AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 2000
REGISTRATION NO. 333-89359
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CGA GROUP, LTD.
(Exact name of registrant as specified in its charter)
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<CAPTION>
BERMUDA 6351 98-0173536
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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CRAIG APPIN HOUSE
8 WESLEY STREET
HAMILTON HM11 BERMUDA
(441) 296-5144
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
-------------------
CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 664-1666
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
-------------------
Copies to:
WILLIAM W. ROSENBLATT, ESQ.
DEWEY BALLANTINE LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6092
(212) 259-8000
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |X|
CALCULATION OF REGISTRATION FEE
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===============================================================================================================
| | PROPOSED | PROPOSED |
| | MAXIMUM | MAXIMUM |
| | OFFERING | AGGREGATE |
TITLE OF EACH CLASS | AMOUNT TO BE | PRICE PER | OFFERING | AMOUNT OF
SECURITIES TO BE REGISTERED | REGISTERED | SHARE(1) | PRICE(1) | REGISTRATION FEE
--------------------------------------|--------------------|----------------|---------------|------------------
<S> | <C> | | <C> | <C>
Series A Cumulative Voting | | | |
Preference Shares ................. | 811,103 shares | $25.00 | $20,277,575 | $5,637.17(2)
===============================================================================================================
(1) Estimated solely for the purpose of computing the registration fee.
(2) Previously paid.
</TABLE>
Pursuant to Rule 429 under the Securities Act the prospectus filed as part
of this Registration Statement may be used in connection with the securities
covered by Registration Statement 333-7944. This Registration Statement and the
prospectus included herein relates to 811,103 shares of the Registrant's Series
A Cumulative Voting Preference Shares ("Series A Stock") issued as paid-in-kind
dividends with respect to the 2,992,109 shares of Series A Stock previously
registered pursuant to the Registration Statement on Form S-1 of the Registrant
(Registration No. 333-7944, effective August 6, 1998).
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 7, 2000
PROSPECTUS
3,803,212 SHARES OF
SERIES A CUMULATIVE VOTING PREFERENCE SHARES
CGA GROUP, LTD.
-------------------
There is no public market for Series A preferred stock. We do not intend to
list the Series A preferred stock on a national securities exchange or to apply
for quotation of the Series A preferred stock through the National Association
of Securities Dealers Automated Quotation System.
We have registered the Series A preferred stock for sale by the selling
stockholders identified in this prospectus, We will not receive any of the
proceeds from the sale of the Series A preferred stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF SPECIFIC RISKS
ASSOCIATED WITH AN INVESTMENT IN THE SERIES A PREFERRED STOCK.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
THE DATE OF THIS PROSPECTUS IS __________, 2000.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................................................ 1
Risk Factors .............................................................. 3
Use Of Proceeds ........................................................... 9
Selected Consolidated Financial Data ...................................... 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 11
Quantitative and Qualitative Disclosure About
Market Risk ............................................................. 21
Business .................................................................. 27
Regulation ................................................................ 38
Management ................................................................ 41
Related Party Transactions ................................................ 48
Selling Stockholders ...................................................... 49
Plan of Distribution ...................................................... 49
Security Ownership of Certain Beneficial Owners
and Management .......................................................... 50
Description of Securities ................................................. 54
Material Tax Considerations ............................................... 62
Legal Matters ............................................................. 71
Experts ................................................................... 71
Enforceability of Civil Liabilities ....................................... 71
Available Information ..................................................... 72
Index to Financial Statements and Schedules ............................... F-1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It may not contain all the information that you should consider before investing
in the Series A preferred stock. You should read the entire prospectus
carefully, including the "Risk Factors" section and the financial statements and
the notes to these statements.
We have presented all financial information in this prospectus in
accordance with generally accepted accounting principles, unless otherwise
specified.
CGA GROUP, LTD.
We are a holding company incorporated in Bermuda with limited liability.
Through our subsidiary Commercial Guaranty Assurance, Ltd., a Bermuda insurance
company, we provide financial guaranty insurance of structured securities,
including commercial real estate backed securities and asset backed securities.
We also provide financial guaranty insurance of other securities, where we have
expertise and where we deem credit enhancement opportunities to be attractive.
We also provide investment management and investment advisory services to
investment funds and other clients through our other subsidiary, CGA Investment
Management, Inc., a Delaware corporation that is registered as an investment
adviser with the Securities and Exchange Commission.
The primary clients of Commercial Guaranty Assurance and CGA Investment
Management are St. George Holdings, Ltd., a Cayman Islands company, and its
subsidiaries and Cobalt Holdings LLC, a Delaware limited liability corporation,
and its subsidiaries. Most of CGA's premiums and CGA Investment Management's
management fees originate from St. George and Cobalt.
We formed Commercial Guaranty Assurance with a view to becoming the market
leader in the commercial real estate segment of the financial guaranty insurance
industry. We use our structured finance and real estate expertise to underwrite
financial guaranties for commercial real estate and other securities to a "zero
loss" underwriting standard. This means that our underwriting guidelines require
that the obligations we insure are structured with sufficient levels of excess
collateral or other security so that we anticipate no losses on each risk we
insure. The zero loss underwriting standard applies to all obligations we insure
without regard to the amount of premium we collect on the policies or the
investment income related to the premium collected. Our primary target market is
the large U.S. commercial real estate mortgage market, which we believe is
underserved by the financial guaranty insurance industry. We also target select
segments of the private asset backed securities market.
Customers can purchase Commercial Guaranty Assurance's insurance only
through unaffiliated non-U.S. insurance brokers. Customers include investment
and commercial banks with significant real estate and asset-backed advisory
businesses, and commercial mortgage loan origination and asset-backed
repackaging operations and other participants in the securitization markets.
Our executive offices are located at Craig Appin House, 8 Wesley Street,
Hamilton HM11 Bermuda. Our telephone number at that address is (441) 296-5144.
1
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--------------------------------------------------------------------------------
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
You should read this summary consolidated financial information in
conjunction with the consolidated financial statements and the notes to those
statements presented on page F-1 to F-34 in this prospectus.
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<CAPTION>
NINE MONTHS
THREE MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED JUNE 21, 1996
ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, TO MARCH 31,
MARCH 31, 2000 MARCH 31, 1999 1999 1998 1997 1997
-------------- -------------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES
Gross premiums written .................. $ 4,010,355 $ 3,467,232 $ 16,358,269 $ 49,217,083 $ 773,571 $ --
Ceded premiums .......................... (553,393) (419,625) (2,037,576) (39,420,247) -- --
------------ ------------ ------------ ------------ ------------ --------
Net premiums written .................... 3,456,962 3,047,607 14,320,693 9,796,836 773,571 --
Change in unearned premiums ............. (273,695) 34,439 (2,097,209) (550,547) (270,576) --
------------ ------------ ------------ ------------ ------------ --------
Net premiums earned ..................... 3,183,267 3,082,046 12,223,484 9,246,289 502,995 --
Net investment income ................... 2,277,324 1,671,501 8,641,551 8,528,122 2,955,601 801
Net realized gains (losses) ............. (321,509) 151,566 (60,485) 2,814,132 885,422 --
Management fees ......................... 549,056 1,145,259 8,207,746 3,353,499 -- --
------------ ------------ ------------ ------------ ------------ --------
Total revenues ...................... 5,688,138 6,050,372 29,012,296 23,942,042 4,344,018 801
------------ ------------ ------------ ------------ ------------ --------
EXPENSES
Operating expenses ...................... 3,616,324 3,276,277 12,987,596 14,023,366 6,510,103 11
Rebate on credit support arrangements ... -- -- 5,510,000 -- -- --
Policy acquisition costs ................ 227,245 148,138 713,571 433,217 53,590 --
Commitment fees ......................... 150,000 147,945 600,000 600,000 323,836 --
Excess of loss facility ................. 50,000 50,000 200,000 200,000 107,671 --
Losses and loss adjustment expenses ..... 2,991,391 300,000 16,650,000 22,745,000 55,000 --
------------ ------------ ------------ ------------ ------------ --------
Total expenses .................... 7,034,960 3,922,360 36,661,167 38,001,583 7,050,200 11
------------ ------------ ------------ ------------ ------------ --------
Income (loss) before cumulative effect of
change in accounting principle ........ (1,346,822) 2,128,012 (7,648,871) (14,059,541) (2,706,182) 790
Cumulative effect of change in
accounting principle .................. -- -- -- (3,928,238) -- --
NET INCOME (LOSS) ......................... (1,346,822) 2,128,012 (7,648,871) (17,987,779) (2,706,182) 790
------------ ------------ ------------ ------------ ------------ --------
Other comprehensive income ............... (575,357) (1,704,381) (7,428,109) (710,416) 1,638,092 --
------------ ------------ ------------ ------------ ------------ --------
COMPREHENSIVE INCOME (LOSS) .............. $ (1,922,179) $ 423,631 $(15,076,980 $(18,698,195) $ (1,068,090) $ 790
============ ============ ============ ============ ============ ========
Net income (loss) attributable to
common shareholders .................... $ (4,654,563) $ (3,531,036 $(22,614,915 $(38,896,227 $(12,332,792) $ 790
Basic and diluted income (loss)
per common share ....................... $ (0.17) $ (0.38) $ (0.97) $ (4.27) $ (1.89) $ 0.07
============ ============ ============ ============ ============ ========
Weighted average common shares
outstanding ............................ 28,005,648 9,310,063 23,395,778 9,100,000 6,522,313 12,000
============ ============ ============ ============ ============ ========
BALANCE SHEET DATA:
Fixed maturities available for sale
(at fair value) ......................... $147,919,381 $100,716,387 $146 337,676 $100,488,537 $123,302,763 $ --
Other investments ......................... -- 30,000,000 -- 30,000,000 -- --
Cash and cash equivalents ................. 2,460,476 53,083,244 12,775,595 2,598,140 7,199,106 121,742
Total assets .............................. 169,426,761 265,648,722 199,619,508 215,903,933 142,721,186 133,790
Total liabilities ......................... 16,388,528 95,324,915 44,674,096 95,797,551 3,916,609 $121,000
Total mezzanine equity .................... 90,813,951 127,993,011 87,506,212 126,608,249 107,047,101 --
Total shareholders' equity (deficit) ...... 62,224,282 42,330,796 67,439,200 (6,501,867) 31,737,476 12,790
Total liabilities, mezzanine equity, and
shareholders' equity ..................... 169,426,761 265,648,722 199,619,508 215,903,933 142,721,186 133,790
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2
<PAGE>
RISK FACTORS
Investing in our Series A preferred stock involves risk. You should
carefully consider the risks and uncertainties described below and elsewhere in
this prospectus before making an investment decision. Any of the risks described
below could result in significant or material harm to our business, financial
condition or results of operations, and a corresponding decline in the value of
our Series A preferred stock.
IF WE CANNOT RETAIN THE KEY EMPLOYEES WHO ARE RESPONSIBLE FOR PRODUCING AND
SERVICING ALMOST ALL OF OUR BUSINESS, WE MAY NOT BE ABLE TO EFFECTIVELY RUN OUR
BUSINESS.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends in part on the continued services of key
employees of CGA Group, Commercial Guaranty Assurance and CGA Investment
Management, including:
o Richard A. Price--Chief Executive Officer and President of CGA Group
o James R. Reinhart--Chief Financial Officer of CGA Group and Commercial
Guaranty Assurance
o Michael Miran--President of Commercial Guaranty Assurance
o Geoffrey N. Kauffman--President and Chief Executive Officer of CGA
Investment Management
o Kem H. Blacker--Head of Portfolio Management of CGA Investment
Management
o Jean-Michel Wasterlain--Head of Commercial Real Estate of CGA
Investment Management
o Landon D. Parsons--Head of Structured Finance of CGA Investment
Management
o Martin S. Avidan--Head of Liabilities Management of CGA Investment
Management
CGA Group and its subsidiaries together have about 40 full-time employees
and depend on a small number of key employees for the production and servicing
of almost all of their business. We believe that there is, and will continue to
be, intense competition for qualified personnel in the insurance industry in
general and in the financial guaranty insurance industry in particular, and we
may not be successful in retaining our key employees or in attracting and
retaining other highly qualified management personnel. Mr. Price and several key
employees have entered into employment agreements, but CGA Group may be unable
to retain these employees or quickly replace them. The inability or
unwillingness of one or more of these individuals to continue in their present
positions could significantly impair our ability to develop new customers,
service existing business and effectively manage our operations. CGA Group does
not maintain key man life insurance policies with respect to any of its
employees.
Under Bermuda law, non-Bermudians generally may not be employed in Bermuda
without the specific permission of governmental authorities. Obtaining this
permission requires a showing that no Bermudian with the minimum qualifications
is available. Although the executive officers of CGA Group and Commercial
Guaranty Assurance based in Bermuda are not Bermudian, these officers have all
received work permits. It is possible that CGA Group or Commercial Guaranty
Assurance could lose the services of these officers if we are unable to renew
their work permits, but CGA Group and Commercial Guaranty Assurance are unaware
of any reasons why this might occur.
FITCH, THE PRIMARY RATING AGENCY THAT RATES COMMERCIAL GUARANTY ASSURANCE, HAS
PLACED COMMERCIAL GUARANTY ASSURANCE'S "TRIPLE-A" FINANCIAL STRENGTH RATING ON
GENERAL REVIEW, WHICH MAY LEAD TO A DOWNGRADE OF COMMERCIAL GUARANTY ASSURANCE'S
RATING TO "DOUBLE-A", WHICH DOWNGRADE WOULD LIKELY HARM THE FINANCIAL
PERFORMANCE AND BUSINESS PROSPECTS OF COMMERCIAL GUARANTY ASSURANCE AND
THEREFORE CGA GROUP.
Commercial Guaranty Assurance's claims-paying ability, also referred to as
its financial strength, is rated "Triple-A" or the equivalent by Fitch, a
nationally recognized statistical rating organization with U.S. and worldwide
operations, Canadian Bond Rating Service Inc. and Dominion Bond Rating Service
Limited, two Canadian rating agencies, and Japan Rating and Investment
Information, Inc., a Japanese rating agency, in each case the highest rating
category assigned by each of these rating agencies. These ratings reflect the
current opinion of these rating agencies
3
<PAGE>
on Commercial Guaranty Assurance's claims-paying ability, its financial and
operating performance and its ability to meet its obligations to its
policyholders. These ratings are not an evaluation of the merits of the Series A
preferred stock.
Commercial Guaranty Assurance's claims-paying ability had also been rated
"Triple-A" by Duff & Phelps Credit Rating Company. In April 2000, Fitch acquired
and subsequently merged with Duff & Phelps, with Fitch as the surviving company.
On June 2, 2000, Fitch announced that it was placing Commercial Guaranty
Assurance's "Triple-A" rating on general review, on the basis that Commercial
Guaranty Assurance does not meet Fitch's minimum capital requirements for a
"Triple-A" financial strength rating. Fitch has advised Commercial Guaranty
Assurance that to meet Fitch's capital requirements, Commercial Guaranty
Assurance will require a total of approximately $350 million in equity capital,
and $150 million in additional capital support (such as excess of loss
insurance), for total claims-paying resources of $500 million. Commercial
Guaranty Assurance currently has approximately $223 million in claims-paying
resources. CGA Group is presently seeking to raise additional capital sufficient
to increase Commercial Guaranty Assurance's total claims-paying resources to
$500 million (see "Business - Commercial Guaranty Assurance, Ltd.--Certain
Events"). We cannot give assurances, however, as to whether CGA Group will be
successful in raising any additional capital, or that it will be able to raise
sufficient capital to meet Fitch's requirements. Fitch has further announced
that affirmation of Commercial Guaranty Assurance's "Triple-A" financial
strength rating will depend on Commercial Guaranty Assurance acquiring the
additional capital, that Commercial Guaranty Assurance believes this will occur
by September 30, 2000, and that if the capital is not raised, Fitch will lower
its rating of Commercial Guaranty Assurance to "Double-A".
If Fitch were to lower Commercial Guaranty Assurance's financial strength
rating, this action would likely have a negative impact on Commercial Guaranty
Assurance's financial performance and business prospects, which in turn would
negatively impact the financial performance of CGA Group. A downgrade to
"Double-A" would likely decrease the attractiveness of the insurance products
offered by Commercial Guaranty Assurance, and would therefore likely decrease
sales of these products. A downgrade would also likely result in Commercial
Guaranty Assurance having to significantly lower the premium rates it charges
for its products. It is also possible that the other rating agencies that
currently rate Commercial Guaranty Assurance may lower their ratings of
Commercial Guaranty Assurance, which would further impair the ability of
Commercial Guaranty Assurance to sell its insurance products, and would lower
the premium rates which it could charge for these products. Thus, a downgrade of
Commercial Guaranty Assurance's financial strength rating would likely have a
negative effect on both the volume of business done by Commercial Guaranty
Assurance, as well as on the amount of premium it could charge for its products,
which in turn would have a direct negative impact on CGA Group's financial
performance, including on the ability of CGA Group to pay dividends on the
Series A preferred stock.
Most of Commercial Guaranty Assurance's competitors are rated "Triple-A" by
at least one nationally recognized statistical rating organization. CGA Group is
unaware of any situations where a financial guaranty insurance company has been
downgraded from "Triple-A" to a lower rating. Therefore, neither CGA Group nor
Commercial Guaranty Assurance is able at this time to estimate or otherwise
quantify the impact on Commercial Guaranty Assurance's financial performance or
business prospects of a downgrading by Fitch or any of the other rating agencies
that currently rate Commercial Guaranty Assurance.
COMMERCIAL GUARANTY ASSURANCE'S INSURANCE PORTFOLIO IS INTERDEPENDENT WITH A
SMALL NUMBER OF INTERRELATED COMPANIES THAT COULD BE UNABLE TO CONTINUE TO PAY
INSURANCE PREMIUMS TO COMMERCIAL GUARANTY ASSURANCE IN THE EVENT THAT ONE OR
MORE RATING AGENCIES DONWGRADES COMMERCIAL GUARANTY ASSURANCE'S CLAIMS PAYING
ABILITY RATING.
Approximately 54% of the outstanding principal amount of obligations
insured by Commercial Guaranty Assurance as of December 31, 1999 consisted of
insurance policies which guarantee payment obligations under the financing
arrangements of St. George Holdings, Cobalt Holdings and their subsidiaries.
These guaranteed financing arrangements provide the St. George and Cobalt
companies with the financing to acquire the assets in their investment
portfolios.
The continued ability of the St. George and Cobalt companies to pay their
fees and expenses, including premiums payable to Commercial Guaranty Assurance
and asset management expenses payable to CGA Investment Management, depends on
their general ability to finance their investment activities under these types
of guaranteed financing arrangements and to generate sufficient cash flow from
their investment activities. The providers of the
4
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guaranteed financing arrangements to the St. George and Cobalt companies have
made the continued availability of these financing arrangements conditional upon
their repayment obligations being guaranteed by Commercial Guaranty Assurance's
Triple-A rated financial guaranty insurance policies. A downgrade of Commercial
Guaranty Assurance by one or more rating agencies would allow the providers of
the guaranteed financing arrangements to terminate these financing arrangements.
The inability of the St. George and Cobalt companies to pay premiums to
Commercial Guaranty Assurance and asset management expenses to CGA Investment
Management would have eliminated approximately 62% of the present premiums of
Commercial Guaranty Assurance and management fees of CGA Investment Management,
and therefore of CGA Group for the year ended December 31, 1999.
CGA GROUP AND COMMERCIAL GUARANTY ASSURANCE COULD BECOME SUBJECT TO U.S.
TAXATION, WHICH COULD MATERIALLY DECREASE OUR NET EARNINGS.
We have organized CGA Group and Commercial Guaranty Assurance to operate in
a manner so that neither company should be subject to United States taxation and
so that U.S. persons who own Series A preferred stock should not be subject to
U.S. federal income tax on CGA Group's undistributed earnings. It is possible
that U.S. tax authorities could determine Commercial Guaranty Assurance to be
engaged in a U.S. trade or business. If this were to occur, some or all of
Commercial Guaranty Assurance's investment income could become subject to
taxation on a net basis at standard U.S. corporate income tax rates, which are
currently 35%. Commercially Guaranty Assurance could also become subject to the
branch profits tax, which is currently 30%, on the amount of net income deemed
to have been withdrawn from the U.S. In light of this risk, Commercial Guaranty
Assurance files protective tax returns in the U.S. reporting no U.S. income, in
order to preserve its ability to deduct its expenses should the Internal Revenue
Service successfully challenge Commercial Guaranty Assurance's position.
In addition, U.S. tax authorities could determine CGA Group and/or
Commercial Guaranty Assurance to be, or in the future CGA Group or Commercial
Guaranty Assurance could become, "controlled foreign corporations" and
Commercial Guaranty Assurance could generate "related person insurance income."
Any of these results could subject U.S. owners of Series A preferred stock to
current U.S. federal income tax on all or a portion of CGA Group's and/or
Commercial Guaranty Assurance's undistributed earnings. Any of these results
could also subject any investors in Series A preferred stock who are allocated
this income and are tax-exempt organizations to unrelated business taxable
income. For a more detailed discussion of the United States tax implications of
an investment in the Series A preferred stock, see "Material Tax Considerations"
elsewhere in this prospectus.
COMMERCIAL GUARANTY ASSURANCE COULD BE SUBJECT TO INCREASED COSTS OF REGULATORY
COMPLIANCE OR THE IMPOSTION OF FINES OR PENALTIES IF IT BECOMES SUBJECT TO U.S.
OR OTHER NON-BERMUDIAN LICENSING OR INSURANCE REQUIREMENTS.
In general, the Bermuda statutes and regulations applicable to Commercial
Guaranty Assurance are less restrictive than the insurance laws and regulations
of any state in the U.S. Commercial Guaranty Assurance does not write insurance
in the U.S., and it conducts its business to avoid being subject to licensing
requirements or insurance regulations in the U.S. or elsewhere other than in
Bermuda.
Although management of Commercial Guaranty Assurance believes that its
current activities comply with all applicable insurance laws and regulations,
insurance regulators in the U.S. or elsewhere could claim that Commercial
Guaranty Assurance is subject to their jurisdiction's licensing requirements
and/or is not in compliance with its insurance laws or regulations. Commercial
Guaranty Assurance's becoming subject to regulation in the U.S. or other
non-Bermudian jurisdiction, or having to modify the manner of conducting its
business, could materially increase Commercial Guaranty Assurance's costs and
expenses of licensing and compliance with insurance laws and regulations of
these jurisdictions, or could lead the imposition of fines or penalties upon
Commercial Guaranty Assurance.
IF COMMERCIAL GUARANTY ASSURANCE IS UNABLE TO COMPETE EFFECTIVELY WITH FINANCIAL
GUARANTORS THAT ARE RATED BY MORE THAN ONE U.S. RATING AGENCY, OR WITH
U.S.-BASED FINANCIAL GUARANTORS, OUR ABILITY TO MAINTAIN OR INCREASE OUR
PROFITABILITY WILL BE HARMED.
Commercial Guaranty Assurance's current and prospective competitors in the
financial guaranty insurance business are numerous. Some of Commercial Guaranty
Assurance's competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and
5
<PAGE>
more established relationships in the industry than Commercial Guaranty
Assurance. Commercial Guaranty Assurance has a "Triple-A" financial strength
rating from Fitch, but it does not have, nor has it requested, claims-paying
ability ratings from Standard & Poor's Ratings Services or Moody's Investors
Service, Inc. In addition, Commercial Guaranty Assurance's financial strength
rating has been placed on general review by Fitch, and may be lowered by Fitch
to "Double-A" if CGA Group does not succeed in raising additional capital in an
amount sufficient to increase Commercial Guaranty Assurance's claims-paying
resources to at least $500 million. These factors place Commercial Guaranty
Assurance at a significant disadvantage in markets where other financial
guarantors currently write insurance, especially the municipal bond market,
because many institutional investors require financial guaranty insurers to have
ratings from at least two of the nationally-recognized rating agencies listed
above. Also, Commercial Guaranty Assurance's inability to negotiate and conclude
its insurance policies in the U.S. may be a competitive disadvantage, in that
its potential clients, including issuers and investment banks located in the
United States, might not be willing to do business with a non-U.S. financial
guarantor.
COMMERCIAL GUARANTY ASSURANCE'S RESULTS OF OPERATIONS WOULD BE MATERIALLY HARMED
IF IT ESTABLISHES INADEQUATE CLAIM RESERVES AND ACTUAL CLAIMS EXCEED
EXPECTATIONS.
Due to its relatively recent commencement of operations, Commercial
Guaranty Assurance has a limited operating history from which to estimate
necessary reserves. Reserves are estimates at a given time of what the insurer
ultimately expects to pay on claims, based on facts and circumstances then
known. If Commercial Guaranty Assurance increases its claims reserves, it would
then have to report lower net income in the future. Furthermore, Commercial
Guaranty Assurance's net income would decrease if actual claims should exceed
its claim reserves. Claims reserves are of two types. Commercial Guaranty
Assurance maintains a general loss reserve in respect of its insured portfolio
generally. As of March 31, 2000, Commercial Guaranty Assurance's general loss
reserve was approximately $3.8 million. In addition, Commercial Guaranty
Assurance will establish a case basis reserve in respect of particular insured
obligations when a loss on the obligation becomes both probable and determinable
in amount. To date, Commercial Guaranty Assurance has established two case basis
reserves--an approximately $36.1 million case basis reserve in respect of
specific asset backed securities, out of which it has paid approximately $35.5
million in claims, and an approximately $2.6 million case basis reserve in
respect of another asset backed security, which was entirely paid out as a claim
payment, leaving Commercial Guaranty Assurance with no further exposure in
respect of this security. See "Business--Commercial Guaranty Assurance,
Ltd.--Claims". Commercial Guaranty Assurance has a remaining net exposure of
approximately $9.6 million in respect of the asset backed securities first
referred to above. Although its claim payments and remaining case basis reserve
of approximately $0.4 million represent Commercial Guaranty Assurance's best
current estimate of its probable total losses on these securities, it is
possible that its ultimate loss could be greater than this amount, or that it
could potentially recover a portion of the amount paid in claims. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Losses and Loss Adjustment Expenses."
CGA GROUP WILL BE UNABLE TO PAY DIVIDENDS TO HOLDERS OF SERIES A PREFERRED STOCK
IF FITCH DOES NOT APPROVE DIVIDENDS FROM COMMERCIAL GUARANTY ASSURANCE TO CGA
GROUP.
CGA Group does not expect to pay dividends to its shareholders other than
the dividends required to be paid on the Series A preferred stock. The dividends
required to be paid by CGA Group on the Series A preferred stock are a key
financial term of the Series A preferred stock. The ability of CGA Group to make
cash distributions and dividends, and to redeem its preferred stock will be
dependent primarily upon receiving dividends and distributions from Commercial
Guaranty Assurance. Commercial Guaranty Assurance's board of directors has
passed a resolution that Commercial Guaranty Assurance will not declare or pay
cash dividends to CGA Group until June 17, 2002. After that date, Commercial
Guaranty Assurance intends to comply with dividend restrictions imposed by Fitch
in order to maintain its financial strength rating from Fitch. In addition,
Commercial Guaranty Assurance has agreed with Fitch that it will not declare or
pay any dividend, including non-cash dividends, without first giving Fitch 20
business days notice and then receiving from Fitch a written confirmation that
the declaration or payment of the dividend will not affect Commercial Guaranty
Assurance's financial strength rating from Fitch. If Fitch at any time after
June 17, 2002 rates the Series A preferred stock "Triple-B minus" (BBB-) or
higher, the dividend rate on the Series A preferred stock will decrease by 200
basis points, which is equal to two percent.
6
<PAGE>
YOU MAY NOT BE ABLE TO ENFORCE YOUR LEGAL RIGHTS AGAINST CGA GROUP OR COMMERCIAL
GUARANTY ASSURANCE IN THE UNITED STATES.
CGA Group and Commercial Guaranty Assurance are Bermuda companies, and
several of their officers and directors are residents of Bermuda. Most of the
assets of CGA Group, Commercial Guaranty Assurance and these officers and
directors are located outside the United States. Therefore, it may be difficult
for investors to effect service of process within the United States on any of
these parties who reside outside the United States or to recover against them or
their assets in the event of any judgments against them obtained in United
States courts.
ADVERSE EVENTS IN THE COMMERCIAL REAL ESTATE LOAN MARKET OR ADVERSE EVENTS
RELATING TO SPECIFIC REAL ESTATE PROJECTS COULD CAUSE DEFAULTS ON THESE
SECURITIES THAT WOULD TRIGGER INSURANCE PAYMENTS BY COMMERCIAL GUARANTY
ASSURANCE AND REDUCE ITS NET INCOME.
The securities and obligations insured by Commercial Guaranty Assurance are
concentrated in the commercial real estate sector. Approximately 42% of
Commercial Guaranty Assurance's exposure is backed by pools of commercial real
estate loans, and obligations issued by companies known as real estate
investment trusts, which manage real estate portfolios to earn profits for
equityholders. Accordingly, events that have an adverse effect on these
commercial real estate loans and real estate investment trust obligations could
cause defaults on these securities, which would trigger insurance payments by
Commercial Guaranty Assurance and therefore reduce its net income or cause net
losses. Commercial mortgage loans depend for repayment upon the successful
operation of the related real estate project because these loans typically do
not provide for recourse, or for only limited recourse, to the borrower in the
event of non-payment. The successful operation of each real estate project is
subject to the following types of risks:
o general or local economic conditions and property risks, including
structural defects, natural disasters, the conditions of specific
industry segments, competition with other projects and operating costs
of the project,
o costs of compliance with laws, including zoning laws and the Americans
With Disabilities Act, and the adverse effect on the returns of a
project,
o risks relating to commercial mortgage loans, including payments of
principal due on the maturity dates of the loans, making payment
dependent on borrower's ability to refinance the loan or sell the
property at a sufficient price to make the payment,
o risks relating to liabilities under state and federal environmental
laws and regulations, which often impose liability for environmental
contamination and clean-up costs, regardless of fault, on secured
lenders and holders of secured debt,
THERE MAY BE INADEQUATE MARKET DEMAND FOR FINANCIAL GUARANTY INSURANCE WHICH
WOULD MATERIALLY DECREASE THE REVENUES OF COMMERCIAL GUARANTY ASSURANCE.
The demand for financial guaranty insurance depends on many factors, most
of which are beyond the control of Commercial Guaranty Assurance. The ability of
issuers of debt obligations to use financial guaranty insurance to obtain a
lower total cost for their debt obligations is affected by a variety of factors,
including:
o the general perception by investors of the financial strength of the
providers of financial guaranty insurance
o the interest rates borne by uninsured obligations
Inadequate demand for financial guaranty insurance would decrease sales of
Commercial Guaranty Assurance's products, and would therefore decrease revenues.
COMMERCIAL GUARANTY ASSURANCE'S INSURANCE PORTFOLIO IS PRIMARILY COMPOSED OF
SECURITIES RATED "TRIPLE-B", WHICH HAVE A GREATER RISK OF LOSS THAN HIGHER RATED
SECURITIES.
Commercial Guaranty Assurance's primary business focus is on securities
rated in the "Triple-B" rating category, which includes securities rated
"Triple-B minus", by at least one nationally recognized credit rating company.
Although these securities are still considered to be "investment grade", they
have a somewhat greater risk
7
<PAGE>
of loss than securities rated in higher rating categories of "Triple-A",
"Double-A", or "Single-A." Commercial Guaranty Assurance has adopted single risk
limits which limit the amount of exposure Commercial Guaranty Assurance can take
to particular securities. See "Business--Commercial Guaranty Assurance,
Ltd.--Risk Management." Also, Commercial Guaranty Assurance underwrites the
securities it insures to a "zero loss" standard. Nevertheless, a major loss on
one or more insured securities could deplete Commercial Guaranty Assurance's
claims-paying resources, which could potentially result in a downgrade of its
financial strength rating. In addition, securities rated in the "Triple-B"
rating category generally trade at wider credit spreads and have greater price
volatility than more highly rated comparable securities. This can exacerbate
Commercial Guaranty Assurance's exposure to liquidity, refinancing and market
value risks on its insurance of the liabilities of the St. George and Cobalt
investment funds, particularly during periods of instability in the capital
markets.
COMMERCIAL GUARANTY ASSURANCE IS EXPOSED TO CREDIT RISK OF THE OBLIGORS ON THE
SECURITIES IT HAS INSURED, AND ALSO TO LIQUIDITY RISK.
Commercial Guaranty Assurance's most significant risk is its exposure to
the credit risk of the securities and other financial obligations it insures.
Commercial Guaranty Assurance also has credit risk to counterparties that
provide interest rate and currency swaps, credit derivatives and liquidity to
the St. George and Cobalt investment funds. Commercial Guaranty Assurance's
primary credit risk exposure is the risk of non payment on the securities or
other financial obligations it has guaranteed. Under its financial guaranty
insurance policies, Commercial Guaranty Assurance is generally liable to pay
interest, principal and other amounts in respect of the obligation it has
insured as these become due for payment in accordance with the payment terms of
the insured obligation, without giving effect to any acceleration of that
obligation. In the event the issuer of a security insured by Commercial Guaranty
Assurance were to default on its payment obligations, Commercial Guaranty
Assurance would be obligated to make all scheduled payments on that security
when due. In respect of its obligations under default swaps and similar credit
derivatives, upon the occurrence of a specified default in respect of the
underlying "reference security", which is the security specified as the
reference security in the default swap, Commercial Guaranty Assurance would
generally be obligated to purchase the reference security at its full principal
amount, or make a cash payment equal to the difference between the current value
of the reference security and its value at the time of entering into the default
swap. Thus, default swaps present Commercial Guaranty Assurance with liquidity
risk, in addition to credit risk on the underlying security.
SEVERAL OF THE ST. GEORGE INVESTMENT FUNDS PRESENT COMMERCIAL GUARANTY ASSURANCE
WITH ADDITIONAL RISK IF THE MARKET VALUE OF THEIR INVESTMENT PORTFOLIOS DECLINED
BELOW SPECIFIED LIMITS.
Several of the St. George investment funds are parties to borrowing
facilities that contain "market value" covenants or events of default. The exact
terms of these covenants and events of default vary from facility to facility
depending on the requirements of the particular lender. In general, however,
they provide that if the market value of a given fund's investment portfolio
declined below a specified percentage, typically 5-10%, of the then outstanding
principal balance of the fund's loan, and the shortfall is not cured in a
specified period of time, typically 5-45 days, depending on the severity of the
shortfall, the lender has the right to accelerate its loan to that fund and to
foreclose upon and sell all of that fund's investments, which serve as
collateral for that loan. If this were to happen, Commercial Guaranty Assurance,
as guarantor of the fund's repayment obligations under its loan, would be
required to pay any shortfall in repayment of the fund's loan following the sale
of the fund's investments and use of the sale proceeds to pay down the fund's
loan. CGA Group expects that as Commercial Guaranty Assurance continues to do
business and becomes more accepted in the capital markets, CGA Investment
Management, as investment adviser to these funds, should be able to obtain new
credit facilities for these funds which do not have market value triggers, or to
renegotiate the terms of existing credit facilities to lower or remove these
market value triggers. However, if CGA Investment Management is not successful
in these efforts, several of the St. George funds, and therefore Commercial
Guaranty Assurance, will remain subject to this risk for the foreseeable future.
THE ST. GEORGE AND COBALT INVESTMENT FUNDS ALSO PRESENT COMMERCIAL GUARANTY
ASSURANCE WITH RISK OF LOSS IF THEY ARE UNABLE TO REFINANCE THEIR BORROWING
FACILITIES AT MATURITY ON ACCEPTABLE TERMS.
The St. George and Cobalt investment finds finance their investment
activities by issuing debt securities or by entering into credit facilities or
other financing arrangements. To date, Commercial Guaranty Assurance has
guaranteed the repayment obligations of the St. George and Cobalt investment
funds under all of these securities,
8
<PAGE>
facilities and other financing arrangements. These funds use the proceeds from
these borrowings to invest in securities that meet their respective investment
guidelines. Commercial Guaranty Assurance has approved these funds' investment
guidelines, which permit investments only in securities of the type and credit
profile that Commercial Guaranty Assurance would be willing to insure directly.
The terms of these debt securities and financing arrangements generally range
from one to ten years. The terms of the securities the St. George and Cobalt
investment funds purchase do not necessarily match the terms of the related
financing. If a fund's financing were to mature, and the fund was unable to
refinance the maturing obligation on acceptable terms, the fund would be
obligated to pay off the maturing obligation in cash. Similarly, if the lender
under a fund's credit facility were to decline to renew the term of that
facility, the fund would be obligated to pay down the maturing facility in
accordance with its amortization schedule. If the fund did not have enough cash
on hand to make any required payment under the maturing facility, the fund would
have to sell some or all of its investments to make the required payment. If
these investments could only be sold at a net loss, the fund would not have
enough funds to make the required payment, and Commercial Guaranty Assurance
would have to pay any shortfall pursuant to its guaranty.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This prospectus or any other written or
oral statements made by or on behalf of our company may include forward-looking
statements which reflect our current views with respect to future events and
financial performance. These statements include forward-looking statements both
with respect to our company and the business in which we operate, including the
insurance and reinsurance sectors in general, and the financial guaranty
insurance sector in particular.
All forward-looking statements address matters that involve inherent risks
and uncertainties. Accordingly, there are or will be important factors that
could cause actual results to differ materially from those indicated in those
statements. We believe that these factors include, but are not limited to, the
following:
o financial difficulties encountered by an insured of Commercial
Guaranty Assurance,
o uncertainties relating to government and regulatory policies, such as
subjecting CGA Group and/or its subsidiaries to insurance regulation
or taxation in additional jurisdictions,
o the legal environment,
o the uncertainties of the reserving process,
o risks relating to the claims-paying ability rating of Commercial
Guaranty Assurance,
o loss of the services of any of CGA Group's executive officers,
o changing rates on inflation and other economic conditions,
o ability to collect reinsurance recoverables,
o developments in global financial markets which could affect CGA
Group's investment portfolio, and
o 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.
USE OF PROCEEDS
The registration statement is intended to satisfy the obligation of CGA
Group under the subscription agreement for the Series A preferred stock to
register the shares of Series A preferrred stock on behalf of the selling
stockholders. CGA Group will not receive any additional proceeds from sales of
Series A preferred stock and has agreed to pay the expenses of the performance
of its obligations under the subscription agreement with respect to the
registration statement.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read this summary consolidated financial information in
conjunction with the consolidated financial statements and the notes to these
statements presented on pages F-1 to F-34 in this prospectus.
<TABLE>
<CAPTION>
THREE THREE NINE JUNE 21,
MONTHS MONTHS YEAR YEAR MONTHS 1996
ENDED ENDED ENDED ENDED ENDED TO
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1999 1998 1997 1997
----------- ----------- ------------ ------------ ------------ ---------
(UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA:
REVENUES
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written ..................... $ 4,010,335 $ 3,467,232 $ 16,358,269 $ 49,217,083 $ 773,571 $ --
Ceded premiums ............................. (553,393) (419,625) (2,037,576) (39,420,247) -- --
----------- ----------- ------------ ------------ ------------ -------
Net premiums written ....................... (3,456,962) 3,047,607 14,320,693 9,796,836 773,571 --
Change in unearned premiums ................ (273,695) (34,439) (2,097,209) (550,547) (270,576) --
----------- ----------- ------------ ------------ ------------ -------
Net premiums earned ........................ 3,183,267 3,082,046 12,223,484 9,246,289 502,995 --
Net investment income ...................... 2,227,324 1,671,501 8,641,551 8,528,122 2,955,601 801
Net realized gains (losses) ................ (321,509) 151,566 (60,485) 2,814,132 885,422 --
Management fees ............................ (549,056) 1,145,259 8,207,746 3,353,499 -- --
----------- ----------- ------------ ------------ ------------ -------
Total revenues ......................... 5,688,138 6,050,372 29,012,296 23,942,042 4,344,018 801
----------- ----------- ------------ ------------ ------------ -------
EXPENSES
Operating expenses ......................... 3,616,324 3,276,277 12,987,596 14,023,366 6,510,103 11
Rebate on credit support arrangements ...... -- -- 5,510,000 -- -- --
Policy acquisition costs ................... 227,245 148,138 713,571 433,217 53,590 --
Commitment fees ............................ 150,000 147,945 600,000 600,000 323,836 --
Excess of loss facility .................... 50,000 50,000 200,000 200,000 107,671 --
Losses and loss adjustment expenses ........ 2,991,391 300,000 16,650,000 22,745,000 55,000 --
----------- ----------- ------------ ------------ ------------ -------
Total expenses ....................... 7,034,960 3,922,360 36,661,167 38,001,583 7,050,200 11
----------- ----------- ------------ ------------ ------------ -------
Income (loss) before cumulative effect of
change in accounting principle ........... (1,346,822) 2,128,012 (7,648,871) (14,059,541) (2,706,182) 790
Cumulative effect of change in accounting
principle ................................ -- -- -- (3,928,238) -- --
NET INCOME (LOSS) ............................ (1,346,822) 2,128,012 (7,648,871) (17,987,779) (2,706,182) 790
----------- ----------- ------------ ------------ ------------ -------
Other comprehensive income ................... (575,357) (1,704,381) (7,428,109) (710,416) 1,638,092 --
----------- ----------- ------------ ------------ ------------ -------
COMPREHENSIVE INCOME (LOSS) .................. $(1,922,179) $ 423,631 $(15,076,980) $(18,698,195) $ (1,068,090) $ 790
=========== =========== ============ ============ ============ =======
Net income (loss) attributable to common
shareholders ............................... $(4,654,563) $(3,531,036) $(22,614,915) $(38,896,227) $(12,332,792) $ 790
Basic and diluted income (loss) per common
share ...................................... $ (0.17) $ (0.38) $ (0.97) $ (4.27) $ (1.89) $ 0.07
=========== =========== ============ ============ ============ =======
Weighted average common shares
outstanding ................................ 28,005,648 9,310,063 23,395,778 9,100,000 6,522,313 12,000
========== ========= ========== ========= ========= ======
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the
consolidated financial statements of CGA Group and the related notes included
elsewhere in this prospectus. The following discussion is qualified in its
entirety by these financial statements and notes.
GENERAL
CGA Group, Ltd., a holding company, 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
of Bermuda. This act authorizes Commercial Guaranty Assurance 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 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.
Commercial Guaranty Assurance's claims-paying ability, also referred to as its
financial strength, is currently rated "Triple-A" or the equivalent by Fitch, a
nationally recognized statistical rating organization with U.S. and worldwide
operations, Canadian Bond Rating Service Inc. and Dominion Bond Rating Service
Limited, two Canadian rating agencies, and Japan Rating and Investment
Information, Inc., a Japanese rating agency, in each case the highest rating
category assigned by each of these rating agencies. On June 2, 2000, Fitch
announced that it was placing Commercial Guaranty Assurance's "Triple-A" rating
on general review. See "Business--Commercial Guaranty Assurance, Ltd."
The founders of CGA Group incorporated CGA Investment Management, Inc. in
the state of Delaware in July 1996. CGA Group acquired CGA Investment Management
at nominal cost on June 9, 1997. CGA Investment Management did not commence
operations until after its acquisition by CGA Group. CGA Investment Management
is registered as an investment advisor with the United States Securities and
Exchange Commission under the Investment Advisors Act of 1940, as amended. CGA
Investment Management provides investment management and financial advisory
services primarily to specialized investment funds, partnerships and other
entities, 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 completed its private placement offering which recapitalized it
with
o two classes of preferred stock sold for an aggregate purchase price of
$105 million,
o common stock sold for an aggregate purchase price of $45.5 million and
o 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 of the
outstanding shares of Series B preferred stock were exchanged for 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.
Financial comparisons with the nine month period ended December 31, 1997
have limited meaning, as CGA Group did not commence operations until after
completing the private placement offering on June 17, 1997. Accordingly, 1997
financial results reflect only six months of operating during a period in which
CGA Group was focused on hiring personnel and commencing operations.
RESULTS OF OPERATIONS--MARCH 31, 2000
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.
11
<PAGE>
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 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:
2000 1999
ASSET TYPE (IN 000'S) (IN 000'S)
---------- ---------- ----------
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
========== ==========
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:
2000 1999
---- ----
"AAA" ................................ 3% 4%
"AA" ................................. 3% 2%
"A" .................................. 25% 25%
"BBB" ................................ 60% 58%
"BB" ................................. 9% 9%
Not rated ............................ -- 2%
Total ............................ 100% 100%
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 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.
12
<PAGE>
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 several 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 $5.6 million for the quarter ended March 31, 1999. The decrease resulted from
the conversion of all outstanding Series B preferred stock into common stock on
March 31, 1999.
13
<PAGE>
RESULTS OF OPERATIONS -- DECEMBER 31, 1999
SUMMARY OF OPERATIONS
($ IN $000'S)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, % DECEMBER 31, DECEMBER 31,
1999 CHANGE 1998 1997
------------ ------ ------------ -------------
<S> <C> <C> <C> <C>
Gross premiums written ............................... $ 16,358 (67%) $ 49,217 $ 774
Ceded premiums ....................................... (2,038) (95%) (39,420) --
Change in unearned premiums .......................... (2,097) 281% (551) (271)
-------- ---- -------- --------
Net premiums earned .................................. 12,223 32% 9,246 503
Net investment income ................................ 8,641 1% 8,528 2,956
Net realized gains (losses) .......................... (60) (102%) 2,814 885
Management fees ...................................... 8,208 145% 3,354 --
-------- ---- -------- --------
Total Revenues ....................................... 29,012 21% 23,942 4,344
EXPENSES
Operating expenses ................................... 12,988 (7%) 14,024 6,510
Rebate on credit support arrangements ................ 5,510 -- -- --
Policy acquisition costs ............................. 713 65% 433 53
Commitment fees ...................................... 600 -- 600 324
Excess of loss facility .............................. 200 -- 200 108
Losses and loss adjustment expenses .................. 16,650 (27%) 22,745 55
-------- ---- -------- --------
TOTAL EXPENSES ....................................... 36,661 (4%) 38,002 7,050
Cumulative effect of change in accounting principle .. -- -- (3,928) --
-------- ---- -------- --------
NET LOSS ............................................. (7,649) (58%) (17,988) (2,706)
Pay-in-kind dividends--preferred stock ............... (14,324) (28%) (19,961) (9,353)
Accretion--preferred stock ........................... (642) (32%) (947) (274)
-------- ---- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ......... $(22,615) (42%) $(38,896) $(12,333)
======== ==== ======== ========
</TABLE>
Premiums
The net premiums earned in 1999 of $12.2 million were derived from $16.3
million of gross premiums written, of which $2.0 million were ceded under
reinsurance agreements, and offset by a $2.1 million change in unearned
premiums. Ceded premiums in 1999 were affected by approximately $1.0 million of
charges due to recognition of upfront reinsurance premiums related to Commercial
Financial Services securities. As a result of claims paid in 1999 related to the
Commercial Financial Services securities by Commercial Guaranty Assurance's
reinsurer, the reinsured exposure decreased from approximately $154 million to
approximately $58 million, thereby requiring early recognition of the $1.0
million charge. Commercial Guaranty Assurance paid an up-front premium of $1.3
million for the reinsurance in October 1998. Most of the increase in unearned
premiums during 1999 was from one transaction for which CGA received an up-front
premium of approximately $1.8 million, of which only $11 thousand was earned in
1999. Net premiums earned increased by approximately $3 million, or 32% for 1999
compared to 1998. The increase is primarily the result of a 43% increase in
insurance in force as of December 31, 1999 compared to December 31, 1998.
Net premiums earned in 1998 of $9.2 million were derived from $49.2 million
of gross premiums written, of which $39.4 million were ceded under reinsurance
agreements, and offset by a $0.6 million change in unearned premiums. The gross
premiums written and ceded premiums included approximately $39 million from one
transaction. The transaction was entered into by Commercial Guaranty Assurance
to mitigate risks related to its exposure in connection with guarantees of two
credit facilities for St. George investment funds. As a result of turmoil in the
capital markets during the month of October 1998, the spreads over treasuries at
which investors were willing to purchase asset-backed, commercial
mortgage-backed and other securities widened considerably. This spread widening
caused a decrease in the market value of many of the securities used as
collateral for two of St. George's insured credit facilities. The facilities had
requirements that the lender's operating ratio, which is the portfolio market
value divided by the loan outstanding, be maintained above levels set by the
lender. In the event that an operating ratio
14
<PAGE>
fell below the required level and was not brought into compliance within a cure
period, the lender could liquidate the collateral and require Commercial
Guaranty Assurance to pay any remaining balance outstanding under the credit
facility. On October 30, 1998, Commercial Guaranty Assurance provided asset
specific guarantees and obtained third party credit support on a "cut-through"
basis on approximately $382 million par amount of securities within the two
insured investment portfolios. The three parties that provided this credit
support are institutional investors in CGA Group. The effect of this third party
credit support was to substantially increase the market value and reduce the
future market value volatility of the credit enhanced securities. In connection
with these arrangements, Commercial Guaranty Assurance received a premium of
$38.95 million from its two clients, and ceded an aggregate of $38.7 million to
the institutions that provided the cut-through credit enhancement.
Management fees
Management fees increased to $8.2 million in 1999 from $3.3 million in
1998. The $8.2 million is comprised of $1.7 million of structuring fees earned
in connection with three resecuritizations, $3.5 million of finance origination
fees, and approximately $3.0 million of investment management fees. No
structuring or finance origination fees were earned in 1998.
CGA Investment Management's assets under management increased by 39% to
$2.5 billion at December 31, 1999 from $1.8 billion as of December 31, 1998.
However, investment management fees earned during 1999 decreased by 11% compared
to 1998. The decrease in management fees earned as a percentage of assets under
management is attributable to clients of CGA Investment Management having
resecuritized approximately $924 million in assets over the period between
September 30, 1998 and December 31, 1999. The asset management fees earned from
these resecuritization transactions are lower than the asset management fees
earned while these assets remained in the clients' investment portfolios. In
addition, CGA Investment Management reduced the amount of the asset management
fee charged to several of its clients by 60% to assist them with the liquidity
difficulties that arose in the fourth quarter of 1998. This fee reduction
totaled approximately $1.3 million for 1999. CGA Investment Management earned no
investment management or advisory fees in 1997.
Insurance in force
The amount of Commercial Guaranty Assurance's insured portfolio increased
from $1.6 billion net par as of December 31, 1998 to $2.2 billion as of December
31, 1999. The following table shows the net par insured obligations at December
31, by asset type:
<TABLE>
<CAPTION>
1999 1998 1997
(000'S) (000'S) (000'S)
---------- ---------- --------
<S> <C> <C> <C>
Real estate investment trust debt .................. $ 256,774 $ 381,777 $ --
Consumer asset-backed securities ................... 656,075 456,521 52,439
Corporate asset-backed securities .................. 459,909 270,612 46,337
Commercial mortgage-backed securities .............. 614,217 185,754 100,703
Sovereign debt ..................................... 90,000 120,000 120,000
Corporate debt ..................................... 87,490 75,000 --
Real estate investment trust preferred stock ....... 70,000 70,000 --
---------- ---------- --------
Total ............................................ $2,234,465 $1,559,664 $319,479
========== ========== ========
</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 December 31:
1999 1998 1997
---- ---- ----
"AAA" 4% 4% --
"AA" 2% 3% --
"A" 25% 12% 7%
"BBB" 58% 67% 65%
"BB" 9% 11% 28%
Not rated 2% 3% --
--- --- ---
Total 100% 100% 100%
=== === ===
15
<PAGE>
The credit quality of the portfolio improved during 1998 and 1999 as
non-investment grade exposure decreased from 28% at December 31, 1997 to 11% at
December 31, 1999. The portfolio includes one problem credit consisting of
charged-off credit card receivable transactions. These transactions comprised
less than one percent of Commercial Guaranty Assurance's net par insured
portfolio as of December 31, 1999 and three percent as of December 31, 1998.
Commercial Guaranty Assurance has established a case basis reserve for this
exposure which is more fully described below.
Investment income
Net investment income was $8.6 million for the year ended December 31,
1999, $8.5 million for 1998, and $2.9 million for the period ended December 31,
1997. Net investment income is presented after deducting the cost of external
investment management fees that totaled $0.1 million for 1999, $0.3 million for
1998 and $0.2 million for the period ended December 31, 1997. Commencing in
September 1998, Commercial Guaranty Assurance modified its investment strategy
to have the investment portfolio closely match the returns of a "Double-A" or
better three to five year Eurodollar bond index. This strategy results in a less
actively managed portfolio, which resulted in the management fee being reduced
by approximately twenty basis points per annum. The new strategy also resulted
in above normal turnover of the portfolio and contributed to the significant
gains realized during 1998. The total market value of the investment portfolio,
other investments, cash and accrued interest receivable at December 31, 1999,
was $163.5 million compared to $136.8 million at December 31, 1998. In April
1999, $47 million was added to the portfolio with proceeds from CGA Group's
rights offering. Cumulative unrealized losses in the portfolio as of December
31, 1999 were $6.5 million compared to $0.9 million of unrealized gains as of
December 31, 1998. The unrealized losses in the portfolio resulted from the
increase in interest rates during 1999. The average yield on the investment
portfolio was 6.86% at December 31, 1999 compared to 4.82% at December 31, 1998.
Operating expenses
Operating expenses for the year ended December 31, 1999 were $13 million,
$14 million for 1998 and $6.5 million for the nine months ended December 31,
1997. These costs are primarily personnel related which totaled $8.8 million for
1999 and $7.4 million for 1998. The primary reason for the operating expense
reduction in 1999 compared to 1998 was due to a non-recurring expense of $1.2
million of client acquisition costs in 1998 which had previously been
capitalized. These costs were incurred by CGA Investment Management to set up
new investment programs and funding sources for its clients. The majority of the
other operating expenses are comprised of occupancy costs, professional fees,
travel, information services, and administration.
Rebate on credit support arrangements
In December 1999, CGA Investment Management paid $5.5 million to St. George
to cover a portion of the $9.5 million net cost incurred by St. George for the
credit support arrangements which which were provided in 1998 and cancelled in
1999.
Losses and loss adjustment expenses
Commercial Guaranty Assurance established general loss reserves of $3.3
million in 1999, $2.0 million in 1998, and $0.1 million in 1997. Commercial
Guaranty Assurance established case basis reserves, net of reinsurance, of $15.3
million in 1999 and $20.8 million in 1998. Total case basis reserves to date,
net of reinsurance, are $36.1 million and all relate to exposure to Commercial
Financial Services securities.
In December 1998, Commercial Financial Services Inc., a credit-card debt
collection company and several of its affiliates filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code. Commercial Guaranty
Assurance previously had guaranteed approximately $212 million face amount of
asset backed securities issued by various trusts established and serviced by
Commercial Financial Services, and had reinsured approximately $162 million of
this exposure, so that its original net exposure was $50 million. As of December
31, 1999, Commercial Guaranty Assurance has made claim payments under its
guarantees in respect of the insured Commercial Financial Services securities in
an aggregate amount of approximately $117.8 million, of which $90 million was
funded by Commercial Guaranty Assurance's reinsurer, and $27.8 million was
funded by Commercial Guaranty Assurance from its own reserves. Commercial
Guaranty Assurance made an additional claims payment with respect to the
Commercial Financial Services securities on March 15, 2000, in the amount of
approximately $28.5 million. $21.8 million of this amount was funded by
Commercial Guaranty Assurance's reinsurer, and $6.7 million was funded from
Commercial Guaranty Assurance's case basis reserves. Upon making this payment,
and together with all prior
16
<PAGE>
payments, Commercial Guaranty Assurance's aggregate net exposure, net of
reinsurance and net of Commercial Guaranty Assurance's remaining $1 million case
basis reserve, in respect of Commercial Financial Services securities, was
reduced to approximately $9.6 million. This aggregate net exposure is reflected
in Commercial Guaranty Assurance's December 31, 1999 financial statements.
Commercial Guaranty Assurance, CGA Investment Management and various other
plaintiffs have commenced legal proceedings against Commercial Financial
Services, William Bartmann, Commercial Financial Services' founder and principal
shareholder, other former members of Commercial Financial Services' senior
management, Chase Securities, Inc. (the placement agent for the Commercial
Financial Services securities insured by Commercial Guaranty Assurance), and
Arthur Andersen LLC (Commercial Financial Services' auditors), alleging various
counts of federal and state securities law fraud and common law fraud. It is too
early to predict what, if anything, Commercial Guaranty Assurance ultimately may
recover in this legal proceeding.
Change in accounting principle
The Accounting Standards Executive Committee issued Statement of Position
98-5,"Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998, which requires the CGA Group to expense
organization costs as incurred. CGA Group expensed the remaining unamortized
organization costs totaling $3.9 million in July 1998 which is reflected in the
financial statements as a change in accounting principle.
Preferred dividends
For the year ended December 31, 1999, the pay-in-kind dividends on
preferred stock and accretion on preferred stock totaled $15.0 million compared
to $20.9 million for 1998. The decrease resulted from the conversion of all
outstanding Series B preferred stock into common stock on March 31, 1999.
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. CGA Investment Management provides investment
management and advisory services. The tables below presents selected financial
information for each of the operating segments:
As of and for the three months ended March 31, 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.
17
<PAGE>
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>
As of and for the year ended December 31, 1999:
CGA CGAIM
------------ -----------
REVENUES
Net premiums earned .......................... $ 12,223,484 $ --
Net investment income ........................ 8,030,130 61,479
Net realized losses .......................... (60,485) --
Management fees .............................. -- 8,207,746
Intersegment revenue ......................... -- 349,546
------------ -----------
Total revenues ............................... 20,193,129 8,618,771
------------ -----------
EXPENSES
Operating expenses ........................... 1,279,553 9,940,212
Rebate on credit support arrangements ........ -- 5,510,000
Acquisition costs ............................ 713,571 --
Commitment fees .............................. 600,000 --
Excess of loss facility ...................... 200,000 --
Losses and loss adjustment expenses .......... 16,650,000 --
Intersegment expenses ........................ 349,546 257,589
------------ -----------
Total expenses ............................... 19,792,670 15,707,801
------------ -----------
Net income (loss) ............................ 400,459 (7,089,030)
------------ -----------
TOTAL ASSETS ............................... $190,644,086 $ 3,005,640
============ ===========
18
<PAGE>
As of and for the year ended December 31, 1998:
CGA CGAIM
------------ -----------
REVENUES
Net premiums earned $ 9,246,289 $ --
Net investment income 8,387,513 64,934
Net realized gains 2,814,132 --
Management fees -- 3,353,499
Intersegment revenue -- 122,301
------------ -----------
Total revenues 20,447,934 3,540,734
------------ -----------
EXPENSES
Operating expenses 1,558,407 10,711,550
Acquisition costs 433,217 --
Commitment fees 600,000 --
Excess of loss facility 200,000 --
Losses and loss adjustment expenses 22,745,000 --
Intersegment expenses 122,301 --
Total expenses 25,658,925 10,711,550
------------ -----------
Net loss (5,210,991) (7,170,816)
------------ -----------
TOTAL ASSETS $214,823,536 $ 3,752,936
============ ===========
As of and for the nine months ended December 31, 1997:
CGA CGAIM
------------ -----------
REVENUES
Net premiums earned $ 502,995 $ --
Net investment income 2,955,601 --
Net realized gains 885,422 --
------------ -----------
Total revenues 4,344,018 --
------------ -----------
EXPENSES
Operating expenses 597,883 5,313,368
Acquisition costs 53,590 --
Commitment fees 323,836 --
Excess of loss facility 107,671 --
Losses and loss adjustment expenses 55,000 --
------------ -----------
Total expenses 1,137,980 5,313,368
------------ -----------
Net income (loss) 3,206,038 (5,313,368)
------------ -----------
TOTAL ASSETS $131,607,950 $ 3,577,782
============ ===========
LIQUIDITY AND CAPITAL RESOURCES
CGA Group capitalized Commercial Guaranty Assurance with $125 million. On
March 31, 1999, CGA Group contributed an additional $27.2 million to Commercial
Guaranty Assurance using proceeds from the sale of CGA Group's Series C
preferred stock. In June 1999, CGA Group contributed an additional $7.1 million
to Commercial Guaranty Assurance. 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%.
19
<PAGE>
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 the five-year period, Commercial Guaranty
Assurance intends to comply with dividend restrictions, if any, imposed by
Fitch, 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 limitations under Bermudian
insurance regulations that require minimum solvency margins and liquidity
ratios.
CGA Investment Management was capitalized with $3 million. It has required
additional funding of $13.9 million from CGA Group since its commencement of
operations through December 31, 1999 to cover its operations. 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. Management projects that CGA Investment Management will require
additional funding at least through 2003 while it continues to build its assets
under management up to an amount that generates sufficient fee income to cover
its operations.
March 31, 2000
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.
Commercial Guaranty Assurance monitors its exposure on a routine basis and
stays in close contact with its rating agencies, Fitch, CBRS, DBRS and JRII.
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 several of its institutional shareholders to purchase an aggregate of $60
million of Series B preferred stock which, if issued, 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 Fitch provides
written notice at least 45 days prior to June 17, 2002 that Commercial Guaranty
Assurance's financial strength 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.
In April 2000, Fitch acquired and subsequently merged with Duff & Phelps,
with Fitch as the surviving company. On June 2, 2000, Fitch announced that it
was placing Commercial Guaranty Assurance's "Triple-A" rating on general review,
on the basis that Commercial Guaranty Assurance does not meet Fitch's minimum
capital requirements of approximately $350 million of equity capital and $150
million in "soft" capital for a "Triple-A" financial strength rating. See
"Business--Commercial Guaranty Assurance, Ltd." CGA Group has engaged the
investment banking firm of Donaldson, Lufkin & Jenrette Securities Corporation
to act as its exclusive financial advisor for the purpose of raising additional
capital sufficient to meet Fitch's requirements. As of the date of this
prospectus, no additional capital has been raised, and no assurances can be
given as to whether CGA Group will be successful in raising any additional
capital, or whether it will be able to raise sufficient capital to meet Fitch's
requirements.
December 31, 1999
On a consolidated basis, CGA Group used $15.8 million of cash from
operating activities during 1999 compared to providing $1.2 million during 1998.
CGA Group applied $23.9 million of net cash to investing activities during
20
<PAGE>
1999 compared to $5.8 million in 1998. Cash flows from financing activities in
1999 resulted from the sale of Series C preferred stock, which raised net
proceeds of $49.9 million.
On March 31, 1999, CGA Group sold 43,997,863 shares of Series C preferred
stock, par value $.01 per share, to existing shareholders for an aggregate sales
price of $50,996,795. Concurrent with the sale of the Series C preferred stock,
the outstanding 1,600,000 of Series B preferred stock and the 668,678 shares of
Series B preferred stock declared as pay-in-kind dividends thereon, totaling
2,268,678 shares valued at $56,716,950, were exchanged for 18,905,648 shares of
common stock based on an exchange price of $3 per share of common stock.
On April 26, 1999, CGA Group sold 973,483 shares of Series C preferred
stock to employees of CGA Group and its subsidiaries. The shares were sold for
$1.20 each, for a total of $1.2 million. The shares were 90% financed by CGA
Group at 7% per annum with equal principal installments due annually over a
three-year period.
SUBSEQUENT EVENTS
On April 4, 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 owned by one of the St. George funds. Based on its ongoing
surveillance, Commercial Guaranty Assurance concluded that this security was no
longer investment grade risk and consequently, as insurer of the fund,
Commercial Guaranty Assurance directed CGA Investment Management, as investment
adviser to the fund, to sell the security. The sale resulted in a shortfall of
$2.6 million, which will be paid by Commercial Guaranty Assurance to the
affected fund under its insurance policy.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities, 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 in the statement of
financial position 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
RISK MANAGEMENT
In the ordinary course of business, CGA Group, through its subsidiaries,
manages a variety of risks. Of these, the primary risk is the credit risk taken
by Commercial Guaranty Assurance in respect of obligations insured by it. Other
material risks include those in respect of credit derivatives, liquidity,
capital markets and exposure to reinsurers. These risks are identified, measured
and monitored through a variety of control mechanisms, which are in place at
different levels throughout the organization.
CREDIT RISK
The most significant risk to which CGA Group is exposed is credit risk.
Credit risk occurs at a number of levels, primarily in respect of the securities
and other financial obligations insured by Commercial Guaranty Assurance, but
also in connection with counterparties to interest rate and currency swaps,
credit derivatives, and liquidity providers.
The primary credit risk to which Commercial Guaranty Assurance is exposed
is the risk of default on the underlying securities or other financial
obligations which it has guaranteed. Under its financial guaranty
insurancepolicy, Commercial Guaranty Assurance would generally be liable to pay
interest, principal and other amounts in respect of the insured obligation as
these become due for payment in accordance with the payment terms of the
underlying obligation, without giving effect to any acceleration of these
payments. In the event the issuer of a security insured by Commercial Guaranty
Assurance defaults on its payment obligations, under its policy Commercial
Guaranty Assurance would be obligated to make all scheduled payments when due
for payment. Under its insurance policies, Commercial Guaranty Assurance would
generally have the right, but not the obligation, to repay the defaulted
security on an accelerated basis. Upon making payment in respect of a defaulted
security, Commercial Guaranty Assurance would generally be subrogated to all
rights and remedies of the issuer of the security in respect of any related
collateral or other security, to the extent of the payment made by Commercial
Guaranty Assurance.
21
<PAGE>
CREDIT DERIVATIVES
Commercial Guaranty Assurance has exposure to counterparties in respect of
credit derivatives, as described below. Commercial Guaranty Assurance has
entered into default swaps in respect of many of its sovereign and corporate
exposures. Commercial Guaranty Assurance has also guaranteed the payment
obligations of subsidiaries of St. George Holdings and Cobalt Holdings under
default swaps and total rate of return swaps which have been entered into by
these vehicles.
Default Swaps
Default swaps are credit derivatives which enable the owner of a security
to transfer credit risk to another party. Commercial Guaranty Assurance has
entered into default swaps directly with banks and investment banks and has also
guaranteed the obligations of subsidiaries of St. George Holdings and Cobalt
Holdings under default swaps.
The party taking the credit exposure in a default swap receives a net
payment that is the economic equivalent of a premium. Unless a credit event
occurs, the swap typically terminates on the maturity date of the reference
security, and there is no termination payment at maturity. Credit events relate
to the reference security and typically include:
o bankruptcy,
o failure to pay,
o repudiation,
o restructuring, and
o cross default or cross-acceleration.o
If a credit event occurs, Commercial Guaranty Assurance generally would be
obligated to purchase the reference security at par plus accrued interest. In
some cases, Commercial Guaranty Assurance would have the additional option of
cash settlement, whereby Commercial Guaranty Assurance can make a payment equal
to the difference between the market value of the security at the time, and the
par value of the security.
Principal credit risks associated with default swaps include:
o credit risk--a loss may be incurred following a credit event in
respect of the underlying or reference security;
o market value risk--this risk is limited to cash settlement or to the
value of the reference security following a physical settlement upon a
credit event;
o counterparty bankruptcy risk--from Commercial Guaranty Assurance's
perspective, the counterparty's fixed payments would no longer be
received; however, the swap would terminate and Commercial Guaranty
Assurance would no longer have the credit exposure to the reference
security;
o liquidity risk--if a credit event occurs, Commercial Guaranty
Assurance must fund the purchase of the reference security. The cash
amount required may be reduced in the event of a cash settlement, but
this option may not be attractive if the reference security is
illiquid or is marked at an unattractive price; and
o assignment risk--if the reference security carries rights, remedies,
or obligations such as voting rights related to a bank loan, these
should be assignable in the event of a physical settlement.
The loan documents for the reference security may not allow assignment of the
security. The loan documents may also obligate the assignee to fund additional
amounts under the loan, which Commercial Guaranty Assurance may not be able to
do in the required time period.
As of December 31, 1999, Commercial Guaranty Assurance was party to an
aggregate $210 million notional amount of default swaps. $120 million in
notional amount of this exposure was in respect of 16 corporate credits, ranging
from $5 million to $30 million in notional amount. The "notional amount" is the
amount financed less any principal amounts received. Each of these default swaps
has a five-year term, with $75 million in notional amount maturing in September
2003, and $45 million in notional amount maturing in June 2004. The remaining
$90 million in notional amount of default swap exposure consists of seven
sovereign or quasi-sovereign credits, ranging in notional amount from $10
million to $20 million. Each of these default swaps matures in November 2002. In
addition, Commercial Guaranty Assurance had guaranteed the payment obligations
of a St. George company under a default
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swap covering the senior debt obligations of a publicly traded real estate
investment trust under a revolving credit facility, with a maximum exposure of
$60 million. Commercial Guaranty Assurance had approximately $42 million of
exposure to this credit as of December 31, 1999, which matures in July 2000. As
noted above, unless a defaultevent occurs in respect of the reference security
to which the default swap pertains, Commercial Guaranty Assurance will not be
required to make any payments and will have no further exposure under the
default swap following the maturity date.
Total Rate of Return Swaps
Total rate of return swaps are credit derivatives that are used by
subsidiaries of St. George Holdings and Cobalt Holdings to assume credit
exposure without using cash. Effectively, the total rate of return swaps allow
them to receive all the economic benefits of owning the investment without
financing it on their balance sheets. At the end of the total rate of return
swap's term, which is typically one year, they must purchase the underlying bond
at the notional amount. Any market value appreciation or decline is for their
account.
These swaps are either provided by investment banks selling the bond or
through a swap line provided by institutional lenders to St. George Holdings and
Cobalt Holdings. The total rate of return swap counterparty benefits from a
Commercial Guaranty Assurance surety bond guaranteeing the insured's obligations
under the contract. The counterparty also retains an ownership interest in the
specific bond that is being financed. In general, the investment guidelines of
the St. George and Cobalt companies require no less than a "Double-A minus" or
Aa3 rating from Standard & Poor's or Moody's for eligible counterparties.
There are three principal risks associated with total rate of return swaps:
o refinancing risk--if at the termination date the counterparty does not
refinance its exposure to the St. George and Cobalt companies at the
then current notional or financing rate, then the bond will need to be
refinanced at the then current notional or financing rates;
o market value risk--many, but not all, total rate of return swaps have
market value triggers ranging from 5% to 10% of the notional amount.
If the market value of the reference security drops below the relevant
dollar price, then either cash collateral will need to be posted,
which is normally enough to bring the collateral package back to par,
or an early termination event can be declared by the counterparty; and
o counterparty bankruptcy risk--the St. George and Cobalt companies do
not have a security interest in the underlying bond that is being
financed. In the event of the counterparty's bankruptcy, the St.
George or Cobalt company would have only an unsecured claim against
the counterparty.
Under its surety bond, Commercial Guaranty Assurance would typically guarantee
any payment default by St. George Holdings, Cobalt Holdings or other insured
customer under the total rate of return swap, and would thus be liable to cover
any payment default by the insured customer under the total rate of return swap.
As of December 31, 1999, Commercial Guaranty Assurance had exposure in
respect of approximately $285 in notional amount of reference securities held by
various subsidiaries of St. George Holdings and Cobalt Holdings under total rate
of return swaps. The underlying reference securities consist of:
o subordinated tranches of credit card securitizations ($153 million);
o real estate investment trust senior debt ($50 million);
o collateralized loan obligations / collateralized bond obligations ($28
million);
o future flow transactions ($19 million);
o equipment leases ($18 million); and
o home equity loans ($17 million).
As noted above, total rate of return swaps are generally for one year terms,
with a market value "true-up" typically required upon renewal. See also
"--Liquidity" below.
LIQUIDITY
The liabilities of many Commercial Guaranty Assurance-insured companies and
funds, including the subsidiaries of St. George Holdings and Cobalt Holdings, do
not necessarily provide term funding for the assets
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owned by these companies. This could result in incremental exposure to
Commercial Guaranty Assurance in the event of an inability to refinance an asset
at the maturity date of the associated liability, especially when the asset's
market value is lower than its acquisition cost. This inability to refinance
could result in a claim against Commercial Guaranty Assurance in the amount of
the market value loss on the securities liquidated to repay the maturing
liability.
As the liabilities of these CGA-guaranteed insureds approach maturity, CGA
Investment Management will attempt to refinance the liability with the insured's
existing lenders, replace the facility with another lender or syndicate of
lenders, or issue medium-term notes through a CGA-guaranteed Euro medium term
note program established in 1998 for the benefit of specific subsidiaries of St.
George Holdings and Cobalt Holdings. In the event a Commercial Guaranty
Assurance-insured liability cannot be used to refinance a maturing liability,
Commercial Guaranty Assurance will direct the insured to sell the related asset,
with or without Commercial Guaranty Assurance's insurance, or attempt to arrange
for the purchase of the asset by another Commercial Guaranty Assurance insured.
Refinance options for maturing total rate of return swaps include:
(a) refinance or "term out" the full amount of the total rate of return
swap with the existing total rate of return swap counterparty;
(b) refinance the maturing total rate of return swap with the existing
total rate of return swap counterparty or new counterparty at the
related security's market value;
(c) sell the asset with or without a Commercial Guaranty Assurance
guaranty; and
(d) attempt to arrange for the purchase of the asset by another Commercial
Guaranty Assurance insured.
In the case of (b), (c) and (d), Commercial Guaranty Assurance would be
liable for any market value shortfall not otherwise covered by the terms of the
refinancing.
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As of December 31, 1999, there was approximately $531 million principal
amount of Commercial Guaranty Assurance-insured medium term notes outstanding
under the CGA-guaranteed Euro medium term note program referred to above, with
maturities ranging from one to ten years. The maturity schedule for these medium
term notes is as follows:
YEAR AMOUNT
---- ------
2000 $170 million
2001 $136 million
2003 $100 million
2004 $86 million
2009 $65 million
In respect of the approximately $170 million in medium term notes maturing
in 2000, CGA Investment Management intends to fund these maturities through
medium term note issuance of $25 to $50 million per month over the first six
months of 2000. If medium term note issuance falls short of these levels, a
portion of the $140 million in cash and liquid assets currently available in the
CGA-guaranteed medium term note program will be reserved to retire the maturing
liabilities.
In the case of St. George Investments I, its revolving credit facility was
not renewed in 1998, and this facility has converted into a term loan maturing
November 2, 2002, with annual amortization. Approximately $274 million remains
outstanding under this facility as of December 31, 1999. St. George Investments
I fully paid down the first installment in November 1999, has prepaid
approximately $62 million of the $106 million installment due in November 2000,
and will have to make two further installment payments of approximately $106
million each in November 2001 and 2002. St. George Investments III renewed its
$500 million 364-day credit facility in July 1999, which if not renewed in July
2000 will convert into a six-year term loan. There was approximately $274
million outstanding under this facility as of December 31, 1999.
CAPITAL MARKETS
Spread Risk--Credit Spread and Swap Spread Widening/Compression
The market value of a fixed income asset has two components, duration risk
and credit spread risk. Duration risk is the risk of change in price of a
fixed-rate bond as a result of changes in interest rates. The investment
guidelines of the St. George and Cobalt subsidiaries, which generally borrow at
floating, LIBOR based rates, require them to hedge this risk, through interest
rate swaps, to minimize fluctuations in the market value of their portfolios
resulting from movements in the Treasury market. Interest rate swaps of this
type effectively convert fixed rate assets into synthetic floating rate bonds.
Credit spread risk is the risk resulting from change in price of any
non-government bond as a result of a change in the market's willingness to hold
the issuer's risk. CGA Group believes that the risk premium, the change in the
price of a bond due to credit spread movements, cannot be hedged in today's
market for the type of assets in the investment portfolios of the St. George
Holdings and Cobalt Holdings subsidiaries. Credit derivative contracts with
market value triggers are also subject to credit spread risk.
The following hold true for spread volatility:
o the shorter life of the asset, the lower the credit spread volatility;
o higher rated assets have lower credit spread volatility than lower
rated assets; and
o assets with better liquidity or a tighter bid/ask spread have lower
credit spread volatility.
The market value volatility of a portfolio of assets and/or derivative
contracts is simply the weighted average of the volatility of the individual
assets. Credit spreads move for the following reasons:
o underlying changes in the credit quality of the securities;
o supply and demand; and
o absences of liquidity, such as occurred in the capital markets in the
second half of 1998.
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Interest Rate Movements
The market value of fixed rate bonds fluctuates as underlying interest
rates change. This fluctuation is commonly measured by the modified duration of
the bond. CGA Investment Management manages the duration risk of the assets in
its clients' portfolios by swapping the fixed rate cash flows into LIBOR on a
floating rate basis. The interest rate hedge is generally put on simultaneously
with the purchase by the client of the fixed rate bond. CGA Investment
Management monitors the interest rate risks as agreed with each client and as
set forth in the investment guidelines for that client. Under the client's
investment guidelines, CGA Investment Management must manage each client's
investment portfolio so as to remain within the parameters of its market risk
category.
Interest Rate Swaps
The respective investment guidelines of the St. George and Cobalt
subsidiaries require them to swap all fixed rate investments to LIBOR. This is
intended to ensure that the subsidiaries lock-in the intended spread on their
respective investments and have sufficient resources to pay interest on their
respective financings. The bankruptcy of a provider of an interest rate swap
could leave Commercial Guaranty Assurance exposed to the marked-to-market value
of the interest rate swap. In general, the investment guidelines for the St.
George and Cobalt subsidiaries require that swap counterparties be rated not
less than "Single-A" by one or more nationally recognized credit agencies.
Several of the St. George and Cobalt subsidiaries have higher or additional
requirements for swap counterparties.
ST. GEORGE AND COBALT
INTEREST RATE SWAP COUNTERPARTY EXPOSURE
AS OF DECEMBER 31, 1999
DEBT RATING CATEGORY NOTIONAL AMOUNT ($mm)
-------------------- ---------------------
"Triple-A" ....................................... $ 9
"Double A" ....................................... $599
"Single A" ....................................... $575
(for counterparties with split ratings, the lowest rating category governs)
Counterparty derivative exposures are a function of the notional amount and
tenor of the derivative contracts outstanding, as well as the yield curve. Since
the future paths of the yield curve are probabilistic, there are a number of
analytical approaches to measure the credit exposures from interest rate swaps.
CGA Group applies a stressed expected mark-to-market approach, known as
"3-Sigma", and aggregates counterparty risks across the Commercial Guaranty
Assurance-guaranteed investment vehicles and swap contracts. The "starting
point" for the 3-Sigma measurement is the current marked-to-market value of each
derivative contract.
Most of the long dated interest rate swaps to which the St. George and
Cobalt subsidiaries are party have "true-up" provisions which allow either
counterparty to terminate a swap contract in five years. This provision provides
both counterparties with a credit risk mitigant. At the current time, Commercial
Guaranty Assurance-guaranteed clients have over $700 million of long dated
interest rate swaps with this type of provision.
Spread Deterioration Risk
Several of the St. George and Cobalt subsidiaries fund their LIBOR-based
portfolios by borrowings under asset backed commercial paper facilities. This
could subject the St. George and Cobalt subsidiaries to basis risk if LIBOR and
asset backed commercial paper rates diverge. These two indices normally trade
with a high degree of correlation, that is to say, asset backed commercial paper
generally yields around LIBOR minus 5 basis points. However, in times of market
disruption such as occurred in September and October of 1998, asset-backed
commercial paper widened to as much as LIBOR plus 20 basis points. To the extent
that the LIBOR-based cash flow generated by the St. George and Cobalt
subsidiaries is insufficient to cover these subsidiaries' increased funding cost
due to excessive widening of asset-backed commercial paper rates, Commercial
Guaranty Assurance would generally be liable for any shortfall pursuant to the
insurance issued by it.
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REINSURANCE
In the ordinary course of its business, Commercial Guaranty Assurance
enters into reinsurance contracts primarily designed to minimize its losses from
large risks and to protect its capital and surplus. The reinsurance of risk does
not relieve Commercial Guaranty Assurance of its original liability to
policyholders. In the event that any or all of the reinsurers were unable to
meet their obligations to Commercial Guaranty Assurance under these reinsurance
arrangements, Commercial Guaranty Assurance would be liable for the defaulted
amounts. Commercial Guaranty Assurance's exposure to reinsurers was $109.7
million as of December 31, 1999. All of this exposure is with counterparties
which are rated at least "Double-A minus" or the equivalent by one or more
nationally recognized statistical credit rating agencies.
BUSINESS
CGA GROUP, LTD.
Organized on June 21, 1996 and operating since June 17, 1997, we are a
Bermuda holding company that provides financial guaranty insurance of structured
securities, including commercial real estate backed securities and asset-backed
securities, through our primary and wholly-owned subsidiary, Commercial Guaranty
Assurance. We also provide financial guaranty insurance of other securities,
where our senior management team has expertise and where we deem credit
enhancement opportunities to be attractive.
We also provide investment management and investment advisory services to
investment funds and other clients. We provide these services through our other
wholly-owned subsidiary, CGA Investment Management, a Delaware corporation that
is registered as an investment adviser with the Securities and Exchange
Commission under the Investment Advisors Act of 1940, as amended.
The primary clients of Commercial Guaranty Assurance and CGA Investment
Management are St. George Holdings, a Cayman Islands company, and Cobalt
Holdings, a Delaware limited liability corporation, and each of their respective
subsidiaries. Most of CGA's premiums and CGA Investment Management's management
fees originate from St. George and Cobalt.
We formed CGA Group with a view to becoming the market leader in the
commercial real estate segment of the financial guaranty industry. We utilize
our structured finance and real estate expertise to underwrite financial
guaranties for commercial real estate and other securities to a zero loss
underwriting standard. Our primary target market is the large U.S. commercial
real estate mortgage market, which we believe is underserved by the financial
guaranty insurance industry. We also target select segments of the private
asset-backed securities market.
Customers can purchase Commercial Guaranty Assurance's insurance only
through unaffiliated non-U.S. insurance brokers. Customers include investment
and commercial banks with significant real estate and asset-backed advisory
businesses, and commercial mortgage loan origination and asset-backed
repackaging operations and other participants in the securitization markets.
OVERVIEW OF THE SUBSIDIARIES
Commercial Guaranty Assurance focuses on CGA Group's primary business of
issuing financial guaranty insurance policies, while CGA Investment Management
provides investment and collateral management and financial advisory services
including transaction structuring advice.
The main office address of CGA Group and Commercial Guaranty Assurance is
Craig Appin House, 8 Wesley Street, Hamilton HM 11 Bermuda. The main office
address of CGA Investment Management is 17 State Street, New York, New York
10004.
COMMERCIAL GUARANTY ASSURANCE, LTD.
Commercial Guaranty Assurance is an insurance company incorporated on
October 16, 1996 in Bermuda with limited liability. Commercial Guaranty
Assurance commenced operations in June 1997 and is licensed as a Class 3 insurer
under The Insurance Act 1978 of Bermuda. 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's
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claims-paying ability, also referred to as its financial strength, is rated
"AAA" (on general review) by Fitch, "AAA" by JRII, "A++" (triple-A) by CBRS and
"AAA" by DBRS. See "Certain Events" below. Fitch is a nationally recognized
statistical rating organization with U.S. and worldwide operations, Canadian
Bond Rating Service Inc. and Dominion Bond Rating Service Limited are the two
principal Canadian rating agencies, and Japan Rating and Investment Information,
Inc., is a leading Japanese rating agency.
As of March 31, 2000 Commercial Guaranty Assurance's ratings are supported
by an aggregate of approximately $233 million in claims-paying resources,
consisting of
o approximately $143 million in statutory capital;
o an irrevocable capital commitment on the part of existing
institutional investors in CGA Group to purchase an aggregate of $60
million in additional equity securities of CGA Group in the event
Fitch lowers, or provides definitive notice that it will lower,
Commercial Guaranty Assurance's rating to below "Triple-A", and
o a $20 million excess of loss insurance policy provided by ACE Capital
Re Overseas Ltd., formerly known as KRE Reinsurance Ltd., which is an
indirect wholly owned subsidiary of ACE, Ltd., a shareholder of CGA
Group.
As a Bermuda domiciled insurance company, Commercial Guaranty Assurance
does not write insurance or otherwise conduct or transact insurance business in
the United States or any other jurisdiction where it is not authorized to do so.
Commercial Guaranty Assurance's insurance may only be obtained through
unaffiliated non-U.S. insurance brokers and consultants on a direct-placement
basis. All negotiations with, and issuances of policies by, Commercial Guaranty
Assurance take place in Bermuda or other locations outside of the United States.
CREDIT ENHANCEMENT BUSINESS
Commercial Guaranty Assurance's principal business is the issuance of
financial guaranty insurance policies which guarantee timely payment of
interest, principal and other amounts on securities and other financial
obligations. Commercial Guaranty Assurance primarily insures investment grade
securities in the commercial real estate and asset backed securities markets. It
also insures the liabilities of investment vehicles which invest in structured
securities, including asset-backed securities, commercial mortgage-backed
securities, mortgage backed securities and other securities and financial
obligations. A financial guaranty insurance policy is used in the capital
markets as a credit enhancement instrument to guarantee payments of principal,
interest and other amounts in accordance with the original debt service schedule
of the security. In the event the issuer of a security defaults on its payment
obligations, the financial guarantor makes the scheduled payments. In this
instance, the insurer generally has the option, but not the obligation, to repay
the security on an accelerated basis. The financial guaranty insurance policy is
unconditional, irrevocable and noncancellable.
The fundamental business proposition of all financial guarantors is to
elevate lower rated securities to a higher level, equal to the rating of the
financial guarantor. Issuers of lower rated securities, typically "Triple-B" or
the equivalent, purchase financial guaranty insurance policies to enhance the
rating of these securities, thereby reducing their borrowing costs and/or
increasing the liquidity of their securities. In turn, the guarantor collects a
premium that is payable either upon issuance of its policy or periodically in
installments. The premium is equal to a significant portion of the savings
resulting from the improved trading levels of the guaranteed securities.
Generally, an issuer will purchase a financial guaranty insurance policy to
increase the ratings of its securities only when the yield on the uninsured
security exceeds the sum of the annual premium charged to upgrade the security,
the yield on the same security when enhanced, and some "incentive" or savings
for the issuer. Therefore, the ability of a financial guarantor to sell its
credit enhancement is a function both of the credit spreads available in a
market, such as, for example, the difference in the yield of a security rated
"Triple-A" without insurance and the yield of a similar security rated
"Triple-B," the trading level achieved as a result of the guaranty policy, and
the premium charged for the insurance.
One of Commercial Guaranty Assurance's primary target markets is investment
funds and other entities that purchase structured securities. Therefore,
Commercial Guaranty Assurance generates a substantial portion of its guaranty
business from advisers to these types of customers. In these cases, and as a
condition to issuing its policy, Commercial Guaranty Assurance will generally
require that the customer adopt investment guidelines acceptable to Commercial
Guaranty Assurance.
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ZERO-LOSS UNDERWRITING STANDARD
Commercial Guaranty Assurance underwrites all risks insured by it to a
"zero loss" standard--that is, obligations insured by Commercial Guaranty
Assurance are required to be structured with sufficient levels of excess
collateral or other security so that Commercial Guaranty Assurance anticipates
no losses on each risk insured without regard to the premium collected on the
policies or the investment income related to the premiums collected. To this
end, each policy Commercial Guaranty Assurance writes is required to meet the
criteria specified in the underwriting guidelines adopted by its board of
directors. Commercial Guaranty Assurance is able to deviate from these
guidelines on a case-by-case basis only in accordance with procedures
established by its board of directors. There can be no assurance, however, that
Commercial Guaranty Assurance will not incur losses with respect to these
insured obligations.
Commercial Guaranty Assurance's underwriting guidelines are intended to
provide multiple layers of loss protection. Structured securities and other
obligations insured by Commercial Guaranty Assurance are generally backed by
pools of assets having reasonably predictable cash flows. These securities
typically provide for one or more forms of overcollateralization, such as excess
collateral, excess cash flow, excess "spread" or reserves. They also often
provide for third-party protections, such as bank letters of credit, guarantees,
net worth maintenance agreements or reinsurance policies. On a transaction by
transaction basis, overcollateralization or third-party protections which assume
the primary risk of financial loss are used to protect Commercial Guaranty
Assurance against losses. Overcollateralization or third-party protections may
not, however, be required in transactions in which Commercial Guaranty Assurance
is insuring the obligations of highly rated issuers that typically are regulated
or have implied or explicit government support, or sovereign credits.
Commercial Guaranty Assurance manages its exposure on an ongoing basis and
is monitored by Fitch, Dominion Bond Ratings Service,Canadian Bond Rating
Service and Japan Ratings and Investor Information to ensure that it is
operating in a manner consistent with their respective requirements.
COMMERCIAL GUARANTY ASSURANCE'S INSURED BOOK OF BUSINESS
Commercial Guaranty Assurance focuses on insuring the "Single-A" and
"Triple-B" rated classes or tranches of asset backed securities, commercial
mortgage backed securities, senior debt of real estate investment trusts and
other structured securities. Commercial Guaranty Assurance also provides
financial guarantees to investment vehicles which invest in these securities. As
of March 31, 2000, Commercial Guaranty Assurance's five largest exposures by
asset type were to
o commercial mortgage backed securities,
o home equity loans,
o collateralized debt obligations,
o securities issued by real estate investment trusts, and
o subordinated classes of credit card securitizations.
Each of these asset types is briefly described below.
Commercial Mortgage Backed Securities. Commercial mortgage backed
securities are securities collateralized by loans which are secured by mortgages
on commercial real estate. The commercial mortgage backed securities are repaid
by the principal and interest collected on the underlying mortgage loans. As of
March 31, 2000, Commercial Guaranty Assurance had a total of $732.6 million in
commercial mortgage backed securities exposure. The commercial mortgage backed
securities in Commercial Guaranty Assurance's portfolio are predominately
"Triple-B" rated classes of multi-class issuances:
CMBS RATING PERCENTAGE
----------- ----------
BBB 65.1%
A 23.3%
BB 11.6%
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Commercial mortgage backed securities are backed by pools of commercial
mortgages. that are diversified by property type, obligor and geography.
Property types typically include office buildings, multi-family housing,
industrial properties, warehouses and hotels. Commercial mortgage backed
securities insured by Commercial Guaranty Assurance consist primarily of fixed
rate long term assets, but also include a growing amount of shorter term
floating rate assets. Long term assets have an average life of ten to eleven
years, whereas shorter term floating rate assets have an average life of three
to five years.
Home Equity Loans. Home equity loans are generally first-lien residential
mortgage loans made to borrowers who do not qualify for agency conforming loans,
due to credit reasons, lack of income documentation, higher debt to income
ratios, or non-standard property type, such as investment properties. Home
equity loan securitizations are backed by diversified pools of these loans.
Securities backed by home equity loans are currently the largest asset class in
the public asset backed securities market. As of March 31, 2000, Commercial
Guaranty Assurance had a total of $416.3 million in home equity loan asset
backed securities exposure. The home equity loan backed securities insured by
Commercial Guaranty Assurance are predominately "Triple-B" rated classes of
multi-class issuances:
HEL RATING PERCENTAGE
---------- ----------
BBB 73.9%
A 19.6%
BB 4.3%
AA 2.2%
The weighted average life of these securities is approximately three years.
Collateralized Debt Obligations. Collateralized debt obligations are
securities backed by pools of high yield corporate bonds and/or bank loans. The
pools are diversified by obligor and by industry. The issuance of collateralized
debt obligations has grown rapidly over the last four years, largely as a result
of banks trying to find a more efficient means to syndicate corporate credit
risk. As of March 31, 2000, Commercial Guaranty Assurance had a total of $371.5
million in exposure to collateralized debt obligations. The majority of
collateralized debt obligations transactions insured by Commercial Guaranty
Assurance are "Triple-B" rated classes of multi-class issuances:
CDO RATING PERCENTAGE
---------- ----------
BBB 75.0%
A 20.8%
AAA 4.2%
The weighted average life of these securities is approximately eight years.
Securities Issued by Real Estate Investment Trusts. Real estate investment
trusts are typically public companies that own real estate but are structured to
qualify for an exemption from U.S. income tax so long as the real estate
investment trust distributes at least 90% of the its net taxable income to its
shareholders. Real estate investment trusts invest in all segments of the
commercial real estate market, but generally each real estate investment trust
focuses on a specific property type or market niche. The real estate investment
trusts targeted by Commercial Guaranty Assurance are public companies with a
market capitalization of over $1 billion that own portfolios of apartment
buildings, office buildings, retail or industrial properties and that are
generally well diversified geographically. As of March 31, 2000, Commercial
Guaranty Assurance had a total of $321.6 million in exposure to securities
issued by real estate investment trusts. The real estate investment trust
securities insured by Commercial Guaranty Assurance primarily consist of senior
unsecured debt issued by the real estate investment trust, with some preferred
stock.
Subordinated Classes of Credit Card Securitizations. These securities, also
known as credit card "C" pieces, are the most junior tranche of a bank sponsored
credit card securitization. Traditionally, a highly rated bank provided this
tranche of credit enhancement. However, due to tightened capital adequacy
guidelines, most of the traditional bank providers of this tranche of credit
enhancement have exited this line of business, leaving an opportunity for
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investors who are willing to purchase these securities. As of March 31, 2000,
Commercial Guaranty Assurance had a total of $148 million in exposure to credit
card "C" pieces. These securities are all "Triple-B" rated classes of credit
card securitizations. These transactions are issued out of highly diversified,
master trusts containing billions of dollars of credit card receivables. The
weighted average life of these securities is approximately five years.
INSURANCE IN FORCE
The following table shows Commercial Guaranty Assurance's net par
outstanding insured obligations (after reinsurance) at March 31, 2000 by asset
type and by credit rating:
CREDIT RATING U.S.$ THOUSANDS PERCENTAGE
------------- --------------- ----------
"AAA" $ 78,204 3%
"AA" 82,634 3%
"A" 601,367 25%
"BBB" 1,451,987 60%
"BB" 212,791 9%
Not Rated 10,603 --%
---------- ----
TOTAL $2,437,586 100%
========== ====
ASSET TYPE U.S.$ THOUSANDS PERCENTAGE
---------- --------------- ----------
ABS Consumer (including HELs and CIAs) $ 700,485 29%
CMBS 732,574 30%
ABS Corporate (including CDOs) 505,478 21%
REIT Debt 251,559 10%
Sovereign 90,000 4%
Corporate 87,490 3%
REIT Preferred 70,000 3%
---------- ----
TOTAL $2,437,586 100%
========== ====
INVESTMENT PORTFOLIO
Commercial Guaranty Assurance invests its capital, premiums received from
its insurance business, and earnings thereon in an investment portfolio. This
investment portfolio is Commercial Guaranty Assurance's primary source of
claims-paying ability. Commercial Guaranty Assurance manages its investment
portfolio with the objectives of protecting its claims-paying ability ratings,
maintaining a high level of liquidity, making investments in U.S. dollar
denominated securities which generate non-U.S. source income, and, within these
constraints, obtaining market level long-term total returns. Commercial Guaranty
Assurance's investment guidelines are consistent with these objectives.
All of Commercial Guaranty Assurance's investments must comply with
investment guidelines adopted by its board of directors. The minimum rating
level for an investment is at least "Double-A minus" or the equivalent by a
nationally recognized credit rating agency. Commercial Guaranty Assurance's
policy is to invest only in investments which are readily marketable with no
legal or contractual restrictions on resale. No investment is allowed if it
would generate U.S. source income to Commercial Guaranty Assurance.
The investment manager for Commercial Guaranty Assurance is Alliance
Capital Management Corporation. Subject to the investment guidelines determined
by Commercial Guaranty Assurance's board of directors, Alliance Capital has
discretion to, among other things, buy, sell, retain, or exchange investments.
Alliance Capital has entered into an investment management agreement with
Commercial Guaranty Assurance, which is terminable by either party upon 30 days'
written notice.
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The following tables summarize Commercial Guaranty Assurance's investments
by country and by type of debt security, in each case as of March 31, 2000:
COUNTRY PERCENTAGE TYPE PERCENTAGE
------- ---------- ---- ----------
Germany 22% Banking 42%
Supra-national 20% Financial 25%
Japan 10% Sovereign 19%
Netherlands 10% Corporate 5%
United Kingdom 7% Public Utilities 5%
France 5% Industrial/Manuf. 4%
----
Canada 5% TOTAL 100%
Italy 3%
Sweden 2%
Belgium 2%
Denmark 2%
Australia 2%
Other 10%
----
TOTAL 100%
At March 31, 2000, no investments in CGA's investment portfolio were rated
less than "Double-A minus" or the equivalent. The average yield to maturity on
the investment portfolio was 7.2% as of March 31, 2000.
At March 31, 2000, the portfolio holds over eighty different securities,
each of which comprise less than 3% of the portfolio except for one, which
comprises 3.2%. The largest concentration of securities from a single issuer
held by the portfolio is 6.3%.
RISK MANAGEMENT
The primary risk Commercial Guaranty Assurance assumes when it issues an
insurance policy is the credit risk taken in respect of the insured obligation.
Commercial Guaranty Assurance assumes credit risk both when it guarantees a
security directly, and when it guarantees the liabilities of investment
companies which invest in these securities. The most significant mitigant to
credit risk is proper credit underwriting. Commercial Guaranty Assurance
subjects all the securities and other financial obligations it proposes to
insure to an intensive credit underwriting process. This is true for securities
and obligations it insures directly, as when it issues an insurance policy
guaranteeing an individual asset, or indirectly, as when it guarantees the
liabilities of a St. George or other investment fund. As described above,
Commercial Guaranty Assurance underwrites all risks insured by it to a "zero
loss" standard. A zero loss standard means that all obligations Commercial
Guaranty Assurance insures are structured with sufficient levels of "first loss"
credit protection so that Commercial Guaranty Assurance expects, with a high
degree of certainty, no losses on any insured obligation, even under stress
scenarios.
The actual process of underwriting new transactions follows several steps.
Commercial Guaranty Assurance typically receives the proposed transactions from
Bermuda based brokers. Commercial Guaranty Assurance then performs a
quantitative and qualitative risk assessment that includes stress testing the
transaction to a zero-loss standard, a review of the economic rationale and the
motivation of participants, an analysis of relative value and a legal review of
the transaction structure. As part of the risk assessment process, Commercial
Guaranty Assurance also performs an economic analysis of each transaction,
including a review of the proposed pricing relative to credit spreads for
similar assets available in the market and the return to equity to Commercial
Guaranty Assurance based on capital charges assessed by Fitch.
Those transactions that meet Commercial Guaranty Assurance's zero loss
underwriting standard and risk adjusted return on equity requirements are then
reviewed by Commercial Guaranty Assurance's underwriting committee before
Commercial Guaranty Assurance issues any insurance policy or commitment. In
addition, Commercial Guaranty Assurance provides written summaries of all
insured transactions to Fitch and the other rating agencies that rate its claims
paying ability or financial strength. Finally, the underwriting committee of the
board of directors of CGA Group reviews on a quarterly basis all transactions
insured by Commercial Guaranty Assurance.
SINGLE RISK LIMITS
Commercial Guaranty Assurance further mitigates credit risk exposure
through the use of single risk limits. Single risk limits are the maximum
exposure Commercial Guaranty Assurance will take to a particular issuer of
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securities or, more accurately, to a single revenue source. The limits vary by
credit rating of the underlying asset, the perceived risk of the sector, and
whether Commercial Guaranty Assurance assumes the risk by providing direct or
indirect insurance.
SURVEILLANCE
Commercial Guaranty Assurance also mitigates credit risk by active
surveillance, which provides Commercial Guaranty Assurance with the ability to
anticipate problems and proactively minimize exposure to problem credits.
Commercial Guaranty Assurance monitors and reviews its exposure on an ongoing
basis. CGA Investment Management performs surveillance for transactions in the
St. George and Cobalt investment funds on behalf of Commercial Guaranty
Assurance pursuant to a surveillance contract. In accordance with the provisions
of this agreement, CGA Investment Management monitors each asset owned by each
St. George and Cobalt fund and provides detailed surveillance reports to
Commercial Guaranty Assurance on a monthly or quarterly basis, depending on
asset type. Commercial Guaranty Assurance personnel provide surveillance for
non-St. George/Cobalt exposures. In each case, Commercial Guaranty Assurance and
CGA Investment Management customize surveillance procedures to the type of
transaction in the same manner that underwriting is transaction-type specific,
but generally include the review of monthly or quarterly servicer and trustee
reports, and periodic "on site" due diligence visits with originators and
servicers. In addition, Fitch, Canadian Bond Rating Service, Dominion Bond
Rating Service and Japan Rating and Investment Information monitor Commercial
Guaranty Assurance to ensure that it operates in a manner consistent with their
respective requirements. Commercial Guaranty Assurance also benefits from the
oversight provided by the CGA Group Board of Directors.
CLAIMS
Even though all risks insured by Commercial Guaranty Assurance are
underwritten to a "zero loss" standard, Commercial Guaranty Assurance is
prepared to deal with claims in the event they should materialize. Commercial
Guaranty Assurance's actions in respect of potential claims would include the
review and investigation of loss reports, creation and maintenance of claim
files, establishment of proper reserves and payment of claims. Commercial
Guaranty Assurance would monitor the progress and ultimate outcome of claims to
ensure that cost recovery opportunities are fully explored. Commercial Guaranty
Assurance may become actively involved in the financial restructuring of a
transaction if its management concludes that losses would be minimized by so
doing. When and as appropriate, Commercial Guaranty Assurance may supplement its
in-house capabilities in this regard with services available from other sources.
Commercial Guaranty Assurance monitors its exposure to insured credits on an
ongoing basis. In this regard, Commercial Guaranty Assurance reviews available
information on the entities which issued the insured securities, the assets
underlying the insured securities, and general trends in the relevant industry.
There may also be instances where Commercial Guaranty Assurance elects to
pay a claim in connection with a security where it does not actually anticipate
that a credit default in respect of the security will occur in the immediate
future. Because Commercial Guaranty Assurance can in many instances commute risk
by requiring St. George or another investment company insured by Commercial
Guaranty Assurance to sell a security, Commercial Guaranty Assurance may require
these companies to sell a security when, due to credit deterioration, the
security no longer meets Commercial Guaranty Assurance's risk parameters and can
be sold at a price acceptable to Commercial Guaranty Assurance. In these
instances, the claim Commercial Guaranty Assurance pays will generally equal the
difference between the security's par amount and the amount for which it is
sold.
The first application of this policy occurred in April, 2000, when
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 owned by
one of the St. George funds. Although the investment grade ratings of this
security had recently been reaffirmed by the rating agencies that rated it,
Commercial Guaranty Assurance had reason to believe, based on its ongoing
surveillance, that the price of this security in the market did not reflect
Commercial Guaranty Assurance's negative views. In short, Commercial Guaranty
Assurance concluded that this security was no longer an investment grade risk,
irrespective of its actual rating, and that its credit fundamentals would
continue to worsen. Consequently, Commercial Guaranty Assurance, as insurer of
the fund, directed CGA Investment Management, as investment adviser to the fund,
to sell the security. The sale resulted in a shortfall of $2.6 million, which
was be paid by Commercial Guaranty Assurance to the affected fund under its
insurance policy.
In December 1998, Commercial Financial Services, Inc., a credit card debt
collection company, filed a petition for relief under Chapter 11 of the United
States Bankruptcy Code in response to allegations of accounting and other
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irregularities, including fraud, at Commercial Financial Services and relating
to over $1.6 billion principal amount of asset backed securities issued by
various trusts established and serviced by Commercial Financial Services.
Clients of Commercial Guaranty Assurance had previously purchased approximately
$212 million face amount of these securities, which exposure had been guaranteed
by Commercial Guaranty Assurance. Commercial Guaranty Assurance had obtained
reinsurance for about $162 million of this exposure, leaving it with a net
retention of approximately $50 million. To date, Commercial Guaranty Assurance
has paid an aggregate of $150.7 million in claims in respect of this exposure,
of which $115.2 million was paid by its reinsurer, and $35.5 million was paid by
Commercial Guaranty Assurance. Commercial Guaranty Assurance currently has
approximately $9.6 million of exposure, net of reinsurance, remaining in respect
of these securities. Commercial Guaranty Assurance does not expect to pay any
further claims in respect of this exposure.
Commercial Guaranty Assurance, CGA Investment Management and various other
plaintiffs have commenced legal proceedings against Commercial Financial
Services, William Bartmann, Commercial Financial Services' founder and principal
shareholder, other former members of Commercial Financial Services' senior
management, Chase Securities Inc. (the placement agent for the Commercial
Financial Services securities insured by Commercial Guaranty Assurance), and
Arthur Andersen LLC (Commercial Financial Services' auditors), alleging various
counts of federal and state securities law fraud and common law fraud. It is too
early to predict what, if anything, Commercial Guaranty Assurance ultimately may
recover in this legal proceeding.
RESERVES
Commercial Guaranty Assurance maintains a general loss reserve for all
risks insured. A general loss reserve is a balance sheet liability representing
management's estimate of ultimate liability for potential losses and loss
adjustment expenses with respect to insured obligations.
In addition to this general loss reserve, Commercial Guaranty Assurance
reflects its liability for the ultimate payment of incurred losses and loss
adjustment expenses in respect of specific insured obligations by establishing
case basis loss and loss adjustment expense reserves, which are balance sheet
liabilities representing estimates of future amounts needed to pay claims and
related expenses with respect to specific insured obligations. Case basis
reserves are established for insured risks at the time that the likelihood of a
future loss is probable and determinable. As of December 31, 1999, the only case
basis reserves established by Commercial Guaranty Assurance were in respect of
the Commercial Financial Services securities insured by Commercial Guaranty
Assurance and one other asset backed security. (See "--Claims".)
Reserves are necessarily based on estimates. Because it is difficult to
establish a meaningful statistical base due to the absence of a sufficient
number of losses in Commercial Guaranty Assurance's financial guaranty insurance
activities and in the financial guaranty insurance industry generally, there can
be no assurance that Commercial Guaranty Assurance's general or case basis
reserves will be adequate to cover losses in Commercial Guaranty Assurance's
insured book of business. Commercial Guaranty Assurance reviews its estimates on
an ongoing basis and, as experience develops and new information becomes known,
Commercial Guaranty Assurance will adjust its reserves as necessary.
CONTINGENCY RESERVES
As a Bermuda based class 3 insurer, Commercial Guaranty Assurance generally
is not required to establish contingency reserves. If Commercial Guaranty
Assurance were to assume reinsurance from a U.S. domiciled financial guaranty
insurer, then it would be required to maintain contingency reserves, which would
be maintained as part of its general reserves.
REINSURANCE
In order to minimize losses from large exposures and to protect capital and
surplus, Commercial Guaranty Assurance may cede a portion of its exposure on a
particular transaction or transactions to one or more reinsurers. To the extent
that a risk has been reinsured, if Commercial Guaranty Assurance were to incur a
loss on the reinsured transaction, the reinsurer would be obligated to pay to
Commercial Guaranty Assurance its proportionate share of the loss. The
reinsurance of risk, however, does not relieve Commercial Guaranty Assurance of
its original liability to
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policyholders. In the event that a reinsurer was unable to meet its obligations
under a reinsurance contract, Commercial Guaranty Assurance would remain liable
for losses covered by the applicable policy it issued. To the extent Commercial
Guaranty Assurance utilizes reinsurance, it has given ACE Guaranty Re Inc.,
formerly known as Capital Reinsurance Company, which is rated "Triple-A" for
claims-paying ability by Standard & Poor's Ratings Services and Fitch, and "Aa2"
by Moody's Investor's Services, a right of first offer to provide the
reinsurance. Capital Reinsurance Company is an indirect, wholly owned subsidiary
of ACE, Ltd., a shareholder of CGA Group. Commercial Guaranty Assurance's
aggregate exposure to reinsurers was $109.7 million as of December 31, 1999.
Commercial Guaranty Assurance has entered into an excess of loss
reinsurance facility dated as of June 12, 1997, as amended, with ACE Capital Re
Overseas Ltd., formerly known as KRE Reinsurance Ltd., an indirect wholly owned
subsidiary of ACE Ltd. The obligations of ACE Capital Re Overseas Ltd. under
this agreement are guaranteed by ACE Capital Re International Ltd., another
wholly owned subsidiary of ACE, Ltd. which is rated "Double-A" by Standard &
Poor's Ratings Services and Fitch. The agreement provides for a $20 million
limit of liability during its nine year term, with no reinstatement of the limit
in the event of loss payments. This agreement covers all policies and guarantees
written and reinsurance assumed by Commercial Guaranty Assurance from its
inception until June 12, 2006.
RECENT EVENTS
As noted above, Commercial Guaranty Assurance's claims-paying ability, also
referred to as its financial strength, is currently rated "Triple-A" or the
equivalent by Fitch and certain other rating agencies. Commercial Guaranty
Assurance's claims-paying ability had also been rated "Triple-A" by Duff &
Phelps Credit Rating Company. In April 2000, Fitch acquired and subsequently
merged with Duff & Phelps, with Fitch as the surviving company. On June 2, 2000,
Fitch announced that it was placing Commercial Guaranty Assurance's "Triple-A"
rating on general review, on the basis that Commercial Guaranty Assurance does
not meet Fitch's minimum capital requirements for a "Triple-A" financial
strength rating. Fitch has advised Commercial Guaranty Assurance that it will
require a total of approximately $350 million in equity capital, and $150
million in additional capital support (such as excess of loss insurance) to meet
Fitch's capital requirements, for total claims-paying resources of $500 million.
Commercial Guaranty Assurance currently has approximately $223 million in
claims-paying resources.
CGA Group has engaged the investment banking firm of Donaldson, Lufkin &
Jenrette Securities Corporation to act as its exclusive financial advisor for
the purpose of raising additional capital for CGA Group sufficient to meet
Fitch's requirements. As of the date of this prospectus, no additional capital
has been raised, and we can give no assurances as to whether we will be
successful in raising any additional capital, or whether we will be able to
raise sufficient capital to meet Fitch's requirements. Fitch has further
announced that affirmation of Commercial Guaranty Assurance's "Triple-A"
financial strength rating will depend on Commercial Guaranty Assurance acquiring
the additional capital, that Commercial Guaranty Assurance believes this will
occur by September 30, 2000, and that if the capital is not raised, Fitch will
lower its rating of Commercial Guaranty Assurance to "Double-A". If Fitch were
to lower Commercial Guaranty Assurance's financial strength rating, this action
would likely have a direct negative impact on Commercial Guaranty Assurance's
financial performance and business prospects. See "Risk Factors".
CGA INVESTMENT MANAGEMENT, INC.
CGA Investment Management is a Delaware corporation that is registered as
an investment advisor with the Securities and Exchange Commission under the
Investment Advisers Act of 1940, as amended. CGA Investment Management, which
commenced operations in June 1997, provides investment management and financial
advisory services primarily to specialized investment funds and other entities
and for the U.S. and international structured finance markets. CGA Investment
Management's advisory team currently includes more than twenty experienced
professionals in the areas of asset securitization and structured finance, real
estate finance and risk management.
INVESTMENT MANAGEMENT SERVICES
CGA Investment Management acts as investment manager to specialized
investment funds and other clients, including St. George Holdings, Cobalt
Holdings, and their respective subsidiaries. Its activities in this capacity
include providing advice regarding the purchase and sale of structured finance
assets, the management of funding and market risks, and reporting and accounting
functions. CGA Investment Management performs initial and ongoing
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credit reviews on the assets which it recommends for purchase to its clients,
and the counterparties with which it negotiates financial hedges and derivative
contracts. Investment guidelines are developed for each client to ensure that
CGA Investment Management manages its clients' assets under agreed upon
guidelines and limits.
As an investment manager, CGA Investment Management's duties include the
following:
o Identifying potential investments on behalf of its clients, including
analyzing credit, legal and interest rate, currency and prepayment
risks, and negotiating the price, covenants, rights, remedies and all
related documentation.
o Identifying swaps, financial hedges and other derivative contracts on
behalf of the client in order to manage the client's investment
portfolio within prudent market risk limits as agreed with the client.
o Negotiating financing arrangements on behalf of its clients.
o Preparing valuations, reports and other documents as may be required
from time to time by its clients and persons providing financing to
these clients in order to determine compliance with the clients' and
their lenders' policies and procedures.
o Analyzing the performance of assets including recommending the sales
of investments when appropriate.
Market risk management and operations are performed using systems which
integrate front, middle and back office applications with live feeds from market
information services. Policies and procedures are in place to ensure that CGA
Investment Management manages its clients' assets pursuant to agreed upon
guidelines and limits.
FINANCIAL ADVISORY SERVICES
CGA Investment Management also acts as a financial advisor for its clients,
which include financial asset issuers and investment banks, in evaluating
structured finance alternatives and financing structures. CGA Investment
Management charges advisory fees to its clients for its services. CGA Investment
Management's services as financial advisor include the following:
o providing assistance in evaluating, structuring and documenting
structured finance transactions, which could include the purchase of
credit enhancement provided by Commercial Guaranty Assurance; and
o providing assistance in organizing and performing due diligence
relating to financial assets and structured transactions.
REGULATORY STATUS
CGA Investment Management is a registered investment advisor under the
United States Investment Advisers Act of 1940, as amended, which requires
registration of all non-exempt advisors to conform their conduct to statutory
norms. The act, among other things, Commission to inspect such books and
records.
o governs fee arrangements between advisors and clients;
o prohibits fraudulent practices, precludes the assignment of an
investment advisory contract without the client's consent;
o requires advisors to maintain books and records consistent with rules
that may be promulgated by the Securities and Exchange Commission; and
o authorizes the Securities and Exchange Commission to inspect these
books and records.
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ST. GEORGE AND COBALT
The two primary clients of CGA Investment Management are St. George
Holdings, a Cayman Islands company, Cobalt Holdings, a Delaware limited
liability company, and their respective subsidiaries. Each of St. George
Holdings and Cobalt Holdings was established for the purpose of owning special
purpose subsidiaries that invest in fixed income structured securities pursuant
to investment guidelines approved by Commercial Guaranty Assurance. To date,
Commercial Guaranty Assurance has guaranteed all indebtedness and other
liabilities entered into by these companies in furtherance of their investment
activities. The investors in St. George Holdings and Cobalt Holdings are also
investors in CGA Group.
To date, St. George Holdings has established seven subsidiaries, which
invest primarily in investment grade fixed income assets, including asset backed
securities, commercial mortgage backed securities and debt securities issued by
real estate investment trusts. Cobalt Holdings has established two subsidiaries,
which invest primarily in investment grade fixed income assets which could be
subject to U.S. withholding tax if acquired by a non-U.S. investor such as St.
George. These assets include preferred stock issued by real estate investment
trusts, and subordinated tranches of credit card securitizations. CGA Investment
Management acts as asset manager for each of these companies.
The various St. George and Cobalt investment subsidiaries fund their
investment activities through various financing sources. Several borrow under
credit facilities with commercial paper conduit lenders, such as St. George
Investments III, Ltd., which is party to a $500 million credit facility with a
commercial paper conduit issuer established and managed by a major national
bank. GFC St. George, Ltd. and GFC Cobalt, LLC, two of the investment
subsidiaries, are party to a $2 billion Euro medium term note program guaranteed
by Commercial Guaranty Assurance. Others, such as St. George Investments II,
Ltd. and Cobalt Capital, LLC, invest by means of total return swaps, default
swaps and other synthetic funding sources.
In addition to acquiring assets, St. George and Cobalt investment
subsidiaries are used to implement resecuritizations of previously acquired
assets. Securities accumulated in the St. George and Cobalt funds have gone into
four resecuritizations -- a $537 million repackaging of debt and preferred stock
issued by various real estate investment trusts, two repackagings of home equity
loans totaling $265 million, and a $119 million repackaging of collateralized
debt obligations.
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REGULATION
BERMUDA
THE INSURANCE ACT 1978 AND RELATED REGULATIONS
The Insurance Act 1978 of Bermuda, as amended, and related regulations,
which regulates the business of Commercial Guaranty Assurance, provides that no
person shall carry on an insurance business in or from within Bermuda unless
registered as an insurer under the Act by the Minister of Finance. The Minister,
in deciding whether to grant registration, has broad discretion to act as he
thinks fit in the public interest. The Minister is required by the Insurance Act
to determine whether the applicant is a fit and proper body to be engaged in
insurance business and, in particular, whether it has, or has available to it,
adequate knowledge and expertise. In connection with registration, the Minister
may impose conditions relating to the writing of specific types of insurance.
The registration of an applicant as an insurer is subject to its complying with
the terms of its registration and other conditions as the Minister may impose at
any time.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions, and sub-committees of
this committee supervise and review the law and practice of insurance in
Bermuda, including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework, as it applies to Class 3 insurers such as Commercial Guaranty
Assurance, are set forth below.
CLASSIFICATION OF INSURERS
The Insurance Act provides for four classes of registration of insurers
carrying on general business. Commercial Guaranty Assurance is registered and
licensed as a Class 3 insurer. Class 3 insurers are considered to be subject to
a higher degree of regulation than Classes 1 and 2 insurers, which are primarily
concerned with underwriting related or parent's risks. In addition, minimum
capital and surplus for a Class 3 insurer is $1 million, whereas the minimum
capital and surplus for Class 2 and Class 1 insurers is $250,000 and $120,000
respectively. There is also a Class 4 insurer classification which is used for
property catastrophe reinsurance companies and companies involved in the excess
liability business. By virtue of its class 3 license, Commercial Guaranty
Assurance is authorized to carry on insurance business of all classes in or from
within Bermuda subject to its compliance with the solvency margin, liquidity
ratio and other requirements imposed on it by the Insurance Act.
CANCELLATION OF INSURER'S REGISTRATION
An insurer's registration may be canceled by the Minister on grounds
specified in the Insurance Act, including failure of the insurer to comply with
its obligations under the Insurance Act or if, in the opinion of the Minister
after consultation with the Insurance Advisory Committee, the insurer has not
been carrying on business in accordance with sound insurance principles.
INDEPENDENT APPROVED AUDITOR
Every registered insurer must appoint an independent auditor who will
annually audit and report on the statutory financial statements and the
statutory financial return of the insurer, which are required to be filed
annually with the Registrar of Companies, who is the chief administrative
officer under the Insurance Act. The auditor must be approved by the Minister as
the independent auditor of the insurer. The approved auditor may be the same
person or firm which audits the insurer's financial statements and reports for
presentation to its shareholders.
LOSS RESERVE SPECIALIST
Each Class 3 insurer is required to submit an annual loss reserve opinion
by the approved loss reserve specialist when filing its statutory financial
statements and statutory financial return. The loss reserve specialist, who will
normally be a qualified property/casualty actuary, must be approved by the
Minister. Commercial Guaranty Assurance has received an exemption from having to
appoint a loss reserve specialist and to file the annual loss
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reserve opinion on the condition that Commercial Guaranty Assurance maintains
its claims-paying ability rating of not less than "Triple-A" by Duff & Phelps.
STATUTORY FINANCIAL STATEMENTS
An insurer must prepare annual statutory financial statements. The
Insurance Act prescribes rules for the preparation and substance of the
statutory financial statements. These rules include, in statutory form, a
balance sheet, an income statement, and a statement of capital and surplus, and
detailed notes to the statutory financial statements. The rules require the
insurer to give detailed information and analyses regarding premiums, claims,
reinsurance and investments. The statutory financial statements are not prepared
in accordance with U.S. generally accepted accounting principles and are
distinct from the financial statements prepared for presentation to the
insurer's shareholders under The Companies Act 1981 of Bermuda, which financial
statements may be prepared in accordance with U.S. generally accepted accounting
principles. Commercial Guaranty Assurance, within a specified time, must file
its statutory financial statements with the Registrar. The statutory financial
statements must be maintained at the principal office of the insurer for a
period of five years.
MINIMUM SOLVENCY MARGIN
The Insurance Act provides that the statutory assets of an insurer must
exceed its statutory liabilities by an amount greater than the prescribed
minimum solvency margin which varies with the class of the insurer and the
insurer's net premiums written and loss reserve level.
MINIMUM LIQUIDITY RATIO
The Insurance Act provides a minimum liquidity ratio for general business.
An insurer engaged in general business is required to maintain the value of its
relevant assets at not less than 75% of the amount of its relevant liabilities.
Relevant assets include cash and time deposits, quoted investments, unquoted
bonds and debentures, mortgages secured by first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are specific categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and advances
to affiliates, real estate and collateral loans. The relevant liabilities are
total general business insurance reserves and total other liabilities less
deferred income tax and sundry liabilities.
RESTRICTION ON DIVIDENDS
The payment of dividends or other distributions by Commercial Guaranty
Assurance is limited under Bermuda insurance regulations. In accordance with
these regulations, Commercial Guaranty Assurance is prohibited from paying
dividends or other distributions unless after the payment the amount by which
its general business assets exceed its general business liabilities is the
greater of the following amounts:
o $1,000,000; or
o the amount determined by applying the rate of 20% to net premiums
written in the subject year up to $6,000,000 plus the rate of 15%
applied to net premiums written in the subject year in excess of
$6,000,000; or
o the amount determined by applying the rate of 15% to reserves for
losses and loss adjustment expenses reflected in the balance sheet at
the date of determination.
Commercial Guaranty Assurance may declare and pay a dividend or make a
distribution out of contributed surplus or other assets legally available for
distribution provided that after the payment of the dividend or distribution
Commercial Guaranty Assurance will continue to meet its minimum solvency margin
and minimum liquidity ratio as detailed above. Further, in accordance with
Bermuda insurance regulations, before reducing by 15% or more its total
statutory capital as set out in its previous year's financial statements, a
Class 3 insurer such as Commercial Guaranty Assurance must apply to the Minister
for his approval and is obliged to provide any information in connection with
the application as the Minister may require.
In addition, the fiduciary obligations of members of the board of directors
to creditors, policyholders and shareholders apply to their votes in respect of
dividends, distributions and redemptions.
The above restrictions on distributions by Commercial Guaranty Assurance to
CGA Group will restrict the ability of CGA Group to use the proceeds of the
capital commitments to pay dividends to holders of CGA Group's
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securities, because all proceeds from the capital commitments will be
contributed by CGA Group to Commercial Guaranty Assurance. For a description of
the capital commitments, see "Description of Securities--Commitments".
SUPERVISION, INVESTIGATION AND INTERVENTION
The Minister may appoint an inspector with extensive powers to investigate
the affairs of an insurer if the Minister is satisfied that an investigation is
required in the interest of the insurer's policyholders or persons who may
become policyholders. In order to verify or supplement information otherwise
provided to him, the Minister may direct an insurer and others to produce
documents or information relating to matters connected with theinsurer's
business.
If it appears to the Minister that there is a significant risk of the
insurer becoming insolvent, the Minister may direct the insurer not to take on
any new insurance business; not to vary any insurance contract if the effect
would be to increase the insurer's liabilities; not to make specific
investments; to realize specific investments; to maintain in Bermuda, or
transfer to the custody of a Bermuda bank, specific assets; and to limit its
premium income. Further, in these types of circumstances, the Minister may
direct that no dividends be paid.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. The principal office
of Commercial Guaranty Assurance is at Craig Appin House, 8 Wesley Street,
Hamilton HM 11 Bermuda and Michael M. Miran, Commercial Guaranty Assurance's
President and Chief Underwriting Officer, is Commercial Guaranty Assurance's
principal representative. Without a reason acceptable to the Minister, an
insurer may not terminate the appointment of its principal representative, and
the principal representative may not cease to act in this capacity, unless 30
days' notice in writing to the Minister is given of the intention to do so. It
is the duty of the principal representative, within 30 days of his reaching the
view that there is a likelihood of the insurer for which he acts becoming
insolvent or its coming to his knowledge, or his having reason to believe, that
an "event" has occurred, to make a report in writing to the Minister setting out
all the particulars of the case that are available to him. Examples of this type
of "event" include failure by the insurer to comply substantially with a
condition imposed upon the insurer by the Minister relating to a solvency margin
or a liquidity or other ratio.
OTHER BERMUDA LAW MATTERS
Although CGA Group and Commercial Guaranty Assurance are incorporated in
Bermuda, each is classified as non-resident of Bermuda for exchange control
purposes by the Bermuda Monetary Authority, Foreign Exchange Control. Because of
its non-resident status, CGA Group may hold any currency other than Bermuda
dollars and convert that currency into any currency other than Bermuda dollars
without restriction.
As "exempted" companies, CGA Group and Commercial Guaranty Assurance may
not, without the express authorization of the Bermuda legislature or under a
license granted by the Minister, participate in specific types of business
transactions, including:
o the acquisition or holding of land in Bermuda, except as required for
its business and held by way of lease or tenancy agreement for a term
not exceeding 50 years;
o the taking of mortgages on land in Bermuda in excess of $50,000; or
o the carrying on of business of any kind in Bermuda, except in
furtherance of the business of CGA Group carried on outside Bermuda.
The Bermuda government actively encourages foreign investment in "exempted"
entities like the Company that are based in Bermuda but do not operate in
competition with local businesses. As well as having no restrictions on the
degree of foreign ownership, CGA Group and Commercial Guaranty Assurance are not
currently subject to taxes on their income or dividends or to any foreign
exchange controls in Bermuda. In addition there currently is no capital gains
tax in Bermuda.
U.S. AND OTHER
Commercial Guaranty Assurance is not admitted to do business in any
jurisdiction except Bermuda. The insurance laws of each state of the U.S. and of
many foreign countries regulate the sale of insurance within their jurisdictions
by alien insurers, such as Commercial Guaranty Assurance, which are not
authorized or admitted to do business within each jurisdiction. With some
exceptions, this type of sale of insurance within a jurisdiction where the
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<PAGE>
insurer is not admitted to do business is prohibited. We do not intend for
Commercial Guaranty Assurance to maintain an office or to solicit, advertise,
settle claims or conduct other insurance activities in any jurisdiction other
than Bermuda where the conduct of these activities would require that Commercial
Guaranty Assurance be so authorized or admitted.
Commercial Guaranty Assurance does not write insurance in the U.S.
Commercial Guaranty Assurance conducts its business so as not to be subject to
the licensing requirements of insurance regulations in the U.S. or elsewhere,
other than Bermuda. We have developed operating guidelines, which include the
acceptance of business through insurance brokers not resident in the U.S., to
assist our personnel in conducting business in conformity with the laws of U.S.
jurisdictions. We follow these guidelines and expect that our activities will
comply with applicable insurance laws and regulations. There can be no
assurance, however, that insurance regulators in the U.S. or elsewhere will not
review our activities and claim that Commercial Guaranty Assurance is subject to
their jurisdiction's licensing requirements.
Many states impose a premium tax, typically 2--4% of gross premiums, on
U.S. insureds obtaining insurance from unlicensed foreign insurers, such as
Commercial Guaranty Assurance, by direct placement. The premiums Commercial
Guaranty Assurance charges do not include any state premium tax. Each insured is
responsible for determining whether it is subject to any state taxes and for
paying these taxes as may be due.
The U.S. also imposes an excise tax on insurance and reinsurance premiums
paid to foreign insurers or reinsurers by insureds who are U.S. persons with
respect to risks located in the U.S. The rates of tax applicable to premiums
paid to Commercial Guaranty Assurance are currently 4% for insurance premiums
and 1% for reinsurance premiums.
MANAGEMENT
DIRECTORS AND OFFICERS OF CGA GROUP AND ITS SUBSIDIARIES
The table below sets forth the names, ages (as of March 15, 2000) and
titles of the persons who are the members of the board of directors of CGA Group
and the executive officers of the CGA Group and its subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard A. Price 53 Director, Chief Executive Officer and
President, CGA Group
James R. Reinhart 43 Vice President and Chief Financial Officer,
CGA Group and Commercial Guaranty Assurance
Michael M. Miran 47 President and Chief Underwriting Officer,
Commercial Guaranty Assurance
Geoffrey N. Kauffman 41 President and Chief Executive Officer,
CGA Investment Management
Kem H. Blacker 44 Head of Portfolio Management,
CGA Investment Management
Landon D. Parsons 41 Head of Structured Finance,
CGA Investment Management
Jean-Michel Wasterlain 42 Head of Commercial Real Estate,
CGA Investment Management
Martin S. Avidan 42 Head of Liabilities Management,
CGA Investment Management
</TABLE>
Jay H. Shidler 53 Chairman of the Board of Directors,
CGA Group
David M. Barse 37 Director, CGA Group
Robert L. Denton 47 Director, CGA Group
Richard S. Frary 52 Director, CGA Group
Eric A. Gritzmacher 51 Director, CGA Group
Jeffrey P. Krasnoff 44 Director, CGA Group
Michael J. Morrissey 52 Director, CGA Group
F. Fuller O'Connor, Jr. 40 Director, CGA Group
Alan S. Roseman 43 Director, CGA Group
Paul A. Rubin 37 Director, CGA Group
Jay S. Sugarman 37 Director, CGA Group
41
<PAGE>
Our board of directors consists of twelve members. The board has been
elected in accordance with our bylaws and holds office until the next annual
general meeting of the shareholders of CGA Group. Under our bylaws, the board of
directors has the following composition: the Chairman, currently Jay H. Shidler,
the Chief Executive Officer, currently Richard A. Price, the "management
member," currently Robert L. Denton, eight members elected by the eligible
shareholders and two members elected by the holders of the Series C Preferred
Stock. As of the date of this prospectus, one of these two seats remains vacant.
The quorum necessary for the transaction of business at a meeting of the board
is a majority of the number of directors constituting the board.
Pursuant to our bylaws, the board has established five committees. The
compensation committee is comprised of Alan S. Roseman, as chairman, Eric A.
Gritzmacher, Paul A. Rubin and F. Fuller O'Connor, Jr., and is responsible for
determining compensation for the officers of CGA Group and its subsidiaries and
for authorizing and approving our employee benefits plans. The audit committee
reviews the adequacy and effectiveness of the external auditors and the audit
report, and is comprised of Jeffrey P. Krasnoff, as chairman, Michael J.
Morrissey, Paul A. Rubin, Richard S. Frary and David M. Barse. The underwriting
committee is responsible for approving the credit underwriting guidelines for
Commercial Guaranty Assurance and is comprised of Eric A. Gritzmacher, as
chairman, Alan S. Roseman, Jay H. Shidler, Jeffrey P. Krasnoff, F. Fuller
O'Connor, Jr., and Jay S. Sugarman. The investment committee is responsible for
recommending investment asset allocations, approving the investment guidelines
which provide standards to ensure portfolio liquidity and safety and
recommending to the board investment managers and custodians for portfolio
assets. The investment committee is comprised of David M. Barse, as chairman,
Michael J. Morrissey, Robert L. Denton, Richard S. Frary and Jay S. Sugarman.
The capital committee is comprised of Paul A. Rubin, as chairman, David M.
Barse, Robert L. Denton and Alan S. Roseman, and is responsible for reviewing
our equity financing opportunities and other strategic opportunities in the
capital markets.
The holders of the Series A preferred stock as a class may elect two
additional members of the board of directors if and so long as one or more of
the following events occurs:
o CGA Group fails to pay stock and/or cash dividends on the Series A
preferred stock or other preferred stock as required by it bylaws, or
fails to make payments on permitted debt, if any, and the aggregate
unpaid amounts exceed $5 million in value.
o CGA Group does not pay the redemption price and premium, if any, of
the Series A preferred stock when due.
o CGA Group's noncompliance with any of the restrictions, limitations
and covenants it made to the Series A investors in the Series A
subscription agreement for a period of 60 days after receiving notice
from holders of 25% of the liquidation value of the Series A preferred
stock of the noncompliance, unless compliance has been waived by
holders of 50% of the liquidation value of the Series A preferred
stock.
o CGA Group defaults in the performance of, or fails to comply with and
does not cure within the applicable time period, any obligation
arising under any contract or instrument under which it has issued
preferred stock or incurred permitted debt, and under which the unpaid
amount exceeds $5 million.
o A court of competent jurisdiction enters one or more judgments or
orders against CGA Group, Commercial Guaranty Assurance or CGA
Investment Management in an uninsured aggregate amount over $10
million, and the judgment or order is not discharged, waived, stayed
or satisfied within 45 days , or is the subject of an ongoing appeal
and CGA Group is not obligated to pay the amount while the appeal is
pending.
o CGA Group, Commercial Guaranty Assurance or CGA Investment Management
files for or becomes subject to a bankruptcy, liquidation or
reorganization proceeding.
o Commercial Guaranty Assurance's claims paying ability rating is
downgraded below "Double-A minus" (AA-) by Fitch for a period of 45
consecutive days.
CGA Group's bylaws contain provisions for the election of alternate directors.
BIOGRAPHICAL INFORMATION
RICHARD A. PRICE--Director, Chief Executive Officer and President of CGA
Group since July 5, 1996. Until July, 1996, Mr. Price was one of the top
executives at Financial Guaranty Insurance Company, which he joined in
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<PAGE>
1985. Most recently, Mr. Price was President of FGIC Capital Markets Services, a
wholly-owned subsidiary of General Electric Capital Corporation. The FGIC
Capital Market Services companies provide various capital market services to
municipalities and public finance bankers including investment advice,
investment contracts and liquidity for tax-exempt variable rate debt issues. Mr.
Price was responsible to General Electric Capital Corporation for forming these
companies, marketing these products and services, and establishing market,
credit and operating risk controls. In 1988, Mr. Price led FGIC's entry into the
structured finance markets, establishing FGIC's asset-backed securities,
mortgage-backed securities and commercial real estate securitization activities.
Mr. Price was a member of FGIC's three person Credit Policy Committee, along
with FGIC's Chief Executive Officer and FGIC's Chief Credit Officer.
Prior to joining FGIC, Mr. Price spent 11 years with Chemical Bank in a
number of areas including Chemical's commercial real estate division where he
was Vice President. He also spent several years at Bankers Trust with the
responsibility of expanding Bankers' third party commercial paper dealer
activities.
Mr. Price received a bachelor's degree from Cornell University and a MBA
from the Wharton Schoolof Business.
JAMES R. REINHART--Chief Financial Officer of CGA Group and Commercial
Guaranty Assurance since January 1, 1997. Prior to joining CGA Group, Mr.
Reinhart served as Chief Financial Officer and Executive Vice President of
TriNet Corporate Realty Trust, Inc. from its inception in May 1993. Mr. Reinhart
was previously Chief Financial Officer at Holman/Shidler Corporate Capital,
TriNet's predecessor company and an affiliate company of The Shidler Group,
which he joined in 1986. Prior to joining The Shidler Group, Mr. Reinhart was a
Division Controller for Coldwell Banker Real Estate Group, an auditor with the
accounting firm of McKeehan, Hallstein, Kendall & Warner, and served as an
officer in the U.S. Marine Corps.
Mr. Reinhart is a CPA and received a bachelor's degree in accounting from
Bryant College and a MBA from National University.
MICHAEL M. MIRAN--President, Chief Underwriting Officer and Principal
Representative of Commercial Guaranty Assurance since January 3, 2000. Mr. Miran
served as Managing Director and General Counsel of CGA Investment Management
from June 30, 1997 to January 3, 2000. Prior to joining CGA Investment
Management, Mr. Miran was Vice President and Senior Counsel at Financial
Guaranty Insurance Company, where he was responsible for structuring,
negotiating and documenting a wide range of commercial real estate,
mortgage-backed securities and asset-backed securities transactions, including
all of FGIC's international asset backed transactions. More recently, Mr. Miran
also served as FGIC's Chief Compliance Officer, with responsibility over
regulatory and corporate compliance.
Before joining FGIC in 1990, Mr. Miran was an attorney for seven years with
Weil, Gotshal and Manges in New York, where his practice covered a broad range
of commercial transactions, including mergers and acquisitions, secured
financings, debt restructurings and workouts, and capital markets and securities
transactions.
Mr. Miran received a bachelor of arts degree from New York University, and
a juris doctorate degree from Fordham University School of Law.
GEOFFREY N. KAUFFMAN--President and Chief Executive Officer of CGA
Investment Management since January 3, 2000. Mr. Kauffman served as President
and Chief Underwriting Officer of Commercial Guaranty Assurance from January 1,
1997 to January 3, 2000. Prior to joining Commercial Guaranty Assurance, Mr.
Kauffman worked at AMBAC Financial Group, Inc., where he was a First Vice
President in the Structured Finance & International Department. Mr. Kauffman
joined AMBAC's Structured Finance & International Department in March of 1995 to
help the group build a presence in international structured finance, and joined
the MBIA/AMBAC International joint venture upon its inception in the fourth
quarter of 1995. When the joint venture opened its London office in April 1996,
Mr. Kauffman transferred temporarily to London to launch the joint venture's
structured finance effort in London.
Prior to joining AMBAC, Mr. Kauffman was the Acting Director of the asset
backed securities group at Financial Guaranty Insurance Company and a member of
FGIC's European strategy team. Mr. Kauffman joined FGIC in 1989 to help
establish FGIC's presence in the asset backed securities market.
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<PAGE>
Mr. Kauffman received a bachelor's degree from Vassar College and a MBA
from Carnegie Mellon University.
KEM H. BLACKER--Head of Portfolio Management, CGA Investment Management
since January 1, 1997. For the twelve years prior to joining CGA Investment
Management, Mr. Blacker served in various key positions at FGIC. As Senior
Product Manager at FGIC Capital Markets Services Group, Mr. Blacker invested in
structured assets sourced in the euromarkets for the municipal guaranteed
investment contract business and organized off-balance sheet vehicles. From 1990
to 1993, he served as FGIC's Director of Marketing & Product Development in
London, launching the firm's expansion into the euromarkets.
Prior to his time at FGIC, Mr. Blacker held Vice President positions with
J.J. Lowry & Company and with E.F. Hutton in both its San Francisco and New York
offices.
Mr. Blacker received a bachelor's degree in economics from the University
of California.
LANDON D. PARSONS--Head of Structured Finance, CGA Investment Management.
Mr. Parsons joined CGA Investment Management in August 1997 as Co-Head of
Structured Finance. Mr. Parsons became sole head of Structured Finance during
the first quarter of 1999, and was promoted to Managing Director effective
January 1, 2000. Prior to joining CGA Investment Management, Mr. Parsons held
various positions at FGIC, including Acting Director of the Asset Backed
Securities Group and Senior Business Development Manager. Prior to joining FGIC
in 1994, Mr. Parsons was a Vice President and Team Leader in Credit Lyonnais'
Structured Finance Group. Mr. Parsons managed the bank's joint venture
asset-backed commercial paper conduits, and developed an off-balance sheet
mortgage-warehousing product. Mr. Parsons joined Credit Lyonnais in 1991 from
Capital Markets Assurance Corporation where he was a Vice President in the
Corporate Structured Finance Group. At CapMAC, Mr. Parsons focused on
debtor-in-possession facilities, domestic and European trade receivables, and
asset-backed commercial paper conduit credit enhancement. Mr. Parsons was a
member of the Citibank team responsible for establishing CapMAC in 1987.
Mr. Parsons received A bachelor's degree in economics from the University
of Northern Iowa and an MS from Purdue University's Krannert Graduate School of
Management.
JEAN-MICHEL WASTERLAIN--Head of Commercial Real Estate, CGA Investment
Management since June 1, 1997. Mr. Wasterlain manages CGA Investment
Management's real estate group. Prior to joining CGA Investment Management, Mr.
Wasterlain was responsible for real estate lending and securitization at ING
Barings. At ING, he created a commercial mortgage conduit which originated time
sensitive and complex real estate loans, and structured commercial mortgage loan
securitizations backed by these loans. Mr. Wasterlain's other responsibilities
at ING included establishing and managing a $300 million commercial mortgage
securities investment portfolio, and securing third party financing for ING's
other real estate assets.
Mr. Wasterlain also has previous experience in the financial guaranty
business, at FGIC, and in investment banking, at Lehman Brothers. At FGIC, from
1990 to 1993, he worked on the credit enhancing of over $1 billion of commercial
mortgage securities. At Lehman Brothers, from 1985 to 1990, he was involved in
residential and commercial mortgage-backed securities, as well as providing
investment banking coverage to financial institutions.
Mr. Wasterlain received a bachelor's degree in economics from Stanford
University and a MBA from the Wharton Graduate School of Business.
MARTIN AVIDAN--Head of Liabilities Management, CGA Investment Management.
Mr. Avidan joined CGA Investment Management in July 1997 as Co-Head of
Structured Finance. Mr. Avidan focuses on developing and implementing CGA
Investment Management's liability strategy, including conduit commercial paper
facilities, medium term notes and credit derivatives. He is also responsible for
CGA Investment Management's emerging markets investment activities. Prior to
joining CGA Investment Management, he was First Vice President at Credit
Lyonnais in its Structured Finance Group, responsible for both domestic and
international asset-backed securities (ABS). Mr. Avidan founded Credit Lyonnais'
structured finance group in 1987, emphasizing credit enhancement for public and
private ABS issues. From 1990 to 1994 he served as Branch Manager of Credit
Lyonnais in Los Angeles.
Mr. Avidan received a bachelor's degree in business administration from the
American College in Paris, and a master's degree in International Management
(concentration in finance) from the American Graduate School of International
Management.
44
<PAGE>
JAY H. SHIDLER--Chairman of the Board of Directors of CGA Group since June
21, 1996. Mr. Shidler is the Founder and Managing Partner of The Shidler Group,
which he founded in 1970. Mr. Shidler is a founder of, and since June 1994,
Chairman of, First Industrial Realty Trust, Inc. (NYSE: FR). Since October 1997,
Mr. Shidler has served as Chairman of Corporate Office Properties Trust (NYSE:
OSC).
DAVID M. BARSE--Director of CGA Group since June 18, 1997. Since May 1998,
Mr. Barse has served as President and Chief Operating Officer of Third Avenue
Trust, an open-end management investment company, where he served as
Vice-President and Chief Operating Officer from June 1995 until his election as
President. From April 1995 until February 1998, Mr. Barse served as
Vice-President and Chief Operating Officer of EQSF Advisors, Inc., Third
Avenue's investment advisor, where he currently serves as President and Chief
Operating Officer. Since June 1995, Mr. Barse has been the President of M.J.
Whitman, Inc., a registered broker-dealer, and of M.J. Whitman Holding Corp. Mr.
Barse joined the predecessors of M.J. Whitman in December 1991 as general
counsel.
ROBERT L. DENTON--Director of CGA Group since July 5, 1996. Since January
1995, Mr. Denton has served as a Managing Partner of The Shidler Group and
resident principal in its New York office. Prior to joining The Shidler Group,
Mr. Denton was employed from December 1991 to December 1994 as an investment
banker at Providence Capital, Inc., which he co-founded. Prior to joining
Providence Capital, Mr. Denton was employed as a management consultant at Booz,
Allen & Hamilton, Inc.
RICHARD S. FRARY--Director of CGA Group from June 18, 1997 to March 31,
1999, and from September 10, 1999 to present. Since 1990, Mr. Frary has worked
in investment banking and real estate investment at Tallwood Associates, which
he co-founded and for which he serves as President. Mr. Frary is also a director
of Washington Homes, Inc. and Wellsford Real Properties, Inc.
ERIC A. GRITZMACHER--Director of CGA Group since June 18, 1997. Since 1987,
Mr. Gritzmacher has served as Vice President, Investments for Pacific Life
Insurance Company (formerly Pacific Mutual Life Insurance Company).
JEFFREY P. KRASNOFF--Director of CGA Group since June 18, 1997. Mr.
Krasnoff became the President of LNR Property Corporation when it was formed in
June 1997 and he became a director in December 1997. From 1987 until June 1997,
he was a Vice President of Lennar Corporation. From 1990 until he became the
President of LNR, Mr. Krasnoff was involved almost entirely in Lennar's real
estate investment and management division.
MICHAEL J. MORRISSEY--Director of CGA Group since June 18, 1997. Mr.
Morrissey has served as the Chairman and Chief Executive Officer of The Firemark
Group, an investment management firm specializing in public and private
insurance related investments, for the past fifteen years. He also serves as a
director of NewCap Re, ONYX, Health Care First, FinPac and Post Acute Care.
F. FULLER O'CONNOR, JR.--Director of CGA Group since September 10, 1999.
Since August 1996, Mr. O'Connor has served as Managing Director of Prudential
Securities, where he specializes in real estate investment banking. From August
1994 to August 1996, he served in the real estate finance group at Chase
Manhattan Bank, where he specialized in commercial mortgage backed securities.
ALAN S. ROSEMAN--Director of CGA Group since January 27, 1999. Mr. Roseman
is currently a director, and since 1989, General Counsel, of Capital Reinsurance
Corporation, where he also serves as Executive Vice President and Secretary.
PAUL A. RUBIN--Director of CGA Group since June 18, 1997. In April 1995,
Mr. Rubin became a principal of Olympus Partners, an investment limited
partnership, and he became partner of Olympus in December 1996. Prior to joining
Olympus in April 1995, Mr. Rubin worked as Vice President at Summit Partners, a
venture capital firm in Boston, which he joined in July 1990.
JAY S. SUGARMAN--Director of CGA Group since June 18, 1997. Mr. Sugarman is
currently President, and since November 1997, Chief Executive Officer, of
Starwood Financial Trust, a finance company focused exclusively on commercial
real estate. Prior to his arrival in 1993 at Starwood Capital Group, a real
estate fund, where he has served as Senior Managing Director, Mr. Sugarman
managed a diversified, privately-owned investment fund.
EXECUTIVE COMPENSATION
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the other four most highly
compensated executive officers of CGA Group for services rendered during the
fiscal year ended December 31, 1999.
45
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------------------------------- ------------
(A) (B) (C) (D) (E) (F) (G)
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION LTIP PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
------------------- -------- ----------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Price 1999 312,000 345,000 185,721(1) 0 0
Chief Executive Officer, 1998 300,000 75,000 144,931(2) 0 0
President and Director, CGA 1997 162,500 160,274 45,061(3) 0 0
Group
Geoffrey N. Kauffman 1999 208,000 285,000 163,977(4) 0 0
President, CGA Investment 1998 187,500 100,000 144,514(5) 0 0
Management 1997 94,792 175,000 189,511(6) 0 0
Kem H. Blacker 1999 234,000 230,000 5,000 0 0
Head of Portfolio Management, 1998 225,000 105,000 5,000 0 0
CGA Investment Management 1997 121,875 200,000 73,745(7) 0 0
Jean-Michel Wasterlain 1999 182,000 230,000 5,000 0 0
Head of Commercial Real Estate 1998 175,000 175,000 5,000 0 0
CGA Investment Management 1997 94,792 225,000 179,994(7)(8) 0 0
Michael M. Miran 1999 208,000 185,600 5,000 0 0
President and Chief 1998 200,000 145,000 5,000 0 0
Underwriting Officer, 1997 100,769 150,000 0 0 0
Commercial Guaranty Assurance
</TABLE>
--------------
(1) Includes housing allowance of $116,211 and payment of $52,062 to reimburse
cost for taxable expatriate allowances paid in 1997 and 1998.
(2) Includes housing allowance of $126,385.
(3) Includes housing allowance of $36,750.
(4) Includes housing allowance of $127,650.
(5) Includes housing allowance of $126,000.
(6) Includes housing allowance of $63,000 and $115,000 as buyout of Mr.
Kauffman's bonus arrangement with previous employer.
(7) Amounts include payments by CGA Group of $50,244 and $68,995 made to
Messrs. Wasterlain and Blacker, respectively, for services rendered prior
to June 17, 1997, pursuant to CGA Group's assumption of these individuals'
employment agreements with CGA Funding, L.P.
(8) Amount includes payment by CGA Group of $125,000 made to Mr. Wasterlain as
buyout of his bonus arrangement with previous employer.
DIRECTOR COMPENSATION AND BENEFITS
The chairman and all but one of the directors do not receive compensation
in connection with their service as members of CGA Group's Board. Richard S.
Frary, the director elected by the Series C preferred stockholders, receives
$5,000 for each board meeting attended. All members of CGA Group's board are
reimbursed by CGA Group for transportation to all meetings of the board of
directors or a committee of the board of directors as well as all reasonable
expenses in connection with this service.
DIRECTORS AND OFFICERS INSURANCE
Management maintains insurance to insure against liabilities asserted
against any director, officer, employee or agent of CGA Group arising out of the
performance of their duties.
REMUNERATION AND EMPLOYEE AGREEMENTS
LONG-TERM INCENTIVE PLANS
CGA Group adopted a stock warrant plan to promote equity ownership of CGA
Group by selected employees, and the founders and sponsoring investors of CGA
Group and its subsidiaries, to increase their proprietary interest in
46
<PAGE>
the success of CGA Group and/or to encourage them to remain in the employ of CGA
GroupCGA Group and its subsidiaries. On June 17, 1997, 2,342,500 warrants were
issued. Each warrant represents a right to purchase, on or prior to June 17,
2007, one share of common stock of CGA Group at an exercise price of $5.00 per
share. The warrants issued to employees vest ratably over a four-year period.
All warrants issued to the founders and sponsoring investors of CGA Group
pursuant to the stock warrant plan vested immediately upon issuance. In
addition, the warrants contain adjustments for dilutive events, such as
dividends or additional issuances of stock, and protections for reorganization,
and consolidations or mergers.
401(K) PLAN
CGA Group maintains a qualified 401(K) retirement plan for all its
employees. The amounts contributed by CGA Group during the fiscal year ended
December 31, 1999 for the executive officers named in the above table was
$25,000.
MANAGEMENT CONTRACTS
As of January 1, 1997, CGA Group entered into an employment agreement with
Richard A. Price, as Chief Executive Officer and President of CGA Group, for a
term of three years and subject to annual renewal thereafter. Mr. Price's
employment agreement with CGA Group provides for the payment of a base salary of
$300,000 and a discretionary annual cash bonus based upon an annual incentive
plan approved by the compensation committee of CGA Group's board of directors.
The employment agreement automatically renews for a one-year period upon the end
of the term of the agreement, unless terminated by CGA Group or Mr. Price, and
provides that if his employment is terminated other than for "cause," he shall
receive a severance payment of not less than one-half of his then-current base
salary plus relocation expenses. As of January 1, 2000, Mr. Price's base salary
was increased to $345,000.
CGA Investment Management has entered into employment agreements with
Geoffrey N. Kauffman, Kem H. Blacker, Michael M. Miran and Jean-Michel
Wasterlain, in each case for a term of one year. The employment agreements of
Messrs. Kauffman, Blacker, Miran and Wasterlain provide for the payment of base
salaries of $175,000, $200,000, $200,000 and $175,000 per annum, respectively,
and discretionary annual cash bonuses in an amount based upon an annual
incentive plan approved by the compensation committee of CGA Group's board of
directors. Each of these employment agreements automatically renews for a
one-year period upon the anniversary of the agreement, unless terminated by CGA
Group or the employee. As of January 1, 2000, the base salaries of Messrs.
Kauffman, Blacker, Miran and Wasterlain have been increased to $285,000,
$240,000, $240,000 and $240,000, respectively. CGA Group currently is amending
the employment contracts of Messrs. Miran and Kauffman to reflect their new
positions at Commercial Guaranty Assurance and CGA Investment Management,
respectively.
Each of the employment agreements described above contains provisions
relating to the payment of base salary and discretionary bonus with respect to
the contract period, grants of warrants to purchase common stock of CGA Group,
the exclusivity of the employee's services, severance benefits in the event of
termination other than for "cause," noncompetition and confidentiality. In
addition, the directors and officers of CGA Group shall be indemnified and
secured harmless out of the assets of CGA Group from and against all actions,
costs and charges that they may incur or sustain by or by reason of any act done
in or about execution of their duty. CGA Group has also purchased insurance for
its business obligations.
BERMUDA-BASED EMPLOYEES
Richard A. Price, James R. Reinhart and Michael M. Miran are based in
Bermuda. Since none of the key employees based in Bermuda are Bermudian, their
employment in Bermuda is subject to the specific permission of the appropriate
governmental authority. While CGA Group is not currently aware of any reasons
why the current work permits for these officers will not be renewed, there can
be no assurance that they will be renewed.
CONFLICTS
CGA Group's board of directors has adopted a resolution to the effect that
future transactions between CGA Group or any of its subsidiaries or affiliates,
on one hand, and Jay Shidler, The Shidler Group or any affiliates of The Shidler
Group, on the other hand, is restricted. Management believes that Mr. Shidler's
real estate investments do not pose a conflict of interest with the business of
CGA Group. However, to eliminate any appearance of a conflict, CGA Group, its
subsidiaries and its affiliates have established a policy of not providing
insurance guaranties or investment services to Mr. Shidler or his affiliates. In
addition, Mr. Shidler does not receive any compensation while he serves as
Chairman or otherwise as a director of CGA Group, except reimbursements for
travel expenses.
47
<PAGE>
Except for the arrangements described below under "Related Party
Transactions," CGA Group does not, and does not permit any of its subsidiaries
to, directly or indirectly, conduct any business with any of the members of the
board of directors or any of their affiliates, unless the transaction or series
of transactions are in the best interests of CGA Group as determined by the
disinterested members of the board of directors and are entered into on an
arms-length basis.
Commercial Guaranty Assurance may not insure risks of stockholders or their
affiliates without bringing the proposed action to the attention of the board of
directors. The decision whether Commercial Guaranty Assurance may insure risks
of this type will be determined by a vote of the board of directors.
RELATED PARTY TRANSACTIONS
Commercial Guaranty Assurance and Capital Reinsurance Company have entered
into an agreement as of June 4, 1997 which grants ACE Guaranty Re Inc., formerly
known as Capital Reinsurance Company, the right to make the first offer to
provide reinsurance for all insurance contracts, including contracts of
financial guaranty as reinsurance, issued by Commercial Guaranty Assurance. ACE
Guaranty Re's rights under the right of first offer agreement terminate on the
earlier of (a) the date that ACE Guaranty Re no longer owns 5% of the common
stock of CGA Group or (b) the date of a public offering of capital stock by CGA
Group.
CGA Investment Management has entered into asset management agreements with
St. George Holdings, Cobalt Holdings, and each of their respective subsidiaries.
Pursuant to these agreements, CGA Investment Management performs advisory, asset
management and related services for these companies. CGA has guaranteed the
payment obligations of these companies under their financing arrangements, and
is expected to guarantee the payment obligations of any other subsidiaries of
St. George Holdings or Cobalt Holdings which may be established in the future in
respect of their financing obligations. See "Business--CGA Investment
Management, Inc.--St. George and Cobalt."
In October 1998, Commercial Guaranty Assurance provided asset-specific
guarantees and obtained third party credit support on a "cut-through" basis on
approximately $382 par amount of securities in the investment portfolios of two
of its clients, St. George Investments I and St. George Investments III. The
three parties that provided this credit support are institutional investors in
CGA Group. In connection with these arrangements, Commercial Guaranty Assurance
received a premium of $38.95 million from St. George Investments I and St.
George Investments III, and ceded an aggregate of $38.7 million to the three
institutions that provided this credit support. Commercial Guaranty Assurance
loaned $30 million to St. George Holdings, the parent corporation of St. George
Investments I and St. George Investments III, in order to permit St. George
Holdings to provide its subsidiaries with sufficient funds to pay the premium
for this credit support, and to meet its clients' liquidity needs.
CGA Group pays the holders of its investment units an aggregate of $600,000
per annum as a fee with respect to the $60 million in capital commitments. See
"Description of Securities--Commitments."
On April 26, 1999, CGA Group sold 973,483 shares of Series C preferred
stock to employees of CGA Group and its subsidiaries. The shares were sold for
$1.20 each, for a total of approximately $1.2 million. The shares were 90%
financed by CGA Group at 7% per annum with equal principal installments due
annually over a three-year period.
On April 14, 1999, subsidiaries of St. George Holdings entered into two
securitization transactions pursuant to which they securitized approximately
$527 million principal amount of securities in their investment portfolios, by
selling these securities to two special purpose trusts established to implement
this transaction. The transaction was financed by issuing three classes of
securities from these trusts. The two seniormost classes of certificates with an
aggregate face amount of $446,450,000 were acquired by or on behalf of an
institutional investor in CGA Group. The $80,550,000 face amount of subordinated
certificates issued by these trusts were acquired by a subsidiary of Cobalt
Holdings. Commercial Guaranty Assurance issued a pool policy relating to each
trust's underlying pool of securities in an amount equal to 5.9% of these
securities. A subsidiary of St. George Holdings also provided put/call
agreements in respect of securities owned by the trusts with an aggregate face
amount of $50 million. Commercial Guaranty Assurance has guaranteed this St.
George subsidiary's obligations under the put/call agreements.
In a separate transaction that closed in December 1999, CGA Investment
Management paid $5.5 million to St. George to cover a portion of the cost St.
George incurred for the credit support arrangements. CGA Investment Management
made this payment to assist St. George with liquidity issues that arose due to
the cost of the credit support arrangements.
48
<PAGE>
As of December 31, 1999, 54% of Commercial Guaranty Assurance's net
exposure was from assets owned by St. George and Cobalt. Most of Commercial
Guaranty Assurance's premiums and CGA Investment Management's fee income is
originated from St. George and Cobalt.
SELLING STOCKHOLDERS
The registration statement of which this prospectus is a part has been
filed pursuant to Rule 415 under the Securities Act to afford the holders of
Series A preferred stock listed in the table below the opportunity to sell their
Series A Preferred Stock in a public transaction. By virtue of their ownership
of CGA Group's investment units, several of the selling stockholders, because
they are eligible to do so under CGA Group's bylaws, have elected designees to
the board of directors of CGA Group. See "Management--Directors and Officers of
CGA Group and its subsidiaries" and "Security Ownership of Certain Beneficial
Owners and Management." Share numbers and percentages listed below are as of
March 31, 2000.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
ON THE DATE HEREOF AFTER SALE*
------------------ NUMBER OF --------------------
NUMBER OF PERCENT SERIES A NUMBER OF PERCENT
SERIES A OF SHARES SERIES A OF
NAME SHARES CLASS TO BE OFFERED SHARES CLASS
---- --------- ------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
Putnam Investments (The Putnam Fiduciary
Trust Company on behalf of Putnam High Yield
Fixed Income Trust (DBT) and Putnam High
Yield Managed Trust, Putnam Diversified
Income Trust, Putnam Diversified Income
Trust II, Putnam Funds Trust-Putnam High
Yield Total Return Fund, Putnam High Yield
Advantage Fund, Putnam High Yield Trust,
Putnam Managed High Yield Trust, Putnam
Variable Trust-Putnam VT Diversified Income
Fund, Putnam Variable Trust-Putnam VT High
Yield Fund) ....................................... 965,428 25.4 965,428 0 0
Oppenheimer Funds (Oppenheimer
Champion Income Fund, Oppenheimer High
Yield Fund, Oppenheimer Multi-Sector
Income Trust, Oppenheimer Strategic Income
Fund, Oppenheimer Variable Account Funds
for the account of Oppenheimer High
Income Fund) ..................................... 731,390 19.2 731,390 0 0
Third Avenue Trust on behalf of the
Third Avenue Value Fund Series ................... 643,631 16.9 643,621 0 0
Lennar Capital Services, Inc. ...................... 468,086 12.3 468,086 0 0
Olympus Growth Fund II, L.P. ....................... 351,067 9.2 351,067 0 0
Capital Reinsurance Company ........................ 351,065 9.2 351,065 0 0
Pacific Life Insurance Company and PM Group
Life Insurance Company ........................... 292,555 7.7 292,555 0 0
</TABLE>
-------------
* Assumes the sale of all shares of Series A preferred stock offered by the
registration statement of which this prospectus is a part. The selling
stockholders may offer all or only some of these shares.
PLAN OF DISTRIBUTION
The shares of Series A preferred stock offered by this prospectus are being
offered directly by the selling stockholders. The sale of the securities may be
effected by the selling stockholders from time to time in transactions in the
over-the-counter market, in negotiated transactions or a combination of these
methods of sale. In each case, these sales could be made at fixed prices which
may be changed, at market prices prevailing at the time of sale, at prices
related to prevailing market prices, or at negotiated prices. The selling
stockholders may effect these transactions by selling securities to or through
broker dealers. Broker-dealers may receive compensation in the form of
underwriting
49
<PAGE>
discounts, concessions or commissions from selling stockholders and/or
purchasers of securities for whom these broker-dealers may act as agents or to
whom they sell as principals, or both. The compensation as to a particular
broker-dealer may be in excess of customary commissions. These broker-dealer(s)
may be affiliated with, be customers of, or engage in transactions with or
perform services for one or more of the selling stockholders and/or CGA Group in
the ordinary course of business. CGA Group will keep the registration statement
of which this prospectus is a part, or a similar registration statement,
effective until the earliest to occur of
o the date that all securities registered pursuant to the registration
statement have been disposed of in accordance with the plan of
disposition indicated in this prospectus,
o the date that all securities registered pursuant to the registration
statement have become saleable pursuant to Rule 144 under the
Securities Act, or
o three years from the date the registration statement was first
declared effective.
At the time a particular offer of the securities is made, to the extent
required, a post-effective amendment will be distributed which will set forth
the number of securities being offered and the terms of the offering. The
post-effective amendment will include the name or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for the securities
purchased from the selling stockholders, any discounts, commissions and other
items constituting compensation from the selling stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers.
In order to comply with state securities laws, if applicable, the
securities will be sold in these jurisdictions only through registered or
licensed brokers or dealers to the extent required by these laws. In addition,
in some states the securities may not be sold unless they have been registered
or qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with by
CGA Group and the selling stockholders.
The selling stockholders and any broker-dealers, agents or underwriters
that participate with selling stockholders in the distribution of securities may
be deemed to be "underwriters" as defined in the Securities Act. In this event,
all brokerage commissions or discounts and other compensation received by these
selling stockholders, brokers-dealers, agents or underwriters may be deemed
underwriting compensation under the Securities Act. In addition, any of the
securities that qualify for sale pursuant to Rule 144 may be sold under Rule 144
rather than pursuant to the prospectus.
In addition, the selling stockholders and any others engaged in
distribution of securities will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of securities by the selling
stockholders.
CGA Group agreed to register the securities under the Securities Act and to
indemnify and hold the selling stockholders harmless against liabilities under
the Securities Act that could arise in connection with the sale by the selling
stockholders of the securities as a result of any untrue statements of material
fact or omissions of material fact in this prospectus or in the registration
statement of which this prospectus is a part.
See "Selling Stockholders".
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding the ownership
of CGA Group's securities of
o each person known by the CGA Group to own beneficially five percent or
more of the outstanding shares of any class of CGA Group's voting
securities;
o each of CGA Group's directors;
o each of CGA Group's executive officers; and
o all directors and executive officers of CGA Group as a group.
None of the directors or executive officers of CGA Group own beneficially any
shares of CGA Group's Series A preferred stock. See the table above under the
heading "Selling Stockholders" for a list of the names of the specific Putnam
and Oppenheimer funds that own shares of the Series A Preferred Stock.
50
<PAGE>
SERIES A PREFERRED STOCK (as of March 31, 2000).
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
------------------------------------ ------------------- ----------------
<S> <C> <C>
Putnam Investments
One Post Office Square, Boston, MA 02109 .............................. 965,428 25.4
Oppenheimer Funds
Two World Trade Center, 34th Floor, New York, NY 10048 ................ 731,390 19.2
Third Avenue Trust on behalf of the
Third Avenue Value Fund Series
767 Third Ave., New York, NY 10017 .................................... 643,621 16.9
Lennar Capital Services, Inc.
760 N.W. 107th Ave., Suite 300, Miami, FL 33172 ....................... 468,086 12.3
Olympus Growth Fund II, L.P. and Olympus Executive Fund, L.P. ........... 351,067 9.2
Capital Reinsurance Company
1325 Avenue of the Americas, New York, NY 10019 ....................... 351,065 9.2
Pacific Life Insurance Company and PM Group Life Insurance Company
700 Newport Center Drive, Newport Beach, CA 92660 ..................... 292,555 7.7
</TABLE>
SERIES C PREFERRED STOCK (as of March 31, 2000).
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT OF CLASS
------------------------------------ ----------------- ----------------
<S> <C> <C>
Pacific Life Insurance Company
700 Newport Center Drive, Newport Beach, CA 92660 ...................... 10,553,309 23.5
Third Avenue Trust
767 Third Ave., New York, NY 10017 ..................................... 6,045,667 13.4
Capital Reinsurance Company
1325 Avenue of the Americas, New York, NY 10019 ........................ 5,978,543 13.3
Morgan Guaranty Trusts (Morgan Guaranty Trust Company of
New York as Trustee of the Multi-market Special Investment Trust
Fund of Morgan Guaranty Trust Company of New York and Morgan
Guaranty Trust Company of New York as Trustee of the Commingled
Pension Trust Fund (Multi-market Special Investment Fund II) of
Morgan Guaranty Trust Company of New York)
522 Fifth Avenue, New York, NY 10036 ................................... 5,636,684 12.5
Olympus Partners
Metro Centre, One Station Place, Stamford, CT 06902 .................... 5,454,882 12.1
Lennar CGA Holdings, Inc.
760 N.W. 107th Ave., Suite 400, Miami, FL 33172 ........................ 5,224,666 11.6
</TABLE>
51
<PAGE>
COMMON STOCK (as of March 31, 2000).
<TABLE>
<CAPTION>
NUMBER OF TOTAL
SHARES OF NUMBER OF NUMBER OF
COMMON STOCK WARRANTS SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER* OWNED OWNED OWNED OF CLASS
------------------------- ------------- ------------- ------------- --------
<S> <C> <C> <C> <C>
Capital Reinsurance Company
1325 Avenue of the Americas, New York, NY 10019 ........... 6,206,021 24,923 6,230,944 21.1
Third Avenue Value Fund
767 Third Avenue, New York, NY 10017 ...................... 3,341,703 45,692 3,387,395 11.5
Olympus Partners
Metro Centre, One Station Place, Stamford, CT 06902 ....... 3,341,711 24,923 3,366,634 11.4
Pacific Life Insurance Company
700 Newport Center Drive, Newport Beach, CA 92660 ......... 3,341,703 20,769 3,362,472 11.4
Morgan Guaranty Trust
522 Fifth Avenue, New York, NY 10036 ...................... 2,864,318 20,769 2,959,783 10.0
Lennar CGA Holdings, Inc.
760 N.W. 107th Ave., Suite 400, Miami, FL 33172 ........... 1,909,548 0 2,324,673 7.8
The Equitable Life Assurance Society of the United States
1290 Avenue of the Americas, New York, NY 10104 ........... 1,432,454 0 1,909,548 6.8
----------------
</TABLE>
SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS
(AS OF MARCH 31, 2000)
None of the directors or officers of CGA Group own shares of CGA Group
Series A preferred stock.
The percentages listed in the right column of the table below assume
29,511,369 shares of common stock, comprised of 28,005,648 shares of common
stock, warrants held by the holders of Series A preferred stock to purchase
270,000 shares of common stock, sponsor and founder warrants to purchase 847,729
shares of common stock and vested employee warrants to purchase 657,992 shares
of common stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NUMBER OF VESTED CLASS
SHARES OF NUMBER OF WARRANTS (COMMON
SERIES C PERCENT SHARES OF TO PURCHASE STOCK AND
PREFERRED STOCK OF CLASS COMMON STOCK COMMON STOCK WARRANTS)
--------------- -------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
David M. Barse (1) ..................... 0 0 0 0 0
Robert L. Denton (2) ................... 32,801 * 85,535 80,072 *
Richard S. Frary ....................... 0 0 0 0 0
Eric A. Gritzmacher (3) ................ 0 0 0 0 0
Jeffrey P. Krasnoff (4) ................ 0 0 0 0 0
Michael J. Morissey (5) ................ 0 0 0 0 0
Richard A. Price ....................... 0 0 148,544 383,162 1.8
Alan S. Roseman (6) .................... 0 0 0 0 0
Paul A. Rubin (7) ...................... 0 0 0 0 0
F. Fuller O'Connor, Jr. (8) ............ 0 0 0 0 0
Jay H. Shidler (9) ..................... 338,863 * 541,330 396,583 3.1
Jay S. Sugarman (10) ................... 0 0 0 0 0
Kem H. Blacker ......................... 41,667 * 20,000 112,232 *
Jean-Michel Wasterlain ................. 40,000 * 17,000 81,730 *
Michael M. Miran ....................... 100,000 * 12,000 15,161 *
Geoffrey N. Kauffman ................... 146,138 * 23,289 86,563 *
Directors and Named Executive
Officers as a group .................. 699,469 1.5 847,698 1,155,503 6.8
</TABLE>
--------------
* Less than one percent.
(1) Excludes 3,341,703 shares of common stock, warrants to purchase 45,692
shares of common stock, 643,621 shares of Series A preferred stock and
6,045,667 shares of Series C preferred stock held of record by Third Avenue
Trust, for which Mr. Barse, a Director of CGA Group, serves as President
and Chief Operating Officer. Mr. Barse disclaims beneficial ownership of
these securities held by Third Avenue Trust.
(2) Includes 68,511 and 17,024 shares of common stock and warrants to purchase
64,135 and 15,937 shares of common stock held of record by Mr. Denton and
Mr. Denton's wife, Doreen A. Denton, respectively, and includes 32,801
shares of Series C preferred stock owned by Ms. Denton.
52
<PAGE>
(3) Excludes 3,341,703 shares of common stock, warrants to purchase 20,769
shares of common stock, 292,555 shares of Series A preferred stock and
10,553,309 shares of Series C preferred stock held of record by Pacific
Life Insurance Company for which Mr. Gritzmacher, a Director of CGA Group,
serves as Vice President, and its affiliates. Mr. Gritzmacher disclaims
beneficial ownership of these securities held of record by these entities.
(4) Excludes 2,291,442 shares of common stock, warrants to purchase 33,231
shares of common stock and 5,224,666 shares of Series C preferred stock
held of record by Lennar CGA Holdings Inc. and 468,086 shares of Series A
preferred stock held of record by Lennar Capital Services. Mr. Krasnoff
serves as President of LNR Property Corporation, an affiliate of Lennar CGA
Holdings, Inc. and of Lennar Capital Services, Inc. Mr. Krasnoff disclaims
beneficial ownership of these securities held of record by these entities.
(5) Excludes 1,432,154 shares of common stock and 533,333 shares of Series C
preferred stock held of record by CGA Firemark Venture Fund I, LLC. Mr.
Morrissey, a Director of CGA Group, serves as Chairman and Chief Executive
Officer of the Firemark Group, an affiliate of CGA Firemark Venture Fund I,
LLC. Mr. Morrissey disclaims beneficial ownership of these securities held
of record by CGA Firemark Venture Fund I, LLC.
(6) Excludes 3,341,703 shares of common stock, warrants to purchase 4,154
shares of common stock and 58,511 shares of Series A preferred stock held
of record by Capital Reinsurance Company, and 292,554 shares of Series A
preferred stock, 5,978,543 shares of Series C preferred stock, 2,864,318
shares of common stock and warrants to purchase 20,769 shares of common
stock held of record by ACE Limited, a wholly-owned subsidiary of Capital
Reinsurance Company. Mr. Roseman, a Director of CGA Group, serves as
General Counsel, Executive Vice President and Secretary of Capital
Reinsurance Company. Mr. Roseman disclaims beneficial ownership of these
securities held of record by these entities.
(7) Excludes 3,341,711 shares of common stock, 351,067 shares of Series A
preferred stock and 5,454,882 shares of Series C preferred stock held of
record by Olympus Growth Fund II, L.P. and Olympus Executive Fund, L.P. Mr.
Rubin, a Director of CGA Group, is a partner of Olympus Partners, an
affiliate of these two funds. Mr. Rubin disclaims beneficial ownership of
these securities held of record by these entities.
(8) Excludes 954,770 shares of common stock and 1,818,303 shares of Series C
preferred stock held of record by Prudential Securities Group, Inc., for
which Mr. O'Connor, a Director of CGA Group, serves as managing director.
Mr. O'Connor disclaims beneficial ownership of these securities held of
record by Prudential Securities Group, Inc.
(9) Includes 7,720 shares of common stock, warrants to purchase 7,227 shares of
common stock and 14,875 shares of Series C preferred stock held of record
by Shidler/CGA Corp., 3,741 shares of common stock, warrants to purchase
3,502 shares of common stock and 7,208 shares of Series C preferred stock
held of record by Shidler Equities Corp., and 529,869 shares of common
stock, warrants to purchase 385,854 shares of common stock and 316,780
shares of Series C preferred stock held by Shidler Equities, L.P.
(10) Excludes 954,770 shares of common stock and 1,818,303 shares of Series C
preferred stock held of record by Starwood CGA, LLC. Mr. Sugarman, a
Director of CGA Group, is President and Chief Executive Officer of Starwood
Financial Trust, an affiliate of Starwood CGA, LLC. Mr. Sugarman disclaims
beneficial ownership of these securities held of record by Starwood CGA,
LLC.
53
<PAGE>
DESCRIPTION OF SECURITIES
CGA Group's authorized capital stock consists of:
o 268,012,000 shares of common stock,
o 10,000,000 shares of Series A preferred stock,
o 10,000,000 shares of Series B preferred stock, and
o 52,000,000 shares of Series C preferred stock.
As of December 31, 1999, the following shares were issued and outstanding:
o 28,005,648 shares of common stock,
o 3,676,821 shares of Series A preferred stock,
o no shares of Series B preferred stock, and
o 44,971,346 shares of Series C preferred stock.
SERIES A PREFERRED STOCK
GENERAL
CGA Group has issued 3,803,212 shares of its Series A preferred stock, each
share having a $.01 par value. As described below, the shares of Series A
preferred stock have a mandatory redemption period of ten years. CGA Group also
has an optional redemption after June 17, 2002 as described more fully below.
See "--Optional Redemption." The Series A preferred stock ranks senior to all
other classes of CGA Group's capital stock.
DIVIDENDS
Each share of Series A preferred stock is entitled to dividends in an
amount equal to 13.75% per annum based on a $25 stated value. In addition, if
any time after June 17, 2002, the Series A preferred stock is rated "Triple-B
minus" or higher from Fitch, or the then-equivalent rating in the event Fitch
changes its rating designations, this dividend rate will decrease by 200 basis
points. The Series A preferred dividends are fully cumulative, compound
quarterly and accrue quarterly until redemption. The accrual period is based on
the actual number of days elapsed over a year of 360 days. Subject to Bermuda
law, the payment of accrued Series A preferred dividends will be as, if and when
any dividends are declared by CGA Group's board of directors. The Series A
preferred dividends accrued prior to June 17, 2002 will be paid in kind, and the
Series A preferred dividends accruing after that date will be paid in cash at a
rate of 11.75% per annum, and, to the extent that the dividends accrue in excess
of a rate of 11.75% per annum, the excess, if any, will be paid in cash to the
extent CGA Group receives assurance from Fitch that the cash payment will not
adversely affect Commercial Guaranty Assurance's AAA rating; otherwise the
excess will be paid in kind or in cash as determined by CGA Group.
If an event of non-compliance occurs, the dividend rate shall be increased
by 250 basis points so long as the event of non-compliance is continuing. See
"--Events of Non-Compliance" below.
DIVIDEND PREFERENCE
So long as any Series A preferred stock remains outstanding, no dividends
other than dividends payable in shares of stock ranking junior to the Series A
preferred stock may be declared or paid or set apart for payment on, nor may any
distribution be made to, any class of stock of CGA Group ranking junior to or on
parity with the Series A preferred stock.
MANDATORY REDEMPTION
CGA Group will be obligated to redeem the Series A preferred stock, in
whole, on June 17, 2007 at a redemption price per share equal to 100% of the
stated value of the Series A preferred stock, together with accrued and unpaid
Series A preferred dividends, if any, subject to applicable Bermuda laws
regarding solvency.
After June 17, 1997, each holder of Series A preferred stock has the right
to require CGA Group to redeem all of the holder's shares of Series A preferred
stock upon the occurrence of a change of control of CGA Group at a redemption
price equal to the sum of 101% of $25, the stated value of the Series A
preferred stock and accrued and
54
<PAGE>
unpaid non-cash dividends on the Series A preferred stock through the date of
the redemption, subject to applicable Bermuda laws regarding solvency.
OPTIONAL REDEMPTION
CGA Group and the holders of the Series A preferred stock agreed on March
1, 1999 that the Series A preferred stock shall be redeemable in cash at the
election of CGA Group, in whole or in part at any time and from time to time at
a redemption price equal to the stated value of the Series A preferred stock per
share plus accrued but unpaid dividends through the date of the redemption, pro
rata from all holders of Series A preferred stock, subject to applicable Bermuda
laws regarding solvency.
The Series A holders and any future transferees have irrevocably waived any
right to receive any redemption premium or other additional amount in respect of
any optional redemption of the Series A preferred stock by CGA Group. Under the
March 1, 1999 agreement described above, if CGA Group at any time completes a
public offering of shares of its common stock, which public offering has been
registered with the Securities and Exchange Commission and has resulted in net
proceeds to CGA Group of not less than $50 million, then CGA Group shall utilize
the net proceeds to redeem the shares of Series A preferred stock, on a pro rata
basis from all holders of Series A preferred stock, subject to applicable
Bermuda laws regarding solvency.
At any time prior to June 17, 2000 and upon ten days' prior written notice
to the holders, up to 35% of the Series A preferred stock is redeemable in cash
at the election of CGA Group with the proceeds of one or more public offerings
of CGA Group's capital stock registered with the Securities and Exchange
Commission, at any time or from time to time, at a redemption price equal to the
sum of 120% of the sum of $25 and accrued and unpaid non-cash dividends through
the date of the redemption plus accrued and unpaid cash dividends through the
date of the redemption, subject to applicable Bermuda laws regarding solvency.
LIQUIDATION PREFERENCE
If CGA Group voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the Series A preferred stock will be entitled to
receive, after all creditors of CGA Group have been paid, a liquidation
preference per share equal to $25, together with all accrued and unpaid Series A
preferred dividends through the date of the liquidation, dissolution or winding
up, out of the assets of CGA Group before any distribution is made to the
holders of any security ranking junior to or on parity with the Series A
preferred stock.
VOTING RIGHTS AND BOARD REPRESENTATION
The holders of Series A preferred stock are entitled to exercise seven
votes per share, constituting an aggregate of 18.2 million votes. This
represents, as of June 17, 1997, approximately 41% of the total number of votes
that the holders of CGA Group voting capital stock may cast. Each additional
issuance of Series A preferred stock in excess of 2,600,000 shares, including
shares issued as paid-in-kind dividends, will dilute proportionally the per
share voting rights attributable to the then-outstanding shares of Series A
preferred stock for so long as the excess exists.
The holders of the Series A preferred stock are not entitled to elect any
members of the CGA Group board of directors, except as provided in "--Penalties
for Non-Compliance" below.
CGA Group's bye-laws limit the direct and indirect voting power of each
U.S. person so that, unless an event of non-compliance has occurred and is
continuing, no U.S. person will own, directly or indirectly, stock that controls
10% or more of the total combined voting power of all classes of stock of CGA
Group entitled to vote. See "--Events of Non-Compliance" below.
LIMITATION ON COMPANY INDEBTEDNESS AND PREFERRED STOCK
Under the subscription agreement for the Series A preferred stock, CGA
Group will not, directly or indirectly, incur any indebtedness or issue any
preferred stock unless CGA Group is in compliance with the restrictions set
forth in "--Events of Non-Compliance," below as a consequence of the incurrence
of the indebtedness or issuance of preferred stock, and the indebtedness or
preferred stock is specifically permitted under the Series A subscription
agreement. This covenant will not restrict CGA
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Group's ability to incur obligations under insurance, reinsurance or
retrocession contracts or other arrangements by which a person guarantees
financial or credit risks in each case provided the obligations were entered
into in the ordinary course of business. This covenant also will not restrict
CGA Group's ability to incur obligations with respect to letters of credit or
similar instruments or credit facilities for the purpose of securing insurance,
reinsurance or retrocessional obligations entered into in the ordinary course of
business, to the extent that these letters of credit or similar instruments or
credit facilities are not drawn upon, or if drawn upon, the drawing is
reimbursed not later than the 30th business day following a demand for
reimbursement. This covenant also will not restrict CGA Group's ability to issue
the Series B preferred stock pursuant to the commitments.
LIMITATION ON RESTRICTED SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK
Under the subscription agreement, Commercial Guaranty Assurance and CGA
Investment Management may not incur indebtedness or issue preferred stock unless
the transaction is entered into with the specific permission of CGA Group and in
compliance with the terms of the subscription agreement described below under
"--Events of Non-Compliance." This covenant will not restrict the ability of
Commercial Guaranty Assurance or CGA Investment Management to incur, directly or
indirectly, insurance obligations.
OTHER RESTRICTIONS AND LIMITATIONS ON CGA GROUP AND ITS SUBSIDIARIES
The subscription agreement for the Series A preferred stock also restricts:
o the ability of CGA Group and its subsidiaries to pay dividends or
distributions in respect of their shares of capital stock, other than
dividends or distributions payable solely to CGA Group or a subsidiary
of CGA Group;
o the ability of CGA Group and its subsidiaries to make intercompany
loans or advances, or to make intercompany transfers of assets or
properties;
o the ability of CGA Group and its subsidiaries to sell assets or shares
of capital stock at less than their fair market value, as determined
by the board of directors of CGA Group;
o the ability of CGA Group and its subsidiaries to enter into
encumbrances or restrictions, except as required by law or regulation,
relating to the payment of dividends or redemptions, the making of
intercompany loans or advances, or intercompany transfers of assets or
properties;
o the ability of CGA Group to amend or modify the terms of the
commitments to purchase Series B preferred stock without the written
consent of the holders of 90% of the outstanding shares of Series A
preferred stock;
o the ability of CGA Group and its subsidiaries to enter into any
transaction with or for the benefit of any of their respective
affiliates on terms less favorable to CGA Group or the subsidiary than
those that could be obtained in a comparable arms-length transaction
with an unrelated third party, unless approved by the CGA Group board
of directors, including approval by a majority of the disinterested
directors;
o the ability of CGA Group or any of its subsidiaries to merge,
amalgamate or consolidate with any other entity.
EVENTS OF NON-COMPLIANCE
Under the subscription agreement, events of non-compliance with respect to
the Series A preferred stock include:
o failure of CGA Group to pay dividends on the Series A preferred stock
under the terms of CGA Group's bylaws, provided that the unpaid amount
is in excess of $5 million;
o failure by CGA Group to pay the redemption price and premium, if any,
in respect of the Series A Preferred Stock when due upon mandatory or
optional redemption, required purchase or otherwise;
o failure by CGA Group or its subsidiaries to pay amount in respect of
indebtedness or preferred stock when due, provided that the unpaid
amount exceeds $5 million individually or in the aggregate;
o the entry by a court of competent jurisdiction of one or more
judgments or orders against CGA Group or any of its subsidiaries in an
uninsured aggregate amount in excess of $10 million, which judgment or
order is not discharged or waived within 45 days or subject to an
appeal during which CGA Group is not obligated to pay the amount;
o the making by CGA Group or any of its subsidiaries of a general
assignment for the benefit of creditors, or the consent to the
appointment of a receiver or trustee, or the occurrence of an event of
bankruptcy, insolvency or reorganization;
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o a downgrade of Commercial Guaranty Assurance's claims-paying ability
rating below a "Double A minus" (AA-) rating by Fitch for a period of
45 consecutive days.
PENALTIES FOR NON-COMPLIANCE
If any of the above events of non-compliance has occurred, then, for so
long as the event of non-compliance remains uncured and is continuing:
o the size of the board of directors of CGA Group will be increased by
two members, and the holders of the Series A preferred stock as a
class will be entitled to appoint at least two members of the board;
o the dividend rate on the Series A preferred stock will be increased by
250 basis points (2.5%); and D no class of stock of CGA Group ranking
junior to or on parity with the Series A Preferred Stock may be
redeemed.
REPORTING
CGA Group is required by the Series A subscription agreement to furnish to
the holders of the Series A preferred stock copies of the annual and quarterly
reports and the information, documents and other reports that CGA Group is
required to file with the Securities and Exchange Commission under Sections 13
and 15(d) of the Exchange Act within 15 days after it files them with the
Securities and Exchange Commission. Notwithstanding that CGA Group may not be
required to remain subject to the reporting requirements of Section 13 and 15(d)
of the Exchange Act, to the extent permitted by the Exchange Act, CGA Group will
continue to file with the Securities and Exchange Commission with the annual
reports and the information, documents and other reports that are specified in
Section 13 and 15(d) of the Exchange Act. In the event that CGA Group is not
permitted to file such reports, documents and information with the Securities
and Exchange Commission, CGA Group will provide substantially similar
information with respect to itself and its subsidiaries to the holders of the
Series A preferred stock as it would with the Securities and Exchange Commission
if CGA Group were subject to the reporting requirements of the Section 13 and
15(d) of the Exchange Act.
WAIVER AND AMENDMENT
The consent of the holders of a majority of the outstanding shares of the
Series A preferred stock is required with respect to waivers and amendments that
do not affect the payment terms of the Series A preferred stock or the amount of
Series A preferred stock holders who must consent to any amendment or the
relative ranking of the Series A preferred stock. The latter waiver and
amendments may be made only with the consent of the holders of 90% of the
outstanding aggregate liquidation value of the Series A preferred stock.
WARRANTS
The purchaser of each of the 2,600,000 shares of Series A preferred stock
issued on June 17, 1997 acquired for no additional consideration one warrant for
each share of Series A preferred stock purchased. Each warrant represents a
right to purchase, on or prior to June 17, 2007, .1038462 shares of common stock
at an exercise price of $.01 per share, for an aggregate total of 270,000 shares
of common stock. The warrants contain adjustment provisions for dilutive events,
such as dividends and issuances of additional shares, and protections for
reorganizations, consolidations, or mergers.
SERIES B PREFERRED STOCK
GENERAL
On June 4, 1997, CGA Group issued 1,600,000 investment units. Each
investment unit consisted of one share of Series B preferred stock, 4.8925
shares of common stock and a commitment to purchase 1.5 additional shares of
Series B preferred stock. Accordingly, CGA Group issued 1,600,000 shares of its
Series B preferred stock, with a par value of $.01 per share. CGA Group also
obtained commitments to purchase an additional 2,400,000 shares of Series B
preferred stock, as described below under "--Commitments." The Series B
preferred stock ranks junior to the Series A preferred stock and the Series C
preferred stock and senior to the common stock.
On March 31, 1999, in connection with the sale by CGA Group of 43,997,863
shares of Series C preferred stock, all of the issued and outstanding shares of
Series B preferred stock were converted into shares of common stock at a
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conversion ratio of 11.816 shares of common stock per share of Series B
preferred stock. The conversion ratio was based on an assumed value of $3.00 per
share of common stock. As of the date of this prospectus, no shares of Series B
preferred stock are issued and outstanding.
DIVIDENDS
The Series B preferred stock is entitled to dividends in an amount equal to
7% per annum based on a $25 stated value. The Series B preferred dividends are
fully cumulative, compound quarterly and accrue quarterly, based on the actual
number of days elapsed over a year of 360 days, until redemption. Subject to
Bermuda law, the payment of accrued Series B preferred dividends is payable in
cash or in kind as, if and when dividends are declared by CGA Group's board of
directors, provided that, so long as any Series A preferred stock is
outstanding, no dividends other than dividends payable in shares of Series B
preferred stock may be declared or paid or set apart for payment on the Series B
preferred stock.
DIVIDEND PREFERENCE
Any obligation of CGA Group with regard to the Series B preferred dividends
does not affect the payment by CGA Group of the Series A preferred dividends
when these dividends become due. As long as any Series B preferred stock remains
outstanding, no dividends other than dividends payable in shares of stock
ranking junior to the Series B preferred stock may be declared as paid or set
apart for payment on, nor may any distribution be made to, any class of stock
that ranks junior to the Series B preferred stock.
MANDATORY REDEMPTION
The Company is obligated to redeem the issued and outstanding Series B
preferred stock, if any, in whole, at a redemption price per share equal to $25,
together with accrued and unpaid dividends, if any, upon the earliest of June
17, 2012, a sale, merger or amalgamation of CGA Group and a qualified public
offering; provided, however, that so long as CGA Group is in default in respect
of any obligation to redeem or pay dividends in respect of the Series A
preferred stock, CGA Group may not redeem any Series B preferred stock.
REDEMPTION PREFERENCE
If CGA Group defaults on any payment due upon the mandatory redemption of
the Series B preferred stock and the default is not cured:
o no class of stock ranking junior to the Series B preferred stock may
be redeemed;
o no dividends other than dividends payable in stock ranking junior to
the Series B preferred stock may be declared or paid or set apart for
payment on, nor may any distribution be made, to, any class of stock
ranking junior to the Series B preferred stock; and
o no dividends on shares ranking on parity with the Series B preferred
stock may be paid or set apart for payment.
LIQUIDATION PREFERENCE
If CGA Group voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the Series B preferred stock, if any, will be entitled
to receive, after all creditors of CGA Group have been paid and the Series A
preferred liquidation preference and Series C liquidation preference have been
satisfied, a liquidation preference per share equal to $25, plus all accrued and
unpaid dividends to the date of such liquidation, dissolution or winding up, out
of the assets of CGA Group before any distribution is made to the holders of any
stock of CGA Group ranking junior to the Series B preferred stock.
In the event that the assets available for distribution to the holders of
the Series B preferred stock and stock ranking on a parity with the Series B
preferred stock are insufficient to pay the respective preferential amounts in
full, these assets will be distributed ratably in proportion to the preferential
amounts payable thereon.
VOTING RIGHTS
Except as otherwise required by Bermuda law, the holders of the Series B
preferred stock are entitled to exercise five votes per share on all matters
presented to CGA Group's shareholders. As more fully described below under
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"Material Tax Considerations", CGA Group's bylaws attempt to limit the direct
and indirect voting power of each holder of CGA Group's stock so that no U.S.
person will be entitled to votes representing 10 percent or more of CGA Group's
voting power.
BOARD REPRESENTATION RIGHTS
Prior to a qualified public offering, the holders of Series B preferred
stock are entitled to elect at least eight directors to CGA Group's board of
directors. Following a qualified public offering, holders of Series B preferred
stock may maintain special rights to designate members of the board.
REGISTRATION RIGHTS
There are no demand or piggyback registration rights with respect to the
Series B preferred stock.
SERIES C PREFERRED STOCK
GENERAL
On March 31, 1999, CGA Group sold to existing shareholders an aggregate of
43,997,863 shares of Series C preferred stock for net cash proceeds of
$50,996,794.50. On April 26, 1999, CGA Group sold 973,483 shares of Series C
preferred stock to employees of CGA Group and its subsidiaries, for a total of
approximately $1.2 million. The Series C preferred stock ranks junior to the
Series A preferred stock and senior to the Series B preferred stock and the
common stock.
DIVIDENDS
The holders of shares of Series C preferred stock are not entitled to
receive any dividends with respect to these shares.
REDEMPTION
CGA Group will redeem the Series C preferred stock in the event of a sale
of CGA Group or a merger, consolidation or amalgamation with another entity
which results in the owners of all of CGA Group's capital stock prior to the
transaction owning securities with less than 50% of the then-outstanding voting
power of the surviving entity following the transaction. The redemption will
only be made if and to the extent that the consideration paid for each share of
Series C preferred stock in connection with the sale, merger or other
transaction is less than the liquidation value of the Series C preferred stock.
The liquidation value of the Series C preferred stock is the stock's stated
value, $1.50 per share, plus an amount equal to 7.00% per annum of the stated
value, compounded annually from March 31, 1999 through the closing date of the
liquidation.
On the maturity date of the Series C preferred stock, March 31, 2009, the
Series C preferred stock will, at the option of CGA Group, be redeemed for cash
in an amount per share equal to the liquidation value described in the preceding
paragraph, or converted into shares of CGA Group's common stock as described
below.
No later than 10 days prior to the maturity date, CGA Group will give
notice to the holders of Series C preferred stock of the impending maturity of
the shares, of whether CGA Group intends to redeem the shares for cash or shares
of common stock, and of the then-applicable Series C liquidation value or number
of shares of common stock into which a share of Series C preferred stock is then
convertible. Any redemption of Series C preferred stock will be made pro rata
from among the registered holders of the shares then issued and outstanding and
with ten calendar days' prior notice to the registered holders.
CONVERSION
In lieu of the cash redemption at maturity described above, at the option
of the board of directors the shares of Series C preferred stock may be
automatically converted into shares of common stock on March 31, 2009, the
maturity date, or on an earlier date in the event of the issuance by CGA Group
of equity securities resulting in aggregate gross proceeds to CGA Group of at
least $50 million. This automatic conversion will not be triggered by any
issuances of equity securities by CGA Group pursuant to acquisitions, mergers or
other business combinations, or pursuant to stock option plans, stock purchase
plans or other employee benefit plans or arrangements.
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In the event of the automatic conversion of the Series C preferred stock
into shares of common stock upon maturity, if the fair market value of the
common stock at that time is greater than $1.50, then each share of Series C
preferred stock will be converted into the number of shares of common stock
equal to $1.50 plus 7% per annum compounded annually from March 31, 1999. If the
fair market value of the common stock is less than $1.50 per share at that time,
then the conversion ratio will equal 95% of the fair market value of the common
stock. In the event of the automatic conversion of the Series C preferred stock
into common stock as a result of an equity issuance in excess of $50 million, as
described in the previous paragraph, the conversion ratio will be one for one,
with adjustments made for any dividends or other distributions paid in common
stock by CGA Group after March 31, 1999 that would have increased the number of
common shares outstanding after that date.
Series C preferred stock may be converted into shares of common stock at
any time at the option of the holder at the then-applicable conversion price.
The conversion price will be adjusted from time to time in accordance with the
terms of the appendices to CGA Group's bylaws in order to reflect dividends,
stock splits, distributions, issuances of securities entitling subscribers to
purchase shares of common stock for less than the conversion price, or other
changes in CGA Group's capital structure.
LIQUIDATION PREFERENCE
If CGA Group voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the Series C preferred stock will be entitled to
receive, after all creditors of CGA Group have been paid and the Series A
preferred liquidation preference has been satisfied, a liquidation preference
per share equal to the stated value of the Series C preferred stock, U.S. $1.50
per share, subject to adjustment in the event of any share split or combination
with respect to these shares, plus an amount equal to 7.00% per annum of the
stated value, which amount will calculated based on the actual number of days
elapsed over a year of 360 days from March 31, 1999 through the date of the
liquidation and will be compounded annually.
In the event that the assets available for distribution to the holders of
the Series C preferred stock and stock ranking on parity with the Series C
preferred stock are insufficient to pay the respective preferential amounts in
full, the assets will be distributed ratable in proportion to the preferential
amounts payable thereon.
VOTING RIGHTS
Except as otherwise required by Bermuda law, the holders of Series C
preferred stock are entitled to exercise one vote per share on all matters
presented to CGA Group's shareholders. As more fully described below under
"Material Tax Considerations", CGA Group's bylaws attempt to limit the direct
and indirect voting power of each holder of CGA Group's stock so that no U.S.
person will be entitled to votes representing 10 percent or more of CGA Group's
voting power.
BOARD REPRESENTATION RIGHTS
Prior to a qualified public offering, the holders of Series C preferred
stock are entitled, as a class, to elect two members of CGA Group's board of
directors.
REGISTRATION RIGHTS
There are no demand or piggyback registration rights with respect to the
Series C preferred stock.
COMMON STOCK
GENERAL
On June 17, 1997, CGA Group issued 9,100,000 shares of its common stock,
each share having a $.01 par value, representing 7,827,957 shares to the
investment unit investors and 1,272,043 shares to CGA Group's sponsoring
investors. On March 31, 1999, all of the issued and outstanding shares of CGA
Group's Series B preferred stock were converted into shares of common stock at a
conversion ratio of 11.816 shares of common stock per share of Series B
preferred stock. The conversion ratio was based on an assumed value of $3.00 per
share of common stock. As a result of the conversion, 18,905,648 new shares of
common stock were issued. As of the date of this prospectus, 28,005,648 shares
of common stock were issued and outstanding. The common stock is perpetual in
duration.
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DIVIDENDS
The common stock is not entitled to dividends as long as any shares of
Series A preferred stock or Series B preferred stock remain outstanding.
Thereafter, the common stock is entitled to any net profits of CGA Group, when,
as and if declared as dividends by the board of directors.
LIQUIDATION
If CGA Group voluntarily or involuntarily liquidates, dissolves or
winds-up, the holders of the common stock are entitled, after all creditors of
CGA Group have been paid and the Series A preferred liquidation preference, the
Series B preferred liquidation preference and the Series C liquidation
preference have been satisfied, to share ratably in the remaining assets of CGA
Group together with common stock.
VOTING RIGHTS
Except as otherwise required by Bermuda law, the holders of common stock
are entitled to exercise two votes per share on all matters presented to CGA
Group's shareholders. As more fully described below under "Material Tax
Considerations", CGA Group's bylaws attempt to limit the direct and indirect
voting power of each holder of CGA Group's stock so that no U.S. person will be
entitled to votes representing 10 percent or more of CGA Group's voting power.
OTHER RIGHTS
The holders of the common stock have registration rights, preemption
rights, first refusal rights, tag-along rights and drag-along rights with
respect to the common stock, as set forth in CGA Group's shareholders agreement
attached as an exhibit to the registration statement of which this prospectus is
a part.
INVESTOR WARRANTS
CGA Group's sponsoring investors and founders hold 847,729 warrants. Each
investor warrant represents a right to purchase, on or prior to June 16, 2007,
one share of common stock at an exercise price of $2.12 per share. The investor
warrants contain adjustments for dilutive events and protections for
reorganizations, consolidations, or mergers.
COMMITMENTS
GENERAL
In connection with their purchase of investment units, the unit investors
irrevocably committed to purchase an aggregate of $60 million of Series B
preferred stock, at a purchase price of $25 per share, in the event that CGA
Group receives written notice from Fitch that Fitch will reduce its
claims-paying ability rating of Commercial Guaranty Assurance below "Triple-A",
and the events that have led to the notice of the proposed downgrade have not
been cured within 45 days to the satisfaction of Fitch.
COMMITMENT FEE
CGA Group is required to pay annually in advance a commitment fee to each
unit investor equal to one percent of the unit investor's then-aggregate
commitment amount.
COMMITMENT SUPPORT
In order to secure their commitments, each unit investor not rated
"Double-A" or higher delivered to CGA Group a five-year letter of credit from a
bank rated at least "Double-A" or a one-year letter of credit from a bank rated
at least "Double-A" to be renewed annually for five years, or other form of
credit support as will not give rise to a downgrading of Commercial Guaranty
Assurance's rating by Fitch. Each unit investor is also subject to maintenance
requirements with respect to its rating on the letter of credit. Failure to
renew a one-year letter of credit prior to expiration will give rise to the
right of CGA Group to draw down on the letter of credit.
COMMITMENT BY CGA GROUP TO COMMERCIAL GUARANTY ASSURANCE
On June 17, 1997, CGA Group entered into a commitment agreement with
Commercial Guaranty Assurance to contribute to Commercial Guaranty Assurance,
through the purchase of equity securities of Commercial Guaranty
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Assurance or otherwise, the proceeds of the sale of any Series B preferred stock
to the unit investors pursuant to the commitments. CGA Group has assigned its
rights to the unit investors' commitments to support this commitment to
Commercial Guaranty Assurance.
VOTING RIGHTS
The unit investors are not entitled to any rights, including voting or
consent rights, of a shareholder of CGA Group with respect to their commitments.
Each share of Series B preferred stock issued pursuant to the commitments will
have proportional voting rights based on the number of shares of Series B
preferred stock issued and outstanding at that time. See "Description of
Securities--Series B Preferred Stock--Voting Rights."
GOVERNING LAW
The shares of Series A preferred stock are governed by the laws of Bermuda,
without regard to the principles of conflicts of law.
CONSENT TO JURISDICTION AND SERVICE
CGA Group has appointed CT Corporation System as its agent for service of
process in any suit, action or proceeding with respect to the Series A preferred
stock and for actions brought under the United States federal or state
securities laws brought in any United States federal or state court located in
the City of New York, and submits to this jurisdiction.
MATERIAL TAX CONSIDERATIONS
The following summary of the taxation of CGA Group, Commercial Guaranty
Assurance, CGA Investment Management and the taxation of shareholders of CGA
Group describes the material U.S. federal and Bermuda tax consequences as of the
date of this prospectus. The tax treatment of a holder of securities for U.S.
federal, state, local and non-U.S. tax purposes may vary depending on the
holder's particular status. The description of U.S. federal income tax law set
forth below is Dewey Ballantine LLP's opinion as to the material tax
considerations with respect to the taxation of CGA Group, Commercial Guaranty
Assurance, CGA Investment Management, and shareholders of CGA Group. The
description of Bermuda tax law set forth below is based upon the advice of
Conyers Dill & Pearman, Bermuda. Because of their inherently factual nature, no
opinion has been given by Dewey Ballantine to investors with respect to
o whether CGA Group or Commercial Guaranty Assurance will have a
permanent establishment in the U.S. or will be engaged in a U.S. trade
or business,
o any factual or accounting matters, or
o the existence or amounts of "related person insurance income,"
described below.
All statements in this prospectus with respect to these matters and information
with respect to facts, determinations or conclusions relating to the business or
activities of Commercial Guaranty Assurance and CGA Investment Management have
been provided by the management of CGA Group, and Dewey Ballantine LLP's opinion
in this prospectus is based on the assumption that all of this information is
accurate and complete in all respects.
Investors have been advised and again are urged to consult their own tax
advisors concerning the U.S. federal, state, and local and non-U.S. tax
consequences to them of owning securities in CGA Group.
The Bermuda Insurance Enterprises and Mutual Assistance Tax Treaty is a
limited income tax treaty between Bermuda and the United States that affects the
taxation of insurance company income only. In form the treaty provides for
reciprocal waiver of taxation by both countries with respect to income derived
by an insurance company. However, since Bermuda does not currently tax this type
of income, the treaty, in effect, currently operates unilaterally with respect
to the imposition of taxes. The treaty is, however, reciprocal with respect to
mutual assistance in tax matters.
TAXATION OF CGA GROUP AND ITS SUBSIDIARIES
BERMUDA
CGA Group and Commercial Guaranty Assurance have received from the Minister
of Finance of Bermuda an assurance under The Exempted Undertakings Tax
Protection Act, 1966 of Bermuda. The tax assurance states that in
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the event of there being enacted in Bermuda any legislation imposing tax
computed on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, then
the imposition of this type of tax shall not be applicable to CGA Group or
Commercial Guaranty Assurance or to any of their operations or the shares,
debentures or other obligations of CGA Group and Commercial Guaranty Assurance
until March 28, 2016. This assurance does not prevent the application of any tax
payable in accordance with the provisions of the Land Tax Act 1967 of Bermuda or
otherwise payable in relation to the property leased to CGA Group or Commercial
Guaranty Assurance. Commercial Guaranty Assurance will be required to pay
registration fees as an insurer under the Bermuda insurance laws, and each of
Commercial Guaranty Assurance and CGA Group will be required to pay annual
Bermuda government fees. In addition, all entities employing individuals in
Bermuda are required to pay a payroll tax to the Bermuda government.
Currently there is no Bermuda withholding tax on dividends paid by CGA
Group or Commercial Guaranty Assurance.
U.S.
CGA Group and CGA. CGA Group is a pure holding company and does not engage
in any business activity; hence, it is not engaged in a trade or business in the
United States. Commercial Guaranty Assurance operates its business in a manner
that management believes should not result in its being treated as engaged in a
trade or business within the U.S. Consequently, management does not believe
Commercial Guaranty Assurance is obligated to pay U.S. federal income tax.
However, because the determination of whether a foreign corporation is engaged
in a trade or business in the U.S. is inherently factual and there are no
definitive standards for making this determination, there can be no assurance
that the Internal Revenue Service will not contend that Commercial Guaranty
Assurance is engaged in a trade or business in the U.S.
Ordinarily, a foreign corporation deemed to be engaged in a trade or
business in the U.S. will be subject to U.S. income tax, including, potentially,
the branch profits tax, on its net income that is effectively connected with the
conduct of that trade or business, unless the corporation is entitled to relief
under an income tax treaty. This type of income tax would be imposed on
effectively connected net income and would be computed in a manner generally
analogous to that applied to the net income of a domestic corporation. However,
if a foreign corporation does not timely file a U.S. federal income tax return,
even if its failure to do so is based upon a good faith determination that it
was not engaged in a trade or business in the U.S., it is not entitled to
deductions and credits allocable to its effectively connected income. Moreover,
penalties may be assessed for failure to file these tax returns. Commercial
Guaranty Assurance files "protective" U.S. federal income tax returns, which
means that it reports no "effectively connected" income and hence pays no tax,
so that if it were held to be engaged in a trade or business in the U.S., it
would be allowed to deduct expenses and utilize credits allocable to income
determined to be effectively connected with this trade or business and would not
be subject to a failure to file penalty. The maximum U.S. income tax rates
currently are 35% for a corporation's effectively connected net income and 30%
for the branch profits tax. The branch profits tax, which is based on net income
after subtracting the regular corporate tax and making other adjustments, is
imposed on the amount of net income deemed to have been withdrawn from the U.S.
Thus, the maximum combined corporate net income and branch profits tax rate is
approximately 54.5%.
Under the tax treaty described above, a Bermuda corporation that meets
eligibility requirements described below and that is predominantly engaged in
the insurance business will not be subject to U.S. federal income tax on its
business profits effectively connected with a U.S. trade or business provided
that the trade or business is not conducted through a permanent establishment in
the U.S. This is referred to in this prospectus as the "No PE Exemption".
Management believes that Commercial Guaranty Assurance qualifies for the No PE
Exemption; however, because the determination of whether a trade or business is
being conducted through a permanent establishment is inherently factual,
management cannot assure the exemption's availability. In order to meet the
eligibility requirements of the tax treaty:
o more than 50% of Commercial Guaranty Assurance's stock must be
beneficially owned, directly or indirectly, by individuals who are
either Bermuda residents or U.S. citizens or residents, and
o Commercial Guaranty Assurance's income must not be used in substantial
part, directly or indirectly, to make disproportionate distributions
to, or to meet liabilities to, individuals who are not either Bermuda
residents or U.S. citizens or residents.
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Management has monitored the sale of securities made pursuant to the offering of
the Series A preferred stock and warrants, the offering of the investment units
and the offering of the Series C preferred stock to ensure that Commercial
Guaranty Assurance would meet the tax treaty's eligibility requirement after the
completion of each of these offerings. Thus, absent a misrepresentation by any
of the purchasers of CGA Group's securities, CGA Group, and hence Commercial
Guaranty Assurance, meets the eligibility requirements of the tax treaty.
However, there can be no assurance that Commercial Guaranty Assurance will
continue to meet these requirements in the future.
The No PE Exemption clearly applies to net premium income but it is unclear
whether it applies to non-premium income (i.e., investment income). Thus,
reliance on the No PE Exemption may not preclude the U.S. from taxing a Bermuda
corporation that is predominantly engaged in the insurance business in the U.S.
on its non-premium effectively connected income. Accordingly, even if the No PE
Exemption is available to Commercial Guaranty Assurance, if Commercial Guaranty
Assurance is determined to be engaged in a trade or business in the U.S., the
U.S. may be able to tax any of its income, other than net premium income, that
is effectively connected with the conduct of that trade or business. In general,
income is effectively connected with the conduct of a U.S. trade or business
only if it is derived from U.S. sources. However, under special rules applicable
to foreign insurance companies engaged in an insurance business in the U.S., a
minimum amount of investment income, whether or not derived from U.S. sources,
determined by a formula, is deemed to be effectively connected with the conduct
of that U.S. trade or business. As previously indicated, this income may not be
protected from U.S. taxation by the No PE Exemption. Thus, if Commercial
Guaranty Assurance is determined to be engaged in a trade or business in the
U.S. but it does not have a permanent establishment, a portion of its investment
income may be subject to U.S. taxation, and this could be so even though
Commercial Guaranty Assurance does not, and does not intend in the future to,
invest in securities that generate U.S. source income.
A foreign corporation not engaged in a trade or business in the U.S. is
subject to U.S. federal income tax at the rate of 30% on its "fixed or
determinable annual or periodical gains, profits and income" derived from
sources within the U.S., for example, dividends and specific types of interest
income. Thus, even if Commercial Guaranty Assurance is not engaged in a trade or
business in the U.S., it could be subject to the 30% tax on this type of income,
depending upon the types of instruments in which it invests. As noted above,
however, Commercial Guaranty Assurance does not invest, and does not intend in
the future to invest, in securities that generate U.S. source income.
The U.S. also imposes an excise tax on insurance and reinsurance premiums
paid to foreign insurers or reinsurers by insureds who are U.S. persons with
respect to risks located in the U.S. The rates of tax currently applicable to
these premiums are four percent for direct insurance premiums and one percent
for reinsurance premiums. A substantial portion of Commercial Guaranty
Assurance's premium income has been U.S. source income and therefore subject to
the excise tax. The excise tax would not apply, however, if Commercial Guaranty
Assurance were determined to be engaged in a trade or business in the U.S. and
ineligible for the No PE Exemption.
CGA Investment Management. As a U.S. corporation, CGA Investment Management
is subject to U.S. taxation at regular corporate tax rates, generally 35%. If
CGA Investment Management were to distribute dividends to CGA Group, these
dividends would be subject to a 30% withholding tax. Because Commercial Guaranty
Assurance and CGA Investment Management are related parties for purposes of the
Internal Revenue Code's transfer pricing rules, under these rules the IRS could
allocate additional income to CGA Investment Management if it were to determine
that under circumstances involving unrelated parties dealing at arm's length CGA
Investment Management would have earned income in connection with Commercial
Guaranty Assurance policies issued to CGA Investment Management's customers,
which was instead being shifted to Commercial Guaranty Assurance. In this case,
the reallocated income would be taxed as income to CGA Investment Management at
regular corporate rates and also might be subject to a 30% withholding tax.
Nonetheless, there is no reason to believe that the various fees are not at
arm's length.
TAXATION OF HOLDERS OF SERIES A PREFERRED STOCK
BERMUDA TAXATION
Under current Bermuda law, dividends paid by Commercial Guaranty Assurance
to CGA Group and by CGA Group to the holders of its securities are not subject
to Bermuda withholding tax. If Bermuda were to enact a withholding tax on
dividends, which is not expected, the tax treaty would not protect U.S. holders
from the imposition of this type of tax with respect to distributions from CGA
Group.
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U.S. TAXATION
The following summary addresses only U.S. federal income tax consequences
with respect to Series A preferred stock acquired by investors and held as
capital assets but does not deal with the tax consequences applicable to all
categories of investors. Some investors, for example, broker-dealers, investors
who hold Series A preferred stock as part of hedging or conversion transactions
and investors whose functional currency is not the U.S. dollar, may be subject
to special rules. Current investors in Series A preferred stock have been
advised and prospective investors in Series A preferred stock are again advised,
to consult their own tax advisers with respect to their particular circumstances
and with respect to the effects of U.S. federal, state, local or other
countries' tax laws to which they may be subject.
U.S. HOLDERS
The following discussion summarizes U.S. federal income tax consequences
relating to the acquisition, ownership and disposition of Series A preferred
stock by a beneficial owner thereof that is
o a citizen or resident of the U.S.;
o a U.S. domestic corporation;
o otherwise subject to U.S. federal income taxation on a net income
basis; or
o otherwise tax-exempt.
Dividends. Distributions with respect to the Series A preferred stock,
whether in cash or in additional shares, will be treated as ordinary dividend
income to the extent of CGA Group's current or accumulated earnings and profits
as determined for U.S. federal income tax purposes. Except in limited
circumstances not expected to be applicable here, these dividends will not be
eligible for the dividends received deduction generally allowed to U.S.
corporations. Distributions in excess of CGA Group's current and accumulated
earnings and profits will first be applied to reduce the holder's tax basis in
the Series A preferred stock, and any amounts distributed in excess of this tax
basis will be treated as gain from the sale or exchange of Series A preferred
stock. However, as discussed below, this treatment would be subject to
modifications if CGA Group is considered a "controlled foreign corporation."
Under existing rules and regulations, undeclared dividends are not taxable
until declared even if those dividends are cumulative and must be paid when the
shares are redeemed, as a result of a call, put or mandatory redemption
obligation. It is possible, however, that this rule could be changed so that in
some circumstances these undeclared but cumulative dividends would be currently
taxable. If this type of change were to occur, it is not possible to say whether
it would apply to the Series A preferred stock, although if it were to apply it
is likely that it would apply prospectively. This change could be made by
regulation and therefore does not require Congressional action.
Redemption of Series A Preferred Stock. A redemption of Series A preferred
stock for cash will be taxable as a distribution in exchange for the stock.
Generally, a redemption will result in capital gain or loss equal to the
difference between the amount of cash received and the stockholder's tax basis
in the stock redeemed and will be long-term if the stock was owned for more than
one year. However, any portion of the redemption price attributable to declared
but unpaid dividends or dividend arrearages will be taxable as a dividend to the
extent of earnings and profits.
Cash received in redemption of preferred stock that is not attributable to
dividend arrearages or declared but unpaid dividends may nevertheless also be
taxable as a dividend, rather than as an exchange. This type of a result could
obtain in the event that CGA Group redeems less than the full amount of a
stockholder's shares of Series A preferred stock under one of its early
redemption options. However, when, taking into account all classes of stock in
CGA Group, a stockholder either
o completely terminates its interest, other than as a creditor, in the
redeeming company, taking into account the attribution rules
prescribed by the Internal Revenue Code;
o experiences a substantial reduction in its interest in corporate
management and earnings as a result of the redemption and is a
minority shareholder after the redemption; or
o is a less than one percent stockholder and experiences any reduction
in its interest, the redemption proceeds will instead be treated as an
exchange and generally will give rise to capital gain or loss.
Redemption Premium. The Internal Revenue Code may require that a redemption
premium, which is the excess of the redemption price of preferred stock over its
issue price be included in income, prior to receipt, as a
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constructive dividend. However, this provision should not apply to the Series A
preferred stock because the redemption price is not expected to exceed the issue
price by more than a de minimis amount. These rules could, however, apply to the
shares that are distributed as dividends in the event that the fair market value
of any distributed shares of Series A preferred stock is less than $25.00 on the
date of distribution by more than a de minimis amount. Moreover, any de minimis
redemption premium will be taken into account as income at the time the Series A
preferred stock is redeemed.
Controlled Foreign Corporations. Each U.S. 10% shareholder of a controlled
foreign corporation must include in gross income for U.S. federal income tax
purposes its pro rata share of the controlled foreign corporation's "subpart F
income," whether or not the income is distributed by the controlled foreign
corporation to the shareholder. Any U.S. corporation, citizen, resident,
partnership, estate or trust that owns, directly or indirectly through foreign
persons, or is considered to own, 10 percent or more of the total combined
voting power of all classes of stock of the foreign corporation will be
considered to be a "U.S. 10% shareholder." Subpart F income includes insurance
income and "fixed or determinable annual or periodical" income. A foreign
insurance company, such as Commercial Guaranty Assurance, will be treated as a
controlled foreign corporation only if U.S. 10% shareholders collectively own
more than 25 percent of the total combined voting power or total value of the
corporation's stock for an uninterrupted period of 30 days or more during any
taxable year of the corporation. In the case of all other foreign corporations,
such as CGA Group, the test is generally the same except that more than 50
percent is substituted for more than 25 percent.
Except as provided below, CGA Group's bylaws limit the direct indirect and
attributed voting power of each holder of CGA Group's stock so that no U.S.
person, other than a holder of Series A preferred stock during an event of
non-compliance, is entitled directly or indirectly, and after taking into
account for this purpose shares owned by third parties that are related to the
holder pursuant to the attribution rules contained in Section 958 of the
Internal Revenue Code, to votes representing 10 percent or more of CGA Group's
voting power regardless of the percentage value of the shares in CGA Group owned
by the holder. In addition, CGA Group's bylaws provide that CGA Group's voting
rights in Commercial Guaranty Assurance will be exercised in accordance with the
proportional voting rights of the shareholders of CGA Group so that no U.S.
person will be entitled indirectly to votes representing 10% or more of
Commercial Guaranty Assurance's voting power. Accordingly, neither CGA Group nor
Commercial Guaranty Assurance should become a controlled foreign corporation. It
should be noted, however, that there are no authorities that specifically
address the effectiveness of a by-law of this type on the status of a U.S.
person as a U.S. 10% shareholder so the conclusion set forth above is not free
from doubt. Moreover, if an event of non-compliance occurs, one or more holders
of the Series A preferred stock could become a U.S. 10% shareholder because upon
the happening of one of these events, the holders of the Series A preferred
stock as a class have the right to appoint additional directors to the board.
Accordingly, in this case, it is possible that each of CGA Group and Commercial
Guaranty Assurance could become a controlled foreign corporation. Nonetheless,
so long as a shareholder of CGA Group is not itself a U.S. 10% Shareholder and,
as expected and explained below, Commercial Guaranty Assurance does not have
related person insurance income that is currently taxable to U.S. shareholders,
the classification of CGA Group or Commercial Guaranty Assurance as a controlled
foreign corporation will have no adverse effect on that shareholder.
Related Person Insurance Income Rules. As described below, the "related
person insurance income" rules of the Internal Revenue Code will apply to
off-shore insurance companies such as Commercial Guaranty Assurance, if
o at least 25% of the value or voting power of an insurance company's
stock is held, directly or indirectly through foreign entities, by
U.S. persons ,which includes all U.S. shareholders, not just U.S. 10%
shareholders, and
o at least 20% of an insurance company's gross insurance income is
related person insurance income, as described below, and
o at least 20% of the voting power or the value of an insurance
company's stock is owned, directly or indirectly, by related U.S.
persons or persons which are insured or reinsured, directly or
indirectly, by the insurance company or persons "related" to the
insureds or reinsureds. This is known as the "RPII CFC Rule".
Related person insurance income is investment income and premium income from the
direct or indirect insurance or reinsurance of any U.S. person who holds,
directly or indirectly through foreign entities, the insurance company's
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stock or a person "related" to the U.S. holder of the insurance company's stock.
Generally, the term "related" person for this purpose means someone who controls
or is controlled by the U.S. person or someone who is controlled by the same
person or persons that control the U.S. person. "Control" exists where a person
owns more than 50% in value or voting power of a corporation's stock, after
applying, applicable constructive ownership rules.
Commercial Guaranty Assurance has taken and will continue to take steps
that are designed to ensure that less than 20% of Commercial Guaranty
Assurance's gross insurance income is related person insurance income and that
less than 20% of the voting power or value of CGA Group's stock is owned by
persons insured or reinsured, directly or indirectly, by Commercial Guaranty
Assurance or "related" to these insureds or reinsureds.
Commercial Guaranty Assurance has and is likely to continue to insure risks
on behalf of St. George and/or Cobalt. The insurance of these risks does not
create related person insurance income, provided no U.S. person owns directly or
constructively more than 50% of the vote or value of St. George Holdings' or
Cobalt Holdings', and hence each of their subsidiaries', stock. Upon the initial
distributions of the securities of St. George and Cobalt, respectively, and as
of December 31, 1999, no U.S. person owned directly or constructively more than
50% of the vote or value of these companies' securities. Moreover, St. George
Holdings' and Cobalt Holdings' governing documents each contain restrictions on
the sale of their securities that should effectively preclude any U.S. person
from owning more than 50% of the vote or value of either the securities of St.
George Holdings or the securities of Cobalt Holdings. Therefore, management
expects that no related person insurance income will result from insuring
investments of St. George and/or Cobalt.
In light of the foregoing, management believes that less than 20% of the
gross insurance income of Commercial Guaranty Assurance for any taxable year has
constituted or will in the future constitute related person insurance income.
However, if 20% or more of the gross insurance income of Commercial Guaranty
Assurance for any taxable year were to constitute related person insurance
income and 20% or more of the voting power or value of Commercial Guaranty
Assurance stock is held, directly or indirectly, by U.S. insureds or reinsureds
or by persons related to Commercial Guaranty Assurance, each direct and indirect
U.S. holder of securities would be taxable currently on its allocable share of
Commercial Guaranty Assurance's related person insurance income regardless of
whether the holder is a "U.S. 10% Shareholder" and regardless of whether the
holder is an insured or related to an insured. For this purpose, all of
Commercial Guaranty Assurance's related person insurance income would be
allocated solely to U.S. holders, but no holder would be allocated related
person insurance income in excess of its ratable share of Commercial Guaranty
Assurance's total income.
In order to determine how much related person insurance income, if any,
Commercial Guaranty Assurance has earned in each fiscal year, management asks
its policyholders whether they or any persons related to them own shares of CGA
Group and are U.S. persons. In addition, after each fiscal year ended,
Commercial Guaranty Assurance has sent a letter to each person who was a
policyholder during that year asking the policyholder to represent whether
during the year it was a U.S. person owning stock of CGA Group or was related to
such a person. There can be no assurance that this procedure will enable CGA
Group to identify all of Commercial Guaranty Assurance's income which may be
considered related person insurance income. For any taxable year in which CGA
Group determines that Commercial Guaranty Assurance's gross related person
insurance income is 20% or more of Commercial Guaranty Assurance's gross
insurance income for the year, CGA Group might also seek information from its
shareholders as to whether beneficial owners of its shares at the end of the
year are U.S. persons. To the extent CGA Group is unable to determine whether a
beneficial owner of shares is a U.S. person, CGA Group would assume that the
owner is not a U.S. person for purposes of apportioning related person insurance
income, thereby increasing the per share related person insurance income amount
for all other shareholders who are known to be U.S. persons.
Information Reporting. If Commercial Guaranty Assurance meets the related
person insurance income controlled foreign corporation rule in a given tax year,
each U.S. person who is a shareholder of CGA Group on the last day of CGA
Group's fiscal year must attach a Form 5471 to the shareholder's income tax or
information return for the period which includes that date. In the event that
Commercial Guaranty Assurance's gross related person insurance income
constitutes 20% or more of its gross insurance income, which is not anticipated,
and no other exception applies that would prevent Commercial Guaranty Assurance
from being subject to the related person insurance income controlled foreign
corporation Rule, CGA Group intends to provide Form 5471 to its U.S.
shareholders for attachment to their returns. The amount of the related person
insurance income inclusions may be subject to adjustment based upon subsequent
IRS examination. A tax-exempt organization will be required to attach
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Form 5471 to its information return in the circumstances described above. See
"--Unrelated Business Taxable Income of tax-exempt Shareholders" below. Failure
to file Form 5471 may result in penalties.
In addition, U.S. persons who at any time own 10% or more in vote or value
of the total outstanding shares of CGA Group have an independent obligation to
file Form 5471 with respect to these shares, and should consult with their tax
advisor regarding this and other possible reporting requirements.
Unrelated Business Taxable Income of Tax-Exempt Shareholders. Subpart F
insurance income, which includes related person insurance income, allocable to
U.S. tax-exempt organizations is likely to be treated as unrelated business
taxable income. Under a look-through rule, this type of income is treated as if
it were directly received by the tax-exempt organization and therefore will be
considered income from an unrelated business. While the look-through rule
generally will not apply to subpart F insurance income attributable to insurance
of the tax-exempt organization's own risks or those of its affiliates, it is
unlikely that this subpart F insurance income will be so traced. Rather, since
subpart F insurance income is allocated to all U.S. 10% shareholders, and
related person insurance income, if there is any, is allocated to all U.S.
persons who own stock, it is likely that any subpart F insurance income that is
allocated to a tax exempt shareholder, will be attributable to risks other than
its own or those of its affiliates. Nonetheless, to the extent any tax-exempt
shareholder is allocated exempt subpart F insurance income and that income is so
traceable, the income should not be unrelated business taxable income. Investors
are advised to consult their own tax advisors regarding the application of this
rule.
Dispositions of Series A Preferred Stock by U.S. Persons, Generally.
Subject to the discussions below relating to "Disposition of Series A Preferred
Stock by U.S. Persons Who are Not U.S. 10% Shareholders" and "Disposition of
Series A Preferred Stock by U.S. 10% Shareholders," U.S. persons will, upon the
sale or exchange of Series A preferred stock, generally recognize gain or loss
for federal income tax purposes equal to the excess of the amount realized upon
the sale or exchange over the person's federal income tax basis for the Series A
preferred stock. However, in circumstances described below, gain may be
recharacterized, in whole or in part, as a dividend.
Disposition of Series A Preferred Stock by U.S. Persons Who are Not U.S.
10% Shareholders. As noted above, in the case of a U.S. person who owns Series A
preferred stock but is not a U.S. 10% shareholder, related person insurance
income may be allocable to the holder's securities in CGA Group during the
period of ownership but not taxed to him because less than 20 percent of CGA
Group's securities are owned by persons generating related person insurance
income or less than 20 percent of Commercial Guaranty Assurance's gross
insurance income is related person insurance income. Upon the holder's sale or
exchange of Series A preferred stock at a gain, however, there is a reasonable
likelihood that an amount of the gain equal to the holder's allocable share of
untaxed related person insurance income will be taxable as a dividend. Moreover,
the IRS has an arguable position that the amount of gain so taxed as a dividend
will be equal to all the earnings and profits allocable to the U.S. holder
during the period that the holder held the Series A preferred stock, whether or
not Commercial Guaranty Assurance has related person insurance income. Dewey
Ballantine believes that this position would not be correct, but due to the
absence of clarifying regulations, there can be no assurance that the IRS will
not take this position. If the IRS were to take this position and were to
prevail, for individuals, this would mean that the amount of gain taxed as a
dividend would bear tax at the rates applicable to ordinary income rather than
at the currently lower rates applicable to long-term capital gain. The rates
applicable to corporate shareholders would not be affected, however, since
corporations pay tax on capital gains at the same rates as they pay on ordinary
income.
If, as Dewey Ballantine believes, only the untaxed related person insurance
income would be subject to dividend characterization, the selling shareholder
nevertheless has the burden of showing the amount of untaxed related person
insurance income allocable to the Series A preferred stock sold. CGA Group keeps
records showing what it believes to be the untaxed related person insurance
income allocable to each share of Series A preferred stock and will, upon
reasonable request, provide any owner or prior owner of Series A preferred stock
with this information.
Disposition of Series A Preferred Stock by U.S. 10% Shareholders. To the
extent that the income of Commercial Guaranty Assurance is taxable currently to
a U.S. 10% shareholder as subpart F income, which includes related person
insurance income, gain from the sale of Series A preferred stock by such U.S.
10% shareholder will not be recharacterized as a dividend, except to the extent
of the U.S. 10% shareholder's allocable share of subpart F income in the year of
sale.
Uncertainty as to Application of Related Person Insurance Income.
Regulations interpreting the related person insurance income provisions of the
Internal Revenue Code exist only in proposed form. It is not certain
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whether these regulations will be adopted in their proposed form or what changes
might ultimately be made to them when they are finalized, or whether any
changes, as well as any interpretation or application of the related person
insurance income rules by the IRS, the courts or otherwise, might have
retroactive effect. In addition, there can be no assurance that the IRS will not
challenge any determinations by CGA Group or Commercial Guaranty Assurance as to
the amount, if any, of related person insurance income that should be includible
in the income of a holder of Series A preferred stock or that the amounts of the
related person insurance income inclusions will not be subject to adjustment
based upon subsequent IRS examination. Accordingly, the meaning of the related
person insurance income provisions and the application thereof to CGA Group and
its subsidiaries is uncertain. Each U.S. person which currently owns Series A
preferred stock has been advised, and each person which is considering an
investment in Series A preferred stock is again advised, to consult a tax
advisor as to the implications of related person insurance income on its
investment.
Foreign Tax Credit. Because it is believed that currently U.S. persons own
at least 50 percent of CGA Group's stock and this ownership distribution is
anticipated to continue in the future, only a portion of both the dividends paid
by CGA Group, including any gain from the sale of Series A preferred stock that
is treated as a dividend, and any subpart F income of its subsidiaries,
including related person insurance income of Commercial Guaranty Assurance may
be treated as foreign source income for purposes of computing a shareholder's
U.S. foreign tax credit limitation. CGA Group will consider providing
shareholders with information regarding the portion of this subpart F income or
dividend inclusions constituting foreign source income to the extent this
information is reasonably available. It is likely that substantially all of this
income that is foreign source will constitute either "passive" or "financial
services" income for foreign tax credit limitation purposes. Thus, U.S.
shareholders with excess foreign tax credits may not be able to utilize these
excess foreign tax credits to reduce U.S. tax on this income.
Passive Foreign Investment Companies. Special U.S. federal income tax rules
apply to foreign corporations that are "passive foreign investment companies."
In general, a foreign corporation will be a passive foreign investment company
if 75 percent or more of its income constitutes "passive income" or 50 percent
or more of its assets produce passive income. In the case of a company that is a
passive foreign investment company, its shareholders who are U.S. persons would
be subject to a penalty tax at the time of their sale of, or receipt of an
"excess distribution" with respect to their securities unless they elected to be
treated as a "qualified electing fund," in which case they would be currently
taxable on their share of each year's income. In general, a shareholder receives
an "excess distribution" if the amount of the distribution is more than 125
percent of the average distribution with respect to their stock during the three
preceding taxable years, or shorter period during which the taxpayer held the
stock. In general, the penalty tax is equivalent to an interest charge on taxes
that are deemed due but not paid during the period that the shareholder owned
the shares, computed by assuming that the excess distribution or gain with
respect to the securities was received in equal portions and taxed at the
highest applicable tax rate throughout the holder's period of ownership. The
interest charge is equal to the applicable rate imposed on underpayments of U.S.
federal income tax for the applicable period.
The passive foreign investment company statutory provisions contain an
express exception from the definition of passive income for income "derived in
the active conduct of an insurance business by a corporation which is
predominantly engaged in an insurance business." This exception is intended to
ensure that income derived by a bona fide insurance company is not treated as
passive income, except to the extent this income is attributable to financial
reserves in excess of the reasonable needs of the insurance business.
The passive foreign investment company statutory provisions contain a
look-through rule which states that for purposes of determining whether a
foreign corporation is a passive foreign investment company, the foreign
corporation shall be treated as if it received "directly its proportionate share
of the income" and as if it "held its proportionate share of the assets" of any
other corporation in which it owns at least 25 percent of the value of its
stock. Because CGA Group owns all of the outstanding stock of Commercial
Guaranty Assurance and CGA Investment Management, the look-through rule should
apply to treat CGA Group as owning the assets and receiving the income of
Commercial Guaranty Assurance and CGA Investment Management directly for
purposes of determining whether CGA Group is a passive foreign investment
company in any given year.
In management's view, CGA Group, through its principal subsidiary,
Commercial Guaranty Assurance, is predominantly engaged in an insurance business
and does not have financial reserves in excess of the reasonable
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needs of Commercial Guaranty Assurance's insurance business. While no explicit
guidance is provided by the statutory language and regulations governing these
provisions have not been issued, Dewey Ballantine believes that under the
look-through rule CGA Group should be deemed to own the assets and to have
received the income of Commercial Guaranty Assurance, its insurance subsidiary,
directly for purposes of determining whether CGA Group qualifies for the above
insurance exception. This interpretation of the look-through rule is consistent
with the legislative intention generally to exclude bona fide insurance
companies from the application of the passive foreign investment company
provisions; however, until definitive regulations are issued there can be no
assurance that the look through rule will be applied in this fashion.
If, however, the look-through rule does not apply to CGA Group with respect
to the income and assets of Commercial Guaranty Assurance in the manner
described above, then CGA Group might be a passive foreign investment company.
Moreover, there is a risk that the Commercial Guaranty Assurance Fund Guaranty
would be viewed as equity in St. George, in which event Commercial Guaranty
Assurance would be viewed as owning virtually all of the equity of St. George
and/or Cobalt. This risk arises because Commercial Guaranty Assurance-guaranteed
borrowing will provide 99% of the funds used to acquire the respective
investment portfolios of St. George and Cobalt and for the collateral value of
their respective investment portfolios, and that Commercial Guaranty Assurance's
Fund Guaranty will represent the principal credit support for lenders and
counterparties of St. George and Cobalt. If the Commercial Guaranty Assurance
Fund Guaranty were to be viewed as equity, the "look through" rule would apply
to treat Commercial Guaranty Assurance as if it owned virtually all of St.
George's and/or Cobalt's assets and earned virtually all of St. George's and/or
Cobalt's income, and since both the assets and income would be passive, this
might result in CGA Group becoming a passive foreign investment company. Fund
Guaranty to the availability of the
Moreover, if Commercial Guaranty Assurance were considered to own
substantially all of St. George's and/or Cobalt's equity, there is also a risk
that Commercial Guaranty Assurance's premium income from St. George and/or
Cobalt would not be viewed as insurance income. Nonetheless, there are
substantial arguments against treating Commercial Guaranty Assurance as owning
substantially all of St. George's and/or Cobalt's equity by reason of the
insurance that it writes for these companies, with one of the strongest being
that the premiums that Commercial Guaranty Assurance charges St. George and
Cobalt for insurance are based upon the same criteria as those used to determine
the premium charged to unrelated third parties and therefore should be viewed as
an arm's length premium.
It is the opinion of Dewey Ballantine that Commercial Guaranty Assurance
should not be viewed as holding equity in St. George and/or Cobalt and therefore
the look through rules should not apply with respect to St. George's or Cobalt's
assets or income and the premiums derived by Commercial Guaranty Assurance from
St. George and Cobalt should be viewed as active income derived from the
insurance business. However, given the relatively small amount of equity in St.
George and Cobalt, the importance of the Commercial Guaranty Assurance Fund
Guaranty to the availability of the loan facility, the fact that initially all
of the equity securities of St. George Holdings and limited partnership
interests in Cobalt Holdings are held by shareholders of CGA Group and the
absence of authority directly on point, there is some risk that the IRS could
successfully treat Commercial Guaranty Assurance as owning most of St. George's
and Cobalt's equity and apply the look-through rule to cause Commercial Guaranty
Assurance to be characterized as a passive foreign investment company.
Therefore, each U.S. person which owns Series A preferred stock and each U.S.
person which is considering an investment in the Series A preferred stock and is
not a tax-exempt entity, which would be unaffected by the passive foreign
investment company rules under existing law, is again advised to consult a tax
advisor as to the effects of the passive foreign investment company rules.
NON-U.S. HOLDERS
Persons that are not U.S. persons generally will be subject to U.S. federal
income tax on dividend distributions with respect to, and gain realized from the
sale or exchange of, Series A preferred stock only if the dividends or gains are
effectively connected with the conduct of a trade or business within the United
States. Management believes that nonresident alien individuals will not be
subject to U.S. federal income or estate tax with respect to Series A preferred
stock of CGA Group.
ALL HOLDERS OF SERIES A PREFERRED STOCK
Management does not expect CGA Group to pay dividends on the Series A
preferred stock through paying agents or custodians located in the U.S., but if
this were the case, the U.S. custodian or payor would be required to
70
<PAGE>
satisfy information reporting requirements. In addition, in this case, a holder
of Series A preferred stock could be subject to backup withholding at the rate
of 31 percent with respect to dividends paid to these persons, unless the holder
o is a corporation or comes within other exempt categories and, when
required, demonstrates this fact, or
o provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.
The backup withholding tax is not an additional tax and may be credited against
a holder's regular U.S. federal income tax liability. No backup withholding
would occur if CGA Group were to directly pay any dividends on the Series A
preferred stock or were to use a non-U.S. paying agent or custodian to do so.
Except as discussed above with respect to backup withholding, dividends
paid by CGA Group will not be subject to a U.S. withholding tax.
LEGAL MATTERS
The validity of the Series A preferred stock will be passed upon as to
matters of Bermuda law by Conyers Dill & Pearman, and as to matters of United
States tax law, by Dewey Ballantine LLP, New York, New York.
EXPERTS
The financial statements of CGA Group as of December 31, 1999 and 1998 and
for the years ended December 31, 1999 and 1998 and for the period from April 1,
1997 to December 31, 1997 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers, independent accountants, given
on the authority of PricewaterhouseCoopers as experts in auditing and
accounting.
ENFORCEABILITY OF CIVIL LIABILITIES
As a Bermuda corporation, substantially all the assets of CGA Group are
located outside the United States. Accordingly, any judgment obtained in the
United States against CGA Group may not be collectible within the United States.
CGA Group will consent to service of process in the City of New York, Borough of
Manhattan, for claims relating to the validity, or seeking enforcement, of CGA
Group's obligations under the terms of the Series A preferred stock. CGA Group
has appointed CT Corporation System as its authorized agent upon which process
may be served in any action of this type. See "Description Of
Securities--Governing Law; Consent To Jurisdiction and Service." Accordingly, it
may be difficult for investors to effect service within the United States upon
CGA Group with respect to other claims pertaining to the Series A preferred
stock, including claims predicated upon the civil liability provisions of the
securities laws of the United States. Moreover, it may be difficult for
investors to enforce outside the United States judgments against CGA Group
obtained in the United States in any actions pertaining to the Series A
preferred stock, particularly with respect to actions to which CGA Group has not
consented to service of process in the United States. such as those predicated
upon the civil liability provisions of the securities laws of the United States.
In addition, some of CGA Group's directors and executive officers, and the
independent accountants named in this prospectus, are residents of Bermuda. As a
result, it may be difficult for investors to effect service within the United
States upon these persons or to realize in the United States upon judgments of
courts in the United States, including judgments predicated upon civil liability
under United States securities laws. CGA Group has been informed by its Bermuda
counsel, Conyers Dill & Pearman, that the United States and Bermuda do not
currently have a treaty providing for reciprocal recognition and enforcement of
judgments of U.S. courts in civil and commercial matters and that a final
judgment for the payment of money rendered by any federal or state court in the
United States based on civil liability, whether or not predicated solely upon
the U.S. federal securities laws, would, therefore, not be automatically
enforceable in Bermuda. CGA Group has also been advised by Conyers Dill &
Pearman that a final and
71
<PAGE>
conclusive judgment obtained in federal or state courts in the United States
under which a sum of money is payable as compensatory damages may be the subject
of an action on a debt in the Supreme Court of Bermuda under the common law
doctrine of obligation.
This type of action should be successful upon proof that the sum of money
is due and payable, and without having to prove the facts supporting the
underlying judgment, as long as the court that gave the judgment was competent
to hear the action in accordance with private international law principles as
applied by the courts in Bermuda and the judgment is not contrary to public
policy in Bermuda, was not obtained by fraud or in proceedings contrary to
natural justice of Bermuda and is not based on an error in Bermuda law. A
Bermuda court may impose civil liability on CGA Group or its directors or
officers in a suit brought in the Supreme Court of Bermuda against CGA Group or
these persons with respect to a violation of U.S. federal securities laws,
provided that the facts surrounding the violation would constitute or give rise
to a cause of action under Bermuda law.
AVAILABLE INFORMATION
We have filed a registration statement on Form S-1 with the SEC covering
the Series A preferred stock. This prospectus is part of that registration
statement. For additional information about us you should refer to our
registration statement and the exhibits and schedules filed with the
registration statement. This prospectus summarizes material provisions of
contracts and other documents that we refer you to. Since this prospectus may
not contain all the information that you may find important, you should refer
the full text of these documents. We have included copies of these documents as
exhibits to our registration statement.
In addition, we will continue to file annual, quarterly and special reports
with the SEC after the effectiveness of the registration statement. CGA Group's
SEC filings are available over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York and Chicago. Please call
the SEC at 1-800-SEC-0330 for more information on the public reference rooms and
their copy charges.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements of CGA Group, Ltd.
Report of Independent Auditors on Financial Statements .................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 ............................... F-3
Consolidated Statements of Operations for the years ended December 31, 1999,
and 1998 and for the nine months ended December 31, 1997 .............................. F-4
Consolidated Statements of Comprehensive Income ......................................... F-5
Consolidated Statements of Changes in Mezzanine Equity for the years ended
December 31, 1999 and 1998 .......................................................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999 and 1998 .......................................................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1999, and
1998 and for the nine months ended December 31, 1997 .................................. F-8
Notes to Consolidated Financial Statements for the year ended December 31, 1999 ......... F-9
Unaudited Consolidated Balance Sheets--March 31, 2000 and December 31, 1999 ............. F-23
Unaudited Consolidated Statements of Operations--three months ended March 31, 2000
and March 31, 1999 .................................................................... F-24
Unaudited Consolidated Statements of Comprehensive Income--three months ended
March 31, 2000 and March 31, 1999 ..................................................... F-25
Unaudited Consolidated Statements of Changes in Mezzanine Equity--three months ended
March 31, 2000 and the Year Ended December 31, 1999 ................................... F-26
Unaudited Consolidated Statements of Shareholders' Equity--three months ended March
31, 2000 and the Year Ended December 31, 1999 ......................................... F-27
Unaudited Consolidated Statements of Cash Flows--three months ended March 31, 2000
and March 31, 1999 .................................................................... F-28
Notes to Unaudited Consolidated Financial Statements for the three months ended
March 31, 2000 ........................................................................ F-29
</TABLE>
Financial Schedule(s)
All financial statement schedules have been omitted because they are not
applicable or are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF CGA GROUP, LTD.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, mezzanine equity,
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of CGA Group, Ltd. and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for the
years ended December 31, 1999 and 1998 and for the period from April 1, 1997 to
December 31, 1997, in conformity with generally accepted accounting principles
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers
Hamilton, Bermuda
March 20, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
CGA GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities available for sale at fair value
(amortized cost: $152,838,109 and $99,560,861) .......................... $146,337,676 $100,488,537
Other investments ......................................................... -- 30,000,000
Cash and cash equivalents ................................................. 12,775,595 2,598,140
Premiums receivable ....................................................... 2,267,991 3,228,497
Management fees receivable ................................................ 412,644 1,093,411
Accrued investment income ................................................. 4,385,663 3,679,763
Deferred acquisition costs ................................................ 4,767,372 3,202,557
Prepaid reinsurance premiums .............................................. 310,144 1,286,782
Reinsurance recoverable ................................................... 25,000,000 67,400,000
Deferred premiums receivable .............................................. 519,809 --
Other assets .............................................................. 2,842,614 2,926,246
------------ ------------
Total assets .......................................................... $199,619,508 $215,903,933
============ ============
LIABILITIES
Unearned premiums ......................................................... $ 2,946,120 $ 821,124
Reserve for losses and loss adjustment expenses ........................... 36,545,700 90,200,000
Reinsurance balances payable .............................................. 285,726 420,660
Accrued costs and expenses ................................................ 4,896,550 4,355,767
------------ ------------
Total liabilities ..................................................... 44,674,096 95,797,551
------------ ------------
MEZZANINE EQUITY Preferred stock, $.01 par value:
Series A, 10,000,000 shares authorized, 3,676,821 and 3,211,891
issued and outstanding .................................................. 87,506,212 75,291,100
Series B, 10,000,000 shares authorized, nil and 1,600,000
issued and outstanding .................................................. -- 51,317,149
------------ ------------
Total mezzanine equity ................................................ 87,506,212 126,608,249
------------ ------------
Shareholders' Equity
Series C preferred stock, $.01 par value 52,000,000 shares authorized
44,971,346 issued and outstanding ....................................... 449,713 --
Additional paid-in-capital--Series C preferred stock ...................... 49,466,298 --
Common stock, $.01 par value, 268,000,000 and 20,000,000 shares
authorized, 28,005,648 and 9,100,000 issued and outstanding ............. 280,057 91,000
Additional paid-in-capital--common stock .................................. 95,723,081 42,486,057
Accumulated other comprehensive income (loss) ............................. (6,500,433) 927,676
Accumulated deficit ....................................................... (71,979,516) (50,006,600)
------------ ------------
Total shareholders' equity (deficit) .................................. 67,439,200 (6,501,867)
------------ ------------
Total liabilities and shareholders' equity ............................ $199,619,508 $215,903,933
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Gross premiums written ................................. $ 16,358,269 $ 49,217,083 $ 773,571
Ceded premiums .......................................... (2,037,576) (39,420,247) --
------------ ------------ ------------
Net premiums written .................................... 14,320,693 9,796,836 773,571
Change in unearned premiums ............................. (2,097,209) (550,547) (270,576)
------------ ------------ ------------
Net premiums earned ..................................... 12,223,484 9,246,289 502,995
Net investment income ................................... 8,641,551 8,528,122 2,955,601
Net realized gains (losses) ............................. (60,485) 2,814,132 885,422
Management fees ......................................... 8,207,746 3,353,499 --
------------ ------------ ------------
Total Revenues ...................................... 29,012,296 23,942,042 4,344,018
------------ ------------ ------------
EXPENSES
Operating expenses ...................................... 12,987,596 14,023,366 6,510,103
Rebate on credit support arrangements ................... 5,510,000 -- --
Policy acquisition costs ................................ 713,571 433,217 53,590
Commitment fees ......................................... 600,000 600,000 323,836
Excess of loss facility ................................. 200,000 200,000 107,671
Losses and loss adjustment expenses ..................... 16,650,000 22,745,000 55,000
------------ ------------ ------------
Total expenses ...................................... 36,661,167 38,001,583 7,050,200
------------ ------------ ------------
Loss before cumulative effect of change in
accounting principle .................................... (7,648,871) (14,059,541) (2,706,182)
Cumulative effect of change in accounting principle ....... -- (3,928,238) --
------------ ------------ ------------
NET LOSS .................................................. (7,648,871) (17,987,779) (2,706,182)
Pay-in-kind dividends-- preferred stock ................. (14,324,045) (19,960,852) (9,352,577)
Accretion-- preferred stock ............................. (641,999) (947,596) (274,033)
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS .............. $(22,614,915) $(38,896,227) $(12,332,792)
Basic and diluted loss per common share ................... $ (0.97) $ (4.27) $ (1.89)
------------ ------------ ------------
Weighted average shares outstanding ....................... 23,395,778 9,100,000 6,522,313
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(EXPRESSED IN U.S. DOLLARS)
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET LOSS FOR THE PERIOD ................................... $ (7,648,871) $(17,987,779) $ (2,706,182)
OTHER COMPREHENSIVE INCOME
Changes in unrealized appreciation (depreciation) on
fixed maturity securities ............................... (7,428,109) (710,416) 1,638,092
------------ ------------ ------------
COMPREHENSIVE LOSS FOR THE PERIOD ......................... $(15,076,980) $(18,698,195) $ (1,068,090)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY
(EXPRESSED IN U.S. DOLLARS)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
MEZZANINE EQUITY
SERIES A PREFERRED STOCK
Balance--beginning of period ................................................ $ 32,119 $ 27,965
Pay-in-kind dividends paid .................................................. 4,649 4,154
------------ ------------
Balance--end of period ...................................................... 36,768 32,119
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES A PREFERRED
Balance--beginning of period ................................................ 75,258,981 65,504,534
Fair value of warrants ...................................................... -- (1,347,300)
Pay-in-kind dividends paid .................................................. 11,618,601 10,379,765
Accretion to redemption value ............................................... 457,132 514,273
Accretion on warrants ....................................................... 134,730 207,709
------------ ------------
Balance--end of period ...................................................... 87,469,444 75,258,981
------------ ------------
TOTAL SERIES A PREFERRED STOCK .............................................. $ 87,506,212 $ 75,291,100
============ ============
SERIES B PREFERRED STOCK
Balance--beginning of period ................................................ $ 16,000 $ 16,000
Pay-in-kind dividends paid .................................................. 6,687 --
Conversion to common stock .................................................. (22,687) --
------------ ------------
Balance--end of period ...................................................... -- 16,000
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES B PREFERRED
Balance--beginning of period ................................................ 37,284,985 37,059,371
Pay-in-kind dividends paid .................................................. 16,710,271 --
Accretion to redemption value ............................................... 50,137 225,614
Unaccreted issuance costs ................................................... 2,648,879 --
Conversion to common stock .................................................. (56,694,272) --
------------ ------------
Balance--end of period ...................................................... -- 37,284,985
------------ ------------
PAY-IN-KIND DIVIDENDS ACCRUED--SERIES B
Balance--beginning of period ................................................ $ 14,016,164 $ 4,439,231
Dividends accrued ........................................................... 2,700,795 9,576,933
Dividends paid .............................................................. (16,716,959) --
------------ ------------
Balance--end of period ...................................................... $ -- $ 14,016,164
------------ ------------
TOTAL SERIES B PREFERRED STOCK .............................................. $ -- $ 51,317,149
============ ============
TOTAL MEZZANINE EQUITY ...................................................... $ 87,506,212 $126,608,249
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
SHAREHOLDERS' EQUITY
SERIES C CONVERTIBLE PREFERRED STOCK
Balance--beginning of period ................................................ $ -- $ --
Stock issued (44,971,346 shares) ............................................ 449,713 --
------------ ------------
Balance--end of period ...................................................... 449,713 --
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--SERIES C PREFERRED
Balance--beginning of period ................................................ -- --
Stock issued ................................................................ 51,715,259 --
Employee loans .............................................................. (1,045,961) --
Issuance costs .............................................................. (1,203,000) --
------------ ------------
Balance--end of period ...................................................... 49,466,298 --
------------ ------------
TOTAL SERIES C PREFERRED STOCK .............................................. 49,916,011 --
------------ ------------
COMMON STOCK
Balance--beginning of period ................................................ 91,000 91,000
Stock issued (18,905,648 shares) ............................................ 189,057 --
------------ ------------
Balance--end of period ...................................................... 280,057 91,000
------------ ------------
ADDITIONAL PAID-IN-CAPITAL--COMMON STOCK
Balance--beginning of period ................................................ 42,486,057 42,086,353
Stock issued ................................................................ 56,527,902 --
Fair value of warrants ...................................................... -- 1,347,300
Accretion of Series A Preferred Stock to redemption value ................... (457,132) (514,273)
Accretion of Series B Preferred Stock to redemption value ................... (50,137) (225,614)
Accretion on warrants ....................................................... (134,730) (207,709)
Unaccreted issuance costs (Series B) ........................................ (2,648,879) --
------------ ------------
Balance--end of period ...................................................... 95,723,081 42,486,057
------------ ------------
TOTAL COMMON STOCK .......................................................... 96,003,138 42,577,057
------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance--beginning of period ................................................ 927,676 1,638,092
Decrease during the period .................................................. (7,428,109) (710,416)
------------ ------------
Balance--end of period ...................................................... (6,500,433) 927,676
------------ ------------
ACCUMULATED DEFICIT
Balance--beginning of period ................................................ (50,006,600) (12,057,969)
Net loss .................................................................... (7,648,871) (17,987,779)
Series A pay-in-kind dividends .............................................. (11,623,250) (10,383,919)
Series B pay-in-kind dividends .............................................. (2,700,795) (9,576,933)
------------ ------------
Balance--end of period ...................................................... (71,979,516) (50,006,600)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ........................................ $ 67,439,200 $ (6,501,867)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ................................................ $ (7,648,871) $ (17,987,779) $ (2,706,182)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of investments ........................... 413,024 (176,711) 1,314,765
Depreciation expense .................................. 508,987 354,587 51,076
Realized loss (gain) on sale of investments ........... 60,485 (2,814,132) (885,422)
Realized loss on sale of fixed assets ................. -- 26,282 --
Changes in assets and liabilities:
Premiums receivable ................................... 960,506 (2,781,325) (447,172)
Management fees receivable ............................ 680,767 (1,093,411) --
Accrued investment income ............................. (705,900) 400,837 (4,080,600)
Deferred acquisition costs ............................ (1,564,815) (2,200,674) (1,001,883)
Prepaid reinsurance premiums .......................... 976,638 (1,286,782) --
Deferred premiums receivable .......................... (519,809) -- --
Reinsurance recoverable ............................... 42,400,000 (67,400,000) --
Other assets .......................................... (234,389) (175,510) (1,159,177)
Organization costs .................................... -- 4,421,353 (4,409,373)
Unearned premiums ..................................... 2,124,996 550,548 270,576
Reserve for losses and loss adjustment expenses ....... (53,654,300) 90,145,000 55,000
Reinsurance balances payable .......................... (134,934) 420,660 --
Accrued costs and expenses ............................ 540,783 764,734 3,591,033
------------ ------------- ------------
Net cash provided by (used in) operating activities ..... (15,796,832) 1,167,677 (9,407,359)
------------ ------------- ------------
Cash flows from investing activities
Cost of fixed maturity investments acquired ............. (88,182,991) (143,845,735) (278,498,706)
Proceeds from sale of fixed maturity investments ........ 64,432,233 138,940,387 156,404,692
Purchases of fixed assets ............................... (190,966) (1,113,295) (910,140)
Note receivable ......................................... -- 250,000 (250,000)
------------ ------------- ------------
Net cash used in investing activites .................... (23,941,724) (5,768,643) (123,254,154)
------------ ------------- ------------
Cash flows from financing activities
Proceeds on issuance of series C preferred stock ........ 52,164,972 -- --
Employee loans .......................................... (1,045,961) -- --
Issuance costs of series C preferred stock .............. (1,203,000) -- --
Redemption of Common Stock .............................. -- -- (12,000)
Proceeds on issuance of series A preferred stock ........ -- -- 65,000,000
Proceeds on issuance of series B preferred stock ........ -- -- 40,000,000
Proceeds on issuance of common stock .................... -- -- 45,500,000
Issuance costs of series A preferred stock .............. -- -- (4,571,319)
Issuance costs of series B preferred stock .............. -- -- (3,008,190)
Issuance costs of common stock .......................... -- -- (3,048,614)
Loan repaid ............................................. -- -- (121,000)
------------ ------------- ------------
Net cash provided by financing activities ............... 49,916,011 -- 139,738,877
------------ ------------- ------------
Net increase (decrease) in cash and
cash equivalents ...................................... 10,177,455 (4,600,966) 7,077,364
Cash and cash equivalents--beginning of period .......... 2,598,140 7,199,106 121,742
------------ ------------- ------------
Cash and cash equivalents--end of period ................ $ 12,775,595 $ 2,598,140 $ 7,199,106
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(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. 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 by the founders of
CGA Group and was acquired at nominal cost to CGA Group on June 9, 1997. CGA
Investment Management did not commence operations until after its acquisition by
CGA Group. CGA Investment Management is registered as an investment advisor with
the United States Securities and Exchange Commission under the Investment
Advisors 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.
CGA Group's first fiscal year end was March 31, 1997. CGA Group
subsequently changed its fiscal year end to December 31. Therefore, the
comparative periods in the consolidated financial statements are not consistent.
Operations commenced following the completion of CGA Group's private
placement offering which occurred on June 17, 1997. The initial capitalization
of CGA Group consisted of 12,000 common shares with a par value of $1.00 per
share. All 12,000 shares were redeemed on June 17, 1997 at which time CGA Group
completed its recapitalization.
As part of the recapitalization on June 17, 1997, CGA Group issued 2.6
million shares of Series A preferred stock with a par value of $.01 per share at
a price of $25 per share. The shares of Series A preferred stock are entitled to
a 13.75% quarterly compounding dividend paid in additional shares of Series A
preferred stock. The Series A preferred stockholders also received warrants,
which are transferable separately from the Series A preferred stock, which
represent the right to purchase on or prior to June 17, 2007 a total of 270,000
shares of common stock at an exercise price of $.01 per share. The warrants were
valued at $4.99 per share and were accounted for as additional paid-in-capital
to the common stock.
As part of the recapitalization on June 17, 1997, CGA Group issued 1.6
million shares of Series B preferred stock with a par value of $.01 per share
for a price of $25 per share. The shares of Series B preferred stock were
entitled to a quarterly compounding dividend paid in additional shares of Series
B preferred stock. The shares of Series B preferred stock were sold to investors
as part of investment units which also included commitments to purchase an
additional $60 million of Series B preferred stock in the aggregate upon the
occurrence of certain events, in order to maintain Commercial Guaranty
Assurance's "Triple-A" rating from Duff & Phelps. Commercial Guaranty Assurance
pays a $600,000 annual fee to the holders of the investment units for their
commitments. The investment units also included an aggregate of 7,827,957 shares
of common stock out of a total of 9,100,000 million shares of common stock
issued pursuant to the recapitalization at a price of $5 per share.
The remaining 1,272,043 shares of common stock were sold to the sponsoring
investors and certain members of management who also received 847,729 warrants,
which each represent the right to purchase one share of common stock on or prior
to June 17, 2007 at an exercise price of $5 per share. The exercise price on
these warrants is subject to reduction based on the sales price of additional
common stock or equivalents. A reduction in the exercise price occurred on March
31, 1999 from $5.00 to $2.12 as a result of the Series B preferred stock
conversion and Series C
F-9
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
preferred stock issuance described below. An additional 1,494,771 warrants have
been authorized for issuance to certain employees, which each represent the
right to purchase one share of common stock on or prior to June 17, 2007 at an
exercise price of $5 per share.
On March 31, 1999 CGA Group sold 43,997,863 shares of Series C preferred
stock, par value $.01 per share, to existing shareholders for an aggregate sales
price of $50,996,795. Concurrent with the sale of the Series C preferred stock,
the outstanding 1,600,000 of Series B preferred stock and the 668,678 shares of
Series B preferred stock declared as pay-in-kind dividends thereon, totaling
2,268,678 shares valued at $56,716,950, were exchanged for 18,905,648 shares of
common stock based on an exchange price of $3 per share of common stock.
On April 26, 1999 CGA Group sold 973,483 shares of Series C preferred stock
to employees of CGA Group and its subsidiaries. The shares were sold for $1.20
each for an aggregate sales price of $1,168,179. CGA Group received cash
proceeds of $122,218 and the remaining $1,045,961 was financed by CGA Group by
granting employee loans up to a maximum of 90% of the purchase price of the
shares. The employee loans were granted in the form of promissory notes which
bear interest at a rate of 7% per annum and are repayable in three equal annual
installments.
The primary clients of Commercial Guaranty Assurance and CGA Investment
Management are St. George and Cobalt. As of December 31, 1999 approximately 54%
of Commercial Guaranty Assurance's net exposure was from assets owned by St.
George and Cobalt. Most of Commercial Guaranty Assurance's premiums and CGA
Investment Management's fee income is originated from St. George and Cobalt.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America (GAAP)
and include the accounts of CGA Group, Commercial Guaranty Assurance, and CGA
Investment Management. All significant intercompany accounts and transactions
have been eliminated in consolidation. The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies under GAAP are as follows:
a) Premiums
Insurance contracts are classified as long-duration contracts for
accounting purposes as the contracts are expected to remain in force for an
extended period. The contracts generally are not subject to unilateral changes
in their provisions and provide insurance protection for extended periods.
Premium rates generally are level throughout the period of coverage. Premiums
are recognized as written upon inception of multi-year policies. Up-front
premiums are earned pro-rata over the period of risk. Installment premiums are
earned over each installment period.
b) Management fees
Fees earned by CGA Investment Management on managed assets are generally
paid quarterly on the outstanding par balance. Fees on assets managed as of
December 31, 1999 range from 5 to 25 basis points per annum.
c) Deferred premiums receivable
The collection of premiums owed to Commercial Guaranty Assurance related to
certain insured securities is deferred. Certain securities that were purchased
by clients at significant discounts from their par values generate cash flows
that are insufficient to cover the related insurance premiums. The premiums are
earned over the period of risk and are recorded at the present value of premiums
that will be received upon the maturity of such securities.
F-10
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
d) Deferred acquisition costs
Deferred acquisition costs are expenses that vary with and are primarily
related to the production of business. These costs include compensation,
underwriting, certain rating agency fees, legal and other expenses. Deferred
acquisition costs are amortized on a straight-line basis over the estimated term
of the related insured risks. Commercial Guaranty Assurance evaluates the
recoverability of deferred acquisition costs whenever changes in circumstances
warrant. If it is determined that an impairment exists, the excess of the
unamortized balance over deferred acquisition costs will be charged to earnings.
e) Reinsurance
In the ordinary course of business, Commercial Guaranty Assurance cedes
exposures under various reinsurance contracts designed to limit losses from
certain risks and to protect capital and surplus. The reinsurance of risk does
not relieve Commercial Guaranty Assurance of its original liability to its
policyholders. In the event that a reinsurer was unable to meet its obligations
under the existing reinsurance contracts, Commercial Guaranty Assurance would be
liable for such defaulted amounts.
Prepaid reinsurance premiums represent the portion of premiums ceded to
reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
f) Reserve for losses and loss adjustment expenses
A case basis reserve for unpaid losses and loss adjustment expenses may be
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. A general reserve is calculated by applying a loss factor to
the total net par amount outstanding of Commercial Guaranty Assurance's insured
obligations over the expected term of such insured obligations.
Management believes that the current level of the reserve is adequate to
cover the ultimate net cost of claims. The reserve is necessarily an estimate
and there can be no assurance that the ultimate liability will not differ from
such estimates. Commercial Guaranty Assurance will monitor the provision on an
ongoing basis and may periodically adjust the reserve based on actual loss
experience, the future mix of business and economic conditions.
The reserve for losses and loss adjustment expenses is reflected on the
balance sheet gross of any losses recoverable from reinsurers.
g) Investments
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," investments in debt securities are designated as available-for-sale
and are recorded at fair value, being quoted market value. Any resulting
unrealized gains or losses are reflected as a separate component of
shareholder's equity as accumulated other comprehensive income and as a separate
component of the statement of comprehensive income. Short-term investments,
which are those investments with a maturity of less than one year at time of
purchase, are carried at cost, which approximates fair value. Other investments
are carried at cost, which approximates fair value.
Bond discounts and premiums are accreted or amortized on the effective
interest method over the term of the related securities. Realized gains or
losses on sale of investments are determined on the basis of specific
identification. Net investment income is recognized when earned and includes
interest and amortization of market premiums and discounts and is net of
investment management and custody fees.
h) Statement of cash flows
For purposes of the statements of cash flows, cash equivalents are composed
of short term deposits with original maturities which are less than three
months.
F-11
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
i) Loss per common share
CGA Group computes loss per share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Loss per common share is
calculated using the loss for the period adjusted for preference dividends,
accretion of preference stock to redemption value, and accretion on warrants
divided by the weighted average number of common shares outstanding and, if
dilutive, shares issuable under outstanding warrants.
j) Start-up activities
The Accounting Standards Executive Committee issued Statement of Position
98-5, "Reporting on Costs of Start-Up Activities", effective for fiscal years
beginning after December 15, 1998. This statement requires CGA Group to expense
organization costs as incurred. On July 1, 1998, CGA Group expensed the
remaining unamortized organization costs which is reflected in the financial
statements as a change in accounting principle.
3. INVESTMENTS
a) Fixed maturities
The fair values, gross unrealized gains and losses and amortized cost of
fixed maturities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
1999 COST GAINS LOSSES FAIR VALUE
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Non-U.S. Government ....................... $ 33,995,209 -- $(1,509,028) $ 32,486,181
Corporate ................................. 116,796,572 -- (4,991,405) 111,805,167
Short-term ................................ 2,046,328 -- -- 2,046,328
------------ ------------ ----------- ------------
Fixed Maturities .......................... $152,838,109 -- $(6,500,433) $146,337,676
============ ============ =========== ============
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
1998 COST GAINS LOSSES FAIR VALUE
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Non-U.S. Government ....................... $ 12,024,005 $ 77,789 $ (82,384) $ 12,019,410
Corporate ................................. 85,488,892 1,316,526 (384,255) 86,421,163
Short-term ................................ 2,047,964 -- -- 2,047,964
------------ ------------ ----------- ------------
Fixed Maturities .......................... $ 99,560,861 $ 1,394,315 $ (466,639) $100,488,537
============ ============ =========== ============
The change in unrealized appreciation (depreciation) on fixed maturity
securities was $(7,428,109) in 1999 and $(710,416) in 1998.
Fixed maturities at December 31, 1999 and 1998, by contractual maturity,
are shown below. Expected maturities could differ from contractual maturities
because borrowers may have the right to call or prepay obligations, with or
without call or prepayment penalties.
1999 1999 1998 1998
MATURITY PERIOD FAIR VALUE AMORTIZED COST FAIR VALUE AMORTIZED COST
--------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Less than 1 year ............................ $ 2,046,328 $ 2,046,328 $ 2,047,964 $ 2,047,964
1-5 years ................................... 139,855,448 146,089,396 91,006,563 90,195,974
5-10 years .................................. 4,435,900 4,702,385 7,434,010 7,316,923
------------ ------------ ------------ ------------
Total fixed maturities .................. $146,337,676 $152,838,109 $100,488,537 $ 99,560,861
============ ============ ============ ============
</TABLE>
F-12
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
Realized gains for the year ended December 31, 1999 were $244,586; for the
year ended December 31, 1998 were $3,436,817 and for the nine months ended
December 31, 1997 were $1,895,725. Realized losses for the year ended December
31, 1999 were $305,071; for the year ended December 31, 1998 were $622,685 and
for the nine months ended December 31, 1997 were $1,010,303. Investments are
made predominately in U.S. dollar denominated foreign corporate and government
securities. The rating level for an investment cannot be below "Double-A minus".
The portfolio consists of "Double-A" rated investments on average. The portfolio
manager operates under guidelines to maintain a weighted average duration of two
to five years.
(b) Net investment income
Net investment income for the years ended December 31, 1999 and 1998 and
the nine months ended December 31, 1997 was derived from the following sources:
1999 1998 1997
---------- ---------- ----------
Fixed maturities .............. $7,989,790 $8,400,894 $2,849,428
Other ......................... 796,702 501,677 331,297
---------- ---------- ----------
Gross investment income ....... 8,786,492 8,902,571 3,180,725
Investment expense ............ (144,941) (374,449) (225,124)
---------- ---------- ----------
Net investment income ......... $8,641,551 $8,528,122 $2,955,601
========== ========== ==========
4. OTHER INVESTMENTS
Other investments at December 31, 1998 are comprised of a $30 million note
issued by St. George Holdings which is the parent company of certain clients of
CGA Investment Management. The note was carried at its original cost which
approximated fair value. The note bore interest of 3 month LIBOR plus 1% per
annum payable quarterly and had a five year term with no prepayment penalty. The
3 month LIBOR rate at December 31, 1998 was 5.06%. The note was purchased to
provide St. George Holdings and its subsidiaries with cash to manage their
liquidity and to pay for additional financial guaranty insurance. The note was
repaid in full in 1999.
5. DETAIL OF OTHER ASSETS
1999 1998
---------- ----------
Other Assets
Other prepaid expenses ................... $ 668,627 $ 222,752
Prepaid commitment fees .................. 276,164 276,164
Fixed assets, net of depreciation ........ 1,285,579 1,603,600
Deposits ................................. 301,080 280,000
Accounts receivable ...................... 47,405 368,730
Other .................................... 263,759 175,000
---------- ----------
Total other assets ................... $2,842,614 $2,926,246
========== ==========
6. LOSSES AND LOSS EXPENSES
The reserve for losses and loss adjustment expenses is established in an
amount equal to the 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.
F-13
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
The reserve for losses and loss adjustment expenses is comprised of the
following at December 31, 1999 and 1998:
1999 1998
----------- -----------
Case basis reserve ......................... $33,200,000 $88,200,000
General reserve ............................ 3,345,700 2,000,000
----------- -----------
Total reserve for losses and loss
adjustment expenses .................. $36,545,700 $90,200,000
=========== ===========
The activity in the reserve for losses and loss adjustment expenses is as
follows:
1999 1998
----------- -----------
Balance at beginning of year ............... $90,200,000 $ 55,000
Less reinsurance recoverables .......... (67,400,000) --
----------- -----------
Net balance at beginning of year ........... 22,800,000 55,000
Net losses and loss expenses incurred in
respect of losses occurring in:
Current year ........................... 1,350,000 22,745,000
Prior years ............................ 15,300,000 --
----------- -----------
Total .................................. 16,650,000 22,745,000
Net losses and loss expenses paid in respect
of losses occuring in prior years ........ (27,904,300) --
----------- -----------
Balance at end of year ................. 11,545,700 22,800,000
Reinsurance recoverable .................... 25,000,000 67,400,000
----------- -----------
Reserve for losses and loss adjustment
expenses, gross of reinsurance recoverable
Balance at end of year ................. $36,545,700 $90,200,000
=========== ===========
In October, 1998 the credit ratings on asset-backed securities which
clients of Commercial Guaranty Assurance had purchased, and that were originated
and serviced by Commercial Financial Services Inc., a credit-card debt
collection company, were withdrawn by the three credit rating companies that
rated the most recently issued Commercial Financial Services securities. The
withdrawal of the ratings was in response to allegations of accounting
irregularities at Commercial Financial Services. The rating agencies, investors
and insurers commenced investigations into the allegations. On December 11,
1998, Commercial Financial Services filed a petition for relief under Chapter 11
of the United States Bankruptcy Code with the Bankruptcy Court for the Northern
District of Oklahoma (the "Bankruptcy Court"). The Bankruptcy Court approved
Commercial Financial Services' rejection of the servicing contracts and other
agreements relating to Commercial Financial Services' servicing of the
receivables underlying the Commercial Financial Services securities, effective
as of June 23, 1999. As a result, servicing in respect of the Commercial
Financial Services securities was transferred to the trustees of the respective
trusts which issued such securities (Bankers Trust Company, in the case of the
Commercial Financial Services securities guaranteed by Commercial Guaranty
Assurance), as backup servicers, and their designated sub-servicers.
Clients of Commercial Guaranty Assurance had previously purchased
approximately $212 million face amount of Commercial Financial Services
securities, which exposure was guaranteed by Commercial Guaranty Assurance.
Commercial Guaranty Assurance had obtained reinsurance for approximately $162
million face amount of such exposure. In December 1998, Commercial Guaranty
Assurance established a $20.8 million case basis reserve in respect of its
exposure on Commercial Financial Services securities, representing management's
estimate of probable losses on such exposure. In June, 1999 Commercial Guaranty
Assurance added an additional $7.1 million to its case
F-14
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
basis reserve for Commercial Financial Services. In June and September 1999,
Commercial Guaranty Assurance made claim payments on its guarantees in respect
of Commercial Financial Services securities in the aggregate amount of
approximately $117.9 million, of which $90 million consisted of payments from
its reinsurer and $27.9 million consisted of Commercial Guaranty Assurance's own
funds, paid out of such case basis reserve. In connection with this claim
payment, Commercial Guaranty Assurance and its reinsurer received approximately
$119.1 million par value of Commercial Financial Services bonds. The bonds have
no readily determinable market value and have not been recorded on the books of
Commercial Guaranty Assurance. Until Commercial Guaranty Assurance's exposure on
Commercial Financial Services securities reaches zero, any future interest
payments received on these securities are intended to be used to purchase
additional Commercial Financial Services securities from Commercial Guaranty
Assurance's clients, thereby further reducing Commercial Guaranty Assurance's
exposure. In December, 1999 Commercial Guaranty Assurance added an additional
$8.2 million to its case basis reserve for Commercial Financial Services
comprised of $7.7 million of expected losses and $0.5 million of expected loss
adjustment expenses.
As a result of these claim payments, additional reserves and interim
principal repayments on the Commercial Financial Services securities, Commercial
Guaranty Assurance's gross remaining exposure in respect of Commercial Financial
Services securities has been reduced to approximately $76.0 million as of
December 31, 1999. Of this exposure, approximately $58.1 million is covered by
reinsurance and $7.7 million is included in case basis reserves, leaving
Commercial Guaranty Assurance with a remaining net exposure of approximately
$9.6 million at December 31, 1999.
At December 31, 1999 aggregate incurred losses for Commercial Financial
Services securities total $36.1 million of which $27.9 million has been paid. On
March 15, 2000 Commercial Guaranty Assurance made a claim payment 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. Giving effect to the claim payment on March 15, 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.
Commercial Guaranty Assurance, CGA Investment Management and various other
plaintiffs have commenced legal proceedings against Commercial Financial
Services, William Bartmann (the founder and principal shareholder of Commercial
Financial Services), other former members of Commercial Financial Services'
senior management, the placement agent for the Commercial Financial Services
securities insured by Commercial Guaranty Assurance and Commercial Financial
Services' auditors, alleging various counts of federal and state securities law
fraud and common law fraud. It is too early to predict what, if anything,
Commercial Guaranty Assurance ultimately may recover in this legal proceeding.
7. REINSURANCE
In the ordinary course of business, Commercial Guaranty Assurance cedes
exposures under various reinsurance contracts primarily designed to minimize
losses from large risks and to protect capital and surplus. The reinsurance of
risk does not relieve the ceding insurer of its original liability to its
policyholders. In the event that all or any of the reinsurers are unable to meet
their obligations to Commercial Guaranty Assurance under the existing
reinsurance agreements, Commercial Guaranty Assurance would be liable for such
defaulted amounts. Commercial Guaranty Assurance also has a $20 million excess
of loss reinsurance facility. As of December 31, 1999 prepaid reinsurance of
approximately $0.3 million was associated with a single reinsurer. As stated
above, Commercial Guaranty Assurance has reinsured a portion of its exposure to
asset-backed securities originated and serviced by Commercial Financial
Services.
In October, 1998 Commercial Guaranty Assurance provided credit support on
approximately $382 million of securities within two insured portfolios, which
was further supported by a "Triple-A" rated reinsurer, using
F-15
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
documentation that would permit the insured to proceed directly against the
reinsurer. The effect of the described credit support arrangements was to
substantially increase the market value of the subject securities. Commercial
Guaranty Assurance received a premium of $38.95 million from its clients in
connection with these credit support arrangements, and ceded $38.7 million to
the aforementioned reinsurer. On April 14, 1999, these credit support
arrangements were cancelled and approximately $29.5 million of premium was
refunded to the clients.
In a separate transaction that closed in December 1999, CGA Investment
Management paid $5.5 million to St. George to cover a portion of the cost
incurred by St. George for the credit support arrangements. This payment was
made to assist St. George with liquidity issues that arose due to the cost of
the credit support arrangements.
8. MEZZANINE EQUITY
1999 1998
---------- ----------
Series A : 3,676,821 and 3,211,891 shares
issued and outstanding .................... $ 36,768 $ 32,119
Additional paid in capital .................. 87,469,444 75,258,981
---------- ----------
Total series A preferred stock .............. 87,506,212 75,291,100
Series B: nil and 1,600,000 shares
issued and outstanding .................... -- 16,000
Additional paid in capital .................. -- 37,284,985
---------- ----------
Total series B preferred stock .......... -- 37,300,985
========== ==========
CGA Group's Series A preferred stock is subject to mandatory redemption
including all accrued and unpaid dividends thereon, on June 17, 2007. The Series
A preferred stock is also redeemable at the election of CGA Group at any time.
The dividends on the Series A preferred stock are declared quarterly by the
Board of Directors and paid in additional shares of Series A preferred stock.
The Series A and Series B preferred stock were each recorded at fair value.
The difference between fair value and the redemption value (excluding
pay-in-kind dividends) is being accreted over the mandatory redemption period by
a charge to shareholders' equity.
The Series A preferred stock and the Series B preferred stock are voting
securities, and are entitled to 7 votes per share and 5 votes per share,
respectively, on all matters presented to the security holders of CGA Group for
their approval. The Series A preferred stock ranks senior in liquidation
preference to all other classes of capital stock of CGA Group, followed by the
Series C preferred stock, the Series B preferred stock and the common stock of
CGA Group, respectively.
On March 31, 1999, all issued and outstanding shares of Series B preferred
stock were converted into shares of common stock, at a conversion ratio of
11.816 shares of common stock per share of Series B preferred stock. The
conversion ratio was based on an assumed value of $3.00 per share of common
stock. As a result of the conversion, 18,905,648 new shares of common stock were
issued. No shares of Series B preferred stock are currently issued and
outstanding. If the $60 million of Series B preferred commitments are called,
new shares will be issued with pay-in-kind dividends yielding 7%.
9. SHAREHOLDERS' EQUITY
A) COMMON STOCK
The number of common shares outstanding during the years ended December 31,
1999 and 1998 was as follows:
1999 1998
---------- ---------
Issued and outstanding ..................... 28,005,648 9,100,000
Weighted average number of shares .......... 23,395,778 9,100,000
F-16
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
The common stock of CGA Group carries two votes per share on all matters
presented to the security holders of CGA Group for their approval.
B) SERIES C PREFERRED STOCK
The Series C preferred stock are voting securities and are entitled to 1
vote per share on all matters presented to the security holders of CGA Group for
their approval. The book values of shares issued and outstanding as of December
31, 1999 and 1998 were as follows:
1999 1998
----------- -------
44,971,346 and nil shares issued and
outstanding ............................... $ 449,713 $ --
Additional paid-in-capital .................. 49,466,298 --
----------- -------
Total Series C preferred stock .............. $49,916,011 $ --
=========== =======
The shares of Series C preferred stock which may be converted into shares
of common stock on a one-for-one basis at the holder's option at any time, are
mandatorily convertible into shares of common stock upon the occurrence of
certain events at the conversion rate specified in CGA Group's bye-laws, and are
subject to redemption by CGA Group for cash upon the occurrence of certain
events at the redemption rate specified in CGA Group's bye-laws.
The additional paid in capital has been reduced by approximately $1.2
million in issuance costs and $1.0 million in employee loans. CGA Group holds
promissory notes from certain employees in connection with the sale of Series C
preferred stock that occurred on April 26, 1999. The notes are repayable in
three equal installments and accrue interest at an annual rate of 7%. The
employee loan balance represents the original principal loan balance.
10. LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss
per share for the years ended December 31, 1999 and 1998 and the nine months
ended December 31, 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Basic Loss Per Share
Numerator:
Net loss ................................................... $ (7,648,871) $ (17,987,779) $ (2,706,182)
Series A--Pay-in-kind dividends paid ....................... (11,623,250) (10,383,919) (4,913,346)
Series A--Accretion to redemption value .................... (457,132) (514,273) (190,472)
Series A--Accretion on warrants ............................ (134,730) (207,709) --
Series B--Pay-in-kind dividends ............................ (2,700,795) (9,576,933) (4,439,231)
Series B--Accretion to redemption value .................... (50,137) (225,614) (83,561)
------------- ------------- ------------
Net loss attributable to common shareholders ................. $ (22,614,915) $ (38,896,227) $(12,332,792)
------------- ------------- ------------
Denominator:
Weighted average shares outstanding ........................ 23,395,778 9,100,000 6,522,313
------------- ------------- ------------
Basic loss per share ......................................... $ (0.97) $ (4.27) $ (1.89)
============= ============= ============
Diluted loss per share
Numerator .................................................... $(22,614,915) $ (38,896,227) $(12,332,792)
------------- ------------- ------------
Denominator .................................................. 23,395,778 9,100,000 6,522,313
------------- ------------- ------------
Diluted loss per share ....................................... $ (0.97) $ (4.27) $ (1.89)
============= ============= ============
Loss per share on cumulative effect of change in
accounting principle ....................................... $ -- $ (0.43) $ --
============= ============= ============
</TABLE>
CGA Group has outstanding warrants and Series C preferred stock which were
not included in the computation of the diluted loss per share as the effect of
these warrants and Series C preferred stock is antidilutive for the periods
presented above.
F-17
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
On June 17, 1997 CGA Group issued warrants to purchase 270,000 shares of
common stock in connection with the issuance of 2.6 million shares of Series A
preferred stock. All of the warrants are outstanding as of December 31, 1999.
These warrants are exercisable at any time on or prior to June 17, 2007 at an
exercise price of $.01 per share of common stock.
CGA Group also issued 847,729 warrants to certain investors and members of
management on June 17, 1997. Each such warrant represents the right to purchase
one share of common stock on or prior to June 17, 2007. The exercise price of
the warrants was lowered from $5 per share to $2.12 per share in connection with
the Series B preferred stock conversion into common stock and the issuance of
the Series C preferred stock. All such warrants were outstanding as of December
31, 1999. In addition, CGA Group has authorized 1,494,771 warrants for issuance
to certain employees. These warrants each represent the right to purchase one
share of common stock on or prior to June 17, 2007 at an exercise price of $5
per share. The employee warrants vest ratably over a four-year period and expire
if not exercised within thirty days of the employee's termination of employment.
As of December 31, 1999, there were 1,315,984 warrants outstanding of which
657,992 warrants were exercisable. As of December 31, 1998 there were 1,348,129
warrants outstanding of which 337,032 warrants were exercisable. 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.
11. INSURANCE IN FORCE
The following table shows the net par outstanding of insured obligations,
net of reinsurance, at December 31, by asset type:
1999 1998
ASSET TYPE (IN 000'S) (IN 000'S)
---------- ----------
Auto .......................................... $ 26,158 $ 3,158
Commercial loan and bond obligations .......... 327,335 189,375
Commercial mortgage-backed securities ......... 614,217 185,754
Corporate asset-backed securities ............. 147,490 90,000
Credit card receivables ....................... 165,997 185,732
Equipment ..................................... 17,111 27,129
Future flows .................................. 55,463 39,108
Home equity loans ............................. 374,280 236,381
Real estate investment trust debt ............. 256,774 381,777
Real estate investment trust preferred stock .. 70,000 70,000
Sovereign debt ................................ 90,000 120,000
Other consumer ABS ............................ 89,640 31,250
---------- ----------
Total ..................................... $2,234,465 $1,559,664
========== ==========
The following table presents the credit ratings of the above assets, based
on net par outstanding at December 31:
1999 1998
---- ----
"AAA" ......................................... 4% 4%
"AA" .......................................... 2% 3%
"A" ........................................... 25% 12%
"BBB" ......................................... 58% 67%
"BB" .......................................... 9% 11%
Not rated ..................................... 2% 3%
--- ---
Total ..................................... 100% 100%
=== ===
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 goegraphic exposure.
12. 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
F-18
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
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 accounting policies of each of the segments are the same as those described
in the summary of significant accounting policies.
The table below presents financial information for each of the operating
segments.
As of and for the year ended December 31, 1999.
<TABLE>
<CAPTION>
CGA CGAIM OTHER (A) TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned ............................ $ 12,223,484 $ -- $ -- $ 12,223,484
Net investment income .......................... 8,030,130 61,479 549,942 8,641,551
Net realized losses ............................ (60,485) -- -- (60,485)
Management fees ................................ -- 8,207,746 -- 8,207,746
Intersegment revenue ........................... -- 349,546 257,589 607,135
------------ ----------- ----------- ------------
TOTAL REVENUES ............................. 20,193,129 8,618,771 807,531 29,619,431
------------ ----------- ----------- ------------
EXPENSE ITEMS
Operating expenses ............................. 1,279,553 9,940,212 1,767,831 12,987,596
Rebate on credit support arrangements .......... -- 5,510,000 -- 5,510,000
Acquisition costs .............................. 713,571 -- -- 713,571
Commitment fees ................................ 600,000 -- -- 600,000
Excess of loss facility ........................ 200,000 -- -- 200,000
Losses and loss adjustment expenses ............ 16,650,000 -- -- 16,650,000
Intersegment expenses .......................... 349,546 257,589 -- 607,135
------------ ----------- ----------- ------------
TOTAL EXPENSES ............................. 19,792,670 15,707,801 1,767,831 37,268,302
------------ ----------- ----------- ------------
NET INCOME (LOSS) .......................... 400,459 (7,089,030) (960,301) (7,648,871)
------------ ----------- ----------- ------------
ASSETS
TOTAL ASSETS ............................... $190,644,086 $ 3,005,640 $17,302,581 $210,952,307
============ =========== =========== ============
---------------
(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 year ended December 31, 1998.
CGA CGAIM OTHER TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned ............................ $ 9,246,289 $ -- $ -- $ 9,246,289
Net investment income .......................... 8,387,513 64,934 75,675 8,528,122
Net realized gains ............................. 2,814,132 -- -- 2,814,132
Management fees ................................ -- 3,353,499 -- 3,353,499
Intersegment revenue ........................... -- 122,301 -- 122,301
------------ ----------- ----------- ------------
TOTAL REVENUES ............................. 20,447,934 3,540,734 75,675 24,064,343
------------ ----------- ----------- ------------
EXPENSE ITEMS
Operating expenses ............................. 1,558,407 10,711,550 1,753,409 14,023,366
Acquisition Costs .............................. 433,217 -- -- 433,217
Commitment Fees ................................ 600,000 -- -- 600,000
Excess of loss facility ........................ 200,000 -- -- 200,000
Losses and loss adjustment expenses ............ 22,745,000 -- -- 22,745,000
Intersegment expenses .......................... 122,301 -- -- 122,301
------------ ----------- ----------- ------------
TOTAL EXPENSES ............................. 25,658,925 10,711,550 1,753,409 38,123,884
------------ ----------- ----------- ------------
NET LOSS .................................. (5,210,991) (7,170,816) (1,677,734) (14,059,541)
------------ ----------- ----------- ------------
Cumulative effect of change in accounting
policy ....................................... 1,127,353 480,207 2,320,678 3,928,238
ASSETS
TOTAL ASSETS ............................... $214,823,536 $ 3,752,936 $ 7,860,816 $226,437,288
============ =========== =========== ============
</TABLE>
F-19
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
As of and for the nine months ended December 31, 1997.
<TABLE>
<CAPTION>
CGA CGAIM OTHER TOTAL
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned ............................ $ 502,995 $ -- $ -- $ 502,995
Net investment income .......................... 2,955,601 -- -- 2,955,601
Net realized gains ............................. 885,422 -- -- 885,422
------------ ----------- ----------- ------------
TOTAL REVENUES ............................. 4,344,018 -- -- 4,344,018
------------ ----------- ----------- ------------
EXPENSE ITEMS
Operating expenses ............................. 597,883 5,313,368 598,852 6,510,103
Acquisition Costs .............................. 53,590 -- -- 53,590
Commitment Fees ................................ 323,836 -- -- 323,836
Excess of loss facility ........................ 107,671 -- -- 107,671
Losses and loss adjustment expenses ............ 55,000 -- -- 55,000
------------ ----------- ----------- ------------
TOTAL EXPENSES ............................. 1,137,980 5,313,368 598,852 7,050,200
------------ ----------- ----------- ------------
NET INCOME (LOSS) .......................... 3,206,038 (5,313,368) (598,852) (2,706,182)
------------ ----------- ----------- ------------
ASSETS
TOTAL ASSETS ............................... $131,607,950 $ 3,577,782 $11,085,250 $146,270,982
============ =========== =========== ============
The following are reconciliations of reportable segment revenues, expenses
and assets to CGA Group's consolidated totals in the financial statements.
Depreciation expense is included in operating expenses.
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Total revenues for reportable segments ............. $ 29,619,431 $ 24,064,343 $ 4,344,018
Elimination of intersegment revenues ............... (607,135) (122,301) --
------------ ------------ ------------
Total consolidated revenues .................... $ 29,012,296 $ 23,942,042 $ 4,344,018
------------ ------------ ------------
EXPENSES
Total expenses for reportable segments ............. $ 37,268,302 $ 38,123,884 $ 7,050,200
Elimination of intersegment operating expenses ..... (607,135) (122,301) --
------------ ------------ ------------
Total consolidated expenses .................... $ 36,661,167 $ 38,001,583 $ 7,050,200
------------ ------------ ------------
ASSETS
Total assets for reportable segments ............... $210,952,307 $226,437,288 $146,270,982
Intercompany loans ................................. (8,700,421) (7,551,429) (3,549,796)
Other intercompany balances ........................ (2,632,378) (2,981,926) --
------------ ------------ ------------
Total consolidated assets .......................... $199,619,508 $215,903,933 $142,721,186
============ ============ ============
</TABLE>
13. CONTINGENCIES AND COMMITMENTS
Lease commitments
CGA Group rents office space in Hamilton, Bermuda under an operating lease
which expires in July 2000, but is expected to be renewed in April 2000. CGA
Investment Management rents office space in New York, under an operating lease
which expires in 2003 with one option for a renewal period of five years. Total
rent expense was approximately $437,769, $355,000 and $300,000 in 1999, 1998 and
1997 respectively. Future minimum rental commitments under the leases, are
expected to be approximately $500,000 per annum.
14. TAXATION
CGA Group and Commercial Guaranty Assurance, which are domiciled in
Bermuda, have received from the Minister of Finance of Bermuda an assurance
under the Exempted Undertakings Tax Protection Act, 1966, as amended, of
Bermuda, that generally protects them from incurring taxation by Bermuda tax
authorities until March
F-20
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
28, 2016. Since CGA Group and Commercial Guaranty Assurance are not engaged in a
trade or business in the U.S. there should be no U.S. income taxes due, however,
CGA Group and Commercial Guaranty Assurance do file protective U.S. income tax
returns. CGA Investment Management will be subject to U.S. taxation at regular
corporate tax rates, but has tax losses carried forward of approximately $7.1
million and $7.7 million as at December 31, 1999 and 1998 respectively, for
which no benefit has been recorded in the financial statements. These tax loss
carry-forwards expire in the year 2014 and 2013 respectively.
15. STATUTORY FINANCIAL DATA
Under The Insurance Act 1978, amendments thereto and related regulations,
Commercial Guaranty Assurance is required to file an annual Statutory Financial
Return and Statutory Financial Statements to maintain certain measures of
solvency and liquidity during the period. The statutory capital and surplus at
December 31, 1999 and 1998 was $141,938,889 and $114,898,018 respectively.
Statutory net income for the year ended December 31, 1999 was $161,828 and
statutory net loss for the year ended December 31, 1998 was $13,809,607. The
principal differences between capital and surplus and statutory net income and
shareholders' equity and income as reported in conformity with GAAP relates to
deferred acquisition costs and prepaid expenses of Commercial Guaranty
Assurance. There were no statutory restrictions on payment of dividends from the
retained earnings of Commercial Guaranty Assurance as the required level of
solvency was met by the common stock in issue.
16. 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 the Company is
required to adopt effective January 1, 2001. SFAS 133 requires all derivatives
to be recognized in the statement of financial position 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 the Company'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.
17. SUBSEQUENT EVENTS
On March 7, 2000, Fitch IBCA, Ltd. announced that it intended to acquire
DCRDuff & Phelps, subject to obtaining all requisite shareholder and regulatory
approvals. CGACommercial Guaranty Assurance is not currently rated by Fitch. If
suchthis acquisition is consummated, it is unclear what action, if any, Fitch
will take in respect of CGACommercial Guaranty Assurance's "Triple-A" rating
from DCRDuff & Phelps. If Fitch were to rate CGACommercial Guaranty Assurance's
claims paying ability at less than "Triple-A", such action could have a material
adverse effect on CGA's business. financial condition and prospects.
On March 13, 2000, the CompanyCGA Group hired Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), an investment banking firm, to act as the
Company'sCGA Group's exclusive financial advisor for the purpose of raising
additional capital. At this time, Management is unable to predict whether or to
what extent DLJ will be successful in these capital raising efforts.
F-21
<PAGE>
CGA GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(EXPRESSED IN U.S. DOLLARS)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1999 1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net premiums written ................... $ 3,047,607 $ 4,000,007 $ 2,183,509 $ 5,089,570 $ 14,320,693
Net premiums earned .................... 3,082,046 3,465,496 2,340,119 3,335,823 12,223,484
Net investment income and net
realized gains ....................... 1,823,067 2,327,536 2,246,174 2,184,289 8,581,066
Management fees ........................ 1,145,259 478,796 506,894 6,076,797 8,207,746
----------- ----------- ----------- ----------- ------------
TOTAL REVENUES ..................... 6,050,372 6,271,828 5,093,187 11,596,909 29,012,296
=========== =========== =========== =========== ============
Operating Expenses ..................... 3,276,277 3,238,902 3,424,867 3,047,550 12,987,596
Rebate on credit support
arrangements ......................... -- -- -- 5,510,000 5,510,000
Acquisition costs ...................... 148,138 167,116 186,802 211,515 713,571
Commitment fees and excess of
loss facility ........................ 197,945 202,055 201,233 198,767 800,000
Losses and loss adjustment
expenses, net ........................ 300,000 7,450,000 300,000 8,600,000 16,650,000
----------- ----------- ----------- ----------- ------------
TOTAL EXPENSES ..................... 3,922,360 11,058,073 4,112,902 17,567,832 36,661,167
=========== =========== =========== =========== ============
Net income (loss) ...................... 2,128,012 (4,786,245) 980,285 (5,970,923) (7,648,871)
Net loss attributable to
shareholders ......................... $(3,531,036) $(7,789,311) $(2,120,831) $(9,173,737) $(22,614,915)
Basic and fully diluted loss
per share ............................ $(0.38) $(0.28) $(0.10) $(0.21) $(0.97)
1998 1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net premiums written ................... $ 1,949,993 $ 1,607,759 $ 2,882,474 $ 3,356,610 $ 9,796,836
Net premiums earned .................... 1,071,135 1,649,341 3,027,536 3,498,277 9,246,289
Net investment income and net
realized gains ....................... 1,646,061 3,119,215 1,985,828 4,591,150 11,342,254
Management fees ........................ 189,056 492,939 1,472,589 1,198,915 3,353,499
----------- ----------- ----------- ----------- ------------
TOTAL REVENUES ..................... 2,906,252 5,261,495 6,485,953 9,288,342 23,942,042
=========== =========== =========== =========== ============
Operating Expenses ..................... 3,063,863 4,366,129 4,043,755 2,549,619 14,023,366
Acquisition costs ...................... 53,245 92,342 129,944 157,686 433,217
Commitment fees and excess of
loss facility ........................ 197,945 199,589 201,233 201,233 800,000
Losses and loss adjustment
expenses, net ........................ 195,000 405,000 700,000 21,445,000 22,745,000
----------- ----------- ----------- ----------- ------------
TOTAL EXPENSES ..................... 3,510,053 5,063,060 5,074,932 24,353,538 38,001,583
=========== =========== =========== =========== ============
Net income (loss) ...................... (603,801) 198,435 (2,517,216) (15,065,197) (17,987,779)
Net loss attributable to
shareholders ......................... (5,683,130) (4,909,349) (7,991,082) (20,312,666) (38,896,227)
Basic and fully diluted earnings
(loss) per share ..................... ($0.62) ($0.54) ($0.88) ($2.23) ($4.27)
</TABLE>
F-22
<PAGE>
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 ................................... 90,813,951 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.
F-23
<PAGE>
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.
F-24
<PAGE>
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.
F-25
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, 2000 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.
F-26
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, 2000 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.
F-27
<PAGE>
CGA GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 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.
F-28
<PAGE>
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:
2000 1999
----------- -----------
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
=========== ===========
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
F-29
<PAGE>
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(EXPRESSED IN U.S. DOLLARS)
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. 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.
F-30
<PAGE>
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(EXPRESSED IN U.S. DOLLARS)
3. 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.
F-31
<PAGE>
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(EXPRESSED IN U.S. DOLLARS)
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:
2000 1999
---- ----
"AAA" ............................ 3% 4%
"AA" ............................. 3% 2%
"A" .............................. 25% 25%
"BBB" ............................ 60% 58%
"BB" ............................. 9% 9%
Not rated ........................ -- 2%
--- ---
Total ............................ 100% 100%
=== ===
North America comprises 93% of the insured obligations' geographic
exposure. Other countries includeTurkey, 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.
F-32
<PAGE>
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(EXPRESSED IN U.S. DOLLARS)
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.
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>
F-33
<PAGE>
CGA GROUP, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(EXPRESSED IN U.S. DOLLARS)
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>
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.
F-34
<PAGE>
======================================== ==================================
WE HAVE NOT AUTHORIZED ANY DEALER, 3,803,212 SHARES
SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS CGA GROUP, LTD.
PROSPECTUS OR TO MAKE REPRESENTATIONS AS
TO MATTERS NOT STATED IN THIS SERIES A
PROSPECTUS. THIS PROSPECTUS IS NOT AN PREFERRED STOCK
OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE
THAT WOULD NOT BE PERMITTED OR LEGAL.
NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALES MADE UNDER THIS PROSPECTUS
SHOULD CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS
OR THE AFFAIRS OF CGA GROUP, LTD. HAVE
NOT CHANGED SINCE THE DATE OF THIS
PROSPECTUS.
-------------
PROSPECTUS
-------------
_________, 2000
======================================== ==================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table lists the expenses incurred in connection with the
distribution of the securities being registered hereby, all of which shall be
borne by the Company:
Commission Registration Fees ...................... $ 26,520
Transfer Agent Fees ............................... --
Printing Costs .................................... 50,000
Legal Fees and Expenses ........................... 150,000
Accounting Fees and Expenses ...................... 20,000
Miscellaneous ..................................... 10,000
--------
Total ..................................... $256,520
========
Other than the Commission registration fees, all of the foregoing are
estimates and subject to future contingencies.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The bye-laws of CGA Group provide that directors, alternate directors and
other officers for the time being acting in relation to any of the affairs of
CGA Group, as well as their heirs, executors and administrators, shall be
indemnified and secured harmless out of the assets of CGA Group from and against
all actions, costs, charges, losses, damages and expenses which they or any of
them, their heirs, executors or administrators, shall or may incur or sustain by
or by reason of any act done, concurred in or omitted in or about the execution
of them duty, or supposed duty, or in their respective offices or trusts, and
none of them shall be answerable for the acts, receipts, neglects or defaults of
the others of them or for joining in any receipts for the sake of conformity, or
for any bankers or other persons with whom any money or effects belonging to CGA
Group shall or may be lodged or deposited for safe custody, or for insufficiency
or deficiency of any security upon which any moneys of or belonging to CGA Group
shall be placed out on or invested, or for any other loss, misfortune or damage
which may happen in the execution of their respective offices or trusts, or in
relation thereto, provided that the indemnity shall not extend to any matter in
respect of any fraud or dishonesty which may attach to any of said persons.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued the following equity
securities that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"):
On June 17, 1997, the Registrant redeemed its initial capitalization of
12,000 shares of common stock, par value of $1.00 per share, and effected the
following transactions:
(i) The Registrant issued to accredited investors 2.6 million shares of
Series A preferred stock for aggregate cash consideration of $65,000,000. In
addition, for no additional consideration, the Registrant issued to the
Series A Preferred Stockholders warrants which represent the right to
purchase a total of 270,000 shares of common stock, par value $.01 per
share, of the Company. The principal underwriter for this offering of the
Series A preferred stock was Donaldson, Lufkin & Jenrette Securities
Corporation.
(ii) The Registrant issued to accredited investors 1.6 million
investment units for aggregate consideration of $140 million, consisting of
$80 million in cash and $60 million in commitments. Each investment unit
consists of one share of Series B preferred stock, 4.8925 shares of common
stock and a commitment to purchase 1.5 additional shares of Series B
preferred stock upon the occurrence of certain events. The principal
underwriter for the offering of the investment units was Salomon Brothers
Inc.
(iii) The Registrant sold 1,272,043 shares of common stock to the
sponsoring investors and certain members of management for an aggregate
consideration of $6,360,215. The Registrant issued to such investors,
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for no additional consideration, 847,729 warrants, which each represent the
right to purchase one share of Common Stock on or prior to June 16, 2007, at
an exercise price of $5 per share.
(iv) The Registrant issued an additional 1,494,771 warrants, for no
consideration, to certain employees of the Company, which each represent the
right to purchase one share of common stock at an exercise price of $5 per
share. The employees' warrants will vest ratably over a four-year period and
expire if not exercised within thirty days of the employee's termination of
employment.
On March 31, 1999, the Registrant sold to certain existing shareholders of
the Registrant an aggregate of 43,997,863 shares of Series C preferred stock for
net cash proceeds of $50,996,794.50. The sale was made pursuant to the terms of
the Series C Convertible Cumulative Voting Preferred Stock Subscription
Agreement which is filed as an Exhibit to this Registration Statement. Pursuant
to the terms of the Series C Subscription Agreement, 31,997,863 shares of Series
C preferred stock were sold at $1.50 per share pursuant to the basic
subscription privilege (and overallotments with respect thereto) and 12,000,000
shares of Series C preferred stock were sold at $0.25 per share pursuant to the
additional allotment privilege (and overallotments with respect thereto). Shares
of Series C preferred stock may be converted into shares of common stock on a
one-for-one basis at the holder's option at any time, and are mandatorily
convertible into shares of common stock on a one-for-one basis upon the
occurrence of certain events. The net proceeds from the transaction will be used
for general corporate purposes and to make capital investments in Commercial
Guaranty Assurance.
In connection with the consummation of the transactions contemplated by the
Series C preferred stock Subscription Agreement, on March 31, 1999 all issued
and outstanding shares of Series B preferred stock were converted into shares of
common stock, at a conversion ratio of 11.816 shares of Common Stock per share
of Series B preferred stock. The conversion ratio was based on an assumed value
of $3.00 per share of common stock. As a result of the conversion, 18,905,648
new shares of common stock were issued.
On April 26, 1999, the Company sold 973,483 shares of Series C preferred
stock to employees of the Registrant and its subsidiaries. The shares were sold
for $1.20 each, for a total of approximately $1.2 million. The shares were 90%
financed by the Registrant at 7% per annum with equal principal installments due
annually over a three-year period.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are either not
applicable, not required, or because the information required therein is
included in the financial statements or the notes thereto.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1* Memorandum of Association and Certificate of Incorporation of CGA
Group, Ltd.
3.2* Amended and Restated Bye-laws of CGA Group, Ltd. dated as of March
31, 1999.
3.3* Amended and Restated Appendices to the Amended and Restated Bye-laws
of CGA Group, Ltd. dated as of March 31, 1999.
4.1* CGA Group, Ltd. Shareholders Agreement dated as of June 12, 1997, as
amended and restated as of March 31, 1999.
5.1*** Opinion of Dewey Ballantine LLP as to certain United States tax
matters
5.2*** Opinion of Conyers Dill & Pearman as to the legality of the
securities being registered and as to certain matters of law of
Bermuda
10.1* Series A Subscription Agreement dated as of June 9, 1997, by and
among CGA Group, Ltd. and the holders of the Series A Preferred
Stock
10.2* Common Stock Warrant Acquisition Agreement, dated as of June 9,
1997, by and among CGA Group, Ltd. and the holders of the Series A
Preferred Stock.
10.3* Investment Units Subscription Agreement dated as of June 4, 1997, by
and among CGA Group, Ltd. and the holders of the Investment Units
10.4* Right of First Refusal Agreement dated as of June 17, 1997, by and
between CGA Group, Ltd. and Capital Reinsurance Company
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EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.5* Discretionary Investment Advisory Agreement, dated as of December
18, 1996, between Alliance Capital Management L.P. and Commercial
Guaranty Assurance, Ltd.
10.6* Investment Management Agreement dated as of December 27, 1996,
between J.P. Morgan Investment Management Inc. and Commercial
Guaranty Assurance, Ltd.
10.7* Letter Agreement, dated June 17, 1997, between CGA Group, Ltd. and
DCR (and attachments)
10.8* Employee Warrant Agreement
10.9* CGA Group, Ltd. Employee Stock Warrant Plan
10.10* CGA Group, Ltd. Sponsoring Investors and Founders Stock Warrant Plan
10.11* Excess of Loss Agreement, dated as of June 12, 1997, by and between
CGA Group, Ltd. and KRE Reinsurance Ltd.
10.12* Employment Agreement, as of January 1, 1997, by and between CGA
Group, Ltd. and Richard A. Price
10.13* Employment Agreement, as of January 1, 1997, by and between CGAIM
and Jean-Michel Wasterlain.
10.14* Employment Agreement, as of June 30, 1997, by and between CGAIM and
Michael M. Miran.
10.15* Employment Agreement, as of January 1, 1997, by and between CGAIM
and Kem H. Blacker.
10.16* Employment Agreement, as of January 1, 1997, by and between CGA and
Geoffrey N. Kauffman.
10.17* CGA Group, Ltd. Founders' Common Stock Subscription Agreement, dated
as of June 12, 1997, among CGA Group, Ltd., CGA Funding, L.P., and
certain Founders of CGA Group, Ltd.
10.18* Series C Convertible Cumulative Voting Preferred Stock Subscription
Agreement, dated as of March 31, 1999.
10.19* Agreement dated as of March 1, 1999 by and among CGA Group, Ltd. and
the holders of the Series C Preferred Stock.
10.20* Restricted Stock Purchase Agreement and Promissory Note, dated as of
April 26, 1999, between CGA Group, Ltd. and the employees thereof
listed in Exhibit B thereto.
10.21* CGA Group, Ltd. Chief Financial Officer's Certificate as to
Adjustment to Exercise Price of Warrants Issued Pursuant to the
Sponsoring Investors and Founders Stock Warrant Plan, dated May 18,
1999.
21.1*** Subsidiaries of CGA Group, Ltd.
23.1** Consent of Dewey Ballantine LLP
23.2** Consent of Conyers Dill & Pearman
23.3 Consent of PricewaterhouseCoopers
24.1* Power of Attorney (included in signature page to Registration
Statement)
-----------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 333-7944, effective August 6, 1998, as amended).
** Included in the respective opinions.
*** Previously filed
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
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<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue;
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Hamilton, Bermuda, on July 7, 2000.
CGA GROUP, LTD.
By: /s/ RICHARD A. PRICE
---------------------
RICHARD A. PRICE
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below on July 7, 2000 by the
following persons in the capacities indicated. Each person whose signature
appears below hereby appoints and constitutes Richard A. Price or James R.
Reinhart, and each of them, as his attorney-in-fact, with full power of
substitution, for him or her in any and all capacities, to execute in the name
and on behalf of such person any amendment to this Registration Statement
(including any post-effective amendment) and to file the same, with exhibits
thereto, and other documents in connection therewith, making such changes in
this Registration Statement as the person so acting deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his or her
substitute may do or cause to be done by virtue hereof.
SIGNATURE TITLE
--------- -----
/s/ RICHARD PRICE Chief Executive Officer, President
------------------------------ and Director
RICHARD PRICE
/s/ JAY SHIDLER* Chairman
------------------------------
JAY SHIDLER
/s/ JAMES REINHART* Chief Financial Officer
------------------------------
JAMES REINHART
/s/ ROBERT DENTON* Director
------------------------------
ROBERT DENTON
/s/ DAVID BARSE* Director
------------------------------
DAVID BARSE
/s/ RICHARD FRARY* Director
------------------------------
RICHARD FRARY
/s/ ERIC GRITZMACHER* Director
------------------------------
ERIC GRITZMACHER
/s/ JEFF KRASNOFF* Director
------------------------------
JEFF KRASNOFF
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SIGNATURE TITLE
--------- -----
/s/ MICHAEL MORRISSEY* Director
------------------------------
MICHAEL MORRISSEY
/s/ ALAN S. ROSEMAN* Director
------------------------------
ALAN S. ROSEMAN
/s/ PAUL RUBIN* Director
------------------------------
PAUL RUBIN
/s/ F. FULLER O'CONNOR, JR.* Director
------------------------------
F. FULLER O'CONNOR, JR.
/s/ JAY SUGARMAN* Director
------------------------------
JAY SUGARMAN
*By: /s/ RICHARD PRICE
-----------------------------------
(RICHARD PRICE, ATTORNEY-IN-FACT**)
** By authority of Power of Attorney filed with this Registration Statement on
Form S-1.
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