<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-7944
CGA GROUP, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
BERMUDA 98-0173536
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
CRAIG APPIN HOUSE
8 WESLEY STREET
HAMILTON HM11 BERMUDA NOT APPLICABLE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(441) 296-3165
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
28,005,648
(AS OF JUNE 30, 1999)
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<PAGE> 2
CGA GROUP, LTD.
------------------------
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
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PAGE
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<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -- June 30, 1999
and December 31, 1998................................. 1
Unaudited Consolidated Statements of
Operations -- Three Months and Six Months Ended June
30, 1999 and 1998..................................... 2
Unaudited Consolidated Statements of Changes in
Mezzanine Equity -- Six Months Ended June 30, 1999 and
the Year Ended December 31, 1998...................... 3
Unaudited Consolidated Statements of Changes in
Shareholders' Equity -- Six Months Ended June 30, 1999
and the Year Ended December 31, 1998.................. 4
Unaudited Consolidated Statements of Cash Flows -- Six
Months Ended June 30, 1999 and 1998................... 5
Notes to Unaudited Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and
Results of Operations.................................. 17
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... II-1
Item 4. Submission of Matters to a Vote of Security
Holders................................................ II-1
Item 6. Exhibits and Reports on Form 8-K.................. II-2
Signatures................................................ II-3
Index to Exhibits......................................... II-4
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CGA GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities available for sale at fair value
(amortized cost: $149,560,124 and $99,560,861)......... $144,584,244 $100,488,537
Other investments......................................... 5,000,000 30,000,000
Cash and short-term investments........................... 18,744,457 2,598,140
Premiums receivable....................................... 2,535,342 3,228,497
Management fees receivable................................ 400,577 1,093,411
Accrued investment income................................. 3,621,906 3,679,763
Deferred acquisition costs................................ 3,930,577 3,202,557
Prepaid reinsurance premiums.............................. 1,264,330 1,286,782
Reinsurance recoverable................................... 44,936,126 67,400,000
Other assets.............................................. 4,168,873 2,926,246
------------ ------------
Total assets.............................................. $229,186,432 $215,903,933
============ ============
LIABILITIES
Deferred premium revenue.................................. $ 1,432,311 $ 821,124
Reserve for losses and loss adjustment expenses........... 61,605,054 90,200,000
Reinsurance balances payable.............................. 378,544 420,660
Accrued costs and expenses................................ 3,263,959 4,355,767
------------ ------------
Total liabilities......................................... 66,679,868 95,797,551
------------ ------------
MEZZANINE EQUITY
Preferred stock, $.01 par value, 72,000,000 shares
authorized:
Series A.................................................. 81,202,282 75,291,100
Series B.................................................. -- 51,317,149
Series C.................................................. 50,961,972 --
------------ ------------
Total mezzanine equity.................................... 132,164,254 126,608,249
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 268,000,000 and 20,000,000
shares authorized, 28,005,648 and 9,100,000 issued and
outstanding............................................ 280,057 91,000
Additional paid-in-capital................................ 96,019,011 42,486,057
Accumulated other comprehensive income (loss)............. (4,975,880) 927,676
Retained deficit.......................................... (60,980,878) (50,006,600)
------------ ------------
Total shareholders' (deficit) equity...................... 30,342,310 (6,501,867)
------------ ------------
Total liabilities and shareholders' equity................ $229,186,432 $215,903,933
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written............ $ 4,387,861 $ 1,780,226 $ 7,855,093 $ 3,730,219
Ceded premiums.................... (387,854) (172,467) (807,479) (172,467)
----------- ----------- ------------ ------------
Net premiums written.............. 4,000,007 1,607,759 7,047,614 3,557,752
Change in unearned premiums....... (534,511) 41,582 (500,072) (837,276)
----------- ----------- ------------ ------------
Net premiums earned............... 3,465,496 1,649,341 6,547,542 2,720,476
Net investment income............. 2,348,222 2,324,640 4,019,724 4,212,895
Net realized gains (losses)....... (20,686) 794,575 130,880 552,381
Management fees................... 478,796 492,939 1,624,055 681,995
----------- ----------- ------------ ------------
Total Revenues.................... 6,271,828 5,261,495 12,322,201 8,167,747
----------- ----------- ------------ ------------
EXPENSES
Operating expenses................ 3,238,902 4,366,129 6,515,180 7,437,538
Policy acquisition costs.......... 167,116 92,342 315,254 145,587
Commitment fees................... 152,055 149,589 300,000 297,534
Excess of loss facility........... 50,000 50,000 100,000 100,000
Losses and loss adjustment
expenses....................... 7,450,000 405,000 7,750,000 600,000
----------- ----------- ------------ ------------
Total expenses.................... 11,058,073 5,063,060 14,980,434 8,580,659
----------- ----------- ------------ ------------
NET INCOME (LOSS)................... (4,786,245) 198,435 (2,658,233) (412,912)
Paid in kind
dividends -- preferred stock... (2,855,100) (4,909,681) (8,316,045) (9,635,722)
Accretion -- preferred stock...... (147,966) (198,103) (346,069) (551,392)
----------- ----------- ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS...................... $(7,789,311) $(4,909,349) $(11,320,347) $(10,600,026)
Basic and diluted loss per common
share............................. $ (0.28) $ (0.54) $ (0.61) $ (1.16)
=========== =========== ============ ============
Weighted average shares
outstanding....................... 28,005,648 9,100,000 18,709,501 9,100,000
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
Balance -- beginning of period.............................. $ 32,119 $ 27,965
Stock issued................................................ -- --
Pay-in-kind dividends paid.................................. 2,246 4,154
------------ ------------
Balance -- end of period.................................... 34,365 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.................................. 5,613,004 10,379,765
Accretion to redemption value............................... 228,566 514,273
Accretion on warrants....................................... 67,366 207,709
------------ ------------
Balance -- end of period.................................... 81,167,917 75,258,981
------------ ------------
TOTAL SERIES A PREFERRED STOCK.............................. $ 81,202,282 $ 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
------------ ------------
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
------------ ------------
TOTAL SERIES B PREFERRED STOCK.............................. $ -- $ 51,317,149
============ ============
SERIES C CONVERTIBLE PREFERRED STOCK
Balance -- beginning of period.............................. $ -- $ --
Stock issued (44,971,346 shares)............................ 449,713 --
------------ ------------
Balance -- end of period.................................... 449,713 --
------------ ------------
ADDITIONAL PAID-IN-CAPITAL -- SERIES C PREFERRED
Balance -- beginning of period.............................. -- --
Stock issued................................................ 51,715,259 --
Issuance costs.............................................. (1,203,000) --
------------ ------------
Balance -- end of period.................................... 50,512,259 --
------------ ------------
TOTAL SERIES C CONVERTIBLE PREFERRED STOCK.................. $ 50,961,972 $ --
============ ============
TOTAL MEZZANINE EQUITY...................................... $132,164,254 $126,608,249
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
SHAREHOLDERS' EQUITY
COMMON STOCK
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... (228,566) (514,273)
Accretion of Series B Preferred Stock to redemption value... (50,137) (225,614)
Accretion on warrants....................................... (67,366) (207,709)
Unaccreted issuance costs (Series B)........................ (2,648,879) --
------------ ------------
Balance -- end of period.................................... 96,019,011 42,486,057
------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance -- beginning of period.............................. 927,676 1,638,092
Decrease during the period.................................. (5,903,556) (710,416)
------------ ------------
Balance -- end of period.................................... (4,975,880) 927,676
------------ ------------
RETAINED EARNINGS (DEFICIT)
Balance -- beginning of period.............................. (50,006,600) (12,057,969)
Net loss.................................................... (2,658,233) (17,987,779)
Series A pay-in-kind dividends.............................. (5,615,250) (10,383,919)
Series B pay-in-kind dividends.............................. (2,700,795) (9,576,933)
------------ ------------
Balance -- end of period.................................... (60,980,878) (50,006,600)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........................ $ 30,342,310 $ (6,501,867)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (2,658,233) $ (412,912)
Adjustments to reconcile loss to net cash used in operating
activities:
Amortization of investments............................... 224,970 1,374,914
Depreciation expense...................................... 252,863 168,127
Realized gain on sale of investments...................... (130,880) (552,381)
Realized loss on sale of fixed assets..................... -- 26,282
Changes in assets and liabilities:
Premiums receivable....................................... 693,155 (1,099,837)
Management fees receivable................................ 692,834 --
Accrued investment income................................. 57,857 1,404,271
Deferred acquisition costs................................ (728,020) (1,692,894)
Prepaid reinsurance premiums.............................. 22,452 --
Reinsurance recoverable................................... 22,463,874 --
Other assets.............................................. (1,420,701) (504,145)
Organization costs........................................ -- 493,115
Deferred premium revenue.................................. 611,187 837,277
Reserve for losses and loss adjustment expenses........... (28,594,946) 600,000
Reinsurance balances payable.............................. (42,116) 172,467
Accrued costs and expenses................................ (1,091,808) (296,584)
------------ ------------
Net cash provided by (used in) operating activities......... (9,647,512) 517,700
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired................. (71,185,421) (76,545,764)
Proceeds from sale of fixed maturity investments............ 46,092,067 73,479,977
Purchases of fixed assets................................... (74,789) (499,714)
Note receivable............................................. -- 250,000
------------ ------------
Net cash used in investing activities....................... (25,168,143) (3,315,501)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on issuance of Series C Preferred Stock............ 52,164,972 --
Issuance costs of Series C Preferred Stock.................. (1,203,000) --
------------ ------------
Net cash provided by financing activities................... 50,961,972 --
------------ ------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS............................................... 16,146,317 (2,797,801)
CASH AND SHORT-TERM INVESTMENTS -- BEGINNING OF PERIOD...... 2,598,140 7,199,106
------------ ------------
CASH AND SHORT-TERM INVESTMENTS -- END OF PERIOD............ $ 18,744,457 $ 4,401,305
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(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 Preferred Stock with a par value of $.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 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 a total of
270,000 shares of Common Stock at an exercise price of $.01 per share. The
warrants were valued at $4.99 per share and were 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 of $.01 per share for a price of $25 per share. The
shares of Series B Preferred Stock were entitled to a 20% quarterly compounding
6
<PAGE> 9
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 on
these warrants is subject to reduction based on the sales price of additional
common stock or equivalents. A reduction in the exercise price occurred on March
31, 1999 from $5.00 to $2.12 as a result of the Series B Preferred Stock
conversion and Series C Preferred Stock issuance. 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 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.
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 an aggregate sales price of $1,168,179. The company received cash
proceeds of $122,218 and the remaining $1,045,961 was financed by the Company by
granting employee loans up to a maximum of 90% of the purchase price of the
shares. The employee loans were granted in the form of promissory notes which
bear interest at a rate of 7% per annum and are repayable in three equal
installments on April 26, 2000, April 26, 2001 and April 26, 2002.
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.
7
<PAGE> 10
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 GA 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) Reserve 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 reserve is adequate to
cover the ultimate net cost of claims. The reserve 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 reserve on an ongoing basis and may
periodically adjust the reserve based on actual loss experience, the future mix
of business and economic conditions.
The reserve 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.
8
<PAGE> 11
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 fixed maturity securities. The
Company adopted SFAS 130 in 1998.
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 $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 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. The Cobalt Holdings note matures in
July, 2013 and may be prepaid without penalty.
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Other Assets
Other prepaid expenses................................... 228,938 222,752
Prepaid commitment fees.................................. 576,164 276,164
Fixed assets, net of depreciation........................ 1,425,527 1,603,600
Deposits................................................. 352,080 280,000
Accounts receivable...................................... 378,000 368,730
Other.................................................... 1,208,164 175,000
Total Other Assets....................................... $4,168,873 $2,926,246
</TABLE>
5. LOSSES AND LOSS EXPENSES
The reserve for losses and loss adjustment expenses ("LAE") is established
in an amount equal to CGA's estimate of general and case basis reserves 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. A case
basis reserve is based on the present value of the expected loss and LAE. The
general reserve for losses and LAE is
9
<PAGE> 12
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 30,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Case basis reserve........................................ $58,955,054 $88,200,000
General reserve........................................... 2,650,000 2,000,000
Total reserve for losses and LAE................ $61,605,054 $90,200,000
</TABLE>
The activity in the provision for losses and LAE is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1999 1998
---------------- ------------
<S> <C> <C>
Reserve for losses and LAE
Balance at January 1................................... $90,200,000 $ 55,000
Less reinsurance recoverables........................ 67,400,000 --
----------- -----------
Net Balance at beginning of period..................... 22,800,000 55,000
Net losses and loss expenses incurred.................. 7,750,000 22,745,000
Net losses and loss expenses paid...................... (13,881,072) --
----------- -----------
Net reserve for losses and LAE
Balance at end of period............................. 16,668,928 22,800,000
Reinsurance recoverable................................ 44,936,126 67,400,000
----------- -----------
Reserve for losses and LAE, gross of reinsurance
recoverable
Balance at end of period............................... $61,605,054 $90,200,000
</TABLE>
In October 1998, the credit ratings on asset-backed securities which
clients of CGA had purchased, and that were originated and serviced by
Commercial Financial Services, Inc., a credit-card debt collection company, were
withdrawn by the three credit rating companies that rated the most recently
issued Commercial Financial Services securities. The withdrawal of the ratings
was in response to allegations of accounting irregularities at Commercial
Financial Services. The rating agencies, investors and insurers commenced
investigations into the allegations. On December 11, 1998, Commercial Financial
Services filed a petition for relief under Chapter 11 of the United States
Bankruptcy Code with the Bankruptcy Court for the Northern District of Oklahoma.
The Bankruptcy Court approved Commercial Financial Services' rejection of the
servicing contracts and other agreements relating to its servicing of the
receivables underlying the Commercial Financial Services securities, effective
as of June 23, 1999. As a result, servicing in respect of the Commercial
Financial Services securities was transferred to the trustees of the respective
trusts which issued the securities (Bankers Trust Company, in the case of the
Commercial Financial Services securities guaranteed by CGA), as backup
servicers, and their designated sub-servicers.
Clients of CGA had previously purchased approximately $212 million face
amount of Commercial Financial Services securities, which exposure was
guaranteed by CGA. CGA had obtained reinsurance for about $162 million face
amount of this exposure. In December 1998, CGA established a $20.8 million case
basis reserve in respect of its exposure on Commercial Financial Services
securities, representing management's estimate of probable losses on this
exposure. In June 1999, CGA made claim payments on its guarantees in respect of
Commercial Financial Services securities in the aggregate amount of
approximately $58.9 million, of which $45 million consisted of payments from its
reinsurer and $13.9 million consisted of CGA's own funds, paid out of the case
basis reserve. In connection with this claim payment, CGA and its reinsurer
received approximately $58.9 million par value of Commercial Financial Services
bonds. The bonds
10
<PAGE> 13
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have no readily determinable market value and have not been recorded on the
books of CGA. Until CGA's exposure on Commercial Financial Services securities
reaches zero, any future interest payments received on these securities are
intended to be used to purchase additional Commercial Financial Services
securities from CGA's clients, thereby further reducing CGA's exposure.
As a result of these claim payments and interim principal repayments on the
Commercial Financial Services securities, CGA's gross exposure in respect of
Commercial Financial Services securities has been reduced to approximately
$138.7 million as of June 30, 1999. Of this exposure, approximately $106 million
is covered by reinsurance, leaving CGA with a remaining net exposure of
approximately $32.7 million. In June 1999, CGA added an additional $7.1 million
to its case basis reserve for Commercial Financial Services securities, which
brought the reserve up to $14 million. The increase to the reserve was based on
revised collection estimates on the assets underlying the Commercial Financial
Services securities. Aggregate incurred losses for Commercial Financial Services
securities total $27.9 million against par exposure of approximately $46.6
million.
6. 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
June 30, 1999 prepaid reinsurance of approximately $1.26 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.
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. 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>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Series A: 3,436,501 and 3,211,890 shares issued and
outstanding............................................. $ 34,365 $ 32,119
Additional paid in capital................................ 81,167,917 75,258,981
----------- -----------
Total Series A preferred stock............................ $81,202,282 $75,291,100
=========== ===========
Series B: nil and 1,600,000 shares issued and
outstanding............................................. $ -- $ 16,000
Additional paid in capital and pay-in-kind dividends...... -- 51,301,149
----------- -----------
Total Series B preferred stock............................ $ -- $51,317,149
=========== ===========
Series C: 44,971,346 and nil shares issued and
outstanding............................................. $ 449,713 $ --
Additional paid in capital................................ 50,512,259 --
----------- -----------
Total Series C preferred stock............................ $50,961,972 $ --
=========== ===========
</TABLE>
11
<PAGE> 14
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and 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
the 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. If the $60 million of Series B Preferred Stock commitments are
called, new shares will be issued with pay-in-kind dividends yielding 7%.
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. The Series C
Preferred Stock does not earn dividends.
8. COMMON STOCK
The number of common shares outstanding as of June 30, 1999 and the year
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Issued and outstanding...................................... 28,005,648 9,100,000
Weighted average number of shares........................... 18,709,501 9,100,000
</TABLE>
The Common Stock of the Company carries 2 votes per share on all matters
presented to the security holders of the Company for their approval.
12
<PAGE> 15
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share for the periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------- ----------------
<S> <C> <C>
Basic loss per share ("EPS")
Numerator:
Net loss.................................................. $ (2,658,233) $ (412,912)
Series A -- Pay-in-kind dividends paid.................... (5,615,250) (4,889,380)
Series A -- Pay-in-kind dividends accrued................. -- (191,320)
Series A -- Accretion to redemption value................. (228,566) (285,707)
Series A -- Accretion on warrants......................... (67,366) (140,344)
Series B -- Pay-in-kind dividends accrued................. (2,700,795) (4,555,022)
Series B -- Accretion to redemption value................. (50,137) (125,341)
------------ ------------
Net Loss Available to Common Shareholders................... $(11,320,347) $(10,600,026)
------------ ------------
Denominator:
Weighted Average Shares Outstanding....................... 18,709,501 9,100,000
------------ ------------
Basic EPS................................................. $ (0.61) $ (1.16)
============ ============
Diluted Loss Per Share Numerator.......................... $(11,320,347) $(10,600,026)
------------ ------------
Denominator............................................... 18,709,501 9,100,000
------------ ------------
Diluted EPS............................................... $ (0.61) $ (1.16)
============ ============
</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 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 on June 17, 1997. Each such warrant represents the right to
purchase one share of Common Stock on or prior to June 17, 2007. The exercise
price of the warrants was lowered from $5 per share to $2.12 per share in
connection with the Series B preferred stock conversion into Common Stock and
the issuance of the Series C Preferred Stock. All such warrants were outstanding
as of June 30, 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 vest ratably over a four-year
period and expire if not exercised within thirty days of the employee's
termination of employment. As of June 30, 1999, there were 1,315,984 warrants
outstanding of which 657,992 warrants were exercisable. As of December 31, 1998
there were 1,348,129 warrants outstanding of which 337,032 warrants were
exercisable.
13
<PAGE> 16
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INSURANCE IN FORCE
The following table shows the net par outstanding of insured obligations,
net of reinsurance, at June 30, 1999 and December 31, 1998 by asset type:
<TABLE>
<CAPTION>
1999 1998
ASSET TYPE (IN 000'S) (IN 000'S)
- ---------- ---------- ----------
<S> <C> <C>
Auto........................................................ $ 10,540 $ 3,158
CLO's/CBO's................................................. 260,615 189,375
Commercial mortgage-backed securities....................... 379,316 185,754
Corporate asset-backed securities........................... 87,490 75,000
Credit card receivables..................................... 140,751 185,732
Equipment................................................... 19,807 27,129
Future flows................................................ 88,880 39,108
Home equity loans........................................... 309,304 236,381
REIT Debt................................................... 211,774 381,777
REIT Preferred.............................................. 70,000 70,000
Sovereign debt.............................................. 110,000 120,000
XOL Reinsurance............................................. 91,250 46,250
---------- ----------
Total....................................................... $1,779,727 $1,559,664
========== ==========
</TABLE>
The following table presents the credit ratings of the above assets, based
on net par outstanding at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
"AAA"....................................................... 4.5% 4%
"AA"........................................................ 2.1% 3%
"A"......................................................... 18.6% 12%
"BBB"....................................................... 63.7% 67%
"BB"........................................................ 9.3% 11%
Not rated................................................... 1.8% 3%
---- ---
Total....................................................... 100% 100%
==== ===
</TABLE>
11. OTHER COMPREHENSIVE INCOME
Other comprehensive income is comprised of unrealized gains and losses on
investments. Accumulated other comprehensive income is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
---------------- -----------------
<S> <C> <C>
Unrealized appreciation (depreciation) on
investments
Balance -- beginning of period...................... $ 927,676 $1,638,092
Decrease during period.............................. (5,903,556) (710,416)
----------- ----------
Balance -- end of period............................ $(4,975,880) $ 927,676
=========== ==========
</TABLE>
12. 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
14
<PAGE> 17
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
separate legal entities and 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 six months ended June 30, 1999:
<TABLE>
<CAPTION>
CGA CGAIM OTHER(A) TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned................. $ 6,547,542 $ -- $ -- $ 6,547,542
Net investment income............... 3,769,116 39,948 210,660 4,019,724
Net realized gains.................. 130,880 -- -- 130,880
Management fees..................... -- 1,624,055 -- 1,624,055
Intersegment revenue................ -- 118,789 118,356 237,145
TOTAL REVENUES...................... 12,559,346
EXPENSE ITEMS
Operating expenses.................. 735,090 5,250,217 767,018 6,752,325
Acquisition costs................... 315,254 -- -- 315,254
Commitment fees..................... 300,000 -- -- 300,000
Excess of loss facility............. 100,000 -- -- 100,000
Losses and loss adjustment
expenses.......................... 7,750,000 -- -- 7,750,000
TOTAL EXPENSES...................... -- 15,217,579
NET INCOME.......................... 1,247,789 (3,468,021) (438,001) (2,658,233)
ASSETS
Total assets........................ 186,579,341 2,922,421 31,070,141 220,571,903
============ =========== =========== ============
</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 six months ended June 30, 1998:
<TABLE>
<CAPTION>
CGA CGAIM OTHER TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned................. $ 2,720,476 $ -- $ -- $ 2,720,476
Net investment income............... 4,134,921 14,429 63,545 4,212,895
Net realized gains.................. 552,381 -- -- 552,381
Management fees..................... -- 681,995 -- 681,995
TOTAL REVENUES...................... 8,167,747
EXPENSE ITEMS
Operating expenses.................. 627,472 5,838,139 971,927 7,437,538
Acquisition Costs................... 145,587 -- -- 145,587
Commitment Fees..................... 297,534 -- -- 297,534
Excess of loss facility............. 100,000 -- -- 100,000
Losses and loss adjustment
expenses.......................... 600,000 -- -- 600,000
TOTAL EXPENSES...................... 8,580,659
NET INCOME.......................... 5,637,185 (5,165,637) (884,460) (412,912)
ASSETS
Total Assets........................ 137,813,058 2,278,891 10,777,343 150,869,292
============ =========== =========== ============
</TABLE>
15
<PAGE> 18
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------- ----------------
<S> <C> <C>
REVENUES
Total revenues for reportable segments...................... $ 12,559,346 $ 8,167,747
Elimination of intersegment revenues........................ (237,145) --
------------ ------------
Total consolidated revenues................................. $ 12,322,201 $ 8,167,747
============ ============
EXPENSES
Total expenses for reportable segments...................... $ 15,217,579 $ 8,580,659
Elimination of intersegment operating expenses.............. (237,145) --
------------ ------------
Total consolidated expenses................................. $ 14,980,434 $ 8,580,659
============ ============
ASSETS
Total assets for reportable segments........................ $220,571,903 $150,869,292
Intercompany loans.......................................... (11,122,336) (7,522,773)
Other intercompany balances................................. (2,863,135) --
------------ ------------
Total consolidated assets................................... $206,586,432 $143,346,519
============ ============
</TABLE>
13. 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.
14. STATUTORY FINANCIAL DATA
Under The Insurance Act of 1978, amendments thereto and related
regulations, the Company 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
June 30, 1999 and December 31, 1998 were $143,746,566 and $114,681,031
respectively. Statutory net income for the six months ended June 30, 1999 was
$519,769 and statutory net loss for the year ended December 31, 1998 was
$11,264,214. 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.
15. COMPARATIVE FINANCIAL INFORMATION
The comparative figures for the year ended December 31, 1998 are based on
audited financial statements as of that date.
16
<PAGE> 19
ITEM 2. 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 report.
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 the State of
Delaware 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 totaling $105
million, (ii) common stock totaling $45.5 million and (iii) conditional
commitments to purchase $60 million of additional preferred stock. On March 31,
1999 the Company sold 43,997,863 shares of Series C Preferred Stock to existing
shareholders for an aggregate sales price of approximately $51 million.
Concurrent with the sale of the Series C Preferred Stock, all the outstanding
shares of Series B Preferred Stock were exchanged for shares of Common Stock. On
April 26, 1999, the Company sold 973,483 shares of Series C Preferred Stock to
employees of the Company and its subsidiaries for an aggregate sales price of
approximately $1.2 million.
RESULTS OF OPERATIONS
Total revenues for the quarter ended June 30, 1999 were $6.3 million, of
which $3.5 million was from financial guaranty insurance premiums, $0.5 million
was from investment management and advisory fees, $2.3 million was from
investment income. Total revenues for the quarter ended June 30, 1998 were $5.3
million, of which $1.7 million was from financial guaranty insurance premiums,
$.5 million was from investment management and advisory fees, $2.3 million was
from investment income and $0.8 million from net realized gains on the sale of
investments. Net premiums earned were derived from $4.4 million of gross
premiums written, of which $0.4 million were ceded under reinsurance agreements.
The 110% increase in net premiums earned in the quarter ended June 30, 1999
compared to the quarter ended June 30, 1998 reflects CGA's increased insured
exposure. The net par outstanding insured obligations increased by 41% from $1.3
billion at June 30, 1998 to $1.8 billion as of June 30, 1999.
Management fees earned by CGAIM remained constant on a comparable quarter
basis although assets under management increased by 68% from $1.2 billion at
June 30, 1998 to $2.0 billion as of June 30, 1999. A portion of the decrease in
management fees earned as a percentage of assets under management is
attributable to several clients of CGAIM having resecuritized approximately $805
million in assets over the period between June 30, 1998 and June 30, 1999. The
asset management fees payable to CGAIM in these resecuritization transactions
are lower than the asset management fees payable to CGAIM while these assets
17
<PAGE> 20
remained in these clients' investment portfolios. In addition, due to the credit
spread widening faced by the capital markets generally in September and October
of 1998, several clients of CGAIM encountered liquidity difficulties. At the
request of these clients, CGAIM agreed to reduce the amount of the asset
management fee.
The amount of CGA's insured portfolio was $1.8 billion net par as of June
30, 1999. The weighted average term of the insured securities at June 30, 1999
was approximately 8.5 years. The following table shows the net par insured
obligations at June 30, 1999 and December 31, 1998 by asset type:
<TABLE>
<CAPTION>
1999 1998
ASSET TYPE (IN 000'S) (IN 000'S)
- ---------- ---------- ----------
<S> <C> <C>
Auto................................................ $ 10,540 $ 3,158
Commercial loan obligations/Commercial bond
obligations....................................... 260,615 189,375
Commercial mortgage-backed securities............... 379,316 185,754
Corporate asset-backed securities................... 87,490 75,000
Credit card receivables............................. 140,751 185,732
Equipment........................................... 19,807 27,129
Future flows........................................ 88,880 39,108
Home equity loans................................... 309,304 236,381
Real estate investment trust debt................... 211,774 381,777
Real estate investment trust preferred stock........ 70,000 70,000
Sovereign debt...................................... 110,000 120,000
Excess of loss reinsurance.......................... 91,250 46,250
Total............................................... $1,779,727 $1,559,664
---------- ----------
</TABLE>
The following table presents the credit ratings of the above assets, based
on net par outstanding at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
"AAA"....................................................... 4.5% 4%
"AA"........................................................ 2.1% 3%
"A"......................................................... 18.6% 12%
"BBB"....................................................... 63.7% 67%
"BB"........................................................ 9.3% 11%
Not rated................................................... 1.8% 3%
Total....................................................... 100% 100%
----- ----
</TABLE>
Net investment income was $2.3 million for the quarter ended June 30, 1999
and also for the quarter ended June 30, 1998. The value of the investment
portfolio, other investments, and cash was $168.3 million at June 30, 1999
compared to $133.1 million at June 30, 1998, however, the investment allocations
and lower yields on the investments in the current quarter compared to the
quarter ended June 30, 1998 resulted in only a slight increase in investment
income. Cumulative unrealized losses on the investment portfolio as of June 30,
1999 were $5 million.
Operating expenses for the quarter ended June 30, 1999 were $3.2 million
compared to $4.4 million for the quarter ended June 30, 1998. This decrease is
non-recurring as it resulted from CGAIM expensing $1.2 million of client
acquisition costs in the second quarter of 1998 that had previously been
capitalized. Operating expenses are primarily personnel, legal, and
administrative in nature.
Total revenues for the six months ended June 30, 1999 were $12.3 million
compared to $8.1 million for the six months ended June 30, 1998. The $4.2
million increase is primarily attributable to the increase in premiums earned
due to the growth in insured par exposure. Net investment income for the six
months ended June 30, 1999 decreased by $0.2 million compared to the same period
in 1998 primarily due to lower yields on the Company's investments. Operating
expenses for the six months ended June 30, 1999 decreased by $0.9
18
<PAGE> 21
million, but would have been $0.3 million higher than the comparable period in
1998 except for expensing the $1.2 million of client acquisition costs in the
second quarter of 1998 referred to above.
In October 1998, the credit ratings on asset-backed securities which
clients of CGA had purchased, and that were originated and serviced by
Commercial Financial Services, Inc., were withdrawn by the three credit rating
companies that rated the most recently issued Commercial Financial Services
securities. The withdrawal of the ratings was in response to allegations of
accounting irregularities at Commercial Financial Services. The rating agencies,
investors and insurers commenced investigations into the allegations. On
December 11, 1998, Commercial Financial Services filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court
for the Northern District of Oklahoma (the "Bankruptcy Court"). The Bankruptcy
Court approved Commercial Financial Services' rejection of the servicing
contracts and other agreements relating to its servicing of the receivables
underlying the Commercial Financial Services securities, effective as of June
23, 1999. As a result, servicing in respect of the Commercial Financial Services
securities was transferred to the trustees of the respective trusts which issued
these securities (Bankers Trust Company, in the case of the Commercial Financial
Services securities guaranteed by CGA), as backup servicers, and their
designated sub-servicers.
Clients of CGA had previously purchased approximately $212 million face
amount of Commercial Financial Services securities, which exposure was
guaranteed by CGA. CGA had obtained reinsurance for about $162 million face
amount of this exposure. In December 1998, CGA established a $20.8 million case
basis reserve in respect of its exposure on Commercial Financial Services
securities, representing management's estimate of probable losses on this
exposure. In June 1999, CGA made claim payments on its guarantees in respect of
Commercial Financial Services securities in the aggregate amount of
approximately $58.9 million, of which $45 million consisted of payments from its
reinsurer and $13.9 million consisted of CGA's own funds, paid out of the case
basis reserve. In connection with this claim payment, CGA and its reinsurer
received from CGA's clients approximately $58.9 million par value of Commercial
Financial Services bonds. The bonds have no readily determinable market value
and have not been recorded on the books of CGA. Until CGA's exposure on
Commercial Financial Services securities reaches zero, any future interest
payments received on these securities are intended to be used to purchase
additional Commercial Financial Services securities from CGA's clients, thereby
further reducing CGA's exposure.
As a result of these claim payments and interim principal repayments on the
Commercial Financial Services securities, CGA's gross exposure in respect of
Commercial Financial Services securities has been reduced to approximately
$138.7 million as of June 30, 1999. Of this exposure, approximately $106 million
is covered by reinsurance, leaving CGA with a remaining net exposure of
approximately $32.7 million. In June 1999, CGA added an additional $7.1 million
to its case basis reserve for Commercial Financial Services securities which
brought the reserve up to $14 million. The increase to the reserve was based on
revised collection estimates on the assets underlying the Commercial Financial
Services securities. Aggregate incurred losses for Commercial Financial Services
securities total $27.9 million against par exposure of approximately $46.6
million.
LIQUIDITY AND CAPITAL RESOURCES
The Company initially 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 $11.5 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. On a
consolidated basis, the Company used $9.6 million of cash from operating
activities during the six months ended June 30, 1999 compared to generating $0.5
million for the six months ended June 30, 1998. The Company would have generated
$4.2 million from operating activities during the six months ended June 30, 1999
if the payments related to the Commercial Financial Services securities had not
been incurred.
19
<PAGE> 22
The Company applied $25.1 million of net cash to investing activities
during the six months ended June 30, 1999, compared to $3.3 million in the first
six months of 1998. Cash flows from financing activities in the six months ended
June 30, 1999 resulted from the sale of Series C Preferred Stock, which raised
net proceeds of $50.9 million.
On April 14, 1999 the credit support arrangements referred to in footnote
6. were terminated in their entirety. In connection with this 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 sold 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 total proceeds 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 commencing April 26, 2000.
The Company does not expect to pay cash dividends to its shareholders.
CGA's Board of Directors has passed a resolution that CGA will not declare or
pay cash dividends during its first five years of operations. After this
five-year period, 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 limitations under Bermudian insurance regulations that require
minimum solvency margins and liquidity ratios.
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 several of its 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.
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 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 has reviewed its exposure to Year 2000 issues resulting from
its customers and vendors' computer systems. The Company has contacted its
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 these 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.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Report on Form 10-K or any other
written or oral statements made by or on behalf of the
20
<PAGE> 23
Company may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors (which are described in more
detail herein and in other documents filed by the Company with the Securities
and Exchange Commission) include, but are not limited to, (i) financial
difficulties encountered by an insured of the Company's insurance company
subsidiary, (ii) uncertainties relating to government and regulatory policies
(such as subjecting the Company and/or its subsidiaries to insurance regulation
or taxation in additional jurisdictions), (iii) the legal environment, (iv) the
uncertainties of the reserving process, (v) risks relating to the claims-paying
ability rating of the Company's insurer subsidiary, (vi) loss of the services of
any of the Company's executive officers, (vii) changing rates on inflation and
other economic conditions, (viii) ability to collect reinsurance recoverables,
(ix) developments in global financial markets which could affect the Company's
investment portfolio, and (xii) risks associated with the development of new
products and services. The words "believe", "anticipate", "considered to be",
"project", "plan", "expect", "intend", "will likely result" or "will continue"
and similar expressions identify forward-looking statements, whether as a result
of new information, future events or otherwise.
21
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 26, 1999, CGA Group sold 973,483 shares of its Series C Preferred
Stock to employees of CGA Group and its subsidiaries. CGA Group sold these
shares for $1.20 per share, for a total proceeds of $1.2 million. The shares
were 90% financed by CGA Group at 7% per annum with equal principal installments
due annually over a three-year period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part
of this Report.
(b) Reports on Form 8-K
On April 8, 1999, the Company filed a Current Report on Form 8-K with
respect to the completion of the sale of 43,997,863 shares of Series C Preferred
Stock to existing investors of the Company for net cash proceeds of
$50,996,794.50.
II-1
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CGA GROUP, LTD.
Registrant
/s/ JAMES R. REINHART
--------------------------------------
JAMES R. REINHART
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date: August 16, 1999
II-2
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3.1 Memorandum of Association and Certificate of Incorporation
of CGA Group, Ltd., incorporated herein by reference to
Exhibit 3.1 to the Registration Statement on Form S-1 (No.
333-7944) of the Company (the "Registration Statement")
3.2 Amended and Restated Bye-laws of CGA Group, Ltd.,
incorporated herein by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K filed on April 8, 1999
(the "April 8, 1999 8-K")
3.3 Amended and Restated Appendices to Bye-laws of CGA Group,
Ltd., incorporated herein by reference to Exhibit 4.3 to the
April 8, 1999 8-K
4.1 CGA Group, Ltd. Shareholders Agreement, dated as of June 12,
1997, as amended and restated as of March 31, 1999,
incorporated herein by reference to Exhibit 4.4 to the April
9, 1999 8-K
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, incorporated herein by reference to Exhibit
10.1 to the Registration Statement
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, incorporated herein by reference
to Exhibit 10.2 to the Registration Statement
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, incorporated herein by reference to
Exhibit 10.3 to the Registration Statement
10.4 Right of First Refusal Agreement dated as of June 17, 1997,
by and between CGA Group, Ltd. and Capital Reinsurance
Company, incorporated herein by reference to Exhibit 10.4 to
the Registration Statement
10.5 Discretionary Investment Advisory Agreement, dated as of
December 18, 1996 between Alliance Capital Management, L.P.
and Commercial Guaranty Assurance, Ltd., incorporated herein
by reference to Exhibit 10.5 to the Registration Statement
10.6 Investment Management Agreement dated as of December 27,
1996, between J.P. Morgan Investment Management Inc. and
Commercial Guaranty Assurance, Ltd., incorporated herein by
reference to Exhibit 10.6 to the Registration Statement
10.7 Letter Agreement, dated June 17, 1997 between CGA Group,
Ltd. and DCR (and Attachments), incorporated herein by
reference to Exhibit 10.7 to the Registration Statement
10.8 Employee Warrant Agreement, incorporated herein by reference
to Exhibit 10.8 to the Registration Statement
10.9 CGA Group, Ltd. Employee Stock Warrant Plan, incorporated by
reference to Exhibit 10.9 to the Registration Statement
10.10 CGA Group, Ltd. Sponsoring Investors and Founders Stock
Warrant Plan, incorporated herein by reference to Exhibit
10.10 to the Registration Statement
10.11 Excess of Loss Agreement, dated as of June 12, 1997, by and
between CGA Group, Ltd. and KRE Reinsurance Ltd.,
incorporated herein by reference to Exhibit 10.11 to the
Registration Statement
10.12 Employment Agreement, as of January 1, 1997, by and between
CGA Group, Ltd. and Richard A. Price, incorporated by
reference to Exhibit 10.12 to the Registration Statement
</TABLE>
II-3
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.13 Employment Agreement, as of January 1, 1997, by and between
CGA Investment Management, Inc. and Jean-Michel Wasterlain,
incorporated herein by reference to Exhibit 10.13 to the
Registration Statement
10.14 Employment Agreement, as of June 30, 1997, by and between
CGA Investment Management, Inc. and Michael M. Miran,
incorporated herein by reference to Exhibit 10.18 to the
Registration Statement
10.15 Employment Agreement, as of January 1, 1997, by and between
CGA Investment Management, Inc. and Kem H. Blacker,
incorporated herein by reference to Exhibit 10.16 to the
Registration Statement
10.16 Employment Agreement, as of August 1, 1997, by and between
CGA Investment Management, Inc. and Landon D. Parsons,
incorporated herein by reference to Exhibit 10.16 to the
1998 10-K
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.,
incorporated herein by reference to Exhibit 10.17 to the
Registration Statement
10.18 Series C Convertible Cumulative Voting Preferred Stock
Subscription Agreement, dated as of March 31, 1999,
incorporated herein by reference to Exhibit 10.18 to the
Registration Statement.
10.19 Agreement dated as of March 1, 1999 by and among CGA Group,
Ltd. and the holders of the Series C Preferred Stock,
incorporated herein by reference to Exhibit 10.19 to the
Registration Statement.
10.20 Restricted Stock Purchase Agreement and Promissory Note,
dated as of April 26, 1999, between CGA Group, Ltd. and the
employees thereof listed in Exhibit B thereto.
10.21 CGA Group, Ltd. Chief Financial Officer's Certificate As To
Adjustment to Exercise Price of Warrants Issued Pursuant to
the Sponsoring Investors and Founders Stock Warrant Plan,
dated May 18, 1999.
27.1 Financial Data Schedule
</TABLE>
II-4
<PAGE> 1
Exhibit 10.20
[FORM OF]
RESTRICTED STOCK PURCHASE AGREEMENT
RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of
April 26, 1999 ("Effective Date"), between CGA Group, Ltd., a Bermuda
corporation ("Seller"), and [____________] ("Purchaser").
WHEREAS, the Board of Directors of Seller has directed that Seller
offer to sell to Purchaser an aggregate of [_______] shares of its Series C
Convertible Cumulative Voting Preference Shares, par value $.01 per share (the
"Series C Preferred Stock"), on the terms and subject to the conditions set
forth herein;
WHEREAS, Purchaser is employed by Seller or a Subsidiary of Seller and
desires to purchase the shares of Series C Preferred Stock so offered on the
terms and subject to the conditions set forth herein; and
WHEREAS, concurrently herewith, Purchaser has executed and delivered a
promissory note to seller dated as of the date hereof.
NOW, THEREFORE, to implement the foregoing and in consideration of the
mutual agreements contained herein, the parties hereto agree as follows:
SECTION 1. PURCHASE OF SERIES C PREFERRED STOCK
(a) Purchase and Sale of Shares. Subject to the terms set
forth in this Agreement, and in reliance upon the representations, warranties
and agreements of Purchaser contained herein, Seller hereby agrees to sell to
Purchaser, and Purchaser agrees to purchase, a total of [___________] shares of
Series C Preferred Stock (the "Purchased Shares"), at a price of $1.20 per
share, which represents an aggregate purchase price of $_______ (the "Purchase
Price"), with such transaction to occur on the Purchase Date (as defined below).
(b) Purchase Loan. On the Purchase Date (as defined below),
Seller will make a loan to Purchaser (the "Loan") in the amount of $ _______ for
the purpose of financing a portion of the aggregate Purchase Price payable by
Purchaser (maximum 90% of Purchase Price). The Loan will be evidenced by a
promissory note to be executed and delivered by Purchaser (a "Note")
substantially in the form of EXHIBIT A hereto.
(c) Closing of the Purchase and Sale; Payment for Shares. The
closing of the transactions contemplated hereby shall take place at the offices
of Seller on April 26, 1999, or at such time, date and place as Seller and
Purchaser shall mutually agree (the "Purchase Date"). At the closing, Purchaser
shall pay the Purchase Price to Seller, by executing and delivering the Note and
by payment of $_________ in cash or by cash equivalent acceptable to the
Company, and as promptly as reasonably practicable thereafter, Seller shall
deliver to Purchaser a duly executed certificate representing the Purchased
Shares.
(d) Voting and Dividend Rights. Purchaser will have all voting
rights with respect to the Purchased Shares. Cash dividends and distributions
payable with respect to the
<PAGE> 2
Purchased Shares shall be the property of the Purchaser. Any other interests of
Purchaser with respect to the Purchased Shares shall be determined as otherwise
set forth in this Agreement, including the vesting provisions of Section 2
below.
SECTION 2. VESTING
(a) Vesting and Transfer Restrictions. The Purchased Shares
will be subject to the vesting and transfer restrictions to the extent set forth
in this Section 2 (such Purchased Shares are sometimes referred to herein as
"Unvested Shares" during the period that such restrictions apply and as "Vested
Shares" after such restrictions have expired). Until the lapsing of the vesting
restrictions set forth in this Section 2, Unvested Shares may not be sold,
transferred, pledged, encumbered or otherwise disposed of by Purchaser (except
by will or by the laws of descent and distribution) and shall be subject to the
Call Option set forth in Section 3 hereof.
(b) Vesting Events. The Purchased Shares shall become Vested
Shares (i) immediately on the Purchase Date for the number of shares represented
by the cash payment made by the Purchaser and (ii) on each date that the
Purchaser makes a principal payment on the Note, for the number of shares
represented on such repayment (based on the Purchase Price per share)
Notwithstanding the foregoing, the Purchased Shares that are Unvested Shares
shall become earlier vested upon an Involuntary Termination or a Change in
Control, each as defined below in this Section 2.
(c) Termination of Employment.
(i) Involuntary Termination. In the event of
termination of employment of Purchaser prior to vesting of any Purchased Shares
either (a) by Seller without Cause (as defined below) or (b) upon the Disability
(as defined below) or death of Purchaser (each such event, an "Involuntary
Termination"), the vesting and transfer restrictions of this Section 2 on any
Unvested Shares shall immediately lapse, and such shares shall become Vested
Shares.
(1) For purposes hereof, the term "Cause" shall mean
(i) the willful failure by the Purchaser to substantially perform his or her
duties as an employee of the Seller (other than due to death or Disability)
after reasonable notice to the Purchaser of such failure, (ii) the Purchaser's
engaging in serious misconduct that is injurious to the Seller in any way,
including, without limitation, by way of damage to its business reputation or
standing, or (iii) the Purchaser having been convicted of, or entered a plea of
nolo contendere to, a crime that constitutes a felony or involving moral
turpitude. Notwithstanding the foregoing, in the event a Purchaser is party to
an employment (or similar) agreement with the Company or any Subsidiary (as
defined below) that defines the term "cause," such definition shall apply for
purpose of this Agreement.
(2) For purposes hereof, the term "Disability" shall
mean the total and permanent disability of the Purchaser, as determined by the
Board of Directors ("Board") in its sole discretion.
(ii) Voluntary Termination. In the event of any
termination of the employment of Purchaser prior to vesting of any Purchased
Shares for any reason other than an Involuntary Termination (each such event, a
"Voluntary Termination"), Seller shall have a Call
2
<PAGE> 3
Option under Section 3 on the Unvested Shares of Purchaser, and may accelerate
the principal and interest due under the Note (in accordance with its terms).
(3) For purposes hereof, "Subsidiary" shall mean
Commercial Guaranty Assurance, Ltd. and CGA Investment Management, Inc.
(d) Change in Control. In the event that a Change in Control
(as defined below) of Seller occurs prior to vesting of any Purchased Shares,
the vesting and transfer restrictions of this Section 2 will automatically lapse
with respect to all Unvested Shares. For purposes hereof, a "Change in Control"
shall be deemed to have occurred upon the occurrence of one of the following
events:
(i) The consummation of the acquisition by any person (as
such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act
of 1934 (the "Exchange Act")) of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%)
of the combined voting power of the then outstanding voting securities of the
Seller;
(ii) The cessation, for any reason, by the individuals
who, as of the Closing Date, are members of the Board to constitute a majority
of such Board, unless the designation of any new individual as a director is
pursuant to the right to designate a director granted to certain members under
the By-laws of Seller, and such new director shall be considered as a member of
such Board; or
(iii) Approval by stockholders of: (1) a merger or
consolidation if the stockholders of the Seller immediately before such merger
or consolidation do not, as a result of such merger or consolidation, own,
directly or indirectly, more than fifty percent (50%) of the combined voting
power of the then outstanding voting securities of the entity resulting from
such merger or consolidation; (2) an agreement for the sale or other disposition
of all or substantially all of the assets of Seller other than an agreement for
such sale or disposition to a corporation which, immediately prior to such sale
or disposition, is owned directly or indirectly by the stockholders of Seller in
materially the same proportion as their ownership of stock immediately prior to
such sale or disposition.
For purposes hereof, the term "Change in Control" shall not mean the
following:
(a) An initial public offering of the capital stock of the
Company resulting in net proceeds to the Company of at least $50 million;
(b) A merger of the Company with, or acquisition of the Company
by, any other entity if such merger or acquisition, as applicable, is approved
by the Board or any other recapitalization or change in capital structure,
whether public or private, of the Company, in each case, after which, and for a
period of one year following any such transaction, the Purchaser holds the same
position as set forth in his employment agreement with the Company (or, in the
case of a Purchaser who is not employed pursuant to an employment agreement, has
the same position, duties and responsibilities as existed prior to any such
transaction), has the same chain of command, reports to the same individual or
individuals, and suffers no material change in his employment.
3
<PAGE> 4
Notwithstanding anything to the contrary contained above, a Change in
Control shall not be deemed to occur solely because more than fifty percent
(50%) of the combined voting power of the then outstanding securities is, or all
or substantially all of the assets of the Company are, acquired by: (i) a
trustee or other fiduciary holding securities under one or more employee benefit
plans maintained for employees of the Company; or (ii) any corporation which,
immediately prior to such acquisition, is owned directly or indirectly by the
stockholders of the Company in materially the same proportion as their ownership
of stock immediately prior to such acquisition.
SECTION 3. CALL OPTION ON UNVESTED SHARES
(a) Voluntary Termination. If Purchaser shall no longer be
employed by Seller by reason of a Voluntary Termination, then Seller, by written
notice (the "Call Notice") to Purchaser (or his legal representative), shall
have the right and option (the "Call Option"), but not the obligation, to
purchase all or any portion of the Purchased Shares that remain Unvested Shares,
at the repurchase price set forth in Section 3(b) hereof, for a period of ninety
(90) days following the effective date of such termination. If Seller exercises
such right, Purchaser shall have the obligation to sell such Purchased Shares
specified in the Call Notice, at the Repurchase Price (as set forth below) of
such repurchased shares. Notwithstanding anything herein to the contrary, Seller
may assign its rights under this Section 3 to any of its Subsidiaries.
(b) Repurchase Price. For purposes of this Section 3, Seller
may repurchase Unvested Shares at a per share repurchase price equal to the sum
of (A) 1.20 per share, plus (B) any accrued but unpaid interest on the Note
through the closing of the Call Option, calculated on a per share basis (subject
to any applicable tax withholding requirements in the event such repurchase
price exceeds the fair market value of the shares on the closing of the Call
Option). Payment of the repurchase price may be made, in the discretion of
Seller, in cash, cash equivalent, by offset of the corresponding principal
amount due under the Note upon a Voluntary Termination, or by a combination of
the foregoing forms of payment. Any amount of appreciation equal to the excess
of fair market value at such time and the Purchaser's original purchase price
shall be forfeited by Purchaser to Seller, and Purchaser shall have no rights
whatsoever with respect thereto.
(c) Closing. The closing of any purchase under this Section 3
shall be held at the principal offices of Seller on the 30th day after the date
of the Call Notice, or at such other time and place as Seller and Purchaser
agree upon. At such closing, Purchaser shall deliver or cause the delivery of
certificates representing the Purchased Shares to be sold, duly endorsed for
transfer and accompanied by all requisite stock transfer taxes, and, except as
specifically provided herein, such Purchased Shares shall be free and clear of
any liens, claims, options, charges, encumbrances or rights of others arising
through the action or inaction of Purchaser, and Purchaser shall so represent
and warrant, and further represent and warrant that he is the beneficial owner
of such Purchased Shares. Seller shall deliver at the closing payment for such
Purchased Shares by check.
SECTION 4. SHAREHOLDERS AGREEMENT
As a condition of this Agreement and the Purchaser's right to
acquire the Purchased Shares hereunder, the Purchaser shall be required to
execute and agree to be bound by the terms and conditions of the CGA Group, Ltd.
Shareholders Agreement dated as of June 12, 1997, as amended and restated as of
March 31, 1999, as such Shareholders Agreement applies to holders of Series C
4
<PAGE> 5
Preferred Stock, and the Company agrees that Purchaser shall be afforded the
rights and privileges set forth in such Shareholders Agreement with respect to
the Purchased Shares upon their conversion into Company common stock.
SECTION 5. ISSUANCE OF SHARES; RIGHTS AS A STOCKHOLDER
(a) Stock Certificates. Stock certificates representing the
Purchased Shares shall be registered in the name of Purchaser.
(b) Legends. Certificates representing Purchased Shares to
which the provisions of this Agreement apply shall bear the following legends:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN COMPLIANCE WITH SAID ACT AND THE RULES
AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES
LAWS.
THIS CERTIFICATE AND THE SHARES OF STOCK AND ALL RIGHTS
HEREBY REPRESENTED ARE SUBJECT TO THE TERMS, CONDITIONS AND
RESTRICTIONS SET FORTH IN THE RESTRICTED STOCK PURCHASE
AGREEMENT DATED APRIL 26, 1999 AND THE SHAREHOLDERS
AGREEMENT DATED JUNE 12, 1997, AS AMENDED AND RESTATED AS OF
MARCH 31, 1999, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN
ACCORDANCE WITH THE TERMS AND CONDITIONS OF SUCH AGREEMENTS,
COPIES OF WHICH ARE ON FILE AT THE OFFICES OF CGA GROUP,
LTD.
(c) Rights as a Stockholder. Except as otherwise provided in
this Agreement, Purchaser shall have the same rights and privileges as any other
stockholder holding the same class of stock, including, without limitation, the
right to vote the Purchased Shares and to receive distributions and dividends on
such Purchased Shares. Purchaser's rights as a shareholder are subject to the
making of provision for the payment or withholding of any taxes to be withheld
pursuant to any applicable law in respect of the receipt or lapse of forfeiture
with respect to such shares.
SECTION 6. REPRESENTATIONS AND WARRANTIES
(a) Representations and Warranties of Seller. Seller represents
and warrants to Purchaser that:
5
<PAGE> 6
(i) Seller is a corporation duly organized, validly
existing and in good standing under the laws of Bermuda, and has the requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
(ii) The execution, delivery and performance of this
Agreement, and the delivery of the Purchased Shares have been duly authorized by
all necessary corporate action on the part of Seller.
(iii) This Agreement has been duly executed and delivered by
Seller and constitutes the legal, valid and binding obligations of Seller,
enforceable against Seller in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency or other similar laws affecting
the enforcement of creditors of creditors rights in general or general
principles of equity.
(b) Representations and Warranties of Purchaser. Purchaser
represents and warrants to Seller that:
(i) Purchaser is acquiring the Purchased Shares for his or
her own account and not with a view to distributing or reselling the Purchased
Shares in any transaction that would be in violation of any federal or state
securities laws;
(ii) Purchaser (a) is familiar with the business of Seller,
(b) has had an opportunity to discuss with representatives of Seller the
condition of and prospects for the continued operation of Seller and such other
matters as he deemed appropriate in considering whether to acquire the Purchased
Shares and (c) has been provided access to all available information about
Seller requested by him;
(iii) Purchaser understands that the Purchased Shares
have not been registered under the Act, or registered or qualified under the
securities laws of any state, and that she may not sell or otherwise transfer
the Purchased Shares unless the Purchased Shares are subsequently registered
under the Act and registered or qualified under applicable state securities
laws, or unless an exemption is available that permits such sale or transfer
without such registration and qualification;
(iv) Purchaser's intention is not to transfer, sell or
otherwise dispose of any Purchased Shares prior to the registration thereof
other than through a transaction that would not require registration of such
shares under the Act; and
(v) this Agreement has been duly executed and delivered by
Purchaser and constitutes the legal, valid and binding obligation of Purchaser,
enforceable against Purchaser in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights in general or general
principles of equity.
SECTION 7. MISCELLANEOUS
(a) Withholding of Taxes; Notice of 83(b) Election. Seller
shall have the right to require Purchaser to pay to Seller the amount of any
taxes that are required to be withheld with
6
<PAGE> 7
respect to Purchaser's Purchased Shares, including any such taxes required to be
withheld in connection with (i) any dividend or distribution in respect of the
Purchased Shares, (ii) any conversion of Unvested Shares to Vested Shares, or
(iii) any sale of Purchased Shares. Purchaser shall promptly notify Seller if
Purchaser makes an election under section 83(b) of the Internal Revenue Code.
(b) Governing Law. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York, without giving
effect to the conflicts of laws principles thereof.
(c) Specific Performance. The parties hereto acknowledge that
there will be no adequate remedy at law for a violation of any of the provisions
of this Agreement and that, in addition to any other remedies that may be
available, all of the provisions of this Agreement shall be specifically
enforceable in accordance with their respective terms.
(d) Severability. The invalidity or unenforceability of any
provision of this Agreement in any jurisdiction shall not affect the validity or
enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of this Agreement, including that provision, in any
other jurisdiction.
(e) Notice. All notices and other communications hereunder
shall be in writing and, unless otherwise provided herein, shall be deemed to
have been given when received by the party to whom such notice is to be given at
its address set forth below, or such other address for the party as shall be
specified by notice given pursuant hereto:
If to Seller:
CGA Group, Ltd.
Craig Appin House
8 Wesley Street
Hamilton HM 11 Bermuda
Attn: James Reinhart
If to Purchaser:
-------------------------
-------------------------
-------------------------
(f) Binding Effect. This Agreement shall inure to the benefit
of and shall be binding upon the parties hereto and their respective heirs,
legal representatives, successors and assigns.
(g) Amendment and Modification. This Agreement may be amended,
modified or supplemented only by written agreement of the party against whom
enforcement of such amendment, modification or supplement is sought.
7
<PAGE> 8
(h) Headings; Execution in Counterparts. The headings and
captions contained herein are for convenience only and shall not control or
affect the meaning or construction of any provision hereof. 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 constitute one and the same
instrument.
(i) No Rights to Employment. Nothing in this Agreement shall
constitute an offer of employment to Purchaser or be construed to require Seller
to continue Purchaser in the employ of Seller for any stated period of time.
(j) Entire Agreement. This Agreement and the Note constitute
the entire agreement, and supersedes all prior agreements and understandings,
oral and written, between the parties hereto with respect to the subject matter
hereof.
IN WITNESS WHEREOF, Purchaser and Seller have executed this
Restricted Stock Award Agreement as of the date first above written.
CGA GROUP, LTD.
By:__________________________________________
Name:
Title:
PURCHASER
_____________________________________________
8
<PAGE> 9
EXHIBIT A
TO EXHIBIT 10.20
[FORM OF]
PROMISSORY NOTE
$________________ April 26, 1999
FOR VALUE RECEIVED, the undersigned, __________________, an individual
residing at __________________, ("Maker"), hereby promises to pay to the order
of CGA Group, Ltd., a company with limited liability formed under the laws of
Bermuda (together with its successors and permitted assigns, the "Holder"), at
the Holder's address at Craig Appin House, 8 Wesley Street, Hamilton HM 11,
Bermuda, or at such other place as Holder may designate from time to time, the
principal sum of _________________ ($_________) in legal and lawful money of the
United States of America, together with accrued interest thereon as set forth in
Section 1 hereof, which interest shall accrue on the outstanding principal from
and including the date hereof, but excluding the date on which the principal and
all accrued interest are paid in full. The principal of this Note, together with
all accrued interest thereon, shall be due and payable in three equal
installments on April 26, 2000, April 26, 2001 and April 26, 2002, respectively
(or, if any such day is not a business day in each of New York, New York and
Hamilton, Bermuda, then on the next succeeding business day) ("Installment
Dates").
This Note is issued in connection with the CGA Group, Ltd. Restricted
Stock Purchase Agreement dated as of April 26, 1999 between Maker and Holder
(the "Agreement") .
Section 1. Interest. This Note shall accrue interest at the rate of
7% per annum. Interest shall be payable on each Installment Date.
Section 2. Prepayments. Maker may, at his option, prepay the
principal amount of this Note, and all accrued interest thereon, at any time and
from time to time, in whole or in part and without penalty.
Section 3. Acceleration. The Holder will have the right to accelerate
the principal and interest due under this Note if any of the following events
(such event, an "Event of Default") occurs:
(a) During the period that any Purchased Shares remain Unvested
Shares under the Agreement, a termination of the employment of Maker occurs by
reason of a Voluntary Termination (as defined in the Agreement), effective
ninety (90) days after the effective date of such termination, or such earlier
or later date that is the closing date of the Holder's Call Option under the
Agreement, as to the Unvested Shares repurchased under the Call Option;
(b) Maker shall fail to pay any principal or interest amount due
under this Note on any Installment Date on or prior to such Installment Date;
1
<PAGE> 10
(c) Maker shall fail to perform, observe or comply with any
other covenant, agreement, or condition contained in this Note and such failure
continues for a period of ten (10) days following written notice to Maker from
Holder of the continuation of such failure; or
(d) Maker (i) shall generally not, or be unable to, or shall
admit in writing his inability to, pay his debts as such debts become due; (ii)
shall make an assignment for the benefit of creditors, petition or apply to any
tribunal for the appointment of a custodian, receiver, or trustee for himself or
a substantial part of his assets; (iii) shall commence any proceeding under any
bankruptcy, reorganization, arrangement or readjustment of debt law or statute
of any jurisdiction, whether now or hereafter in effect; (iv) shall have had any
such petition or application filed or any such proceeding shall have been
commenced, against him, in which an adjudication or appointment is made or order
for relief is entered, or which petition, application or proceeding remains
undismissed or unstayed for a period of thirty (30) days or more; (v) shall be
the subject of any proceeding under which his assets may be subject to seizure,
forfeiture or divestiture; (vi) by any act or omission shall indicate his
consent to, approval of or acquiescence in any such petition, application or
proceeding or order for relief or the appointment of a custodian, receiver or
trustee for all or any substantial part of his property; or (vii) shall suffer
any such custodianship, receivership, or trusteeship to continue undischarged
for a period of thirty (30) days or more.
Upon the existence of an Event of Default, Holder may (i) declare this
Note outstanding, all interest thereon, and all other amounts payable at any
time or from time to time under this Note to be forthwith due and payable,
whereupon the Note, all such interest, and all such amounts due at any time and
from time to time under this Note shall become and be forthwith due and payable,
without presentment, demand, protest, or further notice of any kind, all of
which are hereby expressly waived by Maker; and/or (ii) exercise any rights and
remedies provided by law.
Section 4. Collection Costs and Expenses. If there is an Event of
Default, Maker shall pay all costs and expenses incurred by Holder, including
reasonable attorneys' fees and expenses, in connection with the enforcement and
collection of this Note.
Section 5. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New York (without giving
effect to its conflict of law principles).
Section 6. Waiver and Amendment. Maker hereby waives presentment,
demand for payments, notice of dishonor, protest and notice of protest and any
and all other notices or demands in connection with this Note. No delay or
omission on the part of Holder in exercising any right hereunder shall operate
as a waiver of such right or of any other right under this Note. A waiver on one
occasion shall not be construed as a bar to or waiver of any such right and/or
remedy on any future occasion. Any provision of this Note may be amended upon
the express written agreement thereto of Maker and Holder at the time of such
amendment.
Section 7. Headings; Construction. The headings of the sections of
this Note are inserted for convenience only and shall not be deemed to
constitute a part hereof; words used herein of any gender shall be construed to
include any other gender where appropriate, and
2
<PAGE> 11
words used herein that are either singular or plural shall be construed to
include the other where appropriate.
Section 8. Notices. Any notice or other communication permitted or
required to be given hereunder to the Holder shall be given to the Holder in
accordance with the Agreement. Any notice or other communication permitted or
required to be given hereunder to the Maker shall be given to the Maker at the
registered offices of CGA Group, Ltd. as set forth in the Agreement, or to such
other address as given to the Holder by the Maker in writing and agreed to by
the Maker.
Section 9. Lost Note. Upon receipt by Maker of evidence satisfactory
to it of the loss, theft, destruction or mutilation of this Note, and (in the
case of loss, theft or destruction) of indemnity satisfactory to it, and upon
reimbursement to Maker of all reasonable expenses incidental thereto, and upon
surrender and cancellation of such Note, if mutilated, Maker will deliver in
lieu of such Note a new note for the unpaid principal amount thereof and
carrying the same rights to interest on the unpaid principal.
Section 10. Severability. Any provision of this Note which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
IN WITNESS WHEREOF, the undersigned has executed this Note on the date
first above written.
______________________________
[Name]
3
<PAGE> 12
EXHIBIT B
TO EXHIBIT 10.20
CGA GROUP, LTD.
Employee Stock Purchase Plan Participants
Closed April 26, 1999
<TABLE>
<CAPTION>
Total Total Down Loan
Shares Cost Payment Amount
------ ---- ------- ------
<S> <C> <C> <C> <C> <C> <C>
1 Aseron Ross 15,000.00 18,000.00 1,800.00 16,200.00
2 Avidan Martin 50,000.00 60,000.00 6,000.00 54,000.00
3 Blacker Kem 41,667.00 50,000.40 5,000.04 45,000.36
4 Borg Joshua 20,000.00 24,000.00 2,400.00 21,600.00
5 Bourdeau Isabelle 45,000.00 54,000.00 5,400.00 48,600.00
6 Coon Andy 25,000.00 30,000.00 3,000.00 27,000.00
7 Coyle James 35,000.00 42,000.00 4,200.00 37,800.00
8 Egler Gerri 20,000.00 24,000.00 2,400.00 21,600.00
9 Faber Carol 20,000.00 24,000.00 2,400.00 21,600.00
10 Fishbone Scott 30,000.00 36,000.00 3,600.00 32,400.00
11 Lang Yan-Meng 5,000.00 6,000.00 6,000.00 -
12 Liabotis Elizabeth 15,000.00 18,000.00 1,800.00 16,200.00
13 Manion Peter 8,500.00 10,200.00 1,020.00 9,180.00
14 McGovern Geraldine 10,000.00 12,000.00 1,200.00 10,800.00
15 Miran Michael 100,000.00 120,000.00 12,000.00 108,000.00
16 Parsons Landon 83,334.00 100,000.80 10,000.08 90,000.72
17 Price Richard 308,316.00 369,979.20 36,997.92 332,981.28
18 Pridgen Tracy 25,000.00 30,000.00 3,000.00 27,000.00
19 Riordan Brian 15,000.00 18,000.00 1,800.00 16,200.00
20 Steffelin Edward 41,666.00 49,999.20 4,999.92 44,999.28
21 Stuhlemmer Eric 15,000.00 18,000.00 1,800.00 16,200.00
22 Wasterlain Jean-Michel 40,000.00 48,000.00 4,800.00 43,200.00
23 Yung Ron 5,000.00 $ 6,000.00 600.00 5,400.00
---------- -------------- ------------ -------------
Totals 973,483.00 $ 1,168,179.60 $122,217.96 $1,045,961.64
========== ============== ============ =============
</TABLE>
<PAGE> 1
Exhibit 10.21
CGA GROUP, LTD.
CHIEF FINANCIAL OFFICER'S CERTIFICATE
As to Adjustment to Exercise Price of Warrants Issued
Pursuant to the Sponsoring Investors and Founders Stock Warrant Plan
This Chief Financial Officer's Certificate is delivered pursuant to Sections 14
and 15 of the CGA Group, Ltd. Sponsoring Investors and Founders Stock Warrant
Plan dated as of June 17, 1997 (the "Warrant Agreement"). Capitalized terms used
but not otherwise defined herein shall have the meanings ascribed to them in the
Warrant Agreement.
The undersigned, being the duly appointed, qualified and
acting Chief Financial Officer of CGA Group, Ltd. (the "Company"), DOES HEREBY
CERTIFY, in the name and on behalf of the Company, that:
1. On March 31, 1999, the Company converted 2,268,678 shares
of the Company's Series B Preferred Stock into an aggregate of 18,905,648 shares
of the Company's Common Stock.
2. On March 31, 1999, the Company sold to investors 43,997,863
shares of the Company's Series C Preferred Stock for aggregate proceeds of
$50,996,794.50. The shares of Series C Preferred Stock are convertible into
shares of the Company's Common Stock on a one-for-one basis at the holder's
option at any time, and are mandatorily convertible into shares of the Company's
Common Stock on a one-for-one basis upon the occurrence of certain events.
3. On April 16, 1999, the Company sold to certain of its
employees an aggregate of 973,483 shares of the Company's Series C Preferred
Stock for aggregate proceeds of $1,168,179.60.
4. As of the date of this Certificate there are 28,005,648
shares of Common Stock and 44,971,346 shares of Series C Preferred Stock issued
and outstanding, respectively. Assuming the conversion of all such shares of
Series C Preferred Stock into shares of Common Stock, there are 72,976,994
shares of Common Stock deemed to be issued and outstanding.
5. Immediately prior to March 31, 1999, each Warrant entitled
the holder thereof to purchase from the Company, on or prior to June 16, 2007,
one share of Common Stock for an exercise price of $5.00.
6. As a result of the transactions listed above, the Purchase
Price of the Warrants has been adjusted so that each Warrant now entitles the
holder thereof to purchase from the Company, on or prior to June 16, 2007, one
share of Common Stock for an exercise price of $2.12.
IN WITNESS WHEREOF, the undersigned has executed this Chief
Financial Officer's Certificate this 18th day of May, 1999.
By: /s/ James R. Reinhart
---------------------
Name: James R. Reinhart
Title: Chief Financial Officer, CGA Group, Ltd.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 144,584,244
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 149,584,244
<CASH> 18,744,457
<RECOVER-REINSURE> 44,938,128
<DEFERRED-ACQUISITION> 3,930,577
<TOTAL-ASSETS> 229,186,432
<POLICY-LOSSES> 61,605,054
<UNEARNED-PREMIUMS> 1,432,311
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
132,164,254
0
<COMMON> 280,057
<OTHER-SE> 30,062,253
<TOTAL-LIABILITY-AND-EQUITY> 229,186,432
6,547,542
<INVESTMENT-INCOME> 4,019,724
<INVESTMENT-GAINS> 130,880
<OTHER-INCOME> 1,624,055
<BENEFITS> 7,750,000
<UNDERWRITING-AMORTIZATION> 315,254
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (2,658,233)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,658,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,658,233)
<EPS-BASIC> (0.61)
<EPS-DILUTED> (0.61)
<RESERVE-OPEN> 90,200,000
<PROVISION-CURRENT> 7,750,000
<PROVISION-PRIOR> 90,200,000
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 61,605,054
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
