII of the Investment Unit Subscription
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Agreement, Article VII of the Founders' Subscription Agreement or Article IV of
the Warrant Acquisition Agreement as the case may be. Unless (x) a registration
statement is in effect with respect to the Common Stock to be transferred or (y)
the transfer is made pursuant to Rule 144 of the Securities Act, or (z) the
transfer is of Common Stock that has been transferred previously pursuant to (x)
or (y), no Common Holder shall transfer any Common Stock whether held separately
or as part of one or more Investment Units, unless the transferee of such shares
has agreed to be bound by the terms of this Agreement and has duly executed a
counterpart of this Agreement. Any transfer or purported transfer made in
violation of this Section 1 and Section 2 hereof shall be null and void and of
no effect and the Company shall cause any correction required to be made to the
register of the Members of the Company to be effected.
(b) Right of First Offer
(i) Subject to subsection (vii) below, any Common Holder desiring to
transfer, prior to any Separation Event, Investment Units or Common Stock,
whether held separately or as part of one or more Investment Units and after a
Separation Event any Common Stock (hereinafter for purposes of this Section
only, the "Securities"), held by such Common Holder (the "Seller") shall give
written notice (the "Sales Notice") to the other Common Holders that the Seller
desires to effect such a transfer (a "Sale") and setting forth the number of
Investment Units or shares of Common Stock proposed to be transferred by the
Seller.
(ii) The receipt of the Sales Notice by each other Common Holder party to
this Shareholders Agreement shall constitute an offer (the "Offer") by the
Seller to sell to such Common Holder or group of Common Holders for cash the
Securities subject to the Sale, subject to the Seller's approval of the terms
and conditions of the Bid (as defined below). Each Common Holder, or any group
of one or more Common Holders, receiving an Offer shall have a 15-day period
(the "Order Period") in which to give a written notice (a "Bid") to the Seller
prior to the expiration of such 15-day period, which written notice shall set
the price per Security that such Common Holder or group of Common Holders
proposes to pay (the "Proposed Sales Price") and such other terms and conditions
it or they propose with respect to the Sale; provided, however, a Bid must be
for all of the Securities the Seller proposes to transfer as stated in the Sales
Notice.
(iii) Upon the receipt of all Bids, if any, the Seller shall have the right
to solicit offers for the Securities subject to the Sale from any non-affiliated
third-party (a "Third-Party Offer") for a period of 90 days
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<PAGE>
from the date the Order Period expires. To the extent the Seller receives a
Third-Party Offer and such Third-Party Offer contains a Proposed Sales Price in
excess of the highest Sales Price received by Seller pursuant to the Bids made
by the Common Holders or group of Common Holders, then Seller shall have the
right to sell the Securities to the Third-Party pursuant to its Offer. If no
Bids are delivered during the Order Period then the Seller shall be entitled to
accept, in its sole discretion, any Third-Party Offer it so chooses. If such
sale pursuant to a Third-Party Offer is not consummated within 120-days from
receipt of the Third-Party Offer, and no Bids of Common Holders are accepted by
the Seller within 10 days following the expiration of the 90-day period
described in the first sentence of this subparagraph (iii), then the provisions
of this Section 1(b) shall be reinstated as to any other transfers proposed to
be made by the Seller.
(iv) The Common Holders or group of Common Holders providing a Bid to the
Seller during the Order Period as to all of the Securities subject to the Sale,
and which Bid is accepted by the Seller, shall be required to purchase and pay
for all the Securities accepted pursuant to their Bid within a 30-day period
from the date on which the buying Common Holder (or group of Common Holders)
receives written notice of the Seller's acceptance of the Bid; provided that if
the purchase and sale of such Securities is subject to any prior regulatory
approval, the time period during which such purchase and sale may be consummated
shall be extended until the expiration of five Business Days after all such
approvals shall have been received.
(v) Subject to the transfer restrictions of Section 1(a)(ii), the Seller
may transfer Investment Units or shares in accordance with subsection (b)(iii)
for consideration other than cash to an unaffiliated third-party only if the
Seller has first obtained and delivered to each of the Common Holders an opinion
of an independent investment banking firm of national standing indicating that
the fair market value of the per share non-cash consideration that the Seller
proposes to accept as consideration for such Investment Units or shares,
together with any per share cash consideration, is at least equal to the highest
proposed Sale Price received by the Seller pursuant to Bids made by the Common
Holders or group of Common Holders.
(vi) Notwithstanding any provision of this Section 1(b), no action may be
taken by the Seller, the other Common Holders or the Company that would cause a
violation of the provisions of Section 2.
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(vii) The Company shall take all reasonable steps necessary to ensure
application is made for the appropriate permissions from the Bermuda authorities
in connection with any Transfer complying with this Agreement. The Company
hereby acknowledges that no prior approval of the Bermuda Monetary Authority is
necessary for any Transfer between Persons who are designated as non-residents
of Bermuda for the purposes of the Exchange Control Act, 1972.
(viii) The provisions of this Section 1(b) shall not apply to:
(A) a Transfer of shares of Common Stock to an Affiliate of the
Seller;
(B) a Transfer of shares of Common Stock to another Common Holder;
(C) a Transfer of Investment Units to a Common Holder holding
Investment Units;
(D) a Transfer by one or more Common Holders of a majority of all
shares of Common Stock (and, if prior to a Separation Event, Investment
Units) then outstanding to any Person or Persons;
(E) a Transfer required by the provisions of Section 1(c) or Section
2;
(F) a Transfer permitted by the provisions of Section 1(d);
(G) a Transfer pursuant to an effective registration statement with
respect to the Common Stock to be transferred;
(H) a Transfer on or after the fifth anniversary of the date of this
Agreement; or
(I) a Transfer made by Richard A. Price to one or more employees
(listed on Schedule II hereto on the date hereof as such schedule may be
amended or supplemented from time to time) of the Company and its
affiliates no later than January 30, 1999.
(c) Drag Along Right
(i) If at any time and from time to time after the date of this Agreement
Common Holders holding a majority of all shares of Common Stock then issued and
outstanding (whether or not such shares are held separately or as part of
Investment Units, the "Transferring Investors") wish to Transfer in a bona fide
arm's length sale for cash
6
<PAGE>
consideration all of the Common Stock (and, if prior to a Separation Event, the
Investment Units) held by the Transferring Investors to any Person or Persons
who are not Affiliates of the Transferring Investors (for purposes of this
Section 1(c), the "Proposed Transferee"), the Transferring Investors shall have
the right (the "Drag-Along Right"), subject to applicable law and compliance
with Section 1(a) with respect to such Transfer, to require all (but not less
than all) other Common Holders to sell, pursuant to Section 1(c)(ii), to the
Proposed Transferee all (but not less than all) of the shares of Common Stock
(and, if prior to a Separation Event, the Investment Units) then owned by such
other Common Holders. Each Common Holder agrees to take all steps necessary to
enable such Common Holder to comply with the provisions of this Section 1(c).
(ii) To exercise a Drag-Along Right, the Transferring Investors shall give
each other Common Holder and the Company a written notice (for purposes of this
Section 1(c), a "Drag-Along Notice") containing (a) the aggregate number of
shares of Common Stock (and, if prior to a Separation Event, the Investment
Units) that the Proposed Transferee proposes to acquire from the Transferring
Investors and the other Common Holders, (b) the name and address of the Proposed
Transferee and (c) the proposed purchase price, terms of payment and other
material terms and conditions of the Proposed Transferee's offer. Each Common
Holder shall thereafter be obligated, subject to applicable law, to sell all
(but not less than all) of its shares of Common Stock (and, if prior to a
Separation Event, its Investment Units) as provided in such Drag-Along Notice,
provided that the sale to the Proposed Transferee is consummated within one
hundred and twenty (120) days of delivery of the Drag-Along Notice. If the sale
is not consummated within such 120-day period, then each Common Holder shall no
longer be obligated to sell such Common Holder's shares of Common Stock (or, if
prior to a Separation Event, Investment Units) pursuant to that specific
Drag-Along Right but shall remain subject to the provisions of this Section 1(c)
with respect to any subsequent Drag-Along Rights.
(d) Tag Along Right. If at any time or from time to time after the date of
this Agreement one or more Common Holders (whether or not such shares are held
separately or as part of Investment Units, the "Transferors") wish to Transfer,
in one transaction or a series of related transactions, a majority of the then
issued and outstanding Common Stock (whether or not such shares of Common Stock
are held separately or as part of Investment Units) to any Person or Persons who
are not Affiliates of the Transferors (other than pursuant to an effective
registration statement with respect to the shares of Common Stock to be
transferred
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<PAGE>
or as a result of a pledge of shares as security for a bona fide loan), such
Transferors shall notify each other Common Holder holding Common Stock (and, if
prior to a Separation Event, Investment Units) (the "Other Holders") and the
Company, in writing, of such Transfer and its terms and conditions. Within 20
days of the date that such notice is deemed to have been given (as provided in
Section 6(f) herein) to such Other Holders, each of the Other Holders shall
notify the Transferors if it elects to participate in such Transfer. Each of the
Other Holders that so notifies the Transferors shall be obligated to sell, at
the same price and on the same terms as the Transferors, such number of shares
of Common Stock (or, if prior to a Separation Event, such number of shares of
Common Stock or Investment Units, as the case may be) equal to the number of
shares of Common Stock (or, if prior to a Separation Event, such number of
shares of Common Stock or Investment Units, as the case may be) the third party
actually proposes to purchase multiplied by a fraction, the numerator of which
shall be the number of shares of Common Stock (or, if prior to a Separation
Event, such number of shares of Common Stock or Investment Units, as the case
may be) owned by such Other Holder and the denominator of which shall be the
aggregate number of shares of Common Stock (or, if prior to a Separation Event,
such number of shares of Common Stock or Investment Units, as the case may be)
held by the Transferors and each Other Holder exercising its rights under this
Section 1(d).
(e) Preemption Right. If at any time after the date hereof, the Company
proposes to issue equity securities of any kind (the term "equity securities"
shall include for these purposes any warrants, options or other rights to
acquire equity securities or debt securities convertible into equity securities)
of the Company (except for issuances pursuant to the terms of the Stock Warrant
Plans and issuances in connection with (i) a Qualified Public Offering, (ii) a
conversion or exchange of any outstanding securities, (iii) a stock dividend,
(iv) the exercise of any right existing pursuant to any agreements in effect
immediately following the Closing to acquire equity securities of the Company,
including, without limitation, pursuant to the Warrants and the Commitments, or
(v) a merger, amalgamation, reclassification or other reorganization), then, as
to each Common Holder who holds Company Stock at such time, the Company shall:
(i) give written notice setting forth in reasonable detail (1) the
designation and all of the terms and provisions of the equity securities
proposed to be issued (the "Proposed Securities"), including, where applicable,
the voting powers, preferences and relative participating, optional or other
special rights, and the
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<PAGE>
qualification, limitations or restrictions thereof and interest rate and
maturity; (2) the price and other terms of the proposed sale of such securities;
(3) the amount of such securities proposed to be issued; and (4) such other
information as may be reasonably required in order to evaluate the proposed
issuance; and
(ii) offer to issue to each such Common Holder a portion of the Proposed
Securities equal to a percentage determined by dividing (x) the number of shares
of Common Stock held by such Common Holder (whether held separately or as part
of one or more Investment Units) by (y) the total number of shares of Common
Stock including those part of any Investment Units then issued and outstanding.
Each such Common Holder that wishes to exercise its purchase rights
hereunder must deliver a written notice to that effect to the Company within
fifteen (15) days after the date the notice specified in Section 1(e)(i) was
deemed to have been given (as provided in Section 6(f) herein) by the Company.
If all of the Proposed Securities offered to such Common Holders are not fully
subscribed by such Common Holders, the remaining Proposed Securities will be
reoffered to the Common Holders purchasing their full allotment upon the terms
set forth in this Section 1(e), until all such Proposed Securities are fully
subscribed for or until all such Common Holders have subscribed for all such
Proposed Securities which they desire to purchase, except that such Common
Holders must exercise their purchase rights within five (5) days after the date
notice was deemed to have been given (as provided in Section 6(f) herein) of all
such reoffers. To the extent that the Company offers two or more securities in
units, Common Holders must purchase such units as a whole and will not be given
the opportunity to purchase only one of the securities making up such units.
Upon the expiration of the offering periods described above, the Company
will be free to sell such Proposed Securities that the Common Holders have not
elected to purchase during the ninety (90) days following such expiration on
terms and conditions no more favorable to the purchasers thereof than those
offered to such holders. Any Proposed Securities offered or sold by the Company
after such 90-day period must be reoffered to the Common Holders pursuant to
this Section 1(e). The election by a Common Holder not to exercise its purchase
rights under this Section 1(e) in any one instance shall not affect its right
(other than in respect of a reduction in its percentage holdings) as to any
subsequent proposed issuance. Any sale of such securities by the Company without
first giving the Common Holders the rights described in this Section 1(e) shall
be void and of no force and effect and the Company
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shall cause any correction required to be made to the Register of the Members of
the Company to be effected.
The Company hereby agrees that it shall cause each of its wholly-owned
subsidiaries to comply with the terms of this Section 1(e) with respect to the
issuance of any equity securities by such subsidiary (except for issuances of
stock dividends or in connection with a merger, amalgamation, reclassification
or other reorganization).
(f) Regulatory Transfer. If a Common Holder reasonably determines and
delivers written notice to the Company that its holding of shares of Company
Stock (x) has resulted in a violation of any law or governmental rule,
regulation, order or decree to which such Common Holder is subject, or (y) has
caused such Common Holder to become subject to and be required to comply with
any law, regulation, order or decree to which it was not theretofore subject,
the result of which violation or subjection and compliance, as the case may be,
would be materially adverse to such Common Holder, the Company shall use its
commercially reasonable efforts, after such Common Holder has complied with
Section 1(b), to locate on behalf of the Common Holder a purchaser for all or
part of the Company Stock held by such Common Holder.
(g) Exception. Notwithstanding anything to the contrary contained herein,
no provisions of this Section 1 shall apply to the Transfer of Common Stock from
CGA Funding, L.P., a Delaware limited partnership, solely to its partners (who
are partners as of the Closing Date) within 30 days of the date hereof, provided
that (i) each such partner agrees to be bound by the terms hereof as if it were
an original party hereto and (ii) such transfer is in compliance with all
applicable securities or other laws.
(h) Termination of Rights. The rights and obligations provided by Section 1
shall expire upon a Qualified Public Offering.
2. RESTRICTIONS ON STOCK OWNERSHIP.
(a) Share Ownership Limitations.
(i) Notwithstanding any other provision of this Agreement, no Common
Holder may transfer, purchase or acquire (except by operation of law) any
Company Stock, directly, indirectly or by attribution, or take any other action
if such transfer, purchase, acquisition or other action would cause any Person
to become a 10% Investor.
(ii) Without limiting Section 2(a)(i), if any Common Holder becomes a 10%
Investor, such Common Holder
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(the "Excess Investor") shall give notice to the Company within five (5) days
following the date of such Common Holder's becoming aware that it has become a
10% Investor. Such notice shall specify the identity of such record or
beneficial owner, and such Common Holder shall furnish to the Company such other
information as the Company shall reasonably request.
(iii) Any proposed Transfer in violation of this Section (2)(a) made
known to the Company shall not be registered in the Register of Members of the
Company. If the Company learns that a Common Holder is holding Company Stock in
violation of this Section 2(a) that is registered in the Register of Members,
the Company may deregister the transfer of the Common Stock held in violation of
this Section 2(a) and register such Company Stock in the name of the Member that
transferred such Company Stock or repurchase the Company Stock held in violation
of this Section 2(a) as determined by the Board in its absolute and unfettered
discretion, subject to the restrictions on repurchase set forth in Bye-law 52(4)
of the Company's Bye-laws.
(b) Prompt Disposition of Shares. If a Common Holder takes any action
resulting in a violation of the provisions of Section (2)(a) and the Company
determines, pursuant to a Super-Majority Board Action, that the disposition of
Company Stock by such Excess Investor is in the interest of the Company and its
members, (i) the Company shall require the Excess Investor to dispose of a
number of shares of Company Stock such that such Excess Investor or other
Person, as the case may be, no longer exceeds the limitations set forth in
Section (2)(a) and (ii) each Common Holder hereby agrees, if so required by the
Company, to sell such Company Stock as the Company may direct in accordance with
Section 2(c). Any disposition pursuant to this Section (2)(b) should occur no
later than the 28th calendar day after the date on which the Excess Investor
first violated, or caused another Person to violate, the share ownership
limitations set forth in Section (2)(a) and such Excess Investor shall make all
reasonable efforts to effect such disposition within such 28-day period. The
determination of whether an Excess Investor is in violation of the share
ownership limitations of Section (2)(a) and, if so, whether such disposition is
in the interests of the Company and its members may be made on behalf of the
Company by the Board, pursuant to a Super-Majority Board Action, in its judgment
and such determination shall be binding on the Common Holders.
(c) Manner of Disposition. Any Company Stock required to be disposed of
pursuant to Section (2)(b) shall (i) (x) if purchased by the Excess Investor or
a Related Person from another Common Holder or Common Holders, be resold to such
other Common Holder or Common Holders at the original
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purchase price and (y) each Common Holder agrees, if applicable, to purchase
such Company Stock back from the Excess Investor as contemplated by the
foregoing clause, or (ii) if otherwise acquired by the Excess Investor, be sold
to any Person subject to the restrictions of Section (2)(a) (including, but not
limited to, the Company if a sale to the Company would not cause any Person to
exceed the share ownership limitations of Section (2)(a)), but within the time
period set forth in Section (2)(b).
Notwithstanding the foregoing, a holder of Series A Preferred Stock shall
not be obligated to dispose of shares of such Stock, but it may be obligated in
accordance with the foregoing to dispose of other classes of stock of the
Company.
3. REGISTRATION RIGHTS.
The Common Holders shall have the right to have their Registrable
Securities registered under the Securities Act and applicable United States
state securities laws in accordance with the following provisions.
(a) Definitions. As used in this Section 3:
(i) "Commission" shall mean the Securities and Exchange Commission or any
other United States of America federal agency at the time administering the
Securities Act;
(ii) the term "Holder" shall mean any holder of Registrable Securities;
(iii) the term "Initiating Holder" shall mean, any Holder or Holders who
in the aggregate are Holders of more than 10% of the then issued and outstanding
Registrable Securities;
(iv) the terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (and any post-effective amendments filed or
required to be filed) and the declaration or ordering of effectiveness of such
registration statement;
(v) the term "Registrable Securities" shall mean (A) Common Stock issued
to the Common Holders, (B) any additional Common Stock acquired by the Common
Holders, including any Common Stock acquired upon the exercise of options
granted under the Stock Warrant Plans, and (C) any Common Stock issued as a
dividend or other distribution with respect to, or in exchange for or in
replacement of, the Common Stock referred to in clauses (A) and (B) above;
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(vi) "Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with its obligations under Sections 3(b)
and 3(c) hereof, including without limitation, all Commission, National
Association of Securities Dealers ("NASD") and stock exchange or Nasdaq
registration and filing fees and expenses, fees and expenses of compliance with
applicable state securities or "blue sky" laws (including, without limitation,
reasonable fees and disbursements of counsel for the underwriters in connection
with "blue sky" qualifications of the Registrable Securities), printing
expenses, messenger and delivery expenses, the fees and expenses incurred in
connection with the listing of the securities to be registered in an initial
public offering on each securities exchange or national market system on which
such securities are to be so listed and, following such initial public offering,
the fees and expenses incurred in connection with the listing of such securities
to be registered on each securities exchange or national market system on which
such securities are listed, fees and disbursements of counsel for the Company
and all independent certified public accountants (including the expenses of any
annual audit and "cold comfort" letters required by or incident to such
performance and compliance), the fees and disbursements of underwriters
customarily paid by issuers or sellers of securities (including the fees and
expenses of any "qualified independent underwriter" required by the NASD), the
reasonable fees of one counsel retained in connection with each such
registration by the holders of a majority of the Registrable Securities being
registered, the reasonable fees and expenses of any special experts retained by
the Company in connection with such registration, and fees and expenses of other
Persons retained by the Company (but not including any underwriting discounts or
commission or transfer taxes, if any, attributable to the sale of Registrable
Securities by holders of such Registrable Securities other than the Company);
and
(vii) "Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities.
(b) Demand Registration.
(i) Request for Registration. If the Company shall receive from an
Initiating Holder, at any time after 180 days after a Qualified Public Offering,
a written request that the Company effect any registration with respect to all
or a part of the Registrable Securities, the Company will:
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(A) promptly give written notice of the proposed registration to
all other Holders of Registrable Securities; and
(B) as soon as practicable, use its best efforts to effect a
registration statement, in accordance with Section 3(e), as would
permit or facilitate the sale and distribution of all or such portion
of such Registrable Securities as are specified in such request in
accordance with such request, together with all or such portion of the
Registrable Securities of any Holder or Holders joining in such
request as are specified in a written request received by the Company
within 10 Business Days after written notice from the Company is
deemed given (as provided in Section 6(f) herein) under Section
3(b)(i)(A) above; provided that the Company shall not be obligated to
effect, or take any action to effect, any such registration pursuant
to this Section 3(b):
(v) within 180 days following the effective date of any
underwritten public offering of the Company's securities;
(w) for a period of 180 days following the date of the Board
resolution described in this clause (w), if the Company furnishes
to the Holders requesting the filing of a registration statement
pursuant to this Section 3(b) a certificate signed by the
President or Chief Executive Officer of the Company stating that
the Board has passed a resolution authorizing the Company to
register any of its equity securities for its own account and the
Company is in the process of effecting such registration (it
being understood that the limitation described in this clause (w)
shall not affect any Holder's rights with respect to a
registration effected pursuant to Section 3(c));
(x) in any particular jurisdiction in which the Company
would be required as a result of such registration to (1) qualify
generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this clause (x), (2)
subject itself to taxation or regulation of its insurance
business in any such jurisdiction other than Bermuda or (3)
consent to service
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of process in effecting such registration, qualification or
compliance;
(y) if the Registrable Securities requested by all Holders
to be registered pursuant to such request do not (I) represent at
least 10% of the Registrable Securities or (II) have an
anticipated aggregate public offering price (before any
underwriting discounts and commissions) of at least $10,000,000.
The registration statement filed pursuant to the request of the Initiating
Holders may, subject to the provisions of Section 3(b)(ii) below, include other
securities of the Company which are held by Persons who, by virtue of agreements
with the Company, are entitled to include their securities in any such
registration, but the right of such Persons to include any of their securities
in any such registration shall be subject to the limitations set forth in
Section 3(b)(ii) below.
Holders holding a majority of the Registrable Securities requested to be
registered may, at any time prior to the effective date of the registration
statement relating to such registration, revoke such request, without liability
to any of the other Holders or the Other Shareholders (as defined below), by
providing a written notice to the Company revoking such request.
(ii) Underwriting. The Initiating Holders shall distribute the
Registrable Securities covered by their request by means of an underwriting
(which underwriter shall be selected by the Company and reasonably acceptable to
the Initiating Holders).
If holders of Common Stock other than Registrable Securities who are
entitled, by virtue of agreements with the Company, to have Common Stock
included in such a registration (the "Other Shareholders") request such
inclusion, the securities of such Other Shareholders shall be included in the
underwriting subject to the applicable provisions of this Section 3. The Holders
whose shares are to be included in such registration and the Company shall
(together with all Other Shareholders proposing to distribute their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected for
such underwriting by the Company and reasonably acceptable to the Initiating
Holders. Notwithstanding any other provision of this Section 3(b), if the
representative advises the Holders or the Company in writing that (i) marketing
factors require a limitation on the number of
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shares to be underwritten or (ii) the inclusion of shares held by officers and
directors of the Company in the offering could, in the representative's best
judgment, materially reduce the offering price per share, then, in the case of
the preceding clause (i), the Common Stock held by Other Shareholders shall be
excluded from such underwriting to the extent so required by such limitations
and, in the case of the preceding clause (ii), the Common Stock held by officers
and directors of the Company shall be excluded from such underwriting to the
extent advised by the representative. If, after the exclusion of such shares,
further reductions are required to meet the limitation on the number of shares
to be underwritten as advised by the representative, the number of shares that
may be included in the underwriting by each Holder requesting inclusion in the
registration shall be reduced on a pro rata basis (based on the number of shares
held at such time by the respective Holders requesting inclusion in such
registration) by such minimum number of shares as is necessary to comply with
such limitation. If any Other Shareholder who has requested inclusion in such
registration as provided above disapproves of the terms of the underwriting,
such person may elect to withdraw therefrom by written notice to the Company,
the underwriter and the Initiating Holders. If the underwriter has not limited
the number of Registrable Securities or other securities to be underwritten, the
Company may include its securities for its own account in such registration if
the representative so agrees and if the number of Registrable Securities and
other securities which would otherwise have been included in such registration
and underwriting will not thereby be limited. Any Registrable Securities or
other securities excluded or withdrawn from such underwriting shall not be
included in such registration.
(iii) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting the filing of a registration statement pursuant to this
Section 3(b) a certificate signed by the President or Chief Executive Officer of
the Company stating that, in the good faith judgment of the Board, it would be
materially detrimental to the Company and its members for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, then the Company shall have the right to defer such
filing for a period of not more than 90 days after receipt of the request of the
Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any twelve (12) month period.
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<PAGE>
c) Piggyback Registration
(i) If the Company shall determine to register any of its Common Stock
either for its own account or for the account of a holder or holders of Common
Stock (other than a registration on Form S-8 (or similar or successor form)
relating solely to stock option, stock purchase or other employee benefit plans,
or a registration on Form S-4 (or similar or successor form) relating solely to
a transaction exempt under Rule 145 of the Securities Act, or a registration on
any registration form which does not permit secondary sales or does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities), the Company
will:
(A) promptly give to each of the Holders a written notice thereof
(which shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such securities under the applicable
blue sky or other state securities laws); and
(B) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a
written request or requests made by the Holders within fifteen (15)
days after the date written notice described in clause (i)(A) above is
deemed given (as provided in Section 6(f) herein) by the Company
except as set forth in Section 3(c)(ii) below. Such written request
may specify all or a part of the Holders' Registrable Securities.
(ii) Underwriting. If the registration of which the Company gives notice is
for a registered public offering involving an underwriting (which underwriter
shall be selected by the Company, in its sole discretion), the Company shall so
advise each of the Holders as a part of the written notice given pursuant to
Section 3(c)(i)(A). In such event, the right of each of the Holders to
registration pursuant to this Section 3(c) shall be conditioned upon such
Holders' participation in such underwriting and the inclusion of such Holders'
Registrable Securities in the underwriting to the extent provided herein. The
Holders whose shares are to be included in such registration shall (together
with the Company and the Other Shareholders distributing their Common Stock
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected for
underwriting by the Company. Notwithstanding any other provision of this Section
3(c), if the representative advises the Holders or the Company in writing
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<PAGE>
that (i) marketing factors require a limitation on the number of shares to be
underwritten or (ii) the inclusion of shares held by the officers and directors
of the Company in the offering could, in the representative's best judgment,
materially reduce the offering price per share, then, in the case of the
preceding clause (i), the Common Stock held by Other Shareholders shall be
excluded from such underwriting to the extent so required by such limitations
and, in the case of the preceding clause (ii), the Common Stock held by officers
and directors of the Company shall be excluded from such underwriting to the
extent so advised by the representative. If, after exclusion of such shares,
further reductions are required to meet the limitation on the number of shares
to be underwritten as advised by the representative, the number of shares that
may be included in the underwriting by each Holder requesting inclusion in such
registration shall be reduced, on a pro rata basis (based on the number of
shares held at such time by the respective Holders requesting inclusion in such
registration), by such minimum number of shares as is necessary to comply with
such limitation (it is hereby understood that the foregoing shall not be a
limitation on the number of shares of Common Stock to be registered by the
Company). If any of the Holders or any officer, director or Other Shareholder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such underwriting
shall not be included in such registration.
(iii) Number. Each of the Holders shall be entitled to have its shares
included in an unlimited number of registrations pursuant to this Section 3(c).
(d) Expenses of Registration. Upon the exercise of registration rights set
forth in this Section 3, the Company shall pay all Registration Expenses
incurred in connection with any registration, qualification or compliance
pursuant to this Section 3, provided that such expenses shall not include
Selling Expenses which shall be borne by the Holders of the securities so
registered pro rata on the basis of the number of their shares so registered;
provided, however, that the Company shall not otherwise be required to pay any
Registration Expenses if, as a result of the withdrawal of a request for
registration by any of the Holders, as applicable, including, without
limitation, as provided in the last paragraph of Section 3(b)(i), the
registration statement does not become effective, in which case each of the
Holders and Other Shareholders requesting registration and thereafter
withdrawing its request for registration shall bear such Registration Expenses
pro rata on the basis of the number of its shares so included in the
registration request (it is hereby understood that this proviso shall not
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<PAGE>
apply to a withdrawal of a registration being effected pursuant to Section 3(c))
provided further, however, that the Company shall not otherwise be required to
pay any Registration Expenses after the Company has effected four (4)
registrations pursuant to Section 3(b) requested by an Initiating Holder and
such registrations have been declared or ordered effective and the sales of such
Registrable Securities shall have closed.
(e) Registration Procedures. In the case of each registration effected by
the Company pursuant to Section 3, the Company will keep the Holders requesting
inclusion in such registration advised in writing as to the initiation of each
registration and as to the completion thereof. In connection with any offering
of Registrable Securities registered pursuant to clause (b) or (c) of this
Section 3, the Company shall use its best efforts to obtain all necessary
permissions from the Bermuda governmental authorities and, upon obtaining such
permission, at its expense, the Company shall:
(i) prepare and file with the Commission, as promptly as practical after
receipt of a request for registration pursuant to this Section 3, a registration
statement on any form for which the Company then qualifies, and which form shall
be available for the sale of the Registrable Securities in accordance with the
intended methods of distribution thereof, and use its best efforts to cause such
registration statement to become and remain effective as provided herein;
provided that before filing with the Commission a registration statement or
prospectus or any amendments or supplements thereto, the Company will (A)
furnish, to one counsel selected by the Holders of a majority of the Registrable
Securities requested to be registered, copies of all such documents proposed to
be filed for said counsel's review and comment and (B) notify each Holder of
Registrable Securities to be registered of any stop order issued or threatened
by the Commission and take all reasonable actions required to prevent the entry
of such stop order or to remove it if entered;
(ii) prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration effective for a period of one
hundred and eighty (180) days or until the Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs (but not before the time periods referred to in Section 4(3) of the
Securities Act and Rule 174 promulgated thereunder, or any successor provisions,
if applicable) and comply with the provisions of the Securities Act with respect
to the disposition of securities covered by such
19
<PAGE>
registration statement during such period in accordance with the intended method
of disposition by sellers thereof set forth in such registration statement;
provided, however, that (A) such 180-day period shall be extended for a period
of time equal to the period, if any, during which the Holders refrain from
selling any securities included in such registration in accordance with
provisions of the last paragraph of this Section 3(e) and (B) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 180-day period shall be extended
until all such Registrable Securities are sold, provided that (x) Rule 415, or
any successor rule under the Securities Act, permits an offering on a continuous
or delayed basis and (y) the applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment which (1) includes any prospectus required by Section
10(a)(3) of the Securities Act or (2) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation in the registration statement by reference to
periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act of
the information specified in clauses (1) and (2) above;
(iii) furnish to each underwriter, if any, and each Holder of Registrable
Securities covered by such registration statement such number of copies of such
registration statement, each amendment and supplement thereto (in each case
including all exhibits thereto), and the prospectus included in such
registration statement (including each preliminary prospectus) in conformity
with the requirements of the Securities Act, and such other documents incident
thereto as each of the Holders from time to time may reasonably request in order
to facilitate the disposition of the Registrable Securities owned by such
Holder;
(iv) use its best efforts to register or qualify such Registrable
Securities under such other state securities or "blue sky" laws of such
jurisdictions as any Holder, and underwriter, if any, of Registrable Securities
covered by such registration statement reasonably requests and do any and all
other acts and things that may be reasonably necessary or advisable to enable
such Holder and each underwriter, if any, to consummate the disposition in such
jurisdictions of the Registrable Securities owned by such Holder; provided that
the Company will not be required as a result thereof to (A) qualify generally to
do business in any jurisdiction where it would not otherwise be required to
qualify but for this clause (iv), (B) subject itself to taxation or regulation
of its insurance business in any such
20
<PAGE>
jurisdiction other than Bermuda or (C) consent to general service of process in
any such jurisdiction;
(v) use its best efforts to cause the Registrable Securities covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the Holder or Holders thereof
to consummate the disposition of such Registrable Securities;
(vi) immediately notify each Holder of such Registrable Securities at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act of the happening of any event that comes to the Company's
attention if as a result of such event the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading; and the Company will promptly prepare and
furnish to such Holder a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
(vii) use its best efforts to cause all such Registrable Securities to be
listed on a national securities exchange in the United States or Nasdaq and on
each securities exchange on which similar securities issued by the Company may
then be listed, and enter into such customary agreements including a listing
application and indemnification agreement in customary form, and, subject to
Bermuda law, to provide a transfer agent and registrar for such Registrable
Securities covered by such registration statement no later than the effective
date of such registration statement;
(viii) enter into such customary agreements (including an underwriting
agreement or qualified independent underwriting agreement, in each case, in
customary form) and take all such other actions as the Holders of a majority of
the Registrable Securities being covered by such registration statement or the
underwriters retained by such Holders, if any, reasonably request in order to
expedite or facilitate the disposition of such Registrable Securities, including
customary representations, warranties, indemnities and agreements;
(ix) make available for inspection, during business hours of the Company,
by any Holder of Registrable
21
<PAGE>
Securities covered by such registration statement, any underwriter participating
in any disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such Holder or underwriter
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries
(collectively, "Records"), if any, as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause the Company's
officers, directors and employees, and those of the Company's affiliates, if
any, to supply all information and respond to all inquiries reasonably requested
by any such Inspector in connection with such registration statement;
(x) use its best efforts to obtain a "cold comfort" letter from the
Company's appointed auditors in customary form and covering such matters of the
type customarily covered by "cold comfort" letters as the Holders of a majority
in interest of the Registrable Securities being sold reasonably request; and
(xi) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission and all conditions imposed by Bermuda
governmental authorities or under Bermuda law, including, without limitation,
under the Bermuda Companies Act, and make available to the Holders, as soon as
reasonably practicable, an earnings statement covering a period of at least
twelve months beginning after the effective date of the registration statement
(as the term "effective date" is defined in Rule 158(c) under the Securities
Act) which earnings statement shall satisfy the provisions of Section 11(a) of
the Securities Act and Rule 158 thereunder.
It shall be a condition precedent to the obligation of the Company to take
any action with respect to any Registrable Securities that the Holder thereof
shall furnish to the Company such information regarding the Registrable
Securities and any other Company Stock held by such Holder and the intended
method of disposition of the Registrable Securities held by such Holder as the
Company shall reasonably request and as shall be required in connection with the
action taken by the Company.
Each Holder of Registrable Securities agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 3(e)(vi) hereof, such Holder will forthwith discontinue disposition of
Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e)(vi) hereof, and,
if so directed by the Company (at the Company's expense), such Holder will
22
<PAGE>
deliver to the Company all copies (including, without limitation, any and all
drafts), other than permanent file copies, then in such Holder's possession, of
the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
(f) Indemnification
(i) In the event of any registration of any shares of Company Stock under
the Securities Act pursuant to this Agreement, the Company will indemnify and
hold harmless each of the Holders of any Registrable Securities covered by such
registration statement, their respective directors and officers, general
partners, limited partners and managing directors, each other Person who
participates as an underwriter in the offering or sale of such securities and
each other Person, if any, who controls, is controlled by or is under common
control with any such Holder or any such underwriter within the meaning of the
Securities Act (and directors, officers, controlling Persons, partners and
managing directors of any of the foregoing) against any and all losses, claims,
damages and liabilities (or actions in respect thereto), joint or several, and
expenses (including any amounts paid in any settlement effected with the
Company's consent, which consent will not be unreasonably withheld) to which
such Holder, any such director or officer or general or limited partner or
managing director or any such underwriter or controlling Person may become
subject under the Securities Act, United States state securities "blue sky"
laws, common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) or expenses arise out
of or are based upon (A) any untrue statement (or alleged untrue statement) of
any material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary, final or
summary prospectus contained therein, or any amendment or supplement thereto,
(B) any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or (C) any violation (or alleged violation) by the Company of any United States
federal, state or common law rule or regulation applicable to the Company and
relating to action required of or inaction by the Company in connection with any
such registration, qualification or compliance. The Company will reimburse each
such Holder, director, officer, general partner, limited partner, managing
director or underwriter and controlling Person (and directors, officers,
controlling Persons, partners and managing directors of any of the foregoing)
for any legal and any other expenses reasonably incurred in connection with
investigating or defending such claim, loss, damage, liability or action;
provided, however, that the Company
23
<PAGE>
shall not be liable in any such case to the extent that any such claim, loss,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of or is based on any untrue statement (or alleged untrue statement) or
omission (or alleged omission) made in such registration statement or amendment
or supplement thereto or in any such preliminary, final or summary prospectus in
reliance upon and in conformity with written information furnished to the
Company by such Holder in its capacity as a Holder or any such director,
officer, general or limited partner, managing director, underwriter or
controlling Person specifically stating that it is for use therein; provided
further, however, that the Company shall not be liable to any Holder, any Person
who participates as an underwriter in the offering or sale of Registrable
Securities, if any, or any other Person, if any, who controls such underwriter
within the meaning of the Securities Act, pursuant to this Section 3(f) with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus or the final prospectus or the final
prospectus as amended or supplemented, as the case may be, to the extent that
any such loss, claim, damage or liability of such Holder, underwriter or
controlling Person results from the fact that such Holder or underwriter sold
Registrable Securities to a Person to whom there was not sent or given, at or
prior to the written confirmation of such sale, a copy of the final prospectus
or of the final prospectus as then amended or supplemented, whichever is most
recent, if the Company has previously furnished copies thereof to such Holder or
underwriter and such final prospectus, as then amended or supplemented, had
corrected any such misstatement or omission.
The indemnity provided for herein shall remain in full force and effect
regardless of any investigation made by or on behalf of such Holder or any such
director, officer, general partner, limited partner, managing director,
underwriter or controlling Person and shall survive the transfer of such
securities by such Holder.
(ii) Each of the Holders will, if Registrable Securities held by it are
included in any registration statement filed in accordance with the provisions
hereof, (x) indemnify, on a several and not joint basis, the Company and its
directors, officers, controlling Persons and all other prospective sellers and
their respective directors, officers, general and limited partners, managing
directors, and their respective controlling Persons against all claims, losses,
damages and liabilities (or actions in respect thereof) and expenses to which
any such Person may become subject under the Securities Act, United States state
securities "blue sky" laws, common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions
24
<PAGE>
or proceedings in respect thereof) or expenses arise out of or are based upon
(A) any untrue statement (or alleged untrue statement) of a material fact with
respect to such Holder contained in any such registration statement,
preliminary, final or summary prospectus contained therein, or any amendment or
supplement thereto, or (B) any omission (or alleged omission) to state therein a
material fact with respect to such Holder required to be stated therein or
necessary to make the statements made by such Holder therein not misleading and
(y) reimburse the Company and its directors, officers, controlling Persons and
all other prospective sellers and their respective directors, officers, general
and limited partners, managing directors, and their respective controlling
Persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, in the case of both clause (x) and clause (y), to the extent, and only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
preliminary, final or summary prospectus contained therein, or any amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Company by such Holder with respect to such Holder and stated
to be specifically for use therein; provided, however, that the obligations of
each of the Holders hereunder shall be limited to an amount equal to the
proceeds to be received by such Holder from securities sold by such Holder
pursuant to such registration statement or prospectus.
The indemnity provided for herein shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company or any of
the Holders of Registrable Securities, underwriters or any of their respective
directors, officers, general or limited partners, managing directors or
controlling Persons and shall survive the transfer of such securities by such
Holder.
(iii) Each party entitled to indemnification under this Section 3(f) (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom provided that counsel for the Indemnifying Party,
who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld) and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall have
reasonably concluded that there may be a
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<PAGE>
conflict of interest between the Indemnifying Party and the Indemnified Party in
such action, in which case the fees and expenses of the Indemnified Party's
counsel shall be at the expense of the Indemnifying Party and shall be
reimbursed as they are incurred); and provided, further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 3 except to the extent
the Indemnifying Party is actually materially prejudiced thereby. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as a term thereof
the giving by the claimant or plaintiff to such Indemnified Party of an
unconditional release from all liability with respect to such claim or
litigation. Each Indemnified Party shall promptly furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with the defense of such claim and litigation resulting therefrom.
(iv) In order to provide for a just and equitable contribution in
circumstances in which the foregoing indemnity agreements provided for in this
Section 3(f) is for any reason held to be unenforceable although applicable in
accordance with its terms, the Company and the Holders shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity agreement in such proportion as shall be
appropriate to reflect (A) the relative benefits received by the Company, on the
one hand, and the Holders of the Registrable Securities included in the offering
on the other hand, from the offering of the Registrable Securities and any other
securities included in such offering, and (B) the relative fault of the Company,
on the one hand, and the Holders of the Registrable Securities included in the
offering, on the other, with respect to the statements or omissions that
resulted in such loss, liability, claim, damage or expense, or action in respect
thereof, as well as any other relevant equitable considerations; provided,
however, that no Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to a
contribution from any Person who was not guilty of such fraudulent
misrepresentation. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or the Holders of the Registrable Securities, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Holders of the
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<PAGE>
Registrable Securities agree that it would not be just and equitable if a
contribution pursuant to this Section 3(f) were to be determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to herein. Notwithstanding anything to the
contrary contained herein, the Company and the Holders agree that any
contribution required to be made by a Holder pursuant to this Section 3(f) shall
not exceed the net proceeds from the offering of Registrable Securities (before
deducting expenses) received by such Holder with respect to such offering. For
purposes of this Section 3(f), each Person, if any, who controls a Holder within
the meaning of Section 15 of the Securities Act shall have the same rights to
contribution as such Holder, and each director of the Company, each officer of
the Company who signed the registration statement, and each Person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act
shall have the same rights to contribution as the Company.
(v) The foregoing indemnity agreements of the Company and the Holders are
subject to the condition that, insofar as they relate to any loss, claim,
liability or damage made in a preliminary prospectus but eliminated or remedied
in the amended prospectus on file with the Commission at the time the
registration statement in question becomes effective or the amended prospectus
filed with the Commission pursuant to Commission Rule 424(b) (the "Final
Prospectus"), such indemnity agreements shall not inure to the benefit of any
underwriter if a copy of the Final Prospectus was furnished to the underwriter
and was not furnished to the Person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(g) Information by the Holders. Each of the Holders and each Other
Shareholder holding Company Stock included in any registration shall furnish to
the Company such information regarding such Holder or Other Shareholder and the
distribution proposed by such Holder or Other Shareholder as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this Section
3.
(h) Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may permit the sale of the
restricted securities to the public without registration, the Company agrees to:
(A) make and keep public information available as those terms are
understood and defined in Rule 144
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under the Securities Act, at all times from and after the effective date of
the first registration statement under the Securities Act filed by the
Company for an offering of its securities to the general public;
(B) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act at any time after it has become subject
to such reporting requirements; and
(C) so long as any Holder owns any Registrable Securities, furnish to
such Holder upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 under the Securities
Act (at any time from and after the effective date of the first
registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed as such Holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing such Holder to sell any such securities without
registration.
(i) "Market Stand-off" Agreement. (i) If any registration of Common Stock
(or other securities) of the Company shall be in connection with an underwritten
public offering, each Holder of Registrable Securities agrees not to effect any
sale or distribution, including any private placement or any sale pursuant to
Rule 144A under the Securities Act (or any successor provision) or otherwise or
any sale pursuant to Rule 144 under the Securities Act (or any successor
provision), under the Securities Act of any Registrable Securities, other than
by pro-rata distribution to its shareholders, partners or other beneficial
holders, and not to effect any such sale or distribution of any other equity
security of the Company or of any security convertible into or exchangeable or
exercisable for any equity security of the Company (in each case, other than as
part of such underwritten public offering) during the ten calendar days prior
to, and during the 180 calendar day period (or such lesser period as may be
agreed upon between such Holders and the representative of the underwriters of
such offering) that begins on the effective date of such registration statement
(except as part of such registration), without the consent of the representative
of the underwriters of such offerings; provided, however, that written notice of
such registration has been deemed given (as provided in Section 6(f) herein) to
each Holder of
28
<PAGE>
Registrable Securities at least two Business Days prior to the anticipated
beginning of the ten calendar day period referred to above.
(ii) If requested by the representative of the underwriters, the Holders
shall execute a separate agreement to the foregoing effect. The Company may
impose stop-transfer instructions with respect to the shares (or securities)
subject to the foregoing restriction until the end of said 180-day period. The
provisions of this Section 3(i) shall be binding upon any transferee who
acquires Registrable Securities, including, without limitation, any Holder's
shareholders, partners or other beneficial holders, whether or not such
transferee is entitled to the registration rights provided hereunder.
(iii) If any registration of Registrable Securities shall be in
connection with an underwritten public offering, the Company agrees (A) not to
effect any public sale or distribution of any of its equity securities or of any
security convertible into or exchangeable or exercisable for any equity security
of the Company (other than any such sale or distribution of such securities in
connection with any amalgamation, merger or consolidation by the Company or any
Affiliate of the Company or the acquisition by the Company or an Affiliate of
the Company of the shares of substantially all the assets of any other Person or
in connection with a stock option, stock purchase or other employee benefit
plan) during the ten days prior to, and during the 180-day period (or such
lesser period as may be agreed upon between the Company and the representative
of the underwriters of such offering) which begins on the effective date of such
registration statement (except as part of such registration) without the consent
of the representative of the underwriters of such offering and (B) that any
agreement entered into after the date hereof pursuant to which the Company
issues or agrees to issue any privately placed equity securities shall contain a
provision under which the holders of such securities agree not to effect any
sale or distribution of any such securities during the period and in the manner
referred to in the foregoing clause (A) of this Section 3(i)(iii).
(j) Assignability. The registration rights set forth in this Section 3
shall be assignable by any Holder, in whole or in part, to any transferee of
Registrable Securities provided such transferee agrees to be bound by all
provisions of this Agreement.
(k)) Termination. The registration rights set forth in this Section 3 shall
not be available to any Holder if, in the opinion of counsel to the Company, all
of the Registrable Securities then owned by such Holder could be
29
<PAGE>
sold in any 90-day period pursuant to Rule 144 under the Securities Act (without
giving effect to the provisions of Rule 144(k)).
4. INFORMATION AS TO COMPANY AND RELATED COVENANTS
(a) Auditors. The Company shall maintain a system of accounting established
and administered in accordance with United States generally accepted accounting
principles ("U.S. GAAP") and shall set aside on its books all such proper
reserves as shall be required by U.S. GAAP. The Company shall retain a firm of
independent chartered accountants of recognized standing to audit and report on
the Company's annual consolidated balance sheets and statements of operations,
shareholders' equity and cash flows and to report to the Board. Subject to the
requirements of the Companies Act of 1981 of Bermuda and the regulations
promulgated thereunder, all major accounting policies and principles shall be
determined by the Board in accordance with U.S. GAAP.
(b) Financial Information. The Company shall prepare annual consolidated
balance sheets and statements of operations, shareholders' equity and cash flows
of the Company and its subsidiaries, which shall be prepared in accordance with
U.S. GAAP, and setting forth in each case in comparative form the figures for
the previous year, and audited by the auditors referred to in Section 4(a)
hereof. The Company shall also prepare quarterly unaudited, consolidated balance
sheets and statements of operations, shareholders' equity and cash flows of the
Company and its subsidiaries, certified by the Chief Financial Officer and the
Chief Executive Officer of the Company and prepared in accordance with U.S. GAAP
and setting forth in each case in comparative form the same figures for the
previous year and, in addition, year-to-date figures. The Company will furnish
to all Common Holders the following information within the time specified: (i)
as soon as practicable after the end of each fiscal quarter and, in any event
within 45 days thereafter, all of the quarterly financial information referred
to herein, and (ii) as soon as practicable after the end of each fiscal year,
and in any event within 110 days thereafter, all of the annual financial
information referred to herein.
(c) Business Report. The Company shall prepare and deliver to each Common
Holder within 45 days after the end of each calendar quarter a report as to the
implementation of the Company's business plan during such quarter, which report
shall be accompanied by a certificate signed by the Chief Executive Officer and
the Chief Financial Officer of the Company as to the Company's compliance with
its operating guidelines during such quarter.
30
<PAGE>
(d) Inspection. From and after the date hereof, the Company will permit
each Common Holder, its nominee, assignee or its representative, to visit and
inspect any of the properties of the Company, to examine all its books of
account, records, reports and other papers not contractually required of the
Company to be kept confidential or secret, to make copies and extracts
therefrom, and to discuss its affairs, finances and accounts with its officers,
directors, key employees and independent public accountants or any of them (and
by this provision the Company authorizes said accountants to discuss with said
Common Holder, its nominee, assign and representatives the finances and affairs
of the Company and its Subsidiaries), all at such reasonable times and as often
as may be reasonably requested.
(e) The provisions of Section 4(a)-(d) shall expire upon the closing of the
Qualified Public Offering.
5. DEFINITIONS
(a) Terms Defined. As used in this Agreement, the following terms have the
respective meaning set forth below:
$: means United States dollars.
Affiliate: means (i) with respect to a Person, any other Person directly or
indirectly controlling, controlled by or under common control with such Person
and, in the case of an individual Common Holder, means members of his or her
immediate family or a trust for their benefit, (ii) a nominee(s) of a Person or
a principal of a nominee Person, (iii) a trustee of a trust, or (iv) such
Person's shareholders, partners, beneficiaries or members.
Board: means the board of directors of the Company.
Business Day: means any day except a Saturday, Sunday or other day on which
commercial banks in The City of New York or Bermuda are authorized by law or
executive order to close.
Commission: means the United States Securities and Exchange Commission.
Exchange Act: means the United States Securities Exchange Act of 1934, as
amended.
The terms "hold" and "holder": means, with reference to any Common Stock,
the Person whose name appears in the register of Members of the Company.
Person: means an individual, partnership, joint-stock company, corporation,
trust or unincorporated organization,
31
<PAGE>
limited liability company, or a government or agency or political subdivision
thereof or any other entity.
Qualified Public Offering: means the completion of an underwritten public
offering of Common Stock pursuant to a registration statement under the
Securities Act resulting in net proceeds to the Company of at least $50,000,000.
Related Person: means any Person who bears a relationship to an Excess
Investor as described in Section 958 of the Code.
Securities Act: means the United States Securities Act of 1933, as amended.
Stock Warrant Plans: means (i) the Employee Stock Warrant Plan of the
Company dated June 17, 1997 and (ii) the Sponsoring Investors' and Founders'
Stock Warrant Plan of the Company dated June 17, 1997, each in the form attached
as Exhibit I hereto, except for such changes as are not material to the terms
and conditions thereof, and which have been duly adopted by the Board of
Directors and the Shareholders of the Company.
Super-Majority Board Action: means a vote of three-quarters (3/4) of the
directors serving on the Board at the time of such vote.
10% Investor: means a U.S. Person that (i) owns directly, indirectly or by
attribution (within the meaning of Section 958 of the United States Internal
Revenue Code of 1986, as amended) 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote or (ii) by virtue of
such ownership is treated as owning indirectly or constructively 10% or more of
the total combined voting power of all classes of the stock entitled to vote of
Commercial Guaranty Assurance, Ltd., a Bermuda company with limited liability
(and its successors).
Transfer: means any sale, assignment, pledge, hypothecation, or other
disposition or encumbrance of any interest.
Trigger Event: means (a) the closing of a Qualified Public Offering, (b)
the consummation of an acquisition of a majority of the issued and outstanding
shares of 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 corporate
reorganization) resulting in the ultimate beneficial ownership of such acquired
shares of Common Stock
32
<PAGE>
being different than before such acquisition or (c) 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 of or immediately before such sale.
U.S. Person: means an individual who is a citizen or resident of the United
States, a company, corporation or partnership created or organized under the
laws of the United States or any state thereof, an estate, the income of which,
from non-United States sources and not effectively connected with the conduct of
a trade or business in the United States, is includable in gross income for
United States federal income tax purposes, or a trust, if (i) a court within the
United States may exercise primary supervision of the trust, and (ii) one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.
6. MISCELLANEOUS
(a) Legends. In addition to any other legends required by applicable law,
the Company's Bye-laws or any other agreement restricting the Transfer of the
Company Stock or Investment Units, as the case may be, each certificate
evidencing the Common Stock or Investment Units, as the case may be, acquired by
the Common Holders will bear a legend reflecting the restrictions on the
transfer of such shares contained in this Agreement and in the Investment Units
Subscription Agreement, the Warrant Acquisition Agreement or the Founders'
Subscription Agreement, as the case may be.
(b) Waiver; Amendments. Except as expressly provided otherwise herein,
neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the Company and each of the Common Holders at the time who are party to this
Agreement; provided, however, that, any provision hereof, other than Section 4,
may be amended, which amendment shall be effective as to all Common Holders,
with the consent of the Company and the parties hereto that at the time just
prior to the amendment hold at least seventy-five percent (75%) of the Common
Stock; provided, further, however, that any amendment to Section 4 shall require
the consent of the Company and the parties hereto that at the time just prior to
the amendment hold at least ninety percent (90%) of the Common Stock.
(c) Amendment of Schedule I to this Agreement. The Secretary of the Company
shall, from time to time in the
33
<PAGE>
ordinary course of business as reasonably necessary, amend Schedule I to this
Agreement to reflect accurately the addition or deletion of parties to this
Agreement by virtue of the succession, assignment, or other transfer of shares
of Company Stock in accordance with this Agreement, or exercise of Warrants
pursuant to the Warrant Acquisition Agreement or otherwise, and applicable law.
(d) Recapitalization, Exchange, Etc. The provisions of this Agreement shall
apply to the full extent set forth herein with respect to shares or other
securities of the Company that may be issued in respect of, in exchange for, or
in substitution of the Common Stock. The Company agrees not to enter into any
transaction with any Person pursuant to which shares or other securities of such
Person will be exchanged or substituted for the Common Stock unless it is a
condition to such transaction that such Person and the Common Holders execute an
agreement substantially in the form of this Agreement (or the surviving
provisions hereof).
(e) Specific Performance. Each of the parties hereto acknowledges and
agrees that, in the event of any breach of this Agreement, the non-breaching
parties would be irreparably harmed and could not be made whole by monetary
damages. Accordingly, each of the parties hereto agrees that the other parties,
in addition to any other remedy to which they may be entitled at law or in
equity, shall be entitled to compel specific performance of this Agreement.
(f) Notices. All notices, requests, demands and other communications
hereunder shall be in writing and, except to the extent otherwise provided in
this Agreement, shall be deemed to have been duly given if delivered by same day
or next day courier or mailed, registered mail, return receipt requested, or
transmitted by telegram, telex or facsimile (i) if to a Common Holder, at such
Common Holder's address appearing on applicable schedule attached hereto or at
any other address such Common Holder may have provided in writing to the Company
and (ii) if to the Company, at Clarendon House, Church Street, Hamilton HM 11,
Bermuda, Attention: Secretary, or such other address as the Company may have
furnished to the Common Holders in writing. A notice hereunder shall be deemed
to have been given on the day such notice is sent or transmitted; provided,
however, that if such notice is sent by next-day courier it shall be deemed to
have been given the day following sending and, if by registered mail, five days
following sending.
(g) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall inure to the benefit of, and be binding upon, the successors and
assigns of each of the parties; provided, however, that this Agreement may not
be assigned by any party hereto other than in compliance
34
<PAGE>
with the terms hereof, including the restrictions on transfers of Company Stock
as set forth in Sections 1 and 2 hereof.
(h) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
(i) Entire Agreement. This Agreement and the Subscription Agreement
constitute the entire understanding of the parties hereto and supersede all
prior understandings among such parties.
(j) Applicable Law. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder, shall
be determined under, governed by and construed in accordance with the laws of
New York without giving effect to the principles of conflicts of laws thereof.
Each party hereto agrees that any suit, action or other proceeding arising out
of this Agreement shall be brought and litigated in the courts of New York (or
if a suit, action or other proceeding arising out of this Agreement is unable to
be brought or is dismissed for jurisdictional reasons in the courts of New York,
then the suit, action or proceeding arising out of this Agreement shall be
brought in the courts of Bermuda) and each party hereto hereby irrevocably
consents to personal jurisdiction and venue in any such court and hereby waives
any claim it may have that such court is an inconvenient forum for the purposes
of any such suit, action or other proceeding.
(k) Section Headings. The headings of the sections and subsections of this
Agreement are inserted for convenience only and shall not be deemed to
constitute a part thereof.
(l) Holders of Warrant Shares. Each of the parties hereto hereby consents
and agrees that any holder of the Warrant Shares not already a party hereto may
become a party to this Agreement upon exercise of the Warrant by executing a
counterpart signature page hereto and such holder shall then be reflected on
Schedule I hereto as a Common Holder. Each of the parties hereto hereby agrees
that each of the holders of the Warrants are third party beneficiaries of this
Section 6(l).
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Shareholders
Agreement as of the date first above written.
COMPANY:
CGA GROUP, LTD.
By: /s/ RICHARD A. PRICE
------------------------
Name: Richard A. Price
Title: President and Chief
Executive Officer
COMMON HOLDERS:
CAPITAL REINSURANCE COMPANY
By: /s/ ALAN S. ROSEMAN
------------------------
Name: Alan S. Roseman
Title: SVP, General Counsel
Secretary
<PAGE>
ST. GEORGE HOLDER:
THIRD AVENUE TRUST, ON BEHALF
OF THE THIRD AVENUE VALUE FUND
SERIES
By: /s/ DAVID BARSE
------------------------
Name: David Barse
Title: Executive Vice President
COMMON HOLDER:
OLYMPUS GROWTH FUND II, LP
By: OGP II, L.P., its general partner
By: Nibur, L.L.C., a general partner
By: /s/ PAUL A. RUBIN
------------------------
Name: Paul A. Rubin
Title: Member
COMMON HOLDER:
OLYMPUS EXECUTIVE FUND, LP
By: OEF, L.P., its general partner
By: RSM, L.L.C., a general partner
By: /s/ ROBERT S. MORRIS
------------------------
Name: Robert S. Morris
Title: President
ST. GEORGE HOLDER:
ACE LIMITED
By: /s/ PETER MEAR
------------------------
Name: Peter Mear
Title: Executive Vice President and
General Counsel
<PAGE>
COMMON HOLDER:
LENNAR CGA HOLDINGS, INC
By: /s/ JEFFREY P. KRASNOFF
-------------------------
Name: Jeffrey P. Krasnoff
Title: Vice President
COMMON HOLDER:
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
By: /s/ BASIL P. LIVANOS
-------------------------
Name: Basil P. Livanos
Title: Investment Officer
COMMON HOLDER:
CGA FIREMARK VENTURE FUND I,
LLC
By: /s/ MICHAEL J. MORRISSEY
-------------------------
Name: Michael J. Morrissey
Title: Chairman and CEO
<PAGE>
COMMON HOLDER:
PACIFIC MUTUAL LIFE INSURANCE
COMPANY
By: /s/ RONN C. CORNELIUS
------------------------
Name: Ronn C. Cornelius
Title: Asst. Vice President
COMMON HOLDER:
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
By: /s/ KATHLEEN N. STARRS
------------------------
Name: Kathleen N. Starrs
Title: Vice President
COMMON HOLDER:
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 COMPAN OF NEW
YORK
By: /s/ KATHLEEN N. STARRS
------------------------
Name: Kathleen N. Starrs
Title: Vice President
<PAGE>
COMMON HOLDER:
STARWOOD CGA, LLC
By: /s/ JAY SUGARMAN
------------------------
Name: Jay Sugarman
Title: Authorized Signatory
COMMON HOLDER:
MUTUAL DISCOVERY FUND
By: FRANKLIN MUTUAL ADVISORS, INC.
-----------------------------------
By: /s/ E.N. COHERNOUR
------------------------
Name: E.N. Cohernour
Title: V.P., Gen. Counsel
& Asst. Sec.
COMMON HOLDER:
PRUDENTIAL SECURITIES GROUP, INC.
By: /s/ ELIZABETH W. CASTAGNA
--------------------------
Name: Elizabeth W. Castagna
Title: Treasurer
COMMON HOLDER:
MUTUAL QUALIFIED FUND
By: FRANKLIN MUTUAL ADVISORS, INC.
By: /s/ E.N. COHERNOUR
------------------------
Name: E.N. Cohernour
Title: V.P., Gen. Counsel
& Asst. Sec.
COMMON HOLDER:
CGA FUNDING, L.P.
By: Shidler/CGA Corporation,
Its General Partner
By: /s/ JAY H. SHIDLER
------------------------
Jay H. Shidler,
Its President
COMMON HOLDER:
SHIDLER/CGA CORPORATION
By: /s/ JAY H. SHIDLER
------------------------
Name: Jay H. Shidler
Title: Its President
COMMON HOLDER:
SHIDLER EQUITIES L.P.
By: Shidler Equities Corp.,
Its General Partner
By: /s/ JAY H. SHIDLER
------------------------
Name: Jay H. Shidler
Title: Its President
COMMON HOLDER:
SHIDLER EQUITIES CORP.
By: /s/ JAY H. SHIDLER
------------------------
Name: Jay H. Shidler
Title: Its President
<PAGE>
COMMON HOLDER:
/s/ ROBERT L. DENTON
------------------------
Robert L. Denton
COMMON HOLDER:
/s/ RICHARD A. PRICE
------------------------
Richard A. Price
COMMON HOLDER:
/s/ PAUL T. LAMBERT
------------------------
Paul T. Lambert
COMMON HOLDER:
REYNOLDS PARTNERS
By:/s/ JAMES C. REYNOLDS
------------------------
Name: James C. Reynolds
Title: Its General Partner
COMMON HOLDER:
LBCW LIMITED PARTNERSHIP
By: /s/ CLAY W. HAMLIN
------------------------
Name: Clay W. Hamlin
Title: Its General Partner
COMMON HOLDER:
/s/ ROBERT W. HOLMAN, JR.
--------------------------
Robert W. Holman, Jr.
COMMON HOLDER:
MICHAEL T. TOMASZ REVOCABLE
TRUST UAD 2/5/90
By: /s/ MICHAEL T. TOMASZ
------------------------
Name: Michael T. Tomasz
Title: Trustee
COMMON HOLDER:
NAGLEBERG FAMILY
PARTNERSHIP, L.P.
By: /s/ HOWARD A. NAGELBERG
------------------------
Name: Howard A. Nagelberg
Its General Partner
COMMON HOLDER:
/s/ SAMUEL TANG
------------------------
Samuel Tang
COMMON HOLDER:
/s/ DOREEN A. DENTON
------------------------
Doreen A. Denton
COMMON HOLDER:
/s/ MARK S. WHITING
------------------------
Mark S. Whiting
<PAGE>
COMMON HOLDER:
/s/ DUANE H. LUND
------------------------
Duane H. Lund
COMMON HOLDER:
/s/ STEPHEN J. MERINGOFF
-------------------------
Stephen J. Meringoff
COMMON HOLDER:
MATTISON FAMILY TRUST
By:/s/ J. STANLEY MATTISON
------------------------
J. Stanley Mattison
Trustee
COMMON HOLDER:
/s/ LAWRENCE J. TAFF
------------------------
Lawrence J. Taff
COMMON HOLDER:
MARILYNN E. TOMASZ
REVOCABLE TRUST UAD 2/5/90
By:/s/ MARILYNN E. TOMASZ
-----------------------
Marilynn E. Tomasz
Trustee
COMMON HOLDER:
/s/ MICHAEL W. BRENNAN
------------------------
Michael W. Brennan
COMMON HOLDER:
RADNOR CAPITAL CORPORATION
PENSION TRUST
By:/s/ MARC BRUTTEN
-------------------------
Marc Brutten, Trustee
COMMON HOLDER:
/s/ JOHANNSON YAP
------------------------
Johannson Yap
COMMON HOLDER:
/s/ KIMBERLY F. AQUINO
------------------------
Kimberly F. Aquino
COMMON HOLDER:
/s/ GARY H. HEIGL
------------------------
Gary H. Heigl
<PAGE>
COMMON HOLDER:
/s/ STEPHEN B. ORESMAN
------------------------
Stephen B. Oresman
COMMON HOLDER:
/s/ SUSAN G. BURRUS
------------------------
Susan B. Burrus
COMMON HOLDER:
/s/ MICHAEL J. HAVALA
------------------------
Michael J. Havala
COMMON HOLDER:
/s/ WALLACE McDOWELL
------------------------
Wallace McDowell
COMMON HOLDER:
/s/ WILLIAM WALTON
------------------------
William Walton
COMMON HOLDER:
/s/ JAMES R. REINHART
------------------------
James R. Reinhart
COMMON HOLDER:
/s/ ANTHONY R. MONTEMURNO
--------------------------
Anthony R. Montemurno
COMMON HOLDER:
/s/ GEOFFREY KAUFFMAN
------------------------
Geoffrey Kauffman
EXHIBIT 5.1
[Letterhead of Dewey Ballantine LLP]
July 30, 1998
CGA Group, Ltd.
Clarendon House
2 Church Street
Hamilton, Bermuda
Re: CGA Group, Ltd.
Registration Statement on Form S-1
----------------------------------
Dear Sirs:
We have represented CGA Group, Ltd. (the "Company") in connection with the
registration of 2,992,109 shares of Series A Cumulative Voting Preference Shares
of the Company pursuant to which a Registration Statement on Form S-1 (the
"Registration Statement") and the prospectus included therein (the "Prospectus")
have been filed under the Securities Act of 1933, as amended.
In rendering the opinions expressed herein, we have examined and are
familiar with the Registration Statement as an exhibit to which this opinion
will be filed. We have also examined such other documents and instruments and
have made such further investigations as we have deemed necessary or appropriate
in connection with this opinion.
Based upon and subject to the foregoing, and having regard for the legal
considerations which we deem relevant, we hereby confirm that the statements of
legal matters contained in the Prospectus under the captions "CERTAIN TAX
CONSIDERATIONS"-"Taxation of the Company and its Subsidiaries"-"U.S." and
"CERTAIN TAX CONSIDERATIONS"-"Taxation of Holders of Series A Preferred
Stock"-"U.S. Taxation" are based on current
<PAGE>
OGA Group, Ltd., p2
United States law and constitute the opinion of this firm, except that, as
stated therein, this firm has given no opinion with respect to (a) whether the
Company or CGA will have a permanent establishment in the United States or will
be engaged in a U.S. trade or business, (b) any factual or accounting matters
and (c) the existence or amounts of Related Person Insurance Income (as defined
in the Prospectus).
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to all references to this firm in the Registration Statement.
Very truly yours,
/S/ DEWEY BALLANTINE LLP
------------------------
EXHIBIT 5.2
[LETTERHEAD OF CONYERS DILL & PEARMAN]
July 30, 1998
CGA Group, Ltd.
Clarendon House
2 Church Street
Hamilton, Bermuda
Dear Sirs:
We have acted as Bermuda counsel for CGA Group, Ltd. (the "Company"), a
Bermuda exempted company, in connection with the registration of 2,992,109
shares of Series A Cumulative Voting Preference Shares of the Company.
In our capacity as Bermuda counsel to the Company, we participated in the
preparation of the registration statement ("Registration Statement") on Form S-1
(Registration No. 333-7944) which was filed with the Securities and Exchange
Commission ("Commission") under the Securities Act of 1933 as amended ("Act") of
the United States of America and the forms of prospectus (the "Prospectus") also
filed with the Commission together with all amendments thereto filed in
accordance with the Act.
For the purposes of giving this opinion, we have examined and relied upon
the Registration Statement. We have also reviewed a copy of the memorandum of
association, bye-laws and share register of the Company certified as true copies
thereof by the secretary of the Company, minutes of meetings of the Company's
board of directors, minutes of shareholders' meetings and such other documents,
and have made such enquiries as to questions of law as we have deemed necessary
in order to render the opinion set forth below.
<PAGE>
-2-
Capitalised terms not otherwise defined in this opinion are used herein as
defined in the Registration Statement.
We have assumed:
(i) the genuineness and authenticity of all signatures and the conformity to
the originals of all copies (whether or not certified) of all documents
examined by us and the authenticity and completeness of the originals from
which such copies were taken;
(ii) the correctness, accuracy and completeness of all factual representations
made in the Registration Statement and in the other documents which we have
reviewed; and
(iii) that there is no provision of the law of any jurisdiction, other than
Bermuda, which would have any implication in relation to the opinions
expressed herein.
The term "non assessability" is not a legal concept under Bermuda law, but when
we describe shares as being "non assessable" (see paragraph 2 below) we mean
with respect to the shareholders of a company, in relation to fully paid shares
of that company and subject to any contrary provision in any agreement in
writing between the company and any one of its shareholders holding such shares
but only with respect to such shareholder, that such shareholder shall not be
bound by an alteration to the memorandum of association or the bye-laws of the
company after the date upon which they became such shareholders, if and insofar
as the alteration requires them to take, or subscribe for additional shares, or
in any way increases their liability to contribute to the share capital of, or
otherwise pay money to, such company.
We have made no investigation of and express no opinion in relation to the laws
of any jurisdiction other than Bermuda. This opinion is to be governed by and
construed in accordance with the laws of Bermuda and is limited to and is given
on the basis of the current law and practice in Bermuda.
On the basis of and subject to the foregoing, we are of the opinion that at the
date hereof:
1. The Company has been duly incorporated and is an existing limited liability
exempted company under the laws of Bermuda, with corporate power and
corporate authority to own, lease and operate its properties and conduct
its business as described in the Prospectus.
2. The Series A Preferred Stock to be registered by the Company pursuant to
the Registration Statement have been duly authorised and legally issued and
are fully paid and non-assessable.
3. The statements in the Registration Statement and Prospectus contained in
the sub-paragraphs under the caption "REGULATIONS", "Bermuda" to the extent
that they constitute matters of law or legal conclusions with respect
thereto, have been prepared and reviewed by us and are correct in all
material respects as at the date hereof.
<PAGE>
-3-
4. The statements in the Registration Statement and Prospectus under the
captions "CERTAIN TAX CONSIDERATIONS"-"Taxation of the Company and its
Subsidiaries"-"Bermuda" and "CERTAIN TAX CONSIDERATIONS"-"Taxation of
Holders of Series A Preferred Stock"-"Bermuda Taxation" are all the
material Bermuda tax consequences in relation to (a) the Company and CGA
(as defined in the Registration Statement) and (b) an investment in or,
subsequent sale of the Series A Preferred Stock, are based on current
Bermuda law and constitute the opinion of this Firm.
We hereby consent to the filing of this opinion with the Commission and as an
exhibit to the Registration Statement and to the reference to this Firm under
the captions "ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES", "CERTAIN TAX
CONSIDERATIONS" and "LEGAL MATTERS".
Yours faithfully
/s/ CONYERS DILL & PEARMAN
- ---------------------------
EXHIBIT 10.1
CGA GROUP, LTD.
SERIES A PREFERRED STOCK
SUBSCRIPTION AGREEMENT
Dated as of June 9, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I AUTHORIZATION; SUBSCRIPTION FOR SERIES A PREFERRED
STOCK................................................. 1
Section 1.1 The Series A Preferred Stock................ 1
Section 1.2 The Subscription for Series A Preferred
Stock..................................... 2
ARTICLE II CLOSING................................................. 2
ARTICLE III CONDITIONS TO OBLIGATIONS OF THE INVESTORS.............. 3
Section 3.1 Accuracy of Representations and Warranties.. 3
Section 3.2 Performance of Agreements; Regulatory
Approvals; Credit Rating.................. 3
Section 3.3 Compliance Certificate...................... 4
Section 3.4 Bye-laws.................................... 5
Section 3.5 Warrant Agreement; Other Agreements......... 5
Section 3.6 Opinion of Conyers Dill & Pearman........... 5
Section 3.7 Opinion of Dewey Ballantine................. 5
Section 3.8 Aggregate Funding........................... 5
Section 3.9 St. George.................................. 5
Section 3.10 Avoidance of Conflicts...................... 6
Section 3.11 Appointment of Agent........................ 6
Section 3.12 List of Shareholders........................ 6
ARTICLE IV CONDITIONS TO THE COMPANY'S OBLIGATIONS................. 6
Section 4.1 Accuracy of Representations and Warranties.. 7
Section 4.2 Performance of Agreements................... 7
Section 4.3 Other Agreements............................ 7
Section 4.4 Letters from Placement Agents............... 7
Section 4.5 Payment for the Series A Preferred Stock.... 7
Section 4.6 Aggregate Funding........................... 7
ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
COMPANY............................................... 8
Section 5.1 Due Organization, Valid Existence and
Authority of the Company and the
Company's Initial Subsidiaries............ 8
Section 5.2 Authorization and Validity of Agreements.... 8
Section 5.3 Capitalization.............................. 9
Section 5.4 No Conflict with Other Instruments; No
Approvals Required Except as Have Been
Obtained.................................. 9
<PAGE>
Section 5.5 Regulatory Filings; Compliance with Law..... 11
Section 5.6 Stamp Duties or Taxes....................... 11
Section 5.7 Private Offering of the Series A
Preferred Stock........................... 12
Section 5.8 The Private Placement Memorandum............ 13
Section 5.9 Not an "Investment Company"................. 13
Section 5.10 Business Newly Formed....................... 13
Section 5.11 Operating Company........................... 13
Section 5.12 No U.S. Trade or Business and not a
Controlled Foreign Corporation............ 14
Section 5.13 Related Person Insurance Income............. 14
Section 5.14 Operating Guidelines........................ 15
Section 5.15 Passive Foreign Investment Company.......... 15
Section 5.16 Use of Proceeds of the Offering............. 16
Section 5.17 Shareholders................................ 16
Section 5.18 St. George Representations.................. 16
Section 5.19 Bermuda Withholding Tax..................... 16
Section 5.20 No Events of Non-Compliance................. 16
Section 5.21 Registration Rights......................... 16
Section 5.22 Letter Agreement with DCR................... 16
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE INVESTORS......... 17
Section 6.1 Due Organization, Good Standing and
Authority of the Investor................. 17
Section 6.2 Authorization and Validity of Agreements.... 17
Section 6.3 Investment Intent........................... 17
Section 6.4 No Conflict with Other Instruments; No
Approvals Required Except as Have Been
Obtained.................................. 17
Section 6.5 Investor Awareness and Suitability.......... 18
Section 6.6 Accredited Investor Status.................. 20
ARTICLE VII BUSINESS COVENANTS...................................... 21
Section 7.1 Limitation on Company Indebtedness and
Preferred Stock........................... 21
Section 7.2 Limitation on Restricted Subsidiary
Indebtedness and Preferred Stock.......... 21
Section 7.3 Limitation on Restricted Payments........... 21
Section 7.4 Limitation on Dividends and Other Payment
Restrictions Affecting Restricted
Subsidiaries.............................. 22
Section 7.5 Limitation on Sales of Assets and Capital
Stock..................................... 23
Section 7.6 Limitation on Release of Commitments........ 24
Section 7.7 Limitation on Transactions with Affiliates.. 25
<PAGE>
Section 7.8 Limitation on Merger, Consolidation and
Sale of Assets............................ 25
Section 7.9 Restricted and Unrestricted Subsidiaries.... 26
ARTICLE VIII EVENTS OF NON-COMPLIANCE................................ 27
ARTICLE IX REPORTING............................................... 30
Section 9.1 Reporting................................... 30
Section 9.2 Rule 144 Reporting.......................... 31
Section 9.3 Bermuda Laws................................ 31
ARTICLE X REGISTERED EXCHANGE OFFER............................... 31
Section 10.1 Exchange Offer Registration................. 31
Section 10.2 Continuity of Effectiveness................. 32
Section 10.3 Exchange by Restricted Broker-Dealers....... 32
ARTICLE XI SHELF REGISTRATION...................................... 33
Section 11.1 Shelf Obligation............................ 33
Section 11.2 Continuity of Effectiveness................. 34
Section 11.3 Compliance.................................. 34
Section 11.4 Provision by Holders of Certain
Information in Connection with the Shelf
Registration Statement.................... 35
ARTICLE XII REGISTRATION PROCEDURES................................. 35
Section 12.1 Exchange Offer Registration Statement....... 35
Section 12.2 General Provisions.......................... 37
Section 12.3 Registration Expenses....................... 41
Section 12.4 Indemnification............................. 41
ARTICLE XIII RESTRICTIONS ON TRANSFER................................ 45
Section 13.1 Restrictive Legends......................... 45
Section 13.2 Notice of Proposed Transfers................ 45
ARTICLE XIV DEFINITIONS............................................. 47
ARTICLE XV MISCELLANEOUS........................................... 60
Section 15.1 Survival of Representations, Warranties
and Covenants............................. 60
Section 15.2 Termination of Agreement.................... 60
Section 15.3 Entire Agreement............................ 60
Section 15.4 Severability................................ 61
Section 15.5 Successors and Assigns...................... 61
Section 15.6 Amendment; Waiver........................... 61
<PAGE>
Section 15.7 Headings.................................... 61
Section 15.8 Counterparts................................ 61
Section 15.9 Applicable Law.............................. 62
Section 15.10 Notices and Payment......................... 62
Section 15.11 Full Payment................................ 62
Section 15.12 Indemnification............................. 63
Section 15.13 Submission to Jurisdiction.................. 64
Section 15.14 Payment; Transfer Agent and Registrar....... 65
Section 15.15 Expenses.................................... 66
Schedules:
Schedule 1 -- List of Investors
Schedule 2 -- List of Shareholders of the Company and Their
respective shareholdings
Schedule 3 -- Schedule of Exceptions
Annexes:
Annex I -- Form of Memorandum of Association
Annex II -- Form of Bye-laws
Annex III -- Opinion of Conyers Dill & Pearman
Annex IV -- Opinion of Dewey Ballantine
Annex V -- List of Other Closing Documents
Annex VI -- Form of Common Stock Warrant Acquisition
Agreement
Annex VII -- Operating Guidelines
Annex VIII -- Letter Agreement with Cap Re
Annex IX -- Letter Agreement with DCR
Annex X -- Sponsoring Investors and Founders Stock
Warrant Plan and Employee Stock Warrant Plan
<PAGE>
CGA GROUP, LTD.
SERIES A PREFERRED STOCK
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of June 9, 1997,
among CGA Group, Ltd., a company with limited liability organized under the laws
of Bermuda (together with its successors and permitted assigns, the "Company"),
and each of the Investors identified in Schedule 1 hereto (collectively,
together with their successors and permitted assigns, the "Investors").
Capitalized terms used in this Agreement, and not otherwise defined herein, have
the meanings set forth in Article XIV.
WHEREAS, the Company has offered (the "Offering") the opportunity to
purchase Series A Cumulative Voting Preference Shares of the Company ("Series A
Preferred Stock" or "Shares") to the Investors pursuant to an Amended and
Restated Confidential Private Placement Memorandum, dated June 2, 1997 (together
with any amendments, modifications or supplements thereto as may be made from
time to time prior to the Closing Date (as defined below), the "Private
Placement Memorandum");
WHEREAS, each of the Investors wishes to subscribe for and purchase,
severally and not jointly, and the Company wishes to issue and allot the number
of Shares set forth opposite such Investor's name on Schedule 1 hereto on the
terms set forth herein;
WHEREAS, the Company will use a substantial portion of the proceeds of
the Investors' subscriptions to capitalize the Company's subsidiaries,
Commercial Guaranty Assurance, Ltd. ("CGA") and CGA Investment Management, Ltd.
("CGAIM" and, together with CGA, the "Initial Subsidiaries"), as described in
the Private Placement Memorandum;
In consideration of the premises and mutual agreements herein
contained, the parties hereto hereby agree as follows:
ARTICLE I
AUTHORIZATION; SUBSCRIPTION FOR SERIES A PREFERRED STOCK
Section 1.1 The Series A Preferred Stock. The Company has authorized
the issuance and sale pursuant to this Agreement of up to 2,600,000 Shares, each
having such
<PAGE>
rights, restrictions and privileges as are contained in or accorded by (i) the
Memorandum of Association of the Company in the form attached hereto as Annex I
(the "Memorandum of Association"), (ii) the Bye-laws of the Company,
substantially in the form attached hereto as Annex II and all appendices and
exhibits thereto (the "Bye-laws") and (iii) this Agreement. Subject to the terms
and conditions hereof, the Shares will be issued on the Closing Date.
Section 1.2 The Subscription for Series A Preferred Stock. Subject to
the terms and conditions of this Agreement, each of the Investors hereby
irrevocably subscribes for and agrees to purchase, severally and not jointly,
the number of Shares set forth opposite such Investor's name on Schedule 1
hereto for the purchase price specified in Article II hereof. No Investor shall
be obligated to purchase any of the Shares unless the conditions set forth in
Article III hereof shall have been satisfied or waived by such Investor on or
prior to the Closing Date. The Company shall not be obligated to sell any of the
Shares unless the conditions set forth in Article IV hereof shall have been
satisfied or waived by the Company on or prior to the Closing Date.
ARTICLE II
CLOSING
The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place as follows:
(i) On the basis of the representations, warranties and
covenants herein set forth, the Company will sell to each of the Investors,
and each of the Investors will purchase from the Company, at the Closing on
June 17, 1997 or such later date (not later than June 30, 1997) as the
Company may designate upon not less than five Business Days prior written
notice, delivered by facsimile, to the Investors (the "Closing Date"), the
number of Shares set forth opposite each such Investor's name on Schedule 1
hereto for the consideration of a cash purchase price of U.S. $25.00 per
Share, to be paid on the Closing Date. The aggregate cash purchase price
for the number of Shares set forth opposite the name of each Investor on
Schedule 1 hereto is such Investor's "Aggregate Purchase Price."
(ii) At the Closing, subject to the terms and conditions of
this Agreement and on the basis of the representations, warranties and
covenants herein set forth, the Company will deliver to each of the
2
<PAGE>
Investors, or representatives thereof, a certificate or certificates
registered in the name of such Investor (or such other name as may be
indicated in writing to the Company prior to the Closing Date) representing
the aggregate number of Shares to be purchased by such Investor, against
payment of such Investor's Aggregate Purchase Price by either such Investor
or Donaldson, Lufkin & Jenrette, on behalf of such Investor, by wire
transfer of immediately available funds to an account specified to the
Investors and the Placement Agents (as defined below) by the Company at
least three (3) Business Days prior to the Closing Date. The Closing will
take place at the offices of Conyers Dill & Pearman in Hamilton, Bermuda at
10:00 a.m., Bermuda time, on the Closing Date.
ARTICLE III
CONDITIONS TO OBLIGATIONS OF THE INVESTORS
The obligation of each Investor to purchase the Series A Preferred
Stock under this Agreement is subject to the satisfaction at or prior to the
Closing Date of each of the following conditions:
Section 3.1 Accuracy of Representations and Warranties. All
representations and warranties of the Company and of each other Investor
contained herein shall be true in all material respects on and as of the Closing
Date as if made on and as of the Closing Date.
Section 3.2 Performance of Agreements; Regulatory. (i) The Company
shall have performed all obligations and agreements, and complied with all
covenants and conditions contained in this Agreement to be performed or complied
with by it prior to or at the Closing Date.
(ii) The Company and CGA shall have obtained all consents and
approvals of regulatory bodies and authorities in Bermuda necessary on the
Closing Date for CGA to carry on the business of an insurer and a reinsurer, and
CGAIM shall have obtained all consents and approvals of regulatory bodies and
authorities in the United States necessary on the Closing Date for CGAIM to
carry out its businesses. (It being understood that any such consent or approval
that is conditioned solely on the capitalization of the Company or either of the
Initial Subsidiaries (as contemplated in the Private Placement Memorandum)
through the application of the net proceeds of the Closing and the closing of
the purchases of Investment Units (other than pursuant to the Commitments) under
the Investment Units
3
<PAGE>
Subscription Agreement, dated as of or prior to the Closing Date, among the
Company and the investors named therein (the "Investment Units Subscription
Agreement") and the Founders' Common Stock Subscription Agreement, dated as of
or prior to the Closing Date, among the Company and the investors named therein
(the "Founders' Common Stock Subscription Agreement") and/or the consummation of
the transactions contemplated hereby shall be considered "obtained" for the
purposes of this Agreement).
(iii) CGA shall have received a letter from Duff & Phelps
Credit Rating Company ("DCR") dated as of the Closing Date to the effect that
CGA will receive evidence of its AAA claims paying ability rating from DCR upon
the consummation of the transactions (other than a purchase pursuant to the
Commitments) contemplated hereby, by the Founders' Common Stock Subscription
Agreement and by the Investment Units Subscription Agreement, which letter shall
be in form and substance satisfactory to the Investors and shall have no other
conditions which need to be satisfied in order for CGA to receive a AAA claims
paying ability rating from DCR. The Commitments (as defined in the Investment
Units Subscription Agreement) shall be supported by supplemental obligations to
the extent contemplated by the Private Placement Memorandum and in accordance
with the Investment Units Subscription Agreement as in effect on the date
hereof.
(iv) The Minister of Finance of Bermuda ("Minister") shall have
granted to each of CGA and the Company a tax assurance (as described in the
Private Placement Memorandum) pursuant to the Exempt Undertakings Tax Protection
Act, 1966 of Bermuda.
(v) The Minister, through the offices of the Registrar of
Companies, has delivered to CGA a written approval, dated January 23, 1997,
authorizing CGA to reduce by 15% or more its total statutory capital as set out
in its previous year's financial statements, subject to such conditions as are
attached to the approval, and the Minister's approval shall not have been
revoked, amended or supplemented and a true, correct and complete copy of such
letter shall be included in the documents provided to each Investor at the
Closing. The parties understand that such approval is not necessarily binding on
the Bermudian authorities.
Section 3.3 Compliance Certificate. The Company shall have delivered
to such Investor a certificate, dated the Closing Date, of the Chief Executive
Officer of the Company to the effect that the conditions specified in Sections
3.1 (other than with respect to the representations
4
<PAGE>
and warranties of the Investors), 3.2, 3.4, 3.5, 3.8, 3.9, 3.10 and 3.11 have
been fulfilled.
Section 3.4 Bye-laws. The Bye-laws of the Company shall have been
adopted by the Company in the form attached as Annex II hereto.
Section 3.5 Warrant Agreement; Other Agreeements. Each Investor and
the Company shall have executed and delivered, in escrow pending completion of
the Closing, a separate Warrant Acquisition Agreement (the "Warrant Acquisition
Agreement"), in the form attached as Annex VI hereto, with respect to such
number of Warrants of the Company set forth opposite each such Investor's name
on Schedule 1 hereto. Each of the closing documents listed on Annex V hereto
(the "Other Closing Documents") shall have been, where appropriate, executed and
delivered to the Company, in escrow pending completion of the Closing, by the
parties thereto in substantially the form reviewed and found reasonably
acceptable by the Investors or counsel to the Investors (it being understood
that Cleary, Gottlieb, Steen & Hamilton is acting as counsel to the Placement
Agents (as defined below) and the Investors, respectively).
Section 3.6 Opinion of Conyers Dill & Pearman. Conyers Dill & Pearman,
Bermuda special counsel for the Company, shall have delivered to such Investor
an opinion dated the Closing Date in substantially the form attached as Annex
III hereto.
Section 3.7 Opinion of Dewey Ballantine. Dewey Ballantine, special
counsel for the Company, shall have delivered to such Investor an opinion dated
the Closing Date in substantially the form attached as Annex IV hereto.
Section 3.8 Aggregate Funding. The total number of shares of Series A
Preferred Stock purchased by the Investors shall be not less than 2,600,000
Shares, the total number of Investment Units (as defined in the Private
Placement Memorandum) and common shares of the Company (the "Common Stock")
purchased by other investors shall be not less than 1,600,000 Investment Units
and 1,272,043 shares, respectively, and the Company shall have received
Commitments and gross proceeds from the sale of the Investment Units, the Series
A Preferred Stock and the Common Stock of not less than U.S. $210,500,000. The
Shares have been duly authorized and issued to the respective Investors.
Section 3.9 St. George. Each of the St. George Holdings, Ltd. Class
A-SG Non-Voting Ordinary Shares and Class B-SG Voting Ordinary Shares
Subscription Agreement, dated as of or prior to the Closing Date (the "St.
George
5
<PAGE>
Subscription Agreement"), among St. George Holdings, Ltd. ("St. George") and the
investors named therein (the "St. George Investors") and the Credit Agreement,
dated as of the Closing Date (the "Credit Agreement"), among St. George
Investments I, Ltd., as borrower, Thames Asset Global Securitization No. 1,
Inc., as lender, and other parties thereto, shall have been executed by the
parties thereto and delivered in escrow pending completion of the closing in
connection therewith and the Closing. The Credit Agreement will provide, subject
to certain conditions, for the establishment on the Closing Date of a $100
million Credit Facility for the benefit of St. George and a commercially
reasonable best efforts obligation by the lender to syndicate an additional $400
million credit facility for the benefit of St. George. The transactions
contemplated by the St. George Subscription Agreement and the Credit Agreement,
which are transactions to be completed on or prior to the Closing Date, shall
have been completed or will be completed simultaneously with the Closing.
Section 3.10 Avoidance of Conflicts. The Company shall have adopted a
resolution restricting any future transactions between the Company or any of its
Initial Subsidiaries or affiliates and Jay Shidler, The Shidler Group, any
affiliates of The Shidler Group or any shareholders of the Company with the
right to appoint a voting member of the Board of Directors or affiliates
thereof, in order to avoid the appearance of a potential conflict of interest.
Section 3.11 Appointment of Agent. The Company shall have appointed an
agent for service of process in accordance with Section 15.13.
Section 3.12 List of Shareholders. The Company shall have provided to
such Investor a list of the shareholders of the Company and their respective
shareholdings on the Closing Date.
If at or prior to the Closing all of the conditions of this Article
III have not been satisfied, any Investor may elect to waive such conditions or
to be relieved of all further obligations hereunder.
ARTICLE IV
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to issue and sell the Series A Preferred
Stock under this Agreement is subject to the satisfaction at the Closing Date of
each of the following conditions:
6
<PAGE>
Section 4.1 Accuracy of Representations and Warranties. All
representations and warranties of each Investor contained herein shall be true
in all material respects on and as of the Closing Date as if made on and as of
the Closing Date.
Section 4.2 Performance of Agreements. Each Investor shall have
performed all obligations and agreements, and complied with all covenants and
conditions, contained in this Agreement to be performed or complied with by it
prior to or at the Closing Date and each such Investor shall notify the Company.
Section 4.3 Other Agreements. The Warrant Acquisition Agreement, in
the form attached as Annex VI hereto, with respect to such number of Common
Warrants of the Company set forth opposite each such Investor's name on Schedule
1 hereto, shall have been executed and delivered in escrow pending completion of
the Closing, by the parties thereto. Each of the Other Closing Documents shall
have been executed and delivered, in escrow pending completion of the Closing,
by the parties thereto in substantially the form reviewed by the Investors or
counsel to the Investors.
Section 4.4 Letters from Placement Agents. The Company shall have
received from each of Donaldson, Lufkin & Jenrette Securities Corporation and
Salomon Brothers Inc (the "Placement Agents") a letter dated as of the Closing
Date reasonably satisfactory to the Company, to the effect that neither it nor
any person (other than the Company and its Affiliates) authorized to act on its
behalf has used any form of general solicitation or general advertising in
connection with the offer and sale of the Series A Preferred Stock, including,
without limitation, any advertisement, article, notice or other communication
published in any newspaper, magazine or similar medium or broadcast over
television or radio, or any seminar or meeting whose attendees have been invited
by any general solicitation or general advertising.
Section 4.5 Payment for the Series A Preferred Stock. Each Investor
shall have delivered to the Company and the Company shall have received, full
payment in immediately available funds of the aggregate Purchase Price of such
Investor as set forth in Schedule 1 in respect of such Investor's purchase of
the Series A Preferred Stock.
Section 4.6 Aggregate Funding. The total number of the shares of
Series A Preferred Stock purchased by the Investors shall be not less than
2,600,000 Shares, the total number of Investment Units and shares of Common
Stock of the Company purchased by other investors shall be not less than
1,600,000 Investment Units and 1,272,043 shares,
7
<PAGE>
respectively, and the Company shall have received Commitments and gross proceeds
from the sale of the Investment Units, the Series A Preferred Stock and the
Common Stock of not less than U.S. $210,500,000.
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company represents, warrants and covenants to each of the
Investors as of the date of this Agreement and as of the Closing Date as
follows:
Section 5.1 Due Organization, Valid Existence and Authority of the
Company and the Company's Initial Subsidiaries. (a) The Company has been duly
incorporated and is validly existing under the laws of Bermuda. Upon completion
of the Closing, the Company will have full right, power and authority to carry
on its business as conducted and as proposed to be conducted as described in the
Private Placement Memorandum. The Company has full right, power and authority to
enter into this Agreement and the Other Closing Documents to which the Company
is a party, and perform its obligations hereunder and thereunder. The Memorandum
of Association, in the form attached hereto as Annex I is a true and complete
copy of the Memorandum of Association of the Company as in effect at the date of
this Agreement, and no amendment to such Memorandum of Association has been
proposed or adopted. At the Closing, the Bye-laws of the Company will be in the
form attached hereto as Annex II. Upon completion of the Closing, the Company
will not own any interest in or control, directly or indirectly, any other
corporations, partnerships or other entities, other than the Initial
Subsidiaries.
(b) Each of the Initial Subsidiaries has been duly incorporated and is
validly existing under the laws of its jurisdiction of incorporation. Upon
completion of the Closing and the closings under the Investment Units
Subscription Agreement and the Founders' Common Stock Subscription Agreement,
and the use of the proceeds therefrom as described in the Private Placement
Memorandum, each Initial Subsidiary will have the full right, power and
authority to carry on its business as proposed to be conducted as described in
the Private Placement Memorandum.
Section 5.2 Authorization and Validity of Agreements. This Agreement
has been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance,
8
<PAGE>
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity) (together, the "Creditor and Enforceability Exceptions"). Each of the
Other Closing Documents to which the Company is a party has been duly authorized
by the Company, and, when executed and delivered by the Company at the Closing,
will constitute a valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, subject to the Creditor and
Enforceability Exceptions.
Section 5.3 Capitalization. The sale and the issuance of the Shares
have been duly authorized by the Company and, upon payment for the Shares in
accordance with Article II hereof, the Shares will be validly issued, fully paid
and non-assessable (meaning that no further sums will be payable in respect of
the holding of the Shares). Except as contemplated by its Memorandum of
Association and Bye-laws, the Shareholders Agreement to be dated on or prior to
the Closing Date, among the Company and the other parties named therein (as such
agreement may be amended, supplemented, restated or otherwise modified from time
to time in accordance with its terms, the "Shareholders Agreement"), the Common
Stock Warrant Acquisition Agreement in substantially the form attached as Annex
VI hereto, the Sponsoring Investors and Founders Stock Warrant Plan and the
Employee Stock Warrant Plan in substantially the forms attached as Annex X
hereto, and this Agreement, each of the Company and its Initial Subsidiaries
does not, and on the Closing Date will not, have any outstanding or authorized
options, warrants, calls, rights, commitments or any other agreements of any
character obligating it to issue any of its Capital Stock or any securities
convertible into or exchangeable for, or evidencing the right to purchase or
obtain, any of its Capital Stock or any agreements or understandings with
respect to the voting, sale or transfer of any of its Capital Stock or any
securities convertible into or exchangeable for or evidencing the right to
purchase or obtain any of its Capital Stock. The Company shall reserve such
shares of Capital Stock as may be purchased upon drawdown on the Commitments.
The Shares shall conform in all material respects to the description of such
Shares provided in the Private Placement Memorandum.
Section 5.4 No Conflict with Other Instruments; No Aprovals Required
Except as Have Been Obtained. (i) The execution and delivery of this Agreement
and the Other Closing Documents to which the Company is a party by the Company
and compliance by the Company with the terms and conditions hereof and thereof,
will not violate, with or
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without the giving of notice or the lapse of time, or both, or require any
registration, qualification, approval or filing under, any provision of law,
statute, ordinance or regulation applicable to the Company or any Affiliate
thereof, and will not conflict with, or require any consent or approval under,
or result in the breach or termination of any provision of, or constitute a
default under, or result in the acceleration of the performance of the
obligations of the Company or any Affiliate thereof under, or result in the
creation of any claim, lien, charge or encumbrance upon any of the properties,
assets or businesses of the Company or any Affiliate thereof pursuant to the
Memorandum of Association or Bye-laws of the Company or the organizational
documents of such Affiliate, as the case may be, or any order, judgment, decree,
law, ordinance or regulation applicable to the Company or such Affiliate, as the
case may be, or any contract, instrument, agreement or restriction to which the
Company or such Affiliate, as the case may be, is a party or by which the
Company or such Affiliate, as the case may be, or any of its assets or
properties is bound. Except where the Company is obliged to obtain Bermuda
governmental approvals that have been obtained, neither the Company or any
Affiliate thereof nor any of the Company's or any of its Affiliates' respective
assets or properties is subject to any charter, bye-law, contract or other
instrument or agreement, order, judgment, decree, law, statute, ordinance or
regulation or any other restriction of any kind or character that would prevent
the Company from entering into this Agreement or the Other Closing Documents to
which the Company is a party or from consummating the transactions contemplated
hereby or thereby in accordance with the terms hereof or thereof.
(ii) The execution and delivery of the Other Closing Documents to
which each of the Initial Subsidiaries is a party by such Initial Subsidiary and
compliance by such Initial Subsidiary with the terms and conditions thereof,
will not violate, with or without the giving of notice or the lapse of time, or
both, or require any registration, qualification, approval or filing under, any
provision of law, statute, ordinance or regulation applicable to such Initial
Subsidiary or any Affiliate thereof, and will not conflict with, or require any
consent or approval under, or result in the breach or termination of any
provision of, or constitute a default under, or result in the acceleration of
the performance of the obligations of such Initial Subsidiary or any Affiliate
thereof under, or result in the creation of any claim, lien, charge or
encumbrance upon any of the properties, assets or businesses of such Initial
Subsidiary or any Affiliate thereof pursuant to the Memorandum of Association,
Articles of Incorporation or Bye-laws, as the case may be, of such Initial
Subsidiary or the organization documents of such Affiliate, as the case
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may be, or any order, judgment, decree, law, ordinance or regulation applicable
to the Initial Subsidiary or such Affiliate, as the case may be, or any
contract, instrument, agreement or restriction to which such Initial Subsidiary
or such Affiliate, as the case may be, is a party or by which such Initial
Subsidiary or such Affiliate, as the case may be, or any of its assets or
properties is bound. Except where such Initial Subsidiary is obliged to obtain
Bermuda governmental approvals that have been obtained, neither such Initial
Subsidiary or any Affiliate thereof nor any of such Initial Subsidiary's or its
Affiliates' respective assets or properties is subject to any charter, bye-law,
contract or other instrument or agreement, order, judgment, decree, law,
statute, ordinance or regulation or any other restriction of any kind or
character that would prevent such Initial Subsidiary from entering into the
Other Closing Documents to which such Initial Subsidiary is a party or from
consummating the transactions contemplated thereby in accordance with the terms
thereof.
Section 5.5 Regulatory Filings; Compliance with Law. Upon completion
of the Closing and the closings under the Investment Units Subscription
Agreement and the Founders' Common Stock Subscription Agreement, and the use of
the proceeds therefrom (other than from the Commitments) as described in the
Private Placement Memorandum, CGA will be authorized on the Closing Date under
Bermuda law to conduct the business of selling insurance and reinsurance as
contemplated by the Private Placement Memorandum and no further approvals of the
insurance regulatory or other authorities of Bermuda are required for the
conduct of such business. Upon completion of the Closing, and the closing under
the Investment Units Subscription Agreement and the Founders' Common Stock
Subscription Agreement, and the use of proceeds therefrom as described in the
Private Placement Memorandum, CGAIM will be authorized on the Closing Date or
immediately thereafter under the applicable United States federal and state laws
to conduct its business as contemplated by the Private Placement Memorandum and
no further approvals of regulatory or other authorities are required for the
conduct of such business. Upon completion of the Closing and the closings under
the Investment Units Subscription Agreement and the Founders' Common Stock
Subscription Agreement, and the use of proceeds therefrom (other than from the
Commitments) as described in the Private Placement Memorandum, the Company and
the Initial Subsidiaries will be in compliance with all applicable laws and
regulations.
Section 5.6 Stamp Duties or Taxes. No Bermuda stamp, transfer or
similar duties or taxes are payable in respect of the issuance and delivery of
the Shares to the Investors pursuant to this Agreement provided that any such
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Investor is not resident in Bermuda for exchange control purposes and if any
such taxes arise in connection with the execution of this Agreement, the Other
Closing Documents, or the consummation of any of the transactions contemplated
hereby or thereby, then the Company will pay such taxes.
Section 5.7 Private Offering of the Series A Preferred Stock
(a) The offer and sale and the issuance and delivery of the
Shares are intended to be exempt from the provisions of Section 5 of the United
States Securities Act of 1933, as amended (the "Securities Act"), and from the
registration provisions of the applicable state securities laws. Neither the
Company nor anyone acting on its behalf has taken, or omitted to take, any
action, with respect to the Shares or any securities similar to the Shares, or
otherwise, that would bring the sale and issuance of the Shares within the
provisions of Section 5 of the Securities Act or that would violate any blue sky
laws of a state of the United States or securities law of any foreign
jurisdiction (including Bermuda).
(b) In the case of each offer or sale of the Shares, no form of
general solicitation or general advertising was used by the Company or any
person authorized to act on behalf of the Company, including, without
limitation, any advertisement, article, notice or other communication published
in any newspaper, magazine or similar medium or broadcast over television or
radio, or any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
(c) Neither the Company nor anyone acting on its behalf has
taken, or omitted to take, any action, with respect to any other shares of the
Company issued and sold by the Company that would bring the issuance and sale of
such shares within the provisions of Section 5 of the Securities Act or that
would violate any blue sky laws of a state of the United States or securities
law of a foreign jurisdiction (including Bermuda).
(d) Except for (i) the issuance of shares of capital stock of
the Company in connection with the initial organization of the Company (such
shares shall be redeemed by the Company at the Closing) and (ii) the issuance of
shares of capital stock by the Initial Subsidiaries to the Company, neither the
Company nor any Initial Subsidiary has issued or sold, or agreed to issue or
sell, any shares in the Company or any Initial Subsidiary to any persons other
than to the Investors pursuant hereto and to the other investors pursuant to the
subscription agreements contained in the Other Closing Documents.
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Section 5.8 The Private Placement Memorandum. The Private Placement
Memorandum does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading. There
is no fact which the Company has not disclosed herein or in the Private
Placement Memorandum or any amendment or supplement thereto as of the date
thereof and at all times subsequent thereto up to the Closing Date that, so far
as the Company can foresee, is reasonably likely to have a material adverse
effect on the performance of obligations hereunder and under the other Closing
Documents by the Company and its Initial Subsidiaries, considered as a whole, or
on the business operations, financial condition, assets, liabilities or
prospects of the Company and its Initial Subsidiaries taken as a whole.
Section 5.9 Not an "Investment Company". Each of the Company and the
Initial Subsidiaries is not, and when conducting business as contemplated by the
Private Placement Memorandum will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the United
States Investment Company Act of 1940, as amended.
Section 5.10 Business Newly Formed. Each of the Company and its
Initial Subsidiaries is newly formed, has neither conducted any business nor
incurred any liabilities (other than organizational expenses with respect to the
Company and the Initial Subsidiaries, expenses associated with establishing the
businesses of the Subsidiaries and expenses in connection with the offering and
issuance of the securities of the Company and the Subsidiaries), has entered
into no material agreements and incurred no liens or encumbrances on present or
future assets or revenues, and has no proceedings pending against, or to the
Company's knowledge, threatened against or affecting it before any court,
governmental authority, arbitration board or tribunal, in each of the foregoing
cases, other than as disclosed in the Private Placement Memorandum or referred
to herein or in an attachment hereto.
Section 5.11 Operating Company. At the time the Company issues any
Shares, the Company shall be an "operating company" as defined in United States
Department of Labor Regulation section 2510.3-101(c) issued under the United
States Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Company shall at all times thereafter conduct its activities so that it
will continue to qualify as such an "operating company." As a result, pursuant
to United States Department of Labor Regulation section 2510.3-101(a)(2)(i), at
no time shall the assets of the Company constitute the assets of any Investor
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or Member of the Company for purposes of Title I of ERISA or Section 4975 of the
United States Internal Revenue Code of 1986 (the "Code").
Section 5.12 No U.S. Trade or Business and not a Controlled Foreign
Corporation. The Company shall use its best efforts not to take, and to cause
CGA not to take, any action which the Company has reason to believe could cause
it or CGA to be considered engaged in the conduct of a trade or business in the
United States (within the meaning of Code Section 864) or to become a controlled
foreign corporation (within the meaning of Code Section 957) ("CFC"); provided,
however, that this Section 5.12 shall not apply to any action which affects the
election of directors pursuant to Section 12 of the Bye-laws; provided, further,
that it is hereby understood that the Company shall not be considered to violate
this Section 5.12 in the event that (x) the board of directors of the Company
(the "Board") shall, in its sole discretion, request the advice of counsel with
respect to a proposed action and counsel determines that such action will more
likely than not cause the Company or CGA to be engaged in the conduct of a trade
or business in the United States or become a CFC and (y) such proposed action to
be taken by the Company receives the prior approval of 75% of the members of the
Board then in office (for the sake of clarity, the foregoing imposes no
obligation on the Company or the Board to seek the advice of counsel prior to
taking any action unless the Company wishes to take advantage of this second
proviso to this Section 5.12). It is hereby understood that this Section 5.12
does not alter any provision in the Company's Bye-laws and all actions taken in
connection herewith must comply with such Bye-laws.
Section 5.13 Related Person Insurance Income. (a) The Company shall
use its best efforts to cause CGA not to sell insurance or reinsurance to a U.S.
person which is a shareholder of the Company ("U.S. Shareholder") or a related
person (within the meaning of Section 953(c)(6) of the Code) to a U.S.
Shareholder ("Related Person") and which would therefore generate related person
insurance income (within the meaning of Section 953(c)(2) of the Code) ("RPII")
if the Company knows that (i) 20% or more of CGA's gross insurance income in any
taxable year will be RPII and (ii) persons which are directly or indirectly
insured or reinsured by CGA ("Insureds") or Related Persons to Insureds own 20
percent or more of the stock of CGA ("Excess RPII"); provided, however, that it
is hereby understood that the Company shall not be considered to violate this
Section 5.13(a) by virtue of such sale which the Company has reason to believe
will generate Excess RPII if the Company receives the prior approval of 100% of
the members of the Board then in office, provided, further, that it is hereby
understood that this Section 5.13(a) does not alter any provision in
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the Company's Bye-laws and all actions taken in connection herewith must comply
with such Bye-laws.
(b) In the event that the Board shall have given prior authorization
(as provided in subsection (a) of this Section 5.13) for CGA to sell insurance
or reinsurance which the Company has reason to believe will generate Excess RPII
for any tax year, unless a U.S. statute, a final regulation of the U.S. Treasury
or a published ruling of the U.S. Internal Revenue Service issued after the
Closing Date provides or establishes that subpart F insurance income (as defined
in Code Section 953) does not constitute unrelated business taxable income (as
defined in Code Section 512), the Company shall so notify any U.S. Shareholder
which is subject, pursuant to Code Section 511, to tax on its unrelated business
taxable income not later than June 30 of the tax year in which the Company
proposes that CGA generate Excess RPII.
Section 5.14 Operating Guidelines. Attached hereto as Annex VII is a
true, correct and complete copy of the operating guidelines of the Company and
the Initial Subsidiaries (the "Operating Guidelines"), which were adopted by all
necessary corporate action of the Board at a duly called and convened meeting of
the Board. The resolution(s) pursuant to which the Operating Guidelines were
adopted provides that the Operating Guidelines may be amended or revoked only
pursuant to a resolution adopted by a two-thirds vote of the Board at a duly
called and convened meeting of the Board. To the extent the Operating Guidelines
are followed by the Company and the Initial Subsidiaries, (i) neither the
Company nor CGA will be considered to be engaged in the conduct of a trade or
business in the United States through a U.S. "permanent establishment" as
defined in Article 3 of the Convention between the Government of the United
States of America and the Government of the United Kingdom of Great Britain and
Northern Ireland (on behalf of the Government of Bermuda) relating to the
Taxation of Insurance Enterprises and Mutual Assistance in Tax Matters and (ii)
neither the Company nor any Initial Subsidiaries will be considered to be
transacting the business of insurance in any state of the United States without
appropriate licenses or approvals. The Company knows of no reason why it and the
Initial Subsidiaries cannot now and will not in the future be able to
continuously comply with the Operating Guidelines. The Company knows of no
reason why compliance with the Operating Guidelines would result in the
company's inability to meet the projections set forth in the Private Placement
Memorandum.
Section 5.15 Passive Foreign Investment Company. The Company shall use
its best efforts to operate its
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business in such manner that neither the Company nor CGA will be considered a
passive foreign investment company under Section 1296 of the Code.
Section 5.16 Use of Proceeds of the Offering. The Company shall use
the net proceeds of this subscription (after payment of placement agent fees and
other fees and expenses incurred by the Company in connection with the Offering,
the offering of the Investment Units and the Common Stock to other investors and
the organization and establishment of the Company and the Initial Subsidiaries,
which fees and expenses shall be substantially as described in the Private
Placement Memorandum) as capital to engage in the financial guarantee insurance
business as described in the Private Placement Memorandum. On the Closing Date,
CGA will be capitalized with $125,000,000 and will have received Acknowledgments
with respect to each investor's obligation under Section 1.3 of the Investment
Units Subscription Agreement.
Section 5.17 Shareholders. Schedule 2 to this Agreement represents a
true and complete list of the shareholders of the Company upon completion of the
Closing and their respective shareholdings on the Closing Date.
Section 5.18 St. George Representations. The Company has no reason to
believe that the representations and warranties given by St. George to the St.
George Investors pursuant to the St. George Subscription Agreement are not true
and complete as of the date made thereunder and as of the Closing Date.
Section 5.19 Bermuda Withholding Tax. The payment of dividends on or
the making of distributions or redemption payments to any holder of the Series A
Preferred Stock will not be subject to any tax withholding requirement under
current Bermuda tax law.
Section 5.20 No Events of Non-Compliance. No event has occurred and no
condition exists which, upon the consummation of transactions under this
Agreement or any Other Closing Document would constitute an Event of
Non-Compliance under Article VIII with or without notice or lapse of time or
both.
Section 5.21 Registration Rights. Other than as provided in this
Agreement and the Shareholders Agreement, the Company has not agreed to register
any of its Capital Stock under the Securities Act.
Section 5.22 Letter Agreement with DCR. In connection with obtaining
its AAA rating from DCR, the Company will enter into a letter agreement with
DCR, dated
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as of the Closing Date, in substantially the form attached as Annex IX hereto.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF
THE INVESTORS
Each of the Investors, severally and not jointly, hereby represents
and warrants to the Company as of the date of this Agreement and as of the
Closing Date as follows:
Section 6.1 Due Organization, Good Standing and Authority of the
Investor. Such Investor is a corporation, partnership, limited liability
company, trust or other legal entity and is duly organized, validly existing and
in good standing under the laws of such Investor's jurisdiction of organization
and not resident in Bermuda for Bermuda foreign exchange control purposes.
Section 6.2 Authorization and Validity of Agreements. This Agreement
has been duly authorized, executed and delivered by such Investor and, assuming
the due authorization, execution and delivery by the other parties hereto,
constitutes a valid and binding obligation of such Investor enforceable against
such Investor in accordance with its terms subject to the "Creditor and
Enforceability Exceptions".
Section 6.3 Investment Intent. Such Investor is acquiring the Shares
for its own account as principal or for one or more separate accounts maintained
by such Investor or for the account of one or more pension or trust funds of
which such Investor is trustee, in each case, for investment purposes only, and
not with a view to, or for, the resale or other distribution thereof, in whole
or in part, other than pursuant to the Exchange Offer Registration Statement or
the Shelf Registration Statement (as defined herein) pursuant to this Agreement;
provided that, subject to the terms hereof, the disposition of such Investor's
or their property shall at all times be within such Investor's or their control.
Section 6.4 No Conflict with Other Instruments; No Approvals Required
Except as Have Been Obtained. The execution and delivery of this Agreement, by
such Investor and the compliance by such Investor with the terms and conditions
hereof will not violate, with or without the giving of notice or the lapse of
time, or both, or require any registration, qualification, approval or filing
under, any provision of law, statute, ordinance or regulation applicable to such
Investor, and will not conflict with, or require any consent or approval under,
or result in the
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breach or termination of any provision of, or constitute a default under, or
result in the acceleration of the performance of the obligations of such
Investor under, or result in the creation of any claim, lien, charge or
encumbrance upon any of the properties, assets or businesses of such Investor
pursuant to the articles of incorporation or by-laws of such Investor (if such
Investor is a corporation) or equivalent organizational documents (if such
Investor is not a corporation) or any order, judgment, decree, law, statute,
ordinance or regulation applicable to such Investor or any contract, instrument,
agreement or restriction to which such Investor is a party or by which such
Investor or any of its assets or properties is bound, other than any such (i)
violation, (ii) failure to register, qualify, obtain approval or file, (iii)
conflict, (iv) breach, termination or default, (v) acceleration or (vi) creation
of claim, lien, charge or encumbrance that would not, individually or in the
aggregate, have a material adverse effect on such Investor's ability to
consummate the transactions contemplated hereby. Neither such Investor nor any
of its assets or properties is subject to any charter, by-law, contract or other
instrument or agreement, order, judgment, decree, law, statute, ordinance or
regulation or any other restriction of any kind or character that would prevent
such Investor from entering into this Agreement or from consummating the
transactions contemplated hereby in accordance with the terms hereof other than
that which would not, individually or in the aggregate, have a material adverse
effect on such Investor's ability to consummate the transactions contemplated
hereby in accordance with the terms hereof. Notwithstanding anything in this
Agreement to the contrary, no representation or warranty is made by any Investor
regarding compliance with ERISA or Section 4975 of the Code, or the effect under
ERISA or Section 4975 of the Code of the execution and delivery of this
Agreement, and the compliance by such Investor with the terms and conditions
hereof.
Section 6.5 Investor Awareness and Suitability. Such Investor
acknowledges, agrees and is aware that:ility
(i) An investment in the Shares involves a high degree of risk,
including, without limitation, the risks identified under the caption "Risk
Factors" in the Private Placement Memorandum, and such Investor may lose
the entire amount of its investment and such Investor has the knowledge and
experience in financial affairs that it is capable of evaluating the merits
and risks of purchasing the Shares;
(ii) The Company has only recently been organized and has no
financial or operating history;
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(iii) The Private Placement Memorandum contains a summary of
certain United States and Bermuda tax consequences under current laws
relating to (i) the United States federal income taxation of the Company
and of U.S. Persons (as defined below) and non-U.S. Persons that own Shares
of the Company and (ii) the Bermuda taxation of persons or entities not
resident in Bermuda for exchange control purposes that own Shares of the
Company. Positions of, and developments in rulings of, the United States
Internal Revenue Service, court decisions or legislative or administrative
actions may have an adverse effect on one or more of the tax benefits
sought by the Company. Moreover, the Company retains the right to alter the
conduct of its affairs in such a manner as to subject its business to
United States federal and/or state taxation. The Private Placement
Memorandum does not address the Bermuda taxation of Investors that are
resident in Bermuda for exchange control purposes or the taxation of
Investors by any jurisdiction other than the United States or Bermuda,
which tax consequences may be significantly different from the tax
consequences discussed in the Private Placement Memorandum. (For purposes
of this Section 6.5, "U.S. Person" means an individual who is a citizen or
resident of the United States, a corporation or partnership created or
organized under the laws of the United States or any state thereof, an
estate, the income of which, from non-U.S. sources and not effectively
connected with the conduct of a trade or business in the United States, is
includable in gross income for United States federal income tax purposes,
or a trust, if (i) a court within the United States may exercise primary
supervision of the trust, and (ii) one or more United States fiduciaries
have the authority to control all substantial decisions of the trust);
(iv) No Bermuda or United States federal or state regulatory
authority or any foreign agency has passed upon the accuracy, adequacy,
validity or completeness of the Private Placement Memorandum or this
Agreement or made any finding or determination as to the fairness of an
investment in the Shares;
(v) The Bye-laws and this Agreement contain substantial
restrictions on the transferability of the Shares;
(vi) The Shares have not been registered under the Securities
Act or under the securities laws of any other jurisdiction, including the
states of the United States and, except as otherwise provided with respect
to the Exchange Offer Registration Statement or
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the Shelf Registration Statement as set forth herein, the Company is under
no obligation to, and currently does not intend to, register or qualify the
Shares for resale by such Investor or assist such Investor in complying
with any exemption under such securities laws or the securities laws of any
such jurisdiction or any other jurisdiction;
(vii) Such Investor shall hold the Shares subject to this
Agreement and the Bye-laws of the Company from time to time in effect and
shall have voting rights with respect to the Shares as specified in the
Bye-laws of the Company from time to time in effect;
(viii) It is intended that no person or entity may acquire or
own, directly, indirectly or by attribution (within the meaning of Section
958 of Code) 10% or more of the total combined voting power of the Common
Stock, the Series A Preferred Stock and the Series B Preferred Stock as
such voting power is described in the Bye-laws.
Section 6.6 Accredited Investor Status. Such Investor hereby
represents and warrants to the Company that it qualifies as an "accredited
investor" within the meaning of Rule 501(a)(1), (2), (3), (7) or (8) of
Regulation D under the Securities Act.
Section 6.7 Series A Preferred Stock Ownership Limitations. To such
Investor's knowledge, such Investor's purchase on the Closing Date of Shares
pursuant to this Agreement will not cause any person or entity to own on the
Closing Date directly, indirectly or by attribution (within the meaning of
Section 958 of the Code) 10% or more of the total combined voting power of the
Common Stock, the Series A Preferred Stock and the Series B Preferred Stock as
such voting power is described in the Bye-laws, or to be treated by virtue of
its ownership of stock in the Company as indirectly or constructively owning on
the Closing Date 10% or more of the voting power of all classes of capital stock
of CGA entitled to vote. Such Investor may rely on the list of anticipated
shareholders of the Company and their respective anticipated shareholdings set
forth in Schedule 2 hereto for purposes of making this representation and
warranty.
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ARTICLE VII
BUSINESS COVENANTS
The Company covenants and agrees that so long as any Shares shall be
issued and outstanding:
Section 7.1 Limitation on Company Indebtedness and Preferred Stock.
The Company will not, directly or indirectly, Incur any Indebtedness or 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; provided, however, that this Section 7.1 shall not (i)
restrict the Company's ability to Incur Insurance Obligations, directly or
indirectly or (ii) to issue the Series B Preferred Stock pursuant to the
Commitments.
Section 7.2 Limitation on Restricted Subsidiary Indebtedness and
Preferred Stock. The Company will not permit any of its Restricted Subsidiaries
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 or
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; provided, however, that this Section 7.2 shall not restrict
any Restricted Subsidiary's ability to Incur, directly or indirectly, Insurance
Obligations.
Section 7.3 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 and be continuing at such time or (ii) the aggregate amount
expended or declared for all Restricted Payments after the Closing Date 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 the Closing Date 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
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subsequent to the Closing Date 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; provided, however, that
this Section 7.3 shall 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.
Section 7.4 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
applicable laws or regulations) on the ability of any Restricted Subsidiary (i)
to pay dividends, make redemption payments or 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:
(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 the defined term "Insurance Obligations" in Article
XIV, in either case, securing
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insurance, reinsurance or retrocessional obligations entered into in the
ordinary course of business;
(d) any encumbrance or restriction in respect of Permitted Company
Indebtedness And Preferred Stock or Permitted Restricted Subsidiary Indebtedness
And Preferred Stock;
(e) any encumbrance under employee pension plans (provided that any
such benefits granted to employees are in compliance with the standards set
forth in clauses (i) through (iv) of Section 7.7), employee health insurance
plans (provided that any such benefits granted to employees are in compliance
with the standards set forth in clauses (i) through (iv) of Section 7.7),
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;
(f) 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;
(g) 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;
(h) 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
(i) such restriction set forth in the Company's and its Initial
Subsidiaries' undertakings in the letter to DCR in substantially the form of
Annex IX hereto.
Section 7.5 Limitation on Sales of Assets and Capital Stock.
(a) 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
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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 this Section 7.5, if permissible under applicable laws
or regulations.
(b) Within 270 calendar days after any Specified Asset Sale, the
Company or such Restricted Subsidiary, as the case may be, may at its option (i)
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 (ii) 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".
(c) When the aggregate amount of Excess Proceeds exceeds U.S.$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 with respect to which
100% of the Series A Preferred Stated Value, together with accrued and unpaid
dividends thereon through the repurchase date, if any, equals, as nearly as
practicable, 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 for purposes of
this Section 7.5 shall be reset to zero.
Section 7.6 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 any
provision of, Section 1.3 of the Investment Units Subscription Agreement or any
Acknowledgment (as defined in the Investment Units Subscription Agreement)
without the written consent of 90% of the issued and outstanding shares of
Series A Preferred Stock.
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Section 7.7 Limitation on Transactions with Affiliates. Except for
reinsurance agreements entered into with Capital liates Reinsurance Company or
its Affiliates pursuant to the letter agreement as in effect on the date hereof,
a copy of which is attached as Annex VIII hereto, 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 U.S.$1 million
(other than transactions in the ordinary course of business (A) involving the
insurance or reinsurance of risks, (B) involving the brokering of insurance or
reinsurance, or (C) as otherwise contemplated in the Private Placement
Memorandum), 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 U.S.$3
million (other than transactions in the ordinary course of business (A)
involving the insurance or reinsurance of risks, (B) involving the brokering of
insurance or reinsurance, or (C) as otherwise contemplated in the Private
Placement Memorandum), 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 only one voting member of the Company's Board of Directors or any
Affiliate of such a Person, unless such transaction or series of transactions is
(1) in the best interests of the Company as determined by the disinterested
members of the Board and (2) entered into on an arms-length basis.
Section 7.8 Limitation on Merger, Consolidation and Sale of Assets.
The Company will not, and will not permit any Restricted Subsidiary to, merge,
amalgamate or
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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 agrees to be bound by this 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.
Section 7.9 Restricted and Unrestricted Subsidiaries.
(a) As of the Closing Date, each of the Initial Subsidiaries shall be
classified as a "Restricted Subsidiary". Except as provided in Section 7.9(b)
and in compliance with Section 7.9(e), any Person that is or becomes a
Subsidiary of the Company or any of its Restricted Subsidiaries shall be
classified as a "Restricted Subsidiary". A Restricted Subsidiary may not be
redesignated as an "Unrestricted Subsidiary" except as provided in Section
7.9(b).
(b) For the purposes of this Agreement, the Company may designate a
Subsidiary (including a newly formed or newly acquired Subsidiary, but excluding
any of the Initial Subsidiaries) of either 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 cross-default on
Indebtedness of any of the Company's Restricted Subsidiaries and (b) such
Subsidiary has less
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than U.S.$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.
(c) The Company may redesignate, at any time, an Unrestricted
Subsidiary as a Restricted Subsidiary if, after giving effect to such an action,
the Company is in compliance with Section 7.9(e).
(d) The designation of an Unrestricted Subsidiary pursuant to Section
7.9(b) or the removal of such designation pursuant to Section 7.9(c) 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.
(e) Notwithstanding any other provision of this Section 7.9, 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.
(f) At all times the Company or a Wholly-Owned Restricted Subsidiary
thereof shall own all of the Capital Stock of the Restricted Subsidiaries of the
Company.
ARTICLE VIII
EVENTS OF NON-COMPLIANCE
An "Event of Non-Compliance" shall exist if any of the following
occurs and is continuing:
(a) failure by the Company to pay (i) prior to the fifth anniversary
of the Closing Date, a quarterly dividend in the form of Series A Preferred
Stock or (ii) from the fifth anniversary of the Closing Date, a quarterly cash
dividend at the applicable Series A Preferred Dividend Rate (as defined in the
Bye-laws) (A) in the case of (i) and (ii), on each share of Series A Preferred
Stock then outstanding and (B) in the case of (i) and (ii), 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,
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however, that there shall not be an "Event of Non-Compliance" under this clause
(a) unless the sum of the aggregate Series A Preferred Stated Value (as defined
in the Bye-laws of the Company) for the unpaid stock dividends under clause (i)
and the aggregate unpaid cash amount under clause (ii) is, in the aggregate, in
excess of U.S. $5 million;
(b) failure of 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,
notwithstanding the legal restrictions on redemption payments described in
paragraph (f) of Section 5 of Appendix A to the Bye-laws as in effect on the
Closing Date, upon mandatory or optional redemption, required purchase or
otherwise;
(c) 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 in Article VII and Section 9.1 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;
(d) failure by the Company or any Restricted Subsidiary of the Company
to pay any amounts in respect of Indebtedness or Preferred Stock when due (after
giving effect to 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, U.S.$5 million;
(e) any default (other than under clauses (a), (b), (c) and (d) of
this Section 8.1) 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 U.S.$5 million;
(f) 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 U.S.$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
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subject of an ongoing appeal and the Company is not obligated to pay such amount
while such appeal is pending.
(g) the Company or any Restricted Subsidiary shall
(i) make a general assignment for the benefit of, or enter into
any composition or arrangement with, creditors;
(ii) apply for, or consent (by admission of material
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;
(iii) 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
(iv) 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; or
(h) there shall have been entered an order or decree for relief in a
case under Title 11 of the United States Code (or similar law of the United
States or any other jurisdiction which relates to liquidation or reorganization
of companies or the modification or alteration of the rights of creditors)
commenced by the filing of a petition against the Company or a Restricted
Subsidiary or for appointment of a receiver, trustee, custodian, liquidator (or
similar official) of the Company or a Restricted Subsidiary, or of a substantial
part of any of such corporation's assets obtained without the consent of the
Company or such Restricted Subsidiary, or for the winding-up or liquidation of
the Company or a Restricted Subsidiary, and such order or decree shall have
continued unstayed or undismissed and in effect for a period of 60 days; or
(i) CGA's claims paying ability rating is downgraded below a AA-
rating by DCR (or the then-equivalent rating by DCR in the event such rating
agency changes its rating designations after the date hereof) for a period of 45
consecutive days.
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ARTICLE IX
REPORTING
Section 9.1 Reporting. (a) 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.
(b) 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 United States Securities and Exchange Commission
(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.
(c) Following the effectiveness of the Exchange Offer Registration
Statement or the Shelf 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.
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Section 9.2 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may permit the
sale of the restricted securities to the public without registration, the
Company agrees to:
(A) make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act, at all times
from and after the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities to
the general public;
(B) use its reasonable best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act at any time after it has become
subject to such reporting requirements; and
(C) furnish to each holder of the Series A Preferred Stock upon
request a written statement by the Company as to its compliance with the
reporting requirements of Rule 144 under the Securities Act (at any time
from and after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and
documents so filed as such holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing such holder to sell
any such securities without registration.
Section 9.3 Bermuda Laws. The Company has and will maintain all
necessary consents and approvals for the Shares to be traded without restriction
under Bermuda law.
ARTICLE X
REGISTERED EXCHANGE OFFER
Section 10.1 Exchange Offer Registration. Unless the Exchange Offer
shall not be permitted by applicable United States law (after the procedures set
forth in Section 12.1(a) below have been complied with), the Company shall use
its best efforts to cause the Exchange Offer Registration Statement to become
effective at the earliest possible time, but in no event later than 180 days
after the Closing Date, and in connection with the foregoing, (A) file all
pre-effective amendments to such Exchange Offer
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Registration Statement as may be necessary to cause such Exchange Offer
Registration Statement to become effective, (B) file, if applicable, a
post-effective amendment to such Exchange Offer Registration Statement pursuant
to Rule 430A under the Securities Act and (C) cause all necessary filings, if
any, in connection with the registration and qualification of the New Shares to
be made under the Blue Sky laws of such jurisdictions and the laws of Bermuda
and any other applicable jurisdictions as are necessary to permit Consummation
of the Exchange Offer, and (D) upon the effectiveness of such Exchange Offer
Registration Statement, commence and Consummate the Exchange Offer. The Exchange
Offer shall be on the appropriate form permitting registration of the New Shares
to be offered in exchange for the Shares and to permit sales of Broker-Dealer
New Shares by Restricted Broker-Dealers as contemplated by Section 10.3 below.
Section 10.2 Continuity of Effectiveness. The Company shall use its
best efforts to cause the Exchange Offer Registration Statement to be effective
continuously, and shall keep the Exchange Offer open for a period of not less
than the minimum period required under applicable federal and state securities
laws to Consummate the Exchange Offer; provided, however, that in no event shall
such period be less than 30 Business Days. The Company shall cause the Exchange
Offer to comply with all applicable federal and state securities laws. No
securities other than the New Shares shall be included in the Exchange Offer
Registration Statement. The Company shall use its best efforts to cause the
Exchange Offer to be Consummated on the earliest practicable date after the
Exchange Offer Registration Statement has become effective, but in no event
later than 30 days thereafter.
Section 10.3 Exchange by Restricted Broker-Dealers.
(a) The Company shall include a "Plan of Distribution" section in the
Prospectus contained in the Exchange Offer Registration Statement and indicate
therein that any Restricted Broker-Dealer who holds Shares that were acquired
for the account of such Broker-Dealer as a result of market-making activities or
other trading activities, may exchange such Shares (other than Shares acquired
directly from the Company or any Affiliate of the Company) pursuant to the
Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter"
within the meaning of the Securities Act and must, therefore, deliver a
prospectus meeting the requirements of the Securities Act in connection with its
initial sale of each New Share received by such Broker-Dealer in the Exchange
Offer, which prospectus delivery requirement may be satisfied by the delivery by
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such Broker-Dealer of the Prospectus contained in the Exchange Offer
Registration Statement. Such "Plan of Distribution" section shall also contain
all other information with respect to such sales of Broker-Dealer New Shares by
Restricted Broker-Dealers that the Commission may require in order to permit
such sales pursuant thereto, but such "Plan of Distribution" shall not name any
such Broker-Dealer, except to the extent required by the Commission as a result
of a change in policy after the date of this Agreement.
(b) The Company shall use its best efforts to keep the Exchange Offer
Registration Statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for sales of Broker-Dealer New
Shares by Restricted Broker-Dealers, and to ensure that such Exchange Offer
Registration Statement conforms with the requirements of this Agreement, the
Securities Act (including, without limitation, the standard set forth in Section
11.3(b)) and the policies, rules and regulations of the Commission as announced
from time to time, for a period of one year from the date on which the Exchange
Offer is Consummated.
(c) The Company shall as promptly as practicable after request,
provide sufficient copies of the latest version of such Prospectus to such
Restricted Broker-Dealers promptly upon request, and in no event later than one
day after such request, at any time during such one-year period in order to
facilitate such sales.
ARTICLE XI
SHELF REGISTRATION
Section 11.1 Shelf Obligation. If (a) the Company is not required to
file an Exchange Offer Registration Statement with respect to the New Shares
because the Exchange Offer is not permitted by applicable law (after the
procedures set forth in Section 12.1(a) below have been complied with) or (b) if
(i) any holder of Shares was prohibited by law or Commission policy from
participating in the Exchange Offer or (ii) any holder may not resell the New
Shares acquired by it in the Exchange Offer to the public without delivering a
prospectus and the Prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales by such holder or
(iii) any holder is a Broker-Dealer and holds Shares acquired directly from the
Company or one of its Affiliates, then the Company shall use its best efforts to
cause a shelf registration statement pursuant to Rule 415 under the Securities
Act (which may be an amendment to the
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Exchange Offer Registration Statement (in either event, the "Shelf Registration
Statement")), relating to all Shares the holders of which shall have provided
the information required pursuant to Section 11.4 hereof to become effective on
or prior to 210 days after the Closing Date.
Section 11.2 Continuity of Effectiveness. The Company shall use best
efforts to keep the Shelf Registration Statement continuously effective in order
to permit the Prospectus included therein to be usable by the holders of the
Shares for a period of three years from the date the Shelf Registration
Statement is declared effective or such shorter period that will terminate when
all the Shares covered by the Shelf Registration Statement have been sold
pursuant to such Shelf Registration Statement or are salable pursuant to Rule
144 under the Securities Act; provided, that the Company shall be deemed not to
have used best efforts to keep the Shelf Registration Statement effective during
the requisite period if it voluntarily takes or omits to take any action that it
knows would result in holders of Shares covered thereby not being able to offer
and sell such securities during that period, unless, in the case of periods not
in excess of 90 days and which occur no more than once in any 12-month period,
such action or omission is required by applicable law, including, but not
limited to, reasonable periods necessary to prepare appropriate disclosure. The
foregoing proviso shall not apply to actions taken (or contemplated to be taken)
by the Company in good faith and for business reasons (a "Suspension Event"),
including, without limitation, the acquisition or divestiture of assets or the
offering or sale of securities, so long as the Company promptly thereafter
complies with the requirements of Section 12.2(g), if applicable. Any such
period, not in excess of 90 days and occurring no more than once in any 12-month
period, during which the Company fails to keep the Shelf Registration Statement
effective and usable for offers and sales of Shares is referred to as a
"Suspension Period." A Suspension Period shall commence on and include the date
that the Company gives notice that the Shelf Registration Statement is no longer
effective or the Prospectus included therein is no longer usable for offers and
sales of Shares and shall end on the date, when each seller of Shares covered by
such Shelf Registration Statement either receives the copies of the supplemented
or amended Prospectus contemplated by Section 12.2(g) or is advised in writing
by the Company that use of the Prospectus may be resumed, provided, that such
period shall not be in excess of 90 days and shall occur no more than once in a
12-month period.
Section 11.3 Compliance. The Company shall cause the Shelf
Registration Statement and the related Prospectus and any amendment or
supplement thereto, as of the effective
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date of such Shelf Registration Statement, amendment or supplement, (a) to
comply in all material respects with the applicable requirements of the
Securities Act and the rules and regulations of the Commission and (b) not to
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading other than statements or omissions made in reliance upon and in
conformity with information furnished to the Company in writing by the holders
of the Shares expressly for use in such Shelf Registration Statement and the
related Prospectus and any amendment or supplement thereto.
Section 11.4 Provision by Holders of Certain Information in Connection
with the Shelf Registration Statement. No holder of Shares may include any of
its Shares in any Shelf Registration Statement pursuant to this Agreement unless
and until such holder furnishes to the Company in writing, within 20 days after
receipt of a request therefor, such information specified in item 507 of
Regulation S-K under the Act for use in connection with any Shelf Registration
Statement or Prospectus or preliminary Prospectus included therein. Each holder
as to which any Shelf Registration Statement is being effected agrees to furnish
promptly to the Company all information required to be disclosed in order to
make the information previously furnished to the Company by such holder under
the preceding sentence not materially misleading.
ARTICLE XII
REGISTRATION PROCEDURES
Section 12.1 Exchange Offer Registration Statement. In connection with
the Exchange Offer contemplated by Article X hereof, the Company shall comply
with all applicable provisions of Section 12.3 below, shall use its best efforts
to effect such exchange and to permit the sale of Broker-Dealer New Shares being
sold in accordance with the intended method or methods of distribution thereof,
and shall comply with all of the following provisions:
(a) If, following the date hereof there has been published or
otherwise announced a change in Commission policy with respect to exchange
offers such as the Exchange Offer, such that in the reasonable opinion of
counsel to the Company there is a substantial question as to whether the
Exchange Offer is permitted by applicable federal law, the Company hereby
agrees to seek a no-action letter or other favorable decision from the
Commission allowing the Company to Consummate
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an Exchange Offer for such Shares, unless, in the reasonable written
opinion of counsel to the Company, it is not reasonably likely that such
letter or decision will be obtained. The Company hereby agrees to pursue
the issuance of such a decision to the Commission staff level. In
connection with the foregoing, the Company hereby agrees to take all such
other actions as are requested by the Commission or otherwise required in
connection with the issuance of such decision, including without limitation
(i) participating in telephonic conferences with the Commission, (ii)
delivering to the Commission staff an analysis prepared by counsel to the
Company setting forth the legal bases, if any, upon which such counsel has
concluded that such an Exchange Offer should be permitted and (iii)
diligently pursuing a resolution (which need not be favorable) by the
Commission staff of such submission.
(b) As a condition to its participation in the Exchange Offer pursuant
to the terms of this Agreement, each holder of Shares shall furnish, upon
the request of the Company, prior to the Consummation of the Exchange
Offer, a written representation to the Company (which may be contained in
the letter of transmittal contemplated by the Exchange Offer Registration
Statement) to the effect that (i) it is not an Affiliate of the Company,
(ii) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the New Shares to be issued in the Exchange Offer and (iii)
it is acquiring the New Shares in its ordinary course of business. Each
holder hereby acknowledges and agrees that any Broker-Dealer and any such
holder using the Exchange Offer to participate in a distribution of the
securities to be acquired in the Exchange Offer (A) could not under
Commission policy as in effect on the date of this Agreement rely on the
position of the Commission enunciated in Morgan Stanley and Co., Inc.
(available June 5, 1991) and Exxon Capital Holdings Corporation (available
May 13, 1988), as interpreted in similar no-action letters (including, if
applicable, any no-action letter obtained pursuant to clause (a) above),
and (B) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be covered by
an effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K
if the resales are of New Shares obtained by such holder in exchange for
Shares acquired
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by such holder directly from the Company or an Affiliate thereof.
(c) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company shall provide a supplemental letter to the
Commission (i) stating that the Company is registering the Exchange Offer
in reliance on the position of the Commission enunciated in Exxon Capital
Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc.
(available June 5, 1991), K-III Communication Corporation (available May
14, 1993) and, if applicable, any no-action letter obtained pursuant to
clause (a) above, (ii) including a representation that the Company has not
entered into any arrangement or understanding with any Person to distribute
the New Shares to be received in the Exchange Offer and that, to the best
of the Company's information and belief, each holder participating in the
Exchange Offer is acquiring the New Shares in its ordinary course of
business and has no arrangement or understanding with any Person to
participate in the distribution of the New Shares received in the Exchange
Offer and (iii) any other undertaking or representation required by the
Commission as set forth in any no-action letter obtained pursuant to clause
(a) above.
Section 12.2 General Provisions. In connection with any Registration
Statement and any related Prospectus required by this Agreement to permit the
sale or resale of Shares (including, without limitation, any Exchange Offer
Registration Statement and the related Prospectus, to the extent that the same
are required to be available to permit sales of Broker-Dealer New Shares by
Restricted Broker-Dealers), the following provisions shall apply:
(a) The Company shall advise the holders of the Shares as promptly as
practicable:
(i) when the Registration Statement and any amendment thereto has been
filed with the Commission (provided, that before any filing with the
Commission, the Company will furnish one counsel designated by the holders
of the securities required to be covered by such registration a copy
thereof for review and comments) and when the Registration Statement or any
post-effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or supplements to
the Registration Statement or the Prospectus included therein or for
additional information;
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(iii) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose;
(iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; and
(v) of the happening of any event (other than a Suspension Event, in
which case the Company need only notify the holders of the Shares that a
Suspension Event exists) that requires the Company to make changes in the
Registration Statement or the Prospectus in order to make the statements
therein not misleading (which advice shall be accompanied by an instruction
that such notice constitutes material nonpublic information, and to suspend
the use of the Prospectus until the requisite changes have been made, and
which instruction shall require that such holders shall not communicate
such material nonpublic information to any third party and shall not sell
or purchase, or offer to sell or purchase, any securities of the Company
after receipt of such advice and prior to the effectiveness of any action
required to be taken by the Company pursuant to Section 12.2(g)).
(b) The Company shall use best efforts to prevent the issuance or
obtain the withdrawal of any order suspending the effectiveness of the
Registration Statement at the earliest possible time.
(c) The Company shall furnish to each holder of Shares included within
the coverage of the Registration, without charge, one copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, and, if the holder so requests in writing, all
exhibits (including those incorporated by reference).
(d) The Company shall deliver to each holder of Shares included within
the coverage of the Registration and each underwriter (which shall be selected
by the Company and be reasonably acceptable to such holders), if any, without
charge, as many copies of the Prospectus (including each preliminary prospectus)
included in the Registration Statement with respect to the Registration and any
amendment or supplement thereto as such persons may reasonably request. The
Company consents, subject to the provisions of this Agreement, to the use of the
Prospectus or any amendment or supplement thereto by each of the selling
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holders of Shares or, as provided in Section 10.3, New Shares and each
underwriter (which shall be selected by the Company and be reasonably acceptable
to such holders) in connection with the offering and sale of the Shares or, as
provided in Section 10.3, New Shares covered by the Prospectus, or any amendment
or supplement thereto, included in such Registration Statement.
(e) Prior to any public offering of Shares pursuant to the
Registration, the Company shall register or qualify or cooperate with the
holders of securities included therein and their respective counsel in
connection with the registration or qualification of such Shares for offer and
sale under the securities or blue sky laws of such jurisdictions in the United
States, Bermuda and any other applicable jurisdiction as any holder of Shares
reasonably requests in writing and do any and all other acts or things necessary
or advisable to enable the offer and sale in such jurisdictions of the
securities covered by the Registration; provided that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction where it is
not then so qualified, (ii) take any action that would subject it to the service
of process in suits, other than as to matters and transactions relating to the
Registration, in any jurisdiction where it is not now subject or (iii) take any
action which would subject it to general service of process or to taxation in
any jurisdiction where it is not then so subject.
(f) The Company shall cooperate with the holders of the Shares to
facilitate the timely preparation and delivery of certificates representing
Shares to be sold in the Registration free of any restrictive legends and in
such number and registered in such names as the holders may request a reasonable
period of time prior to sales of Shares or, as provided in Section 10.3, New
Shares pursuant to the Registration.
(g) Upon the occurrence of any event contemplated by Section
12.2(a)(v) above (including, without limitation, any Suspension Event) or any
other event that causes the Registration Statement to contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, the
Company shall immediately notify each holder and, as promptly as reasonably
practicable, prepare a post-effective amendment to the Registration Statement or
a supplement to the related Prospectus or file any other required document so
that, as thereafter delivered to purchasers of the Shares or, in the case of
Section 10.3, the New Shares, the Prospectus will not contain an untrue
statement of a material fact or omit to state any material
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fact required to be stated therein or necessary to make the statements therein
not misleading.
(h) The Company will use best efforts to comply with all rules and
regulations of, and conditions imposed by, the Commission and Bermuda
governmental authorities to the extent and so long as they are applicable to the
Registration and will make generally available to its security holders (or
otherwise provide in accordance with Section 11(a) of the Securities Act) an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act, no later than 45 days after the end of a 12-month period (or 90 days, if
such period is a fiscal year) beginning with the first month of the Company's
first fiscal quarter commencing after the effective date of the Registration,
which statement shall cover such 12-month period.
(i) The Company shall require each holder of Shares to be sold
pursuant to the Registration to furnish to the Company, and each such holder
agrees to so furnish, such information regarding the holder and the distribution
of such Shares as the Company may from time to time reasonably require for
inclusion in the Registration Statement. Each holder agrees by acquisition of
Shares that, upon receipt of any notice from the Company of the existence of any
fact of the kind described in Section 12.2(a)(v) hereof, such holder will
immediately discontinue disposition of Shares until such holder's receipt of the
copies of the supplemented or amended Prospectus contemplated by Section 12.2(g)
hereof, or until it is advised in writing by the Company that the use of the
Prospectus may be resumed, and has received copies of any additional or
supplemental filings with respect to the Prospectus. If so directed by the
Company, each holder will deliver to the Company all copies, other than
permanent file copies then in such holder's possession, of the Prospectus
covering such Shares current at the time of receipt of such notice.
(j) In the case of a Shelf Registration Statement, the Company will
enter into such customary agreements (including an underwriting agreement or
qualified independent underwriting agreement, in each case, in customary form)
and take all such other actions as the holders of a majority of the Shares being
covered by such registration statement or the underwriters retained by such
holders, if any, reasonably request in order to expedite or facilitate the
disposition of such Shares, including customary representations, warranties,
indemnities and agreements.
(k) In the case of a Shelf Registration Statement or Section 10.3, the
Company will make available for
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inspection, during business hours of the Company, by any holder of Shares or, in
the case of Section 10.3, New Shares covered by such registration statement, any
underwriter participating in any disposition pursuant to such registration
statement, and any attorney, accountant or other agent retained by any such
holder or underwriter (collectively, the "Inspectors"), all financial and other
records, pertinent corporate documents and properties of the Company and its
subsidiaries (collectively, "Records"), if any, as shall be reasonably necessary
to enable them to exercise their due diligence responsibility, and cause the
Company's officers, directors and employees, and those of the Company's
Affiliates, if any, to supply all information and respond to all inquiries
reasonably requested by any such Inspector in connection with such registration
statement.
(l) In the case of a Shelf Registration Statement or Section 10.3, the
Company will use its best efforts to obtain a "cold comfort" letter from the
Company's appointed auditors in customary form and covering such matters of the
type customarily covered by "cold comfort" letters as the holders of a majority
in interest of the Shares or, in the case of Section 10.3, New Shares being sold
reasonably request.
Section 12.3 Registration Expenses. The Company shall pay all expenses
in connection with the performance of its obligations under Articles X and XI
and Sections 12.1 and 12.2 (other than underwriting discounts and commissions)
and pay or reimburse the holders of the Shares or, the case of Section 10.3, New
Shares for the reasonable fees and disbursements of one firm of counsel
designated by the holders of a majority of the Shares or, in the case of Section
10.3, New Shares to act as counsel for the holders of the Shares in connection
therewith.
Section 12.4 Indemnification. (a) In the event of the registration of
the Shares under the Securities Act pursuant to this Article XII, the Company
shall enter into an agreement or agreements with the underwriters selected by
the Company (which underwriters must be reasonably acceptable to the holders),
if any, participating in such registration obligating the Company to provide
indemnification and reimbursement to the extent provided to each holder (a
"Holder") participating in such Registration hereunder.
(b) The Company agrees to indemnify and hold harmless (i) each Holder,
their respective directors and officers, general partners, limited partners and
managing directors, (ii) each other Person who participates as an underwriter in
the offering or sale of such securities, and
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their respective directors and officers, general partners, limited partners and
managing directors (iii) each Person, if any, who controls (within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act) any Holder or any
such underwriter (any of the persons referred to in this clause (iii) being
hereinafter referred to as a "controlling person") and (iv) the respective
officers, directors, partners, employees, representatives and agents of any such
controlling person (any person referred to in clause (i), (ii), (iii) or (iv)
may hereinafter be referred to as a "Non-Company Indemnitee"), to the fullest
extent lawful, from and against any and all losses, claims, damages, liabilities
and judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus (or any
amendments or supplements thereto) hereunder, including any document
incorporated by reference therein, or caused by any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except, with respect to any
Non-Company Indemnitee, insofar as such losses, claims, damages, liabilities or
judgments (1) are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information furnished in writing to the
Company by such Non-Company Indemnitee expressly for use therein or (2) with
respect to any preliminary prospectus, result from the fact that such
Non-Company Indemnitee sold Shares to a person to whom there was not sent or
given, at or prior to the written confirmation of such sale, a copy of the final
prospectus, as amended or supplemented, if required under the Securities Act and
if the Company shall have previously furnished copies thereof to such
Non-Company Indemnitee in accordance with this Agreement and the final
prospectus, as amended or supplemented, would have corrected such untrue
statement or omission.
(c) In case any action shall be brought against any Non-Company
Indemnitee based upon any registration statement or prospectus, or any amendment
or supplement thereto, and with respect to which indemnity may be sought against
the Company, such Non-Company Indemnitee shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Non-Company Indemnitee and
payment of all fees and expenses. Such Non-Company Indemnitee shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of counsel shall be paid by such
Non-Company Indemnitee, unless (i) the employment of such counsel shall have
been specifically authorized in writing by the Company, (ii) the Company shall
have failed to assume the defense and employ counsel or (iii) the named parties
to any such action (including any impleaded parties)
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include both such Non-Company Indemnitee and the Company and such Non-Company
Indemnitee shall have been advised by counsel that it would be inappropriate for
the same counsel to represent such Non-Company Indemnitee and the Company (in
which case the Company shall not have the right to assume the defense of such
action on behalf of such Non-Company Indemnitee, it being understood, however,
that the Company shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for the Non-Company Indemnitees, which firm shall be designated in
writing by the Non-Company Indemnitees and whose fees and expenses reasonably
incurred shall be reimbursed as they are incurred). The Company shall not be
liable for any settlement of any such action effected without the written
consent of the Company, but if settled with the written consent of the Company,
the Company agrees to indemnify and hold harmless any Non-Company Indemnitee
from and against any amounts payable pursuant to such written consent in
connection with such settlement. The Company shall not, without the prior
written consent of such Non-Company Indemnitee, effect any settlement of any
pending or threatened proceeding in respect of which such Non-Company Indemnitee
is or could have been a party and indemnity could have been sought hereunder by
such Non-Company Indemnitee, unless such settlement includes an unconditional
release of such Non-Company Indemnitee from all liability on claims that are the
subject matter of such proceeding.
(d) Each Holder agrees to indemnify and hold harmless (i) the Company,
(ii) each other Holder, (iii) any person controlling (within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act) the Company and each
other Holder and (iv) the respective officers, directors, partners, employees,
representatives and agents of each of the parties referred to in clauses (i),
(ii) and (iii), to the same extent as the foregoing indemnity from the Company
to each of the Non-Company Indemnitees, but only with respect to information
relating to such Holder that was furnished in writing by such Holder expressly
for use in any registration statement (or any amendment or supplement thereto)
prepared in accordance with this Agreement. In no event shall the liability of
any Holder hereunder be greater in amount than the dollar amount of the proceeds
received by such holder upon the sales of the Shares giving rise to such
indemnification obligation.
(e) In order to provide for just and equitable contribution in
circumstances in which the foregoing indemnity agreements provided for in this
Section 12.4 are
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for any reason held to be unenforceable although applicable in accordance with
its terms, the Company and the Holders shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement in such proportion as shall be appropriate to reflect (A)
the relative benefits received by the Company, on the one hand, and the Holders
on the other hand, from the offering under the Registration Statement and any
other securities included in such offering, and (B) the relative fault of the
Company, on the one hand, and the Holders included in the offering, on the
other, with respect to the statements or omissions that resulted in such loss,
liability, claim, damage or expense, or action in respect thereof, as well as
any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the Holders, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Holders agree that it would not be just and equitable if contribution
pursuant to this Section 12.4 where to be determined by pro rata allocation or
by any other method of allocation that does not take into account the equitable
considerations referred to herein. Notwithstanding anything to the contrary
contained herein, the Company and the Holders agree that any contribution
required to be made by a Holder pursuant to this Section 12.4 shall not exceed
the net proceeds from the registered offering (before deducting expenses)
received by such Holder with respect to such offering. For purposes of this
Section 12.4, each Person, if any, who controls a Holder within the meaning of
Section 15 of the Securities Act shall have the same rights to contribution as
such Holder, and each director of the Company, each officer of the Company who
signed the registration statement, and each Person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act shall have the
same rights to contribution as the Company. Notwithstanding the foregoing, no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(f) Notwithstanding the foregoing, to the extent that the provisions
on indemnification contained in the underwriting agreement (to which the Company
and the Holders have consented) entered into in connection with any underwritten
public offering contemplated by this Agreement are in conflict with the
foregoing provisions, the
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provisions in such underwriting agreement shall be controlling.
ARTICLE XIII
RESTRICTIONS ON TRANSFER
The Series A Preferred Stock shall not be transferable except upon the
conditions specified in this Article XIII, which are intended to insure
compliance with the provisions of the Securities Act, applicable securities laws
of other jurisdictions and Bermuda law in respect of the transfer of any Shares
and are in addition to the conditions relating to the transfer of shares set
forth in the Company's Bye-laws.
Section 13.1. In addition to any other legend required by the
Company's Bye-laws or applicable law, each certificate representing the Shares
shall (unless otherwise permitted by the provisions of this Article XIII) be
stamped or otherwise imprinted with a legend in substantially the following
form:
"ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE TERMS AND
CONDITIONS CONTAINED IN THE BYE-LAWS OF CGA GROUP, LTD. (THE "COMPANY")
WHICH ARE AVAILABLE FOR EXAMINATION BY HOLDERS OF THESE SECURITIES AT THE
REGISTERED OFFICE OF THE COMPANY. IN ADDITION TO THE FOREGOING
RESTRICTIONS, THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE TRANSFERRED, SOLD OR
OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT IS IN EFFECT UNDER
THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH
SECURITIES OR A WRITTEN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY IS
PROVIDED TO THE COMPANY TO THE EFFECT THAT NO SUCH REGISTRATIONS ARE
REQUIRED UNDER SUCH LAWS. THE PRIOR APPROVAL OF THE BERMUDA MONETARY
AUTHORITY IS NOT REQUIRED FOR ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR
OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
PROVIDED THAT ANY SUCH SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER
DISPOSITION IS BETWEEN PERSONS WHO ARE DESIGNATED AS NON-RESIDENTS OF
BERMUDA FOR THE PURPOSES OF THE EXCHANGE CONTROL ACT, 1972.
Section 13.2. (a) The holder of any Shares bearing the entire
restrictive
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legend set forth in Section 13.1 above ("Restricted Shares"), by acceptance
thereof, agrees that, unless a registration statement is in effect under the
Securities Act and under applicable securities laws with respect to such
Restricted Shares, prior to any transfer or attempted transfer of such
Restricted Shares, such holder will give the Company (i) unless the transferee
is an Affiliate of the transferor, written notice describing the proposed
transfer of any Restricted Shares in reasonable detail only to the extent
necessary to evaluate whether such transfer is in compliance with applicable
securities laws and the Bye-laws sections 61 through 63, (ii) unless the
transferee is an Affiliate of the transferor, such other information about the
proposed transfer of such Restricted Shares or the proposed transferee of such
Restricted Shares as the Company may reasonably request only to the extent
necessary to evaluate whether such transfer is in compliance with applicable
securities laws and the Bye-laws sections 61 through 63, and (iii) an opinion of
counsel (both counsel and opinion reasonably satisfactory to the Company (it
being understood that in-house counsel for such holder shall be considered
satisfactory to the Company) to the effect that the proposed transfer of such
Restricted Shares may be effected without registration of such Restricted Shares
under the Securities Act and under other applicable securities laws. The Company
hereby acknowledges that no prior approval of the Bermuda Monetary Authority is
necessary for any transfer of Restricted Shares between persons who are
designated as non-residents of Bermuda for the purposes of the Exchange Control
Act, 1972.
(b) If (i) the holder of the Restricted Shares delivers to the Company
an opinion of counsel that subsequent transfers of such Restricted Shares will
not require registration or qualification under the Securities Act or under
other applicable securities laws or (ii) such Restricted Shares are being
transferred under a Registration Statement, the Company will, or will cause the
transfer agent for such shares, promptly after such contemplated transfer to
deliver new certificates for such Restricted Shares that do not bear that
section of the restrictive legend set forth in Section 13.1 above imposed by the
Securities Act and under other applicable securities laws of any other
jurisdictions. If the foregoing conditions entitling the holder to effect a
proposed transfer of such Restricted Shares without registration under the
Securities Act and under other applicable securities laws have not been
satisfied, the holder shall not transfer the Restricted Shares, and the Company
will cause the transfer agent not to transfer such Restricted Shares on its
books or issue any certificates representing such Restricted Shares. Any
purported transfer of Restricted Shares not in accordance with applicable
securities laws shall be void.
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(c) The restrictions imposed by this Agreement with respect to the
Securities Act and under other applicable securities laws of any other
jurisdictions upon the transferability of any particular Restricted Shares shall
cease and terminate when such Restricted Shares have been sold pursuant to an
effective registration statement under the Securities Act and under other
applicable securities laws or transferred pursuant to Rule 144 promulgated under
the Securities Act. The holder of any Restricted Shares as to which such
restrictions shall have terminated shall be entitled to receive from the
Company, without expense, a new certificate representing such Shares that does
not bear the restrictive legend set forth above imposed by the Securities Act
and under other applicable securities laws of any other jurisdictions but shall
retain the restrictive legend set forth above imposed by the requirements of the
Bye-laws.
(d) As used in this Agreement, the term "transfer" encompasses any
sale, transfer, pledge or other disposition of any Shares referred to herein.
ARTICLE XIV
DEFINITIONS
Capitalized terms used in this Agreement, but not otherwise defined
herein, have the meanings set forth in this Article XIV.
"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
AAA 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
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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 clause 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. Notwithstanding the foregoing, in the case of Articles X, XI and XII,
"Affiliate" shall have the meaning assigned to such term under the Securities
Act and Exchange Act. A Person shall not be deemed to be an Affiliate of the
Company solely through possession of the right to elect one director.
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such amount of such
Indebtedness or redemption or similar payment with respect to such Preferred
Stock multiplied by the amount of such payment by (ii) the sum of all such
payments.
"Board of Directors" means the board of directors of the Company.
"Broker-Dealer" means any broker or dealer registered under the
Exchange Act.
"Broker-Dealer New Shares" means New Shares that are acquired by a
Broker-Dealer in the Exchange Offer in exchange for Shares that such
Broker-Dealer acquired for its own account as a result of market-making
activities or other trading activities (other than Shares acquired directly from
the Company or any of its Affiliates).
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York or Bermuda are authorized by law
or executive order to close.
"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
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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.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible or exchangeable into such
equity.
"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.
"Commission" means the United States Securities and Exchange
Commission.
"Commitments" means those certain commitments by certain investors,
severally and not jointly, in the Company to purchase shares of Series B Stock
for an aggregate purchase price of $60,000,000 pursuant to Section 1.3 of that
Investment Units Subscription Agreement.
"Consummate", "Consummation" and "Consummated" with respect to the
Exchange Offer, shall refer to the occurrence of (a) the filing and
effectiveness under the Securities Act of the Exchange Offer Registration
Statement relating to the New Shares to be issued in the Exchange Offer, (b) the
maintenance of such Registration Statement continuously effective and the
keeping of the Exchange Offer open for a period not less than the minimum period
required pursuant to Section 10.2 hereof and (c) the delivery of New Shares by
the Company to holders in the same number as the number of Shares tendered by
such holders pursuant to the Exchange Offer.
"Consolidated Net Income" of the Company 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
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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 restrictions,
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" of the Company 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.
"Exchange Offer" means the registration by the Company under the
Securities Act of the New Shares pursuant to the Exchange Offer Registration
Statement pursuant to which the Company shall offer the holders of all
outstanding Shares the opportunity to exchange all such outstanding Shares for
New Shares in a number equal to the number of Shares tendered in such exchange
offer by such holders.
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"Exchange Offer Registration Statement" means the Registration
Statement relating to the Exchange Offer, including the related Prospectus
covering all of the New Shares.
"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.
"GAAP" means the generally accepted accounting principles (including
the methods of application of such principles) so described and promulgated by
the U.S. Financial Accounting Standards Board (FASB) which are applicable as at
the date on which any calculation or determination made hereunder is to be
effective or as at the date of any financial statement referred to herein, as
the case may be.
"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 (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 U.S.$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, the accrual of dividends nor the accretion of original
issue discount shall be considered an Incurrence of Indebtedness. The terms
"Incurrable," "Incurred,"
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"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 (accreted 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
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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 Section 1.3 of the Investment Units Subscription
Agreement.
"Insurance Obligations" means: (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 or
providing funds to pay 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 (it being understood that such
obligations shall no longer be deemed Insurance Obligations upon such 30th
Business Day). (For the avoidance of doubt, a stand-by credit facility within
the meaning of Commitment Termination Event (as defined in the Investment Units
Subscription Agreement) that meets the requirements of clause (b) of this
definition shall be included within this definition).
"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
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forth the type of assets which would be reflected in the line item "Cash and
Invested Assets" on the Closing Date) 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 cash and 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
U.S.$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 U.S.$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 or Redeemable Stock with a rating of "BBB--" or
higher by S&P, "Baa3" 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; and
(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 has the meaning ascribed to such term in Appendix A to the Company's
Bye-laws.
"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
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(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 the 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 broker, accountant and attorney's fees and other fees
actually incurred in connection with such sale and net of taxes paid or payable
as a result thereof.
"New Shares" means Series A Cumulative Voting Preference Shares of the
Company to be issued in the Exchange Offer; it being understood that New Shares
shall be identical in all respects to the Shares issued hereunder (including,
without limitation, with respect to a holder's rights, preferences, immunities
and obligations hereunder and under the Bye-laws of the Company), except that
the New Shares shall contain no restrictive legend thereon other than with
respect to transfer restrictions set forth in the Bye-laws and, except in the
case of Section 10.3 of the Agreement, Section 2(a)(ii)(B) of Appendix A to the
Bye-laws shall not apply to such New Shares.
"Permitted Company Indebtedness And Preferred Stock" means (a)
Preferred Stock issued as of the Closing Date under the Investment Units
Subscription Agreement and this Agreement, each as in effect on the Closing Date
and not as amended 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 the Closing Date 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 aggregate 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
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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 or contribution to
any Person that is a Restricted Subsidiary of the Company at the time, or
becomes a Restricted Subsidiary 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 Section 7.2, (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) Insurance Obligations; (d) Indebtedness Incurred by CGA
through the
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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 (e)
Indebtedness of Restricted Subsidiaries (other than pursuant to the foregoing
clauses) in an amount 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, limited
liability company, 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.
"Prospectus" means the prospectus included in a Registration Statement
at the time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
"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.
"Registration" or "registration" means the registration pursuant to
the Exchange Offer Registration Statement or the Shelf Registration Statement.
"Registration Statement" means any registration statement of the
Company relating to (a) offering of New Shares pursuant to an Exchange Offer or
(b) the registration for resale of Shares pursuant to the Shelf Registration
Statement, in each case, (i) which is filed pursuant to the provisions of this
Agreement and (ii) including the Prospectus included therein, all amendments and
supplements
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thereto (including post-effective amendments) and all exhibits and material
incorporated by reference therein.
"Restricted Broker-Dealer" means any Broker-Dealer which holds
Broker-Dealer New Shares.
"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.
"Restricted Subsidiaries" means those subsidiaries designated or
classified as Restricted Subsidiaries pursuant to Section 7.9.
"Sale/Leaseback Transaction" 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.
"Series A Preferred Stated Value" shall have the meaning ascribed to
such term in the Company's Bye-laws.
"Shareholders Agreement" means that certain Shareholders Agreement,
dated as of the Closing Date, among the Company and certain holders of Capital
Stock of the Company, as such agreement may be amended, supplemented or
modified.
"Shelf Registration Statement" shall have the meaning ascribed to such
term in Article XI.
"S&P" means Standard & Poor's and its successors.
"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 (i) Capital Stock of the Company issued as
dividends pursuant to the terms of the appendices to the
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Bye-laws and (ii) Common Stock issued in connection with stock option plans
established by the Company pursuant to the Common Stock Warrant Acquisition
Agreement, the Sponsoring Investors and Founders Stock Warrant Plan and the
Employee Stock Warrant Plan, which number of shares of Common Stock shall not
exceed ten percent (10%) in the aggregate of the number of shares of Common
Stock issued and outstanding on the Closing Date), 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 Section 7.8.
"Specified Holders" means the holders of Capital Stock of the Company
as of the Closing Date and their Majority Controlled Affiliates.
"St. George" means St. George, Ltd., a company with limited liability
incorporated under the laws of the Cayman Islands.
"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 or service creditors
created, assumed or Guaranteed by such Person arising in the ordinary course of
business of such Person in connection with the acquisition of goods or services.
"Unrestricted Subsidiaries" means those Subsidiaries designated as
Unrestricted Subsidiaries pursuant to Section 7.9.
"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
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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 is owned by the Company or another
Wholly-Owned Restricted Subsidiary of the Company.
ARTICLE XV
MISCELLANEOUS
Section XV.1 Survival of Representations, Warranties and Covenants.
The representations, warranties and covenants of the parties contained in this
Agreement and in any document delivered or to be delivered pursuant to this
Agreement and in connection with the Closing hereunder shall survive the
Closing. The parties have made no representations or warranties other than those
that are expressly set forth in this Agreement, any document delivered in
connection herewith (including the certificate referred to in Section 3.3
hereof) and the Other Closing Documents.
Section 15.2 Termination of Agreement. This Agreement (a) may be
terminated and the transactions contemplated herein abandoned by the written
agreement of the Company and each Investor and (b) shall terminate upon the
redemption in full of all the outstanding shares of Series A Preferred Stock or
if the Closing Date has not occurred within 45 days from the date hereof.
Section 15.3 Entire Agreement. This Agreement (including the
Schedules, Exhibits and Annexes hereto), together with the Other Closing
Documents to which the
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parties hereto are parties, constitutes the entire agreement among the parties
hereto and supersede all prior agreements and understandings, oral and written,
among the parties hereto with respect to the subject matter hereof.
Section 15.4 Severability. Any provision of this Agreement that is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or lack of authorization without invalidating the remaining
provisions hereof or affecting the validity, unenforceability or legality of
such provision in any other jurisdiction.
Section 15.5 Successors and Assigns. All covenants, agreements,
representations and warranties made herein by the Investors shall bind and inure
to the benefit of the Company and the successors and assigns of the Company,
whether so expressed or not (provided that the Company may not transfer any of
its obligations hereunder without each Series A Preferred Stock holder's prior
consent and any transfer in violation of this proviso shall be null and void),
and all such covenants, agreements, representations and warranties by the
Company shall bind and inure to the benefit of each Investor and such Investor's
successors and assigns, and in the case of Section 15.12, such Investor's
Affiliates' successors and assigns. All provisions of this Agreement are
intended to be for the benefit of all holders, from time to time, of the Shares
and New Shares issued pursuant hereto (or as dividends in kind with respect to
such Shares or New Shares) as if such holders were Investors, and shall be
enforceable by any such holder, whether or not an express assignment to such
holder of rights under this Agreement has been made by the Investor, or any of
its successors or assigns.
Section 15.6 Amendment; Waiver. Except as provided in the last
paragraph of Article III, no provision of this Agreement may be amended, waived
or otherwise modified except by an instrument in writing executed by the Company
and the holders of ninety percent (90%) of the shares of Series A Preferred
Stock.
Section 15.7 Headings. The Articles and Section headings contained in
this Agreement are for convenience only and shall not affect the meaning or
interpretation of this Agreement.
Section 15.8 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
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Section 15.9 Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of New York without giving effect to the
principles of conflicts of laws thereof.
Section 15.10 Notices and Payment. (a) All notices, requests, demands
and other communications hereunder shall be in writing and, except to the extent
otherwise provided in this Agreement, shall be deemed to have been duly given if
delivered by same day or next day courier or mailed, registered mail, return
receipt requested, or transmitted by telegram, telex or facsimile (i) if to an
Investor, at such Investor's address appearing on Schedule 1 hereto or at any
other address such Investor may have provided in writing to the Company and (ii)
if to the Company, at Clarendon House, Church Street, Hamilton HM 11, Bermuda,
Attention: Secretary, or such other address as the Company may have furnished to
the Investors in writing. A notice hereunder shall be deemed to have been given
on the day such notice is sent or transmitted; provided, however, that if such
notice is sent by next-day courier it shall be deemed to have been given the day
following sending and, if by registered mail, five days following sending.
(b) Unless otherwise provided in this Agreement, payments hereunder
shall be made by wire transfer of immediately available funds.
Section 15.11 Full Payment. (a) All payments in respect of the Series
A Preferred Stock (including, without limitation, dividend, redemption and
liquidation payments, and payments under Section 15.11(b), but excluding
dividends permitted to be made in kind), shall be made in immediately available
U.S. dollar funds. Each reference in this Agreement and the Other Closing
Documents to U.S. dollars (the "relevant currency") is of the essence. To the
fullest extent permitted by law, the obligation of the Company in respect of any
amount due under this Agreement, the Bye-laws and the Other Closing Documents
will, notwithstanding any payment in any other currency (whether pursuant to a
judgment or otherwise), be discharged only to the extent of the amount in the
relevant currency that the party entitled to receive such payment may, in
accordance with its normal procedures, purchase with the sum paid in such other
currency (after any premium and costs of exchange) on the Business Day
immediately following the day on which such party receives such payment. If the
amount in the relevant currency that may be so purchased for any reason falls
short of the amount originally due, the Company will pay such additional
amounts, in the relevant currency, as may be necessary to compensate for the
shortfall. Any obligation of the Company not discharged by such payment will, to
the fullest extent permitted by applicable law, be due as a
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separate and independent obligation and, until discharged as provided herein,
will continue in full force and effect.
(b) The Company will make all dividend, redemption, and liquidation
payments to the holders of Series A Preferred Stock in respect of this Agreement
and the Bye-laws free and clear of and without deductions or withholding for or
on account of any present or future taxes, duties, assessments, fees or other
governmental charges imposed or levied by or on behalf of Bermuda or any other
jurisdiction from or through which such payment is made to the holders of Series
A Preferred Stock (all such taxes, duties, assessments, fees or other
governmental charges being referred to herein as "Taxes"), unless such
withholding or deduction is required by law. In that event, the Company will pay
to the holders of Series A Preferred Stock such additional amounts as may be
necessary in order that every net dividend and redemption payment made by the
Company after deduction or withholding for or on account of any such present or
future Taxes will not be less than the amount then due and payable in respect of
this Agreement and the Bye-laws.
Section 15.12 Indemnification. (a) The Company shall defend, hold
harmless and indemnify each Investor and its Affiliates from and against all
damages, losses, costs and expenses (including reasonable legal expenses) to
which any of such Persons becomes subject as a result of any inaccuracy in any
representation or warranty of the Company contained in this Agreement or any
document delivered in connection herewith (including the certificate referred to
in Section 3.3) or the breach of any covenant or agreement of the Company
contained in this Agreement or the Company's Bye-laws.
(b) In the event a party entitled to indemnification under this
Agreement (an "Indemnified Party") becomes aware of a claim, liability, expense
or other event with respect to which such party is entitled to indemnification
(an "Indemnification Event"), such Indemnified Party shall promptly give notice
of such Indemnification Event to the Company. The failure by any Indemnified
Party to give such notice to the Company within a reasonable period of time
shall relieve the Company of its obligations under this Section 15.12, if and to
the extent that it has been prejudiced by a lack of timely and adequate notice.
The Company shall have the right to defend, contest, settle or otherwise resolve
any Indemnification Event involving a third-party claim (a "Third-Party
Indemnification Event") as long as the Indemnification Event may not possibly
give rise to a non-monetary liability, including, without limitation,
injunctions and criminal liability; provided, however, that the Company shall
not
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settle or compromise any Third-Party Indemnification Event without the
Indemnified Party's prior written consent thereto, unless the terms of such
settlement or compromise provide for an unconditional release of the Indemnified
Parties. Notwithstanding the foregoing, any Indemnified Party shall have the
right to employ separate counsel (including local counsel), and the Company
shall bear the reasonable costs, fees and expenses of such separate counsel if
(i) the use of counsel chosen by the Company to represent such Indemnified Party
would present such counsel with any actual or potential conflict of interest,
(ii) the actual or potential defendants in, or targets of, any Third-Party
Indemnification Event include both such Indemnified Party and the Company or any
Affiliate thereof and such Indemnified Party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the Company or any Affiliate thereof which is
an actual or potential defendant in, or target of, such Third-Party
Indemnification Event, (iii) the Indemnification Event may give rise to a
non-monetary liability including without limitation injunctions and criminal
liability, or (iv) the Company has authorized such Indemnified Party to employ
separate counsel. The Indemnified Parties and the Company shall cooperate fully
in defending any Third-Party Indemnification Event, and the Company shall have
reasonable access to the books and records and personnel of the Indemnified
Parties that are relevant hereto.
(c) The indemnification provisions of this Article XV shall be in
addition to any rights each Indemnified Party may otherwise have.
Section 15.13 Submission to Jurisdiction. The Company irrevocably
submits to the non-exclusive jurisdiction of any New York State or federal
courts sitting in The City of New York and any court sitting in Bermuda, and any
appellate court from any thereof, in any suit, action or proceeding arising out
of or relating to this Agreement or any of the Other Closing Documents or the
transactions contemplated hereby or thereby (a "Related Proceeding"), and the
Company hereby irrevocably agrees that all claims in respect of any Related
Proceeding may be heard and determined in such New York State or federal court
or any court sitting in Bermuda. The Company hereby irrevocably waives, to the
fullest extent it may effectively do so, the defense of an inconvenient forum to
the maintenance of any Related Proceeding and any objection to any Related
Proceeding whether on the grounds of venue, residence or domicile. A final
judgment in any such suit, action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or any other manner
provided by law.
64
<PAGE>
The Company hereby irrevocably appoints the CT Corporation System (the
"Process Agent"), with an office on the date hereof at 1633 Broadway, New York,
New York, United States of America, as its agent to receive on behalf of the
Company and its property service of copies of the summons and complaint and any
other process that may be served in any Related Proceeding in such New York
State or federal court sitting in The City of New York. Service may be made by
U.S. registered mail or other comparable means or by delivering by hand a copy
of such process to the Company in care of the Process Agent at the address
specified above for the Process Agent (such service to be effective upon the
mailing or delivery by hand of such process to the office of the Process Agent),
and the Company hereby irrevocably authorizes and directs the Process Agent to
accept on its behalf such service. Failure of the Process Agent to give notice
to the Company, or failure of the Company to receive notice of such service of
process, shall not affect in any way the validity of such service on the Process
Agent or the Company. As an alternative method of service, the Company also
irrevocably consents to the service of any and all process in any Related
Proceeding in a New York State or federal court sitting in The City of New York
by sending by U.S. registered mail or other comparable means copies of such
process to the Company at its address under Section 15.10 (such service to be
effective seven days after mailing thereof). The Company covenants and agrees
that it shall take any and all reasonable action, including the execution and
filing of any and all documents, that may be necessary to continue the
designation of the Process Agent in full force and effect, and to cause the
Process Agent to continue to act as such. Nothing herein shall affect the right
of any party to serve legal process in any other manner permitted by law or
affect the right of any party to bring any suit, action or proceeding against
any other party or its property in the courts of other jurisdictions.
To the extent that the Company has or hereafter may acquire any
immunity from any legal action, suit or proceeding, from jurisdiction of any
court or from setoff or any legal process (whether through service or notice,
attachment in aid of execution or otherwise) with respect to itself or any of
its property, the Company hereby irrevocably waives and agrees not to plead or
claim such immunity in respect of its obligations under this Agreement and the
other Closing Documents.
Section 15.14 Payment; Transfer Agent and Registrar. (a) The Company
shall pay all cash amounts payable with respect to the Shares held by each
holder of shares by wire transfer of immediately available U.S. dollar funds to
the account of such holder in any bank in the United States as may be designated
in writing by such
65
<PAGE>
holder, or in such other manner or to such other address as may be designated in
writing by such holder.
(b) The Company shall provide from and after the Closing Date for a
transfer agent and registrar (collectively, the "Agent") for the Shares issued
hereunder. The Agent shall keep a register for the registration and transfer of
the Shares.
(c) Upon surrender of any Share certificate at the office of the
Agent, the Company, at the request of the holder thereof, will deliver at the
Company's expense, new Share certificates in exchange therefor, in denominations
as requested by such holder.
Section 15.15 Expenses. The Company shall pay the reasonable fees and
expenses of Cleary, Gottlieb, Steen & Hamilton, counsel for the Investors.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
CGA GROUP, LTD.
By: /s/ RICHARD A. PRICE
---------------------------------------
Name: Richard A. Price
Title: President & CEO
MUTUAL DISCOVERY FUND
BY: FRANKLIN MUTUAL ADVISERS, INC.
By: /s/ E.N. COHERNOUR
--------------------------------------
Name: E.N. Cohernour
Title: V.P., General Counsel &
Asst. Secretary
MUTUAL QUALIFIED FUND
BY: FRANKLIN MUTUAL ADVISERS, INC.
By: /s/ E.N. COHERNOUR
--------------------------------------
Name: E.N. Cohernour
Title: V.P., General Counsel &
Asst. Secretary
OPPENHEIMER CHAMPION INCOME FUND
By: /s/ RALPH STELLMACHER
---------------------------------------
Name: Ralph Stellmacher
Title: Vice President
OPPENHEIMER HIGH YIELD FUND
By: /s/ THOMAS REEDY
--------------------------------------
Name: Thomas Reedy
Title: Vice President
OPPENHEIMER MULTI-SECTOR INCOME TRUST
By: /s/ THOMAS REEDY
--------------------------------------
Name: Thomas Reedy
Title: Vice President
OPPENHEIMER STRATEGIC INCOME FUND
By: /s/ DAVID P. NEGRI
--------------------------------------
Name: David P. Negri
Title: Vice President
OPPENHEIMER VARIABLE ACCOUNT FUNDS
FOR THE ACCOUNT OF OPPENHEIMER HIGH
INCOME FUND
By: /s/ DAVID P. NEGRI
--------------------------------------
Name: David P. Negri
Title: Vice President
OPPENHEIMER VARIABLE ACCOUNT FUNDS
FOR THE ACCOUNT OF STRATEGIC BOND FUND
By: /s/ DAVID P. NEGRI
--------------------------------------
Name: David P. Negri
Title: Vice President
<PAGE>
THE PUTNAM FIDUCIARY TRUST COMPANY ON
BEHALF OF:
PUTNAM HIGH YIELD FIXED INCOME
TRUST (DBT)
PUTNAM HIGH YIELD MANAGED TRUST
By: /s/ PAUL M. O'NEIL
--------------------------------------
Name: Paul M. O'Neil
Title: Vice President
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
By: /s/ PAUL M. O'NEIL
--------------------------------------
Name: Paul M. O'Neil
Title: Vice President
ACE LIMITED
By: /s/ PETER MEAR
--------------------------------------
Name: Peter Mear
Title: E.V.P. & General Counsel
THIRD AVENUE TRUST, on behalf of the
THIRD AVENUE VALUE FUND SERIES
By: /s/ DAVID M. BARSE
--------------------------------------
Name: David M. Barse
Title: Executive Vice President
LENNAR FINANCIAL SERVICES, INC.
By: /s/ NANCY KAMINSKY
--------------------------------------
Name: Nancy Kaminsky
Title: Executive Vice President and
Chief Financial Officer
PACIFIC MUTUAL LIFE INSURANCE COMPANY
By: /s/ RONN C. CORNELIUS
--------------------------------------
Name: Ronn C. Cornelius
Title: Assistant Vice Presdient
PM GROUP LIFE INSURANCE COMPANY
By: /s/ LARRY J. CARD
--------------------------------------
Name: Larry J. Card
Title: Vice President
CAPITAL REINSURANCE COMPANY
By: /s/ WILLIAM T. TOMLJANOVIC
--------------------------------------
Name: William T. Tomljanovic
Title: Vice President & Treasurer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ ERIC A. ANDERSON
--------------------------------------
Name: Eric A. Anderson
Title: Managing Director
CGA GROUP, LTD.
COMMON STOCK
WARRANT ACQUISITION AGREEMENT
Dated as of June 9, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I ISSUANCE OF THE WARRANTS............................. 2
ARTICLE II REPRESENTATIONS, WARRANTIES AND
COVENANTS OF THE COMPANY............................ 2
Section 2.1 Due Organization, Valid
Existence and Authority of
the Company and the Company's
Subsidiaries............................... 2
Section 2.2 Authorization and Validity of
Agreements................................. 3
Section 2.3 Capitalization............................. 3
Section 2.4 Shares Issued Pursuant to
Warrants .................................. 4
Section 2.5 No Conflict with Other
Instruments; No Approvals
Required Except as Have
Been Obtained.............................. 4
Section 2.6 Regulatory Filings; Compliance
with Law................................... 5
Section 2.7 Stamp Duties or Taxes...................... 6
Section 2.8 Private Offering........................... 6
Section 2.9 The Private Placement
Memorandum................................. 7
Section 2.10 Not an "Investment Company"................ 7
Section 2.11 Business Newly Formed...................... 8
Section 2.12 Operating Company.......................... 8
Section 2.13 No U.S. Trade or Business and
Not a Controlled Foreign Corporation....... 8
Section 2.14 Related Person Insurance
Income..................................... 9
Section 2.15 Operating Guidelines........................ 9
Section 2.16 Passive Foreign Investment
Company.................................... 10
Section 2.17 Use of Proceeds of the
Offering................................... 10
Section 2.18 Shareholders............................... 10
Section 2.19 St. George Representations................. 11
Section 2.20 Bermuda Withholding Tax.................... 11
Section 2.21 No Events of Non-Compliance................ 11
Section 2.22 Registration Rights........................ 11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
THE INVESTORS....................................... 11
Section 3.1 Due Organization, Good Standing
and Authority of the Investor.............. 11
Section 3.2 Authorization and Validity of
Agreements................................. 11
<PAGE>
Page
----
Section 3.3 Investment Intent.......................... 12
Section 3.4 No Conflict with Other
Instruments; No Approvals
Required Except as Have Been
Obtained................................... 12
Section 3.5 Investor Awareness and
Suitability................................ 13
Section 3.6 Accredited Investor Status................. 15
Section 3.7 Warrant Stock Ownership
Limitations................................ 15
ARTICLE IV RESTRICTIONS ON TRANSFER............................. 16
Section 4.1 Restrictive Legends on
Certificates Representing
Warrants................................... 16
Section 4.2 Restrictive Legends on Certificates
Representing Shares Issuable Upon
Exercise of Warrants....................... 16
Section 4.3 Notice of Proposed Transfers............... 17
ARTICLE V MISCELLANEOUS........................................ 19
Section 5.1 Survival of Representations,
Warranties and Covenants................... 19
Section 5.2 Entire Agreement........................... 19
Section 5.3 Severability............................... 19
Section 5.4 Assignability.............................. 19
Section 5.5 Amendment; Waiver.......................... 20
Section 5.6 Headings................................... 20
Section 5.7 Counterparts............................... 20
Section 5.8 Applicable Law............................. 20
Section 5.9 Notices and Payments....................... 20
Section 5.10 Indemnification............................ 21
Section 5.11 Submission to Jurisdiction................. 22
Section 5.12 Transfer Agent and Registrar............... 23
<PAGE>
CGA GROUP, LTD.
COMMON STOCK
WARRANT ACQUISITION AGREEMENT
THIS WARRANT ACQUISITION AGREEMENT, dated as of June 9, 1997 (this
"Agreement"), among CGA Group, Ltd., a company with limited liability organized
under the laws of Bermuda (together with its successors and permitted assigns,
the "Company"), and each of the Investors identified in Schedule 1 hereto
(collectively, together with their successors and permitted assigns, the
"Investors"). The date of this Agreement may sometimes be referred to herein as
the "Closing Date." Capitalized terms used, but not defined, herein shall have
the meanings set forth in the Series A Subscription Agreement.
RECITALS
WHEREAS, the Company has offered (the "Offering") the opportunity to
purchase Series A Cumulative Voting Preference Shares of the Company ("Series A
Preferred Stock") to the Investors pursuant to a Confidential Private Placement
Memorandum, dated January 24, 1997 (together with any amendments, modifications
or supplements thereto as may be made from time to time prior to the Closing
Date (as defined below), the "Private Placement Memorandum");
WHEREAS, the Investors have, pursuant to the terms of the Series A
Preferred Stock Subscription Agreement, dated as of June 9, 1997 (the "Series A
Subscription Agreement"), among the Investors and the Company, agreed to
purchase, severally and jointly, such Series A Preferred Stock on the Closing
Date upon completion of the transactions contemplated by such Series A
Subscription Agreement (the "Closing");
WHEREAS, in consideration of the purchase of Class Series A
Preferred Stock, the Company has agreed to issue warrants to purchase shares of
Common Shares of the Company ("Common Stock" or "Warrant Shares") to the
Investors;
NOW THEREFORE, in consideration of the premises and mutual
agreements herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
<PAGE>
ARTICLE I
ISSUANCE OF THE WARRANTS
(i) On the basis of the representations, warranties and
covenants herein set forth, the Company hereby issues and delivers, to
each of the Investors, and each of the Investors hereby accepts delivery
from the Company, the number of Warrants, in the form of Annex I hereto
(the "Warrants"), set forth opposite each such Investor's name on Schedule
1 hereto. Each Investor Warrant shall evidence the right to purchase from
the Company a total of .1038462 shares of Common Stock.
(ii) Delivery of the Warrants is hereby acknowledged to be
made on the Closing Date by the Company delivering to each of the
Investors, or representatives thereof, a warrant certificate evidencing
the number of Warrants acquired by each of the Investors, with such
delivery taking place at the offices of Conyers Dill & Pearman in
Hamilton, Bermuda at 10:00 a.m., Bermuda time, on the Closing Date.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company represents, warrants and covenants to each of the
Investors as of the Closing Date as follows:
Section 2.1 Due Organization, Valid Existence and Authority of the
Company and the Company's Subsidiaries. (a) The Company has been duly
incorporated and is validly existing under the laws of Bermuda. Upon completion
of the Closing, the Company will have full right, power and authority to carry
on its business as conducted and as proposed to be conducted as described in the
Private Placement Memorandum. The Company has full right, power and authority to
enter into this Agreement and the Other Closing Documents (as defined in the
Series A Subscription Agreement) to which the Company is a party, and perform
its obligations hereunder and thereunder. The Memorandum of Association, in the
form attached as Annex I to the Series A Subscription Agreement is a true and
complete copy of the Memorandum of Association of the Company as in effect at
the date of this Agreement, and no amendment to such Memorandum of Association
has been proposed or adopted. At the Closing, the Bye-laws of the Company will
be in the form attached as Annex II to the Series A Subscription Agreement. Upon
completion of the Closing, the Company will not own any interest in or control,
directly or indirectly, any other corporations, partnerships or other entities,
other than the
2
<PAGE>
Initial Subsidiaries (as defined in the Series A Subscription Agreement).
(b) Each of the Initial Subsidiaries has been duly incorporated and
is validly existing under the laws of its jurisdiction of incorporation. Upon
completion of the Closing and the closings under the Investment Units
Subscription Agreement (as defined in the Series A Subscription Agreement), the
Founders' Common Stock Subscription Agreement, (as defined in the Series A
Subscription Agreement) and the use of proceeds therefrom as described in the
Private Placement Memorandum, each Initial Subsidiary (as defined in the Series
A Subscription Agreement) will have the full right, power and authority to carry
on its business as then conducted and as proposed to be conducted as described
in the Private Placement Memorandum.
Section 2.2 Authorization and Validity of Agreements. This Agreement
has been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity) (together, the "Creditor and Enforceability
Exceptions"). Each of the Other Closing Documents to which the Company is a
party has been duly authorized by the Company, and, when executed and delivered
by the Company at the Closing, will constitute a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms,
subject to the Creditor and Enforceability Exceptions.
Section 2.3 Capitalization. The issuance of the Warrants has been,
and upon exercise the Warrant Shares shall be, duly authorized by the Company
and the Warrants are, and upon exercise the Warrant Shares shall be, validly
issued, fully paid and non-assessable (meaning that no further sums will be
payable in respect of the holding of the Warrants). Except as contemplated by
its Memorandum of Association, Bye-laws, the Shareholders Agreement to be dated
on or prior to the Closing Date among the Company and the other parties named
therein (the "Shareholders Agreement"), the Sponsoring Investors and Founders
Stock Warrant Plan and the Employee Stock Warrant Plan each in substantially the
form as attached to Annex X to the Series A Subscription Agreement, and this
Agreement, each of the Company and its Initial Subsidiaries does not, and on the
3
<PAGE>
Closing Date will not, have any outstanding or authorized options, warrants,
calls, rights, commitments or any other agreements of any character obligating
it to issue any of its shares or any securities convertible into or exchangeable
for, or evidencing the right to purchase or obtain, any of its shares or any
agreements or understandings with respect to the voting, sale or transfer of any
of its shares or any securities convertible into or exchangeable for or
evidencing the right to purchase or obtain any of its shares. Prior to the
Closing, the Company shall reserve the Warrant Shares and the Warrant Shares
shall conform in all material respects to the description of such shares
provided in the Private Placement Memorandum.
Section 2.4 Shares Issued Pursuant to Warrants. The Warrant Shares
will, when issued by the Company and paid for pursuant to this Agreement, be
duly authorized by the Company and will be validly issued, fully paid and
non-assessable (meaning that no further sums will be payable in respect of the
holding the Warrant Shares).
Section 2.5 No Conflict with Other Instruments; No Approvals
Required Except as Have Been Obtained. (i) The execution and delivery of this
Agreement and the Other Closing Documents to which the Company is a party by the
Company and compliance by the Company with the terms and conditions hereof and
thereof, will not violate, with or without the giving of notice or the lapse of
time, or both, or require any registration, qualification, approval or filing
under, any provision of law, statute, ordinance or regulation applicable to the
Company or any affiliate thereof, and will not conflict with, or require any
consent or approval under, or result in the breach or termination of any
provision of, or constitute a default under, or result in the acceleration of
the performance of the obligations of the Company or any affiliate thereof
under, or result in the creation of any claim, lien, charge or encumbrance upon
any of the properties, assets or businesses of the Company or any affiliate
thereof pursuant to the Memorandum of Association or Bye-laws of the Company or
the organizational documents of such affiliate, as the case may be, or any
order, judgment, decree, law, ordinance or regulation applicable to the Company
or such affiliate, as the case may be, or any contract, instrument, agreement or
restriction to which the Company or such affiliate, as the case may be, is a
party or by which the Company or such affiliate, as the case may be, or any of
its assets or properties is bound. Except where the Company is obliged to obtain
Bermuda governmental approvals that have been obtained, neither the Company or
any affiliate thereof nor any of the Company's or any of its affiliates',
respectively, assets or properties is subject to any charter, bye-law, contract
or other instrument or agreement, order, judgment, decree, law,
4
<PAGE>
statute, ordinance or regulation or any other restriction of any kind or
character that would prevent the Company from entering into this Agreement or
the Other Closing Documents to which the Company is a party or from consummating
the transactions contemplated hereby or thereby in accordance with the terms
hereof or thereof.
(ii) The execution and delivery of the Other Closing Documents to
which each of the Initial Subsidiaries is a party by such Initial Subsidiary and
compliance by such Initial Subsidiary with the terms and conditions thereof,
will not violate, with or without the giving of notice or the lapse of time, or
both, or require any registration, qualification, approval or filing under, any
provision of law, statute, ordinance or regulation applicable to such Initial
Subsidiary or any affiliate thereof, and will not conflict with, or require any
consent or approval under, or result in the breach or termination of any
provision of, or constitute a default under, or result in the acceleration of
the performance of the obligations of such Initial Subsidiary or any affiliate
thereof under, or result in the creation of any claim, lien, charge or
encumbrance upon any of the properties, assets or businesses of such Initial
Subsidiary or any affiliate thereof pursuant to the Memorandum of Association,
Articles of Incorporation or Bye-laws, as the case may be, of such Initial
Subsidiary or the organizational documents of such affiliate, as the case may
be, or any order, judgment, decree, law, ordinance or regulation applicable to
the Company or any contract, instrument, agreement or restriction to which such
Initial Subsidiary or such affiliate, as the case may be, is a party or by which
such Initial Subsidiary or any of its assets or properties is bound. Except
where such Initial Subsidiary is obliged to obtain Bermuda governmental
approvals that have been obtained, neither such Initial Subsidiary or any
affiliate thereof nor any of its assets or properties is subject to any charter,
bye-law, contract or other instrument or agreement, order, judgement, decree,
law, statute, ordinance, or regulation or any other restriction of any kind or
character that would prevent such Initial Subsidiary from entering into the
Other Closing Documents to which the Initial Subsidiary is a party or from
consummating the transactions contemplated thereby in accordance with the terms
thereof.
Section 2.6 Regulatory filings; Compliance with Law. Upon completion
of the Closing and the closings under the Series A Subscription Agreement, the
Investment Units Subscription Agreement, the Founders' Common Stock Subscription
Agreement, and the use of the proceeds therefrom as described in the Private
Placement Memorandum, CGA will be authorized on the Closing Date under Bermuda
law to conduct the business of selling insurance and reinsurance
5
<PAGE>
as contemplated by the Private Placement Memorandum and no further approvals of
the insurance regulatory or other authorities of Bermuda are required for the
conduct of such business. Upon completion of the Closing, and the closings under
the Series A Subscription Agreement, the Investment Units Subscription
Agreement, the Founders' Common Stock Subscription Agreement, and the use of
proceeds therefrom as described in the Private Placement Memorandum, CGAIM (as
defined in the Series A Subscription Agreement) will be authorized on the
Closing Date or immediately thereafter under the applicable United States
federal and state laws to conduct its respective business as contemplated by the
Private Placement Memorandum and no further approvals of regulatory or other
authorities are required for the conduct of such business. Upon completion of
the Closing and the closings under the Series A Subscription Agreement, the
Investment Units Subscription Agreement, the Founders' Common Stock Subscription
Agreement, and the use of proceeds therefrom as described in the Private
Placement Memorandum, the Company and the Initial Subsidiaries will be in
compliance with all applicable laws and regulations.
Section 2.7 Stamp Duties or Taxes. No Bermuda stamp, transfer or
similar duties or taxes are payable in respect of the issuance and delivery of
the Warrants, to the Investors pursuant to this Agreement provided that any such
Investor is not resident in Bermuda for exchange control purposes, and if any
such taxes arise in connection with the execution of this Agreement, the Other
Closing Documents or the consummation of any of the transactions contemplated
hereby or thereby, then the Company will pay such taxes.
Section 2.8 Private Offering
(a) The offer and sale and the issuance and delivery of the
Shares are intended to be exempt from the provisions of Section 5 of the United
States Securities Act of 1933, as amended (the "Securities Act"), and from the
registration provisions of the applicable state securities laws. Neither the
Company nor anyone acting on its behalf has taken, or omitted to take, any
action, with respect to the Shares or any securities similar to the Shares, or
otherwise, that would bring the sale and issuance of the Shares within the
provisions of Section 5 of the Securities Act or that would violate any blue sky
laws of a state of the United States or securities law of any foreign
jurisdiction (including Bermuda).
(b) In the case of each offer or sale of the Shares, no form
of general solicitation or general advertising was used by the Company or any
person authorized to act on behalf of the Company, including, without
limitation, any advertisement, article, notice or other
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communication published in any newspaper, magazine or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising.
(c) Neither the Company nor anyone acting on its behalf has
taken, or omitted to take, any action, with respect to any other shares of the
Company issued and sold by the Company that would bring the issuance and sale of
such shares within the provisions of Section 5 of the Securities Act or that
would violate any blue sky laws of a state of the United States or securities
law of a foreign jurisdiction (including Bermuda).
(d) Except for the issuance of shares (as defined in the
Series A Subscription Agreement) by the Initial Subsidiaries (other than CGA (as
defined in the Series A Subscription Agreement)) to the Company or another
Initial Subsidiary, as the case may be, neither the Company nor any Initial
Subsidiary has issued or sold, or agreed to issue or sell, any shares in the
Company or any Initial Subsidiary to any persons other than to the Investors
pursuant hereto and to the other investors pursuant to the subscription
agreements contained in the Other Closing Documents.
Section 2.9 The Private Placement Memorandum. The Private Placement
Memorandum does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading. There
is no fact which the Company has not disclosed herein or in the Private
Placement Memorandum or any amendment or supplement thereto as of the date
thereof and at all times subsequent thereto up to the Closing Date that, so far
as the Company can foresee, is reasonably likely to have a material adverse
effect on the performance of obligations hereunder and under the Other Closing
Documents by the Company and its Initial Subsidiaries, considered as a whole, or
on the business, operations, financial condition, assets, liabilities or
prospects of the Company and its Subsidiaries taken as a whole.
Section 2.10 Not an "Investment Company". Each of the Company and
the Initial Subsidiaries is not, and when conducting business as contemplated by
the Private Placement Memorandum will not be, an "investment company" or an
entity "controlled" by an "investment company" as such terms are defined in the
United States Investment Company Act of 1940, as amended.
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Section 2.11 Business Newly Formed. Each of the Company and its
Initial Subsidiaries is newly formed, has neither conducted any business nor
incurred any liabilities (other than organizational expenses with respect to the
Company and the Initial Subsidiaries, expenses associated with establishing the
businesses of the Initial Subsidiaries and expenses in connection with the
offering and issuance of the securities of the Company and the Subsidiaries),
has entered into no material agreements and incurred no liens or encumbrances on
present or future assets or revenues and has no proceedings pending against, or
to the Company's knowledge, threatened against or affecting it before any court,
governmental authority, arbitration board or tribunal, in each of the foregoing
cases other than as disclosed in the Private Placement Memorandum or referred to
herein or in the Series A Subscription Agreement or in an attachment to the
Series A Subscription Agreement.
Section 2.12 Operating Company. At the time the Company issues any
Shares, the Company shall be an "operating company" as defined in United States
Department of Labor Regulation section 2510.3-101(c) issued under the United
States Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Company shall at all times thereafter conduct its activities so that it
will continue to qualify as such an "operating company." As a result, pursuant
to United States Department of Labor Regulation section 2510.3-101(a)(2)(i), at
no time shall the assets of the Company constitute the assets of any Investor or
Member of the Company for purposes of Title I of ERISA or section 4975 of the
United States Internal Revenue Code of 1986 (the "Code").
Section 2.13 No U.S. Trade or Business and Not a Controlled Foreign
Corporation. The Company shall use its best efforts not to take, and to cause
CGA not to take, any action which the Company has reason to believe could cause
it or CGA to be considered engaged in the conduct of a trade or business in the
United States (within the meaning of Code Section 864) or to become a controlled
foreign corporation (within the meaning of Code Section 957) ("CFC"); provided,
however, that this Section 2.13 shall not apply to any action which affects the
election of directors pursuant to Section 12 of the Bye-laws; provided, further,
that it is hereby understood that the Company shall not be considered to violate
this Section 2.13; in the event that (x) the board of directors of the Company
(the "Board") shall, in its sole discretion, request the advice of counsel with
respect to a proposed action and counsel determines that such action will more
likely than not cause the Company or CGA to be engaged in the conduct of a trade
or business in the United States or become a CFC and (y) such proposed action to
be taken by the Company receives the prior
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approval of 75% of the members of the Board then in office (for the sake of
clarity, the foregoing imposes no obligation on the Company or the Board to seek
the advice of counsel prior to taking any action unless the Company wishes to
take advantage of this second proviso to this Section 2.13); provided, further,
that it is hereby understood that this Section 2.13 does not alter any provision
in the Company's Bye-laws and all actions taken in connection herewith must
comply with such Bye-laws.
Section 2.14 Related Person Insurance Income. The Company shall use
its best efforts to cause CGA not to sell insurance or reinsurance to a U.S.
person which is a shareholder of the Company ("U.S. Shareholder") or a related
person (within the meaning of Section 953(c)(6) of the Code) to a U.S.
Shareholder ("Related Person") and which would therefore generate related person
insurance income (within the meaning of Section 953(c)(2) of the Code) ("RPII")
if the Company knows that (i) 20% or more of CGA's gross insurance income in any
taxable year will be RPII and (ii) persons which are directly or indirectly
insured or reinsured by CGA ("Insureds") or Related Persons to Insureds own 20
percent or more of the stock of CGA ("Excess RPII"); provided, however, that it
is hereby understood that the Company shall not be considered to violate this
Section 2.14(a) by virtue of such sale which the Company has reason to believe
will generate Excess RPII if the Company receives the prior approval of 100% of
the members of the Board then in office, provided, further, that it is hereby
understood that this Section 2.14(a) does not alter any provision in the
Company's Bye-laws and all actions taken in connection herewith must comply with
such Bye-laws.
(b) In the event that the Board shall have given prior authorization
(as provided in subsection (a) of this Section 2.14 for CGA to sell insurance or
reinsurance which the Company has reason to believe will generate Excess RPII
for any tax year, unless a U.S. statute, a final regulation of the U.S. Treasury
or a published ruling of the U.S. Internal Revenue Service issued after the
Closing Date provides or establishes that subpart F insurance income (as defined
in Code Section 953) does not constitute unrelated business taxable income (as
defined in Code Section 512), the Company shall so notify any U.S. Shareholder
which is subject pursuant to Code Section 511, to tax on its unrelated business
taxable income not later than June 30 of the tax year in which the Company
proposes that CGA generate Excess RPII.
Section 2.15 Operating Guidelines. Attached as Annex VII to the
Series A Subscription Agreement is a true, correct and complete copy of the
operating guidelines of the Company and the Initial Subsidiaries (the "Operating
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guidelines"), which were adopted by all necessary corporate action of the Board
of Directors of the Company (the "Board") at a duly called and convened meeting
of the Board, and the resolution(s) pursuant to which the Operating Guidelines
were adopted provides that the Operating Guidelines may only be amended or
revoked pursuant to a resolution adopted by a two-thirds vote of the Board at a
duly called and convened meeting of the Board. To the extent the Operating
Guidelines are followed by the Company and the Subsidiaries, (i) neither the
Company nor CGA will be considered to be engaged in the conduct of a trade or
business in the United States through a U.S. "permanent establishment" as
defined in Article 3 of the Convention between the Government of the United
States of America and the Government of the United Kingdom of Great Britain and
Northern Ireland (on behalf of the Government of Bermuda) relating to the
Taxation of Insurance Enterprises and Mutual Assistance in Tax Matters and (ii)
neither the Company nor any Initial Subsidiaries will be considered to be
transacting the business of insurance in any state of the United States without
appropriate licenses or approvals. The Company knows of no reason why it and the
Initial Subsidiaries cannot now and will not in the future be able to
continuously comply with the Operating Guidelines. The Company knows of no
reason why compliance with the Operating Guidelines would result in the
company's inability to meet the projections set forth in the Private Placement
Memorandum.
Section 2.16 Passive Foreign Investment Company. The Company shall
use its best efforts to operate its business in such manner that neither the
Company nor CGA will be considered a passive foreign investment company under
Section 1296 of the Code.
Section 2.17 Use of proceeds of the Offering. The Company shall use
the net proceeds of the subscription under the Series A Subscription Agreement
(after payment of placement agent fees and other fees and expenses incurred by
the Company in connection with the Offering, the offering of the Investment
Units and the Common Stock to other investors and the organization and
establishment of the Company and the Initial Subsidiaries, which fees and
expenses shall be substantially as described in Private Placement Memorandum) as
capital to engage in the financial guarantee insurance business as described in
the Private Placement Memorandum. On the Closing Date, CGA will be capitalized
with $125 million.
Section 2.18 Shareholders. Schedule 2 to this Agreement represents a
true and complete list of the shareholders of the Company upon completion of the
Closing and their respective shareholdings on the Closing Date.
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Section 2.19 St George Representations. The Company has no reason to
believe that the representations and warranties given by St. George Holdings,
Ltd. ("St. George") to the investors in St. George (the "St. George Investors")
pursuant to the St. George Subscription Agreement, dated as of or prior to the
Closing Date, among St. George and the St. George Investors, are not true and
complete as of the date made thereunder and as of the Closing Date.
Section 2.20 Bermuda Withholding Tax. The payment of dividends on or
the making of distributions or redemption payments to any holder of the Warrant
Shares will not be subject to any tax withholding requirement under current
Bermuda tax law.
Section 2.21 No Events of Non-Compliance. No event has occurred and
no condition exists which, upon the consummation of transactions under this
Agreement or any Other Closing Document would constitute an Event of
Non-Compliance (as defined in the Series A Preferred Subscription Agreement as
in effect on the date hereof) with or without notice or lapse of time or both.
Section 2.22 Registration Rights. Other than as provided in the
Series A Preferred Subscription Agreement and the Shareholders Agreement, the
Company has not agreed to register any of its shares under the Securities Act.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE INVESTORS
Each of the Investors, severally and not jointly, hereby represents
and warrants to the Company as of the Closing Date as follows:
Section 3.1 Due Organization, Good Standing and Authority of the
Investor. Such Investor is a corporation, partnership, limited liability
company, trust or other legal entity and is duly organized, validly existing and
in good standing under the laws of such Investor's jurisdiction of organization
and not resident in Bermuda for Bermuda foreign exchange control purposes.
Section 3.2 Authorization and Validity of Agreements. This agreement
has been duly authorized, executed and delivered by such Investor and, assuming
the due authorization, execution and delivery by the other parties hereto,
constitutes a valid and binding obligation of such Investor enforceable against
such Investor in
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accordance with its terms subject to the Creditor and Enforceability Exceptions.
Section 3.3 Investment Intent. Such Investor is acquiring the
Warrants for its own account as principal or for one or more separate accounts
maintained by it or for the account of one or more pension or trust funds of
which it is trustee, in each case, for investment purposes only, and not with a
view to, or for, the resale or other distribution thereof, in whole or in part,
other than pursuant to the Exchange Offer Registration Statement or the Shelf
Registration Statement (as defined in the Series A Subscription Agreement)
pursuant to the Series A Subscription Agreement; provided that, subject to the
terms hereof, the disposition of its or their property shall at all times be
within its or their control.
Section 3.4 No Conflict with Other Instruments; No Approvals
Required Except as Have Been Obtained. The execution and delivery of this
Agreement, by such Investor and the compliance by such Investor with the terms
and conditions hereof will not violate, with or without the giving of notice or
the lapse of time, or both, or require any registration, qualification, approval
or filing under, any provision of law, statute, ordinance or regulation
applicable to such Investor, and will not conflict with, or require any consent
or approval under, or result in the breach or termination of any provision of,
or constitute a default under, or result in the acceleration of the performance
of the obligations of such Investor under, or result in the creation of any
claim, lien, charge or encumbrance upon any of the properties, assets or
businesses of such Investor pursuant to the articles of incorporation or by-laws
of such Investor (if such Investor is a corporation) or equivalent
organizational documents (if such Investor is not a corporation) or any order,
judgment, decree, law, statute, ordinance or regulation applicable to such
Investor or any contract, instrument, agreement or restriction to which such
Investor is a party or by which such Investor or any of its assets or properties
is bound, other than any such (i) violation, (ii) failure to register, qualify,
obtain approval or file, (iii) conflict, (iv) breach, termination or default,
(v) acceleration, or (vi) creation of claim, lien, charge or encumbrance that
would not, individually or in the aggregate, have a material adverse effect on
such Investor's ability to consummate the transactions contemplated hereby.
Neither such Investor nor any of its assets or properties is subject to any
charter, by-law, contract or other instrument or agreement, order, judgment,
decree, law, statute, ordinance or regulation or any other restriction of any
kind or character that would prevent such Investor from entering into this
Agreement or from consummating the transactions contemplated hereby in
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accordance with the terms hereof other than that which would not, individually
or in the aggregate, have a material adverse effect on such Investor's ability
to consummate the transactions contemplated hereby in accordance with the terms
hereof. Notwithstanding anything in this Agreement to the contrary, no
representation or warranty is made by any Investor regarding compliance with
ERISA or section 4975 of the Code, or the effect under ERISA or section 4975 of
the Code of the execution and delivery of this Agreement, and the compliance by
such Investor with the terms and conditions hereof.
Section 3.Investor Awareness and Suitability. Such Investor
acknowledges, agrees and is aware that:
(i) An investment in the Warrants involves a high degree of
risk, including, without limitation, the risks identified under the
caption "Risk Factors" in the Private Placement Memorandum, and such
Investor may lose the entire amount of its investment and such Investor
has the knowledge and experience in financial affairs that it is capable
of evaluating the merits and risks of purchasing the Warrants;
(ii) The Company has only recently been organized and has no
financial or operating history;
(iii) The Private Placement Memorandum contains a summary of
certain United States and Bermuda tax consequences under current laws
relating to (i) the United States federal income taxation of the Company
and of U.S. Persons (as defined below) and non-U.S. Persons that own
Warrants of the Company and (ii) the Bermuda taxation of persons or
entities not resident in Bermuda for exchange control purposes that own
Warrants of the Company. Positions of, and developments in rulings of, the
United States Internal Revenue Service, court decisions or legislative or
administrative actions may have an adverse effect on one or more of the
tax benefits sought by the Company. Moreover, the Company retains the
right to alter the conduct of its affairs in such a manner as to subject
its business to United States federal and/or state taxation. The Private
Placement Memorandum does not address the Bermuda taxation of Investors
that are resident in Bermuda for exchange control purposes or the taxation
of Investors by any jurisdiction other than the United States or Bermuda,
which tax consequences may be significantly different from the tax
consequences discussed in the Private Placement Memorandum. (For purposes
of this Section 3.5, "U.S. Person" means an individual who is a citizen or
resident of the United States, a corporation or partnership created or
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organized under the laws of the United States or any state thereof, an
estate, the income of which, from non-U.S. sources and not effectively
connected with the conduct of a trade or business in the United States, is
includable in gross income for United States federal income tax purposes,
or a trust, if (i) a court within the United States may exercise primary
supervision of the trust, and (ii) one or more United States fiduciaries
have the authority to control all substantial decisions of the trust);
(iv) No Bermuda or United States federal or state regulatory
authority or any foreign agency has passed upon the accuracy, adequacy,
validity or completeness of the Private Placement Memorandum or this
Agreement or made any finding or determination as to the fairness of an
investment in the Warrants;
(v) The Warrants are illiquid, and such Investor must bear
the financial risk of investment in the Warrants for an indefinite period
of time and such Investor represents and warrants that such Investor has
the financial ability to bear the financial risk of its investment and,
except in the case of such Investor's listed on Schedule 4 attached
hereto, such Investor's investment does not exceed ten percent (10%) of
such Investor's net worth;
(vi) The Bye-laws and this Agreement contain substantial
restrictions on the transferability of the Warrants;
(vii) There is no existing public or other market for the
Warrants, and it is not expected that any such market will develop. There
can be no assurance that such Investor will be able to sell or dispose of
such Investor's Warrants. Without limiting the generality of the
foregoing, in order not to jeopardize the Offering's exempt status under
the Securities Act or under the securities laws of any other jurisdiction,
the transferee of such Warrants may, among other things, be required to
fulfill the investor suitability requirements thereunder;
(viii) The Warrants have not been registered under the
Securities Act or under the securities laws of any other jurisdiction,
including the states of the United States and, except as otherwise
provided with respect to the Exchange Offer Registration Statement or the
Shelf Registration Statement as set forth herein, the Company is under no
obligation to, and currently does not intend to, register or qualify the
Warrants for resale by such Investor or assist such Investor in
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complying with any exemption under such securities laws or the securities
laws of any such jurisdiction or any other jurisdiction. An offer or sale
of Warrants by such Investor in the absence of registration under such
securities laws will require the availability of an exemption thereunder.
A restrictive legend in substantially the form set forth either Section
4.1 or Section 4.2 respectively, shall be placed on the certificates
representing the Warrants and a notation shall be made in the appropriate
records of the Company indicating that the securities underlying the
Warrants are subject to restrictions on transfer;
(ix) Such Investor shall hold the Warrants subject to this
Agreement and the Bye-laws of the Company from time to time in effect and
shall have voting rights with respect to the Warrants as specified in the
Bye-laws of the Company from time to time in effect; and
(x) It is intended that no person or entity may acquire or
own, directly, indirectly or by attribution (within the meaning of Section
958 of the Code) 10% or more of the total combined voting power of the
Common Stock, the Series A Preferred Stock and the Series B Preferred
Stock (as defined below) as such voting power is described in the
Bye-laws.
Section 3.6 Accredited Investor Status. Such Investor hereby
represents and warrants to the Company that it qualifies as an "accredited
investor" within the meaning of Rule 501(a)(1),(2),(3),(7) or (8) of Regulation
D under the Securities Act.
Section 3.7 Warrant Stock Ownership Limitations. To such Investor's
knowledge, such Investor's acquisition on the Closing Date of Warrants pursuant
to this Agreement will not cause any person or entity to own on the Closing Date
directly, indirectly or by attribution (within the meaning of Section 958 of the
Code) 10% or more of the total combined voting power of the Common Stock of the
Company , the Series A Preferred Stock and the Series B Cumulative Voting
Preference Shares of the Company ("Series B Preferred Stock") as such voting
power is described in the Bye-laws or to be treated by virtue of its ownership
of stock in the Company as indirectly or constructively owning on the Closing
Date 10% or more of the voting power of all classes of capital stock of CGA
entitled to vote. Such Investor may rely on the list of anticipated shareholders
of the Company and their respective anticipated shareholdings set forth in
Schedule 2 hereto for purposes of making this representation and warranty.
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ARTICLE IV
RESTRICTIONS ON TRANSFER
The Warrant, and the shares issuable upon exercise of the Warrants,
shall not be transferable except upon the conditions specified in this Article
IV, which are intended to insure compliance with the provisions of the
Securities Act, applicable securities laws of other jurisdictions and Bermuda
law and the Company's Bye-laws.
Section 4.1 Restrictive Legends on Certificates . In addition to any
other legend required by the Company's Bye-laws, or applicable law, each
certificate representing the Warrants, shall (unless otherwise permitted by the
provisions of this Article IV) be stamped or otherwise imprinted with a legend
in substantially the following form:
"ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE
RIGHTS REPRESENTED HEREBY IS RESTRICTED BY, AND THE RIGHTS OF THE HOLDER
HEREOF ARE SUBJECT TO, THE TERMS AND CONDITIONS CONTAINED IN THE CGA
GROUP, LTD. (THE "COMPANY") COMMON STOCK WARRANT ACQUISITION AGREEMENT,
WHICH IS AVAILABLE FOR EXAMINATION BY HOLDERS OF THESE SHARES AT THE
REGISTERED OFFICE OF THE COMPANY. IN ADDITION TO THE FOREGOING
RESTRICTIONS, THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES
ACT") OR UNDER THE SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE
TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT
IS IN EFFECT UNDER THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAWS
WITH RESPECT HERETO OR THERETO OR A WRITTEN OPINION OF COUNSEL ACCEPTABLE
TO THE COMPANY IS PROVIDED TO THE COMPANY TO THE EFFECT THAT NO
REGISTRATIONS ARE REQUIRED UNDER SUCH SECURITIES LAWS. THE PRIOR APPROVAL
OF THE BERMUDA MONETARY AUTHORITY IS NOT REQUIRED FOR ANY SALE,
ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THIS WARRANT AND THE
SHARES ISSUABLE HEREUNDER PROVIDED THAT ANY SUCH SALE, ASSIGNMENT,
TRANSFER, PLEDGE OR OTHER DISPOSITION IS BETWEEN PERSONS WHO ARE
DESIGNATED AS NON-RESIDENTS OF BERMUDA FOR THE PURPOSES OF THE EXCHANGE
CONTROL ACT, 1972."
Section 4.2 Restrictive Legends on Certificates Representing Shares
Issuable Upon Exercise of Warrants. In addition to any other legend required by
the Company's documents, or applicable law, each certificate representing
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the shares issuable upon exercise of the Warrants, shall (unless otherwise
permitted by the provisions of this Article IV) be stamped or otherwise
imprinted with a legend in substantially the following form:
"ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE
SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY, THE TERMS AND
CONDITIONS CONTAINED IN THE BYE-LAWS OF CGA GROUP, LTD. (THE "COMPANY"),
THE SHAREHOLDERS AGREEMENT AND THE COMMON STOCK WARRANT ACQUISITION
AGREEMENT, WHICH ARE AVAILABLE FOR EXAMINATION BY HOLDERS OF THESE SHARES
AT THE REGISTERED OFFICE OF THE COMPANY. IN ADDITION TO THE FOREGOING
RESTRICTIONS, THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE TRANSFERRED, SOLD OR
OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT IS IN EFFECT UNDER
THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH
SHARES OR A WRITTEN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY IS
PROVIDED TO THE COMPANY TO THE EFFECT THAT NO REGISTRATIONS ARE REQUIRED
UNDER SUCH SECURITIES LAWS. THE PRIOR APPROVAL OF THE BERMUDA MONETARY
AUTHORITY IS NOT REQUIRED FOR ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR
OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
PROVIDED THAT ANY SUCH SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER
DISPOSITION IS BETWEEN PERSONS WHO ARE DESIGNATED AS NON-RESIDENTS OF
BERMUDA FOR THE PURPOSES OF THE EXCHANGE CONTROL ACT, 1972."
Section 4.3 Notice of Proposed Transfers. (a) The holder of any
securities constituting Warrants, or the shares issuable upon the exercise of
the Warrants, bearing either the entire restrictive legend set forth in Section
4.1 or Section 4.2, respectively ("Restricted Shares"), by acceptance thereof,
agrees that, unless a registration statement is in effect under the Securities
Act and under applicable securities laws with respect to such Restricted Shares,
prior to any transfer or attempted transfer of such Restricted Shares, such
holder will give the Company (i) unless the transferee is an Affiliate (as
defined in the Shareholders Agreement) of the transferor written notice
describing the proposed transfer of any Restricted Shares in reasonable detail
only to the extent necessary to evaluate whether such transfer is in compliance
with applicable securities laws, the Shareholders Agreement (with respect to the
Warrant Shares, but not the Warrants) and the Bye-laws sections 61 through 63,
(ii) unless the
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transferee is an Affiliate (as defined in the Shareholders Agreement) of the
transferor, such other information about the proposed transfer of such
Restricted Shares or the proposed transferee of such Restricted Shares as the
Company may reasonably request only to the extent necessary to evaluate whether
such transfer is in compliance with applicable securities laws, the Shareholders
Agreement (with respect to the Warrant Shares, but not the Warrants) and the
Bye-laws sections 61 through 63, and (iii) an opinion of counsel (both counsel
and opinion reasonably satisfactory to the Company (it being understood that
in-house counsel for such holder shall be considered satisfactory to the
Company)) to the effect that the proposed transfer of such Restricted Shares may
be effected without registration of such Restricted Shares under the Securities
Act and under other applicable securities laws. The Company hereby acknowledges
that no prior approval of the Bermuda Monetary Authority is necessary for any
transfer of Restricted Shares between persons who are designated as
non-residents of Bermuda for the purposes of the Bermuda Exchange Control Act,
1972.
(b) If the holder of the Restricted Shares delivers to the Company
an opinion of counsel that subsequent transfers of such Restricted Shares will
not require registration or qualification under the Securities Act or under
other applicable securities laws, the Company will, or will cause the transfer
agent, if any, for such Warrants or shares, as the case may be, promptly after
such contemplated transfer to deliver new certificates for such Restricted
Shares that do not bear that section of the restrictive legend set forth in
Section 5.1 above imposed by the Securities Act and under other applicable
securities laws of any other jurisdictions. If the foregoing conditions
entitling the holder to effect a proposed transfer of such Restricted Shares
without registration under the Securities Act and under other applicable
securities laws have not been satisfied, the holder shall not transfer the
Restricted Shares, and the Company will cause the transfer agent not to transfer
such Restricted Shares on its books or issue any certificates representing such
Restricted Shares. Any purported transfer not in accordance with the terms
hereof shall be void.
(c) The restrictions imposed by this Agreement with respect to the
Securities Act and under other applicable securities laws of any other
jurisdictions upon the transferability of any particular Restricted Shares shall
cease and terminate when such Restricted Shares have been sold pursuant to an
effective registration statement under the Securities Act and under other
applicable securities laws or transferred pursuant to Rule 144 promulgated under
the Securities Act. The holder of any
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Restricted Shares as to which such restrictions shall have terminated shall be
entitled to receive from the Company, without expense, a new certificate
representing Warrants or shares, as the case may be, that does not bear the
restrictive legend set forth above imposed by the Securities Act and under other
applicable securities laws of any other jurisdictions but shall retain the
restrictive legends set forth above imposed by the requirements of the Bye-laws
and the Shareholders Agreement (with respect to the Warrant Shares but not the
Warrants).
(d) As used in this Agreement, the term "transfer" encompasses any
sale, transfer, pledge or other disposition of any Shares referred to herein.
ARTICLE V
MISCELLANEOUS
Section 5.1 Survival of Representations, Warranties and Covenants.
The representations, warranties and covenants of the parties contained in this
Agreement and in any document delivered or to be delivered pursuant to this
Agreement and in connection with the Closing hereunder shall survive the
Closing. The parties have made no representations or warranties other than those
that are expressly set forth in this Agreement, any document delivered in
connection herewith and the Other Closing Documents.
Section 5.2 Entire Agreement. This Agreement (including the
Schedules, Exhibits and Annexes hereto) together with the Other Closing
Documents to which the parties hereto are parties, constitutes the entire
agreement among the parties hereto and supersede all prior agreements and
understandings, oral and written, among the parties hereto with respect to the
subject matter hereof.
Section 5.3 Severability. Any provision of this Agreement that is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or lack of authorization without invalidating the remaining
provisions hereof or affecting the validity, unenforceability or legality of
such provision in any other jurisdiction.
Section 5.4 assignability. Except in connection with the transfer of
Warrants or Warrant Shares, as the case may be, as contemplated by this
Agreement, and, in the case of Warrant Shares, by the Company's Bye-laws and the
Shareholders Agreement, this Agreement and the rights hereunder shall not be
assignable by any Investor without
19
<PAGE>
the prior written consent of the Company. The Company may not assign its
obligations hereunder without the consent of the holders of the Warrants and the
Warrant Shares.
Section 5.5 Amendment; Waiver. No provision of this Agreement may be
amended, waived or otherwise modified except by an instrument in writing
executed by the Company and the holders of ninety percent (90%) of the Warrant
Shares and the Warrants relating to the unexercised Warrants.
Section 5.6 Headings. The Articles and Section headings contained in
this Agreement are for convenience only and shall not affect the meaning or
interpretation of this Agreement.
Section 5.7 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
Section 5.8 Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of New York without giving effect to the
principles of conflicts of laws thereof.
Section 5.9 Notices and Payments. (a) All notices, requests, demands
and other communications hereunder shall be in writing and, except to the extent
otherwise provided in this Agreement, shall be deemed to have been duly given if
delivered by same day or next day courier or mailed, registered mail, return
receipt requested, or transmitted by telegram, telex or facsimile (i) if to an
Investor, at such Investor's address appearing on Schedule 1 hereto or at any
other address such Investor may have provided in writing to the Company and (ii)
if to the Company, at Clarendon House, Church Street, Hamilton HM 11, Bermuda,
Attention: Secretary, or such other address as the Company may have furnished to
the Investors in writing. A notice hereunder shall be deemed to have been given
on the day such notice is sent or transmitted; provided, however, that if such
notice is sent by next-day courier it shall be deemed to have been given the day
following sending and, if by registered mail, five days following sending.
(b) Unless otherwise provided in this Agreement, payments hereunder
shall be made by wire transfer of immediately available funds.
20
<PAGE>
Section 5.10 Indemnification.
(a) The Company shall defend, hold harmless and indemnify each
Investor and its affiliates from and against all damages, losses, costs and
expenses (including reasonable legal expenses) to which any of such Persons
becomes subject as a result of any inaccuracy in any representation or warranty
of the Company contained in this Agreement or the breach of any covenant or
agreement of the Company contained in this Agreement or the Company's Bye-laws.
(b) In the event a party entitled to indemnification under this
Agreement (an "Indemnified Party") becomes aware of a claim, liability, expense
or other event with respect to which such party is entitled to indemnification
(an "Indemnification Event"), such Indemnified Party shall promptly give notice
of such Indemnification Event to the Company. The failure by any Indemnified
Party to give such notice to the Company within a reasonable period of time
shall relieve the Company of its obligations under this Section 5.10, if and to
the extent that it has been prejudiced by a lack of timely and adequate notice.
The Company shall have the right to defend, contest, settle or otherwise resolve
any Indemnification Event involving a third-party claim (a "Third-Party
Indemnification Event") as long as the Indemnification Event may not possibly
give rise to a non-monetary liability, including, without limitation,
injunctions and criminal liability; provided, however, that the Company shall
not settle or compromise any Third-Party Indemnification Event without the
Indemnified Party's prior written consent thereto, unless the terms of such
settlement or compromise provide for an unconditional release of the Indemnified
Parties. Notwithstanding the foregoing, any Indemnified Party shall have the
right to employ separate counsel (including local counsel), and the Company
shall bear the reasonable costs, fees and expenses of such separate counsel if
(i) the use of counsel chosen by the Company to represent such Indemnified Party
would present such counsel with any actual or potential conflict of interest,
(ii) the actual or potential defendants in, or targets of, any Third-Party
Indemnification Event include both such Indemnified Party and the Company or any
affiliate thereof and such Indemnified Party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the Company or any affiliate thereof which is
an actual or potential defendant in, or target of, such Third-Party
Indemnification Event, (iii) the Indemnification Event may give rise to a
non-monetary liability including without limitation injunctions and criminal
liability, or (iv) the Company has authorized such Indemnified Party to employ
separate counsel. The
21
<PAGE>
Indemnified Parties and the Company shall cooperate fully in defending any
Third-Party Indemnification Event, and the Company shall have reasonable access
to the books and records and personnel of the Indemnified Parties that are
relevant hereto.
(c) The indemnification provisions of this Section 5.10 shall be in
addition to any rights each Indemnified Party may otherwise have.
Section 5.11 Submission to Jurisdiction.
The Company irrevocably submits to the non-exclusive jurisdiction of
any New York State or federal courts sitting in The City of New York and any
court sitting in Bermuda, and any appellate court from any thereof, in any suit,
action or proceeding arising out of or relating to this Agreement or any of the
Other Closing Documents or the transactions contemplated hereby or thereby (a
"Related Proceeding"), and the Company hereby irrevocably agrees that all claims
in respect of any Related Proceeding may be heard and determined in such New
York State or federal court or any court sitting in Bermuda. The Company hereby
irrevocably waives, to the fullest extent it may effectively do so, the defense
of an inconvenient forum to the maintenance of any Related Proceeding and any
objection to any Related Proceeding whether on the grounds of venue, residence
or domicile. A final judgment in any such suit, action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
any other manner provided by law.
The Company hereby irrevocably appoints the CT Corporation System
(the "Process Agent"), with an office on the date hereof at 1633 Broadway, New
York, New York, United States of America, as its agent to receive on behalf of
the Company and its property service of copies of the summons and complaint and
any other process that may be served in any Related Proceeding in such New York
State or federal court sitting in The City of New York. Service may be made by
U.S. registered mail or other comparable means or by delivering by hand a copy
of such process to the Company in care of the Process Agent at the address
specified above for the Process Agent (such service to be effective upon the
mailing or delivery by hand of such process to the office of the Process Agent),
and the Company hereby irrevocably authorizes and directs the Process Agent to
accept on its behalf such service. Failure of the Process Agent to give notice
to the Company, or failure of the Company to receive notice of such service of
process, shall not affect in any way the validity of such service on the Process
Agent or the Company. As an alternative method of service, the Company also
irrevocably consents to the service of any and all
22
<PAGE>
process in any Related Proceeding in a New York State or federal court sitting
in The City of New York by sending by U.S. registered mail or other comparable
means copies of such process to the Company at its address under Section 5.10
(such service to be effective seven days after mailing thereof). The Company
covenants and agrees that it shall take any and all reasonable action, including
the execution and filing of any and all documents, that may be necessary to
continue the designation of the Process Agent in full force and effect, and to
cause the Process Agent to continue to act as such. Nothing herein shall affect
the right of any party to serve legal process in any other manner permitted by
law or affect the right of any party to bring any suit, action or proceeding
against any other party or its property in the courts of other jurisdictions.
To the extent that the Company has or hereafter may acquire any
immunity from any legal action, suit or proceeding, from jurisdiction of any
court or from setoff or any legal process (whether through service or notice,
attachment in aid of execution or otherwise) with respect to itself or any of
its property, the Company hereby irrevocably waives and agrees not to plead or
claim such immunity in respect of its obligations under this Agreement and the
other Closing Documents.
Section 5.12 Transfer Agent and Registrar
(a) The Company shall provide from and after the Closing Date for a
transfer agent and registrar (collectively, the "Agent") for the Warrants issued
hereunder. The Agent shall keep a register for the registration and transfer of
the Warrants.
(b) Upon surrender of any Warrant certificate at the office of the
Agent, the Company, at the request of the holder thereof, will deliver at the
Company's expense, new Warrant certificates in exchange therefor, in
denominations as requested by such holder.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
COMPANY:
CGA GROUP, LTD.
By: /S/ RICHARD A. PRICE
----------------------
Name: Richard A. Price
Title: President & CEO
<PAGE>
MUTUAL DISCOVERY FUND
BY: FRANKLIN MUTUAL ADVISORS, INC.
By: /S/ E.N. COHERNOUR
-----------------------
Name: E.N. Cohernour
Title: V.P., General Counsel
& Asst. Secretary
<PAGE>
MUTUAL QUALIFIED FUND
BY: FRANKLIN MUTUAL ADVISORS, INC.
By: /S/ E.N. COHERNOUR
-----------------------
Name: E.N. Cohernour
Title: V.P., General Counsel
& Asst. Secretary
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
OPPENHEIMER CHAMPION INCOME FUND
By: /S/ RALPH STELLMACHER
--------------------------
Name: Ralph Stellmacher
Title: Vice President
OPPENHEIMER HIGH YIELD FUND
By: /S/ RALPH STELLMACHER
--------------------------
Name: Ralph Stellmacher
Title: Vice President
OPPENHEIMER MULTI-SECTOR INCOME
TRUST
By: /S/ THOMAS REEDY
--------------------------
Name: Thomas Reedy
Title: Vice President
OPPENHEIMER STRATEGIC INCOME FUND
By: /S/ DAVID P. NEGRI
--------------------------
Name: David P. Negri
Title: Vice President
OPPENHEIMER VARIABLE ACCOUNT FUNDS
FOR THE ACCOUNT OF OPPENHEIMER HIGH
INCOME FUND
By: /S/ DAVID P. NEGRI
--------------------------
Name: David P. Negri
Title: Vice President
OPPENHEIMER VARIABLE ACCOUNT FUNDS
FOR THE ACCOUNT OF STRATEGIC BOND
FUND
By: /S/ DAVID P. NEGRI
--------------------------
Name: David P. Negri
Title: Vice President
<PAGE>
THE PUTNAM FIDUCIARY TRUST COMPANY
ON BEHALF OF:
PUTNAM HIGH YIELD FIXED INCOME
TRUST (DBT)
PUTNAM HIGH YIELD MANAGED TRUST
By: /S/ PAUL M. O'NEIL
--------------------------
Name: Paul M. O'Neil
Title: Vice President
<PAGE>
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
By: /S/ PAUL M. O'NEIL
--------------------------
Name: Paul M. O'Neil
Title: Vice President
<PAGE>
ACE LIMITED
By: /S/ PETER MEAR
--------------------------
Name: Peter Mear
Title: Executive VP
& General Counsel
<PAGE>
THIRD AVENUE TRUST, ON BEHALF OF
THE THIRD AVENUE VALUE FUND SERIES
By: /S/ DAVID M. BARSE
--------------------------
Name: David M. Barse
Title: Executive Vice President
<PAGE>
LENNAR FINANCIAL SERVICES, INC.
By: /S/ NANCY KAMINSKY
--------------------------
Name: Nancy Kaminsky
Title: Executive Vice President
and Chief Financial
Officer
<PAGE>
Common Stock
Warrant Acquisition Agreement
PACIFIC MUTUAL LIFE INSURANCE COMPANY
By: /S/ RONN C. CORNELIUS
--------------------------
Name: Ronn C. Cornelius
Title: Assistant Vice President
<PAGE>
Common Stock
Warrant Acquisition Agreement
PM GROUP LIFE INSURANCE COMPANY
By: /S/ LARRY J. CARD
--------------------------
Name: Larry J. Card
Title: Vice President
<PAGE>
CAPITAL REINSURANCE COMPANY
By: /S/ WILLIAM T. TOMLJANOVIC
--------------------------
Name: William T. Tomljanovic
Title: Vice President
& Treasurer
<PAGE>
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /S/ ERIC A. ANDERSON
--------------------------
Name: Eric A. Anderson
Title: Managing Director
EXHIBIT 10.3
CGA GROUP, LTD.
INVESTMENT UNITS
SUBSCRIPTION AGREEMENT
Dated as of June 4, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I AUTHORIZATION; SUBSCRIPTION FOR UNITS.......................... 2
Section 1.1 The Investment Units............................. 2
Section 1.2 The Subscription for Investment Units............ 2
Section 1.3 Commitment....................................... 2
ARTICLE II CLOSING........................................................ 12
ARTICLE III CONDITIONS TO OBLIGATIONS OF THE INVESTORS..................... 13
Section 3.1 Accuracy of Representations and
Warranties..................................... 13
Section 3.2 Performance of Agreements; Regulatory
Approvals; Credit Rating......................... 13
Section 3.3 Compliance Certificate........................... 15
Section 3.4 Bye-laws......................................... 15
Section 3.5 Other Agreements................................. 15
Section 3.6 Opinion of Conyers Dill & Pearman................ 15
Section 3.7 Opinion of Dewey Ballantine...................... 15
Section 3.8 Aggregate Funding................................ 15
Section 3.9 St. George....................................... 16
Section 3.10 Avoidance of Conflicts........................... 16
Section 3.11 Appointment of Agent............................. 16
Section 3.12 List of Shareholders............................. 16
ARTICLE IV CONDITIONS TO THE COMPANY'S OBLIGATIONS........................ 17
Section 4.1 Accuracy of Representations and
Warranties..................................... 17
Section 4.2 Performance of Agreements........................ 17
Section 4.3 Bye-laws......................................... 17
Section 4.4 Other Agreements................................. 17
Section 4.5 Letters from Placement Agents.................... 17
Section 4.6 Payment for the Investment Units................. 17
Section 4.7 Aggregate Funding................................ 18
-i-
<PAGE>
ARTICLE V REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
COMPANY...................................................... 18
Section 5.1 Due Organization, Valid Existence and
Authority of the Company and the
Company's Initial Subsidiaries................. 18
Section 5.2 Authorization and Validity of
Agreements..................................... 19
Section 5.3 Capitalization................................... 19
Section 5.4 Reserve of Shares Issued in Connection
with the Commitment............................ 20
Section 5.5 Shares Issued in Connection with the
Commitment..................................... 20
Section 5.6 No Conflict with Other Instruments; No
Approvals Required Except as Have Been
Obtained....................................... 20
Section 5.7 Regulatory Filings; Compliance with Law.......... 21
Section 5.8 Stamp Duties or Taxes............................ 22
Section 5.9 Private Offering of the Shares................... 23
Section 5.10 The Private Placement Memorandum................. 23
Section 5.11 Not an "Investment Company"...................... 23
Section 5.12 Business Newly Formed............................ 23
Section 5.13 Operating Company................................ 24
Section 5.14 No U.S. Trade or Business and Not a
Controlled Foreign Corporation................. 24
Section 5.15 Related Person Insurance Income.................. 25
Section 5.16 Operating Guidelines............................. 25
Section 5.17 Passive Foreign Investment Company............... 26
Section 5.18 Use of Proceeds of the Offering.................. 26
Section 5.19 Shareholders..................................... 26
Section 5.20 St. George Representations....................... 26
Section 5.21 Bermuda Withholding Tax.......................... 27
Section 5.22 No Events of Non-Compliance...................... 27
Section 5.23 Registration Rights.............................. 27
Section 5.24 Letter Agreement with DCR........................ 27
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE INVESTORS................ 27
-ii-
<PAGE>
Section 6.1 Due Organization, Good Standing and
Authority of the Investor...................... 27
Section 6.2 Authorization and Validity of
Agreements..................................... 27
Section 6.3 Investment Intent................................ 28
Section 6.4 No Conflict with Other Instruments; No
Approvals Required Except as Have Been
Obtained....................................... 28
Section 6.5 Investor Awareness and Suitability............... 29
Section 6.6 Accredited Investor Status....................... 32
Section 6.7 Receipt of Information, Access to
Information.................................... 33
Section 6.8 Investment Unit Ownership Limitations............ 34
ARTICLE VII RESTRICTIONS ON TRANSFER....................................... 34
Section 7.1 Restrictive Legends.............................. 35
Section 7.2 Notice of Proposed Transfers..................... 35
ARTICLE VIII MISCELLANEOUS.................................................. 37
Section 8.1 Survival of Representations, Warranties
and Covenants.................................. 37
Section 8.2 Entire Agreement................................. 37
Section 8.3 Severability..................................... 37
Section 8.4 Binding Effect; Benefit.......................... 37
Section 8.5 Assignability.................................... 38
Section 8.6 Amendment; Waiver................................ 38
Section 8.7 Headings......................................... 38
Section 8.8 Counterparts..................................... 38
Section 8.9 Applicable Law................................... 38
Section 8.10 Notices and Payment.............................. 38
Section 8.11 Full Payment..................................... 39
Section 8.12 Indemnification.................................. 40
Section 8.13 Submission to Jurisdiction....................... 41
Section 8.14 Expenses......................................... 42
Schedules:
Schedule 1 - List of Investors
Schedule 2 - List of Shareholders of the Company and Their
Respective Shareholdings
Schedule 3 - List of ss.6.3(b) Excepted Investors
Exhibits:
Exhibit A-1 - Form of Acknowledgment Concerning Commitment
-iii-
<PAGE>
Exhibit A-2 - Form of Commitment of the Company
Exhibit B - Forms of Letter of Credit
Exhibit C - Form of Trust Agreement
Annexes:
Annex I - Form of Memorandum of Association
Annex II - Form of Bye-Laws
Annex III - Forms of Series A Preferred Stock Subscription Agreement,
Founders' Common Stock Subscription Agreement and
Shareholders Agreement
Annex IV - Opinion of Conyers Dill & Pearman
Annex V - Opinion of Dewey Ballantine
Annex VI - List of Other Closing Documents
Annex VII - Operating Guidelines
Annex VIII - Letter Agreement with DCR
Annex IX - Sponsoring Investors and Founders Stock Warrant Plan and
Employees Stock Warrant Plan
-iv-
<PAGE>
CGA GROUP, LTD.
INVESTMENT UNITS
SUBSCRIPTION AGREEMENT
EACH INVESTMENT UNIT CONSISTING 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
SUBSCRIPTION AGREEMENT, dated as of June 4, 1997 (this "Agreement"),
among CGA Group, Ltd., a company with limited liability organized under the laws
of Bermuda (together with its successors and permitted assigns, the "Company"),
and each of the Investors identified in Schedule 1 hereto (collectively,
together with their successors and permitted assigns, the "Investors").
WHEREAS, the Company has offered (the "Offering") the opportunity to
purchase Investment Units (as defined below) to the Investors pursuant to an
Amended and Restated Confidential Private Placement Memorandum, dated April 9,
1997 (together with any amendments, modifications or supplements thereto as may
be made from time to time on or prior to the Closing Date (as defined below),
the "Private Placement Memorandum");
WHEREAS, each of the Investors wishes to subscribe for and purchase,
severally and not jointly, and the Company wishes to issue and allot the number
of Investment Units (the "Investment Units," and, if the context so requires,
such term may include all or some of the underlying shares of the Company's
capital) set forth opposite such Investor's name on Schedule I hereto, on the
terms set forth herein;
WHEREAS, each Investment Unit consists of one share of Series B
Cumulative Voting Preference Shares of the Company ("Series B Preferred Stock"),
4.8925 shares of Common Shares of the Company ("Common Stock") and a commitment,
pursuant to Section 1.3 hereof, to purchase 1.5 additional shares of Series B
Preferred Stock ("Commitment") (the Series B Preferred Stock and the Common
Stock issued or to be issued in connection with the sale of the Investment
Units, including pursuant to the Commitments, are herein referred to as the
"Shares");
WHEREAS, the Company will use a substantial portion of the proceeds of
the Investors' subscriptions to capitalize the Company's subsidiaries,
Commercial Guaranty Assurance, Ltd. (together with its successors, "CGA") and
CGA Investment Management, Ltd. (together with its successors, "CGAIM" and
together with CGA, the "Initial
<PAGE>
Subsidiaries"), as described in the Private Placement Memorandum;
In consideration of the premises and mutual agreements herein
contained, the parties hereto hereby agree as follows:
ARTICLE I
AUTHORIZATION; SUBSCRIPTION FOR UNITS; COMMITMENTS
Section 1.1 The Investment Units. The Company has authorized the
issuance and sale pursuant to this Agreement of 1,600,000 Investment Units
(which consists of an aggregate of 1,600,000 shares of Series B Preferred Stock,
7,828,000 shares of Common Stock and commitments to purchase 2,400,000 shares of
Series B Preferred Stock, all of which securities have been authorized for
issuance and sale as a part of the units), each having such rights, restrictions
and privileges as are contained in or accorded by (i) the Memorandum of
Association of the Company in the form attached hereto as Annex I (the
"Memorandum of Association"), (ii) the Bye-laws of the Company, in the form
attached hereto as Annex II and all appendices and exhibits thereto (the
"Bye-Laws"), (iii) the Shareholders Agreement, to be dated as of the Closing
Date, among the Company, the Investors and the other parties named therein, in
the form attached hereto as Annex III (as such agreement may be amended,
supplemented, restated or otherwise modified from time to time in accordance
with its terms, the "Shareholders Agreement"), and (iv) this Agreement. Subject
to the terms and conditions hereof, the Investment Units will be issued on the
Closing Date.
Section 1.2 The Subscription for Investment Units. Subject to the
terms and conditions of this Agreement, each of the Investors hereby irrevocably
subscribes for and agrees to purchase, severally and not jointly, the number of
Investment Units set forth opposite such Investor's name on Schedule 1 hereto
for the purchase price specified in Article II hereof. No Investor shall be
obligated to purchase any of the Investment Units unless the conditions set
forth in Article III hereof shall have been satisfied or waived by such Investor
on or prior to the Closing Date. The Company shall not be obligated to sell any
of the Investment Units unless the conditions set forth in Article IV hereof
shall have been satisfied or waived by the Company on or prior to the Closing
Date.
Section 1.3 Commitment. (a) For purposes of this Section 1.3 and other
provisions of this Agreement, the following terms shall have the meanings set
forth below:
2
<PAGE>
"Business Day" shall mean any day except a Saturday, Sunday or other
day on which commercial banks in The City of New York or Bermuda are authorized
by law or executive order to close.
"Commitment Termination Event" shall mean the earliest of (v) the
latest of (1) the fifth anniversary of the Closing Date, (2) immediately after
the final Funding Event occurring after the fifth anniversary of the Closing
Date with respect to a Downgrade Notice delivered prior to the fifth anniversary
of the Closing Date, or (3) the date of withdrawal of the final Downgrade Notice
which was delivered prior to the fifth anniversary of the Closing Date, (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 corporate 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) 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, upon terms acceptable to the
Company in its sole discretion, for an aggregate principal amount, in the case
of a bank stand-by credit facility, or which provides limits of liability, in
the case of an excess of loss reinsurance treaty, equal to or greater than the
sum of each Investors' Maximum Section 1.3 Obligation; provided, however, that,
solely with respect to the foregoing clauses (w), (x), (y) and (z), such closing
or establishment shall constitute a Commitment Termination Event only if (i) at
such time (A) the sum of retained earnings, determined in accordance with GAAP,
of CGA, plus the amount of equity capital (in excess of the amount of equity
capital contributed on or prior to the Closing Date) contributed to CGA is equal
to or greater than $60,000,000 (provided, that, CGA shall be a Restricted
Subsidiary for this clause (A) to be satisfied) or (B) the Series A Preferred
Stock (as defined below) is rated investment grade (i.e., a rating of BBB- or
higher from DCR (as defined below) or the then-equivalent rating if DCR changes
its rating designations after the date hereof) and (ii) (A) the Company receives
a Ratings Confirmation with respect to such closing or establishment and the
termination of the
3
<PAGE>
Commitments as a result thereof and (B) a Downgrade Notice is not in effect at
the time of such closing or establishment.
"DCR" means Duff & Phelps Credit Rating Company or any successor
thereto.
"Downgrade Notice" shall mean written notice that CGA's claims paying
ability rating will be reduced to a level below the Required Company Rating.
"Funding Event" shall mean the 45th consecutive day on which a
Downgrade Notice has been in effect and not been withdrawn (or, if such 45th
consecutive day is not a Business Day, the immediately preceding Business Day).
"GAAP" shall mean the generally accepted accounting principles
(including the methods of application of such principles) so described and
promulgated by the U.S. Financial Accounting Standards Board ("FASB") which are
applicable as at the date on which any calculation or determination made
hereunder is to be effective or as at the date of any financial statement
referred to herein, as the case may be.
"Letter of Credit Provider" shall mean the person who is issuing the
Required Letter of Credit.
"Maximum Section 1.3 Obligation" shall mean, with respect to each
Investor, at any time, the remaining dollar amount of such Investor's obligation
under Section 1.3 of this Agreement at such time.
"Minimum Rating" shall mean, as to any person, (1) at the time which
any determination regarding such person is first made hereunder, a long-term
unsecured senior debt rating of AA or higher by DCR (or the then-equivalent
rating in the event DCR changes its rating designations after the date hereof);
provided, however, if the long-term unsecured senior debt of such person is not
rated by DCR, then an equivalent rating from at least one other nationally
recognized rating agency, provided that no other nationally recognized rating
agency has rated such person below the equivalent of a rating of AA- by DCR (or
the then-equivalent rating in the event DCR changes its rating designations
after the date hereof) and (2) thereafter, whenever any determination regarding
such person is made from time to time hereunder, a long-term unsecured senior
debt rating from all nationally recognized rating agencies rating such debt of
such person of the equivalent of a rating of AA- or higher by DCR (or the
then-equivalent rating in the event DCR changes its rating designations after
the date hereof); provided, however, that should such person fail to maintain
4
<PAGE>
the Minimum Rating described in clause (2) of this definition, such person shall
not again meet the Minimum Rating requirement until it first again meets the
requirements of clause (1) of this definition.
"Permitted Investments" shall mean (i) U.S. Government Obligations (as
defined below) or securities that would be U.S. Government Obligations if such
securities were not callable or redeemable at the option of the issuer thereof;
(ii) debt securities or debt instruments with a rating of AAA by DCR (or the
then-equivalent rating in the event DCR changes its rating designations after
the date hereof), or the equivalent of such a rating by Standard & Poor's Rating
Service and its successors ("S&P"), Moody's Investors Service, Inc. and its
successors ("Moody's") or any other nationally recognized securities rating
agency; or (iii) debt securities or debt instruments with a rating of Class 1 or
higher by the National Association of Insurance Commissioners ("NAIC") (or the
then-equivalent rating in the event NAIC changes its rating designations after
the date hereof) 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.
"Qualified Public Offering" shall mean the completion of an
underwritten public offering of Common Stock pursuant to a registration
statement under the Securities Act (as defined below) resulting in net proceeds
to the Company of at least $50,000,000.
"Ratings Confirmation" shall mean DCR's written confirmation that,
after its review of the matter under review, DCR's rating of the claims paying
ability of CGA will not be downgraded, terminated, withdrawn or suspended.
"Required Company Rating" shall mean a claims paying ability rating of
AAA (or the then-equivalent rating in the event DCR changes its rating
designations after the date hereof) issued by DCR.
"Required Letter of Credit" shall mean an irrevocable direct pay
letter of credit for the benefit of the Special Account Trustee from a Letter of
Credit Provider rated at least the Minimum Rating (a) in substantially the forms
attached as Exhibit B hereto (appropriately completed), and (b) if obtained
subsequent to the Closing Date pursuant to Sections 1.3(d)(i) or 1.3(d)(ii), in
such forms and otherwise subject to a Ratings Confirmation by DCR; in the case
of each of (a) and (b), with a stated amount not less than the applicable
Maximum Section 1.3 Obligation.
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"Restricted Subsidiaries" shall mean those subsidiaries designated or
classified as Restricted Subsidiaries pursuant to Section 7.9 of the Series A
Subscription Agreement (as defined below).
"Series A Preferred Stock" means the Series A Preferred Stock of the
Company.
"Special Account" shall mean a segregated trust account designated
pursuant to a trust agreement in the form of Exhibit C hereto (appropriately
completed).
"Special Account Trustee" shall mean the person acting, on behalf of
the Company and its assignee (as well as others), as trustee for the Special
Account and the Special Transaction Subaccounts (as defined below). The Company
shall cause the Special Account Trustee to comply with its obligation hereunder.
"Special Transaction Subaccount" shall mean, with respect to an
Investor (if applicable to such Investor), the subaccount of the Special Account
designated by the Company as such Investor's subaccount thereof.
"Supporting Obligation Provider" shall mean a Letter of Credit
Provider or other person issuing a Supporting Obligation (as defined below).
"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 defined below)), 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.
(b) (i) Subject to the occurrence of the Closing (as defined herein)
and a Funding Event, each Investor hereby irrevocably agrees to purchase,
severally and not
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jointly, on a pro rata basis with all other Investors determined in proportion
to such Investor's Maximum Section 1.3 Obligation, as compared to the aggregate
of all of the Investors' Maximum Section 1.3 Obligations, in accordance with the
procedures set forth below in this Section 1.3(b) and for the purchase price of
U.S. $25 per share, the number of shares of Series B Preferred Stock specified
in one or more Drawdown Notices (as defined below) delivered by the Company or
by an assignee on behalf of the Company to such Investor pursuant to the
provisions of this Section 1.3; provided, however, that the aggregate number of
shares of Series B Preferred Stock that such Investor shall be required to
purchase pursuant to this Section 1.3 shall not exceed the aggregate number of
additional shares of Series B Preferred Stock set forth opposite such Investor's
name on Schedule 1 hereto; provided, further, that such Investor shall not be
obligated to purchase any such shares in respect of any Drawdown Closing Date
(as defined below) that is after the date of a Commitment Termination Event.
(ii) Unless the Commitment Termination Event has occurred, the
Company or an assignee on behalf of the Company shall, no later than 10 days
after receipt by the Company or CGA of a Downgrade Notice, send to each Investor
a notice (a "Drawdown Notice") specifying (i) the aggregate number of shares of
Series B Preferred Stock that such Investor is required to purchase pursuant to
such Drawdown Notice and the aggregate purchase price therefor at U.S. $25 per
share, provided that (x) the aggregate purchase price specified in the Drawdown
Notice sent to each Investor shall not exceed the Maximum Section 1.3 Obligation
of such Investor, (y) the aggregate number of shares of Series B Preferred Stock
specified in the Drawdown Notice sent to each Investor shall be such Investor's
pro rata share, determined in proportion to such Investor's Maximum Section 1.3
Obligation as compared to the aggregate of all of the Investors' Maximum Section
1.3 Obligations, of the aggregate number of shares of Series B Preferred Stock
specified in all of the Drawdown Notices sent in connection with the Funding
Event with respect to which such Drawdown Notices are being sent, and (z) the
aggregate amount of such aggregate purchase prices for all Investors shall not
exceed the smallest amount necessary to cause DCR to withdraw such Downgrade
Notice by issuance of a Ratings Confirmation with respect to such amount
following CGA's receipt of the proceeds thereof, and (ii) the date (the
"Drawdown Closing Date") on which the Investor is required to purchase such
Series B Preferred Stock, which date shall be no later than the 45th day after
the date of receipt by the Company or CGA of the Downgrade Notice (provided that
if such 45th day is not a Business Day, then the Drawdown Closing Date shall be
the first Business Day prior to such day); provided, further, that such Investor
shall not be obligated to
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purchase any such shares in respect of any Drawdown Closing Date that is after
the date of a Commitment Termination Event. Each Investor which has either (a)
not provided a Supporting Obligation (as defined below) or (b) provided a
Supporting Obligation which is not capable of being drawn upon shall, on or
prior to the Drawdown Closing Date, pay the aggregate purchase price specified
in such Drawdown Notice by wire transfer of immediately available funds to the
account of the Special Account Trustee specified in the Drawdown Notice. With
respect to each Investor which has provided a Supporting Obligation capable of
being drawn upon, the Special Account Trustee shall draw on such Supporting
Obligation on the Drawdown Closing Date in an amount necessary to pay the
aggregate purchase price specified in the Drawdown Notice sent to such Investor;
provided, however, an Investor who has previously provided a Supporting
Obligation may, in lieu of having its Supporting Obligation drawn upon by the
Special Account Trustee, pay the aggregate purchase price specified in such
Drawdown Notice by wire transfer of immediately available funds to the account
of the Special Account Trustee specified in the Drawdown Notice on the Drawdown
Closing Date if such Investor has given written notice of such intent to the
Special Account Trustee at least two days prior to the Drawdown Closing Date. If
at any time DCR withdraws its Downgrade Notice or if a Commitment Termination
Event occurs prior to the Drawdown Closing Date, the Company shall immediately
(x) notify each Investor and withdraw the Drawdown Notice and (y) if a Ratings
Confirmation is issued by DCR, promptly return, or cause the return of, any
amounts received by the Special Account Trustee pursuant to this Section
1.3(b)(ii) in respect of such withdrawn Drawdown Notice prior to the Drawdown
Closing Date to such Investor or the Supporting Obligation Provider, as the case
may be.
(iii) The aggregate purchase price paid by an Investor or drawn
by the Special Account Trustee, as the case may be, pursuant to this Section 1.3
shall reduce the Maximum Section 1.3 Obligation of such Investor from and after
the date of such purchase by the amount of such aggregate purchase price to the
extent such amounts are not returned or disgorged.
(c) (i) On the Closing Date, each Investor shall deliver to the
Company an acknowledgment of such Investor's obligation under Section 1.3 and of
the Company's assignment of its rights under Section 1.3 to CGA, in the form
attached hereto as Exhibit A-1 (the "Acknowledgment").
(ii) In addition, on the Closing Date, except as indicated in a
Ratings Confirmation deeming this condition satisfied, each Investor who does
not have long-term unsecured senior debt rated the Minimum Rating or
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higher shall deliver together with any memorandum required to be endorsed on the
Special Account trust agreement (x) to the Special Account Trustee a Required
Letter of Credit, (y) to the Special Account Trustee cash or other assets with
fair market value not less than such Investor's Maximum Section 1.3 Obligation
or (z) to the Special Account Trustee such other supporting instruments as may
be acceptable to DCR (collectively, the "Supporting Obligations").
(iii) In addition, on the Closing Date, the Company will enter
into a Commitment Agreement, in the form attached as Exhibit A-2 hereto (the
"Commitment Agreement"), to contribute additional capital to CGA with the
proceeds of the sale of any Series B Preferred Stock pursuant to Section 1.3 and
the Company will assign to CGA its rights under Section 1.3 of this Agreement as
collateral to support such commitment. On the Closing Date, such assignment
shall be placed in the Special Account. The maximum number of shares of Series B
Preferred Stock which may be sold under Section 1.3 shall be issued to the
Special Account Trustee and held in an escrow account in the form of Exhibit D
hereto. In addition, the Company shall pledge and grant to CGA a security
interest in the Commitments and all of its rights with respect thereto held in
the Special Account by the Special Account Trustee and all proceeds thereof, as
security for the performance by the Company of its obligations pursuant to the
Commitment Agreement. Any assignment of the Company's rights under Section 1.3
of this Agreement to the Commitments other than an assignment to, or for the
benefit of, CGA shall be null and void.
(d) (i) Each Investor hereby agrees that during and only during the
period of time following the Closing Date and prior to the Commitment
Termination Event that both (A) such Investor does not have a Supporting
Obligation in effect and (B) such Investor's long-term unsecured senior debt
rating falls below the Minimum Rating or is suspended, withdrawn or cancelled,
such Investor shall, unless a Ratings Confirmation is given without doing so as
soon as reasonably practicable (but in any event within 45 days), deliver
together with any memorandum required to be endorsed on the Special Account
trust agreement a Supporting Obligation to the Special Account Trustee.
(ii) Each Investor hereby agrees that if, at any time prior to
the Commitment Termination Event, it delivers a Required Letter of Credit or, if
appropriate, other Supporting Obligation, pursuant to the terms hereof and (x)
the Supporting Obligation Provider's long-term unsecured senior debt rating
drops below the Minimum Rating or is suspended, withdrawn or cancelled or (y)
such Required Letter of Credit or, if appropriate, other Supporting Obligation,
as the case may be, will expire by its terms
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prior to the Commitment Termination Event, such Investor shall, unless a Ratings
Confirmation is given without doing so, as soon as practicable (but in any
event, with respect to clause (x), within 45 days of written notice of such
drop, suspension, withdrawal or cancellation and, with respect to clause (y), at
least 30 days prior to such expiration) deliver a new (or, in the case of clause
(y), an extended) Required Letter of Credit or other Supporting Obligation to
the Special Account Trustee. Upon delivery by an Investor of such new Required
Letter of Credit, such new Supporting Obligation or such other Supporting
Obligation, as the case may be, the Special Account Trustee shall concurrently
return, or cause the return of, the previously delivered Required Letter of
Credit or, if applicable, the previously delivered other Supporting Obligation
to such Investor.
(iii) If at any time an Investor is required to deliver a
Supporting Obligation pursuant to the terms hereof and such Investor fails for
any reason to do so within the applicable time period, the Special Account
Trustee shall (x) if the Investor has not previously delivered a Supporting
Obligation, demand a cash payment from such Investor to the Special Account
Trustee in the amount of such Investor's Maximum Section 1.3 Obligation by
delivering to such Investor a notice with respect thereto (a "Demand Notice"),
payable immediately upon receipt by such Investor of such Demand Notice or (y)
if such Investor has previously delivered a Required Letter of Credit or, if
appropriate, other Supporting Obligation, draw on such Required Letter of Credit
or such other Supporting Obligation, as the case may be, in an amount equal to
such Investor's Maximum Section 1.3 Obligation (a "Subaccount Draw") and, to the
extent the amount received pursuant to such Subaccount Draw falls short of such
Maximum Section 1.3 Obligation, submit a Demand Notice with respect to such
shortfall; provided, however, that the amount of such cash payment or the
proceeds from such draw, as the case may be, shall be deposited in the
Investor's Special Transaction Subaccount and invested only in Permitted
Investments. The Investor shall be entitled to be paid currently all interest
and other income earned (net of all losses) on the Permitted Investments
deposited in such Investor's Special Transaction Subaccount to the extent not
necessary to maintain a balance in such Investor's Special Transaction
Subaccount at least equal to such Investor's Maximum Section 1.3 Obligation.
Each Investor agrees that, upon its receipt of a Demand Notice, it shall
immediately make payment as provided therein.
(iv) Subject to Section 1.3(d)(i), if, at any time after (x) an
Investor shall have made a payment pursuant to a Demand Notice or delivered or
extended a Supporting Obligation or (y) the Special Account Trustee
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shall have made a Subaccount Draw with respect to such Investor, such Investor's
long-term unsecured senior debt rating equals or exceeds the Minimum Rating, the
Company shall return, or shall cause the Special Account Trustee to return, to
such Investor the proceeds remaining in such Investor's Special Transaction
Subaccount or the Company shall return, or shall cause the Special Account
Trustee to return, the Supporting Obligation, as appropriate. In such case, the
Special Account Trustee shall execute any and all documents which an Investor
shall reasonably request the Special Account Trustee to execute in order to
evidence the Special Account Trustee's agreement to the surrender of a
Supporting Obligation.
(v) Immediately following the Commitment Termination Event, the
Special Account Trustee shall return, or the Company shall cause the Special
Account Trustee to return, as appropriate, to each Investor any Supporting
Obligations provided by such Investor (and any amounts remaining in such
Investor's Special Transaction Subaccount) not used to satisfy such Investor's
obligation to purchase shares pursuant to this Section 1.3.
(vi) If at any time the Company or the Special Account Trustee
delivers to an Investor a Required Letter of Credit for cancellation in
accordance with the terms of this Section 1.3, such Investor shall be entitled
to deliver such Required Letter of Credit to the Letter of Credit Provider for
cancellation.
(vii) Prior to any permitted assignment or other transfer of all
or a portion of an Investor's Commitment or obligations hereunder relating to
such Commitment, the Investor shall cause the transferee to provide to the
Company and the Special Account Trustee a written undertaking for the benefit of
the Company and the Special Account Trustee, in form and substance acceptable to
the Company and sufficient to receive a Ratings Confirmation with respect to
such transfer, to be bound by the provisions of this Section 1.3 as if such
transferee were such Investor, and an Acknowledgment (as defined below). In
addition, prior to consenting to such transfer, the Company and such Investor
shall cause such transferee, if such transferee is not rated the Minimum Rating,
to deliver a Supporting Obligation. Upon the delivery by such transferee of such
undertaking, Acknowledgment and, if applicable, a Supporting Obligation, and the
receipt of the Company's and the Special Account Trustee's consent to such
transfer and a Ratings Confirmation such Investor shall be completely and
unconditionally released from its Commitment, and the Company or the Special
Account Trustee, as appropriate, shall promptly return to such Investor its
Acknowledgment,
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Supporting Obligation (if any) and the net proceeds remaining in its Special
Transaction Subaccount, if any.
(e) Until the occurrence of the Commitment Termination Event, the
Company shall pay to each Investor, annually in advance, a commitment fee
("Commitment Fee") equal to one percent (1%) of such Investor's Maximum Section
1.3 Obligation. The Commitment Fee payment shall be paid by the Company
initially on the Closing Date and subsequently on each anniversary of such
Closing Date; provided, however, that each such Investor's commitment under this
Section 1.3 shall continue, and be binding on and enforceable against such
Investor, whether or not the Commitment Fee is paid. Notwithstanding any other
provision of this Agreement, the payment of the Commitment Fee due on the
Closing Date shall be paid to the Investor by check or draft, which shall be
delivered by the Company to the Investors (or counsel to the Investors) or an
account specified by the Investors to the Company in writing at least three
Business Days before the Closing Date or each anniversary of the Closing Date.
(f) Upon any Investor's purchase of shares underlying its Commitment,
such Investor shall make such representations, warranties and covenants as the
Company may reasonably request to assure compliance with applicable securities
laws.
ARTICLE II
CLOSING
The closing (the "Closing") of the transactions contemplated by this
Agreement shall take place as follows:
(i) On the basis of the representations, warranties and covenants
herein set forth, the Company will sell to each of the Investors, and each
of the Investors will purchase from the Company, at the Closing on June __,
1997 or such later date (not later than June __, 1997) as the Company may
designate upon not less than five Business Days prior written notice,
delivered by facsimile, to the Investors (the "Closing Date"), the number
of Investment Units set forth opposite each such Investor's name on
Schedule 1 hereto for the consideration of a cash purchase price of U.S.
$49.46 per Investment Unit, to be paid on the Closing Date, and the making
of a Commitment per Investment Unit. The aggregate cash purchase price for
the number of Investment Units set forth opposite the name of each Investor
on Schedule 1 hereto is such Investor's "Aggregate Purchase Price." The
aggregate Commitment for the number of Investment Units set forth opposite
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the name of each Investor on Schedule 1 hereto is such Investor's
"Aggregate Commitment."
(ii) At the Closing, subject to the terms and conditions of this
Agreement and on the basis of the representations, warranties and covenants
herein set forth, the Company will deliver to each of the Investors, or
representatives thereof, a certificate or certificates registered in the
name of such Investor (or such other name as may be indicated in writing to
the Company prior to the Closing Date) representing the aggregate number of
shares underlying the Investment Units to be purchased by such Investor,
against (A) payment of such Investor's Aggregate Purchase Price by wire
transfer, on the Closing Date, of immediately available funds to an account
specified to the Investors and the Placement Agents (as defined below) by
the Company at least three (3) Business Days prior to the Closing Date and
(B) making of such Investor's Aggregate Commitment by delivery of such
Investor's Acknowledgment to the Company and, if applicable, such
Investor's Supporting Obligation to the Company, the Special Account
Trustee or the Other Agents, as applicable. The Closing will take place at
the offices of Conyers Dill & Pearman in Hamilton, Bermuda at 10:00 a.m.,
Bermuda time, on the Closing Date.
ARTICLE III
CONDITIONS TO OBLIGATIONS OF THE INVESTORS
The obligation of each Investor to purchase Investment Units under
this Agreement is subject to the satisfaction at or prior to the Closing Date of
each of the following conditions:
Section 3.1 Accuracy of Representations and Warranties. All
representations and warranties of the Company and of each other Investor
contained herein shall be true in all material respects on and as of the Closing
Date as if made on and as of the Closing Date.
Section 3.2 Performance of Agreements; Regulatory Approvals; Credit
Rating. (i) The Company shall have performed all obligations and agreements, and
complied with all covenants and conditions, contained in this Agreement to be
performed or complied with by it prior to or at the Closing Date.
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(ii) The Company and CGA shall have obtained all consents and
approvals of regulatory bodies and authorities in Bermuda necessary on the
Closing Date for CGA to carry on the business of an insurer and a reinsurer, and
CGAIM shall have obtained all consents and approvals of regulatory bodies and
authorities in the United States necessary on the Closing Date for CGAIM to
carry out its business. (It being understood that any such consent or approval
that is conditioned solely on the capitalization of the Company or either of the
Initial Subsidiaries (as contemplated in the Private Placement Memorandum
through the application of the net proceeds of the Closing and the closing of
the Series A Subscription Agreement, dated as of or prior to the Closing Date,
among the Company and the investors named therein (the "Series A Subscription
Agreement") and the Founders' Common Stock Subscription Agreement, dated as of
or prior to the Closing Date, among the Company and the investors named therein
(the "Founders' Subscription Agreement") and/or the consummation of the
transactions contemplated hereby (other than a purchase pursuant to the
Commitments) shall be considered "obtained" for the purposes of this Agreement).
(iii) CGA shall have received a letter from DCR dated as of the
Closing Date to the effect that CGA will receive evidence of its AAA claims
paying ability rating from DCR upon the consummation of the transactions (other
than a purchase pursuant to the Commitments) contemplated hereby, by the Series
A Subscription Agreement and by the Founders' Subscription Agreement,
respectively, which letter shall be in form and substance satisfactory to the
Investors and shall have no other conditions which need to be satisfied in order
for CGA to receive a AAA claims paying ability rating from DCR. The Commitments
shall be supported by Supporting Obligations to the extent contemplated by this
Agreement as in effect on the date hereof.
(iv) The Minister of Finance of Bermuda ("Minister") shall have
granted to each of CGA and the Company a tax assurance (as described in the
Private Placement Memorandum) pursuant to the Exempt Undertakings Tax Protection
Act, 1966 of Bermuda.
(v) The Minister, through the offices of the Registrar of
Companies, has delivered to CGA a written approval, dated January 23, 1997,
authorizing CGA to reduce its total statutory capital by 15% or more as set out
in its previous year's financial statements, subject to such conditions as are
attached to the approval, and the Minister's approval shall not have been
revoked, amended or supplemented and such letter shall be included in the
documents provided to each Investor at the Closing. The
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parties understand that such approval is not necessarily binding on the
Bermudian authorities.
Section 3.3 Compliance Certificate. The Company shall have delivered
to such Investor a certificate, dated the Closing Date, of the Chief Executive
Officer of the Company to the effect that the conditions specified in Sections
3.1 (other than with respect to the representations and warranties of the
Investors), 3.2, 3.4, 3.5, 3.8, 3.9, 3.10 and 3.11 have been fulfilled.
Section 3.4 Bye-laws. The Bye-laws of the Company shall have been
adopted by the Company in the form attached as Annex II hereto.
Section 3.5 Other Agreements. The Shareholders Agreement, the Series A
Subscription Agreement and the Founders' Common Stock Subscription Agreement
shall have been, where appropriate, executed and delivered to the Company by the
parties thereto in substantially the forms attached as Annex III hereto (except
for such changes as are not material, which changes, however, shall have been
provided to the Investors prior to the Closing Date). Each of the closing
documents listed on Annex VI hereto (the "Other Closing Documents") shall have
been executed and delivered, in escrow pending completion of the Closing, by the
parties thereto in substantially the form reviewed and found reasonably
acceptable by the Investors or counsel to the Investors (it being understood
that LeBoeuf, Lamb, Greene & MacRae, L.L.P. is acting as counsel for the
Investors).
Section 3.6 Opinion of Conyers Dill & Pearman. Conyers Dill & Pearman,
Bermuda special counsel for the Company, shall have delivered to such Investor
an opinion dated the Closing Date in substantially the form attached as Annex IV
hereto.
Section 3.7 Opinion of Dewey Ballantine. Dewey Ballantine, special
counsel for the Company, shall have delivered to such Investor an opinion dated
the Closing Date in substantially the form attached as Annex V hereto.
Section 3.8 Aggregate Funding. Each of the other Investors listed in
Schedule 1 shall have purchased Investment Units pursuant to this Agreement and
the total number of Investment Units purchased by the Investors shall be not
less than 1,600,000 Investment Units, the total number of Series A Cumulative
Voting Preference Shares of the Company (the "Series A Preferred Stock") and
shares of Common Stock purchased by other investors shall be not less than
2,600,000 shares and 1,272,043 shares, respectively, and the Company shall have
received Commitments and gross
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proceeds from the sale of the Investment Units, the Series A Preferred Stock and
the Common Stock of not less than U.S. $210,500,000. The Shares have been duly
authorized and issued to the respective Investors.
Section 3.9 St. George. Each of the St. George Holdings, Ltd. Class
A-SG Non-Voting Ordinary Shares and Class B-SG Voting Ordinary Shares
Subscription Agreement, dated as of or prior to the Closing Date (the "St.
George Subscription Agreement"), among St. George Holdings, Ltd. ("St. George")
and the investors named therein (the "St. George Investors") and the Credit
Agreement, dated as of the Closing Date (the "Credit Agreement"), among St.
George Investments I, Ltd., as borrower, Thames Asset Global Securitization No.
1, Inc., as lender, and other parties thereto, shall have been executed by the
parties thereto and delivered in escrow pending completion of the closing in
connection therewith and the Closing. The Credit Agreement will provide, subject
to certain conditions, for the establishment on the Closing Date of a $100
million credit facility for the benefit of St. George, and a commercially
reasonable best efforts obligation by the lender to syndicate an additional $400
million credit facility for the benefit of St. George. The transactions
contemplated by the St. George Subscription Agreement and the Credit Agreement,
which are transactions to be completed on or prior to the Closing Date, shall
have been completed or will be completed simultaneously with the Closing.
Section 3.10 Avoidance of Conflicts. The Company shall have adopted a
resolution restricting any future transactions between the Company or any of its
Initial Subsidiaries or affiliates and Jay Shidler, The Shidler Group, any
affiliates of The Shidler Group or any shareholders of the Company with the
right to appoint a voting member of the Board of Directors or affiliates
thereof, in order to avoid the appearance of a potential conflict of interest.
Section 3.11 Appointment of Agent. The Company shall have appointed an
agent for service of process in accordance with Section 8.13.
Section 3.12 List of Shareholders. The Company shall have provided to
such Investor a list of the shareholders of the Company and their respective
shareholdings on the Closing Date.
If at or prior to the Closing all of the conditions in this Article
III have not been satisfied, any Investor may elect to waive such conditions or
to be relieved of all further obligations hereunder.
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ARTICLE IV
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to issue and sell the Investment Units
under this Agreement is subject to the satisfaction at the Closing Date of each
of the following conditions:
Section 4.1 Accuracy of Representations and Warranties. All
representations and warranties of each Investor contained herein shall be true
in all material respects on and as of the Closing Date as if made on and as of
the Closing Date.
Section 4.2 Performance of Agreements. Each Investor shall have
performed all obligations and agreements, and complied with all covenants and
conditions, contained in this Agreement to be performed or complied with by it
prior to or at the Closing Date and each such Investor shall notify the Company
prior to the Closing Date if the foregoing condition cannot be fulfilled by such
Investor.
Section 4.3 Bye-laws. The Bye-laws of the Company shall have been
adopted by the Company in the form attached as Annex II hereto.
Section 4.4 Other Agreements. The Shareholders Agreement shall have
been executed and delivered by the parties thereto in the form attached as Annex
III hereto. Each of the Other Closing Documents shall have been executed and
delivered, in escrow pending completion of the Closing, by the parties thereto
in form and substance satisfactory to the Company.
Section 4.5 Letters from Placement Agents. The Company shall have
received from each of Donaldson Lufkin & Jenrette Securities Corporation and
Salomon Brothers Inc (the "Placement Agents") a letter dated as of the Closing
Date reasonably satisfactory to the Company, to the effect that neither it nor
any person (other than the Company and its affiliates) authorized to act on its
behalf has used any form of general solicitation or general advertising in
connection with the offer and sale of the Investment Units, including, without
limitation, any advertisement, article, notice or other communication published
in any newspaper, magazine or similar medium or broadcast over television or
radio, or any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
Section 4.6 Payment for the Investment Units. Each Investor shall have
delivered to the Company and the Company shall have received, (i) full payment
in immediately
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available funds of the aggregate Purchase Price of such Investor as set forth in
Schedule I, (ii) an Acknowledgment and, (iii) if applicable, a Supporting
Obligation.
Section 4.7 Aggregate Funding. The total number of Investment Units
purchased by the Investors shall be not less than 1,600,000 Investment Units,
the total number of shares of Series A Preferred Stock and Common Stock
purchased by other investors shall be not less than 2,600,000 shares and
1,272,043 shares, respectively, and the Company shall have received Commitments
and gross proceeds from the sale of the Investment Units, the Series A Preferred
Stock and the Common Stock of not less than U.S. $210,500,000.
ARTICLE V
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company represents, warrants and covenants to each of the
Investors as of the date of this Agreement and as of the Closing Date as
follows:
Section 5.1 Due Organization, Valid Existence and Authority of the
Company and the Company's Initial Subsidiaries. (a) The Company has been duly
incorporated and is validly existing under the laws of Bermuda. Upon completion
of the Closing, the Company will have full right, power and authority to carry
on its business as conducted and as proposed to be conducted as described in the
Private Placement Memorandum. The Company has full right, power and authority to
enter into this Agreement and the Other Closing Documents to which the Company
is a party, and perform its obligations hereunder and thereunder. The Memorandum
of Association, in the form attached hereto as Annex I, is a true and complete
copy of the Memorandum of Association of the Company as in effect at the date of
this Agreement, and no amendment to such Memorandum of Association has been
proposed or adopted. At the Closing, the Bye-laws of the Company will be in the
form attached hereto as Annex II. Upon completion of the Closing, the Company
will not own any interest in or control, directly or indirectly, any other
corporations, partnerships or other entities, other than the Initial
Subsidiaries.
(b) Each of the Initial Subsidiaries has been duly incorporated
and is validly existing under the laws of its jurisdiction of incorporation.
Upon completion of the Closing and the closings under the Series A Subscription
Agreement and the Founders' Common Stock Subscription Agreement, and the use of
the proceeds therefrom as described in the Private Placement Memorandum, each
Initial
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Subsidiary will have the full right, power and authority to carry on its
business as proposed to be conducted as described in the Private Placement
Memorandum.
Section 5.2 Authorization and Validity of Agreements. This Agreement
has been duly authorized, executed and delivered by the Company and constitutes
a valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity) (together, the "Creditor and Enforceability
Exceptions"). Each of the Other Closing Documents to which the Company is a
party has been duly authorized by the Company, and, when executed and delivered
by the Company at the Closing, will constitute a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms,
subject to the Creditor and Enforceability Exceptions.
Section 5.3 Capitalization. The sale of the Investment Units and the
issuance of the Shares have been duly authorized by the Company and, upon
payment for the Investment Units in accordance with Article II hereof, the
Shares issued at Closing will be validly issued, fully paid and non-assessable
(meaning that no further sums will be payable in respect of the holding of the
Shares). Except as contemplated by its Bye-laws, the Shareholders Agreement, the
Common Stock Warrant Acquisition Agreement dated on or prior to the Closing Date
among the Company and the investors named therein, the Sponsoring Investors and
Founders Stock Warrant Plan in substantially the form attached hereto as Annex
IX, the Employee Stock Warrant Plan in substantially the form attached hereto as
Annex IX, and this Agreement, each of the Company and the Initial Subsidiaries
does not, and on the Closing Date will not, have any outstanding or authorized
options, warrants, calls, rights, commitments or any other agreements of any
character obligating it to issue any of its shares or any securities convertible
into or exchangeable for, or evidencing the right to purchase or obtain, any of
its shares or any agreements or understandings with respect to the voting, sale
or transfer of any of its shares or any securities convertible into or
exchangeable for or evidencing the right to purchase or obtain any of its
shares. The Investment Units and all underlying Shares shall conform in all
material respects to the descriptions of such securities provided in the Private
Placement Memorandum.
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Section 5.4 Reserve of Shares Issued in Connection with the
Commitment. Prior to the Closing, the Company shall reserve such number of
Series B Preferred Stock equal to the aggregate number of such shares that each
Investor may be required to purchase pursuant to such Investor's Commitment.
Section 5.5 Shares Issued in Connection with the Commitment. The
Series B Preferred Stock that each Investor may be required to purchase pursuant
to such Investor's Commitment will, when issued by the Company and paid for
pursuant to this Agreement, be duly authorized by the Company and will be
validly issued, fully paid and non-assessable (meaning that no further sums will
be payable in respect of the holding of the Shares).
Section 5.6 No Conflict with Other Instruments; No Approvals Required
Except as Have Been Obtained. (i) The execution and delivery of this Agreement
and the Other Closing Documents to which the Company is a party by the Company
and compliance by the Company with the terms and conditions hereof and thereof,
will not violate, with or without the giving of notice or the lapse of time, or
both, or require any registration, qualification, approval or filing under, any
provision of law, statute, ordinance or regulation applicable to the Company or
any affiliate thereof, and will not conflict with, or require any consent or
approval under, or result in the breach or termination of any provision of, or
constitute a default under, or result in the acceleration of the performance of
the obligations of the Company or any affiliate thereof under, or result in the
creation of any claim, lien, charge or encumbrance upon any of the properties,
assets or businesses of the Company or any affiliate thereof pursuant to the
Memorandum of Association or Bye-laws of the Company or the organizational
documents of such affiliate, as the case may be, or any order, judgment, decree,
law, ordinance or regulation applicable to the Company or such affiliate, as the
case may be, or any contract, instrument, agreement or restriction to which the
Company or such affiliate, as the case may be, is a party or by which the
Company or such affiliate, as the case may be, or any of its assets or
properties is bound. Except where the Company is obliged to obtain Bermuda
governmental approvals that have been obtained, neither the Company or any
affiliate thereof nor any of the Company's or any of its affiliates' respective
assets or properties is subject to any charter, bye-law, contract or other
instrument or agreement, order, judgment, decree, law, statute, ordinance or
regulation or any other restriction of any kind or character that would prevent
the Company from entering into this Agreement or the Other Closing Documents to
which the Company is a party or from consummating the transactions
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contemplated hereby or thereby in accordance with the terms hereof or thereof.
(ii) The execution and delivery of the Other Closing Documents to
which each of the Initial Subsidiaries is a party by such Initial Subsidiary and
compliance by such Initial Subsidiary with the terms and conditions thereof,
will not violate, with or without the giving of notice or the lapse of time, or
both, or require any registration, qualification, approval or filing under, any
provision of law, statute, ordinance or regulation applicable to such Initial
Subsidiary or any affiliate thereof, and will not conflict with, or require any
consent or approval under, or result in the breach or termination of any
provision of, or constitute a default under, or result in the acceleration of
the performance of the obligations of such Initial Subsidiary or any affiliate
thereof under, or result in the creation of any claim, lien, charge or
encumbrance upon any of the properties, assets or businesses of such Initial
Subsidiary or any affiliate thereof pursuant to the Memorandum of Association,
Articles of Incorporation or Bye-laws, as the case may be, of such Initial
Subsidiary or the organizational documents of such affiliate, as the case may
be, or any order, judgment, decree, law, ordinance or regulation applicable to
the Initial Subsidiary or such affiliate, as the case may be, or any contract,
instrument, agreement or restriction to which such Initial Subsidiary or such
affiliate, as the case may be, is a party or by which such Initial Subsidiary or
such affiliate, as the case may be, or any of its assets or properties is bound.
Except where such Initial Subsidiary is obliged to obtain Bermuda governmental
approvals that have been obtained, neither such Initial Subsidiary or any
affiliate thereof nor any of such Initial Subsidiary's or its affiliates'
respective assets or properties is subject to any charter, bye-law, contract or
other instrument or agreement, order, judgment, decree, law, statute, ordinance
or regulation or any other restriction of any kind or character that would
prevent such Initial Subsidiary from entering into the Other Closing Documents
to which such Initial Subsidiary is a party or from consummating the
transactions contemplated thereby in accordance with the terms thereof.
Section 5.7 Regulatory Filings; Compliance with Law. Upon completion
of the Closing and the closings under the Series A Subscription Agreement and
the Founders' Common Stock Subscription Agreement, and the use of proceeds
therefrom (other than from the Commitments) as described in the Private
Placement Memorandum, CGA will be authorized on the Closing Date under Bermuda
law to conduct the business of selling insurance and reinsurance as contemplated
by the Private Placement Memorandum and no further approvals of insurance
regulatory or other authorities are required for
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the conduct of such business. Upon completion of the Closing and the closings
under the Series A Subscription Agreement and the Founders' Common Stock
Subscription Agreement, and the use of proceeds therefrom as described in the
Private Placement Memorandum, CGAIM will be authorized on the Closing Date or
immediately thereafter under the applicable United States federal and state laws
to conduct its business as contemplated by the Private Placement Memorandum and
no further approvals of regulatory or other authorities are required for the
conduct of such business. Upon completion of the Closing and the closings under
the Series A Subscription Agreement and the Founders' Common Stock Subscription
Agreement, and the use of proceeds therefrom (other than from the Commitments)
as described in the Private Placement Memorandum, the Company and the Initial
Subsidiaries will be in compliance with all applicable laws and regulations.
Section 5.8 Stamp Duties or Taxes. No Bermuda stamp, transfer or
similar duties or taxes are payable in respect of the issuance and delivery of
the Shares, and the sale and delivery of the Investment Units, to the Investors
pursuant to this Agreement and if any such taxes arise in connection with the
execution of this Agreement, the Other Closing Documents, or the consummation of
any of the transactions contemplated hereby or thereby, then the Company will
pay such taxes.
Section 5.9 Private Offering of the Shares.
(a) The offer and sale of the Investment Units and the issuance
and delivery of the Shares are intended to be exempt from the provisions of
Section 5 of the United States Securities Act of 1933, as amended (the
"Securities Act"), and from the registration provisions of the applicable state
securities laws. Neither the Company nor anyone acting on its behalf has taken,
or omitted to take, any action, with respect to the Investment Units or any
securities similar to the Investment Units, or otherwise, that would bring the
sale of the Investment Units and the issuance of the Shares within the
provisions of Section 5 of the Securities Act or that would violate any blue sky
laws of a state of the United States or securities law of any foreign
jurisdiction (including Bermuda).
(b) In the case of each offer or sale of the Investment Units,
no form of general solicitation or general advertising was used by the Company
or any person authorized to act on behalf of the Company, including, without
limitation, any advertisement, article, notice or other communication published
in any newspaper, magazine or similar medium or broadcast over television or
radio, or any
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seminar or meeting whose attendees have been invited by any general solicitation
or general advertising.
(c) Neither the Company nor anyone acting on its behalf has
taken, or omitted to take, any action, with respect to any other shares of the
Company issued and sold by the Company that would bring the issuance and sale of
such shares within the provisions of Section 5 of the Securities Act or that
would violate any blue sky laws of a state of the United States or securities
law of a foreign jurisdiction (including Bermuda).
(d) Except for (i) the issuance of shares of capital stock of
the Company in connection with the initial organization of the Company (which
such shares shall be redeemed by the Company at the Closing) and (ii) the
issuance of shares of capital stock by the Initial Subsidiaries to the Company,
neither the Company nor any Initial Subsidiary has issued or sold, or agreed to
issue or sell, any shares in the Company or any Initial Subsidiary to any
persons other than to the Investors pursuant hereto and to the other investors
pursuant to the subscription agreements contained in the Other Closing
Documents.
Section 5.10 The Private Placement Memorandum. The Private Placement
Memorandum does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading. There
is no fact which the Company has not disclosed herein or in the Private
Placement Memorandum nor any amendment or supplement thereto as of the date
thereof and at all times subsequent thereto up to the Closing Date that, so far
as the Company can now foresee, is reasonably likely to have a material adverse
effect on the performance of obligations hereunder and under the Other Closing
Documents by the Company and its Initial Subsidiaries, considered as a whole, or
on the business, operations, financial condition, assets, liabilities or
prospects of the Company and its Initial Subsidiaries taken as a whole.
Section 5.11 Not an "Investment Company". Each of the Company and the
Initial Subsidiaries is not, and when conducting business as contemplated by the
Private Placement Memorandum will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the United
States Investment Company Act of 1940, as amended.
Section 5.12 Business Newly Formed. Each of the Company and its
Initial Subsidiaries is newly formed, has neither conducted any business nor
incurred any liabilities (other than organizational expenses with respect to the
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Company and the Initial Subsidiaries, expenses associated with establishing the
businesses of the Initial Subsidiaries and expenses in connection with the
offering and issuance of the securities of the Company and the Initial
Subsidiaries), has entered into no material agreements and incurred no liens or
encumbrances on present or future assets or revenues and has no proceedings
pending against, or to the Company's knowledge, threatened against or affecting
it before any court, governmental authority, arbitration board or tribunal, in
each of the foregoing cases, other than as disclosed in the Private Placement
Memorandum or referred to herein or in an attachment hereto.
Section 5.13 Operating Company. At the time the Company issues any
Investment Units, the Company shall be an "operating company" as defined in
United States Department of Labor Regulation section 2510.3-101(c) issued under
the United States Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Company shall at all times thereafter conduct its activities
so that it will continue to qualify as such an "operating company." As a result,
pursuant to United States Department of Labor Regulation section
2510.3-101(a)(2)(i), at no time shall the assets of the Company constitute the
assets of any Investor or shareholder of the Company for purposes of Title I of
ERISA or Section 4975 of the United States Internal Revenue Code of 1986 (the
"Code").
Section 5.14 No U.S. Trade or Business and Not a Controlled Foreign
Corporation. The Company shall use its best efforts not to take, and to cause
CGA not to take, any action which the Company has reason to believe could cause
it or CGA to be considered engaged in the conduct of a trade or business in the
United States (within the meaning of Code Section 864) or to become a controlled
foreign corporation (within the meaning of Code Section 957) ("CFC"); provided,
however, that this Section 5.14 shall not apply to any action which affects the
election of directors pursuant to Section 12 of the Bye-laws; provided, further,
that it is hereby understood that the Company shall not be considered to violate
this Section 5.14 in the event that (x) the board of directors of the Company
(the "Board") shall, in its sole discretion, request the advice of counsel with
respect to a proposed action and counsel determines that such action will more
likely than not cause the Company or CGA to be engaged in the conduct of a trade
or business in the United States or become a CFC and (y) such proposed action to
be taken by the Company receives the prior approval of 75% of the members of the
Board then in office (for the sake of clarity, the foregoing imposes no
obligation on the Company or the Board to seek the advice of counsel prior to
taking any action unless the Company wishes to take advantage of this second
proviso to Section 5.14). It is hereby
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understood that this Section 5.14 does not alter any provision in the Company's
Bye-laws and all actions taken in connection herewith must comply with such
Bye-laws.
Section 5.15 Related Person Insurance Income. (a) The Company shall
use its best efforts to cause CGA not to sell insurance or reinsurance to a U.S.
person which is a shareholder of the Company ("U.S. Shareholder") or a related
person (within the meaning of Section 953(c)(6) of the Code) to a U.S.
Shareholder ("Related Person") and which would therefore generate related person
insurance income (within the meaning of Section 953(c)(2) of the Code) ("RPII")
if the Company knows that (i) 20% or more of CGA's gross insurance income in any
taxable year will be RPII and (ii) persons which are directly or indirectly
insured or reinsured by CGA ("Insureds") or Related Persons to Insureds own 20
percent or more of the stock of CGA ("Excess RPII"); provided, however, that it
is hereby understood that the Company shall not be considered to violate this
Section 5.15(a) by virtue of such sale which the Company has reason to believe
will generate Excess RPII if the Company receives the prior approval of 100% of
the members of the Board then in office; provided, further, that it is hereby
understood that this Section 5.15(a) does not alter any provision in the
Company's Bye-laws and all actions taken in connection herewith must comply with
such Bye-laws.
(b) In the event that the Board shall have given prior authorization
(as provided in subsection (a) of this Section 5.15) for CGA to sell insurance
or reinsurance which the Company has reason to believe will generate Excess RPII
for any tax year, unless a U.S. statute, a final regulation of the U.S. Treasury
or a published ruling of the U.S. Internal Revenue Service issued after the
Closing Date provides or establishes that subpart F insurance income (as defined
in Code Section 953) does not constitute unrelated business taxable income (as
defined in Code Section 512), the Company shall so notify any U.S. Shareholder
which is subject, pursuant to Code Section 511, to tax only on its unrelated
business taxable income not later than June 30 of the tax year in which the
Company proposes that CGA generate Excess RPII.
Section 5.16 Operating Guidelines. Attached hereto as Annex VII is a
true, correct and complete copy of the operating guidelines of the Company and
the Initial Subsidiaries (the "Operating Guidelines"), which were adopted by all
necessary corporate action of the Board at a duly called and convened meeting of
the Board. The resolution(s) pursuant to which the Operating Guidelines were
adopted provide(s) that the Operating Guidelines may only be amended or revoked
pursuant to a resolution adopted by a two-thirds vote of the Board at a duly
called and
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convened meeting of the Board. To the extent the Operating Guidelines are
followed by the Company and the Initial Subsidiaries, (i) neither the Company
nor CGA will be considered to be engaged in the conduct of a trade or business
in the United States through a U.S. "permanent establishment" as defined in
Article 3 of the Convention between the Government of the United States of
America and the Government of the United Kingdom of Great Britain and Northern
Ireland (on behalf of the Government of Bermuda) relating to the Taxation of
Insurance Enterprises and Mutual Assistance in Tax Matters and (ii) neither the
Company nor any Initial Subsidiaries will be considered to be transacting the
business of insurance in any state of the United States without appropriate
licenses or approvals. The Company knows of no reason why it and the Initial
Subsidiaries cannot now and will not in the future be able to continuously
comply with the Operating Guidelines. The Company knows of no reason why
compliance with the Operating Guidelines would result in the Company's inability
to meet the projections set forth in the Private Placement Memorandum.
Section 5.17 Passive Foreign Investment Company. The Company shall use
its best efforts to operate its business in such manner that neither the Company
nor CGA will be considered a passive foreign investment company under Section
1296 of the Code.
Section 5.18 Use of Proceeds of the Offering. The Company shall use
the net proceeds of this subscription (after payment of placement agent fees and
other fees and expenses incurred by the Company in connection with the Offering,
the offering of the Series A Preferred Stock and the Common Stock to other
investors and the organization and establishment of the Company and the Initial
Subsidiaries, which fees and expenses shall be substantially as disclosed in
writing to counsel to the Investors) as capital to engage in the financial
guarantee insurance business as described in the Private Placement Memorandum.
On the Closing Date, CGA will be capitalized with $125 million and will have
received Acknowledgments with respect to each Investor's obligation under
Section 1.3 hereof.
Section 5.19 Shareholders. Schedule 2 to this Agreement represents a
true and complete list of the shareholders of the Company upon completion of the
Closing and their respective shareholdings on the Closing Date.
Section 5.20 St. George Representations. The Company has no reason to
believe that the representations and warranties given by St. George to the St.
George Investors pursuant to the St. George Subscription Agreement
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are not true and complete as of the date made thereunder and as of the Closing
Date.
Section 5.21 Bermuda Withholding Tax. The payment of dividends on or
the making of distributions or redemption payments to any holder of the Shares
will not be subject to any tax withholding requirement under current Bermuda tax
law.
Section 5.22 No Events of Non-Compliance. No event has occurred and no
condition exists which, upon the consummation of transactions under this
Agreement or any Other Closing Document would constitute an Event of
Non-Compliance (as defined in the Series A Subscription Agreement as in effect
on the date hereof) with or without notice or lapse of time or both.
Section 5.23 Registration Rights. Other than as provided in the Series
A Subscription Agreement and the Shareholders Agreement, the Company has not
agreed to register any of its shares under the Securities Act.
Section 5.24 Letter Agreement with DCR. In connection with obtaining
its AAA rating from DCR, the Company will enter into a letter agreement with
DCR, dated as of the Closing Date, in substantially the form attached as Annex
VIII hereto.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
Each of the Investors, severally and not jointly, hereby represents
and warrants to the Company as of the date of this Agreement and as of the
Closing Date as follows:
Section 6.1 Due Organization, Good Standing and Authority of the
Investor. Such Investor is a corporation, partnership, limited liability
company, trust or other legal entity and is duly organized, validly existing and
in good standing under the laws of such Investor's jurisdiction of organization
and not resident in Bermuda for Bermuda foreign exchange control purposes.
Section 6.2 Authorization and Validity of Agreements. This Agreement
has been duly authorized, executed and delivered by such Investor and, assuming
the due authorization, execution and delivery by the other parties hereto,
constitutes a valid and binding obligation of such Investor enforceable against
such Investor in accordance with its terms, subject to the Creditor and
Enforceability Exceptions. Each of the Shareholders
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Agreement and the Acknowledgment has been duly authorized by such Investor and,
when executed and delivered by such Investor at the Closing, and assuming, in
the case of the Shareholders Agreement, the due authorization, execution and
delivery thereof by the other parties thereto, will constitute a valid and
binding obligation of such Investor enforceable against such Investor in
accordance with its terms, subject to the Creditor and Enforceability
Exceptions.
Section 6.3 Investment Intent. (a) Such Investor is acquiring the
Investment Units for its own account as principal or for one or more separate
accounts maintained by such Investor or for the account of one or more pension
or trust funds of which such Investor is trustee, in each case, for investment
purposes only, and not with a view to, or for, the resale or other distribution
thereof, in whole or in part; provided that, subject to the terms hereof, the
disposition of such Investor's or their property shall at all times be within
such Investor's or their control.
(b) If the Investment Units are acquired for the account of one or
more pension or trust funds, such Investor is acting as sole trustee (other than
with respect to the Investors listed on Schedule 3) and has sole investment
discretion with respect to such Investor's acquisition of the Investment Units,
and the determination and decision on such Investor's behalf to acquire the
Investment Units for such pension or trust funds is being made by the same
individual or group of individuals who customarily pass on such investments so
that such Investor's decision as to acquisitions for all such funds is the
result of one study and conclusion. Such Investor (i) is an insurance company
and is using the assets of its general account or (ii) has advised the Company
in writing of such Investor's form of organization and, except with respect to a
commingled trust account, the accounts for which such Investor is purchasing,
and all such information provided to the Company is true and correct as of the
date hereof.
Section 6.4 No Conflict with Other Instruments; No Approvals Required
Except as Have Been Obtained. The execution and delivery of this Agreement, the
Acknowledgment and the Shareholders Agreement by such Investor and the
compliance by such Investor with the terms and conditions hereof and thereof
will not violate, with or without the giving of notice or the lapse of time, or
both, or require any registration, qualification, approval or filing under, any
provision of law, statute, ordinance or regulation applicable to such Investor,
and will not conflict with, or require any consent or approval under, or result
in the breach or termination of any provision of, or constitute a
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default under, or result in the acceleration of the performance of the
obligations of such Investor under, or result in the creation of any claim,
lien, charge or encumbrance upon any of the properties, assets or businesses of
such Investor pursuant to the articles of incorporation or by-laws of such
Investor (if such Investor is a corporation) or equivalent organizational
documents (if such Investor is not a corporation) or any order, judgment,
decree, law, statute, ordinance or regulation applicable to such Investor or any
contract, instrument, agreement or restriction to which such Investor is a party
or by which such Investor or any of its assets or properties is bound other than
any such (i) violation, (ii) failure to register, qualify, obtain approval or
file, (iii) conflict, (iv) breach, termination or default, (v) acceleration, or
(vi) creation of claim, lien, charge or encumbrance that would not, individually
or in the aggregate, have a material adverse effect on such Investor's ability
to consummate the transactions contemplated hereby. Neither such Investor nor
any of its assets or properties is subject to any charter, by-law, contract or
other instrument or agreement, order, judgment, decree, law, statute, ordinance
or regulation or any other restriction of any kind or character that would
prevent such Investor from entering into this Agreement, the Acknowledgment or
the Shareholders Agreement or from consummating the transactions contemplated
hereby or thereby in accordance with the terms hereof or thereof other than that
which would not, individually or in the aggregate have a material adverse effect
on such Investor's ability to consummate the transactions contemplated in
accordance with the terms hereof or thereof. Notwithstanding anything in this
Agreement to the contrary, no representation or warranty is made by any Investor
regarding compliance with ERISA or Section 4975 of the Code, or the effect under
ERISA or Section 4975 of the Code of the execution and delivery of this
Agreement, the Acknowledgment and the Shareholders Agreement by such Investor
and the compliance by such Investor with the terms and conditions hereof or
thereof.
Section 6.5 Investor Awareness and Suitability. Such Investor
acknowledges, agrees and is aware that:
(i) An investment in the Shares involves a high degree of risk,
including, without limitation, the risks identified under the caption "Risk
Factors" in the Private Placement Memorandum, and such Investor may lose
the entire amount of its investment and such Investor has the knowledge and
experience in financial affairs that it is capable of evaluating the merits
and risks of purchasing the Investment Units;
(ii) The Company has only recently been organized and has no
financial or operating history;
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(iii) The Private Placement Memorandum contains a summary of
certain United States and Bermuda tax consequences under current laws
relating to (i) the United States federal income taxation of the Company
and of U.S. Persons (as defined below) and non-U.S. Persons that own
Investment Units of the Company and (ii) the Bermuda taxation of persons or
entities not resident in Bermuda for exchange control purposes that own
Investment Units of the Company. Positions of, and developments in rulings
of, the United States Internal Revenue Service, court decisions or
legislative or administrative actions may have an adverse effect on one or
more of the tax benefits sought by the Company. Moreover, the Company
retains the right to alter the conduct of its affairs in such a manner as
to subject its business to United States federal and/or state taxation,
subject to the limitations set forth in Section 5.14. The Private Placement
Memorandum does not address the Bermuda taxation of Investors that are
resident in Bermuda for exchange control purposes or the taxation of
Investors by any jurisdiction other than the United States or Bermuda,
which tax consequences may be significantly different from the tax
consequences discussed in the Private Placement Memorandum. (For purposes
of this Section 6.5, "U.S. Person" means an individual who is a citizen or
resident of the United States, a company, corporation or partnership
created or organized under the laws of the United States or any state
thereof, an estate, the income of which, from non-United States sources and
not effectively connected with the conduct of a trade or business in the
United States, is includable in gross income for United States federal
income tax purposes, or a trust, if (i) a court within the United States
may exercise primary supervision of the trust, and (ii) one or more United
States fiduciaries have the authority to control all substantial decisions
of the trust);
(iv) No Bermuda or United States federal or state regulatory
authority or any foreign agency has passed upon the accuracy, adequacy,
validity or completeness of the Private Placement Memorandum, this
Agreement or the Shareholders Agreement or made any finding or
determination as to the fairness of an investment in the Investment Units;
(v) The Investment Units are illiquid, and such Investor must
bear the financial risk of investment in the Investment Units for an
indefinite period of time and such Investor represents and warrants that
such Investor has the financial ability to bear the financial risk of its
investment, and, except for Starwood CGA, LLC, CGA Firemark Venture Fund
30
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I, LLC and Lennar CGA Holdings, Inc., such Investor's investment does not
exceed ten percent (10%) of such Investor's net worth;
(vi) The Bye-laws, the Shareholders Agreement and this
Agreement contain substantial restrictions on the transferability of the
Investment Units and separation of the Shares attributable to each
Investment Unit;
(vii) There is no existing public or other market for the
Investment Units, and it is not expected that any such market will develop.
There can be no assurance that such Investor will be able to sell or
dispose of such Investor's Investment Units. Without limiting the
generality of the foregoing, in order not to jeopardize the Offering's
exempt status under the Securities Act or under the securities laws of any
other jurisdiction, the transferee of such Investment Units may, among
other things, be required to fulfill the investor suitability requirements
thereunder;
(viii) The Investment Units, or the securities underlying such
units, have not been registered under the Securities Act or under the
securities laws of any other jurisdiction, including the states of the
United States and, except as provided in the Shareholders Agreement, the
Company is under no obligation to, and currently does not intend to,
register or qualify the Investment Units or any securities underlying such
units for resale by such Investor or assist such Investor in complying with
any exemption under the Securities Act or the securities laws of any such
jurisdiction or any other jurisdiction. An offer or sale of Investment
Units, or the securities underlying such units, by such Investor in the
absence of registration under such securities laws will require the
availability of an exemption thereunder. A restrictive legend in
substantially the form set forth in Section 7.1 hereof shall be placed on
the certificates representing the Investment Units and a notation shall be
made in the appropriate records of the Company indicating that the
securities underlying the Investment Units are subject to restrictions on
transfer;
(ix) Such Investor shall hold the Investment Units subject to
this Agreement, the Bye-laws of the Company and the Shareholders Agreement
from time to time in effect and shall have voting rights with respect to
the Investment Units as specified in the Bye-laws of the Company from time
to time in effect and subject to applicable law; and
31
<PAGE>
(x) It is intended that no person or entity may acquire or own,
directly, indirectly or by attribution (within the meaning of Section 958
of the Code) 10% or more of the total combined voting power of the Common
Stock, the Series A Preferred Stock and the Series B Preferred Stock, as
such voting power is described in the Bye-Laws.
Section 6.6 Accredited Investor Status. Such Investor hereby
represents and warrants to the Company that it qualifies as an "accredited
investor" within the meaning of Rule 501(a)(1), (2), (3), (7) or (8) of
Regulation D under the Securities Act because such Investor is:
(a) A bank as defined in Section 3(a)(2) of the Securities Act
or a savings and loan association or other institution as defined in
Section (3)(a)(5)(A) of the Securities Act whether acting in its individual
or fiduciary capacity; a broker or dealer registered pursuant to Section 15
of the United States Securities Exchange Act of 1934; an insurance company
as defined in Section 2(13) of the Securities Act; an investment company
registered under the United States Investment Company Act of 1940 or a
business development company as defined in Section 2(a)(48) of that Act; a
Small Business Investment Company licensed by the United States Small
Business Administration under Section 301(c) or (d) of the United States
Small Business Investment Act of 1958; a plan established and maintained by
a state of the United States, its political subdivisions, or an agency or
instrumentality of such state or its political subdivisions for the benefit
of its employees, if such plan has total assets in excess of U.S.
$5,000,000; an employee benefit plan within the meaning of the United
States Employee Retirement Income Security Act of 1974, if the investment
decision is made by a plan fiduciary, as defined in Section 3(21) of such
Act, which is either a bank, savings and loan association, insurance
company, or registered investment advisor, or if the employee benefit plan
has total assets in excess of U.S. $5,000,000 or, if a self-directed plan,
with investment decisions made solely by persons that are accredited
investors; or
(b) A private business development company as defined in
Section 202(a)(22) of the United States Investment Advisers Act of 1940; or
(c) An organization described in Section 501(c)(3) of the Code,
corporation, Massachusetts or similar business trust, or partnership, not
formed for
32
<PAGE>
the specific purpose of acquiring the Investment Units, with total assets
in excess of U.S. $5,000,000; or
(d) A trust, with total assets in excess of U.S. $5,000,000,
not formed for the specific purpose of acquiring the Investment Units,
whose purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) under the Securities Act; or
(e) An entity in which all of the equity owners are accredited
investors.
Section 6.7 Receipt of Information, Access to Information.
Such Investor:
(a) has been furnished with the Private Placement Memorandum,
the Memorandum of Association, the form of Bye-laws of the Company, the
Other Closing Documents, and any documents that may have been made
available upon such Investor's request (such documents, other than the
Private Placement Memorandum, being collectively referred to as the "Other
Documents"), and such Investor has carefully read the Private Placement
Memorandum and the Other Documents and understands and has evaluated the
risks of a purchase of the Investment Units, including the risks set forth
under the caption "Risk Factors" in the Private Placement Memorandum;
(b) has been given the opportunity to ask questions of, and
receive answers from, the Company and the Sponsoring Investors (as defined
in the Company's Bye-laws) concerning the terms and conditions of the
Offering and other matters pertaining to an investment in the Investment
Units, has been given the opportunity to obtain such additional information
necessary to evaluate the merits and risks of a purchase of the Investment
Units to the extent the Company or the Sponsoring Investors possess such
information, and has received all documents and information that it has
requested relating to an investment in the Investment Units;
(c) has not relied upon any representations or other
information (whether oral or written) from the Company, any of the
Sponsoring Investors, or their respective directors, officers or
affiliates, or from any other persons, other than the representations
contained in this Agreement and the information contained in the Private
Placement Memorandum and the Other Documents; and
(d) has carefully considered and has, to the extent such
Investor believes such discussion
33
<PAGE>
necessary, discussed with such Investor's professional legal, financial and
tax advisers, the suitability of an investment in the Investment Units for
such Investor's particular financial and tax situation and has determined
that such Investor's Investment Units are a suitable investment for such
Investor.
Section 6.8 Investment Unit Ownership Limitations. To such Investor's
knowledge, such Investor's purchase on the Closing Date of Investment Units
pursuant to this Agreement will not cause any person or entity to own on the
Closing Date directly, indirectly or by attribution (within the meaning of
Section 958 of the Code) 10% or more of the total combined voting power of the
Common Stock, the Series A Preferred Stock and the Series B Preferred Stock, as
such voting power is described in the Bye-Laws or to be treated by virtue of its
ownership of stock in the Company as indirectly or constructively owning on the
Closing Date 10% or more of the voting power of all classes of capital stock of
CGA entitled to vote. Such Investor may rely on the list of anticipated
shareholders of the Company and their respective anticipated shareholdings set
forth in Schedule 2 hereto for purposes of making this representation and
warranty.
At such time as the Company supplies the Investors with names of
additional Series A Preferred Stock investors, prior to the Closing, the
Investors will indicate whether the additional names will cause any person or
entity to own on the Closing Date directly, indirectly or by attribution (within
the meaning of Section 958 of the Code) 10% or more of the total combined voting
power of the Common Stock, the Series A Preferred Stock and the Series B
Preferred Stock, as such voting power is described in the Bye-Laws or to be
treated by virtue of its ownership of stock in the Company as indirectly or
constructively owning on the Closing Date 10% or more of the voting power of all
classes of capital stock of CGA entitled to vote.
ARTICLE VII
RESTRICTIONS ON TRANSFER
Investment Units and the underlying shares (collectively,
"Securities") shall not be transferable except upon the conditions specified in
this Article VII, which are intended to insure compliance with the provisions of
the Securities Act, applicable securities laws of other jurisdictions and
Bermuda law in respect of the transfer of any Securities and are in addition to
the conditions relating to the transfer of the Securities set forth in the
Shareholders Agreement and the Company's Bye-laws.
34
<PAGE>
Section 7.1 Restrictive Legends. In addition to any other legend
required by the Company's Bye-laws or applicable law, each certificate
representing Securities shall (unless otherwise permitted by the provisions of
this Article VII) be stamped or otherwise imprinted with a legend in
substantially the following form:
"ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE
SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY, AND THE RIGHTS OF
THE HOLDER OF SUCH SECURITIES ARE SUBJECT TO, THE TERMS AND CONDITIONS
CONTAINED IN THE BYE-LAWS OF CGA GROUP, LTD. (THE "COMPANY"), THE
INVESTMENT UNITS SUBSCRIPTION AGREEMENT AND THE SHAREHOLDERS AGREEMENT
WHICH ARE AVAILABLE FOR EXAMINATION BY HOLDERS OF THESE SHARES AT THE
REGISTERED OFFICE OF THE COMPANY. IN ADDITION TO THE FOREGOING
RESTRICTIONS, THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE TRANSFERRED, SOLD OR
OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT IS IN EFFECT UNDER
THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH
SHARES OR A WRITTEN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY IS
PROVIDED TO THE COMPANY TO THE EFFECT THAT NO REGISTRATIONS ARE REQUIRED
UNDER SUCH SECURITIES LAWS. THE PRIOR APPROVAL OF THE BERMUDA MONETARY
AUTHORITY IS NOT REQUIRED FOR ANY SALE, ASSIGNMENT, TRANSFER, PLEDGE OR
OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
PROVIDED THAT ANY SUCH SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER
DISPOSITION IS BETWEEN PERSONS WHO ARE DESIGNATED AS NON-RESIDENTS OF
BERMUDA FOR THE PURPOSES OF THE EXCHANGE CONTROL ACT, 1972."
Section 7.2 Notice of Proposed Transfers. (a) The holder of any
Securities bearing the entire restrictive legend set forth in Section 7.1 above
("Restricted Securities"), by acceptance thereof, agrees that, unless a
registration statement is in effect under the Securities Act and under
applicable securities laws with respect to such Restricted Securities, prior to
any transfer or attempted transfer of such Restricted Securities, such holder
will give the Company (i) unless the transferee is an Affiliate of the
transferor (as defined in the Shareholders Agreement), written notice describing
the proposed transfer of any Restricted Securities in reasonable detail only to
the extent necessary to evaluate whether such transfer is in compliance with the
applicable securities laws, the Shareholders Agreement and the Bye-laws sections
61 through 63, (ii) unless the transferee is an Affiliate of the
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<PAGE>
transferor (as defined in the Shareholders Agreement), such other information
about the proposed transfer of such Restricted Securities or the proposed
transferee of such Restricted Securities as the Company may reasonably request
only to the extent necessary to evaluate whether such transfer is in compliance
with the applicable securities laws, the Shareholders Agreement and 61 through
63 of the Bye-laws, and (iii) an opinion of counsel (both counsel and opinion
reasonably satisfactory to the Company (it being understood that in-house
counsel for such holder shall be considered satisfactory to the Company)) to the
effect that the proposed transfer of such Restricted Securities may be effected
without registration of such Restricted Securities under the Securities Act and
under other applicable securities laws. The Company hereby acknowledges that no
prior approval of the Bermuda Monetary Authority is necessary for any transfer
of restricted shares between persons who are designated as non-residents of
Bermuda for the purposes of the Exchange Control Act, 1972.
(b) If the holder of the Restricted Securities delivers to the Company
an opinion of counsel that subsequent transfers of such Restricted Securities
will not require registration or qualification under the Securities Act or under
other applicable securities laws, the Company will, or will cause the transfer
agent, if any, for such Restricted Securities promptly after such contemplated
transfer to deliver new certificates for such Restricted Securities that do not
bear that section of the restrictive legend set forth in Section 7.1 above
imposed by the Securities Act and under other applicable securities laws of any
other jurisdictions. If the foregoing conditions entitling the holder to effect
a proposed transfer of such Restricted Securities without registration under the
Securities Act and under other applicable securities laws and the conditions
relating to the transfer of Securities in the Shareholders Agreement have not
been satisfied, the holder shall not transfer the Restricted Securities, and the
Company will cause the transfer agent not to transfer such Restricted Securities
on its books or issue any certificates representing such Restricted Securities.
Any purported transfer of Restricted Securities not in accordance with
applicable securities laws shall be void.
(c) The restrictions imposed by this Agreement and the Shareholders
Agreement with respect to the Securities Act and under other applicable
securities laws of any other jurisdictions upon the transferability of any
particular Restricted Securities shall cease and terminate when such Restricted
Securities have been sold pursuant to an effective registration statement under
the Securities Act and under other applicable securities laws or transferred
pursuant to Rule 144 promulgated under the Securities Act.
36
<PAGE>
The holder of any Restricted Securities as to which such restrictions shall have
terminated shall be entitled to receive from the Company, without expense, a new
certificate representing such Securities that does not bear the restrictive
legend set forth above referring to transfer restrictions imposed by the
Securities Act and under other applicable securities laws of any other
jurisdictions and this Agreement but shall retain the restrictive legend set
forth above referring to transfer restrictions imposed by the requirements of
the Bye-laws and the Shareholders Agreement.
(d) As used in this Agreement, the term "transfer" encompasses any
sale, transfer, pledge or other disposition of any Securities referred to
herein.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Survival of Representations, Warranties and Covenants.
The representations, warranties and covenants of the parties contained in this
Agreement and in any document delivered or to be delivered pursuant to this
Agreement and in connection with the Closing hereunder shall survive the
Closing. The parties have made no representations or warranties other than those
that are expressly set forth in this Agreement and the Shareholders Agreement.
Section 8.2 Entire Agreement. This Agreement (including the Schedules,
Exhibits and Annexes hereto), together with the Other Closing Documents to which
the parties hereto are parties, constitutes the entire agreement among the
parties hereto and supersede all prior agreements and understandings, oral and
written, among the parties hereto with respect to the subject matter hereof.
Section 8.3 Severability. Any provision of this Agreement that is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or lack of authorization without invalidating the remaining
provisions hereof or affecting the validity, unenforceability or legality of
such provision in any other jurisdiction.
Section 8.4 Binding Effect; Benefit. This Agreement shall inure to the
benefit of and be binding upon the parties hereto, and their respective
successors, legal representatives and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer on
37
<PAGE>
any person other than the parties hereto, and their respective successors, legal
representatives and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
Section 8.5 Assignability. Except in connection with the transfer of
Investment Units or Shares, as the case may be, as contemplated by the Company's
Bye-laws, this Agreement and the Shareholders Agreement, this Agreement and the
rights hereunder shall not be assignable by any Investor without the prior
written consent of the Company; provided, however, that any Investor's
Commitment or obligations hereunder to the extent relating to such Commitment
may be transferred only in compliance with Section 1.3(d)(vii) and with the
prior consent of the Company. Except as provided in Section 1.3(c)(iii), the
Company may not assign its obligations hereunder without the prior consent of
the Investors. Any transfer in violation of this Section 8.5 shall be null and
void.
Section 8.6 Amendment; Waiver. Except as provided in the last
paragraph of Article III, no provision of this Agreement may be amended, waived
or otherwise modified except by an instrument in writing executed by the parties
hereto; provided, however, that the provisions of Sections 5.13, 5.14, 5.15,
5.16 and 5.17 may be amended, waived or otherwise modified by an instrument in
writing executed by the Company and the parties hereto that at the time just
prior to the amendment or modification own at least ninety percent (90%) of the
shares of Common Stock and ninety percent (90%) of the shares of Series B
Preferred Stock sold pursuant to this Agreement, whether or not such shares are
held as part of an Investment Unit.
Section 8.7 Headings. The Articles and Section headings contained in
this Agreement are for convenience only and shall not affect the meaning or
interpretation of this Agreement.
Section 8.8 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be one and the same instrument.
Section 8.9 Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of New York without giving effect to the
principles of conflicts of laws thereof.
Section 8.10 Notices and Payment. (a) All notices, requests, demands
and other communications hereunder shall be in writing and, except to the extent
otherwise provided in this Agreement, shall be deemed to
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<PAGE>
have been duly given if delivered by same day or next day courier or mailed,
registered mail, return receipt requested, or transmitted by telegram, telex or
facsimile (i) if to an Investor, at such Investor's address appearing on
Schedule 1 hereto or at any other address such Investor may have provided in
writing to the Company and (ii) if to the Company, at Clarendon House, Church
Street, Hamilton HM 11, Bermuda, Attention: the Company Secretary, or such other
address as the Company may have furnished to the Investors in writing. A notice
hereunder shall be deemed to have been given on the day such notice is sent or
transmitted; provided, however, that if such notice is sent by next-day courier
it shall be deemed to have been given the day following sending and, if by
registered mail, five days following sending.
(b) Unless otherwise provided in this Agreement, payments hereunder
shall be made by wire transfer of immediately available funds.
Section 8.11 Full Payment. (i) All payments in respect of the
Investment Units (including, without limitation, dividend, redemption and
liquidation payments, and payments under Section 8.11(ii), but excluding
dividends permitted to be made in kind) and all payments made by Investors with
respect to obligations under the Commitments, shall be made in immediately
available U.S. dollar funds. Each reference in this Agreement and the Other
Closing Documents to U.S. dollars (the "relevant currency") is of the essence.
To the fullest extent permitted by law, the obligations of the Company and each
Investor in respect of any amount due under this Agreement and the Other Closing
Documents will, notwithstanding any payment in any other currency (whether
pursuant to a judgment or otherwise), be discharged only to the extent of the
amount in the relevant currency that the party entitled to receive such payment
may, in accordance with its normal procedures, purchase with the sum paid in
such other currency (after any premium and costs of exchange) on the Business
Day immediately following the day on which such party receives such payment. If
the amount in the relevant currency that may be so purchased for any reason
falls short of the amount originally due, the Company or such Investor, as the
case may be, will pay such additional amounts, in the relevant currency, as may
be necessary to compensate for the shortfall. Any obligation of the Company or
such Investor, as the case may be, not discharged by such payment will, to the
fullest extent permitted by applicable law, be due as a separate and independent
obligation and, until discharged as provided herein, will continue in full force
and effect.
(ii) The Company will make all dividend, redemption, and liquidation
payments to the holders of
39
<PAGE>
Investment Units in respect of this Agreement and the Bye-laws free and clear of
and without deductions or withholding for or on account of any present or future
taxes, duties, assessments, fees or other governmental charges imposed or levied
by or on behalf of Bermuda or any other jurisdiction from or through which such
payment is made to the holders of Investment Units (all such taxes, duties,
assessments, fees or other governmental charges being referred to herein as
"Taxes"), unless such withholding or deduction is required by law. In that
event, the Company will pay to the holders of Investment Units such additional
amounts as may be necessary in order that every net dividend and redemption
payment made by the Company after deduction or withholding for or on account of
any such present or future Taxes will not be less than the amount then due and
payable in respect of this Agreement and the Bye-laws.
Section 8.12 Indemnification. (i) The Company shall defend, hold
harmless and indemnify each Investor and its Affiliates from and against all
damages, losses, costs and expenses (including reasonable legal expenses) to
which any of such persons becomes subject as a result of any inaccuracy in any
representation or warranty of the Company contained in this Agreement or any
document delivered in connection herewith (including the certificate referred to
in Section 3.3) or the breach of any covenant or agreement of the Company
contained in this Agreement, the Company's Bye-laws, or the Shareholders
Agreement.
(ii) In the event a party entitled to indemnification under this
Agreement (an "Indemnified Party") becomes aware of a claim, liability, expense
or other event with respect to which such party is entitled to indemnification
(an "Indemnification Event"), such Indemnified Party shall promptly give notice
of such Indemnification Event to the Company. The failure by any Indemnified
Party to give such notice to the Company within a reasonable period of time
shall relieve the Company of its obligations under this Section 8.12, if and to
the extent that it did not otherwise learn of such Indemnification Event and
such failure results in the forfeiture by the Company of substantial rights and
defenses.
The Company shall have the right to defend, contest, settle or
otherwise resolve any Indemnification Event involving a third-party claim (a
"Third-Party Indemnification Event") as long as the Indemnification Event may
not possibly give rise to a non-monetary liability, including, without
limitation, injunctions and criminal liability; provided, however, that the
Company shall not settle or compromise any Third-Party Indemnification Event
without the Indemnified Party's prior written consent thereto, unless the terms
of such settlement or compromise
40
<PAGE>
provide for an unconditional release of the Indemnified Parties. Notwithstanding
the foregoing, any Indemnified Party shall have the right to employ separate
counsel (including local counsel), and the Company shall bear the reasonable
costs, fees and expenses of such separate counsel if (i) the use of counsel
chosen by the Company to represent such Indemnified Party would present such
counsel with any actual or potential conflict of interest, (ii) the actual or
potential defendants in, or targets of, any Third-Party Indemnification Event
include both such Indemnified Party and the Company or any Affiliate thereof and
such Indemnified Party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the Company or any Affiliate thereof which is an actual or
potential defendant in, or target of, such Third-Party Indemnification Event,
(iii) the Indemnification Event may give rise to a non-monetary liability
including, without limitation, injunctions and criminal liability, or (iv) the
Company has authorized such Indemnified Party to employ separate counsel. The
Indemnified Parties and the Company shall cooperate fully in defending any
Third-Party Indemnification Event, and the Company shall have reasonable access
to the books and records and personnel of the Indemnified Parties that are
relevant hereto.
(iii) The indemnification provisions of this Article VIII shall be in
addition to any rights each Indemnified Party may otherwise have.
Section 8.13 Submission to Jurisdiction. The Company irrevocably
submits to the non-exclusive jurisdiction of any New York State or federal
courts sitting in The City of New York and any court sitting in Bermuda, and any
appellate court from any thereof, in any suit, action or proceeding arising out
of or relating to this Agreement or any of the Other Closing Documents or the
transactions contemplated hereby or thereby (a "Related Proceeding"), and the
Company hereby irrevocably agrees that all claims in respect of any Related
Proceeding may be heard and determined in such New York State or federal court
or any court sitting in Bermuda. The Company hereby irrevocably waives, to the
fullest extent it may effectively do so, the defense of an inconvenient forum to
the maintenance of any Related Proceeding and any objection to any Related
Proceeding whether on the grounds of venue, residence or domicile. A final
judgment in any such suit, action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or any other manner
provided by law.
The Company hereby irrevocably appoints the CT Corporation System (the
"Process Agent"), with an office on
41
<PAGE>
the date hereof at 1633 Broadway, New York, New York, United States of America,
as its agent to receive on behalf of the Company and its property service of
copies of the summons and complaint and any other process that may be served in
any Related Proceeding in such New York State or federal court sitting in The
City of New York. Service may be made by U.S. registered mail or other
comparable means or by delivering by hand a copy of such process to the Company
in care of the Process Agent at the address specified above for the Process
Agent (such service to be effective upon the mailing or delivery by hand of such
process to the office of the Process Agent), and the Company hereby irrevocably
authorizes and directs the Process Agent to accept on its behalf such service.
Failure of the Process Agent to give notice to the Company, or failure of the
Company to receive notice of such service of process, shall not affect in any
way the validity of such service on the Process Agent or the Company. As an
alternative method of service, the Company also irrevocably consents to the
service of any and all process in any Related Proceeding in a New York State or
federal court sitting in The City of New York by sending by U.S. registered mail
or other comparable means copies of such process to the Company at its address
under Section 8.10 (such service to be effective seven days after mailing
thereof). The Company covenants and agrees that it shall take any and all
reasonable action, including the execution and filing of any and all documents,
that may be necessary to continue the designation of the Process Agent in full
force and effect, and to cause the Process Agent to continue to act as such.
Nothing herein shall affect the right of any party to serve legal process in any
other manner permitted by law or affect the right of any party to bring any
suit, action or proceeding against any other party or its property in the courts
of other jurisdictions.
To the extent that the Company has or hereafter may acquire any immunity from
any legal action, suit or proceeding, from jurisdiction of any court or from
setoff or any legal process (whether through service or notice, attachment in
aid of execution or otherwise) with respect to itself or any of its property,
the Company hereby irrevocably waives and agrees not to plead or claim such
immunity in respect of its obligations under this Agreement and the other
Closing Documents.
Section 8.14. The Company shall pay the reasonable fees and expenses
of LeBoeuf, Lamb, Greene & MacRae, L.L.P, counsel for the Investors.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
COMPANY:
CGA GROUP, LTD.
By: /s/ JAMES R. REINHART
-------------------------------------
Name: James R. Reinhart
Title: Chief Financial Officer
<PAGE>
CAPITAL REINSURANCE COMPANY
By: /s/ ALAN S. ROSEMAN
--------------------------------------
Name: Alan S. Roseman
Title: SVP, General Counsel Secretary
<PAGE>
PACIFIC MUTUAL LIFE INSURANCE COMPANY
By: /s/ RONN C. CORNELIUS
--------------------------------------
Name: Ronn C. Cornelius
Title: Asst. Vice President
<PAGE>
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
By: /s/ KATHLEEN N. STARRS
-----------------------------------
Name: Kathleen N. Starrs
Title: Vice President
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
By: /s/ KATHLEEN N. STARRS
-----------------------------------
Name: Kathleen N. Starrs
Title: Vice President
<PAGE>
OLYMPUS GROWTH FUND II, L.P.
By: OGP II, L.P., its general partner
By: Nibur, L.L.C., a general partner
By: /s/ PAUL A. RUBIN
-----------------------------------
Name: Paul A. Rubin
Title: Member
OLYMPUS EXECUTIVE FUND, L.P.
By: OEF, L.P., its general partner
By: RSM, L.L.C., a general partner
By: /s/ ROBERT S. MORRIS
-----------------------------------
Name: Robert S. Morris
Title: President
<PAGE>
THIRD AVENUE TRUST, ON BEHALF
OF THE THIRD AVENUE VALUE FUND
SERIES
By: /s/ DAVID BARSE
-----------------------------------
Name: David Barse
Title: Executive Vice President
<PAGE>
ACE LIMITED
By: /s/ PETER MEAR
----------------------------------
Name: Peter Mear
Title: Executive V.P. &
General Counsel
<PAGE>
LENNAR CGA HOLDINGS, INC.
By: /s/ JEFFREY P. KRASNOFF
-----------------------------------
Name: Jeffrey P. Krasnoff
Title: Vice President
<PAGE>
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
By: /s/ BASIL P. LIVANOS
------------------------------------
Name: Basil P. Livanos
Title: Investment Officer
<PAGE>
CGA FIREMARK VENTURE FUND I, LLC
By: /s/ MICHAEL J. MORRISSEY
-------------------------------------
Name: Michael J. Morrissey
Title: Chairman & CEO
<PAGE>
STARWOOD CGA, LTD.
By: /s/ JAY SUGARMAN
-------------------------------------
Name: Jay Sugarman
Title: Authorized Signatory
<PAGE>
MUTUAL DISCOVERY FUND
By: Franklin Mutual Advisers, Inc.
By: /s/ E.N. COHERNOUR
-------------------------------------
Name: E.N. Cohernour
Title: V.P., Gen. Counsel & Asst. Sec.
<PAGE>
PRUDENTIAL SECURITIES GROUP, INC.
By: /s/ ELIZABETH W. CASTAGNA
------------------------------------
Name: Elizabeth W. Castagna
Title: Treasurer
RIGHT OF FIRST OFFER TO REINSURE
TERM SHEET
================================================================================
PARTIES: Commercial Guaranty Assurance, Ltd.
("CGA") and Capital Reinsurance
Company ("Cap Re").
================================================================================
COVERED BUSINESS: All insurance contracts, including
contracts of financial guaranty
insurance or reinsurance, issued by
CGA.
================================================================================
RIGHT OF FIRST OFFER: 1. Before soliciting any offer from
any person to reinsure all or a
portion of the Covered Business,
CGA will first notify Cap Re of
its intention to solicit such
offer and give Cap Re the right
to make a first offer to provide
such reinsurance.
================================================================================
2. Before CGA accepts the offer of
any person to reinsure all or a
portion of the Covered Business,
CGA will first notify Cap Re and
give Cap Re the right to provide
such reinsurance at the same
price and on the same terms
offered by such other person,
except that CGA shall not be
required to give Cap Re the right
to provide such reinsurance if:
================================================================================
a. CGA has already provided Cap Re with
an opportunity to make an offer to
reinsure such Covered Business and
Cap Re failed to offer reinsurance
within the time allowed by this
Agreement; or
================================================================================
b. Cap Re has, within the
preceding 10 business days,
made an offer to reinsure
such Covered Business and
the reinsurance offered by
<PAGE>
such other person is more
favorable to CGA in material
respects than the
reinsurance offered by Cap Re.
================================================================================
TIME FOR THE EXERCISE OF THE Cap Re shall have at least 5 business
RIGHT TO MAKE FIRST OFFER: days after receipt of the notices
described above to make an offer to reinsure
CGA, provided that such period shall not begin
to run until CGA shall have provided to Cap Re
all information which is reasonably necessary
to formulate an offer.
================================================================================
MATERIALITY: A difference in reinsurance offered by
Cap Re and another reinsurer shall be
deemed to be material only if it
involves any of the following:
================================================================================
a. A difference in the applicable
term of coverage of more than one
year.
================================================================================
b. A difference in the basis on which risks
attach.
================================================================================
c. A difference in the overall allowable
ceding commission or profit commission of
more than 5% of total ceded premium.
================================================================================
d. Positive differences in the ratings made
by any nationally recognized rating agency
of one entire rating category.
================================================================================
e. A difference in the premium of more than
5%.
================================================================================
TERM: Cap Re's rights under this Agreement
commence on June 4, 1997 and terminate
on the earlier of (x) the date that
Cap Re no longer owns 5% of the Common
Stock of CGA Group, Ltd. or (y) a
Qualified Public Offering (as defined
in the CGA Group Bye-laws) by CGA
Group.
================================================================================
REQUIRED TERMS FOR REINSURANCE All quota share reinsurance must
PROVIDED BY CAP RE: include a provision for a ceding
commission. The ceding
2
<PAGE>
commission must be not less than
the applicable pro rata share of
CGA's allocable expenses.
================================================================================
OTHER PROVISIONS: Arbitration, Service of Suit,
Governing Law (New York)
================================================================================
CAPITAL REINSURANCE COMPANY
By:
---------------------------
Name:
Title:
Agreed and Accepted by:
CGA GROUP, LTD.
By:
-----------------------------
Name:
Title:
EXHIBIT 10.5
ALLIANCE CAPITAL MANAGEMENT L.P.
Discretionary Investment Advisory Agreement
with
Commercial Guaranty Assurance, Ltd.
-----------------------------------
(Name of Client)
Dated December 18, 1996
(Effective Date)
Alliance Capital management L.P. (the "Adviser") and the undersigned (the
"Client") hereby agree as of the above date that the Adviser shall act as
discretionary investment manager with respect to assets of the Client described
below (the "Investment Account") on the following terms and conditions:
1. The Investment Account
The Investment Account shall initially consist of cash, cash equivalents,
stocks, bonds, and other securities or assets the Client places in the
Investment Account or which shall become part of the Investment Account as a
result of transactions.
The Client may make additions to and withdrawals from the Investment
Account provided the Adviser receives at least five (5) business days' prior
written notice of withdrawals. All cash, securities and other assets in the
Investment Account shall be held by such other party as the client shall
designate as trustee or custodian (the "Custodian"). The Adviser shall not be
responsible for any custodian arrangements involving any assets of the
Investment Account or for the payment of any custodial charges and fees, nor
shall the Adviser have possession or custody of any such assets. All payments,
distributions and other transactions in cash, securities or other assets in
respect of the Investment Account shall be made directly to or from the
Custodian, and the Adviser shall have no responsibility or liability with
respect to transmittal or safekeeping of such cash, securities or other assets
of the Investment Account, or the acts or omissions of the Custodian or others
with respect thereto unless such acts or omissions of the Custodian are a direct
result of the Adviser's negligence, wilful misconduct, fraud, dishonesty or
malfeasance. The Client shall direct the Custodian to furnish to the Adviser
from time to time such reports concerning assets, receipts and disbursements
with respect to the Investment Account as the Adviser shall reasonably request.
<PAGE>
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2. Services of Adviser
By execution of this Agreement, the Adviser accepts appointment as
discretionary investment manager for the Investment Account with full discretion
and agrees to supervise and direct the investments of the Investment Account in
accordance with the written investment objectives, policies and restrictions of
the Client previously furnished to the Adviser and attached as Schedule A to
this agreement as the same may be amended by the Client from time to time. In
the performance of its services, the Adviser will not be liable for any error in
judgment or any acts or omissions to act except those resulting from the
Adviser's negligence, wilful misconduct or malfeasance. Nothing herein shall in
any way constitute a waiver or limitation of any right of any person under the
Federal Securities Laws or any State Securities Laws.
The Adviser will render to the Client at least monthly a written report and
inventory of the investments in the Investment Account. It is agreed that the
Adviser, in the maintenance of its records, does not assume responsibility for
the accuracy of information furnished by the Client or any other person not
being an agent or subcontracter of the Adviser.
3. Funding Policy
The Client shall from time to time inform the Adviser in writing of the
funding policy applicable with respect to the Client and of its cash
disbursement requirements. The Adviser shall make its investment decisions for
the Investment Account in accordance with such funding policy and requirements.
4. Investment Objectives, Policies and Restrictions
It will be the Client's responsibility to notify the Adviser in writing of
the investment objectives and policies of the Investment Account, and of any
modifications therein, as well as any specific investment restrictions
applicable thereto and to give the Adviser prompt written notice if the Client
deems any investments made for the Investment Account to be inconsistent with
such objectives, policies or restrictions. The Client is also required to notify
the Adviser in writing of specific restrictions governing the Investment Account
under the current or future laws of any jurisdiction or by virtue of the terms
of any other contract or instrument known by the Client to be binding on the
Client.
5. Delivery of Client Documentation
No later than the date of this Agreement, the Client will provide the
Adviser with copies of all documents relevant to the Adviser's management of the
Investment Account which relate to the Adviser's management of the Investment
Account, including the written statement of the Client's investment objectives,
policies and restrictions referred to above. The Client further agrees to
promptly deliver to the Adviser true and complete copies of all amendments or
supplements to such documents. The Adviser will be indemnified and held harmless
against any and all losses,
<PAGE>
-3-
costs, claims and liabilities which it may suffer or incur arising solely out of
the failure by the Client to provide to the Adviser the documents required to be
furnished in accordance with the above provisions.
6. Discretionary Authority
It is understood that, to the extent permitted by the written statement of
investment objectives, policies and restrictions referred to in Schedule A, the
Adviser, whenever it deems appropriate and without prior consultation with the
Client, may (i) buy, sell, exchange, convert, liquidate or otherwise trade in
any stock, bonds and other securities (including money market instruments) and
(ii), subject to the provisions of paragraph 7 hereof, place orders for the
execution of such transactions with or through such brokers, dealers or issuers
as the Adviser in its absolute discretion may select.
It is understood that, to the extent permitted by the written statement of
investment objectives, policies and restrictions referred to in Schedule A, the
Adviser may also effect transactions for the Investment Account in options and
financial futures, stock market index futures and other commodity contracts. In
such event, the Client will execute any additional documentation which the
Adviser deems necessary to enable it to engage in such transactions on behalf of
the Investment Account.
7. Allocation of Brokerage
When placing orders for the execution of transactions for the Investment
Account, the Adviser may, unless the Client otherwise directs, allocate such
transactions to such broker-dealers, for execution on such markets, at such
prices and at such commission rates, as in the good faith judgment of the
Adviser will be in the best interests of the Client. In the selection of such
broker-dealers, the Adviser will take into consideration not only the available
prices and rates of brokerage commissions, but also other relevant factors (such
as, without limitation, execution capabilities, research and other services
provided by such broker-dealers which are expected to enhance the general
portfolio management capabilities of the Adviser, and the value of an ongoing
relationship of the Adviser with such broker-dealers) without having to
demonstrate that such factors are of a direct benefit to the Investment Account.
As a result, the commissions charged to the Investment Account with respect to a
particular transaction may be somewhat higher than those another broker-dealer
might charge for the same transaction. The Adviser will exercise good faith in
negotiating the commissions paid by the Investment Account and will seek to
obtain the best price and execution for each transaction for the Investment
Account, taking into consideration the value of any brokerage and research
services provided by the broker-dealer effecting the transaction. As set forth
in Part II of the Adviser's Form ADV Registration Statement on file with the
Securities and Exchange Commission ("Form ADV"), the Adviser will not implement
other arrangements governing the use or selection of affiliated broker-dealers
or their correspondents to effect transactions for the Investment Account
without first obtaining express written consent or direction from the Client,
which consent or direction will constitute a modification to this Agreement.
<PAGE>
-4-
8. Aggregation of Transactions
The Client authorizes the Adviser in its discretion to aggregate purchases
and sales of securities for the Investment Account with purchases and sales of
securities of the same issuer for other clients of the Adviser occurring on the
same day. When transactions are so aggregated, the actual prices applicable to
the aggregated transactions will be averaged, and the Investment Account and the
accounts of other participating clients of the Adviser will be deemed to have
purchased or sold their proportionate share of the securities involved at the
average price so obtained.
9. Transaction Procedures
All transactions will be settled by payment to, or delivery by, the
Custodian of all cash, securities or other assets due to or from the Investment
Account. The Adviser may issue such instructions to the Custodian as may be
appropriate in connection with the settlement of transactions initiated by the
Adviser. Instructions of the Adviser to the Custodian shall be transmitted in
writing or, at the option of the Adviser, orally and confirmed in writing as
soon as practical thereafter. The Adviser will take reasonable measures to
ensure that broker-dealers and issuers selected by the Adviser perform their
obligations with respect to the Investment Account.
10. Fees
The compensation of the Adviser for its services under this Agreement shall
be calculated and paid in accordance with the attached Fee Schedule B, as the
same may be amended from time to time by mutual agreement between the Client and
the Adviser. It is understood that, in the event that such fees are to be billed
to and paid by the Custodian, the Client will provide written authorization to
the Custodian to pay the fees of the Adviser directly from the Investment
Account.
11. Confidential Relationship
All information provided by the Client or the Custodian to the Adviser
shall be held as confidential by the Adviser; provided, however, as is necessary
to carry out the purposes of this Agreement or as may be required by law, the
Adviser shall be permitted to disclose or communicate to a proper party any
information received from the Client or the Custodian or developed by the
Adviser under the terms of this Agreement. All recommendations, advice and other
work product of the Adviser developed under the terms of this Agreement and
disclosed to the Client or the Custodian shall be held as confidential, except
as required by law to be disclosed to other persons.
<PAGE>
-5-
12. Services to Other Clients
It is understood that the Adviser performs investment advisory services for
various clients including investment companies. The Client agrees that the
Adviser may give advice and take action with respect to any of its other clients
which may differ from advice given, or the timing or nature of action taken,
with respect to the Investment Account, so long as it is the Adviser's policy,
to the extent practical, to allocate investment opportunities to the Investment
Account over a period of time on a fair and equitable basis relative to other
clients.
Nothing in this Agreement shall limit or restrict the Adviser or any of its
directors, officers, affiliates or employees from buying, selling or trading in
any securities or other assets for its or their own account or accounts, and the
Client acknowledges that the Adviser, its directors, officers, affiliates and
employees, and other clients of the Adviser, may at any time have, acquire,
increase, decrease or dispose of positions in investments which are at the same
time being acquired, held or disposed of for the Investment Account.
The Adviser will not have any obligation to initiate the purchase or sale,
or to recommend for purchase or sale, for the Investment Account any security or
other asset which the Adviser, its directors, officers, affiliates or employees
may purchase, hold or sell for its or their own accounts or for the accounts of
any clients of the Adviser.
13. Information Required by Adviser
The Client agrees to provide or instruct the Custodian to provide to the
Adviser such information as the Adviser may reasonably request as being
necessary or appropriate to the performance of the Adviser's responsibilities to
the Client under this Agreement.
14. Non-Public Information
The Adviser will have no obligation to purchase or sell for the Investment
Account the securities of any issuer on the basis of any material non-public
information as may come into its possession.
15. Proxies
Unless otherwise directed by the Client in writing, the Adviser will not be
required to take any action or render any advice with respect to the voting of
proxies solicited by or with respect to the issuers of securities in which
assets of the Investment Account may be invested from time to time.
<PAGE>
-6-
16. Representations by Client
The Client represents and warrants that the employment of the Adviser is
authorized by the governing documents relating to the Investment Account and
that the terms of this Agreement do not violate any obligation by which the
Client is a person other than a natural person, that (i) this Agreement has been
duly authorized by appropriate action and when executed and delivered will be
binding upon the Client in accordance with its terms and (ii) the Client will
deliver to the Adviser such evidence of such authority as the Adviser may
reasonably require, whether by way of a certified resolution or otherwise.
17. Representations by Adviser
The Adviser represents that it is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended.
18. Indemnification
The Client and the Adviser agree to indemnify and hold each other harmless
from any and all expenses, damages, costs and fees, including reasonable
attorney's fees, which may be incurred by reason of the gross negligence,
willful misconduct or malfeasance, (including fraud or dishonesty) on the part
of the offending party.
19. Valuation
In computing the market value of any security held in the Investment
Account which is listed on a national securities exchange, such security shall
be valued at the last quoted sale price on the valuation date on the principal
exchange on which the security is traded. Any other security or asset shall be
valued in a manner determined in good faith by the Adviser to reflect its fair
market value.
20. Receipt of Disclosure Statement
The Client acknowledges receipt of Part II of the Adviser's Form ADV in
compliance with Rule 204-3(b) under the Investment Advisers Act of 1940, as
amended ("Advisers Act") more than 48 hours prior to the date of execution of
this Agreement.
21. Notices
Unless otherwise specified herein, all notices, instructions and advices
with respect to security transactions or any other matters contemplated by this
Agreement shall be in writing and shall be deemed duly given when received by
the Adviser, the Client and the Custodian, as applicable, at their respective
addresses below. The Adviser may rely upon any written notice from
<PAGE>
-7-
any person which the Adviser reasonably believes to be an authorized
representative of the Client. Written notice shall include notice sent by telex
or facsimile copier.
22. Specimen Signatures
The Adviser will forward from time to time to the Client and the Custodian
a list of names and specimen signatures of persons authorized to act on behalf
of the Adviser. The Client will forward to the Adviser a list of names and
specimen signatures of persons authorized to act on Client's behalf and shall
cause the Custodian to forward a like list and specimen signatures to the
Adviser.
23. Invalid Provisions
If any provision of this Agreement is held to be illegal, invalid or
unenforceable under present or future law, such provision shall be fully
severable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of this
Agreement, and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or its severance from this Agreement.
24. Termination; Assignment; Amendment
This Agreement may be terminated at any time by either party giving to the
other at least thirty (30) days' prior written notice of such termination. Fees
paid in advance of the effectiveness of the termination will be prorated to the
date of termination specified in the notice of termination, and any unearned
portion thereof will be refunded to the Client. No assignment, as that term is
defined in the Advisers Act, shall be made by the Adviser without the written
consent of the Client. No assignment shall be deemed to result from changes in
the directors, officers or employees of the Adviser except as may be provided in
the Advisers Act. The Adviser agrees that it will notify the Client of any
change in the membership of the general partners of the Adviser within a
reasonable time after such change. This Agreement may be amended or modified at
any time by mutual agreement in writing.
25. Counterparts
This Agreement may be executed in two or more counterparts, each one of
which shall be deemed to be an original.
26. Governing Law
To the extent Federal law does not apply, this Agreement shall be construed
in accordance with and governed by the laws of the State of New York.
<PAGE>
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27. Entire Agreement
This Agreement constitutes the entire agreement of the parties with respect
to management of the Investment Account.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective representatives as of the date first above written.
NAME OF
CLIENT: Commercial Guaranty Assurance Ltd.
-----------------------------------
By: /s/ A.R. MONTEMURNO
---------------------------------------
A.R. Montemurno
Pres. & C.E.O.
---------------------------------------
(Print Name and Title)
ADDRESS: Commercial Guaranty Assurance Ltd.
c/o The Shidler Group
9 West 57th Street
Suite 4275
New York, NY 10019
ALLIANCE CAPITAL MANAGEMENT L.P.
By: ALLIANCE CAPITAL MANAGEMENT
CORPORATION, ITS GENERAL PARTNER
By: /s/ MARK R. MANLEY
---------------------------------------
Mark R. Manley
Assistant Secretary
ADDRESS: 1345 Avenue of the Americas
New York, N.Y. 10105
<PAGE>
COMMERCIAL GUARANTY ASSURANCE, LTD.
INVESTMENT GUIDELINES
Schedule A to the Investment Management Agreement dated December 18, 1996
between ________________ and Commercial Guaranty Assurance, Ltd.
Objective
The primary objective of the portfolio is to achieve a total rate of return in
excess of the stated benchmark, consistent with safety of principal and
liquidity. Performance will be measured against the AA or better subset of the
3-5 year Merrill Lynch Eurodollar index.
Guidelines
1) Investment will be primarily in foreign (non-U.S) securities denominated in
U.S. Dollars, as follows: Euro certificates of deposit ("C.D.'s"), Euro
time deposits, Euro medium-term notes, Eurobonds, Yankee bonds, Euro
commercial paper and Euro floating rate notes. Interest rates may be fixed
or variable. No U.S. income source is allowed.
2) In addition, up to 100% of the market value of the portfolio may be
invested in non U.S. dollar denominated foreign (non U.S.) securities,
provided that the foreign exchange exposure thus created is hedged back
into U.S. dollars at all times. Investments in non U.S. dollar denominated
securities may include those outlined above as well as government, agency
and corporate bonds issued in the domestic bond markets of OECD countries.
3) Obligations issued by foreign subsidiaries of U.S. companies, except for
bakes, may be purchased as long as the obligations are not guaranteed by
the U.S. parent company.
4) Credit exposure
Only securities rated double A (Aa3/AA-) or better by Moody's,
Standard & Poor's or the equivalent rates by Duff & Phelps may be
purchased. If an issue is unrated, it may be purchased, provided the
issuer or guarantor has a comparable issue with a Aa3/AA- or higher
rating or, in the opinion of the manager, the issue is equivalent to a
Aa3/AA- or better security.
5) A maximum of 5% of the portfolio may be invested in the securities of any
one corporate obligor and 10% in the securities of non-guaranteed
government agencies of any one country. Non-U.S. Sovereign exposure is
limited to 20% of the portfolio per issuer.
6) Maturity
The portfolio shall be managed with a weighted average duration of not
less than two years nor more than five years.
<PAGE>
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7) Derivatives
a) Options are not allowed.
b) Interest rate futures are allowed in order to control overall interest
rate exposure, subject to the following conditions.
i) The notional value of net short futures positions must not exceed
the market value of the portfolio.
ii) The notional value of net long positions must not exceed the
amount of available cash in the portfolio. No leverage of the
portfolio is allowed.
iii) Contracts may only be with offshore exchanges such as LIFFE.
iv) Taking physical ownership of securities underlying the futures
contract is prohibited.
8) No equity exposure, convertible bonds, or equity linked securities are
allowed.
9) No commodity exposure, or commodity linked securities, are allowed.
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.
Fee Schedule
The fee for separately managed accounts is billed quarterly based upon
the value of the assets on the last day of the calendar quarter. On an
annualized basis our fee is as follows:
.50% - first $10 million
.35% - next $20 million
.30% - next $20 million
.25% - on balance
EXHIBIT 10.6
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made the 27 day of Dec. 1996 BETWEEN
J.P. MORGAN INVESTMENT MANAGEMENT INC. (a company incorporated under the laws of
the State of Delaware) ("JPMIM" acting through its London Office at 28 King
Street, London, SW1Y 6XA;
and COMMERCIAL GUARANTY ASSURANCE, LTD (a company incorporated under the laws of
Bermuda) ("the Company") of Clarendon House, Church Street, Hamilton, Bermuda.
WHEREAS
The Company wishes to appoint JPMIM as discretionary investment manager of
certain assets of the Company which may be held in one or more accounts ("the
Portfolio") and JPMIM wishes to accept this appointment under the terms set out
below.
IT IS HEREBY AGREED AS FOLLOWS:-
1. Authority and Limitations
-------------------------
1.1 Except as may otherwise be notified in writing to JPMIM, the Company hereby
confirms that the Portfolio is and will be owned beneficially and
absolutely by it or held by it as trustee. The Company further confirms
that the Portfolio is free from any lien, charge or other impediment and
that the Company has full power and authority to appoint JPMIM to deal with
the Portfolio in accordance with the terms of this Agreement.
1.2 Subject to such investment objectives and restrictions ("Guidelines") as
are set out in this Agreement, JPMIM will have:-
(a) complete discretion on behalf of the Company to buy, sell, retain or
exchange investments of any nature, to subscribe to issues of
securities, to enter into spot or forward foreign exchange contracts
and to cause the Custodian to place and withdraw cash from deposit, as
and when JPMIM thinks fit or otherwise to act as it judges appropriate
in relation to the Portfolio;
<PAGE>
(b) authority and power to purchase, sell, hold and generally deal in and
with all futures contracts (and any option on such contracts),
including without limitation contracts for differences with respect to
financial instruments and any group or index of securities (or any
interest therein based on the value thereof), and in connection
therewith to cause the Custodian to deposit any margin payment or
property as collateral with any agent and to grant security interests
in such collateral, all on such terms and conditions as JPMIM shall
determine;
1.3 In the performance of its services under this Agreement, JPMIM may
(a) effect or arrange transactions through or with any person, firm or
company that JPMIM may select other than associated or related
companies in the J.P. Morgan group ("Morgan");
(b) deal collectively as agent for the Company and for other clients
including Morgan companies;
(c) commit the Company to underwriting any issue or offer for sale of
securities of a type and to the extent permitted by the Guidelines;
(d) effect transactions in which an issue of the relevant securities was
underwritten, managed or arranged by Morgan within twelve months of
the date of the transaction;
(e) not borrow on behalf of the Company;
1.4 In the performance of its services under this Agreement JPMIM has no
authority or power except as expressly provided.
2. Guidelines
----------
2.1 The initial guidelines for the Portfolio are set out in Schedule 1 to this
Agreement. Any change which the Company wishes to make shall be discussed
with the agreed to by JPMIM and shall be confirmed by the Company in
writing, by telex or by facsimile telecopier.
2.2 If at any time due to major fluctuations in market prices, abnormal market
conditions or any other reason outside the control of JPMIM, there shall be
a deviation from the specific instructions set out in the Guidelines;
2
<PAGE>
(a) JPMIM shall not be in breach of the Guidelines provided it takes such
steps as may be necessary to ensure compliance within 7 days after
such deviation occurs; or
(b) JPMIM may, prior to the expiry of the 7 day period referred to in (a)
above, make a written recommendation to the Company on the most
appropriate way to deal with the deviation and, unless the Company
directs JPMIM to the contrary within 14 days of the receipt by the
Company of the recommendation, JPMIM shall be entitled to implement
its recommendation and shall not be in breach of the Guidelines.
3. Custody
-------
3.1 The Company will appoint a custodian ("the Custodian") by a separate
agreement under which all investments and cash comprising the Portfolio
will be held for the Company by the Custodian or its agents. JPMIM shall
not have control of the investments or cash in the Portfolio but shall have
authority to issue to the Custodian such instructions as it may consider
appropriate in connection with the settlement of any transaction relating
to the Portfolio which it has initiated.
3.2 The Company confirms that:--
(a) whether or not JPMIM directs the Custodian to exercise any voting or
other rights and entitlements attached to securities held in the
Portfolio, and how JPMIM directs that they are to be exercised, will
be at the total discretion of JPMIM.
(b) unless the Company gives written instructions to the contrary all
dividend and interest income received in respect of the Portfolio will
be retained by the Custodian for reinvestment as part of the
Portfolio.
(c) it shall have full responsibility for the payment of all taxes due on
capital or income held or collected for the Portfolio.
3.3 The Company and JPMIM will arrange for the Custodian to provide to JPMIM
daily cash account statements and monthly asset position statements. JPMIM
will compare these statements with its own records and inform the Custodian
of any differences. In the event that differences between the Custodian's
statements and JPMIM's records cannot be resolved between JPMIM and the
Custodian, JPMIM will inform the Company in writing.
3
<PAGE>
4. Portfolio reports and records
-----------------------------
4.1 JPMIM will provide the Company with:--
(a) a monthly valuation report of all investments and cash comprising the
Portfolio within ten working days of the end of each calendar month.
JPMIM will determine the value of all assets in the Portfolio
following methods consistently applied by it using the valuation basis
specified in the report;
(b) a monthly report of all transactions relating to the Portfolio within
ten working days of the end of each calendar month. If requested by
the Company, JPMIM will also send transaction advices containing full
details of each transaction to the Company or to such other persons as
the Company shall nominate on the next business day following the day
on which the transaction was effected or at such other frequency as
the Company shall request.
(c) a quarterly report on the performance of the Portfolio against the
performance benchmark specified in the Guidelines following the end of
each calendar quarter.
4.2 JPMIM will maintain full records of all transactions effected for the
Portfolio. JPMIM agrees to provide to the Company, the Custodian and to the
accountants and other professional advisers of the Company any information
which they may from time to time reasonably require in connection with the
Portfolio, but it is understood and agreed that JPMIM in maintaining its
records and providing such information does not assume responsibility for
the accuracy of any accounts, reports or other information furnished by the
Custodian or any other person, firm or corporation to the Company.
5. Fees
----
The Company accepts the scale of fees and terms of payment (as may be
varied from time to time by mutual agreement) set out in Schedule 2 to this
Agreement. No other fees or remuneration from any source shall be due to
JPMIM in respect of the services provided under this Agreement.
6. Termination
-----------
This Agreement may be terminated without penalty at any time by either
party giving at least thirty days written notice of termination, to the
other party.
4
<PAGE>
Termination shall be effective from the date specified in the notice and
will be without prejudice to the payment of any outstanding fees due to
JPMIM or to the completion of any transaction already initiated and JPMIM
shall be entitled if necessary after the date of effective termination to
direct the Custodian to settle such transactions.
7. Indemnity and Limitation of Liability
-------------------------------------
7.1 The Company will indemnify JPMIM from and against any and all claims,
proceedings, damages, loss and liability made or taken against or suffered
or incurred by JPMIM in its capacity as manager of the Portfolio except
insofar as the same arises as a result of negligence or wilful default
(including fraud or dishonesty) on the part of JPMIM.
7.2 JPMIM shall not be liable to the Company for any losses suffered by the
Company arising from any depreciation in the value of the Portfolio or from
the income derived from it (including, without limitation, where such
depreciation results from capital loss or taxation liability) or otherwise
in any way whatsoever except insofar as the same arises as a result of
negligence or wilful default (including fraud or dishonesty) on the part of
JPMIM.
7.3 JPMIM shall not be liable in respect of the default or fraud of any person,
firm or company through or with whom transactions are effected for the
Company's account.
8. Confidentiality
---------------
Except insofar as required by law or regulation, JPMIM shall ensure that
all matters relating to the Portfolio shall be kept strictly confidential.
9. Regulation
----------
JPMIM is registered as an investment adviser under the United States
Investment Advisers Act of 1940. Under the United Kingdom Financial
Services Act 1986, JPMIM is a member of the Investment Management
Regulatory Organisation Ltd. ("IMRO") and as such is regulated by IMRO in
the conduct of its investment business.
All services provided by JPMIM under this agreement are provided on the
basis that the Company is a non-private customer as that term is defined in
IMRO's rules.
5
<PAGE>
10. Additional Provisions--Transactions in Derivatives
--------------------------------------------------
To the extent that the Guidelines permit investment in futures or options,
the additional provisions in Schedule 3 form part of this Agreement.
11. Notices
-------
11.1 All directions and notifications to be given hereunder shall be addressed
to the appropriate party at the address appearing at the head of this
Agreement, or to such other address as shall be notified in writing by that
party to the other party] from time to time.
11.2 Any notice to be given in relation to this Agreement shall be given in
writing and may be given by delivering or posting it or by sending it by
fax or telex. Any notice given by post will be deemed given 24 hours after
posting and any notice given by delivery or by fax or telex will be deemed
given upon delivery or transmission, and in proving service of the notice
it shall be sufficient to prove that the letter was correctly addressed and
was posted or that where it was delivered otherwise than by post that it
was delivered to the correct address or that where it was sent by fax or
telex it was transmitted to the correct number.
12. Complaints
----------
Any complaint that the Company may have relating to any services provided
to it by JPMIM under this Agreement should be addressed to the Compliance
Officer of JPMIM at its London office. The Company also has a direct right
of complaint to the Office of the Investment Ombudsman, 6 Frederick's
Place, London EC2R 8BT.
13. Assignment
----------
No assignment of this Agreement may be made by JPMIM without the prior
written consent of the Company.
6
<PAGE>
14. Governing Law
-------------
This Agreement will be governed by and construed in accordance with English
law.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed by their duly appointed agents so as to be effective as of the
date first written above.
/s/
--------------------------------------
Vice President
for and on behalf of
J.P. MORGAN INVESTMENT MANAGEMENT INC.
/s/ A. R. MONTEMURNO
----------------------------------------
Director
for and on behalf of
COMMERCIAL GUARANTY ASSURANCE, LTD.
7
<PAGE>
SCHEDULE 1
GUIDELINES
Schedule 1 to the Investment Management Agreement dated 27, Dec. 1996 between
J.P. Morgan Investment Management Inc. and Commercial Guaranty Assurance, Ltd
Objective
- ---------
The primary objective of the portfolio is to achieve a total rate of return in
excess of the stated benchmark, consistent with safety of principal and
liquidity. Performance will be measured against the AA or better subset of the
35 year Merrill Lynch Eurodollar index.
Guidelines
- ----------
1) Investments will be primarily in foreign (non-U.S.) securities denominated
in U.S. Dollars, as follows: Euro certificates of deposit ("C.D.'s"), Euro
time deposits, Euro medium-term notes, Eurobonds, Yankee bonds, Euro
commercial paper and Euro floating rate notes. Interest rates may be fixed
or variable. No U.S. income source is allowed.
2) In addition, up to 100% of the market value of the portfolio may be
invested in non U.S. dollar denominated foreign (non U.S.) securities,
provided that the foreign exchange exposure thus created is hedged back
into U.S. dollars at all times. Investment in non U.S. dollar denominated
securities may include those outlined above as well as government, agency
and corporate bonds issued in the domestic bond markets of OECD countries.
3) Obligations issued by foreign subsidiaries of U.S. companies, except for
banks, may be purchased as long as the obligations are not guaranteed by
the U.S. parent company.
4) Credit exposure
Only securities rated double A (Aa3/AA-) or better by Moody's,
Standard & Poor's or the equivalent rates by Duff & Phelps may be
purchased. If an issue is unrated, it may be purchased, provided the
issuer or guarantor has a comparable issue with a Aa3/AA- or higher
rating or, in the opinion of the manager, the issue is equivalent to a
Aa3/AA- or better security.
8
<PAGE>
5) A maximum of 5% of the portfolio may be invested in the securities of any
one corporate obligor and 10% in the securities of non-guaranteed
government agencies of any one country. Non-U.S. Sovereign exposure is
limited to 20% of the portfolio per issuer.
6) Maturity
The portfolio shall be managed with a weighted average duration of not
less than two years nor more than five years.
(7) Derivatives
a) Options are not allowed
b) Interest rate futures are allowed in order to control overall
interest rate exposure, subject to the following conditions.
i) The notional value of net short futures positions must
not exceed the market value of the portfolio
ii) The notional value of net long positions must not exceed
the amount of available cash in the portfolio. No leverage
of the portfolio is allowed.
8) No equity exposure, convertible bonds, or equity linked securities are
allowed.
9) No commodity exposure, or commodity linked securities, are allowed.
9
<PAGE>
SCHEDULE 2
FEE SCHEDULE
Schedule 2 to the Investment Management Agreement dated 27 Dec. 1996 between
J.P. Morgan Investment Management Inc. and Commercial Guaranty Assurance, Ltd.
The following fee scale, [payable in US Dollars], will apply in respect of
services provided under the above referenced agreement:--
.30 of 1% per annum on the first US$ 75 million
.25 of 1% per annum on the next US$ 75 million
.20 of 1% per annum on the balance over US$ 150 million.
There shall be a minimum fee of US$150,000.
Fees are based on the total market value of the assets under management at each
calendar quarter end and will be invoiced to the Company's Custodian in the
following month.
Broker's fees for transactions executed on the Company's behalf are charged to
the Company and any brokerage discounts or reallowances are passed on to the
Company. Any charges made by the Custodian appointed by the Company shall be for
the Company's account.
10
<PAGE>
SCHEDULE 3
FUTURES & OPTIONS
Schedule 3 to the Investment Management Agreement dated 27 Dec. 1996 between
J.P. Morgan Investment Management Inc. and Commercial Guaranty Assurance, Ltd.
1. Further to JPMIM's authorization under this Agreement to invest and
reinvest in futures (subject to the Guidelines), the Company agrees that:
(a) JPMIM is authorized to select the brokerage firms through which
futures contracts and options are traded for the Portfolio and to sign
as the Company's agent any account agreements or other documents
required or deemed appropriate by such brokers or by JPMIM. In
connection with the opening of each account with each broker through
which futures contracts and/or options are traded for the Portfolio,
the Company specifically authorizes JPMIM to execute on its behalf a
Customer Application and Customer, Procedural and Safekeeping
Agreements and Customer's Options Agreements.
(b) In accordance with the regulations of the United States Commodity
Futures Trading Commission ("CFTC") and other regulatory agencies,
JPMIM is authorized to and may reveal the Company's identity, and
address to any broker through which futures contracts or options are
traded.
(c) The Company understands that the CFTC and other regulatory agencies
require that anyone trading in futures contracts must advance
collateral to meet initial and daily variation margins. In addition,
collateral may be required for trading in options. JPMIM is hereby
authorized to instruct the Custodian to advance cash or securities as
collateral to an account designated by the broker to meet margin
payments as required by the rules of exchanges or markets on which
contracts for Futures and Options are dealt by JPMIM as the Company's
agent. If, under the rules of such exchanges or markets, margin calls
are increased and insufficient funds are available in the Portfolio,
JPMIM may require the Company to make additional funds temporarily
available at short notice (in some cases less than 24 hours) until
assets can be realised to cover the related margin calls.
11
<PAGE>
2. The rules of the CFTC require JPMIM to furnish the following statements to
the Company and the Company to acknowledge by its signature that these
statements have been received and understood.
12
<PAGE>
Name and address of broker ("Broker"):
______________________________________
______________________________________
______________________________________
RISK DISCLOSURE STATEMENT FOR FUTURES AND OPTIONS
This brief statement does not disclose all of the risks and other significant
aspects of trading in futures and options. In light of the risks, you should
undertake such transactions only if you understand the nature of the contracts
(and contractual relationships) into which you are entering and the extent of
your exposure to risk. Trading in futures and options is not suitable for many
members of the public. You should carefully consider whether trading is
appropriate for you in light of your experience, objectives, financial resources
and other relevant circumstances.
FUTURES
1. Effect of 'Leverage' or "Gearing'
Transactions in futures carry a high degree of risk. The amount of initial
margin is small relative to the value of the futures contract so that
transactions are 'leveraged' or 'geared' A relatively small market movement
will have a proportionately larger impact on the funds you have deposited
or will have to deposit: this may work against you as well as for you. You
may sustain a total loss of initial margin funds and any additional funds
deposited with the firm to maintain your position. If the market moves
against your position or margin levels are increased, you may be called
upon to pay substantial additional funds on short notice to maintain your
position. If you fail to comply with a request for additional funds within
the time prescribed, your position may be liquidated at a loss and you will
be liable for any resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g., 'stop-loss' orders, where permitted
under local law, or 'stop-limit' orders) which are intended to limit losses
to certain amounts may not be effective because market conditions may make
it impossible to execute such orders. Strategies using combinations of
positions, such as 'spread' and 'straddle' positions may be as risky as
taking simple 'long' or 'short' positions.
13
<PAGE>
OPTIONS
3. Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers
of options should familiarize themselves with the type of option (i.e., put
or call) which they contemplate trading and the associated risks. You
should calculate the extent to which the value of the options must increase
for your position to become profitable, taking into account the premium and
all transaction costs.
The purchaser of options may offset or exercise the options or allow the
options to expire. The exercise of an option results either in a cash
settlement or in the purchaser acquiring or delivering the underlying
interest. If the option is on a future, the purchaser will acquire a
futures position with associated liabilities for margin (see the section on
Futures above). If the purchased options expire worthless, you will suffer
a total loss of your investment which will consist of the option premium
plus transaction costs. If you are contemplating purchasing
deep-out-of-the-money options, you should be aware that the chance of such
options becoming profitable ordinarily is remote.
Selling ('writing' or 'granting') an option generally entails considerably
greater risk than purchasing options. Although the premium received by the
seller is fixed, the seller may sustain a loss well in excess of that
amount. The seller will be liable for additional margin to maintain the
position if the market moves unfavourably. The seller will also be exposed
to the risk of the purchaser exercising the option and the seller will be
obligated to either settle the option in cash or to acquire or deliver the
underlying interest. If the option is on a future, the seller will acquire
a position in a future with associated liabilities for margin (see the
section on Futures above). If the position is 'covered' by the seller
holding a corresponding position in the underlying interest or a future or
another option, the risk may be reduced. If the option is not covered, the
risk of loss can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the
option premium, exposing the purchaser to liability for margin payments not
exceeding the amount of the premium. The purchaser is still subject to the
risk of losing the premium and transaction costs. When the option is
exercised or expires, the purchaser is responsible for any unpaid premium
outstanding at that time.
ADDITIONAL RISKS COMMON TO FUTURES AND OPTIONS
4. Terms and conditions of contracts
You should ask the firm with which you deal about the term and conditions
of the specific futures or options which you are trading and associated
obligations (e.g., the circumstances under which you may become obligated
to make or take delivery of the underlying interest
14
<PAGE>
of a futures contract and, in respect of options, expiration dates and
restrictions on the time for exercise). Under certain circumstances the
specifications of outstanding contracts (including the exercise price of an
option) may be modified by the exchange or clearing house to reflect
changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships
Market conditions (e.g., illiquidity) and/or the operation of the rules of
certain markets (e.g., the suspension of trading in any contract or
contract month because of price limits or 'circuit breakers') may increase
the risk of loss by making it difficult or impossible to effect
transactions or liquidate/offset positions. If you have sold options, this
may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and
the future, and the underlying interest and the option may not exist. This
can occur when, for example, the futures contract underlying the option is
subject to price limits while the option is not. The absence of an
underlying reference price may make it difficult to judge 'fair' value.
6. Deposited cash and property
You should familiarize yourself with the protections accorded money or
other property you deposit for domestic and foreign transactions,
particularly in the event of a firm insolvency or bankruptcy. The extent to
which you may recover your money or property may be governed by specified
legislation or local rules. In some jurisdictions, property which had been
specifically identifiable as your own will be pro-rated in the same manner
as cash for purposes of distribution in the event of a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all
commission, fees and other charges for which you will be liable. These
charges will affect your net profit (if any) or increase your loss.
8. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally
linked to a domestic market, may expose you to additional risk. Such
markets may be subject to regulation which may offer different or
diminished investor protection. Before you trade you should enquire about
any rules relevant to your particular transactions. Your local regulatory
authority will be unable to compel the enforcement of the rules of
regulatory authorities or markets in other jurisdictions where your
transactions have been effected. You should ask the firm with which you
deal for details about the types of redress available in both your home
jurisdiction and other relevant jurisdictions before you start to trade.
15
<PAGE>
9. Currency risks
The profit or loss in transactions in foreign curency-denominated contracts
(whether they are traded in your own or another jurisdiction) will be
affected by fluctuations in currency rates where there is a need to convert
from the currency denomination of the contract to another currency.
10. Trading facilities
Most open-outcry and electronic trading facilities are supported by
computer-based component systems for the order-routing, execution,
matching, registration or clearing of trades. As with all facilities and
systems, they are vulnerable to temporary disruption or failure. Your
ability to recover certain losses may be subject to limits on liability
imposed by the system provider, the market, the clearing house and/or
member firms. Such limits may vary; you should ask the firm with which you
deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ not only from trading in
an open-outcry market but also from trading on other electronic trading
systems. If you undertake transactions on an electronic trading system, you
will be exposed to risk associated with the system including the failure of
hardware and software. The result of any system failure may be that your
order is either not executed according to your instructions or is not
executed at all.
12. Off-exchange transactions
In some jursidictions, and only then in restricted circumstances, firms are
permitted to effect off-exchange transactions. The firm with which you deal
may be acting as your counterparty to the transaction. It may be difficult
or impossible to liquidate an existing position, to assess the value, to
determine a fair price or to assess the exposure to risk. For these
reasons, these transactions may involve increased risks. Off-exchange
transactions may be less regulated or subject to a separate regulatory
regime. Before you undertake such transactions, you should familiarize
yourself with applicable rules and attendant risks.
16
<PAGE>
I hereby acknowledge that I have received and understood this risk disclosure
statement.
Client: Commercial Guaranty Assurance Ltd Manager: J.P Morgan Investment
Management Inc.
By: /s/ A. R. MONTEMURNO By: /s/
----------------------------------- ---------------------------------
Title: President & CEO Title: Vice President
--------------------------------- ---------------------------------
Date: 27 December 1996 Date: 18 December 1996
--------------------------------- ---------------------------------
17
<PAGE>
HEDGE ACCOUNT DESIGNATION AND ELECTION
Broker:__________________________
_________________________________
_________________________________
Gentlemen:
Unless specified in writing to the contrary, Broker is hereby notified that all
transactions effected for the undersigned Client's account and all positions
taken in this account will either be (a) bona fide hedging transactions and
positions as defined in section 4(a) of the Commodity Exchange Act, as amended,
the Regulation 1.3(z) promulgated thereunder by the Commodity Futures Trading
Commission ("CFTC") or (b) risk management positions as recognized in the rules
of the relevant commodities exchange. The undersigned Client and Manager/Advisor
have read and understand the relevant rules and regulations and agrees that all
transactions and positions executed or carried in this account will be
consistent with such rules and regulations and agree that all transactions and
positions executed or carried in this account will be consistent with such rules
and regulations and any interpretations thereof.
It is agreed that positions carried in the undersigned Client's account will be
strictly for hedge purposes and not for speculation. Broker may rely on the
representations made herein. Should the undersigned Manager/Advisor transmit
orders for the account which do not meet the definition of "hedging" or "risk
management", the undersigned Manager/Advisor shall advise Broker in writing to
that effect and will keep such contracts margined as required by Broker and the
applicable exchanges.
Pursuant to CFTC Regulation 190.06(d), in the event of Broker's bankruptcy,
Broker shall attempt to contact the undersigned Manager/Advisor for
instructions as to the disposition of the open contracts held in the undersigned
Client's account's).
Client: Commercial Guaranty Assurance Ltd Manager: J.P Morgan Investment
Management Inc.
By: /s/ A. R. MONTEMURNO By: /s/
----------------------------------- ---------------------------------
Title: President & C.E.O. Title: Vice President
--------------------------------- ---------------------------------
Date: 27 December 1996 Date: 18 December 1996
--------------------------------- ---------------------------------
18
<PAGE>
[NON US]
CFTC EXEMPT ACCOUNT STATUS
Gentlemen:
We hereby consent to JPMIM treating such futures account(s) as an "exempt
account" under Rule 4.7 of the Commodity Futures Trading Commission (the
"CFTC"), the regulatory agency charged with oversight of futures trading in the
United States. Such consent permits JPMIM to dispense with certain disclosure
and recordkeeping requirements otherwise mandated by the CFTC with respect to
the accounts of clients who meet the objective criteria specified in Rule 4.7.
Such criteria are designed to indicate that a client possesses the investment
expertise and experience necessary to understand the risks involved in futures
trading as well as the financial resources to withstand the risks of such
trading.
In this regard the Client represents that:
(1) it owns an investment portfolio with a market value in excess of
$5,000,000; and
(2) it is, or is of the character of, or is otherwise analogous to, one or more
of the following client types: high net worth individual, collective
investment vehicle, employee benefit or retirement plan, commercial entity,
insurance company, bank, central bank, sovereign government, international
organization, endowment fund, foundation or other charitable organization.
JPMIM is hereby authorized to rely on the representations set forth in this
addendeum until notified by the client in writing of any changes.
Sincerely,
Commercial Guaranty Assurance, Ltd.
By: A. R. MONTEMURNO
--------------------------------
Title: President & C.E.O.
------------------------------
Date: 27 December 1996
-------------------------------
19
EXHIBIT 10.7
DCR
- --------------------------------------------------------------------------------
DUFF & PHELPS CREDIT RATING CO.
17 State Street
New York, New York 10004
(212) 908-0200
FAX (212) 908-0222
June 17, 1997
Mr. Richard A. Price
Chief Executive Officer and President
CGA Group, Ltd.
Clarendon House, Church Street
Hamilton, HM 11, Bermuda
Dear Rick:
In accordance with your request, Duff & Phelps Credit Rating Co. (DCR) is
pleased to advise you that based on the documents and information provided to
us, DCR assigns a Triple-A ('AAA') claims paying ability (CPA) rating to
Commercial Guaranty Assurance, Ltd (CGA) upon deposit of funds representing
CGA's capitalization at the agreed-to levels. The maintenance of this rating is
conditioned upon CGA's compliance with DCR's 'AAA' rating guidelines, including:
o CGA's agreement to pursue business consistent with the business plan
reviewed by DCR.
o CGA's agreement to conduct business in accordance with the terms of the
Letter Agreement dated June 12, 1997 attached to and made part of each
shareholder agreement for (and each subscription agreement for securities
of) each CGA Entity.
o CGA's agreement to submit all transactions on an ongoing basis to DCR for
review prior to insurance in acccordance with the terms of the Application
and Agreement for an Insurance Claims Paying Ability Rating.
The assigned rating does not constitute a recommendation to purchase or sell
securities guaranteed by CGA or sold by a CGA or CGA Entity client. Rather, it
is an indication of the ability of the insurer to meet policyholder obligations.
A Duff & Phelps Credit Rating Co. CPA is not intended to refer to the ability of
either the rated company or, as the case may be, a parent, affiliate,
subsidiary, etc., to pay non-policy holder obligations (e.g. debt or commercial
paper).
We hereby consent to the use of our name and the assigned rating in connection
with disclosure documents (provided that we reserve the right to approve any
description of the rating or of Duff & Phelps Credit Rating Co. in such
documents), advertisements, and descriptions of the insurer.
DCR reserves the right to publish the assigned rating with an explanation
thereof and a description of the insurer. Further, on an ongoing basis, we will
review CGA's credit quality in accordance with our policies and procedures.
Therefore, the assigned rating may be changed or withdrawn. In order to monitor
the assigned rating we ask that you advise us of any material changes in
management, financial condition, or business circumstances that materially
impact CGA. Please forward these reports to Duff & Phelps Credit Rating Co., 17
State Street, 12 Floor, New York, NY 10004, Attn.: Financial Guaranty
Department.
<PAGE>
We are pleased to have been of assistance to CGA in this matter. If you have any
questions, or if we may be of further assistance, please do not hesitate to
contact us.
Very truly yours,
/s/ JOSEPH C. FRANZETTI
- --------------------------------
Joseph C. Franzetti
Senior Vice President
<PAGE>
CGA GROUP, LTD.
CLARENDON HOUSE,
CHURCH STREET
HAMILTON, HM 11, BERMUDA
June 17, 1997
Morgan Guaranty Trust Company of New York,
acting as trustee
522 Fifth Avenue
New York, NY 10036
Attn: Kathleen N. Starrs
Vice President
Gentlemen:
Reference is made to the letter dated June 17, 1997 from CGA Group,
Ltd. ("CGA") to Duff & Phelps Credit Rating Co. ("DCR"), a copy of which is
attached hereto, and the letter dated June 17, 1997 from DCR to CGA, a copy of
which is attached hereto. On behalf of CGA, the undersigned agrees that CGA will
not make any request or submission to DCR which would cause DCR to change or
modify its letter dated June 17, 1997 to CGA.
CGA Group, Ltd.
By: /s/ JAMES R. REINHART
----------------------------
Name: James R. Reinhart
Title: Chief Financial Officer
<PAGE>
CGA GROUP, LTD.
Craig Appin House
8 Wesley Street
Hamilton, HM 11
Bermuda
June 17, 1997
Mr. Ralph R. Aurora
Duff & Phelps Credit Rating Company
17 State Street
New York, NY 10004
Dear Ralph:
The CGA Group has received a representation and covenant letter provided by
Morgan Guaranty Trust Company, which we desire to submit for your consideration
and evaluation as a Supporting Obligation consistent with the Double-A ("AA")
level required to satisfy the Minimum Rating requirement as defined in Section
1.3 of the CGA Group Ltd. Investment Units Subscription Agreement dated as of
June 4, 1997 (the "Subscription Agreement") and therefore, acceptable to DCR
pursuant to said Section 1.3.
Very truly yours,
/s/ RICHARD A. PRICE
- -----------------------
Richard A. Price
President
<PAGE>
DCR
- --------------------------------------------------------------------------------
DUFF & PHELPS CREDIT RATING CO.
17 State Street
New York, New York 10004
(212) 9008-0200
FAX (212) 908-0222
June 17, 1997
Mr. Richard A. Price, CEO
CGA Group, Ltd.
Craig Appin House
8 Wesley Street
Hamilton, HM 11
Bermuda
Dear Rick:
In accordance with your request, based on the information provided, we consider
the representation and covenant letter dated June 4, 1997, provided by Morgan
Guaranty Trust Company of New York to be a Supporting Obligation which is
consistent with the Double-A ("AA") level required to satisfy the Minimum Rating
requirement as defined in Section 1.3 of the CGA Group Ltd. Investment Units
Subscription Agreement dated as of June 4, 1997 (the "Subscription Agreement")
and therefore, acceptable to DCR pursuant to Section 1.3(c)(ii)(z) of the
Subscription Agreement. Please be advised that, for so long as Morgan Guaranty
Trust Company of New York is rated Triple-A ("AAA") by DCR and the
representations and covenants contained in such letter remain correct in all
material respects, such letter constitutes a Supporting Obligation pursuant to
Section 1.3(c)(ii)(z) of the Subscription Agreement.
Very truly yours,
/s/ RALPH R. AURORA
- --------------------------
Ralph R. Aurora
Vice President, Financial Guaranty
EXHIBIT 10.8
Warrant Agreement
Warrant Agreement, dated as of ____________ __, 1997 (the "Date of
Grant"), between CGA Group, Ltd. (the "Company"), and _______________ (the
"Optionee"), an employee of the Company. This Warrant Agreement is pursuant to
the terms of the Company's Stock Warrant Plan (the "Plan"). The applicable terms
of the Plan are incorporated herein by reference, including the definition of
terms contained in the Plan.
Section 1. Warrant Award. The Company grants to the Optionee, on the
terms and conditions hereinafter set forth, a Warrant with respect to
________________ shares of the Company's Common Stock (the "Warrant Shares").
The Warrant is intended to qualify as an incentive stock option under Section
422 of the Code.
Section 2. Exercise Price. The exercise price per share of the Warrant
Shares shall be US $5.00 per share.
Section 3. Vesting of Warrant. Subject to Section 6 hereof, the
Warrant Shares shall become vested and exercisable in four equal annual
installments based on the Optionee's continued employment with the Company and
the passage of time according to the following vesting schedule:
================================================================================
Vesting Date Number of Shares
- --------------------------------------------------------------------------------
1. June __, 1998
- --------------------------------------------------------------------------------
2. June __, 1999
- --------------------------------------------------------------------------------
3. June __, 2000
- --------------------------------------------------------------------------------
4. June __, 2001
================================================================================
Notwithstanding the foregoing, but subject to Section 6 hereof, all Warrant
Shares shall become (i) fully and immediately vested and exercisable to the
extent provided under Article IX of the Plan upon a "change in control" of the
Company or (ii) vest as provided in Section 8.2 of the Plan, upon the disability
of the Optionee.
Section 4. Limitations of Section 422 of the Code. Pursuant to Section
7.2 of the Plan and Section 422(d) of the Code, to the extent the aggregate fair
market value of stock with respect to which the Warrant (together with any other
incentive stock options of the Company and its subsidiaries) is exercisable, for
the first time by the Optionee during any
<PAGE>
calendar year, exceeds $100,000, the portion of the Warrant representing such
excess shall not be treated as an incentive stock option and shall instead be
treated as a nonqualified option.
Section 5. Warrant Term. Warrant Shares that become exercisable
pursuant to Section 3 hereof may be purchased at any time during the Warrant
Term. For purposes hereof, the "Warrant Term" shall commence on the Date of
Grant and shall expire on the day before the tenth anniversary thereof, unless
earlier terminated upon the Optionee's termination from service as an employee
as provided in Section 6 hereof. Upon the expiration of the Warrant Term, any
unexercised Warrant Shares shall be cancelled and shall be of no further force
or effect.
Section 6. Termination of Service. If Optionee's service as an
employee of the Company is terminated for any reason prior to the occurrence of
any otherwise applicable vesting date or event provided in Section 3 hereof, the
Optionee shall (i) forfeit his interest in any Warrant Shares that have not yet
become vested, which shall be cancelled and be of no further force or effect,
and (ii) retain the right to exercise any Warrant Shares that have previously
become vested until the expiration of 30 days after the effective date of such
termination of service or, in the event such termination of service is as a
result of disability or death (as provided in Article VIII of the Plan), until
the expiration of one year after the date of termination; provided, however,
that in the event of termination of service for "cause" (as defined in Section
8.3 of the Plan), the Optionee's right to exercise any unexercised portion of
his Warrant shall immediately terminate and all rights thereunder shall cease.
Section 7. Procedure for Exercise. The Warrant may be exercised, in
whole or part (for the purchase of whole shares only), by delivery of a written
notice (the "Notice") from the Optionee to the Secretary of the Company at the
Company's principal office, which Notice shall: (i) state the number of Warrant
Shares being exercised; (ii) state the method of payment for the Warrant Shares
and tax withholding pursuant to Section 8 hereof; (iii) include any
representation of the Optionee required pursuant to Section 9 hereof; (iv) in
the event that the Warrant shall be exercised by any person other than the
Optionee pursuant to Section 13 hereof, include appropriate proof of the right
of such person to exercise the Warrant; and (v) comply with such further
requirements consistent with the Plan as the Committee may from time to time
prescribe.
Section 8. Payment of Exercise Price and Tax Withholding. Payment of
the Exercise Price for the Warrant Shares shall be made (i) in cash or by
personal or certified
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check or other cash equivalent, (ii) by delivery of stock certificates (in
negotiable form) representing shares of Common Stock having a Fair Market Value
equal to the aggregate Exercise Price of the Warrant Shares or (iii) a
combination of the methods set forth in the foregoing clauses (i) and (ii). If
shares of previously owned Common Stock are used as the medium of payment, the
Fair Market Value of such shares of Common Stock shall be determined as of the
date on which the payment is made. Alternatively, payment of the Exercise Price
shall be deemed satisfied by having the Company withhold a number of shares of
Common Stock otherwise issuable to the Optionee upon exercise of the Warrant,
the Fair Market Value of which equals the Exercise Price; provided, however,
that the shares so withheld shall be considered issued for purposes of Section
5.1 of the Plan. For purposes hereof, the Fair Market Value of the shares of
Common Stock delivered and withheld shall be determined as of the date on which
the Warrant is exercised. In addition and at the time of exercise, as a
condition of delivery of the Warrant Shares, the Optionee shall remit to the
Company all required federal, state and local withholding tax amounts in any
manner permitted for the payment of the exercise price as provided above.
Section 9. Investment Representation. Upon the exercise of the Warrant
at a time when there is not in effect a registration statement under the
Securities Act of 1933 relating to the Warrant Shares, the Optionee hereby
represents and warrants, and by virtue of such exercise shall be deemed to
represent and warrant, to the Company that the Warrant Shares shall be acquired
for investment and not with a view to the distribution thereof, and not with any
present intention of distributing the same, and the Optionee shall provide the
Company with such further representations and warranties as the Company may
require in order to ensure compliance with applicable federal and state
securities, blue sky and other laws. No Warrant Shares shall be purchased upon
the exercise of the Warrant unless and until the Company and/or the Optionee
shall have complied with all applicable federal or state registration, listing
and/or qualification requirements and all other requirements of law or of any
regulatory agencies having jurisdiction, unless the Committee has received
evidence satisfactory to it that a prospective Optionee may acquire such shares
pursuant to an exemption from registration under the applicable securities laws.
Any determination in this connection by the Committee shall be final, binding
and conclusive. The Company reserves the right to legend any certificate for
shares of Common Stock, conditioning sales of such shares upon compliance with
applicable federal and state securities laws and regulations.
Section 10. Shareholders Agreement. Each Optionee that wishes to
exercise a Warrant shall be required, at the
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time of the exercise of the Warrant and prior to receiving certificates
representing the Common Stock with respect to such exercise, unless such
Optionee is already a party thereto, to execute a counterpart signature page,
and thereby become a party, to the Shareholders Agreement among the Company and
the investors named therein dated as of June __, 1997, as the same may be
amended, supplemented or otherwise modified from time to time.
Section 11. No Rights as Stockholder or Employee.
(a) The Optionee shall not have any privileges of a stockholder of the
Company with respect to any Warrant Shares subject to (but not acquired upon
valid exercise of) the Warrant, nor shall the Company have any obligation to
issue any dividends or otherwise afford any rights to which shares of Common
Stock are entitled with respect to any such Warrant Shares, until the date of
the issuance to the Optionee of a stock certificate evidencing such shares.
(b) Nothing in this Warrant Agreement or the Warrant shall confer upon
the Optionee any right to continue as an employee of the Company or to interfere
in any way with the right of the Company to terminate the Optionee's employment
at any time.
Section 12. Adjustments. If at any time while the Warrant is
outstanding, the number of outstanding shares of Common Stock of the Company is
changed by reason of a reorganization, recapitalization, stock split or any of
the other events described in Section 5.2 of the Plan, the number and kind of
Warrant Shares and/or the exercise price of such Warrant Shares shall be
adjusted in accordance with the provisions of Section 5.2 of the Plan.
Section 13. Restriction on Transfer of Warrant. The Warrant may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Optionee, except by will or by the laws of descent and distribution. In
the event an Optionee becomes legally incapacitated, his Warrant shall be
exercisable by his legal guardian, committee or legal representative. If the
Optionee dies, the Warrant shall thereafter be exercisable by the Optionee's
executors or administrators. The Warrant shall not be subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of the Warrant contrary to the provisions
hereof, and the levy of any execution, attachment or similar process upon the
Warrant, shall be null and void and without effect.
Section 14. Notices. Any notice hereunder by the Optionee shall be
given to the Company in writing and such notice shall be deemed duly given only
upon receipt thereof at
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the Company's office at Clarendon House, Church Street, Hamilton HM11 Bermuda,
Attention: The Company's Secretary, or at such other address as the Company may
designate by notice to the Optionee. Any notice hereunder by the Company shall
be given to the Optionee in writing and such notice shall be deemed duly given
only upon receipt thereof at such address as the Optionee may have on file with
the Company.
Section 15. Construction. The construction of this Warrant Agreement
is vested in the Committee, and the Committee's construction shall be final and
conclusive.
Section 16. Governing Law. This Warrant Agreement shall be construed
and enforced in accordance with the laws of the State of New York, without
giving effect to the choice of law principles thereof.
CGA GROUP, LTD.
By: ________________________________
Name:
Title:
OPTIONEE
____________________________________
Name:
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EXHIBIT 10.9
CGA GROUP, LTD.
EMPLOYEE STOCK WARRANT PLAN
<PAGE>
CGA GROUP, LTD.
EMPLOYEE STOCK WARRANT PLAN
ARTICLE I
PURPOSE
I.1 This CGA Group, Ltd. Employee Stock Warrant Plan is
intended to advance the interests of the Company and its stockholders and
subsidiaries by attracting, retaining and motivating the performance of selected
management employees of the Company of high caliber and potential upon whose
judgment, initiative and effort the Company is largely dependent for the
successful conduct of its business, and to encourage and enable such management
employees to acquire and retain a proprietary interest in the Company through
the purchase of shares of the Company's Common Stock, par value US $.01 per
share.
ARTICLE II
DEFINITIONS
II.1 "Board" means the Board of Directors of the Company.
II.2 "Closing Date" means June __, 1997.
II.3 "Code" means the Internal Revenue Code of 1986, as
amended.
II.4 "Common Stock" means the Company's Common Stock, par
value US $.01 per share, and any other securities into which or for which any of
the Company's Common Stock may be converted or exchanged as set forth in the
Company's Bye-laws.
II.5 "Committee" means the Compensation Committee of the Board
or any other committee of the Board appointed by the Board to administer the
Plan from time to time. The full Board shall also have the authority to exercise
the powers and duties of the Committee under the Plan.
II.6 "Company" means CGA Group, Ltd., a Company with limited
liability organized under the laws of Bermuda, and any company which shall
succeed to or assume the obligations of the Company hereunder.
II.7 "Date of Grant" means the date on which a Warrant becomes
effective in accordance with Section 6.1 hereof.
II.8 "Eligible Person" means any person who is a management
employee, including any officer, who is considered an employee of the Company or
any Subsidiary for purposes of Section 422 of the Code.
II.9 "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
II.10 "Exercise Price" means the price at which each share of
Common Stock subject to a Warrant may be purchased, determined in accordance
with Section 6.2 hereof.
II.11 "Fair Market Value" means the last reported sales prices
of the Common Stock on the Nasdaq National Market on the date as of which fair
market value is to be determined or, in the absence of any reported sales of
Common Stock on such date, on the first preceding date on which any such sale
shall have been reported. If the Company's Common Stock is not listed on the
Nasdaq National Market on the date as of which fair market value is to be
determined, the Committee shall determine in good faith the fair market value in
whatever manner it considers appropriate.
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II.12 "Optionee" means an Eligible Person to whom a Warrant
has been granted, which Warrant has not expired, under the Plan.
II.13 "Plan" means this CGA Group, Ltd. Employee Stock Warrant
Plan.
II.14 "Subsidiary" means a subsidiary corporation of the
Company, within the meaning of Section 424(f) of the Code.
II.15 "Ten-Percent Owner" means an Optionee who, at the time a
Warrant is granted, owns stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company, its parent, if
any, or any Subsidiary, within the meaning of Sections 422(b)(6) and 424(d) of
the Code.
II.16 "Warrant" means an incentive stock option granted under
the Plan that is intended to meet the requirements of Section 422 of the Code
and the regulations promulgated thereunder.
II.17 "Warrant Agreement" means an agreement between the
Company and an Optionee under which the Optionee may purchase Common Stock under
the Plan.
ARTICLE III
ELIGIBILITY
All Eligible Persons are eligible to receive a grant of a
Warrant under the Plan. The Committee shall, in its sole discretion, determine
and designate from time to time those Eligible Persons who are to be granted a
Warrant. The initial Optionees shall be those management employees named or
referenced by position or function on Schedule A hereto.
ARTICLE IV
ADMINISTRATION
IV.1 Committee Members. The Plan shall be administered by the
Committee acting upon the recommendations of the Chief Executive Officer of the
Company.
IV.2 Committee Authority. Subject to the express provisions of
the Plan, the Committee shall have the authority, in its discretion, to
determine the Eligible Persons to whom a Warrant shall be granted, the time or
times at which a Warrant shall be granted, the number of shares of Common Stock
subject to each Warrant, the Exercise Price of the shares subject to each
Warrant, the time or times when each Warrant shall become exercisable and the
duration of the exercise period.
Subject to the express provisions of the Plan, the Committee
shall also have discretionary authority to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it, to determine the details
and provisions of each Warrant Agreement, and to make all the determinations
necessary or advisable in the administration of the Plan. All such actions and
determinations by the Committee shall be conclusively binding for all purposes
and upon all persons. No Committee member shall be liable for any action or
determination made in good faith with respect to the Plan, any Warrant or any
Warrant Agreement entered into hereunder.
IV.3 Majority Rule. A majority of the members of the Committee
(or, if less than three, all of the members) shall constitute a quorum, and any
action taken by a majority present at a meeting at which a quorum is present or
any action taken without a meeting evidenced by a writing executed by a majority
of the whole Committee shall constitute the action of the Committee.
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IV.4 Company Assistance. The Company shall supply full and
timely information to the Committee on all matters relating to Eligible Persons,
their employment or other service to the Company, their death, disability or
other termination of service, and such other pertinent facts as the Committee
may require.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
V.1 Number of Shares. Subject to adjustment pursuant to the
provisions of Section 5.2 hereof, the maximum number of shares of Common Stock
which may be issued and sold hereunder shall be 1,494,771 shares. Shares of
Common Stock issued and sold under the Plan may be either authorized but
unissued shares or shares held in the Company's treasury. Shares of Common Stock
covered by a Warrant that shall have been exercised shall not again be available
for a Warrant grant. If a Warrant shall terminate for any reason (including,
without limitation, the cancellation of a Warrant pursuant to Section 6.6
hereof) without being wholly exercised, the number of shares to which such
expired or terminated Warrant relates shall again be available for grant under
this Plan, subject to its terms.
V.2 Antidilution. Subject to Article IX hereof, in the event
of a reorganization, recapitalization, stock split, stock dividend, combination
of shares, merger or consolidation, or the sale, conveyance, or other transfer
by the Company of all or substantially all of its property, or any other change
in the corporate structure or shares of the Company, pursuant to any of which
events the then outstanding shares of Common Stock are split up or combined, or
are changed into, become exchangeable at the holder's election for, or entitle
the holder thereof to, other shares of stock, or in the case of any other
transaction described in Section 424(a) of the Code, the Committee may change
the number and kind of shares (including by substitution of shares of another
corporation) subject to the Warrants and/or the Exercise Price of such shares in
the manner that it shall deem to be equitable and appropriate. In no event may
any such change be made to a Warrant which would constitute a "modification"
within the meaning of Section 424(h)(3) of the Code.
ARTICLE VI
WARRANTS
VI.1 Grant of Warrant. A Warrant may be granted to any
Eligible Person selected by the Committee. The grant of a Warrant shall first be
effective upon the date it is approved by the Committee, except to the extent
the Committee shall specify a later date upon which the grant of a Warrant shall
first be effective. The Company and the Optionee shall execute a Warrant
Agreement which shall set forth such terms and conditions of the Warrant as may
be determined by the Committee to be consistent with the Plan, and which may
include additional provisions and restrictions that are not inconsistent with
the Plan.
VI.2 Exercise Price. The Exercise Price shall be determined by
the Committee; provided, however, that the Exercise Price shall not be less than
100 percent of the Fair Market Value of a share of Common Stock on the Date of
Grant (subject to Section 7.1 hereof in the case of a Ten-Percent Owner).
VI.3 Vesting; Term of Warrant. Unless otherwise specified by
the Committee in the Warrant Agreement for an Optionee, and subject to Article
VIII hereof, a Warrant granted under the Plan shall vest and become exercisable,
based on the Optionees's continued employment with the Company, at an annual
rate of 25% of the shares subject to the Warrant, beginning on the day preceding
the first anniversary of the later of (i) the Closing Date and (ii) the date of
the Optionee's employment pursuant to his employment agreement with the Company
and continuing through the day preceding the fourth anniversary of the later of
(i) the Closing Date and (ii) the date of such employment. Notwithstanding the
foregoing, the Committee, in its sole discretion, may accelerate the
exercisability of any Warrant at any time. The period during which a vested
Warrant may be exercised shall be ten years from the Date of Grant (subject to
Section 7.1 hereof in the case of a Ten-Percent Owner), unless a shorter
exercise period is specified by the Committee in the Warrant
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Agreement for an Optionee.
VI.4 Warrant Exercise; Withholding. A Warrant may be exercised
in whole or in part at any time, with respect to whole shares only, within the
period permitted for the exercise thereof, and shall be exercised by written
notice of intent to exercise the Warrant with respect to a specified number of
shares delivered to the Company at its principal office, and payment in full to
the Company at said office of the amount of the Exercise Price for the number of
shares of the Common Stock with respect to which the Warrant is then being
exercised. Payment of the Exercise Price shall be made (i) in cash or by cash
equivalent, (ii) in Common Stock (not subject to limitations on transfer) valued
at the Fair Market Value of such shares on the trading date immediately
preceding the date of exercise or (iii) by a combination of such cash or cash
equivalent and Common Stock. If shares of previously owned Common Stock are used
as the medium of payment, the Fair Market Value of such shares of Common Stock
shall be determined as of the date on which the payment is made. Alternatively,
payment of the Exercise Price shall be deemed satisfied by having the Company
withhold a number of shares of Common Stock otherwise issuable to the Optionee
upon exercise of the Warrant, the Fair Market Value of which equals the Exercise
Price; provided, however, that the shares so withheld shall be considered issued
for purposes of Section 5.1 hereof. For purposes hereof, the Fair Market Value
of the shares of Common Stock delivered and withheld shall be determined as of
the date on which the Warrant is exercised. In addition to and at the time of
payment of the Exercise Price, the Optionee shall pay to the Company in cash or
cash equivalent or, at the discretion of the Committee, in Common Stock the full
amount of all federal and state withholding and other employment taxes
applicable to the taxable income of such Optionee resulting from such exercise.
VI.5 Nontransferability of Warrant. No Warrant shall be
transferred by an Optionee other than by will or the laws of descent and
distribution. No transfer of a Warrant by the Optionee by will or by laws of
descent and distribution shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and an
authenticated copy of the will and/or such other evidence as the Committee may
deem necessary to establish the validity of the transfer. During the lifetime of
an Optionee, the Warrant shall be exercisable only by him, except that, in the
case of an Optionee who is legally incapacitated, the Warrant shall be
exercisable by his guardian or legal representative.
VI.6 Cancellation, Substitution and Amendment of Warrants. The
Committee shall have the authority to effect, at any time and from time to time,
with the consent of the affected Optionees, (i) the cancellation of any or all
outstanding Warrants and the grant in substitution therefor of new Warrants
covering the same or different numbers of shares of Common Stock and having an
Exercise Price which may be the same as or different than the Exercise Price of
the cancelled Warrants or (ii) the amendment of the terms of any and all
outstanding Warrants. In no event may any such substitution or amendment be made
to a Warrant which would constitute a "modification" within the meaning of
Section 424(h)(3) of the Code.
ARTICLE VII
COMPLIANCE WITH SECTION 422 OF THE CODE
VII.1 Ten-Percent Owners. Notwithstanding any other provisions
of this Plan to the contrary, in the case of a Warrant granted to a Ten-Percent
Owner, (i) the period during which any such Warrant may be exercised shall not
be greater than five years from the Date of Grant and (ii) the Exercise Price of
such Warrant shall not be less than 110 percent of the Fair Market Value of a
share of Common Stock on the Date of Grant.
VII.2 Annual Limits. No Warrant shall be granted to an
Optionee as a result of which the aggregate fair market value (determined as of
the date of grant) of the stock with respect to which incentive stock options
are exercisable for the first time in any calendar year under the Plan, and any
other stock option plans of the Company, any Subsidiary or any parent
corporation, would exceed $100,000, determined in accordance with Section 422(d)
of the Code. This limitation shall be applied by taking options into account in
the order in which granted.
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VII.3 Disqualifying Dispositions. If shares of Common Stock
acquired by exercise of a Warrant are disposed of within two years following the
Date of Grant or one year following the transfer of such shares to the Optionee
upon exercise, the Optionee shall, within 10 days after such disposition, notify
the Company in writing of the date and terms of such disposition and provide
such other information regarding the disposition as the Committee may reasonably
require.
VII.4 Other Terms and Conditions. Any Warrant granted
hereunder shall contain such additional terms and conditions, not inconsistent
with the terms of this Plan, as are deemed necessary or desirable by the
Committee, which terms, together with the terms of this Plan, shall be intended
and interpreted to cause such Warrant to qualify as an "incentive stock option"
under Section 422 of the Code.
ARTICLE VIII
TERMINATION OF SERVICE
VIII.1 Death. If an Optionee shall die at any time after the
Date of Grant and while he is an Eligible Person, at a time when one or more of
the Optionee's Warrants remains wholly or partially unvested, then the vesting
of each such Warrant shall cease. If an Optionee shall die at any time after the
Date of Grant and while he is an Eligible Person, the executor or administrator
of the estate of the decedent, or the person or persons to whom a Warrant shall
have been validly transferred in accordance with Section 6.5 hereof pursuant to
will or the laws of descent and distribution, shall have the right, during the
period ending one year after the date of the Optionee's death (subject to
Sections 6.3 and 7.1 hereof concerning the maximum term of a Warrant), to
exercise the Optionee's Warrant to the extent that it was exercisable at the
date of the Optionee's death and shall not have been previously exercised.
VIII.2 Disability. If an Optionee's employment with the
Company or any Subsidiary shall be terminated as a result of his permanent and
total disability (within the meaning of Section 22(e)(3) of the Code) at any
time after the Date of Grant and while he is an Eligible Person, at a time when
one or more of the Optionee's Warrants remains wholly or partially unvested,
then such Warrants shall immediately vest to the extent that they would have
vested had the Optionee remained employed until the end of the then-current term
of his employment agreement with the Company (without regard to any renewals or
extensions thereto), unless such Optionee has entered into a separation
agreement with the Company, which terms, if any, shall supersede this Section
8.2. In the case of an Optionee who is not employed pursuant to an employment
agreement, the Committee may determine, on or after grant, to make any portion
of his Warrant that is not exercisable at the date of termination of employment
due to permanent and total disability immediately vested and exercisable. If an
Optionee's employment with the Company or any Subsidiary shall be terminated as
a result of his permanent and total disability (within the meaning of Section
22(e)(3) of the Code) at any time after the Date of Grant and while he is an
Eligible Person, the Optionee (or in the case of an Optionee who is legally
incapacitated, his guardian or legal representative) shall have the right,
during a period ending one year after the date of his permanent and total
disability (subject to Sections 6.3 and 7.1 hereof concerning the maximum term
of a Warrant), to exercise such Warrant to the extent that it was exercisable at
the date of such termination of employment or other service and shall not have
been exercised.
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VIII.3 Termination for Cause. If an Optionee's employment with
the Company or any Subsidiary shall be terminated for cause (as defined below)
at any time after the Date of Grant, at a time when one or more of the
Optionee's Warrants remains wholly or partially unvested, then the vesting of
each such Warrant shall cease. If an Optionee's employment with the Company or
any Subsidiary shall be terminated for cause, the Optionee's right to exercise
any unexercised portion of his Warrant shall immediately terminate and all
rights thereunder shall cease. For purposes of this Section 8.3, termination for
"cause" shall mean a termination of the Optionee's employment by the Company for
"cause" as defined under such Optionee's employment agreement with the Company,
or, in the case of an Optionee who is not employed pursuant to an employment
agreement, termination for "cause" shall include, but not be limited to, the
following acts by the Optionee: (i) embezzlement or misappropriation of
corporate funds, (ii) any acts resulting in a conviction for, or plea of guilty
or nolo contendere to, a charge of commission of a felony, (iii) misconduct
resulting in material injury to the Company or any Subsidiary, (iv) significant
activities harmful to the reputation of the Company or any Subsidiary, (v) a
significant violation of Company or Subsidiary operating guidelines or policies,
(vi) willful refusal to perform, or substantial disregard of, the duties
properly assigned to the Optionee, or (vi) a significant violation of any
contractual, statutory or common law duty of loyalty to the Company or any
Subsidiary. The Committee shall have the power to determine whether the Optionee
has been terminated for cause and the date upon which such termination for cause
occurs. Any such determination shall be final, conclusive and binding upon the
Optionee.
VIII.4 Other Termination of Service. If an Optionee's
employment with the Company or any Subsidiary shall be terminated for any
reason, other than as set forth in Sections 8.1, 8.2 and 8.3 hereof, at any time
after the Date of Grant (including termination pursuant to the non-renewal of
the Optionee's employment agreement), at a time when one or more of the
Optionee's Warrants remains wholly or partially unvested, then the vesting of
each such Warrant shall cease. If an Optionee's employment with the Company or
any Subsidiary shall be terminated for any reason other than death, permanent
and total disability or termination for cause, the Optionee shall have the
right, during the period ending 30 days after such termination (subject to
Sections 6.3 and 7.1 hereof concerning the maximum term of a Warrant), to
exercise such Warrant to the extent that it was exercisable at the date of such
termination and shall not have been exercised. For purposes of this Section 8.4,
an Optionee shall not be considered to have terminated employment or other
service with the Company or any Subsidiary until the expiration of the period of
any military, sick leave or other bona fide leave of absence, up to a maximum
period of 90 days (or such greater period during which the Optionee is
guaranteed reemployment either by statute or contract).
ARTICLE IX
CHANGE IN CONTROL
IX.1 Change in Control. Upon a "change in control" of the
Company (as defined below), each outstanding Warrant, to the extent that it
shall not otherwise have become vested, shall become fully and immediately
vested (without regard to any otherwise applicable vesting requirement under
Section 6.3 hereof) and an Optionee shall surrender his Warrant and receive with
respect to each share of Common Stock issuable under such Warrant outstanding at
such time, a payment in cash equal to the excess of the Fair Market Value of the
Common Stock at the time of the change in control over the Exercise Price of the
Common Stock.
IX.2 Definition. For purposes of Section 9.1 hereof, a "change
in control" of the Company shall mean any of the following which occurs prior to
the closing of a Qualified Public Offering (as defined in the Company's
Bye-laws) by the Company:
(a) The consummation of the acquisition by any person
(as such term is defined in Section 13(d) or 14(d) of the
Exchange Act) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of more than
fifty percent (50%) of the combined voting power of the then
outstanding voting securities of the Company;
(b) The cessation, for any reason, by the individuals
who, as of the Closing Date, are members of the Board to
constitute a majority of such Board, unless the designation of
any new individual as a director is pursuant to the right to
designate a director granted to
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certain members under the Bye-laws of the Company, and such
new director shall be considered as a member of such Board; or
(c) Approval by stockholders of: (1) a merger or
consolidation if the stockholders of the Company immediately
before such merger or consolidation do not, as a result of
such merger or consolidation, own, directly or indirectly,
more than fifty percent (50%) of the combined voting power of
the then outstanding voting securities of the entity resulting
from such merger or consolidation; or (2) an agreement for the
sale or other disposition of all or substantially all of the
assets of the Company other than an agreement for such sale or
disposition to a corporation which, immediately prior to such
sale or disposition, is owned directly or indirectly by the
stockholders of the Company in materially the same proportion
as their ownership of stock immediately prior to such sale or
disposition.
For purposes of Section 9.1 hereof, the term "Change in
Control" shall not mean the following:
a) An initial public offering of the capital stock of
Company consistent with the Company's business plan as
described in the Amended and Restated Confidential Private
Placement Memorandum dated [June __, 1997];
b) A merger of the Company with, or acquisition of
the Company by, any other entity if such merger or
acquisition, as applicable, is approved by the Board or any
other recapitalization or change in capital structure, whether
public or private, of the Company, in each case, after which,
and for a period of one year following any such transaction,
the Optionee holds the same position as set forth in his
employment agreement with the Company (or, in the case of an
Optionee who is not employed pursuant to an employment
agreement, has the same position, duties and responsibilities
as existed prior to any such transaction), has the same chain
of command, reports to the same individual or individuals, and
suffers no material change in his employment.
In addition, notwithstanding anything to the contrary
contained above, a Change in Control shall not be deemed to occur solely because
more than fifty percent (50%) of the combined voting power of the then
outstanding securities is, or all or substantially all of the assets of the
Company are, acquired by: (i) a trustee or other fiduciary holding securities
under one or more employee benefit plans maintained for employees of the
Company; or (ii) any corporation which, immediately prior to such acquisition,
is owned directly or indirectly by the stockholders of the Company in materially
the same proportion as their ownership of stock immediately prior to such
acquisition.
ARTICLE X
STOCK CERTIFICATES
X.1 Issuance of Certificates. Subject to Section 10.2 hereof,
the Company shall issue a stock certificate in the name of the Optionee (or
other person exercising the Warrant in accordance with the provisions of the
Plan) for the shares of Common Stock purchased by exercise of a Warrant as soon
as practicable after due exercise and payment of the aggregate Exercise Price
for such shares.
X.2 Conditions. The Company shall not be required to issue or
deliver any certificate for shares of Common Stock purchased upon the exercise
of any Warrant granted hereunder or any portion thereof prior to fulfillment of
all of the following conditions:
(a) The completion of any registration or other qualification
of such shares, under any federal or state law or under the rulings or
regulations of the Securities and Exchange Commission or any other governmental
regulatory body, that the Committee shall in its sole discretion deem necessary
or advisable;
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(b) The obtaining of any approval or other clearance from any
federal or state governmental agency which the Committee shall in its sole
discretion determine to be necessary or advisable;
(c) The lapse of such reasonable period of time following the
exercise of the Warrant as the Committee from time to time may establish for
reasons of administrative convenience;
(d) Satisfaction by the Optionee of all applicable withholding
taxes or other withholding liabilities; and
(e) If required by the Committee, in its sole discretion, the
receipt by the Company from an Optionee of (i) a representation in writing that
the shares of Common Stock received upon exercise of a Warrant are being
acquired for investment and not with a view to distribution, (ii) a
representation in writing that the Optionee is a party to the Shareholders
Agreement dated as of June __, 1997, as the same may be amended, supplemented or
otherwise modified from time to time, or the execution by the Optionee of a
counterpart signature page to such Shareholders Agreement, and (iii) such other
representations and warranties as are deemed necessary by counsel to the
Company.
X.3 Legends. The Company reserves the right to legend any
certificate for shares of Common Stock, conditioning sales of such shares upon
compliance with applicable federal and state securities laws and regulations.
ARTICLE XI
EFFECTIVE DATE, TERMINATION AND AMENDMENT
XI.1 Effective Date. The Plan shall become effective on the
date of its adoption by the Board; provided, however, that no Warrant shall be
exercisable by an Optionee unless and until the Plan shall have been approved by
the stockholders of the Company, which approval shall be obtained within 12
months before or after the adoption of the Plan by the Board. If the
stockholders fail to approve the Plan within one year from the Effective Date,
any Warrants granted hereunder shall be null and void and of no effect.
XI.2 Termination. The Plan shall terminate on the date
immediately preceding the tenth anniversary of the earlier of the date the Plan
is adopted by the Board or the date the Plan is approved by the Company's
stockholders. The Board may, in its sole discretion and at any earlier date,
terminate the Plan. Notwithstanding the foregoing, no termination of the Plan
shall in any manner affect any Warrant theretofore granted without the consent
of the Optionee or the permitted transferee of the Warrant.
XI.3 Amendment. The Board may at any time and from time to
time and in any respect, amend or modify the Plan; provided, however, that, the
approval of the Company's stockholders will be required for any amendment or
modification that (i) increases (other than as described in Section 5.2) the
maximum number of shares of Common Stock subject to Warrants granted under the
Plan or (ii) changes the class of persons eligible for participation in the
Plan. Notwithstanding the foregoing, no amendment or modification of the Plan
shall in any manner affect any Warrant theretofore granted without the consent
of the Optionee or the permitted transferee of the Warrant.
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ARTICLE XII
MISCELLANEOUS
XII.1 Employment or other Service. Nothing in the Plan, in
the grant of any Warrant or in any Warrant Agreement shall confer upon any
Eligible Person the right to continue in the capacity in which he is employed by
or otherwise provides services to the Company or any Subsidiary. Notwithstanding
anything contained in the Plan to the contrary, unless otherwise provided in a
Warrant Agreement, no Warrant shall be affected by any change of duties or
position of the Optionee (including a transfer to or from the Company or any
Subsidiary), so long as such Optionee continues to be an Eligible Person.
XII.2 Rights as Shareholder. An Optionee or the permitted
transferee of a Warrant shall have no rights as a shareholder with respect to
any shares subject to such Warrant prior to the purchase of such shares by
exercise of such Warrant as provided herein. Nothing contained herein or in the
Warrant Agreement relating to any Warrant shall create an obligation on the part
of the Company to repurchase any shares of Common Stock purchased hereunder.
XII.3 Other Compensation and Benefit Plans. The adoption of
the Plan shall not affect any other stock option or incentive or other
compensation plans in effect for the Company or any Subsidiary, nor shall the
Plan preclude the Company from establishing any other forms of incentive or
other compensation for employees of the Company or any Subsidiary. The amount of
any compensation deemed to be received by an Optionee as a result of the
exercise of a Warrant or the sale of shares received upon such exercise shall
not constitute compensation with respect to which any other employee benefits of
such Optionee are determined, including, without limitation, benefits under any
bonus, pension, profit sharing, life insurance or salary continuation plan,
except as otherwise specifically determined by the Board or the Committee or
provided by the terms of such plan.
XII.4 Plan Binding on Successors. The Plan shall be binding
upon the Company, its successors and assigns, and the Optionee, his executor,
administrator and permitted transferees.
XII.5 Construction and Interpretation. Whenever used herein,
nouns in the singular shall include the plural, and the masculine pronoun shall
include the feminine gender. Headings of Articles and Sections hereof are
inserted for convenience and reference and constitute no part of the Plan.
XII.6 Severability. If any provision of the Plan or any
Warrant Agreement shall be determined to be illegal or unenforceable by any
court of law in any jurisdiction, the remaining provisions hereof and thereof
shall be severable and enforceable in accordance with their terms, and all
provisions shall remain enforceable in any other jurisdiction.
XII.7 Governing Law. The validity and construction of this
Plan and of the Warrant Agreements shall be governed by the laws of the State of
New York.
9
EXHIBIT 10.10
CGA GROUP, LTD.
SPONSORING INVESTORS AND FOUNDERS STOCK WARRANT PLAN
(Effective as of __________ __, 1997)
1. Purpose of the Plan.
The purpose of the CGA Group, Ltd. Sponsoring Investors and Founders
Employee Stock Warrant Plan (the "Plan") is to further the long-term growth of
CGA Group, Ltd. (the "Company") by offering special incentives in the form of a
stock warrant plan for the benefit of those sponsoring investors and founders of
the Company who have been largely responsible for the development of the
Company. It is the express purpose of this Plan to provide such sponsoring
investors and founders with the opportunity to acquire or increase their equity
ownership in the Company through the purchase of shares of the Company's Common
Stock, par value US $.01 per share.
2. Definitions.
As used herein, the following terms have the following respective
meanings:
(a) "Beneficiary" shall mean any person who may, under a Holder's
will or under the laws of descent and distribution, including the Holder's
personal representative, succeed to the Holder's right to exercise any Warrant
by reason of the Holder's death.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Business Day" shall mean any day which is neither a Saturday
or Sunday nor a legal holiday on which banks or established securities exchanges
are authorized or required to be closed in either Hamilton, Bermuda or New York,
New York.
(d) "Closing Date" shall mean June __, 1997.
(e) "Common Stock" shall mean the Company's Common Shares, US $.01
par value per share, and any other securities into which or for which any of the
Common Shares may be converted or exchanged as set forth in the Company's
Bye-laws.
<PAGE>
(f) "Company" shall mean CGA Group, Ltd., a Company with limited
liability organized under the laws of Bermuda, and any company which shall
succeed to or assume the obligations of the Company hereunder.
(g) "Exercise Period" shall have the meaning set forth in the
Warrant Certificate.
(h) "Holder" shall mean a Person who is eligible to participate in
this Plan under Section 4 hereof.
(i) "Plan" shall refer to the CGA Group, Ltd. Sponsoring Investors
and Founders Stock Warrant Plan dated June __, 1997, as amended from time to
time, pursuant to which the Warrants were granted.
(j) "Plan Administrator" shall mean the Compensation Committee of
the Board acting upon the recommendations of the Chief Executive officer of the
Company.
(k) "Purchase Price" shall mean the amount to be paid for the
purchase of shares of Common Stock on exercise of a Warrant as set forth in
Section 8 hereof.
(l) "Securities Act" refers to the United States Securities Act of
1933, as amended.
(m) "Warrant" shall mean a Holder's right to purchase one or more
shares of Common Stock, as granted and determined in accordance with the
provisions of this Plan.
(n) "Warrant Certificate" shall mean the Warrant Certificate
pursuant to which a Holder is granted a Warrant.
3. Administration of the Plan.
(a) The Plan shall be administered by the Plan Administrator.
(b) Decisions and determinations by the Plan Administrator shall be
final and binding upon all parties, including stockholders, Holders and
Beneficiaries. The Plan Administrator shall have the authority to interpret the
Plan, to establish and revise rules and regulations relating to the Plan, and to
make any other determinations that it believes necessary or advisable for the
administration of the Plan.
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4. Participation.
Holders shall be those sponsoring investors and founders named on
Schedule A hereto.
5. Effective Date and Termination of Plan.
(a) The Plan shall become effective upon its adoption by the Board.
(b) The Plan shall terminate ten years after the date on which it is
adopted by the Board, but the Board may terminate or amend the Plan at any time
after November __, 1997. The termination or amendment of the Plan under this
Section 5(b) shall not alter or impair any rights or obligations under any
outstanding Warrant without the consent of the Holder of the Warrant.
6. Shares Subject to Warrants.
(a) Subject to adjustment pursuant to Section 12 and Section 13
hereof, the number of shares of Common Stock that may be issued pursuant to
Warrants granted under this Plan shall not exceed 847,729. Shares of Common
Stock issued upon exercise of a Warrant under the Plan may be either authorized
but unissued shares or shares held in the Company's treasury. Shares of Common
Stock covered by a Warrant that shall have been exercised shall not again be
available for a Warrant grant. If a Warrant shall expire or terminate for any
reason (including, without limitation, the cancellation of a Warrant pursuant to
Section 9(d) below) without being wholly exercised, the number of shares to
which such expired or terminated Warrant relates shall again be available for
grant under this Plan, subject to its terms.
(b) The Company will authorize, reserve and set apart and have
available for issuance at all times, free from preemptive rights, that number of
shares of the Common Stock which is deliverable upon exercise of the granted
Warrants, and the Company will have at all times any other rights or privileges
provided for therein sufficient to enable it at any time to fulfill all its
obligations under the Plan.
7. Duration of Warrants.
Any Warrant granted to a Holder shall be exercisable only during the
Exercise Period.
8. Purchase Price.
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The Purchase Price for each share of Common Stock subject to any
Warrant granted to a Holder shall be equal to US $5.00 (subject to adjustment as
provided for herein); provided, however, that at no time shall the Purchase
Price be less than the par value of the Common Stock, that is, US $.01 per
share.
9. Terms of Exercise.
(a) Full Exercise. A Warrant may be exercised in full (but not for
a fractional share (it being understood that fractional shares shall be rounded
up or down to the nearest whole number based on the number of Warrants being
exercised by a Holder)), by the Holder thereof during normal business hours on
any Business Day upon surrender of the Warrant, together with the form of
exercise notice attached as Exhibit A to the Warrant Certificate (the "Notice of
Exercise"), or a comparable form reasonably acceptable to the Company, duly
completed and executed by such Holder, to the Company at its principal office or
at the office of its warrant agent (as provided in Section 18), accompanied by
payment in full, in cash or by official bank check or by wire transfer of
immediately available funds in the amount obtained by multiplying the number of
shares of Common Stock for which a Warrant is then exercisable by the Purchase
Price then in effect.
(b) Partial Exercise. A Warrant may be exercised in part (but not
for a fractional share (it being understood that fractional shares shall be
rounded up or down to the nearest whole number based on the number of Warrants
being exercised by a Holder)), by the Holder thereof during normal business
hours on any Business Day upon surrender of the Warrant, together with the duly
completed and executed Notice of Exercise, or a comparable form reasonably
acceptable to the Company, duly completed and executed by such Holder, to the
Company at its principal office or at the office of its warrant agent (as
provided in Section 18), accompanied by payment in cash or by official bank
check or by wire transfer of immediately available funds, in the amount obtained
by multiplying (i) the number of shares of Common Stock designated by the Holder
in the Notice of Exercise by (ii) the Purchase Price then in effect. On any such
partial exercise of a Warrant, the Company, at its expense, will forthwith issue
and deliver to or upon the order of the Holder thereof a new Warrant of like
tenor, in the name of the Holder thereof or, subject to Section 16 hereof, as
such Holder (upon payment by such Holder of any applicable transfer taxes) may
request, for the number of shares of Common Stock for which such Warrant may
still be exercised.
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(c) Shareholders Agreement. Each Holder that wishes to exercise a
Warrant shall be required, at the time of the exercise of the Warrant and prior
to receiving certificates representing the Common Stock with respect to such
exercise, unless such Holder is already a party thereto, to execute a
counterpart signature page, and thereby become a party, to the Shareholders
Agreement dated as of June __, 1997, as the same may be amended, supplemented or
otherwise modified from time to time (the "Shareholders Agreement") among the
Company and certain members of the Company.
(d) Cancellation, Substitution and Amendment of Warrants. The Plan
Administrator shall have the authority to effect, at any time and from time to
time, with the consent of the affected Holders, (i) the cancellation of any or
all outstanding Warrants and the grant in substitution therefor of new Warrants
covering the same or different numbers of shares of Common Stock and having a
Purchase Price which may be the same as or different than the Purchase Price of
the cancelled Warrants or (ii) the amendment of the terms of any and all
outstanding Warrants.
(e) Other Terms. The Plan Administrator shall have the power to
determine such additional terms for the exercise of Warrants not inconsistent
with the terms of this Plan as it deems appropriate.
10. Warrant Certificates.
Upon the grant of any Warrant hereunder, the Holder shall be required
to sign a Warrant Certificate, in such form as shall be prescribed by the Plan
Administrator, reflecting the terms and conditions of the Warrant. Each such
Warrant Certificate shall refer to this Plan and shall give notice to the Holder
that all Warrants are subject to the terms and conditions of this Plan.
11. Delivery of Stock Certificates, etc., on Exercise.
The Company agrees that the shares of Common Stock purchased upon
exercise of a Warrant shall be deemed to be issued to the Holder thereof as the
record owner of such shares as of the close of business on the date on which the
Warrant shall have been surrendered and payment made for such shares as
aforesaid. As soon as practicable after the exercise of the Warrant in full or
in part, and in any event within ten (10) Business Days thereafter, the Company
at its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the Holder thereof, or,
subject to any applicable restrictions on transfer, as such Holder (upon payment
by
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such Holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of Common Stock to which such Holder shall be entitled to
pursuant to such exercise (it being understood that fractional shares shall be
rounded up or down to the nearest whole number based on the number of Warrants
being exercised by a Holder), together with any other stock or other securities
and property (including cash, where applicable) to which such Holder is entitled
upon such exercise pursuant to Section 9 or otherwise.
12. Adjustment for Dividends In Stock, Property, etc.;
Reclassification, etc.
In case at any time or from time to time while a Warrant or any
portion thereof remains outstanding and unexpired, the holders of Common Stock
shall have received, or, on or after the record date fixed for the determination
of members eligible to receive, shall have become entitled to receive, without
payment therefor, by virtue of their ownership of Common Stock (a) other or
additional stock or other securities or property (other than cash) by way of
dividend, or (b) any cash (excluding cash dividends (other than extraordinary
cash dividends) payable solely out of earnings or earned surplus of the
Company), or (c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate arrangement, then
and in each such case the Holder of a Warrant, on the exercise thereof as
provided in Section 9, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subsections (b) and (c) of this Section 12) that such Holder would hold on the
date of such exercise if on the date of grant of such Warrant such Holder had
been the Holder of record of the number of shares of Common Stock called for on
the face of the Warrant and had thereafter, during the period from the date of
grant of such Warrant to and including the date of such exercise, retained such
shares and all such other or additional stock and other securities and property
(including cash in the cases referred to in subsections (b) and (c) of this
Section 12) receivable by such Holder as aforesaid during such period, giving
effect to all adjustments called for during such period by Sections 13 and 14.
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13. Adjustment for Reorganization, Consolidation, Merger, etc.
(a) Reorganization, Consolidation, Merger, etc. In case at any time or
from time to time while a Warrant or any portion thereof remains outstanding and
unexpired, the Company shall (a) effect a reorganization, (b) consolidate with
or merge into any other person, or (c) transfer all or substantially all of its
properties or assets to any other person under any plan or arrangement
contemplating the dissolution of the Company, then, in each such case, as a
condition to the consummation of such a transaction, lawful, proper and adequate
provision shall be made by the Company whereby the Holder of a Warrant, on the
exercise thereof as provided in Section 9 at any time after the consummation of
such reorganization, consolidation or merger or the effective date of such
dissolution following any such transfer, as the case may be, and prior to the
expiration of the Exercise Period shall receive, in lieu of the Common Stock
issuable on such exercise prior to such consummation or such effective date, the
stock and other securities and property (including cash) to which such Holder
would have been entitled upon such consummation or in connection with such
dissolution, as the case may be, if such Holder had so exercised the Warrant
immediately prior thereto, all subject to further adjustment thereafter as
provided in Sections 12 and 14.
(b) Dissolution. In the event of any dissolution of the Company
following the transfer of all or substantially all of its properties or assets
prior to the expiration of the Exercise Period, the Company, prior to such
dissolution, shall at its expense deliver or cause to be delivered the stock and
other securities and property (including cash, where applicable) receivable by
the Holders of the Warrants after the effective date of such dissolution
pursuant to this Section 13 to a bank or trust company having its principal
office in New York, New York, as trustee for the Holder or Holders of the
Warrants. In the event that a bank or trust company shall have been appointed as
trustee for the Holders of the Warrants pursuant to this Section 13, such bank
or trust company shall have all the powers and duties of a warrant agent
appointed pursuant to Section 18 and shall accept, in its own name for the
account of the Company or such successor person as may be entitled thereto, all
amounts otherwise payable to the Company or such successor, as the case may be,
upon exercise of any Warrants.
(c) Continuation of Terms. Upon any reorganization, consolidation,
merger or transfer or sale of substantially all of its properties or assets to
any other person (and any dissolution following any transfer) referred
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to in this Section 13, a Warrant shall continue in full force and effect in
accordance with the terms thereof, and the terms thereof shall be applicable to
the shares of stock and other securities and property receivable on the exercise
of the Warrant after the consummation of such reorganization, consolidation or
merger or the effective date of dissolution following any such transfer or sale,
as the case may be, and shall be binding upon the issuer of any such stock or
other securities, including, in the case of any such transfer or sale of
substantially all of its properties or assets to any other person, the person
acquiring all or substantially all of the properties or assets of the Company,
whether or not such person shall have expressly assumed the terms of the
Warrant.
14. Adjustment for Certain Share Issuances.
If the Company at any time during the Exercise Period shall issue any
shares of Common Stock prior to the exercise of all of the Warrants granted
pursuant hereto (other than (a) as provided in Section 12, Section 13 or this
Section 14 or (b) an aggregate number of shares of Common Stock not exceeding
10% of the number of shares of Common Stock issued and outstanding on the
Closing Date which are issued upon exercise of options issued under any employee
incentive stock option plan and/or any nonqualified stock option plan adopted by
the Company) for a consideration per share less than the Purchase Price that
would be in effect at the time of such issue, then and thereafter successively
upon each such issue, the Purchase Price with respect to such unexercised
Warrants shall be recalculated as follows:
(i) the number of shares of Common Stock outstanding immediately
prior to such issue shall be multiplied by the Purchase Price in effect at the
time of such issue and the product shall be added to the aggregate
consideration, if any, received by the Company upon such issue of additional
shares of Common Stock; and
(ii) the sum so obtained shall be divided by the number of shares
of Common Stock outstanding immediately after such issue.
The resulting quotient shall be the Purchase Price. For purposes of this
adjustment, except for options that may be issued under any employee incentive
stock option plan and/or any nonqualified stock option plan adopted by the
Company which are exercisable for an aggregate number of shares of Common Stock
not exceeding 10% of the number of shares of Common Stock issued and outstanding
on the Closing Date), the issuance of any security of the Company carrying the
right to convert such security into shares of Common Stock
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<PAGE>
or of any warrant, right or option to purchase Common Stock shall be deemed to
constitute the issuance of the maximum number of shares of Common Stock issuable
on full exercise of such conversion or purchase right, and the consideration for
such security plus any consideration payable upon exercise of its conversion or
purchase right shall be deemed to have been paid to the Company. Upon the
expiration and non-exercise of any such conversion or purchase right, the
adjustment to the Purchase Price shall be readjusted to reflect the expiration
and non-exercise of such conversion or purchase right.
15. Chief Financial Officer's Certificate as to Adjustments.
In the case of any adjustment or readjustment in the number of shares
of Common Stock issuable on the exercise of a Warrant or the Purchase Price, the
Company at its expense will promptly cause its Chief Financial Officer to
compute such adjustment or readjustment in accordance with the terms hereof and
prepare for each Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (a) the consideration received
or receivable by the Company for any additional shares of Common Stock issued or
sold or deemed to have been issued or sold, (b) the number of shares of Common
Stock outstanding or deemed to be outstanding, and (c) the Purchase Price
payable and the number of shares of Common Stock to be received by such Holder
upon exercise of each of such Holder's Warrants, in each case, as in effect
immediately prior to such adjustment or readjustment and as adjusted or
readjusted as provided herein. The Company will forthwith mail a copy of such
certificate to each Holder and to any warrant agent of the Company (appointed
pursuant to Section 18 hereof).
16. Assignment. The Warrants shall not be assignable by any Investor
without the prior written consent of the Directors of the Company. The Company
may not assign its obligations hereunder without the consent of the holders of
the Warrants and the Warrant Shares.
17. Replacement of Warrant.
On receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of a Warrant and, in the case of any such loss, theft
or destruction of a Warrant, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of such Warrant, the Company will
execute and
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<PAGE>
deliver, in lieu thereof, a new Warrant of like tenor and amount.
18. Warrant Agent.
The Company may, by written notice to the Holder of the Warrant,
appoint an agent having an office in Hamilton, Bermuda for the purpose of
issuing Common Stock on the exercise of a Warrant pursuant to Section 9,
transferring a Warrant pursuant to Section 16, and replacing a Warrant pursuant
to Section 17, or any of the foregoing, and thereafter any such issuance,
transfer or replacement, as the case may be, shall be made at such office by
such agent.
19. Transfer on the Company's Books.
Until a Warrant is transferred on the books of the Company, the
Company may treat the registered Holder hereof as the absolute owner hereof for
all purposes, notwithstanding any notice to the contrary.
20. Notices, etc.
All notices and other communications from the Company to the Holder of
a Warrant shall be mailed by first class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company in writing by
such Holder or, until any such Holder furnishes to the Company an address, then
to, and at the address of, the last Holder of the Warrant who has so furnished
an address to the Company.
21. Miscellaneous Provisions.
(a) This Plan shall be governed by, and construed in accordance
with, the internal laws of New York, without regard to the principles of
conflicts of law.
(b) The Board may at any time terminate or amend this Plan in any
respect; provided that any such termination or amendment may not alter or impair
any rights or obligations under any outstanding Warrant without the consent of
the Holder of the Warrant.
(c) The headings and subheadings used in this Plan are for
purposes of reference only, and shall not limit or otherwise affect any of the
terms hereof.
10
EXHIBIT 10.11
COMMERCIAL GUARANTY ASSURANCE, LTD.
EXCESS OF LOSS REINSURANCE FACILITY
SUMMARY OF TERMS AND CONDITIONS
REINSURED: Commercial Guaranty Assurance, Ltd., a Bermuda financial
guaranty insurance company (the "Company").
REINSURER: KRE Reinsurance Ltd. (the "Reinsurer").
LIMIT OF LIABILITY: $20 million during the term of this Facility, with no
reinstatement of the limit in the event of loss
payments (the "Limit of Liability").
BUSINESS COVERED: All policies and guaranties written and reinsurance
assumed by the Company from the inception of the
Company and in effect during the term of this Facility
(the "Policies").
The covered portfolio shall become fixed, with no new
business covered, if:
(i) the Company ceases to have a claims-paying ability
rating from Duff & Phelps Credit Rating Co. ("DCR")
at least in the AA category;
(ii) the Company becomes insolvent or has a final order
or liquidition, rehabilitation or receivership
entered against it; or
(iii) there is a Change of Control.
TERRTORY: Worldwide.
EXCLUSIONS: The following shall be excluded from coverage:
(i) any Policy guarantying a risk that, at the time of
issuance, did not conform to the Company's
underwriting criteria;
(ii) punitive damages or other extracontractural
liabilities asserted against the Company;
(iii) any payment by the Company in excess of its
contractual obligations under a Policy; and
(iv) guaranty fund assessments and similar charges.
<PAGE>
EFFECTIVE DATE: Commencement of operations of the Company, which is
expected to be June 12, 1997 (the "Effective Date").
MINIMUM RATING: The Reinsurer shall have at all times a claims-paying
ability rating from Standard & Poor's Ratings Services
at least in the AA category (the "Minimum Rating").
TERM: Nine years commencing on the Effective Date, unless
canceled prior thereto by the Company as provided below.
TERMINATION: This Facility may be canceled by the Company effective
as of the sixth anniversary of the Effective Date or as
of any anniversary of the Effective Date thereafter
upon not less than 90 days' written notice of cancellation
to the Reinsurer. Any such cancellation shall be effective
on a "cut-off" basis (meaning that the Reinsurer's
liability for losses under this Facility shall cease as of
the effective date of any such cancellation).
ATTACHMENT POINT: The Reinsurer will not be liable under this Facility
until (i) the aggregate Net Incurred Losses exceed $210.5
million and (ii) Adjusted Surplus is less than $50
million (the "Attachment Point").
DEFINITIONS: As used herein,
"Adjusted Surplus" means, as of any date, the sum of (i)
the surplus of the Company as of such date, determined
in accordance with SAP, (ii) any amounts paid or
reserved by the Company from the Effective Date to such
date in respect of (A) any Policy guarantying a risk
that, at the time of issuance, did not conform to the
Company's underwriting criteria, (B) punitive damages
or other extracontractural liabilities asserted against
the Company and (C) any payment by the Company in excess
of its contractual obligations under a Policy and (iii)
uncollectible reinsurance recoverables.
"Change of Control" shall mean the acquisition of
beneficial ownership of 30% or more of the issued and
outstanding common shares of CGA, Ltd. by one or more
purchasers acting in concert in a single transaction or
in a series of related transactions; provided, however,
that "Change of Control" shall not mean an initial
public offering of the capital stock of CGA Group, Ltd.
"Net Incurred Losses" shall mean losses and loss
adjustment expenses paid by the Company or with respect
to which the
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Company has established Reserves, in each case, net of
all Reinsurance and Recoveries;
"SAP" shall mean statutory accounting principles
prescribed or permitted by the insurance regulatory
authorities of Bermuda.
"US GAAP" shall mean United States generally accepted
accounting principles as in effect from time to time.
"Recoveries" shall mean salvage and subrogation to the
extent realized into cash or the equivalent and
actually received by the Company;
"Reinsurance" shall mean reinsurance contracts, letters
of credit or similar obligations
(i) for which the Company has received reimbursement
for a loss under a Policy or for which such
reimbursement is due and owing from a reinsurance
provider or other supporting obligation
provider; or
(ii) for which the Company is entitled to take financial
credit under applicable insurance law to reduce
Reserves;
but shall not include the reinsurance provided by this
Facility or any aggregate excess of loss reinsurance
in excess of the reinsurance provided by this Facility;
and
"Reserves" shall mean case-basis loss and loss adjustment
expense reserves required by applicable insurance law.
PAYMENTS/RESERVES: When the Attachment Point is reached, the Reinsurer shall
assume 100% of Net Incurred Losses, if any, in excess of
the Attachment Point until the Limit of Liability is met,
except that, to the extent the Company is entitled to
take regulatory credit in Bermuda for Reserves ceded to
the Reinsurer, the Reinsurer shall be obligated to
make payments to the Company only to reimburse the
Company for loss and loss adjustment expense payments
or to advance the Company funds for such payments.
RECOVERIES: To the extent of payments made under this Facility, the
Reinsurer shall have the right to all Recoveries with
respect to the insured transactions covered by this
Facility, subject to the rights of the Company's
reinsurers, if any, providing Reinsurance.
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<PAGE>
PREMIUM: The Company shall pay the Reinsurer an annual premium
equal to 100 basis points per annum of the Limit of
Liability.
REMITTANCES: The Premium will be paid to the Reinsurer semi-annually
in advance with the initial payment (covering the
period from the Effective Date through December 31,
1997) due on the Effective Date and subsequent balances
due within 30 days of each December 31 and June 30
during the term of this Facility. Payments by the
Reinsurer involving loss and loss adjustment expense
amounts in excess of $1,000,000 shall be due the later
of three business days following notice thereof or one
business day prior to the date of claim or loss payment.
REPORTS: The Company will provide quarterly bordereaux within 30
days of the close of each quarter, plus such other reports
as are reasonably requested from time to time by the
Reinsurer, provided that such other reports are
produced by the Company in the ordinary course or may
be produced by the Company at a minimal cost to it or
by its minimal efforts.
CURRENCY: United States dollars.
GOVERNING LAW: New York, without regard to the conflicts of law
provisions thereof.
COVENANTS BY
THE COMPANY: The Company shall maintain in effect its underwriting
criteria for the Policies with such changes as are
approved by the Underwriting Committee or Board of
Directors of the Company or of CGA Group, Ltd.
The Company will not (i) enter into any borrowing (other
than a borrowing to fund a loss or loss adjustment
expense payment) whose repayment would be senior to the
Reinsurer's right to Recoveries (ii) consent to a lien
(other that a lien to secure a permitted borrowing)
that would be senior to the Reinsurer's right to
Recoveries or (iii) enter into any reinsurance agreements
providing aggregate excess of loss reinsurance in excess
of the reinsurance provided by this Facility.
No greater than 15% of the outstanding par exposure of
the Policies shall cover non-US risks.
The Company shall not, in any fiscal year, pay dividends
on its common shares in an aggregate amount greater than
50% of its
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net income, determined in accordance with US GAAP, for
such fiscal year.
The Company, as assignee of the Commitments (as such
term is defined in the Investment Units Subscription
Agreement dated as of June 4, 1997 by and among CGA
Group, Ltd. and the other parties named therein), shall
not waive or modify the terms of any Commitment without
the prior written consent of the Reinsurer.
OTHER CLAUSES: Honorable undertaking.
Access to books and records.
Errors and omissions.
Service of suit.
Insolvency, to the extent required by applicable law.
Arbitration.
Taxes.
KRE REINSURANCE LTD.
By: _________________________
5
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered into
as of the 1st day of January, 1997 (the "Effective Date"), by and between CGA
Group, Ltd., a Bermuda corporation (referred to herein as the "Employer"), and
James R. Reinhart (the "Employee").
RECITALS
A. The Employer desires to employ the Employee for a specified term;
and
B. The Employee is willing to be employed by the Employer upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter contained, it is covenanted and agreed by and between
the parties hereto as follows:
AGREEMENTS
I. POSITION AND DUTIES. The Employer hereby employs the Employee as
the Chief Financial Officer of the Employer or in such other capacity as shall
be mutually agreed between the Employee and the Employer. During the period of
the Employee's employment hereunder, the Employee shall devote the Employee's
best efforts and full business time, energy, skills and attention to the
business and affairs of the Employer; provided, however, that the Employee shall
perform on behalf of the Employer in the United States of America only such
duties that are of a ministerial nature and the performance of which are in
compliance with the Operating Guidelines (the "Operating Guidelines," as such
term is defined in the Investment Units Subscription Agreement dated as of June
4, 1997 by and among CGA Group and the other parties named therein). The
Employee's duties and authority shall consist of and include all duties and
authority customarily performed and held by persons holding equivalent positions
with business organizations similar in nature and size to the Employer, as such
duties and authority are, subject to the immediately preceding sentence,
reasonably defined, modified and delegated from
<PAGE>
time to time by the Board of Directors of the Employer (the "Board") or that
person to whom the Board has delegated such authority. The Employee shall have
the powers necessary to perform the duties assigned to him, and shall be
provided such supporting services, staff, secretarial and other assistance,
office space and accoutrements as shall be reasonably necessary and appropriate
in light of such assigned duties.
II. COMPENSATION. As compensation for the services to be provided by
the Employee, the Employee shall receive the following compensation and other
benefits:
A. BASE SALARY. The Executive shall receive an aggregate annual
minimum base salary ("Base Salary") at the rate of One Hundred Seventy Five
Thousand U.S. Dollars ($175,000.00) payable in installments in accordance with
the regular payroll practices of the Employer; provided that, any amount paid by
CGA Group or CGA Funding, L.P. with respect to the period commencing after
December 31, 1996 and ending May 31, 1997, shall be credited against the
aggregate annual minimum base salary for 1997 payable to the Employee. Such Base
Salary shall be subject to review annually, commencing on the anniversary of the
Effective Date and shall be maintained or increased during the term hereof in
accordance with the Employer's established compensation policies.
B. BONUSES. The Employee shall receive a cash bonus, payable within
thirty (30) days after the end of the 1997 calendar year in the amount of not
less than One Hundred Thousand Dollars ($100,000.00) ("Base Bonus"). The
Employee may receive a discretionary annual cash bonus ("Annual Bonus"), also
payable within thirty (30) days after the end of each subsequent calendar year
during which this Agreement is in effect, which shall be based upon an annual
incentive plan approved by the compensation committee of the board of directors
of the Employer.
C. CLUB MEMBERSHIP. The Employee shall be reimbursed for membership
dues at a local country club of his choice, in an amount to be mutually agreed
upon between the Employee and the Employer.
D. REIMBURSEMENT OF EXPENSES. In accordance with the expense
reimbursement policies of the
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Employer, as promulgated and in effect from time to time, the Employee shall be
reimbursed, upon submission of appropriate vouchers and supporting
documentation, for all travel, entertainment and other out-of-pocket expenses
reasonably and necessarily incurred by the Employee in the performance of his
duties hereunder.
E. MOVING AND INTERIM LIVING EXPENSES. The Employer shall pay all
reasonable expenses related to the relocation to Bermuda from Lafayette,
California of the Employee and his family, including packing and shipping the
Employee's entire household and all furniture, belongings and effects. If the
Employer's relocation to Bermuda entails the sale of Employee's primary
residence in the U.S. and such sale occurs within (12) months of the relocation
of the Employee's family, the Employer shall reimburse the Employee for real
estate brokerage fees incurred in such sale up to a maximum of seven percent
(7%) of the sale price, together with all closing costs, including reasonable
attorney's fees. In addition, the Employer shall pay the temporary living
expenses of the Employee and his family in Bermuda, in accommodations
commensurate with the Employee's position, for up to three (3) months. Such
expenses shall be reasonable and commensurate with the Employee's position. The
Employer shall also, upon termination of the Employee's employment hereunder,
pay all expenses related to the relocation of Employee and Employee's family to
the U.S. location of Employee's choice, including packing and shipping
Employee's effects, furniture and personal belongings.
F. HOUSING ALLOWANCE. The Employer shall pay the Employee a housing
allowance each month during the term of Employee's employment hereunder, in an
amount equal to the Employee's actual monthly housing rental expense not to
exceed the Maximum Monthly Allowance (as hereinafter defined), plus electric
utility costs; provided however, that such allowance shall not be paid during
any month in which the Employee is receiving temporary living expenses pursuant
to Section 2(e) above. As used herein, the term "Maximum Monthly Allowance"
shall mean Ten Thousand U.S. Dollars (U.S. $10,000) plus 50% (fifty percent) of
the Employee's actual monthly housing rental expense over U.S. $10,000 up to
U.S. $16,000 (it being understood that the Maximum Monthly Allowance
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<PAGE>
payable by the Employer shall in no event exceed Thirteen Thousand U.S. Dollars
(U.S. $13,000)).
G. SCHOOLING EXPENSES. The Employer shall pay the private secondary
school tuition and fees for the Employee's children, in an amount not to exceed
ten thousand U.S. Dollars (U.S. $10,000) per child per academic year, during the
term of Employee's employment.
H. OTHER BENEFITS. The Employee shall be entitled to all benefits
specifically established for him by the Board or a committee thereof and, when
and to the extent he is eligible therefor, to participate in all plans and
benefits generally accorded to employees of the Employer, under the subject to
all of the terms thereof, including, but not limited to, as applicable, pension,
profit-sharing, supplemental retirement, incentive compensation , bonus,
disability income, split-dollar life insurance, group life, medical and
hospitalization insurance, and similar or comparable plans, and also to
perquisites extended to similarly situated senior employees. Additionally, the
Employer shall obtain for the benefit of the Employee's estate a term life
insurance policy with a value of two times the Employee's base salary as
presented in paragraph 2(a).
I. VACATIONS. The Employee shall be entitled to an annual vacation in
accordance with the operative vacation policy of the Employer in effect from
time to time, which vacation shall be taken at a time or times mutually
agreeable to the Employee and the Employer. In addition, each calendar year the
Company shall reimburse Employee for round-trip coach airfare for one trip to
the U.S. for the Employee and each member of his immediate family.
J. FULL BENEFIT OF ALLOWANCES. If any of the compensation and benefits
provided in paragraphs (e) through (g), the last sentence of paragraph (i), and
paragraphs (l), (m) and (n) shall be deemed taxable to the Employee in the U.S.,
the Employer shall pay to the Employee that additional amount necessary to
"gross-up" the payment in question and fully subsidize any U.S. tax consequences
to the Employee.
K. WITHHOLDING. The Employer shall be entitled to withhold, from
amounts payable to the Employee
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<PAGE>
hereunder, any federal, state or local withholding or other taxes or charges
which it is from time to time required to withhold.
L. IMMIGRATION AND WORK PERMITS. The Employer shall be responsible for
and will pay all expenses related to obtaining all ordinary and necessary
immigration and work permit approvals on Employee's behalf with respect to his
employment in Bermuda. The Employee shall cooperate with the Employer in
obtaining such approvals.
M. TAX ASSISTANCE. The Employer shall provide the Employee with
reasonable expatriates tax assistance, provided by the independent accountants
and tax counsel regularly engaged by the Employer.
N. AUTOMOBILE EXPENSE. The Employee shall receive from Employer a
monthly auto expense assistance in the amount of $750.
III. TERM AND TERMINATION
A. BASIC TERM. The Employee's employment under this Agreement shall be
for a term of two (2) years commencing as of the Effective Date and shall
automatically extend for one (1) additional year commending on the second
anniversary of the Effective Date and on each anniversary thereafter, unless
terminated by either party effective as of the last day of the then current
Agreement Term by written notice to the effect delivered to the other not less
than one hundred twenty (120) days prior to the anniversary of such Effective
Date.
B. VOLUNTARY TERMINATION BY EMPLOYEE. The Employee may voluntarily
terminate this Agreement, at any time, by written notice to that effect
delivered to the Employer not less than thirty (30) days prior to the effective
date of Employee's voluntary termination. Upon Employee's voluntary termination,
Employee shall have no obligations to the Employer other than as provided for in
Sections 4 and 5 hereof, together with an obligation to provide Employee's
reasonable transitional assistance to the Employer for a period of not more than
thirty (30) days in connection with matters for which the Employee was
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<PAGE>
responsible during the term of this Agreement and which were not concluded prior
to Employee's voluntary termination. Upon Employee's voluntary termination, no
Annual Bonus (or Base Bonus, if applicable) for the year in which such
termination occurs shall be payable to the Employee and no further payments of
any kind shall be due hereunder, except for compensation and benefits accrued as
of the date of such termination, and except that Employer shall pay all expenses
related to the relocation of Employee and Employee's family to the U.S. location
of Employee's choice, including packing and shipping Employee's household
effects, furniture and personal belongings.
C. PREMATURE TERMINATION WITHOUT CAUSE AND CONSTRUCTIVE TERMINATION.
1. In the event of the termination of the Employee's employment under
this Agreement prior to the last day of the then current term, either (A) by the
Employer for any reason other than a termination in accordance with the
provisions of paragraph 3(d), 3(e) or 3(f) or (B) by the Employee by written
notice to the Employer given within thirty (30) days of Constructive Discharge
(as hereinafter defined) effective as of thirty (30) days after such notice,
then the Employer shall: (A) pay the Employee the greater of (x) the Base Salary
the Employee would have received had he remained employed through the end of the
then current term of the Agreement and (y) six (6) months of Base Salary; (B)
pay the Employee, if such termination occurs in the 1997 calendar year, the Base
Bonus; (C) continue to provide coverage for the Employee under the medical
benefit program maintained by the Employer through the remainder of the term of
the Agreement (if permitted to do so under such program), and (D) pay all
expenses related to the relocation of Employee and Employee's family to the U.S.
location of Employee's choice, including packing and shipping Employee's
household effects, furniture and personal belongings. The benefits provided in
paragraphs 2(f), 2(g), 2(m) and 2(n) shall continue for 3 months or, if
Employee's children are attending school in Bermuda at the time of such
termination, the end of the academic school year, whichever is longer; provided,
however, that such continuation shall not
6
<PAGE>
include any expenses for temporary housing or accommodation in the U.S. The
benefits described in paragraphs 2(c) and 2(i) shall not continue following
termination under this paragraph 3(c).
2. Payments to the Employee under this paragraph 3(c) will be made in
accordance with the regular payroll practices of the Employer during the
remaining term of this Agreement or, at the election of the Employer, such
payments may be made in a lump sum.
3. For purposes of this Agreement, the Employee shall be deemed
"Constructively Discharged" if the Employer changes the primary employment
location of the Employee to a place other than Bermuda without the express
written consent of the Employee.
D. TERMINATION FOR CAUSE. Notwithstanding any other provision of this
Agreement, in the event of the termination of the Employee's employment under
this Agreement for cause, no Annual Bonus (or Base Bonus, if applicable) for the
year in which such termination occurs shall be payable to the Employee and no
further payments shall be due hereunder except for compensation or benefits
accrued as of the date of such termination, and except that Employer shall pay
all expenses related to the relocation of Employee and Employee's family to the
U.S. location of Employee's choice, including packing and shipping Employee's
household effects, furniture and personal belongings. For purposes of this
Agreement, "cause" shall mean: (i) a material violation by the Employer, in
which the Employee materially and directly participated, of any law or
regulation respecting the business of the Employer or any affiliate, other than
a material violation which is a direct result of the operation of the Employer
and/or its affiliates in accordance with the Operating Guidelines; (ii) the
Employee being found guilty by a court of competent jurisdiction or a plea of
guilty or nolo contendre to a charge of (A) any felony or (B) an act of
dishonesty in connection with the performance of his duties for the Employer; or
(iii) the willful or negligent failure of the Employee to perform his duties
hereunder in any material respect.
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<PAGE>
E. TERMINATION UPON DEATH. If the Employee dies during the term of
this Agreement, payment of any accrued compensation due to the Employee at the
time of death including the bonus payable with respect to the prior calendar
year if death occurs prior to payment of such bonus, shall be made to such
beneficiary as the Employee may designate in writing, or failing such
designation, to the executor, administrator or other representative of his
estate (provided, however, that the Employee's Base Bonus or Annual Bonus
payable with respect to the calendar year in which such termination occurs (with
such Annual Bonus calculated based on the bonus(es) payable to the Employee with
respect to the immediately preceding year) shall be payable on a pro rata basis
to the date of the Employee's death). Such payments shall be in addition to any
other death benefits of the Employer for the benefit of the Employee and in full
settlement and satisfaction of all payments provided for in this Agreement,
except for benefits provided for in sections 2(e) through 2(g) and 2(j) through
2(n), which shall continue for 3 months following the Employee's death or, if
Employee's children are attending school in Bermuda at the time of such
termination, the end of the academic school year, whichever is longer. In
addition, Employer shall pay all expenses related to the relocation of
Employee's family to the single U.S. location of their choice, including packing
and shipping their household effects, furniture and personal belongings.
F. TERMINATION UPON DISABILITY. The Employer may terminate the
Employee's employment after the Employee is determined to be disabled under the
then current Employer program if such a program exists at the time the Employee
is disabled. If no such program exists, the Employee will be considered disabled
if the Employee suffers an illness or injury of a potentially permanent nature
which results in the Employee's inability to substantially perform his duties
hereunder as determined by the board of directors of the Employer's ultimate
parent for a period of either six (6) consecutive months, or one hundred and
twenty (120) business days within a consecutive twelve (12) month period. If the
Employer terminates the Employee after it is determined that the Employee is
disabled, the Employer shall pay the Employee the compensation accrued through
the date of the Employee's termination of employment including the bonus payable
with respect to the prior calendar year if the
8
<PAGE>
termination occurs prior to payment of such bonus (provided, however, that the
Employee's Base Bonus or Annual Bonus payable with respect to the calendar year
in which such termination occurs (with such Annual Bonus calculated based on the
bonus(es) payable to Employee with respect to the immediately preceding year)
shall be payable on a pro rata basis to the date of the Employee's termination).
In the event of a dispute regarding the Employee's disability, each party shall
choose a physician who together will choose a third physician to make a final
determination. The Employee shall be entitled to the compensation and benefits
provided for under this Agreement for any period during the term of this
Agreement and prior to the establishment of the Employee's disability.
Notwithstanding anything contained in this Agreement to the contrary, until the
date specified in a notice of termination relating to the Employee's disability,
the Employee shall be entitled to return to his position with the Employer as
set forth in this Agreement, in which event no disability of the Employee will
be deemed to have occurred. In the event of a termination of the Employee under
this paragraph Employer shall pay all expenses related to the relocation of
Employee and Employee's family to the U.S. location of Employee's choice,
including packing and shipping Employee's household effects, furniture and
personal belongings.
IV. CONFIDENTIALITY AND LOYALTY. The Employee acknowledges that during
the course of the Employee's employment, the Employee will produce and have
access to material, records, data, trade secrets and information not generally
available to the public regarding the Employer and its subsidiaries and
affiliates (collectively, "Confidential Information"). Accordingly, during and
subsequent to termination of this Agreement, the Employee shall hold in
confidence and not directly or indirectly disclose, use, copy or make lists of
any such Confidential Information, except to the extent that such information is
or thereafter becomes lawfully available from public sources, or such disclosure
is authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
employee's duties hereunder. All records, files, documents and other
9
<PAGE>
materials or copies thereof relating to the Employer's business which the
Employee shall prepare or use shall be and remain the sole property of the
Employer, shall not be removed from the Employer's premises without its written
consent other than in the ordinary course of business, and shall be promptly
returned to the Employer upon termination of the Employee's employment
hereunder. The Employee agrees to abide by the Employer's reasonable policies,
as in effect from time to time, respecting avoidance of interests conflicting
with those of the Employer.
V. NON-SOLICITATION AND NON-COMPETITION COVENANTS
A. RESTRICTIVE COVENANT. The Employee and the Employer have jointly
reviewed the operations of the Employer and have agreed that the covenants
contained in this Section 5 are an essential ingredient of this Agreement and
are made in consideration for the payment of the amounts described in Sections 2
and 3 hereof. The Employee hereby agrees that, except with the express prior
written consent of the Employer, for a period of one (1) year after the
termination of the Employee's employment with the Employer, with respect to
clause (i) below, for any reason and, with respect to clause (ii) below, for any
reason other than a termination pursuant to Section 3(c)(the "Restrictive
Period"), the Employee (i) will not (a) solicit employees of the Employer or of
any subsidiary or affiliate of the Employer or (b) solicit clients or customers
of the Employer or of any subsidiary or affiliate of the Employer in respect of
any transaction, matter or business that directly or indirectly competes with
any of the businesses then conducted by the Employer or any of its subsidiaries
or affiliates, and (ii) will not directly or indirectly compete with the
business of the Employer, by directly or indirectly being a shareholder or
partner of or serving as an employee, officer or director of or consultant to,
or in any other capacity with, any person, firm, partnership, corporation,
subsidiary, division, joint venture, trust or other entity, or any division,
subsidiary or separate enterprise of any such entity, which (x) was created
during the term of Employee's employment with the Employer or is expected to be
created within a period of one (1) year after the Employee's termination of
employment with the Employer,
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<PAGE>
and (y) which owns or operates a business which is either: (A) an insurer or
reinsurer of asset backed securities, mortgage backed securities or commercial
mortgage backed securities; or (B) an investment company that is directly or
indirectly owned by, affiliated with, attached to or otherwise related to an
insurer or reinsurer of asset backed securities, mortgage backed securities or
commercial mortgage backed securities; or (C) an investment advisory firm that
is directly or indirectly owned by, affiliated with, attached to or otherwise
related to an insurer or reinsurer of asset backed securities, mortgage backed
securities or commercial mortgage backed securities (the "Restrictive
Covenant"). If the Employee violates the Restrictive Covenant and the Employer
brings legal action for injunctive or other relief, the Employer shall not, as a
result of the time involved in obtaining such relief, be deprived of the benefit
of the full period of the Restrictive Covenant. Accordingly, the Restrictive
Covenant shall be deemed to have the duration specified in this paragraph 5(a)
computed from the date the relief is granted but reduced by the time between the
period when the Restrictive Period began to run and the date of the first
violation of the Restrictive Covenant by the Employee. The Restrictive Covenant
shall not prohibit the Employee from owning directly or indirectly capital stock
or similar securities which are listed on a securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation System which do
not represent more than five percent (5%) of the outstanding capital stock of
any business similar to that of the Employer's.
B. REMEDIES FOR BREACH OF RESTRICTIVE COVENANT. The Employee acknowledges
that the restrictions contained in sections 4 and 5 of this Agreement are
reasonable and necessary for the protection of the legitimate business interests
of the Employer, that any violation of these restrictions would cause
substantial injury to the Employer and such interests, that the Employer would
not have entered into this Agreement with the Employee without receiving the
additional consideration offered by the Employee in binding himself to these
restrictions and that such restrictions were a material inducement to the
Employer to enter into this Agreement. In the event of any violation of these
restrictions, the Employer shall be relieved of all further obligations under
this Agreement and shall be
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<PAGE>
entitled to any rights, remedies or damages available to the Employer under this
Agreement or otherwise at law or in equity. In addition, in the event of any
violation or threatened violation of these restrictions, the Employer shall be
entitled to preliminary and permanent injunctive relief to prevent or restrain
any such violation by the Employee and any and all persons directly or
indirectly acting for the Employee, as the case may be.
VI. INTEREST IN ASSETS. Neither the Employee nor the Employee's estate
shall acquire hereunder any rights in funds or assets of the Employer, otherwise
than by and through the actual payment of amounts payable hereunder; nor shall
the Employee or the Employee's estate have any power to transfer, assign,
anticipate, hypothecate or otherwise encumber in advance any of said payments;
nor shall any of such payments be subject to seizure for the payment of any
debt, judgment, alimony, separate maintenance or be transferable by operation of
law in the event of bankruptcy, insolvency or otherwise of the Employee.
VII. GENERAL PROVISIONS.
A. SUCCESSORS; ASSIGNMENT. Neither party hereto may assign his or its
rights or delegate his or its duties under this Agreement without the prior
written consent of the other party; provided, however, that (i) this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
the Employer upon any sale of all or substantially all of the Employer's assets,
or upon any merger, consolidation or reorganization of the Employer with or into
any other corporation, all as though such successors and assigns of the Employer
and their respective successors and assigns were the Employer; and (ii) this
Agreement shall inure to the benefit of and be binding upon the heirs, assigns
or designees of the Employee to the extent of any payments due to them
hereunder. As used in this Agreement, the term "Employer" shall be deemed to
refer to any such successor or assign of the Employer referred to in the
preceding sentence.
B. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement constitutes the
entire agreement between the
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parties respecting the subject matter hereof, and supersedes all prior
negotiations, undertakings, agreements and arrangements with respect thereto,
whether written or oral. Except as otherwise explicitly provided herein, this
Agreement may not be amended or modified except by written agreement signed by
the Employee and the Employer.
C. ENFORCEMENT AND GOVERNING LAW. The provisions of this Agreement
shall be regarded as divisible and separate; if any of said provisions should be
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remaining provisions shall not be affected
thereby. This Agreement shall be construed and the legal relations of the
parties hereto shall be determined in accordance with the laws of the State of
New York, without reference to the law regarding conflicts of law.
D. ARBITRATION. The provisions of paragraph 5(b) shall supersede the
provisions of this paragraph 7(d) in the event of a simultaneous dispute between
the Employer and the Employee so as to afford the Employer with the remedy of
injunctive relief, without the necessity for arbitration. Any dispute or
controversy arising under or in connection with this Agreement or the Employee's
employment by the Employer shall be settled exclusively by arbitration,
conducted by a single arbitrator sitting in New York City, New York, in
accordance with the rules of the American Arbitration Association (the "AAA")
then in effect. The arbitrator shall be selected by mutual agreement between the
Employer and the Employee. However, in the event that the parties are unable to
agree on an arbitrator within a period of one week, the arbitrator shall be
selected by the parties from a list of eleven (11) arbitrators provided by the
AAA, provided that no arbitrator shall be related to or affiliated with either
of the parties. If the parties mutually agree on an arbitrator within ten (10)
days after the list of the proposed arbitrators is received by the parties, then
no later than twenty (20) days after such list is received by the parties, the
parties, or their respective representatives, shall meet at a mutually
convenient location in New York City, New York, or telephonically. At that
meeting, the party who sought arbitration shall eliminate one (1) proposed
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arbitrator and then the other party shall eliminate one (1) proposed arbitrator.
The parties shall continue to eliminate names from the list of proposed
arbitrators in this manner until each part has eliminated five (5) proposed
arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party
shall submit, in writing, the specific requested action or decision it wishes to
take, or make, with respect to the matter in dispute, and the arbitrator shall
be obligated to choose one (1) party's specific requested action or decision,
without being permitted to effectuate any compromise position. The party whose
requested action or decision is not selected by the arbitrator shall bear the
cost of all counsel, experts or other representatives who are retained by both
parties, together with all costs of the arbitration proceeding, including,
without limitation, the fees, costs and expenses imposed or incurred by the
arbitrator. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that the Employee shall be entitled to
seek specific performance of the Employee's right to be paid through the date of
termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
E. WAIVER. No waiver be either party at any time of any breach by the
other party of, or compliance with, any condition or provision of this Agreement
to be performed by the other party, shall be deemed a waiver of any similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time.
F. NOTICES. Notices pursuant to this Agreement shall be in writing and
shall be deemed given when received; and, if mailed, shall be mailed by United
States registered or certified mail, return receipt requested, postage prepaid;
and if to the Employer, addressed to the principal headquarters of the Employer,
attention: Chairman; or, if to the Employee, to the address set forth below the
Employee's signature on this Agreement, or to such other address as the party to
be notified shall have given to the other.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CGA Group, Ltd. James R. Reinhart
By: /s/ RICHARD A. PRICE /s/ JAMES R. REINHART
--------------------------- --------------------------
Richard A. Price 958 Oak Vista Court
Chief Executive Officer Lafayette,
California 94549
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EXHIBIT 10.14
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered
into as of the 1st day of January, 1997 (the "Effective Date"), by and between
Commercial Guaranty Assurance, Ltd., a Bermuda corporation (referred to herein
as the "Employer"), and Anthony R. Montemurno (the "Employee").
RECITALS
A. The Employer desires to employ the Employee for a specified term;
and
B. The Employee is willing to be employed by the Employer upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter contained, it is covenanted and agreed by
and between the parties hereto as follows:
AGREEMENTS
I. POSITION AND DUTIES. The Employer hereby employs the Employee as
the President of the Employer or in such other capacity as shall be mutually
agreed between the Employee and the Employer. During the period of the
Employee's employment hereunder, the Employee shall devote the Employee's best
efforts and full business time, energy, skills and attention to the business and
affairs of the Employer; provided, however, that the Employee shall perform on
behalf of the Employer and the Employer's parent corporation, CGA Group, Ltd.
("CGA Group") in the United States of America only such duties that are of a
ministerial nature and the performance of which are in compliance with the
Operating Guidelines (the "Operating Guidelines," as such term is defined in the
Investment Units Subscription Agreement dated as of June 4, 1997 by and among
CGA Group and the other parties named therein). The Employee's duties and
authority shall consist of and include all duties and authority customarily
performed and held by persons holding equivalent positions with business
organizations similar in nature and size to the Employer, as such duties and
authority are, subject to the immediately preceding sentence, reasonably
defined, modified and delegated from time to time by the Board of Directors of
the Employer (the "Board") or that person to whom the Board has delegated such
authority. The Employee shall have the powers necessary to perform the duties
assigned to him, and shall be provided such supporting services, staff,
secretarial and other assistance, office space and accoutrements as shall be
reasonably necessary and appropriate in light of such assigned duties.
<PAGE>
II. COMPENSATION. As compensation for the services to be provided
by the Employee, the Employee shall receive the following compensation and other
benefits:
A. BASE SALARY. The Executive shall receive an aggregate
annual minimum base salary ("Base Salary") at the rate of Two Hundred
Twenty Five Thousand U.S. Dollars ($225,000) payable in installments in
accordance with the regular payroll practices of the Employer; provided
that, any amount paid by CGA Group or CGA Funding, L.P. with respect to
the period commencing after December 31, 1996 and ending prior to May 31,
1997 shall be credited against the aggregate annual minimum base salary
for 1997 payable to the Employee. Such Base Salary shall be subject to
review annually, commencing on the anniversary of the Effective Date and
shall be maintained or increased during the term hereof in accordance with
the Employer's established compensation policies.
B. BONUSES. The Employee shall receive a cash bonus, payable
within thirty (30) days after the end of the 1997 calendar year in the
amount of not less than Two Hundred Twenty Five Thousand U.S. Dollars
($225,000) ("Base Bonus"). The Employee may receive a discretionary annual
cash bonus ("Annual Bonus"), also payable within thirty (30) days after
the end of each subsequent calendar year during which this Agreement is in
effect, which shall be based upon an annual incentive plan approved by the
compensation committee of the board of directors of the Employer's
ultimate parent.
C. CLUB MEMBERSHIP. The Employee shall be reimbursed for
membership dues at a local country club of his choice, in an amount to be
mutually agreed upon between the Employee and the Employer.
D. REIMBURSEMENT OF EXPENSES. In accordance with the expense
reimbursement policies of the Employer, as promulgated and in effect from
time to time, the Employee shall be reimbursed, upon submission of
appropriate vouchers and supporting documentation, for all travel,
entertainment and other out-of-pocket expenses reasonably and necessarily
incurred by the Employee in the performance of his duties hereunder.
E. MOVING AND INTERIM LIVING EXPENSES. The Employer shall
pay all reasonable expenses related to the relocation to Bermuda from
Westport, Connecticut of the Employee and his family, including packing
and shipping the Employee's entire household and all furniture, belongings
and effects. If the Employee's relocation to Bermuda
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entails the sale of Employee's primary residence in the U.S. and such sale
occurs within twelve (12) months after the relocation of the Employee's
family, the Employer shall reimburse the Employee for real estate
brokerage fees incurred in such sale up to a maximum of seven percent (7%)
of the sale price, together with all closing costs, including reasonable
attorney's fees. In addition, the Employer shall pay the temporary living
expenses of the Employee and his family in Bermuda, in accommodations
commensurate with the Employee's position, for up to three (3) months.
Such expenses shall be reasonable and commensurate with the Employee's
position. The Employer shall also, upon termination of the Employee's
employment hereunder, pay all expenses related to the relocation of the
Employee and the Employee's family to the U.S. location of Employee's
choice, including packing and shipping Employee's effects, furniture and
personal belongings.
F. HOUSING ALLOWANCE. The Employer shall pay the Employee a
housing allowance each month during the term of Employee's employment
hereunder, in an amount equal to the Employee's actual monthly housing
rental expense not to exceed the Maximum Monthly Allowance (as hereinafter
defined), plus electric utility costs; provided however, that such
allowance shall not be paid during any month in which the Executive is
receiving temporary living expenses pursuant to Section 2(e) above. As
used herein, the term "Maximum Monthly Allowance" shall mean Ten Thousand
U.S. Dollars (U.S. $10,000) plus 50% (fifty percent) of the Employee's
actual monthly housing rental expense over U.S. $10,000 up to U.S. $16,000
(it being understood that the Maximum Monthly Allowance payable by the
Employer shall in no event exceed Thirteen Thousand U.S. Dollars (U.S.
$13,000)).
G. SCHOOLING EXPENSES. The Employer shall pay the private
Bermuda secondary school tuition and fees for the Employee's children, if
and to the extent any of the Employee's children relocate to Bermuda, in
an amount not to exceed ten thousand U.S. Dollars (U.S. $10,000) per child
per academic year, during the term of Employee's employment.
H. OTHER BENEFITS. The Employee shall be entitled to all
benefits specifically established for him by the Board or a committee
thereof and, when and to the extent he is eligible therefor, to
participate in all plans and benefits generally accorded to employees of
the Employer, under the subject to all of the terms thereof, including,
but not limited to, as applicable, pension, profit-sharing, supplemental
retirement, incentive compensation , bonus, disability income,
split-dollar life insurance, group life,
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medical and hospitalization insurance, and similar or comparable plans,
and also to perquisites extended to similarly situated senior employees.
Additionally, the Employer shall obtain for the benefit of the Employee's
estate a term life insurance policy with a value of two times the
Employee's base salary as presented in paragraph 2(a).
I. VACATIONS; VISITATION RIGHTS. The Employee shall be
entitled to an annual vacation in accordance with the operative vacation
policy of the Employer in effect from time to time, which vacation shall
be taken at a time or times mutually agreeable to the Employee and the
Employer. In addition, during the term of the Employee's employment, the
Company shall reimburse the Employee for round-trip coach airfare for up
to (I) two trips to Bermuda and back to the U.S. in any month by the
Employee's wife, or two trips to the U.S. and back to Bermuda in any month
by the Employee, and (II) one trip to Bermuda and back to the U.S. in any
month by the Employee's children, to the extent incurred by the Employee.
J. FULL BENEFIT OF ALLOWANCES. If any of the compensation
and benefits provided in paragraphs (e) through (g), the last sentence of
paragraph (i), and paragraphs (l), (m) and (n) shall be deemed taxable to
the Employee in the U.S., the Employer shall pay to the Employee that
additional amount necessary to "gross-up" the payment in question and
fully subsidize any U.S. tax consequences to the Employee.
K. WITHHOLDING. The Employer shall be entitled to withhold,
from amounts payable to the Employee hereunder, any federal, state or
local withholding or other taxes or charges which it is from time to time
required to withhold.
L. IMMIGRATION AND WORK PERMITS. The Employer shall be
responsible for and will pay all expenses related to obtaining all
ordinary and necessary immigration and work permit approvals on Employee's
behalf with respect to his employment in Bermuda. The Employee shall
cooperate with the Employer in obtaining such approvals.
M. TAX ASSISTANCE. The Employer shall provide the Employee
with reasonable expatriates tax assistance, provided by the independent
accountants and tax counsel regularly engaged by the Employer.
N. AUTOMOBILE EXPENSE. The Employee shall receive from
Employer a monthly auto expense assistance in the amount of $750.
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III. TERM AND TERMINATION
A. BASIC TERM. The Employee's employment under this Agreement shall
be for a term of two (2) years commencing as of the Effective Date and shall
automatically extend for one (1) additional year commencing on the second
anniversary of the Effective Date and on each anniversary thereafter, unless
terminated by either party effective as of the last day of the then current
Agreement term by written notice to the effect delivered to the other not less
than one hundred twenty (120) days prior to the anniversary of such Effective
Date.
B. VOLUNTARY TERMINATION BY EMPLOYEE. The Employee may voluntarily
terminate this Agreement, at any time, by written notice to that effect
delivered to the Employer not less than thirty (30) days prior to the effective
date of Employee's voluntary termination. Upon Employee's voluntary termination,
Employee shall have no obligations to the Employer other than as provided for in
Sections 4 and 5 hereof, together with an obligation to provide Employee's
reasonable transitional assistance to the Employer for a period of not more than
thirty (30) days in connection with matters for which the Employee was
responsible during the term of this Agreement and which were not concluded prior
to Employee's voluntary termination. Upon Employee's voluntary termination, no
Annual Bonus (or Base Bonus, if applicable) for the year in which such
termination occurs shall be payable to the Employee and no further payments of
any kind shall be due hereunder, except for compensation and benefits accrued as
of the date of such termination, and except that Employer shall pay all expenses
related to the relocation of Employee and Employee's family to the U.S. location
of Employee's choice, including packing and shipping Employee's household
effects, furniture and personal belongings.
C. PREMATURE TERMINATION WITHOUT CAUSE AND CONSTRUCTIVE TERMINATION.
1. In the event of the termination of the Employee's
employment under this Agreement prior to the last day of the then current
term, either (A) by the Employer for any reason other than a termination
in accordance with the provisions of paragraph 3(d), 3(e) or 3(f) or (B)
by the Employee by written notice to the Employer given within thirty (30)
days of Constructive Discharge (as hereinafter defined) effective as of
thirty (30) days after such notice, then the Employer shall: (A) pay the
Employee the greater of (x) the Base Salary the Employee would have
received had he remained employed through the end of the then current term
of the Agreement and (y) six (6) months of Base Salary; (B) pay the
Employee, if such termination occurs in the 1997
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calendar year, the Base Bonus; (C) continue to provide coverage for the
Employee under the medical benefit program maintained by the Employer
through the remainder of the term of the Agreement (if permitted to do so
under such program), and (D) pay all expenses related to the relocation of
Employee and Employee's family to the U.S. location of Employee's choice,
including packing and shipping Employee's household effects, furniture and
personal belongings. The benefits provided in paragraphs 2(f), 2(g), 2(m)
and 2(n) shall continue for 3 months or, if Employee's children are
attending school in Bermuda at the time of such termination, the end of
the academic school year, whichever is longer; provided, however, that
such continuation shall not include any expenses for temporary housing or
accommodation in the U.S. The benefits described in paragraphs 2(c) and
2(i) shall not continue following termination under this paragraph 3(c).
2. Payments to the Employee under this paragraph 3(c) will
be made in accordance with the regular payroll practices of the Employer
during the remaining term of this Agreement or, at the election of the
Employer, such payments may be made in a lump sum.
3. For purposes of this Agreement, the Employee shall be
deemed "Constructively Discharged" if the Employer changes the primary
employment location of the Employee to a place other than Bermuda without
the express written consent of the Employee.
D. TERMINATION FOR CAUSE. Notwithstanding any other provision of
this Agreement, in the event of the termination of the Employee's employment
under this Agreement for cause, no Annual Bonus (or Base Bonus, if applicable)
for the year in which such termination occurs shall be payable to the Employee
and no further payments shall be due hereunder except for compensation or
benefits accrued as of the date of such termination, and except that Employer
shall pay all expenses related to the relocation of Employee and Employee's
family to the U.S. location of Employee's choice, including packing and shipping
Employee's household effects, furniture and personal belongings. For purposes of
this Agreement, "cause" shall mean: (i) a material violation by the Employer, in
which the Employee materially and directly participated, of any law or
regulation respecting the business of the Employer or any affiliate, other than
a material violation which is a direct result of the operation of the Employer
and/or its affiliates in accordance with the Operating Guidelines; (ii) the
Employee being found guilty by a court of competent jurisdiction or a plea of
guilty or nolo contendre to a charge of (A) any felony or (B) an act of
dishonesty in connection with the performance of his duties for the Employer;
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or (iii) the willful or negligent failure of the Employee to perform his duties
hereunder in any material respect.
E. TERMINATION UPON DEATH. If the Employee dies during the term of
this Agreement, payment of any accrued compensation due to the Employee at the
time of death including the bonus payable with respect to the prior calendar
year if death occurs prior to payment of such bonus, shall be made to such
beneficiary as the Employee may designate in writing, or failing such
designation, to the executor, administrator or other representative of his
estate (provided, however, that the Employee's Base Bonus or Annual Bonus
payable with respect to the calendar year in which such termination occurs (with
such Annual Bonus calculated based on the bonus(es) payable to the Employee with
respect to the immediately preceding year) shall be payable on a pro rata basis
to the date of the Employee's death). Such payments shall be in addition to any
other death benefits of the Employer for the benefit of the Employee and in full
settlement and satisfaction of all payments provided for in this Agreement,
except for benefits provided for in sections 2(e) through 2(g) and 2(j) through
2(n), which shall continue for 3 months following the Employee's death or, if
Employee's children are attending school in Bermuda at the time of such
termination, the end of the academic school year, whichever is longer. In
addition, Employer shall pay all expenses related to the relocation of
Employee's family to the single U.S. location of their choice, including packing
and shipping their household effects, furniture and personal belongings.
F. TERMINATION UPON DISABILITY. The Employer may terminate the
Employee's employment after the Employee is determined to be disabled under the
then current Employer program if such a program exists at the time the Employee
is disabled. If no such program exists, the Employee will be considered disabled
if the Employee suffers an illness or injury of a potentially permanent nature
which results in the Employee's inability to substantially perform his duties
hereunder as determined by the board of directors of the Employer's ultimate
parent for a period of either six (6) consecutive months, or one hundred and
twenty (120) business days within a consecutive twelve (12) month period. If the
Employer terminates the Employee after it is determined that the Employee is
disabled, the Employer shall pay the Employee the compensation accrued through
the date of the Employee's termination of employment including the bonus payable
with respect to the prior calendar year if the termination occurs prior to
payment of such bonus (provided, however, that the Employee's Base Bonus or
Annual Bonus payable with respect to the calendar year in which such termination
occurs (with such Annual Bonus calculated based on the bonus(es) payable to
Employee with respect to the immediately preceding year) shall be payable on a
pro rata basis to the date
7
<PAGE>
of the Employee's termination). In the event of a dispute regarding the
Employee's disability, each party shall choose a physician who together will
choose a third physician to make a final determination. The Employee shall be
entitled to the compensation and benefits provided for under this Agreement for
any period during the term of this Agreement and prior to the establishment of
the Employee's disability. Notwithstanding anything contained in this Agreement
to the contrary, until the date specified in a notice of termination relating to
the Employee's disability, the Employee shall be entitled to return to his
position with the Employer as set forth in this Agreement, in which event no
disability of the Employee will be deemed to have occurred. In the event of a
termination of the Employee under this paragraph Employer shall pay all expenses
related to the relocation of Employee and Employee's family to the U.S. location
of Employee's choice, including packing and shipping Employee's household
effects, furniture and personal belongings.
IV. CONFIDENTIALITY AND LOYALTY. The Employee acknowledges that
during the course of the Employee's employment, the Employee will produce and
have access to material, records, data, trade secrets and information not
generally available to the public regarding the Employer and its subsidiaries
and affiliates (collectively, "Confidential Information"). Accordingly, during
and subsequent to termination of this Agreement, the Employee shall hold in
confidence and not directly or indirectly disclose, use, copy or make lists of
any such Confidential Information, except to the extent that such information is
or thereafter becomes lawfully available from public sources, or such disclosure
is authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
employee's duties hereunder. All records, files, documents and other materials
or copies thereof relating to the Employer's business which the Employee shall
prepare or use shall be and remain the sole property of the Employer, shall not
be removed from the Employer's premises without its written consent other than
in the ordinary course of business, and shall be promptly returned to the
Employer upon termination of the Employee's employment hereunder. The Employee
agrees to abide by the Employer's reasonable policies, as in effect from time to
time, respecting avoidance of interests conflicting with those of the Employer.
V. NON-SOLICITATION AND NON-COMPETITION COVENANTS.
A. RESTRICTIVE COVENANT. The Employee and the Employer have jointly
reviewed the operations of the Employer and have agreed that the covenants
contained in this Section 5 are an essential ingredient of this Agreement and
are made in consideration for the payment of the amounts described in
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Sections 2 and 3 hereof. The Employee hereby agrees that, except with the
express prior written consent of the Employer, for a period of one (1) year
after the termination of the Employee's employment with the Employer, with
respect to clause (i) below, for any reason and, with respect to clause (ii)
below, for any reason other than a termination pursuant to Section 3(c) (the
"Restrictive Period"), the Employee (i) will not (a) solicit employees of the
Employer or of any subsidiary or affiliate of the Employer or (b) solicit
clients or customers of the Employer or of any subsidiary or affiliate of the
Employer in respect of any transaction, matter or business that directly or
indirectly competes with any of the businesses then conducted by the Employer or
any of its subsidiaries or affiliates, and (ii) will not directly or indirectly
compete with the business of the Employer, by directly or indirectly being a
shareholder or partner of or serving as an employee, officer or director of or
consultant to, or in any other capacity with, any person, firm, partnership,
corporation, subsidiary, division, joint venture, trust or other entity, or any
division, subsidiary or separate enterprise of any such entity, which (x) was
created during the term of Employee's employment with the Employer or is
expected to be created within a period of one (1) year after the Employee's
termination of employment with the Employer, and (y) which owns or operates a
business which is either: (A) an insurer or reinsurer of asset backed
securities, mortgage backed securities or commercial mortgage backed securities;
or (B) an investment company that is directly or indirectly owned by, affiliated
with, attached to or otherwise related to an insurer or reinsurer of asset
backed securities, mortgage backed securities or commercial mortgage backed
securities; or (C) an investment advisory firm that is directly or indirectly
owned by, affiliated with, attached to or otherwise related to an insurer or
reinsurer of asset backed securities, mortgage backed securities or commercial
mortgage backed securities (the "Restrictive Covenant"). If the Employee
violates the Restrictive Covenant and the Employer brings legal action for
injunctive or other relief, the Employer shall not, as a result of the time
involved in obtaining such relief, be deprived of the benefit of the full period
of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be
deemed to have the duration specified in this paragraph 5(a) computed from the
date the relief is granted but reduced by the time between the period when the
Restrictive Period began to run and the date of the first violation of the
Restrictive Covenant by the Employee. The Restrictive Covenant shall not
prohibit the Employee from owning directly or indirectly capital stock or
similar securities which are listed on a securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation System which do
not represent more than five percent (5%) of the outstanding capital stock of
any business similar to that of the Employer's.
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B. REMEDIES FOR BREACH OF RESTRICTIVE COVENANT. The Employee
acknowledges that the restrictions contained in sections 4 and 5 of this
Agreement are reasonable and necessary for the protection of the legitimate
business interests of the Employer, that any violation of these restrictions
would cause substantial injury to the Employer and such interests, that the
Employer would not have entered into this Agreement with the Employee without
receiving the additional consideration offered by the Employee in binding
himself to these restrictions and that such restrictions were a material
inducement to the Employer to enter into this Agreement. In the event of any
violation of these restrictions, the Employer shall be relieved of all further
obligations under this Agreement and shall be entitled to any rights, remedies
or damages available to the Employer under this Agreement or otherwise at law or
in equity. In addition, in the event of any violation or threatened violation of
these restrictions, the Employer shall be entitled to preliminary and permanent
injunctive relief to prevent or restrain any such violation by the Employee and
any and all persons directly or indirectly acting for the Employee, as the case
may be.
VI. INTEREST IN ASSETS. Neither the Employee nor the Employee's
estate shall acquire hereunder any rights in funds or assets of the Employer,
otherwise than by and through the actual payment of amounts payable hereunder;
nor shall the Employee or the Employee's estate have any power to transfer,
assign, anticipate, hypothecate or otherwise encumber in advance any of said
payments; nor shall any of such payments be subject to seizure for the payment
of any debt, judgment, alimony, separate maintenance or be transferable by
operation of law in the event of bankruptcy, insolvency or otherwise of the
Employee.
VII. GENERAL PROVISIONS.
A. SUCCESSORS; ASSIGNMENT. Neither party hereto may assign his or
its rights or delegate his or its duties under this Agreement without the prior
written consent of the other party; provided, however, that (i) this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
the Employer upon any sale of all or substantially all of the Employer's assets,
or upon any merger, consolidation or reorganization of the Employer with or into
any other corporation, all as though such successors and assigns of the Employer
and their respective successors and assigns were the Employer; and (ii) this
Agreement shall inure to the benefit of and be binding upon the heirs, assigns
or designees of the Employee to the extent of any payments due to them
hereunder. As used in this Agreement, the term "Employer" shall be deemed to
refer to any such successor or assign of the Employer referred to in the
preceding sentence.
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B. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement constitutes the
entire agreement between the parties respecting the subject matter hereof, and
supersedes all prior negotiations, undertakings, agreements and arrangements
with respect thereto, whether written or oral. Except as otherwise explicitly
provided herein, this Agreement may not be amended or modified except by written
agreement signed by the Employee and the Employer.
C. ENFORCEMENT AND GOVERNING LAW. The provisions of this Agreement
shall be regarded as divisible and separate; if any of said provisions should be
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remaining provisions shall not be affected
thereby. This Agreement shall be construed and the legal relations of the
parties hereto shall be determined in accordance with the laws of the State of
New York, without reference to the law regarding conflicts of law.
D. ARBITRATION. The provisions of paragraph 5(b) shall supersede the
provisions of this paragraph 7(d) in the event of a simultaneous dispute between
the Employer and the Employee so as to afford the Employer with the remedy of
injunctive relief, without the necessity for arbitration. Any dispute or
controversy arising under or in connection with this Agreement or the Employee's
employment by the Employer shall be settled exclusively by arbitration,
conducted by a single arbitrator sitting in New York City, New York, in
accordance with the rules of the American Arbitration Association (the "AAA")
then in effect. The arbitrator shall be selected by mutual agreement between the
Employer and the Employee. However, in the event that the parties are unable to
agree on an arbitrator within a period of one week, the arbitrator shall be
selected by the parties from a list of eleven (11) arbitrators provided by the
AAA, provided that no arbitrator shall be related to or affiliated with either
of the parties. If the parties mutually agree on an arbitrator within ten (10)
days after the list of the proposed arbitrators is received by the parties, then
no later than twenty (20) days after such list is received by the parties, the
parties, or their respective representatives, shall meet at a mutually
convenient location in New York City, New York, or telephonically. At that
meeting, the party who sought arbitration shall eliminate one (1) proposed
arbitrator and then the other party shall eliminate one (1) proposed arbitrator.
The parties shall continue to eliminate names from the list of proposed
arbitrators in this manner until each part has eliminated five (5) proposed
arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party
shall submit, in writing, the specific requested action or decision it wishes to
take, or make, with respect to the matter in dispute, and the arbitrator shall
be obligated to choose one (1) party's specific requested action or decision,
without being permitted to
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effectuate any compromise position. The party whose requested action or decision
is not selected by the arbitrator shall bear the cost of all counsel, experts or
other representatives who are retained by both parties, together with all costs
of the arbitration proceeding, including, without limitation, the fees, costs
and expenses imposed or incurred by the arbitrator. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
the Employee shall be entitled to seek specific performance of the Employee's
right to be paid through the date of termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
E. WAIVER. No waiver be either party at any time of any breach by
the other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party, shall be deemed a waiver of any
similar or dissimilar provisions or conditions at the same time or any prior or
subsequent time.
F. NOTICES. Notices pursuant to this Agreement shall be in writing
and shall be deemed given when received; and, if mailed, shall be mailed by
United States registered or certified mail, return receipt requested, postage
prepaid; and if to the Employer, addressed to the principal headquarters of the
Employer, attention: Chairman; or, if to the Employee, to the address set forth
below the Employee's signature on this Agreement, or to such other address as
the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
Commercial Guaranty
Assurance, Ltd. Anthony R. Montemurno
By: /s/ RICHARD A. PRICE /s/ ANTHONY R. MONTEMURNO
--------------------------------- ----------------------------------
Richard A. Price 142 North Compo Road
President, CGA Group, Ltd. Westport, CT 06880
12
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered into as of the
1st day of January, 1997 (the "Effective Date"), by and between Commercial
Guaranty Assurance, Ltd., a Bermuda corporation (referred to herein as the
"Employer"), and Geoffrey N. Kauffman (the "Employee").
RECITALS
A. The Employer desires to employ the Employee for a specified term; and
B. The Employee is willing to be employed by the Employer upon the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter contained, it is covenanted and agreed by
and between the parties hereto as follows:
AGREEMENTS
I. POSITION AND DUTIES. The Employer hereby employs the Employee as
the Vice Chairman and Managing Director of the Employer or in such other
capacity as shall be mutually agreed between the Employee and the Employer.
During the period of the Employee's employment hereunder, the Employee shall
devote the Employee's best efforts and full business time, energy, skills and
attention to the business and affairs of the Employer; provided, however, that
the Employee shall perform on behalf of the Employer and the Employer's ultimate
parent corporation, CGA Group, Ltd. ("CGA Group") in the United States of
America only such duties that are of a ministerial nature and the performance of
which are in compliance with the Operating Guidelines (the "Operating
Guidelines," as such term is defined in the Investment Units Subscription
Agreement dated as of June 4, 1997 by and among CGA Group and the other parties
named therein). The Employee's duties and authority shall consist of and include
all duties and authority customarily performed and held by persons holding
equivalent positions with business organizations similar in nature and size to
the Employer,
<PAGE>
as such duties and authority are, subject to the immediately
preceding sentence, reasonably defined, modified and delegated from time to time
by the Board of Directors of the Employer (the "Board") or that person to whom
the Board has delegated such authority. The Employee shall have the powers
necessary to perform the duties assigned to him, and shall be provided such
supporting services, staff, secretarial and other assistance, office space and
accoutrements as shall be reasonably necessary and appropriate in light of such
assigned duties.
II. COMPENSATION. As compensation for the services to
be provided by the Employee, the Employee shall receive the following
compensation and other benefits:
A. BASE SALARY. The Executive shall receive an aggregate
annual minimum base salary ("Base Salary") at the rate of One Hundred Seventy
Five Thousand U.S. Dollars ($175,000.00) payable in installments in accordance
with the regular payroll practices of the Employer; provided that, any amount
paid by CGA Group or CGA Funding, L.P. with respect to the period commencing
after December 31, 1996 and ending prior to May 31, 1997, shall be credited
against the aggregate annual minimum base salary for 1997 payable to the
Employee. Such Base Salary shall be subject to review annually, commencing on
the anniversary of the Effective Date and shall be maintained or increased
during the term hereof in accordance with the Employer's established
compensation policies.
B. BONUSES. The Employee shall receive a one-time sign-on
bonus, payable as promptly as practicable after the date of the execution
hereof, in the amount of One Hundred Fifteen Thousand Dollars ($115,000). The
Employee shall receive a cash bonus, payable within thirty (30) days after the
end of the 1997 calendar year in the amount of not less than One Hundred Seventy
Five Thousand Dollars ($175,000) ("Base Bonus"). The Employee may receive a
discretionary annual cash bonus ("Annual Bonus"), also payable within thirty
(30) days after the end of each subsequent calendar year during which this
Agreement is in effect, which shall be based upon an annual incentive plan
approved by the compensation committee of the board of directors of the
Employer's ultimate parent.
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<PAGE>
C. CLUB MEMBERSHIP. The Employee shall be reimbursed for
membership dues at a local country club of his choice, in an amount to be
mutually agreed upon between the Employee and the Employer.
D. REIMBURSEMENT OF EXPENSES. In accordance with the expense
reimbursement policies of the Employer, as promulgated and in effect from time
to time, the Employee shall be reimbursed, upon submission of appropriate
vouchers and supporting documentation, for all travel, entertainment and other
out-of-pocket expenses reasonably and necessarily incurred by the Employee in
the performance of his duties hereunder.
E. MOVING AND INTERIM LIVING EXPENSES. The Employer shall pay
all reasonable expenses related to the relocation to Bermuda from New York City
of the Employee, including packing and shipping the Employee's entire household
and all furniture, belongings and effects. If the Employer's relocation to
Bermuda entails the sale of Employee's primary residence in the U.S. and such
sale occurs within (12) months of the relocation of the Employee's family, the
Employer shall reimburse the Employee for real estate brokerage fees incurred in
such sale up to a maximum of seven percent (7%) of the sale price, together with
all closing costs, including reasonable attorney's fees. In addition, the
Employer shall pay the temporary living expenses of the Employee in Bermuda, in
accommodations commensurate with the Employee's position, for up to three (3)
months. Such expenses shall be reasonable and commensurate with the Employee's
position. The Employer shall also, upon termination of the Employee's employment
hereunder, pay all expenses related to the relocation of Employee and Employee's
family to the U.S. location of Employee's choice, including packing and shipping
Employee's effects, furniture and personal belongings.
F. HOUSING ALLOWANCE. The Employer shall pay the Employee a
housing allowance each month during the term of Employee's employment hereunder,
in an amount equal to the Employee's actual monthly housing rental expense not
to exceed the Maximum Monthly Allowance (as hereinafter defined), plus electric
utility costs; provided however, that such allowance shall not be paid during
any month in which the Employee is receiving
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<PAGE>
temporary living expenses pursuant to Section 2(e) above. As used herein, the
term "Maximum Monthly Allowance" shall mean Ten Thousand U.S. Dollars (U.S.
$10,000) plus 50% (fifty percent) of the Employee's actual monthly housing
rental expense over U.S. $10,000 up to U.S. $16,000 (it being understood that
the Maximum Monthly Allowance payable by the Employer shall in no event exceed
Thirteen Thousand U.S. Dollars (U.S. $13,000)).
G. SCHOOLING EXPENSES. {Intentionally Omitted].
H. OTHER BENEFITS. The Employee shall be entitled to all
benefits specifically established for him by the Board or a committee thereof
and, when and to the extent he is eligible therefor, to participate in all plans
and benefits generally accorded to employees of the Employer, under the subject
to all of the terms thereof, including, but not limited to, as applicable,
pension, profit-sharing, supplemental retirement, incentive compensation ,
bonus, disability income, split-dollar life insurance, group life, medical and
hospitalization insurance, and similar or comparable plans, and also to
perquisites extended to similarly situated senior employees. Additionally, the
Employer shall obtain for the benefit of the Employee's estate a term life
insurance policy with a value of two times the Employee's base salary as
presented in paragraph 2(a).
I. VACATIONS. The Employee shall be entitled to an annual
vacation in accordance with the operative vacation policy of the Employer in
effect from time to time, which vacation shall be taken at a time or times
mutually agreeable to the Employee and the Employer. In addition, each calendar
year the Company shall reimburse Employee for round-trip coach airfare for one
trip to the U.S. for the Employee and each member of his immediate family.
J. FULL BENEFIT OF ALLOWANCES. If any of the compensation and
benefits provided in paragraphs (e) through (f), the last sentence of paragraph
(i), and paragraphs (l), (m) and (n) shall be deemed taxable to the Employee in
the U.S., the Employer shall pay to the Employee that additional amount
necessary to "gross-up" the payment in question and fully subsidize any U.S. tax
consequences to the Employee.
4
<PAGE>
K. WITHHOLDING. The Employer shall be entitled to withhold,
from amounts payable to the Employee hereunder, any federal, state or local
withholding or other taxes or charges which it is from time to time required to
withhold.
L. IMMIGRATION AND WORK PERMITS. The Employer shall be
responsible for and will pay all expenses related to obtaining all ordinary and
necessary immigration and work permit approvals on Employee's behalf with
respect to his employment in Bermuda. The Employee shall cooperate with the
Employer in obtaining such approvals.
M. TAX ASSISTANCE. The Employer shall provide the Employee
with reasonable expatriates tax assistance, provided by the independent
accountants and tax counsel regularly engaged by the Employer.
N. AUTOMOBILE EXPENSE. The Employee shall receive from
Employer a monthly auto expense assistance in the amount of $750.
III. TERM AND TERMINATION
A. BASIC TERM. The Employee's employment under this Agreement
shall be for a term of two (2) years commencing as of the Effective Date and
shall automatically extend for one (1) additional year commending on the second
anniversary of the Effective Date and on each anniversary thereafter, unless
terminated by either party effective as of the last day of the then current
Agreement term by written notice to the effect delivered to the other not less
than one hundred twenty (120) days prior to the anniversary of such Effective
Date.
B. VOLUNTARY TERMINATION BY EMPLOYEE. The Employee may voluntarily
terminate this Agreement, at any time, by written notice to that effect
delivered to the Employer not less than thirty (30) days prior to the effective
date of Employee's voluntary termination. Upon Employee's voluntary termination,
Employee shall have no obligations to the Employer other than as provided for in
Sections 4 and 5 hereof, together with an obligation to
5
<PAGE>
provide Employee's reasonable transitional assistance to the Employer for a
period of not more than thirty (30) days in connection with matters for which
the Employee was responsible during the term of this Agreement and which were
not concluded prior to Employee's voluntary termination. Upon Employee's
voluntary termination, no Annual Bonus (or Base Bonus, if applicable) for the
year in which such termination occurs shall be payable to the Employee and no
further payments of any kind shall be due hereunder, except for compensation and
benefits accrued as of the date of such termination, and except that Employer
shall pay all expenses related to the relocation of Employee and Employee's
family to the U.S. location of Employee's choice, including packing and shipping
Employee's household effects, furniture and personal belongings.
C. PREMATURE TERMINATION WITHOUT CAUSE AND
CONSTRUCTIVE TERMINATION.
1. In the event of the termination of the Employee's
employment under this Agreement prior to the last day of the then current
term, either (A) by the Employer for any reason other than a termination
in accordance with the provisions of paragraph 3(d), 3(e) or 3(f) or (B)
by the Employee by written notice to the Employer given within thirty (30)
days of Constructive Discharge (as hereinafter defined) effective as of
thirty (30) days after such notice, then the Employer shall: (A) pay the
Employee the greater of (x) the Base Salary the Employee would have
received had he remained employed through the end of the then current term
of the Agreement and (y) six (6) months of Base Salary; (B) pay the
Employee, if such termination occurs in the 1997 calendar year, the Base
Bonus; (C) continue to provide coverage for the Employee under the medical
benefit program maintained by the Employer through the remainder of the
term of the Agreement (if permitted to do so under such program), and (D)
pay all expenses related to the relocation of Employee and Employee's
family to the U.S. location of Employee's choice, including packing and
shipping Employee's household effects, furniture and personal belongings.
The benefits provided in paragraphs 2(f), 2(m) and 2(n) shall continue for
3 months; provided, however, that such continuation shall not
6
<PAGE>
include any expenses for temporary housing or accommodation in the U.S.
The benefits described in paragraphs 2(c) and 2(i) shall not continue
following termination under this paragraph 3(c).
2. Payments to the Employee under this paragraph 3(c) will be
made in accordance with the regular payroll practices of the Employer
during the remaining term of this Agreement or, at the election of the
Employer, such payments may be made in a lump sum.
3. For purposes of this Agreement, the Employee shall be
deemed "Constructively Discharged" if the Employer changes the primary
employment location of the Employee to a place other than Bermuda without
the express written consent of the Employee.
D. TERMINATION FOR CAUSE. Notwithstanding any other provision
of this Agreement, in the event of the termination of the Employee's employment
under this Agreement for cause, no Annual Bonus (or Base Bonus, if applicable)
for the year in which such termination occurs shall be payable to the Employee
and no further payments shall be due hereunder except for compensation or
benefits accrued as of the date of such termination, and except that Employer
shall pay all expenses related to the relocation of Employee and Employee's
family to the U.S. location of Employee's choice, including packing and shipping
Employee's household effects, furniture and personal belongings. For purposes of
this Agreement, "cause" shall mean: (i) a material violation by the Employer, in
which the Employee materially and directly participated, of any law or
regulation respecting the business of the Employer or any affiliate, other than
a material violation which is a direct result of the operation of the Employer
and/or its affiliates in accordance with the Operating Guidelines; (ii) the
Employee being found guilty by a court of competent jurisdiction or a plea of
guilty or nolo contendre to a charge of (A) any felony or (B) an act of
dishonesty in connection with the performance of his duties for the Employer; or
(iii) the willful or negligent failure of the Employee to perform his duties
hereunder in any material respect.
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<PAGE>
E. TERMINATION UPON DEATH. If the Employee dies during the term of
this Agreement, payment of any accrued compensation due to the Employee at the
time of death including the bonus payable with respect to the prior calendar
year if death occurs prior to payment of such bonus, shall be made to such
beneficiary as the Employee may designate in writing, or failing such
designation, to the executor, administrator or other representative of his
estate (provided, however, that the Employee's Base Bonus or Annual Bonus
payable with respect to the calendar year in which such termination occurs (with
such Annual Bonus calculated based on the bonus(es) payable to the Employee with
respect to the immediately preceding year) shall be payable on a pro rata basis
to the date of the Employee's death). Such payments shall be in addition to any
other death benefits of the Employer for the benefit of the Employee and in full
settlement and satisfaction of all payments provided for in this Agreement,
except for benefits provided for in sections 2(e) through 2(f) and 2(j) through
2(n), which shall continue for 3 months following the Employee's death. In
addition, Employer shall pay all expenses related to the relocation of
Employee's family to the single U.S. location of their choice, including packing
and shipping their household effects, furniture and personal belongings.
F. TERMINATION UPON DISABILITY. The Employer may terminate the
Employee's employment after the Employee is determined to be disabled under the
then current Employer program if such a program exists at the time the Employee
is disabled. If no such program exists, the Employee will be considered disabled
if the Employee suffers an illness or injury of a potentially permanent nature
which results in the Employee's inability to substantially perform his duties
hereunder as determined by the board of directors of the Employer's ultimate
parent for a period of either six (6) consecutive months, or one hundred and
twenty (120) business days within a consecutive twelve (12) month period. If the
Employer terminates the Employee after it is determined that the Employee is
disabled, the Employer shall pay the Employee the compensation accrued through
the date of the Employee's termination of employment including the bonus payable
with respect to the prior calendar year if the termination occurs prior to
payment of such bonus (provided, however, that the Employee's Base Bonus or
8
<PAGE>
Annual Bonus payable with respect to the calendar year in which such termination
occurs (with such Annual Bonus calculated based on the bonus(es) payable to
Employee with respect to the immediately preceding year) shall be payable on a
pro rata basis to the date of the Employee's termination). In the event of a
dispute regarding the Employee's disability, each party shall choose a physician
who together will choose a third physician to make a final determination. The
Employee shall be entitled to the compensation and benefits provided for under
this Agreement for any period during the term of this Agreement and prior to the
establishment of the Employee's disability. Notwithstanding anything contained
in this Agreement to the contrary, until the date specified in a notice of
termination relating to the Employee's disability, the Employee shall be
entitled to return to his position with the Employer as set forth in this
Agreement, in which event no disability of the Employee will be deemed to have
occurred. In the event of a termination of the Employee under this paragraph
Employer shall pay all expenses related to the relocation of Employee and
Employee's family to the U.S. location of Employee's choice, including packing
and shipping Employee's household effects, furniture and personal belongings.
IV. CONFIDENTIALITY AND LOYALTY. The Employee acknowledges that
during the course of the Employee's employment, the Employee will produce and
have access to material, records, data, trade secrets and information not
generally available to the public regarding the Employer and its subsidiaries
and affiliates (collectively, "Confidential Information"). Accordingly, during
and subsequent to termination of this Agreement, the Employee shall hold in
confidence and not directly or indirectly disclose, use, copy or make lists of
any such Confidential Information, except to the extent that such information is
or thereafter becomes lawfully available from public sources, or such disclosure
is authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
employee's duties hereunder. All records, files, documents and other materials
or copies thereof relating to the Employer's business which the Employee shall
prepare or use shall be
9
<PAGE>
and remain the sole property of the Employer, shall not be removed from the
Employer's premises without its written consent other than in the ordinary
course of business, and shall be promptly returned to the Employer upon
termination of the Employee's employment hereunder. The Employee agrees to abide
by the Employer's reasonable policies, as in effect from time to time,
respecting avoidance of interests conflicting with those of the Employer.
V. NON-SOLICITATION AND NON-COMPETITION COVENANTS
A. RESTRICTIVE COVENANT. The Employee and the Employer have
jointly reviewed the operations of the Employer and have agreed that the
covenants contained in this Section 5 are an essential ingredient of this
Agreement and are made in consideration for the payment of the amounts described
in Sections 2 and 3 hereof. The Employee hereby agrees that, except with the
express prior written consent of the Employer, for a period of one (1) year
after the termination of the Employee's employment with the Employer, with
respect to clause (i) below, for any reason and, with respect to clause (ii)
below, for any reason other than a termination pursuant to Section 3(c)(the
"Restrictive Period"), the Employee (i) will not (a) solicit employees of the
Employer or of any subsidiary or affiliate of the Employer or (b) solicit
clients or customers of the Employer or of any subsidiary or affiliate of the
Employer in respect of any transaction, matter or business that directly or
indirectly competes with any of the businesses then conducted by the Employer or
any of its subsidiaries or affiliates, and (ii) will not directly or indirectly
compete with the business of the Employer, by directly or indirectly being a
shareholder or partner of or serving as an employee, officer or director of or
consultant to, or in any other capacity with, any person, firm, partnership,
corporation, subsidiary, division, joint venture, trust or other entity, or any
division, subsidiary or separate enterprise of any such entity, which (x) was
created during the term of Employee's employment with the Employer or is
expected to be created within a period of one (1) year after the Employee's
termination of employment with the Employer, and (y) which owns or operates a
business which is either: (A) an insurer or reinsurer of asset backed
securities,
10
<PAGE>
mortgage backed securities or commercial mortgage backed securities;
or (B) an investment company that is directly or indirectly owned by, affiliated
with, attached to or otherwise related to an insurer or reinsurer of asset
backed securities, mortgage backed securities or commercial mortgage backed
securities; or (C) an investment advisory firm that is directly or indirectly
owned by, affiliated with, attached to or otherwise related to an insurer or
reinsurer of asset backed securities, mortgage backed securities or commercial
mortgage backed securities (the "Restrictive Covenant"). If the Employee
violates the Restrictive Covenant and the Employer brings legal action for
injunctive or other relief, the Employer shall not, as a result of the time
involved in obtaining such relief, be deprived of the benefit of the full period
of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be
deemed to have the duration specified in this paragraph 5(a) computed from the
date the relief is granted but reduced by the time between the period when the
Restrictive Period began to run and the date of the first violation of the
Restrictive Covenant by the Employee. The Restrictive Covenant shall not
prohibit the Employee from owning directly or indirectly capital stock or
similar securities which are listed on a securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation System which do
not represent more than five percent (5%) of the outstanding capital stock of
any business similar to that of the Employer's.
B. REMEDIES FOR BREACH OF RESTRICTIVE COVENANT. The Employee
acknowledges that the restrictions contained in sections 4 and 5 of this
Agreement are reasonable and necessary for the protection of the legitimate
business interests of the Employer, that any violation of these restrictions
would cause substantial injury to the Employer and such interests, that the
Employer would not have entered into this Agreement with the Employee without
receiving the additional consideration offered by the Employee in binding
himself to these restrictions and that such restrictions were a material
inducement to the Employer to enter into this Agreement. In the event of any
violation of these restrictions, the Employer shall be relieved of all further
obligations under this Agreement and shall be entitled to any rights, remedies
or damages available to the Employer under this Agreement or otherwise at law or
11
<PAGE>
in equity. In addition, in the event of any violation or threatened violation of
these restrictions, the Employer shall be entitled to preliminary and permanent
injunctive relief to prevent or restrain any such violation by the Employee and
any and all persons directly or indirectly acting for the Employee, as the case
may be.
VI. INTEREST IN ASSETS. Neither the Employee nor the Employee's
estate shall acquire hereunder any rights in funds or assets of the Employer,
otherwise than by and through the actual payment of amounts payable hereunder;
nor shall the Employee or the Employee's estate have any power to transfer,
assign, anticipate, hypothecate or otherwise encumber in advance any of said
payments; nor shall any of such payments be subject to seizure for the payment
of any debt, judgment, alimony, separate maintenance or be transferable by
operation of law in the event of bankruptcy, insolvency or otherwise of the
Employee.
VII. GENERAL PROVISIONS.
A. SUCCESSORS; ASSIGNMENT. Neither party hereto may assign his or
its rights or delegate his or its duties under this Agreement without the prior
written consent of the other party; provided, however, that (i) this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
the Employer upon any sale of all or substantially all of the Employer's assets,
or upon any merger, consolidation or reorganization of the Employer with or into
any other corporation, all as though such successors and assigns of the Employer
and their respective successors and assigns were the Employer; and (ii) this
Agreement shall inure to the benefit of and be binding upon the heirs, assigns
or designees of the Employee to the extent of any payments due to them
hereunder. As used in this Agreement, the term "Employer" shall be deemed to
refer to any such successor or assign of the Employer referred to in the
preceding sentence.
B. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement constitutes
the entire agreement between the parties respecting the subject matter hereof,
and supersedes all prior negotiations, undertakings,
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<PAGE>
agreements and arrangements with respect thereto, whether written or oral.
Except as otherwise explicitly provided herein, this Agreement may not be
amended or modified except by written agreement signed by the Employee and the
Employer.
C. ENFORCEMENT AND GOVERNING LAW. The provisions of this
Agreement shall be regarded as divisible and separate; if any of said provisions
should be declared invalid or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be construed and the legal
relations of the parties hereto shall be determined in accordance with the laws
of the State of New York, without reference to the law regarding conflicts of
law.
D. ARBITRATION. The provisions of paragraph 5(b) shall
supersede the provisions of this paragraph 7(d) in the event of a simultaneous
dispute between the Employer and the Employee so as to afford the Employer with
the remedy of injunctive relief, without the necessity for arbitration. Any
dispute or controversy arising under or in connection with this Agreement or the
Employee's employment by the Employer shall be settled exclusively by
arbitration, conducted by a single arbitrator sitting in New York City, New
York, in accordance with the rules of the American Arbitration Association (the
"AAA") then in effect. The arbitrator shall be selected by mutual agreement
between the Employer and the Employee. However, in the event that the parties
are unable to agree on an arbitrator within a period of one week, the arbitrator
shall be selected by the parties from a list of eleven (11) arbitrators provided
by the AAA, provided that no arbitrator shall be related to or affiliated with
either of the parties. If the parties mutually agree on an arbitrator within ten
(10) days after the list of the proposed arbitrators is received by the parties,
then no later than twenty (20) days after such list is received by the parties,
the parties, or their respective representatives, shall meet at a mutually
convenient location in New York City, New York, or telephonically. At that
meeting, the party who sought arbitration shall eliminate one (1) proposed
arbitrator and then the other party shall eliminate one (1) proposed arbitrator.
The parties shall continue to eliminate names from the list of proposed
arbitrators in this manner until
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each part has eliminated five (5) proposed arbitrators. The remaining arbitrator
shall arbitrate the dispute. Each party shall submit, in writing, the specific
requested action or decision it wishes to take, or make, with respect to the
matter in dispute, and the arbitrator shall be obligated to choose one (1)
party's specific requested action or decision, without being permitted to
effectuate any compromise position. The party whose requested action or decision
is not selected by the arbitrator shall bear the cost of all counsel, experts or
other representatives who are retained by both parties, together with all costs
of the arbitration proceeding, including, without limitation, the fees, costs
and expenses imposed or incurred by the arbitrator. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
the Employee shall be entitled to seek specific performance of the Employee's
right to be paid through the date of termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
E. WAIVER. No waiver be either party at any time of any breach
by the other party of, or compliance with, any condition or provision of this
Agreement to be performed by the other party, shall be deemed a waiver of any
similar or dissimilar provisions or conditions at the same time or any prior or
subsequent time.
F. NOTICES. Notices pursuant to this Agreement shall be in
writing and shall be deemed given when received; and, if mailed, shall be mailed
by United States registered or certified mail, return receipt requested, postage
prepaid; and if to the Employer, addressed to the principal headquarters of the
Employer, attention: Chairman; or, if to the Employee, to the address set forth
below the Employee's signature on this Agreement, or to such other address as
the party to be notified shall have given to the other.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Commercial Guaranty
Assurance, Ltd. Geoffrey N. Kauffman
By:/s/ Richard A. Price /s/ Geoffrey N. Kauffman
--------------------- ------------------------
Richard A. Price "Coolshanah"
President, CGA 20 Point Shares Road
Group, Ltd. Pembroke HM05
Bermuda
15
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), made and entered into as of
the 1st day of January, 1997 (the "Effective Date"), by and between CGA
Investment Management, Inc., a Delaware corporation (referred to herein as the
Employer"), and Kem H. Blacker (the "Employee").
RECITALS
A. The Employer desires to employ the Employee for a
specified term; and
B. The Employee is willing to be employed by the Employer upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter contained, it is covenanted and agreed by and between the
parties hereto as follows:
AGREEMENTS
1. Position and Duties. The Employer hereby employs the Employee as
the Principal of the Employer or in such other capacity as shall be mutually
agreed between the Employee and the Employer. During the period of the
Employee's employment hereunder, the Employee shall devote the Employee's best
efforts and full business time, energy, skills and attention to the business and
affairs of the Employer; provided, however, that the Employee shall perform on
behalf of the Employer and the Employer's parent corporation, CGA Group, Ltd.
("CGA Group") in the United States of America only such duties that are of a
ministerial nature and the performance of which are in compliance with the
Operating Guidelines (the "Operating Guidelines," as such term is defined in the
Investment Units Subscription Agreement dated as of June 4, 1997 by and among
CGA Group and the other parties named therein (the "Subscription Agreement").
The Employee's duties and authority shall consist of and include all duties and
authority customarily performed and held by persons holding equivalent positions
with business organizations similar in nature and size to the Employer, as such
duties and authority are, subject to the immediately preceding sentence,
reasonably defined, modified and delegated from time to time by the Board of
Directors of the Employer (the "Board") or that person to whom the Board has
delegated such authority. The Employee shall have the powers necessary to
perform the duties assigned to him, and shall be provided such supporting
services, staff, secretarial and other assistance, office space and
accoutrements as shall be reasonably necessary and appropriate in light of such
assigned duties.
<PAGE>
2. Compensation. As compensation for the services to be provided by
the Employee hereunder, the Employee shall receive the following compensation
and other benefits:
(a) Base Salary. The Employee shall receive an aggregate
annual minimum base salary ("Base Salary") at the rate of Two Hundred Twenty
Five Thousand Dollars ($225,000) payable in installments in accordance with the
regular payroll practices of the Employer; provided that, any amount paid by CGA
Group or CGA Funding, L.P. with respect to the period commencing after December
31, 1996 and ending prior to May 31, 1997 shall be credited against the
aggregate minimum base salary for 1997 payable to the Employee.
(b) Bonuses. The Employee shall receive a cash bonus, payable
within (30) days after the end of the 1997 calendar year, in the amount of not
less than Two Hundred Thousand Dollars ($200,000) ("Base Bonus"). The Employee
may receive a discretionary annual cash bonus ("Annual Bonus"), also payable
within thirty (30) days after the end of each subsequent calendar year during
which this Agreement is in effect, which shall be based upon an annual incentive
plan approved by the compensation committee of the board of directors of the
Employer's ultimate parent.
(c) Reimbursement of Expenses. In accordance with the expense
reimbursement policies of the Employer, as promulgated and in effect from time
to time, the Employee shall be reimbursed, upon submission of appropriate
vouchers and supporting documentation, for all travel, entertainment and other
out-of-pocket expenses reasonably and necessarily incurred by the Employee in
the performance of his duties hereunder.
(d) Other Benefits. The Employee shall be entitled to all
benefits specifically established for him by the Board or a committee thereof
and, when and to the extent he is eligible therefor, to participate in all plans
and benefits generally accorded to employees of the Employer, under and subject
to all of the forms thereof, including, but not limited to, as applicable,
pension, profit-sharing, supplemental retirement, incentive compensation, bonus,
disability income, split-dollar life insurance, group life, medical and
hospitalization insurance, and similar or comparable plans, and also to
perquisites extended to similarly situated senior employees. Additionally, the
Employer shall obtain for the benefit of the Employee's estate a term life
insurance policy with a value of two times the Employee's base salary as
presented in paragraph 2(a).
(e) Vacations. The Employee shall be entitled to an annual
vacation in accordance with the operative vacation policy of the Employer in
effect from time to time, which vacation shall be taken at a time or times
mutually agreeable to the Employee and the Employer.
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<PAGE>
(f) Withholding. The Employer shall be entitled to withhold,
from amounts payable to the Employee hereunder, any federal, state or local
withholding or other taxes or charges which it is from time to time required to
withhold.
3. Term and Termination.
(a) Basic Term. The Employee's employment under this
Agreement shall be for a term of one (1) year commencing as of the Effective
Date, and shall automatically extend for one (1) year commencing on each
anniversary of the Effective Date, unless terminated by either party effective
as of the last day of the then current Agreement term by written notice to that
effect delivered to the other not less than thirty (30) days prior to the
expiration of such Agreement term.
(b) Voluntary Termination by Employee. The Employee may
voluntarily terminate this Agreement, at any time, by written notice to that
effect delivered to the Employer not less than thirty (30) days prior the
effective date of Employee's voluntary termination. Upon Employee's voluntary
termination, Employee shall have no obligations to the Employer other than as
provided for in Sections 4 and 5 hereof, together with an obligation to provide
Employee's reasonable transitional assistance to the Employer for a period of
not more than thirty (30) days in connection with matters for which the Employee
was responsible during the term of this Agreement and which were not concluded
prior to Employee's voluntary termination. Upon Employee's voluntary
termination, no Annual Bonus (or Base Bonus, if applicable) for the year in
which such termination occurs shall be payable to the Employee and no further
payments of any kind shall be due hereunder, except for compensation and
benefits accrued as of the date of such termination.
(c) Premature Termination Without Cause and Constructive
Discharge.
(i) In the event of the termination of the Employee's
employment under this Agreement prior to the last day of the then current
term, either (A) by the Employer for any reason other than a termination
in accordance with the provisions of paragraph 3(d), 3(e) or 3(f) or (B)
by the Employee by written notice to the Employer given within thirty (30)
days of Constructive Discharge (as hereinafter defined) effective as of
thirty (30) days after such notice, then the Employer shall: (A) pay the
Employee the greater of (x) the Base Salary the Employee would have
received had he remained employed through the end of the then current term
of the Agreement and (y) six (6) months of salary; (B) pay the Employee,
if such termination occurs in the 1997 calendar year, the Base Bonus and
(C) continue to provide coverage for the Employee under the medical
benefit program maintained by
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<PAGE>
the Employer through the remainder of the term of the Agreement (if
permitted to do so under such program).
(ii) Payments to the Employee under this paragraph 3(c)
will be made in accordance with the regular payroll practices of the
Employer during the remaining term of this Agreement or, at the election
of the Employer, such payments may be made in a lump sum. Such payments
shall not be reduced in the event the Employee obtains other employment
following the termination of employment by the Employer.
(iii) For purposes of this Agreement, the Employee
shall be deemed "Constructively Discharged" if the Employer changes the
primary employment location of the Employee to a place that is more than
forty (40) miles from the primary employment location of the Employee as
of the Closing Date (as defined in the Subscription Agreement).
(d) Termination For Cause. Notwithstanding any other
provision of this Agreement, in the event of the termination of the Employee's
employment under this Agreement for cause, no Annual Bonus (or Base Bonus, if
applicable) for the year in which such termination occurs shall be payable to
the Employee and no further payments shall be due hereunder except for
compensation or benefits accrued as of the date of such termination. For
purposes of this Agreement, "cause" shall mean: (i) a material violation by the
Employer, in which the Employee materially and directly participated, of any law
or regulation respecting the business of the Employer or any affiliate, other
than a material violation which is a direct result of the operation of the
Employer and/or its affiliates in accordance with the Operating Guidelines; (ii)
the Employee being found guilty by a court of competent jurisdiction or a plea
of guilty or nolo contendere to a charge of (A) any felony or (B) an act of
dishonesty in connection with the performance of his duties for the Employer; or
(iii) the willful or negligent failure of the Employee to perform his duties
hereunder in any material respect.
(e) Termination Upon Death. If the Employee dies during the
term of this Agreement, payment of any accrued compensation due to the Employee
at the time of death including the bonus payable with respect to the prior
calendar year if death occurs prior to payment of such bonus, shall be made to
such beneficiary as the Employee may designate in writing, or failing such
designation, to the executor, administrator or other representative of his
estate (provided, however, that the Employee's Base Bonus or Annual Bonus
payable with respect to the calendar year in which such termination occurs (with
such Annual Bonus calculated based on the bonus(es) payable to Employee with
respect to the immediately preceding year) shall be payable on a pro rata basis
to the date of the Employee's death). Such payments shall be in addition to any
other death benefits of the
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<PAGE>
Employer for the benefit of the Employee and in full settlement and satisfaction
of all payments provided for in this Agreement.
(f) Termination Upon Disability. The Employer may terminate
the Employee's employment after the Employee is determined to be disabled under
the then current Employer program if such a program exists at the time the
Employee is disabled. If no such program exists, the Employee will be considered
disabled if the Employee suffers an illness or injury of a potentially permanent
nature which results in the Employee's inability to substantially perform his
duties hereunder as determined by the board of directors of the Employer's
ultimate parent for a period of either six (6) consecutive months, or one
hundred and twenty (120) business days within a consecutive twelve (12) month
period. If the Employer terminates the Employee after it is determined that the
Employee is disabled, the Employer shall pay the Employee the compensation
accrued through the date of the Employee's termination of employment, including
the bonus payable with respect to the prior calendar year if the termination
occurs prior to payment of such bonus (provided, however, that the Employee's
Base Bonus or Annual Bonus payable with respect to the calendar year in which
such termination occurs (with such Annual Bonus calculated based on the
bonus(es) payable to the Employee with respect to the immediately preceding
year) shall be payable on a pro rata basis to the date of the Employee's
termination). In the event of a dispute regarding the Employee's disability,
each party shall choose a physician who together will choose a third physician
to make a final determination. The Employee shall be entitled to the
compensation and benefits provided for under this Agreement for any period
during the term of this Agreement and prior to the establishment of the
Employee's disability. Notwithstanding anything contained in this Agreement to
the contrary, until the date specified in a notice of termination relating to
the Employee's disability, the Employee shall be entitled to return to his
position with the Employer as set forth in this Agreement, in which event no
disability of the Employee will be deemed to have occurred.
4. Confidentiality and Loyalty. The Employee acknowledges that
during the course of the Employee's employment, the Employee will produce and
have access to material, records, data, trade secret and information not
generally available to the public regarding the Employer and its subsidiaries
and affiliates (collectively, "Confidential Information"). Accordingly, during
and subsequent to termination of this Agreement, the Employee shall hold in
confidence and not directly or indirectly disclose, use, copy or make lists of
any such Confidential Information, except to the extent that such information is
or thereafter becomes lawfully available from public sources, or such disclosure
is authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
Employee's duties
5
<PAGE>
hereunder. All records, files, documents and other materials or copies thereof
relating to the Employer's business which the Employee shall prepare or use
shall be and remain the sole property of the Employer, shall not be removed from
the Employer's premises without its written consent other than in the ordinary
course of business, and shall be promptly returned to the Employer upon
termination of the Employee's employment hereunder. The Employee agrees to abide
by the Employer's reasonable policies, as in effect from time to time, respects
avoidance of interests conflicting with those of the Employer.
5. Non-Solicitation and Non-Competition Covenants.
(a) Restrictive Covenant. The Employee and the Employer have
jointly reviewed the operations of the Employer and have agreed that the
covenants contained in this Section 5 are an essential ingredient of this
Agreement and are made in consideration for the payment of the amounts described
in Sections 2 and 3 hereof. The Employee hereby agrees that, except with the
express prior written consent of the Employer, for a period of one (1) year
after the termination of the Employee's employment with the Employer, with
respect to clause (i) below, for any reason and, with respect to clause (ii)
below, for any reason other than a termination pursuant to Section 3(c) (the
"Restrictive Period"), the Employee (i) will not (a) solicit employees of the
Employer or of any subsidiary or affiliate of the Employer or (b) solicit
clients or customers of the Employer or of any subsidiary or affiliate of the
Employer in respect of any transaction, matter or business that directly or
indirectly competes with any of the businesses then conducted by the Employer or
any of its subsidiaries or affiliates, and (ii) will not directly or indirectly
compete with the business of the Employer, by directly or indirectly being a
shareholder or partner of or serving as an employee, officer or director of or
consultant to, or in any other capacity with, any person, firm, partnership,
corporation, subsidiary, division, joint venture, trust or other entity, or any
division, subsidiary or separate enterprise of any such entity, which (x) was
created during the term of the Employee's employment with the Employer or is
expected to be created within a period of one (1) year after the Employee's
termination of employment with the Employer, and (y) which owns or operates a
business which is either: (A) an insurer or reinsurer of asset backed
securities, mortgage backed securities or commercial mortgage backed securities;
or (B) an investment company that is directly or indirectly owned by, affiliated
with, attached to or otherwise related to an insurer or reinsurer of asset
backed securities, mortgage backed securities or commercial mortgage backed
securities; or (C) an investment advisory firm that is directly or indirectly
owned by, affiliated with, attached to or otherwise related to an insurer or
reinsurer of asset backed securities, mortgage backed securities or commercial
mortgage backed securities (the "Restrictive Covenant"). If the Employee
violates the Restrictive Covenant and the Employer brings legal action for
6
<PAGE>
injunctive or other relief, the Employer shall not, as a result of the time
involved in obtaining such relief, be deprived of benefit of the full period of
the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed
to have the duration specified in this paragraph 5(a) computed from the date the
relief is granted but reduced by the time between the period when Restrictive
Period began to run and the date of the first violation of the Restrictive
Covenant by the Employee. The Restrictive Covenant shall not prohibit the
Employee from owning directly or indirectly capital stock or similar securities
which are listed on a securities exchange or quoted on the National Association
of Securities Dealers Automated Quotation System which do not represent more
than five percent (5%) of the outstanding capital stock of any business similar
to that of the Employer's.
(b) Remedies for Breach of Restrictive Covenant. The Employee
acknowledges that the restrictions contained in Sections 4 and 5 of this
Agreement are reasonable and necessary for the protection of the legitimate
business interests of the Employer, that any violation of these restrictions
would cause substantial injury to the Employer and such interests, that the
Employer would not have entered into this Agreement with the Employee without
receiving the additional consideration offered by the Employee in binding
himself to these restrictions and that such restrictions were a material
inducement to the Employer to enter into this Agreement. In the event of any
violation of these restrictions, the Employer shall be relieved of all further
obligations under this Agreement and shall be entitled to any rights, remedies
or damages available to the Employer under this Agreement or otherwise at law or
in equity. In addition, in the event of any violation or threatened violation of
these restrictions, the Employer shall be entitled to preliminary and permanent
injunctive relief to prevent or restrain any such violation by the Employee and
any and all periods directly or indirectly acting for the Employee, as the case
may be.
6. Interest in Assets. Neither the Employee nor the Employee's
estate shall acquire hereunder any rights in funds or assets of the Employer,
otherwise than by and through the actual payment of amounts payable hereunder;
nor shall the Employee or the Employee's estate have any power to transfer,
assign, anticipate, hypothecate or otherwise encumber in advance any of said
payments; nor shall any of such payments be subject to seizure for the payment
of any debt, judgment, alimony, separate maintenance or be transferable by
operation of law in the event of bankruptcy, insolvency or otherwise of the
Employee.
7. Indemnification. The Employer shall indemnify the Employee (and
his legal representatives or other successors) to the fullest extent permitted
(including payment of expenses in advance of final disposition of a proceeding)
by the laws of the State of New York, as in effect at the time of the subject
act or omission, or the Certificate of Incorporation and By-Laws of the
7
<PAGE>
Employer, as in effect at such time or on the effective date of this Agreement,
whichever affords or afforded greater protection to the Employee, and the
Employee shall be entitled to the protection of any insurance policies the
Employer may elect to maintain generally for the benefit of its directors and
officers, against any and all fines, losses, liabilities, claims, assessments,
damages, deficiencies, judgments, costs, charges and expenses whatsoever
incurred or sustained by him or his legal representatives in connection with any
claim, action, suit, proceeding or investigation (whether civil, criminal,
administrative or investigative) to which he (or his legal representatives or
other successors) may be made party by reason of his becoming, but not being or
having been, a director, officer or employee of the Employer or any of its
subsidiaries or affiliates; provided, however, that the Employee shall assign to
the Employer all rights of the Employee to indemnification under any policy of
directors' and owners' liability insurance or otherwise, to the extent of the
amount actually paid by the Employer to or on behalf of the Employee.
8. General Provisions.
(a) Neither party hereto may assign his or its rights or delegate
his or its duties under this Agreement without the prior written consent of the
other party; provided, however, that (i) this Agreement shall inure to the
benefit of and be binding upon the successors and assigns of the Employer upon
any sales of all or substantially all of the Employer's assets, or upon any
merger, consolidation or reorganization of the Employer with or into any other
corporation, all as though such successors and assigns of the Employer and their
respective successors and assigns were the Employer; and (ii) this Agreement
shall inure to the benefit of and be binding upon the heirs, assigns or
designees of the Employee to the extent of any payments due to them hereunder.
As used in this Agreement, the term "Employer" shall be deemed to refer to any
such successor or assign of the Employer referred to in the preceding sentence.
(b) Entire Agreement; Modifications. This Agreement
constitutes the entire agreement between the parties respecting the subject
matter hereof, and supersedes all prior negotiations, undertakings, agreements
and arrangements with respect thereto, whether written or oral. Except as
otherwise explicitly provided herein, this Agreement may not be amended or
modified except by written agreement signed by the Employee and the Employer.
(c) Enforcement and Governing Law. The provisions of this
Agreement shall be regarded as divisible and separate; if any of said provisions
should be declared invalid or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be construed and the legal
relations of the parties hereto shall be determined in accordance with the laws
of
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the State of New York, without reference to the law regarding conflicts of law.
(d) Arbitration. The provisions of paragraph 5(b) shall
supersede the provisions of this paragraph 8(d) in the event of a simultaneous
dispute between the Employer and the Employee so as to afford the Employer with
the remedy of injunctive relief, without the necessity for arbitration. Any
dispute or controversy arising under or in connection with this Agreement or the
Employee's employment by the Employer shall be settled exclusively by
arbitration, conducted by a single arbitrator sitting in New York City, New
York, in accordance with the rules of the American Arbitration Association (the
"AAA") then in effect. The arbitrator shall be selected by mutual agreement
between the Employer and the Employee. However, in the event that the parties
are unable to agree on an arbitrator within a period of one week, the arbitrator
shall be selected by the parties from a list of eleven (11) arbitrators provided
by the AAA, provided that no arbitrator shall be related to or affiliated with
either of the parties. If the parties mutually agree on an arbitrator from such
list, such arbitrator shall be selected. If the parties cannot agree on the
arbitrator within ten (10) days after the list of the proposed arbitrators is
received by the parties, then no later than twenty (20) days after such list is
received by the parties, the parties, or their respective representatives, shall
meet at a mutually convenient location in New York City, New York, or
telephonically. At that meeting, the party who sought arbitration shall
eliminate one (1) proposed arbitrator and then the other party shall eliminate
one (1) proposed arbitrator. The parties shall continue to eliminate names from
the list of proposed arbitrators in this manner until each party has eliminated
five (5) proposed arbitrators. The remaining arbitrator shall arbitrate the
dispute. Each party shall submit, in writing, the specific requested action or
decision it wishes to take, or make, with respect to the matter in dispute, and
the arbitrator shall be obligated to choose one (1) party's specific requested
action or decision, without being permitted to effectuate any compromise
position. The party whose requested action or decision is not selected by the
arbitrator shall bear the cost of all counsel, experts or other representatives
who are retained by both parties, together with all costs of the arbitration
proceeding, including, without limitation, the fees, costs and expenses imposed
or incurred by the arbitrator. Judgment may be entered on the arbitrator's award
in any court having jurisdiction; provided, however, that the Employee shall be
entitled to seek specific performance of the Employee's right to be paid through
the date of termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
(e) Waiver. No waiver by either party at any time of any
breach by the other party of, or compliance with, any condition or provision of
this Agreement to be performed by the other party, shall be deemed a waiver of
any similar or dissimilar
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<PAGE>
provisions or conditions at the same time or any prior or subsequent time.
(f) Notices. Notices pursuant to this Agreement shall be in
writing and shall be deemed given when received; and, if mailed, shall be mailed
by United States registered or certified mail, return receipt requested, postage
prepaid; and if to the Employer, addressed to the principal headquarters of the
Employer, attention: Chairman; or, if to the Employee, to the address set forth
below the Employee's signature on this Agreement, or to such other address as
the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CGA Investment Management, Inc. Kem H. Blacker
By: /s/ RICHARD A. PRICE /s/ KEM H. BLACKER
------------------------- ---------------------------
Name: Richard A. Price 5 Prospect Hill Avenue
Title: President, Summit, New Jersey 07901
CGA Group, Ltd.
10
EXHIBIT 10.17
CGA INVESTMENT MANAGEMENT, INC.
17 State Street NY, NY, 10004
August 1, 1997
Mr. Tom Wickwire
33 Deer Field Lane
Cortland Manner, NY 10566
Dear Tom:
I am pleased to offer you a position as Principal with CGA Investment Management
Inc. (the "Company"), a subsidiary of CGA Group, Ltd. ("CGA Group"). As a valued
member of our original management team you will be in a position to make an
important and significant contribution to the Company's success and directly
share in that success through your equity participation in CGA Group. I am
writing to confirm the specifics of our offer of employment to you. Set forth
below are the details relating to your compensation, equity participation and
terms of employment:
Base Salary: You will receive a guaranteed base salary through December
31, 1997 at a per annum rate equal to $175,000, payable in
installments in accordance with the regular payroll
practices of the Company.
Bonus: You will receive a bonus of $200,000 payable in January 1998
(your "Guaranteed Bonus"). Thereafter, you may receive a
discretionary annual bonus, payable at the same time that
bonuses are paid to employees generally, as may be
determined by the senior management of the Company, based
upon, among other things, your performance and the
performance of the Company during the relevant year. Please
not that a portion of your Guaranteed Bonus payable in
January 1998, and a portion of any bonus payable to you in
1999 in respect of the 1998 calendar year (your "1998
Bonus"), will be applied, on an after-tax basis, against the
purchase price of shares of CGA Group common stock, as set
out more fully below under the caption "CGA Group Stock and
Warrants".
Equity
Participation: Plan Warrants: You will receive an initial grant of warrants
to purchase 80,000 shares of CGA Group common stock at an
exercise price of $5 per share, pursuant to CGA Group's
Employee Stock Warrant Plan, which is a qualified plan under
the Internal
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<PAGE>
Revenue Code. Such warrants will vest in 25% installments on
each of the first through fourth anniversaries of your
commencing employment.
CGA Group Stock and Warrants: You will purchase 20,000
shares of CGA Group common stock, 10,000 shares from your
1997 Guaranteed Bonus and 10,000 shares from your 1998
Bonus. The purchase price of such stock will be equal to
$5.00 per share, plus funding costs of 7% per annum
commencing on June 17, 1997 through the date of acquisition
of the relevant shares. The purchase price for any such
stock will be deducted from the amount of the cash bonus, on
an after tax basis, otherwise payable to you on the relevant
Bonus Payment Date. In connection with each such purchase of
shares of CGA common stock, you will receive warrants
excercisable for one share of CGA common stock for every
four shares of CGA common stock so purchased, at an exercise
price of $5.00 per share. Such shares and warrants will be
fully vested upon acquisition.
Vacation: You will be entitled to an annual vacation of five weeks in
accordance with the Company's vacation policy as in effect
from time to time, which vacation will be taken at a time or
times mutually agreeable to you and the Company.
Benefits: You will be entitled to participate in or receive benefits
under, subject to meeting any applicable eligibility
requirements, all plans and benefits generally accorded to
similarly situated employees of the Company of the same
level of seniority and responsibility, including, but not
limited to, pension, profit sharing, supplemental
retirement, incentive compensation, disability income, life
insurance, medical and hospitalization insurance and similar
or comparable plans.
You may terminate your employment under this arrangement at any time after
giving not less than 30 days advance written notice to the Company. Upon your
voluntary termination, you will be paid any accrued and unpaid base salary due
as of the date of termination and any other unpaid amounts to which you are
entitled under any employee benefit plan or program of the Company. Upon your
voluntary termination, no bonus or other payments (except as set forth to in the
immediately preceding sentence) will be payable by the Company to you.
The Company may terminate you for "cause" whereupon you will be paid similarly
as explained directly above. For the purposes of this agreement, "cause" shall
include, but not be limited to: refusal to follow written directions from your
business leader; material failure to perform your duties; your disregard or
failure to comply with Company policies or procedures, including CGA Group's
Operating Guidelines, or engaging in misconduct
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Page 2
<PAGE>
injurious to the Company or any of its affiliates; or your having been convicted
of a felony or a crime of moral turpitude.
In the event the Company terminates your employment other than for "cause" on
your disability, or in the event of your death, the Company will pay you (or
your estate) upon termination:
1. in a lump sum, the greater of (a) your remaining guaranteed base
salary through December 31, 1997 and (b) three month's base salary;
2. any accrued but unpaid base salary due as of the date of termination;
3. if such termination occurs in the 1997 calendar year, the bonus
specified above (such bonus to be paid all in cash and none in CGA
Group stock and warrants), and;
4. any other unpaid amounts to which you are entitled under any employee
benefit plan or program of the Company.
You acknowledge that, during the course of your employment, you will produce and
have access to materials, records, data, trade secrets and information not
generally available to the public regarding the Company and its subsidiaries and
affiliates (collectively, the "Confidential Information"). Accordingly, you
agree that you will at all times hold in confidence, and not directly or
indirectly disclose, use, copy or make lists of any such Confidential
Information, except to the extent that such information is or thereafter becomes
lawfully available from public sources, or such disclosure is authorized in
writing by the Company, or required by a law or any completent administrative
agency or judicial authority, or otherwise as reasonably necessary or
appropriate in connection with your performance of your duties. All records,
files, documents and other materials or copies thereof relating to the Company's
and its affiliates' businesses which you may prepare or use shall be and remain
the sole property of the Company, shall not be removed from the Company's
premises without its prior written consent other than in the ordinary course of
business, and shall be promptly returned to the Company upon termination of your
employment hereunder. You agree to abide by the Company's policies, as in effect
from time to time, respecting avoidance of interest conflicting with those of
the Company.
In addition to terms set out in this letter, you also agree to comply with the
provisions of the Company's Employee Manual, a copy of which will be provided to
you upon your commencement of employment with the Company.
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Page 3
<PAGE>
Our ultimate success will be determined by the talent and quality of our
employees. We look forward to your joining our team.
Sincerely,
/s/KEM H. BLACKER
-------------------------------
Kem H. Blacker
Principal
Accepted and agreed to this 1 day of August, 1997
/s/ TOM WICKWIRE
- -----------------------------
Tom Wickwire
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Page 4
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (this "Agreement"), made and entered into as of
the 30th day of June, 1997 (the "Effective Date"), by and between CGA Investment
Management, Inc., a Delaware corporation (referred to herein as the Employer"),
and Michael Miran (the "Employee").
RECITALS
--------
A. The Employer desires to employ the Employee for a specified term; and
B. The Employee is willing to be employed by the Employer upon the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter contained, it is covenanted and agreed by and between the
parties hereto as follows:
AGREEMENTS
----------
1. Position and Duties. The Employer hereby employs the Employee as the
General Counsel of the Employer or in such other capacity as shall be mutually
agreed between the Employee and the Employer. During the period of the
Employee's employment hereunder, the Employee shall devote the Employee's best
efforts and full business time, energy, skills and attention to the business and
affairs of the Employer; provided, however, that the Employee shall perform on
behalf of the Employer and the Employer's parent corporation, CGA Group, Ltd.
("CGA Group") in the United States of America only such duties that are of a
ministerial nature and the performance of which are in compliance with the
Operating Guidelines (the "Operating Guidelines," as such term is defined in the
Investment Units Subscription Agreement dated as of June 4, 1997 by and among
CGA Group and the other parties named therein (the "Subscription Agreement").
The Employee's duties and authority shall consist of and include all duties and
authority customarily performed and held by persons holding equivalent positions
with business organizations similar in nature and size to the Employer, as such
duties and authority are, subject to the immediately preceding sentence,
reasonably defined, modified and delegated from time to time by the Board of
Directors of the Employer (the "Board") or that person to whom the Board has
delegated such authority. The Employee shall have the powers necessary to
perform the duties assigned to him, and shall be provided such supporting
services, staff, secretarial and other assistance, office space and
accoutrements as shall be reasonably necessary and appropriate in light of such
assigned duties.
<PAGE>
2. Compensation. As compensation for the services to be provided by the
Employee hereunder, the Employee shall receive the following compensation and
other benefits:
(a) Base Salary. The Employee shall receive an aggregate annual minimum
base salary ("Base Salary") at the rate of Two Hundred Thousand Dollars
($200,000) payable in installments in accordance with the regular payroll
practices of the Employer.
(b) Bonuses. The Employee shall receive a cash bonus, payable within (30)
days after the end of the 1997 calendar year, in the amount of not less than One
Hundred Fifty Thousand Dollars ($150,000) ("Base Bonus"). The Employee may
receive a discretionary annual cash bonus ("Annual Bonus"), also payable within
thirty (30) days after the end of each subsequent calendar year during which
this Agreement is in effect, which shall be based upon an annual incentive plan
approved by the compensation committee of the board of directors of the
Employer's ultimate parent.
(c) Reimbursement of Expenses. In accordance with the expense reimbursement
policies of the Employer, as promulgated and in effect from time to time, the
Employee shall be reimbursed, upon submission of appropriate vouchers and
supporting documentation, for all travel, entertainment and other out-of-pocket
expenses reasonably and necessarily incurred by the Employee in the performance
of his duties hereunder.
(d) Other Benefits. The Employee shall be entitled to all benefits
specifically established for him by the Board or a committee thereof and, when
and to the extent he is eligible therefor, to participate in all plans and
benefits generally accorded to employees of the Employer, under and subject to
all of the forms thereof, including, but not limited to, as applicable, pension,
profit-sharing, supplemental retirement, incentive compensation, bonus,
disability income, split-dollar life insurance, group life, medical and
hospitalization insurance, and similar or comparable plans, and also to
perquisites extended to similarly situated senior employees. Additionally, the
Employer shall obtain for the benefit of the Employee's estate a term life
insurance policy with a value of two times the Employee's base salary as
presented in paragraph 2(a).
(e) Vacations. The Employee shall be entitled to an annual vacation in
accordance with the operative vacation policy of the Employer in effect from
time to time, which vacation shall be taken at a time or times mutually
agreeable to the Employee and the Employer.
(f) Withholding. The Employer shall be entitled to withhold, from amounts
payable to the Employee hereunder, any federal, state or local withholding or
other taxes or charges which it is from time to time required to withhold.
2
<PAGE>
3. Term and Termination.
(a) Basic Term. The Employee's employment under this Agreement shall be for
a term of one (1) year commencing as of the Effective Date, and shall
automatically extend for one (1) year commencing on each anniversary of the
Effective Date, unless terminated by either party effective as of the last day
of the then current Agreement term by written notice to that effect delivered to
the other not less than thirty (30) days prior to the expiration of such
Agreement term.
(b) Voluntary Termination by Employee. The Employee may voluntarily
terminate this Agreement, at any time, by written notice to that effect
delivered to the Employer not less than thirty (30) days prior the effective
date of Employee's voluntary termination. Upon Employee's voluntary termination,
Employee shall have no obligations to the Employer other than as provided for in
Sections 4 and 5 hereof, together with an obligation to provide Employee's
reasonable transitional assistance to the Employer for a period of not more than
thirty (30) days in connection with matters for which the Employee was
responsible during the term of this Agreement and which were not concluded prior
to Employee's voluntary termination. Upon Employee's voluntary termination, no
Annual Bonus (or Base Bonus, if applicable) for the year in which such
termination occurs shall be payable to the Employee and no further payments of
any kind shall be due hereunder, except for compensation and benefits accrued as
of the date of such termination.
(c) Premature Termination Without Cause and Constructive Discharge.
(i) In the event of the termination of the Employee's employment under
this Agreement prior to the last day of the then current term, either (A)
by the Employer for any reason other than a termination in accordance with
the provisions of paragraph 3(d), 3(e) or 3(f) or (B) by the Employee by
written notice to the Employer given within thirty (30) days of
Constructive Discharge (as hereinafter defined) effective as of thirty (30)
days after such notice, then the Employer shall: (A) pay the Employee the
greater of (x) the Base Salary the Employee would have received had he
remained employed through the end of the then current term of the Agreement
and (y) six (6) months of salary; (B) pay the Employee, if such termination
occurs in the 1997 calendar year, the Base Bonus and (C) continue to
provide coverage for the Employee under the medical benefit program
maintained by the Employer through the remainder of the term of the
Agreement (if permitted to do so under such program).
(ii) Payments to the Employee under this paragraph 3(c) will be made
in accordance with the regular
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<PAGE>
payroll practices of the Employer during the remaining term of this
Agreement or, at the election of the Employer, such payments may be made in
a lump sum. Such payments shall not be reduced in the event the Employee
obtains other employment following the termination of employment by the
Employer.
(iii) For purposes of this Agreement, the Employee shall be deemed
"Constructively Discharged" if the Employer changes the primary employment
location of the Employee to a place that is more than forty (40) miles from
the primary employment location of the Employee as of the Closing Date (as
defined in the Subscription Agreement).
(d) Termination For Cause. Notwithstanding any other provision of this
Agreement, in the event of the termination of the Employee's employment under
this Agreement for cause, no Annual Bonus (or Base Bonus, if applicable) for the
year in which such termination occurs shall be payable to the Employee and no
further payments shall be due hereunder except for compensation or benefits
accrued as of the date of such termination. For purposes of this Agreement,
"cause" shall mean: (i) a material violation by the Employer, in which the
Employee materially and directly participated, of any law or regulation
respecting the business of the Employer or any affiliate, other than a material
violation which is a direct result of the operation of the Employer and/or its
affiliates in accordance with the Operating Guidelines; (ii) the Employee being
found guilty by a court of competent jurisdiction or a plea of guilty or nolo
contendere to a charge of (A) any felony or (B) an act of dishonesty in
connection with the performance of his duties for the Employer; or (iii) the
willful or negligent failure of the Employee to perform his duties hereunder in
any material respect.
(e) Termination Upon Death. If the Employee dies during the term of this
Agreement, payment of any accrued compensation due to the Employee at the time
of death including the bonus payable with respect to the prior calendar year if
death occurs prior to payment of such bonus, shall be made to such beneficiary
as the Employee may designate in writing, or failing such designation, to the
executor, administrator or other representative of his estate (provided,
however, that the Employee's Base Bonus or Annual Bonus payable with respect to
the calendar year in which such termination occurs (with such Annual Bonus
calculated based on the bonus(es) payable to Employee with respect to the
immediately preceding year) shall be payable on a pro rata basis to the date of
the Employee's death). Such payments shall be in addition to any other death
benefits of the Employer for the benefit of the Employee and in full settlement
and satisfaction of all payments provided for in this Agreement.
(f) Termination Upon Disability. The Employer may terminate the Employee's
employment after the Employee is determined to be disabled under the then
current Employer program
4
<PAGE>
if such a program exists at the time the Employee is disabled. If no such
program exists, the Employee will be considered disabled if the Employee suffers
an illness or injury of a potentially permanent nature which results in the
Employee's inability to substantially perform his duties hereunder as determined
by the board of directors of the Employer's ultimate parent for a period of
either six (6) consecutive months, or one hundred and twenty (120) business days
within a consecutive twelve (12) month period. If the Employer terminates the
Employee after it is determined that the Employee is disabled, the Employer
shall pay the Employee the compensation accrued through the date of the
Employee's termination of employment, including the bonus payable with respect
to the prior calendar year if the termination occurs prior to payment of such
bonus (provided, however, that the Employee's Base Bonus or Annual Bonus payable
with respect to the calendar year in which such termination occurs (with such
Annual Bonus calculated based on the bonus(es) payable to the Employee with
respect to the immediately preceding year) shall be payable on a pro rata basis
to the date of the Employee's termination). In the event of a dispute regarding
the Employee's disability, each party shall choose a physician who together will
choose a third physician to make a final determination. The Employee shall be
entitled to the compensation and benefits provided for under this Agreement for
any period during the term of this Agreement and prior to the establishment of
the Employee's disability. Notwithstanding anything contained in this Agreement
to the contrary, until the date specified in a notice of termination relating to
the Employee's disability, the Employee shall be entitled to return to his
position with the Employer as set forth in this Agreement, in which event no
disability of the Employee will be deemed to have occurred.
4. Confidentiality and Loyalty. The Employee acknowledges that during the
course of the Employee's employment, the Employee will produce and have access
to material, records, data, trade secret and information not generally available
to the public regarding the Employer and its subsidiaries and affiliates
(collectively, "Confidential Information"). Accordingly, during and subsequent
to termination of this Agreement, the Employee shall hold in confidence and not
directly or indirectly disclose, use, copy or make lists of any such
Confidential Information, except to the extent that such information is or
thereafter becomes lawfully available from public sources, or such disclosure is
authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
Employee's duties hereunder. All records, files, documents and other materials
or copies thereof relating to the Employer's business which the Employee shall
prepare or use shall be and remain the sole property of the Employer, shall not
be removed from the Employer's premises without its written consent other than
in the ordinary course of business, and shall be promptly returned to the
Employer
5
<PAGE>
upon termination of the Employee's employment hereunder. The Employee agrees to
abide by the Employer's reasonable policies, as in effect from time to time,
respects avoidance of interests conflicting with those of the Employer.
5. Non-Solicitation and Non-Competition Covenants.
(a) Restrictive Covenant. The Employee and the Employer have jointly
reviewed the operations of the Employer and have agreed that the covenants
contained in this Section 5 are an essential ingredient of this Agreement and
are made in consideration for the payment of the amounts described in Sections 2
and 3 hereof. The Employee hereby agrees that, except with the express prior
written consent of the Employer, for a period of one (1) year after the
termination of the Employee's employment with the Employer, with respect to
clause (i) below, for any reason and, with respect to clause (ii) below, for any
reason other than a termination pursuant to Section 3(c) (the "Restrictive
Period"), the Employee (i) will not (a) solicit employees of the Employer or of
any subsidiary or affiliate of the Employer or (b) solicit clients or customers
of the Employer or of any subsidiary or affiliate of the Employer in respect of
any transaction, matter or business that directly or indirectly competes with
any of the businesses then conducted by the Employer or any of its subsidiaries
or affiliates, and (ii) will not directly or indirectly compete with the
business of the Employer, by directly or indirectly being a shareholder or
partner of or serving as an employee, officer or director of or consultant to,
or in any other capacity with, any person, firm, partnership, corporation,
subsidiary, division, joint venture, trust or other entity, or any division,
subsidiary or separate enterprise of any such entity, which (x) was created
during the term of the Employee's employment with the Employer or is expected to
be created within a period of one (1) year after the Employee's termination of
employment with the Employer, and (y) which owns or operates a business which is
either: (A) an insurer or reinsurer of asset backed securities, mortgage backed
securities or commercial mortgage backed securities; or (B) an investment
company that is directly or indirectly owned by, affiliated with, attached to or
otherwise related to an insurer or reinsurer of asset backed securities,
mortgage backed securities or commercial mortgage backed securities; or (C) an
investment advisory firm that is directly or indirectly owned by, affiliated
with, attached to or otherwise related to an insurer or reinsurer of asset
backed securities, mortgage backed securities or commercial mortgage backed
securities (the "Restrictive Covenant"). If the Employee violates the
Restrictive Covenant and the Employer brings legal action for injunctive or
other relief, the Employer shall not, as a result of the time involved in
obtaining such relief, be deprived of benefit of the full period of the
Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to
have the duration specified in this paragraph 5(a) computed from the date the
relief is granted but reduced by the time between the period
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<PAGE>
when Restrictive Period began to run and the date of the first violation of the
Restrictive Covenant by the Employee. The Restrictive Covenant shall not
prohibit the Employee from owning directly or indirectly capital stock or
similar securities which are listed on a securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation System which do
not represent more than five percent (5%) of the outstanding capital stock of
any business similar to that of the Employer's.
(b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges
that the restrictions contained in Sections 4 and 5 of this Agreement are
reasonable and necessary for the protection of the legitimate business interests
of the Employer, that any violation of these restrictions would cause
substantial injury to the Employer and such interests, that the Employer would
not have entered into this Agreement with the Employee without receiving the
additional consideration offered by the Employee in binding himself to these
restrictions and that such restrictions were a material inducement to the
Employer to enter into this Agreement. In the event of any violation of these
restrictions, the Employer shall be relieved of all further obligations under
this Agreement and shall be entitled to any rights, remedies or damages
available to the Employer under this Agreement or otherwise at law or in equity.
In addition, in the event of any violation or threatened violation of these
restrictions, the Employer shall be entitled to preliminary and permanent
injunctive relief to prevent or restrain any such violation by the Employee and
any and all periods directly or indirectly acting for the Employee, as the case
may be.
6. Interest in Assets. Neither the Employee nor the Employee's estate shall
acquire hereunder any rights in funds or assets of the Employer, otherwise than
by and through the actual payment of amounts payable hereunder; nor shall the
Employee or the Employee's estate have any power to transfer, assign,
anticipate, hypothecate or otherwise encumber in advance any of said payments;
nor shall any of such payments be subject to seizure for the payment of any
debt, judgment, alimony, separate maintenance or be transferable by operation of
law in the event of bankruptcy, insolvency or otherwise of the Employee.
7. Indemnification. The Employer shall indemnify the Employee (and his
legal representatives or other successors) to the fullest extent permitted
(including payment of expenses in advance of final disposition of a proceeding)
by the laws of the State of New York, as in effect at the time of the subject
act or omission, or the Certificate of Incorporation and By-Laws of the
Employer, as in effect at such time or on the effective date of this Agreement,
whichever affords or afforded greater protection to the Employee, and the
Employee shall be entitled to the protection of any insurance policies the
Employer may elect to maintain generally for the benefit of its directors and
officers, against any and all fines, losses, liabilities, claims,
7
<PAGE>
assessments, damages, deficiencies, judgments, costs, charges and expenses
whatsoever incurred or sustained by him or his legal representatives in
connection with any claim, action, suit, proceeding or investigation (whether
civil, criminal, administrative or investigative) to which he (or his legal
representatives or other successors) may be made party by reason of his
becoming, but not being or having been, a director, officer or employee of the
Employer or any of its subsidiaries or affiliates; provided, however, that the
Employee shall assign to the Employer all rights of the Employee to
indemnification under any policy of directors' and owners' liability insurance
or otherwise, to the extent of the amount actually paid by the Employer to or on
behalf of the Employee.
8. General Provisions.
(a) Neither party hereto may assign his or its rights or delegate his or
its duties under this Agreement without the prior written consent of the other
party; provided, however, that (i) this Agreement shall inure to the benefit of
and be binding upon the successors and assigns of the Employer upon any sales of
all or substantially all of the Employer's assets, or upon any merger,
consolidation or reorganization of the Employer with or into any other
corporation, all as though such successors and assigns of the Employer and their
respective successors and assigns were the Employer; and (ii) this Agreement
shall inure to the benefit of and be binding upon the heirs, assigns or
designees of the Employee to the extent of any payments due to them hereunder.
As used in this Agreement, the term "Employer" shall be deemed to refer to any
such successor or assign of the Employer referred to in the preceding sentence.
(b) Entire Agreement; Modifications. This Agreement constitutes the entire
agreement between the parties respecting the subject matter hereof, and
supersedes all prior negotiations, undertakings, agreements and arrangements
with respect thereto, whether written or oral. Except as otherwise explicitly
provided herein, this Agreement may not be amended or modified except by written
agreement signed by the Employee and the Employer.
(c) Enforcement and Governing Law. The provisions of this Agreement shall
be regarded as divisible and separate; if any of said provisions should be
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remaining provisions shall not be affected
thereby. This Agreement shall be construed and the legal relations of the
parties hereto shall be determined in accordance with the laws of the State of
New York, without reference to the law regarding conflicts of law.
(d) Arbitration. The provisions of paragraph 5(b) shall supersede the
provisions of this paragraph 8(d) in the event of a simultaneous dispute between
the Employer and the Employee so
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<PAGE>
as to afford the Employer with the remedy of injunctive relief, without the
necessity for arbitration. Any dispute or controversy arising under or in
connection with this Agreement or the Employee's employment by the Employer
shall be settled exclusively by arbitration, conducted by a single arbitrator
sitting in New York City, New York, in accordance with the rules of the American
Arbitration Association (the "AAA") then in effect. The arbitrator shall be
selected by mutual agreement between the Employer and the Employee. However, in
the event that the parties are unable to agree on an arbitrator within a period
of one week, the arbitrator shall be selected by the parties from a list of
eleven (11) arbitrators provided by the AAA, provided that no arbitrator shall
be related to or affiliated with either of the parties. If the parties mutually
agree on an arbitrator from such list, such arbitrator shall be selected. If the
parties cannot agree on the arbitrator within ten (10) days after the list of
the proposed arbitrators is received by the parties, then no later than twenty
(20) days after such list is received by the parties, the parties, or their
respective representatives, shall meet at a mutually convenient location in New
York City, New York, or telephonically. At that meeting, the party who sought
arbitration shall eliminate one (1) proposed arbitrator and then the other party
shall eliminate one (1) proposed arbitrator. The parties shall continue to
eliminate names from the list of proposed arbitrators in this manner until each
party has eliminated five (5) proposed arbitrators. The remaining arbitrator
shall arbitrate the dispute. Each party shall submit, in writing, the specific
requested action or decision it wishes to take, or make, with respect to the
matter in dispute, and the arbitrator shall be obligated to choose one (1)
party's specific requested action or decision, without being permitted to
effectuate any compromise position. The party whose requested action or decision
is not selected by the arbitrator shall bear the cost of all counsel, experts or
other representatives who are retained by both parties, together with all costs
of the arbitration proceeding, including, without limitation, the fees, costs
and expenses imposed or incurred by the arbitrator. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
the Employee shall be entitled to seek specific performance of the Employee's
right to be paid through the date of termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
(e) Waiver. No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision of this Agreement
to be performed by the other party, shall be deemed a waiver of any similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time.
(f) Notices. Notices pursuant to this Agreement shall be in writing and
shall be deemed given when received; and, if mailed, shall be mailed by United
States registered or certified
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<PAGE>
mail, return receipt requested, postage prepaid; and if to the Employer,
addressed to the principal headquarters of the Employer, attention: Chairman;
or, if to the Employee, to the address set forth below the Employee's signature
on this Agreement, or to such other address as the party to be notified shall
have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CGA Investment Management, Inc. Michael Miran
By: /s/ RICHARD A. PRICE /s/ MICHAEL MIRAN
------------------------------- --------------------------------
Name: Richard A. Price 10 Cherry Lane
Title: President, Scarsdale, New York 10583
CGA Group, Ltd.
10
EXHIBIT 10.20
EMPLOYMENT AGREEMENT/WASTERLAIN
-------------------------------
This Employment Agreement (this "Agreement"), made and entered into as of
the 1st day of June, 1997 (the "Effective Date"), by and between CGA Investment
Management, Inc., a Delaware corporation (referred to herein as the Employer"),
and Jean-Michel Wasterlain (the "Employee").
RECITALS
--------
A. The Employer desires to employ the Employee for a specified term; and
B. The Employee is willing to be employed by the Employer upon the terms
and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter contained, it is covenanted and agreed by and between the
parties hereto as follows:
AGREEMENTS
----------
1. Position and Duties. The Employer hereby employs the Employee as the
Principal of the Employer or in such other capacity as shall be mutually agreed
between the Employee and the Employer. During the period of the Employee's
employment hereunder, the Employee shall devote the Employee's best efforts and
full business time, energy, skills and attention to the business and affairs of
the Employer; provided, however, that the Employee shall perform on behalf of
the Employer and the Employer's parent corporation, CGA Group, Ltd. ("CGA
Group") in the United States of America only such duties that are of a
ministerial nature and the performance of which are in compliance with the
Operating Guidelines (the "Operating Guidelines," as such term is defined in the
Investment Units Subscription Agreement dated as of June 4, 1997 by and among
CGA Group and the other parties named therein (the "Subscription Agreement").
The Employee's duties and authority shall consist of and include all duties and
authority customarily performed and held by persons holding equivalent positions
with business organizations similar in nature and size to the Employer, as such
duties and authority are, subject to the immediately preceding sentence,
reasonably defined, modified and delegated from time to time by the Board of
Directors of the Employer (the "Board") or that person to whom the Board has
delegated such authority. The Employee shall have the powers necessary to
perform the duties assigned to him, and shall be provided such supporting
services, staff, secretarial and other assistance, office space and
accoutrements as shall be reasonably necessary and appropriate in light of such
assigned duties.
<PAGE>
2. Compensation. As compensation for the services to be provided by the
Employee hereunder, the Employee shall receive the following compensation and
other benefits:
(a) Base Salary. The Employee shall receive an aggregate annual minimum
base salary ("Base Salary") at the rate of One Hundred Seventy Five Thousand
Dollars ($175,000) payable in installments in accordance with the regular
payroll practices of the Employer.
(b) Bonuses. The Employee shall receive a one-time sign-on bonus, payable
as promptly as practicable after the date of execution hereof, in the amount of
One Hundred Twenty Five Thousand Dollars ($125,000). The Employee shall also
receive a cash bonus, payable within (30) days after the end of the 1997
calendar year, in the amount of not less than Two Hundred Twenty Five Thousand
Dollars ($225,000) ("Base Bonus"). The Employee may receive a discretionary
annual cash bonus ("Annual Bonus"), also payable within thirty (30) days after
the end of each subsequent calendar year during which this Agreement is in
effect, which shall be based upon an annual incentive plan approved by the
compensation committee of the board of directors of the Employer's ultimate
parent.
(c) Reimbursement of Expenses. In accordance with the expense reimbursement
policies of the Employer, as promulgated and in effect from time to time, the
Employee shall be reimbursed, upon submission of appropriate vouchers and
supporting documentation, for all travel, entertainment and other out-of-pocket
expenses reasonably and necessarily incurred by the Employee in the performance
of his duties hereunder.
(d) Other Benefits. The Employee shall be entitled to all benefits
specifically established for him by the Board or a committee thereof and, when
and to the extent he is eligible therefor, to participate in all plans and
benefits generally accorded to employees of the Employer, under and subject to
all of the forms thereof, including, but not limited to, as applicable, pension,
profit-sharing, supplemental retirement, incentive compensation, bonus,
disability income, split-dollar life insurance, group life, medical and
hospitalization insurance, and similar or comparable plans, and also to
perquisites extended to similarly situated senior employees. Additionally, the
Employer shall obtain for the benefit of the Employee's estate a term life
insurance policy with a value of two times the Employee's base salary as
presented in paragraph 2(a).
(e) Vacations. The Employee shall be entitled to an annual vacation in
accordance with the operative vacation policy of the Employer in effect from
time to time, which vacation shall be taken at a time or times mutually
agreeable to the Employee and the Employer.
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<PAGE>
(f) Withholding. The Employer shall be entitled to withhold, from amounts
payable to the Employee hereunder, any federal, state or local withholding or
other taxes or charges which it is from time to time required to withhold.
3. Term and Termination.
(a) Basic Term. The Employee's employment under this Agreement shall be for
an initial term commencing on the Effective Date and ending on December 31,
1997, which term shall automatically extend for successive one (1) year periods
commencing on January 1, 1998 and on each succeeding January 1 thereafter,
unless terminated by either party effective as of the last day of the then
current Agreement term by written notice to that effect delivered to the other
not less than thirty (30) days prior to the expiration of such Agreement term.
(b) Voluntary Termination by Employee. The Employee may voluntarily
terminate this Agreement, at any time, by written notice to that effect
delivered to the Employer not less than thirty (30) days prior the effective
date of Employee's voluntary termination. Upon Employee's voluntary termination,
Employee shall have no obligations to the Employer other than as provided for in
Sections 4 and 5 hereof, together with an obligation to provide Employee's
reasonable transitional assistance to the Employer for a period of not more than
thirty (30) days in connection with matters for which the Employee was
responsible during the term of this Agreement and which were not concluded prior
to Employee's voluntary termination. Upon Employee's voluntary termination, no
Annual Bonus (or Base Bonus, if applicable) for the year in which such
termination occurs shall be payable to the Employee and no further payments of
any kind shall be due hereunder, except for compensation and benefits accrued as
of the date of such termination.
(c) Premature Termination Without Cause and Constructive Discharge.
(i) In the event of the termination of the Employee's employment under
this Agreement prior to the last day of the then current term, either (A)
by the Employer for any reason other than a termination in accordance with
the provisions of paragraph 3(d), 3(e) or 3(f) or (B) by the Employee by
written notice to the Employer given within thirty (30) days of
Constructive Discharge (as hereinafter defined) effective as of thirty (30)
days after such notice, then the Employer shall: (A) pay the Employee the
greater of (x) the Base Salary the Employee would have received had he
remained employed through the end of the then current term of the Agreement
and (y) six (6) months of salary; (B) pay the Employee, if such termination
occurs in the 1997 calendar year, the Base Bonus and (C) continue to
provide coverage for
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<PAGE>
the Employee under the medical benefit program maintained by the Employer
through the remainder of the term of the Agreement (if permitted to do so
under such program).
(ii) Payments to the Employee under this paragraph 3(c) will be made
in accordance with the regular payroll practices of the Employer during the
remaining term of this Agreement or, at the election of the Employer, such
payments may be made in a lump sum. Such payments shall not be reduced in
the event the Employee obtains other employment following the termination
of employment by the Employer.
(iii) For purposes of this Agreement, the Employee shall be deemed
"Constructively Discharged" if the Employer changes the primary employment
location of the Employee to a place that is more than forty (40) miles from
the primary employment location of the Employee as of the Closing Date (as
defined in the Subscription Agreement).
(d) Termination For Cause. Notwithstanding any other provision of this
Agreement, in the event of the termination of the Employee's employment under
this Agreement for cause, no Annual Bonus (or Base Bonus, if applicable) for the
year in which such termination occurs shall be payable to the Employee and no
further payments shall be due hereunder except for compensation or benefits
accrued as of the date of such termination. For purposes of this Agreement,
"cause" shall mean: (i) a material violation by the Employer, in which the
Employee materially and directly participated, of any law or regulation
respecting the business of the Employer or any affiliate, other than a material
violation which is a direct result of the operation of the Employer and/or its
affiliates in accordance with the Operating Guidelines; (ii) the Employee being
found guilty by a court of competent jurisdiction or a plea of guilty or nolo
contendere to a charge of (A) any felony or (B) an act of dishonesty in
connection with the performance of his duties for the Employer; or (iii) the
willful or negligent failure of the Employee to perform his duties hereunder in
any material respect.
(e) Termination Upon Death. If the Employee dies during the term of this
Agreement, payment of any accrued compensation due to the Employee at the time
of death including the bonus payable with respect to the prior calendar year if
death occurs prior to payment of such bonus, shall be made to such beneficiary
as the Employee may designate in writing, or failing such designation, to the
executor, administrator or other representative of his estate (provided,
however, that the Employee's Base Bonus or Annual Bonus payable with respect to
the calendar year in which such termination occurs (with such Annual Bonus
calculated based on the bonus(es) payable to Employee with respect to the
immediately preceding year) shall be payable on a pro rata basis to the date of
the Employee's death). Such payments shall be in addition to any other death
benefits of the
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Employer for the benefit of the Employee and in full settlement and satisfaction
of all payments provided for in this Agreement.
(f) Termination Upon Disability. The Employer may terminate the Employee's
employment after the Employee is determined to be disabled under the then
current Employer program if such a program exists at the time the Employee is
disabled. If no such program exists, the Employee will be considered disabled if
the Employee suffers an illness or injury of a potentially permanent nature
which results in the Employee's inability to substantially perform his duties
hereunder as determined by the board of directors of the Employer's ultimate
parent for a period of either six (6) consecutive months, or one hundred and
twenty (120) business days within a consecutive twelve (12) month period. If the
Employer terminates the Employee after it is determined that the Employee is
disabled, the Employer shall pay the Employee the compensation accrued through
the date of the Employee's termination of employment, including the bonus
payable with respect to the prior calendar year if the termination occurs prior
to payment of such bonus (provided, however, that the Employee's Base Bonus or
Annual Bonus payable with respect to the calendar year in which such termination
occurs (with such Annual Bonus calculated based on the bonus(es) payable to the
Employee with respect to the immediately preceding year) shall be payable on a
pro rata basis to the date of the Employee's termination). In the event of a
dispute regarding the Employee's disability, each party shall choose a physician
who together will choose a third physician to make a final determination. The
Employee shall be entitled to the compensation and benefits provided for under
this Agreement for any period during the term of this Agreement and prior to the
establishment of the Employee's disability. Notwithstanding anything contained
in this Agreement to the contrary, until the date specified in a notice of
termination relating to the Employee's disability, the Employee shall be
entitled to return to his position with the Employer as set forth in this
Agreement, in which event no disability of the Employee will be deemed to have
occurred.
4. Confidentiality and Loyalty. The Employee acknowledges that during the
course of the Employee's employment, the Employee will produce and have access
to material, records, data, trade secret and information not generally available
to the public regarding the Employer and its subsidiaries and affiliates
(collectively, "Confidential Information"). Accordingly, during and subsequent
to termination of this Agreement, the Employee shall hold in confidence and not
directly or indirectly disclose, use, copy or make lists of any such
Confidential Information, except to the extent that such information is or
thereafter becomes lawfully available from public sources, or such disclosure is
authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
Employee's duties
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hereunder. All records, files, documents and other materials or copies thereof
relating to the Employer's business which the Employee shall prepare or use
shall be and remain the sole property of the Employer, shall not be removed from
the Employer's premises without its written consent other than in the ordinary
course of business, and shall be promptly returned to the Employer upon
termination of the Employee's employment hereunder. The Employee agrees to abide
by the Employer's reasonable policies, as in effect from time to time, respects
avoidance of interests conflicting with those of the Employer.
5. Non-Solicitation and Non-Competition Covenants.
(a) Restrictive Covenant. The Employee and the Employer have jointly
reviewed the operations of the Employer and have agreed that the covenants
contained in this Section 5 are an essential ingredient of this Agreement and
are made in consideration for the payment of the amounts described in Sections 2
and 3 hereof. The Employee hereby agrees that, except with the express prior
written consent of the Employer, for a period of one (1) year after the
termination of the Employee's employment with the Employer, with respect to
clause (i) below, for any reason and, with respect to clause (ii) below, for any
reason other than a termination pursuant to Section 3(c) (the "Restrictive
Period"), the Employee (i) will not (a) solicit employees of the Employer or of
any subsidiary or affiliate of the Employer or (b) solicit clients or customers
of the Employer or of any subsidiary or affiliate of the Employer in respect of
any transaction, matter or business that directly or indirectly competes with
any of the businesses then conducted by the Employer or any of its subsidiaries
or affiliates, and (ii) will not directly or indirectly compete with the
business of the Employer, by directly or indirectly being a shareholder or
partner of or serving as an employee, officer or director of or consultant to,
or in any other capacity with, any person, firm, partnership, corporation,
subsidiary, division, joint venture, trust or other entity, or any division,
subsidiary or separate enterprise of any such entity, which (x) was created
during the term of the Employee's employment with the Employer or is expected to
be created within a period of one (1) year after the Employee's termination of
employment with the Employer, and (y) which owns or operates a business which is
either: (A) an insurer or reinsurer of asset backed securities, mortgage backed
securities or commercial mortgage backed securities; or (B) an investment
company that is directly or indirectly owned by, affiliated with, attached to or
otherwise related to an insurer or reinsurer of asset backed securities,
mortgage backed securities or commercial mortgage backed securities; or (C) an
investment advisory firm that is directly or indirectly owned by, affiliated
with, attached to or otherwise related to an insurer or reinsurer of asset
backed securities, mortgage backed securities or commercial mortgage backed
securities (the "Restrictive Covenant"). If the Employee violates the
Restrictive Covenant and the Employer brings legal action for
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injunctive or other relief, the Employer shall not, as a result of the time
involved in obtaining such relief, be deprived of benefit of the full period of
the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed
to have the duration specified in this paragraph 5(a) computed from the date the
relief is granted but reduced by the time between the period when Restrictive
Period began to run and the date of the first violation of the Restrictive
Covenant by the Employee. The Restrictive Covenant shall not prohibit the
Employee from owning directly or indirectly capital stock or similar securities
which are listed on a securities exchange or quoted on the National Association
of Securities Dealers Automated Quotation System which do not represent more
than five percent (5%) of the outstanding capital stock of any business similar
to that of the Employer's.
(b) Remedies for Breach of Restrictive Covenant. The Employee acknowledges
that the restrictions contained in Sections 4 and 5 of this Agreement are
reasonable and necessary for the protection of the legitimate business interests
of the Employer, that any violation of these restrictions would cause
substantial injury to the Employer and such interests, that the Employer would
not have entered into this Agreement with the Employee without receiving the
additional consideration offered by the Employee in binding himself to these
restrictions and that such restrictions were a material inducement to the
Employer to enter into this Agreement. In the event of any violation of these
restrictions, the Employer shall be relieved of all further obligations under
this Agreement and shall be entitled to any rights, remedies or damages
available to the Employer under this Agreement or otherwise at law or in equity.
In addition, in the event of any violation or threatened violation of these
restrictions, the Employer shall be entitled to preliminary and permanent
injunctive relief to prevent or restrain any such violation by the Employee and
any and all periods directly or indirectly acting for the Employee, as the case
may be.
6. Interest in Assets. Neither the Employee nor the Employee's estate shall
acquire hereunder any rights in funds or assets of the Employer, otherwise than
by and through the actual payment of amounts payable hereunder; nor shall the
Employee or the Employee's estate have any power to transfer, assign,
anticipate, hypothecate or otherwise encumber in advance any of said payments;
nor shall any of such payments be subject to seizure for the payment of any
debt, judgment, alimony, separate maintenance or be transferable by operation of
law in the event of bankruptcy, insolvency or otherwise of the Employee.
7. General Provisions.
(a) Neither party hereto may assign his or its rights or delegate his or
its duties under this Agreement without the prior written consent of the other
party; provided, however, that (i) this Agreement shall inure to the benefit of
and be binding
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upon the successors and assigns of the Employer upon any sales of all or
substantially all of the Employer's assets, or upon any merger, consolidation or
reorganization of the Employer with or into any other corporation, all as though
such successors and assigns of the Employer and their respective successors and
assigns were the Employer; and (ii) this Agreement shall inure to the benefit of
and be binding upon the heirs, assigns or designees of the Employee to the
extent of any payments due to them hereunder. As used in this Agreement, the
term "Employer" shall be deemed to refer to any such successor or assign of the
Employer referred to in the preceding sentence.
(b) Entire Agreement; Modifications. This Agreement constitutes the entire
agreement between the parties respecting the subject matter hereof, and
supersedes all prior negotiations, undertakings, agreements and arrangements
with respect thereto, whether written or oral. Except as otherwise explicitly
provided herein, this Agreement may not be amended or modified except by written
agreement signed by the Employee and the Employer.
(c) Enforcement and Governing Law. The provisions of this Agreement shall
be regarded as divisible and separate; if any of said provisions should be
declared invalid or unenforceable by a court of competent jurisdiction, the
validity and enforceability of the remaining provisions shall not be affected
thereby. This Agreement shall be construed and the legal relations of the
parties hereto shall be determined in accordance with the laws of the State of
New York, without reference to the law regarding conflicts of law.
(d) Arbitration. The provisions of paragraph 5(b) shall supersede the
provisions of this paragraph 7(d) in the event of a simultaneous dispute between
the Employer and the Employee so as to afford the Employer with the remedy of
injunctive relief, without the necessity for arbitration. Any dispute or
controversy arising under or in connection with this Agreement or the Employee's
employment by the Employer shall be settled exclusively by arbitration,
conducted by a single arbitrator sitting in New York City, New York, in
accordance with the rules of the American Arbitration Association (the "AAA")
then in effect. The arbitrator shall be selected by mutual agreement between the
Employer and the Employee. However, in the event that the parties are unable to
agree on an arbitrator within a period of one week, the arbitrator shall be
selected by the parties from a list of eleven (11) arbitrators provided by the
AAA, provided that no arbitrator shall be related to or affiliated with either
of the parties. If the parties mutually agree on an arbitrator from such list,
such arbitrator shall be selected. If the parties cannot agree on the arbitrator
within ten (10) days after the list of the proposed arbitrators is received by
the parties, then no later than twenty (20) days after such list is received by
the parties, the parties, or their respective representatives, shall meet at a
mutually convenient location in New York City, New York, or
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telephonically. At that meeting, the party who sought arbitration shall
eliminate one (1) proposed arbitrator and then the other party shall eliminate
one (1) proposed arbitrator. The parties shall continue to eliminate names from
the list of proposed arbitrators in this manner until each party has eliminated
five (5) proposed arbitrators. The remaining arbitrator shall arbitrate the
dispute. Each party shall submit, in writing, the specific requested action or
decision it wishes to take, or make, with respect to the matter in dispute, and
the arbitrator shall be obligated to choose one (1) party's specific requested
action or decision, without being permitted to effectuate any compromise
position. The party whose requested action or decision is not selected by the
arbitrator shall bear the cost of all counsel, experts or other representatives
who are retained by both parties, together with all costs of the arbitration
proceeding, including, without limitation, the fees, costs and expenses imposed
or incurred by the arbitrator. Judgment may be entered on the arbitrator's award
in any court having jurisdiction; provided, however, that the Employee shall be
entitled to seek specific performance of the Employee's right to be paid through
the date of termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
(e) Waiver. No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision of this Agreement
to be performed by the other party, shall be deemed a waiver of any similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time.
[Intentionally Left Blank]
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(f) Notices. Notices pursuant to this Agreement shall be in writing and
shall be deemed given when received; and, if mailed, shall be mailed by United
States registered or certified mail, return receipt requested, postage prepaid;
and if to the Employer, addressed to the principal headquarters of the Employer,
attention: Chairman; or, if to the Employee, to the address set forth below the
Employee's signature on this Agreement, or to such other address as the party to
be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CGA Investment Management, Inc. Jean-Michel Wasterlain
By:
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Name: Richard A. Price 2211 Broadway, Apt. 10DS
Title: President, New York, New York 10024
CGA Group, Ltd.
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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 2,992,109 shares of its Series A Preferred Stock.
/s/ PRICEWATERHOUSECOOPERS
---------------------------
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
July 30, 1998
