AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999
REGISTRATION NO. 333-7944
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 1
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
- ------------------------------- ---------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
----------------------
CRAIG APPIN HOUSE
8 WESLEY STREET
HAMILTON HM11 BERMUDA
(441) 296-5144
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(Address, including zip code, and telephone
number, including area code, of Registrant's
principal executive offices)
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CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 664-1666
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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]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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 JUNE 14, 1999
PROSPECTUS
3,322,297 SHARES OF
SERIES A CUMULATIVE VOTING PREFERENCE SHARES
CGA GROUP, LTD.
This Prospectus relates to 3,322,297 shares of Series A Preferred Stock of
CGA Group, Ltd., a Bermuda company. The Series A Preferred Stock was originally
issued by CGA Group to a limited number of institutional "accredited investors".
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. 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.
The Series A Preferred Stock has been registered for sale by certain
selling stockholders and may be offered by the selling stockholders from time to
time. The selling stockholders may effect such transactions by selling shares of
the Series A Preferred Stock to or through broker-dealers. 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. To the
extent required, shares of the Series A Preferred Stock, the name of the selling
stockholder, the offering price, the names of any agent, dealer or underwriter,
and any applicable commission or discount with respect to a particular offer
will be set forth in a supplement to this prospectus.
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.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE SERIES A PREFERRED STOCK.
-----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE
-----------------------
THE DATE OF THIS PROSPECTUS IS __________, 1999.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary .................................................... 1
Risk Factors .......................................................... 3
Use Of Proceeds ....................................................... 6
Selected Consolidated Financial Data .................................. 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 8
Quantitative and Qualitative Disclosure About Market Risk ............. 16
The Company ........................................................... 20
Regulation ............................................................ 28
Management ............................................................ 32
Related Party Transactions ............................................ 37
Selling Stockholders .................................................. 38
Plan of Distribution .................................................. 39
Security Ownership of Certain Beneficial Owners and Management ........ 39
Description of Securities ............................................. 43
Certain Tax Considerations ............................................ 54
Legal Matters ......................................................... 62
Experts ............................................................... 62
Enforceability of Civil Liabilities ................................... 62
Available Information ................................................. 63
Index to Financial Statements and Schedules ........................... F-1
--------------------
You should rely only on the information contained in this prospectus. We
have not, and the selling stockholders have not, authorized any other person to
provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the selling
stockholders are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
All references to "we," "us," "our," "the Company" or "CGA Group" in this
prospectus mean CGA Group, Ltd.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all the information that you should
consider before investing in the Series A Stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the notes to these statements. See "Glossary of Selected
Insurance Terms" for definitions of certain insurance terms used in this
prospectus.
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.
OUR COMPANY
We are a holding company incorporated in Bermuda with limited liability.
Through our subsidiary Commercial Guaranty Assurance, Ltd. ("CGA"), a Bermuda
insurance company, we provide financial guaranty insurance of structured
securities, including commercial real estate backed securities and asset backed
securities. We also provide financial guaranty insurance of other securities,
where we have expertise and where we deem credit enhancement opportunities to be
attractive.
We also provide investment management and investment advisory services to
investment vehicles and other clients through our other subsidiary, CGA
Investment Management, Inc. ("CGAIM"), a Delaware corporation that is registered
as an investment adviser with the SEC.
The primary clients of CGA and CGAIM are St. George Holdings, Ltd., a
Cayman Islands company, and its subsidiaries and Cobalt Holdings LLC, a
Delaware limited liability corporation, and its subsidiaries. In 1998 St. George
and Cobalt provided approximately 85% of the total insurance premiums earned by
CGA, and 91% of the total investment management fees earned by CGAIM. These
percentages are expected to decrease in the future.
We formed CGA with a view to becoming the market leader in the commercial
real estate segment of the financial guaranty industry. We use our structured
finance and real estate expertise to underwrite financial guaranties for
commercial real estate and other securities to a zero loss underwriting
standard. Our primary target market is the large U.S. commercial real estate
mortgage market, which we believe is underserved. We also target select segments
of the private asset-backed securities ("ABS") market.
Customers can purchase CGA's insurance only through unaffilated non-U.S.
insurance brokers. Customers include investment and commercial banks with
significant real estate and asset-backed advisory businesses, and commercial
mortgage loan origination and asset-backed repackaging operations and other
participants in the securitization markets.
Our executive offices are located at Craig Appin House, 8 Wesley Street,
Hamilton HM11 Bermuda. Our 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 3. Factors you should consider include,
among other things, our dependence on key employees, our holding company
structure and dividend restriction, the risk of United States taxation or of
changes in our United States or Bermuda regulatory status, our dependence on
maintaining CGA's "Triple-A" claims-paying ability rating from Duff & Phelps
Credit Rating Services, risks relating to competition in the financial guaranty
insurance industry and risks relating to commercial mortgage loans and
securities.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED ENDED JUNE 21, 1996
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, TO MARCH 31,
1999 1998 1998 1997 1997
------------- ------------ ------------ ------------- --------------
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES
Gross premiums written ........................ $ 3,467,232 $ 49,217,083 $ 1,949,993 $ 773,571 $ --
Ceded premiums ................................ (419,625) (39,420,247) -- -- --
------------ ------------ ------------ ------------ --------
Net premiums written .......................... 3,047,607 9,796,836 1,949,993 773,571 --
Change in unearned premiums ................... 34,439 (550,547) (878,858) (270,576) --
------------ ------------ ------------ ------------ --------
Net premiums earned ........................... 3,082,046 9,246,289 1,071,135 502,995 --
Net investment income ......................... 1,671,501 8,528,122 1,888,255 2,955,601 801
Net realized gains (losses) ................... 151,566 2,814,132 (242,194) 885,422 --
Management fees ............................... 1,145,259 3,353,499 189,056 -- --
------------ ------------ ------------ ------------ --------
Total revenues .............................. 6,050,372 23,942,042 2,906,252 4,344,018 801
------------ ------------ ------------ ------------ --------
EXPENSES
Operating expenses ............................ 3,276,277 14,023,366 3,063,863 6,510,103 11
Acquisition costs ............................. 148,138 433,217 53,245 53,590 --
Commitment fees ............................... 147,945 600,000 147,945 323,836 --
Excess of loss facility ....................... 50,000 200,000 50,000 107,671 --
Losses and loss adjustment expenses
(Net of reinsurance of $67.4 million
in 1998) .................................... 300,000 22,745,000 195,000 55,000 --
------------ ------------ ------------ ------------ --------
Total expenses ............................. 3,922,360 38,001,583 3,510,053 7,050,200 11
------------ ------------ ------------ ------------ --------
Income (loss) before cumulative effect of
change in accounting principle ............... 2,128,012 (14,059,541) (603,801) (2,706,182) 790
Cumulative effect of change in accounting
principle .................................... -- (3,928,238) -- -- --
NET INCOME (LOSS) .............................. 2,128,012 (17,987,779) (603,801) (2,706,182) 790
------------ ------------ ------------ ------------ --------
Other comprehensive income ..................... (1,704,381) (710,417) 607,868 1,638,092 --
------------ ------------ ------------ ------------ --------
COMPREHENSIVE INCOME (LOSS) .................... $ 423,631 $(18,698,196) $ 4,067 $ (1,068,090) $ 790
============ ============ ============ ============ ========
Net income (loss) available to common
shareholders .................................. $ (3,531,036) $(38,896,226) $ (5,683,130) $(12,332,792) $ 790
Basic and diluted income (loss) per common
share ......................................... $ (0.38) $ (4.27) $ (0.62) $ (1.89) $ 0.07
============ ============ ============ ============ ========
Weighted average common shares
outstanding ................................... 9,310,063 9,100,000 9,100,000 6,522,313 12,000
============ ============ ============ ============ ========
BALANCE SHEET DATA:
Fixed maturities available for sale
(at fair value) ............................... $100,716,387 $100,488,537 $126,580,195 $123,302,763
$ --
Other investments .............................. 30,000,000 30,000,000 -- -- --
Cash and short-term investments ................ 53,083,244 2,598,140 1,025,623 7,199,106 121,742
Total assets ................................... 265,648,722 215,903,933 142,385,071 142,721,186 133,790
Total liabilities .............................. 95,324,915 95,797,551 3,576,427 3,916,609 121,000
Total mezzanine equity ......................... 127,993,011 126,608,249 110,779,130 107,047,101 --
Total shareholders' (deficit) equity ........... 42,330,796 (6,501,867) 28,029,514 31,737,476 12,790
Total liabilities, mezzanine equity, and
shareholders' equity .......................... 265,648,722 215,903,933 142,385,071 142,721,186 133,790
</TABLE>
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RISK FACTORS
Your investment in the Series A Preferred Stock will involve certain risks.
You should carefully consider the following factors and other information in
this Prospectus before deciding whether an investment in the Series A Preferred
Stock is suitable for you.
WE DEPEND ON KEY EMPLOYEES AND NON-BERMUDIAN EMPLOYEES
We believe that our ability to successfully implement our business strategy
and to operate profitably depends in part on the continued services of key
employees of CGA Group, Commercial Guaranty Assurance and CGA Investment
Management, including:
o Richard A. Price--Chief Executive Officer and President of CGA Group
o James R. Reinhart--Chief Financial Officer of CGA Group and Commercial
Guaranty Assurance
o Geoffrey N. Kauffman--President and Chief Underwriting Officer of
Commercial Guaranty Assurance
o Kem H. Blacker--Managing Director and Chief Operating Officer of CGA
Investment Management
o Michael Miran--Managing Director and General Counsel of CGA Investment
Management
o Jean-Michel Wasterlain--Managing Director of CGA Investment Management
CGA Group and its subsidiaries together have about 40 full-time employees
and depend on a small number of key employees for the production and servicing
of almost all of their business. The inability or unwillingness of these
individuals to continue in their present positions could have a material adverse
effect on our business and financial results and those of CGA Group and its
subsidiaries. Mr. Price and several key employees have entered into employment
agreements, but CGA Group may be unable to retain these employees or quickly
replacement them. CGA Group does not maintain key man life insurance policies
with respect to any of its employees.
Under Bermuda law, non-Bermudians generally may not be employed in Bermuda
without the specific permission of governmental authorities. Obtaining this
permission requires a showing that no Bermudian with the minimum qualifications
is available. Although most of the executive officers of CGA Group and
Commercial Guaranty Assurance based in Bermuda are not Bermudian, all of the
non-Bermudian officers have received work permits. It is possible that CGA Group
or Commercial Guaranty Assurance could lose the services of these officers if
their work permits are not renewed, but CGA Group and Commercial Guaranty
Assurance are unaware of any reasons why this might occur.
COMMERCIAL GUARANTY ASSURANCE COULD BE ADVERSELY AFFECTED IF IT LOSES ITS AAA
CLAIMS PAYING RATING FROM DUFF & PHELPS CREDIT RATING COMPANY
CGA is rated "Triple-A" for claims-paying ability by Duff & Phelps Credit
Rating Company (DCR), a nationally-recognized credit rating company. "Triple-A"
is the highest claims-paying ability rating available from DCR. This "Triple-A"
rating is DCR's rating of the insurance provided by CGA to its clients and is
not directed to the protection of investors in the Company's Series A Preferred
Stock or other securities. The rating reflects DCR's current opinion of CGA's
claims-paying ability, its financial and operating performance and its ability
to meet its obligations to its policyholders. The rating is not an evaluation of
the merits of the Series A Preferred Stock.
DCR could downgrade or withdraw the rating of CGA if it fails to continue
to meet DCR's rating requirements or if these requirements are changed. A
downgrade or withdrawal would have an adverse effect on the sales of CGA's
products, which, in turn, would have an adverse effect on the Company.
DCR and the Company have entered into a letter agreement that
o provides that the Company and CGA may not take actions such as the payment
of dividends from CGA to the Company without obtaining a ratings
confirmation from DCR; and
o lists specific steps CGA must follow in connection with its issuance of
financial guaranty insurance, surety bonds or similar agreements or
instruments to maintain its current rating.
THE COMPANY AND CGA COULD BE ADVERSELY AFFECTED IF THEY BECOME SUBJECT TO U.S.
TAXATION
The Company and CGA are organized and operate in a manner so that neither
company should be subject to United States taxation and so that U.S. persons who
own Series A Preferred Stock should not be subject to U.S. federal
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income tax on the Company's undistributed earnings. It is possible that CGA
could be considered in the future to be engaged in a U.S. trade or business. If
this were to occur, some or all of CGA's investment income could become subject
to taxation on a net basis at standard U.S. corporate income tax rates
(currently 35%) and it could also become 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 files protective tax returns in the U.S. reporting no U.S.
income, in order to preserve its ability to deduct its 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." Any of these results could subject U.S. owners of
Series A Preferred Stock to current U.S. federal income tax on all or a portion
of the Company's and/or CGA's undistributed earnings. Any of these results could
subject any investors in Series A Preferred Stock who are allocated this income
and are tax-exempt organizations to unrelated business taxable income (UBTI).
COMMERCIAL GUARANTY ASSURANCE COULD BE ADVERSELY AFFECTED IF IT BECOMES SUBJECT
TO U.S. OR OTHER NON-BERMUDIAN LICENSING OR INSURANCE REQUIREMENTS
In general, the Bermuda statutes and regulations applicable to CGA are less
restrictive than those that would be applicable were it subject to the insurance
laws and regulations of any state in the U.S. CGA does not write insurance in
the U.S., and it conducts its business to avoid being subject to licensing
requirements or insurance regulations in the U.S. or elsewhere other than in
Bermuda.
Although management of CGA believes that its current activities comply with
all applicable insurance laws and regulations, insurance regulators in the U.S.
or elsewhere could claim that CGA is subject to their jurisdiction's licensing
requirements and/or is not in compliance with its insurance laws or regulations.
CGA's becoming subject to regulation in the U.S. or other non-Bermudian
jurisdiction, or having to modify the manner of conducting its business, could
have a material adverse effect on it, including the imposition of fines and
penalties.
COMMERCIAL GUARANTY ASSURANCE OPERATES IN AN EXTREMELY COMPETITIVE MARKET AND
MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH FINANCIAL GUARANTORS THAT ARE RATED
BY MORE THAN ONE U.S. RATING AGENCY, OR WITH U.S.-BASED FINANCIAL GUARANTORS
CGA's current and prospective competitors in the financial guaranty
insurance business are numerous. Some of CGA's competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than CGA does. CGA has a "Triple-A" claims-paying
ability rating from DCR, but it does not have, nor has it requested,
claims-paying ability ratings from Standard & Poor's Ratings Services, Fitch
IBCA, Ltd. or Moody's Investors Service, Inc. This places it at a significant
disadvantage in markets where other financial guarantors currently write
insurance, especially the municipal bond market, because many institutional
investors require financial guaranty insurers to have ratings from at least two
of the nationally-recognized rating agencies listed above. Also, its inability
to negotiate and conclude its policies in the U.S. may be a competitive
disadvantage, in that potential clients of CGA, including issuers and investment
banks located in the United States, might not be willing to travel to Bermuda to
do business with CGA.
AN INVESTMENT IN SERIES A PREFERRED STOCK IS ILLIQUID
There is no established market for the shares of Series A Preferred Stock.
The Series A Preferred Stock is subject to substantial legal restrictions under
the U.S. federal and state securities laws. The Company's Bye-laws also contain
significant transfer restrictions which are applicable to the Series A Preferred
Stock. In view of the risks associated with an investment in the Series A
Preferred Stock, investors should assume that they may have to bear the economic
risk of an investment in the Series A Preferred Stock for an indefinite period
of time.
COMMERCIAL GUARANTY ASSURANCE COULD BE ADVERSELY AFFECTED IF IT ESTABLISHES
INADEQUATE CLAIM RESERVES AND ACTUAL CLAIMS EXCEED EXPECTATIONS
Due to its relatively recent commencement of operations, CGA has a limited
operating history from which to estimate necessary 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 were required to
increase its claims reserves, it would
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then have to report lower net income in the future. Furthermore, CGA's future
financial condition could also be adversely affected if actual claims should
exceed its claim reserves.
THE COMPANY HAS SIGNIFICANT RESTRICTIONS AGAINST PAYING DIVIDENDS TO
SHAREHOLDERS, AND CGA HAS SIGNIFICANT RESTRICTIONS AGAINST PAYING DIVIDENDS TO
THE COMPANY
The Company does not expect to pay dividends to its shareholders other than
the dividends required to be paid on the Series A Preferred Stock. If DCR at any
time after June 17, 2002 rates the Series A Preferred Stock "Triple-B minus"
(BBB-) or higher, the dividend rate on the Series A Preferred Stock will
decrease by 200 basis points (two percent).
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 distributions to the Company by CGA. CGA's board of directors has
passed a resolution that CGA will not declare or pay cash dividends to the
Company until June 17, 2002. After that date, CGA intends to comply with
dividend restrictions imposed by DCR in order to maintain its "Triple-A"
claims-paying ability rating. In addition, CGA has agreed with DCR that it will
not declare or pay any dividend, including non-cash dividends, without first
giving DCR 20 business days notice and then receiving from DCR a written
confirmation that the declaration or payment of the dividend will not affect
CGA's "Triple-A" rating from DCR.
YOU MAY NOT BE ABLE TO ENFORCE YOUR LEGAL RIGHTS AGAINST THE COMPANY OR CGA IN
THE UNITED STATES
The Company and CGA are Bermuda companies, and many of their officers and
directors are residents of Bermuda. Most of the assets of the Company, CGA and
these officers and directors are located outside the United States. Therefore,
it may be difficult for investors to effect service of process within the United
States on any of these parties who reside outside the United States or to
recover against them or their assets in the event of any judgments against them
obtained in United States courts.
THE INSURANCE PORTFOLIO OF CGA IS INTERDEPENDENT WITH A SMALL NUMBER OF
INTERRELATED COMPANIES THAT ARE VULNERABLE TO A RATINGS DOWNGRADE OF CGA
More than 80% of the outstanding principal amount of obligations insured by
CGA as of March 31, 1999 consisted of insurance policies which guarantee payment
obligations under the financing arrangements of St. George Holdings, Cobalt
Holdings and their subsidiaries. These guaranteed financing arrangements provide
the St. George and Cobalt companies with the financing to acquire the assets in
their investment portfolios.
The ability of the St. George and Cobalt companies to pay their fees and
expenses, including premiums payable to CGA and asset management expenses
payable to CGAIM, depends on their general ability to finance their investment
activities and to generate sufficient cash flow from these investment
activities. The continued availability of financing arrangements to these
companies is conditional upon their repayment obligations being guaranteed by
CGA's financial guaranty insurance policies.
COMMERCIAL GUARANTY ASSURANCE'S INSURED BOOK OF BUSINESS IS CONCENTRATED IN
COMMERCIAL REAL ESTATE OBLIGATIONS AND COULD BE ADVERSELY AFFECTED BY ADVERSE
EVENTS IN THE COMMERCIAL REAL ESTATE LOAN MARKET OR BY ADVERSE EVENTS RELATING
TO SPECIFIC REAL ESTATE PROJECTS.
About 50% of CGA's insured book of business consists of securities or
obligations backed by pools of commercial real estate loans, and obligations
issued by companies known as real estate investment trusts, which manage real
estate portfolios to earn profits for equityholders. Accordingly, CGA could be
adversely affected by events that have an adverse effect on commercial real
estate loans and real estate investment trust obligations. Commercial mortgage
loans depend for repayment upon the successful operation of the related real
estate project because these loans typically do not provide for recourse, or for
only limited recourse, to the borrower in the event of non-payment. The
successful operation of each real estate project is subject to the following
types of risks:
o general or local economic conditions and property risks, including
structural defects, natural disasters, the conditions of specific industry
segments, competition with other projects and operating costs of the
project
o costs of compliance with laws, including zoning laws and the Americans With
Disabilities Act, and the adverse effect on the returns of a project
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o risks relating to commercial mortgage loans, including payments of
principal due on the maturity dates of the loans, making payment dependent
on borrower's ability to refinance the loan or sell the property at a
sufficient price to make the payment
o risks relating to liabilities under state and federal environmental laws
and regulations, which often impose liability for environmental
contamination and clean-up costs, regardless of fault, on secured lenders
and holders of secured debt
THERE MAY BE INADEQUATE MARKET DEMAND FOR FINANCIAL GUARANTY INSURANCE WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL CONDITION OR RESULTS OF
OPERATIONS OF COMMERCIAL GUARANTY ASSURANCE
The demand for financial guaranty insurance depends on many factors, most
of which are beyond the control of CGA. The ability of issuers of debt
obligations to use financial guaranty insurance to obtain a lower total cost for
their debt obligations is affected by a variety of factors, including:
o the general perception by investors of the financial strength of the
providers of financial guaranty insurance
o the interest rates borne by uninsured obligations
Inadequate demand for financial guaranty insurance could have a material
adverse effect on the financial condition or results of operations of CGA.
OUR COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES WITH WHOM WE DO BUSINESS MAY NOT
BE YEAR 2000 COMPLIANT, WHICH MAY CAUSE SYSTEMS FAILURES AND DISRUPTIONS OF
OPERATIONS
Currently, many computer and software products are coded to accept
two-digit entries in the date code field and are unable to distinguish between
the year 1900 and the year 2000. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements. Our current computer
and software systems have recently been purchased or leased, as we commenced
operations in June 1997, and therefore we believe that the risk of Year 2000
non-compliance is insignificant as it relates to our computer systems. Although
we are not currently aware of any Year 2000 compliance problems relating to our
own systems that would have a material adverse effect on our business, results
of operations and financial condition, we cannot give you any assurance that we
will not discover Year 2000 compliance problems in these systems that will
require substantial revisions.
In addition, we cannot give you any assurance as to the state of Year 2000
compliance of the software and computers of third parties with whom we do
business, including our customers, suppliers of telecommunications, electric
power suppliers and financial institutions. We have contacted our vendors
regarding the state of their remediation activities for material Year 2000
issues. We do not expect that there will be material disruptions to our business
or material costs to us associated with any Year 2000 disruptions by our
vendors. The cost and timing of third party Year 2000 compliance is not within
our control and we cannot give you any assurances regarding the cost or timing
of such efforts or the potential effects of any failure of these third parties
to comply. The failure by these entities to be Year 2000 compliant could result
in a systemic failure beyond our control, such as a prolonged telecommunications
or electrical failure, and could prevent us from delivering our products and
services to customers. Any of these occurrences could have an adverse effect on
our business, results of operations and financial condition.
USE OF PROCEEDS
The Registration Statement is intended to satisfy certain obligations of
the Company under the subscription agreement for the Series A Preferred Stock.
The Company will not receive any proceeds from sales of Series A Preferred Stock
and has agreed to pay the expenses of the performance of its obligations under
the subscription agreement with respect to the Registration Statement.
6
<PAGE>
SELECTED CONSOLIDATED 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 THREE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED ENDED JUNE 21, 1996
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, TO MARCH 31,
1999 1998 1998 1997 1997
------------ ------------ ------------- ------------- --------------
(UNAUDITED) (AUDITED) (UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES
Gross premiums written .................... $ 3,467,232 $ 49,217,083 $ 1,949,993 $ 773,571 $ --
Ceded premiums ............................ (419,625) (39,420,247) -- -- --
------------ ------------ ------------ ------------ -------
Net premiums written ...................... 3,047,607 9,796,836 1,949,993 773,571 --
Change in unearned premiums ............... 34,439 (550,547) (878,858) (270,576) --
------------ ------------ ------------ ------------ -------
Net premiums earned ....................... 3,082,046 9,246,289 1,071,135 502,995 --
Net investment income ..................... 1,671,501 8,528,122 1,888,255 2,955,601 801
Net realized gains (losses) ............... 151,566 2,814,132 (242,194) 885,422 --
Management fees ........................... 1,145,259 3,353,499 189,056 -- --
------------ ------------ ------------ ------------ -------
Total revenues .......................... 6,050,372 23,942,042 2,906,252 4,344,018 801
------------ ------------ ------------ ------------ -------
EXPENSES
Operating expenses ........................ 3,276,277 14,023,366 3,063,863 6,510,103 11
Acquisition costs ......................... 148,138 433,217 53,245 53,590 --
Commitment fees ........................... 147,945 600,000 147,945 323,836 --
Excess of loss facility ................... 50,000 200,000 50,000 107,671 --
Losses and loss adjustment expenses
(Net of reinsurance of $67.4 million
in 1998) ................................ 300,000 22,745,000 195,000 55,000 --
------------ ------------ ------------ ------------ -------
Total expenses ......................... 3,922,360 38,001,583 3,510,053 7,050,200 11
------------ ------------ ------------ ------------ -------
Income (loss) before cumulative effect of
change in accounting principle ........... 2,128,012 (14,059,541) (603,801) (2,706,182) 790
Cumulative effect of change in accounting
principle -- (3,928,238) -- -- --
NET INCOME (LOSS) .......................... 2,128,012 (17,987,779) (603,801) (2,706,182) 790
------------ ------------ ------------ ------------ -------
Other comprehensive income ................. (1,704,381) (710,417) 607,868 1,638,092 --
------------ ------------ ------------ ------------ -------
COMPREHENSIVE INCOME (LOSS) ................ $ 423,631 $(18,698,196) $ 4,067 $ (1,068,090) $ 790
============ ============ ============ ============ =======
Net income (loss) available to common
shareholders .............................. $ (3,531,036) $(38,896,226) $ (5,683,130) $(12,332,792) $ 790
Basic and diluted income (loss) per common
share ..................................... $ (0.38) $ (4.27) $ (0.62) $ (1.89) $ 0.07
============ ============ ============ ============ =======
Weighted average common shares
outstanding ............................... 9,310,063 9,100,000 9,100,000 6,522,313 12,000
============ ============ ============ ============ =======
</TABLE>
7
<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
CGA Group, Ltd. (the "Company"), a holding company, 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 Insurance Act
1978 of Bermuda (the "Act") 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. CGA has a "Triple-A" "claims paying ability" rating from Duff & Phelps
Credit Rating Company ("DCR") and has also been rated in the highest rating
category assigned by each of the two Canadian rating agencies, Dominion Bond
Ratings Service and Canadian Bond Ratings Service. CGA issues financial guaranty
insurance policies, which are the functional equivalent of direct-pay letters of
credit, to insure payment of interest, principal and other amounts payable in
respect of notes, securities, and other financial obligations. 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. CGAIM did not commence operations until after its acquisition by
the Company. CGAIM is registered as an investment advisor with the United States
Securities and Exchange Commission under the Investment Advisors Act of 1940, as
amended. CGAIM provides investment management and financial advisory services
primarily to specialized investment vehicles and for the U.S. and international
structured finance markets. The Company and its subsidiaries were inactive until
June 17, 1997, on which date the Company's private placement offering was
completed and the Company was recapitalized with (i) two classes of preferred
stock sold for an aggregate purchase price of $105 million, (ii) common stock
sold for an aggregate purchase price of $45.5 million and (iii) commitments to
purchase $60 million of additional preferred stock upon the occurrence of
certain events.
RESULTS OF OPERATIONS
March 31, 1999
Total revenues for the quarter ended March 31, 1999 were $6.1 million, of
which $3.1 million was from financial guaranty insurance premiums, $1.1 million
was from investment management and advisory fees, $1.7 million was from
investment income and $0.2 million was from net realized gains on the sale of
investments. Total revenues for the quarter ended March 31, 1998 were $2.9
million, of which $1.1 million was from financial guaranty insurance premiums,
$0.2 million was from investment management and advisory fees, $1.8 million was
from investment income minus $0.2 million from net realized losses on the sale
of investments.
Net premiums earned were derived from $3.5 million of gross premiums
written, of which $0.4 million were ceded under reinsurance agreements.
The amount of CGA's insured portfolio was $1.6 billion net par as of March
31, 1999. The weighted average term of the insured securities at March 31, 1999
is approximately 11 years. The following table shows the net par insured
obligations at March 31, 1999 and December 31, 1998 by asset type:
1999 1998
----------- ----------
(IN 000'S) (IN 000'S)
Real estate investment trust debt ........... $ 376,073 $ 381,777
Consumer asset-backed securities ............ 454,656 456,521
Corporate asset-backed securities ........... 303,208 270,612
Commercial mortgage-backed securities ....... 215,501 185,754
Sovereign debt .............................. 120,000 120,000
Corporate debt .............................. 75,000 75,000
REIT Preferred stock ........................ 70,000 70,000
---------- ----------
Total ....................................... $1,614,428 $1,559,664
========== ==========
8
<PAGE>
The following table presents the credit ratings of the above assets, based
on net par outstanding at March 31, 1999 and December 31, 1998:
1999 1998
------ -----
"AAA" ...................................... 5% 4%
"AA" ....................................... 3% 3%
"A" ........................................ 14% 12%
"BBB" ...................................... 67% 67%
"BB" ....................................... 8% 11%
Not rated .................................. 3% 3%
--- ---
Total ..................................... 100% 100%
=== ===
The portfolio currently includes one problem credit consisting of four
charged-off credit card receivable transactions. These transactions comprise
three percent of CGA's net par insured portfolio as of March 31, 1999. CGA has
established a case basis reserve for this exposure which is more fully described
below.
During the first quarter of 1999 the par value of CGAIM's assets under
management increased from $1.8 billion to $1.9 billion. CGAIM generally earns a
management fee of .25% per annum on the average market value of the assets under
its management.
Net investment income is presented after deducting the cost of external
investment management fees which totaled $20,000 for the quarter ended March 31,
1999 and $100,795 for the quarter ended March 31, 1998. Unrealized losses on the
investment portfolio as of March 31, 1999 were $0.8 million. The average yield
on the investment portfolio was 5.6% as of March 31, 1999.
Operating expenses for the quarter ended March 31, 1999 were $3.3 million
compared to $3.1 million for the quarter ended March 31, 1998. These costs are
primarily personnel, legal, and administrative.
December 31, 1998
Total revenues for the year ended December 31, 1998 were $23.9 million, of
which $9.2 million was from financial guaranty insurance premiums, $3.4 million
was from investment management and advisory fees, $8.5 million was from
investment income and $2.8 million was from net realized gains on the sale of
investments. Total revenues for the nine month period ended December 31, 1997
were $4.3 million, of which $.5 million was from financial guaranty insurance
premiums, $3 million was from investment income and $.9 million was from net
realized gains on the sale of investments. There were no investment management
or advisory fees earned in 1997. Further comparisons between the year ended
December 31, 1998 and the nine months ended December 31, 1997 have limited
meaning, as the Company did not commence operations until after the private
placement offering was completed on June 17, 1997.
Net premiums earned were derived from $49.2 million of gross premiums
written, of which $39.4 million were ceded under reinsurance agreements. The
gross premiums written and ceded premiums include approximately $39 million from
one transaction. The transaction was entered into by CGA to mitigate risks
related to its exposure in connection with guarantees of two credit facilities
for St. George Investments I, Ltd. ("SGI") and St. George Investments III, Ltd.
("SG3") which are used to purchase asset backed and real estate backed
securities. As a result of turmoil in certain areas of the capital markets
during the month of October 1998, the spreads over treasuries at which investors
were willing to purchase certain securities widened considerably. This spread
widening caused a decrease in the market value of many of the securities used as
collateral for the two insured credit facilities. The facilities have
requirements that the lender's operating ratio, (the portfolio market value
divided by the loan outstanding) be maintained above certain levels. In the
event that an operating ratio falls below the required level and is not brought
into compliance within a cure period, the lender may liquidate the collateral
and require CGA to pay any remaining balance outstanding under the credit
facility. On October 30, 1998 CGA provided asset specific guarantees and
obtained "cut-through" reinsurance on approximately $382 million par amount of
securities within the two insured investment portfolios. The three parties that
provided such reinsurance and credit support are institutional investors in the
Company. The effect of this reinsurance and third party credit support was to
substantially increase the market value and reduce the future market value
volatility of the credit enhanced securities. In connection with these
arrangements, CGA received a premium of $38.95 million from the clients, and
ceded an aggregate of $38.7 million to the reinsurer that provided the
cut-through credit enhancement. On April 14, 1999, these credit support
arrangements were cancelled and approximately $29.5 million of premium was
refunded to the clients.
9
<PAGE>
The amount of CGA's insured portfolio increased from $319 million net par
as of December 31, 1997 to $1.6 billion as of December 31, 1998. The weighted
average term of the insured securities at December 31, 1998 is approximately 14
years, with 34 percent of the portfolio having an expected average life of less
than five years. The following table shows the net par insured obligations at
December 31, by asset type:
1999 1998
---------- ----------
(IN 000'S) (IN 000'S)
Real estate investment trust debt ......... $ 381,777 $ --
Consumer asset-backed securities .......... 456,521 52,439
Corporate asset-backed securities ......... 270,612 46,337
Commercial mortgage-backed securities ..... 185,754 100,703
Sovereign debt ............................ 120,000 120,000
Corporate debt ............................ 75,000 --
REIT Preferred stock ...................... 70,000 --
---------- --------
Total .................................... $1,559,664 $319,479
========== ========
The following table presents the credit ratings of the above assets, as
assigned by one or more nationally recognized credit rating agencies, based on
net par outstanding at December 31:
1998 1997
---- ----
"AAA" ................................ 4% --
"AA" ................................. 3% --
"A" .................................. 12% 7%
"BBB" ................................ 67% 65%
"BB" ................................. 11% 28%
Not rated ............................ 3% --
--- ---
Total ............................... 100% 100%
=== ===
The portfolio currently includes one problem credit consisting of four
charged-off credit card receivable transactions. These transactions comprise
three percent of CGA's net par insured portfolio as of December 31, 1998. CGA
has established a case basis reserve for this exposure which is more fully
described below.
During 1998 the par value of CGAIM's assets under management increased from
$199 million to over $1.8 billion. CGAIM generally earns a management fee of
.25% per annum on the average market value of the assets under its management.
CGAIM did not earn any management fees in 1997.
Net investment income is presented after deducting the cost of external
investment management fees which totaled $0.3 million for 1998 and $0.2 million
for the nine months ended December 31, 1997. Commencing in September 1998, CGA
modified its investment strategy to have the investment portfolio closely match
the returns of a "Double-A" or better three to five year Eurodollar bond index.
This strategy results in a less actively managed portfolio, which resulted in
the management fee being reduced by approximately twenty basis points per annum.
The new strategy also resulted in above normal turnover of the portfolio and
contributed to the significant gains realized during the year. The total market
value of the fixed maturity portfolio at December 31, 1998, including accrued
interest receivable, was $104 million. Unrealized gains on the investment
portfolio as of December 31, 1998 were $0.9 million. The average yield on the
investment portfolio was 5.8% for 1998 and 6.3% for the period ended December
31, 1997.
Operating expenses for the year ended December 31, 1998 were $14 million
compared to $6.5 million for the nine months ended December 31, 1997. These
costs are primarily personnel-related which totaled $7.4 million for 1998. The
majority of the other 1998 operating expenses were comprised of legal and
financing costs incurred to set up investment programs for CGAIM's clients
totaling $1.6 million, and professional fees of $1.3 million.
In October, 1998 the credit ratings on asset-backed securities issued by
various trusts established and serviced by Commercial Financial Services Inc.
("CFS"), a credit-card debt collection company, were withdrawn by the three
credit rating companies that rate the securities issued by such trusts (the "CFS
Securities"). The withdrawal of said ratings was in response to allegations of
accounting and other irregularities at CFS. The rating agencies, investors and
insurers, as well as the United States Securities and Exchange Commission have
commenced an investigation into these allegations. Clients of CGA own
approximately $199 million par amount of CFS Securities, which exposure has
10
<PAGE>
been guaranteed by CGA. CGA has reinsured approximately $152 million par amount
of this exposure, leaving CGA with a net exposure of approximately $46.7 million
par amount as of April 30, 1999. CGA has taken a case basis reserve in respect
of the CFS Securities in the amount of $20.8 million. This amount represents
Management's best estimate of potential losses in respect of the CFS Securities
at this time.
The Accounting Standards Executive Committee issued Statement of Position
98-5, "Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998, which requires the Company to expense
organization costs as incurred. The Company expensed the remaining unamortized
organization costs totaling $3.9 million in July 1998 which is reflected in the
financial statements as a change in accounting principle.
SUMMARY OF OPERATING SEGMENTS
The Company has two reportable segments, CGA and CGAIM. CGA issues
financial guaranty insurance policies and CGAIM provides investment management
and advisory services. The tables below presents selected financial information
for each of the operating segments:
As of and for the three months ended March 31, 1999:
<TABLE>
<CAPTION>
CGA CGAIM OTHER(a) TOTAL
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned ......................... $ 3,082,046 $ -- $ -- $ 3,082,046
Net investment income ....................... 1,651,857 16,972 2,672 1,671,501
Net realized gains .......................... 151,566 -- -- 151,566
Management fees ............................. -- 1,145,259 -- 1,145,259
Intersegment revenue ........................ -- 59,827 -- 59,827
TOTAL REVENUES .............................. 6,110,199
EXPENSE ITEMS
Operating expenses .......................... 363,383 2,627,079 345,642 3,336,104
Acquisition costs ........................... 148,138 -- -- 148,138
Commitment fees ............................. 147,945 -- -- 147,945
Excess of loss facility ..................... 50,000 -- -- 50,000
Losses and loss adjustment
expenses ................................... 300,000 -- -- 300,000
TOTAL EXPENSES .............................. 3,982,187
ASSETS
Total Assets ................................ 244,118,686 3,644,229 31,307,904 279,070,819
</TABLE>
- -----------------------
(a) The "other" segment is comprised of CGA Group, Ltd., the holding company,
which does not meet any of the quantitative thresholds for determining a
reportable segment.
As of and for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
CGA CGAIM OTHER TOTAL
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned .......................... $ 1,071,135 $ -- $ -- $ 1,071,135
Net investment income ........................ 1,840,037 6,103 42,115 1,888,255
Net realized gains ........................... (242,194) -- -- (242,194)
Management fees .............................. -- 189,056 -- 189,056
TOTAL REVENUES ............................... 2,906,252
EXPENSE ITEMS
Operating expenses ........................... 199,568 2,384,063 480,232 3,063,863
Acquisition costs ............................ 53,245 -- -- 53,245
Commitment fees .............................. 147,945 -- -- 147,945
Excess of loss facility ...................... 50,000 -- -- 50,000
Losses and loss adjustment
expenses .................................... 195,000 -- -- 195,000
TOTAL EXPENSES ............................... 3,510,053
ASSETS
Total assets ................................. 134,936,068 2,403,068 11,145,695 148,485,071
</TABLE>
11
<PAGE>
As of and for the year ended December 31, 1998.
<TABLE>
<CAPTION>
CGA CGAIM OTHER (a) TOTAL
------------ ----------- ---------- ------------
REVENUES
<S> <C> <C> <C> <C>
Net premiums earned ...................................... $ 9,246,289 $ -- $ -- $ 9,246,289
Net investment income .................................... 8,387,513 64,934 75,675 8,528,122
Net realized gains ....................................... 2,814,132 -- -- 2,814,132
Management fees .......................................... -- 3,353,499 -- 3,353,499
Intersegment revenue ..................................... -- 122,301 -- 122,301
TOTAL REVENUES ......................................... 24,064,343
EXPENSE ITEMS
Operating expenses ....................................... 1,680,707 10,711,550 1,753,410 14,145,667
Acquisition costs ........................................ 433,217 -- -- 433,217
Commitment fees .......................................... 600,000 -- -- 600,000
Excess of loss facility .................................. 200,000 -- -- 200,000
Losses and loss adjustment expenses ...................... 22,745,000 -- -- 22,745,000
TOTAL EXPENSES ......................................... 38,123,884
Cumulative effect of change in accounting
policy .................................................. 1,127,353 480,207 2,320,678 3,928,238
------------ ----------- ---------- ------------
ASSETS
Total assets ........................................... 214,823,536 3,752,936 7,860,816 226,437,288
============ =========== ========== ============
</TABLE>
- -----------
(a) The "other" segment is comprised of CGA Group, Ltd., the holding company,
which does not meet any of the quantitative thresholds for determining a
reportable segment.
As of and for the nine months ended December 31, 1997.
<TABLE>
<CAPTION>
CGA CGAIM OTHER TOTAL
------------ ---------- ---------- -----------
REVENUES
<S> <C> <C> <C> <C>
Net premiums earned ...................................... $ 502,995 $ -- $ -- $ 502,995
Net investment income .................................... 2,901,306 2,955,601
Net realized gains ....................................... 885,422 -- -- 885,422
TOTAL REVENUES ......................................... 4,344,018
EXPENSE ITEMS
Operating expenses ....................................... 597,883 5,313,368 598,852 6,510,103
Acquisition costs ........................................ 53,590 -- -- 53,590
Commitment fees .......................................... 323,836 -- -- 323,836
Excess of loss facility .................................. 107,671 -- -- 107,671
Losses and loss adjustment expenses ...................... 55,000 -- -- 55,000
TOTAL EXPENSES ......................................... 7,050,200
ASSETS
----------- ---------- ---------- -----------
Total Assets ........................................... 131,607,950 3,577,782 11,085,250 146,270,982
=========== ========== ========== ===========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company capitalized CGA with $125 million. On March 31, 1999, the
Company contributed an additional $27.2 million to CGA using proceeds from the
sale of Series C Preferred Stock. Alliance Capital Management Corporation
manages CGA's entire investment portfolio. These funds are invested in foreign
corporate and government debt securities which are rated "Double-A" or higher
and denominated in U.S. dollars. The portfolio maintains a weighted average
duration of two to five years. CGAIM was initially capitalized with $3 million.
It has required funding from the Company since its commencement of operations
totaling $11 million to cover its operations. It is expected to require
additional funding in 1999 and 2000 while it continues to build its assets under
management to generate sufficient fee income to cover its operations.
12
<PAGE>
March 31, 1999
On a consolidated basis, the Company generated $2.6 million of cash from
operating activities during the quarter ended March 31, 1999, compared to $1.3
million for the quarter ended March 31, 1998. This doubling of cash flow from
operations is the result of the Company's rapid growth during this period.
The Company used $1.9 million of net cash in investing activities during
the quarter ended March 31, 1999, compared to $4.5 million in the first quarter
of 1998. Cash flows from financing activities in the quarter ended March 31,
1999 result from the net proceeds of the Company's issuance of 43,997,863 shares
of Series C Preferred Stock, which raised net proceeds of $49.8 million.
On January 27, 1999, the Company held a Special General Meeting for all
shareholders, which was both preceded and followed by meetings of its Board of
Directors. The purpose of the meetings was primarily to approve and authorize
the Company to seek to raise additional capital from existing shareholders and
from one or more third party investors.
During the meetings the following resolutions were among those approved:
o That the authorized share capital of the Company be increased from $412,000
to $3,412,000 by the creation of an additional 300,000,000 shares of a par
value of $0.01 per share;
o That the Company create a new series of Preference Shares being Series C
Convertible Cumulative Voting Preference Shares (the "Series C Preferred
Stock") and offer up to $63 million to the existing holders of the
Company's Common Stock and Series B Preferred Stock (the "Rights
Offering");
o Concurrent with the closing of the Rights Offering all outstanding shares
of Series B Preferred Stock, including accrued dividends thereon, shall be
converted into shares of Common Stock based on a value of $3 per share of
Common Stock;
o That the Company amend the terms of the Series B Preferred Stock such that
the dividend rate applicable to the Shares of Series B Preferred Stock
which may be issued in the future upon exercise of the Unit Investors
Capital Commitments or otherwise will not be greater than 7% per annum,
that any such Series B Preferred Stock shall rank junior to the Series C
Preferred Stock in all respects, and that any such Series B Preferred Stock
shall not be entitled to voting rights; and
o That the number of Directors of the Company be increased from 13 to 15 by
the creation of two new vacancies and that the said two vacancies be filled
by nominees elected by the holders of the new Series C Preferred Stock of
the Company.
On March 31, 1999, the Company sold to certain existing shareholders of the
Company an aggregate of 43,997,863 shares of Series C Preferred Stock for net
cash proceeds of $50,996,794.50. The sale was made pursuant to the terms of the
Series C Convertible Cumulative Voting Preferred Stock Subscription Agreement
(the "Series C Preferred Stock Subscription Agreement") which is filed as an
Exhibit to the Registration Statement of which this Prospectus is a part.
Pursuant to the terms of the Series C Subscription Agreement, 31,997,863 shares
of Series C Preferred Stock were sold at $1.50 per share pursuant to the basic
subscription privilege (and overallotments with respect thereto) and 12,000,000
shares of Series C Preferred Stock were sold at $0.25 per share pursuant to the
additional allotment privilege (and overallotments with respect thereto). Shares
of Series C Preferred Stock may be converted into shares of Common Stock on a
one-for-one basis at the holder's option at any time, and are mandatorily
convertible into shares of Common Stock on a one-for-one basis upon the
occurrence of certain events. The net proceeds from the transaction will be used
for general corporate purposes and to make capital investments in CGA.
In connection with the consummation of the transactions contemplated by the
Series C Preferred Stock Subscription Agreement, on March 31, 1999 all issued
and outstanding shares of Series B Preferred Stock were converted into shares of
Common Stock, at a conversion ratio of 11.816 shares of Common Stock per share
of Series B Preferred Stock. The conversion ratio was based on an assumed value
of $3.00 per share of Common Stock. As a result of the conversion, 18,905,648
new shares of Common Stock were issued.
The Company has amended its Bye-laws (including the Appendices thereto) as
of March 31, 1999 to reflect the new capital structure of the Company as a
result of the consummation of the transactions described above. The Amended and
Restated Bye-laws of the Company and the amended Appendices thereto are filed as
exhibits to the Registration Statement of which this Prospectus is a part.
13
<PAGE>
The Company, the holders of the Common Stock and the holders of the Series
C Preferred Stock have entered into the Shareholders Agreement, dated as of June
12, 1997, as amended and restated as of March 31, 1999 (the "Amended and
Restated Shareholders Agreement"), to reflect the new capital structure of the
Company as a result of the consummation of the transactions described above, and
to add the new holders of Series C Preferred Stock as parties thereto. The
Amended and Restated Shareholders Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
In connection with the transactions described above, the Company obtained
agreements from the holders of Series A Preferred Stock to amend the terms of
the Series A Preferred Stock so that the early redemption premium with respect
thereto is eliminated.
On March 10, 1999 DCR reaffirmed its "Triple-A" claims paying rating for
CGA.
December 31, 1998
On a consolidated basis, the Company generated $1.2 million of cash from
operating activities during 1998 compared to using $9.4 million for the
nine-month period ended December 31, 1997. This $10.6 million increase in cash
flow from operations is the result of the Company moving from the start-up phase
of operations during 1997 to producing cash flow from premiums and management
fees during 1998.
The Company used $5.8 million of net cash in investing activities during
1998 which was the result of an effort to reduce cash balances and stay more
fully invested in fixed maturities. During 1997 the Company used $123.3 million
of net cash in investing activities which was the result of using the proceeds
from the private placement offering to build CGA's investment portfolio. There
were no cash flows from financing activities in 1998 and $139.7 million of net
cash flows from financing activities in 1997 resulting from the net proceeds of
the Company's private placement offering.
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 until June 17, 2002. After such date, CGA intends to comply
with dividend restrictions, if any, imposed by DCR subject to covenants
contained in the subscription agreements for the various classes of the
Company's stock. In addition, CGA's dividend payments are subject to certain
limitations under Bermudian insurance regulations that require minimum solvency
margins and liquidity ratios.
In October 1998, CGA purchased a $30 million five year note from SG
Holdings (the parent of SGI and SG3) in order to enable SG Holdings to provide
its subsidiaries with sufficient funds to pay CGA the $38.95 million insurance
premium referred to above. The $30 million note was recorded as an investment on
CGA's books, however, it was not included in the calculation of CGA's claims
paying resources.
As a result of the $30 million reduction in CGA's claims paying resources
and its exposure to the CFS Securities, CGA modified its business plan pending
the receipt of additional claims paying resources. Accordingly, CGA acquired
additional exposure of only $41 million during the months of November and
December 1998.
CGA monitors its exposure on a routine basis and stays in close contact
with DCR to ensure that its "Triple-A" 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 which expire June 17, 2002, from certain institutional shareholders
to purchase an aggregate of $60 million of additional Series B Preferred Stock.
Should those commitments be called upon, the proceeds would likely 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 "Triple-A" rating.
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SUBSEQUENT EVENTS
On April 14, 1999, the credit support arrangements referred to in note 8 to
the Company's financial statements for the year ended December 31, 1998 were
terminated in their entirety. In connection with such termination, two
subsidiaries of SG Holdings received a refund of premium totaling approximately
$29.5 million. On April 16, 1999, a portion of these funds were used to repay
the $25 million note to CGA referred to in footnote 3. Also on April 16, 1999,
the $5 million note payable by Cobalt to CGA was assigned to CGA to the Company.
The effect of these transactions was to increase claims paying resources at CGA
by $30 million.
On April 26, 1999 the Company sold 973,483 shares of Series C Preferred
Stock to employees of the Company and its subsidiaries. The shares were sold for
$1.20 each, for a total of $1.2 million. The shares were 90% financed by the
Company at 7% per annum with equal principal installments due annually over a
three-year period.
YEAR 2000
The Company's primary uses of software systems are for corporate and
investment portfolio accounting, as well as investment underwriting and
analysis. The Company's current systems have recently been purchased or leased
as the Company commenced operations in June 1997 and are believed to be Year
2000 compliant. Therefore, the Company believes that the risk of Year 2000
compliance is not significant as it relates to its computer software systems.
The Company has incurred no material costs to date and expects to incur no
material costs in the future to make its systems Year 2000 compliant.
The Company is also in the process of reviewing its exposure to Year 2000
issues resulting from its customers' and vendors' computer systems. The Company
has contacted its customers and vendors regarding the state of their remediation
activities for material Year 2000 issues. The Company does not expect that there
will be material disruptions to its business or material costs associated with
any Year 2000 disruption by its customers and vendors. However, the cost and
timing of third party Year 2000 compliance is not within the Company's control
and no assurances can be given with respect to the cost or timing of such
efforts or the potential effects of any failure to comply. The Company will
continue to monitor Year 2000 compliance and formal contingency plans will be
formulated if the Company identifies specific areas where there is a substantial
risk of Year 2000 problems occurring. No such areas are identified as of this
date.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities" effective for fiscal years beginning after June 15, 1999.
SFAS 133 requires all derivatives to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. The Company
does not believe the application of SFAS 133 will have a material effect on its
consolidated financial statements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
RISK MANAGEMENT
In the ordinary course of business, the Company, through its Subsidiaries,
manages a variety of risks. Of these, the primary risk is the credit risk taken
by CGA in respect of obligations insured by it. Other material risks include
those in respect of credit derivatives, liquidity, capital markets, exposure to
reinsurers, operational and legal. These risks are identified, measured and
monitored through a variety of control mechanisms, which are in place at
different levels throughout the organization.
CREDIT RISK
The most significant risk to which the Company is exposed is credit risk.
Credit risk occurs at a number of levels, primarily in respect of the securities
and other financial obligations insured by CGA, but also in connection with
counterparties to interest rate and currency swaps, credit derivatives, and
liquidity providers.
The primary credit risk to which CGA is exposed is the risk of default on
the underlying securities or other financial obligations which it has
guaranteed. Under its financial guaranty insurance policy, CGA would generally
be liable to pay interest, principal and other amounts in respect of the insured
obligation as these become due for payment in accordance with the payment terms
of the underlying obligation, without giving effect to any acceleration thereof.
In the event the issuer of a CGA-insured security defaults on its payment
obligations, under its policy CGA would be obligated to make all scheduled
payments when due for payment. Under its insurance policies, CGA would generally
have the right, but not the obligation, to repay the defaulted security on an
accelerated basis. Upon making payment in respect of a defaulted security, CGA
would generally be subrogated to all rights and remedies of the issuer of the
security in respect of any related collateral or other security, to the extent
of the payment made by CGA.
CREDIT DERIVATIVES
CGA has exposure to counterparties in respect of certain credit
derivatives. CGA has entered into default swaps in respect of certain sovereign
and corporate exposures. CGA has also guaranteed the payment obligations of
certain subsidiaries of SG Holdings and Cobalt Holdings under default swaps and
total rate of return swaps which have been entered into by such vehicles.
Default Swaps
Default swaps are credit derivatives which enable the owner of a security
to transfer credit risk to another party. CGA has entered into default swaps
directly with banks and investment banks and has also guaranteed the obligations
of certain subsidiaries of SG Holdings and Cobalt Holdings pursuant to default
swaps.
The party taking the credit exposure in a default swap receives a net
payment that is the economic equivalent of a premium. Unless a credit event
occurs, the swap typically terminates on the maturity date of the reference
security, and there is no termination payment at maturity. Credit events relate
to the reference security and typically include: (i) bankruptcy, (ii) failure to
pay, (iii) repudiation, (iv) restructuring, and (v) cross default or
cross-acceleration. If a credit event occurs, CGA generally would be obligated
to purchase the reference security at par plus accrued interest. In some cases,
CGA would have the additional option of cash settlement, whereby CGA can make a
payment equal to the difference between the market value of the security at the
time, and the par value of the security.
Principal credit risks associated with default swaps include: (i) credit
risk--a loss may be incurred pursuant to a credit event in respect of the
underlying or reference security; (ii) market value risk--this risk is limited
to cash settlement or to the value of the reference security following a
physical settlement upon a credit event; (iii) counterparty bankruptcy
risk--from CGA's perspective, the counterparty's fixed payments would no longer
be received; however, the swap would terminate and CGA would no longer have the
credit exposure to the reference security; (iv) liquidity risk--if a credit
event occurs, CGA must fund the purchase of the reference security. The cash
amount required may be reduced in the event of a cash settlement, but this
option may not be attractive if the reference security is illiquid or is marked
at an unattractive price; and (v) assignment risk--if the reference security
carries certain rights, remedies, or obligations (such as voting rights related
to a bank loan), these should be assignable in the
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event of a physical settlement. The loan documents for the reference security
may not allow this. The loan documents may also obligate the assignee to fund
additional amounts under the loan, which CGA may not be able to do in the
required time period.
Total Rate of Return Swaps
Total rate of return swaps ("TRORs") are credit derivatives that are used
by certain subsidiaries of SG Holdings and Cobalt Holdings to assume credit
exposure without using cash. Effectively, the investment vehicle receives all
the economic benefits of owning the investment without financing it on balance
sheet. At the end of the TROR's term (typically one year), the investment
vehicle must purchase the underlying bond at the amount that had been financed
less any principal payments received ("Notional"). Any market value appreciation
or decline is for the investment vehicle's account.
These swaps are either provided by investment banks selling the bond or
through a swap line provided by certain institutional lenders to St. George and
Cobalt. The TROR counterparty benefits from a CGA surety bond guaranteeing the
investment vehicle's obligations under the contract. The counterparty also
retains an ownership interest in the specific bond that is being financed. In
general, the investment vehicle's investment guidelines require no less than a
"Double-A minus" or Aa3 rating from S&P or Moody's for eligible counterparties.
There are three principal risks associated with TRORs: (i) refinancing
risk--if at the termination date the counterparty does not roll its exposure to
the investment vehicles at the then current Notional or financing rate, then the
bond will need to be refinanced at the then available market value and financing
rates; (ii) market value risk--many TRORs (but not all) have market value
triggers ranging from 5% to 10% of the Notional. If the market value of the bond
drops below the relevant dollar price, then either (a) cash collateral will need
to be posted (normally enough to bring the collateral package back to par), or
(b) an early termination event can be declared by the counterparty; and (iii)
counterparty bankruptcy risk--the investment vehicle does not have a security
interest in the underlying bond that is being financed. In the event of the
counterparty's bankruptcy, the investment vehicle would have only an unsecured
claim against the counterparty. Under its surety bond, CGA would typically
guarantee any payment default by St. George, Cobalt or other investment vehicle
under the TROR, and would thus be liable to cover any payment default by the
investment vehicle thereunder.
LIQUIDITY
The liabilities of certain CGA-insured investment vehicles (e.g., SG1 and
SG3) do not provide term funding for the assets owned by these vehicles. This
could result in incremental exposure to CGA in the event of an inability to
refinance an asset at the maturity date of the associated liability, especially
when the asset's market value is lower than its acquisition cost. Such inability
to refinance could result in a claim against CGA in the amount of the market
value loss.
As loans, notes and TRORs (liabilities) of the CGA-guaranteed investment
vehicles mature, the investment vehicle will attempt to refinance the liability
with the existing lender or issue a new CGA-insured liability to refinance the
maturing liability. In vehicles such as SG1 and SG3, if the 364-day facility is
not renewed, the facility rolls into a four-year term loan with 25% annual
amortization. Currently, for SG1 (since the facility was not rolled and SG1 is
now a 4-year term loan with an outstanding principal amount of approximately
$425 million) the assets will be refinanced or liquidated as the term loan
amortizes. CGA remains liable for current interest and principal when due in
accordance with the stated amortization schedule on such term loan.
In the event a CGA-insured liability cannot be issued to refinance a
maturing liability, CGA will (i) direct the investment vehicle to sell the
related asset with or without CGA insurance or (ii) attempt to arrange for the
purchase of the asset by another CGA-insured investment vehicle. Refinance
options for maturing TRORs include: (i) refinance or "term out" the full amount
of the maturing TROR with the existing TROR counterparty; (ii) refinance the
maturing TROR with the existing TROR counterparty or new counterparty at the
related security's market value; (iii) sell the asset with or without a CGA
guaranty; and (iv) attempt to arrange for the purchase of the asset by another
CGA-insured investment vehicle. In the case of (ii), (iii) and (iv), CGA would
be liable for any market value shortfall not otherwise covered by the terms of
the refinancing.
The Company had exposure totaling approximately $425 million related to the
timely payment of interest and principal on a loan to SG1. The loan is payable
in four equal annual installments with the first installment due
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November 11, 1999. In order to meet this obligation, CGAIM, as the advisor to
SG1, advised SG1 to sell a portion of the underlying securities to special
purpose vehicles that will repackage the securities as follows. Underlying
securities were sold to two newly organized special purpose vehicles, financed
by three classes of certificates. The two most senior classes of certificates,
representing approximately 84% of the total, were purchased by a third party who
is also an institutional investor in the Company. The Company issued a 5.9% pool
policy related to the underlying pool of securities. This transaction closed in
April, 1999. The proceeds from this sale were sufficient to meet SG1's
obligations due in November, 1999.
CAPITAL MARKETS
Spread Risk (Credit Spread and Swap Spread Widening/Compression)
The market value of a fixed income asset has two components, duration risk
and credit spread risk. Duration risk is the risk of change in price of a
fixed-rate bond as a result of changes in interest rates. St. George and Cobalt
investment vehicles, which generally borrow at floating, LIBOR based rates, are
required by their investment guidelines to hedge this risk, through interest
rate swaps, to minimize fluctuations in the market value of their portfolios
resulting from movements in the Treasury market. Such interest rate swaps
effectively convert fixed rate assets into synthetic floating rate bonds. Credit
spread risk is the risk resulting from change in price of any non-government
bond as a result of a change in the market's willingness to hold the issuer's
risk. The Company believes that the change in the price of a bond due to credit
spread movements (risk premium) cannot be hedged in today's market for the type
of assets in the St. George and Cobalt investment portfolios. Credit derivative
contracts with market value triggers are also subject to credit spread risk.
The following hold true for spread volatility: (i) the shorter life of the
asset, the lower the credit spread volatility; (ii) higher rated assets have
lower credit spread volatility than lower rated assets; and (iii) assets with
better liquidity (tighter bid/ask spread) have lower credit spread volatility.
The market value volatility of a portfolio of assets and/or derivative
contracts is simply the weighted average of the volatility of the individual
assets. Credit spreads move for the following reasons: (i) underlying changes in
the credit quality of the securities; (ii) supply/demand equation; and (iii)
absences of liquidity, such as occurred in the capital markets in the second
half of 1998.
Interest Rate Movements
The market value of fixed rate bonds fluctuates as underlying interest
rates change (parallel shifts and/or twists). This is commonly measured by the
modified duration of the bond. CGAIM manages the duration risk of the assets in
its clients' portfolios by swapping the fixed rate cash flows into LIBOR
floating rate basis. The interest rate hedge is generally put on simultaneously
with the purchase by the client of the fixed rate bond. CGAIM monitors the
interest rate risks as agreed with each client and set forth in the investment
guidelines for such client. Pursuant to the client's investment guidelines, each
client's investment portfolio must be managed so as to remain within certain
parameters in this market risk category.
Interest Rate Swaps
CGA-insured investment vehicles are required by their respective investment
guidelines to swap all fixed rate investments to LIBOR. This is intended to
ensure that the vehicles lock-in the intended spread on their respective
investments and have sufficient resources to pay interest on their respective
financings. The bankruptcy of a provider of an interest rate swap could leave
CGA exposed to the marked-to-market value of the interest rate swap. In general,
the investment guidelines for the various St. George and Cobalt vehicles require
that swap counterparties be rated not less than "Single-A" by one or more
nationally recognized credit agencies. Certain of the St. George and Cobalt
vehicles have higher or additional requirements for swap counterparties.
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ST. GEORGE AND COBALT
INTEREST RATE SWAP COUNTERPARTY EXPOSURE
AS OF DECEMBER 31, 1998
DEBT RATINGS
-------------------------------------------------
S&P MOODY'S NOTIONAL ($MM)
----------- ----------- ---------------------
AAA Aaa 9
AAA Aa1 35
AA+ Aa1 20
AA Aa2 124
AA- Aa3 82
A+ Aa2 85
A+ Aa3 124
A+ A1 400
Aa3 9
Counterparty derivative exposures are a function of the notional amount and
tenor of the derivative contracts outstanding, as well as the yield curve. Since
the future paths of the yield curve are probabilistic, there are a number of
analytical approaches to measure the credit exposures from interest rate swaps.
The Company applies a stressed (3-Sigma) expected mark-to-market approach and
aggregates counterparty risks across the CGA-guaranteed investment vehicles and
swap contracts. The "starting point" for the 3-Sigma measurement is the current
marked-to-market value of each derivative contract.
Most of the long dated interest rate swaps to which St. George and Cobalt
are party have "true-up" provisions which allow either counterparty to terminate
a swap contract in five years. This provision provides both counterparties with
a credit risk mitigant. At the current time, CGA-guaranteed vehicles have over
$700 million of long dated interest rate swaps with this type of provision.
Spread Deterioration Risk
Certain of the St. George and Cobalt investment vehicles fund their
LIBOR-based portfolios by borrowings under asset backed commercial paper
facilities. This could subject the vehicle to basis risk if LIBOR and asset
backed commercial paper rates diverge. These two indices normally trade with a
high degree of correlation; i.e. asset backed commercial paper generally yields
around LIBOR minus 5 basis points. However, in times of market disruption, such
as occurred in September and October of 1998, asset-backed commercial paper
widened to as much as LIBOR plus 20 basis points. To the extent that the
LIBOR-based cash flow generated by such St. George and Cobalt investment
vehicles is insufficient to cover such vehicles' increased funding cost due to
excessive widening of asset-backed commercial paper rates, CGA would generally
be liable for any shortfall pursuant to the insurance issued by it.
REINSURANCE
In the ordinary course of its business, CGA cedes exposures under various
reinsurance contracts primarily designed to minimize losses from large risks and
to protect capital and surplus. The reinsurance of risk does not relieve the
ceding insurer of its original liability to policyholders. In the event that any
or all of the reinsurers were unable to meet their obligations to CGA under
these reinsurance arrangements, CGA would be liable for such defaulted amounts.
CGA's exposure to reinsurers was $607.18 million as of December 31, 1998. All
such exposure is with counterparties which are institutional shareholders (or
affiliates of institutional shareholders) of the Company.
CGA's exposure relating to its reinsurers is the joint probability of both
an asset and a reinsurer defaulting at the same time. Generally speaking, this
risk is considered to be non-correlated, and is therefore considered to be a low
probability risk. Assuming that there is no correlation between the default of
an asset and a reinsurer, the probability of simultaneous default would be
product of the individual default probabilities. For example, a five year
Baa3-rated asset backed security should have a default probability of
approximately 3.7%, according to Moody's Default Study. Similarly, a Aa3 rated
reinsurer should have a five-year default probability of approximately .60%.
Therefore, the joint probability of simultaneous default would be only .02%. The
risk mitigation gained from the non-correlation of asset and counterparty is
extremely valuable and it is the basis for the capital relief provided by
reinsurance.
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OPERATIONAL
Operational risk relates to the potential for loss caused by a breakdown in
information, communication and settlement systems. The Company and the
Subsidiaries attempt to mitigate operational risk by maintaining a comprehensive
system of internal controls. This includes the establishment of systems and
procedures to monitor transactions and positions, documentation and confirmation
of transactions and ensuring compliance with applicable regulations.
LEGAL
Legal risk relates to the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of the Company's and the Subsidiaries'
counterparties, including contractual provisions intended to reduce exposure by
providing for the offsetting or netting of mutual obligations. The Company seeks
to remove or minimize such uncertainties through continuous consultation with
internal and external legal advisors to analyze and understand the nature of
legal risk, to improve documentation and to strengthen transaction structure.
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 backed securities and asset-backed
securities through its primary subsidiary, CGA.
CGA Group, Ltd. (the "Company") is a holding company incorporated in
Bermuda with limited liability. The Company, through its primary and
wholly-owned subsidiary Commercial Guaranty Assurance, Ltd. ("CGA"), a Bermuda
insurance company, provides financial guaranty insurance of structured
securities, including commercial real estate backed securities and asset backed
securities. The Company also provides financial guaranty insurance of other
securities, where the Company's senior management team ("Management") has
expertise and credit enhancement opportunities are deemed attractive.
The Company also provides investment management and investment advisory
services to investment vehicles and other clients. These services are provided
through the Company's other wholly-owned subsidiary, CGA Investment Management,
Inc. ("CGAIM"), a Delaware corporation that is registered as an investment
adviser with the Securities and Exchange Commission (the "Commission") under the
Investment Advisors Act of 1940, as amended. CGA and CGAIM are sometimes
referred to herein as the "Subsidiaries."
The primary clients of CGA and CGAIM are St. George Holdings, Ltd., a
Cayman Islands company ("SG Holdings"), and its subsidiaries (collectively, "St.
George") and Cobalt Holdings LLC, a Delaware limited liability corporation
("Cobalt Holdings"), and its subsidiaries (collectively, "Cobalt"). In 1998 St.
George and Cobalt provided approximately 85% of the total premiums earned by
CGA, and 91% of the total investment management fees earned by CGAIM. These
percentages are expected to decrease in the future.
The Company was formed with a view to becoming the market leader in the
commercial real estate segment of the financial guaranty industry. The Company
utilizes its structured finance and real estate expertise to underwrite
financial guaranties for commercial real estate and other securities to a zero
loss underwriting standard. The Company's primary target market is the large
U.S. commercial real estate mortgage market, which the Company believes is
underserved. The Company also targets select segments of the private
asset-backed securities ("ABS") market.
Customers can purchase CGA's insurance only through unaffiliated non-U.S.
insurance brokers. Customers include investment and commercial banks with
significant real estate and asset-backed advisory businesses, and commercial
mortgage loan origination and asset-backed repackaging operations and other
participants in the securitization markets.
FINANCIAL GUARANTY INSURANCE PRODUCTS
CGA offers four 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 four
programs can be applied.
Each of the product applications is described as follows:
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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 New Issue Guaranty--CGA is involved in the structuring and
guaranteeing of new debt securities including commercial
mortgage-backed securities ("CMBS"), ABS, corporate and government
obligations. As securities insured by CGA are rated "Triple-A", this
guaranty should lower the all-in cost of the financing and/or increase
proceeds to the issuer.
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.
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.
As part of its business strategy in the commercial real estate (including
real estate investment trust ("REIT")) 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 rapidly 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 below under "CGA Investment Management, Inc.--St. George and
Cobalt."
OVERVIEW OF THE SUBSIDIARIES
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
advice.
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.
Commercial Guaranty Assurance, Ltd. ("CGA") is an insurance company
incorporated in Bermuda with limited liability. CGA was incorporated on October
22, 1996, and commenced operations in June 1997. CGA is licensed as a Class 3
insurer under the Insurance Act 1978 of Bermuda. CGA's claims-paying ability has
been rated "Triple-A" by Duff & Phelps Credit Rating Company ("DCR"), the
highest rating assigned by such rating agency. CGA's claims-paying ability has
also been rated in the highest rating category assigned by each of the two
Canadian rating agencies, Dominion Bond Ratings Service ("DBRS") and Canadian
Bond Ratings Service ("CBRS"). CGA issues financial guaranty insurance policies,
which are the functional equivalent of direct-pay letters of credit, to insure
payment of interest, principal and other amounts payable in respect of notes,
securities and other financial obligations. Because CGA's credit rating is
"Triple-A", all securities and other obligations guaranteed by CGA are rated
"Triple-A" by DCR and, if applicable, DBRS and CBRS.
CGA's "Triple-A" rating is supported by an aggregate of approximately $224
million in claims-paying resources (as of April 30, 1999), consisting of (i)
approximately $144 million in statutory capital, (ii) an irrevocable capital
commitment (the "Capital Commitments") on the part of certain existing
shareholders of CGA Group to purchase an aggregate of $60 million in additional
equity securities of CGA Group in the event DCR requires such commitment to be
funded in order for CGA to maintain its "Triple-A" rating (for a description of
the Capital Commitment, see Item 12--"Security Ownership of Certain Beneficial
Owners and Management") and (iii) a $20 million excess of loss insurance policy
provided by KRE Reinsurance Ltd., an affiliate of Capital Reinsurance Company (a
shareholder of the Company). On March 31, 1999, the Company sold 43,997,863
shares of its Series Convertible Preferred Stock to certain of its existing
investors for net cash proceeds of $50,996,794.50. The Company
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used approximately $27.2 million of the net proceeds of the sale to make a
capital investment in CGA, which capital investment increased CGA's
claims-paying resources by a corresponding amount.
As a Bermuda domiciled insurance company, CGA does not write insurance or
otherwise conduct or transact insurance business in the United States or any
other jurisdiction where it is not authorized to do so. CGA's insurance may only
be obtained through unaffiliated non-U.S. insurance brokers and consultants on a
direct-placement basis. All negotiations with, and issuances of policies by, CGA
take place in Bermuda or other locations outside of the United States.
CREDIT ENHANCEMENT BUSINESS
CGA's principal business is the issuance of financial guaranty insurance
policies which guarantee timely payment of interest, principal and other amounts
on securities and other financial obligations. CGA primarily insures investment
grade securities in the commercial real estate and asset backed securities
markets, and also insures the liabilities of investment vehicles which invest in
structured securities, including ABS, CMBS, mortgage backed securities ("MBS")
and other securities and financial obligations. A financial guaranty insurance
policy is used in the capital markets as a credit enhancement instrument to
guarantee payments of principal, interest and other amounts in accordance with
the original debt service schedule of the security. In the event 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
noncancelable.
The fundamental business proposition of all financial guarantors is to
elevate to a "Triple-A" level securities which would otherwise have a lower
rating. Issuers of securities rated lower than "Triple-A" purchase financial
guaranty insurance policies to enhance the rating of such securities to
"Triple-A", thereby reducing their borrowing costs and/or increasing the
liquidity of the security. In turn, the guarantor collects a premium (payable
either upon issuance of its policy or periodically in installments) equal to a
significant portion of the savings resulting from the improved trading levels of
the guaranteed securities.
Generally, an issuer will purchase a financial guaranty insurance policy to
increase the ratings of its securities to "Triple-A" only when the yield on the
uninsured security exceeds (i) the annual premium charged to upgrade the
security to "Triple-A" plus (ii) the yield on the same security when enhanced to
a "Triple-A" 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 security rated "Triple-A"
without insurance and the yield of a similar security rated "Triple-B") and the
trading level achieved as a result of the "Triple-A" guaranty policy.
One of CGA's primary target markets is investment vehicles which purchase
structured securities. Therefore, a substantial portion of CGA's guaranty
business is generated from advisers to such investment vehicles. Such policies
typically guaranty the liabilities issued by the investment vehicle. In such
cases, and as a condition to issuing its policy, CGA will generally require that
the investment vehicle adopt investment guidelines acceptable to CGA.
ZERO-LOSS UNDERWRITING STANDARD
CGA underwrites all risks insured by it to a "zero loss" standard--that is,
obligations insured by CGA are required to be structured with sufficient levels
of excess collateral or other security so that CGA, to a high degree of
certainty, anticipates no losses on each risk insured without regard to the
premium collected thereon or the investment income related thereto. To this end,
each policy written by CGA is required to meet the criteria specified in the
underwriting guidelines adopted by its Board of Directors. CGA is able to
deviate from such guidelines on a case-by-case basis only in accordance with
procedures established by its Board of Directors. There can be no assurance,
however, that CGA will not incur losses with respect to such insured
obligations.
CGA's underwriting guidelines are intended to provide multiple layers of
loss protection. Notes or structured securities insured by CGA are generally
backed by pools of assets having reasonably predictable cash flows. These
securities typically 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, guarantees, 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. Over
collateralization or third-party protections may not, however, be required in
transactions in which CGA is
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insuring the obligations of certain highly rated issuers that typically are
regulated or have implied or explicit government support, or sovereign credits.
CGA manages its exposure on an ongoing basis and is closely monitored by
DCR, DBRS and CBRS to ensure that it is operating in a manner consistent with
its "Triple-A" rating.
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, making investments in U.S. dollar denominated
securities which generate non-U.S. source income, and within these constraints,
obtaining superior long-term total returns. CGA's investment guidelines are
consistent with these objectives.
All of CGA's investments must comply with investment guidelines adopted by
its Board of Directors. The minimum rating level for an investment is at least
"Double-A minus" or the equivalent by a nationally recognized credit rating
agency. 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. No investment is allowed if such investment would generate U.S. source
income to CGA.
The investment manager (the "Investment Manager") for CGA is Alliance
Capital Management Corporation. Subject to the investment guidelines determined
by CGA's Board of Directors, the Investment Manager has discretion to, among
other things, buy, sell, retain, or exchange investments. The Investment Manager
has entered into an investment management agreement with CGA, which is
terminable by either party upon 30 days' written notice.
The following tables summarize CGA's investments by country and by type of
debt security, in each case as of December 31, 1998:
COUNTRY PERCENTAGE TYPE PERCENTAGE
- ------- ---------- ---- ----------
Supra-national 15% Financial 38%
Other 15% Sovereign 25%
Germany 12% Banking 20%
UK 11% Industrial 9%
Japan 9% Accrued income 3%
Netherlands 6% Public utilities 3%
France 6% Corporate 2%
Cayman Islands 6% Cash equivalents 1%
Canada 6% ---
Sweden 3% TOTAL 100%
Italy 3% ===
Ireland 2%
Belgium 2%
Denmark 1%
Norway 1%
Spain 1%
Channel Islands 1%
---
TOTAL 100%
===
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At December 31, 1998, no investments in CGA's investment portfolio were
rated less than "Double-A minus" or the equivalent. The average yield to
maturity on the investment portfolio was 4.7% as of December 31, 1998.
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. CGA monitors its exposure to insured credits on an ongoing basis.
In this regard, CGA reviews available information on the entities which issued
the insured securities, the assets underlying the insured securities, and
general trends in the relevant industry.
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 corporate bonds 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. In the event that reserves are
increased or decreased with respect to a potential claim, a corresponding
adjustment to the Company's earnings would be made in its financial statements
for the period in which such reserve increase or decrease is made.
In October 1998, the credit ratings on asset-backed securities issued by
various trusts established and serviced by Commercial Financial Services, Inc.
("CFS"), a credit-card debt collection company, were withdrawn by the three
credit rating companies that rate the securities issued by such trusts (the "CFS
Securities"). The withdrawal of said ratings was in response to allegations of
accounting and other irregularities at CFS. The rating agencies, investors and
insurers, as well as the Commission, have commenced an investigation into these
allegations. Clients of CGA own approximately $199 million par amount of CFS
Securities, which exposure has been guaranteed by CGA. CGA has reinsured
approximately $152 million par amount of this exposure, leaving CGA with a net
exposure of approximately $46.7 million par amount as of April 30, 1999. CGA has
taken a case basis reserve in respect of the CFS Securities in the amount of
approximately $20.8 million. This amount represents Management's best estimate
of potential losses in respect of the CFS Securities at this time.
CONTINGENCY RESERVE
As a Bermuda based Class 3 insurer (as defined herein), CGA is generally
not required to establish contingency reserves. If CGA were to assume
reinsurance from a U.S. domiciled financial guaranty insurer, then CGA would be
required to maintain contingency reserves, which would be 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 that CGA utilizes reinsurance, CGA
has given Capital Reinsurance Company ("Cap Re"), a financial guarantor rated
AAA by Standard & Poor's Ratings Services ("S&P") and FitchIBCA, Ltd.
("FitchIBCA"), and
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Aa2 by Moody's Investors Service, Inc., a right of first offer to provide such
reinsurance. The reinsurance of risk does not relieve CGA of its original
liability to its policyholders. In the event that a reinsurer was unable to meet
its obligations under a reinsurance contract, CGA would be liable for such
defaulted amounts.
CGA has entered into an excess of loss reinsurance facility agreement dated
as of June 12, 1997, as amended, with KRE Reinsurance Ltd. (the "Reinsurer"), an
affiliate of Cap Re rated AA by S&P and AA+ by FitchIBCA. 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.
During October, 1998, CGA took steps to mitigate risks related to its
exposure in connection with guarantees of certain client credit facilities used
to purchase asset-backed and real estate backed securities. As a result of
turmoil in certain areas of the capital markets during this time period, the
spreads over treasuries at which investors were willing to purchase certain
securities widened considerably. This spread widening caused a decrease in the
fair market value of many of the securities used as collateral for the insured
credit facilities. The estimated fair market value of these securities had
declined significantly during October. Certain of the credit facilities have
requirements that lender's operating ratios, (the portfolio market value divided
by the amount of the loan outstanding) be maintained above certain levels. In
the event that an operating ratio falls below the required level and is not
brought into compliance within the applicable cure period, the lender may
liquidate the collateral and require CGA to pay any remaining balance
outstanding under the credit facility.
On October 30, 1998, CGA provided asset specific guarantees and obtained
third party credit support on a "cut-through" basis on approximately $382
million par amount of securities in the investment portfolios of two of its
clients, St. George Investments I, Ltd. ("SGI") and St. George Investments III,
Ltd. ("SG3"). The three parties which provided such credit support are
institutional investors in the Company. The effect of this third-party credit
support was to substantially increase the market value and reduce the future
market value volatility of the credit enhanced securities. In connection with
these arrangements, CGA received a premium of $38.95 million from its two
clients, and ceded an aggregate of $38.7 million to the institutions that
provided the cut-through credit enhancement. CGA loaned an aggregate of $30
million to SG Holdings, the parent corporation of SGI and SG3) and Cobalt
Holdings in order to permit them to provide their subsidiaries with sufficient
funds to pay the premium for such credit support, and to meet such clients'
ongoing liquidity needs. Such loan reduced CGA's claims-paying resources by $30
million. As a result of these arrangements, SGI and SG3 were and remain to date
in full compliance with all loan to value covenants set out in such companies'
credit facilities. On April 14, 1999, these credit support arrangements were
terminated in their entirety. In connection with such termination, two
subsidiaries of SG Holdings received a refund of premium totaling approximately
$29.5 million. On April 16, 1999, a portion of these funds were used to repay
the $25 million note to CGA. Also on April 16, 1999, the $5 million note payable
by Cobalt to CGA was assigned by CGA to the Company. The effect of these
transactions was to increase claims-paying resources at CGA by $30 million.
The Company had exposure totaling approximately $425 million related to the
timely payment of interest and principal on a loan to SG1. The loan is payable
in four equal annual installments with the first installment due November 11,
1999. In order to meet this obligation, CGAIM, as the advisor to SG1, advised
SG1 to sell a portion of the underlying securities to special purpose vehicles
that will repackage the securities as follows. Underlying securities were sold
to two newly organized special purpose vehicles, financed by three classes of
certificates. The two most senior classes of certificates, representing
approximately 84% of the total, were purchased by a third party who is also an
institutional investor in the Company. The Company issued a 5.9% pool policy
related to the underlying pool of securities. This transaction closed in April,
1999. The proceeds from this sale were sufficient to meet SG1's obligations due
in November, 1999.
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INSURANCE IN FORCE
The following table shows CGA's net par outstanding insured obligations at
December 31, 1998 by asset type and by credit rating:
<TABLE>
<CAPTION>
ASSET TYPE CREDIT RATING
-------------- -------------
<S> <C> <C> <C> <C> <C>
ABS Consumer ....................... $ 456,521,235 29% AAA $ 58,203,887 4%
ABS Corporate ...................... 345,612,368 22% AA 39,454,116 3%
CMBS ............................... 185,753,755 12% A 180,310,840 12%
REIT Debt .......................... 381,777,437 24% BBB 1,049,028,508 67%
REIT Preferred ..................... 70,000,000 5% BB 175,692,856 11%
Sovereign .......................... 120,000,000 8% Not Rated 56,974,587 3%
-------------- --- -------- -------------- ---
TOTAL ............................ $1,559,664,795 100% TOTAL $1,559,664,795 100%
============== === ============== ===
</TABLE>
CGA INVESTMENT MANAGEMENT, INC.
CGAIM is a Delaware corporation that is registered as an investment adviser
with the Commission under the Investment Advisors Act of 1940, as amended.
CGAIM, which commenced operations in June, 1997, 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.
GENERAL
CGAIM acts as investment manager and/or collateral manager to specialized
investment vehicles and other clients, including SG Holdings, Cobalt Holdings,
and their respective subsidiaries. Its activities in this capacity include
providing advice regarding the purchase and sale of structured and other
financial assets, the management of funding and market risk, and reporting and
accounting functions. CGAIM performs initial and ongoing credit reviews on the
assets which it recommends for purchase to its clients, and the counterparties
with which it negotiates financial hedges and derivative contracts. Investment
guidelines are developed for each client to ensure that CGAIM manages its
clients' assets pursuant to agreed upon guidelines and limits.
CGAIM also acts as a financial adviser for its clients, which include
issuers and investment banks, in evaluating structured finance alternatives and
financing structures. CGAIM's services in this capacity include providing
assistance in evaluating, structuring and documenting structured finance
transactions, and in organizing and performing due diligence relating to
financial assets and structured transactions.
INVESTMENT ADVISER/COLLATERAL MANAGEMENT SERVICES
CGAIM acts as investment manager and/or collateral manager to specialized
finance vehicles, including SG Holdings, Cobalt Holdings and their respective
subsidiaries, which invest primarily in structured fixed income securities. In
so acting, CGAIM's duties include some or all of the following:
(i) Identifying assets on behalf of its clients, including (1)
analyzing credit, legal and market/optionability (i.e. interest rate,
currency and 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 as agreed with the client.
(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 its clients and persons providing financing
to such clients in order to determine compliance with the clients' and such
lenders' policies and procedures.
(v) Analyzing the performance of assets including recommending the
sales of investments when appropriate.
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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 also acts as a financial advisor for its clients, which include
financial asset issuers and investment banks, in evaluating structured finance
alternatives and financing structures. CGAIM charges advisory fees to its
clients for its services. CGAIM's services as financial advisor include the
following:
(i) providing assistance in evaluating, structuring and documenting
structured finance transactions (which could include the purchase of credit
enhancement provided by CGA); 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 Commission, and authorizes
the Commission to inspect such books and records.
ST. GEORGE AND COBALT
SG Holdings 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, MBS, ABS and corporate securities. Cobalt
Holdings was organized as a Delaware limited liability company for the purpose
of forming subsidiaries which invest in certain types of securities, primarily
debt obligations and 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
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 acts as asset manager for SG Holdings, Cobalt Holdings, and
their respective subsidiaries. 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 SG Holdings
and Cobalt Holdings under their respective financing arrangements will similarly
be guaranteed by CGA.
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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 is 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 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
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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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<PAGE>
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 Capital
Commitments to pay dividends to holders of the Company's securities, because all
proceeds from the Capital Commitments will be contributed by the Company to CGA.
For a description of the Capital Commitments, see Item 12--"Security Ownership
of Certain Beneficial Owners and Management".
SUPERVISION, INVESTIGATION AND INTERVENTION
The Minister may appoint an inspector with extensive powers to investigate
the affairs of an insurer if the Minister is satisfied that an investigation is
required in the interest of the insurer's policyholders or persons who may
become policyholders. In order to verify or supplement information otherwise
provided to him, the Minister may direct an insurer and others to produce
documents or information relating to matters connected with the insurer's
business.
If it appears to the Minister that there is a significant risk of the
insurer becoming insolvent, the Minister may direct the insurer not to take on
any new insurance business; not to vary any insurance contract if the effect
would be to increase the insurer's liabilities; not to make certain investments;
to realize certain investments; to maintain in Bermuda, or transfer to the
custody of a Bermuda bank, certain assets; and to limit its premium income.
Further, in such circumstances, the Minister may direct that no dividends be
paid.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. The principal office
of CGA is at Craig Appin House, 8 Wesley Street, Hamilton HM 11 Bermuda and
Geoffrey Kauffman, CGA's President and Chief Underwriting Officer, is CGA's
principal representative. 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. 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 50 years);
(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
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dividends or to any foreign exchange controls in Bermuda. In addition there
currently is no capital gains tax in Bermuda.
U.S. AND OTHER
CGA is not 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). The Company has developed operating guidelines, which include the
acceptance of business through insurance brokers not resident in the U.S., to
assist its personnel in conducting business in conformity with the laws of U.S.
jurisdictions. The Company intends to follow these guidelines and expects that
to the extent that these operating guidelines are followed, its activities will
comply with applicable insurance laws and regulations. There can be no
assurance, however, that insurance regulators in the U.S. or elsewhere will not
review the activities of CGA and claim that CGA is subject to such
jurisdiction's licensing requirements.
Many states impose a premium tax (typically 2--4% of gross premiums) on
U.S. insureds obtaining insurance from unlicensed foreign insurers, such as CGA,
by direct placement. The premiums charged by CGA do not include any state
premium tax. Each insured is responsible for determining whether it is subject
to any such tax and for paying such tax as may be due.
The U.S. also imposes an excise tax on insurance and reinsurance premiums
paid to foreign insurers or reinsurers by insureds who are U.S. persons with
respect to risks located in the U.S. The rates of tax applicable to premiums
paid to CGA are currently 4% for insurance premiums and 1% for reinsurance
premiums.
CGAIM has been registered under the United States Investment Advisers Act
of 1940, as amended.
31
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY AND THE SUBSIDIARIES
The table below sets forth the names, ages (as of March 31, 1999) 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 ....... 52 Director, Chief Executive Officer and President,
CGA Group
James R. Reinhart ...... 42 Vice President and Chief Financial Officer, CGA
Group and CGA
Geoffrey N. Kauffman ... 40 President, CGA
Kem H. Blacker ......... 43 Managing Director and Chief Operating Officer,
CGAIM
Michael M. Miran ....... 46 Managing Director and General Counsel,
CGAIM
Jean-Michel Wasterlain . 41 Managing Director, CGAIM
Jay H. Shidler ......... 52 Chairman of the Board of Directors
David M. Barse ......... 36 Director
Robert L. Denton ....... 46 Director
Eric A. Gritzmacher .... 51 Director
Alan S. Roseman ........ 42 Director
Donald Kramer .......... 61 Director
Jeffrey P. Krasnoff .... 43 Director
Michael J. Morrissey ... 51 Director
Paul A. Rubin .......... 36 Director
Richard G. Schoninger .. 40 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 holds office until the
next 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 (currently Jay H. Shidler), the CEO Member (currently
Richard A. Price), the Management Member (currently Robert L. Denton) and ten
Members elected by the Eligible Investment Units Investors (as defined in the
Bye-laws). In connection with the Rights Offering (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Subsequent
Events"), the size of the Board has been increased to fifteen members, with the
two new vacancies to be filled by nominees elected by the holders of the
Company's Series C Preferred Stock. As of March 31, 1999, the two additional
directors had not yet been elected. 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 Donald Kramer, Alan S. Roseman (as
Chairman), Paul A. Rubin and Richard G. Schoninger, and is responsible for
determining compensation for the officers of the Company and the Subsidiaries
and for authorizing and approving the Company's employee benefits plans. 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, Paul A. Rubin and David M. Barse. The
Underwriting Committee is responsible for approving the credit underwriting
guidelines for CGA and is composed of Donald Kramer, Jay H. Shidler, Jeffrey P.
Krasnoff, Eric A. Gritzmacher (as Chairman), 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
and Jay S. Sugarman.
Under certain circumstances described in the Company's Series A
Subscription Agreement, two additional members of the Board may be elected by
the holders of the Series A Preferred Stock as a class.
32
<PAGE>
The Company's Bye-Laws contain provisions for the election of alternate
directors.
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 Financial Guaranty Insurance Company ("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. 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 joining 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. Prior to joining the Company, Mr. Reinhart served as Chief
Financial Officer and Executive Vice President of TriNet Corporate Realty Trust,
Inc. from its inception in May 1993. 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--President of CGA since June 30, 1998, and Chief
Underwriting Officer of CGA from January 1, 1997. Prior to joining CGA, Mr.
Kauffman worked at AMBAC Financial Group, Inc. ("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.
Prior to joining AMBAC, Mr. Kauffman was the Acting Director of the Asset
Backed Securities Group at Financial Guaranty Insurance Company ("FGIC") and a
member of FGIC's European Strategy Team. Mr. Kauffman joined FGIC in 1989 to
help establish FGIC's presence in the asset backed securities market.
Mr. Kauffman received a bachelor's degree from Vassar College and a MBA
from Carnegie Mellon 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, where he was responsible for structuring,
33
<PAGE>
negotiating and documenting a wide range of commercial real estate, MBS and ABS
transactions, including all of FGIC's international asset backed transactions.
More recently, Mr. Miran also served as FGIC's Chief Compliance Officer, with
responsibility over regulatory and corporate compliance.
Before joining FGIC in 1990, Mr. Miran was an attorney for seven years with
Weil, Gotshal and Manges in New York, where his practice covered a broad range
of commercial transactions, including mergers and acquisitions, secured
financings, debt restructurings and workouts, and capital markets and securities
transactions.
Mr. Miran received a bachelor of arts degree from New York University, and
a juris doctorate degree from Fordham University School of Law.
JEAN-MICHEL WASTERLAIN--Managing Director of CGAIM since June 1, 1997. Mr.
Wasterlain manages CGAIM's 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 structured commercial mortgage loan
securitizations backed by these loans. Mr. Wasterlain's 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 worked on the credit enhancing of 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 bachelor's degree in economics from Stanford
University and a MBA from the Wharton Graduate School of Business.
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, which he founded in 1970. 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. 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. 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. Mr.
Barse joined the predecessors of M.J. Whitman in December 1991 as general
counsel.
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 joining The Shidler Group,
Mr. Denton was employed from December 1991 to December 1994 as an investment
banker at Providence Capital, Inc., which he co-founded. Prior to joining
Providence Capital, Mr. Denton was employed as a management consultant at Booz,
Allen & Hamilton, 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).
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, 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.
34
<PAGE>
MICHAEL J. MORRISSEY--Director of the Company since June 18, 1997. Mr.
Morrissey has served as the Chairman and CEO of The Firemark Group, an
investment management firm specializing in public and private insurance related
investments, for the past fifteen years. He also serves as a director of NewCap
Re, ONYX, Health Care First, FinPac and Post Acute Care.
ALAN S. ROSEMAN--Director of the Company since January 27, 1999. Mr.
Roseman is currently a Director, and since 1989, General Counsel of Capital
Reinsurance Corporation, where he also serves as Executive Vice President and
Secretary.
PAUL A. RUBIN--Director of the Company since June 18, 1997. In April 1995,
Mr. Rubin became a principal of Olympus Partners, an investment limited
partnership, and he became partner of Olympus in December 1996. Prior to joining
Olympus in April 1995, Mr. Rubin worked as Vice President at Summit Partners, a
venture capital firm in Boston, which he joined in July 1990.
RICHARD G. SCHONINGER--Director of the Company since June 18, 1997. Mr.
Schoninger is managing director and head of Real Estate Investment Banking at
Prudential Securities, a wholly owned subsidiary of Prudential Securities Group,
Inc.
JAY S. SUGARMAN--Director of the Company since June 18, 1997. Mr. Sugarman
is currently President and since November 1997, Chief Executive Officer, of
Starwood Financial Trust, a finance company focused exclusively on commercial
real estate. 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 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, 1998 (the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
- --------------------------------------------------------------------------------------------------- ------------
(A) (B) (C) (D) (E) (F) (G)
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION LTIP PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
------------------ ---- ------ ------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Price ......................... 1998 300,000 75,000 144,931(1) 0 0
Chief Executive Officer, 1997 162,500 160,274 45,061(2) 0 0
President and Director, CGA
Group, Ltd.
Jean-Michel Wasterlain ................... 1998 175,000 175,000 5,000 0 0
Managing Director, 1997 94,792 225,000 179,994(3)(4) 0 0
CGAIM
Michael M. Miran ......................... 1998 200,000 145,000 5,000 0 0
Managing Director and 1997 100,769 150,000 0 0 0
General Counsel,
CGAIM
Kem H. Blacker ........................... 1998 225,000 105,000 5,000 0 0
Chief Operating Officer, 1997 121,875 200,000 73,745(3) 0 0
CGAIM
Landon D. Parsons ........................ 1998 170,000 145,000 5,000 0 0
Director and Co-Head 1997 63,750 155,000 0 0 0
of Structured Finance,
CGAIM
</TABLE>
- ------------
(1) Includes housing allowance of $126,385.
35
<PAGE>
(2) Includes housing allowance of $36,750.
(3) Amounts include payments by the Company of $50,244 and $68,995 made to
Messrs. 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.
(4) Amount includes payment by the Company of $125,000 made to Mr. Wasterlain
as buyout of his bonus arrangement with previous employer.
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
LONG-TERM INCENTIVE PLANS
The Company adopted a stock warrant plan (the "Stock Warrant Plan") to
promote equity ownership of the Company by selected employees, and the founders
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 June 17, 2007, 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 of the
Company pursuant to the Stock Warrant Plan vested immediately upon issuance. In
addition, the warrants contain certain adjustments for dilutive events and
certain protections for reorganization, and consolidations or mergers.
401(K) PLAN
The Company maintains a qualified retirement plan (401(K) plan) for all its
employees. The amounts contributed by the Company for the Named Executive
Officers during the fiscal year ended December 31, 1998was $25,000.
MANAGEMENT CONTRACTS
As of January 1, 1997, the Company entered into an employment agreement
with Richard A. Price, as Chief Executive Officer and President of the Company,
for a term of three years and subject to annual renewal thereafter. Mr. Price's
employment agreement with the Company provides for the payment of a base salary
of $300,000 and a discretionary annual cash bonus based upon an annual incentive
plan approved by the compensation committee of the Company's Board. The
employment agreement automatically renews for a one-year period upon the end of
the term of such agreement, unless terminated by the Company or Mr. Price, and
provides that if his employment is terminated other than for "cause", he shall
receive a severance payment of not less than one-half of his then-current base
salary plus certain relocation expenses.
CGAIM has entered into employment agreements with Kem H. Blacker, Michael
M. Miran, Jean-Michel Wasterlain and Landon D. Parsons, in each case for a term
of one year. The employment agreements of Messrs. Blacker, Miran, Wasterlain and
Parsons provide for the payment of base salaries of $200,000, $200,000, $175,000
and $170,000 per annum, respectively, and discretionary annual cash bonuses in
an amount based upon an annual incentive plan approved by the compensation
committee of the Company's Board. Each such employment agreement automatically
renews for a one-year period upon the anniversary of such agreement, unless
terminated by the Company or the employee. The employment agreements of Messrs.
Blacker, Miran, Wasterlain and Parsons each provide that if the employee's
employment is terminated other than for "cause", such employee shall receive a
severance payment of not less than one-half of his then-current base salary.
Each of the employment agreements described above contains provisions
relating to the payment of base salary and discretionary bonus with respect to
the contract period, grants of warrants to purchase common stock of the
36
<PAGE>
Company, the exclusivity of the employee's services, severance benefits in the
event of termination other than for "cause", noncompetition and confidentiality.
In addition, the directors and officers of the Company 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. While the Company is not currently aware of any reasons
why the current work permits for these officers will not be renewed, there can
be no assurance that they will be.
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, on
one hand, and Jay Shidler, The Shidler Group or any affiliates of The Shidler
Group, on the other hand, 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 arrangement described below under "Related Party
Transactions", the Company does not, and does not permit any of its Restricted
Subsidiaries to, directly or indirectly, conduct any business with any of the
Directors or any of their affiliates, 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.
RELATED PARTY 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 of 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 SG Holdings, Cobalt Holdings, and each of their
respective subsidiaries. Pursuant to such agreements, CGAIM will perform
advisory, asset management and related services for such companies. CGA has
guaranteed the payment obligations of such companies under their financing
arrangements, and its expected to guarantee the payment obligations of any other
subsidiaries of SG Holdings or Cobalt Holdings which may be established in the
future in respect of their financing obligations. See "The Company--CGA
Investment Management, Inc.--St. George and Cobalt."
In October 1998, CGA provided asset-specific guarantees and obtained third
party credit support on a "cut-through" basis on approximately $382 million par
amount of securities in the investment portfolios of two of its clients, SG1 and
SG3. The three parties which provided such credit support are institutional
investors in the Company. In connection with these arrangements, CGA received a
premium of $38.95 million from SG1 and SG3, and ceded an aggregate of $38.7
million to the three institutions which provided such credit support. CGA loaned
$30 million to SG Holdings (the parent corporation of SG1 and SG3) in order to
permit SG Holdings to provide its subsidiaries with sufficient funds to pay the
premium for such credit support, and to meet its clients' liquidity needs. See
"The Company--Commercial Guaranty Assurance, Ltd.--Reinsurance."
The Company pays the holders of Investment Units an aggregate of $600,000
per annum as a fee with respect to the $60 million in Capital Commitments. See
"Security Ownership of Certain Beneficial Owners and Management".
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
June 17, 1997 Recapitalization in exchange for 250,000 shares of the
37
<PAGE>
Company's Common Stock. The note was interest-bearing at a rate of 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.
SELLING STOCKHOLDERS
The Registration Statement of which this Prospectus is a part 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 March 31, 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) ........................ 843,350 25.4 843,350 0 0
Oppenheimer (6 funds)(1)(3) ................................ 638,904 19.2 638,904 0 0
Third Avenue Trust on behalf of the
Third Avenue Value Fund Series(5) ......................... 562,236 16.9 562,236 0 0
Lenner Capital Services, Inc. (5) .......................... 408,896 12.3 408,896 0 0
Olympus Partners (2 funds)(1)(6) ........................... 306,675 9.2 306,675 0 0
ACE Limited(5) ............................................. 255,561 7.7 255,561 0 0
Pacific Life Insurance Company
(2 companies)(1)(4)(5) .................................... 255,562 7.7 255,562 0 0
Capital Reinsurance Company(5)(7) .......................... 51,113 1.5 51,113 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.
(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) The two funds are: Olympus Growth Fund II, L.P. and Olympus Executive Fund,
L.P.
(7) 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.
38
<PAGE>
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 was first 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 Stockholders 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.
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.
39
<PAGE>
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK (as of March 31, 1999).
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 ...................... 843,350 25.4
Oppenheimer (6 funds)(1)(3)
Two World Trade Center, 34th Floor, New York, NY 10048 ........ 638,904 19.2
Third Avenue Trust on behalf of the
Third Avenue Value Fund Series
767 Third Ave., New York, NY 10017 ............................ 562,236 16.9
Lennar Capital Services, Inc.
760 N.W. 107th Ave., Suite 300, Miami, FL 33172 ............... 408,896 12.3
Olympus Partners (2 funds)(1)(4) ............................... 306,675 9.2
Pacific Life Insurance Company (2 companies)(1)(5)
700 Newport Center Drive, Newport Beach, CA 92660 ............. 255,562 7.7
ACE Limited
Suite 653, 48 Par-La Ville Road, Hamilton, HM11, Bermuda ...... 255,561 7.7
Capital Reinsurance Company(6)
1325 Avenue of the Americas, New York, NY 10019 ............... 51,113 1.5
</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 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.
(4) The two funds are: Olympus Growth Fund II, L.P. and Olympus Executive
Fund, L.P.
(5) The two companies are: Pacific Life Insurance Company and PM Group Life
Insurance Company.
(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.
<TABLE>
<CAPTION>
SERIES C PREFERRED STOCK (as of March 31, 1999).
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------------------ ------------------ ----------------
<S> <C> <C>
Pacific Life Insurance Company
700 Newport Center Drive, Newport Beach, CA 92660 ............. 10,553,309 12.5
Morgan Guaranty Trusts (2 trusts)(1)(2)
522 Fifth Avenue, New York, NY 10036 .......................... 5,636,684 11.1
Third Avenue Trust
767 Third Ave., New York, NY 10017 ............................ 6,045,667 10.7
Olympus Partners (2 funds)(1)(3)
Metro Centre, One Station Place, Stamford, CT 06902 ........... 5,454,882 10.7
ACE Limited
Suite 653, 48 Par-La Ville Road, Hamilton, HM11, Bermuda ...... 5,978,543 10.7
Lennar CGA Holdings, Inc.
760 N.W. 107th Ave., Suite 400, Miami, FL 33172 ............... 5,224,666 8.6
</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.
40
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK (as of March 31, 1999).
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------------------ ------------------ ----------------
<S> <C> <C>
Third Avenue Value Fund(1)
767 Third Avenue, New York, NY 10017 .......................... 3,387,395 11.4
Olympus Partners (2 funds)(2)(3)
Metro Centre, One Station Place, Stamford, CT 06902 ........... 3,366,634 11.3
Pacific Life Insurance Company(4)
700 Newport Center Drive, Newport Beach, CA 92660 ............. 3,362,472 11.3
Capital Reinsurance Company(5)
1325 Avenue of the Americas, New York, NY 10019 ............... 3,345,857 11.2
Morgan Guaranty Trust (2 trusts)(2)(6)
522 Fifth Avenue, New York, NY 10036 .......................... 2,959,783 9.9
ACE Limited(7)
Suite 653, 48 Par-La Ville Road, Hamilton, HM11, Bermuda ...... 2,885,087 9.7
Lennar CGA Holdings, Inc.(8)
760 N.W. 107th Ave., Suite 400, Miami, FL 33172 ............... 2,324,673 7.8
The Equitable Life Assurance Society of the United States
1290 Avenue of the Americas, New York, NY 10104 ............... 1,909,548 6.4
CGA Firemark Venture Fund I, LLC
c/o The Firemark Group, 67 Park Place, Morristown, NJ 07960 ... 1,432,454 4.8
</TABLE>
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS**
(AS OF MARCH 31, 1999)
NUMBER OF
SHARES OF NUMBER OF
SERIES C PERCENT SHARES OF PERCENT OF
PREFERRED STOCK OF CLASS COMMON STOCK CLASS***
--------------- -------- ------------ ----------
<S> <C> <C> <C> <C>
David M. Barse (9) .................... 0 0 0 0
Robert L. Denton (10) ................. 32,801 * 165,607 *
Eric A. Gritzmacher (11) .............. 0 0 0 0
Donald Kramer (12) .................... 0 0 0 0
Jeffrey P. Krasnoff (13) .............. 0 0 0 0
Michael J. Morissey (14) .............. 0 0 0 0
Richard A. Price (15) ................. 0 0 531,706 1.8
Alan S. Roseman (16) .................. 0 0 0 0
Paul A. Rubin (17) .................... 0 0 0 0
Richard G. Schoninger (18) ............ 0 0 0 0
Jay H. Shidler (19) ................... 0 0 937,913 3.1
Jay S. Sugarman (20) .................. 0 0 0 0
Kem H. Blacker (21) ................... 0 0 132,232 *
Jean-Michel Wasterlain (22) ........... 0 0 98,730 *
Michael M. Miran (23) ................. 0 0 27,161 *
Landon D. Parsons (24) ................ 0 0 18,073 *
Directors and Named Executive
Officers as a group 32,801 * 1,911,422 6.1
</TABLE>
- ----------
* Less than one percent.
** None of the directors or officers of the Company own shares of the
Company's Series A Preferred Stock.
*** Percentages assume 29,781,369 shares of Common Stock, comprised of
28,005,648 shares of Common Stock, investor warrants (held by the holders
of Series A Preferred Stock) to purchase 270,000 shares of Common Stock,
sponsor and founder warrants to purchase 847,729 shares of Common Stock,
vested employee warrants to purchase 328,996 shares of Common Stock and
employee warrants to purchase 328,996 shares of Common Stock which will
vest on June 17, 1999.
(1) Includes 3,341,703 shares of Common Stock and warrants to purchase 45,692
shares of Common Stock.
(2) These parties are investment managers with discretion for various funds
under their control.
(3) The two funds are: Olympus Growth Fund II, L.P. and Olympus Executive
Fund, L.P. Includes 3,341,711 shares of Common Stock and warrants to
purchase 24,923 shares of Common Stock.
41
<PAGE>
(4) Includes 3,341,703 shares of Common Stock and warrants to purchase 20,769
shares of Common Stock.
(5) Includes 3,341,703 shares of Common Stock and warrants to purchase 4,154
shares of Common Stock.
(6) 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.
(7) Includes 2,864,318 shares of Common Stock and warrants to purchase 20,769
shares of Common Stock.
(8) Includes 2,291,442 shares of Common Stock and warrants to purchase 33,231
shares of Common Stock.
(9) Excludes 3,341,703 shares of Common Stock, warrants to purchase 20,769
shares of Common Stock, 562,236 shares of Series A Preferred Stock and
6,045,667 shares of Series C 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.
(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, and includes 32,801
shares of Series C Preferred Stock owned by Ms. Denton.
(11) Excludes 3,341,703 shares of Common Stock, warrants to purchase 20,769
shares of Common Stock, 255,562 shares of Series A Preferred Stock and
10,553,309 shares of Series C 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 2,864,318 shares of Common Stock, warrants to purchase 20,769
shares of Common Stock, 255,561 shares of Series A Preferred Stock and
5,978,543 shares of Series C 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.
(13) Excludes 2,291,442 shares of Common Stock, warrants to purchase 33,231
shares of Common Stock and 5,224,666 shares of Series C Preferred Stock
held of record by Lennar CGA Holdings Inc. and 408,896 shares of Series A
Preferred Stock held of record by Lennar Capital Services. 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.
(14) Excludes 1,432,154 shares of Common Stock and 1,818,303 shares of Series C
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.
(15) Includes 148,544 shares of Common Stock and warrants to purchase 383,162
shares of Common Stock.
(16) Excludes 3,341,703 shares of Common Stock, warrants to purchase 4,154
shares of Common Stock and 51,113 shares of Series A Preferred Stock held
of record by Capital Reinsurance Company, for which Mr. Roseman, a
Director of the Company, serves as General Counsel, Executive Vice
President and Secretary of Capital Reinsurance Company. Mr. Roseman
disclaims beneficial ownership of such securities held of record by
Capital Reinsurance Corporation.
(17) Excludes 3,341,711 shares of Common Stock, 306,675 shares of Series A
Preferred Stock and 5,454,882 shares of Series C 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 954,770 shares of Common Stock and 1,818,303 shares of Series C
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, warrants to purchase 7,227 shares
of Common Stock and 14,875 shares of Series C Preferred Stock held of
record by Shidler/CGA Corp., 3,741 shares of Common Stock, warrants to
purchase 3,502 shares of Common Stock and 7,208 shares of Series C
Preferred Stock held of record by Shidler Equities Corp., and 529,869
shares of Common Stock, warrants to purchase 385,854 shares of Common
Stock and 316,780 shares of Series C Preferred Stock held by Shidler
Equities, L.P.
(20) Excludes 954,770 shares of Common Stock and 1,818,303 shares of Series C
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 20,000 shares of Common Stock and warrants to purchase 112,232
shares of Common Stock.
(22) Includes 17,000 shares of Common Stock and warrants to purchase 81,730
shares of Common Stock.
(23) Includes 12,000 shares of Common Stock and warrants to purchase 15,161
shares of Common Stock.
(24) Includes 5,000 shares of Common Stock and warrants to purchase 13,073
shares of Common Stock.
42
<PAGE>
DESCRIPTION OF SECURITIES
CGA Group's authorized capital stock consists of 268,012,000 shares of
Common Stock, 10,000,000 shares of Series A Preferred Stock, 10,000,000 shares
of Series B Preferred Stock and 52,000,000 shares of Series C Preferred Stock.
As of March 31, 1999, there were 3,322,297 shares of Series A Preferred Stock,
no shares of Series B Preferred Stock, 43,997,863 shares of Series C Preferred
Stock and 28,005,648 shares of Common Stock issued and outstanding.
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 64 of this Prospectus.
GENERAL
The Company has issued 3,322,297 shares of its Series A Preferred Stock,
each share having a $.01 par value. As described below, the shares of 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 Company 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 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 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
43
<PAGE>
compounding) through the date of such redemption, and (ii) accrued and unpaid
cash dividends thereon (including as a result of the quarterly compounding)
through the date of such redemption.
OPTIONAL REDEMPTION
Pursuant to an Agreement dated as of March 1, 1999 by and among the
Company and the holders of the Series A Preferred Stock (the "March 1, 1999
Agreement"), the Series A Preferred Stock is redeemable in cash at the election
of the Company, in whole or in part at any time and from time to time at a
redemption price equal to the Series A Preferred Stated Value per share plus
dividends accrued but unpaid thereon through the date of such redemption, pro
rata from all holders of Series A Preferred Stock.
The Series A Holders (and any future transferees thereof) have irrevocably
waived any right to receive any redemption premium or other additional amount in
respect of any such optional redemption of the Series A Preferred Stock by the
Company. Pursuant to the March 1, 1999 Agreement, if the Company at any time
consummates a public offering of shares of its Common Stock, which public
offering has been registered with the U.S. Securities and Exchange Commission
and has resulted in net proceeds to the Company of not less than $50 million,
then the Company shall utilize such net proceeds to redeem the shares of Series
A Preferred Stock, on a pro rata basis from all holders of Series A Preferred
Stock.
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 are 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 (including
paid-in-kind) (PIK) dividends) 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 are not 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
Pursuant to the Subscription Agreement, 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
44
<PAGE>
business and (b) obligations with respect to letters of credit or similar
instruments or credit facilities for the purpose of securing insurance,
reinsurance or retrocessional obligations entered into in the ordinary course of
business, to the extent that such letters of credit or similar instruments or
credit facilities are not drawn upon, or if and to the extent drawn upon, such
drawing is reimbursed not later than the 30th business day following a demand
for reimbursement ((a) and (b) together, "Insurance Obligations," it being
understood that the obligations described in (b) shall no longer be deemed
Insurance Obligations upon such 30th business day). This covenant also will not
restrict the Company's ability to issue the Series B Preferred Stock pursuant to
the Commitments.
LIMITATION ON RESTRICTED SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK
Pursuant to the Subscription Agreement, 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
Pursuant to the Subscription Agreement, 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
Pursuant to the Subscription Agreement, 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
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,
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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
Pursuant to the Subscription Agreement, 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
Pursuant to the Subscription Agreement, the Company will 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
Pursuant to the Subscription Agreement, 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 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
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paragraph shall be made by the Company's Board of Directors pursuant to a
Certified Resolution and shall be effective as of the date specified in such
Certified Resolution, which shall not be prior to the date of such Certified
Resolution.
The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person becoming a Restricted Subsidiary
(whether through an acquisition, the redesignation of an Unrestricted Subsidiary
or otherwise) unless, after giving effect to such action, transaction or series
of transactions, on a pro forma basis the Company would have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company prior
to the transaction giving rise to the need to make such calculation.
EVENTS OF NON-COMPLIANCE
Pursuant to the Subscription Agreement, 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 has 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 will be
increased by two members, and the holders of Series A Preferred Stock as a class
will be entitled to appoint at least two members of the Company's Board; (b) the
dividend rate on the Series A Preferred Stock will be increased 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
The Company is required by the Subscription Agreement to 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 is 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 consisted of 1 share of Series
B Preferred Stock, 4.8925 shares of Common Stock and a Commitment to purchase
1.5 additional shares of Series B Preferred Stock. Accordingly, the Company
issued 1,600,000 shares of its Series B Cumulative Voting Preference Shares,
with a par value of $.01 per share. The Company also obtained commitments to
purchase an additional 2,400,000 shares of Series B Preferred Stock, as
described below under "Commitments." The Series B Preferred Stock ranks junior
to the Series A Preferred Stock and the Series C Preferred Stock and senior to
the Common Stock.
On March 31, 1999, in connection with the sale by the Company of
43,997,863 shares of Series C Preferred Stock, all of the issued and outstanding
shares of Series B Preferred Stock were converted into shares of Common Stock at
a conversion ratio of 11.816 shares of Common Stock per share of Series B
Preferred Stock. The conversion
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ratio was based on an assumed value of $3.00 per share of Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Subsequent Events." As of the date of this Prospectus, no shares of
Series B Preferred Stock are issued and outstanding.
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 issued and outstanding Series B
Preferred Stock, if any, 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 may 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 senior 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, if any, will be entitled
to receive, after all creditors of the Company have been paid and the Series A
Preferred Liquidation Preference and Series C Liquidation Preference have been
satisfied, a liquidation preference per share equal to the Series B Preferred
Stated Value, plus all accrued and unpaid dividends thereon (including as a
result of semi-annual compounding) to the date of such liquidation, dissolution
or winding up (the "Series B Preferred Liquidation Preference"), out of the
assets of the Company before any distribution is made to the holders of any
stock of the Company ranking junior to the Series B Preferred Stock.
In the event that the assets available for distribution to the holders of
the Series B Preferred Stock and stock ranking on a parity with the Series B
Preferred Stock are insufficient to pay the respective preferential amounts in
full, such assets will be distributed ratably in proportion to the preferential
amounts payable thereon.
VOTING RIGHTS
Except as otherwise provided in the Bye-laws of the Company and otherwise
required by Bermuda law, the holders of the Series B Preferred Stock are
entitled to exercise five votes per share on all matters presented to the
Company's shareholders.
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BOARD REPRESENTATION RIGHTS
Prior to a Qualified Public Offering, the holders of Series B Preferred
Stock are entitled to elect at least eight directors to the Company's Board of
Directors. Following a Qualified Public Offering, certain holders of Series B
Preferred Stock may maintain special rights to designate members of the Board.
[CHECK THIS]
REGISTRATION RIGHTS
There are no demand or piggyback registration rights with respect to the
Series B Preferred Stock.
SERIES C PREFERRED STOCK
GENERAL
Pursuant to the Series C Convertible Cumulative Voting Preferred Stock
Subscription Agreement, on March 31, 1999 the Company sold to certain existing
shareholders of the Company an aggregate of 43,997,863 shares of Series C
Preferred Stock for net cash proceeds of $50,996,794.50. The Series C Preferred
Stock ranks junior to the Series A Preferred Stock and senior to the Series B
Preferred Stock and the Common Stock.
DIVIDENDS
The holders of shares of Series C Preferred Stock are not entitled to
receive any dividends with respect to such shares.
REDEMPTION
The shares of Series C Preferred Stock shall be redeemed by the Company
upon a Sale (as defined below) of the Company but only if and to the extent that
the consideration to be paid (or deemed to be paid) for each share of Series C
Preferred Stock in connection with such Sale is less than the Series C
Liquidation Value (as defined below). In such case, the Company shall redeem in
full each share of Series C Preferred Stock for the Series C Liquidation Value.
In the case of an Asset Sale (as defined below), the consideration per share
deemed to be paid for each share of Series C Preferred Stock shall be determined
by (x) dividing the aggregate gross purchase price received by the Company in
connection therewith by the fully diluted number of shares of Common Stock
outstanding assuming conversion or exchange of all convertible or exchangeable
securities and exercise of all warrants and other derivative securities for
shares of Common Stock and (y) multiplying the result of the calculation in
clause (x) by the number of shares into which each share of Series C Preferred
Stock is convertible at the time of the consummation of the applicable Sale
based upon the then applicable Conversion Price. Upon the consummation of any
such Sale, the Company shall promptly give notice to the holders of Series C
Preferred Stock setting forth the per share consideration payable in respect of
the Series C Preferred Stock calculated pursuant to the immediately preceding
sentence. With respect to the foregoing, a "Sale" of the Company means (i) a
sale or other transfer in one or a series of related transactions of all or
substantially all of the assets of the Company and its subsidiaries taken as a
whole (an "Asset Sale") and (ii) a merger, consolidation or amalgamation to
which the Company is a party which results in the owners of all of the Company's
classes of voting securities prior to such merger, consolidation or amalgamation
owning securities with less than 50% of the then-outstanding voting power of the
surviving entity following such merger, consolidation or amalgamation.
On March 31, 2009 (the "Maturity Date"), the Series C Preferred Stock
shall, at the option of the Company, either (i) be redeemed for cash in an
amount per share equal to the Series C Liquidation Value or (ii) converted in
shares of Common Stock as described below. No later than 10 days prior to the
Maturity Date, the Company shall give notice to the holders of Series C
Preference Shares of the impending maturity of such shares, of whether the
Company intends to redeem such shares for cash or shares of Common Stock, and of
the then-applicable Series C Liquidation Value or number of shares of Common
Stock into which a share of Series C Preferred Stock is then convertible. Any
such redemption of Series C Preferred Stock 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.
CONVERSION
The shares of Series C Preferred Stock shall automatically be converted
into shares of Common Stock at the earlier to occur of (i) the Maturity Date, or
(ii) the issuance by the Company in one or a series of related transactions
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either privately or through registered public offerings (other than pursuant to
acquisitions, mergers or other business combinations or pursuant to stock option
plans, stock purchase plans or other employee benefit plans or arrangements) of
equity securities resulting in aggregate gross proceeds to the Company of at
least $50,000,000 and at a price per share determined by a majority of the Board
of Directors to be fair and reasonable ("New Equity"), at the conversion ratios
set forth in the Amended and Restated Appendices to the Company's Bye-laws. Upon
the issuance by the Company of New Equity, each share of Series C Preferred
Stock shall be converted into such number of shares of Common Stock to be
determined by dividing the Series C Preferred Stated Value by the Conversion
Price.
Series C Preferred Stock may be converted into shares of Common Stock at
any time at the option of the holder at the then-applicable Conversion Price.
The Conversion Price shall be adjusted from time to time in accordance with the
terms of the Amended and Restated Appendices to the Company's Bye-laws in order
to reflect dividends, stock splits, distributions, issuances of securities
entitling the subscribers thereof to purchase shares of Common Stock for less
than the Conversion Price, or certain other changes in the Company's capital
structure.
LIQUIDATION PREFERENCE
If the Company voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the Series C 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 (i) U.S. $1.50 (the "Series C Preferred Stated Value") per
share, subject to adjustment in the event of any share split or combination with
respect to such shares plus (ii) an amount equal to 7.00% per annum of the
Series C Preferred Stated Value, which amount shall calculated based on the
actual number of days elapsed over a year of 360 days from the Series C Closing
Date through the date of such liquidation and shall be compounded annually.
In the event that the assets available for distribution to the holders of
the Series C Preferred Stock and stock ranking on parity with the Series C
Preferred Stock are insufficient to pay the respective preferential amounts in
full, such assets will be distributed ratable in proportion to the preferential
amounts payable thereon.
VOTING RIGHTS
Except as otherwise provided in the Bye-laws of the Company and otherwise
required by Bermuda law, the holders of Series C Preferred Stock are entitled to
exercise one vote per share on all matters presented to the Company's
shareholders.
BOARD REPRESENTATION RIGHTS
Prior to a Qualified Public Offering, the holders of Series C Preferred
Stock are entitled, as a class, to elect two members of the Company's Board of
Directors.
REGISTRATION RIGHTS
There are no demand or piggyback registration rights with respect to the
Series C Preferred Stock.
COMMON STOCK
GENERAL
On June 17, 1997, the Company issued 9,100,000 shares of its Common Stock,
each share having a $.01 par value, representing 7,827,957 shares to the Unit
Investors and 1,272,043 shares to the Company's sponsoring investors. On March
31, 1999, all of the issued and outstanding shares of the Company's Series B
Preferred Stock were converted into shares of Common Stock at a conversion ratio
of 11.816 shares of Common Stock per share of Series B Preferred Stock. The
conversion ratio was based on an assumed value of $3.00 per share of Common
Stock. As a result of the conversion, 18,905,648 new shares of Common Stock were
issued. As of the date of this Prospectus, 28,005,648 shares of Common Stock
were issued and outstanding. The Common Stock is perpetual in duration.
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."
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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 holders of Common Stock 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
with respect to the Common Stock, as set forth in the Company's Amended and
Restated Shareholders Agreement.
INVESTOR WARRANTS
The Company's 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 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 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 "Triple-B minus" 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 "Triple-A" (or the then-equivalent rating designation).
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COMMITMENT FEE
The Investment Unit 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 Unit Subscription Agreement, each Unit Investor not rated "Double-A"
or higher delivered to the Company a five-year letter of credit from a bank
rated at least "Double-A" or a one-year letter of credit from a bank rated at
least "Double-A" 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."
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.
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.
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
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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 files "protective" U.S.
federal income tax returns so that if it were held to be engaged in a trade or
business in the U.S., it would be allowed to deduct expenses and utilize credits
allocable to income determined to be effectively connected with such trade or
business and would not be subject to a failure to file penalty. The maximum U.S.
income tax rates currently are 35% for a corporation's effectively connected net
income and 30% for the branch profits tax. The branch profits tax, which is
based on net income after subtracting the regular corporate tax and making
certain other adjustments, is imposed on the amount of net income deemed to have
been withdrawn from the U.S. The maximum combined corporate net income and
branch profits tax rate is approximately 54.5%.
Under the Treaty, a Bermuda corporation that meets certain eligibility
requirements (described below) and that is predominantly engaged in the
insurance business will not be subject to U.S. federal income tax on its
business profits effectively connected with a U.S. federal trade or business
provided such trade or business is not conducted through a permanent
establishment in the U.S. (the "No PE Exemption"). Management believes that CGA
qualifies for the No PE Exemption; however, because the determination of whether
a trade or business is being conducted through a permanent establishment is
inherently factual, management cannot assure the exemption's availability. In
order to meet the eligibility requirements of the Treaty, (i) more than 50% of
CGA's stock must be beneficially owned, directly or indirectly, by individuals
who are Bermuda residents or U.S. citizens or residents, and (ii) CGA's income
must not be used in substantial part, directly or indirectly, to make
disproportionate distributions to, or to meet certain
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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, the offering of the
Investment Units and the offering of the Series C Preferred Stock to ensure that
CGA would meet the Treaty's eligibility requirement after the completion of each
of these 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 reinsurers 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 applicable to
all categories of investors, some of which (such as broker-dealers, investors
who hold Series A Preferred
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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.
Controlled Foreign Corporations. Each U.S. 10% Shareholder (as described
below) of a CFC must include in gross income for U.S. federal income tax
purposes its pro rata share of the CFC's "subpart F income," whether or not such
income is distributed by the CFC to such shareholder. Any U.S. corporation,
citizen, resident, partnership, estate or trust that owns, directly or
indirectly through foreign persons, or is considered to own, 10 percent or more
of the
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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 Bye-laws 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 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.
CGA takes 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 and/or Cobalt without
creating RPII, provided no U.S. person owns directly or constructively more than
50% of the vote or value of St. George Holdings' or Cobalt Holdings', and hence
each of their subsidiaries', stock. Upon the initial distributions of the
securities of St. George and Cobalt, respectively, no U.S. person owned directly
or constructively more than 50% of the vote or value of such securities.
Moreover, St. George Holdings' and Cobalt Holdings' governing documents each
contain restrictions on the sale of such securities that should effectively
preclude any U.S. person from owning more than 50% of the vote or value of
either the securities of St. George Holdings or the securities of Cobalt
Holdings. Therefore, Management expects that no RPII will result from insuring
investments of St. George and/or Cobalt.
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's total income.
In order to determine how much RPII, if any, CGA has earned in each fiscal
year, Management asks 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 sends 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 10% or more in vote or 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 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 the equity of St. George and/or Cobalt. This risk arises
because St. George and Cobalt intend that CGA-guaranteed borrowing will provide
99% of the funds used to acquire their respective investment portfolios and for
the collateral value of their respective investment portfolios and that CGA's
Fund Guaranty will represent the principal credit support for lenders and
counterparties of St. George and Cobalt. 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's and/or Cobalt's assets and earned virtually
all of St. George's and/or Cobalt's 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's and/or
Cobalt's equity, there is also a risk that CGA's premium income from St. George
and/or Cobalt would not be viewed as insurance income. Nonetheless, there are
substantial arguments against treating CGA as owning substantially all of St.
George's and/or Cobalt's equity by reason of the insurance that it writes for
such companies, with one of the strongest being that the premiums that CGA will
charge St. George and Cobalt 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
and/or Cobalt and therefore the look through rules should not apply with respect
to St. George's or Cobalt's assets or income and the premiums derived by CGA
from St. George and Cobalt should be viewed as active income derived from the
insurance business. However, given the relatively small amount of equity in St.
George and Cobalt the importance of the CGA Fund Guaranty to the availability of
the Loan Facility, the fact that initially all of the equity securities of St.
George Holdings and limited partnership interests in Cobalt Holdings 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's and Cobalt'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 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.
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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 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 year ended
December 31, 1998, 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.
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 Jurisdiction and 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
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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.
AVAILABLE INFORMATION
We have filed with the Commission a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Series A Preferred Stock
offered hereby. This prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
additional information with respect to us and the Series A Preferred Stock
offered hereby, reference is made to the Registration Statement and the exhibits
and schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the offices of the Commission in
Washington, D.C. 20549 and copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section 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.
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GLOSSARY
CERTAIN DEFINITIONS
Capitalized terms used in the foregoing description of the Series A
Preferred Stock, but not otherwise defined herein, have the meanings set forth
below.
"AAA Investment" means any investment in:
(i) U.S. Government Obligations or securities that would be U.S.
Governmental Obligations if such securities were not callable or
redeemable at the option of the issuer thereof;
(ii) debt securities or debt instruments or Redeemable Stock with a
rating of AA or higher by S&P, AAA or higher by Moody's or the equivalent
of such rating by S&P and Moody's or the equivalent of such rating by any
other nationally recognized securities rating agency; or
(iii) debt securities or debt instruments or Redeemable Stock with a
rating of Class 1 or higher by the NAIC and issued or guaranteed by the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, the Governmental National Mortgage Association, the Student
Loan Marketing Association or the Federal Home Loan Bank.
"Affiliate" of any specified Person means:
(i) any other Person, directly or indirectly, controlling or
controlled by or under direct or indirect common control with such
specified Person;
(ii) any other Person who is a director or officer (a) of such
specified Person, (b) of any Subsidiary of such specified Person or (c) of
any Person described in clause (i) above; or
(iii) any beneficial owner of shares representing 10% or more of the
total voting power of the Voting Stock of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof. For the purposes
of this definition, "control" when used with respect to any Person means
the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling: and "controlled" have
meanings correlative to the foregoing.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP; and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Certified Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such by the Secretary or an Assistant Secretary of the Company.
"Change of Control" means an event of series of events by which (a) any
"person" or "group" (as defined in Section 13(d)(3) and 14(d) of the Exchange
Act), other than one or more Specified Holders, is or becomes the "beneficial
owner" (as defined under Rule 13d-3 of the Exchange Act), directly or
indirectly, of at least 35% of the total voting power of the Voting Stock of the
Company; (b) after June 17, 1997 and the election of the first full Board of
Directors, during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved by
a vote of 66-2/3% of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) shall cease for any reason to
constitute 66-2/3% of the members of the Board of Directors of the Company then
still in office, provided that, in the event that a "person" or "group" (as
defined in Section 13(d)(3) and 14(d) of the Exchange Act), other than Specified
Holders, that is the "beneficial owner" (as defined under Rule 13d-3 of the
Exchange Act), directly or indirectly, of less than 35% of the Voting Stock of
the Company is able to elect a majority of the Board of Directors of the Company
pursuant to an agreement with the
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company or any of its Subsidiaries, a Change of Control shall be deemed to have
occurred; or (c) the Company consolidates with or merges or amalgamates into, or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any Person consolidates with or mergers or amalgamates into the
Company, in either event pursuant to a transaction in which any Voting Stock of
the Company outstanding immediately prior to the effectiveness thereof is
reclassified or changed into or exchanged for cash, securities or property,
unless (i) such Change of Control arises from a transaction between the Company
and a Restricted Subsidiary thereof, or (ii) such Change of Control arises from
a transaction involving an exchange of Voting Stock by the holders of the Voting
Stock of the company at such time for Voting Stock of a surviving entity
immediately following which such holders own at least 50% of the outstanding
Voting Stock of such surviving entity and upon consummation of which none of the
events described in clause (a) or (b) shall have occurred in respect of such
surviving entity.
"Consolidated Net Income" means, for any period, the net income or loss of
the Company and its consolidated Subsidiaries as determined in accordance with
GAAP; provided, that there shall not be included in such Consolidated Net
Income:
(i) any net income of any Person if such Person is not a Restricted
Subsidiary, except that, subject to the limitations contained in (iv)
below, the Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution to
a Restricted Subsidiary, to the limitations contained in clause (iii)
below),
(ii) any net income or loss of any Person acquired by the Company or
a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition,
(iii) any net income or loss of any Restricted Subsidiary if such
Subsidiary is subject to restriction, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that subject to
the limitations contained in (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included
in such Consolidated Net Income up to the aggregate amount of cash that
could have been distributed (whether or not actually distributed) by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution to another Restricted Subsidiary,
to the limitation contained in this clause),
(iv) any gain or loss realized upon the sale or other disposition of
any asset of the Company or its consolidated Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise
disposed of in the ordinary course of business and any gain or loss
realized upon the sale or other disposition of any capital stock of any
Person,
(v) any extraordinary gain or loss and
(vi) the cumulative effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding capital stock of the Company plus (ii)
paid-in capital or capital surplus relating to such capital stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Redeemable Stock of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the
price that could be negotiated in an arms-length free market transaction, for
cash, between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person,
including any such obligation, direct or indirect, contingent or otherwise, of
such Person:
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(i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by agreement to purchase assets, goods, securities or
services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or
(ii) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in
part); provided, that the term "Guarantee" shall not include guarantees or
indemnities required to be given in connection with obtaining services in
the ordinary course of business, endorsements for collection or deposit in
the ordinary course of business or guarantees of lease obligations not
exceeding $1 million in the aggregate. The terms "Guarantee,"
"Guaranteed," "Guaranteeing" and "Guarantor" shall each have a correlative
meaning.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, that any Indebtedness or capital stock of a Person existing at
the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary, provided, further, that neither the accrual of
interest not the accretion of original issue discount shall be considered an
Incurrence of Indebtedness. The terms "Incurable," "Incurred," "Incurrence" and
"Incurring" shall each have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal (accredited value in the case of Indebtedness
incurred with original issue discount) of and premium (if any) in respect
of indebtedness of such Person for borrowed money;
(ii) the principal of and premium (if any) in respect of obligations
of such Person evidenced by bonds, debentures, notes or other similar
instruments;
(iii) all Capitalized Lease Obligations of such Person;
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than one year after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services;
(v) all obligations of such Person in respect of letters of credit,
bankers' acceptances or other similar instruments or credit transactions
(including reimbursement obligations with respect thereto);
(vi) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any Redeemable Stock of
such Person or any Redeemable Stock or Preferred Stock of such Person's
Subsidiaries (but excluding, in each case, any accrued dividends);
(vii) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, that if such Indebtedness is not assumed by such Person,
the amount of such Indebtedness shall be the lesser of (a) the Fair Market
Value of such asset at such date of determination and (b) the amount of
such Indebtedness of such other Person;
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person; and
(ix) to the extent not otherwise included in this definition, net
payment obligations in respect of interest rate agreements and currency
exchange protection agreements.
For purposes of this definition, the maximum fixed redemption, repayment
or repurchase price of any Redeemable Stock that does not have a fixed
redemption, repayment or repurchase price shall be calculated in accordance with
the terms of such Redeemable Stock as if such Redeemable Stock were redeemed,
repaid or repurchased on any date on which Indebtedness shall be required to be
determined; provided, that if such Redeemable Stock is not then permitted to be
redeemed, repaid or repurchased, the redemption, repayment or repurchase price
shall be the book value of such Redeemable Stock as reflected in the most recent
financial statements of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date. This definition is not meant to include the commitment of the Company
to acquire equity securities of CGA with the proceeds of the sale of any Series
B Preferred Stock pursuant to a Commitment Termination Event.
66
<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
67
<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
68
<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 or
part.
"Restricted Payment" by the Company or any Restricted Subsidiary means:
(i) any declaration or payment of any dividend or making of any
distribution on or in respect of its capital stock (including any payment
in connection with any merger or consolidation involving the Company or
any Restricted Subsidiary thereof) except dividends or distributions
payable solely in capital stock (other than Redeemable Stock) of the
Company or in options, warrants or other rights to purchase such capital
stock and except dividends or distributions payable solely to the Company
or a Restricted Subsidiary thereof,
(ii) any purchase, repurchase, redemption, retirement or other
acquisition for value of any capital stock of the Company or any
Restricted Subsidiary thereof held by Persons other than the Company or a
Restricted Subsidiary thereof, or
(iii) making of any investment other than a Permitted Investment in
any Person.
"S&P" means Standard & Poor's Corporation and its successors.
"Sale/Leaseback Transactions" means an arrangement relating to property
now owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"Specified Asset Sale" means any sale, lease, transfer, issuance or other
disposition of shares of capital stock of the Company or any Restricted
Subsidiary of the Company (other than shares issued under the Stock Warrant
Plans, property or assets (each referred to for purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries (including
any disposition by means of a merger, amalgamation, consolidation or similar
transaction) other than (i) a disposition to a Restricted Subsidiary, (ii) a
disposition of property or assets (including Permitted Investments) in the
ordinary course or (iii) a disposition that is permitted by the provisions of
Merger, Consolidation and Sale of Assets above.
"Specified Holders" means the holders of capital stock of the Company as
of June 17, 1997 and their Majority Controlled Affiliates.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of capital stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Trade Payables" means, with respect to any Person, any accounts payable
or any Indebtedness or monetary obligation to trade creditors created, assumed
or Guaranteed by such Person arising in the ordinary course of business of such
Person in connection with acquisition of goods or services.
69
<PAGE>
"U.S. Government Obligations" means securities that are:
(i) direct obligations of the United States of America for the
timely payment of which its full faith and credit is pledged or
(ii) obligations of a Person controlled or supervised by and acting
as an agency or instrumentality of the United States of America the timely
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such
U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided, that (except as required by
law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or
the specific payment of principal of or interest on the U.S. Government
Obligation evidenced by such depository receipt.
"Voting Stock" of any Person means all classes of capital stock of such
Person then outstanding and entitled to vote in the election of directors.
"Wholly-Owned Restricted Subsidiary" means a Restricted Subsidiary of the
Company, all the capital stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly Owned Restricted Subsidiary of
the Company.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
Financial Statements of CGA Group, Ltd.
<S> <C>
Report of Independent Auditors on Financial Statements ...................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 ................................... F-3
Consolidated Statements of Operations for the year ended December 31, 1998,
the nine months ended December 31, 1997 and for the period from June 21, 1996
to March 31, 1997 ......................................................................... F-4
Consolidated Statements of Mezzanine Equity for the year ended December 31, 1998
and the nine months ended December 31, 1997 ............................................... F-5
Consolidated Statements of Shareholders' Equity for the year ended December 31, 1998
and the nine months ended December 31, 1997 ............................................... F-6
Consolidated Statements of Cash Flow for the year ended December 31, 1998,
the nine months ended December 31, 1997 and for the period from June 21, 1996
to March 31, 1997 ......................................................................... F-7
Notes to Consolidated Financial Statements for the year ended December 31, 1998 ............. F-8
Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998 ......................... F-23
Consolidated Statements of Operations -- Three Months Ended March 31, 1999
and March 31, 1998 ........................................................................ F-24
Consolidated Statements of Mezzanine Equity -- Three Months Ended March 31, 1999
and the Year Ended December 31, 1998 ...................................................... F-25
Consolidated Statements of Shareholders' Equity -- Three Months Ended March 31, 1999
and the Year Ended December 31, 1998 ...................................................... F-26
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1999
and the Year Ended December 31, 1998 ...................................................... F-27
Notes to Consolidated Financial Statements for the Three Months Ended March 31, 1999 ........ F-28
</TABLE>
Financial Schedule(s)
All financial statement schedules have been omitted because they are not
applicable or are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF CGA GROUP, LTD.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, mezzanine equity, shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of CGA Group, Ltd. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for the period from
June 21, 1996 to March 31, 1997, the period from April 1, 1997 to December 31,
1997 and the year ended December 31, 1998, in conformity with generally accepted
accounting principles in the United States of America. 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 of these statements in accordance with
generally accepted auditing standards in the United States of America which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers
Hamilton, Bermuda
March 31, 1999, except as to note 18, which is as of
April 23, 1999
F-2
<PAGE>
<TABLE>
CGA GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Fixed maturities available for sale, (at fair value)
(Amortized cost: $99,560,861 and $121,664,671) ........................... $100,488,537 $123,302,763
Other investments .......................................................... 30,000,000 --
Cash and short-term investments ............................................ 2,598,140 7,199,106
Premiums receivable ........................................................ 3,228,497 447,172
Management fees receivable ................................................. 1,093,411 --
Accrued interest receivable ................................................ 3,679,763 4,080,600
Deferred acquisition costs ................................................. 3,202,557 1,001,883
Prepaid reinsurance premiums ............................................... 1,286,782 --
Reinsurance recoverable .................................................... 67,400,000 --
Other assets ............................................................... 2,926,246 2,018,309
Note receivable ............................................................ -- 250,000
Organization costs ......................................................... -- 4,421,353
------------ ------------
Total assets ............................................................ $215,903,933 $142,721,186
============ ============
LIABILITIES
Unearned premiums .......................................................... $ 821,124 $ 270,576
Provision for losses and loss adjustment expenses .......................... 90,200,000 55,000
Reinsurance balances payable ............................................... 420,660 --
Accrued costs and expenses ................................................. 4,355,767 3,591,033
Contingencies and commitments (Note 14) .................................... -- --
------------ ------------
Total liabilities ....................................................... 95,797,551 3,916,609
------------ ------------
MEZZANINE EQUITY
Preferred stock, $.01 par value, 20,000,000 shares authorized:
Series A .................................................................. 75,291,100 65,532,499
Series B .................................................................. 37,300,985 37,075,371
Dividends accrued on Series B .............................................. 14,016,164 4,439,231
------------ ------------
Total mezzanine equity .................................................. 126,608,249 107,047,101
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 20,000,000 shares authorized,
9,100,000 issued and outstanding .......................................... 91,000 91,000
Additional paid-in-capital ................................................. 42,486,057 42,086,353
Accumulated other comprehensive income ..................................... 927,676 1,638,092
Deficit .................................................................... (50,006,600) (12,057,969)
------------ ------------
Total shareholders' (deficit) equity .................................... (6,501,867) 31,757,476
------------ ------------
Total liabilities and shareholders' equity .............................. $215,903,933 $142,721,186
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED JUNE 21, 1996
DECEMBER 31, DECEMBER 31, TO MARCH 31,
1998 1997 1997
------------ ------------ -------------
INCOME STATEMENT DATA:
REVENUES
<S> <C> <C> <C>
Gross premiums written ................................... $ 49,217,083 $ 773,571 $ --
Ceded premiums ........................................... (39,420,247) -- --
------------ ------------ -------
Net premiums written ..................................... 9,796,836 773,571 --
Change in unearned premiums .............................. (550,547) (270,576) --
------------ ------------ -------
Net premiums earned ...................................... 9,246,289 502,995 --
Net investment income .................................... 8,528,122 2,955,601 801
Net realized gains ....................................... 2,814,132 885,422 --
Management fees .......................................... 3,353,499 -- --
------------ ------------ -------
Total revenues ......................................... 23,942,042 4,344,018 801
------------ ------------ -------
EXPENSES
Operating expenses ....................................... 14,023,366 6,510,103 11
Acquisition costs ........................................ 433,217 53,590 --
Commitment fees .......................................... 600,000 323,836 --
Excess of loss facility .................................. 200,000 107,671 --
Losses and loss adjustment expenses
(Net of reinsurance of $67.4 million in 1998) ........... 22,745,000 55,000 --
------------ ------------ -------
Total expenses ......................................... 38,001,583 7,050,200 11
------------ ------------ -------
Income (loss) before cumulative effect of
change in accounting principle .......................... (14,059,541) (2,706,182) 790
Cumulative effect of change in accounting principle ...... (3,928,238) -- --
------------ ------------ -------
NET INCOME (LOSS) ......................................... (17,987,779) (2,706,182) 790
------------ ------------ -------
Other comprehensive income ................................ (710,417) 1,638,092 --
------------ ------------ -------
COMPREHENSIVE INCOME (LOSS) ............................... $(18,698,196) $ (1,068,090) $ 790
============ ============ =======
Net income (loss) available to common shareholders ........ $(38,896,226) $(12,332,792) $ 790
Basic and diluted income (loss) per common share .......... $ (4.27) $ (1.89) $ 0.07
============ ============ =======
Weighted average common shares outstanding ................ 9,100,000 6,522,313 12,000
============ ============ =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
<S> <C> <C>
Balance--beginning of period ............................................. $ 27,965 $ --
Stock issued ............................................................. -- 26,000
Pay-in-kind dividends paid ............................................... 4,154 1,965
------------ ------------
Balance--end of period ................................................... 32,119 27,965
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES A PREFERRED
Balance--beginning of period ............................................. 65,504,534 --
Stock issued ............................................................. -- 64,974,000
Issuance costs ........................................................... -- (4,571,319)
Fair value of warrants ................................................... (1,347,300) --
Pay-in-kind dividends paid ............................................... 10,379,765 4,911,381
Accretion to redemption value ............................................ 514,273 190,472
Accretion on warrants .................................................... 207,709 --
------------ ------------
Balance--end of period ................................................... 75,258,981 65,504,534
------------ ------------
TOTAL SERIES A PREFERRED STOCK ........................................... $ 75,291,100 $ 65,532,499
============ ============
SERIES B PREFERRED STOCK
Balance--beginning of period ............................................. $ 16,000 $ --
Stock issued ............................................................. -- 16,000
------------ ------------
Balance--end of period ................................................... 16,000 16,000
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES B PREFERRED
Balance--beginning of period ............................................. 37,059,371 --
Stock issued ............................................................. -- 39,984,000
Issuance costs ........................................................... -- (3,008,190)
Accretion to redemption value ............................................ 225,614 83,561
------------ ------------
Balance--end of period ................................................... 37,284,985 37,059,371
------------ ------------
TOTAL SERIES B PREFERRED STOCK ........................................... $ 37,300,985 $ 37,075,371
============ ============
PAY-IN-KIND DIVIDENDS ACCRUED-SERIES B
Balance--beginning of period ............................................. $ 4,439,231 $ --
Dividends accrued ........................................................ 9,576,933 4,439,231
------------ ------------
Balance--end of period ................................................... $ 14,016,164 $ 4,439,231
============ ============
Total Mezzanine Equity ................................................... $126,608,249 $107,047,101
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
SHAREHOLDERS' EQUITY
COMMON STOCK
<S> <C> <C>
Balance--beginning of period ............................................. $ 91,000 $ 12,000
Stock redeemed (12,000 shares) ........................................... -- (12,000)
Stock issued (9,100,000 shares) .......................................... -- 91,000
------------- -------------
Balance--end of period ................................................... 91,000 91,000
------------- -------------
ADDITIONAL PAID-IN-CAPITAL--COMMON STOCK
Balance--beginning of period ............................................. 42,086,353 --
Stock issued ............................................................. -- 45,409,000
Issuance costs ........................................................... -- (3,048,614)
Fair value of warrants ................................................... 1,347,300 --
Accretion of Series A Preferred Stock to redemption value ................ (514,273) (190,472)
Accretion of Series B Preferred Stock to redemption value ................ (225,614) (83,561)
Accretion on warrants .................................................... (207,709) --
------------- -------------
Balance--end of period ................................................... 42,486,057 42,086,353
------------- -------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance--beginning of period ............................................. 1,638,092 --
Increase (decrease) during the period .................................... (710,416) 1,638,092
------------- -------------
Balance--end of period ................................................... 927,676 1,638,092
------------- -------------
RETAINED EARNINGS (DEFICIT)
Balance--beginning of period ............................................. (12,057,969) 790
Net loss ................................................................. (17,987,779) (2,706,182)
Series A pay-in-kind dividends paid ...................................... (10,383,919) (4,913,346)
Series B pay-in-kind dividends accrued ................................... (9,576,933) (4,439,231)
------------- -------------
Balance--end of period ................................................... (50,006,600) (12,057,969)
------------- -------------
TOTAL SHAREHOLDERS' (DEFICIT) EQUITY ..................................... $ (6,501,867) $ 31,757,476
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS JUNE 21, 1996
YEAR ENDED ENDED TO
DECEMBER 31 DECEMBER 31 MARCH 31,
1998 1997 1997
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) ........................................ $ (17,987,779) $ (2,706,182) $ 790
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Amortization of investments ............................. (176,711) 1,314,765 --
Depreciation expense .................................... 354,587 51,076 --
Realized gain on sale of investments .................... (2,814,132) (885,422) --
Realized loss on sale of fixed assets ................... 26,282 -- --
Changes in assets and liabilities:
Premiums receivable ..................................... (2,781,325) (447,172) --
Accrued interest ........................................ 400,837 (4,080,600) --
Deferred acquisition costs .............................. (2,200,674) (1,001,883) --
Prepaid reinsurance premiums ............................ (1,286,782) -- --
Management fees receivable .............................. (1,093,411) -- --
Organization costs ...................................... 4,421,353 (4,409,373) (11,980)
Reinsurance recoverable ................................. (67,400,000) -- --
Other assets ............................................ (175,510) (1,159,177) (68)
Unearned premiums ....................................... 550,548 270,576 --
Provision for losses and loss adjustment expenses ....... 90,145,000 55,000 --
Reinsurance balances payable ............................ 420,660 -- --
Accrued costs and expenses .............................. 764,734 3,591,033 --
------------- ------------- --------
Net cash provided by (used in) operating activities ...... 1,167,677 (9,407,359) (11,258)
------------- ------------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired .............. (143,845,735) (278,498,706) --
Proceeds from sale of fixed maturity investments ......... 138,940,387 156,404,692 --
Purchases of fixed assets ................................ (1,113,295) (910,140) --
Note receivable .......................................... 250,000 (250,000) --
------------- ------------- --------
Net cash used in investing activities .................... (5,768,643) (123,254,154) --
------------- ------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Common Stock ............................... -- (12,000) --
Proceeds on issuance of series A preferred stock ......... -- 65,000,000 --
Proceeds on issuance of series B preferred stock ......... -- 40,000,000 --
Proceeds on issuance of common stock ..................... -- 45,500,000 12,000
Issuance costs of series A preferred stock ............... -- (4,571,319) --
Issuance costs of series B preferred stock ............... -- (3,008,190) --
Issuance costs of common stock ........................... -- (3,048,614) --
Loan received (repaid) ................................... -- (121,000) 121,000
------------- ------------- --------
Net cash provided by financing activities ................ -- 139,738,877 133,000
------------- ------------- --------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS ............................................. (4,600,966) 7,077,364 121,742
CASH AND SHORT-TERM INVESTMENTS--
BEGINNING OF PERIOD ..................................... 7,199,106 121,742 --
------------- ------------- --------
CASH AND SHORT-TERM INVESTMENTS--END OF PERIOD ........... $ 2,598,140 $ 7,199,106 $121,742
============= ============= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 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
Insurance Act 1978 of Bermuda (the "Act") 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. CGA has a "Triple-A" "claims paying ability" rating
from Duff & Phelps Credit Rating Company ("DCR") and has also been rated in the
highest rating category assigned by each of the two Canadian rating agencies,
Dominion Bond Ratings Service and Canadian Bond Ratings Service. CGA issues
financial guaranty insurance policies, which are the functional equivalent of
direct-pay letters of credit, to insure payment of interest, principal and other
amounts payable in respect of notes, securities, and other financial
obligations. 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. CGAIM did not commence operations
until after its acquisition by the Company. CGAIM is registered as an investment
advisor with the United States Securities and Exchange Commission under the
Investment Advisors Act of 1940, as amended. CGAIM provides investment
management and financial advisory services primarily to specialized investment
vehicles and for the U.S. and international structured finance markets. 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. Therefore, the
comparative periods in the consolidated financial statements are not consistent.
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
"Triple-A" 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 million 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 authorized 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 primary clients of CGA and CGAIM are St. George Holdings, Ltd. ("SG
Holdings") and Cobalt Holdings, Ltd. ("Cobalt") and their respective
subsidiaries. In 1998 they provided approximately 85% of the total premiums
earned by CGA, and 91% of the total investment management fees earned by CGAIM.
These percentages are expected to decrease in the future.
F-8
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 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.
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,
underwriting, certain rating agency fees, legal and other expenses. Deferred
acquisition costs are amortized on a straight-line basis over the estimated term
of the related insured risks. The Company evaluates the recoverability of
deferred acquisition costs whenever changes in circumstances warrant. If it is
determined that an impairment exists, the excess of the unamortized balance over
deferred acquisition costs will be charged to earnings.
c) Reinsurance
In the ordinary course of business, CGA cedes exposures under various
reinsurance contracts designed to limit losses from certain risks and to protect
capital and surplus. The reinsurance of risk does not relieve CGA of its
original liability to its policyholders. In the event that a reinsurer was
unable to meet its obligations under the existing reinsurance contracts, CGA
would be liable for such defaulted amounts.
Prepaid reinsurance premiums represent the portion of premiums ceded to
reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
d) Provision for losses and loss adjustment expenses
A case basis reserve for unpaid losses and loss adjustment expenses is
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 monitor the provision on an ongoing basis and
may periodically adjust the provision based on actual loss experience, the
future mix of business and economic conditions. See footnote number four
regarding subsequent events.
e) Organization expenses
Organization costs consisted of expenses incurred to form the Company and
were amortized over a five-year period starting from the date of commencement of
operations using the straight-line method. On July 1, 1998, the
F-9
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
Company expensed the remaining unamortized organization costs which is reflected
in the financial statements as a change in accounting principle. (See footnote
(i.) regarding Statement of Position 98-5 issued by the Accounting Standards
Executive Committee.)
f) 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 are designated as
available-for-sale and are recorded at fair value, being quoted market value.
Any resulting unrealized gains or losses are reflected as a separate component
of shareholders' equity as accumulated other comprehensive income and as a
separate component of the statement of operations as other comprehensive income.
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. Other investments are carried at cost, which approximates fair value.
Bond discounts and premiums are accreted or amortized on the effective
interest method over the term of the related securities. Realized gains or
losses on sale of investments are determined on the basis of specific
identification. Net investment income is recognized when earned and includes
interest and amortization of market premiums and discounts and is net of
investment management and custody fees.
The Company previously used foreign currency forward contracts for the
purpose of managing certain investment portfolio exposures. As of June 30, 1998
the investment in non-U.S. dollar denominated securities was discontinued,
eliminating the need to utilize foreign currency forward contracts.
g) Statement of cash flows
For purposes of the statements of cash flows, short-term deposits are
composed of deposits with original maturities which are less than three months.
h) Loss per common share
The Company computes loss per share in accordance with SFAS No. 128,
"Earnings Per Share." Loss per common share is calculated using the loss for the
period adjusted for preference dividends, 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.
i) Comprehensive income
The 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. Comprehensive income for the Company is comprised solely of changes
in unrealized appreciation or depreciation on marketable investments. The
Company has adopted SFAS 130 in these consolidated financial statements.
j) Segments
The FASB issued Statement of Financial Accounting Standard No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information",
which the Company has adopted in these consolidated financial statements. 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. Segment information is reported separately for the Company's
investment management and insurance operations.
F-10
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
k) Start-up activities
The Accounting Standards Executive Committee issued Statement of Position
98-5, "Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998. This statement requires the Company to
expense organization costs as incurred. On July 1, 1998, the Company expensed
the remaining unamortized organization costs which is reflected in the financial
statements as a change in accounting principle.
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 was interest-bearing at a rate of 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, gross unrealized gains and losses and amortized cost of
fixed maturities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
1998 COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Non-U.S. Government ..................... $ 12,024,005 $ 77,789 $ (82,384) $ 12,019,410
Corporate ............................... 85,488,892 1,316,526 (384,255) 86,421,163
Short-term .............................. 2,047,964 -- -- 2,047,964
------------ ---------- ---------- ------------
Fixed Maturities ....................... $ 99,560,861 $1,394,315 $(466,639) $100,488,537
============ ========== ========== ============
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
1997 COST GAINS LOSSES FAIR VALUE
------------ ---------- ---------- ------------
Non-U.S. Government ..................... $ 52,514,059 $1,382,523 $(308,775) $ 52,788,537
Corporate ............................... 69,150,612 583,353 (19,009) 70,514,226
------------ ---------- ---------- ------------
Fixed Maturities ....................... $121,664,671 $1,965,876 $(327,784) $123,302,763
============ ========== ========== ============
</TABLE>
F-11
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
Fixed maturities at December 31, 1998 and 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>
1998 1998 1997 1997
MATURITY PERIOD FAIR VALUE AMORTIZED COST FAIR VALUE AMORTIZED COST
- --------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Less than 1 year ........................ $ 2,047,964 $ 2,047,964 $ 16,443,261 $ 15,634,565
1-5 years ............................... 91,006,565 90,195,974 87,997,633 87,641,105
5-10 years .............................. 7,434,010 7,316,923 18,861,869 18,389,001
Greater than 10 years ................... -- -- -- --
------------ ------------ ------------ ------------
Total fixed maturities ................ $100,488,537 $ 99,560,861 $123,302,763 $121,664,671
============ ============ ============ ============
</TABLE>
Realized gains for the year ended December 31, 1998 were $3,436,817 and for
the nine months ended December 31, 1997 were $1,895,725. Realized losses for the
year ended December 31, 1998 were $622,685 and for the nine months ended
December 31, 1997 were $1,010,303. Investments are made predominantly in U.S.
dollar denominated foreign corporate and government securities. The rating level
for an investment cannot be below "Double-A minus". The portfolio consists of
"Double-A" rated investments on average. The portfolio manager operates under
guidelines to maintain a weighted average duration of two to five years.
(b) Net investment income
Net investment income for the year ended December 31, 1998 and the nine
months ended December 31, 1997 was derived from the following sources:
1998 1997
---------- ----------
Fixed maturities ................... $8,400,894 $2,849,428
Other .............................. 501,677 331,297
---------- ----------
Gross investment income ............ 8,902,571 3,180,725
Investment expense ................. (374,449) (225,124)
---------- ----------
Net investment income .............. $8,528,122 $2,955,601
========== ==========
5. OTHER INVESTMENTS
Other investments are comprised of a $30 million note issued by SG Holdings
which is the parent company of certain clients of CGAIM. The note is carried at
its original cost which approximates fair value. The note bears interest of 3
month LIBOR plus 1% per annum payable quarterly and has a five year term with no
prepayment penalty. The 3 month LIBOR rate at December 31, 1998 was 5.066. The
note was purchased to provide SG Holdings and its subsidiaries with cash to
manage their liquidity and to pay for additional financial guaranty insurance.
F-12
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
1998 1997
---------- ----------
Other Assets
Other prepaid Expenses ................ $ 222,752 $ 276,164
Prepaid commitment fees ............... 276,164 148,669
Fixed Assets, net of depreciation ..... 1,603,600 844,892
Deposits .............................. 280,000 293,717
Accounts Receivable ................... 368,730 430,785
Other ................................. 175,000 24,082
---------- ----------
Total Other Assets .................. $2,926,246 $2,018,309
========== ==========
7. LOSSES AND LOSS EXPENSES
The provision for losses and loss adjustment expenses ("LAE") is
established in an amount equal to the CGA's estimate of unidentified or case
basis reserves and unallocated losses including costs of settlement, on the
obligations it has insured. Case basis reserves are established when specific
insured issues are identified as currently or likely to be in default. Such a
reserve is based on the present value of the expected loss and LAE. The general
provision for losses and LAE is calculated by applying a loss factor, determined
based on an independent rating agency study of bond defaults, to net par amount
outstanding of the insured obligations.
The provision for losses and LAE is comprised of the following at December
31, 1998 and 1997:
1998 1997
----------- -------
Case basis reserve ..................... $88,200,000 $ --
General reserve ........................ 2,000,000 55,000
----------- -------
Total provision for losses and LAE ... $90,200,000 $55,000
=========== =======
The activity in the provision for losses and LAE is as follows:
1998 1997
----------- -------
Provision for losses and LAE
Balance at January 1 .................. $ 55,000 $ --
Less reinsurance recoverables .......... -- --
----------- -------
Net Balance at January 1 ............... 55,000 --
Net losses and loss expenses incurred .. 22,745,000 55,000
Net losses and loss expenses paid ...... -- --
----------- -------
Net provision for losses and LAE
Balance at December 31 ................ 22,800,000 55,000
Reinsurance recoverable ................ 67,400,000 --
----------- -------
Provision for losses and LAE, gross of
reinsurance recoverable Balance at
December 31 ........................... $90,200,000 $55,000
=========== =======
In October, 1998 the credit ratings on asset-backed securities originated
and serviced by Commercial Financial Services Inc. ("CFS"), a credit-card debt
collection company, were withdrawn by the three credit rating companies
F-13
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
that rate the most recently issued CFS securities. The withdrawal of the ratings
was in response to allegations of accounting irregularities at CFS. The rating
agencies, investors and insurers have commenced an investigation into the
allegations. Clients of CGAIM own approximately $155 million par of the CFS
securities and CGA has insured the credit facilities used to finance their
purchase. CGA had previously reinsured approximately $138 million par of this
exposure. In addition, CGA has exposure of approximately $46 million par to CFS
securities through a financial guaranty policy issued to a client that purchased
the securities for their own account. CGA previously reinsured approximately $16
million par of this exposure. In summary, CGA has exposure to a total of $201
million par of CFS issued securities, of which $154 million par has been
reinsured, leaving a net exposure of approximately $47 million par. CGA
estimates the loss on its net exposure of the CFS securities to be $20.8 million
for which a case basis reserve has been established for the year ended December
31, 1998.
8. REINSURANCE
In the ordinary course of business, CGA cedes exposures under various
reinsurance contracts primarily designed to minimize losses from large risks and
to protect capital and surplus. The reinsurance of risk does not relieve the
ceding insurer of its original liability to its policyholders. In the event that
all or any of the reinsurers are unable to meet their obligations to CGA under
the existing reinsurance agreements, CGA would be liable for such defaulted
amounts. CGA also has a $20 million excess of loss reinsurance facility. As of
December 31, 1998 prepaid reinsurance of approximately $1.3M was associated with
a single reinsurer.
As stated above in note seven, CGA has reinsured approximately $154 million
par of its total exposure to $201 million par of CFS issued securities, leaving
a net exposure of approximately $47 million par. CGA has reinsurance recoverable
of $67.4 million relating to the CFS securities as of December 31, 1998.
Also during October, 1998, CGA took steps to mitigate risks related to its
exposure in connection with guarantees of client credit facilities used to
purchase asset-backed and real estate securities. As a result of turmoil in
certain areas of the capital markets during this time period, the spreads over
treasuries at which investors were willing to purchase certain securities
widened considerably. This spread widening caused a decrease in the fair value
of many of the securities used as collateral for the insured credit facilities.
The estimated fair value of these securities had declined significantly during
October. Certain of the credit facilities have requirements that lender's
operating ratios, (the portfolio market value divided by the loan outstanding)
be maintained above certain levels. In the event that an operating ratio falls
below the required level and is not brought into compliance within the cure
period, the lender may liquidate the collateral and require CGA to pay any
remaining balance outstanding under the credit facility.
During October, 1998 two of CGAIM's clients worked with CGA to reduce the
impact of any future spread widening on their operating ratios. CGA provided
credit support on approximately $382 million of securities within the two
insured portfolios, which was further supported by a "Triple-A" rated reinsurer,
using documentation that would permit the insured to proceed directly against
the reinsurer. The effect of the described credit support arrangements was to
substantially increase the market value of the subject securities. CGA received
a premium of $38.95 million from its clients in connection with these credit
support arrangements, and ceded $38.7 million to the aforementioned reinsurer.
The reinsurer is a shareholder of the Company who has contracted with two other
shareholders of the Company to participate in the above described credit
arrangements.
F-14
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
9. MEZZANINE EQUITY
<TABLE>
<CAPTION>
1998 1997
$ $
---------- ----------
<S> <C> <C>
Series A: 3,211,890 and 2,796,534 shares
issued and outstanding ......................... 32,119 27,965
Additional paid in capital ...................... 75,258,981 65,504,534
---------- ----------
Total series A preferred stock .................. 75,291,100 65,532,499
Series B: 1,600,000 and 1,600,000 shares
issued and outstanding ......................... 16,000 16,000
Additional paid in capital ...................... 37,284,985 37,059,371
---------- ----------
Total series B preferred stock ................ 37,300,985 37,075,371
========== ==========
</TABLE>
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, declining to 8% after June 17, 2003 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 was 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 a
registration statement with respect to the Series A Preferred Stock. The Company
registered the Series A Preferred Stock with the Securities and Exchange
Commission effective August 6, 1998 at which time the accrual of the additional
.5% dividend on the Series A Preferred Stock ceased. The additional dividend was
paid on September 30, 1998. The dividend on the Series B Preferred Stock 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 the Series B Preferred Stock is accrued and the charge
against retained earnings is recorded.
Both Series A Preferred Stock and Series B Preferred Stock 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 deficit.
Both the Series A Preferred Stock and Series B Preferred Stock are voting
securities with Series A Preferred Stock carrying 7 votes per share and Series B
Preferred Stock carrying 5 votes per share. Series A Preferred Stock comes first
in preference in a liquidation of the Company followed by Series B Preferred
Stock and then the Company's Common Stock.
10. COMMON STOCK
The number of shares of Common Stock of the Company outstanding during the
year ended December 31, 1998 and the nine months ended December 31, 1997 was as
follows:
1998 1997
--------- ---------
Issued and outstanding ..................... 9,100,000 9,100,000
Weighted average number of shares .......... 9,100,000 6,522,313
F-15
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
The Common Stock 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.
11. LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share for the year ended December 31, 1998 and the period ended December 31,
1997.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------
Basic Loss Per Share ("EPS")
Numerator:
<S> <C> <C>
Net loss $(17,987,779) $ (2,706,182)
Series A--Pay-in-kind dividends paid (10,383,919) (4,913,346)
Series A--Accretion to redemption value (514,273) (190,472)
Series A--Accretion on warrants (207,709) --
Series B--Pay-in-kind dividends accrued (9,576,932) (4,439,231)
Series B--Accretion to redemption value (225,614) (83,561)
------------ ------------
Net Loss Available to Common Shareholders (38,896,226) (12,332,792)
------------ ------------
Denominator:
Weighted Average Shares Outstanding 9,100,000 6,522,313
Basic EPS $ (4.27) $ (1.89)
============ ============
Diluted Loss Per Share
Numerator $(38,896,226) $(12,332,792)
------------ ------------
Denominator 9,100,000 6,522,313
------------ ------------
Diluted EPS $ (4.27) $ (1.89)
============ ============
Loss per share on cumulative effect of change in
accounting principle $ (0.43) $ --
============ ============
</TABLE>
The Company has outstanding warrants which were not included in the
computation of the diluted loss per share as the effect of these warrants is
antidilutive for the periods presented above.
On June 17, 1997 the Company issued warrants to purchase 270,000 shares of
Common Stock in connection with the issuance of 2.6 million shares of Series A
Preferred Stock. All of the warrants are outstanding as of December 31, 1998.
These warrants are excerciseable at any time on or prior to June 17, 2007 at an
exercise price of $.01.
The Company also issued 847,729 warrants to certain investors and members
of management in connection with the issuance of 1.6 million investment units.
Each warrant represents the right to purchase one share of Common Stock on or
prior to June 17, 2007. The warrants have an exercise price of $5 per share and
were outstanding at December 31, 1998. In addition, the Company has authorized
1,494,771 warrants for 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 employee rights will vest ratably over a four-year
period and expire if not excercised within thirty days of the employee's
termination of employment. As of December 31, 1998, there were 1,348,129
warrants outstanding, of which 337,032 warrants were exercisable. As of December
31, 1997 there were 1,348,129 warrants outstanding, of which none were
exercisable.
F-16
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
12. INSURANCE IN FORCE
CGA principally insures structured securities including asset-backed
securities, mortgage-backed securities and commercial mortgage-backed
securities. CGA's potential liability in the event of nonperformance by the
issuer of the insured obligation is represented by its proportionate share of
the aggregate outstanding principal and interest payable ("insurance in force")
on such insured obligation. At December 31, 1998, CGA's aggregate insurance in
force was approximately $1.6 billion, net of reinsurance.
The following table shows the net par outstanding of insured obligations,
net of reinsurance, at December 31, by asset type:
1998 1997
(IN 000'S) (IN 000'S)
---------- ----------
REIT Debt ................................... $ 381,777 $ --
Consumer asset-backed securities ............ 456,521 52,439
Corporate asset-backed securities ........... 270,612 46,337
Commercial mortgage-backed securities ....... 185,754 100,703
Sovereign debt .............................. 120,000 120,000
Corporate debt .............................. 75,000 --
REIT Preferred stock ........................ 70,000 --
---------- --------
Total ..................................... $1,559,664 $319,479
========== ========
The following table presents the credit ratings of the above assets, based
on net par outstanding at December 31:
1998 1997
---- ----
"AAA" ....................................... 4% --
"AA" ........................................ 3% --
"A" ......................................... 12% 7%
"BBB" ....................................... 67% 65%
"BB" ........................................ 11% 28%
Not rated ................................... 3% --
--- ---
Total ..................................... 100% 100%
=== ===
13. SEGMENT REPORTING
The Company has two reportable segments: CGA and CGAIM (see description of
each segment in Note 1). The Company's management has identified the operating
segments on the basis that they are separate legal entities with each entity
carrying on a different type of business. CGA provides financial guaranty
insurance. CGAIM provides investment management services to third party
investment vehicles and provides investment advisory services including
transaction structuring. The accounting policies of each of the segments are the
same as those described in the summary of significant accounting policies.
F-17
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
The table below presents financial information for each of the operating
segments.
As of and for the year ended December 31, 1998.
<TABLE>
<CAPTION>
CGA CGAIM OTHER(a) TOTAL
------------ ----------- ---------- ------------
REVENUES
<S> <C> <C> <C> <C>
Net premiums earned ............................ $ 9,246,289 $ -- $ -- $ 9,246,289
Net investment income .......................... 8,387,513 64,934 75,675 8,528,122
Net realized gains ............................. 2,814,132 -- -- 2,814,132
Management fees ................................ -- 3,353,499 -- 3,353,499
Intersegment revenue ........................... -- 122,301 -- 122,301
TOTAL REVENUES ............................... 24,064,343
EXPENSE ITEMS
Operating expenses ............................. 1,680,707 10,711,550 1,753,410 14,145,667
Acquisition costs .............................. 433,217 -- -- 433,217
Commitment fees ................................ 600,000 -- -- 600,000
Excess of loss facility ........................ 200,000 -- -- 200,000
Losses and loss adjustment expenses ............ 22,745,000 -- -- 22,745,000
TOTAL EXPENSES ............................... 38,123,884
Cumulative effect of change in accounting
policy ........................................ 1,127,353 480,207 2,320,678 3,928,238
------------ ----------- ---------- ------------
ASSETS
Total assets ................................. 214,823,536 3,752,936 7,860,816 226,437,288
============ =========== ========== ============
</TABLE>
(a) The "other" segment is comprised of CGA Group, Ltd., the holding company,
which does not meet any of the quantitative thresholds for determining a
reportable segment.
As of and for the nine months ended December 31, 1997.
<TABLE>
<CAPTION>
CGA CGAIM OTHER TOTAL
------------ ----------- ---------- ------------
REVENUES
<S> <C> <C> <C> <C>
Net premiums earned ............................ $ 502,995 $ -- $ -- $ 502,995
Net investment income .......................... 2,901,306 2,955,601
Net realized gains ............................. 885,422 -- -- 885,422
TOTAL REVENUES ............................... 4,344,018
EXPENSE ITEMS
Operating expenses ............................. 597,883 5,313,368 598,852 6,510,103
Acquisition costs .............................. 53,590 -- -- 53,590
Commitment fees ................................ 323,836 -- -- 323,836
Excess of loss facility ........................ 107,671 -- -- 107,671
Losses and loss adjustment expenses ............ 55,000 -- -- 55,000
------------ ---------- ----------- ------------
TOTAL EXPENSES ............................... 7,050,200
ASSETS
Total Assets ................................. 131,607,950 3,577,782 11,085,250 146,270,982
============ ========== =========== ============
</TABLE>
F-18
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
The following are reconciliations of reportable segment revenues, expenses
and assets to the Company's consolidated totals in the financial statements.
Depreciation expense is included in operating expenses.
<TABLE>
<CAPTION>
1998 1997
------------- -------------
REVENUES
<S> <C> <C>
Total revenues for reportable segments ................... $ 24,064,343 $ 4,344,018
Elimination of intersegment revenues ..................... (122,301) --
------------- -------------
Total consolidated revenues ............................ $ 23,942,042 $ 4,344,018
============= =============
EXPENSES
Total expenses for reportable segments ................... $ 38,123,884 $ 7,050,200
Elimination of intersegment operating expenses ........... (122,301) --
------------- -------------
Total consolidated expenses ............................ $ 38,001,583 $ 7,050,200
============= =============
ASSETS
Total assets for reportable segments ..................... $ 226,437,288 $ 146,270,982
Intercompany loans ....................................... (7,551,429) (3,549,796)
Other intercompany balances .............................. (2,981,926) --
------------- -------------
Total consolidated assets .............................. $ 215,903,933 $ 142,721,186
============= =============
</TABLE>
14. CONTINGENCIES AND COMMITMENTS
a) The Company has exposure totaling approximately $425 million related to
the timely payment of interest and principal on a loan to St. George Investments
I, Ltd. (SGI). The loan is payable in four equal annual installments with the
first installment due November 11, 1999. In order to meet this obligation,
CGAIM, as the advisor to SGI, has advised SGI to sell a portion of the
underlying securities to special purpose vehicles that will repackage the
securities as follows. The current terms of the proposed transaction indicate
that the underlying securities would be sold to two newly organized special
purpose vehicles, financed by three classes of certificates. The two most senior
classes of certificates, representing approximately 84% of the total, would be
held by a third party who is also an institutional investor in the Company. The
Company would also issue a 5.9% pool policy related to the underlying pool of
securities. This transaction is currently scheduled to close in April, 1999. The
proceeds from this sale under the currently negotiated terms would be sufficient
to meet SGI's obligations due in November, and CGAIM would advise SGI to use the
proceeds to meet the obligation. There can be no assurance that the sale of the
underlying securities occurs under the terms discussed above. In the event that
this transaction does not occur and SGI is not otherwise able to meet their debt
obligation, the lender may call on the Company's loan guaranty for the
shortfall. The Company may then liquidate the underlying collateral to subrogate
losses paid.
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 option for a renewal period of
five years. Total rent expense was approximately $355,000 and $300,000 in 1998
and 1997 respectively. Future minimum rental commitments under the leases, are
expected to be approximately $500,000 per annum.
15. 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, as amended, of Bermuda, that generally protects them from
incurring taxation by Bermuda tax authorities until March 28, 2016. Since the
Company
F-19
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
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 does file protective U.S. income tax
returns. CGAIM will be subject to U.S. taxation at regular corporate tax rates,
but has tax losses carried forward of approximately $7.65 million and $5.3
million as at December 31, 1998 and 1997 respectively, for which no benefit has
been recorded in the financial statements. These tax loss carry-forwards expire
in the year 2013 and 2012 respectively.
16. 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 to maintain certain measures of solvency and liquidity
during the period. The statutory capital and surplus at December 31, 1998 and
1997 were $114,681,031 and $127,041,276, respectively. Statutory net loss for
the year ended December 31, 1998 was $11,264,214 and for the nine months ended
December 31, 1997 statutory net income was $3,152,533. The principal differences
between capital and surplus and statutory net income and shareholders' equity
and income as reported in conformity with GAAP relates to deferred acquisition
costs and prepaid expenses of the Company. There were no statutory restrictions
on payment of dividends from the retained earnings of the Company as the
required level of solvency was met by the common stock in issue.
17. RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities" effective for fiscal years beginning after June 15, 1999,
but earlier application is permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998. SFAS 133 requires all derivatives to be recognized
in the statement of financial position as either assets or liabilities and
measured at fair value. The Company does not believe the application of SFAS 133
will have a material effect on its consolidated financial statements.
18. SUBSEQUENT EVENTS
On January 27, 1999 the Company held a Special General Meeting for all
shareholders, which was both preceded and followed by meetings of its Board of
Directors. The purpose of the meetings was primarily to approve and authorize
the seeking of additional capital from existing shareholders and from one or
more third party investors.
During the meetings the following resolutions were among those approved:
o That the authorized share capital of the Company be increased from
$412,000 to $3,412,000 by the creation of an additional 300,000,000
shares of a par value of $0.01.
o That the Company create a new series of Preference Shares being Series
C Convertible Cumulative Voting Preference Shares (the "Series C
Preferred Stock") and offer up to $63 million of such stock to the
existing holders of the Company's Common Stock and Series B Preferred
Stock (the "Rights Offering").
o Concurrent with the closing of the Rights Offering all outstanding
shares of Series B Preferred Stock, including accrued dividends
thereon, shall be converted into shares of Common Stock based on a
value of $3 per share of Common Stock.
o That the Company amend the terms of the Series B Preferred Stock such
that the dividend rate applicable to the Shares of Series B Preferred
Stock which may be issued in the future upon exercise of the Unit
Investors
F-20
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED DECEMBER 31, 1997
(EXPRESSED IN U.S. DOLLARS)
Capital Commitments or otherwise will not be greater than 7% per
annum, that any such Series B Preferred Stock shall rank junior to the
Series C Preferred Stock in all respects, and that any such Series B
Preferred Stock shall not be entitled to voting rights.
o That the number of Directors of the Company be increased from 13 to 15
by the creation of two new vacancies and that the said two vacancies
be filled by nominees elected by the holders of the new Series C
Preferred Stock of the Company.
The Company has received irrevocable commitments from certain of its
existing investors to purchase approximately $50.7 million of Series C Preferred
Stock. Such amount is comprised of approximately 31.8 million shares priced at
$1.50 per share and 12 million shares priced at $0.25 per share. The Rights
Offering is scheduled to close upon the receipt of the funds on March 31, 1999.
The Company also obtained agreements from the Series A Preferred
Shareholders to amend the terms of the Series A Preferred Stock so that the
early redemption premium referred to in the mezzanine equity footnote above is
eliminated.
The amount of new Common Stock to be issued in connection with the
conversion of the Series B Preferred Stock is projected to be approximately 18.9
million shares which will bring the amount of total Common Stock outstanding to
approximately 28 million shares.
On April 14, 1999, clients of CGA received gross proceeds of approximately
$551 million from the sale of securities that had been financed using credit
facilities insured by CGA. CGA issued new financial guaranty insurance related
to the sale resulting in approximately $163 million of new exposure. The effect
of the transaction was to reduce CGA's risk-in-force by approximately $375
million. The sellers will use the proceeds of this transaction to meet their
respective obligations under various financing arrangements, as well as to
provide cash for investment activities in the normal course of their business.
The financial statements do not include any adjustments that might result from
this transaction.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net premiums written .................... $1,949,993 $1,607,759 $2,882,474 $3,356,610 $ 9,796,836
Net premiums earned ..................... 1,071,135 1,649,341 3,027,536 3,498,277 9,246,289
Net investment income and net
realized gains ......................... 1,646,061 3,119,215 1,985,828 4,591,150 11,342,254
Management fees ......................... 189,056 492,939 1,472,589 1,198,915 3,353,499
---------- ---------- ---------- ---------- -----------
Total Revenues ........................ 2,906,252 5,261,495 6,485,953 9,288,342 23,942,042
========== ========== ========== ========== ===========
Operating Expenses ...................... 3,063,863 4,366,129 4,043,755 2,549,619 14,023,366
Acquisition costs ....................... 53,245 92,342 129,944 157,686 433,217
Commitment fees and excess of
loss facility .......................... 197,945 199,589 201,233 201,233 800,000
Losses and loss adjustment
expenses, net .......................... 195,000 405,000 700,000 21,445,000 22,745,000
---------- ---------- ---------- ---------- -----------
Total Expenses ........................ 3,510,053 5,063,060 5,074,932 24,353,538 38,001,583
========== ========== ========== ========== ===========
Net income (loss) ....................... (603,801) 198,435 (2,517,216) (15,065,197) (17,987,779)
Net income (loss) available to
shareholders ........................... (5,683,130) (4,909,349) (7,991,082) (20,312,665) (38,896,226)
Basic and fully diluted earnings
(loss) per share ....................... ($0.62) ($0.54) ($0.88) ($2.23) ($4.27)
</TABLE>
F-21
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Fixed maturities available for sale, (at fair value)
(Amortized cost: $101,493,092 and $99,560,861) ............................ $100,716,387 $100,488,537
Other investments .......................................................... 30,000,000 30,000,000
Cash and short-term investments ............................................ 53,083,244 2,598,140
Premiums receivable ........................................................ 3,080,055 3,228,497
Management fees receivable ................................................. 1,064,638 1,093,411
Accrued interest receivable ................................................ 2,850,376 3,679,763
Deferred acquisition costs ................................................. 3,562,274 3,202,557
Prepaid reinsurance premiums ............................................... 1,273,640 1,286,782
Reinsurance recoverable .................................................... 67,400,000 67,400,000
Other assets ............................................................... 2,618,108 2,926,246
------------ ------------
Total assets ............................................................. $265,648,722 $215,903,933
============ ============
LIABILITIES
Unearned premiums .......................................................... $ 786,685 $ 821,124
Provision for losses and loss adjustment expenses .......................... 90,500,000 90,200,000
Reinsurance balances payable ............................................... 406,483 420,660
Accrued costs and expenses ................................................. 3,631,747 4,355,767
------------ ------------
Total liabilities ........................................................ 95,324,915 95,797,551
------------ ------------
MEZZANINE EQUITY
Preferred stock, $.01 par value, 72,000,000 shares authorized:
Series A .................................................................. 78,199,216 75,291,100
Series B .................................................................. -- 37,300,985
Dividends accrued on Series B .............................................. -- 14,016,164
Series C ................................................................... 49,793,795 --
------------ ------------
Total mezzanine equity ................................................... 127,993,011 126,608,249
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 268,000,000 shares authorized,
28,005,648 issued and outstanding ......................................... 280,057 91,000
Additional paid-in-capital ................................................. 96,166,977 42,486,057
Accumulated other comprehensive income ..................................... (776,705) 927,676
Retained deficit ........................................................... (53,339,533) (50,006,600)
------------ ------------
Total shareholders' equity (deficit) ..................................... 42,330,796 (6,501,867)
------------ ------------
Total liabilities and shareholders' equity ............................... $265,648,722 $215,903,933
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
REVENUES
<S> <C> <C>
Gross premiums written ................................................... $ 3,467,232 $ 1,949,993
Ceded premiums ........................................................... (419,625) --
----------- -----------
Net premiums written ..................................................... 3,047,607 1,949,993
Change in unearned premiums .............................................. 34,439 (878,858)
----------- -----------
Net premiums earned ...................................................... 3,082,046 1,071,135
Net investment income .................................................... 1,671,501 1,888,255
Net realized gains (losses) .............................................. 151,566 (242,194)
Management fees .......................................................... 1,145,259 189,056
----------- -----------
Total revenues .......................................................... 6,050,372 2,906,252
----------- -----------
EXPENSES
Operating expenses ....................................................... 3,276,277 3,063,863
Acquisition costs ........................................................ 148,138 53,245
Commitment fees .......................................................... 147,945 147,945
Excess of loss facility .................................................. 50,000 50,000
Losses and loss adjustment expenses ...................................... 300,000 195,000
----------- -----------
Total expenses .......................................................... 3,922,360 3,510,053
NET INCOME (LOSS) ......................................................... 2,128,012 (603,801)
Other comprehensive income ................................................ (1,704,381) 607,868
----------- -----------
COMPREHENSIVE INCOME ...................................................... $ 423,631 $ 4,067
=========== ===========
Net loss available to common shareholders ................................. $(3,531,036) $(5,683,130)
Basic and diluted loss per common share ................................... $ (0.38) $ (0.62)
=========== ===========
Weighted average shares outstanding ....................................... 9,310,063 9,100,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
<S> <C> <C>
Balance--beginning of period ............................................. $ 32,119 $ 27,965
Pay-in-kind dividends paid ............................................... 1,104 4,154
------------ ------------
Balance--end of period ................................................... 33,223 32,119
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES A PREFERRED
Balance--beginning of period ............................................. 75,258,981 65,504,534
Fair value of warrants ................................................... -- (1,347,300)
Pay-in-kind dividends paid ............................................... 2,759,046 10,379,765
Accretion to redemption value ............................................ 114,283 514,273
Accretion on warrants .................................................... 33,683 207,709
------------ ------------
Balance--end of period ................................................... 78,165,993 75,258,981
------------ ------------
TOTAL SERIES A PREFERRED STOCK ........................................... $ 78,199,216 $ 75,291,100
============ ============
SERIES B PREFERRED STOCK
Balance--beginning of period ............................................. $ 16,000 $ 16,000
Pay-in-kind dividends paid ............................................... 6,687
Stock exchanged for common stock ......................................... (22,687) --
------------ ------------
Balance--end of period ................................................... -- 16,000
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES B PREFERRED
Balance--beginning of period ............................................. 37,284,985 37,059,371
Pay-in-kind dividends paid ............................................... 16,710,271 --
Accretion to redemption value ............................................ 50,137 225,614
Unaccreted issuance costs ................................................ 2,648,879
Stock exchanged for common stock ......................................... (56,694,272) --
Balance--end of period ................................................... -- 37,284,985
------------ ------------
TOTAL SERIES B PREFERRED STOCK ........................................... $ -- $ 37,300,985
============ ============
PAY-IN-KIND DIVIDENDS ACCRUED--SERIES B
Balance--beginning of period ............................................. $ 14,016,164 $ 4,439,231
Dividends accrued ........................................................ 2,700,795 9,576,933
Dividends paid ........................................................... (16,716,959) --
------------ ------------
Balance--end of period ................................................... $ -- $ 14,016,164
============ ============
SERIES C PREFERRED STOCK
Balance--beginning of period ............................................. $ -- $ --
Stock issued (43,997,863 shares) ......................................... 439,979 --
------------ ------------
Balance--end of period ................................................... 439,979 --
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES C PREFERRED
Balance--beginning of period ............................................. -- --
Stock issued ............................................................. 50,556,816 --
Issuance costs ........................................................... (1,203,000) --
------------ ------------
Balance--end of period ................................................... 49,353,816 --
------------ ------------
TOTAL SERIES C PREFERRED STOCK ........................................... $ 49,793,795 $ --
============ ============
TOTAL MEZZANINE EQUITY ................................................... $127,993,011 $126,608,249
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
SHAREHOLDERS' EQUITY
COMMON STOCK
<S> <C> <C>
Balance--beginning of period ............................................. $ 91,000 $ 91,000
Stock issued (18,905,648 shares) ......................................... 189,057 --
------------- ------------
Balance--end of period ................................................... 280,057 91,000
------------- ------------
ADDITIONAL PAID-IN-CAPITAL--COMMON STOCK
Balance--beginning of period ............................................. 42,486,057 42,086,353
Stock issued ............................................................. 56,527,902 --
Fair value of warrants ................................................... -- 1,347,300
Accretion of Series A Preferred Stock to redemption value ................ (114,283) (514,273)
Accretion of Series B Preferred Stock to redemption value ................ (50,137) (225,614)
Accretion on warrants .................................................... (33,683) (207,709)
Unaccreted issuance costs (Series B) ..................................... (2,648,879) --
------------- ------------
Balance--end of period ................................................... 96,166,977 42,486,057
------------- ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance--beginning of period ............................................. 927,676 1,638,092
Increase (decrease) during the period .................................... (1,704,381) (710,416)
------------- ------------
Balance--end of period ................................................... (776,705) 927,676
------------- ------------
RETAINED EARNINGS (DEFICIT)
Balance--beginning of period ............................................. (50,006,600) (12,057,969)
Net income (loss) ........................................................ 2,128,012 (17,987,779)
Series A pay-in-kind dividends paid ...................................... (2,760,150) (10,383,919)
Series B pay-in-kind dividends accrued ................................... (2,700,795) (9,576,933)
------------- ------------
Balance--end of period ................................................... (53,339,533) (50,006,600)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ..................................... $ 42,330,796 $ (6,501,867)
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) ......................................................... $ 2,128,012 $ (603,801)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Amortization of investments .............................................. 90,484 1,374,914
Depreciation expense ..................................................... 128,792 81,415
Realized (gain) loss on sale of investments .............................. (151,566) 242,194
Realized loss on sale of fixed assets .................................... -- 26,282
Changes in assets and liabilities:
Premiums receivable ...................................................... 148,442 (578,451)
Management fees receivable ............................................... 28,773 --
Accrued interest ......................................................... 829,387 973,774
Deferred acquisition costs ............................................... (359,717) (382,181)
Prepaid reinsurance premiums ............................................. 13,142 --
Other assets ............................................................. 229,646 239,276
Organization costs ....................................................... -- 245,812
Unearned premiums ........................................................ (34,439) 878,859
Provision for losses and loss adjustment expenses ........................ 300,000 195,000
Reinsurance balances payable ............................................. (14,177) --
Deferred compensation payable ............................................ -- 224,449
Accrued costs and expenses ............................................... (724,020) (1,638,490)
------------ -----------
Net cash provided by operating activities ................................. 2,612,759 1,279,052
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired ............................... (22,856,171) (47,025,095)
Proceeds from sale of fixed maturity investments .......................... 20,985,021 42,738,424
Purchases of fixed assets ................................................. (50,300) (420,771)
Note receivable ........................................................... -- 250,000
------------ -----------
Net cash used in investing activities ..................................... (1,921,450) (4,457,442)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on issuance of Series C Preferred Stock .......................... 50,996,795 --
Issuance costs of Series C Preferred Stock ................................ (1,203,000) --
------------ -----------
Net cash provided by financing activities ................................. 49,793,795 --
------------ -----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS ................ 50,485,104 (3,178,390)
CASH AND SHORT-TERM INVESTMENTS--BEGINNING OF PERIOD ...................... 2,598,140 7,199,106
------------ -----------
CASH AND SHORT-TERM INVESTMENTS--END OF PERIOD ............................ $ 53,083,244 $ 4,020,716
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
1. GENERAL
The interim consolidated financial statements, which include the accounts
of CGA Group, Ltd. (the "Company") and its subsidiaries, have been prepared on
the basis of accounting principles generally accepted in the United States of
America and, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim period
are not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the consolidated financial
statements, and related notes thereto, included in the Company's 1998 Annual
Report on Form 10-K.
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 Insurance Act 1978 of Bermuda (the
"Act") 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. CGA has a
"Triple-A" "claims paying ability" rating from Duff & Phelps Credit Rating
Company ("DCR") and has also been rated in the highest rating category assigned
by each of the two Canadian rating agencies, Dominion Bond Ratings Service and
Canadian Bond Ratings Service. CGA issues financial guaranty insurance policies,
which are the functional equivalent of direct-pay letters of credit, to insure
payment of interest, principal and other amounts payable in respect of notes,
securities, and other financial obligations. 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.
CGAIM did not commence operations until after its acquisition by the Company.
CGAIM is registered as an investment advisor with the United States Securities
and Exchange Commission under the Investment Advisors Act of 1940, as amended.
CGAIM provides investment management and financial advisory services primarily
to specialized investment vehicles and for the U.S. and international structured
finance markets. CGAIM and its employees are based in New York City, New York.
The primary clients of CGA and CGAIM are St. George Holdings, Ltd. ("SG
Holdings") and Cobalt Holdings, Ltd. ("Cobalt") and their respective
subsidiaries. In 1998 they provided approximately 85% of the total premiums
earned by CGA, and 91% of the total investment management fees earned by CGAIM.
These percentages are expected to decrease in the future.
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.
As part of the Recapitalization, on June 17, 1997, the Company issued 2.6
million shares of Series A Cumulative Voting Preference Shares (the "Series A
Preferred Stock"), par value $.01 per share, for a price of $25 per share. The
shares of Series A Preferred Stock are entitled to a 13.75% quarterly
compounding dividend paid in additional shares of Series A Preferred Stock. The
holders of Series A Preferred Stock 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 a total of 270,000 shares of
Common Stock at an exercise price of $.01 per share. The warrants are valued at
$4.99 per share and are accounted for as additional paid-in-capital to the
Common Stock.
As part of the Recapitalization, on June 17, 1997, the Company issued 1.6
million shares of Series B Cumulative Voting Preference Shares (the "Series B
Preferred Stock"), par value $.01 per share, for a price of $25 per share. The
shares of Series B Preferred Stock are entitled to a 20% quarterly compounding
dividend paid in additional shares of Series B Preferred Stock. The shares of
Series B Preferred Stock were sold to investors as part of Investment Units
which also included commitments to purchase an additional $60 million of Series
B Preferred Stock in the aggregate upon the occurrence of certain funding
events, in order to maintain CGA's "Triple-A" rating from DCR. The
F-27
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
Company pays a $600,000 annual fee to the holders of the Investment Units for
their commitments. The Investment Units also included an aggregate of 7,827,957
shares of Common Stock out of a total of 9,100,000 million shares of Common
Stock issued pursuant to the Recapitalization, 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. The exercise price of
these warrants is subject to reduction based on the sales price of additional
Common Stock or equivalents. An additional 1,494,771 warrants have been
authorized for issuance 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.
On March 31, 1999, the Company sold 43,997,863 shares of Series C
Convertible Cumulative Voting Preference Shares, par value $.01 per share (the
"Series C Preferred Stock"), to existing shareholders for an aggregate sales
price of $50,996,795. Concurrent with the sale of the Series C Preferred Stock,
the outstanding 1,600,000 shares of Series B Preferred Stock and the 668,678
shares of Series B Preferred Stock declared as pay-in-kind dividends thereon,
totaling 2,268,678 shares valued at $56,716,950, were exchanged for 18,905,648
shares of Common Stock based on an exchange price of $3 per share of Common
Stock.
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.
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,
underwriting, certain rating agency fees, legal and other expenses. Deferred
acquisition costs are amortized on a straight-line basis over the estimated term
of the related insured risks. The Company evaluates the recoverability of
deferred acquisition costs whenever changes in circumstances warrant. If it is
determined that an impairment exists, the excess of the unamortized balance over
deferred acquisition costs will be charged to earnings.
c) Reinsurance
In the ordinary course of business, CGA cedes exposures pursuant to various
reinsurance contracts designed to limit CGA's losses from certain risks and to
protect CGA's capital and surplus. The reinsurance of risk does not relieve CGA
of its original liability to its policyholders. In the event that a reinsurer
was unable to meet its obligations under the existing reinsurance contracts, CGA
would be liable for such defaulted amounts.
F-28
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
Prepaid reinsurance premiums represent the portion of premiums ceded to
reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
d) Provision for losses and loss adjustment expenses
A case basis reserve for unpaid losses and loss adjustment expenses may be
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. A general reserve is calculated by applying a loss factor to
the total net par amount outstanding of CGA's insured obligations over the
expected term of such insured obligations.
Management believes that the current level of the provision is adequate to
cover the ultimate net cost of claims. The provision is necessarily an estimate
and there can be no assurance that the ultimate liability will not differ from
such estimates. The Company will monitor the provision on an ongoing basis and
may periodically adjust the provision based on actual loss experience, the
future mix of business and economic conditions.
The provision for losses is reflected on the balance sheet gross of any
losses recoverable from reinsurers.
e) Investments
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," investments in debt securities are designated as
available-for-sale and are recorded at fair value, being quoted market value.
Any resulting unrealized gains or losses are reflected as a separate component
of shareholder's equity as accumulated other comprehensive income and as a
separate component of the statement of operations as other comprehensive income.
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. Other investments are carried at cost, which approximates fair value.
Bond discounts and premiums are accreted or amortized on the effective
interest method over the term of the related securities. Realized gains or
losses on sale of investments are determined on the basis of specific
identification. Net investment income is recognized when earned and includes
interest and amortization of market premiums and discounts, and is net of
investment management and custody fees.
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
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per share."
This statement requires the Company to report basic earnings per share and
diluted earnings per share. Loss per common share is calculated using the loss
for the period adjusted for preference dividends, 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. The Company adopted SFAS 128 in 1998.
h) Comprehensive Income
The 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. Comprehensive income for the Company is comprised solely of changes
in unrealized appreciation or depreciation on marketable investments. The
Company adopted SFAS 130 in 1998.
F-29
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
i) Start-up activities
The Accounting Standards Executive Committee issued Statement of Position
98-5, "Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998. This statement requires the Company to
expense organization costs as incurred. On July 1, 1998, the Company expensed
the remaining unamortized organization costs, which is reflected in the
financial statements as a change in accounting principle.
3. OTHER INVESTMENTS
Other investments are comprised of a $25 million note from St. George
Holdings, Ltd., a Cayman Islands company which is the parent company of certain
clients of CGAIM ("SG Holdings"), and a $5 million note from Cobalt Holdings
LLC, a Delaware limited liability corporation ("Cobalt Holdings") which is also
the parent company of certain clients of CGAIM. The notes are carried at their
original cost which approximates fair value. The notes bear interest of 3 month
LIBOR plus 1% per annum payable quarterly. The Cobalt note matures in July, 2013
and may be prepaid without penalty. On April 16, 1999, SG Holdings repaid the
$25 million note in full.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
Other Assets
Other prepaid expenses ................. $229,831 $222,752
Prepaid commitment fees ................ 128,219 276,164
Fixed assets, net of depreciation ...... 1,525,108 1,603,600
Deposits ............................... 329,200 280,000
Accounts receivable .................... 328,357 368,730
Other .................................. 77,393 175,000
---------- ----------
Total Other Assets .................... $2,618,108 $2,926,246
========== ==========
5. LOSSES AND LOSS EXPENSES
The provision for losses and loss adjustment expenses ("LAE") is
established in an amount equal to CGA's estimate of unidentified or case basis
reserves and unallocated losses including costs of settlement, on the
obligations it has insured. Case basis reserves are established when specific
insured issues are identified as currently or likely to be in default. Such a
reserve is based on the present value of the expected loss and LAE. The general
provision for losses and LAE is calculated by applying a loss factor, determined
based on an independent rating agency study of bond defaults, to net par amount
outstanding of the insured obligations.
In October, 1998 the credit ratings on asset-backed securities originated
and serviced by Commercial Financial Services Inc. ("CFS"), a credit-card debt
collection company, were withdrawn by the three credit rating companies that
rate the most recently issued CFS securities. The withdrawal of the ratings was
in response to allegations of accounting irregularities at CFS. The rating
agencies, investors and insurers have commenced an investigation into the
allegations. Clients of CGAIM own approximately $153.5 million par of the CFS
securities, and CGA has insured the credit facilities used to finance their
purchase. In addition, CGA has exposure of approximately $45.5 million par to
CFS securities through a financial guaranty policy issued to a client of CGA
that purchased the securities for its own account. In summary, CGA has exposure
to a total of $199 million par of CFS issued securities, of which $152 million
par has been reinsured, leaving a net exposure of approximately $47 million par
at March 31, 1999. CGA estimates the loss on its net exposure of the CFS
securities to be $20.8 million, for which a case basis reserve was established
for the year ended December 31, 1998. The provision for losses is reflected on
the balance sheet gross of reinsurance recoverable of $67.4 million.
F-30
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
6. REINSURANCE
In the ordinary course of business, CGA cedes exposures pursuant to various
reinsurance contracts primarily designed to minimize CGA's losses from large
risks and to protect CGA's capital and surplus. The reinsurance of risk does not
relieve CGA of its original liability to its policyholders. In the event that
all or any of the reinsurers are unable to meet their obligations to CGA under
the existing reinsurance agreements, CGA would be liable for such defaulted
amounts. CGA also has a $20 million excess of loss reinsurance facility. As of
March 31, 1999 prepaid reinsurance of approximately $1.3 million was associated
with a single reinsurer.
As stated above, CGA has reinsured a portion of its exposure to
asset-backed securities originated and serviced by CFS. Approximately $152
million par of this total exposure of $199 million is reinsured leaving a net
exposure of approximately $47 million par. CGA has reinsurance recoverable of
$67.4 million relating to the CFS securities as of March 31, 1999.
In October, 1998, CGA provided credit support on approximately $382 million
of securities within two insured portfolios, which was further supported by a
"Triple-A" rated reinsurer, using documentation that would permit the insured to
proceed directly against the reinsurer. The effect of the described credit
support arrangements was to substantially increase the market value of the
subject securities. CGA received a premium of $38.95 million from its clients in
connection with these credit support arrangements, and ceded $38.7 million to
the aforementioned reinsurer. The reinsurer is a shareholder of the Company who
has contracted with two other shareholders of the Company to participate in the
above-described credit arrangements. On April 14, 1999, these credit support
arrangements were cancelled and approximately $29.5 million of premium was
refunded to the clients.
7. MEZZANINE EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Series A: 3,322,297 and 3,211,890 shares issued
and outstanding .................................................. $ 33,223 $ 32,119
Additional paid in capital ........................................ 78,165,993 75,258,981
----------- -----------
Total series A preferred stock .................................. $78,199,216 $75,291,100
=========== ===========
Series B: nil and 1,600,000 shares issued and outstanding ......... $ -- $ 16,000
Additional paid in capital ........................................ -- 37,284,985
----------- -----------
Total series B preferred stock .................................. $ -- $37,300,985
=========== ===========
Series C: 43,997,863 and nil shares issued and outstanding ........ $ 439,979 $ --
Additional paid in capital ........................................ 49,353,816 --
----------- -----------
Total series C preferred stock .................................. $49,793,795 $ --
=========== ===========
</TABLE>
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.
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 Series A Preferred Stock and the Series B Preferred Stock were each
recorded at fair value. 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 deficit.
The Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock are voting securities, and are entitled to 7 votes per share, 5
votes per share and 1 vote per share, respectively, on all matters presented to
F-31
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
security holders of the Company for their approval. The Series A Preferred Stock
ranks senior in liquidation preference to all other classes of capital stock of
the Company, followed by the Series C Preferred Stock, the Series B Preferred
Stock and the Common Stock of the Company, respectively.
On March 31, 1999, all issued and outstanding shares of Series B Preferred
Stock were converted into shares of Common Stock, at a conversion ratio of
11.816 shares of Common Stock per share of Series B Preferred Stock. The
conversion ratio was based on an assumed value of $3.00 per share of Common
Stock. As a result of the conversion, 18,905,648 new shares of Common Stock were
issued. No shares of Series B Preferred Stock are currently issued and
outstanding.
The shares of Series C Preferred Stock may be converted into shares of
Common Stock on a one-for-one basis at the holder's option at any time, are
mandatorily convertible into shares of Common Stock upon the occurrence of
certain events at the conversion rate specified in the Company's Bye-laws, and
are subject to redemption by the Company for cash upon the occurrence of certain
events at the redemption rate specified in the Company's Bye-laws.
8. COMMON STOCK
The number of shares of Common Stock outstanding as of March 31, 1999 and
the year ended December 31, 1998 were as follows:
1999 1998
---------- ---------
Issued and outstanding .................. 28,005,653 9,100,000
Weighted average number of shares ....... 9,310,063 9,100,000
The Common Stock of the Company carries 2 votes per share on all matters
presented to security holders of the Company for their approval.
9. LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share for the periods ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
Basic loss per share ("EPS")
Numerator:
<S> <C> <C>
Net income (loss) ............................. $ 2,128,012 $ (603,801)
Series A--Pay-in-kind dividends paid .......... (2,760,150) (2,403,154)
Series A--Pay-in-kind dividends accrued ....... -- (100,924)
Series A--Accretion to redemption value ....... (114,283) (171,424)
Series A--Accretion on warrants ............... (33,683) (106,661)
Series B--Pay-in-kind dividends accrued ....... (2,700,795) (2,221,962)
Series B--Accretion to redemption value ....... (50,137) (75,204)
----------- -----------
Net Loss Available to Common Shareholders ..... 3,531,036 (5,683,130)
----------- -----------
Denominator:
Weighted Average Shares Outstanding ............. 9,310,063 9,100,000
Basic EPS ....................................... $ (0.38) $ (0.62)
=========== ===========
Diluted Loss Per Share
Numerator ....................................... (3,531,036) 5,683,130
----------- -----------
Denominator ..................................... 9,310,063 9,100,000
----------- -----------
Diluted EPS ..................................... $ (0.38) $ (0.62)
=========== ===========
</TABLE>
F-32
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
The Company has outstanding warrants which were not included in the
computation of the diluted loss per share, as the effect of these warrants is
antidilutive for the periods presented above.
On June 17, 1997, the Company issued warrants to purchase 270,000 shares of
Common Stock in connection with the issuance of 2.6 million shares of Series A
Preferred Stock. All of the warrants are outstanding as of March 31, 1999. These
warrants are exercisable at any time on or prior to June 17, 2007 at an
exercise price of $.01 per share of Common Stock evidenced thereby.
The Company also issued 847,729 warrants to certain investors and members
of management in connection with the issuance of 1.6 million Investment Units.
Each such warrant represents the right to purchase one share of Common Stock on
or prior to June 17, 2007. The warrants have a new exercise price of $2.12 per
share (originally $5 per share) and were outstanding at March 31, 1999. In
addition, the Company has authorized 1,494,771 warrants for issuance to certain
employees. These warrants 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 employee warrants will vest ratably over a four-year period and expire if
not exercised within thirty days of the employee's termination of employment. As
of March 31, 1999, there were 1,315,984 warrants outstanding, of which 328,996
warrants were exercisable. As of December 31, 1998 there were 1,348,129 warrants
outstanding of which 337,032 warrants were exercisable.
10. INSURANCE IN FORCE
The following table shows the net par outstanding of insured obligations,
net of reinsurance, at March 31, 1999 and December 31, 1998 by asset type:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(IN 000'S) (IN 000'S)
<S> <C> <C>
REIT Debt ...................................... $ 376,073 $ 381,777
Consumer asset-backed securities ............... 454,646 456,521
Corporate asset-backed securities .............. 303,208 270,612
Commercial mortgage-backed securities .......... 215,501 185,754
Sovereign debt ................................. 120,000 120,000
Corporate debt ................................. 75,000 75,000
REIT preferred stock ........................... 70,000 70,000
---------- ----------
Total .......................................... $1,614,428 $1,559,664
========== ==========
</TABLE>
The following table presents the credit ratings of the above assets, based
on net par outstanding at March 31, 1999 and December 31, 1998:
1999 1998
---- ----
"AAA" .......................................... 5% 4%
"AA" ........................................... 3% 3%
"A" ............................................ 14% 12%
"BBB" .......................................... 67% 67%
"BB" ........................................... 8% 11%
Not rated ...................................... 3% 3%
--- ---
Total ........................................ 100% 100%
=== ===
11. SEGMENT REPORTING
The Company has two reportable segments: CGA and CGAIM (see description of
each segment in Note 1). The Company's management has identified the operating
segments on the basis that they are separate legal entities and
F-33
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
that each entity carries on a different type of business. CGA provides financial
guaranty insurance and CGAIM provides investment management services. The
accounting policies of each of the segments are the same as those described in
the summary of significant accounting policies.
The table below presents financial information for each of the operating
segments
As of and for the three months ended March 31, 1999
<TABLE>
<CAPTION>
CGA CGAIM OTHER(a) TOTAL
------------ ---------- ----------- ------------
REVENUES
<S> <C> <C> <C> <C>
Net premiums earned $ 3,082,046 $ -- $ -- $ 3,082,046
Net investment income 1,651,857 16,972 2,672 1,671,501
Net realized gains 151,566 -- -- 151,566
Management fees -- 1,145,259 -- 1,145,259
Intersegment revenue -- 59,827 -- 59,827
TOTAL REVENUES 6,110,199
EXPENSE ITEMS
Operating expenses 363,383 2,627,079 345,642 3,336,104
Acquisition costs 148,138 -- -- 148,138
Commitment fees 147,945 -- -- 147,945
Excess of loss facility 50,000 -- -- 50,000
Losses and loss adjustment expenses 300,000 -- -- 300,000
TOTAL EXPENSES 3,982,187
ASSETS
Total assets 244,118,686 3,644,229 31,307,904 279,070,819
</TABLE>
- ---------------
(a) The "other" segment is comprised of CGA Group, Ltd., the holding company,
which does not meet any of the quantitative thresholds for determining a
reportable segment.
As of and for the three months ended March 31, 1998
<TABLE>
<CAPTION>
CGA CGAIM OTHER TOTAL
------------ ---------- ----------- ------------
REVENUES
<S> <C> <C> <C> <C>
Net premiums earned $ 1,071,135 $ -- $ -- $ 1,071,135
Net investment income 1,840,037 6,103 42,115 1,888,255
Net realized gains (242,194) -- -- (242,194)
Management fees -- 189,056 -- 189,056
TOTAL REVENUES 2,906,252
EXPENSE ITEMS
Operating expenses 199,568 2,384,063 480,232 3,063,863
Acquisition Costs 53,245 -- -- 53,245
Commitment Fees 147,945 -- -- 147,945
Excess of loss facility 50,000 -- -- 50,000
Losses and loss adjustment expenses 195,000 -- -- 195,000
TOTAL EXPENSES 3,510,053
ASSETS
Total Assets 134,936,068 2,403,308 11,145,695 148,485,071
</TABLE>
F-34
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(EXPRESSED IN U.S. DOLLARS)
The following are reconciliations of reportable segment revenues, expenses
and assets to the Company's consolidated totals in the financial statements.
Depreciation expense is included in operation expenses.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
REVENUES
Total revenues for reportable segments ........ $ 6,110,199 $ 2,906,252
Elimination of intersegment revenues .......... (59,827) --
------------ ------------
Total consolidated revenues ................... $ 6,050,372 $ 2,906,252
============ ============
EXPENSES
Total expenses for reportable segments ........ $ 3,982,187 $ 3,510,053
Elimination of intersegment operating expenses (59,827) --
------------ ------------
Total consolidated expenses ................... $ 3,922,360 $ 3,510,053
============ ============
ASSETS
Total assets for reportable segments .......... $279,070,819 $148,485,071
Intercompany loans ............................ (10,500,000) (6,100,000)
Other intercompany balances ................... (2,922,097) --
------------ ------------
Total consolidated assets ..................... $265,648,722 $142,385,071
============ ============
12. 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, as amended, of Bermuda, that generally protects them from
incurring taxation by Bermuda tax authorities until March 28, 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 does 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 $7.65 million and $5.3 million
as at December 31, 1998 and 1997, respectively, for which no benefit has been
recorded in the financial statements. These tax loss carry-forwards expire in
2013 and 2012, respectively.
13. RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the FASB issued Statement of Financial Accounting
Standard No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities" effective for fiscal years beginning after June 15, 1999,
but earlier application is permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998. SFAS 133 requires all derivatives to be recognized
in the statement of financial position as either assets or liabilities and
measured at fair value. The Company does not believe the application of SFAS 133
will have a material effect on its consolidated financial statements.
14. SUBSEQUENT EVENTS
On April 14, 1999, the credit support arrangements referred to in footnote
6 were terminated in their entirety. In connection with such termination, two
subsidiaries of SG Holdings received a refund of premium totaling approximately
$29.5 million. On April 16, 1999 a portion of these funds were used to repay the
$25 million note to CGA referred to in footnote 3. Also on April 16, 1999 the $5
million note payable to Cobalt to CGA was assigned by CGA to the Company. The
effect of these transactions was to increase claims paying resources at CGA by
$30 million.
On April 26, 1999 the Company sold 973,483 shares of Series C Preferred
Stock to employees of the Company and its subsidiaries. The shares were sold for
$1.20 each, for a total of $1.2 million. The shares were 90% financed by the
Company at 7% per annum with equal principal installments due annually over a
three year period.
F-35
<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.
-------------
================================================================================
================================================================================
3,322,297 SHARES
CGA GROUP, LTD.
SERIES A
PREFERRED STOCK
-------------
PROSPECTUS
-------------
________ __, 1999
================================================================================
<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,
II-1
<PAGE>
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.
(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.
On March 31, 1999, the Company sold to certain existing shareholders of the
Company an aggregate of 43,997,863 shares of Series C Preferred Stock for net
cash proceeds of $50,996,794.50. The sale was made pursuant to the terms of the
Series C Convertible Cumulative Voting Preferred Stock Subscription Agreement
(the "Series C Preferred Stock Subscription Agreement") which is filed as an
Exhibit to this Registration Statement. Pursuant to the terms of the Series C
Subscription Agreement, 31,997,863 shares of Series C Preferred Stock were sold
at $1.50 per share pursuant to the basic subscription privilege (and
overallotments with respect thereto) and 12,000,000 shares of Series C Preferred
Stock were sold at $0.25 per share pursuant to the additional allotment
privilege (and overallotments with respect thereto). Shares of Series C
Preferred Stock may be converted into shares of Common Stock on a one-for-one
basis at the holder's option at any time, and are mandatorily convertible into
shares of Common Stock on a one-for-one basis upon the occurrence of certain
events. The net proceeds from the transaction will be used for general corporate
purposes and to make capital investments in CGA.
In connection with the consummation of the transactions contemplated by the
Series C Preferred Stock Subscription Agreement, on March 31, 1999 all issued
and outstanding shares of Series B Preferred Stock were converted into shares of
Common Stock, at a conversion ratio of 11.816 shares of Common Stock per share
of Series B Preferred Stock. The conversion ratio was based on an assumed value
of $3.00 per share of Common Stock. As a result of the conversion, 18,905,648
new shares of Common Stock were issued.
On April 26, 1999, the Company sold 973,483 shares of Series C Preferred
Stock to employees of the Company and its subsidiaries. The shares were sold for
$1.20 each, for a total of approximately $1.2 million. The shares were 90%
financed by the Company at 7% per annum with equal principal installments due
annually over a three-year period.
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 Amended and Restated Bye-laws of CGA Group, Ltd. dated as of March
31, 1999.
3.3 Amended and Restated Appendices to the Amended and Restated
Bye-laws of CGA Group, Ltd. dated as of March 31, 1999.
4.1 CGA Group, Ltd. Shareholders Agreement dated as of June 12, 1997,
as amended and restated as of March 31, 1999.
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
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 CGAIM
and Jean-Michel Wasterlain.
10.14* Employment Agreement, as of June 30, 1997, by and between CGAIM and
Michael M. Miran.
10.15* Employment Agreement, as of January 1, 1997, by and between CGAIM
and Kem H. Blacker.
10.16 Employment Agreement, as of August 1, 1997, by and between CGAIM
and Landon D. Parsons.
10.17* 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.
10.18 Series C Convertible Cumulative Voting Preferred Stock Subscription
Agreement, dated as of March 31, 1999.
10.19 Agreement dated as of March 1, 1999 by and among CGA Group, Ltd.
and the holders of the Series C Preferred Stock.
21.1 Subsidiaries 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)
- ----------
* Previously filed.
** Included in the respective opinions.
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
II-3
<PAGE>
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.
(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 June 11, 1999.
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 June 11, 1999 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/ ALAN S. ROSEMAN* Director
- --------------------------
ALAN S. ROSEMAN
/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
A M E N D E D A N D R E S T A T E D
B Y E - L A W S
OF
C G A G R O U P, L T D.
MARCH 31, 1999
<PAGE>
TABLE OF CONTENTS
Bye-Laws Page
- -------- ----
1. Interpretation........................................................... 7
2. Board of Directors....................................................... 13
3. Management of the Company................................................ 13
4. Power to appoint Chief Executive Officer................................. 14
5. Power to appoint manager................................................. 14
6. Power to authorise specific actions...................................... 14
7. Power to appoint attorney................................................ 14
8. Power to delegate to a committee......................................... 15
9. Power to appoint and dismiss employees................................... 16
10. Power to borrow and charge property...................................... 16
11. Exercise of power to redeem or purchase shares of
or discontinue the Company............................................. 16
12. Election of Directors.................................................... 17
13. Defects in appointment of Directors...................................... 19
14. Alternate Directors...................................................... 19
15. Removal of Directors..................................................... 20
16. Vacancies on the Board................................................... 21
17. Notice of meetings of the Board.......................................... 21
18. Quorum at meetings of the Board.......................................... 22
19. Meetings of the Board.................................................... 22
20. Unanimous written resolutions............................................ 23
21. Contracts and disclosure of Directors' interests......................... 23
22. Remuneration of Directors................................................ 23
23. Officers of the Company.................................................. 24
2
<PAGE>
24. Appointment and Removal of Officers...................................... 24
25. Remuneration of Officers................................................. 24
26. Duties of Officers; Exercise of Executive Authority...................... 24
27. Chairman of meetings..................................................... 25
28. Register of Directors and Officers....................................... 25
29. Obligations of Board to keep minutes..................................... 25
30. Indemnification of Directors and Officers of the Company................. 26
31. Waiver of claim by Member................................................ 26
32. Notice of annual general meeting......................................... 27
33. Notice of special general meeting........................................ 27
34. Accidental omission of notice of general meeting......................... 27
35. Meeting called on requisition of Members................................. 27
36. Short notice............................................................. 28
37. Postponement of meetings................................................. 28
38. Quorum for general meeting............................................... 28
39. Adjournment of meetings.................................................. 29
40. Attendance at meetings................................................... 29
41. Written resolutions...................................................... 29
42. Attendance of Directors.................................................. 30
43. Voting at meetings....................................................... 30
44. [Intentionally omitted].................................................. 31
45. Decision of chairman..................................................... 31
46. Voting by poll........................................................... 31
47. Seniority of joint holders voting........................................ 32
48. Instrument of proxy...................................................... 32
49. Representation of corporations or other non-natural
Person at meetings..................................................... 32
3
<PAGE>
50. Rights of shares; Votes of Members; Special Votes of Members
Relating to Insurance Subsidiary....................................... 33
51. Power to issue shares.................................................... 34
52. Variation of rights, alteration of share capital and purchase
of shares of the Company............................................... 36
53. Registered holder of shares.............................................. 37
54. Death of a joint holder.................................................. 37
55. Share certificates....................................................... 37
56. Calls on shares.......................................................... 38
57. Forfeiture of shares..................................................... 38
58. Contents of Register of Members.......................................... 39
59. Inspection of Register of Members........................................ 39
60. Determination of record dates............................................ 39
61. Instrument of transfer................................................... 39
62. Restriction on transfer.................................................. 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.................................................... 43
71. Records of account....................................................... 43
72. Financial year end....................................................... 43
73. Financial statements..................................................... 44
4
<PAGE>
74. Appointment of Auditor................................................... 44
75. Remuneration of Auditor.................................................. 44
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
5
<PAGE>
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
Appendix D - Designations, Number, Voting Powers, Preferences and Rights of
Series C Convertible Cumulative Voting Preference Shares.
Exhibit:
Exhibit I - Series A Preferred Stock Subscription Agreement
6
<PAGE>
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 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;
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(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 17, 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);
(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
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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 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;
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(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;
(bb) "Management Director" shall have the meaning ascribed to such
term in Bye-law 12;
(cc) "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;
(dd) "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;
(ee) "notice" means written notice as further defined in these
Bye-laws unless otherwise specifically stated;
(ff) "Officer" means any person appointed by the Board to hold an
office in the Company;
(gg) "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;
(hh) "Preference Shares" has the meaning ascribed to such term in
Bye-law 50;
(ii) "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;
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(jj) "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;
(kk) "Register of Directors and Officers" means the Register of
Directors and Officers referred to in these Bye-laws;
(ll) "Register of Members" means the Register of Members referred to
in these Bye-laws;
(mm) "Resident Representative" means any Person appointed to act as
resident representative under the Act and includes any deputy or
assistant resident representative;
(nn) "Restricted Subsidiary" means those subsidiaries designated or
classified as Restricted Subsidiaries pursuant to Section 7.9 of
the Series A Preferred Stock Subscription Agreement;
(oo) "Secretary" means the person appointed to perform any or all the
duties of secretary of the Company and includes any deputy or
assistant secretary;
(pp) "Series A Preference Shares" has the meaning ascribed to such
term in Appendix A hereto;
(qq) "Series A Preferred Directors" has the meaning ascribed to such
term in Bye-law 12;
(rr) "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;
(ss) "Series B Preference Shares" has the meaning ascribed to such
term in Appendix B hereto;
(tt) "Series C Preference Shares" has the meaning ascribed to such
term in Appendix D hereto;
(uu) [Intentionally omitted.]
(vv) "Shareholders Agreement" means that certain Shareholders
Agreement, dated as of March 31, 1999, among the Company and
certain Members, as
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such agreement may be amended, supplemented, restated or
otherwise modified from time to time;
(ww) "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);
(xx) "Shidler Director" has the meaning ascribed to such term in
Bye-law 12;
(yy) "Specified Holders" means the holders of the shares of the
Company as of the Closing Date and their Majority Controlled
Affiliates;
(zz) "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;
(aaa) "Transferee" shall have the meaning ascribed to such term in
Schedule - Form D hereto;
(bbb) "United States" means the United States of America, its
territories, possessions and areas subject to its jurisdiction;
(ccc) "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
(ddd) "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;
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(c) the word:
(i) "may" shall be construed as permissive;
(ii) "shall" shall be construed as imperative; and
(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, C and D 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.
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(2) No regulation or alteration to these Bye-laws made by the Company
in general meeting shall invalidate any prior 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 protection and convenience of Persons dealing with any such attorney as
the Board may think fit and may also authorise any
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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 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
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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, 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.
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12. Election of Directors
(1) The Board shall consist of at least thirteen 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 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 or a person designated by the Chief Executive Officer (provided,
that such Director shall no longer be a Director immediately after such Chief
Executive Officer 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; two directors designated by the holders
of the Series C Preference Shares; one Director (the
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"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 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).
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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 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
functions of such Director for whom such Alternate Director was appointed.
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(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.
(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.
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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.
(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
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(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.
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.
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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
(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
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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.
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
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business of the Company in the United States, including, without limitation,
entering 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
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
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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.
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
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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 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.
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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 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
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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 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
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classes of share capital of the Company; (v) any increase in the number of
authorised shares of the Company; (vi) the 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 and except as
otherwise provided in the Appendices hereto, 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 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
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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 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.
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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 three
series, Series A Preference Shares, Series B Preference Shares and Series C
Preference Shares. Holders of Preference Shares and Common Shares shall, subject
to the provisions of these Bye-laws and the Appendices:
(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 Shares and Common Shares
shall have the rights described in the relevant Appendix A, Appendix B, Appendix
C and Appendix D 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
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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 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
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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.
(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.
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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 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 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
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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 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.
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(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 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.
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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 any of the Appendices, such date shall always be on the first day of
the 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
39
<PAGE>
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 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
40
<PAGE>
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.
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
41
<PAGE>
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.
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.
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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 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.
44
<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 to the
courier or to the cable company or transmitted by telex, facsimile or other
method, as the case may be.
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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 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.
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<PAGE>
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, the Series C
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.
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<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
DATED AS OF MARCH 31, 1999
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 Series A Preference Shares shall be for the
purposes of the Act designated as a separate Series of Preference 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 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% per annum (subject to
adjustments as subsequently provided, the "Series A Preferred Dividend Rate")
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
June 17, 2002 shall be payable only in Series A Preference Shares (with each
share being valued for this purpose at the Series A Preferred Stated Value) 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 (with each share being
valued for this purpose at the Series A Preferred Stated Value), or cash in part
and Series A Preference Shares (with each share being valued for this purpose at
the Series A Preferred Stated Value) 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 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
<PAGE>
for or paid upon the Series B Preference Shares, the Series C 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 June 17, 2002, 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 June 17, 1997), the Series A Preferred Dividend Rate
shall be decreased by 200 basis points for the period from such time until
redemption;
(B) In the event that the Company fails to keep the Registration
Statement on Form S-1 with respect to the Series A Preference Shares ("the
Shelf Registration Statement") effective continuously until June 17, 1999
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 (y) the
date the Shelf Registration Statement is again deemed effective and (z)
June 17, 1999; 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 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 June 17, 1997
through and until the redemption of such shares.
2
<PAGE>
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 at a
quarterly rate) through the date of such liquidation, dissolution or winding up
or similar procedure, the holders 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, if any, 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
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
3
<PAGE>
the Members 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
June 17, 2007.
(b) Upon the occurrence of a Change In Control Event, any holder of
outstanding Series A Preference Shares may elect to have all of its 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 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
4
<PAGE>
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 2/3% of the Directors of the Company then still in office who were
either Directors at the beginning of such period or whose election or nomination
for election was previously so approved 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 2/3% 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 under 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 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 June 17, 2002, 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 Sections 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.
5
<PAGE>
REDEMPTION
REDEMPTION DATE 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 June 17, 2000, 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 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
<PAGE>
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 June 17, 1997 (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 June 17, 1997 (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 Junior
to the Series A Preferred.
(b) For so long as (i) on or after June 17, 2007, 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 or Series C
Preference Shares.
7
<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 Series B Preference Shares shall be a separate Series of Preference
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 there shall no more than 1,600,000
shares issued and outstanding at any one time 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, Section
6(a)(ii) of Appendix A and Section 7 of Appendix D 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 7.00% per annum (the "Series B
Preferred Dividend Rate") based on the Series B Preferred Stated Value (as
defined in Section 3(a) of this Appendix B), payable as the Board may determine;
provided, that such dividends accruing on or prior to June 17, 2007 and so long
as any Series A Preference Shares are outstanding shall be payable only in
Series B Preference Shares (with each share being valued for this purpose at the
Series B Preferred Stated Value) and such dividends accruing thereafter shall be
payable only in cash. Subject to Section 6(a)(ii) of Appendix A and Section 7 of
Appendix D 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, the Series C
Preference Shares and any other shares ranking on liquidation senior to the
Series B Preference Shares (such shares being referred to hereinafter
collectively as "Shares Senior to the Series B Preferred") shall be set apart
for or paid upon the Shares Senior to the Series B Preferred 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.
(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 the Series B
Preference Shares shall accrue at the Series B Preferred Dividend Rate based on
the actual
<PAGE>
number of days elapsed over a year of 360 days from the date of issuance of such
shares 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 Shares Senior to the Series B Preferred 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 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 Shares Senior to the Series B Preferred 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 Series B Preference 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 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 Members of the Company with
respect to any and all matters presented
2
<PAGE>
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) Except as set forth in paragraph (c) below, Series B Preference Shares
issued in connection with the Commitment Draw shall not entitle the holders
thereof to any votes on matters presented to the Members of the Company for any
reason.
(c) 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
including holders of Series B Preference Shares issued in connection with a
Commitment Draw, given in writing, consenting separately as a class.
5. REDEMPTION.
(a) Subject to Section 6 of Appendix A and Section 7 of Appendix D, 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) June 17, 2012, (ii) the Qualified Public Offering,
(iii) the acquisition of a majority of the issued and outstanding 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; provided, however, that the distribution of Rights pursuant to an
Offering Circular dated January 21, 1999, as supplemented on February 5, 1999
and February 12, 1999, and a Subsequent Offering (as defined in the Amended and
Restated Shareholders Agreement, dated March 31, 1999) shall not trigger a
redemption under any of the foregoing clauses (i), (ii) or (iii).
3
<PAGE>
(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 and Section 7 of Appendix D, 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.
(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 June 17, 1997 (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 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.
7. CONVERSION. The Series B Preference Shares are not convertible into any
other security of the Company except as provided in Section 7(a) below.
(a) All Series B Preference Shares issued and outstanding on the date of
issuance of the Series C Preference Shares (the "Series C Closing Date") shall
automatically, without any action on the part of the Company or the holder
thereof, be converted into Common Shares. The number of Common Shares into which
such Series B Preference Shares shall be
4
<PAGE>
converted shall be determined by dividing (X) the Series B Preferred Stated
Value per share plus dividends accrued but unpaid on the Series B 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 at a quarterly rate) through the date of such conversion, subject to
adjustment in the event of any share split or combination with respect to such
shares by (Y) a conversion price of US$3.00 per share and rounding down to the
nearest whole share.
(b) The Series B Preference Shares shall be deemed to have been converted
into Common Shares on the Series C Closing Date, and the person entitled to
receive the Common Shares issuable upon such conversion shall be deemed for all
purposes to be the record holder of such Common Shares as of the close of
business on the Series C Closing Date. Accordingly, certificates for Series B
Preference Shares outstanding immediately preceding the Series C Closing Date
shall only represent such number of Common Shares into which the Series B
Preference Shares were converted.
(c) Holders of certificates for Series B Preference Shares on the Series C
Closing Date can obtain certificates for Common Shares by surrendering their
certificates for Series B Preference Shares, duly endorsed if the Company shall
so require, or accompanied by appropriate instruments of transfer satisfactory
to the Company, at the office of the transfer agent for the Series B Preference
Shares, or at such other office as may be designated by the Company, together
with written request to convert the Series B Preference Shares being surrendered
into Common Shares. Such notice shall also state the name and address in which
such holder wishes the certificate for the Common Shares issuable upon
conversion to be issued. As soon as practicable after receipt of the
certificates representing the Series B Preference Shares to be converted and the
notice of election to convert the same, the Company shall issue and deliver at
said office a certificate for the number of whole Common Shares issuable upon
conversion of the Series B Preference Shares.
5
<PAGE>
APPENDIX C
TO THE BYE-LAWS
DESIGNATIONS, NUMBER, VOTING POWERS AND RIGHTS
OF
COMMON SHARES
1. DESIGNATION AND NUMBER. The Common Shares shall be for the purposes of
the Act designated as a separate class of shares in the Company and shall be
designated the Common Shares, par value U.S.$.01 per share (the "Common
Shares"). The number of shares constituting the Common Shares shall be
200,000,000.
2. DIVIDENDS. Subject to the rights and preferences of the Series A
Preference Shares, the Series B Preference Shares, the Series C Preference
Shares or any other shares ranking on liquidation senior to the Common Shares
(such shares being referred to hereinafter collectively as "Shares Senior to the
Common 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 Shares Senior to the Common Shares and any dividends accrued but
unpaid on the Common Shares, the holders 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 action or consideration.
Except as provided by law or by the provisions of Section 4(b) below or by the
Bye-laws, holders of Common Shares and holders of any Series of issued and
outstanding Preference Shares, which pursuant to the provisions of these
Bye-laws entitle the holder thereof to vote with respect to any and all matters
presented to the Members of the Company for their action or consideration, shall
vote together as a single class.
<PAGE>
(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; provided, however, that any change
in the number of votes per share to which a holder of a Common Share is entitled
shall not be effective without the written consent of the holders of at least
90% of the then outstanding Common Shares voting separately as a class.
2
<PAGE>
APPENDIX D
TO THE BYE-LAWS
DESIGNATIONS, NUMBER, VOTING POWERS,
PREFERENCES AND RIGHTS OF
SERIES C CONVERTIBLE CUMULATIVE VOTING PREFERENCE SHARES
1. DESIGNATION AND NUMBER. The Series C Preference Shares shall be for the
purposes of the Act designated as a separate Series of Preference Shares in the
Company and shall be designated the Series C Convertible Cumulative Voting
Preference Shares, par value U.S.$.01 per share (the "Series C Preference
Shares"); and the number of shares designated as Series C Preference Shares
shall be initially 52,000,000.
2. DIVIDENDS. The holders of Series C Preference Shares shall not be
entitled to receive any dividends with respect to 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 Series A Preference Shares and any other shares ranking on
liquidation senior to the Series C Preference Shares through the date of such
liquidation, dissolution or winding up (or similar procedure), the holders of
Series C 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 by the Company
to the holders of the Series B Preference Shares, the Common Shares or any other
shares of Capital Stock ranking on liquidation junior to the Series C Preference
Shares (such shares being referred to hereinafter collectively as "Shares Junior
to the Series C Preferred"), an amount equal to (i) U.S. $1.50 (the "Series C
Preferred Stated Value") per share, subject to adjustment in the event of any
share split or combination with respect to such shares plus (ii) an amount equal
to 7.00% per annum of the Series C Preferred Stated Value, which amount shall
calculated based on the actual number of days elapsed over a year of 360 days
from the Series C Closing Date through the date of such liquidation and shall be
compounded annually. The sum of the amounts set forth in clauses (i) and (ii) of
the immediately preceding sentence to which the holder of a Series C Preference
Share shall become entitled under this Section 3 with respect to each such
Preference Share held by it shall be referred to as its "Series C 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 C Preference Shares the full Series C Liquidation
Value for each Series C Preference Share held by such holders, the holders of
Series C Preference Shares and the holders of any class of shares ranking on
liquidation on parity with the Series C Preference Shares shall share ratably in
any distribution of the remaining assets and funds of the Company in proportion
to the respective
<PAGE>
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 C Preference Shares shall not participate with
the holders of the Shares Junior to the Series C Preferred in the distribution
of any assets of the Company to the Members in excess of the aggregate Series C
Liquidation Value of the outstanding Series C 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 C Preference Share
shall entitle the holder thereof to one vote at each general meeting of the
Company with respect to any and all matters presented to the Members of the
Company for their action or consideration. Except as provided by law or by the
provisions of Section 4(b) below or by the Bye-laws, the holders of Series C
Preference Shares and of any other outstanding preference shares that entitle
the holder to vote 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 C Preference Shares as set out in the Bye-laws, including this
Appendix D, or (ii) authorize or issue shares of any class or Series having any
preference or priority as to redemption or upon liquidation superior to or on
parity with the Series C Preference Shares, in each case, without the written
consent of the holders of at least 90% of the then issued and outstanding Series
C Preference Shares, given in writing, consenting separately as a class.
5. REDEMPTION.
(a) The Series C Preference Shares shall be redeemed by the Company upon a
Sale (as defined below) of the Company but only if and to the extent that the
consideration to be paid (or deemed to be paid) for each Series C Preference
Share in connection with such Sale is less than the Series C Liquidation Value.
In such case, the Company shall redeem in full each Series C Preference Share
for the Series C Liquidation Value. In the case of an asset sale as described in
clause (i) of paragraph (b) below, the consideration per share deemed to be paid
for each Series C Preference Share shall be determined by (x) dividing the
aggregate gross purchase price received by the Company in connection therewith
by the fully diluted number of Common Shares outstanding assuming conversion or
exchange of all convertible or exchangeable securities and exercise of all
warrants and other derivative securities for Common Shares and (y) multiplying
the result of the calculation in clause (x) by the number of shares into which
each Series C Preference Share is convertible at the time of the consummation of
the applicable Sale based upon the then applicable Conversion Price. Upon the
consummation of any such Sale, the Company shall promptly give notice to the
holders of Series C Preference Shares setting forth the per share consideration
payable in respect of the Series C Preference Shares calculated
2
<PAGE>
pursuant to the immediately preceding sentence. Except as set forth in Section
5(c), below, the Series C Preference Shares may not be redeemed by the holder
under any circumstances, and the redemption contemplated by this Section 5(a)
shall be made ten (10) calendar days following dispatch of such notice.
(b) For purposes of this Section 5, a "Sale" of the Company shall mean, (i)
a sale or other transfer in one or a series of related transactions of all or
substantially all of the assets of the Company and its subsidiaries taken as a
whole and (ii) a merger, consolidation or amalgamation to which the Company is a
party which results in the owners of all of the Company's classes of voting
securities prior to such merger, consolidation or amalgamation owning securities
with less than 50% of the then-outstanding voting power of the surviving entity
following such merger, consolidation or amalgamation.
(c) At the Maturity Date (as defined in Section 6 below), the Series C
Preference Shares shall, at the option of the Company, either (i) be redeemed
for cash in an amount per share equal to the Series C Liquidation Value or (ii)
converted in Common Shares as provided by Section 6 below. No later than 10 days
prior to the Maturity Date, the Company shall give notice to the holders of
Series C Preference Shares of the impending maturity of such shares, of whether
the Company intends to redeem such shares for cash or Common Shares, and of the
then-applicable Series C Liquidation Value or number of Common Shares into which
a Series C Preference Share is then convertible.
(d) Any redemption of Series C Preference Shares pursuant to this Section 5
(other than a redemption pursuant to Section 5(c) above) 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.
(e) 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 C Preference Shares pursuant to this Section
5 because such redemption would violate the applicable laws of Bermuda, then the
Company shall redeem such Series C Preference Shares as soon thereafter as
redemption would not violate such laws. Any Series C 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 C Preference Shares accordingly.
6. CONVERSION.
(a) For purposes of this Section 6 the following definitions shall apply:
(i) "Conversion Date" shall mean the earlier to occur of the Maturity Date
or the date upon which the Series C Preference Shares are required to be
converted pursuant to the provisions of clause (ii) of Section 6(b) below;
(ii) "Conversion Price" shall mean U.S. $1.50 per share, as adjusted from
time to time as provided herein;
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<PAGE>
(iii) "Fair Market Value" shall mean the last reported sales price of
Common Shares on the Nasdaq National Market on the date on which the fair
market value is to be determined or, in the absence of any reported sales of
Common Shares on such date, on the first preceding date on which any such
sale shall have been reported. If the Company's Common Shares are not listed
on the Nasdaq National Market on the date on which the fair market value is
to be determined, the Board of Directors shall determine in good faith the
fair market value in whatever manner it considers appropriate;
(iv) "Issue Date" shall mean March 31, 1999; and
(v) "Maturity Date" shall mean March 31, 2009.
(b) The Series C Preference Shares shall automatically be converted into
Common Shares at the earlier to occur of (i) the Maturity Date, with such Series
C Preference Shares being converted in such case into such number of Common
Shares as provided in Section 6(c) below, notwithstanding the then-applicable
Conversion Price, or (ii) the issuance by the Company in one or a series of
related transactions either privately or through registered public offerings
(other than pursuant to acquisitions, mergers or other business combinations or
pursuant to stock option plans, stock purchase plans or other employee benefit
plans or arrangements) of equity securities (which, for purposes of
clarification, shall not include any debt securities convertible or exchangeable
for equity securities of the Company) resulting in aggregate gross proceeds to
the Company of at least fifty million dollars (US$50,000,000) and at a price per
share determined by a majority of the Board of Directors to be fair and
reasonable ("New Equity"), with such Series C Preference Shares being converted
in such case into such number of Common Shares as set forth in Section 6(d)
below. The Company shall deliver a notice to each holder of Series C Preference
Shares at least ten days prior to the Maturity Date or, with respect to an event
described in clause (ii) of the immediately preceding sentence, promptly upon a
determination by the Board of Directors that such event is reasonably likely to
occur. Such notice shall set forth (i) the Maturity Date or the expected closing
date of such event, as applicable and (ii) the Fair Market Value, in addition to
the items specified in Section 5(c) above.
(c) If an election is not made pursuant to Section 5(c) above, at the
Maturity Date, the Series C Preference Shares shall, notwithstanding the
then-applicable Conversion Price, be converted into such number of Common
Shares, determined by dividing the Series C Liquidation Value by (x) the
Conversion Price if the Fair Market Value per Common Share at the Maturity Date
is at least U.S. $1.50 or (y) ninety-five percent (95%) of the Fair Market
Value, if the Fair Market Value per Common Share at the Maturity Date is less
than U.S. $1.50. The conversion ratio described in the preceding sentence shall
not be applicable to the conversion of the Series C Preference Shares into
Common Shares on a date prior to the Maturity Date.
(d) Upon the issuance by the Company of New Equity, each Series C
Preference Share shall be converted into such number of Common Shares to be
determined by dividing the Series C Preferred Stated Value by the Conversion
Price.
(e) Series C Preference Shares may be converted into Common Shares at any
time at the option of the holder at the then-applicable Conversion Price. For
purposes of
4
<PAGE>
conversions at the option of the holder contemplated by this Section 6(e), each
Series C Preference Share shall be valued at the Series C Preferred Stated
Value.
(f) With respect to any conversions of securities pursuant to the preceding
paragraphs of this Section 6, the holder thereof shall surrender the
certificates therefor, duly endorsed if the Company shall so require, or
accompanied by appropriate instruments of transfer satisfactory to the Company,
at the office of the transfer agent for the Series C Preference Shares, or at
such other office as may be designated by the Company, together with written
notice that such holder irrevocably elects to convert such shares. Such notice
shall also state the name and address in which such holder wishes the
certificate for the Common Shares issuable upon conversion to be issued. As soon
as practicable after receipt of the certificates representing the Series C
Preference Shares to be converted and the notice of election to convert the
same, the Company shall issue and deliver at said office a certificate for the
number of whole Common Shares issuable upon conversion of the Series C
Preference Shares surrendered for conversion (rounding down to the nearest whole
share), to the person entitled to receive the same. The Series C Preference
Shares shall be deemed to have been converted immediately prior to the close of
business on the date such shares are surrendered for conversion and notice of
election to convert the same is received by the Company in accordance with the
foregoing provision, and the person entitled to receive the Common Shares
issuable upon such conversion shall be deemed for all purposes as the record
holder of such Common Shares as of the close of business on such date.
(g) No fractional Common Shares shall be issued upon conversion of any
Series C Preference Shares. If more than one stock certificate for Series C
Preference Shares shall be surrendered for conversion at one time by the same
holder, the number of full Common Shares issuable upon conversion thereof shall
be computed on the basis of the aggregate number of shares represented by all
the certificates so surrendered. If the conversion of any Series C Preference
Shares results in a fractional Common Share, the Company shall round down to the
nearest whole share amount and issue a certificate for such whole number of
shares.
(h) The Conversion Price shall be adjusted from time to time as follows:
(i) In the event that the Company shall pay or make a dividend or other
distribution on any class of Common Shares or Preference Shares (other than
the Series C Preference Shares) of the Company in Common Shares, the
Conversion Price in effect at the opening of business on the date following
the date fixed for the determination of stockholders entitled to receive
such dividend or other distribution shall be reduced by multiplying such
Conversion Price by a fraction, the numerator of which shall be the number
of Common Shares outstanding at the close of business on the date fixed for
such determination, and the denominator of which shall be the sum of such
number of shares and the total number of shares constituting such dividend
or other distribution, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. For purposes of this subsection, the number of Common Shares
at any time outstanding shall not include shares held in the treasury of
the Company or issued to the treasury as a dividend with respect thereto.
(ii) In the event that the Company shall issue options, rights or
warrants to any holders of any class of Common Shares or Preference Shares
(other than the Series C
5
<PAGE>
Preference Shares) of the Company entitling them to subscribe for or
purchase Common Shares or at a price per share less than the Conversion
Price on the date fixed for the determination of stockholders entitled to
receive such options, rights or warrants (other than pursuant to a dividend
reinvestment plan, an employee stock option plan, an employee stock warrant
plan or any similar plan for the benefit of the employees of the Company
and/or its subsidiaries), the Conversion Price in effect at the opening of
business on the day following the date fixed for such determination shall
be reduced by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of Common Shares outstanding at the
close of business on the date fixed for such determination, and the
denominator of which shall be the number of Common Shares outstanding at
the close of business on the date fixed for such determination plus the
number of Common Shares issuable upon exercise of such options, rights or
warrants, such reduction to become effective immediately after the opening
of business on the day following the date fixed for such determination. For
the purposes of this subsection (ii), the number of Common Shares at any
time outstanding shall not include shares held in the treasury of the
Company or issuable pursuant to warrants held in or issued to treasury.
(iii) In the event that outstanding Common Shares shall be subdivided
into a greater number of Common Shares, the Conversion Price in effect at
the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and,
conversely, in case outstanding Common Shares shall be combined into a
smaller number of Common Shares, the Conversion Price in effect at the
opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.
(iv) In the event that the Company shall, by dividend or otherwise,
distribute to any holders of any class of Common Shares or Preference
Shares (other than the Series C Preference Shares) of the Company evidences
of its indebtedness or assets (including (A) securities, but excluding (B)
any rights or warrants referred to in subsection (ii) above, any dividend
or distribution paid in cash out of the consolidated retained earnings of
the Company and any dividend or distribution referred to in subsection (i)
above), the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such distribution by a
fraction, the numerator of which shall be the Fair Market Value of the
Common Shares on the date fixed for such determination less the then fair
market value (as determined by the Board of Directors of the Company, whose
determination shall be conclusive and shall be described in a statement
filed with the transfer agent for the Series C Preference Shares) of the
portion of the evidences of indebtedness or assets so distributed
applicable to one share of Common Shares, and the denominator of which
shall be such Fair Market Value of the Common Shares, such adjustment to
become effective immediately prior to the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such distribution.
6
<PAGE>
(v) The reclassification of Common Shares into securities including
securities other than Common Shares (other than any reclassification upon a
consolidation or merger to which Section 6(j) below applies) shall be
deemed to involve (A) a distribution of such securities other than Common
Shares to all holders of Common Shares (and the effective date of such
reclassification shall be deemed to be "the date fixed for the
determination of stockholders entitled to receive such distribution" and
the "date fixed for such determination" within the meaning of subsection
(iv) above), and (B) a subdivision or combination, as the case may be, of
the number of Common Shares outstanding immediately prior to such
reclassification into the number of Common Shares outstanding immediately
thereafter (and the effective date of such reclassification shall be deemed
to be "the day upon which such subdivision became effective" or "the day
upon which such subdivision becomes effective" as the case may be, and "the
day upon which such combination becomes effective" within the meaning of
subsection (iii) above).
(vi) Notwithstanding the foregoing, no adjustment to the Conversion
Price for the Series C Preference Shares shall be required unless such
adjustment would require an increase or decrease of at least 1% in such
price; provided, however, that any adjustments which by reason of this
subsection (vi) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under
this Section shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
(i) Whenever the Conversion Price shall be adjusted as herein provided (i)
the Company shall forthwith make available at the office of the transfer agent
for the Series C Preference Shares a statement describing in reasonable detail
the adjustment, the facts requiring such adjustment and the method of
calculation used; and (ii) the Company shall cause to be mailed by first class
mail, postage prepaid, as soon as practicable to each holder of record of Series
C Preference Shares a notice stating that the Conversion Price has been adjusted
and setting forth the adjusted Conversion Price.
(j) In the event of any consolidation of the Company with, or merger of the
Company into, any other corporation (other than a merger in which the Company is
the surviving corporation and which does not result in any reclassification,
conversion, exchange or cancellation of outstanding Common Shares of the
Company) or a sale, lease or conveyance of the assets of the Company as an
entirety or substantially as an entirety, or any statutory exchange of
securities with another corporation, the holder of each share of Series C
Preference Shares shall have the right, after such consolidation, merger, sale
or exchange to convert such share only into the number and kind of shares of
stock or other securities, and the amount of cash or other property receivable
upon such consolidation, merger, sale or exchange by a holder of the number of
Common Shares issuable upon conversion of such Series C Preference Shares
immediately prior to such consolidation, merger, sale or exchange. No provision
shall be made for adjustments in the Conversion Price. The provisions of this
Section 6(j) shall similarly apply to successive consolidations, mergers, sales
or exchanges.
(k) The Company shall pay any taxes that may be payable in respect of the
issuance of Common Shares upon conversion of Series C Preference Shares, but the
Company shall not be required to pay any taxes which may be payable in respect
of any transfer involved in the issuance of Common Shares in the name other than
that in which the Series C Preference
7
<PAGE>
Shares so converted are registered, and the Company shall not be required to
issue or deliver any such shares unless and until the person requesting such
issuance shall have paid to the Company the amount of any such taxes, or shall
have established to the satisfaction of the Company that such taxes have been
paid.
(l) The Company may (but shall not be required to) make such reductions in
the Conversion Price, in addition to those required by subsections (i) through
(iv) of Section 6(h) above, as it considers to be advisable in order that
certain stock-related distributions hereafter made by the Company to its
stockholders shall not be taxable.
(m) The Company shall at all times reserve and keep available out of its
authorized but unissued Common Shares the full number of Common Shares issuable
upon the conversion of all Series C Preference Shares then outstanding.
7. DIVIDEND AND REDEMPTION PREFERENCES
(a) For so long as any of the Series C Preference Shares remains
outstanding, the Company shall not declare or pay or set apart for payment any
dividend on or make any distribution to Shares Junior to the Series C Preferred,
whether in cash or other property, including dividends payable in Shares Junior
to the Series C Preferred other than dividends on Series B Preference Shares
payable in accordance with Appendix B.
(b) In the event of any default by the Company on any payment due to the
holders of Series C Preference Shares, the Company shall not (A) purchase,
redeem or otherwise acquire any Shares Junior to the Series C Preferred, (B)
declare or pay or set apart for payment dividends on or make distributions to
Shares Junior to the Series C Preferred and (C) pay or set apart for payment
dividends on any shares ranking on parity with the Series C Preference Shares.
8
CGA GROUP, LTD.
SHAREHOLDERS AGREEMENT
DATED AS OF JUNE 12, 1997
AS AMENDED AND RESTATED AS OF MARCH 31, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. TRANSFERS............................................................ 3
(a) Separation of Investment Units and Resale of Securities........ 3
(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) 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.......................................... 12
3. REGISTRATION RIGHTS.................................................. 12
(a) Definitions.................................................... 12
(b) Demand Registration............................................ 13
(c) Piggyback Registration......................................... 16
(d) Expenses of Registration....................................... 17
(e) Registration Procedures........................................ 17
(f) Indemnification................................................ 20
(g) Information by the Holders..................................... 24
(h) Rule 144 Reporting............................................. 24
(i) "Market Stand-off" Agreement................................... 25
(j) Assignability.................................................. 26
(k) Termination.................................................... 26
4. INFORMATION AS TO COMPANY AND RELATED COVENANTS...................... 26
(a) Auditors....................................................... 26
(b) Financial Information.......................................... 26
(c) Business Report................................................ 27
(d) Inspection..................................................... 27
5. DEFINITIONS.......................................................... 27
(a) Terms Defined.................................................. 27
6. MISCELLANEOUS........................................................ 29
(a) Legends........................................................ 29
(b) Waiver; Amendments............................................. 29
(c) Amendment of Schedules I and II to this Agreement.............. 30
(d) Recapitalization, Exchanges, Etc............................... 30
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(e) Specific Performance........................................... 30
(f) Notices........................................................ 30
(g) Successors and Assigns......................................... 31
(h) Counterparts................................................... 31
(i) Entire Agreement............................................... 31
(j) Applicable Law................................................. 31
(k) Section Headings............................................... 31
(l) Holders of Warrant Shares...................................... 32
(m) Series B Holders............................................... 32
(n) Series C Holders............................................... 32
ii
<PAGE>
SHAREHOLDERS AGREEMENT
Shareholders Agreement, dated as of June 12, 1997, as amended and restated
as of March 31, 1999 (this "Agreement") among CGA Group, Ltd., a company with
limited liability organized under the laws of Bermuda (the "Company"), 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") and each of the persons whose names and addresses appear
on Schedule II hereto, as such Schedule II may be amended from time to time in
accordance with the terms hereof (the "Series C Holders"). It is expressly
understood among the parties that the term "Common Holders", as used herein,
shall include, without limitation, holders of Series B Conversion Shares and/or
Series C Conversion Shares (each as defined below). 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 shares of the
following classes of capital stock: (i) Series A Cumulative Voting Preference
Shares, par value $.01 per share, of the Company ("Series A Preferred Stock"),
(ii) Series B Cumulative Voting Preference Shares, par value $.01 per share, of
the Company ("Series B Preferred Stock"), (iii) Series C Cumulative Voting
Preference Shares, par value $.01 per share, of the Company ("Series C Preferred
Stock") and (iv) common stock, par value of $.01 per share, of the Company (the
"Common Stock") (the Common Stock, the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, and any other shares of capital
stock of the Company, being collectively referred to herein as the "Company
Stock"); and
WHEREAS, certain investors have (i) purchased, 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"), the Series A Preferred Stock
and (ii) purchased, pursuant to the terms of the Warrant Acquisition Agreement,
dated as of June 9, 1997 (the "Warrant Acquisition Agreement"), 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);
and
WHEREAS, certain initial Common Holders have purchased, pursuant to the
terms of the Investment Units Subscription Agreement, dated as of June 4, 1997
(the "Investment Units Subscription Agreement"), an aggregate of 1,600,000
investment units (the "Investment Units"), each such Investment Unit consisting
(a) prior to the Series B Conversion (as defined below) 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) additional shares of Series B Preferred Stock (the "Commitment")
and (b) following the Series B Conversion (as defined below), of (i) a number of
shares of Common Stock equal to the ratio for such
<PAGE>
shares set forth in the Company's Amended and Restated Bye-laws, (ii) 4.8925
shares of Common Stock and (iii) the Commitment; and
WHEREAS, certain other initial Common Holders have (i) purchased, pursuant
to the Founders' Subscription Agreement, dated as of June 12, 1997 (the
"Founders' Subscription Agreement"), an aggregate of 1,272,043 shares of Common
Stock and (ii) purchased, 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"), an aggregate of 847,729 warrants
to purchase Common Stock ("Sponsoring Investors' and Founders' Warrants"); and
WHEREAS, certain management employees of the Company have received and will
continue to 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"); and
WHEREAS, pursuant to the Company's Amended and Restated Bye-laws, the
issued and outstanding shares of Series B Preferred Stock shall, on the closing
date of the Company's initial issuance of Series C Preferred Stock (the "Series
C Closing Date"), automatically convert (the "Series B Conversion") into shares
of Common Stock (the "Series B Conversion Shares"), subject to the Maximum
Percentage limitations set forth in the Company's Amended and Restated Bye-laws;
and
WHEREAS, certain investors have agreed, pursuant to the terms of the Series
C Preferred Stock Subscription Agreement dated as of March 1, 1999 (the "Series
C Subscription Agreement"), to purchase on the Series C Closing Date the Series
C Preferred Stock, which shall be convertible into Common Shares (the "Series C
Conversion Shares") of the Company, on the terms and at the conversion ratio set
forth in the Company's Amended and Restated Bye-laws; and
WHEREAS, the parties hereto have agreed that, as of the date of the Series
B Conversion or of the conversion of any shares of Series C Preferred Stock into
Series C Conversion Shares, the holders of such Series B Conversion Shares
and/or Series C Conversion Shares shall be required to become party to this
Agreement and be bound by the provisions of this Agreement to the extent of
their ownership of such shares, it being understood that the Series B Conversion
Shares and Series C Conversion Shares shall be shares of Common Stock, as such
term is used in this Agreement; and
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.
2
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto hereby agree as follows:
1. TRANSFERS
(a) Separation 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
Company's Amended and Restated Bye-Laws. The non-collective transfers described
in the immediately preceding sentence are referred 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. The
parties to this Agreement expressly agree that the Series B Conversion shall not
constitute a Separation Event. 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 (A) the maximum number
of shares of Series B Preferred Stock required to be purchased pursuant to such
Commitments and (B) $25.00) 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
3
<PAGE>
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, (a) in accordance with the Company's
Amended and Restated Bye-Laws and the provisions of this Section 1 and Section 2
hereof and (b) in accordance with Article VII of the Investment Unit
Subscription Agreement, Article VII of the Series C Subscription 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.
(iii) No Series C Holder shall transfer any Series C Preferred Stock held
by such holder, other than, in each case, (a) in accordance with the Company's
Amended and Restated Bye-Laws and the provisions of this Section 1 and Section 2
hereof and (b) in accordance with Article VII of the Series C Subscription
Agreement. Unless (x) a registration statement is in effect with respect to the
Series C Preferred Stock, or (y) the transfer is made pursuant to Rule 144 of
the Securities Act, or (z) the transfer is of stock that has been transferred
previously pursuant to (x) or (y), no Series C Holder shall transfer any such
shares 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 1(b)
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.
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(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 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.
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(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.
(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; or
(H) a Transfer on or after June 12, 2002; or
(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 any or all of 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 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
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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 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
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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 from and 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 June 17, 1997 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 (the "Offer 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 qualification,
limitations or restrictions thereof and interest rate and maturity; (2) the
price, if applicable, and other terms of the proposed sale or issuance 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 (the quotient of (x) and (y) with respect
to each such Common Holder is referred to hereinafter as such Common
Holder's "Allotted Amount").
Each such Common Holder that wishes to exercise any or all of its
preemption rights hereunder must deliver a written notice (the "Election
Notice") to that effect to the Company within fifteen (15) days after the date
the Offer Notice was deemed to have been given (as provided in Section 6(f)
herein) by the Company. Each such Election Notice shall set forth (i) the
portion of such Common Holder's Allotted Amount for which such Common Holder has
elected to subscribe and (ii) the amount, if any, of additional Proposed
Securities for which such Common Holder wishes to subscribe (the "Proposed
Overallotment Amount" with respect to each such Common Holder) in the event that
all of the Proposed Securities offered or issued to the Common Holders as a
whole are not fully subscribed for; provided, however, that in no event shall
any Common Holder be permitted to subscribe for or purchase shares of Company
Stock to the extent that such Common Holder would be in violation of Section 2
of this
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Agreement or the Maximum Percentage limitations set forth in Bye-law 1(ac) and
Bye-law 50 of the Company's Amended and Restated Bye-laws.
Each Common Holder shall be entitled to subscribe for all or a portion of
its Proposed Overallotment Amount only to the extent that one or more Common
Holders does not subscribe for its full Allotted Amount. Any such
unsubscribed-for Proposed Securities ("Excess Proposed Securities") shall be
allocated pro rata (and by rounding down to the nearest whole share) among those
Common Holders electing to receive their Proposed Overallotment Amount in
proportion to the aggregate number of shares requested by them pursuant to the
Allotted Amount and Proposed Overallotment Amount; provided, however, that in no
event shall any Common Holder be permitted to subscribe for or purchase shares
of Company Stock to the extent that such Common Holder would be in violation of
Section 2 of this Agreement or the Maximum Percentage limitations set forth in
Bye-law 1(ac) and Bye-law 50 of the Company's Amended and Restated Bye-laws.
Upon the expiration of the offering period described above, the Company
may, in its sole discretion, offer to sell or issue such Proposed Securities
that the Common Holders have not elected to purchase or exercise, as the case
may be, during the 180 days following such expiration, on terms and conditions
no more favorable to the prospective purchasers thereof than those offered to
such Common Holders. Any such sale or issuance of Proposed Securities may be
consummated within 60 days after the expiration of such 180-day period. Any
Proposed Securities offered, sold or issued by the Company after such 180-day
period (other than pursuant to the immediately preceding sentence) must be
reoffered to the Common Holders pursuant to this Section 1(e). The election by a
Common Holder not to exercise its preemption 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 or issuance 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 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).
The parties to this Agreement agree that (a) for the purposes of this
Section 1(e) only, holders of Series B Preferred Stock shall be deemed to be
Common Holders with respect to the Company's offering of rights to purchase
Series C Preferred Stock, on substantially the terms set forth in the Rights
Offering Circular dated as of January 21, 1999, as supplemented on February 5,
1999 (the "Rights Offering"), it being understood that for the purposes of such
Rights Offering, the then-existing shares of Series B Preferred Stock shall be
deemed to have been converted into Series B Conversion Shares at the rate set
forth in the Company's Amended and Restated Bye-
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laws and (b) the Rights Offering shall be deemed to be in full compliance with
this Section 1(e).
The parties to this Agreement further agree that upon consummation of the
Rights Offering, the Company may, in the discretion of the Company's Board of
Directors, issue and sell additional equity securities of the Company at no less
than the per share price of Common Stock contemplated by the Rights Offering
(based upon the conversion price of the Series C Preferred Stock of $1.50 as of
the date of its original issuance and a purchase price of $1.50 per share of
Series C Preferred Stock) and for aggregate gross proceeds equal to the
difference between $200 million and the gross proceeds raised pursuant to the
Rights Offering (the "Subsequent Offering"), and that the Common Holders and
Series B Holders hereby consent to such Subsequent Offering and waive, for one
year following the consummation of the Rights Offering (and for an additional 60
days, as set forth above in this Section 1(e), if necessary, for the Company to
consummate the transactions contemplated in such Subsequent Offering), their
preemption rights contained in this Section 1(e) with respect to any such
Subsequent Offering.
(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) Termination of Rights.
The rights and obligations provided by this 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 (A)
become a 10% Investor (as defined in Section 5(a) hereof) or (B) own more than
20% of the issued and outstanding shares of Common Stock calculated on a fully
diluted basis (a "20% Common Investor"). For avoidance of doubt, it is agreed
that for purposes of determining whether any person is a 20% Common Investor,
such person shall be
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deemed to own all shares of Common Stock issuable upon exercise of warrants,
options or other similar derivative securities or issuable upon conversion or
exchange of any convertible or exchangeable security of the Company.
(ii) Without limiting Section 2(a)(i), if any Common Holder becomes a 10%
Investor or a 20% Common Investor, such Common Holder (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 or 20% Common
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 Amended and Restated Bye-laws.
(iv) The Board of Directors of the Company may, in its sole discretion,
waive any of the provisions of this Section 2(a) with respect to one or more
Common Holders.
(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 (as defined in Section 5(a) hereof), 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.
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(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 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 (1) Common Stock issued to
the initial Common Holders, (2) Series B Conversion Shares, (3) Series C
Conversion Shares, (4) 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 (5) any Common Stock issued as a
dividend or other
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distribution with respect to, or in exchange for or in replacement of, the
securities referred to in clauses (1), (2), (3), and (4) above;
(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:
(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
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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 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.
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(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 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
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request of the Initiating Holders; provided, however, that the Company may not
utilize this right more than once in any twelve (12) month period.
(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 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
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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 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:
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(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 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;
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<PAGE>
(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 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;
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<PAGE>
(ix) make available for inspection, during business hours of the Company,
by any Holder of Registrable 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
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
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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 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
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<PAGE>
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 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
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<PAGE>
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 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 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
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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 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
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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 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(ii) 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 or 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
25
<PAGE>
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 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,
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<PAGE>
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; provided, however, that in lieu of providing
such certified report to those Common Holders whose names are set forth on
Schedule I hereto (each a "Sponsoring Investor" and, collectively, the
"Sponsoring Investors") on a quarterly basis, the Company need only furnish to
the Sponsoring Investor such report, accompanied by the certificate referred to
above, within 45 days after the end of each calendar year, as to the Company's
compliance with its operating guidelines during such year.
(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
27
<PAGE>
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": mean 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, 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, (ii) the Sponsoring Investors' and Founders' Stock
Warrant Plan of the Company dated June 17, 1997 and (iii) any employee stock
warrant, stock option or similar plan approved by the Board 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).
28
<PAGE>
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 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. It is expressly acknowledged and agreed by the parties to this
Agreement that the Subsequent Offering (as defined in Section 1(e) of this
Agreement) shall not be a Trigger Event.
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
Amended and Restated 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 and Series C 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
29
<PAGE>
be effective as to all parties hereto, 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 (it being understood that for the
purposes of such calculation, the Series C Preferred Stock shall be deemed to
have been converted into shares of Common Stock at the then applicable
conversion rate for such shares, as set forth in the Company's Amended and
Restated Bye-laws (the "Assumed Conversion")); 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, taking into account the Assumed Conversion.
(c) Amendment of Schedules I and II to this Agreement.
The Secretary of the Company shall, from time to time in the ordinary
course of business as reasonably necessary, amend Schedules I and II 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, Exchanges, 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 or Series C Holder, at
such holder's address appearing on the applicable Schedule attached hereto or at
any other address such holder may have
30
<PAGE>
provided in writing to the Company and (ii) if to the Company, at Craig Appin
House, 2nd Floor, 8 Wesley Street, Hamilton HMFX, Bermuda, Attention: Secretary,
or such other address as the Company may have furnished to such 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 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, the Founders' Subscription Agreement and the Series C
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.
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<PAGE>
(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).
(m) Series B Holders.
The holders of Common Stock who also hold shares of Series B Preferred
Stock expressly acknowledge and agree that upon the Series B Conversion, such
holders shall become bound by the provisions of this Agreement with respect to
the Series B Conversion Shares received by them as a result of such conversion.
(n) Series C Holders.
The holders of Common Stock who subscribe for shares of Series C Preferred
Stock pursuant to the Series C Subscription Agreement expressly acknowledge and
agree that upon the conversion of any such shares of Series C Preferred Stock,
such holders shall become bound by the provisions of this Agreement with respect
to the Series C Conversion Shares received by them as a result of such
conversion.
32
<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: Chief Executive Officer
33
EXHIBIT 10.16
CGA INVESTMENT MANAGEMENT, INC.
August 1, 1997
Mr. Landon Parsons
75 Skyline Drive
Millington, NJ 07946
Dear Landon:
I am pleased to offer you a position as Director 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
June30, 1998 at a per annum rate equal to
$170,000, payable in installments in accordance
with the regular payroll practices of the Company.
Bonus: You will receive a bonus of $155,000 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 note that a portion of your
Guaranteed Bonus, 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 23,645 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
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: On the date that your
Guaranteed Bonus is paid to you, and on the date
any 1998 Bonus is paid to you (each such date a
"Bonus Payment Date "), you will have the
obligation to purchase 2,000 shares of CGA Group
common stock, and you will have the option to
purchase up to 3,000 additional shares of CGA
Group common stock, on each such Bonus Payment
Date. The purchase price of such stock will be
equal to $5.00 per share, plus funding costs of 7%
per annum commencing on June17, 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 exercisable 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.
1
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Vacation: You will be entitled to an annual vacation of four
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 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"
or 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 June30, 1998 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 competent
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 interests
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.
2
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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 ___ day of August, 1997
/s/ LANDON PARSONS
----------------
Landon Parsons
3
CGA GROUP, LTD.
SERIES C CONVERTIBLE CUMULATIVE VOTING PREFERRED STOCK
SUBSCRIPTION AGREEMENT
Dated as of March 1, 1999
<PAGE>
Table of Contents
Page
----
Article 1 AUTHORIZATION; SUBSCRIPTION FOR SERIES C PREFERRED STOCK.......... 1
Section 1.1 The Series C Preferred Stock.......................... 1
Section 1.2 Subscription for Series C Preferred Stock............. 2
Article 2 CLOSING .......................................................... 4
Article 3 CONDITIONS TO OBLIGATIONS OF THE INVESTORS........................ 5
Section 3.1 Accuracy of Representations and Warranties............ 5
Section 3.2 Performance of Agreements; Regulatory Approvals;
Credit Rating....................................... 5
Section 3.3 Compliance Certificate................................ 5
Section 3.4 Amended and Restated Bye-laws......................... 5
Section 3.5 Other Agreements...................................... 5
Section 3.6 Opinion of Conyers Dill & Pearman..................... 6
Section 3.7 List of Shareholders.................................. 6
Article 4 CONDITIONS TO THE COMPANY'S OBLIGATIONS........................... 6
Section 4.1 Accuracy of Representations and Warranties............ 6
Section 4.2 Performance of Agreements............................. 6
Section 4.3 Amended and Restated Bye-laws......................... 6
Section 4.4 Other Agreements...................................... 7
Section 4.5 Letters from Placement Agent.......................... 7
Section 4.6 Payment for the Series C Preferred Stock.............. 7
Section 4.7 Waiver................................................ 7
Section 4.8 Aggregate Funding..................................... 7
Article 5 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.......... 7
Section 5.1 Due Organization, Valid Existence and
Authority of the Company and the
Company's Initial Subsidiaries..................... 7
Section 5.2 Authorization and Validity of Agreements.............. 8
Section 5.3 Capitalization........................................ 8
Section 5.4 No Conflict with Other Instruments;
No Approvals Required Except as Have
Been Obtained....................................... 8
Section 5.5 Regulatory Filings; Compliance with Law............... 9
Section 5.6 Stamp Duties or Taxes................................. 9
Section 5.7 Private Offering of the Shares........................ 9
Section 5.8 The Offering Circular................................. 10
Section 5.9 Not an "Investment Company"........................... 10
Section 5.10 Company Obligations................................... 10
Section 5.11 Operating Company..................................... 11
<PAGE>
Section 5.12 No U.S. Trade or Business and Not a
Controlled Foreign Corporation...................... 11
Section 5.13 Related Person Insurance Income....................... 11
Section 5.14 Operating Guidelines.................................. 12
Section 5.15 Passive Foreign Investment Company.................... 12
Section 5.16 Use of Proceeds of the Offering....................... 12
Section 5.17 Shareholders.......................................... 13
Section 5.18 Bermuda Withholding Tax............................... 13
Section 5.19 No Events of Non-Compliance........................... 13
Section 5.20 Registration Rights................................... 13
Article 6 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS................... 13
Section 6.1 Due Organization, Good Standing and
Authority of the Investor........................... 13
Section 6.2 Authorization and Validity of Agreements.............. 13
Section 6.3 Investment Intent..................................... 14
Section 6.4 No Conflict with Other Instruments;
No Approvals Required Except as Have
Been Obtained....................................... 14
Section 6.5 Investor Awareness and Suitability.................... 15
Section 6.6 Accredited Investor Status............................ 17
Section 6.7 Receipt of Information, Access to Information......... 18
Section 6.8 Series C Preferred Stock Ownership Limitations........ 19
Article 7 RESTRICTIONS ON TRANSFER.......................................... 19
Section 7.1 Restrictive Legends................................... 19
Section 7.2 Notice of Proposed Transfers.......................... 20
Article 8 MISCELLANEOUS..................................................... 21
Section 8.1 Survival of Representations,
Warranties and Covenants............................ 21
Section 8.2 Entire Agreement...................................... 22
Section 8.3 Severability.......................................... 22
Section 8.4 Binding Effect; Benefit............................... 22
Section 8.5 Assignability......................................... 22
Section 8.6 Amendment; Waiver..................................... 22
Section 8.7 Headings 22
Section 8.8 Counterparts.......................................... 22
Section 8.9 Applicable Law........................................ 22
Section 8.10 Notices and Payment................................... 22
Section 8.11 Full Payment.......................................... 23
Section 8.12 Indemnification....................................... 24
Section 8.13 Submission to Jurisdiction............................ 25
ii
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Exhibits:
Annexes:
Annex I - Form of Memorandum of Association
Annex II - Form of Amended and Restated Bye-laws
Annex III - Form of Amended and Restated Shareholders Agreement
Annex IV - Form of Opinion of Conyers Dill & Pearman
Annex V - Operating Guidelines
Annex VI - Letter Agreement with DCR
iii
<PAGE>
CGA GROUP, LTD.
SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT, dated as of March 1, 1999 (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 I hereto (collectively, together
with their successors and permitted assigns, the "Investors").
WHEREAS, the Company has distributed subscription rights (the "Rights") to
subscribe for shares of the Series C Cumulative Convertible Preferred Stock, par
value U.S. $.01 per share (the "Series C Preferred Stock) to the Investors
pursuant to an Offering Circular, dated January 21, 1999 as supplemented on
February 5, 1999, February 12, 1999 and February 22, 1999 (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 "Offering
Circular");
WHEREAS, the Investors understand that the voting power of their aggregate
ownership of voting securities of the company is subject to the Maximum
Percentage limitation contained in Bye-laws 1(cc) and 50 of the Company's
Amended and Restated Bye-laws (as defined herein), and as a result the voting
power of some shares of Series C Preferred Stock may be reduced in accordance
with the terms of the Bye-laws as described in the "Description of Securities"
contained in the Offering Circular; and
WHEREAS, each of the Investors wishes to subscribe for and purchase,
severally and not jointly, and the Company wishes to issue and sell to each
Investor the number of shares of Series C Preferred Stock applicable to each
Investor set forth opposite such Investor's name on Schedule I hereto, on the
terms set forth herein.
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto hereby agree as follows:
Article 1
AUTHORIZATION; SUBSCRIPTION FOR SERIES C PREFERRED STOCK
Section 1.1 The Series C Preferred Stock. The Company has authorized the
issuance and sale pursuant to this Agreement of up to 52,000,000 shares of
Series C Preferred Stock 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
Amended and Restated
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Bye-laws of the Company, in the form attached hereto as Annex II and all
appendices and exhibits thereto (the "Amended and Restated Bye-Laws"), (iii) the
Amended and Restated 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 "Amended and Restated Shareholders Agreement"), and (iv)
this Agreement. Subject to the terms and conditions hereof, the Preferred Stock
will be issued on the Closing Date.
Section 1.2 Subscription for Series C Preferred Stock. (a) 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 aggregate
number of shares of Series C Preferred Stock set forth below such Investor's
name on the signature page hereto for the purchase price specified in Article 2
hereof. Such aggregate number is comprised of (i) the number of shares of Series
C Preferred Stock which such Investor is entitled to purchase upon exercise of
the Rights distributed to such Investor pursuant to the Offering Circular (the
"Basic Subscription"), (ii) such number of additional shares of Series C
Preferred Stock which the Investor requests to purchase pursuant to the Front
End Additional Allotment Privilege (as defined below), (iii) such number of
additional shares of Series C Preferred Stock which the Investor requests to
purchase pursuant to the Back End Oversubscription Privilege (as defined below)
set forth in the Offering Circular and (iv) such number of additional shares of
Series C Preferred Stock which the Investor requests to purchase pursuant to the
Additional Back End Privilege (as defined below) set forth in the Offering
Circular. The Investors acknowledge that the Company may actually issue and
sell to each Investor at the Closing fewer than the number of shares of Series C
Preferred Stock set forth below each Investor's name on its signature page
hereto, based upon the calculations of oversubscriptions and additional
allotments as set forth in this Agreement.
(b) In the event that the Company receives from the Investors subscriptions
to purchase at least U.S. $47 million in Series C Preferred Stock in the
aggregate at U.S. $1.50 per share pursuant to the Basic Subscription Privilege
and the Back End Oversubscription Privilege (as defined below), then those
Investors who fully exercise all Rights allotted to them pursuant to the Basic
Subscription Privilege will be entitled to purchase a portion of 12,000,000
additional shares of Series C Preferred Stock (the "Additional Shares") at a
price (the "Additional Allotment Price") of U.S. $0.25 per share (the "Front End
Additional Allotment Privilege"). The purchase by an Investor of its full
allotted number of shares pursuant to its Basic Subscription Privilege plus its
full allotted number of shares pursuant to its Front End Additional Allotment
Privilege is defined as such Investor's "Front End Purchase" and the average
price per share paid by such Investor for all such shares is defined as such
Investor's "Front End Share Price." The number of Additional Shares that each
Investor will be entitled to purchase at the Additional Allotment Price as part
of its Front End Purchase (a) will be contingent upon the dollar amount of the
Aggregate Basic Subscription (as defined below) and the resulting calculation of
Additional Back End Shares, as described below and (b) will equal a fraction
(the numerator of which will be the number of shares purchased pursuant to such
Investor's Basic Subscription Privilege and the denominator of which will be the
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total number of shares purchased by all Investors who have fully exercised all
Rights allotted to them pursuant to the Basic Subscription Privilege) of the
number of shares equal to 12,000,000 minus the aggregate number of Additional
Back End Shares (as defined below) purchased by all Investors.
(c) If the aggregate purchase price of the shares subscribed for by all
Investors in the aggregate pursuant to the Basic Subscription Privilege (the
"Aggregate Basic Subscription") is less than U.S. $47 million, then those
Investors who fully exercise all Rights allotted to them pursuant to the Basic
Subscription Privilege will be entitled, as a group, to purchase a number of
shares of Series C Preferred Stock, at U.S. $1.50 per share (the "Back End
Oversubscription Shares"), equal to the difference between U.S. $47 million and
the Aggregate Basic Subscription (the "Back End Oversubscription Privilege").
Each such Investor shall be entitled to purchase a percentage of the Back End
Oversubscription Shares equal to a fraction, the numerator of which is the total
number of shares purchased by such Investor pursuant to its Basic Subscription
Privilege, and the denominator of which is the total number of shares purchased
by all Investors who have fully exercised all Rights allotted to them pursuant
to the Basic Subscription Privilege. Any unsubscribed-for Back End
Oversubscription Shares will be offered to those Investors who have elected to
purchase their own full allotment of Back End Oversubscription Shares, pro rata
based on the number of shares constituting such elections.
(d) Each Investor that elects to purchase Back End Oversubscription Shares
will also be entitled to purchase a number of Additional Shares (the "Additional
Back End Shares"), at the Additional Allotment Price of U.S.$0.25 per share (the
"Additional Back End Privilege"), such that the average price per share of such
Investor's Back End Oversubscription Shares and Additional Back End Shares,
taken as a whole, shall be 80% of the Front End Share Price.
(e) Based upon (i) the number of shares of Series C Preferred Stock which
an Investor subscribes for pursuant to the Basic Subscription Privilege, the
Front End Additional Allotment Privilege, the Back End Oversubscription
Privilege and the Additional Back End Privilege such number being determined
after all prorations described above have been effected, the number of shares of
Series C Preferred Stock issuable to each Investor shall be determined as soon
as practicable thereafter.
(f) For purposes of this Agreement, Maximum Percentage shall have the
meaning assigned to it in Bye-laws 1(cc) and 50 of the Amended and Restated
Bye-laws. In the event that the issuance of Series C Preferred Stock upon
exercise of Rights would cause an Investor's ownership of voting stock of the
Company to exceed the Maximum Percentage, the voting power of such Investors'
Series C Preferred Stock shall be reduced pursuant to the terms and conditions
set forth in the Bye-laws and described in the Offering Circular, so that such
Investor will not violate the Maximum Percentage limitation.
(g) No Investor shall be obligated to purchase any shares of Series C
Preferred Stock unless the conditions set forth in Article 3 hereof shall have
been
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satisfied or waived by such Investor on or prior to the Closing Date. The
Company shall not be obligated to sell any shares of the Series C Preferred
Stock unless the conditions set forth in Article 4 hereof shall have been
satisfied or waived by the Company on or prior to the Closing Date.
ARTICLE 2
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 March 1,
1999 or such later date as the Company may designate upon not less than
five business days prior written notice, delivered by facsimile, to the
Investors (the "Closing Date"), (A) the number of shares of Series C
Preferred Stock set forth opposite each such Investor's name on Schedule I
hereto for the consideration of a cash purchase price set forth opposite
each such Investor's name on Schedule I hereto, to be paid on the Closing
Date. The Investors acknowledge and agree that the number of shares of
Series C Preferred Stock being sold to each Investor pursuant to this
Agreement shall not be known at the time such Investor executes this
Agreement but shall be calculable upon expiration of the Rights and after
application of the oversubscription and additional allotment allocations
described above such that Schedule I shall be completed on or prior to the
Closing. The aggregate cash purchase price for the aggregate number of
shares of Series C Preferred Stock set forth opposite the name of each
Investor on Schedule I (as such Schedule I shall be completed on or prior
to the Closing) 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 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 of Series C Preferred Stock to be purchased by such Investor,
against 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 Agent (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 the Company in Hamilton, Bermuda
at 10:00 a.m., Bermuda time, on the Closing Date.
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ARTICLE 3
CONDITIONS TO OBLIGATIONS OF THE INVESTORS
The obligation of each Investor to purchase the Series C 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 Approvals; Credit Rating.
(a) 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.
(b) The Company and Commercial Guaranty Assurance, Ltd. (together with its
successors, "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 CGA Investment Management,
Inc. (together with its successors, "CGAIM" and together with CGA, the "Initial
Subsidiaries") 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.
(c) CGA shall have received a letter from Duff & Phelps Credit Rating
Company or any successor thereto ("DCR") dated as of the Closing Date confirming
that CGA will retain its AAA claims paying ability rating from DCR upon the
consummation of the transactions contemplated hereby, 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 retain its AAA claims
paying ability rating from DCR.
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 and 3.5 have been fulfilled.
Section 3.4 Amended and Restated Bye-laws. The Amended and Restated
Bye-laws of the Company shall have been approved by the shareholders of the
Company and duly adopted by the Company in substantially the form attached as
Annex II hereto.
Section 3.5 Other Agreements. The Amended and Restated Shareholders
Agreement shall have been executed and delivered to the Company by at least
seventy-five percent (75%) of the Common Holders (as defined therein) in
substantially the form attached as Annex III hereto (except for such changes as
are not
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material, which changes, however, shall have been provided to the Investors
prior to the Closing Date).
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 List of Shareholders. The Company shall have provided to such
Investor a list representing the Company's best information of the shareholders
of the Company and their respective shareholdings on the Closing Date. The
Investors acknowledge and agree that a true and complete list of the
shareholders of the Company and their respective shareholdings shall not be
known at the time each Investor executes this Agreement but shall be calculable
upon expiration of the Rights and after application of the Oversubscription
Privilege allocations described herein. The Company agrees to provide at the
Closing an Amended and Restated Schedule II hereto which shall set forth its
best information regarding the identity 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 3 have
not been satisfied, any Investor may elect to waive such conditions or to be
relieved of all further obligations hereunder.
ARTICLE 4
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligation of the Company to issue and sell the shares of Series C
Preferred Stock 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 Amended and Restated Bye-laws. The Amended and Restated
Bye-laws of the Company shall have been approved by the shareholders of the
Company and duly adopted by the Company in substantially the form attached as
Annex II hereto (except for such changes as are not material, which changes,
however, shall have been provided to the Investors prior to the Closing Date).
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Section 4.4 Other Agreements. The Amended and Restated Shareholders
Agreement shall have been executed and delivered to the Company by at least
seventy-five percent (75%) of the Common Holders (as defined therein) in
substantially the form 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).
Section 4.5 Letters from Placement Agent. The Company shall have received
from Salomon Smith Barney Inc. (the "Placement Agent") 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 C 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 4.6 Payment for the Series C 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 I.
Section 4.7 Waiver. Section 7.1 of the Series A Preferred Stock
Subscription Agreement, dated June 9, 1997, among the Company and the Investors
listed on Schedule I thereto pursuant to which the Company is prohibited from
issuing the Series C Preferred Stock, shall have been waived by holders of at
least ninety percent (90%) of the shares of the Company's issued and outstanding
Series A Preferred Stock, par value U.S. $0.01 per share (the "Series A
Preferred Stock"), in accordance with the provisions thereof for valid execution
of a waiver.
Section 4.8 Aggregate Funding. The Company shall have received on or prior
to the Closing Date gross proceeds from the sale of the Series C Preferred Stock
of not less than U.S. $40,000,000.
ARTICLE 5
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
Offering Circular. The Company has full right, power and authority to enter into
this Agreement, and perform its
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obligations hereunder. 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
Amended and Restated 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 use of the proceeds therefrom as described in
the Offering Circular, 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 Offering Circular (including the documents incorporated therein by
reference).
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").
Section 5.3 Capitalization. The sale of the Series C Preferred Stock and
the issuance of the shares have been duly authorized by the Company and, upon
payment for the Series C Preferred Stock in accordance with Article 2 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 described in the Offering Circular (including
the documents incorporated therein by reference), the Company does not, and on
the Closing Date will not, have any outstanding or authorized options, warrants,
calls, rights 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.
Section 5.4 No Conflict with Other Instruments; No Approvals Required
Except as Have Been Obtained. The execution and delivery of this Agreement by
the Company and compliance by the Company 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 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
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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 Amended and Restated
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 from consummating the transactions contemplated
hereby in accordance with the terms hereof.
Section 5.5 Regulatory Filings; Compliance with Law. Upon completion of the
Closing and the use of proceeds therefrom as described in the Offering Circular,
CGA will be authorized on the Closing Date under Bermuda law to conduct the
business of selling insurance and reinsurance as contemplated by the documents
incorporated by reference in the Offering Circular and no further approvals of
insurance regulatory or other authorities are required for the conduct of such
business. Upon completion of the Closing, 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 documents
incorporated by reference in the Offering Circular and no further approvals of
regulatory or other authorities are required for the conduct of such business.
Upon completion of the Closing and the use of proceeds therefrom as described in
the Offering Circular, 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, and the sale and delivery of the Series C Preferred Stock, to the
Investors pursuant to this Agreement and if any such taxes arise in connection
with the execution of this Agreement, or the consummation of any of the
transactions contemplated hereby, then the Company will pay such taxes.
Section 5.7 Private Offering of the Shares. (a) The offer and sale of the
Series C Preferred Stock 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 Series C Preferred Stock or any securities similar
to the Series C Preferred Stock, or otherwise, that would bring the sale of the
Series C Preferred Stock and the issuance of the shares within the provisions of
Section 5
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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 Series C Preferred Stock, 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) Neither the Company nor any Initial Subsidiary has issued or sold, or
agreed to issue or sell, any Series C Preferred Stock of the Company to any
persons other than to the Investors pursuant hereto.
Section 5.8 The Offering Circular. The Offering Circular (including the
documents incorporated therein by reference) 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 Offering Circular (including the documents
incorporated therein by reference) 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 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
Offering Circular (including the documents incorporated therein by reference)
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 Company Obligations. Each of the Company and its Initial
Subsidiaries has incurred no material liens or encumbrances on present or future
assets or revenues and has no material 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
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Offering Circular (including the documents incorporated therein by reference) or
referred to herein or in an attachment hereto.
Section 5.11 Operating Company. At the time the Company issues any Series C
Preferred Stock, 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 5.12 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 Amended and Restated
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 in its opinion it is more likely than not that such proposed action will
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 at least 75% of the members of the
Board then in office. 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 5.12. It is
hereby understood that this Section 5.12 does not alter any provision in the
Company's Amended and Restated Bye-laws and all actions taken in connection
herewith must comply with such Amended and Restated 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
that 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 (interpreted in accordance with Section 953(c)(3)(B) of the Code)
will be RPII and (ii) persons which are directly or indirectly insured or
reinsured by CGA ("Insureds") or Related Persons to Insureds own stock of CGA
that represents 20% or more of the combined voting power of all classes of stock
of the Company that are entitled to vote or 20% or more of the total value of
the Company ("Excess RPII"); provided, however, that it is hereby understood
that the
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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 the Amended and Restated Bye-laws and
all actions taken in connection herewith must comply with such Amended and
Restated 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, then, 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 notify any U.S.
Shareholder that the Company knows 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 of such
authorization.
Section 5.14 Operating Guidelines. Attached hereto as Annex V 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 resolutions pursuant to which the Operating Guidelines were
adopted provide 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 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.
Section 5.15 Passive Foreign Investment Company. The Company shall use its
best efforts to operate its business and the business of CGA in such manner that
neither the Company nor CGA will be considered a passive foreign investment
company within the meaning of Section 1297(a) of the Code.
Section 5.16 Use of Proceeds of the Offering. The net proceeds from the
Rights Offering shall be used by the Company for general corporate purposes and,
at the Company's discretion, to make a capital investment in CGA, which will use
such funds, if any, for general corporate purposes.
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Section 5.17 Shareholders. Schedule II to this Agreement represents the
Company's best information regarding the identity and ownership interests of the
shareholders of the Company upon completion of the Closing. The Investors
acknowledge and agree that a true and complete list of the shareholders of the
Company and their respective shareholdings shall not be known at the time each
Investor executes this Agreement but shall be calculable upon expiration of the
Rights and after application of the Maximum Percentage limitation and
oversubscription and additional allotment allocations described herein. The
Company agrees to provide at the Closing an Amended and Restated Schedule II
which sets its best information regarding the identity of the shareholders of
the Company and their respective shareholdings on the Closing Date.
Section 5.18 Bermuda Withholding Tax. The making of payments to any holder
of the shares will not be subject to any tax withholding requirement under
current Bermuda tax law.
Section 5.19 No Events of Non-Compliance. No event has occurred and no
condition exists which, upon the consummation of transactions under this
Agreement would constitute an Event of Non-Compliance (as defined in the Series
A Subscription Agreement) with or without notice or lapse of time or both.
Section 5.20 Registration Rights. Other than as provided in the Amended and
Restated Shareholders Agreement, the Company has not agreed to register any of
its Series C Preferred Stock under the Securities Act.
ARTICLE 6
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. The Amended and Restated Shareholders Agreement has
been duly authorized, executed and delivered by such Investor at the Closing,
and assuming, in the case of the Amended and Restated Shareholders Agreement,
the due authorization, execution and delivery thereof by the other parties
thereto, will constitute a valid and
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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 Series C
Preferred Stock 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 Series C Preferred Stock is 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 III) and has sole investment
discretion with respect to such Investor's acquisition of the Series C Preferred
Stock, and the determination and decision on such Investor's behalf to acquire
the Series C Preferred Stock 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 and
Amended and Restated 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 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 bye-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, bye-law, contract or
other instrument or agreement, order, judgment, decree, law, statute, ordinance
or regulation or any other restriction of any kind or char-
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acter that would prevent such Investor from entering into this Agreement or the
Amended and Restated 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 and the Amended and Restated
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 Series C Preferred Stock involves a high
degree of risk, including, without limitation, the risks identified under
the caption "Risk Factors" in the Offering Circular, 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 Series C Preferred Stock;
(ii) The Company has only recently been organized and has limited
financial and operating history;
(iii) The Offering Circular 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 CGA and of U.S.
Persons (as defined below) and non-U.S. Persons that own Series C Preferred
Stock of the Company and (ii) the Bermuda taxation of persons or entities
not resident in Bermuda for exchange control purposes that own Series C
Preferred Stock 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 5.12 and the Operating
Guidelines. The Offering Circular 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 Offering Circular. (For purposes of this
Section 6.5, "U.S. Person" means (1) an individual who is a citizen or
resident of the United States, (2) a company, corporation or partnership
created or organized under the laws of the United States or any state
thereof, (3) 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, and
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(4) a trust in respect of which (i) a court within the United States may
exercise primary supervision over its administration, and (ii) one or more
United States fiduciaries have the authority to control all substantial
decisions);
(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 Offering Circular, this Agreement or the Amended and
Restated Shareholders Agreement or made any finding or determination as to
the fairness of an investment in the Series C Preferred Stock;
(v) The Series C Preferred Stock is illiquid, and such Investor must
bear the financial risk of investment in the Series C Preferred Stock 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 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 Amended and Restated Bye-laws, the Amended and Restated
Shareholders Agreement and this Agreement contain substantial restrictions
on the transferability of the Series C Preferred Stock;
(vii) There is no existing public or other market for the Series C
Preferred Stock, 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 Series C Preferred Stock. Without limiting the
generality of the foregoing, in order not to jeopardize the exempt status
under the Securities Act or under the securities laws of any other
jurisdiction of the offering contemplated hereby, the transferee of such
Series C Preferred Stock may, among other things, be required to fulfill
the investor suitability requirements thereunder;
(viii) The Series C Preferred Stock has 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
Amended and Restated Shareholders Agreement, the Company is under no
obligation to, and currently does not intend to, register or qualify the
Series C Preferred Stock 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 Series C Preferred Stock 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 Series C Preferred Stock and a notation shall be made in
the appropriate records of the Company indicating that the Series C
Preferred Stock is subject to restrictions on transfer;
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(ix) Such Investor shall hold the Series C Preferred Stock subject to
this Agreement, the Amended and Restated Bye-laws of the Company and the
Amended and Restated Shareholders Agreement from time to time in effect and
shall have voting rights with respect to the Series C Preferred Stock as
specified in the Amended and Restated Bye-laws of the Company from time to
time in effect and subject to applicable law; 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 C Preferred Stock as
such voting power is described in the Amended and Restated 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) 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 ERISA, if
the investment decision is made by a plan fiduciary, as defined in Section
3(21) of ERISA, 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 an
organization described in Section 501(c)(3) of the Code, corporation,
Massachusetts or similar business trust, or partnership, not formed for the
specific purpose of acquiring the Series C Preferred Stock, with total
assets in excess of U.S. $5,000,000; or
(c) A director, executive officer or general partner of the Company;
or
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(d) A natural person (i) who has had an individual income in excess of
U.S. $200,000 in each of the two most recent years or joint income with his
or her spouse in excess of U.S. $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year or (ii) whose individual net worth, or joint net worth with his or her
spouse, exceeds U.S. $1,000,000 at the time of the Closing. For Purposes of
this Section 6.6(d)(ii), "net worth" means the excess of total assets at
fair market value, including home, home furnishings and automobiles, over
total liabilities; or
(e) A trust, with total assets in excess of U.S. $5,000,000, not
formed for the specific purpose of acquiring the Series C Preferred Stock,
whose purchase is directed by a sophisticated person as described in Rule
506(b)(2)(ii) under the Securities Act; or
(f) 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 Offering Circular, the documents
incorporated by reference therein, the Amended and Restated Bye-laws of the
Company, the Amended and Restated Shareholders Agreement and any documents
that may have been made available upon such Investor's request (such
documents, other than the Offering Circular, being collectively referred to
as the "Other Documents"), and such Investor has carefully read the
Offering Circular, the documents incorporated therein by reference and the
Other Documents and understands and has evaluated the risks of a purchase
of the Series C Preferred Stock, including the considerations set forth
under the caption "Investment Considerations" in the Offering Circular;
(b) has been given the opportunity to ask questions of, and receive
answers from the Company concerning the terms and conditions of the
offering contemplated hereby and other matters pertaining to an investment
in the Series C Preferred Stock, has been given the opportunity to obtain
such additional information necessary to evaluate the merits and risks of a
purchase of the Series C Preferred Stock to the extent the Company
possesses such information, and has received all documents and information
that it has requested relating to an investment in the Series C Preferred
Stock;
(c) has not relied upon any representations or other information
(whether oral or written) from the Company or its directors, officers or
affiliates, or from any other persons, other than the representations
contained in this Agreement and the information contained or incorporated
by reference in the Offering Circular and the Other Documents; and
(d) has carefully considered and has, to the extent such Investor
believes such discussion necessary, discussed with such Investor's
professional legal,
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financial and tax advisers, the suitability of an investment in the Series
C Preferred Stock for such Investor's particular financial and tax
situation and has determined that such Investor's Series C Preferred Stock
is a suitable investment for such Investor.
Section 6.8 Series C Preferred Stock Ownership Limitations. To such
Investor's knowledge, such Investor's purchase on the Closing Date of Series C
Preferred Stock 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 C
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 II hereto for purposes of making this
representation and warranty.
At such time as the Company supplies the Investors with names of the Series
C Preferred Stock investors, prior to the Closing, the Investors will indicate
whether the inclusion of any of the 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 C 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 7
RESTRICTIONS ON TRANSFER
Shares of Series C Preferred Stock and any shares of Common Stock issuable
upon conversion of the Series C Preferred Stock shall not be transferable except
upon the conditions specified in this Article 7, which are intended to ensure
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
of Series C Preferred Stock and any shares of Common Stock issuable upon
conversion of the Series C Preferred Stock and are in addition to the conditions
relating to the transfer of the shares of Series C Preferred Stock and shares of
Common Stock issuable upon conversion of the Series C Preferred Stock set forth
in the Amended and Restated Shareholders Agreement and the Amended and Restated
Bye-laws.
Section 7.1 Restrictive Legends. In addition to any other legend required
by the Company's Amended and Restated Bye-laws or applicable law, each
certificate representing the Series C Preferred Stock and any shares of Common
Stock issuable upon conversion of the Series C Preferred Stock shall (unless
otherwise
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permitted by the provisions of this Article 7) 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 Amended and Restated Bye-laws of CGA Group, Ltd. (the
"Company"), the Series C Cumulative Convertible Preferred Stock
Subscription Agreement and the Amended and Restated 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, as amended (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 Amended and Restated 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 Amended and Restated
Shareholders Agreement and the Amended and Restated Bye-laws sections 61 through
63, (ii) unless the transferee is an Affiliate of the transferor (as defined in
the Amended and Restated 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 Amended and Restated Shareholders Agreement and
61 through 63 of the Amended and Restated Bye-laws, and (iii) an
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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 Amended and Restated 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) No Investor shall transfer any shares of Series C Preferred Stock or
any shares of Common Stock issuable upon conversion of the Series C Preferred
Stock held by such Investor unless the transferee of such shares has agreed to
be bound by the terms of the Amended and Restated Shareholders Agreement and has
duly executed a counterpart signature page to the Amended and Restated
Shareholders Agreement. Any transfer or purported transfer made in violation of
this Section 7.2(c) 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.
(d) As used in this Agreement, the term "transfer" encompasses any sale,
transfer, pledge or other disposition of any securities referred to herein.
ARTICLE 8
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 Amended and Restated
Shareholders Agreement.
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Section 8.2 Entire Agreement. This Agreement (including the Schedules,
Exhibits and Annexes hereto), constitutes the entire agreement among the parties
hereto and supersedes 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 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 shares
of the Series C Preferred Stock, as contemplated by the Company's Amended and
Restated Bye-laws, this Agreement and the Amended and Restated Shareholders
Agreement, this Agreement and the rights hereunder shall not be assignable by
any Investor without the prior written consent of the Company. 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 3, 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 5.11, 5.12, 5.13, 5.14 and
5.15 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 Series C
Preferred Stock.
Section 8.7 Headings. The Article 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
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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, electronic transmission, telex or
facsimile (i) if to an Investor, at such Investor's address appearing on
Schedule I hereto or at any other address such Investor may have provided in
writing to the Company and (ii) if to the Company, at Craig Appin House, 8
Wesley 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. (a) All payments in respect of the Series C
Preferred Stock (including, without limitation, redemption and liquidation
payments, and payments under Section 8.11(b)), shall be made in immediately
available U.S. dollar funds, provided, however, that the Company may make
payments or redemptions in shares of Common Stock as set forth in the Bye-laws
attached as Annex II hereto. Each reference in this Agreement 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 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.
(b) The Company will make all redemption and liquidation payments to the
holders of Series C Preferred Stock in respect of this Agreement and the Amended
and Restated 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 C 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 C Preferred Stock such additional amounts as may be
necessary in order that every liquidation and redemption payment made by the
Company after deduction or withholding for or on account of any such present or
future
23
<PAGE>
Taxes will not be less than the amount then due and payable in respect of
this Agreement and the Amended and Restated Bye-laws.
Section 8.12 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, the Company's Amended and Restated Bye-laws, or the Amended and
Restated Shareholders Agreement.
(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 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.
(c) 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 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.
24
<PAGE>
(d) The indemnification provisions of this Article 8 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 court 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 the transactions contemplated hereby (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 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 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
25
<PAGE>
irrevocably waives and agrees not to plead or claim such immunity in respect of
its obligations under this Agreement.
26
<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: Chief Executive Officer
Counterpart Signature Pages Begin on Next Page
27
<PAGE>
Counterpart Signature Page For Investor
The undersigned hereby agrees to become a party to that certain Series C
Cumulative Convertible Preferred Stock Subscription Agreement dated as of March
1, 1999 (the "Agreement") among CGA Group, Ltd. (the "Company") and others. From
and after the undersigned's execution and delivery and the Company's acceptance
of this Counterpart Signature Page, the undersigned shall be a party to this
Agreement.
- ------------------------------------
Printed Name of Investor
By:_________________________________
Title:______________________________
Address:____________________________
____________________________________
Date: _________ __, 1999
The Investor whose signature appears above hereby subscribes for:
____________ Shares of Series C Preferred Stock pursuant to the BASIC
SUBSCRIPTION PRIVILEGE; and (Number of shares to be completed by Investor)*
____________ Shares of Series C Preferred Stock pursuant to the FRONT END
ADDITIONAL ALLOTMENT Privilege. (Number of shares to be completed by Investor)*
____________ Shares of Series C Preferred Stock pursuant to the BACK END
OVERSUBSCRIPTION PRIVILEGE. (Number of shares to be completed by Investor)*
____________ Shares of Series C Preferred Stock pursuant to the ADDITIONAL BACK
END PRIVILEGE. (Number of shares to be completed by Investor)*
- -------------
* An Investor may write or type the word "Maximum" in any of the blanks above
to indicate that it wishes to subscribe for the maximum amount of such
shares offered to such Investor pursuant to this Agreement.
28
<PAGE>
SCHEDULE I -- INVESTORS
Pacific Life Insurance Company
PM Group Life Insurance Company
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
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
Third Avenue Trust on behalf of the Third Avenue Value Fund Series
Olympus Growth Fund II, L.P.
Olympus Executive Fund, L.P.
ACE Limited
Lennar CGA Holdings, Inc.
CGA Firemark Venture Fund I, LLC
Prudential Securities Group Incorporated
Shidler/CGA Corp.
Shidler Equities Corp.
Shidler Equities, L.P.
Doreen Denton
Paul Lambert
Robert Holman
Samuel Tang
Mark S. Whiting
Anthony R. Montemurno
Michael Brennan
James R. Reinhart
Gary Heigl
William Walton
Geoffrey N. Kauffman
Michael J. Wirth
AGREEMENT
AGREEMENT (this "Agreement"), dated as of March 1, 1999 by and among CGA
Group, Ltd. (the "Company") and each of the undersigned holders (each, a "Series
A Holder" and, collectively, the "Series A Holders") of the Company's Series A
Cumulative Voting Preference Shares (the "Series A Shares").
Notwithstanding anything to the contrary set forth in (i) that certain
Series A Preferred Stock Subscription Agreement, dated as of June 9, 1997, by
and among the Company and each holder of the Series A Shares and (ii) the
Company's Bye-Laws (the "Bye-Laws"), including, without limitation, Appendix A
thereto, each Series A Holder party hereto agrees with the Company as follows.
Capitalized terms used in this Agreement which are not otherwise defined herein
shall have the respective meanings ascribed thereto in the Bye-Laws (including
the Appendices thereto).
1. Each Series A Holder agrees that the Company shall have the right, at any
time and from time to time, to redeem any or all of such Series A Holder's
Series A Shares at a redemption price equal to the Series A Preferred Stated
Value per share plus dividends accrued but unpaid thereon through the date of
such redemption, subject to appropriate adjustment in the event of any share
split or combination with respect to such shares, payable in cash, provided that
any such redemption is effected as nearly as practicable pro rata from the
Series A Shares then held by all Series A Holders. For the avoidance of doubt,
each Series A Holder irrevocably waives any right to receive any redemption
premium or other additional amount in respect of any redemption of Series A
Shares effected pursuant to this Section 1.
2. The Company hereby agrees that if the Company shall consummate at any time
from and after the date hereof a public offering of shares of its Common Stock,
which public offering shall have been registered with the United States
Securities and Exchange Commission and shall have resulted in net proceeds to
the Company of not less than $50 million, the Company shall utilize the net
proceeds of such public offering to redeem Series A Shares held by the Series A
Holders pursuant to Section 1 of this Agreement.
3. Each Series A Holder agrees that it will not transfer any Series A Shares
held by it to any person unless and until such person agrees to become a party
hereto and to be bound by the provisions hereof by executing and delivering to
the Company a counterpart of this Agreement duly executed by such proposed
transferee. Any purported transfer of Series A Shares by a Series A Holder
signatory hereto other than in compliance with the provisions hereof shall be
deemed null and void and of no force or effect whatsoever.
4. The parties hereto agree to use their respective commercially reasonable
efforts to cause the Bye-Laws to be amended to incorporate the foregoing
provisions of this Agreement, which efforts shall include, in the case of the
Series A Holders, voting all
<PAGE>
shares of voting stock of the Company then held by them in favor of any such
proposed amendment to the Bye-Laws.
5. This Agreement shall take effect and shall be binding upon the signatories
hereto when it shall have been executed by the Company and by the holders of all
of the Series A Shares issued and outstanding as of the date hereof. If this
Agreement shall not have been so executed by such parties by the date of the
Closing of the Rights Offering contemplated by the Offering Circular dated
January 21, 1999 (as supplemented on February 5, 1999, February 12, 1999 and
February 22, 1999), or April 15, 1999, whichever date is earlier, the provisions
hereof shall be deemed never to have come into effect and shall be of no force
or effect whatsoever. This Agreement shall be valid, binding and enforceable
when executed by all parties hereto as aforesaid and shall in no way be
construed as being conditional upon or, subject to, the amendments to the
Bye-Laws as contemplated by Section 4 of this Agreement.
6. This Agreement may only be amended or modified by written instrument
executed by the Company and Series A Holders signatory hereto who hold at the
time at least 90% of the Series A Shares held by all Series A Holders signatory
hereto.
7. This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York, without giving effect to the principles of
conflicts of law thereof.
8. This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns in
accordance with the terms hereof. Except as aforesaid, this Agreement shall not
be deemed to inure to the benefit of or create any rights in favor of any person
not a signatory hereto.
9. 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.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
CGA GROUP, LTD.
By: /s/ RICHARD A. PRICE
--------------------
Richard A. Price
President and Chief Executive Officer
Name of Series A Holder
Putnam Fiduciary Trust Company on
behalf of its clients listed on
Attachment A
By: /s/ JOHN R. VERANI
------------------
Name: John R. Verani
Title: Senior Vice President
Attachment A:
-------------
Putnam Fiduciary Trust Company on behalf
of:
Putnam High Yield Managed Trust
Putnam High Yield Fixed Income Fund,
LLC
Name of Series A Holder
Putnam Investment Management, Inc. on
behalf of its clients listed on Attachment A
By: /s/ JOHN R. VERANI
------------------
Name: John R. Verani
Title: Senior Vice President
Attachment A
Putnam Variable Trust-Putnam VT High
Yield Fund
Putnam High Yield Trust
3
<PAGE>
Putnam Strategic Income Fund
Putnam Funds Trust-Putnam High Yield
Total Return Fund
Putnam High Yield Advantage Fund
Putnam Managed High Yield Trust
The George Putnam Fund of Boston
Putnam Income Fund
Putnam Diversified Income Trust
Putnam Variable Trust-Putnam Diversified
Income Fund
Name of Series A Holder
Oppenheimer Champion Income Fund
By: /s/ DAVID NEGRI
---------------
Name: David Negri
Title: Vice President
Name of Series A Holder
Oppenheimer Strategic Income Fund
By: /s/ DAVID NEGRI
---------------
Name: David Negri
Title: Vice President
Name of Series A Holder
Oppenheimer Variable Account Funds for
the account of Oppenheimer Strategic Bond
Fund
By: /s/ DAVID NEGRI
---------------
Name: David Negri
Title: Vice President
Name of Series A Holder
Oppenheimer High Yield Fund
By: /s/ DAVID NEGRI
---------------
4
<PAGE>
Name: David Negri
Title: Vice President
Name of Series A Holder
Oppenheimer Multi Sector Income Trust
By: /s/ DAVID NEGRI
---------------
Name: David Negri
Title: Vice President
Name of Series A Holder
Capital Reinsurance Company
By: /s/ ALAN S. ROSEMAN
-------------------
Name: Alan S. Roseman
Title: SVP, General Counsel
and Secretary
Name of Series A Holder
Pacific Life Insurance Company
By: /s/ ERIC GRITZMACHER
--------------------
Name: Eric Gritzmacher
Title:
Name of Series A Holder
ACE Limited
By: /s/ DONALD KRAMER
-----------------
Name: Donald Kramer
Title: Vice Chairman
Name of Series A Holder
Lennar Capital Services, Inc.
By: /s/ JEFFREY P. KRASNOFF
-----------------------
Name: Jeffrey P. Krasnoff
5
<PAGE>
Title: President
Name of Series A Holder
Mutual Discovery Fund
By: Franklin Mutual Advisers, Inc.
By: /s/ JEFFREY A. ALTMAN
---------------------
Name: Jeffrey A. Altman
Title: Senior Vice President
Name of Series A Holder
Mutual Qualified Fund
By: Franklin Mutual Advisers, Inc.
By: /s/ JEFFREY A. ALTMAN
---------------------
Name: Jeffrey A. Altman
Title: Senior Vice President
Name of Series A Holder
Third Avenue Trust on behalf of the Third
Avenue Value Fund Series
By: /s/ DAVID BARSE
---------------
Name: David Barse
Title: President
EXHIBIT 21.1
Subsidiaries of CGA Group, Ltd.
-------------------------------
Commerical Guaranty Assurance, Ltd.
CGA Investment Management, Inc.
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, March 31, 1999 except as to note 18, which is as of
April 23, 1999, 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 3,322,297 shares of its
Series A Preferred Stock.
/s/ PRICEWATERHOUSECOOPERS
---------------------------
PRICEWATERHOUSECOOPERS
Hamilton, Bermuda
June 14, 1999
