<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-49632
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 MARCH 31, 2000
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- --------------------------------------------------------------------------------
<PAGE> 2
CGA GROUP, LTD.
------------------------
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -- March 31, 2000
and December 31, 1999................................. 1
Unaudited Consolidated Statements of
Operations -- Three Months Ended March 31, 2000 and
March 31, 1999........................................ 2
Unaudited Consolidated Statements of Comprehensive
Income -- Three Months Ended March 31, 2000 and March
31, 1999.............................................. 3
Unaudited Consolidated Statements of Changes in
Mezzanine Equity -- Three Months Ended March 31, 2000
and the Year Ended December 31, 1999.................. 4
Unaudited Consolidated Statements of Shareholders'
Equity -- Three Months Ended March 31, 2000 and the
Year Ended December 31, 1999.......................... 5
Unaudited Consolidated Statements of Cash
Flows -- Three Months Ended March 31, 2000 and March
31, 1999.............................................. 6
Notes to Unaudited Consolidated Financial Statements... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and
Results of Operations.................................. 14
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................. II-1
Signatures................................................ II-2
Index to Exhibits......................................... II-3
</TABLE>
<PAGE> 3
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 4
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CGA GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities available for sale at fair value
(amortized cost: $154,995,171 and $152,838,109)........ $147,919,381 $146,337,676
Cash and cash equivalents................................. 2,460,476 12,775,595
Premiums receivable....................................... 2,055,330 2,267,991
Management fees receivable................................ 410,046 412,644
Accrued investment income................................. 4,096,988 4,385,663
Deferred acquisition costs................................ 4,984,595 4,767,372
Prepaid reinsurance premiums.............................. -- 310,144
Reinsurance recoverable................................... 3,208,668 25,000,000
Deferred premiums receivable.............................. 801,354 519,809
Other assets.............................................. 3,489,923 2,842,614
------------ ------------
Total assets.............................................. $169,426,761 $199,619,508
============ ============
LIABILITIES
Unearned premiums......................................... $ 3,253,151 $ 2,946,120
Reserve for losses and loss adjustment expenses........... 10,963,250 36,545,700
Reinsurance balances payable.............................. 243,249 285,726
Accrued costs and expenses................................ 1,928,878 4,896,550
------------ ------------
Total liabilities......................................... 16,388,528 44,674,096
------------ ------------
MEZZANINE EQUITY
Preferred stock, $.01 par value:
Series A, 10,000,000 shares authorized, 3,803,212 and
3,676,821 issued and outstanding....................... 90,813,952 87,506,212
------------ ------------
Total mezzanine equity.................................... 90,813,951 87,506,212
------------ ------------
SHAREHOLDERS' EQUITY
Series C preferred stock, $.01 par value, 52,000,000
shares authorized, 44,971,346 issued and outstanding... 449,713 449,713
Additional paid-in-capital -- Series C preferred stock.... 49,481,298 49,466,298
Common stock, $.01 par value, 268,000,000 shares
authorized, 28,005,648 issued and outstanding.......... 280,057 280,057
Additional paid-in-capital -- common stock................ 95,575,117 95,723,081
Accumulated other comprehensive loss...................... (7,075,790) (6,500,433)
Accumulated deficit....................................... (76,486,113) (71,979,516)
------------ ------------
Total shareholders' equity................................ 62,224,282 67,439,200
------------ ------------
Total liabilities and shareholders' equity................ $169,426,761 $199,619,508
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 5
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
REVENUES
Gross premiums written.................................... $ 4,010,355 $ 3,467,232
Ceded premiums............................................ (553,393) (419,625)
----------- -----------
Net premiums written...................................... 3,456,962 3,047,607
Change in unearned premiums............................... (273,695) 34,439
----------- -----------
Net premiums earned....................................... 3,183,267 3,082,046
Net investment income..................................... 2,277,324 1,671,501
Net realized gains (losses)............................... (321,509) 151,566
Management fees........................................... 549,056 1,145,259
----------- -----------
Total revenues............................................ 5,688,138 6,050,372
----------- -----------
EXPENSES
Operating expenses........................................ 3,616,324 3,276,277
Policy acquisition costs.................................. 227,245 148,138
Commitment fees........................................... 150,000 147,945
Excess of loss facility................................... 50,000 50,000
Losses and loss adjustment expenses....................... 2,991,391 300,000
----------- -----------
Total expenses............................................ 7,034,960 3,922,360
----------- -----------
NET INCOME (LOSS)........................................... (1,346,822) 2,128,012
Pay-in-kind dividends -- preferred stock.................. (3,159,775) (5,460,945)
Accretion -- preferred stock.............................. (147,966) (198,103)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS................ $(4,654,563) $(3,531,036)
Basic and diluted loss per common share..................... $ (0.17) $ (0.38)
=========== ===========
Weighted average shares outstanding......................... 28,005,648 9,310,063
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 6
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
NET INCOME (LOSS) FOR THE PERIOD............................ (1,346,822) 2,128,012
OTHER COMPREHENSIVE INCOME
Change in unrealized appreciation (depreciation) on fixed
maturity securities....................................... (575,357) (1,704,381)
---------- ----------
COMPREHENSIVE INCOME (LOSS) FOR THE PERIOD.................. (1,922,179) 423,631
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 7
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
Balance -- beginning of period.............................. $ 36,768 $ 32,119
Pay-in-kind dividends paid.................................. 1,264 4,649
----------- ------------
Balance -- end of period.................................... 38,032 36,768
----------- ------------
ADDITIONAL PAID-IN-CAPITAL -- SERIES A PREFERRED
Balance -- beginning of period.............................. 87,469,444 75,258,981
Pay-in-kind dividends paid.................................. 3,158,511 11,618,601
Accretion to redemption value............................... 114,282 457,132
Accretion on warrants....................................... 33,682 134,730
----------- ------------
Balance -- end of period.................................... 90,775,919 87,469,444
----------- ------------
TOTAL SERIES A PREFERRED STOCK.............................. $90,813,951 $ 87,506,212
=========== ============
SERIES B PREFERRED STOCK
Balance -- beginning of period.............................. $ -- $ 16,000
Pay-in-kind dividends paid.................................. -- 6,687
Conversion to common stock.................................. -- (22,687)
----------- ------------
Balance -- end of period.................................... -- --
----------- ------------
ADDITIONAL PAID-IN-CAPITAL -- SERIES B PREFERRED
Balance -- beginning of period.............................. -- 37,284,985
Pay-in-kind dividends paid.................................. -- 16,710,271
Accretion to redemption value............................... -- 50,137
Unaccreted issuance costs................................... -- 2,648,879
Conversion to common stock.................................. -- (56,694,272)
----------- ------------
Balance -- end of period.................................... -- --
----------- ------------
PAY-IN-KIND DIVIDENDS ACCRUED -- SERIES B
Balance -- beginning of period.............................. $ -- $ 14,016,164
Dividends accrued........................................... -- 2,700,795
Dividends paid.............................................. -- (16,716,959)
----------- ------------
Balance -- end of period.................................... $ -- $ --
----------- ------------
TOTAL SERIES B PREFERRED STOCK.............................. $ -- $ --
=========== ============
TOTAL MEZZANINE EQUITY...................................... $90,813,951 $ 87,506,212
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 8
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
SHAREHOLDERS' EQUITY
SERIES C CONVERTIBLE PREFERRED STOCK
Balance -- beginning of period.............................. $ 449,713 $ --
Stock issued (44,971,346 shares)............................ -- 449,713
------------ ------------
Balance -- end of period.................................... 449,713 449,713
------------ ------------
ADDITIONAL PAID-IN-CAPITAL -- SERIES C PREFERRED
Balance -- beginning of period.............................. 49,466,298 --
Stock issued................................................ -- 51,715,259
Employee loans.............................................. -- (1,045,961)
Employee loans repaid....................................... 15,000 --
Issuance costs.............................................. -- (1,203,000)
------------ ------------
Balance -- end of period.................................... 49,481,298 49,466,298
------------ ------------
TOTAL SERIES C PREFERRED STOCK.............................. 49,931,011 49,916,011
------------ ------------
COMMON STOCK
Balance -- beginning of period.............................. 280,057 91,000
Stock issued (18,905,648 shares)............................ -- 189,057
------------ ------------
Balance -- end of period.................................... 280,057 280,057
------------ ------------
ADDITIONAL PAID-IN-CAPITAL -- COMMON STOCK
Balance -- beginning of period.............................. 95,723,081 42,486,057
Stock issued................................................ -- 56,527,902
Accretion of Series A Preferred Stock to redemption value... (114,282) (457,132)
Accretion of Series B Preferred Stock to redemption value... -- (50,137)
Accretion on warrants....................................... (33,682) (134,730)
Unaccreted issuance costs (Series B)........................ -- (2,648,879)
------------ ------------
Balance -- end of period.................................... 95,575,117 95,723,081
------------ ------------
TOTAL COMMON STOCK.......................................... 95,855,174 96,003,138
------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance -- beginning of period.............................. (6,500,433) 927,676
Decrease during the period.................................. (575,357) (7,428,109)
------------ ------------
Balance -- end of period.................................... (7,075,790) (6,500,433)
------------ ------------
ACCUMULATED DEFICIT
Balance -- beginning of period.............................. (71,979,516) (50,006,600)
Net loss.................................................... (1,346,822) (7,648,871)
Series A pay-in-kind dividends.............................. (3,159,775) (11,623,250)
Series B pay-in-kind dividends.............................. -- (2,700,795)
------------ ------------
Balance -- end of period.................................... (76,486,113) (71,979,516)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY.................................. $ 62,224,282 $ 67,439,200
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 9
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ (1,346,822) $ 2,128,012
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of (discounts) premiums on investments....... (34,352) 90,484
Depreciation expense...................................... 130,801 128,792
Realized loss (gain) on sale of investments............... 321,509 (151,566)
Changes in assets and liabilities:
Premiums receivable....................................... 212,661 148,442
Accrued investment income................................. 288,675 829,387
Deferred acquisition costs................................ (217,223) (359,717)
Prepaid reinsurance premiums.............................. 310,144 13,142
Reinsurance recoverable................................... 21,791,332 --
Management fees receivable................................ 2,598 28,773
Deferred premiums receivable.............................. (281,545) --
Other assets.............................................. (772,873) 229,646
Unearned premiums......................................... 307,031 (34,439)
Reserve for losses and loss adjustment expenses........... (25,582,450) 300,000
Reinsurance balances payable.............................. (42,477) (14,177)
Accrued costs and expenses................................ (2,967,672) (724,020)
------------ ------------
Net cash provided by (used in) operating activities......... (7,880,663) 2,612,759
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity securities acquired.................. (8,726,140) (22,856,171)
Proceeds from sale of fixed maturity securities............. 6,281,921 20,985,021
Purchases of fixed assets................................... (5,237) (50,300)
------------ ------------
Net cash used in investing activities....................... (2,449,456) (1,921,450)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on issuance of series C preferred stock............ -- 52,042,756
Employee loans.............................................. -- (1,045,961)
Repayment of employee loans................................. 15,000 --
Issuance costs of series C preferred stock.................. -- (1,203,000)
------------ ------------
Net cash provided by financing activities................... 15,000 49,793,795
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (10,315,119) 50,485,104
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............ 12,775,595 2,598,140
------------ ------------
CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $ 2,460,476 $ 53,083,244
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 10
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(EXPRESSED IN U.S. DOLLARS)
1. BUSINESS AND ORGANIZATION
CGA Group, Ltd. is a holding company which was incorporated in Bermuda on
June 21, 1996. CGA Group has two wholly owned subsidiaries. Commercial Guaranty
Assurance, Ltd. was incorporated in Bermuda on October 16, 1996. Commercial
Guaranty Assurance is licensed as a class 3 insurer under the Insurance Act 1978
(Bermuda), amendments thereto and related regulations, 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. Commercial Guaranty Assurance has a "Triple-A" "claims
paying ability" rating from Duff & Phelps Credit Rating Company 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. Effective March 31, 2000, Commercial Guaranty Assurance's claims-paying
ability rating was rated "Triple A" by Japan Rating and Investment Information,
Inc., the largest credit rating agency in Japan. Commercial Guaranty Assurance
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. was incorporated in the
state of Delaware in July 1996. CGA Investment Management is registered as an
investment advisor with the United States Securities and Exchange Commission
under the Investment Advisers Act of 1940, as amended. CGA Investment Management
provides investment management and financial advisory services primarily to
specialized investment vehicles and for the U.S. and international structured
finance markets. CGA Investment Management and its employees are based in New
York City, New York.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q under the Rules and
Regulations of the Securities and Exchange Commission and accordingly, do not
include all of the information and disclosures required by generally accepted
accounting principles. These financial statements include the accounts of CGA
Group, Ltd. and its subsidiaries, and should be read in conjunction with the
consolidated financial statements, and related notes thereto, included in CGA
Group's 1999 Annual Report on Form 10-K. The accompanying financial statements
have not been audited by independent auditors in accordance with generally
accepted auditing standards. However, in the opinion of management, the
financial statements 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.
2. DETAIL OF OTHER ASSETS
Other assets are comprised of the following at March 31, 2000 and December
31, 1999:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Other Assets
Other prepaid expenses.................................... $1,023,464 $ 668,627
Prepaid commitment fees................................... 126,164 276,164
Fixed assets, net of depreciation......................... 1,160,015 1,285,579
Deposits.................................................. 299,580 301,080
Accounts receivable....................................... 265,500 47,405
Other..................................................... 615,200 263,759
---------- ----------
Total Other Assets........................................ $3,489,923 $2,842,614
========== ==========
</TABLE>
7
<PAGE> 11
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LOSSES AND LOSS ADJUSTMENT EXPENSES
The reserve for losses and loss adjustment expenses is established in an
amount equal to Commercial Guaranty Assurance's estimate of unidentified or case
basis reserves and unallocated losses including costs of settlement, on the
obligations it has insured. Case basis reserves are established when specific
insured issues are identified as currently or likely to be in default. Such a
reserve is based on the present value of the expected loss and loss adjustment
expenses. The general reserve for losses and loss adjustment expenses is
calculated by applying a loss factor, determined based on an independent rating
agency study of bond defaults, to net par amount outstanding of the insured
obligations.
The reserve for losses and loss adjustment expenses is comprised of the
following at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Case basis reserve........................................ $ 7,213,250 $33,200,000
General reserve........................................... 3,750,000 3,345,700
----------- -----------
Total reserve for losses and loss adjustment
expenses...................................... $10,963,250 $36,545,700
=========== ===========
</TABLE>
The activity in the reserve for losses and loss adjustment expenses is as
follows:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Balance at beginning of year............................ $ 36,545,700 $ 90,200,000
Less reinsurance recoverables......................... (25,000,000) (67,400,000)
------------ ------------
Net balance at beginning of year........................ 11,545,700 22,800,000
Net losses and loss expenses incurred in respect of
losses
occurring in:
Current year.......................................... 2,991,391 1,350,000
Prior years........................................... -- 15,300,000
------------ ------------
Total................................................. 14,537,091 16,650,000
Net losses and loss expenses paid in respect of losses
occurring in prior years.............................. (6,782,509) (27,904,300)
------------ ------------
Balance at end of period................................ 7,754,582 11,545,700
Reinsurance recoverable................................. 3,208,668 25,000,000
------------ ------------
Reserve for losses and loss adjustment expenses, gross
of reinsurance recoverable
Balance at end of period................................ $ 10,963,250 $ 36,545,700
============ ============
</TABLE>
On March 15, 2000, Commercial Guaranty Assurance made a claim payment in
respect of Commercial Financial Services securities of $28.5 million, of which
$21.8 million consisted of payments from its reinsurer and $6.7 million
consisted of Commercial Guaranty Assurance's own funds, paid out of the case
basis reserve. At March 31, 2000, Commercial Guaranty Assurance's gross
remaining exposure to Commercial Financial Services was reduced to $45.0
million, of which $34.4 million is covered by reinsurance and $1.0 million is
included in case basis reserves, resulting in a net remaining exposure of $9.6
million. On April 18, 2000, Commercial Guaranty Assurance made an additional
claim payment of $4.2 million, of which $3.2 million consisted of payments from
its reinsurer and $1.0 consisted of Commercial Guaranty Assurance's own funds,
paid out of the case basis reserve.
In April 2000, Commercial Guaranty Assurance elected to pay a $2.6 million
claim in connection with a "Triple-B" rated tranche of a home equity loan
securitization insured by Commercial Guaranty Assurance.
8
<PAGE> 12
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on its ongoing surveillance, Commercial Guaranty Assurance concluded that
this security was no longer investment grade risk and consequently, as insurer
of the transaction, Commercial Guaranty Assurance directed the transaction's
trustee to sell the security. The sale resulted in a shortfall of $2.6 million,
which was included in the case basis reserve at March 31, 2000. The claim
payment of $2.6 million was made on April 27, 2000.
4. LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share for the periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Basic loss per share
Numerator:
Net income (loss)....................................... $(1,346,822) $ 2,128,012
Series A -- Pay-in-kind dividends paid.................. (3,159,775) (2,760,150)
Series A -- Accretion to redemption value............... (114,283) (114,283)
Series A -- Accretion on warrants....................... (33,683) (33,683)
Series B -- Pay-in-kind dividends....................... -- (2,700,795)
Series B -- Accretion to redemption value............... -- (50,137)
----------- -----------
Net loss attributable to common shareholders.............. $(4,654,563) $(3,531,036)
----------- -----------
Denominator:
Weighted average shares outstanding..................... 28,005,648 9,310,063
----------- -----------
Basic loss per share...................................... $ (0.17) $ (0.38)
=========== ===========
Diluted loss per share
Numerator................................................. $(4,654,563) $(3,531,036)
Denominator............................................... 28,005,648 9,310,063
----------- -----------
Diluted loss per share.................................... $ (0.17) $ (0.38)
=========== ===========
</TABLE>
The total number of common share equivalents not included in the
calculation of diluted loss per share was 46,747,067 because they were
anti-dilutive.
9
<PAGE> 13
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INSURANCE IN FORCE
The following table shows the net par outstanding of insured obligations,
net of reinsurance, at March 31, 2000 and December 31, 1999 by asset type:
<TABLE>
<CAPTION>
2000 1999
ASSET TYPE (IN 000'S) (IN 000'S)
- ---------- ---------- ----------
<S> <C> <C>
Auto........................................................ $ 21,709 $ 26,158
Commercial loan and bond obligations........................ 371,512 327,335
Commercial mortgage-backed securities....................... 732,575 614,217
Corporate asset-backed securities........................... 152,490 147,490
Credit card receivables..................................... 158,694 165,997
Equipment................................................... 16,045 17,111
Future flows................................................ 52,921 55,463
Home equity loans........................................... 416,281 374,280
Real estate investment trust debt........................... 251,559 256,774
Real estate investment trust preferred stock................ 70,000 70,000
Sovereign debt.............................................. 90,000 90,000
Other consumer asset-backed securities...................... 103,800 89,640
---------- ----------
Total....................................................... $2,437,586 $2,234,465
========== ==========
</TABLE>
The following table presents the credit ratings of the above assets, based
on net par outstanding at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
"AAA"....................................................... 3% 4%
"AA"........................................................ 3% 2%
"A"......................................................... 25% 25%
"BBB"....................................................... 60% 58%
"BB"........................................................ 9% 9%
Not rated................................................... -- 2%
Total....................................................... 100% 100%
=== ===
</TABLE>
North America comprises 93% of the insured obligations' geographic
exposure. Other countries include Turkey, Korea, Greece, Poland, Portugal and
Venezuela, each of which comprises approximately 2% or less of the geographic
exposure.
6. SEGMENT REPORTING
CGA Group has two reportable segments: Commercial Guaranty Assurance and
CGA Investment Management (see description of each segment in Note 1). CGA
Group's management has identified the operating segments on the basis that they
are separate entities with each entity carrying on a different type of business.
Commercial Guaranty Assurance provides financial guaranty insurance and CGA
Investment Management provides investment management services. The tables below
present financial information for each of the operating segments.
10
<PAGE> 14
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of and for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
COMMERCIAL CGA
GUARANTY INVESTMENT
ASSURANCE MANAGEMENT OTHER(A) TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned................. $ 3,183,267 -- -- $ 3,183,267
Net investment income............... 2,182,285 19,004 76,035 2,277,324
Net realized losses................. (321,509) -- -- (321,509)
Management fees..................... -- 549,056 -- 549,056
Intersegment revenue................ 112,882 191,959 304,841
------------ ----------- ----------- ------------
TOTAL REVENUES...................... 5,044,043 680,942 267,994 5,992,979
------------ ----------- ----------- ------------
EXPENSE ITEMS
Operating expenses.................. 413,322 2,829,970 373,032 3,616,324
Acquisition costs................... 227,245 -- -- 227,245
Commitment fees..................... 150,000 -- -- 150,000
Excess of loss facility............. 50,000 -- -- 50,000
Losses and loss adjustment
expenses.......................... 2,991,391 -- -- 2,991,391
Intersegment expenses............... 112,882 191,959 -- 304,841
------------ ----------- ----------- ------------
TOTAL EXPENSES...................... 3,944,840 3,021,929 373,032 7,339,801
------------ ----------- ----------- ------------
NET INCOME (LOSS)................... 1,099,203 (2,340,987) (105,038) (1,346,822)
============ =========== =========== ============
ASSETS
TOTAL ASSETS........................ $166,786,997 $ 3,439,530 $17,763,430 $187,989,957
============ =========== =========== ============
</TABLE>
- ---------------
(a) The "other" segment is comprised of CGA Group, the holding company, which
does not meet any of the quantitative thresholds for determining a
reportable segment.
11
<PAGE> 15
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of and for the three months ended March 31, 1999:
<TABLE>
<CAPTION>
COMMERCIAL CGA
GUARANTY INVESTMENT
ASSURANCE MANAGEMENT OTHER (A) TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned................. $ 3,082,046 $ -- $ -- $ 3,082,046
Net investment income............... 1,651,857 16,972 2,672 1,671,501
Net realized gains.................. 151,566 -- -- 151,566
Management fees..................... -- 1,145,259 -- 1,145,259
Intersegment revenue................ -- 59,827 -- 59,827
------------ ----------- ----------- ------------
TOTAL REVENUES...................... 4,885,469 1,222,058 2,672 6,110,199
------------ ----------- ----------- ------------
EXPENSE ITEMS
Operating expenses.................. 303,556 2,627,079 345,642 3,276,277
Acquisition Costs................... 148,138 -- -- 148,138
Commitment Fees..................... 147,945 -- -- 147,945
Excess of loss facility............. 50,000 -- -- 50,000
Losses and loss adjustment
expenses.......................... 300,000 -- -- 300,000
Intersegment expenses............... 59,827 -- -- 59,827
------------ ----------- ----------- ------------
TOTAL EXPENSES...................... 1,009,466 2,627,079 345,642 3,982,187
------------ ----------- ----------- ------------
NET INCOME (LOSS)................... 3,876,003 (1,405,021) (342,970) 2,128,012
============ =========== =========== ============
ASSETS
TOTAL ASSETS........................ $244,118,686 $ 3,644,229 $31,307,904 $279,070,819
============ =========== =========== ============
</TABLE>
The following are reconciliations of reportable segment revenues, expenses
and assets to CGA Group's consolidated totals in the financial statements as of
and for the periods ended March 31, 2000 and 1999. Depreciation expense is
included in operating expenses.
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Total revenues for reportable segments...................... $ 5,992,979 $ 6,110,199
Elimination of intersegment revenues........................ (304,841) (59,827)
------------ ------------
Total consolidated revenues................................. $ 5,688,138 $ 6,050,372
============ ============
EXPENSES
Total expenses for reportable segments...................... $ 7,339,801 $ 3,982,187
Elimination of intersegment operating expenses.............. (304,841) (59,827)
------------ ------------
Total consolidated expenses................................. $ 7,034,960 $ 3,922,360
============ ============
ASSETS
Total assets for reportable segments........................ $187,989,957 $279,070,819
Intercompany loans.......................................... (16,043,700) (10,500,000)
Other intercompany balances................................. (2,519,496) (2,922,097)
------------ ------------
Total consolidated assets................................... $169,426,761 $265,648,722
============ ============
</TABLE>
12
<PAGE> 16
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), subsequently amended by SFAS No. 137, which CGA Group is required
to adopt effective January 1, 2001. SFAS 133 requires all derivatives to be
recognized on the balance sheet as either assets or liabilities and measured at
fair value. Upon implementation, credit default swaps will be valued at fair
value in accordance with this statement. The impact of SFAS 133 on CGA Group's
financial statements will depend on a variety of factors, including future
interpretative guidance from the FASB, and the volume of credit default swaps
written by Commercial Guaranty Assurance.
13
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of CGA Group's results of operations,
financial condition, liquidity and capital resources as of and for the three
months ended March 31, 2000. The results of operations and cash flows for any
interim period are not necessarily indicative of results for the full year. This
discussion should be read in conjunction with the consolidated financial
statements, related notes thereto and the Management's discussion and Analysis
of Results of Operations and Financial Conditions included in CGA Group's 1999
Annual Report on Form 10-K.
GENERAL
CGA Group, Ltd. was incorporated in Bermuda in June, 1996. CGA Group has
two wholly-owned subsidiaries. Commercial Guaranty Assurance, Ltd., was
incorporated in Bermuda in October, 1996. Commercial Guaranty Assurance is
licensed as a class 3 insurer under the Insurance Act 1978 (Bermuda), amendments
thereto and related regulations (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. Commercial Guaranty Assurance has a "Triple-A" "claims
paying ability" rating from Duff & Phelps Credit Rating Company 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. Effective March 31, 2000, Commercial Guaranty Assurance's claims-paying
ability rating was rated "Triple-A" by Japan Rating and Investment Information,
Inc., the largest credit rating agency in Japan. Commercial Guaranty Assurance
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. was incorporated in Delaware, U.S.A., in
July 1996. CGA Investment Management is registered as an investment advisor with
the United States Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended. CGA Investment Management provides investment
management and financial advisory services primarily to specialized investment
vehicles and for the U.S. and international structured finance markets.
CGA Group and its subsidiaries were inactive until June 17, 1997, on which
date CGA Group's private placement offering was completed and CGA Group was
recapitalized with (a) two classes of preferred stock totaling $105 million, (b)
common stock totaling $45.5 million and (c) conditional commitments to purchase
$60 million of additional preferred stock. On March 31, 1999, CGA Group sold
43,997,863 shares of its 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 converted to shares of common stock. On April 26, 1999, CGA
Group sold 973,483 shares of Series C preferred stock to employees of CGA Group
and its subsidiaries for an aggregate sales price of approximately $1.2 million.
RESULTS OF OPERATIONS
Total revenues for the quarter ended March 31, 2000 were $5.7 million, of
which $3.2 million was from financial guaranty insurance premiums, $0.5 million
was from investment management and advisory fees and $2.3 million was from
investment income, less $0.3 million from net realized losses on the sale of
investments. Total revenues for the quarter ended March 31, 1999 were $6.1
million, of which $3.1 million was from financial guaranty insurance premiums,
$1.1 million was from investment management and advisory fees, $1.7 million was
from investment income and $0.2 million from net realized gains on the sale of
investments.
Premiums
Net premiums earned in the quarter ended March 31, 2000 were derived from
$4.0 million of gross premiums written, of which $0.6 million were ceded under
reinsurance agreements. Net premiums earned in the quarter ended March 31, 1999
were derived from $3.5 million of gross premiums written, of which $0.4 million
were ceded under reinsurance agreements. The $0.4 million increase in net
premiums written during
14
<PAGE> 18
the three months ended March 31, 2000 compared to March 31, 1999 resulted from
net insurance in force increasing from $1.6 billion at March 31, 1999 to $2.4
billion at March 31, 2000, offset by a 34% premium discount provided to three
subsidiaries of St. George Holdings, Ltd. This premium discount totaled $0.5
million for the quarter ended March 31, 2000. The discount was provided at the
request of the clients which are continuing to resolve liquidity issues that
arose during the fourth quarter of 1998.
Ceded premiums in the first quarter of 2000 were affected by a charge of
approximately $0.3 million relating to recognition of prepaid reinsurance
premiums related to the Commercial Financial Services securities. The increase
in unearned premiums results from two insurance policies for which approximately
$.8 million was received up-front of which only $.2 million was earned during
the first quarter of 2000.
Insurance in force
The amount of Commercial Guaranty Assurance's insured portfolio was $2.4
billion net par as of March 31, 2000. The weighted average term of the insured
securities at March 31, 2000 is approximately eight years. The following table
shows the net par insured obligations at March 31, 2000 and December 31, 1999 by
asset type:
<TABLE>
<CAPTION>
2000 1999
ASSET TYPE (IN 000'S) (IN 000'S)
- ---------- ---------- ----------
<S> <C> <C>
Auto........................................................ $ 21,709 $ 26,158
Commercial loan and bond obligations........................ 371,512 327,335
Commercial mortgage-backed securities....................... 732,575 614,217
Corporate asset-backed securities........................... 152,490 147,490
Credit card receivables..................................... 158,694 165,997
Equipment................................................... 16,045 17,111
Future flows................................................ 52,921 55,463
Home equity loans........................................... 416,281 374,280
Real estate investment trust debt........................... 251,559 256,774
Real estate investment trust preferred stock................ 70,000 70,000
Sovereign debt.............................................. 90,000 90,000
Other consumer asset-backed securities...................... 103,800 89,640
---------- ----------
Total....................................................... $2,437,586 $2,234,465
========== ==========
</TABLE>
The following table presents the credit ratings of the above assets, as
assigned by one or more nationally recognized credit rating agencies, based on
net par outstanding at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
"AAA"....................................................... 3% 4%
"AA"........................................................ 3% 2%
"A"......................................................... 25% 25%
"BBB"....................................................... 60% 58%
"BB"........................................................ 9% 9%
Not rated................................................... -- 2%
--- ---
Total....................................................... 100% 100%
=== ===
</TABLE>
Investment income
Net investment income was $2.3 million for the quarter ended March 31, 2000
and $1.7 million for the same period in 1999. Net investment income is presented
after deducting the cost of external investment management fees which totaled
$30,000 for the quarter ended March 31, 2000 and $20,000 for the quarter ended
March 31, 1999. The increase in net investment income in the first quarter of
2000 over the first quarter of 1999 was due to having investments of $148
million at March 31, 2000 compared to $131 million at
15
<PAGE> 19
March 31, 1999. In addition, the average yield on the investment portfolio was
7.2% as of March 31, 2000 compared with an average yield of 5.6% as of March 31,
1999.
Unrealized losses on the investment portfolio as of March 31, 2000 were
$7.1 million compared to $6.5 million of unrealized losses as of December 31,
1999. The increase in unrealized losses is a result of the increase in interest
rates during the first quarter of 2000.
Management fees
Management fees earned for the quarter ended March 31, 2000 were $0.5
million compared with the same period in 1999 of $1.1 million. During the first
quarter of 2000 the par value of CGA Investment Management's assets under
management increased from $2.5 billion at December 31, 1999 to $2.6 billion. The
primary reason for the 52% decrease in management fees on a comparable quarter
basis is attributable to a 60% reduction of management fees, from 25 basis
points to 10 basis points, charged to certain clients of CGA Investment
Management.
Operating expenses
Operating expenses for the quarter ended March 31, 2000 were $3.6 million
compared to $3.3 million for the quarter ended March 31, 1999. These costs are
primarily personnel, legal, and administrative.
Losses and loss adjustment expenses
On March 15, 2000, Commercial Guaranty Assurance made a claim payment in
respect of Commercial Financial Services securities of $28.5 million of which
$21.8 million consisted of payments from its reinsurer and $6.7 million
consisted of Commercial Guaranty Assurance's own funds, paid out of the case
basis reserve. At March 31, 2000, Commercial Guaranty Assurance's gross
remaining exposure to Commercial Financial Services was reduced to $45.0 million
of which $34.4 million is covered by reinsurance and $1.0 million is included in
case basis reserves, resulting in a net remaining exposure of $9.6 million. On
April 18, 2000, Commercial Guaranty Assurance made an additional claim payment
of $4.2 million of which $3.2 million consisted of payments from its reinsurer
and $1.0 consisted of Commercial Guaranty Assurance's own funds, paid out of the
case basis reserve. Including the claim payment made in April 2000, cumulative
claim payments made in respect of Commercial Financial Services securities total
$150.7 million, of which $115.2 million was covered by reinsurance and $35.5 was
paid by Commercial Guaranty Assurance out of case basis reserves.
In April 2000, Commercial Guaranty Assurance elected to pay a $2.6 million
claim in connection with a "Triple-B" rated tranche of a home equity loan
securitization insured by Commercial Guaranty Assurance. Based on its ongoing
surveillance, Commercial Guaranty Assurance concluded that this security was no
longer investment grade risk and consequently, as insurer of the transaction,
Commercial Guaranty Assurance directed the transaction's trustee to sell the
security. The sale resulted in a shortfall of $2.6 million, which was included
in the case basis reserve at March 31, 2000. The claim payment of $2.6 million
was made on April 27, 2000.
Giving effect to the two claim payments in April 2000 described above, the
balance of Commercial Guaranty Assurance's case basis reserves is approximately
$0.4 million, which represents the balance of expected loss adjustment expenses
relating to the Commercial Financial Services securities.
Preferred dividends
For the quarter ended March 31, 2000, the pay-in-kind dividends on
preferred stock and accretion on preferred stock totaled $3.3 million compared
to $5.6 million for the quarter ended March 31, 1999. The decrease resulted from
the conversion of all outstanding Series B preferred stock into common stock on
March 31, 1999.
16
<PAGE> 20
SUMMARY OF OPERATING SEGMENTS
CGA Group has two reportable segments, Commercial Guaranty Assurance and
CGA Investment Management. Commercial Guaranty Assurance issues financial
guaranty insurance policies and CGA Investment Management provides investment
management and advisory services. The tables below present selected financial
information for each of the operating segments:
As of and for the three months ended March 31, 2000:
<TABLE>
<CAPTION>
COMMERCIAL CGA
GUARANTY INVESTMENT
ASSURANCE MANAGEMENT OTHER(A) TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned......... $ 3,183,267 $ -- $ -- $ 3,183,267
Net investment income....... 2,182,285 19,004 76,035 2,277,324
Net realized losses......... (321,509) -- -- (321,509)
Management fees............. -- 549,056 -- 549,056
Intersegment revenue........ 112,882 191,959 304,841
------------ ----------- ----------- ------------
TOTAL REVENUES.............. 5,044,043 680,942 267,994 5,992,979
------------ ----------- ----------- ------------
EXPENSE ITEMS
Operating expenses.......... 413,322 2,829,970 373,032 3,616,324
Acquisition costs........... 227,245 -- -- 227,245
Commitment fees............. 150,000 -- -- 150,000
Excess of loss facility..... 50,000 -- -- 50,000
Losses and loss adjustment
expenses.................. 2,991,391 -- -- 2,991,391
Intersegment expenses....... 112,882 191,959 -- 304,841
------------ ----------- ----------- ------------
TOTAL EXPENSES.............. 3,944,840 3,021,929 373,032 7,339,801
------------ ----------- ----------- ------------
NET INCOME (LOSS)........... 1,099,203 (2,340,987) (105,038) (1,346,822)
------------ ----------- ----------- ------------
ASSETS
TOTAL ASSETS................ $166,786,997 $ 3,439,530 $17,763,430 $187,989,957
============ =========== =========== ============
</TABLE>
- ---------------
(a) The "other" segment is comprised of CGA Group, Ltd., the holding company,
which does not meet any of the quantitative thresholds for determining a
reportable segment.
As of and for the three months ended March 31, 1999:
<TABLE>
<CAPTION>
COMMERCIAL CGA
GUARANTY INVESTMENT
ASSURANCE MANAGEMENT OTHER(A) TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned......... $ 3,082,046 $ -- $ -- $ 3,082,046
Net investment income....... 1,651,857 16,972 2,672 1,671,501
Net realized gains.......... 151,566 -- -- 151,566
Management fees............. -- 1,145,259 -- 1,145,259
Intersegment revenue........ -- 59,827 -- 59,827
------------ ----------- ----------- ------------
TOTAL REVENUES.............. 4,885,469 1,222,058 2,672 6,110,199
------------ ----------- ----------- ------------
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
COMMERCIAL CGA
GUARANTY INVESTMENT
ASSURANCE MANAGEMENT OTHER(A) TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
EXPENSE ITEMS
Operating expenses.......... 303,556 2,627,079 345,642 3,276,277
Acquisition costs........... 148,138 -- -- 148,138
Commitment fees............. 147,945 -- -- 147,945
Excess of loss facility..... 50,000 -- -- 50,000
Losses and loss adjustment
expenses.................. 300,000 -- -- 300,000
Intersegment expenses....... 59,827 -- -- 59,827
------------ ----------- ----------- ------------
TOTAL EXPENSES.............. 1,009,466 2,627,079 345,642 3,982,187
------------ ----------- ----------- ------------
NET INCOME (LOSS)........... 3,876,003 (1,405,021) (342,970) 2,128,012
------------ ----------- ----------- ------------
ASSETS
TOTAL ASSETS................ $244,118,686 $ 3,644,229 $31,307,904 $279,070,819
============ =========== =========== ============
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
CGA Group's investment portfolio, which is managed by Alliance Capital
Management Corporation, is available to fund the liquidity needs of CGA Group.
These funds are invested in foreign corporate and government debt securities
which are rated "Double-A" or higher by a nationally recognized rating agency
and are denominated in U.S. dollars. The portfolio maintains a weighted average
duration of two to five years. As of March 31, 2000, the duration of the
portfolio was 3.1 years. The investment portfolio had a return of 0.85% for the
quarter ended March 31, 2000, while the Merrill Lynch Eurodollar High Quality
3-5 year Index against which CGA Group's investment portfolio is measured,
returned 0.89%.
CGA Group does not expect to pay cash dividends to its shareholders.
Commercial Guaranty Assurance's Board of Directors has passed a resolution that
Commercial Guaranty Assurance will not declare or pay cash dividends during the
first five years of operations. After such five-year period, Commercial Guaranty
Assurance intends to comply with dividend restrictions, if any, imposed by Duff
& Phelps, subject to covenants contained in the subscription agreements for the
various classes of CGA Group's stock. In addition, Commercial Guaranty
Assurance's dividend payments are subject to certain limitations under Bermudian
insurance regulations that require minimum solvency margins and liquidity
ratios.
CGA Investment Management required additional funding for operations from
CGA Group during the quarter ended March 31, 2000 totaling $5.7 million. All
intercompany loans bear interest at a rate of 6% per annum with interest paid
annually. CGA Investment Management is expected to require additional funding in
2000 while it continues to build its assets under management to generate
sufficient fee income to cover its operations.
On a consolidated basis, CGA Group used $7.9 million of cash from operating
activities during the quarter ended March 31, 2000, compared to generating $2.6
million for the quarter ended March 31, 1999. Cash flows from operations are
affected by claim payments, which due to the nature of CGA Group's operations,
may comprise large loss payments on a limited number of claims and therefore can
fluctuate significantly from year to year. The source of funds for claim
payments occurring in the quarter ended March 31, 2000 was from the sale of cash
equivalents, therefore resulting in a significant variation in cash flows from
operations between comparable periods. For the three months ended March 31, 2000
and 1999, loss and loss adjustment payments amounted to $6.8 million and nil,
respectively. For the three months ended March 31, 2000 and 1999, net losses and
loss adjustment expenses amounted to $3.0 million and $0.3 million respectively.
CGA Group used $2.4 million of net cash in investing activities during the
quarter ended March 31, 2000, compared to $1.9 million in the first quarter of
1999.
18
<PAGE> 22
Commercial Guaranty Assurance has a $20 million excess of loss reinsurance
facility agreement and can also arrange reinsurance on an as needed basis to
manage its exposure. CGA Group also has commitments which expire June 17, 2002,
from certain institutional shareholders to purchase an aggregate of $60 million
of Series B preferred stock which would pay quarterly dividends in kind at 7%
per annum. Should those commitments be called upon, the proceeds are required to
be used to increase the capital of Commercial Guaranty Assurance. The
commitments must be funded in the event that Duff & Phelps (or Fitch IBCA, Inc.,
as successor by merger to Duff & Phelps) provides written notice at least 45
days prior to June 17, 2002 that Commercial Guaranty Assurance's claims paying
ability rating will be reduced below "Triple-A".
At March 31, 2000, Commercial Guaranty Assurance's claims paying resources
were $222.8 million compared to $194.1 million at March 31, 1999.
On April 12, 2000, Fitch IBCA announced that it successfully completed its
acquisition of Duff & Phelps. The merger is expected to be completed by late May
and until such time that the merger is completed, Duff & Phelps will operate as
a separate entity and its ratings shall remain outstanding. Commercial Guaranty
Assurance is not currently rated by Fitch IBCA and it is unclear what effect, if
any, the merger will have on the rating of Commercial Guaranty Assurance.
On March 13, 2000, CGA Group hired Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), an investment banking firm, to act as CGA Group's exclusive
financial advisor for the purpose of raising additional capital. At March 31,
2000, no additional capital had been raised. At this time, Management is unable
to predict whether or to what extent DLJ will be successful in these capital
raising efforts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the FASB) issued
Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), subsequently amended by SFAS No. 137, which CGA Group is required
to adopt effective January 1, 2001. SFAS 133 requires all derivatives to be
recognized on the balance sheet as either assets or liabilities and measured at
fair value. Upon implementation, credit default swaps will be valued at fair
value in accordance with this statement. The impact of SFAS 133 on CGA Group's
financial statements will depend on a variety of factors, including future
interpretative guidance from the FASB, and the volume of credit default swaps
written by Commercial Guaranty Assurance.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This report on Form 10-Q or any other
written or oral statements made by or on behalf of CGA Group may include
forward-looking statements which reflect CGA Group'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 CGA Group with the Securities and Exchange Commission) include, but are not
limited to, (i) financial difficulties encountered by an insured of CGA Group'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) the risks
relating to the claims-paying ability rating of CGA Group's insurer subsidiary,
(vi) loss of the services of any of CGA Group'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 CGA Group's investment portfolio, and (x) 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.
19
<PAGE> 23
PART II. OTHER INFORMATION
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
CGA Group did not file any Current Reports on Form 8-K during the quarter
ended March 31, 2000.
II-1
<PAGE> 24
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: May 15, 2000
II-2
<PAGE> 25
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 Employment Agreement, as of January 1, 2000, by and between
Commercial Guaranty Assurance, Ltd. and Michael Miran
10.2 Employment Agreement, as of January 1, 2000, by and between
CGA Investment Management, Inc. and Geoffrey N. Kauffman
10.3 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
10.4 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
10.5 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, incorporated
herein by reference to Exhibit 10.20 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999 (the "June 30, 1999 10-Q")
10.6 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, incorporated herein by reference to
Exhibit 10.21 to the June 30, 1999 10-Q
27.1 Financial Data Schedule
</TABLE>
II-3
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered into
as of the 1st day of January, 2000 (the "Effective Date"), by and between
Commercial Guaranty Assurance, Ltd., a Bermuda corporation (referred to herein
as the "Employer"), and Michael Miran (the "Employee").
RECITALS
A. The Employer desires to employ the Employee for a specified term;
and
B. The Employee is willing to be employed by the Employer upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter contained, it is covenanted and agreed by
and between the parties hereto as follows:
AGREEMENTS
I. POSITION AND DUTIES. The Employer hereby employs the
Employee as the President and Chief Underwriting Officer of the Employer and as
the General Counsel of CGA Group, Ltd. or in such other capacity as shall be
mutually agreed between the Employee and the Employer. During the period of the
Employee's employment hereunder, the Employee shall devote the Employee's best
efforts and full business time, energy, skills and attention to the business and
affairs of the Employer; provided, however, that the Employee shall perform on
behalf of the Employer and the Employer's parent corporation, CGA Group, Ltd. in
the United States of America only such duties that are of a ministerial nature
and the performance of which are in compliance with the Operating Guidelines of
CGA Group, Ltd. and Subsidiaries (as amended and in effect from time to time,
the "Operating Guidelines"). The Employee's duties and authority shall consist
of and include all duties and authority customarily performed and held by
persons holding equivalent positions with business organizations similar in
nature and size to the Employer, as such duties and authority are, subject to
the immediately preceding sentence, reasonably defined, modified and delegated
from time to time by the Board of Directors of the Employer (the "Board") or
that person to whom the Board has delegated such authority. The Employee shall
have the powers necessary to perform the duties assigned to him, and shall be
provided such supporting services, staff, secretarial and other assistance,
office space and accoutrements as shall be reasonably necessary and appropriate
in light of such assigned duties.
<PAGE> 2
II. COMPENSATION. As compensation for the services to be
provided by the Employee, the Employee shall receive the following compensation
and other benefits:
A. BASE SALARY. The Executive shall receive
an aggregate annual minimum base salary ("Base Salary") at the rate of
Two Hundred Forty Thousand U.S. Dollars ($240,000) payable in
installments in accordance with the regular payroll practices of the
Employer. Such Base Salary shall be subject to review annually,
commencing on the first anniversary of the Effective Date and shall be
maintained or increased during the term hereof in accordance with the
Employer's established compensation policies.
B. BONUSES. The Employee may receive a
discretionary annual cash bonus ("Annual Bonus"), payable within thirty
(30) days after the end of each calendar year during which this
Agreement is in effect, commencing with calendar year 2000, which shall
be based upon an annual incentive plan approved by the compensation
committee of the board of directors of CGA Group, Ltd.
C. CLUB MEMBERSHIP. The Employee shall be
reimbursed for membership dues at a local country club of his choice,
in an amount to be mutually agreed upon between the Employee and the
Employer.
D. REIMBURSEMENT OF EXPENSES. In accordance
with the expense reimbursement policies of the Employer, as promulgated
and in effect from time to time, the Employee shall be reimbursed, upon
submission of appropriate vouchers and supporting documentation, for
all travel, entertainment and other out-of-pocket expenses reasonably
and necessarily incurred by the Employee in the performance of his
duties hereunder.
E. MOVING AND INTERIM LIVING EXPENSES. The
Employer shall pay all reasonable expenses related to the relocation to
Bermuda from Scarsdale, New York of the Employee and his family,
including packing and shipping the Employee's entire household and all
furniture, belongings and effects. The Employer shall also, upon
termination of the Employee's employment hereunder, pay all expenses
related to the relocation of the Employee and the Employee's family to
the U.S. location of Employee's choice, including packing and shipping
Employee's effects, furniture and personal belongings.
F. HOUSING ALLOWANCE. The Employer shall pay
the Employee a housing allowance each month during the term
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<PAGE> 3
of Employee's employment hereunder, in an amount equal to the
Employee's actual monthly housing rental expense not to exceed the
Maximum Monthly Allowance (as hereinafter defined), plus electric
utility costs. As used herein, the term "Maximum Monthly Allowance"
shall mean the greater of (i) Ten Thousand U.S. Dollars (U.S. $10,000)
plus 50% (fifty percent) of the Employee's actual monthly housing
rental expense over U.S. $10,000 up to U.S. $16,000, and (ii) the
actual amount of rent paid by the Employee for the premises known as
"Coolshanah", 20 Point Shares Road, Pembroke HM05; provided, however
that the Maximum Monthly Allowance payable by the Employer shall in no
event exceed Thirteen Thousand U.S. Dollars (U.S. $13,000).
G. SCHOOLING EXPENSES. The Employer shall
pay the private Bermuda secondary school tuition and fees for the
Employee's children, if and to the extent any of the Employee's
children relocate to Bermuda, in an amount not to exceed ten thousand
U.S. Dollars (U.S. $10,000) per child per academic year, during the
term of Employee's employment.
H. OTHER BENEFITS. The Employee shall be
entitled to all benefits specifically established for him by the Board
or a committee thereof and, when and to the extent he is eligible
therefor, to participate in all plans and benefits generally accorded
to employees of the Employer, subject to all of the terms thereof,
including, but not limited to, as applicable, pension, profit-sharing,
supplemental retirement, stock option, severance, incentive
compensation, bonus, disability income, split-dollar life insurance,
group life, medical and hospitalization insurance, and similar or
comparable plans, and also to perquisites extended to similarly
situated senior employees. Additionally, the Employer shall obtain for
the benefit of the Employee's estate a term life insurance policy with
a value of two times the Employee's base salary as presented in
Subsection IIA.
I. VACATIONS; VISITATION RIGHTS. The
Employee shall be entitled to an annual vacation in accordance with the
operative vacation policy of the Employer in effect from time to time,
which vacation shall be taken at a time or times mutually agreeable to
the Employee and the Employer. In addition, (i) during the period
commencing on the date hereof through and including July 31, 2000, the
Company shall reimburse the Employee for round-trip coach airfare for
up to four trips to the U.S. and back to Bermuda (or vice versa) taken
by any of the Employee, his spouse or his children, in any calendar
month (i.e., a total of up to four round trips in any calendar month),
and (ii) thereafter, during the term of the Employee's employment, the
Company
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<PAGE> 4
shall reimburse the Employee for round-trip coach airfare for up to two
trips (one such trip in calendar year 2000) to the U.S. and back to
Bermuda (or vice versa) in any calendar year by the Employee, his
spouse and his children, in each case to the extent incurred by the
Employee.
J. FULL BENEFIT OF ALLOWANCES. If any of the
compensation and benefits provided in Subsections E through G, the last
sentence of Subsection I, and/or Subsections L, M, and N shall be
deemed taxable to the Employee in the U.S., the Employer shall pay to
the Employee that additional amount necessary to "gross-up" the payment
in question and fully subsidize any U.S. tax consequences to the
Employee.
K. WITHHOLDING. The Employer shall be
entitled to withhold, from amounts payable to the Employee hereunder,
any federal, state or local withholding or other taxes or charges which
it is from time to time required to withhold.
L. IMMIGRATION AND WORK PERMITS. The
Employer shall be responsible for and will pay all expenses related to
obtaining all ordinary and necessary immigration and work permit
approvals on Employee's behalf with respect to his employment in
Bermuda. The Employee shall cooperate with the Employer in obtaining
such approvals.
M. TAX ASSISTANCE. The Employer shall
provide the Employee with reasonable expatriates tax assistance,
provided by the independent accountants and tax counsel regularly
engaged by the Employer.
N. AUTOMOBILE EXPENSE. The Employee shall
receive from Employer a monthly auto expense assistance in the amount
of $750.
III. TERM AND TERMINATION
A. BASIC TERM. The Employee's employment under this
Agreement shall be for a term of one (1) year commencing as of the Effective
Date and shall automatically extend for one (1) additional year commencing on
the first anniversary of the Effective Date and on each anniversary thereafter,
unless terminated by either party effective as of the last day of the then
current Agreement term by written notice to the effect delivered to the other
not less than one hundred twenty (120) days prior to the anniversary of such
Effective Date.
B. VOLUNTARY TERMINATION BY EMPLOYEE. The Employee may
voluntarily terminate this Agreement, at any time, by written
4
<PAGE> 5
notice to that effect delivered to the Employer not less than thirty (30) days
prior to the effective date of Employee's voluntary termination. Upon Employee's
voluntary termination, Employee shall have no obligations to the Employer other
than as provided for in Sections IV and V hereof, together with an obligation to
provide Employee's reasonable transitional assistance to the Employer for a
period of not more than thirty (30) days in connection with matters for which
the Employee was responsible during the term of this Agreement and which were
not concluded prior to Employee's voluntary termination. Upon Employee's
voluntary termination, no Annual Bonus for the year in which such termination
occurs shall be payable to the Employee and no further payments of any kind
shall be due hereunder, except for compensation and benefits accrued as of the
date of such termination, and except that the Employer shall pay all expenses
related to the relocation of Employee and Employee's family to the U.S. location
of Employee's choice, including packing and shipping Employee's household
effects, furniture and personal belongings.
C. PREMATURE TERMINATION WITHOUT CAUSE AND
CONSTRUCTIVE TERMINATION.
1. In the event of the termination of the
Employee's employment under this Agreement prior to the last day of the
then current term, either (A) by the Employer for any reason other than
a termination in accordance with the provisions of Subsection IIID,
IIIE or IIIF or (B) by the Employee by written notice to the Employer
given within thirty (30) days of Constructive Discharge (as hereinafter
defined) effective as of thirty (30) days after such notice, then the
Employer shall: (A) pay the Employee the greater of (x) the Base Salary
the Employee would have received had he remained employed through the
end of the then current term of the Agreement and (y) six (6) months of
Base Salary; (B) continue to provide coverage for the Employee under
the medical benefit program maintained by the Employer through the
remainder of the term of the Agreement (if permitted to do so under
such program), and (C) pay all expenses related to the relocation of
Employee and Employee's family to the U.S. location of Employee's
choice, including packing and shipping Employee's household effects,
furniture and personal belongings. The benefits provided in (i)
Subsections IIG, IIJ, IIM and IIN shall continue for 3 months or, if
any of Employee's children are attending school in Bermuda at the time
of such termination, the end of the academic school year, whichever is
longer; and the benefits provided for in Subsection IIF shall continue
for the longer of the period specified in clause (i) of this sentence
or the expiration of the then current lease term for the premises in
Bermuda in which the Employee is then
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<PAGE> 6
residing, not to exceed one year; provided, however, that such
continuation shall not include any expenses for temporary housing or
accommodation in the U.S. The benefits described in Subsections IIC and
II-I shall not continue following termination under this Subsection
IIIC.
2. Payments to the Employee under this
Subsection 3C will be made in accordance with the regular payroll
practices of the Employer during the remaining term of this Agreement
or, at the election of the Employer, such payments may be made in a
lump sum.
3. For purposes of this Agreement, the
Employee shall be deemed "Constructively Discharged" if the Employer
changes the primary employment location of the Employee to a place
other than Bermuda without the express written consent of the Employee.
D. TERMINATION FOR CAUSE. Notwithstanding any other
provision of this Agreement, in the event of the termination of the Employee's
employment under this Agreement for cause, no Annual Bonus for the year in which
such termination occurs shall be payable to the Employee and no further payments
shall be due hereunder except for compensation or benefits accrued as of the
date of such termination, and except that Employer shall pay all expenses
related to the relocation of Employee and Employee's family to the U.S. location
of Employee's choice, including packing and shipping Employee's household
effects, furniture and personal belongings. For purposes of this Agreement,
"cause" shall mean: (i) a material violation by the Employer, in which the
Employee materially and directly participated, of any law or regulation
respecting the business of the Employer or any affiliate, other than a material
violation which is a direct result of the operation of the Employer and/or its
affiliates in accordance with the Operating Guidelines; (ii) the Employee being
found guilty by a court of competent jurisdiction or a plea of guilty or nolo
contendre to a charge of (A) any felony or (B) an act of dishonesty in
connection with the performance of his duties for the Employer; or (iii) the
willful or negligent failure of the Employee to perform his duties hereunder in
any material respect.
E. TERMINATION UPON DEATH. If the Employee dies
during the term of this Agreement, payment of any accrued compensation due to
the Employee at the time of death including the bonus payable with respect to
the prior calendar year if death occurs prior to payment of such bonus, shall be
made to such beneficiary as the Employee may designate in writing, or failing
such designation, to the executor, administrator or other representative of his
estate; provided, however, that the Employee's Annual Bonus payable with respect
to the calendar year
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<PAGE> 7
in which such termination occurs (with such Annual Bonus calculated based on the
bonus(es) payable to the Employee with respect to the immediately preceding
year) shall be payable on a pro rata basis to the date of the Employee's death.
Such payments shall be in addition to any other death benefits of the Employer
for the benefit of the Employee and in full settlement and satisfaction of all
payments provided for in this Agreement, except for (i) the benefits provided
for in Subsections IIG, IIJ, IIM and IIN, which shall continue for 3 months
following the Employee's death or, if any of Employee's children are attending
school in Bermuda at the time of such termination, the end of the academic
school year, whichever is longer; and (ii) the benefits provided for in
Subsection IIF shall continue for the longer of the period specified in clause
(i) of this sentence or the expiration of the then current lease term for the
premises in Bermuda in which the Employee's family is then residing, not to
exceed one year; provided, however, that such continuation shall not include any
expenses for temporary housing or accommodation in the U.S. In addition,
Employer shall pay all expenses related to the relocation of Employee's family
to the single U.S. location of their choice, including packing and shipping
their household effects, furniture and personal belongings.
F. TERMINATION UPON DISABILITY. The Employer may
terminate the Employee's employment after the Employee is determined to be
disabled under the then current Employer program if such a program exists at the
time the Employee is disabled. If no such program exists, the Employee will be
considered disabled if the Employee suffers an illness or injury of a
potentially permanent nature which results in the Employee's inability to
substantially perform his duties hereunder as determined by the board of
directors of CGA Group, Ltd. for a period of either six (6) consecutive months,
or one hundred and twenty (120) business days within a consecutive twelve (12)
month period. If the Employer terminates the Employee after it is determined
that the Employee is disabled, the Employer shall pay the Employee the
compensation accrued through the date of the Employee's termination of
employment including the bonus payable with respect to the prior calendar year
if the termination occurs prior to payment of such bonus; provided, however,
that the Employee's Annual Bonus payable with respect to the calendar year in
which such termination occurs (with such Annual Bonus calculated based on the
bonus(es) payable to Employee with respect to the immediately preceding year)
shall be payable on a pro rata basis to the date of the Employee's termination.
In the event of a dispute regarding the Employee's disability, each party shall
choose a physician who together will choose a third physician to make a final
determination. The Employee shall be entitled to the compensation and benefits
provided for under this Agreement for any period during the term of this
Agreement and prior to the establishment of the Employee's disability.
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<PAGE> 8
Notwithstanding anything contained in this Agreement to the contrary, until the
date specified in a notice of termination relating to the Employee's disability,
the Employee shall be entitled to return to his position with the Employer as
set forth in this Agreement, in which event no disability of the Employee will
be deemed to have occurred. In the event of a termination of the Employee under
this paragraph Employer shall pay all expenses related to the relocation of
Employee and Employee's family to the U.S. location of Employee's choice,
including packing and shipping Employee's household effects, furniture and
personal belongings.
IV. CONFIDENTIALITY AND LOYALTY. The Employee acknowledges
that during the course of the Employee's employment, the Employee will produce
and have access to material, records, data, trade secrets and information not
generally available to the public regarding the Employer and its subsidiaries
and affiliates (collectively, "Confidential Information"). Accordingly, during
and subsequent to termination of this Agreement, the Employee shall hold in
confidence and not directly or indirectly disclose, use, copy or make lists of
any such Confidential Information, except to the extent that such information is
or thereafter becomes lawfully available from public sources, or such disclosure
is authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
employee's duties hereunder. All records, files, documents and other materials
or copies thereof relating to the Employer's business which the Employee shall
prepare or use shall be and remain the sole property of the Employer, shall not
be removed from the Employer's premises without its written consent other than
in the ordinary course of business, and shall be promptly returned to the
Employer upon termination of the Employee's employment hereunder. The Employee
agrees to abide by the Employer's reasonable policies, as in effect from time to
time, respecting avoidance of interests conflicting with those of the Employer.
V. NON-SOLICITATION AND NON-COMPETITION COVENANTS.
A. RESTRICTIVE COVENANT. The Employee and the
Employer have jointly reviewed the operations of the Employer and have agreed
that the covenants contained in this Section V are an essential ingredient of
this Agreement and are made in consideration for the payment of the amounts
described in Sections II and III hereof. The Employee hereby agrees that, except
with the express prior written consent of the Employer, for a period of one (1)
year after the termination of the Employee's employment with the Employer, with
respect to clause (i) below, for any reason and, with respect to clause (ii)
below, for any reason other than a termination pursuant to Subsection
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<PAGE> 9
IIIC (the "Restrictive Period"), the Employee (i) will not (a) solicit employees
of the Employer or of any subsidiary or affiliate of the Employer or (b) solicit
clients or customers of the Employer or of any subsidiary or affiliate of the
Employer in respect of any transaction, matter or business that directly or
indirectly competes with any of the businesses then conducted by the Employer or
any of its subsidiaries or affiliates, and (ii) will not directly or indirectly
compete with the business of the Employer, by directly or indirectly being a
shareholder or partner of or serving as an employee, officer or director of or
consultant to, or in any other capacity with, any person, firm, partnership,
corporation, subsidiary, division, joint venture, trust or other entity, or any
division, subsidiary or separate enterprise of any such entity, which (x) was
created during the term of Employee's employment with the Employer or is
expected to be created within a period of one (1) year after the Employee's
termination of employment with the Employer, and (y) which owns or operates a
business which is either: (A) an insurer or reinsurer of asset backed
securities, mortgage backed securities or commercial mortgage backed securities;
or (B) an investment company that is directly or indirectly owned by, affiliated
with, attached to or otherwise related to an insurer or reinsurer of asset
backed securities, mortgage backed securities or commercial mortgage backed
securities; or (C) an investment advisory firm that is directly or indirectly
owned by, affiliated with, attached to or otherwise related to an insurer or
reinsurer of asset backed securities, mortgage backed securities or commercial
mortgage backed securities (the "Restrictive Covenant"). If the Employee
violates the Restrictive Covenant and the Employer brings legal action for
injunctive or other relief, the Employer shall not, as a result of the time
involved in obtaining such relief, be deprived of the benefit of the full period
of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be
deemed to have the duration specified in this Subsection VA. computed from the
date the relief is granted but reduced by the time between the period when the
Restrictive Period began to run and the date of the first violation of the
Restrictive Covenant by the Employee. The Restrictive Covenant shall not
prohibit the Employee from owning directly or indirectly capital stock or
similar securities which are listed on a securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation System which do
not represent more than five percent (5%) of the outstanding capital stock of
any business similar to that of the Employer's.
B. REMEDIES FOR BREACH OF RESTRICTIVE COVENANT. The
Employee acknowledges that the restrictions contained in Sections IV and V of
this Agreement are reasonable and necessary for the protection of the legitimate
business interests of the Employer, that any violation of these restrictions
would cause substantial injury to the Employer and such interests, that the
Employer
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<PAGE> 10
would not have entered into this Agreement with the Employee without receiving
the additional consideration offered by the Employee in binding himself to these
restrictions and that such restrictions were a material inducement to the
Employer to enter into this Agreement. In the event of any violation of these
restrictions, the Employer shall be relieved of all further obligations under
this Agreement and shall be entitled to any rights, remedies or damages
available to the Employer under this Agreement or otherwise at law or in equity.
In addition, in the event of any violation or threatened violation of these
restrictions, the Employer shall be entitled to preliminary and permanent
injunctive relief to prevent or restrain any such violation by the Employee and
any and all persons directly or indirectly acting for the Employee, as the case
may be.
VI. INTEREST IN ASSETS. Neither the Employee nor the
Employee's estate shall acquire hereunder any rights in funds or assets of the
Employer, otherwise than by and through the actual payment of amounts payable
hereunder; nor shall the Employee or the Employee's estate have any power to
transfer, assign, anticipate, hypothecate or otherwise encumber in advance any
of said payments; nor shall any of such payments be subject to seizure for the
payment of any debt, judgment, alimony, separate maintenance or be transferable
by operation of law in the event of bankruptcy, insolvency or otherwise of the
Employee.
VII. GENERAL PROVISIONS.
A. SUCCESSORS; ASSIGNMENT. Neither party hereto may
assign his or its rights or delegate his or its duties under this Agreement
without the prior written consent of the other party; provided, however, that
(i) this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Employer upon any sale of all or substantially all
of the Employer's assets, or upon any merger, consolidation or reorganization of
the Employer with or into any other corporation, all as though such successors
and assigns of the Employer and their respective successors and assigns were the
Employer; and (ii) this Agreement shall inure to the benefit of and be binding
upon the heirs, assigns or designees of the Employee to the extent of any
payments due to them hereunder. As used in this Agreement, the term "Employer"
shall be deemed to refer to any such successor or assign of the Employer
referred to in the preceding sentence.
B. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement
constitutes the entire agreement between the parties respecting the subject
matter hereof, and supersedes all prior negotiations, undertakings, agreements
and arrangements with respect thereto, whether written or oral. Except as
otherwise explicitly provided
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herein, this Agreement may not be amended or modified except by written
agreement signed by the Employee and the Employer.
C. ENFORCEMENT AND GOVERNING LAW. The provisions of
this Agreement shall be regarded as divisible and separate; if any of said
provisions should be declared invalid or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be construed and the legal
relations of the parties hereto shall be determined in accordance with the laws
of the State of New York, without reference to the law regarding conflicts of
law.
D. ARBITRATION. The provisions of Subsection VB shall
supersede the provisions of this Subsection VIID in the event of a simultaneous
dispute between the Employer and the Employee so as to afford the Employer with
the remedy of injunctive relief, without the necessity for arbitration. Any
dispute or controversy arising under or in connection with this Agreement or the
Employee's employment by the Employer shall be settled exclusively by
arbitration, conducted by a single arbitrator sitting in New York City, New
York, in accordance with the rules of the American Arbitration Association (the
"AAA") then in effect. The arbitrator shall be selected by mutual agreement
between the Employer and the Employee. However, in the event that the parties
are unable to agree on an arbitrator within a period of one week, the arbitrator
shall be selected by the parties from a list of eleven (11) arbitrators provided
by the AAA, provided that no arbitrator shall be related to or affiliated with
either of the parties. If the parties mutually agree on an arbitrator within ten
(10) days after the list of the proposed arbitrators is received by the parties,
then no later than twenty (20) days after such list is received by the parties,
the parties, or their respective representatives, shall meet at a mutually
convenient location in New York City, New York, or telephonically. At that
meeting, the party who sought arbitration shall eliminate one (1) proposed
arbitrator and then the other party shall eliminate one (1) proposed arbitrator.
The parties shall continue to eliminate names from the list of proposed
arbitrators in this manner until each part has eliminated five (5) proposed
arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party
shall submit, in writing, the specific requested action or decision it wishes to
take, or make, with respect to the matter in dispute, and the arbitrator shall
be obligated to choose one (1) party's specific requested action or decision,
without being permitted to effectuate any compromise position. The party whose
requested action or decision is not selected by the arbitrator shall bear the
cost of all counsel, experts or other representatives who are retained by both
parties, together with all costs of the arbitration proceeding, including,
without limitation, the fees,
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costs and expenses imposed or incurred by the arbitrator. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Employee shall be entitled to seek specific performance of the
Employee's right to be paid through the date of termination during the pendency
of any dispute or controversy arising under or in connection with this
Agreement.
E. WAIVER. No waiver be either party at any time of
any breach by the other party of, or compliance with, any condition or provision
of this Agreement to be performed by the other party, shall be deemed a waiver
of any similar or dissimilar provisions or conditions at the same time or any
prior or subsequent time.
F. NOTICES. Notices pursuant to this Agreement shall
be in writing and shall be deemed given when received; and, if mailed, shall be
mailed by United States registered or certified mail, return receipt requested,
postage prepaid; and if to the Employer, addressed to the principal headquarters
of CGA Group, Ltd., attention: President; or, if to the Employee, to the address
set forth below the Employee's signature on this Agreement, or to such other
address as the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
Commercial Guaranty
Assurance, Ltd. Michael Miran
By: /s/ Richard A. Price /s/ Michael Miran
----------------------- ---------------------
Richard A. Price "Coolshanah"
President, CGA Group, Ltd. 20 Point Shares Road
Pembroke HM05 Bermuda
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EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), is made and entered into
as of the 1st day of January, 2000 (the "Effective Date"), by and between CGA
Investment Management, Inc., a Delaware corporation (referred to herein as the
"Employer"), and Geoffrey N. Kauffman (the "Employee").
RECITALS
A. The Employer desires to employ the Employee for a specified term;
and
B. The Employee is willing to be employed by the Employer upon the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter contained, it is covenanted and agreed by
and between the parties hereto as follows:
AGREEMENTS
I. POSITION AND DUTIES. The Employer hereby employs the
Employee as the President and Chief Executive Officer of the Employer or in such
other capacity as shall be mutually agreed between the Employee and the
Employer. During the period of the Employee's employment hereunder, the Employee
shall devote the Employee's best efforts and full business time, energy, skills
and attention to the business and affairs of the Employer; provided, however,
that the Employee shall perform on behalf of the Employer only such duties that
in compliance with the Operating Guidelines of CGA Group, Ltd. and Subsidiaries
(as amended and in effect from time to time, the "Operating Guidelines,"). The
Employee's duties and authority shall consist of and include all duties and
authority customarily performed and held by persons holding equivalent positions
with business organizations similar in nature and size to the Employer, as such
duties and authority are, subject to the immediately preceding sentence,
reasonably defined, modified and delegated from time to time by the Board of
Directors of the Employer (the "Board") or that person to whom the Board has
delegated such authority. The Employee shall have the powers necessary to
perform the duties assigned to him, and shall be provided such supporting
services, staff, secretarial and other assistance, office space and
accoutrements as shall be reasonably necessary and appropriate in light of such
assigned duties.
<PAGE> 2
II. COMPENSATION. As compensation for the services to be
provided by the Employee, the Employee shall receive the following compensation
and other benefits:
A. BASE SALARY. The Employee shall receive an aggregate annual
minimum base salary ("Base Salary") at the rate of Two Hundred Eighty
Five Thousand U.S. Dollars ($285,000) payable in installments in
accordance with the regular payroll practices of the Employer. Such
Base Salary shall be subject to review annually, commencing on the
anniversary of the Effective Date and shall be maintained or increased
during the term hereof in accordance with the Employer's established
compensation policies.
B. BONUSES. The Employee may receive a discretionary annual
cash bonus ("Annual Bonus"), payable within thirty (30) days after the
end of each calendar year during which this Agreement is in effect,
commencing with calendar year 2000, which shall be based upon an annual
incentive plan approved by the compensation committee of the board of
directors of CGA Group, Ltd.
C. REIMBURSEMENT OF EXPENSES. In accordance with the expense
reimbursement policies of the Employer, as promulgated and in effect
from time to time, the Employee shall be reimbursed, upon submission of
appropriate vouchers and supporting documentation, for all travel,
entertainment and other out-of-pocket expenses reasonably and
necessarily incurred by the Employee in the performance of his duties
hereunder.
D. MOVING AND INTERIM LIVING EXPENSES. The Employer shall pay
all reasonable expenses related to the relocation from Bermuda to New
York City of the Employee, including packing and shipping the
Employee's entire household and all furniture, belongings and effects.
E. OTHER BENEFITS. The Employee shall be entitled to all
benefits specifically established for him by the Board or a committee
thereof and, when and to the extent he is eligible therefor, to
participate in all plans and benefits generally accorded to employees
of the Employer, subject to all of the terms thereof, including, but
not limited to, as applicable, pension, profit-sharing, supplemental
retirement, stock option, severance, incentive compensation, bonus,
disability income, split-dollar life insurance, group life, medical and
hospitalization insurance, and similar or comparable plans, and also to
perquisites extended to similarly situated senior employees.
2
<PAGE> 3
Additionally, the Employer shall obtain for the benefit of the
Employee's estate a term life insurance policy with a value of two
times the Employee's base salary as presented in Subsection IIA.
F. VACATIONS. The Employee shall be entitled to an annual
vacation in accordance with the operative vacation policy of the
Employer in effect from time to time, which vacation shall be taken at
a time or times mutually agreeable to the Employee and the Employer.
G. FULL BENEFIT OF ALLOWANCES. If any of the compensation and
benefits provided in Subsections D shall be deemed taxable to the
Employee in the U.S., the Employer shall pay to the Employee that
additional amount necessary to "gross-up" the payment in question and
fully subsidize any U.S. tax consequences to the Employee.
H. WITHHOLDING. The Employer shall be entitled to withhold,
from amounts payable to the Employee hereunder, any federal, state or
local withholding or other taxes or charges which it is from time to
time required to withhold.
I. TAX ASSISTANCE. Until June 1, 2002, the Employer shall
provide the Employee with reasonable tax assistance, provided by the
independent accountants and tax counsel regularly engaged by the
Employer.
III. TERM AND TERMINATION
A. BASIC TERM. The Employee's employment under this Agreement
shall be for a term of one (1) year commencing as of the Effective Date and
shall automatically extend for one (1) additional year commencing on the first
anniversary of the Effective Date and on each anniversary thereafter, unless
terminated by either party effective as of the last day of the then current
Agreement term by written notice to the effect delivered to the other not less
than one hundred twenty (120) days prior to the anniversary of such Effective
Date.
B. VOLUNTARY TERMINATION BY EMPLOYEE. The Employee may
voluntarily terminate this Agreement, at any time, by written notice to that
effect delivered to the Employer not less than thirty (30) days prior to the
effective date of Employee's voluntary termination. Upon Employee's voluntary
termination, Employee shall have no obligations to the Employer other than as
provided for in Sections IV and V hereof, together with an
3
<PAGE> 4
obligation to provide Employee's reasonable transitional assistance to the
Employer for a period of not more than thirty (30) days in connection with
matters for which the Employee was responsible during the term of this Agreement
and which were not concluded prior to Employee's voluntary termination. Upon
Employee's voluntary termination, no Annual Bonus for the year in which such
termination occurs shall be payable to the Employee and no further payments of
any kind shall be due hereunder, except for compensation and benefits accrued as
of the date of such termination.
C. PREMATURE TERMINATION WITHOUT CAUSE AND CONSTRUCTIVE
TERMINATION.
1. In the event of the termination of the Employee's
employment under this Agreement prior to the last day of the then
current term, either (A) by the Employer for any reason other than a
termination in accordance with the provisions of Subsection IIID, IIIE
or IIIF or (B) by the Employee by written notice to the Employer given
within thirty (30) days of Constructive Discharge (as hereinafter
defined) effective as of thirty (30) days after such notice, then the
Employer shall: (A) pay the Employee the greater of (x) the Base Salary
the Employee would have received had he remained employed through the
end of the then current term of the Agreement and (y) six (6) months of
Base Salary; and (B) continue to provide coverage for the Employee
under the medical benefit program maintained by the Employer through
the remainder of the term of the Agreement (if permitted to do so under
such program).
2. Payments to the Employee under this Subsection
IIIC will be made in accordance with the regular payroll practices of
the Employer during the remaining term of this Agreement or, at the
election of the Employer, such payments may be made in a lump sum.
3. For purposes of this Agreement, the Employee shall
be deemed "Constructively Discharged" if the Employer changes the
primary employment location of the Employee to a place other than New
York without the express written consent of the Employee.
D. TERMINATION FOR CAUSE. Notwithstanding any other provision
of this Agreement, in the event of the termination of the Employee's employment
under this Agreement for cause, no Annual Bonus for the year in which such
termination occurs shall be payable to the Employee and no further payments
shall be due hereunder except for compensation or benefits accrued as of the
date of such termination. For purposes of this Agreement,
4
<PAGE> 5
"cause" shall mean: (i) a material violation by the Employer, in which the
Employee materially and directly participated, of any law or regulation
respecting the business of the Employer or any affiliate, other than a material
violation which is a direct result of the operation of the Employer and/or its
affiliates in accordance with the Operating Guidelines; (ii) the Employee being
found guilty by a court of competent jurisdiction or a plea of guilty or nolo
contendre to a charge of (A) any felony or (B) an act of dishonesty in
connection with the performance of his duties for the Employer; or (iii) the
willful or negligent failure of the Employee to perform his duties hereunder in
any material respect.
E. TERMINATION UPON DEATH. If the Employee dies during the
term of this Agreement, payment of any accrued compensation due to the Employee
at the time of death including the bonus payable with respect to the prior
calendar year if death occurs prior to payment of such bonus, shall be made to
such beneficiary as the Employee may designate in writing, or failing such
designation, to the executor, administrator or other representative of his
estate; provided, however, that the Employee's Annual Bonus payable with respect
to the calendar year in which such termination occurs (with such Annual Bonus
calculated based on the bonus(es) payable to the Employee with respect to the
immediately preceding year) shall be payable on a pro rata basis to the date of
the Employee's death. Such payments shall be in addition to any other death
benefits of the Employer for the benefit of the Employee and in full settlement
and satisfaction of all payments provided for in this Agreement.
F. TERMINATION UPON DISABILITY. The Employer may terminate the
Employee's employment after the Employee is determined to be disabled under the
then current Employer program if such a program exists at the time the Employee
is disabled. If no such program exists, the Employee will be considered disabled
if the Employee suffers an illness or injury of a potentially permanent nature
which results in the Employee's inability to substantially perform his duties
hereunder as determined by the board of directors of CGA Group, Ltd. for a
period of either six (6) consecutive months, or one hundred and twenty (120)
business days within a consecutive twelve (12) month period. If the Employer
terminates the Employee after it is determined that the Employee is disabled,
the Employer shall pay the Employee the compensation accrued through the date of
the Employee's termination of employment including the bonus payable with
respect to the prior calendar year if the termination occurs prior to payment of
such bonus; provided, however, that the Annual Bonus payable with respect to the
calendar year in which such termination occurs (with such Annual Bonus
calculated based on the bonus(es) payable to Employee with respect to the
immediately preceding year) shall be payable on a pro rata basis
5
<PAGE> 6
to the date of the Employee's termination. In the event of a dispute regarding
the Employee's disability, each party shall choose a physician who together will
choose a third physician to make a final determination. The Employee shall be
entitled to the compensation and benefits provided for under this Agreement for
any period during the term of this Agreement and prior to the establishment of
the Employee's disability. Notwithstanding anything contained in this Agreement
to the contrary, until the date specified in a notice of termination relating to
the Employee's disability, the Employee shall be entitled to return to his
position with the Employer as set forth in this Agreement, in which event no
disability of the Employee will be deemed to have occurred.
IV. CONFIDENTIALITY AND LOYALTY. The Employee acknowledges
that during the course of the Employee's employment, the Employee will produce
and have access to material, records, data, trade secrets and information not
generally available to the public regarding the Employer and its subsidiaries
and affiliates (collectively, "Confidential Information"). Accordingly, during
and subsequent to termination of this Agreement, the Employee shall hold in
confidence and not directly or indirectly disclose, use, copy or make lists of
any such Confidential Information, except to the extent that such information is
or thereafter becomes lawfully available from public sources, or such disclosure
is authorized in writing by the Employer, required by a law or any competent
administrative agency or judicial authority, or otherwise as reasonably
necessary or appropriate in connection with the Employee's performance of the
employee's duties hereunder. All records, files, documents and other materials
or copies thereof relating to the Employer's business which the Employee shall
prepare or use shall be and remain the sole property of the Employer, shall not
be removed from the Employer's premises without its written consent other than
in the ordinary course of business, and shall be promptly returned to the
Employer upon termination of the Employee's employment hereunder. The Employee
agrees to abide by the Employer's reasonable policies, as in effect from time to
time, respecting avoidance of interests conflicting with those of the Employer.
IV. NON-SOLICITATION AND NON-COMPETITION COVENANTS.
A. RESTRICTIVE COVENANT. The Employee and the
Employer have jointly reviewed the operations of the Employer and have agreed
that the covenants contained in this Section V are an essential ingredient of
this Agreement and are made in consideration for the payment of the amounts
described in Sections II and III hereof. The Employee hereby agrees that, except
with the express prior written consent of the Employer, for a period of one (1)
year after the termination of the
6
<PAGE> 7
Employee's employment with the Employer, with respect to clause (i) below, for
any reason and, with respect to clause (ii) below, for any reason other than a
termination pursuant to Subsection IIIC (the "Restrictive Period"), the Employee
(i) will not (a) solicit employees of the Employer or of any subsidiary or
affiliate of the Employer or (b) solicit clients or customers of the Employer or
of any subsidiary or affiliate of the Employer in respect of any transaction,
matter or business that directly or indirectly competes with any of the
businesses then conducted by the Employer or any of its subsidiaries or
affiliates, and (ii) will not directly or indirectly compete with the business
of the Employer, by directly or indirectly being a shareholder or partner of or
serving as an employee, officer or director of or consultant to, or in any other
capacity with, any person, firm, partnership, corporation, subsidiary, division,
joint venture, trust or other entity, or any division, subsidiary or separate
enterprise of any such entity, which (x) was created during the term of
Employee's employment with the Employer or is expected to be created within a
period of one (1) year after the Employee's termination of employment with the
Employer, and (y) which owns or operates a business which is either: (A) an
insurer or reinsurer of asset backed securities, mortgage backed securities or
commercial mortgage backed securities; or (B) an investment company that is
directly or indirectly owned by, affiliated with, attached to or otherwise
related to an insurer or reinsurer of asset backed securities, mortgage backed
securities or commercial mortgage backed securities; or (C) an investment
advisory firm that is directly or indirectly owned by, affiliated with, attached
to or otherwise related to an insurer or reinsurer of asset backed securities,
mortgage backed securities or commercial mortgage backed securities (the
"Restrictive Covenant"). If the Employee violates the Restrictive Covenant and
the Employer brings legal action for injunctive or other relief, the Employer
shall not, as a result of the time involved in obtaining such relief, be
deprived of the benefit of the full period of the Restrictive Covenant.
Accordingly, the Restrictive Covenant shall be deemed to have the duration
specified in this Subsection VA. computed from the date the relief is granted
but reduced by the time between the period when the Restrictive Period began to
run and the date of the first violation of the Restrictive Covenant by the
Employee. The Restrictive Covenant shall not prohibit the Employee from owning
directly or indirectly capital stock or similar securities which are listed on a
securities exchange or quoted on the National Association of Securities Dealers
Automated Quotation System which do not represent more than five percent (5%) of
the outstanding capital stock of any business similar to that of the Employer's.
B. REMEDIES FOR BREACH OF RESTRICTIVE COVENANT. The
Employee acknowledges that the restrictions contained in Sections IV and V of
this Agreement are reasonable and necessary for the
7
<PAGE> 8
protection of the legitimate business interests of the Employer, that any
violation of these restrictions would cause substantial injury to the Employer
and such interests, that the Employer would not have entered into this Agreement
with the Employee without receiving the additional consideration offered by the
Employee in binding himself to these restrictions and that such restrictions
were a material inducement to the Employer to enter into this Agreement. In the
event of any violation of these restrictions, the Employer shall be relieved of
all further obligations under this Agreement and shall be entitled to any
rights, remedies or damages available to the Employer under this Agreement or
otherwise at law or in equity. In addition, in the event of any violation or
threatened violation of these restrictions, the Employer shall be entitled to
preliminary and permanent injunctive relief to prevent or restrain any such
violation by the Employee and any and all persons directly or indirectly acting
for the Employee, as the case may be.
VI. INTEREST IN ASSETS. Neither the Employee nor the
Employee's estate shall acquire hereunder any rights in funds or assets of the
Employer, otherwise than by and through the actual payment of amounts payable
hereunder; nor shall the Employee or the Employee's estate have any power to
transfer, assign, anticipate, hypothecate or otherwise encumber in advance any
of said payments; nor shall any of such payments be subject to seizure for the
payment of any debt, judgment, alimony, separate maintenance or be transferable
by operation of law in the event of bankruptcy, insolvency or otherwise of the
Employee.
VII. GENERAL PROVISIONS.
A. SUCCESSORS; ASSIGNMENT. Neither party hereto may
assign his or its rights or delegate his or its duties under this Agreement
without the prior written consent of the other party; provided, however, that
(i) this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Employer upon any sale of all or substantially all
of the Employer's assets, or upon any merger, consolidation or reorganization of
the Employer with or into any other corporation, all as though such successors
and assigns of the Employer and their respective successors and assigns were the
Employer; and (ii) this Agreement shall inure to the benefit of and be binding
upon the heirs, assigns or designees of the Employee to the extent of any
payments due to them hereunder. As used in this Agreement, the term "Employer"
shall be deemed to refer to any such successor or assign of the Employer
referred to in the preceding sentence.
B. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement
constitutes the entire agreement between the parties respecting
8
<PAGE> 9
the subject matter hereof, and supersedes all prior negotiations, undertakings,
agreements and arrangements with respect thereto, whether written or oral.
Except as otherwise explicitly provided herein, this Agreement may not be
amended or modified except by written agreement signed by the Employee and the
Employer.
C. ENFORCEMENT AND GOVERNING LAW. The provisions of
this Agreement shall be regarded as divisible and separate; if any of said
provisions should be declared invalid or unenforceable by a court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be construed and the legal
relations of the parties hereto shall be determined in accordance with the laws
of the State of New York, without reference to the law regarding conflicts of
law.
D. ARBITRATION. The provisions of Subsection VB shall
supersede the provisions of this Subsection VIID in the event of a simultaneous
dispute between the Employer and the Employee so as to afford the Employer with
the remedy of injunctive relief, without the necessity for arbitration. Any
dispute or controversy arising under or in connection with this Agreement or the
Employee's employment by the Employer shall be settled exclusively by
arbitration, conducted by a single arbitrator sitting in New York City, New
York, in accordance with the rules of the American Arbitration Association (the
"AAA") then in effect. The arbitrator shall be selected by mutual agreement
between the Employer and the Employee. However, in the event that the parties
are unable to agree on an arbitrator within a period of one week, the arbitrator
shall be selected by the parties from a list of eleven (11) arbitrators provided
by the AAA, provided that no arbitrator shall be related to or affiliated with
either of the parties. If the parties mutually agree on an arbitrator within ten
(10) days after the list of the proposed arbitrators is received by the parties,
then no later than twenty (20) days after such list is received by the parties,
the parties, or their respective representatives, shall meet at a mutually
convenient location in New York City, New York, or telephonically. At that
meeting, the party who sought arbitration shall eliminate one (1) proposed
arbitrator and then the other party shall eliminate one (1) proposed arbitrator.
The parties shall continue to eliminate names from the list of proposed
arbitrators in this manner until each part has eliminated five (5) proposed
arbitrators. The remaining arbitrator shall arbitrate the dispute. Each party
shall submit, in writing, the specific requested action or decision it wishes to
take, or make, with respect to the matter in dispute, and the arbitrator shall
be obligated to choose one (1) party's specific requested action or decision,
without being permitted to effectuate any compromise position. The party whose
requested action or decision is not selected by the arbitrator shall bear
9
<PAGE> 10
the cost of all counsel, experts or other representatives who are retained by
both parties, together with all costs of the arbitration proceeding, including,
without limitation, the fees, costs and expenses imposed or incurred by the
arbitrator. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that the Employee shall be entitled to
seek specific performance of the Employee's right to be paid through the date of
termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.
E. WAIVER. No waiver be either party at any time of
any breach by the other party of, or compliance with, any condition or provision
of this Agreement to be performed by the other party, shall be deemed a waiver
of any similar or dissimilar provisions or conditions at the same time or any
prior or subsequent time.
F. NOTICES. Notices pursuant to this Agreement shall
be in writing and shall be deemed given when received; and, if mailed, shall be
mailed by United States registered or certified mail, return receipt requested,
postage prepaid; and if to the Employer, addressed to the principal headquarters
of CGA Group, Ltd., attention: President; or, if to the Employee, to the address
set forth below the Employee's signature on this Agreement, or to such other
address as the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
CGA Investment Geoffrey N. Kauffman
Management, Inc.
By: /s/ Richard A. Price /s/ Geoffrey N. Kauffman
----------------------- ------------------------------
Richard A. Price
President, CGA Group, Ltd.
10
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