<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1998
REGISTRATION NO. 333-62785
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLOBAL MARKETS ACCESS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
BERMUDA 6351 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
<TABLE>
<S> <C>
CUMBERLAND HOUSE CT CORPORATION SYSTEM
1 VICTORIA STREET 1633 BROADWAY
HAMILTON, HM AX, BERMUDA NEW YORK, NEW YORK 10019
(441) 295-3278 (212) 664-1666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND
NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
PRINCIPAL EXECUTIVE OFFICES) CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
F. DOUGLAS RAYMOND, III, ESQ. CHARLES G. COLLIS, ESQ. CRAIG B. BROD, ESQ.
DRINKER BIDDLE & REATH LLP CONYERS DILL & PEARMAN CLEARY, GOTTLIEB, STEEN & HAMILTON
1100 PHILADELPHIA NATIONAL BANK CLARENDON HOUSE ONE LIBERTY PLAZA
BUILDING 2 CHURCH STREET, P.O. BOX HM666 NEW YORK, NEW YORK 10006
1345 CHESTNUT STREET HAMILTON, HM CX, BERMUDA (212) 225-2000
PHILADELPHIA, PENNSYLVANIA (441) 295-1422
19107-3496
(215) 988-2700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<S> <C> <C> <C> <C>
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE(3)
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<S> <C> <C> <C> <C>
Common Shares....................... 20,918,000 $15.00 $313,770,000 $92,166
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(1) Includes 2,700,000 Common Shares that may be sold pursuant to the
Underwriters' over-allotment options.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The Registrant has previously paid $85,680 of the registration fee.
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains three forms of prospectus: one to be
used in connection with an underwritten offering of the Common Shares in the
United States and Canada (the "U.S. Prospectus"), a second to be used in
connection with a concurrent offering of the Common Shares outside the United
States and Canada (the "International Prospectus") and a third to be used in
connection with a concurrent direct offering of the Common Shares by the Company
to its directors and officers (the "Direct Sales Prospectus"). The three
prospectuses are identical in all respects except for the front cover page, the
Section entitled "Underwriting" ("Plan of Distribution" in the Direct Sales
Prospectus) and the back cover page. Pages included in the International
Prospectus and the Direct Sales Prospectus and not in the U.S. Prospectus are
marked "Alternate Page for the International Prospectus" and "Alternate Page for
the Direct Sales Prospectus," respectively.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1998
PROSPECTUS
18,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
------------------------
All of the 18,000,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby are being sold by Global Markets Access Ltd. ("GMA").
Of the 18,000,000 Common Shares offered hereby, Common Shares are
being offered for sale initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and Common Shares are being offered
for sale initially in a concurrent offering outside the United States and Canada
by the International Managers (the "International Offering" and, together with
the U.S. Offering, the "Offerings"). The initial public offering price and
underwriting discount per Common Share will be identical for both Offerings. The
initial public offering price will be $15.00 per Common Share. See
"Underwriting." Prior to the Offerings, GMA has not conducted any business and
there has been no public market for the Common Shares.
An application has been made to have the Common Shares approved for
quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "GMALF."
In connection with the formation of GMA and the establishment of a core
group of strategic investors, Risk Capital Reinsurance Company, The Trident
Partnership, L.P., Rolaco Holding S.A., Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund (collectively, the "Strategic Investors") have severally
agreed to purchase for investment directly from GMA an aggregate of 5,673,756
Common Shares and Class B Warrants to purchase an aggregate of 600,000 Common
Shares. Such purchases will be consummated immediately prior to the consummation
of the Offerings for an aggregate purchase price for the Common Shares and the
Class B Warrants of approximately $80.0 million. The aggregate purchase price to
be paid by each Strategic Investor is based on a price of $14.10 for (i) one
Common Share and (ii) the right to purchase a specified fraction of a Common
Share under the Class B Warrants. The exercise price for the Class B Warrants
will be $15.00 per share. The closing of the U.S. Offering made hereby is
conditioned upon the closing of sales by GMA to the Strategic Investors of
Common Shares and related Class B Warrants with an aggregate purchase price of
at least $70.0 million.
GMA is also offering by a separate prospectus up to 218,000 Common Shares
directly to certain of its directors and officers at a price per share equal to
the initial public offering price per share, less the per share underwriting
discounts and commissions, for an aggregate purchase price if all such Common
Shares are purchased of approximately $3.1 million. GMA has also contracted to
sell 115,000 Common Shares directly to certain persons involved in the formation
of the Company at a purchase price of $14.10 per share, for an aggregate
purchase price of approximately $1.6 million. All such purchases are expected to
be consummated simultaneously with the consummation of the Offerings and,
together with the purchases by the Strategic Investors, are referred to in this
Prospectus as the "Direct Sales." Upon consummation of the Offerings and the
Direct Sales, the Strategic Investors, GMA's directors and officers and certain
other persons involved in the formation of the Company are expected to own
collectively approximately 25.0% of the outstanding Common Shares. See "Direct
Sales."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except with respect to The Trident
Partnership, L.P. and as otherwise described herein) generally prevent transfers
to holders beneficially owning 10% or more of the Common Shares, require
divestiture of Common Shares to reduce the beneficial ownership of any holder to
less than 10% of the Common Shares and reduce the voting power of any holder
beneficially owning 10% or more of the Common Shares to less than 10% of the
total voting power of GMA's capital stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO GMA(2)
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<S> <C> <C> <C>
Per Common Share................................ $ $ $
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Total(3)........................................ $ $ $ (4)
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(1) GMA has agreed to indemnify the several U.S. Underwriters and the
International Managers (collectively, the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting certain advisory fees and other expenses related to the
Offerings payable by GMA estimated to be $5,175,000. See "Use of Proceeds."
(3) GMA has granted the U.S. Underwriters and the International Managers
options, exercisable within 30 days after the date hereof, to purchase up to
and additional Common Shares, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to GMA will be $ , $ and $ , respectively. See
"Underwriting."
(4) Assuming completion of all the Direct Sales, the total Proceeds to GMA will
be $ . If the Underwriters' over-allotment options described above
are exercised in full, the total Proceeds to GMA including the Direct Sales
will be $ . See "Direct Sales."
------------------------
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offers and to reject orders in whole or in part. It is expected that
delivery of the Common Shares will be made in New York, New York on or about
, 1999.
------------------------
Joint Lead Managers and Joint Bookrunners
MERRILL LYNCH & CO. PRUDENTIAL SECURITIES INCORPORATED
------------------------
BEAR, STEARNS & CO. INC.
ING BARING FURMAN SELZ LLC
SALOMON SMITH BARNEY
WARBURG DILLON READ LLC
, 1999
<PAGE> 4
CONSENT UNDER THE EXCHANGE CONTROL ACT 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND TRANSFER
OF THE COMMON SHARES BEING OFFERED PURSUANT TO THIS OFFERING. IN ADDITION, A
COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF COMPANIES IN
BERMUDA FOR FILING PURSUANT TO THE COMPANIES ACT 1981 OF BERMUDA. IN GIVING SUCH
CONSENT AND IN ACCEPTING THIS PROSPECTUS FOR FILING, THE BERMUDA MONETARY
AUTHORITY AND THE REGISTRAR OF COMPANIES IN BERMUDA ACCEPT NO RESPONSIBILITY FOR
THE FINANCIAL SOUNDNESS OF ANY PROPOSAL OR FOR THE CORRECTNESS OF ANY OF THE
STATEMENTS MADE OR OPINIONS EXPRESSED HEREIN.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SUCH TRANSACTIONS MAY INCLUDE STABILIZATION, THE PURCHASE OF COMMON SHARES TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. SEE
"UNDERWRITING."
2
<PAGE> 5
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER UNITED STATES FEDERAL SECURITIES LAWS
GMA and its wholly-owned subsidiaries, Global Markets Guaranty Ltd. and GMG
Marketing Ltd., through which GMA expects to conduct substantially all of its
operations, were each organized pursuant to the laws of Bermuda. In addition,
certain of the directors and officers of GMA, as well as certain of the experts
named herein, reside outside the United States, and all or a substantial portion
of their assets and the assets of GMA are or may be located in jurisdictions
outside the United States. Therefore, it may be difficult for investors to
effect service of process within the United States upon such persons or to
recover against GMA or such persons on judgments of courts in the United States,
including judgments predicated upon the civil liability provisions of the United
States federal securities laws. However, GMA may be served with process in the
United States with respect to actions against it arising out of or in connection
with violations of United States federal securities laws relating to offers and
sales of Common Shares in the U.S. Offering by serving CT Corporation System,
1633 Broadway, New York, New York 10019, its United States agent irrevocably
appointed for that purpose.
GMA has been advised by Conyers Dill & Pearman, its Bermuda counsel, that
there is doubt as to whether the courts of Bermuda would enforce (i) judgments
of United States courts obtained in actions against GMA or its directors and
officers, as well as the experts named herein, who reside outside the United
States predicated upon the civil liability provisions of the United States
federal securities laws, or (ii) original actions brought in Bermuda against GMA
or such persons predicated solely upon United States federal securities laws.
GMA has also been advised by Conyers Dill & Pearman that there is no treaty in
effect between the United States and Bermuda providing for such enforcement, and
there are grounds upon which Bermuda courts may not enforce judgments of United
States courts. Certain remedies available under the laws of United States
jurisdictions, including certain remedies available under the United States
federal securities laws, may not be allowed in Bermuda courts as contrary to
that nation's public policy.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the balance sheet,
including the notes thereto, included elsewhere in this Prospectus. Unless the
context otherwise requires, references herein to the "Company" mean Global
Markets Access Ltd. ("GMA"), together with its wholly-owned subsidiaries, Global
Markets Guaranty Ltd. (the "Operating Company") and GMG Marketing Ltd. (the
"Marketing Company"), through which GMA expects to conduct substantially all of
its operations. GMA and the Operating Company were both incorporated in August
1998 in Bermuda and neither has any operating history. The Marketing Company was
incorporated in November 1998 in Bermuda and also does not have any operating
history. The Operating Company was licensed in Bermuda on August 28, 1998 as a
Class 3 insurer, which authorizes it to write, among other things, financial
guaranty reinsurance and insurance. See "Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms" for definitions of certain terms and financial
strength, claims-paying ability and credit ratings used in this Prospectus.
Unless otherwise noted, this Prospectus assumes that the Underwriters'
over-allotment options will not be exercised and that all Direct Sales have been
made. In this Prospectus, amounts are expressed in United States dollars unless
expressly indicated otherwise. The notation "BD$" refers to Bermuda dollars
which currently have a fixed exchange ratio with United States dollars of
1BD$ = 1US$. The financial statements contained herein have been prepared in
accordance with United States generally accepted accounting principles ("GAAP").
THE COMPANY
GMA and the Operating Company were both recently organized in Bermuda to
provide "A" rated financial guaranty reinsurance and insurance on financial
obligations, principally asset-backed and municipal securities, that are rated
"BB" or higher or that are unrated and have in the Company's opinion an
equivalent credit quality. The Company will seek to provide financial guaranty
reinsurance on a worldwide basis and direct financial guaranty insurance outside
of the United States. Upon consummation of the Offerings, the Company expects to
be the only publicly traded "A" rated financial guaranty insurance company and
the first publicly traded Bermuda-based company focused principally on the
financial guaranty industry.
According to Asset-Backed Alert, worldwide issuance of asset-backed
securities grew from approximately $225 billion during the first nine months of
1997 to approximately $319 billion during the first nine months of 1998,
representing an increase of approximately 42%. In addition, Asset-Backed Alert
reported that during the first six months of 1998, 18% of asset-backed
securities issued in public offerings were insured. According to Securities Data
Co., the issuance of municipal securities in the United States grew from
approximately $151 billion during the first nine months of 1997 to approximately
$212 billion during the first nine months of 1998, representing an increase of
approximately 40%. In addition, Securities Data Co. reported that during the
same time period, approximately 50% of municipal securities issued in public
offerings were insured.
The Company expects to raise gross proceeds in excess of $350.0 million and
to have an equity capitalization of approximately $331.6 million upon
consummation of the Offerings and the Direct Sales. Management believes that
this level of capitalization will demonstrate a strong financial position and a
high level of commitment to potential clients and is necessary to establish the
Company as a competitive financial guaranty reinsurer and insurer. As a newly
formed entity, the Company's capital is presently unencumbered by such issues as
loss reserve adequacy, unrealized losses in its investment portfolio and
uncollectible reinsurance. In addition, although the Company does expect that it
may seek a working capital line of credit to finance its operations, the Company
does not presently have or plan to have any indebtedness other than obtaining
letters of credit in connection with its reinsurance agreements. In part because
of the Company's expected capitalization following the Offerings and the Direct
Sales, the Operating Company has been assigned preliminary claims-paying ability
ratings of "A+" by each of Duff & Phelps Credit Rating Co. ("Duff & Phelps") and
Fitch IBCA, Inc. ("Fitch IBCA"), subject to the Company raising gross proceeds
of $350.0 million in the Offerings and the Direct Sales.
4
<PAGE> 7
BUSINESS STRATEGY
The Company's objective is to capitalize on what it believes to be an
opportunity to provide innovative and cost-effective forms of third-party credit
enhancement. The Company will seek to achieve this objective through the
implementation of its business strategy, the principal components of which are:
- - Participate in the Development of the "A" Rated Financial Guaranty Market in
the United States
Historically, the United States financial guaranty insurance market has
generally been served by "AAA" rated financial guaranty insurance
companies. The Company will seek to capitalize on what it believes is a
growing market for "A" rated financial guaranty reinsurance and insurance
in the United States. ACA Financial Guaranty Corporation ("ACA"), one of
the Company's sponsors, has since the commencement of its operations in
October 1997 been developing the market for "A" rated financial guaranty
insurance by offering a lower rated alternative to "AAA" rated financial
guaranty insurance. The Company believes that "A" rated financial guaranty
insurance can, in many cases, reduce an issuer's overall cost of borrowing
and increase the liquidity of a financial obligation trading in the
secondary market while costing less than traditional "AAA" rated financial
guaranty insurance or other forms of third-party credit enhancement. In
addition, the Company believes that "A" rated financial guaranty insurance
may be particularly attractive to issuers that have previously had limited
access to the financial markets. The Company has entered into three
reinsurance treaties with ACA that will become effective upon consummation
of the Offerings. The Company believes that the treaties pursuant to which
the Company provides reinsurance to ACA will provide ACA with additional
insurance capacity and will permit ACA to develop further the market for
"A" rated financial guaranty insurance in the United States. See
"-- Reinsurance Treaties with ACA." The Company may also seek to reinsure
obligations rated "AA" or higher in circumstances where the holders of such
obligations require third-party credit enhancement for regulatory or
accounting purposes. The Company will also seek to enter into reinsurance
arrangements with higher rated third-party credit enhancement providers
based in the United States. Such arrangements would be structured so that
the Company would assume a portion of the risk guaranteed by a third-party
credit enhancement provider on a basis that would provide such third-party
credit enhancement provider capital relief and other benefits.
- - Provide Credit Enhancement for Transactions Structured Outside the United
States
The Company believes that financial guaranty insurance has been utilized,
particularly with respect to asset-backed securities, in transactions
structured outside the United States to only a very limited extent, as
issuers of such financial obligations have principally relied for credit
enhancement instead on banks and other financial institutions offering
letters of credit and other guarantees. As a consequence, the Company
believes that an opportunity exists to provide "A" rated financial guaranty
insurance as an innovative and cost-effective alternative to existing forms
of credit enhancement for such transactions. Initially, the Company's
primary international focus will be to insure financial transactions
involving assets held by trusts or similar special purpose vehicles
domiciled in off-shore jurisdictions such as Bermuda, the Cayman Islands
and the Island of Jersey. Such assets are expected typically to originate
in the United States or European Union countries and be transferred to such
off-shore jurisdictions in connection with the structuring of such
transactions. The Company will seek to capitalize on the relationships its
management team has developed with investment banks, commercial banks and
other financial services firms to generate referrals for issuing financial
guaranty insurance in connection with such transactions. The Company has
also established the Marketing Company, which will act solely as a
marketing agent for the Company. The Marketing Company will operate a
branch office in London, where banking and other financial service
activities are concentrated, so as to facilitate the Company's access to
these types of financial transactions. To a lesser extent, the Company also
expects to seek reinsurance opportunities in Bermuda and certain European
Union countries. The Company is not currently licensed as a financial
guaranty insurer or reinsurer in any jurisdiction other than Bermuda, which
will limit its ability to provide financial guaranty insurance or
reinsurance with respect to certain transactions. As the Company's business
develops, management will monitor the need, if any, to obtain licenses in
jurisdictions other than Bermuda in order to comply with applicable law or
to be able to
5
<PAGE> 8
engage in additional financial guaranty insurance related activities. See
"Risk Factors -- Regulation; Restrictions on Reinsurance and Insurance
Operations."
- - Utilize a Disciplined Underwriting Approach
The Company's underwriting strategy is to reinsure and insure financial
obligations which are expected to make full and timely payment of principal
and interest. Nevertheless, given that the Company will be reinsuring and
insuring obligations rated "BB" or higher or that are unrated and have in
the Company's opinion an equivalent credit quality, the Company does
anticipate that its insurance portfolio as a whole may generate a certain
level of losses. Over time, the Company will seek to diversify the risks it
reinsures and insures by type of obligor, type of pledged assets,
geographic origination point of pledged assets, transaction size,
geographic location of the obligor, revenue sources and risk duration. Such
diversification is intended to mitigate the impact on the Company's
insurance portfolio as a whole in the event that higher than expected
losses arise in certain segments of the Company's business. The Company
also intends initially to seek a private or "shadow" rating evaluation from
one or more nationally recognized rating agencies on substantially all
unrated financial obligations that the Company insures on a direct basis.
- - Capitalize on Skill and Experience of Management and Board of Directors
The Company has assembled a senior management team of experienced
reinsurance and insurance professionals to implement its business strategy.
The Company's President and Chief Executive Officer, Donald J. Matthews,
has over 24 years of experience in the insurance and reinsurance industries
and was President, Chief Operating Officer and a director of ACA from its
formation in October 1997 to August 1998 when he resigned as an officer and
director of ACA to join the Company. From 1985 to 1997, he served as a
Senior Vice President and a Principal of Johnson & Higgins (now Marsh &
McLennan Companies, Inc.), where he was employed for 23 years. At Johnson &
Higgins, Mr. Matthews most recently served as Chairman of its Global
Financial Group, where he oversaw the firm's insurance and reinsurance
relationships with financial services companies, including commercial banks
and investment banks, on a worldwide basis. Also while at Johnson &
Higgins, Mr. Matthews was instrumental in the formation of Corporate
Officers & Directors Assurance Ltd. (now part of ACE Limited) and Executive
Risk Inc. , Managing Principal, Chief
Underwriting Officer of the Company, has over years experience in the
financial guaranty insurance industry. Mary Jane Robertson, Managing
Principal, Chief Financial Officer and Treasurer of the Company, has over
21 years experience in the insurance industry. From 1993 to 1997, Ms.
Robertson was the Chief Financial Officer and a Senior Vice President of
Capsure Holdings Corp. (now part of CNA Surety Corp.), an insurance company
focusing principally on the surety and fidelity insurance business. From
1986 to 1996, Ms. Robertson also served as the Chief Financial Officer and
an Executive Vice President of United Capitol Insurance Company, a
property/casualty insurance company. Bruce W. Bantz, Managing Principal,
Marketing and Business Development of GMA and the Marketing Company, has
over 16 years experience in the investment and consumer banking industries,
specializing in asset securitization. From 1997 to 1998, Mr. Bantz was a
Director and Global Head of Asset Securitization of Dresdner Kleinwort
Benson, an investment banking division of Dresdner Bank A.G. From 1994 to
1997, Mr. Bantz served as a Director and Global Head of Asset
Securitization for NatWest Markets, an investment banking division of
NatWest Group PLC. Lionel J. Marsland-Shaw, Principal, Risk Management of
the Company, has over 27 years experience in the credit analysis sector of
the financial services industry. From 1995 to 1998, Mr. Marsland-Shaw
served as General Manager and Chief Executive Officer of Capital
Intelligence, a credit rating and analysis company specializing in emerging
markets. From 1993 to 1995, Mr. Marsland-Shaw was Director and Head of the
London office of Standard & Poor's Ratings Services and was responsible for
its ratings business in the United Kingdom, Ireland and the Netherlands.
The Company's Board of Directors consists of several individuals with
extensive experience in the financial guaranty and financial services
industries. Management believes that the reputation and expertise possessed
by the Company's officers and directors should assist the Company with its
underwriting analysis and marketing efforts.
6
<PAGE> 9
- - Maintain Low Cost Structure
Management believes that through controls on overhead expenses and with the
absence of a corporate level tax in Bermuda on the Company's profits and
income, the Company will have a low cost structure. The Company expects
that its cost structure will help enable it to offer its products at
attractive prices and to compete effectively in the financial guaranty
reinsurance and insurance markets.
The Company's principal executive office is located at Cumberland House, 1
Victoria Street, Hamilton, HM AX, Bermuda, and its telephone number is (441)
295-3278.
REINSURANCE TREATIES WITH ACA
The Operating Company has entered into three reinsurance treaties with ACA,
a sponsor of the Company, which will become effective upon consummation of the
Offerings. The first treaty is a quota share treaty pursuant to which the
Operating Company is required to provide, and ACA is required to purchase,
reinsurance on a fixed percentage of the risks associated with financial
guaranty insurance policies issued by ACA covering new issues of financial
obligations with a rating of "BB" or higher. The second and third treaties are
facultative treaties under which the Operating Company and ACA are each
obligated to first offer the other the opportunity to reinsure each financial
obligation the other insures on a direct or assumed basis. Such facultative
treaties also set forth the basic terms under which the Operating Company and
ACA may purchase such reinsurance from the other on a case-by-case basis. The
Operating Company expects, from time to time, pursuant to the facultative treaty
under which it provides reinsurance to ACA, to reinsure a greater percentage of
risks insured by ACA than the percentage specified under the quota share treaty.
In addition, the Operating Company expects that, pursuant to such facultative
treaty, it may reinsure certain risks insured by ACA with respect to obligations
trading in the secondary market as well as certain risks insured by ACA prior to
the consummation of the Offerings, which risks in each case will not be covered
by the quota share treaty. The Company anticipates that at least in the early
stages of its business development, the premiums it receives under the treaties
with ACA will account for a substantial portion of the Company's total premium
income.
ACA commenced operations as an "A" rated financial guaranty insurer in
October 1997 and, to the Company's knowledge, is the only "A" rated financial
guaranty insurer operating in the United States. ACA is a privately held
Maryland-domiciled insurance company with its principal offices in New York
City. ACA is licensed to provide financial guaranty insurance in all 50 states,
the District of Columbia, and the territories of Guam, the United States Virgin
Islands and Puerto Rico. ACA's primary business is the provision of financial
guaranty insurance on financial obligations that are rated from "A-" to "BB" or
that are unrated and have in ACA's opinion an equivalent credit quality. ACA has
issued such policies both to issuers of financial obligations at the time of
original issuance and to holders of financial obligations in connection with
secondary market transactions. From January 1, 1998 to September 30, 1998, ACA
wrote financial guaranty insurance covering approximately 100 different
underlying credits representing approximately $1.2 billion in aggregate
principal amount for direct and assumed premiums written during that period
totaling approximately $23.4 million. Substantially all of the financial
guaranty insurance written by ACA has covered municipal obligations and
obligations issued by other tax-exempt organizations, although ACA has insured
some asset-backed and corporate securities.
SPONSORS AND STRATEGIC INVESTORS
The Company has been established through the sponsorship of ACA and its
affiliate American Capital Access Service Corporation ("ACA Service"),
Inter-Atlantic Securities Corporation ("Inter-Atlantic"), Risk Capital
Reinsurance Company ("Risk Capital") and The Trident Partnership, L.P.
("Trident" and, together with ACA, ACA Service, Inter-Atlantic and Risk Capital,
the "Sponsors"). ACA Service currently provides management and support services
to ACA. Inter-Atlantic is a provider of investment banking services to insurance
companies and other financial services firms and was the sponsor of Annuity and
Life Re (Holdings), Ltd., the first publicly traded Bermuda-based reinsurance
company focusing principally on writing annuity and life reinsurance. Risk
Capital, a subsidiary of the publicly traded company Risk Capital Holdings,
Inc., provides reinsurance and other forms of capital to insurance companies
with capital needs.
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Trident is a private investment partnership sponsored by J.P. Morgan Capital
Corporation and J&H Marsh & McLennan that invests on a global basis in the
insurance and reinsurance industries. Inter-Atlantic has provided certain
services to the Company in connection with the Offerings, the sales to the
Strategic Investors and the development of the Company's operations, and ACA
Service, Risk Capital and Trident have acted as consultants to Inter-Atlantic in
connection with the delivery of such services. See "Certain Relationships and
Related Party Transactions."
The Company has also entered into agreements with Risk Capital, Trident,
Rolaco Holding S.A., Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund (Third Avenue Value Fund and Third Avenue Small-Cap Value Fund are
hereinafter referred to as the "Third Avenue Funds" and, together with Risk
Capital, Trident and Rolaco Holding S.A., the "Strategic Investors") for the
purchase for investment directly from the Company of an aggregate of 5,673,756
Common Shares and Class B Warrants to purchase an aggregate of 600,000 Common
Shares. Such purchases will be consummated immediately prior to the consummation
of the Offerings for an aggregate purchase price for the Common Shares and the
Class B Warrants of approximately $80.0 million. The aggregate purchase price to
be paid by each Strategic Investor is based on a price of $14.10 for (i) one
Common Share and (ii) the right to purchase a specified fraction of a Common
Share under the Class B Warrants. The exercise price of the Class B Warrants
will be $15.00 per share. Each of the Strategic Investors has agreed not to sell
or otherwise transfer their Common Shares and Class B Warrants for a period of
nine months from the date of this Prospectus without the prior written consent
of Merrill Lynch & Co. and Prudential Securities Incorporated on behalf of the
Underwriters and the prior written consent of the Company. See "Shares Eligible
for Future Sale" and "Direct Sales."
RISK FACTORS
Businesses such as that of the Company which are in their initial stages of
development present substantial business and financial risks and may suffer
significant losses for reasons not anticipated by management. In addition, the
Company's business strategy has not been tested and may not succeed. Investors
should consider carefully the material risk factors involved in connection with
an investment in the Common Shares and the impact to investors from various
circumstances which could adversely affect the Company's business, results of
operations or financial condition. See "Risk Factors."
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THE OFFERINGS
Common Shares Offered in the
Offerings................... 18,000,000 shares
Common Shares Offered in the
Direct Sales(1)............... 6,006,756 shares
Common Shares to be
Outstanding after the
Offerings and the Direct
Sales(2).................... 24,006,756 shares
Use of Proceeds from the
Offerings and the Direct
Sales....................... The net proceeds of the Offerings and the
Direct Sales (after deducting underwriting
discounts and commissions, certain advisory
fees and other expenses, including payments to
Inter-Atlantic for its services and
reimbursement for certain expenses related to
the Offerings and the sales to the Strategic
Investors) will be approximately $248.6 million
and $84.7 million, respectively. Substantially
all of the net proceeds will be contributed to
the capital and surplus of the Operating
Company to support its financial guaranty
business. See "Use of Proceeds."
Dividend Policy............... The Company intends to pay a quarterly cash
dividend of $.04 per Common Share following the
end of the first full fiscal quarter following
the consummation of the Offerings.
Proposed Nasdaq National
Market Symbol................. GMALF
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(1) Unless otherwise noted, this Prospectus assumes that upon consummation of
the Offerings the sale of 5,673,756 Common Shares and Class B Warrants to
purchase 600,000 Common Shares to the Strategic Investors has been completed
and the 333,000 Common Shares offered by the Company to its directors and
officers and certain other persons involved in the formation of the Company
have been purchased. Such individuals who have not contracted with the
Company to make such purchases have indicated their intention to purchase
such Common Shares, but are not obligated to do so.
(2) The Global Purpose Trust, a Bermuda trust (the "Purpose Trust"), owns 12,000
Common Shares, which constitute all of the Common Shares currently
outstanding. Upon consummation of the Offerings, the Purpose Trust has
agreed to sell such Common Shares to GMA for an aggregate price of $12,000
and such Common Shares will be cancelled. Common Shares to be outstanding
after the Offerings and the Direct Sales excludes the 12,000 Common Shares
currently held by the Purpose Trust, 3,240,907 Common Shares issuable upon
the exercise of outstanding Class A Warrants, 600,000 Common Shares issuable
upon the exercise of Class B Warrants to be included in the Direct Sales,
1,106,114 Common Shares issuable upon the exercise of options to be granted
upon consummation of the Offerings and 214,258 Common Shares reserved for
future issuance pursuant to the Company's Initial Stock Option Plan (the
"Stock Option Plan"). If the Underwriters' over-allotment options are
exercised in full, 26,706,756 Common Shares are expected to be outstanding,
the number of Common Shares issuable upon the exercise of outstanding Class
A Warrants will increase to 3,605,406 Common Shares, the number of Common
Shares issuable upon the exercise of options to be granted upon consummation
of the Offerings will increase to 1,160,114 Common Shares and the number of
Common Shares reserved for future issuance pursuant to the Stock Option Plan
will increase to 308,758 Common Shares. The number of Common Shares issuable
upon the exercise of the Class B Warrants will not change if the
Underwriters' over-allotment options are exercised. The Class A Warrants,
Class B Warrants and options will not be exercisable upon consummation of
the Offerings. See "Management -- Stock Option Plan," "Description of
Capital Stock -- Warrants" and "Stock Sales."
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RISK FACTORS
An investment in the Common Shares involves a high degree of risk.
Prospective investors should consider carefully the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the Common Shares.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "plan," "intend" and similar
expressions are intended to identify forward-looking statements regarding, among
other things, (i) the Company's business and growth strategies; (ii) trends in
the financial guaranty reinsurance and insurance industries; (iii) the Company's
relationship with clients and third-party service providers; (iv) the use of the
net proceeds of the Offerings and the Direct Sales; (v) government regulations;
(vi) trends affecting the Company's financial condition or results of
operations; and (vii) the declaration and payment of dividends. Prospective
investors are cautioned that such forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below and under the heading "Management's Discussion and Analysis of Financial
Condition and Plan of Operations" and elsewhere in this Prospectus.
START UP OPERATIONS. GMA and the Operating Company were both formed in
August 1998 and neither has any operating history. The Marketing Company was
incorporated in November 1998 and also does not have any operating history.
Businesses which are starting up or in their initial stages of development
present substantial business and financial risks and may suffer significant
losses. They must successfully develop business relationships, establish
operating procedures, hire staff and complete other tasks appropriate for the
conduct of their intended business activities. In particular, the Company's
ability to implement successfully its strategy to enter the financial guaranty
reinsurance and insurance market depends on, among other things, (i) the demand
for "A" rated financial guaranty reinsurance and insurance both in the United
States and internationally; (ii) the Company's ability to attract clients other
than ACA; (iii) the Company's ability to attract and retain additional personnel
with underwriting and credit analysis expertise; and (iv) the Company's ability
to evaluate effectively the risks it assumes under the financial guaranty
reinsurance and insurance policies it writes. Furthermore, the market for "A"
rated financial guaranty insurance is in the early stages of development and
there can be no assurance that the initial demand for such insurance will
continue or that the Company will be able to capture a sufficient portion of
such market.
RELIANCE ON ACA. The Company anticipates that at least during the early
stages of its business development, it will depend to a significant extent on
reinsurance sold to ACA, one of the Company's Sponsors, pursuant to the
reinsurance treaties between the Operating Company and ACA. To the Company's
knowledge, ACA is the only company engaged in the business of issuing "A" rated
financial guaranty insurance in the United States. Consequently, the Operating
Company anticipates that the premiums the Operating Company receives under its
reinsurance treaties with ACA will account for all of the Company's total
premium income until such time as the Company successfully develops business
from other sources. At least during such period, the success of the Company will
depend on the performance of ACA and any adverse development affecting ACA would
adversely affect the Company. Because ACA was formed only in October 1997, it is
itself subject to the risks associated with a start up operation described
above, and there can be no assurance that its business will continue to develop
or that its demands for reinsurance will be sufficient to provide the Company
with a meaningful source of business. If the market for "A" rated financial
guaranty insurance fails to develop further, ACA would be adversely affected
and, consequently, its need for reinsurance would be limited. Furthermore, if
ACA's underwriting analysis fails to assess accurately the risks it assumes
under the financial guaranty insurance policies it writes, the Company may incur
a greater level of losses than it anticipates under its reinsurance treaties
with ACA. ACA is also subject to certain limitations when doing business with
non-admitted reinsurers such as the Operating Company. Certain states may limit
the aggregate amount of reinsurance ACA may cede to the Operating Company and to
all non-admitted reinsurers in the aggregate, regardless of the type or amount
of security posted by the Operating Company and any such other non-admitted
reinsurers. There can be no assurances that these limitations will not have a
material adverse effect on the Company. If the Company's reinsurance treaties
with ACA were to be terminated for any reason, the Company would be adversely
affected.
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CONCENTRATION OF REINSURANCE CLIENTS. The Company anticipates that at
least during the early stages of its business development, it will rely more
heavily on writing financial guaranty reinsurance than insurance. Due to the
limited number of companies providing financial guaranty insurance or
reinsurance or other forms of third-party credit enhancement, management expects
initially to target a relatively small number of potential reinsurance clients.
Furthermore, management expects that a few of these potential clients will
account for a high percentage of the Company's revenues for the foreseeable
future. If the Company fails to attract or retain business from one or more of
these potential clients, the Company would be adversely affected.
REGULATION; RESTRICTIONS ON REINSURANCE AND INSURANCE OPERATIONS.
Bermuda. The Operating Company is a registered Bermuda insurance company
and is subject to regulation and supervision in Bermuda. Among other things, the
Bermuda statutes and regulations require the Operating Company to maintain
minimum levels of capital and surplus; prescribe minimum solvency and liquidity
standards, limit transfers of ownership of its capital shares; and provide for
the performance of certain periodic examinations of the Operating Company and
its financial condition. These statutes and regulations may restrict the ability
of the Operating Company to write reinsurance and insurance policies and
distribute funds to GMA. Generally, the Bermuda statutes and regulations
applicable to the Operating Company are less restrictive than those that would
be applicable to the Operating Company were it subject to the insurance laws of
any state in the United States. See "Business -- Regulation -- Bermuda."
United States. Neither GMA, the Operating Company nor the Marketing
Company is currently licensed as a financial guaranty reinsurer or insurer in
any jurisdiction in the United States. The insurance laws of each state in the
United States regulate the sale of insurance within its jurisdiction by
insurers, such as the Operating Company, which are not admitted to do business
within such jurisdiction. With some exceptions, the sale of insurance within a
jurisdiction in the United States where an insurer is not admitted to do
business is prohibited. The sale of reinsurance, however, is generally permitted
within each state of the United States and the District of Columbia by
non-admitted reinsurers, provided that certain requirements are satisfied, such
as the need to obtain necessary approvals from certain state insurance
regulators in connection with a particular reinsurance transaction and/or the
need for the insurer to satisfy applicable credit for reinsurance requirements.
The Operating Company has adopted Operating Guidelines pursuant to which it
intends to conduct its reinsurance business in the United States in a manner
that will comply with the requirements applicable to non-admitted reinsurers and
to conduct its insurance business with persons located in the United States in a
manner that will not subject the Operating Company to the insurance licensing
laws of any jurisdiction in the United States. There can be no assurance,
however, that challenges to the Operating Company's reinsurance and insurance
activities in the United States will not be raised in the future or that the
restrictions on the Operating Company's activities associated with its status as
a non-admitted reinsurer and its lack of any insurance licenses in the United
States will not place the Company at a competitive disadvantage or otherwise
adversely affect the Company. In addition, changes in the Company's business
strategy or applicable insurance laws in the United States may lead management
to conclude that the Operating Company should seek to become an admitted
reinsurer in, or to obtain insurance licenses from, one or more jurisdictions in
the United States. If such a conclusion were to be reached, there can be no
assurance that the Operating Company would be able to become an admitted
reinsurer or be able to obtain such licenses. Furthermore, the process of
obtaining such status or licenses is often costly and may take a long time,
which could adversely affect the Company and its objective of being a low-cost
reinsurance and insurance provider.
Because many jurisdictions in the United States do not permit insurance
companies to take credit for reinsurance obtained from unlicensed or
non-admitted reinsurers on their statutory financial statements unless
appropriate security measures are in place, it is anticipated that the Operating
Company's reinsurance clients will require it to post a letter of credit or
enter into other security arrangements. In the event that the Operating Company
should default under a letter of credit facility, it may be required to
liquidate prematurely all or a substantial portion of its investment portfolio
and/or its other assets which have been pledged as security for the letter of
credit facility or otherwise to secure its obligations to its reinsureds, which
would adversely affect the Company. The Operating Company does not currently
have a letter of credit facility
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established and if the Operating Company is unable to obtain such a facility on
commercially acceptable terms or is unable to arrange for other types of
security, the Operating Company's ability to operate its reinsurance business
may be severely limited.
The Operating Company's quota share and facultative treaties with ACA
contain a requirement that the Operating Company must take all steps necessary
in order to permit ACA to receive credit for such reinsurance in all applicable
jurisdictions. The Operating Company expects typically to post a letter of
credit or other security to enable ACA to obtain full credit for the reinsurance
provided under the treaties. If the Operating Company is unable to satisfy any
requirement needed in order for ACA to receive credit for the Operating
Company's reinsurance, ACA would have the right to terminate its reinsurance
treaties with the Operating Company, which would adversely affect the Company.
Outside the United States -- Insurance. Initially, the Company's primary
international focus will be to insure financial transactions involving assets
held by trusts or similar special purpose vehicles domiciled in off-shore
jurisdictions such as Bermuda, the Cayman Islands and the Island of Jersey. Such
assets are expected typically to be financial obligations originating in the
United States and certain European Union countries which are structured in such
off-shore jurisdictions in connection with such transactions. The Operating
Company has obtained the necessary licenses under Bermuda law to provide
financial guaranty insurance to trusts and other special purpose vehicles
located in Bermuda, and the Company believes that no insurance licenses are
required under the laws of the Cayman Islands to provide financial guaranty
insurance to such entities located in the Cayman Islands. Similarly, the Company
believes that the Operating Company is permitted under the laws of the Island of
Jersey to provide financial guaranty insurance to such entities located in the
Island of Jersey without obtaining an insurance permit, subject to certain
restrictions, principally including conducting the marketing, negotiating,
underwriting, contract execution, policy administration and claims handling
activities of the Operating Company entirely outside the Island of Jersey. In
addition, in connection with these types of transactions, the Operating Company,
as a result of being licensed in Bermuda only, will have to investigate risks
and conduct post-closing surveillance activities in Bermuda, rather than from
the Island of Jersey, the Cayman Islands or the jurisdiction from which the
assets underlying such transactions originated, such as the United States and
certain European Union countries. The Operating Company expects to perform its
financial analysis on such transactions in Bermuda and to obtain the information
needed to conduct such analysis from the proposed insured, persons acting as
agent for the proposed insured and other third parties.
The Company has adopted Operating Guidelines pursuant to which it intends
to operate its insurance business with respect to transactions structured in
Bermuda, the Cayman Islands and the Island of Jersey in a manner that will not
subject the Operating Company to the insurance licensing laws of the Cayman
Islands or the Island of Jersey or the jurisdictions from which the assets
underlying such transactions originate. There can be no assurance, however, that
challenges to the Operating Company's insurance activities in such jurisdictions
will not be raised in the future or that the restrictions on the Operating
Company's activities associated with its lack of any insurance licenses in the
Cayman Islands or the Island of Jersey will not place the Company at a
competitive disadvantage or otherwise adversely affect the Company. In addition,
changes in the Company's business strategy, including a decision to target
additional off-shore jurisdictions that are used as domiciles for structuring
asset-backed transactions, or changes in applicable insurance laws in the Island
of Jersey, the Cayman Islands, the United States or certain European Union
countries may lead management to conclude that the Operating Company should seek
insurance licenses in jurisdictions other than Bermuda. If such a conclusion
were to be reached, there can be no assurance that the Operating Company would
be able to obtain such licenses. Furthermore, the process of obtaining such
licenses is often costly and may take a long time, which could adversely affect
the Company and its objective of being a low-cost insurance provider.
The Company believes that the securities issued by trusts and other special
purpose vehicles that purchase financial guaranty insurance from the Operating
Company will likely be sold in numerous jurisdictions, principally including the
United States and the United Kingdom. In part because the Operating Company will
issue its financial guaranty insurance policies to such trusts and other special
purpose vehicles, the Company does not believe that the mere fact that the
securities issued by such entities will be held by an investor residing in a
particular jurisdiction would require the Operating Company to obtain an
insurance
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license in such jurisdiction. The Company has adopted Operating Guidelines
pursuant to which it intends to issue its financial guaranty insurance policies
to such trusts and other special purpose vehicles that issue securities in the
United States in a manner that will not subject the Operating Company to the
insurance licensing laws of any jurisdiction in the United States. Such
Operating Guidelines provide that in such cases, among other things, (i) the
Operating Company will negotiate, issue and deliver its financial guaranty
policy to an insured located outside the United States; (ii) the Operating
Company will investigate risks and conduct post-closing surveillance from
outside the United States; (iii) the Operating Company will not solicit,
advertise or otherwise sell its policies in the United States; (iv) under the
terms of the securities that are subject to the financial guaranty insurance,
principal and interest will be due and payable to a trustee located outside the
United States; and (v) no policy, certificate of insurance, rider, endorsement
or other evidence of insurance will be delivered by the Operating Company to any
securityholder located in the United States. The Company has adopted similar
Operating Guidelines pursuant to which it intends to issue its financial
guaranty insurance policies to trusts and other special purpose vehicles that
issue securities in the United Kingdom in a manner that will not subject the
Operating Company to the insurance licensing laws of the United Kingdom. Such
Operating Guidelines provide, among other things, that the Operating Company
will make underwriting decisions and issue all policies exclusively from outside
the United Kingdom and not otherwise effect or carry out any contracts of
insurance in the United Kingdom.
Because securities insured by the Operating Company may be held in numerous
jurisdictions, there can be no assurance that challenges will not be made by
regulatory authorities or others in a particular jurisdiction, including the
United States and the United Kingdom, where securities insured by the Operating
Company are held seeking to require the Operating Company to obtain an insurance
license in such jurisdiction. If any such challenge were to be successfully
asserted, there can be no assurance that the Operating Company would be able to
obtain the required licenses. Furthermore, the process of obtaining any such
license may be costly and may take a long time, which could adversely affect the
Company and its objective of being a low-cost insurance provider.
Outside the United States -- Reinsurance. The Company also expects to seek
reinsurance opportunities in Bermuda and certain European Union countries. The
Operating Company has obtained the necessary licenses under Bermuda law to
provide financial guaranty reinsurance to insurers domiciled in Bermuda and has
adopted Operating Guidelines pursuant to which it intends to conduct its
reinsurance business in the European Union in a manner that will not subject the
Operating Company to insurance licensing laws in any European Union country.
There can be no assurance, however, that challenges to the Operating Company's
reinsurance activities in European Union countries will not be raised in the
future or that the restrictions on the Operating Company's reinsurance
activities in European Union countries associated with its lack of any insurance
licenses in such countries will not place the Company at a competitive
disadvantage. In addition, changes in the Company's business strategy or
applicable insurance laws in particular European Union countries may lead
management to conclude that the Operating Company should seek insurance licenses
in one or more European Union countries. If such a conclusion were to be
reached, there can be no assurance that the Operating Company would be able to
obtain such licenses. Furthermore, the process of obtaining such licenses is
often costly and may take a long time, which could adversely affect the Company
and its objective of being a low-cost reinsurance provider.
Marketing Company. Neither GMA, the Operating Company nor the Marketing
Company is licensed as an insurer in the United Kingdom. The insurance laws of
the United Kingdom prohibit the carrying on of insurance and reinsurance
business in the United Kingdom by any person other than an authorized or exempt
insurer or reinsurer. The Company believes that the Operating Company and the
Marketing Company will not need to be licensed as insurers in the United
Kingdom, so long as the Operating Company exclusively makes underwriting
decisions and issues all policies from outside the United Kingdom and does not
otherwise effect or carry out any contracts of insurance in the United Kingdom.
In light of this, the Company and the Marketing Company have adopted Operating
Guidelines that provide, among other things, that the activities of the
Marketing Company will be principally limited to maintaining an office in the
United Kingdom, meeting with prospective parties to financial guaranty
transactions and assisting them in originating proposals to be presented to the
Operating Company in Bermuda for its review and further action; that the
Operating Company will perform credit reviews, make underwriting decisions,
issue policies, collect premiums, settle
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<PAGE> 16
claims and perform all other policy servicing activities, including due
diligence and post-closing credit surveillance, from outside the United Kingdom
and will not carry on any insurance-related activities in the United Kingdom;
and that the Marketing Company will not hold itself out as having the authority
to bind the Operating Company and will not participate in any underwriting
decisions, execute policies, collect premiums, settle claims or otherwise effect
or carry out insurance contracts in the United Kingdom. There can be no
assurance, however, that challenges to the Marketing Company's activities in the
United Kingdom will not be raised in the future or that the restrictions on the
activities of the Operating Company and the Marketing Company in the United
Kingdom associated with their lack of any insurance licenses will not place the
Company at a competitive disadvantage or otherwise adversely affect the Company.
Other. Recently, the insurance and reinsurance regulatory framework has
become subject to increased scrutiny in many jurisdictions, including the United
States, various states within the United States and elsewhere. For example,
there have been Congressional and other initiatives in the past in the Unites
States regarding increased supervision and regulation of the insurance industry,
including proposals to supervise and regulate reinsurers domiciled outside the
United States to a greater extent than currently regulated. It is not possible
to predict the future impact of changing law or regulation on the operations of
the Company. Such changes, if any, could have an adverse effect on the Company.
The Operating Guidelines to be employed by the Company were developed in
consultation with counsel in the jurisdictions in which the Company expects to
conduct its insurance and reinsurance business, the jurisdictions in which the
securities issued by trusts and other special purpose vehicles that have
purchased insurance from the Operating Company are principally expected to be
issued, and the jurisdictions from which the assets backing such securities are
principally expected to originate, in each case as noted above. However, there
can be no assurance that if the Company conducts its business in accordance with
such Operating Guidelines that a court or insurance regulator would not
interpret and apply applicable insurance laws so as to require GMA, the
Operating Company or the Marketing Company to obtain an insurance license in a
particular jurisdiction in light of the absence of controlling legal precedent
with respect to many of the regulatory issues noted above and the broad
discretion accorded insurance regulators in many jurisdictions in the
administration of insurance laws. The insurance laws of most jurisdictions
provide for civil and criminal penalties for conducting an insurance business
without the required licenses.
FINANCIAL RATINGS. In part because of the Company's expected
capitalization following the Offerings and the Direct Sales, the Operating
Company has been assigned preliminary claims-paying ability ratings of "A+" by
each of Duff & Phelps and Fitch IBCA, subject to the Company raising gross
proceeds of $350 million in the Offerings and the Direct Sales. These ratings
are used by potential purchasers of financial guaranty insurance and reinsurance
as an important means of assessing the financial strength and quality of
financial guaranty insurers and reinsurers. In addition, the level of capital
charge relief which the rating agencies provide to a financial guaranty insurer
that purchases reinsurance is directly dependent on the rating of the reinsurer.
Likewise, the decreased overall cost of borrowing realized by an issuer of a
financial obligation and the increase in liquidity in the secondary market of a
financial obligation that is subject to financial guaranty insurance is largely
dependent on the rating of the insurer. The Company's principal competitors are
all more highly rated than the Company, which, in some respects, will put the
Company at a competitive disadvantage. No assurance can be given that one or
more of the rating agencies will not downgrade or withdraw its rating of the
Operating Company in the future due to factors that may or may not be within the
control of the Company. A downgrade of any of the Operating Company's ratings
below "A-" or the withdrawal of any of the Operating Company's ratings would
give ACA the right to terminate its reinsurance treaties with the Company after
a 90 day period, which would adversely affect the Company. Any reinsurance
treaty entered into in the future by the Company is expected to contain a
similar provision. As a result, a downgrade or withdrawal of any of the
Operating Company's ratings would severely limit or prevent the Operating
Company from writing any new reinsurance or insurance policies and,
consequently, would adversely affect the Company. Similarly, a downgrade or
withdrawal of any rating of ACA would have adverse consequences to ACA which, in
turn, would adversely affect the Company.
DEPENDENCE ON KEY EMPLOYEES. The Company will be substantially dependent
in the implementation of its business strategy on its executive officers and key
employees. If the Company experiences the
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unexpected loss of the services of one of those individuals, particularly Donald
J. Matthews, President and Chief Executive Officer of the Company,
, Managing Principal, Chief Underwriting Officer of the Company,
Mary Jane Robertson, Managing Principal, Chief Financial Officer and Treasurer
of the Company, Bruce W. Bantz, Managing Principal, Marketing and Business
Development of the Company, or Lionel J. Marsland-Shaw, Principal, Risk
Management of the Company, the Company would be adversely affected. Although the
Company has employment agreements with each of such individuals, no assurance
can be given that the Company will be able to retain their services. In
addition, in order for the Company to assess accurately the risks associated
with the financial guaranty reinsurance and insurance policies it writes, it
will need to hire and retain additional personnel with underwriting and credit
analysis expertise. The Company currently has only five employees, consisting of
the individuals named above. The loss of the services of such individuals, or
the inability of the Company to hire and retain other talented personnel, could
delay or prevent the Company from fully implementing its business strategy and
could otherwise adversely affect the Company. The Company does not carry key
person life insurance policies for any of its executive officers or key
employees.
Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may
not engage in any gainful occupation in Bermuda without an appropriate
governmental work permit. Such a work permit may be granted or extended upon
showing that, after proper public advertisement, no Bermudian (or spouse of a
Bermudian) is available who meets the minimum standards for the advertised
position. Messrs. Matthews, , Bantz and Marsland-Shaw and Ms. Robertson
have not yet received work permits. In addition, the Company will need to obtain
work permits for any other non-Bermudian individuals it hires, including
individuals with underwriting and credit analysis expertise. While the Company
is not currently aware of any reason why the work permits for such individuals
would not be issued, there can be no assurance that such work permits will be
issued prior to the consummation of the Offerings or thereafter. The failure of
these work permits to be issued would adversely affect the Company.
UNDERWRITING RISK. Evaluating risk is central to the business of any
financial guaranty insurer or reinsurer, and will be particularly important in
the case of the Company, which will be reinsuring and insuring financial
obligations that have a credit quality of "BB" or higher or that are unrated and
have in the Company's opinion an equivalent credit quality. Financial guaranty
losses are inherently unpredictable, and the types of obligations insured by the
Company will tend to be subject to a higher risk of loss than financial
obligations that carry higher ratings. As the Company's insurance portfolio
develops, the Company expects that 10% to 25% of its insurance portfolio will
consist of financial obligations that at the time the Company insures such
obligations are rated "BB" or are unrated and have in the Company's opinion an
equivalent credit quality. Such obligations are considered below investment
grade and are subject to a greater risk of default than obligations that are
rated investment grade. There can be no assurance that material losses will not
occur on the insurance risks underwritten by the Company.
The Company's success will depend on its ability to assess accurately the
risks associated with the financial obligations it reinsures or insures. With
respect to automatic treaty reinsurance, such as the quota share treaty with
ACA, the Company's underwriting and credit analysis will focus on the
underwriting policies, procedures and expertise possessed by the ceding company
(such as ACA), rather than the risks associated with particular obligations
covered under the treaty. See "-- Reliance on ACA." If the Company fails to
assess accurately the risks it assumes, the Company may fail to establish
appropriate premium rates, its reserves may prove to be inadequate to cover
losses and, consequently, the Company would be adversely affected. The Company
will also need to hire and retain additional personnel with underwriting and
credit analysis expertise to assess the risks associated with the financial
obligations it reinsures or insures. The inability of the Company to hire or
retain such individuals could delay or prevent the Company from fully
implementing its business strategy and could otherwise adversely affect the
Company.
ADEQUACY OF LOSS RESERVES. The financial guarantees to be issued by the
Company will reinsure or insure the financial performance of obligations over an
extended period of time, in some cases over 30 years, under policies that the
Company cannot generally cancel. The Company's policy is to provide for loss and
loss adjustment expense ("LAE") reserves to cover losses that may be reasonably
estimated on its insured obligations as of the balance sheet date. The reserves
for losses and LAE at any balance sheet date will reflect
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the Company's estimate of identified ("case basis") and unidentified
("unallocated") losses on the obligations it has insured through such date. The
establishment of an appropriate level of loss reserves is an inherently
uncertain process, made even more so by the undeveloped nature of the "A" rated
financial guaranty reinsurance and insurance market, and there can be no
assurance that claims made against the Company will not exceed the Company's
loss reserves. A significant economic event could trigger widespread claims,
particularly if the entire fixed income market were adversely affected.
Significant underwriting losses would adversely affect the Company and could
cause it to experience net losses. Over time, such losses could impair the
Operating Company's ability to maintain its financial strength and claims-paying
ability ratings or to pay dividends to GMA.
MARKET FOR FINANCIAL GUARANTY INSURANCE AND REINSURANCE. The market for
financial guaranty insurance is comprised primarily of the issuers of and
investors in municipal bonds and asset-backed securities who seek credit
enhancement of those financial obligations from insurance companies.
Consequently, changes in the underlying market for such obligations may have an
impact on the financial guaranty insurance and reinsurance industry. In
particular, during periods of rising interest rates or other adverse economic
conditions, there may be fewer issues of financial obligations and,
consequently, a decreased demand for financial guaranty insurance and
reinsurance. During periods of decreasing interest rates, issuers have a greater
incentive to enter the capital markets, but typically the interest rate spread
between insured and uninsured obligations becomes more narrow, resulting in a
decreased incentive to purchase financial guaranty insurance. A general economic
downturn or a downturn in the debt markets could adversely affect the market for
financial guaranty insurance and reinsurance. Similarly, any material change in
the United States tax treatment of municipal securities, or the imposition of a
"flat tax" or a national sales tax in lieu of the current federal income tax
structure in the United States, could adversely affect the market for municipal
obligations and, consequently, the demand for financial guaranty insurance and
reinsurance of such obligations. The market for financial guaranty reinsurance
is largely dependent on the size and strength of the primary financial guaranty
insurance market, as well as the risk retention limitations imposed on primary
financial guaranty insurers and other third-party credit enhancement providers
by rating agencies and regulatory authorities, which limitations are subject to
change.
The market for financial guaranty insurance and reinsurance outside the
United States is substantially less developed than the market in the United
States, particularly with respect to "A" rated financial guaranty insurance. In
addition to the factors described above, the risks inherent in international
markets, including confiscatory taxation, nationalization of assets,
establishment of exchange controls, political or social instability and
fluctuation in foreign exchange rates, could adversely affect the Company's
performance in the financial guaranty insurance and reinsurance market outside
the United States. Instability of a country's currency or political situation
could result in widespread defaults on issues insured or reinsured by the
Company in the country experiencing such instability or backed by assets
originating in such country, which would adversely affect the Company. The
Company's ability to enter the market for financial guaranty insurance and
reinsurance outside the United States will be restricted in certain
jurisdictions due to the Company's lack of a license to write financial guaranty
insurance in any jurisdiction other than Bermuda. See "-- Regulation;
Restrictions on Reinsurance and Insurance Operations."
CONFIDENCE IN THE FINANCIAL GUARANTY INDUSTRY. Because the financial
guaranty industry is composed of a relatively small number of companies, should
any one major financial guaranty insurer suffer a downgrade of its financial
strength or claims-paying ability rating, investor confidence in the market as a
whole could suffer, causing a decrease in the demand for financial guaranty
insurance, which would adversely affect the Company. In particular, if ACA's
financial strength or claims-paying ability rating is downgraded, its ability to
develop further its business would be severely limited and, in turn, the Company
would be adversely affected.
COMPETITION. The traditional financial guaranty insurance and reinsurance
industry is highly competitive. The market for financial guaranty insurance and
reinsurance is dominated by a small number of companies that have greater
financial resources and are more established than the Company. A number of large
banks and other financial institutions, which also have greater financial
resources and are more established than the Company, also provide various forms
of third party credit enhancement. There can be no assurance that such insurers,
banks and financial institutions will not seek to duplicate the Company's
business
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strategy and compete directly with the Company by providing lower-priced
financial guaranty reinsurance or insurance or comparable forms of credit
enhancement. Furthermore, the Company's reinsurance treaties with ACA do not
prohibit ACA from competing directly with the Company. If ACA, other financial
guaranty insurers or other third-party credit enhancement providers enter the
Company's target markets, the Company could be adversely affected. In addition,
if ACA is adversely affected by competition in its target markets, the Company
would also be adversely affected. Under the Company's quota share reinsurance
treaty with ACA, the Company is not permitted to write direct financial guaranty
insurance within any state in the United States, the District of Columbia,
Puerto Rico, Guam and the Virgin Islands so long as such treaty remains in
effect.
Competition in the financial guaranty insurance and reinsurance industry is
based on many factors, including premium charges, the general reputation and
perceived financial strength of the financial guaranty insurer, other terms and
conditions of products offered, and reputation and experience in the particular
line of financial guaranty to be written. The Company will also compete with
alternative methods of credit enhancement that do not employ third-parties, such
as over-collateralization of a structured finance transaction. There can be no
assurance that the Company's strategy will permit it to compete effectively with
these alternative methods of credit enhancement. See "Business -- Competition."
INVESTMENT RISKS. There can be no assurance that the investment objectives
of the Company will be achieved. The success of any investment activity is
affected by general economic conditions, which may adversely affect the markets
for interest-rate-sensitive securities, including the extent and timing of
investor participation in such markets, the level and volatility of interest
rates and, consequently, the value of such fixed income securities. Volatility
or illiquidity in the markets in which the Operating Company directly or
indirectly holds positions could adversely affect the Company. See
"Business -- Investment Strategy."
The Operating Company has retained Alliance Capital Management L.P. and The
Prudential Investment Corporation (collectively, the "Investment Managers") to
manage the Operating Company's investment portfolio. Each Investment Manager
will have discretionary authority over the portion of the Operating Company's
investment portfolio allocated to it, subject to the investment guidelines
adopted by the Operating Company (the "Investment Guidelines"). The performance
of the Operating Company's investment portfolio, therefore, will depend to a
great extent on the ability of the Investment Managers to select and manage
appropriate investments. There can be no assurance that the Investment Managers
will be successful in meeting the Company's investment objectives. The Operating
Company may retain additional or different firms to manage its investment
portfolio from time to time. See "Business -- Investment Managers."
The Investment Guidelines restrict the Operating Company from investing in
securities for which it has written financial guaranty insurance or reinsurance
and limit its investments in securities not insured or reinsured by the
Operating Company, but issued by issuers of securities the Operating Company has
insured or reinsured, to 5% of the Operating Company's total investment
portfolio on an aggregate basis. The Investment Guidelines also provide for the
following procedures that are intended to limit the Operating Company's exposure
to concentrations of risk: (a) investments in an industry sector are limited to
20% of the Operating Company's total investment portfolio, with the exception of
the United States government and its agencies; (b) investments in a single
issuer are limited to 5% of the Operating Company's total investment portfolio,
with the exception of the United States government and its agencies; and (c)
investments in non-United States dollar denominated securities are limited to
10% of the Operating Company's total investment portfolio. There can be no
assurance that such limitations in the Investment Guidelines will sufficiently
insulate the Operating Company's investment portfolio from adverse developments
affecting particular issuers, sectors or industries. See "Business -- Investment
Strategy."
INCOME TAX RISKS
United States Taxation of GMA, the Operating Company and the Marketing
Company. GMA, the Operating Company and the Marketing Company are Bermuda
corporations and do not intend to file United States tax returns. GMA, the
Operating Company and the Marketing Company plan to operate in such a manner
that they will not be subject to United States tax (other than United States
excise tax on reinsurance premiums) because they do not intend to engage in a
trade or business in the United States. However, because definitive
identification of activities which constitute being engaged in a trade or
business in the United States
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is not provided by the Internal Revenue Code of 1986, as amended (the "Code"),
or regulations or court decisions, there can be no assurance that the Internal
Revenue Service ("IRS") will not contend that GMA, the Operating Company and/or
the Marketing Company is engaged in a trade or business in the United States. If
GMA, the Operating Company or the Marketing Company were considered to be
engaged in a trade or business in the United States (and, if such company were
to qualify for benefits under the income tax treaty between the United States
and Bermuda, such business were attributable to a "permanent establishment" in
the United States), it would be subject to United States tax at regular
corporate rates on its taxable income that is effectively connected with its
United States business plus an additional 30% "branch profits" tax on such
income remaining after the regular tax, in which case there would be an adverse
affect on the Company. See "Certain Tax Considerations -- Taxation of GMA, the
Operating Company and the Marketing Company -- United States."
The United States currently imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. In addition, the Company may be subject to
withholding tax on certain investment income from United States sources. There
can be no assurance that such taxes will not be increased or that other taxes
will not be imposed on the Company's business.
Controlled Foreign Corporation Rules. United States persons who may,
directly or through certain attribution rules, acquire 10% or more of the Common
Shares of GMA, should consider the possible application of the "controlled
foreign corporation" ("CFC") rules. (Such persons also should see "Limitations
on Ownership, Transfers and Voting Rights," below.) Each "United States
shareholder" of a CFC who owns shares in the CFC on the last day of the CFC's
taxable year generally must include in such shareholder's gross income for
United States federal income tax purposes the shareholder's pro-rata share of
the CFC's "subpart F income," even if the subpart F income has not been
distributed. For these purposes, any United States person who owns directly or
indirectly 10% or more of the voting stock of a foreign corporation will be
considered to be a "United States shareholder." In general, a foreign insurance
company such as the Operating Company is treated as a CFC only if such "United
States shareholders" collectively own more than 25% of the total combined voting
power or total value of the company's stock for an uninterrupted period of 30
days or more during any year. Because of the anticipated dispersion of GMA's
share ownership following the Offerings and because under GMA's Bye-Laws no
single shareholder (other than Trident) will be permitted to own or to exercise
10% or more of the total combined voting power of GMA, and because neither
Trident nor its general partner is a United States person and no direct or
indirect Trident partner who is a United States person will own a large enough
interest in Trident to own, by attribution, 10% or more of the voting power or
value of GMA stock through Trident, shareholders of GMA should not be viewed as
"United States shareholders" of a CFC for purposes of these rules. There can be
no assurance, however, that the IRS will not successfully assert a contrary
position. See "Certain Tax Considerations -- Taxation of Shareholders -- United
States Taxation."
Related Person Insurance Income Risks. If the Operating Company's related
person insurance income ("RPII") determined on a gross basis were to equal or
exceed 20% of its gross insurance income in any taxable year and direct or
indirect insureds and persons related to such insureds were directly or
indirectly to own more than 20% of the voting power or value of the Operating
Company's capital stock, a United States person who owns Common Shares in GMA
directly or indirectly on the last day of the taxable year may be required to
include in the shareholder's income for United States federal income tax
purposes the shareholder's pro-rata share of the Operating Company's RPII for
the taxable year, determined as if such RPII were distributed proportionately to
such United States persons at that date. RPII is generally underwriting premium
and related investment income attributable to insurance or reinsurance policies
where the direct or indirect insureds are United States shareholders or are
"related" (as defined for purposes of the RPII provision) to United States
shareholders of the insurance or reinsurance company issuing such policies. The
Operating Company will not knowingly enter into any insurance or reinsurance
arrangements in which the direct or indirect insureds are, or are so related to,
owners of Common Shares. Moreover, the Operating Company believes it is highly
unlikely that it will enter into reinsurance agreements in which, in the
aggregate, the direct or indirect insureds are, or are so related to, owners of
20% or more of the Common Shares. Furthermore, the Operating Company believes it
is highly unlikely that the 20% gross insurance income
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threshold will be met or exceeded in 1999 and subsequent years. However, there
can be no assurances regarding either of these thresholds, particularly because
the Operating Company's direct or indirect insureds may be deemed to include the
owners of securities with respect to which the Operating Company issues
financial guaranty insurance or reinsurance, and many of these securities, as
well as the Common Shares, are expected to be publicly traded. Consequently,
there can be no assurance that a United States person will not be required to
include amounts in its income in respect of RPII in any taxable year.
Furthermore, no effort will be made by GMA or the Operating Company to identify
the extent to which owners of securities for which the Operating Company has
issued financial guaranty insurance or reinsurance are also shareholders of GMA.
Thus, GMA, the Operating Company and GMA's United States shareholders may not
know with certainty whether GMA's United States shareholders are subject to the
RPII rules, or how much RPII the Operating Company has earned in any taxable
year. See "Certain Tax Considerations -- Taxation of Shareholders -- United
States Taxation."
Even if the 20% thresholds described in the preceding paragraph are not
met, if a shareholder who is a United States person disposes of shares in a
foreign insurance corporation that has RPII and in which United States persons
own 25% or more of the voting power or value of the corporation's stock, any
gain from the disposition will generally be treated as ordinary income to the
extent of the shareholder's portion of the corporation's undistributed earnings
and profits that were accumulated during the period that the shareholder owned
the shares (potentially whether or not such earnings and profits are
attributable to RPII). In addition, such a shareholder will be required to
comply with certain reporting requirements, regardless of the amount of shares
owned by the shareholder. These rules should not apply to dispositions of Common
Shares because GMA is not itself directly engaged in the insurance business and
because proposed United States Treasury regulations applicable to this situation
appear to apply only in the case of shares of corporations that are directly
engaged in the insurance business. There can be no assurance, however, that the
IRS will interpret the proposed regulations in this manner or that the proposed
regulations will not be promulgated in final form in a manner that would cause
these rules to apply to dispositions of Common Shares. See "Certain Tax
Considerations -- Taxation of Shareholders -- United States Taxation."
Passive Foreign Investment Company Risks. To avoid significant potential
adverse United States federal income tax consequences for any United States
person who owns Common Shares, it is important that GMA not constitute a
"passive foreign investment company" (a "PFIC") in any year in which such person
is a shareholder. In general, a foreign corporation is a PFIC for a taxable year
if 75% or more of its income constitutes "passive income" or 50% or more of its
assets produce passive income. "Passive income" generally includes interest,
dividends and other investment income. However, "passive income" does not
include 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 such income is
attributable to financial reserves in excess of the reasonable needs of the
insurance business. Because GMA, through the Operating Company, intends to be
predominantly engaged in an insurance business and does not intend to have
financial reserves in excess of the reasonable needs of its insurance business,
GMA does not expect to meet the requirements for a PFIC. There can be no
assurance, however, that the IRS or a court will concur in this view. See
"Certain Tax Considerations -- Taxation of Shareholders -- United States
Taxation."
Bermuda Taxes. Bermuda does not currently impose a corporate level tax on
the profits or income of the Company, although it may do so in the future. GMA
and the Operating Company have each received an assurance from the Bermuda
Minister of Finance under The Exempted Undertakings Tax Protection Act 1966 of
Bermuda to the effect that if there is enacted in Bermuda any legislation
imposing tax computed on profits or income, or computed on any capital asset,
gain or appreciation, or any tax in the nature of estate duty or inheritance
tax, then the imposition of any such tax shall not be applicable to GMA, the
Operating Company or to any of their operations or the shares, debentures or
other obligations of GMA or the Operating Company until March 2016. There can be
no assurance that after such date GMA or the Operating Company would not be
subject to any such tax. The Marketing Company has applied to the Bermuda
Minister of Finance for the same assurance that no such tax in Bermuda would be
applicable to it. There can be no assurance that the Marketing Company will
receive such an assurance or, if such assurance is granted, that the Marketing
Company will not be subject to any such tax after March 2016.
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United Kingdom Taxes. Under current United Kingdom law, the measure of
corporate taxation resulting from the activities of the Marketing Company in the
United Kingdom would likely be the portion of the profits of the Marketing
Company attributable on an assumed arm's-length basis to its London branch
activities. Such profit would be measured in practice by comparison with the
compensation that the Marketing Company would need to pay to an independent
entity providing the same services as its office in the United Kingdom. The
Marketing Company will seek to enter into an agreement with the United Kingdom
Inland Revenue under which an agreed profit margin will be attributed to its
office in the United Kingdom under a stated formula for purposes of calculating
the amount of tax owed in the United Kingdom by the Marketing Company. No
assurance can be given that such an agreement will be reached and, if reached,
any such agreement would be cancellable upon reasonable notice by the Marketing
Company or United Kingdom Inland Revenue. No assurance can be given that any
such agreement will not be cancelled by United Kingdom Inland Revenue.
Other Taxes. GMA, the Operating Company and the Marketing Company plan to
operate in such a manner that they will not generally be subject to any material
taxes in jurisdictions other than those noted above, except for withholding
taxes on certain kinds of investment income and excise or similar premium taxes
as described above. It is possible, however, that the Operating Company or the
Marketing Company may be held to be doing business in one or more jurisdictions
and therefore subject to tax on the profits of such business beyond that
contemplated above.
LIMITATIONS ON OWNERSHIP, TRANSFERS AND VOTING RIGHTS. Except as described
below with respect to transfers of Common Shares executed on The Nasdaq National
Market, under GMA's Bye-Laws GMA's directors (or their designee) are required to
decline to register any transfer of shares of GMA, including Common Shares, if
they have any reason to believe that such transfer would result in a person
other than Trident (or any group of which such person is a member) beneficially
owning, directly or indirectly, 10% or more of any class of shares of GMA.
Similar restrictions apply to issuances and repurchases of shares by GMA. The
directors (or their designee) also may, in their absolute discretion, decline to
register the transfer of any shares if they have reason to believe that such
transfer may expose GMA, any subsidiary or shareholder thereof or any person
purchasing reinsurance or insurance from the Operating Company to adverse tax or
regulatory treatment in any jurisdiction or if they have reason to believe that
registration of such transfer under the Securities Act of 1933, as amended (the
"Securities Act"), or under any blue sky or other United States securities laws
or under the laws of any other jurisdiction is required and such registration
has not been duly effected. A transferor of Common Shares will be deemed to own
such shares for dividend, voting and reporting purposes until a transfer of such
Common Shares has been registered on the Register of Members of GMA. GMA is
authorized to request information from any holder or prospective acquiror of
Common Shares as necessary to effect registration of any such transaction, and
may decline to register any such transaction if complete and accurate
information is not received as requested.
GMA's directors will not decline to register any transfer of Common Shares
executed on The Nasdaq National Market for the reasons described above. However,
if any transfer results in the transferee other than Trident (or any group of
which such transferee is a member) beneficially owning, directly or indirectly,
10% or more of any class of GMA's shares or causes GMA's directors (or their
designee) to have reason to believe that such transfer may expose GMA, any
subsidiary or shareholder thereof or any person purchasing reinsurance or
insurance from the Operating Company to adverse tax or regulatory treatment in
any jurisdiction or if they have reason to believe that registration of such
transfer under the Securities Act or under any blue sky or other United States
securities laws or under the laws of any other jurisdiction is required and such
registration has not been duly effected, under GMA's Bye-Laws the directors (or
their designee) are empowered to deliver a notice to the transferee demanding
that such transferee surrender to an agent designated by the directors (the
"Agent") certificates representing the shares and any dividends or distributions
that the transferee has received as a result of owning the shares. A transferee
who has resold the shares before receiving such notice will be required to
transfer to the Agent the proceeds of the sale, to the extent such proceeds
exceed the amount that the transferee paid for the shares, together with any
dividends or distributions that the transferee received from GMA. As soon as
practicable after receiving the shares and any dividends or distributions that
the transferee received, the Agent will use its best efforts to sell such shares
and any non-cash dividends or distributions in an arm's-length transaction on
The Nasdaq National Market. After
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applying the proceeds from such sale toward reimbursing the transferee for the
price paid for the shares, the Agent will pay any remaining proceeds and any
cash dividends and distributions to organizations described in Section 501(c)(3)
of the Code that the directors designate. The proceeds of any such sale by the
Agent or the surrender of dividends or distributions will not inure to the
benefit of the Company or the Agent, but such amounts may be used to reimburse
expenses incurred by the Agent in performing its duties.
In addition, GMA's Bye-Laws generally provide that any person other than
Trident (or any group of which such person is a member) holding directly, or by
attribution, or otherwise beneficially owning voting shares of GMA carrying 10%
or more of the total voting rights attached to all of GMA's outstanding capital
shares, will have the voting rights attached to its voting shares reduced so
that it may not exercise more than approximately 9.9% of such total voting
rights. Because of the attribution provisions of the Code and the rules of the
Securities and Exchange Commission (the "Commission") regarding determination of
beneficial ownership, this requirement may have the effect of reducing the
voting rights of a shareholder whether or not such shareholder directly holds of
record 10% or more of the voting shares of GMA. Further, the directors (or their
designee) have the authority to request from any shareholder certain information
for the purpose of determining whether such shareholder's voting rights are to
be reduced. Failure to respond to such a notice, or submitting incomplete or
inaccurate information, gives the directors (or their designee) discretion to
disregard all votes attached to such shareholder's Common Shares. See
"Description of Capital Stock -- Common Shares."
FOREIGN CURRENCY FLUCTUATIONS. The Company's functional currency is the
United States dollar. However, because the Company's business strategy includes
reinsuring and insuring financial obligations issued outside the United States,
the Company expects that it will write a portion of its business and receive
premiums in currencies other than United States dollars. Furthermore, the
Operating Company may maintain up to 10% of its investment portfolio in
investments denominated in currencies other than United States dollars.
Consequently, the Company may experience exchange losses to the extent its
foreign currency exposure is not hedged or is not sufficiently hedged, which in
turn would adversely affect the Company. The Company will make determinations as
to whether to hedge its foreign currency exposure on a case-by-case basis. The
Company does not expect typically to hedge against such foreign currency
exposure. If the Company were to hedge its foreign currency exposure, the
Company may use forward foreign currency exchange contracts in an effort to
hedge against movements in the value of foreign currencies relative to the
United States dollar. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specified currency at a future date at a price
set at the time of the contract. Foreign currency exchange contracts will not
eliminate fluctuations in the value of the Company's assets and liabilities
denominated in foreign currencies but rather allow the Company to establish a
rate of exchange for a future point in time. If the Company does seek to hedge
its foreign currency exposure through the use of forward currency exchange
contracts or currency swaps, it will be subject to the risk that the
counterparties to such arrangements fail to perform.
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of the Offerings and
the Direct Sales, GMA expects to have outstanding 24,006,756 Common Shares,
Class A Warrants to purchase an aggregate of 3,240,907 Common Shares, Class B
Warrants to purchase an aggregate of 600,000 Common Shares and options to
purchase an aggregate of 1,106,114 Common Shares. If the Underwriters'
over-allotment options are exercised in full, 26,706,756 Common Shares are
expected to be outstanding, the number of Common Shares issuable upon the
exercise of outstanding Class A Warrants will increase to an aggregate of
3,605,406 Common Shares and the number of Common Shares issuable upon the
exercise of outstanding options will increase to an aggregate of 1,160,114
Common Shares. The number of Common Shares issuable upon the exercise of the
Class B Warrants will not change if the Underwriters' over-allotment options are
exercised. The Class A Warrants, Class B Warrants and options will not be
exercisable upon consummation of the Offerings. See "Management -- Stock Option
Plan," "Description of Capital Stock -- Warrants" and "Direct Sales." Except as
disclosed in "Description of Capital Stock -- Restrictions on Transfer" and as
discussed below with respect to the lock-up agreements, the Common Shares sold
in the Offerings and any Common Shares sold in the Direct Sales pursuant to the
separate prospectus to GMA's directors and officers will be freely transferable
without restriction or further registration under the Securities Act, except for
any of those Common Shares owned by an "affiliate" of the Company within the
meaning of Rule 144 under the Securities
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Act (which sales will be subject to volume limitations and certain other
restrictions). The Common Shares to be sold to the Strategic Investors, the
Common Shares the Company has contracted to sell to certain persons involved in
the formation of the Company and the Common Shares underlying the Class A
Warrants, the Class B Warrants and the options are "restricted securities" as
defined in Rule 144 under the Securities Act and may not be resold in the
absence of registration under the Securities Act or pursuant to an exemption
from registration. The Strategic Investors, the holders of the Class A Warrants
and the holders of the Class B Warrants have been granted rights to require the
Company to register under the Securities Act the Common Shares purchased by the
Strategic Investors in the Direct Sales and the Common Shares underlying the
Class A Warrants and the Class B Warrants, which rights are not exercisable
before the first anniversary of the consummation of the Offerings. The Company
has agreed not to permit the acceleration of the exercisability of such rights
without the prior written consent of Merrill Lynch & Co. and Prudential
Securities Incorporated on behalf of the Underwriters. The Company does intend
to register the resale of the Common Shares underlying any outstanding options
promptly following the first anniversary of the consummation of the Offerings.
The Company, its directors and officers, the Strategic Investors, the holders of
the Class A Warrants and certain persons involved in the formation of the
Company have executed agreements (the "lock-up agreements") under which they
have agreed that they will not, without the prior written consent of Merrill
Lynch & Co. and Prudential Securities Incorporated on behalf of the Underwriters
and, in the case of the Strategic Investors, the Company, directly or indirectly
offer, sell, offer to sell, contract to sell, transfer, assign, pledge,
hypothecate, grant any option to purchase, or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, transfer, assignment,
pledge, hypothecation, grant of any option to purchase or other sale or
disposition) of any Common Shares or other capital stock of the Company or any
other securities convertible into, or exercisable or exchangeable for, any
Common Shares or other capital stock of the Company for a period of one year
after the date of this Prospectus or, in the case of the Strategic Investors,
nine months after the date of this Prospectus. Such agreements do not prevent
the Company from granting options so long as such options are not exercisable
until one year from the date of this Prospectus. Merrill Lynch & Co., Prudential
Securities Incorporated and, in the case of the Strategic Investors, the Company
may, in their discretion at any time and without notice, jointly release all or
any portion of the securities subject to such lock-up agreements.
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of Common Shares for future sale, will have
on the market price of the Common Shares prevailing from time to time. Sales of
substantial amounts of Common Shares in the public market following the
Offerings, including sales by persons holding the Common Shares sold to the
Strategic Investors or certain persons involved in the formation of the Company
or the Common Shares underlying the Class A Warrants, Class B Warrants or
options, or the perception that such sales could occur, could adversely affect
the market price of the Common Shares and may make it more difficult for the
Company to sell its equity securities in the future at a time and at a price
which it deems appropriate. See "Shares Eligible for Future Sale."
YEAR 2000 RISK. Many existing computer programs use only two digits to
identify a year in the date field. These programs, if not corrected, could fail
or create erroneous results by or at the year 2000. This "Year 2000" issue is
believed to affect virtually all companies and organizations, including the
Company. Because the Company expects to purchase computer hardware and software
that is either new or less than two years old, the Company believes that its
exposure with respect to its own computer systems to Year 2000-related problems
will not be significant. However, the Company will be exposed to the risk that
its third-party service providers, reinsurance clients and issuers of financial
obligations insured or reinsured by the Company may be exposed to Year
2000-related problems. The Company is in the process of assessing whether its
third-party service providers are or on a timely basis will be Year 2000
compliant. Similarly, the Company has received assurances from ACA that its
computer systems are expected to be Year 2000 compliant on a timely basis and
the Company intends to seek similar assurances from other future reinsurance
clients. Furthermore, as part of the Company's underwriting analysis, it will
review the Year 2000 compliance efforts of the issuers of financial obligations
insured by the Company and, with respect to the Company's reinsurance
operations, will rely on the analysis performed by the primary insurer. There
can be no assurance, however, that the Company's operations will not experience
material disruptions due to the failure of the Company's third-party service
providers, reinsurance clients or the issuers of financial obligations insured
or reinsured by the Company to
22
<PAGE> 25
become fully Year 2000 compliant in a timely manner or that such failure will
not otherwise have an adverse effect on the Company. Furthermore, the Company's
strategy to penetrate the credit enhancement market outside of the United States
may subject the Company to additional Year 2000 risk resulting from the
possibility that foreign entities may not address Year 2000 compliance issues
with as much vigor as their United States counterparts. The Company will
continue to monitor developments relating to this issue, including the
development of additional contingency plans to supplement its current
contingency plan, which provides for the replacement of existing third-party
service providers which are not Year 2000 compliant with comparable third-party
service providers which are Year 2000 compliant.
HOLDING COMPANY STRUCTURE. GMA is a holding company that will not conduct
significant operations of its own and, at least initially, will have no
significant operations or assets other than its ownership of the capital stock
of the Operating Company and the Marketing Company. Over time, dividends and
other permitted payments from the Operating Company are expected to be GMA's
principal source of funds to pay expenses and dividends, if any. The payment of
dividends by the Operating Company to GMA is limited under Bermuda law and
regulations, including Bermuda insurance law. Under the Insurance Act 1978 of
Bermuda, as amended, and the related regulations (the "Insurance Act"), the
Operating Company is prohibited from declaring or paying dividends that would
result in the Operating Company failing to comply with its solvency margin and
liquidity ratio. In addition, under the Bermuda Companies Act 1981, GMA and the
Operating Company may only declare or pay a dividend if there are reasonable
grounds for believing that they are, or would after the payment be, able to pay
their respective liabilities as they become due. Accordingly, there is no
assurance that dividends will be declared or paid by the Company in the future.
See "Dividend Policy," "Management's Discussion and Analysis of Financial
Condition and Plan of Operations -- Liquidity and Capital Resources" and
"Business -- Regulation -- Bermuda."
FOREIGN CORPORATION, SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS. GMA,
the Operating Company and the Marketing Company are each organized pursuant to
the laws of Bermuda. In addition, certain of the directors and officers of GMA,
as well as certain of the experts named herein, reside outside the United
States, and all or a substantial portion of their assets and the assets of GMA
are or may be located in jurisdictions outside the United States. Although GMA
has appointed an agent in the City of New York to receive service of process
with respect to actions against it arising out of or in connection with
violations of United States federal securities laws relating to offers and sales
of Common Shares in the U.S. Offering, it may be difficult for investors to
effect service of process within the United States upon such persons or to
recover against them or GMA on judgments of United States courts, including
judgments predicated upon civil liability provisions of the United States
federal securities laws. See "Enforceability of Civil Liabilities Under United
States Federal Securities Laws."
NO PRIOR PUBLIC MARKET FOR THE COMMON SHARES. Before the Offerings there
has been no public market for the Common Shares. There can be no assurance that
an active trading market for the Common Shares will develop or be sustained
following the completion of the Offerings or that the market price of the Common
Shares will not decline from the initial public offering price. The initial
public offering price for the Common Shares offered hereby was established by
the Company and the representatives of the Underwriters and may not be
indicative of the market price of the Common Shares after the Offerings.
DILUTION. Purchasers of Common Shares in the Offerings will experience
immediate and substantial dilution of approximately $1.19 per share in the net
tangible book value of their Common Shares from the initial public offering
price. See "Dilution."
23
<PAGE> 26
USE OF PROCEEDS
The net proceeds from the sale of the 18,000,000 Common Shares in the
Offerings are estimated to be approximately $248.6 million (after deducting
underwriting discounts and commissions, certain advisory fees and other
estimated expenses, including payments to Inter-Atlantic for its services and
reimbursement for certain expenses related to the Offerings and the sales to the
Strategic Investors). See "Certain Relationships and Related Party
Transactions." The net proceeds from the Direct Sales are estimated to be
approximately $84.7 million. The purpose of the Offerings and the Direct Sales
is to enable the Company to implement its business plan to provide financial
guaranty reinsurance and insurance. Substantially all of the net proceeds of the
Offerings and the Direct Sales will be contributed to the capital and surplus of
the Operating Company to support its financial guaranty business and will be
invested in accordance with the Investment Guidelines. See
"Business -- Investment Strategy." Until so invested, such proceeds will be
invested in short-term, investment grade, interest-bearing securities.
24
<PAGE> 27
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1998, as adjusted for amounts payable upon
consummation of the Offerings and as adjusted to give effect to the Offerings
and the Direct Sales and the receipt of the estimated net proceeds therefrom.
See "Use of Proceeds."
<TABLE>
<CAPTION>
AS ADJUSTED FOR
AMOUNTS PAYABLE AS ADJUSTED FOR THE
UPON CONSUMMATION OFFERINGS AND THE
ACTUAL OF THE OFFERINGS DIRECT SALES(d)
------ ----------------- -------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Preferred Shares, par value $1.00 per share
(50,000,000 shares authorized; no shares
outstanding; no shares outstanding as
adjusted)....................................... $ -- $ -- $ --
Common Shares, par value $1.00 per share
(100,000,000 shares authorized; 12,000 shares
outstanding; 24,006,756 shares outstanding as
adjusted for the Offerings and the Direct
Sales)(a)....................................... 12 12 24,007
Additional paid-in capital........................ 108 (5,067)(b) 309,421
Accumulated deficit............................... (275) (1,870)(c) (1,870)
----- -------- --------
Total shareholders' equity (deficit)......... (155) (6,925) 331,558
----- -------- --------
Total capitalization.............................. $(155) $ (6,925) $331,558
===== ======== ========
</TABLE>
- ---------------
(a) The Purpose Trust owns 12,000 Common Shares, which constitute all of the
Common Shares currently outstanding. Upon consummation of the Offerings, the
Purpose Trust has agreed to sell such Common Shares to GMA for an aggregate
price of $12,000 and such Common Shares will be cancelled. Common Shares
outstanding excludes 3,240,907 Common Shares issuable upon the exercise of
outstanding Class A Warrants, 600,000 Common Shares issuable upon the
exercise of the Class B Warrants to be included in the Direct Sales,
1,106,114 Common Shares issuable upon the exercise of options to be granted
upon consummation of the Offerings and 214,258 Common Shares reserved for
future issuance pursuant to the Stock Option Plan. If the Underwriters'
over-allotment options are exercised in full, 26,706,756 Common Shares are
expected to be outstanding, the number of Common Shares issuable upon the
exercise of outstanding Class A Warrants will increase to 3,605,406 Common
Shares, the number of Common Shares issuable upon the exercise of options to
be granted upon consummation of the Offerings will increase to 1,160,114
Common Shares and the number of Common Shares reserved for future issuance
pursuant to the Stock Option Plan will increase to 308,758 Common Shares.
The number of Common Shares issuable upon the exercise of the Class B
Warrants will not change if the Underwriters' over-allotment options are
exercised. The Class A Warrants, Class B Warrants and options will not be
exercisable upon consummation of the Offerings. See "Management -- Stock
Option Plan," "Description of Capital Stock -- Warrants" and "Direct Sales."
(b) Reflects amounts payable upon consummation of the Offerings of $3.3 million
to Inter-Atlantic for certain advisory services related directly to the
Offerings and the sales to the Strategic Investors; and approximately $1.9
million for estimated out-of-pocket expenses consisting of legal, accounting
and printing expenses as well as filing fees and other costs related
directly to the Offerings and the sales to the Strategic Investors.
(c) Reflects amounts payable upon consummation of the Offerings of $600,000 to
Inter-Atlantic for certain advisory services related to the development of
the Company's operations and approximately $1.3 million for estimated
out-of-pocket expenses consisting of recruiting, personnel and other
expenses related to the Company's operations.
(d) Reflects 24,006,756 Common Shares sold in the Offerings and the Direct Sales
and the receipt of the estimated net proceeds therefrom. Does not give
effect to any exercise of the Underwriters' over-allotment options and
excludes the 12,000 Common Shares currently held by the Purpose Trust.
25
<PAGE> 28
DIVIDEND POLICY
GMA is a newly formed corporation and has not declared or paid any cash
dividends on its Common Shares. The Board of Directors of GMA intends to declare
and pay out of current and retained earnings a quarterly cash dividend of $.04
per Common Share following the first full fiscal quarter following the
consummation of the Offerings. It will be GMA's policy to retain all earnings in
excess of such quarterly dividends to support the growth of its business. If
GMA's current and retained earnings do not support the payment of such quarterly
dividends, future dividends may be reduced or eliminated. If GMA makes a payment
to shareholders in excess of its current and retained earnings, such payment
would be treated as a return of capital to holders of the Common Shares. The
declaration and payment of dividends by GMA will be at the discretion of its
Board of Directors and will depend upon GMA's results of operations and cash
flows, the financial position and capital requirements of the Operating Company,
general business conditions, legal, tax, regulatory and any contractual
restrictions on the payment of dividends and other factors the Board of
Directors of GMA deems relevant. GMA's ability to pay dividends depends on the
ability of the Operating Company to pay dividends to GMA. While GMA is not
itself subject to any significant legal prohibitions on the payment of dividends
on its Common Shares, the Operating Company is subject to Bermuda regulatory
constraints which affect its ability to pay dividends to GMA. Accordingly, there
is no assurance that dividends on the Common Shares will be declared or paid in
the future. See "Management's Discussion and Analysis of Financial Condition and
Plan of Operations -- Liquidity and Capital Resources" and
"Business -- Regulation -- Bermuda."
26
<PAGE> 29
DILUTION
Purchasers of the Common Shares offered in the Offerings will experience an
immediate and substantial dilution in net tangible book value of their Common
Shares from the initial public offering price. After giving effect to the
Offerings and the Direct Sales, the pro forma net tangible book value of the
Common Shares (after deducting underwriting discounts and commissions, certain
advisory fees and other estimated expenses, including payments to Inter-Atlantic
for its services and reimbursement of certain expenses related to the Offerings
and the sales to the Strategic Investors) will be approximately $331.6 million,
or approximately $13.81 per outstanding Common Share. This represents an
immediate and substantial dilution in net tangible book value to investors
purchasing shares in the Offerings of approximately $1.19 per share, without
taking into account any Common Shares issuable upon the exercise of the Class A
Warrants, Class B Warrants and options. As of September 30, 1998, the net
tangible book value per outstanding Common Share before giving effect to the
Offerings and the Direct Sales was $(12.92). Pro forma "net tangible book value"
per outstanding share represents shareholders' equity divided by the number of
outstanding Common Shares, including the Common Shares issued in the Offerings
and the Direct Sales. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $15.00
Net tangible book value per outstanding share as of
September 30, 1998 before giving effect to the
Offerings and the Direct Sales......................... $(12.92)
Increase in net tangible book value per outstanding share
attributable to the sale of the Common Shares in the
Offerings and the Direct Sales......................... 26.73
Pro forma net tangible book value per outstanding share upon
completion of the Offerings and the Direct Sales(1)....... 13.81
------
Dilution to new investors in the Offerings.................. $ 1.19
======
</TABLE>
- ---------------
(1) Does not include 3,240,907 Common Shares issuable upon the exercise of
outstanding Class A Warrants (3,605,406 Common Shares if the Underwriters'
over-allotment options are exercised in full), 600,000 Common Shares
issuable upon the exercise of Class B Warrants to be included in the Direct
Sales, 1,106,114 Common Shares issuable upon the exercise of options
expected to be granted upon consummation of the Offerings (1,160,114 Common
Shares if the Underwriters' over-allotment options are exercised in full)
and 214,258 Common Shares reserved for future issuance under the Stock
Option Plan (308,758 Common Shares if the Underwriters' over-allotment
options are exercised in full). The number of Common Shares issuable upon
the exercise of the Class B Warrants will not change if the Underwriters'
over-allotment options are exercised. The Class A Warrants, Class B Warrants
and options will not be exercisable upon consummation of the Offerings. The
exercise of the Class A Warrants, Class B Warrants and the options are not
expected to be dilutive to purchasers of the Common Shares in the Offerings
because the exercise price per share of such warrants and options is equal
to the initial public offering price per share. See "Management -- Stock
Option Plan," "Description of Capital Stock -- Warrants" and "Direct Sales."
27
<PAGE> 30
The following table summarizes the number of Common Shares issued by GMA,
the total consideration paid and the average price per share paid in the Direct
Sales and the Offerings:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
AMOUNT PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Direct Sales........................ 6,006,756 25.02% $ 84,695,260(a) 23.88% $14.10(b)
Offerings........................... 18,000,000 74.98 270,000,000 76.12 $15.00
---------- ------ ------------ ------
Total..................... 24,006,756 100.00% $354,695,260 100.00% $14.77
========== ====== ============ ======
</TABLE>
- ---------------
(a) Includes amounts paid in the aggregate for Common Shares and Class B
Warrants in the Direct Sales.
(b) The average price per share is based on the number of Common Shares
purchased in the Direct Sales and does not take into account the Common
Shares underlying the Class B Warrants.
28
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The following unaudited pro forma consolidated balance sheet is based on
the historical unaudited consolidated balance sheet of the Company as of
September 30, 1998, and gives effect to the amounts payable upon consummation of
the Offerings and to the receipt of the estimated net proceeds of the Offerings
and the Direct Sales as if they were consummated on September 30, 1998. The
unaudited pro forma consolidated balance sheet is based on assumptions
management believes are reasonable and is presented for informational purposes
only and does not purport to be indicative of the balance sheet data as of any
future date. The unaudited pro forma consolidated balance sheet should be read
in conjunction with the Company's historical consolidated balance sheet and
notes thereto and other information contained herein.
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AS ADJUSTED FOR THE
RECEIPT OF THE
AS ADJUSTED FOR AMOUNTS ESTIMATED NET
PAYABLE UPON PROCEEDS OF THE
HISTORICAL CONSUMMATION OFFERINGS AND THE
INFORMATION OF THE OFFERINGS DIRECT SALES
----------- ----------------------- -------------------
<S> <C> <C> <C>
ASSETS
Cash...................................... $ 120,000 $ 120,000 $333,428,260(d)
Deferred equity offering costs............ 570,000 -- --
--------- ----------- ------------
Total Assets.................... $ 690,000 $ 120,000 $333,428,260
========= =========== ============
LIABILITIES
Accounts payable and accrued expenses..... $ 845,000 $ 7,045,000(a) $ 1,870,000(e)
--------- ----------- ------------
Total Liabilities............... 845,000 7,045,000 1,870,000
--------- ----------- ------------
SHAREHOLDERS' EQUITY
Preferred Shares (par value $1.00;
50,000,000 shares authorized; no shares
outstanding)............................ -- -- --
Common Shares (par value $1.00;
100,000,000 shares authorized; 12,000
shares outstanding; 24,006,756 shares
outstanding as adjusted for the receipt
of the estimated net proceeds of the
Offerings and the Direct Sales)......... 12,000 12,000 24,006,756(f)
Additional paid-in capital................ 108,000 (5,067,000)(b) 309,421,504(g)
Accumulated deficit....................... (275,000) (1,870,000)(c) (1,870,000)
--------- ----------- ------------
Total shareholders' equity
(deficit)..................... (155,000) (6,925,000) 331,558,260
--------- ----------- ------------
Total liabilities and shareholders'
equity.................................. $ 690,000 $ 120,000 $333,428,260
========= =========== ============
</TABLE>
- ---------------
(a) Reflects amounts payable upon consummation of the Offerings of $3.9 million
to Inter-Atlantic for certain advisory services related to the Offerings,
the sales to the Strategic Investors and the development of the Company's
operations; and approximately $3.2 million for estimated out-of-pocket
expenses consisting of recruiting, personnel, legal, accounting and printing
expenses as well as filing fees and other costs related to the Offerings,
the sales to the Strategic Investors and the development of the Company's
operations. Of such fees and expenses, the Company has allocated
approximately $5.2 million as costs related directly to the Offerings and
the sales to the Strategic Investors, and approximately $1.9 million as
operating expenses. Inter-Atlantic has contracted with ACA Service, Risk
Capital and Trident to provide consulting services to Inter-Atlantic in
connection with the services that Inter-Atlantic has agreed to provide to
the Company. Pursuant to such arrangements, Inter-Atlantic has agreed to pay
$1.95 million to ACA Service, $108,225 to Risk Capital and $324,675 to
Trident upon consummation of the Offerings.
29
<PAGE> 32
(b) Reflects the estimated costs associated with the Offerings and the sales to
the Strategic Investors described in footnote (a).
(c) Reflects the estimated operating expenses described in footnote (a).
(d) Reflects the estimated net proceeds of the Offerings and the Direct Sales,
less $12,000 which will be paid to the Purpose Trust in exchange for the
Common Shares it currently holds, net of the estimated costs associated with
the Offerings and the sales to the Strategic Investors described in footnote
(a).
(e) Reflects payment of the estimated costs associated with the Offerings and
the sales to the Strategic Investors described in footnote (a).
(f) Reflects 24,006,756 Common Shares sold in the Offerings and the Direct
Sales, less the 12,000 Common Shares to be repurchased by the Company from
the Purpose Trust.
(g) Reflects additional paid-in capital received in the Offerings and the Direct
Sales, net of the estimated costs associated with the Offerings and the
sales to the Strategic Investors described in footnote (a).
30
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
GENERAL
GMA and the Operating Company were both incorporated in August 1998 in
Bermuda and neither has any operating history. The Marketing Company was
incorporated in November 1998 in Bermuda and also does not have any operating
history. The Operating Company was licensed in Bermuda on August 28, 1998 as a
Class 3 insurer, which authorizes it to write, among other things, financial
guaranty reinsurance and insurance. The Operating Company is not currently
licensed or admitted as an insurer in any jurisdiction other than Bermuda. The
Company's fiscal year ends on December 31 and its financial statements are
prepared in accordance with GAAP.
For the period from August 28, 1998 through September 30, 1998, the Company
incurred costs of $275,000, which consisted primarily of costs related to the
organization of the Company and operating expenses including recruiting and
personnel, as well as professional fees. Through the end of September 30, 1998,
the Company recorded a net loss of $275,000, which also represented the
Company's accumulated deficit at the end of such period.
LIQUIDITY AND CAPITAL RESOURCES
GMA will rely primarily on cash dividends and other permissible payments
from the Operating Company to pay its operating expenses and dividends on its
Common Shares. The Board of Directors of GMA intends to declare and pay out of
current and retained earnings a quarterly cash dividend of $.04 per Common Share
following the end of the first full fiscal quarter following the consummation of
the Offerings. It will be GMA's policy to retain all earnings in excess of such
quarterly dividends to support the growth of its business. If GMA's current and
retained earnings do not support the payment of such quarterly dividends, future
dividends may be reduced or eliminated. If GMA makes a payment to shareholders
in excess of its current and retained earnings, such payment would be treated as
a return of capital to holders of the Common Shares. The declaration and payment
of dividends by GMA will be at the discretion of its Board of Directors and will
depend upon GMA's results of operations and cash flows, the financial position
and capital requirements of the Operating Company, general business conditions,
legal, tax, regulatory and any contractual restrictions on the payment of
dividends and other factors the Board of Directors of GMA deems relevant. GMA's
ability to pay dividends depends on the ability of the Operating Company to pay
dividends to GMA. While GMA is not itself subject to any significant legal
prohibitions on the payment of dividends on its Common Shares, the Operating
Company is subject to Bermuda regulatory constraints which affect its ability to
pay dividends to GMA. Accordingly, there is no assurance that dividends on the
Common Shares will be declared or paid in the future. See "Dividend Policy" and
"Business -- Regulation -- Bermuda."
The principal sources of funds for the Operating Company's operations are
initially expected to be substantially all of the net proceeds of the Offerings
and the Direct Sales (after deducting underwriting discounts and commissions,
certain advisory fees and other expenses, including payments to Inter-Atlantic
for its services and reimbursement for certain expenses related to the Offerings
and the sales to the Strategic Investors), financial guaranty reinsurance
premiums and realized net investment income. These funds are expected to be used
primarily to pay operating expenses (including personnel expenses), the cost of
new computer equipment and software and, subject to Bermuda law, to make
dividend payments to GMA. The balance of the net proceeds will be invested in
accordance with the Investment Guidelines. The Company believes that the net
proceeds of the Offerings and the Direct Sales will be sufficient to fund its
planned growth and operating activities for the next three to five years. Should
the Company's future growth so warrant, the Company may seek to enter into an
excess of loss reinsurance facility with a company rated "A" or higher in order
to provide the Operating Company with additional insurance and reinsurance
capacity. There can be no assurance that such a facility will be available to
the Company at such time on commercially acceptable terms.
31
<PAGE> 34
The Company's underwriting strategy is to reinsure and insure financial
obligations which are expected to make full and timely payment of principal and
interest. Nevertheless, given that the Company will be reinsuring and insuring
financial obligations that have a credit quality rated "BB" or higher or that
are unrated and have in the Company's opinion an equivalent credit quality, the
Company does anticipate that its insurance portfolio as a whole may generate a
certain level of losses. If the Company fails to assess accurately the risks it
assumes, the Company may fail to establish appropriate premium rates, its
reserves may prove to be inadequate to cover losses and, consequently, the
Company would be adversely affected. The financial guarantees to be issued by
the Company will reinsure or insure the financial performance of obligations
over an extended period of time, in some cases over 30 years, under policies
that the Company cannot generally cancel. The Company's policy is to provide for
loss and loss adjustment expense ("LAE") reserves that are adequate to cover the
ultimate aggregate losses inherent in the obligations insured by the Operating
Company. The reserves for losses and LAE at any balance sheet date will reflect
the Company's estimate of identified ("case basis") and unidentified
("unallocated") losses on the obligations it has insured through such date. The
establishment of an appropriate level of loss reserves is an inherently
uncertain process, made even more so by the undeveloped nature of the "A" rated
financial guaranty reinsurance and insurance market, and there can be no
assurance that claims made against the Company will not exceed the Company's
loss reserves. A significant economic event could trigger widespread claims,
particularly if the entire fixed income market were adversely affected.
Significant underwriting losses would adversely affect the Company and could
cause it to experience net losses. Over time, such losses could impair the
Operating Company's ability to maintain its financial strength and claims-paying
ability ratings or to pay dividends to GMA. See "Business -- Reserves."
The Operating Company is a registered Bermuda insurance company and is
subject to regulation and supervision in Bermuda. Neither GMA, the Operating
Company nor the Marketing Company is currently licensed as a financial guaranty
insurer or reinsurer in any jurisdiction in the United States. The insurance
laws of each state in the United States regulate the sale of insurance within
their jurisdiction by insurers, such as the Operating Company, which are not
admitted to do business within such jurisdiction. Because many jurisdictions in
the United States do not permit insurance companies to take credit for
reinsurance obtained from unlicensed or non-admitted insurers on their statutory
financial statements unless appropriate security measures are in place, it is
anticipated that the Company's reinsurance clients will require the Company to
post a letter of credit or enter into other security arrangements. In the event
that the Company should default under a letter of credit facility, it may be
required to liquidate prematurely all or a substantial portion of its investment
portfolio and/or its other assets which have been pledged as security for the
facility or otherwise secure its obligations to its reinsureds, which would
adversely affect the Company. The Operating Company does not currently have a
letter of credit facility established and if the Company is unable to obtain a
letter of credit facility on commercially acceptable terms or is unable to
arrange for other types of security, the Company's ability to operate its
business may be severely limited. The Company's quota share and facultative
treaties with ACA contain a requirement that the Company must take all steps
necessary in order to permit ACA to receive credit for such reinsurance in all
applicable jurisdictions.
Because the Company expects to purchase computer hardware and software that
is either new or less than two years old, the Company believes that its exposure
with respect to its own computer systems to Year 2000-related problems will not
be significant. However, the Company will be exposed to the risk that its third-
party service providers, reinsurance clients and issuers of financial
obligations insured or reinsured by the Company may be exposed to Year
2000-related problems. The Company is in the process of assessing whether its
third-party service providers are or on a timely basis will be Year 2000
compliant. Similarly, the Company has received assurances from ACA that its
computer systems are expected to be Year 2000 compliant on a timely basis and
the Company intends to seek similar assurances from other future reinsurance
clients. Furthermore, as part of the Company's underwriting analysis, it will
review the Year 2000 compliance efforts of the issuers of financial obligations
insured by the Company and, with respect to the Company's reinsurance
operations, will rely on the analysis performed by the primary insurer. There
can be no assurance, however, that the Company's operations will not experience
material disruptions due to the failure of the Company's third-party service
providers, reinsurance clients or the issuers of financial obligations insured
or reinsured by
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the Company to become fully Year 2000 compliant in a timely manner or that such
failure will not otherwise have an adverse effect on the Company. Furthermore,
the Company's strategy to penetrate the credit enhancement market outside of the
United States may subject the Company to additional Year 2000 risk resulting
from the possibility that foreign entities may not address Year 2000 compliance
issues with as much vigor as their United States counterparts. The Company will
continue to monitor developments relating to this issue, including the
development of additional contingency plans to supplement its current
contingency plan, which provides for the replacement of existing third-party
service providers which are not Year 2000 compliant with comparable third-party
service providers which are Year 2000 compliant.
Pursuant to an agreement between Inter-Atlantic and the Company,
Inter-Atlantic has agreed to provide certain services in connection with the
Offerings, the sales to the Strategic Investors and the development of the
Company's operations, including assistance in preparing a registration statement
for the Common Shares, selecting underwriters in connection with the Offerings,
identifying and negotiating with potential strategic investors and such other
services as the Company or Inter-Atlantic deems appropriate. Pursuant to such
Agreement, the Company has agreed to pay Inter-Atlantic a fee of $3.9 million
upon consummation of the Offerings. Inter-Atlantic has in turn contracted with
ACA Service, Risk Capital and Trident to provide consulting services to
Inter-Atlantic in connection with the services Inter-Atlantic has agreed to
provide to the Company. Pursuant to such agreement, Inter-Atlantic has agreed to
pay $1.95 million to ACA Service, $108,225 to Risk Capital and $324,675 to
Trident upon consummation of the Offerings. The Company is also obligated upon
consummation of the Offerings to reimburse Inter-Atlantic for reasonable
expenses it incurs in connection with performing services under its agreement
with the Company. Such expense reimbursements will not include the fees
Inter-Atlantic is obligated to pay ACA Service, Risk Capital and Trident, but
will include expenses incurred by ACA Service, Risk Capital and Trident in
connection with performing services under their agreements with Inter-Atlantic
for which Inter-Atlantic is obligated to reimburse ACA Service, Risk Capital and
Trident upon consummation of the Offerings. Upon consummation of the Offerings,
certain of these incurred but not currently payable expenses may be paid
directly by the Company rather than paid to Inter-Atlantic as reimbursement. At
September 30, 1998, Inter-Atlantic had incurred expenses on the Company's behalf
in connection with the development of the Company's operations of approximately
$275,000 and expenses in connection with the Offerings and the sales to the
Strategic Investors of approximately $570,000, including reimbursements it owed
to ACA Service, Risk Capital and Trident. Upon consummation of the Offerings,
expenses incurred by the Company, including expenses incurred by Inter-Atlantic
on the Company's behalf are currently estimated to be approximately $3.2
million, of which approximately $1.3 million is estimated to relate to expenses
in connection with the development of the Company's operations and approximately
$1.9 million is estimated to relate to expenses in connection with the Offerings
and the sales to the Strategic Investors, including reimbursements it will owe
to ACA Service, Risk Capital and Trident.
The Company has retained Insurance Consulting Services Limited ("ICS"), a
Bermuda corporation licensed as an insurance broker, to provide risk management
services and other related financial services. Pursuant to such agreement, ICS
is entitled to receive an annual fee of $425,000, which is payable in quarterly
installments commencing on the consummation of the Offerings through the fifth
anniversary of the consummation of the Offerings. ICS is in its initial stages
of development and has a limited operating history or experience providing risk
management and other related financial services. ICS is owned by certain persons
affiliated with Inter-Atlantic. See "Certain Relationships and Related Party
Transactions."
PLAN OF OPERATION
The Company's plan of operation for 1999 is to begin full-scale
implementation of its business plan. The Company does not currently have any
material commitments for any capital expenditures over the next twelve months.
Its principal expenditures are expected to consist of operating expenses
(including personnel expenses), the cost of new computer equipment and software
and, subject to Bermuda law, the payment of dividends. By the end of 1999, the
Company anticipates that it will hire approximately thirteen additional
employees, which would bring the total number of employees to approximately
eighteen.
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The Company expects that the net proceeds of the Offerings and Direct Sales
(after deducting underwriting discounts and commissions, certain advisory fees
and other expenses, including payments to Inter-Atlantic for its services and
reimbursement for certain expenses related to the Offerings and the sales to the
Strategic Investors) will be sufficient to satisfy its cash requirements and to
provide a level of capital sufficient to enable the Company to provide financial
guaranty reinsurance and insurance for the next three to five years and that, at
a minimum, the Company believes that it will not be necessary during the six
months immediately following the Offerings and the Direct Sales to raise
additional funds to meet the expenditures required to operate the Company's
business. Over time, internally generated funds from the Company's insurance
operations and investment portfolio plus a working capital line of credit and
the capital base established by the Offerings and Direct Sales are expected to
be sufficient to operate the Company's business, although no such working
capital line has yet been established and no assurance can be given that such a
facility will be obtained on terms acceptable to the Company. Consequently, the
Company does not presently anticipate that it will incur any material
indebtedness in the ordinary course of its business other than obtaining letters
of credit as security for its reinsurance agreements and a working capital line
of credit. However, there can be no assurance that the Company will not be
required to incur other indebtedness in order to implement its business
strategy.
CURRENCY
The Company's functional currency is the United States dollar. However,
because the Company's business strategy includes reinsuring and insuring
financial obligations issued outside the United States, the Company expects that
it will write a portion of its business and receive premiums in currencies other
than United States dollars. Furthermore, the Operating Company may maintain up
to 10% of its investment portfolio in investments denominated in currencies
other than United States dollars. Consequently, the Company may experience
exchange losses to the extent its foreign currency exposure is not hedged or is
not sufficiently hedged, which in turn would adversely affect the Company. The
Company will make determinations as to whether to hedge its foreign currency
exposure on a case-by-case basis. The Company does not expect typically to hedge
against such foreign currency exposure. If the Company were to hedge its foreign
currency exposure, the Company may use forward foreign currency exchange
contracts in an effort to hedge against movements in the value of foreign
currencies relative to the United States dollar. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specified
currency at a future date at a price set at the time of the contract. Foreign
currency exchange contracts will not eliminate fluctuations in the value of the
Company's assets and liabilities denominated in foreign currencies but rather
allow the Company to establish a rate of exchange for a future point in time. If
the Company does seek to hedge its foreign currency exposure through the use of
forward foreign currency exchange contracts or currency swaps, it will be
subject to the risk that the counterparties to such arrangements will fail to
perform.
TAXATION
Bermuda does not currently impose a corporate level tax on the profits or
income of the Company. GMA and the Operating Company have each received an
assurance from the Bermuda Minister of Finance under The Exempted Undertakings
Tax Protection Act 1966 of Bermuda to the effect that if there is enacted in
Bermuda any legislation imposing tax computed on profits or income, or computed
on any capital asset, gain or appreciation, or any tax in the nature of estate
duty or inheritance tax, then the imposition of any such tax shall not be
applicable to GMA, the Operating Company or to any of their operations or
shares, debentures or other obligations of GMA or the Operating Company until
March 2016. There can be no assurance that after such date GMA or the Operating
Company would not be subject to any such tax. The Marketing Company has applied
to the Bermuda Minister of Finance for the same assurance that no such tax in
Bermuda would be applicable to it. There can be no assurance that the Marketing
Company will receive such assurance or , if such assurance is granted, that the
Marketing Company will not be subject to such tax after March 2016. See "Certain
Tax Considerations -- Taxation of GMA and the Operating Company -- Bermuda."
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Because GMA, the Operating Company and the Marketing Company are not
expected to conduct business in the United States, and because GMA, the
Operating Company and the Marketing Company expect to qualify for the benefits
of the tax convention between the United States and Bermuda, it is not expected
that GMA, the Operating Company or the Marketing Company will be subject to
United States federal income taxes or any other United States corporate level
tax. The United States currently imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rate of tax applicable to reinsurance
premiums to be paid to the Operating Company is currently 1%. The rate of tax
for any premiums for direct issuance of financial guarantees would be 4%. In
addition, the Company may be subject to withholding tax on certain investment
income from United States sources. There can be no assurance that such taxes
will not be increased or that other taxes will not be imposed on the Company's
business. See "Certain Tax Considerations."
Under current United Kingdom law, the measure of corporate taxation
resulting from the activities of the Marketing Company in the United Kingdom
would likely be the portion of the profits of the Marketing Company attributable
on an assumed arm's-length basis to its London branch activities. Such profit
would be measured in practice by comparison with the compensation that the
Marketing Company would need to pay to an independent entity providing the same
services as its office in the United Kingdom. The Marketing Company will seek to
enter into an agreement with the United Kingdom Inland Revenue under which an
agreed profit margin will be attributed to its office in the United Kingdom
under a stated formula for purposes of calculating the amount of tax owed in the
United Kingdom by the Marketing Company. No assurance can be given that such an
agreement will be reached and, if reached, any such agreement would be
cancellable upon reasonable notice by the Marketing Company or United Kingdom
Inland Revenue. No assurance can be given that any such agreement will not be
cancelled by United Kingdom Inland Revenue.
GMA, the Operating Company and the Marketing Company plan to operate in
such a manner that they will not generally be subject to any material taxes in
other jurisdictions, except for withholding taxes on certain kinds of investment
income and excise or similar premium taxes as described above. It is possible,
however, that the Operating Company or the Marketing Company may be held to be
doing business in one or more foreign jurisdictions and therefore subject to tax
on the profits of such business beyond that contemplated above.
IMPACT OF INFLATION
The effects of inflation will be implicitly considered in pricing the
Company's products and estimating the Company's loss reserves. The actual
effects of inflation on the results of the Company cannot be accurately known
until claims are ultimately settled.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of that hedge
in the statement of operations. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management does not
believe that the adoption of this statement will have a material impact on the
Company's consolidated financial position, results of operations or cash flows
although the Company does expect that it may hold certain derivative instruments
that pursuant to SFAS No. 133 may have to be valued on the Company's balance
sheet at their fair value.
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BUSINESS
GMA and the Operating Company were both recently organized in Bermuda to
provide "A" rated financial guaranty reinsurance and insurance on financial
obligations, principally asset-backed and municipal securities, that are rated
"BB" or higher or that are unrated and have in the Company's opinion an
equivalent credit quality. The Company will seek to provide financial guaranty
reinsurance on a worldwide basis and direct financial guaranty insurance outside
of the United States. Upon consummation of the Offerings, the Company expects to
be the only publicly traded "A" rated financial guaranty insurance company and
the first publicly traded Bermuda-based company focused principally on the
financial guaranty industry.
According to Asset-Backed Alert, worldwide issuance of asset-backed
securities grew from approximately $225 billion during the first nine months of
1997 to approximately $319 billion during the first nine months of 1998,
representing an increase of approximately 42%. In addition, Asset-Backed Alert
reported that during the first six months of 1998, 18% of asset-backed
securities issued in public offerings were insured. According to Securities Data
Co., the issuance of municipal securities in the United States grew from
approximately $151 billion during the first nine months of 1997 to approximately
$212 billion during the first nine months of 1998, representing an increase of
approximately 40%. In addition, Securities Data Co. reported that during the
same time period, approximately 50% of municipal securities issued in public
offerings were insured.
Financial guaranty insurance provides the holder of a financial obligation
with a guaranty against financial loss. Such insurance is principally used to
guarantee the payment of principal and interest on a financial obligation, and
is typically unconditional, irrevocable and, except in certain cases for
non-payment of premiums, non-cancellable. Financial guaranty insurance is
principally offered as a credit enhancement to asset-backed securities and
municipal bonds and can be provided on an entire issue of securities at the time
of original issuance or to holders of all or a portion of an issue of uninsured
obligations at any time following issuance. Issuers of financial obligations
generally purchase financial guaranty insurance to raise the credit ratings of
their financial obligations and, consequently, to reduce their overall cost of
borrowing. Holders of financial obligations benefit from financial guaranty
insurance because the risk of loss associated with an issuer's default is
reduced and because an obligation that is insured is typically more liquid in
the secondary market than it would be without such insurance. Under a financial
guaranty reinsurance contract, the reinsurer agrees to bear part or all of the
loss the primary insurer may sustain under a financial guaranty insurance policy
it has written. In consideration for this reinsurance, the primary insurer pays
premiums to the reinsurer. Reinsurance in the financial guaranty industry serves
to (i) increase the insurance capacity of a primary insurer; (ii) assist a
primary insurer in meeting applicable capital and other requirements imposed by
rating agencies and regulatory authorities; and (iii) manage the risk exposure
of a primary insurer.
The Company expects to raise gross proceeds in excess of $350.0 million and
to have an equity capitalization of approximately $331.6 million upon
consummation of the Offerings and the Direct Sales. Management believes that
this level of capitalization will demonstrate a strong financial position and a
high level of commitment to potential clients and is necessary to establish the
Company as a competitive financial guaranty reinsurer and insurer. As a newly
formed entity, the Company's capital is presently unencumbered by such issues as
loss reserve adequacy, unrealized losses in its investment portfolio and
uncollectible reinsurance. In addition, although the Company does expect that it
may seek a working capital line of credit to finance its operations, the Company
does not presently have or plan to have any indebtedness other than obtaining
letters of credit in connection with its reinsurance agreements. In part because
of the Company's expected capitalization following the Offerings and the Direct
Sales, the Operating Company has been assigned preliminary claims-paying ability
ratings of "A+" by each of Duff & Phelps and Fitch IBCA, subject to the Company
raising gross proceeds of $350.0 million in the Offerings and the Direct Sales.
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BUSINESS STRATEGY
The Company's objective is to capitalize on what it believes to be an
opportunity to provide innovative and cost-effective forms of third-party credit
enhancement. The Company will seek to achieve this objective through the
implementation of its business strategy, the principal components of which are:
- - Participate in the Development of the "A" Rated Financial Guaranty Market in
the United States
Historically, the United States financial guaranty insurance market has
generally been served by "AAA" rated financial guaranty insurance
companies. The Company will seek to capitalize on what it believes is a
growing market for "A" rated financial guaranty reinsurance and insurance
in the United States. ACA, one of the Company's sponsors, has since the
commencement of its operations in October 1997 been developing the market
for "A" rated financial guaranty insurance by offering a lower rated
alternative to "AAA" rated financial guaranty insurance. The Company
believes that "A" rated financial guaranty insurance can, in many cases,
reduce an issuer's overall cost of borrowing and increase the liquidity of
a financial obligation trading in the secondary market while costing less
than traditional "AAA" rated financial guaranty insurance or other forms of
third-party credit enhancement. In addition, the Company believes that "A"
rated financial guaranty insurance may be particularly attractive to
issuers that have previously had limited access to the financial markets.
The Company has entered into three reinsurance treaties with ACA that will
become effective upon consummation of the Offering. The Company believes
that the treaties pursuant to which the Company provides reinsurance to ACA
will provide ACA with additional insurance capacity and will permit ACA to
develop further the market for "A" rated financial guaranty insurance in
the United States. See "-- Reinsurance Treaties with ACA." The Company may
also seek to reinsure obligations rated "AA" or higher in circumstances
where the holders of such obligations require third-party credit
enhancement for regulatory or accounting purposes. The Company will also
seek to enter into reinsurance arrangements with higher rated third-party
credit enhancement providers based in the United States. Such arrangements
would be structured so that the Company would assume a portion of the risk
guaranteed by a third-party credit enhancement provider on a basis that
would provide such third-party credit enhancement provider capital relief
and other benefits.
- - Provide Credit Enhancement for Transactions Structured Outside the United
States
The Company believes that financial guaranty insurance has been utilized,
particularly with respect to asset-backed securities, in transactions
structured outside the United States to only a very limited extent, as
issuers of such financial obligations have principally relied for credit
enhancement instead on banks and other financial institutions offering
letters of credit and other guarantees. As a consequence, the Company
believes that an opportunity exists to provide "A" rated financial guaranty
insurance as an innovative and cost-effective alternative to existing forms
of credit enhancement for such transactions. Initially, the Company's
primary international focus will be to insure financial transactions
involving assets held by trusts or similar special purpose vehicles
domiciled in off-shore jurisdictions such as Bermuda, the Cayman Islands
and the Island of Jersey. Such assets are expected typically to originate
in the United States or European Union countries and be transferred to such
off-shore jurisdictions in connection with the structuring of such
transactions. The Company will seek to capitalize on the relationships its
management team has developed with investment banks, commercial banks and
other financial services firms to generate referrals for issuing financial
guaranty insurance in connection with such transactions. The Company has
also established the Marketing Company, which will act solely as a
marketing agent for the Company. The Marketing Company will operate a
branch office in London, where banking and other financial service
activities are concentrated, so as to facilitate the Company's access to
these types of financial transactions. To a lesser extent, the Company also
expects to seek reinsurance opportunities in Bermuda and certain European
Union countries. The Company is not currently licensed as a financial
guaranty insurer or reinsurer in any jurisdiction other than Bermuda, which
will limit its ability to provide financial guaranty insurance or
reinsurance with respect to certain transactions. As the Company's business
develops, management will monitor the need, if any, to obtain licenses in
jurisdictions other than Bermuda in order to comply with applicable law or
to be able to engage in additional financial guaranty insurance related
activities.
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- - Utilize a Disciplined Underwriting Approach
The Company's underwriting strategy is to reinsure and insure financial
obligations which are expected to make full and timely payment of principal
and interest. Nevertheless, given that the Company will be reinsuring and
insuring obligations rated "BB" or higher or that are unrated and have in
the Company's opinion an equivalent credit quality, the Company does
anticipate that its insurance portfolio as a whole may generate a certain
level of losses. Over time, the Company will seek to diversify the risks it
reinsures and insures by type of obligor, type of pledged assets,
geographic origination point of pledged assets, transaction size,
geographic location of the obligor, revenue sources and risk duration. Such
diversification is intended to mitigate the impact on the Company's
insurance portfolio as a whole in the event that higher than expected
losses arise in certain segments of the Company's business. The Company
also intends initially to seek a private or "shadow" rating evaluation from
one or more nationally recognized rating agencies on substantially all
unrated financial obligations that the Company insures on a direct basis.
- - Capitalize on Skill and Experience of Management and Board of Directors
The Company has assembled a senior management team of experienced
reinsurance and insurance professionals to implement its business strategy.
The Company's President and Chief Executive Officer, Donald J. Matthews,
has over 24 years of experience in the insurance and reinsurance industries
and was President, Chief Operating Officer and a director of ACA from its
formation in October 1997 to August 1998 when he resigned as an officer and
director of ACA to join the Company. From 1985 to 1997, he served as a
Senior Vice President and a Principal of Johnson & Higgins (now Marsh &
McLennan Companies, Inc.), where he was employed for 23 years. At Johnson &
Higgins, Mr. Matthews most recently served as Chairman of its Global
Financial Group, where he oversaw the firm's insurance and reinsurance
relationships with financial services companies, including commercial banks
and investment banks, on a worldwide basis. Also while at Johnson &
Higgins, Mr. Matthews was instrumental in the formation of Corporate
Officers & Directors Assurance Ltd. (now part of ACE Limited) and Executive
Risk Inc. , Managing Principal, Chief Underwriting
Officer of the Company, has over years experience in the financial
guaranty insurance industry. Mary Jane Robertson, Managing Principal, Chief
Financial Officer and Treasurer of the Company, has over 21 years
experience in the insurance industry. From 1993 to 1997, Ms. Robertson was
the Chief Financial Officer and a Senior Vice President of Capsure Holdings
Corp. (now part of CNA Surety Corp.), an insurance company focusing
principally on the surety and fidelity insurance business. From 1986 to
1996, Ms. Robertson also served as the Chief Financial Officer and an
Executive Vice President of United Capitol Insurance Company, a
property/casualty insurance company. Bruce W. Bantz, Managing Principal,
Marketing and Business Development of GMA and the Marketing Company, has
over 16 years experience in the investment and consumer banking industries,
specializing in asset securitization. From 1997 to 1998, Mr. Bantz was a
Director and Global Head of Asset Securitization of Dresdner Kleinwort
Benson, an investment banking division of Dresdner Bank A.G. From 1994 to
1997, Mr. Bantz served as a Director and Global Head of Asset
Securitization for NatWest Markets, an investment banking division of
NatWest Group PLC. Lionel J. Marsland-Shaw, Principal, Risk Management of
the Company, has over 27 years experience in the credit analysis sector of
the financial services industry. From 1995 to 1998, Mr. Marsland-Shaw
served as General Manager and Chief Executive Officer of Capital
Intelligence, a credit rating and analysis company specializing in emerging
markets. From 1993 to 1995, Mr. Marsland-Shaw was Director and Head of the
London office of Standard & Poor's Ratings Services and was responsible for
its ratings business in the United Kingdom, Ireland and the Netherlands.
The Company's Board of Directors consists of several individuals with
extensive experience in the financial guaranty and financial services
industries. Management believes that the reputation and expertise possessed
by the Company's officers and directors should assist the Company with its
underwriting analysis and marketing efforts.
- - Maintain Low Cost Structure.
Management believes that through controls on overhead expenses and with the
absence of a corporate level tax in Bermuda on the Company's profits and
income, the Company will have a low cost structure.
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The Company expects that its cost structure will help enable it to offer
its products at attractive prices and to compete effectively in the
financial guaranty reinsurance and insurance markets.
SPONSORS AND STRATEGIC INVESTORS
The Company has been established through the sponsorship of ACA and its
affiliate ACA Service, Inter-Atlantic, Risk Capital and Trident. ACA Service
currently provides management and support services to ACA. Inter-Atlantic is a
provider of investment banking services to insurance companies and other
financial services firms and was the sponsor of Annuity and Life Re (Holdings),
Ltd., the first publicly traded Bermuda-based reinsurance company focusing
principally on writing annuity and life reinsurance. Risk Capital, a subsidiary
of the publicly traded company Risk Capital Holdings, Inc., provides reinsurance
and other forms of capital to insurance companies with capital needs. Trident is
a private investment partnership sponsored by J.P. Morgan Capital Corporation
and J & H Marsh & McLennen that invests on a global basis in the insurance and
reinsurance industries. Inter-Atlantic has provided certain services to the
Company in connection with the Offerings, the sales to the Strategic Investors
and the development of the Company's operations, and ACA Service, Risk Capital
and Trident have acted as consultants to Inter-Atlantic in connection with the
delivery of such services. See "Certain Relationships and Related Party
Transactions."
The Company has also entered into agreements with Risk Capital, Trident,
Rolaco Holding S.A., Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund for the purchase for investment directly from the Company of an aggregate
of 5,673,756 Common Shares and Class B Warrants to purchase an aggregate of
600,000 Common Shares. Such purchases will be consummated immediately prior to
the consummation of the Offerings for an aggregate purchase price for the Common
Shares and the Class B Warrants of approximately $80.0 million. The aggregate
purchase price to be paid by each Strategic Investor is based on a price of
$14.10 for (i) one Common Share and (ii) the right to purchase a specified
fraction of a Common Share under the Class B Warrants. The exercise price of the
Class B Warrants will be $15.00 per share. Each of the Strategic Investors has
agreed not to sell or otherwise transfer their Common Shares and Class B
Warrants for a period of nine months from the date of this Prospectus without
the prior written consent of Merrill Lynch & Co. and Prudential Securities
Incorporated on behalf of the Underwriters and the prior written consent of the
Company. See "Shares Eligible for Future Sale" and "Direct Sales."
REINSURANCE TREATIES WITH ACA
The following description of the reinsurance treaties between the Operating
Company and ACA does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all of the provisions of such treaties. A copy
of each reinsurance treaty is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
The Operating Company has entered into three reinsurance treaties with ACA,
a Sponsor of the Company, which will become effective upon consummation of the
Offerings. The first treaty is a quota share treaty pursuant to which the
Operating Company is required to provide, and ACA is required to purchase,
reinsurance on a fixed percentage of the risks associated with financial
guaranty insurance policies issued by ACA covering new issues of financial
obligations with a rating of "BB" or higher. The second and third treaties are
facultative treaties under which the Operating Company and ACA are each
obligated to first offer the other the opportunity to reinsure each financial
obligation the other insures on a direct or assumed basis. Such facultative
treaties also set forth the basic terms under which the Operating Company and
ACA may purchase such reinsurance from the other on a case-by-case basis. The
Operating Company expects, from time to time, pursuant to the facultative treaty
under which it provides reinsurance to ACA, to reinsure a greater percentage of
risks insured by ACA than the percentage specified under the quota share treaty.
In addition, the Operating Company expects that, pursuant to such facultative
treaty, it may reinsure certain risks insured by ACA with respect to obligations
trading in the secondary market as well as certain risks insured by ACA prior to
the consummation of the Offerings, which risks in each case will not be covered
by the quota share treaty. The Operating Company anticipates that at least in
the early stages of its business development, the premiums it receives under the
treaties with ACA will account for a substantial portion of the Operating
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Company's total premium income. ACA currently has no meaningful source of
reinsurance similar to that to be provided by the Operating Company upon
consummation of the Offerings.
Quota-Share Reinsurance Treaty
Under a quota-share reinsurance treaty, dated as of November 25, 1998 and
effective upon the closing of the Offerings, between ACA as reinsured and the
Operating Company as reinsurer, ACA has agreed to cede and the Operating Company
has agreed to accept as reinsurance a pro rata share of the insurance contracts
and policies, surety bonds, indemnity contracts, financial guaranty policies,
binders, endorsements and other evidences of insurance actually written or
assumed by ACA during the term of the agreement that cover financial obligations
at the time of their original issuance. The business reinsured by the Operating
Company under the quota share treaty is limited to insurance covering new issues
of financial obligations with a rating of "BB" or better.
ACA will pay the Operating Company as premiums an amount equal to 22.5% of
all premiums actually received in respect of policies written during the term of
the agreement (the "Ceded Premium"), less a ceding commission equal to 35.0% of
the Ceded Premium. The premium for financial guarantee insurance is typically
payable by the issuer of the obligation either in full at the policy's
inception, as is the case with municipal debt obligations, or in periodic
installments, as is generally the case with asset-backed securities. The
Operating Company's share of premiums actually received by ACA in each month is
payable to the Operating Company in full 15 days following the close of each
month. For example, if ACA collects premiums in full at the time a municipal
debt obligation is originally issued, the Operating Company will be paid its pro
rata share of such full premium within 15 days of the end of the month in which
ACA collects such premium. Similarly, if ACA periodically collects premiums
during the term an asset-backed security is outstanding, the Operating Company
will be paid its pro rata share of such periodic premium payments within 15 days
of the end of the month in which ACA collect such premiums.
Reinsurers pay ceding commissions to primary insurers principally to
reimburse them for insurance policy acquisition costs. The Operating Company and
ACA negotiated the 35% ceding commission to be paid in connection with the quota
share treaty by considering, among other factors, the historical policy
acquisition cost ratio of ACA. From January 1, 1998 to September 30, 1998, the
policy acquisition cost ratio on a GAAP basis of ACA as a percentage of its
gross written premiums was 34.9%. In addition, according to Best's Aggregates &
Averages -- Property-Casualty, 1997 Edition, ceding commissions as a percent of
ceded premiums in the aggregate for 1996 ranged from 23.7% to 39.2% for all
reporting financial guarantee companies and averaged 36.0% for all reporting
credit insurance companies. The Operating Company believes that the ceding
commission it negotiated with ACA is comparable to the ceding commission it
would have to pay to an unrelated third-party insurer that had a cost structure
comparable to ACA's. Under the quota-share treaty, the Operating Company is not
permitted to write direct financial guaranty insurance within any state in the
United States, the District of Columbia, Puerto Rico, Guam and the Virgin
Islands so long as such treaty remains in effect.
The Operating Company will receive premiums under the quota share treaty
with respect to each transaction for which the total premiums payable to ACA is
estimated to equal at least $100,000 during the calendar year in which the
policy or policies covering such risks is issued. Any risks not covered by the
quota-share treaty may be ceded under the master facultative treaty between the
Operating Company and ACA as described below. The Operating Company will have no
obligation to accept any share of a transaction or increase in the limits of
liability thereunder to the extent such acceptance would cause the Operating
Company to exceed any applicable single- or aggregate-risk limit established by
law or by a nationally recognized rating organization that has issued a rating
on the Operating Company. In addition, the Operating Company will take all steps
necessary to enable ACA to obtain full credit for the reinsurance provided under
the quota share treaty, provided, however, that the Operating Company will not
be required to engage in any activity that would require the Operating Company
to operate a trade or business or obtain any license or certification within the
United States. The Operating Company expects to post a letter of credit or other
security to enable ACA to obtain full credit for the reinsurance provided under
the quota share treaty.
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The quota-share treaty expires on December 31, 1999 but will be
automatically renewed for successive one-year terms, unless the Operating
Company gives written notice at least 90 days prior to any December 31 of its
intent not to renew for the succeeding calendar year. In the event the Operating
Company gives such notice, the business reinsured under the quota-share treaty
will become fixed (i.e., no new business will be added to the business already
reinsured) as of such December 31. The business reinsured will also become fixed
on the day that any of the following events occurs: (i) either ACA or the
Operating Company ceases to have a financial strength rating or claims-paying
ability rating from any of Standard & Poor's, Fitch IBCA or Duff & Phelps that
is at least "A-" and such rating has not been restored within 90 days (a
"Ratings Event"); (ii) either ACA or the Operating Company becomes insolvent or
has a final order of liquidation, rehabilitation, conservatorship or
receivership entered against it; (iii) the Operating Company, in its sole
discretion, determines that ACA has materially violated its underwriting
guidelines and delivers a notice to such effect to ACA; (iv) either ACA or the
Operating Company is in breach under the quota share treaty and such breach is
not cured within 60 days of notice to the breaching party by the other party;
(v) there is a change of control of either ACA or its parent, American Capital
Access Holdings, Inc.; (vi) ACA fails to pay the premiums owed to the Operating
Company and such failure is not remedied within ten business days of notice
thereof; or (vii) ACA reinsures, sells, assigns, transfers or conveys, directly
or indirectly, some or all the business reinsured under the quota share treaty
to another person or entity, subject to other rights and remedies in the treaty.
In the event of termination, the Operating Company will remain liable for the
reinsurance liabilities ceded thereunder until the earlier of (i) the date of
settlement, natural expiration or cancellation of such liabilities and (ii) the
cut-off date, if any. The cut-off date is any December 31 as to which ACA has
given at least 90 days' prior written notice and either (i) the business
reinsured has become fixed as described above (provided that such December 31
falls in the year 2000 or later) or (ii) no net incurred losses have been paid
by the Operating Company under the quota-share treaty (provided that such
December 31 falls in the year 2003 or later). The Operating Company's liability
under the quota share treaty will terminate on such cut-off date, if any, and
the Operating Company will return all unearned premiums to ACA within 30
business days less the ceding commission applicable thereto.
Master Facultative Reinsurance Treaties
The Operating Company has entered into two master facultative reinsurance
agreements. The first, pursuant to which the Operating Company reinsures certain
risks of ACA, is effective as of December 15, 1998, subject to the closing of
the Offerings. The second, pursuant to which ACA may reinsure certain risks of
the Operating Company, is effective as of December 15, 1998, subject to the
closing of the Offerings. Under these agreements, the Operating Company or ACA
(as the case may be) as reinsured will agree to cede and the reinsurer will
agree to accept as reinsurance such share of any risk insured by the reinsured
as may be specified and agreed upon by the parties in a reinsurance memorandum.
The reinsured under each master facultative treaty will present to the reinsurer
each of the risks it incepts or renews during the term of such agreement, and
the reinsurer will have the right, in its sole discretion, to reject or accept
any individual risk presented to it by the reinsured.
Each reinsured will pay the reinsurer its share of the premium related to
each particular risk reinsured after first deducting a ceding commission and
other costs allowed by the reinsurer, as such premium and ceding commission are
set forth in the related reinsurance memorandum. Such reinsurance memorandum may
also modify any of the terms, conditions or coverage set forth in the related
master facultative treaty. In addition, the Operating Company will take all
steps necessary to enable ACA to obtain full credit for the reinsurance provided
to it under the relevant master facultative treaty, provided, however, that the
Operating Company as a reinsurer will not be required to engage in any activity
that would require it to operate a trade or business or obtain any license or
certification within the United States. The Operating Company expects to post a
letter of credit or other security to enable ACA to obtain full credit for the
reinsurance provided under the relevant master facultative treaty.
Each master facultative treaty will be a continuous contract until
canceled. The treaties may be canceled at any time by mutual consent of the
parties or by either party by giving at least 90 days' prior written notice. In
either such event, the reinsurer will continue to be liable with respect to
policies ceded pursuant to such agreement until the natural expiration or
cancellation of such policies. Such agreements may also be canceled
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at the discretion (in the case of the Operating Company) of the Minister of
Finance of Bermuda or (in the case of ACA) the Commissioner of Insurance of the
State of Maryland acting (in either case) as rehabilitator, liquidator or
receiver of the reinsured party.
In addition, the reinsured under each master facultative treaty will have
the right to terminate its participation in policies covered thereunder by
giving written notice thereof if: (i)(a) the performance of such agreement is
prohibited or rendered impossible by any applicable law or regulation, (b) such
reinsured fails to receive all or substantially all financial credit for the
reinsurance provided by such agreement in all applicable jurisdictions, or (c)
the state insurance regulator in the applicable jurisdiction directs such
reinsured to cancel its participation in such agreement; (ii) the reinsurer (a)
becomes insolvent, (b) fails to maintain the minimum capital and surplus
requirements required by the laws of its domicile, (c) is the subject of a
voluntary or involuntary filing of a petition in bankruptcy, (d) goes into
liquidation or rehabilitation, (e) has a receiver appointed, (f) allows its
surplus to policyholders to decline by 25% or more during any twelve-month
period as reported in any financial statement, (g) or fails to maintain the
approval of (in the case of the Company) the Minister of Finance of Bermuda or
(in the case of ACA) the Commissioner of Insurance of the State of Maryland;
(iii) such reinsurer (a) is acquired or undergoes a change of control, provided
that the reinsured gives notice of its intention to terminate within fifteen
days of its receipt of notice of such occurrence, or (b) fails to cure in a
timely manner a breach of any of its respective covenants as set forth in the
master facultative treaty; or (iv) the reinsurer ceases to have a financial
strength rating or claims-paying ability rating from any of Standard & Poor's,
Fitch IBCA or Duff & Phelps that is at least "A-" and such rating has not been
restored within 90 days. Termination will be effective upon the related
reinsurer's receipt of written notice thereof, except that termination in the
case of clause (iii) will be effective 60 days after such reinsurer's receipt of
written notice thereof.
DESCRIPTION OF ACA
ACA commenced operations as an "A" rated financial guaranty insurer in
October 1997 and, to the Company's knowledge, is the only "A" rated financial
guaranty insurer operating in the United States. ACA is a privately held
Maryland-domiciled insurance company with its principal offices in New York
City. ACA is licensed to provide financial guaranty insurance in all 50 states,
the District of Columbia and the territories of Guam, the United States Virgin
Islands and Puerto Rico. ACA's primary business is the provision of financial
guaranty insurance on financial obligations that are rated from "A-" to "BB" or
that are unrated and have in ACA's opinion an equivalent credit quality. ACA has
issued such policies both to issuers of financial obligations at the time of
original issuance and to holders of financial obligations in connection with
secondary market transactions. Standard & Poor's currently rates ACA's financial
strength as "A," and its claims-paying ability is currently rated "A" by Duff &
Phelps and Fitch IBCA.
ACA was founded by H. Russell Fraser, a director of the Company, Mr.
Matthews, the President and Chief Executive Officer of the Company, and a group
of senior executives having extensive experience in financial guaranty
insurance, credit analysis and related areas. Mr. Fraser, the Chairman of the
Board and Chief Executive Officer of ACA, formerly served as the Chairman and
Chief Executive Officer of Fitch Investors Service, L.P. (now Fitch IBCA) and
the President and Chief Executive Officer of AMBAC Indemnity Corporation (now
Ambac Assurance Corporation).
From January 1, 1998 to September 30, 1998, ACA wrote financial guaranty
insurance covering approximately 100 different underlying credits representing
approximately $1.2 billion in aggregate principal amount for direct and assumed
premiums written during that period totaling approximately $23.4 million.
Substantially all of the financial guaranty insurance written by ACA has covered
municipal obligations and obligations issued by other tax-exempt organizations,
although ACA has insured some asset-backed and corporate securities. ACA's
insured portfolio as of September 30, 1998 consisted solely of financial
obligations of obligors located in the United States, although the portfolio was
diversified across different states within the United States. As of September
30, 1998, approximately 16% of the principal amount insured in ACA's portfolio
was located in New York, 9% was located in Pennsylvania, 8% was located in
Texas, 7% was located in Florida, 6% was located in Ohio, and less than 5% was
located in each of 30 other states. Also as of September 30, 1998, approximately
44% of ACA's insured portfolio consisted of obligations issued by obligors
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in the health care sector, approximately 17% consisted of obligations issued by
state and local municipal obligors, approximately 10% consisted of obligations
issued by obligors in the education sector, approximately 6% consisted of
corporate obligations, approximately 5% consisted of obligations issued by
obligors in the transportation sector and approximately 5% consisted of
obligations issued by investor owned utilities, constituting in the aggregate,
approximately 87% of ACA's insured portfolio. The remainder of ACA's insured
portfolio consisted of obligations in different sectors that each constituted
less than 5.0% of ACA's insured portfolio. Because ACA has only recently
commenced operations, the composition and diversification of its insured
portfolio is expected to change, and may change significantly, as its business
continues to mature. There can be no assurance as to the future composition of
ACA's insured portfolio. As of September 30, 1998, ACA had admitted assets of
$131.9 million, total liabilities of $27.8 million, and total capital and
surplus of $104.1 million, as determined in accordance with statutory accounting
practices prescribed or permitted by the Maryland Insurance Administration.
The initial gross capital raised in October 1997 by American Capital Access
Holdings, L.LC., the ultimate parent of ACA, consisted of $126.25 million, of
which $120.0 million was contributed by five institutional investors and $6.25
million by ACA management and employees. Of the initial capital raised, $116.6
million was contributed to ACA. ACA has a soft capital facility with Zurich
Reinsurance (North America) Inc. with an aggregate limit of $50.0 million. ACA
also has reinsurance capacity in the form of an excess of loss facility with
Capital Credit Reinsurance Company with an aggregate limit of $75.0 million. The
reinsurance treaties between the Operating Company and ACA are different from
ACA's soft capital and excess of loss facilities in that the Operating Company
will be assuming a specified percentage of particular risks insured by ACA.
Consequently, the Company believes that the reinsurance provided by the
Operating Company will provide ACA with additional individual risk and sector
risk capacity, which the soft capital and excess of loss facilities do not
provide. ACA currently has no meaningful source of reinsurance similar to that
to be provided by the Operating Company upon consummation of the Offerings.
To evaluate the credit quality of each potential transaction, ACA has
established underwriting guidelines that incorporate conventional credit
criteria, including adequacy of projected cash flows, value and availability of
collateral, legal structure and documentation and due diligence. As part of its
business strategy, however, ACA considers variations from such guidelines that,
in its view, do not materially impair credit quality and analyzes each
transaction individually. ACA's underwriting process, which requires approval of
all substantial transactions by a committee that includes (among others) its
Chief Executive Officer, Chief Financial Officer and General Counsel, is
designed to utilize fully the experience and expertise of its staff of eight
underwriters and three attorneys. All transactions that ACA enters into are
reviewed by the rating agencies that have assigned financial strength or
claims-paying ability ratings to ACA. In addition, ACA has an experienced
surveillance staff that, with its legal department, monitors the performance of
all transactions. In the event a claim is made under a policy, ACA will
aggressively pursue its remedies to ensure maximum recoveries.
So as to maintain its "A" rating, ACA adheres to the capital charges,
single-risk limits and investment-grade limits prescribed by its rating
agencies. Standard & Poor's, for example, has published rating-sensitive capital
charges for municipal and corporate obligations and representative capital
charges for asset-backed securities; it has also established single-risk limits
applicable to ACA for investment-grade and non-investment-grade municipal and
corporate bonds and asset-backed securities. Standard & Poor's requires at least
70% of ACA's "public finance volume" (as defined by Standard & Poor's) and at
least 75% of its "asset-backed volume" (as so defined) to be investment grade.
In addition, although ACA operates as a financial guaranty insurance
company throughout the United States, legislation in effect in most states does
not provide for financial guaranty insurance as a distinct type of insurance;
such states classify ACA's business differently depending on their statutory
framework. As a result, ACA is regulated as a financial guaranty insurer, as a
surety and as a property/casualty insurer depending on the jurisdiction
involved. State laws regulate the amount of both the aggregate and individual
risks that may be insured, the amount of reinsurance from any one reinsurer for
which regulatory credit will be given, the payment of dividends by ACA, changes
in control, and certain transactions among affiliates. ACA is also required to
maintain varying contingency reserves with respect to its liabilities in certain
amounts and for certain periods of time.
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UNDERWRITING STRATEGY
The Company's underwriting strategy is to reinsure and insure financial
obligations which are expected to make full and timely payment of principal and
interest. The Company will not reinsure or insure any risk without an evaluation
of what it deems to be all pertinent risk and credit factors, with the exception
that, in the case of risks to be reinsured pursuant to an automatic treaty, such
as the quota share treaty between the Company and ACA, the Company will evaluate
the underwriting guidelines and credit analysis ability of the ceding company
for compatibility with the Company's underwriting guidelines and standards. The
Company will over time seek to diversify the risks it reinsures and insures by
type of obligor, type of pledged assets, geographic origination point of the
pledged assets, transaction size, geographic location of the obligor, revenue
sources and risk duration. Such diversification is intended to mitigate the
impact on the Company's insurance portfolio as a whole in the event that higher
than expected losses arise in certain segments of the Company's business.
The Company has hired to act as its Managing Principal, Chief
Underwriting Officer. Mr. has over years of experience in analyzing the
risks associated with financial guaranty insurance. All risks insured by the
Company will be approved by its management Credit Committee, which consists of
Mr. as well as the Company's Chief Executive Officer, Chief Financial
Officer and Principal, Risk Management. The Company has developed underwriting
guidelines based on requirements of the rating agencies that are expected to
assign financial strength and claims-paying ability ratings to the Operating
Company with the objective of controlling the risks of the financial guaranty
reinsurance and insurance policies written as well as to determine appropriate
pricing levels. Any deviation from the Company's underwriting guidelines, as
they may be amended from time to time, will require the approval of the
Company's Board of Directors or the Underwriting Committee of the Board, as will
the approval of certain categories of contracts which may be established from
time to time by the Company's Board of Directors or the Underwriting Committee
of the Board. The Company expects to review regularly its underwriting
guidelines in light of changing industry conditions, market developments and
changes in technology. The Company reserves the right at all times to amend,
modify or supplement its underwriting guidelines in response to such factors or
for other reasons.
Whenever necessary, the Company intends to retain external assistance to
expedite and support its underwriting review process, including contracting for
analytical, legal, technical and engineering expertise. The Company also intends
initially to seek a private or "shadow" rating evaluation from one or more
nationally recognized rating agencies on substantially all unrated financial
obligations that the Company insures on a direct basis.
The Company will monitor each transaction on an ongoing basis. The
responsibility for monitoring completed transactions will rest primarily with
the Company's Principal, Risk Management. If the Company's Principal, Risk
Management has identified a transaction that is not performing according to the
Company's expectations, or an external event has occurred which has had or may
have an adverse effect on the transaction, his responsibilities include
recommending corrective action or special monitoring to the management Credit
Committee.
RESERVES
The Company's policy is to provide for loss and loss adjustment expense
("LAE") reserves to cover losses that may be reasonably estimated on its insured
obligations as of the balance sheet date. The reserves for losses and LAE at any
balance sheet date will reflect the Company's estimate of identified ("case
basis") and unidentified ("unallocated") losses on the obligations it has
insured through such date.
When a default occurs or is imminent with respect to a particular insured
obligation, a case basis reserve will be established in an amount that is
sufficient to cover the present value of the anticipated defaulted debt service
payments over the expected period of default and the estimated expenses
associated with settling relevant claims, less any estimated recoveries under
salvage or subrogation rights. Upon the establishment of a case basis reserve, a
corresponding reduction will be made in the unallocated reserve. To the extent
that case basis reserves, for any period, exceed the available unallocated
reserve, the excess will be charged against the
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Company's earnings. The unallocated reserve will be calculated by applying a
loss factor to the net outstanding exposure of the Company's insured portfolio.
Such loss factor will be a measure of reasonably estimable insured losses that
have been incurred as of the balance sheet date, will be established after
consultation with independent actuaries and will be based on historical industry
loss experience, the inherent risk characteristics of the Company's insured
portfolio, the loss experience of insurers ceding risks to the Company and, over
time, the Company's actual loss and LAE experience.
The Company's loss and LAE reserves will necessarily be based upon
estimates and as such are inherently uncertain, particularly given the
undeveloped nature of the "A" rated financial guaranty reinsurance and insurance
market. There can be no assurance that claims made against the Company and
related settlement costs will not exceed the Company's loss and LAE reserves.
Historically, insured losses in the financial guaranty insurance business
have occurred infrequently. When such losses occur, they have the potential to
be significant in amount. While the Company would be required to establish a
case basis reserve (as described above) equal to the present value of all
payments due under an insured obligation that goes into default, the Company is
only obligated to make payments of principal and interest as they would
otherwise become due under such obligation. A significant economic event could
trigger widespread claims, particularly if the entire fixed income market were
adversely affected. Significant underwriting losses would adversely affect the
Company and could cause it to experience net losses. Over time, such losses
could impair the Operating Company's ability to maintain its financial strength
and claims-paying ability ratings or to pay dividends to GMA.
RETROCESSIONAL ARRANGEMENTS
The Company may reinsure, or retrocede, portions of certain risks for which
it has accepted liability, including through its master facultative reinsurance
agreement with ACA. Retrocessional arrangements will allow the Company greater
underwriting capacity while limiting its risk profile. There can be no assurance
that there will be companies other than ACA that are willing to reinsure risks
for which the Company has accepted liability.
SALES AND MARKETING
The Company expects that the relationships developed by its experienced
management team with domestic and international firms and persons will allow the
Company to develop business opportunities. With respect to the Company's
reinsurance operations, the Company will seek to capitalize on the relationships
its management team has developed with primary financial guaranty insurers,
particularly ACA, as well as other providers of third-party credit enhancement.
With respect to the Company's direct insurance operations, the Company will seek
to capitalize on the relationships its management team has developed with
investment banks, commercial banks and other financial services firms involved
in the distribution and structuring of financial obligations which are typically
in a position to refer business to the Company. Senior management of the Company
intends to take an active part in the sale and promotion of the Company's
products.
The Company has established the Marketing Company, which will act solely as
a marketing agent for the Company. The Marketing Company will operate a branch
office in London, where banking and other financial service activities are
concentrated, so as to facilitate the Company's access to financial transactions
involving assets originating in European Union countries. The Marketing Company
will not have, nor will it be held out as having, authority to bind the Company
in any transactions, and its activities will be limited to identifying
transaction opportunities for the Company and assisting in preliminary
negotiations on transaction specifics to the point where suitable terms may be
presented to the Operating Company in Bermuda for further action.
COMPETITION
The traditional financial guaranty insurance and reinsurance industry is
highly competitive. The market for financial guaranty insurance and reinsurance
is dominated by a small number of companies, including MBIA Insurance
Corporation, Financial Security Assurance, Inc., Ambac Assurance Corporation,
Financial Guaranty Insurance Co., Capital Reinsurance Co. and Enhance
Reinsurance Co., that have greater financial
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resources and are more established than the Company. A number of large banks and
other financial institutions, which also have greater financial resources and
are more established than the Company, also provide various forms of third-party
credit enhancement. There can be no assurance that such insurers, banks and
financial institutions will not seek to duplicate the Company's business
strategy and compete directly with the Company by providing lower-rated
financial guaranty reinsurance or insurance or comparable forms of credit
enhancement. Furthermore, the Company's reinsurance treaties with ACA do not
prohibit ACA from competing directly with the Company. If ACA, other financial
guaranty insurers or other third-party credit enhancement providers enter the
Company's target markets, the Company could be adversely affected. If ACA is
adversely affected by competition in its target markets, the Company would also
be adversely affected. Under the Company's quota share reinsurance treaty with
ACA, the Company is not permitted to write direct financial guaranty insurance
within any state in the United States, the District of Columbia, Puerto Rico,
Guam and the Virgin Islands so long as such treaty remains in effect.
Competition in the financial guaranty insurance and reinsurance industry is
based on many factors, including premium charges, the general reputation and
perceived financial strength of the financial guaranty insurer, other terms and
conditions of products offered, and reputation and experience in the particular
line of financial guaranty to be written. The Company will also compete with
alternative methods of credit enhancement that do not employ third-parties, such
as over-collateralization of a structured finance transaction. There can be no
assurance that the Company's strategy will permit it to compete effectively with
these alternative methods of credit enhancement.
In part because of the Company's expected capitalization following the
Offerings and the Direct Sales, the Operating Company has been assigned
preliminary claims-paying ability ratings of "A+" by each of Duff & Phelps and
Fitch IBCA, subject to the Company raising gross proceeds of $350.0 million in
the Offerings and the Direct Sales. These ratings are used by potential
purchasers of financial guaranty insurance and reinsurance as an important means
of assessing the financial strength and quality of financial guaranty insurers
and reinsurers. In addition, the level of capital charge relief which the rating
agencies provide to a financial guaranty insurer that purchases reinsurance is
directly dependent on the rating of the reinsurer. Likewise, the decreased
overall cost of borrowing realized by an issuer of a financial obligation and
the increase in liquidity in the secondary market of a financial obligation that
is subject to financial guaranty insurance is largely dependent on the rating of
the insurer. The Company's principal competitors are all more highly rated than
the Company, which, in some respects, will put the Company at a competitive
disadvantage.
INVESTMENT STRATEGY
Investments made by the Operating Company will be governed by the
Investment Guidelines and by accounting regulations prescribed by Bermuda
insurance laws and regulations. The Operating Company's investment portfolio
will consist of investment grade fixed income securities and will be invested in
an effort to maximize total return subject to appropriate liquidity
considerations, diversification of risk and regulatory, rating agency and credit
agreement constraints (if any), as applicable. The Investment Guidelines require
the Operating Company's overall investment portfolio to maintain a minimum
weighted average credit quality rating of "A+." A fixed income security rated
"A+" by Standard & Poor's is somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions, however, the issuer's capacity
to meet its financial commitment on the security is still strong. The Operating
Company will not invest in any securities in emerging markets.
The Investment Guidelines restrict the Operating Company from investing in
securities for which it has written financial guaranty insurance or reinsurance
and limit its investments in securities not insured or reinsured by the
Operating Company, but issued by issuers of securities the Operating Company has
insured or reinsured, to 5% of the Operating Company's total investment
portfolio on an aggregate basis. The Investment Guidelines also provide for the
following procedures that are intended to limit the Operating Company's exposure
to concentrations of risk: (a) investments in an industry sector are limited to
20% of the Operating Company's total investment portfolio, with the exception of
the United States government and its agencies; (b) investments in a single
issuer are limited to 5% of the Operating Company's total investment portfolio,
with the exception of the United States government and its agencies; and (c)
investments in non-
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United States dollar denominated securities are limited to 10% of the Operating
Company's total investment portfolio.
The Investment Guidelines provide that the Operating Company may purchase,
among other things, securities issued by the United States government and its
agencies, securities issued by foreign governments if rated "A" or better by at
least one major rating agency, asset-backed securities, mortgage-backed
securities and corporate debt securities (including convertible debt
securities).
Furthermore, the Investment Guidelines prohibit investments in (i) common
equities; (ii) direct real estate; (iii) oil and gas limited partnerships; (iv)
commodities; (v) emerging market obligations; (vi) securities unrated by major
rating agencies; (vii) payment-in-kind corporate securities; (viii) venture
capital investments, including private equity or its equivalent, and (ix) United
States investments consisting of (a) partnership interests, (b) residual
interests in real estate mortgage investment conduits, (c) any "pass through"
certificate, unless all underlying debt was issued on or after July 18, 1984,
(d) cash settlement options and forwards, if no United States exchange traded
future on the same property exists, (e) options and forwards on indices which
are not traded on United States exchanges, (f) collateralized mortgage
obligations, unless issued with an opinion of counsel stating that such
obligations will be considered debt for tax purposes, (g) real property
interests, including equity in and convertible debt obligations of real property
holding corporations the sale of which would be subject to United States tax,
(h) any tangible property, (i) any debt obligation or preferred stock the
interest on which does not qualify as "portfolio interest" or is otherwise
subject to United States withholding tax and (j) any investment that does not
qualify as a stock or security for purposes of Section 864(b)(2) of the Code. In
addition, the Investment Guidelines prohibit the Operating Company from entering
into the following types of transactions in the United States: (i) swap
agreements other than interest rate swaps or the equivalent used as hedges; (ii)
loans; and (iii) trading in any investment that does not qualify as a stock or
security for purposes of Section 864(b)(2) of the Code.
The Operating Company will be exposed to two primary sources of investment
risk on its fixed income investments: credit risk, relating to the uncertainty
associated with the continued ability of a given obligor to make timely payments
of principal and interest, and interest rate risk, relating to the market price
and/or cash flow variability associated with changes in market interest rates.
The Operating Company will seek to manage credit risk through industry and
issuer diversification and asset allocation. The Operating Company will seek to
manage interest rate risk by structuring the duration of its investment
portfolio to support the cash requirements of the current operations of the
Operating Company and the satisfaction of longer term liabilities of the
Operating Company. The Investment Guidelines provide that the investment
portfolio may not be leveraged and that purchases of securities on margin and
short sales may not be made without approval from the Finance and Investment
Committee of the Company's Board of Directors.
The Finance and Investment Committee of the Company's Board of Directors
will periodically review the Operating Company's investment portfolio and the
performance of the Investment Managers. The Finance and Investment Committee can
approve exceptions to the Investment Guidelines. The Finance and Investment
Committee will also periodically review the Investment Guidelines in light of
prevailing market conditions. The Investment Managers and the Investment
Guidelines may change from time to time as a result of such reviews.
INVESTMENT MANAGERS
The Operating Company has entered into investment advisory agreements with
the Investment Managers, Alliance Capital Management L.P. ("Alliance") and The
Prudential Investment Corporation ("Prudential Investment"), each of which is
anticipated to manage initially approximately 50% of the Operating Company's
investment portfolio. The Company conducted extensive interviews with several
investment management firms before selecting the Investment Managers. The
Investment Managers were selected primarily based on their expertise in managing
fixed-income investments. Each Investment Manager will have discretionary
authority over the portion of the Operating Company's investment portfolio
allocated to it, subject to the Investment Guidelines.
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Alliance is a global investment management firm. According to information
supplied by Alliance, as of September 30, 1998, Alliance had aggregate fixed
income assets under management of approximately $106 billion, including
approximately $31 billion of assets managed for insurance companies. The
agreement with Alliance may be terminated by either party upon 30 days' prior
written notice. Alliance is entitled to receive a fee for its services at an
annual rate between 0.25% and 0.15% of the value of the assets it manages on
behalf of the Operating Company. The exact fee rate charged by Alliance is
dependent upon the amount of assets it manages on behalf of the Operating
Company.
Prudential Investment is a global investment management firm and is a
subsidiary of The Prudential Insurance Company of America. According to
information supplied by Prudential Investment, it manages broadly diversified
portfolios of fixed income securities on behalf of institutional clients. The
agreement with Prudential Investment may be terminated by the Operating Company
without advance notice and by Prudential Investment upon 30 days' prior written
notice. Prudential Investment is entitled to receive a fee for its services at
an annual rate of 0.175% of the value of the first $100 million in assets it
manages on behalf of the Operating Company and 0.10% of the value of any
additional assets it manages on behalf of the Operating Company.
THIRD-PARTY SERVICE PROVIDERS
The Company has entered into an agreement with Marsh & McLennan Management
Services (Bermuda) Limited ("Marsh & McLennan Services") to provide management,
administrative and consulting services to the Company. These services are
anticipated initially to include (i) maintenance of the Company's books and
records, (ii) preparation of periodic reports to the Company, (iii) maintenance
of bank accounts, and (iv) preparation of Bermuda governmental reports. The
contract is subject to termination by either party at any time upon 90 days'
written notice or upon shorter notice in specified circumstances including an
uncured breach or bankruptcy. Pursuant to the contract, Marsh & McLennan
Services is entitled to receive fees based on hourly rates with a $20,000 per
year minimum. In addition, the Company has agreed to indemnify Marsh & McLennan
Services with regard to certain liabilities to which Marsh & McLennan Services
may become subject in connection with performing services for the Company. As
the Company's business grows, management expects that it may become more cost
effective to retain additional employees to perform some of the functions that
will initially be provided by Marsh & McLennan Services. Management believes
that the contractual relationship with Marsh & McLennan Services will provide
the Company with the flexibility needed to add such additional employees in an
orderly fashion.
The Company has retained ICS, a Bermuda corporation licensed as an
insurance broker, to provide risk management services and other related
financial services. Pursuant to such agreement, ICS is entitled to receive an
annual fee of $425,000, which is payable in quarterly installments commencing on
the consummation of the Offerings through the fifth anniversary of the
consummation of the Offerings. ICS is in its initial stages of development and
has a limited operating history or experience providing risk management and
other related financial services. ICS is owned by certain persons affiliated
with Inter-Atlantic. See "Certain Relationships and Related Party Transactions."
PROPERTY
The Company has subleased its principal offices in Hamilton, Bermuda on a
month-to-month basis from Annuity and Life Reassurance, Ltd., a Bermuda
reinsurance company. The subleased office space consists of four offices and
three workstations. The Company has agreed to pay BD$5,200 plus utilities in
rent for the first month of the sublease. Thereafter, the sublease requires the
Company to pay BD$4,500 plus utilities in rent each month.
LEGAL PROCEEDINGS
The Company is not currently involved in any litigation or arbitration. The
Company anticipates that it will be subject to litigation and arbitration in the
ordinary course of business.
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REGULATION
Bermuda
The Insurance Act 1978, as amended, and Related Regulations. As a holding
company, GMA is not subject to Bermuda insurance regulations. The Insurance Act
1978, as amended (the "Insurance Act"), which regulates the insurance business
of the Operating Company, provides that no person shall carry on an insurance
business in or from within Bermuda unless registered as an insurer under the
Insurance Act by the Minister of Finance (the "Minister"). The Minister, in
deciding whether to grant registration, has broad discretion to act as the
Minister 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 the insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise. The registration of an
applicant as an insurer is subject to its complying with the terms of its
registration and such other conditions as the Minister may impose at any time.
An Insurance Advisory Committee appointed by the Minister advises the
Minister on matters connected with the discharge of the Minister's functions and
the subcommittees thereof 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. Certain significant aspects of the Bermuda insurance
regulatory framework are set forth below.
Classification of Insurers. The Insurance Act distinguishes between
insurers carrying on long-term business and insurers carrying on general
business. There are four classifications of insurers carrying on general
business, with Class 4 insurers subject to the strictest regulation. As the
Operating Company has been incorporated to provide reinsurance and insurance of
financial guaranty insurance-related risks, it has been registered as a Class 3
insurer in Bermuda and will be regulated as such under the Insurance Act.
Cancellation of Insurer's Registration. An insurer's registration may be
cancelled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with its obligations under the
Insurance Act or, in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the failure of the insurer to carry 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 in Bermuda.
The independent auditor of the insurer must be approved by the Minister and may
be the same person or firm which audits the insurer's financial statements and
reports for presentation to its shareholders. The Operating Company's
independent auditor is KPMG Peat Marwick.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, a statement of capital and surplus and
notes thereto). The insurer is required to give detailed information and
analyses regarding premiums, claims, reinsurance and investments. The Statutory
Financial Statements are not prepared in accordance with United States GAAP and
are distinct from the financial statements prepared for presentation to the
insurer's shareholders under the Companies Act 1981 of Bermuda, which financial
statements may be prepared in accordance with United States GAAP. An insurer is
required to submit the annual Statutory Financial Statements as part of the
annual Statutory Financial Return.
Annual Statutory Financial Return. The Operating Company is required to
file with the Registrar of Companies in Bermuda a Statutory Financial Return no
later than four months after its financial year end (unless specifically
extended). The Statutory Financial Return includes, among other matters, a
report of the approved independent auditor on the Statutory Financial Statements
of the insurer, a solvency certificate, the Statutory Financial Statements
themselves and an opinion of the Operating Company's loss reserve specialist
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in respect of the Operating Company's loss and loss expense provisions. The
solvency certificate must be signed by the principal representative and at least
two directors of the insurer who are required to certify whether the minimum
solvency margin has been met, and the independent approved auditor is required
to state whether in its opinion it was reasonable for the directors to so
certify. Where an insurer's accounts have been audited for any purpose other
than compliance with the Insurance Act, a statement to that effect must be filed
with the Statutory Financial Return. The Operating Company's loss reserve
specialist is Christopher Harris of KPMG Peat Marwick.
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.
Pursuant to the Insurance Act, the Operating Company is registered as a
Class 3 insurer and, as such: (i) is required to maintain a minimum solvency
margin equal to the greatest of: (a) $1,000,000, (b) 20% of net premium written
up to $6,000,000 plus 15% of net premiums written over $6,000,000, and (c) 15%
of loss reserves; (ii) is prohibited from declaring or paying any dividends
during any financial year it is in breach of its minimum solvency margin or
minimum liquidity ratio or if the declaration or payment of such dividends would
cause it to fail to meet such margin or ratio (if it fails to meet its minimum
solvency margin or minimum liquidity ratio on the last day of any financial
year, the insurer will be prohibited from declaring or paying any dividends
during the next financial year, without the approval of the Minister); (iii) is
prohibited from reducing by 15% or more its total statutory capital, as set out
in its previous year's financial statements without the approval of the
Minister; and (iv) if it appears to the Minister that there is a risk of the
insurer becoming insolvent or that the insurer is in breach of the Insurance Act
or any conditions imposed upon its registration, the Minister may, in addition
to the restrictions specified above, direct the insurer not to declare or pay
any dividends or any other distributions or may restrict it from making such
payments to such extent as the Minister may think fit.
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 of not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and advances
to affiliates and 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 (by interpretation, those not
specifically defined).
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes 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 the Minister, the
Minister may direct an insurer to produce documents or information relating to
matters connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the Minister may, among other things, direct the
insurer (i) not to take on any new insurance business, (ii) not to vary any
insurance contract if the effect would be to increase the insurer's liabilities,
(iii) not to make certain investments, (iv) to realize certain investments, (v)
to maintain, or transfer to the custody of a specified bank, certain assets,
(vi) not to declare or pay any dividends or other distributions or to restrict
the making of such payments, and/or (vii) to limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of the Operating Company is at the
Company's offices in Hamilton, Bermuda, and Donald J. Matthews is the principal
representative of the Operating Company. Without a reason acceptable to the
Minister, an insurer may not terminate the appointment of its principal
representative, and the principal representative may not cease to act as such,
unless 30 days' notice in writing to the Minister is given of the intention to
do so. It is the duty of the
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principal representative, within 30 days of reaching the view that there is a
likelihood of the insurer for which the principal representative acts becoming
insolvent or that a reportable "event" has, to the principal representative's
knowledge, occurred or is believed to have occurred, to make a report in writing
to the Minister setting out all the particulars of the case that are available
to the principal representative. Examples of such a reportable "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 ratio.
Certain Bermuda Law Considerations. GMA and the Operating Company have
been designated as non-resident for exchange control purposes by the Bermuda
Monetary Authority, whose permission for the issue and transfer of the Common
Shares has been obtained. This designation allows GMA and the Operating Company
to engage in transactions, or to pay dividends to non-residents of Bermuda who
are holders of the Common Shares, in currencies other than the Bermuda Dollar.
The transfer of the Common Shares between persons regarded as non-resident
in Bermuda for exchange control purposes and the issue of the Common Shares
after the completion of the Offerings to such persons may be effected without
specific consent under the Exchange Control Act 1972 and regulations thereunder.
Issues and transfers of the Common Shares to any person regarded as resident in
Bermuda for exchange control purposes requires specific prior approval under the
Exchange Control Act 1972. The common shares of the Operating Company cannot be
transferred without the consent of the Bermuda Monetary Authority.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, GMA is not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. GMA will take no notice of any trust
applicable to any of its Common Shares whether or not it had notice of such
trust.
As "exempted companies," GMA and the Operating Company are exempt from
Bermuda laws restricting the percentage of share capital that may be held by
non-Bermudians, but as exempted companies they may not participate in certain
business transactions, including (i) the acquisition or holding of land in
Bermuda (except that required for their business and held by way of lease or
tenancy for terms of not more than 21 years) without the express authorization
of the Bermuda legislature, (ii) the taking of mortgages on land in Bermuda to
secure an amount in excess of $50,000 without the consent of the Minister, (iii)
the acquisition of any bonds or debentures secured by any land in Bermuda, other
than certain types of Bermuda government securities, or (iv) the carrying on of
business of any kind in Bermuda, including insuring domestic risks and the risks
of other Bermuda-exempted companies, except in furtherance of their business
carried on outside Bermuda, and, in the case of the Operating Company,
reinsuring any long-term business risks undertaken by any company incorporated
in Bermuda and permitted to engage in the insurance and reinsurance business, or
under a license granted by the Minister.
United States
Neither GMA, the Operating Company nor the Marketing Company is currently
licensed as a financial guaranty reinsurer or insurer in any jurisdiction in the
United States. The insurance laws of each state in the United States regulate
the sale of insurance within its jurisdiction by insurers, such as the Operating
Company, which are not admitted to do business within such jurisdiction. With
some exceptions, the sale of insurance within a jurisdiction in the United
States where an insurer is not admitted to do business is prohibited. The sale
of reinsurance, however, is generally permitted within each state of the United
States and the District of Columbia by non-admitted reinsurers, provided that
certain requirements are satisfied, such as the need to obtain necessary
approvals from certain state insurance regulators in connection with a
particular reinsurance transaction and/or the need for the insurer to satisfy
applicable credit for reinsurance requirements.
The Operating Company has adopted Operating Guidelines pursuant to which it
intends to conduct its reinsurance business in the United States in a manner
that will comply with the requirements applicable to non-admitted reinsurers and
to conduct its insurance business with persons located in the United States in a
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manner that will not subject the Operating Company to the insurance licensing
laws of any jurisdiction in the United States. There can be no assurance,
however, that challenges to the Operating Company's reinsurance and insurance
activities in the United States will not be raised in the future or that the
restrictions on the Operating Company's activities associated with its status as
a non-admitted reinsurer and its lack of any insurance licenses in the United
States will not place the Company at a competitive disadvantage or otherwise
adversely affect the Company. In addition, changes in the Company's business
strategy or applicable insurance laws in the United States may lead management
to conclude that the Operating Company should seek to become an admitted
reinsurer in, or to obtain insurance licenses from, one or more jurisdictions in
the United States. If such a conclusion were to be reached, there can be no
assurance that the Operating Company would be able to become an admitted
reinsurer or be able to obtain such licenses. Furthermore, the process of
obtaining such status or licenses is often costly and may take a long time,
which could adversely affect the Company and its objective of being a low-cost
reinsurance and insurance provider.
Because many jurisdictions in the United States do not permit insurance
companies to take credit for reinsurance obtained from unlicensed or
non-admitted reinsurers on their statutory financial statements unless
appropriate security measures are in place, it is anticipated that the Operating
Company's reinsurance clients will require it to post a letter of credit or
enter into other security arrangements. In the event that the Operating Company
should default under a letter of credit facility, it may be required to
liquidate prematurely all or a substantial portion of its investment portfolio
and/or its other assets which have been pledged as security for the letter of
credit facility or otherwise to secure its obligations to its reinsureds, which
would adversely affect the Company. The Operating Company does not currently
have a letter of credit facility established and if the Operating Company is
unable to obtain such a facility on commercially acceptable terms or is unable
to arrange for other types of security, the Operating Company's ability to
operate its reinsurance business may be severely limited.
The Operating Company's quota share and facultative treaties with ACA
contain a requirement that the Operating Company must take all steps necessary
in order to permit ACA to receive credit for such reinsurance in all applicable
jurisdictions. The Operating Company expects typically to post a letter of
credit or other security to enable ACA to obtain full credit for the reinsurance
provided under the treaties. If the Operating Company is unable to satisfy any
requirement needed in order for ACA to receive credit for the Operating
Company's reinsurance, ACA would have the right to terminate its reinsurance
treaties with the Operating Company, which would adversely affect the Company.
Outside the United States -- Insurance
Initially, the Company's primary international focus will be to insure
financial transactions involving assets held by trusts or similar special
purpose vehicles domiciled in off-shore jurisdictions such as Bermuda, the
Cayman Islands and the Island of Jersey. Such assets are expected typically to
be financial obligations originating in the United States and certain European
Union countries which are structured in such off-shore jurisdictions in
connection with such transactions. The Operating Company has obtained the
necessary licenses under Bermuda law to provide financial guaranty insurance to
trusts and other special purpose vehicles located in Bermuda, and the Company
believes that no insurance licenses are required under the laws of the Cayman
Islands to provide financial guaranty insurance to such entities located in the
Cayman Islands. Similarly, the Company believes that the Operating Company is
permitted under the laws of the Island of Jersey to provide financial guaranty
insurance to such entities located in the Island of Jersey without obtaining an
insurance permit, subject to certain restrictions, principally including
conducting the marketing, negotiating, underwriting, contract execution, policy
administration and claims handling activities of the Operating Company entirely
outside the Island of Jersey. In addition, in connection with these types of
transactions, the Operating Company, as a result of being licensed in Bermuda
only, will have to investigate risks and conduct post-closing surveillance
activities in Bermuda, rather than from the Island of Jersey, the Cayman Islands
or the jurisdiction from which the assets underlying such transactions
originated, such as the United States and certain European Union countries. The
Operating Company expects to perform its financial analysis on such transactions
in Bermuda and to obtain the information needed to conduct such analysis from
the proposed insured, persons acting as agent for the proposed insured and other
third parties.
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The Company has adopted Operating Guidelines pursuant to which it intends
to operate its insurance business with respect to transactions structured in
Bermuda, the Cayman Islands and the Island of Jersey in a manner that will not
subject the Operating Company to the insurance licensing laws of the Cayman
Islands or the Island of Jersey or the jurisdictions from which the assets
underlying such transactions originate. There can be no assurance, however, that
challenges to the Operating Company's insurance activities in such jurisdictions
will not be raised in the future or that the restrictions on the Operating
Company's activities associated with its lack of any insurance licenses in the
Cayman Islands or the Island of Jersey will not place the Company at a
competitive disadvantage or otherwise adversely affect the Company. In addition,
changes in the Company's business strategy, including a decision to target
additional off-shore jurisdictions that are used as domiciles for structuring
asset-backed transactions, or changes in applicable insurance laws in the Island
of Jersey, the Cayman Islands, the United States or certain European Union
countries may lead management to conclude that the Operating Company should seek
insurance licenses in jurisdictions other than Bermuda. If such a conclusion
were to be reached, there can be no assurance that the Operating Company would
be able to obtain such licenses. Furthermore, the process of obtaining such
licenses is often costly and may take a long time, which could adversely affect
the Company and its objective of being a low-cost insurance provider.
The Company believes that the securities issued by trusts and other special
purpose vehicles that purchase financial guaranty insurance from the Operating
Company will likely be sold in numerous jurisdictions, principally including the
United States and the United Kingdom. In part because the Operating Company will
issue its financial guaranty insurance policies to such trusts and other special
purpose vehicles, the Company does not believe that the mere fact that the
securities issued by such entities will be held by an investor residing in a
particular jurisdiction would require the Operating Company to obtain an
insurance license in such jurisdiction. The Company has adopted Operating
Guidelines pursuant to which it intends to issue its financial guaranty
insurance policies to such trusts and other special purpose vehicles that issue
securities in the United States in a manner that will not subject the Operating
Company to the insurance licensing laws of any jurisdiction in the United
States. Such Operating Guidelines provide that in such cases, among other
things, (i) the Operating Company will negotiate, issue and deliver its
financial guaranty policy to an insured located outside the United States; (ii)
the Operating Company will investigate risks and conduct post-closing
surveillance from outside the United States; (iii) the Operating Company will
not solicit, advertise or otherwise sell its policies in the United States; (iv)
under the terms of the securities that are subject to the financial guaranty
insurance, principal and interest will be due and payable to a trustee located
outside the United States; and (v) no policy, certificate of insurance, rider,
endorsement or other evidence of insurance will be delivered by the Operating
Company to any securityholder located in the United States. The Company has
adopted similar Operating Guidelines pursuant to which it intends to issue its
financial guaranty insurance policies to trusts and other special purpose
vehicles that issue securities in the United Kingdom in a manner that will not
subject the Operating Company to the insurance licensing laws of the United
Kingdom. Such Operating Guidelines provide, among other things, that the
Operating Company will make underwriting decisions and issue all policies
exclusively from outside the United Kingdom and not otherwise effect or carry
out any contracts of insurance in the United Kingdom.
Because securities insured by the Operating Company may be held in numerous
jurisdictions, there can be no assurance that challenges will not be made by
regulatory authorities or others in a particular jurisdiction, including the
United States and the United Kingdom, where securities insured by the Operating
Company are held seeking to require the Operating Company to obtain an insurance
license in such jurisdiction. If any such challenge were to be successfully
asserted, there can be no assurance that the Operating Company would be able to
obtain the required licenses. Furthermore, the process of obtaining any such
license may be costly and may take a long time, which could adversely affect the
Company and its objective of being a low-cost insurance provider.
Outside the United States -- Reinsurance
The Company also expects to seek reinsurance opportunities in Bermuda and
certain European Union countries. The Operating Company has obtained the
necessary licenses under Bermuda law to provide
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financial guaranty reinsurance to insurers domiciled in Bermuda and has adopted
Operating Guidelines pursuant to which it intends to conduct its reinsurance
business in the European Union in a manner that will not subject the Operating
Company to insurance licensing laws in any European Union country. There can be
no assurance, however, that challenges to the Operating Company's reinsurance
activities in European Union countries will not be raised in the future or that
the restrictions on the Operating Company's reinsurance activities in European
Union countries associated with its lack of any insurance licenses in such
countries will not place the Company at a competitive disadvantage. In addition,
changes in the Company's business strategy or applicable insurance laws in
particular European Union countries may lead management to conclude that the
Operating Company should seek insurance licenses in one or more European Union
countries. If such a conclusion were to be reached, there can be no assurance
that the Operating Company would be able to obtain such licenses. Furthermore,
the process of obtaining such licenses is often costly and may take a long time,
which could adversely affect the Company and its objective of being a low-cost
reinsurance provider.
Marketing Company
Neither GMA, the Operating Company nor the Marketing Company is licensed as
an insurer in the United Kingdom. The insurance laws of the United Kingdom
prohibit the carrying on of insurance and reinsurance business in the United
Kingdom by any person other than an authorized or exempt insurer or reinsurer.
The Company believes that the Operating Company and the Marketing Company will
not need to be licensed as insurers in the United Kingdom, so long as the
Operating Company exclusively makes underwriting decisions and issues all
policies from outside the United Kingdom and does not otherwise effect or carry
out any contracts of insurance in the United Kingdom. In light of this, the
Company and the Marketing Company have adopted Operating Guidelines that
provide, among other things, that the activities of the Marketing Company will
be principally limited to maintaining an office in the United Kingdom, meeting
with prospective parties to financial guaranty transactions and assisting them
in originating proposals to be presented to the Operating Company in Bermuda for
its review and further action; that the Operating Company will perform credit
reviews, make underwriting decisions, issue policies, collect premiums, settle
claims and perform all other policy servicing activities, including due
diligence and post-closing credit surveillance, from outside the United Kingdom
and will not carry on any insurance-related activities in the United Kingdom;
and that the Marketing Company will not hold itself out as having the authority
to bind the Operating Company and will not participate in any underwriting
decisions, execute policies, collect premiums, settle claims or otherwise effect
or carry out insurance contracts in the United Kingdom. There can be no
assurance, however, that challenges to the Marketing Company's activities in the
United Kingdom will not be raised in the future or that the restrictions on the
activities of the Operating Company and the Marketing Company in the United
Kingdom associated with their lack of any insurance licenses will not place the
Company at a competitive disadvantage or otherwise adversely affect the Company.
Other
Recently, the insurance and reinsurance regulatory framework has become
subject to increased scrutiny in many jurisdictions, including the United
States, various states within the United States and elsewhere. For example,
there have been Congressional and other initiatives in the past in the United
States regarding increased supervision and regulation of the insurance industry,
including proposals to supervise and regulate reinsurers domiciled outside the
United States to a greater extent than currently regulated. It is not possible
to predict the future impact of changing law or regulation on the operations of
the Company. Such changes, if any, could have an adverse effect on the Company.
The Operating Guidelines to be employed by the Company were developed in
consultation with counsel in the jurisdictions in which the Company expects to
conduct its insurance and reinsurance business, the jurisdictions in which the
securities issued by trusts and other special purpose vehicles that have
purchased insurance from the Operating Company are principally expected to be
issued, and the jurisdictions from which the assets backing such securities are
principally expected to originate, in each case as noted above. However, there
can be no assurance that if the Company conducts its business in accordance with
such Operating
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Guidelines that a court or insurance regulator would not interpret and apply
applicable insurance laws so as to require GMA, the Operating Company or the
Marketing Company to obtain an insurance license in a particular jurisdiction in
light of the absence of controlling legal precedent with respect to many of the
regulatory issues noted above and the broad discretion accorded insurance
regulators in many jurisdictions in the administration of insurance laws. The
insurance laws of most jurisdictions provide for civil and criminal penalties
for conducting an insurance business without the required licenses.
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OVERVIEW OF THE FINANCIAL GUARANTY INSURANCE AND REINSURANCE INDUSTRY
Financial guaranty insurance provides the holder of a financial obligation
with a guaranty against financial loss. Such insurance is principally used to
guarantee the payment of principal and interest on a financial obligation, and
is typically unconditional, irrevocable and, except in certain cases for
non-payment of premiums, non-cancellable. Financial guaranty insurance is
principally offered as a credit enhancement to asset-backed securities and
municipal bonds and can be provided on an entire issue of securities at the time
of original issuance or to holders of all or a portion of an issue of uninsured
obligations at any time following issuance. If an issuer defaults under an
insured financial obligation, the insurer is obligated to pay the principal of
and interest on the obligation based on the original payment schedule and the
holder cannot accelerate the balance if the insurer makes such payments on a
timely basis. The insurer then has recourse against the issuer and/or any
related collateral for any amount paid under the policy.
Financial guaranty insurance provides benefits for both issuers and
investors. Issuers of financial obligations generally purchase financial
guaranty insurance to raise the credit ratings of their financial obligations
and, consequently, to reduce their overall cost of borrowing. Holders of
financial obligations benefit from financial guaranty insurance because the risk
of loss associated with an issuer's default is reduced and because an obligation
that is insured is typically more liquid in the secondary market than it would
be without such insurance.
The premium for financial guaranty insurance is typically non-refundable
and is payable by the issuer of the obligation either in periodic installments,
as is generally the case with asset-backed securities, or in full at the
policy's inception, as is generally the case with municipal debt obligations.
For financial reporting and statutory accounting purposes, insurers and
reinsurers recognize periodic installment premiums in the year that the insurer
receives them and recognize premiums that are paid at a policy's inception over
the term of the related insured obligation. Premium rates are typically
calculated as a percentage of the principal amount of the insured obligation or
the principal and interest scheduled to come due during the stated term of the
insured obligation. Premium rates reflect such factors as the credit strength of
the issuer, size and type of an issue, rating agency capital charges, the
issuer's sources of income, collateral pledged, restrictive covenants, maturity,
prevailing market spreads between insured and uninsured obligations and
competition from other insurers, other providers of credit enhancements and
alternatives to credit enhancement.
Asset-Backed Securities Market
Asset-backed securities are a form of structured financing distinguishable
from more traditional debt financing. In traditional debt financing, the issuer
of the debt retains ownership of its assets and the obligation to repay its
liabilities, even where collateral has been pledged to secure such liabilities.
Further, in a traditional debt financing, a bankruptcy or insolvency of the
issuer can delay scheduled payments to the debt holders even if the debt is
fully collateralized. Therefore, the creditworthiness of a traditional debt
financing is linked to that of the issuer of the debt in addition to any
collateral pledged. In contrast, an asset-backed security is issued by a special
purpose entity organized to hold a specific pool of assets that have an
ascertainable cash flow or market value and to issue the securities that are
secured by the assets or payable from the cash flow derived from the assets. The
special purpose entity created to issue asset-backed securities is typically
intended to be isolated from any bankruptcy of the entity providing the assets.
Because the assets supporting the asset-backed securities are intended to be
insulated from the credit risk of the company that originated or originally
acquired the assets, the ratings assigned to such asset-backed securities are
rated independent from the rating assigned to the company itself.
Most asset-backed securities are supported by diverse pools of fixed-income
financial assets and their related collateral, such as single- and multi-family
residential mortgage loans, home equity loans, time-share loans, automobile
loans, credit card receivables, student loans, commercial loans, equipment
leases, aircraft leases, trade receivables and export finance receivables. There
are also asset-backed securities supported by one or a few assets, such as
public utility mortgage bonds, project finance loans, capital equipment loans
and commercial real estate loans.
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Asset-backed securities involve both asset risk and structural risk. Asset
risk relates to the amount and quality of asset coverage. In general, the amount
and quality of asset coverage is a product of the historical cash flow
performance and projected future cash flow performance of the assets.
Asset-backed securities are often over-collateralized or secured by another form
of credit enhancement to protect against adverse asset performance. The ability
of the servicer of the assets to service properly and collect the cash flows
generated by the underlying assets can also be a factor in determining future
asset performance. Structural risk relates to the extent to which the
transaction structure protects the interests of investors. Asset-backed
securities are usually designed to protect investors from the bankruptcy or
insolvency of the entity that originated the underlying assets as well as from
the bankruptcy or insolvency of the servicer of those assets. In addition,
because the cash flow generated by the underlying assets is the primary source
for the repayment of the asset-backed obligations, the securities are structured
to account for the tax status of the issuing entity and the tax characterization
of the asset-backed obligations that are issued.
Both the United States and international securitization markets have
continued to expand over the past decade, as measured both by the aggregate
principal amount of asset-backed obligations issued and the diversity of
securitized assets. According to Asset-Backed Alert, worldwide issuances of
asset-backed securities grew from approximately $225 billion during the first
nine months of 1997 to approximately $319 billion during the first nine months
of 1998, representing an increase of approximately 42%. In addition, Asset-
Backed Alert reported that during the first six months of 1998, 18% of
asset-backed securities issued in public offerings were insured. While
mortgages, home equity loans, credit card receivables and auto loans have
historically constituted the largest percentage of assets that support
asset-backed securities, the diversity of asset-backed obligations available to
investors has continued to expand as corporations, financial institutions and
state and local governments have sought to access the capital markets by
securitizing their respective assets and utilizing the techniques of structured
finance.
Municipal Bond Market
Municipal bond insurance issued by financial guaranty insurance companies
provides a credit enhancement of debt obligations issued by or on behalf of
states or other political subdivisions (for example, counties, cities, towns and
villages, utility districts, public universities, hospitals and public housing
and transportation authorities) and other public and quasi-public entities
(including non-United States sovereigns and subdivisions thereof). Types of
insured municipal bonds include: general obligations, special tax and assessment
transactions, development districts, utilities (electric, water, sewer and gas),
housing (single and multi-family), transportation (airports, ports and mass
transit), toll facilities (highways, tunnels, parking facilities and bridges),
education (private and certain public universities, private colleges, community
colleges, vocational and technical schools, elementary and high schools, special
education and research facilities), healthcare (acute, rehabilitation, assisted
living, nursing homes and congregate care), lease transactions and economic and
industrial development transactions. Municipal bonds are generally supported by
the issuer's taxing power in the case of general obligation or special
tax-supported bonds, or, in the case of most revenue bonds, by the issuer's
ability to impose and collect fees and charges for public services or specific
projects. Outside the United States, similar transactions center on obligations
involving infrastructure and infrastructure maintenance.
The United States municipal bond market has expanded during the past
decade, as measured by the aggregate principal amount of municipal securities
issued. According to Securities Data Co., the issuance of municipal securities
in the United States grew from approximately $151 billion during the first nine
months of 1997 to approximately $212 billion during the first nine months of
1998, representing an increase of approximately 40%. In addition, Securities
Data Co. reported that during the same time period, approximately 50% of
municipal securities issued in public offerings were insured.
Financial Guaranty Reinsurance Market
Reinsurance is an arrangement under which a financial guaranty insurance
company (the "reinsurer") agrees to indemnify or assume the obligations of
another insurance company (the "ceding company" or "cedent") for all or a
portion of the insurance risks that the ceding company has underwritten in
exchange for
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a premium. Such arrangements are standard industry practice for primary
insurers. The reinsurer may pay a ceding commission to the cedent to compensate
it for the costs of producing and underwriting the insured risk. Reinsurers may
also purchase reinsurance under retrocessional agreements to cover all or a
portion of their own exposure for similar reasons as the primary insurer.
Reinsurance does not relieve the ceding company of its obligation to the insured
party if a reinsurer fails to perform.
The two principal kinds of reinsurance are automatic treaty reinsurance and
facultative reinsurance. Automatic treaty reinsurance requires the ceding
company automatically to cede and the reinsurer to assume specific classes of
risk that the ceding company has underwritten during the term of the treaty,
although the reinsurance risk extends for the term of the respective underlying
obligations. Facultative reinsurance is the reinsurance of all or part of one or
more insurance policies or specific risks, which is subject to separate
negotiation for each reinsurance placement. This option allows the reinsurer to
accept or reject individual submissions by a ceding company for reasons such as
credit risk, sector risk or country risk. Treaty and facultative reinsurance are
typically written on either a proportional or non-proportional basis. In
proportional relationships, such as a quota share treaty, the ceding company and
the reinsurer share premiums, losses and expenses net of any ceding commission
of a single risk or group of risks at an agreed percentage. Non-proportional
reinsurance relationships are typically on an excess-of-loss basis, which
provides coverage to a ceding company up to a certain dollar limit to the extent
that its losses exceed a certain amount.
Reinsurance in the financial guaranty industry serves to (i) increase the
insurance capacity of a primary insurer, (ii) assist a primary insurer in
meeting applicable capital and other requirements imposed by rating agencies and
regulatory authorities; and (iii) manage the risk exposure of a primary insurer.
State insurance laws and regulations, as well as the rating agencies, establish
minimum capital requirements on financial guaranty insurance companies, which
limit the aggregate insurance amount that the insurer may write and the maximum
single-risk size that it may insure. Reinsurance enables the primary insurer to
write policies in amounts larger than the risks it is willing to retain for its
own account and allows the primary insurer to increase its capacity to write new
business by effectively reducing its gross liability on an aggregate and single-
risk basis. In addition, primary insurers manage the risk of their insured
portfolios based on internal underwriting criteria and portfolio management
guidelines. Reinsurance can be instrumental in enabling primary insurers to
achieve portfolio management goals.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the directors and
executive officers of GMA.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GMA
- ---- --- -----------------
<S> <C> <C>
Donald J. Matthews................... 64 President, Chief Executive Officer and Director
........................... Managing Principal, Chief Underwriting Officer
Mary Jane Robertson.................. 45 Managing Principal, Chief Financial Officer and
Treasurer
Bruce W. Bantz....................... 48 Managing Principal, Marketing and Business
Development
Lionel J. Marsland-Shaw.............. 46 Principal, Risk Management
Robert M. Lichten.................... 58 Chairman of the Board and Director
Frederick S. Hammer.................. 63 Deputy Chairman of the Board and Director
Charles G. Collis*................... 36 Director and Secretary
Charles A. Davis..................... 49 Director
Lawrence S. Doyle.................... 54 Director
H. Russell Fraser.................... 57 Director
William M. Goldstein................. 63 Director
Curtis R. Jensen..................... 36 Director
Willis T. King, Jr. ................. 54 Director
Mark D. Mosca........................ 45 Director
Paul T. Walker....................... 63 Director
</TABLE>
- ---------------
* Mr. Collis has indicated his intention to resign as a director of GMA upon
consummation of the Offerings.
Donald J. Matthews was elected Chief Executive Officer and a director of
GMA and the Operating Company upon their formation and was elected President of
GMA and the Operating Company on November 24, 1998. Mr. Matthews was President,
Chief Operating Officer and a director of ACA from its formation in October 1997
to August 1998 when he resigned as an officer and director of ACA to join the
Company. From 1985 to 1997, he served as Senior Vice President and a Principal
of Johnson & Higgins (now Marsh & McLennan Companies, Inc.), an international
insurance intermediary and employee benefits consulting firm, where he was
employed for 23 years. At Johnson & Higgins, Mr. Matthews most recently served
as Chairman of its Global Financial Group, where he oversaw the firm's insurance
and reinsurance relationships with financial services companies, including
commercial banks and investment banks, on a worldwide basis. Also while at
Johnson & Higgins, Mr. Matthews was instrumental in the formation of Corporate
Officers & Directors Assurance Ltd. (now part of ACE Limited) and Executive Risk
Inc. Prior to joining Johnson & Higgins, Mr. Matthews was Chairman of the Board
and President of Midland Insurance Company. Mr. Matthews is currently a director
of Annuity and Life Re (Holdings), Ltd., and from 1985 to 1988 served as a
director of AMBAC Indemnity Corporation (now Ambac Assurance Corporation).
Mary Jane Robertson became Managing Principal, Chief Financial Officer and
Treasurer of GMA and the Operating Company on October 15, 1998. From 1993 to
1997, Ms. Robertson was the Chief Financial Officer and a Senior Vice President
of Capsure Holdings Corp. (now part of CNA Surety Corp.), an insurance company
focusing principally on the surety and fidelity insurance business. From 1986 to
1996, Ms. Robertson also served as the Chief Financial Officer and an Executive
Vice President of United Capitol Insurance Company, a property/casualty
insurance company. Prior thereto, Ms. Robertson served as an Audit Manager of
Coopers & Lybrand from 1978 to 1986.
Bruce W. Bantz became Managing Principal, Marketing and Business
Development of GMA on September 1, 1998. Mr. Bantz was a Director and the Global
Head of Asset Securitization of Dresdner Kleinwort Benson, an investment banking
division of Dresdner Bank A.G., from 1997 to 1998. From 1994 to 1997, he served
as a Director and the Global Head of Asset Securitization for NatWest Markets,
an
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investment banking division of NatWest Group PLC. Prior thereto, Mr. Bantz
served as a Vice President of Citibank from 1982 to 1994, where he was
responsible for creating many of the innovations for Citibank's credit card
asset securitization program that have become basic features of the asset-backed
securities market and where he assisted in the formation of CIESCO, an
innovative multi-seller securitization conduit.
Lionel J. Marsland-Shaw became Principal, Risk Management of GMA and the
Operating Company on November 1, 1998. From 1995 to 1998, Mr. Marsland-Shaw
served as General Manager and Chief Executive Officer of Capital Intelligence, a
credit rating and analysis company specializing in emerging markets. From 1993
to 1995, Mr. Marsland-Shaw was Director and Head of the London office of
Standard & Poor's Ratings Services and was responsible for its ratings business
in the United Kingdom, Ireland and the Netherlands. Prior thereto, Mr.
Marsland-Shaw headed Standard & Poor's European Structured Finance and
Securitization Analytic Group. Prior to joining Standard & Poor's in 1987, he
served as a Manager, Portfolio Administration and Deputy Credit Manager of
Manufacturers Hanover Finance Limited from 1984 to 1987.
Robert M. Lichten was elected a director of GMA and the Operating Company
upon their formation and was elected non-executive Chairman of the Board of GMA
and the Operating Company on November 25, 1998. Mr. Lichten has been Co-Chairman
of Inter-Atlantic Capital Partners, Inc. since 1998. He previously served as
Vice Chairman of Inter-Atlantic Capital Partners, Inc. from 1994 to 1998. He is
the non-executive Deputy Chairman of the Board of Annuity and Life Re
(Holdings), Ltd., a Bermuda-based reinsurance company. Mr. Lichten served as a
Managing Director of Smith Barney Inc. from 1990 to 1994 and as a Managing
Director of Lehman Brothers Inc. from 1988 to 1990. Prior thereto, he served as
an Executive Vice President of The Chase Manhattan Corporation, where he was
responsible for asset liability management and was President of The Chase
Investment Bank.
Frederick S. Hammer was elected a director of GMA and the Operating Company
upon their formation and was elected non-executive Deputy Chairman of the Board
of GMA and the Operating Company on November 25, 1998 Mr. Hammer has been
Co-Chairman of Inter-Atlantic Capital Partners, Inc. since 1998. He previously
served as Vice Chairman of Inter-Atlantic Capital Partners, Inc. from 1994 to
1998. He is the non-executive Chairman of the Board of Annuity and Life Re
(Holdings), Ltd., a Bermuda-based reinsurance company, and serves as a director
of IKON Office Solutions, Inc., Provident American Corporation and Medallion
Financial Corporation. Mr. Hammer served as Chairman and Chief Executive Officer
of Mutual of America Capital Management Corporation, an investment management
company, from 1993 to 1994 and as President of SEI Asset Management Group, an
investment management company, from 1989 to 1993. From 1985 to 1989, Mr. Hammer
was Chairman and Chief Executive Officer of Meritor Savings Bank, and prior
thereto he was an Executive Vice President of The Chase Manhattan Corporation,
where he was responsible for its global consumer activities.
Charles G. Collis was elected a director of GMA and the Operating Company
upon their formation. He is a partner in the law firm of Conyers Dill & Pearman,
the Company's Bermuda counsel, where he has worked since 1990.
Charles A. Davis was elected a director of GMA and the Operating Company on
October 28, 1998. Mr. Davis has been the President and Chief Operating Officer
of Marsh & McLennan Capital, Inc. since April 1998. Prior thereto, Mr. Davis
worked at Goldman, Sachs & Co. for 23 years. He was a Senior Director and
Limited Partner at Goldman, Sachs & Co. from 1995 to 1998 and, prior to that,
was Head of Investment Banking Services worldwide, Co-head of the Americas
Group, Head of the Financial Services Industry Group, a member of the
International Executive Committee and a General Partner. Mr. Davis is also a
director of Media General, Inc., Heilig-Meyers Company, Progressive Corporation,
Lechters, Inc., Merchants Bancshares, Inc. and Sen-Tech International Holdings,
Inc. Mr. Davis is serving as a director of the Company as the nominee of
Trident.
Lawrence S. Doyle was elected a director of GMA and the Operating Company
on November 25, 1998. Mr. Doyle has been the Chief Executive Officer, President
and a director of Annuity and Life Re (Holdings), Ltd., a Bermuda-based
reinsurance company, since December 1997. Mr. Doyle served as an Executive Vice
President of EXEL Limited, a Bermuda-based insurance company in 1997. Mr. Doyle
was the President and Chief Executive Officer of GCR Holdings Limited, a
Bermuda-based reinsurer specializing in catastrophe
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risk, and its subsidiary Global Capital Reinsurance Limited from 1993 until
their acquisition by EXEL Limited in 1997. Prior thereto, Mr. Doyle was Senior
Vice President of the Hartford Insurance Group in charge of international
operations, where he was employed for 27 years, the last six of which he was
also the President of Hartford Fire International.
H. Russell Fraser was elected a director of GMA and the Operating Company
on August 25, 1998. Mr. Fraser has been Chairman and Chief Executive Officer of
ACA since its formation in October 1997. From April 1989 to February 1995, he
served as Chairman and Chief Executive Officer of Fitch Investors Service, L.P.
(now Fitch IBCA, Inc.). Mr. Fraser also served as President and Chief Executive
Officer of AMBAC Indemnity Corporation (now Ambac Assurance Corporation), a
financial guaranty insurer, from 1980 to 1988.
William M. Goldstein was elected a director of GMA and the Operating
Company upon their formation. Mr. Goldstein is Chairman of the Tax Department
and former Chairman of the Managing Partners of the law firm of Drinker Biddle &
Reath LLP, the Company's United States counsel, where he has been a partner
since 1982. Mr. Goldstein served as Deputy Assistant Secretary for Tax Policy
with the United States Department of Treasury from 1975 to 1976.
Curtis R. Jensen was elected a director of GMA and the Operating Company on
November 25, 1998. Mr. Jensen has been a senior analyst for Third Avenue Value
Fund since 1995 and Co-Portfolio Manager of Third Avenue Small-Cap Value Fund
since 1997. Prior thereto, Mr. Jensen was a student at the Yale University
School of Management, from which he received a Masters, Business Administration.
Mr. Jensen served as Director of Operations of Ciao Bella Gelato Company, a food
manufacturer, from 1990 to 1993. Mr. Jensen is serving as a director of the
Company as the nominee of the Third Avenue Funds.
Willis T. King, Jr. was elected a director of GMA and the Operating Company
on November 25, 1998. Mr. King has been Vice Chairman of Guy Carpenter &
Company, Inc., the reinsurance brokerage subsidiary of Marsh & McLennan
Companies, Inc., since its merger with Johnson & Higgins, an international
insurance intermediary and employee benefits consulting firm, in 1997. He served
as a director of Johnson & Higgins from 1987 to 1997 and Chief Executive Officer
of its reinsurance brokerage subsidiary, Willcox Incorporated Reinsurance
Intermediaries, from 1985 to 1997. He is the non-executive Chairman of the Board
of Homeowners' Holdings, Inc. and its insurance company subsidiary, First
Protective Insurance Company. Mr. King is also a Director of SCPIE Holdings,
Inc.
Mark D. Mosca was elected a director of GMA and the Operating Company on
November 25, 1998. Mr. Mosca has been the President and a director of Risk
Capital Holdings, Inc. since 1995, the Chief Executive Officer of Risk Capital
Holdings, Inc. since March 1998, and the President and Chief Executive Officer
and a director of Risk Capital Reinsurance Company since 1995. Prior thereto,
Mr. Mosca served as a Senior Vice President and the Chief Underwriting Officer
of Zurich Reinsurance Centre Holdings, Inc., an insurance company, from 1993 to
1995. From 1986 to 1993, Mr. Mosca served as a Vice President of NAC Re
Corporation, an insurance company, where he was manager of the Treaty Division.
Mr. Mosca served as a Vice President of Gerard Reinsurance Company, an insurance
company, from 1975 to 1986. Mr. Mosca is serving as a director of the Company as
the nominee of Risk Capital.
Paul T. Walker was elected a director of GMA and the Operating Company on
October 28, 1998. Mr. Walker has served as President of Walker, Truesdell &
Associates, a financial consulting firm, since its formation in 1996. From 1992
to 1996, Mr. Walker served as a Trustee of the DBL Liquidating Trust, which was
responsible for liquidating Drexel Burnham Lambert for investors. Prior thereto,
he was employed at The Chase Manhattan Bank, N.A. from 1957 to 1990, where he
most recently served as an Executive Vice President and the Senior Credit Policy
Officer.
PROVISIONS GOVERNING THE BOARD OF DIRECTORS
Number and Terms of Directors
GMA's Bye-Laws provide that the Board of Directors will be divided into
three classes. The first class, whose initial term expires at the first annual
meeting of GMA's shareholders following completion of the
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Offerings, is comprised of Messrs. Collis, Davis, Doyle and King; the second
class, whose initial term expires at the second annual meeting of GMA's
shareholders following completion of the Offerings, is comprised of Messrs.
Hammer, Goldstein, Jensen and Mosca; and the third class, whose initial term
expires at the third annual meeting of GMA's shareholders following completion
of the Offerings, is comprised of Messrs. Matthews, Fraser, Lichten and Walker.
Following their initial terms, all classes of directors will be elected to
three-year terms.
Committees of the Board
The Board of Directors has established Executive, Finance and Investment,
Audit, Compensation and Underwriting committees. Each committee reports to the
Board.
Executive Committee. The Board has established an Executive Committee to
exercise all of the authority of the Board between meetings of the full Board.
The Executive Committee does not, however, have authority to take any action on
matters committed or reserved by Bermuda law, GMA's Bye-Laws or resolution of
the Board of Directors to the full Board or another committee of the Board. The
Executive Committee presently consists of six members (presently Messrs. Lichten
(Chairman), Davis, Goldstein, Hammer, Matthews and Walker).
Finance and Investment Committee. The Board has established a Finance and
Investment Committee to establish and monitor the Operating Company's investment
policies and the performance of the Investment Managers. The Finance and
Investment Committee presently consists of six members (presently Messrs. Davis
(Chairman), Goldstein, Hammer, Jensen, Lichten and Matthews).
Audit Committee. The Board has established an Audit Committee to review
the Company's internal administrative and accounting controls and to recommend
to the Board the appointment of independent auditors. The Audit Committee
presently consists of five members (presently Messrs. Goldstein (Chairman),
Davis, Doyle, Fraser and Walker).
Compensation Committee. The Board has established a Compensation Committee
to review the performance of corporate officers and the Company's compensation
policies and procedures and to make recommendations to the Board with respect to
such policies and procedures. The Compensation Committee also administers the
Company's stock option plans and incentive compensation plans. The Compensation
Committee presently consists of four members (presently Messrs. Hammer
(Chairman), Fraser, King and Mosca).
Underwriting Committee. The Board has established an Underwriting
Committee to review and monitor the risks insured by the Company. The
Underwriting Committee presently consists of four members (presently Messrs.
Walker (Chairman), Doyle, King and Lichten).
Compensation of Directors
Directors who are employees of the Company will not be paid any fees or
additional compensation for services as members of the Company's Board of
Directors or any committee thereof. Non-employee directors will receive cash in
the amount of $20,000 per annum and $1,000 per board or committee meeting
attended. The non-employee Chairman and Deputy Chairman of the Board and
non-employee Committee Chairmen will receive an additional $1,000 per annum. Mr.
Fraser will receive options to acquire 100,000 Common Shares; Mr. Davis will
receive options to acquire 75,000 Common Shares; Messrs. Hammer and Lichten will
receive options to acquire 33,333 Common Shares; Mr. Mosca will receive options
to acquire 25,000 Common Shares; and other non-employee directors (excluding Mr.
Collis) will receive options to acquire 15,000 Common Shares, in each case upon
the later of (i) their election to the Company's Board of Directors or (ii) the
consummation of the Offerings. Michael P. Esposito, Jr., a former director of
the Company, will receive options to acquire 33,333 Common Shares upon
consummation of the Offerings as compensation for services rendered in
connection with the Offerings and the sales to the Strategic Investors . All
such options become exercisable in three equal annual installments commencing on
the first anniversary of the date of grant and will have an exercise price equal
to the fair market value of the Common Shares on the date of grant, except for
any options granted upon consummation of the Offerings, which will have an
exercise price equal to the initial public offering price per share. Such
options may be assigned by the directors without the consent of GMA. On the date
of each annual
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meeting of the Company's shareholders, each non-employee director whose term as
a director has not ended as of the date of such annual meeting will receive
options to acquire 2,000 Common Shares. Such options will be immediately
exercisable if granted on or after the first anniversary of the consummation of
the Offerings and will have an exercise price equal to the fair market value of
the Common Shares on the date of grant. If any such options are granted before
the first anniversary of the consummation of the Offerings, they will not become
exercisable until such first anniversary. All directors will be reimbursed for
travel and other expenses incurred in attending meetings of the Board or
committees thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or was an executive officer or
employee of the Company, nor has any executive officer of the Company served as
a director or a member of the compensation committee of any other company, one
of whose executive officers serves as a member of GMA's Board or Compensation
Committee, except that (i) Mr. Matthews, the Company's President and Chief
Executive Officer, previously served as a director of ACA, of which Mr. Fraser,
a director of the Company, is an executive officer, and (ii) Mr. Matthews serves
on the Compensation Committee of Annuity and Life Re (Holdings), Ltd., of which
Mr. Doyle, a director of the Company, is the President and Chief Executive
Officer.
Mr. Fraser has expressed his non-binding intention to purchase 2,000 Common
Shares directly from the Company as part of the Direct Sales for an aggregate
purchase price of $28,200. Mr. Hammer has contracted with GMA to purchase 12,500
Common Shares directly from the Company as part of the Direct Sales at a price
of $14.10 per share. Such purchase is expected to be consummated simultaneously
with the consummation of the Offerings. Mr. Hammer also purchased on August 25,
1998 for $11,007 a Class A Warrant to purchase an aggregate number of Common
Shares equal to 1.37593% of the sum of (i) the Common Shares outstanding
immediately following the consummation of the Offerings (including the Direct
Sales, but excluding any Common Shares held by the Purpose Trust) and (ii) the
Common Shares issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings except for the Class A
Warrants, the Class B Warrants and any options granted by the Company under its
Stock Option Plan. Mr. Hammer has transferred a portion of his Class A Warrants
to certain trusts that have been established for the benefit of certain family
members. Mr. Hammer is also an owner and officer of Inter-Atlantic Capital
Partners, Inc., the parent corporation of Inter-Atlantic, and he is a
shareholder of ICS. See "Certain Relationships and Related Party Transactions."
EXECUTIVE COMPENSATION
The Company did not pay any compensation to its executive officers during
the fiscal period ended August 28, 1998. Messrs. Matthews, , Bantz,
Marsland-Shaw and Ms. Robertson are currently entitled to receive compensation
from the Company pursuant to the terms of their respective employment
agreements.
EMPLOYMENT AGREEMENTS
GMA, the Operating Company and Mr. Matthews have entered into an Employment
Agreement under which Mr. Matthews has agreed to serve as President and Chief
Executive Officer of GMA and the Operating Company for an initial term ending on
the third anniversary of the consummation of the Offerings and for consecutive
one year terms thereafter, subject to three months' advance written notice by
either party of a decision not to renew the Employment Agreement. Pursuant to
the terms of his Employment Agreement, Mr. Matthews is entitled to receive an
annual salary of BD$360,000 as of September 1, 1998. Upon consummation of the
Offerings, Mr. Matthews will be eligible to participate in all employee benefit
programs maintained by the Company and will receive a monthly housing and travel
allowance of BD$12,000. Mr. Matthews' Employment Agreement provides that he will
be eligible for an annual cash bonus based on performance targets to be
established by the Compensation Committee of the Company's Board of Directors.
GMA, the Operating Company and Ms. Robertson have entered into an
Employment Agreement under which Ms. Robertson has agreed to serve as Managing
Principal, Chief Financial Officer and Treasurer of GMA and the Operating
Company for an initial term ending on the third anniversary of the consummation
of
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the Offerings and for consecutive one year terms thereafter, subject to three
months' advance notice by either party of a decision not to renew the Employment
Agreement. Pursuant to the terms of her Employment Agreement, Ms. Robertson is
entitled to receive an annual salary of BD$250,000 as of October 15, 1998. Upon
consummation of the Offerings, Ms. Robertson will be eligible to participate in
all employee benefit programs maintained by the Company and will receive a
monthly travel and housing allowance of BD$10,000. Ms. Robertson's Employment
Agreement provides that she will be eligible for an annual cash bonus based on
performance targets to be established by the Compensation Committee of the
Company's Board of Directors.
GMA, the Marketing Company and Mr. Bantz have entered into an Employment
Agreement under which Mr. Bantz has agreed to serve as Managing Principal,
Marketing and Business Development, of GMA and the Marketing Company for an
initial term ending on the third anniversary of the consummation of the
Offerings and for consecutive one year terms thereafter, subject to three
months' advance notice by either party of a decision not to renew the Employment
Agreement. Pursuant to the terms of his Employment Agreement, Mr. Bantz is
entitled to receive an annual salary of BD$250,000 as of September 1, 1998. Upon
consummation of the Offerings, Mr. Bantz will be eligible to participate in all
employee benefit programs maintained by the Company and will receive a monthly
housing allowance of L7,200. Mr. Bantz's Employment Agreement provides that he
will be eligible for an annual cash bonus based on performance targets to be
established by the Compensation Committee of the Company's Board of Directors.
GMA, the Operating Company and Mr. Marsland-Shaw have entered into an
Employment Agreement under which Mr. Marsland-Shaw has agreed to serve as
Principal, Risk Management, of GMA and the Operating Company for an initial term
ending on the third anniversary of the consummation of the Offerings and for
consecutive one year terms thereafter, subject to three months' advance notice
by either party of a decision not to renew the Employment Agreement. Pursuant to
the terms of his Employment Agreement, Mr. Marsland-Shaw is entitled to receive
an annual salary of BD$180,000 as of November 1, 1998. Upon consummation of the
Offerings, Mr. Marsland-Shaw will be eligible to participate in all employee
benefit programs maintained by the Company and will receive a monthly travel and
housing allowance of BD$6,000. Mr. Marsland-Shaw's Employment Agreement provides
that he will be eligible for an annual cash bonus based on performance targets
to be established by the Compensation Committee of the Company's Board of
Directors.
The Employment Agreements of Messrs. Matthews, , Bantz and
Marsland-Shaw and of Ms. Robertson provide that each of them will receive,
subject to the consummation of the Offerings, options to purchase Common Shares
under the Stock Option Plan. Mr. Matthews will receive options to purchase
Common Shares equal to 2.0% of the Company's Common Shares outstanding
immediately following the consummation of the Offerings and the Direct Sales,
provided, however, that such amount shall not exceed 727,272 Common Shares. Mr.
will receive options to purchase Common Shares. Mr. Bantz and
Ms. Robertson will each receive options to purchase 100,000 Common Shares. Mr.
Marsland-Shaw will receive options to purchase 33,333 Common Shares. The
exercise price of the options to be awarded under the Employment Agreements will
be equal to the initial public offering price per share. The options become
exercisable in three equal annual installments beginning on the first
anniversary of the consummation of the Offerings provided, however, that upon a
change in control of the Company, the options will become exercisable
immediately.
The Employment Agreement of Mr. Matthews provides that if he is terminated
by the Company for serious cause or without serious cause or resigns without
good reason, he will forfeit all bonus amounts for the then current fiscal year,
and the Company will be liable to him only for accrued but unpaid salary,
accrued but unpaid bonuses from a prior fiscal year and reimbursable business
expenses incurred prior to the date of termination. The Employment Agreements of
Messrs. , Bantz and Marsland-Shaw and Ms. Robertson provide that if the
officer is terminated by the Company for serious cause or resigns without good
reason, the officer will forfeit all bonus amounts for the then current fiscal
year, and the Company will be liable to the officer only for accrued but unpaid
salary, accrued but unpaid bonuses from a prior fiscal year and reimbursable
business expenses incurred prior to the date of termination. If the employment
of Messrs. , Bantz and Marsland-Shaw or Ms. Robertson is terminated by
the Company without serious cause or by Messrs. Matthews, , Bantz and
Marsland-Shaw or Ms. Robertson with good reason, the
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Operating Company will continue to pay the officer's base salary for a period of
18 months from such termination (or, if such termination occurs within the
period commencing on the date that a change of control is formally proposed to
the Company's Board of Directors and ending on the first anniversary of the date
on which such change of control occurs, a lump sum payment equal to two times
the officer's annual base salary as of the date of termination plus an amount
equal to any excise taxes payable by reason of such payments occurring in
connection with a change of control). Additionally, the officer shall be
entitled to any accrued but unpaid salary, any accrued but unpaid bonuses from a
prior fiscal year, reimbursable business expenses incurred prior to the
termination, travel and housing allowances for twelve months after the date of
termination and reasonable relocation expenses.
Each Employment Agreement also provides that no officer will for a period
of one year following the termination of the officer's employment for any
reason, acquire any financial or beneficial interest (unless such interest is
less than one percent in a publicly traded corporation) in, provide consulting
or other services to, be employed by, or own, manage, operate or control any
entity engaged in any business similar to that of the Company at the time of the
termination of the officer's employment. Furthermore, the officers are
prohibited from directly or indirectly employing or seeking to employ any person
or entity employed by the Company at the time their employment is terminated or
enticing any such person or entity to leave such employment for a period of two
years following the termination of their employment. Each Employment Agreement
also provides that the officers will keep secret and retain in the strictest
confidence all confidential matters that relate to the Company or any affiliate
of the Company.
STOCK OPTION PLAN
The Global Markets Access Ltd. Initial Stock Option Plan was approved by a
vote of the shareholder of the Company on August 25, 1998 and was adopted by the
Company's Board of Directors on October 28, 1998. The Stock Option Plan is
intended to attract and retain selected key employees, non-employee directors
and consultants (collectively, the "Eligible Individuals") and to motivate them
to exercise their best efforts on behalf of GMA and any subsidiary or parent of
GMA (a "Related Corporation"). Options granted under the Stock Option Plan may
be "incentive stock options" ("ISOs") within the meaning of Section 422 of the
Code, or may be options not intended to be ISOs ("Non-Qualified Stock Options").
The aggregate maximum number of Common Shares for which options may be granted
under the Stock Option Plan will be equal to the lesser of (i) 5.5% of the
Common Shares outstanding immediately following the consummation of the
Offerings and the Direct Sales or (ii) 2,000,000 Common Shares. No option may be
granted under the Stock Option Plan after October 28, 2008, although options
outstanding on that date may extend beyond that date.
Administration. The Stock Option Plan is administered by the Compensation
Committee, whose members are designated by the Company's Board of Directors.
Under the terms of the Stock Option Plan, the Compensation Committee must
consist of at least two directors. It is intended (although not required) that
each member of the Compensation Committee administering the Plan be a
"non-employee" director within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside director"
within the meaning of Treasury Regulation Section 1.162-27(e)(3) or any
successor provision. If the Compensation Committee does not consist solely of
two or more non-employee directors (within the meaning of Rule 16b-3), each
option must be approved by the full Board. The Compensation Committee has the
authority to (i) select the Eligible Individuals to be granted ISOs and
Non-Qualified Stock Options under the Stock Option Plan, (ii) grant options on
behalf of the Company and (iii) set the date of grant and other terms of the
options, including the times and the price at which options may be exercised.
Except for annual grants of options to GMA's non-employee directors and except
as may be otherwise specified in a particular option agreement, options under
the Stock Option Plan are exercisable in three equal annual installments,
commencing with the first anniversary of the grant date. The Compensation
Committee may, in its discretion, accelerate the date on which an option may be
exercised.
Eligibility. Only employees of GMA and/or a Related Corporation are
eligible to receive ISOs under the Stock Option Plan. Non-Qualified Stock
Options may be granted to all Eligible Individuals. (An Eligible Individual who
receives an option grant is hereinafter referred to as an "Optionee.") As of
December 1, 1998, there were four employees of the Company eligible to receive
ISOs and fifteen Eligible Individuals (including employees) eligible to receive
Non-Qualified Stock Options.
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<PAGE> 68
Terms and Conditions of Option. All options will terminate on the earliest
of: (i) the expiration of the term specified in the option agreement, which may
not exceed ten years (five years, in the case of an ISO if the Optionee on the
date of grant owns, directly or by attribution, shares possessing more than 10%
of the total combined voting power of all classes of shares of the Company); or
(ii) an accelerated expiration date if the Optionee's employment or service as a
director or consultant terminates before the expiration of the term specified in
the option agreement, unless otherwise provided in the option agreement.
However, if the Optionee's employment or service as a director or consultant
terminates for "cause" (as defined in the Stock Option Plan) prior to the
expiration date of the option, such option will terminate immediately.
The option price for an ISO may not be less than 100% of the fair market
value of the shares subject to the option on the date that the option is
granted. If an ISO is granted to an employee who then owns, directly or by
attribution under the Code, Common Shares possessing more than 10% of the total
combined voting power of all classes of shares of the Company, the option price
must be at least 110% of the fair market value of the shares on the date that
the option is granted. The aggregate fair market value of the Common Shares
(determined on the date the ISOs are granted) with respect to which ISOs are
exercisable for the first time by any one employee during any calendar year will
not exceed $100,000.
An Optionee may, in the discretion of the Compensation Committee, pay for
Common Shares covered by his or her option (i) in cash or its equivalent, (ii)
in Common Shares previously acquired by the Optionee (subject, in the discretion
of the Compensation Committee, to certain holding period requirements), (iii) in
Common Shares newly acquired by the Optionee upon exercise of the option (which
will be a "disqualifying disposition" in the case of an ISO), (iv) through a
combination of (i), (ii) or (iii), above, or (v) in the case of options granted
to an employee or consultant, by delivering a properly executed notice of
exercise of the option to the Company and a broker, with irrevocable
instructions to the broker promptly to deliver to the Company the amount of sale
or loan proceeds necessary to pay the exercise price of the option.
If the employment or service of an employee or consultant with GMA (or a
Related Corporation) is terminated prior to the expiration date fixed for his or
her option for any reason other than death or disability, the Optionee may
exercise such option to the extent of the number of Common Shares with respect
to which the Optionee could have exercised it on the date of such termination,
or to such other extent permitted by the Compensation Committee, at any time
prior to the earlier of the expiration date of such option or an accelerated
termination date determined by the Compensation Committee, which, unless
otherwise determined by the Compensation Committee, may not be later than three
months after the date of such termination of employment or service.
If the service of a non-employee director with GMA is terminated prior to
the expiration dated fixed for his or her option for any reason other than
death, disability or cause, the Optionee may exercise such option to the extent
of the number of Common Shares with respect to which the Optionee could have
exercised it on the date of such termination at any time prior to the earlier of
the expiration date of such option or three months after the date of such
termination of service as a non-employee director. If the service of a non-
employee director with GMA is terminated prior to the expiration date fixed for
his or her option for cause, such option will terminate immediately.
If an Optionee's employment or service with GMA (or a Related Corporation
in the case of an employee or consultant) is terminated by reason of death or
disability, or if an Optionee dies after termination of the Optionee's
employment or service but before expiration of the Optionee's option, the
Optionee or his or her representative may exercise such option to the extent of
the number of Common Shares with respect to which the Optionee could have
exercised it on the date of such termination or death, or in the case of an
employee or consultant, to such other extent permitted by the Compensation
Committee, at any time prior to the earlier of the expiration date of such
option or (i) in the case of a non-employee director, one year after the date of
such termination of service or death, and (ii) in the case of an employee or
consultant, an accelerated termination date determined by the Compensation
Committee, which, in the case of disability, unless otherwise determined by the
Compensation Committee, may not be later than one year after the termination of
employment, and in the case of death, may not be later than one year after the
date of death.
In the event of a corporate transaction such as a merger, acquisition of
property or stock, separation, reorganization or liquidation, each outstanding
option will be assumed by the surviving corporation or by a
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<PAGE> 69
parent or subsidiary of such corporation if such corporation is the employer
corporation; provided, however, the Compensation Committee has the discretion to
terminate all or a portion of the outstanding options if it determines it is in
the best interests of the Company. Additionally, upon a "change in control" of
the Company, all outstanding options shall become fully vested and exercisable.
In the event of a change in control in which outstanding options are not assumed
by the surviving entity, the Compensation Committee will terminate all
outstanding options on at least seven days' notice.
Option Agreement; Restriction on Transferability. All options will be
evidenced by an option agreement containing provisions consistent with the Stock
Option Plan and such other provisions as the Compensation Committee deems
appropriate. Except with respect to the initial option grants to GMA's
non-employee directors and except as may be provided in an option agreement with
regard to other Non-Qualified Stock Options, no option granted under the Stock
Option Plan may be transferred, except by will or the laws of descent and
distribution. If the Optionee is married at the time of exercise and if the
Optionee requests at the time of exercise, the certificate for the Common Shares
will be registered in the name of the Optionee and his or her spouse, jointly,
with right of survivorship.
Amendments to Options and the Stock Option Plan; Discontinuance of the
Stock Option Plan. Subject to the provisions of the Stock Option Plan, the
Compensation Committee may not amend an option agreement without an Optionee's
consent if the amendment is unfavorable to the Optionee. The Board of Directors
may suspend or discontinue the Stock Option Plan or amend it in any respect
whatsoever, except that, without the approval of the holders of a majority of
the Common Shares present, in person or by proxy, and entitled to vote at a duly
called meeting, no such action may be taken, with respect to ISOs, to change the
class of employees eligible to participate in the Stock Option Plan, to increase
the maximum number of Common Shares with respect to which ISOs may be granted
under the Stock Option Plan (except as permitted under the Stock Option Plan
with respect to capital adjustments) or to extend the duration of the Stock
Option Plan. Shareholder approval is also required for any amendment that
requires shareholder approval to comply with Rule 16b-3 or any successor
thereto, if such compliance is intended.
Registration Statement on Form S-8. The Company intends to file with the
Commission a registration statement on Form S-8 covering the resale of the
Common Shares issuable upon exercise of options issued under the Stock Option
Plan promptly following the first anniversary of the consummation of the
Offerings.
Stock Option Grants. The following table sets forth information concerning
the outstanding options and options expected to be granted by the Company to its
executive officers upon consummation of the Offerings under the Stock Option
Plan.
INITIAL OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATE OF
COMMON COMMON SHARE PRICE
SHARES PERCENT OF APPRECIATION FOR OPTION
UNDERLYING OPTIONS EXERCISE TERM(2)
OPTIONS GRANTED TO PRICE PER EXPIRATION ------------------------
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Matthews(1)...... 480,135 67.30% $15.00 (3) $4,529,315 $11,478,173
......... % $15.00 (3) $ $
Mary Jane Robertson........ 100,000 14.02% $15.00 (3) $ 943,342 $ 2,390,614
Bruce W. Bantz............. 100,000 14.02% $15.00 (3) $ 943,342 $ 2,390,614
Lionel J. Marsland-Shaw.... 33,333 4.67% $15.00 (3) $ 314,444 $ 796,863
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment options are exercised in full, the
number of Common Shares underlying Mr. Matthews' options will increase to
534,135 Common Shares.
(2) The assumed annual rates of Common Share price appreciation have been
provided for illustrative purposes only in accordance with the rules and
regulations of the Commission and should not be construed as projected
appreciation rates for the price of the Common Shares.
(3) The options expire on the tenth anniversary of the consummation of the
Offerings.
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<PAGE> 70
PRINCIPAL STOCKHOLDERS
The table below sets forth the expected beneficial ownership of Common
Shares, after giving effect to the Offerings and the Direct Sales, by all
persons who are expected beneficially to own 5% or more of the Common Shares and
by each director and executive officer of GMA and by the directors and executive
officers of GMA as a group (assuming no exercise of the Underwriters'
over-allotment options). Certain directors and officers of GMA have expressed
their intention to purchase the Common Shares indicated in the table below in
the Direct Sales, but are under no obligation to purchase any such Common
Shares.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) SHARES CLASS
---------------------------------------- --------- ----------
<S> <C> <C>
The Trident Partnership, L.P.(2)............................ 3,191,489 13.29%
Risk Capital Reinsurance Company(3)......................... 1,063,829 4.43%
Third Avenue Value Fund(4)(5)............................... 644,219 2.68%
Donald J. Matthews(6)....................................... 70,000 *
Third Avenue Small-Cap Value Fund(5)(7)..................... 65,000 *
Mary Jane Robertson(8)...................................... 50,000 *
Bruce W. Bantz(8)........................................... 35,000 *
Lionel J. Marsland-Shaw(9).................................. 20,000 *
Willis T. King, Jr.(10)..................................... 15,000 *
Frederick S. Hammer(11)..................................... 12,500 *
Robert M. Lichten(12)....................................... 12,500 *
Charles A. Davis(13)........................................ 10,000 *
William M. Goldstein(10).................................... 10,000 *
Lawrence S. Doyle(10)....................................... 5,000 *
H. Russell Fraser(8)........................................ 2,000 *
Paul T. Walker(10).......................................... 1,000 *
Curtis R. Jensen(10)........................................ -- *
Mark D. Mosca(14)........................................... -- *
Charles G. Collis........................................... -- --
All directors and executive officers as a group (fifteen
persons).................................................. 243,000 1.01%
</TABLE>
- ---------------
* Less than 1%.
(1) The address for Trident is Victoria Hall, Victoria Street, Hamilton, HM
FX, Bermuda. The address for Risk Capital is 20 Horseneck Lane, Greenwich,
Connecticut 06830. The address for Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund is 767 Third Avenue, New York, New York 10017.
The address for each other beneficial owner is c/o Global Markets Access
Ltd., Cumberland House, 1 Victoria Street, Hamilton, HM AX, Bermuda.
(2) Does not include 270,076 Common Shares (300,451 Common Shares if the
Underwriters' over-allotment options are exercised in full) issuable upon
the exercise of Class A Warrants which are not currently exercisable, and
375,000 Common Shares issuable upon the exercise of Class B Warrants which
are not currently exercisable. For so long as Trident owns at least
500,000 Common Shares, the Company has agreed to nominate for election as
a director of the Company one person selected by Trident. In exchange for
such right and for so long as any person selected by Trident is a director
(and during any period after such person's designation but before his or
her election) Trident will not vote or permit any of the Common Shares
beneficially owned by it to be voted for the election of any director of
the Company, other than the nominee selected by Trident.
(3) Does not include 90,025 Common Shares (100,150 Common Shares if the
Underwriters' over-allotment options are exercised in full) issuable upon
the exercise of Class A Warrants which are not currently exercisable, and
125,000 Common Shares issuable upon the exercise of Class B Warrants
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<PAGE> 71
which are not currently exercisable. For so long as Risk Capital owns at
least 500,000 Common Shares, the Company has agreed to nominate for
election as a director of the Company one person selected by Risk Capital.
In exchange for such right and for so long as any person selected by Risk
Capital is a director (and during any period after such person's
designation but before his or her election) Risk Capital will not vote or
permit any of the Common Shares beneficially owned by it to be voted for
the election of any director of the Company, other than the nominee
selected by Risk Capital.
(4) The Third Avenue Value Fund and the Third Avenue Small-Cap Value Fund are
each a series of the Third Avenue Trust, which may be deemed to own
beneficially such Common Shares. Does not include 45,417 Common Shares
issuable upon the exercise of Class B Warrants which are not currently
exercisable.
(5) For so long as Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund collectively own at least 500,000 Common Shares, the Company has
agreed to nominate for election as a director of the Company one person
jointly selected by Third Avenue Value Fund and Third Avenue Small-Cap
Value Fund. In exchange for such right and for so long as any person
selected by Third Avenue Value Fund and Third Avenue Small-Cap Value Fund
is a director (and during any period after such person's designation but
before his or her election) Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund will not vote or permit any of the Common Shares
beneficially owned by them to be voted for the election of any director of
the Company, other than the nominee selected by Third Avenue Value Fund
and Third Avenue Small-Cap Value Fund.
(6) Does not include 185,101 Common Shares (225,601 Common Shares if the
Underwriters' over-allotment options are exercised in full) issuable upon
the exercise of Class A Warrants which are not currently exercisable, and
480,135 Common Shares (534,135 Common Shares if the Underwriters'
over-allotment options are exercised in full) issuable upon the exercise
of options which are not currently exercisable. Also does not include
175,000 Common Shares issuable upon the exercise of Class A Warrants
initially acquired by Mr. Matthews and subsequently transferred to a trust
for the benefit of his family, as to which he disclaims beneficial
ownership. The trustees of such trusts have executed lock-up agreements
for a period of one year after the date of this Prospectus. See
"Underwriting."
(7) The Third Avenue Small-Cap Value Fund and the Third Avenue Value Fund are
each a series of the Third Avenue Trust, which may be deemed to own
beneficially such Common Shares. Does not include 4,583 Common Shares
issuable upon the exercise of Class B Warrants which are not currently
exercisable.
(8) Does not include 100,000 Common Shares issuable upon the exercise of
options which are not currently exercisable.
(9) Does not include 33,333 Common Shares issuable upon the exercise of
options which are not currently exercisable.
(10) Does not include 15,000 Common Shares issuable upon the exercise of
options which are not currently exercisable.
(11) Does not include 230,316 Common Shares (267,466 Common Shares if the
Underwriters' over-allotment options are exercised in full) issuable upon
the exercise of Class A Warrants which are not currently exercisable, and
33,333 Common Shares issuable upon the exercise of options which are not
currently exercisable. Also does not include 100,000 Common Shares
issuable upon the exercise of Class A Warrants initially acquired by Mr.
Hammer and subsequently transferred to certain trusts for the benefit of
his children and grandchildren, as to which he disclaims beneficial
ownership. The trustees of such trusts have executed lock-up agreements
for a period of one year after the date of this Prospectus. See
"Underwriting."
(12) Does not include 230,316 Common Shares (267,466 Common Shares if the
Underwriters' overallotment options are exercised in full) issuable upon
the exercise of Class A Warrants which are not currently exercisable, and
33,333 Common Shares issuable upon the exercise of options which are not
currently exercisable. Also does not include 100,000 Common Shares
issuable upon the exercise of Class A Warrants initially acquired by Mr.
Lichten and subsequently transferred to certain trusts for
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<PAGE> 72
the benefit of his children and grandchildren, as to which he disclaims
beneficial ownership. The trustees of such trusts have executed lock-up
agreements for a period of one year after the date of this Prospectus, See
"Underwriting."
(13) Does not include 75,000 Common Shares issuable upon the exercise of
options that are not currently exercisable.
(14) Does not include 25,000 Common Shares issuable upon the exercise of
options which are not currently exercisable.
The Purpose Trust currently owns 12,000 Common Shares which constitute all
of the currently outstanding Common Shares. Upon consummation of the Offerings,
the Purpose Trust has agreed to sell such Common Shares to GMA for an aggregate
price of $12,000 and such Common Shares will be cancelled.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following descriptions summarize certain relationships and the terms of
certain agreements of the Company. Such summaries of agreements do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the relevant agreements. A copy of each
such agreement is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
SPONSORS RELATIONSHIPS
Certain directors of the Company (Messrs. Hammer and Lichten) are owners,
directors and/or officers of Inter-Atlantic and/or its parent corporation,
Inter-Atlantic Capital Partners, Inc. Inter-Atlantic is a registered
broker-dealer which provides investment banking services for insurance companies
and other financial services firms. Pursuant to an agreement between
Inter-Atlantic and the Company, Inter-Atlantic has agreed to provide certain
services in connection with the Offerings, the sales to the Strategic Investors
and the development of the Company's operations, including assistance in
preparing a registration statement for the Common Shares, selecting underwriters
in connection with the Offerings, identifying and negotiating with potential
strategic investors and such other services as the Company or Inter-Atlantic
deems appropriate. Pursuant to such agreement, the Company has agreed to pay
Inter-Atlantic a fee of $3.9 million upon consummation of the Offerings. The
Company and Inter-Atlantic negotiated the $3.9 million fee at a level of
approximately 1.0% of the total gross proceeds raised by the Company upon
consummation of the Offerings and the Direct Sales. The Company believes the fee
is reasonable and customary in light of the contingent nature of the fee and the
size of the sales to the Strategic Investors. In addition, the Company believes
the fee is comparable to the fee it otherwise would have paid to an unrelated
third-party service provider. Because Inter-Atlantic employs only eight people
and has limited resources, it has in turn contracted with ACA Service, Risk
Capital and Trident to provide consulting services to Inter-Atlantic in
connection with the services Inter-Atlantic has agreed to provide to the
Company. Pursuant to such agreements, Inter-Atlantic has agreed to pay
$1.95 million to ACA Service, $108,225 to Risk Capital and $324,675 to Trident
upon consummation of the Offerings. The Company is also obligated upon
consummation of the Offerings to reimburse Inter-Atlantic for reasonable
expenses it incurs in connection with performing services under its agreement
with the Company. Such expense reimbursements will not include the fees
Inter-Atlantic is obligated to pay ACA Service, Risk Capital and Trident, but
will include expenses incurred by ACA Service, Risk Capital and Trident in
connection with performing services under their agreements with Inter-Atlantic
for which Inter-Atlantic is obligated to reimburse them. Upon consummation of
the Offerings, certain of these incurred but not currently payable expenses may
be paid directly by the Company rather than paid to Inter-Atlantic as
reimbursement. At September 30, 1998, Inter-Atlantic had incurred expenses on
the Company's behalf in connection with the development of the Company's
operations of approximately $275,000 and expenses in connection with the
Offerings and the sales to the Strategic Investors of approximately $570,000,
including reimbursements it owed to ACA Service, Risk Capital and Trident. Upon
consummation of the Offerings, expenses incurred by the Company, including
expenses incurred by Inter-Atlantic on the Company's behalf, are currently
estimated to be approximately $3.2 million, of which approximately $1.3 million
is estimated to relate to expenses in connection with the Company's operations
and approximately $1.9 million is estimated to relate to expenses in connection
with the Offerings and the sales to the Strategic Investors, including expense
reimbursements it will owe to ACA Service, Risk Capital and Trident.
In connection with the formation of the Company, ACA Holdings, Donald J.
Matthews, five individuals associated with Inter-Atlantic and/or its parent
corporation, Inter-Atlantic Capital Partners, Inc. (Messrs. Michael P. Esposito,
Jr., Frederick S. Hammer, Andrew S. Lerner, Robert M. Lichten and William S.
Ogden, Jr.), Risk Capital and Trident purchased for $42,000, $12,000, $11,007,
$11,007, $6,300, $11,007, $2,679, $3,000 and $9,000, respectively, Class A
Warrants to purchase up to an aggregate number of Common Shares equal to 5.25%,
1.5%, 1.37593%, 1.37593%, 0.7875%, 1.37593%, 0.3347%, 0.375% and 1.125%,
respectively, of the sum of (i) the Common Shares outstanding immediately
following the consummation of the Offerings (including the Direct Sales, but
excluding any Common Shares held by the Purpose Trust) and (ii) the Common
Shares issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings other than the Class A
Warrants, the Class B Warrants and any options granted by the Company under its
Stock Option Plan. Messrs. Esposito, Hammer,
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Lichten and Matthews have each transferred a portion of their Class A Warrants
to certain family members or trusts that have been established for the benefit
of certain family members. The exercise price of the Class A Warrants is equal
to the initial public offering price per share, subject to customary
anti-dilution adjustments for certain future events, including stock splits and
the issuance of Common Shares at a price below the exercise price or the market
price of the Common Shares at the time of such issuance. The Class A Warrants
become exercisable in three equal annual installments commencing on the first
anniversary of the consummation of the Offerings. In the event of a change of
control of GMA, the Class A Warrants then outstanding will become immediately
exercisable. The Class A Warrants will expire on September 30, 2008. The holders
of the Class A Warrants have also been granted rights to require the Company to
register under the Securities Act the Common Shares underlying the Class A
Warrants, which rights become exercisable on the first anniversary of the
consummation of the Offerings. See "Description of Capital Stock -- Warrants."
The Company has retained ICS, a Bermuda corporation licensed as an
insurance broker, to provide risk management and other related financial
services. Pursuant to such agreement, ICS is entitled to receive an annual fee
of $425,000, which is payable in quarterly installments commencing on the
consummation of the Offerings through the fifth anniversary of the consummation
of the Offerings. ICS is in its initial stages of development and has a limited
operating history or experience providing risk management and other related
financial services. ICS is owned by Messrs. Esposito, Hammer, Lerner and
Lichten, each of whom is affiliated with Inter-Atlantic. Mr. Lichten is the
non-executive Chairman of the Board of GMA and the Operating Company. Mr. Hammer
is the non-executive Deputy Chairman of the Board of GMA and the Operating
Company. ICS intends to sub-contract a portion of the services that it is
required to provide to the Company to Risk Capital, one of the Company's
Sponsors, in exchange for an annual fee of $94,000.
ICS has loaned $12,000 to the Purpose Trust which will be repaid upon
consummation of the Offerings.
The Company believes that the arrangements between the Company and the
Sponsors, ICS and certain individuals associated with the Sponsors or ICS
described above were entered into on an arm's-length basis in the ordinary
course of the Company's business and on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
OTHER ACA RELATIONSHIPS
H. Russell Fraser, a director of the Company, is the Chairman of the Board
and Chief Executive Officer of ACA and its parent corporation, ACA Holdings. The
Operating Company has entered into three reinsurance treaties with ACA, a
Sponsor of the Company, which will become effective upon consummation of the
Offerings. The first treaty is a quota-share treaty pursuant to which the
Operating Company is required to provide, and ACA is required to purchase,
reinsurance on a fixed percentage of the risks associated with financial
guaranty insurance policies issued by ACA covering new issues of financial
obligations with a rating of "BB" or higher. The second and third treaties are
facultative treaties under which the Operating Company and ACA are each
obligated to offer the other the opportunity to reinsure each financial
obligation the other insures on a direct basis. Such facultative treaties also
set forth the basic terms under which the Operating Company and ACA may purchase
such reinsurance from the other on a case-by-case basis. See "Business --
Reinsurance Treaties with ACA."
The Company believes that each of the reinsurance treaties with ACA
described above was entered into on an arm's-length basis in the ordinary course
of the Company's business and on terms no less favorable to the Company than
could be obtained from an unaffiliated third party.
OTHER INTER-ATLANTIC RELATIONSHIPS
On August 27, 1998, Messrs. Esposito, Hammer, Lerner and Lichten subscribed
to purchase from the Company an aggregate of 115,000 Common Shares at a purchase
price of $14.10 per share. The purchases of the Common Shares are subject to a
number of conditions precedent customary in transactions of this nature,
including the accuracy of the parties' respective representations and warranties
and compliance with the parties' respective covenants set forth in the purchase
agreements. The purchases are also subject to the condition that an initial
public offering of not less than 14,000,000 Common Shares shall have been
consummated.
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The Company intends to grant Mr. Esposito and Mr. Lerner options to
purchase 33,333 and 17,647 Common Shares, respectively, as consideration for
their services rendered in connection with the Offerings and the sales to the
Strategic Investors. Such options have an exercise price of $15.00 per share and
are exercisable in three equal annual installments commencing on the first
anniversary of the Offerings.
STRATEGIC INVESTOR RELATIONSHIPS
Risk Capital and the Third Avenue Funds have agreed to purchase Common
Shares and Class B Warrants to purchase Common Shares as part of the Direct
Sales. See "Direct Sales." Charles A. Davis, a director of the Company,
currently serves as the President and Chief Operating Officer of Marsh &
McLennan Capital, Inc., an affiliate of Risk Capital and Marsh & McLennan.
Willis T. King, Jr., a director of the Company, currently serves as Vice
Chairman of Guy Carpenter & Company, Inc., the reinsurance brokerage subsidiary
of Marsh & McLennan Companies, Inc., an affiliate of Risk Capital and Marsh &
McLennan. Mark D. Mosca, a director of the Company, currently serves as the
President and Chief Executive Officer and a director of Risk Capital Holdings,
Inc., an affiliate of Risk Capital and Marsh & McLennan, and as the President
and Chief Executive Officer of Risk Capital. Curtis R. Jensen, a director of the
Company, currently serves as a senior analyst of Third Avenue Value Fund and as
Co-Portfolio Manager of Third Avenue Small-Cap Value Fund. The Company has
contracted with Marsh & McLennan to provide certain administrative services. See
"Business -- Administration."
In connection with the Direct Sales to Risk Capital, Trident and the Third
Avenue Funds, the Company has agreed to nominate for election as a director of
the Company one person selected by Risk Capital, one person selected by Trident
and one person selected by the Third Avenue Funds. Risk Capital, Trident and the
Third Avenue Funds will each have such right for so long as they own 500,000
Common Shares. In exchange for such right, and, for so long as any person
selected by Risk Capital, Trident or the Third Avenue Funds respectively, is a
director (and during any period after such person's designation but before his
or her election), each such Strategic Investor will not vote or permit any of
the Common Shares beneficially owned by it to be voted for the election of any
director of the Company, other than the nominee selected by it. Each such
Strategic Investor is permitted to assign its right to select one person to be
nominated for election as a director of the Company only upon the prior written
consent of the Company, which may not be unreasonably withheld. Mark D. Mosca,
Charles A. Davis and Curtis R. Jensen are serving as directors of the Company as
the nominees of Risk Capital, Trident and the Third Avenue Funds, respectively.
MANAGEMENT RELATIONSHIPS
The Company's executive officers, Messrs. Matthews, , Bantz and
Marsland-Shaw and Ms. Robertson, have expressed their non-binding intention to
purchase approximately $987,000, $ , $493,500, $282,000 and $705,000 of
Common Shares, respectively, directly from the Company as part of the Direct
Sales. Based on the initial public offering price of $15.00 per share, the
number of Common Shares that Messrs. Matthews, , Bantz and
Marsland-Shaw and Ms. Robertson are expected to purchase would be 70,000,
, 35,000, 20,000, and 50,000 Common Shares, respectively, and,
collectively, such purchases are expected to total Common Shares.
Similarly, certain directors of the Company have expressed their intention to
purchase an aggregate of 43,000 Common Shares directly from the Company as part
of the Direct Sales. In addition, Messrs. Hammer and Lichten have each
contracted to purchase 12,500 Common Shares directly from the Company as part of
the Direct Sales. Because the Common Shares sold to the officers and directors
will not be sold through the Underwriters as part of the Offerings, the purchase
price per share will be equal to the initial public offering price per share,
less the per share underwriting discounts and commissions. The Company intends
to make loans to Messrs. Matthews, , Bantz and Marsland-Shaw
and Ms. Robertson in the amounts of $493,500, $ , $370,125, $211,500
and $352,500, respectively, to partially finance such purchases in the event
such purchases are completed. Such loans will bear interest at 6.0% per annum
and must be repaid within five years of the consummation of the Direct Sales,
except that $123,375 of the loan made to Mr. Bantz and $70,500 of the loan made
to Mr. Marsland-Shaw must be repaid within 14 months of the consummation of the
Direct Sales. Any such purchases will be completed simultaneously with the
consummation of the Offerings and the other Direct Sales.
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OTHER RELATIONSHIPS
Charles G. Collis, a director of the Company, is a partner in the law firm
of Conyers Dill & Pearman, the Company's Bermuda counsel.
William M. Goldstein, a director of the Company, is a partner in the law
firm of Drinker Biddle & Reath LLP, the Company's United States counsel.
Lawrence S. Doyle, a director of the Company, is the Chief Executive
Officer, President and a director of Annuity and Life Reassurance, Ltd., the
company with which the Company has entered a sublease agreement, and its parent
company, Annuity and Life Re (Holdings), Ltd. Robert M. Lichten, the
non-executive Chairman of the Board of the Company, is the non-executive Deputy
Chairman of the Board of Annuity and Life Re (Holdings), Ltd. and Annuity and
Life Reassurance, Ltd. Frederick S. Hammer, the non-executive Deputy Chairman of
the Board of the Company is the non-executive Chairman of the Board of Annuity
and Life Re (Holdings), Ltd. and Annuity and Life Reassurance Ltd. Donald J.
Matthews, the President and Chief Executive Officer of the Company is a director
of Annuity and Life Re (Holdings), Ltd. and Annuity and Life Reassurance, Ltd.
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DESCRIPTION OF CAPITAL STOCK
The following description of GMA's capital stock summarizes certain
provisions of GMA's Memorandum of Association and Bye-Laws. Such summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of GMA's Memorandum of
Association and Bye-Laws. Copies of GMA's Memorandum of Association and Bye-Laws
are filed as exhibits to the Registration Statement of which this Prospectus is
a part.
GENERAL
GMA's authorized share capital upon consummation of the Offerings and the
Direct Sales will consist of: (i) 100,000,000 Common Shares, of which 24,006,756
Common Shares will be outstanding and (ii) 50,000,000 preferred shares, par
value $1.00 per share (the "Preferred Shares"), none of which will be
outstanding. In addition, an aggregate of 3,240,907 Common Shares will be
issuable upon the exercise of outstanding Class A Warrants, an aggregate of
600,000 Common Shares will be issuable upon the exercise of Class B Warrants to
be included in the Direct Sales and an aggregate of 1,106,114 Common Shares will
be issuable upon the exercise of options to be granted upon consummation of the
Offerings, in each case, subject to adjustment as provided therein. If the
Underwriters' over-allotment options are exercised in full, 26,706,756 Common
Shares will be outstanding, the number of Common Shares issuable upon the
exercise of outstanding Class A Warrants will increase to an aggregate of
3,605,406 Common Shares and the number of Common Shares issuable upon the
exercise of options to be granted upon consummation of the Offerings will
increase to an aggregate of 1,160,114 Common Shares. The number of Common Shares
issuable upon the exercise of the Class B Warrants will not change if the
Underwriters' over-allotment options are exercised. The Class A Warrants, Class
B Warrants and options will not be exercisable upon consummation of the
Offerings. The Purpose Trust currently owns 12,000 Common Shares, which
constitutes all of the currently outstanding Common Shares. Upon consummation of
the Offerings, the Purpose Trust has agreed to sell such Common Shares to GMA
for an aggregate price of $12,000, and such Common Shares will be cancelled.
COMMON SHARES
Holders of the Common Shares have no pre-emptive, redemption, conversion or
sinking fund rights. The quorum required for a general meeting of shareholders
is two or more persons present in person and representing in person or by proxy
more than 50% of the outstanding Common Shares (without giving effect to the
limitation on voting rights described below). Subject to the limitation on
voting rights described below, holders of Common Shares are entitled to one vote
per share on all matters submitted to a vote of holders of Common Shares. Most
matters to be approved by holders of Common Shares require approval by a simple
majority of the votes cast at a meeting at which a quorum is present. However, a
resolution to remove GMA's auditor before the expiration of the auditor's term
of office must be approved by the holders of at least two-thirds of the Common
Shares present in person or by proxy and voting thereon (after giving effect to
the limitation on voting rights) at a meeting at which a quorum is present.
In the event of a liquidation, dissolution or winding-up of GMA, the
holders of Common Shares are entitled to share equally and ratably in the assets
of GMA, if any remain after the payment of all debts and liabilities of GMA and
the liquidation preference of any outstanding Preferred Shares.
Limitation on Voting Rights. Each Common Share has one vote on a poll of
the shareholders, except that if and for as long as the number of issued
Controlled Shares (as defined below) of any person other than Trident would
constitute 10% or more of the combined voting power of the issued voting shares
of GMA (after giving effect to any prior reduction in voting power as described
below), each such issued Controlled Share, regardless of the identity of the
registered holder thereof, will confer only a fraction of a vote as determined
by the following formula (the "Formula"):
(T - C) / (9.1 X C)
Where: "T" is the aggregate number of votes conferred by all the issued shares
immediately prior to the application of the Formula with respect to any
particular shareholder, adjusted to take into account any prior
reduction taken with respect to any other shareholder pursuant to the
"sequencing provision" described below; and
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"C" is the number of issued Controlled Shares attributable to such
person. "Controlled Shares" of any person refers to all Common Shares or
voting Preferred Shares owned by such person, whether (i) directly, (ii)
with respect to persons who are United States persons, by application of
the attribution and constructive ownership rules of Sections 958(a) and
958(b) of the Code or (iii) beneficially, directly or indirectly, within
the meaning of Section 13(d)(3) of the Exchange Act, and the rules and
regulations thereunder.
The Formula will be applied successively as many times as may be necessary
to ensure that no person (except as excluded from the application of the Formula
above) will be a Controlling Shareholder (as defined below) at any time (the
"sequencing provision"). For the purposes of determining the votes exercisable
by shareholders as of any date, the Formula will be applied to the shares of
each shareholder in declining order based on the respective numbers of total
Controlled Shares attributable to each shareholder. Thus, the Formula will be
applied first to the votes of shares held by the shareholder to whom the largest
number of total Controlled Shares is attributable and thereafter sequentially
with respect to the shareholder with the next largest number of total Controlled
Shares. In each case, calculations are made on the basis of the aggregate number
of votes conferred by the issued voting shares as of such date, as reduced by
the application of the Formula to any issued voting shares of any shareholder
with a larger number of total Controlled Shares as of such date. "Controlling
Shareholder" means a person who owns, in aggregate, (i) directly, (ii) with
respect to persons who are United States persons, by application of the
attribution and constructive ownership rules of Sections 958(a) and 958(b) of
the Code or (iii) beneficially, directly or indirectly, within the meaning of
Section 13(d)(3) of the Exchange Act and the rules and regulations thereunder,
issued voting shares of GMA carrying 10% or more of the total combined voting
rights attaching to all issued shares.
The directors are empowered to require any shareholder to provide
information as to that shareholder's beneficial share ownership, the names of
persons having beneficial ownership of the shareholder's shares, relationships
with other shareholders or any other facts the directors may deem relevant to a
determination of the number of Controlled Shares attributable to any person. The
directors may disregard the votes attached to shares of any holder failing to
respond to such a request or submitting incomplete or untrue information.
The directors retain certain discretion to make such final adjustments to
the aggregate number of votes attaching to the voting shares of any shareholder
that they consider fair and reasonable in all the circumstances to ensure that
no person will be a Controlling Shareholder at any time.
Restrictions on Transfer. GMA's Bye-Laws contain several provisions
restricting the transferability of Common Shares. Except as described below with
respect to transfers of Common Shares executed on The Nasdaq National Market,
the directors (or their designee) are required to decline to register a transfer
of shares if they have reason to believe that the result of such transfer would
be to increase the number of total Controlled Shares of any person other than
Trident to 10% or more of a class of GMA's shares. Similarly, GMA is restricted
from issuing or repurchasing Common Shares if such issuance or repurchase would
increase the number of total Controlled Shares of any person other than Trident
to 10% or more of a class of GMA's shares.
The directors (or their designee) also may, in their absolute discretion,
decline to register the transfer of any Common Shares, except for transfers
executed on The Nasdaq National Market, if they have reason to believe (i) that
such transfer may expose GMA, any subsidiary or shareholder thereof or any
person purchasing insurance or reinsurance from GMA or any subsidiary thereof to
adverse tax or regulatory treatment in any jurisdiction, or (ii) that
registration of such transfer under the Securities Act or under any United
States state securities laws or under the laws of any other jurisdiction is
required and such registration has not been duly effected.
GMA's directors will not decline to register any transfer of Common Shares
executed on The Nasdaq National Market for the reasons described above. However,
if any such transfer results in the transferee other than Trident (or any group
of which such transferee is a member) beneficially owning, directly or
indirectly, 10% or more of any class of GMA's shares or causes GMA's directors
(or their designee) to have reason to believe that such transfer may expose GMA,
any subsidiary or shareholder thereof or any person purchasing insurance or
reinsurance from GMA or any subsidiary thereof to adverse tax or regulatory
treatment in any
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jurisdiction or that registration of such transfer under the Securities Act or
under any United States state securities laws or under the laws of any other
jurisdiction is required and such registration has not been duly effected, under
GMA's Bye-Laws, the directors (or their designee) are empowered to deliver a
notice to the transferee demanding that such transferee surrender to an agent
designated by the directors (the "Agent") certificates representing the shares
and any dividends or distributions that the transferee has received as a result
of owning the shares. A transferee who has resold the shares before receiving
such notice will be required to transfer to the Agent the proceeds of the sale,
to the extent such proceeds exceed the amount that the transferee paid for the
shares, together with any dividends or distributions that the transferee
received from the Company. As soon as practicable after receiving the shares and
any dividends or distributions that the transferee received, the Agent will use
its best efforts to sell such shares and any non-cash dividends or distributions
in an arm's-length transaction on The Nasdaq National Market. After applying the
proceeds from such sale toward reimbursing the transferee for the price paid for
the shares, the Agent will pay any remaining proceeds and any cash dividends and
distributions to organizations described in Section 501(c)(3) of the Code that
the directors designate. The proceeds of any such sale by the Agent or the
surrender of dividends or distributions will not inure to the benefit of GMA or
the Agent, but such amounts may be used to reimburse expenses incurred by the
Agent in performing its duties.
GMA is authorized to request information from any holder or prospective
acquiror of Common Shares as necessary to give effect to the transfer, issuance
and repurchase restrictions described above, and may decline to effect any such
transaction if complete and accurate information is not received as requested.
Conyers Dill & Pearman, Bermuda counsel to the Company, has advised the
Company that while the precise form of the restrictions on transfer contained in
GMA's Bye-Laws is untested, as a matter of general principle, restrictions on
transfers are enforceable under Bermuda law and are not uncommon. A proposed
transferee will be permitted to dispose of any Common Shares purchased that
violate the restrictions and as to the transfer of which registration is
refused. The transferor of such Common Shares will be deemed to own such Common
Shares for dividend, voting and reporting purposes until a transfer of such
Common Shares has been registered on the Register of Members of GMA.
If the directors refuse to register a transfer for any reason, they must
notify the proposed transferor and transferee within thirty days of such
refusal. GMA's Bye-Laws also provide that the Board may suspend the registration
of transfers at such time and for such periods as the Board may determine,
provided that they may not suspend the registration of transfers for more than
45 days in any period of 365 consecutive days.
The directors have designated the Company's Chief Executive Officer to
exercise their authority to decline to register transfers or to limit voting
rights as described above, or to take any other action, for as long as such
officer is also a director.
PREFERRED SHARES
Pursuant to GMA's Bye-Laws and Bermuda law, the Board by resolution may
establish one or more series of Preferred Shares having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences, powers and limitations as may be fixed by the Board without
any further shareholder approval, which, if any such Preferred Shares are
issued, will include restrictions on voting and transfer intended to avoid
having GMA constitute a "controlled foreign corporation" for United States
federal income tax purposes. Such rights, preferences, powers and limitations as
may be established could have the effect of discouraging an attempt to obtain
control of GMA. The issuance of Preferred Shares could also adversely affect the
voting power of the holders of Common Shares, deny shareholders the receipt of a
premium on their Common Shares in the event of a tender or other offer for the
Common Shares and have a depressive effect on the market price of the Common
Shares. The Company has no present plan to issue any Preferred Shares.
WARRANTS
Class A Warrants. In connection with the formation of the Company, ACA
Holdings, an affiliate of ACA, Donald J. Matthews, five individuals associated
with Inter-Atlantic and/or its parent corporation, Inter-
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Atlantic Capital Partners, Inc. (Messrs. Esposito, Hammer, Lerner, Lichten and
Ogden), Risk Capital and Trident purchased on August 25, 1998 for an aggregate
of $108,000 Class A Warrants to purchase up to an aggregate number of Common
Shares equal to 13.5% of the sum of (i) the Common Shares outstanding
immediately following the consummation of the Offerings (including the Direct
Sales, but excluding any Common Shares held by the Purpose Trust) and (ii) the
Common Shares issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings other than the Class A
Warrants, the Class B Warrants and any options granted by the Company under its
Stock Option Plan. The exercise price of the Class A Warrants is equal to the
initial public offering price per share, subject to customary anti-dilution
adjustments for certain future events, including stock splits and the issuance
of Common Shares at a price below the exercise price or the market price of the
Common Shares at the time of such issuance. The Class A Warrants become
exercisable in three equal annual installments commencing on the first
anniversary of the consummation of the Offerings. In the event of a change of
control of GMA, the Class A Warrants then outstanding will become immediately
exercisable. The Class A Warrants will expire on September 30, 2008.
The holders of the Class A Warrants have also been granted rights to
require the Company to register under the Securities Act the Common Shares
underlying the Class A Warrants, which rights become exercisable on the first
anniversary of the consummation of the Offerings, and have entered into
agreements with the Underwriters under which they have agreed not to dispose of
such Common Shares or the Class A Warrants for a one-year period from the date
of this Prospectus without the prior written consent of Merrill Lynch & Co. and
Prudential Securities Incorporated on behalf of the Underwriters. See "Shares
Eligible for Future Sale" and "Underwriting."
Class B Warrants. Upon consummation of the Offerings and the Direct Sales,
Class B Warrants to purchase an aggregate of 600,000 Common Shares, subject to
adjustment as provided in the warrants, will be outstanding. The exercise price
of the Class B Warrants is $15.00 per share, subject to customary anti-dilution
adjustments for certain events, including stock splits and the issuance of
Common Shares at a price below the exercise price for the Class B Warrants or
below the then current fair market value of the Common Shares. The Class B
Warrants become exercisable in three equal annual installments commencing on the
first anniversary of the consummation of the Direct Sales. In the event of a
change of control of GMA, the Class B Warrants then outstanding will become
immediately exercisable. The Class B Warrants will expire on the tenth
anniversary of the consummation of the Direct Sales.
The Class B Warrant holders have been granted certain registration rights
with respect to the sale of the Common Shares underlying the warrants, and have
entered into agreements with the Underwriters under which they have agreed not
to dispose of such Common Shares or the Class B Warrants for a nine month period
from the date of this Prospectus without the prior written consent of Merrill
Lynch & Co. and Prudential Securities Incorporated on behalf of the Underwriters
and the prior written consent of the Company. See "Shares Eligible for Future
Sale," "Direct Sales" and "Underwriting."
OPTIONS
Upon consummation of the Offerings, there will be 1,106,114 Common Shares
issuable upon the exercise of outstanding options and 214,258 Common Shares
reserved for future issuance pursuant to the Stock Option Plan. If the
Underwriters' over-allotment options are exercised in full, the number of Common
Shares issuable upon exercise of outstanding options will increase to 1,160,114
Common Shares and the number of Common Shares reserved for future issuance
pursuant to the Stock Option Plan will increase to 308,758 Common Shares. See
"Management -- Stock Option Plan."
The Company intends to file with the Commission a registration statement on
Form S-8 covering the resale of the Common Shares issuable upon exercise of
options issued under the Stock Option Plan promptly following the first
anniversary of the consummation of the Offerings. The individuals who will be
granted options upon consummation of the Offerings have entered into agreements
with the Underwriters under which they have agreed not to dispose of such
options for a one-year period from the date of this Prospectus without
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the prior written consent of Merrill Lynch & Co. and Prudential Securities
Incorporated on behalf of the Underwriters. See "Shares Eligible for Future
Sale" and "Underwriting."
BYE-LAWS
GMA's Bye-Laws provide for the corporate governance of GMA, including the
establishment of share rights, modification of such rights, issuance of share
certificates, imposition of a lien over shares in respect of unpaid amounts on
those shares and other debts or liabilities of a shareholder to GMA, calls on
shares which are not fully paid, the transfer of shares, alterations to capital,
the calling and conduct of general meetings, proxies, the appointment and
removal of directors, conduct and powers of directors, the payment of dividends,
the appointment of an auditor and the winding-up of GMA.
GMA's Bye-Laws provide that the Board shall be elected annually and shall
consist of three approximately equal classes, each class to be elected to serve
for a three year term. Shareholders may only remove a director prior to the
expiration of such director's term at a special meeting of shareholders at which
a majority of the votes cast thereon is cast in favor of such action. A special
meeting of shareholders may be convened by the Chairman or any two directors or
any director and the Secretary or on the request of shareholders holding not
less than 10% of the paid-up share capital of GMA that carries the right to vote
at general shareholders' meetings.
GMA's Bye-Laws also provide that if the Board in its absolute discretion
determines that share ownership by any shareholder may result in adverse tax,
regulatory or legal consequences to GMA, any of its subsidiaries or any other
shareholder, then GMA will have the option, but not the obligation, to
repurchase all or part of the shares held by such shareholder to the extent the
Board determines it is necessary or advisable to avoid or cure such adverse or
potential adverse consequences. GMA will also be entitled to assign this
repurchase right to one or more third parties, including other shareholders. The
price to be paid for such Common Shares will be the fair market value of such
shares.
GMA's Bye-Laws provide that each director may appoint an alternate
director, who shall have the power to attend and vote at any meeting of the
Board at which such director is not personally present and generally to perform
at such meeting all the functions of such director. In addition, the Board may
delegate any of its powers to a committee appointed by the Board, which may
consist partly or entirely of non-directors.
TRANSFER AGENT
The Company's registrar and transfer agent for the Common Shares is
ChaseMellon Shareholder Services, L.L.C.
DIFFERENCES IN CORPORATE LAW
The Companies Act 1981 of Bermuda (the "Act"), which applies to the
Company, differs in certain material respects from laws generally applicable to
United States corporations and their shareholders. Set forth below is a summary
of certain significant provisions of the Act (including modifications adopted
pursuant to GMA's Bye-Laws) applicable to the Company which differ in certain
respects from provisions of Delaware corporate law. The following statements are
summaries and do not purport to deal with all aspects of Bermuda law that may be
relevant to the Company and its shareholders.
Interested Directors. Bermuda law and GMA's Bye-Laws provide that any
transaction entered into by the Company in which a director has an interest is
not voidable by the Company nor can such director be liable to the Company for
any profit realized pursuant to such transaction provided the nature of the
interest is disclosed at the first opportunity at a meeting of directors, or in
writing to the directors. Under Delaware law such transaction would not be
voidable if (i) the material facts as to such interested director's relationship
or interests are disclosed or are known to the board of directors and the board
in good faith authorizes the transaction by the affirmative vote of a majority
of the disinterested directors, (ii) such material facts are disclosed or are
known to the stockholders entitled to vote on such transaction and the
transaction is specifically approved in good faith by vote of the stockholders
or (iii) the transaction is fair as to the
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corporation as of the time it is authorized, approved or ratified. Under
Delaware law, such interested director could be held liable for a transaction in
which such director derived an improper personal benefit.
Mergers and Similar Arrangements. The Company may acquire the business of
another Bermuda exempted company or a company incorporated outside Bermuda when
such business is within its business purpose as set forth in its Memorandum of
Association. The Company may, with the approval of a majority of votes cast at a
general meeting of the shareholders at which a quorum is present, amalgamate
with another Bermuda company or with a body incorporated outside Bermuda. In the
case of an amalgamation, a shareholder may apply to a Bermuda court for a proper
valuation of such shareholder's shares if such shareholder is not satisfied that
fair value has been paid for such shares. The court ordinarily would not
disapprove the transaction on that ground absent evidence of fraud or bad faith.
Under Delaware law, with certain exceptions, a merger, consolidation or sale of
all or substantially all the assets of a corporation must be approved by the
board of directors and a majority of the outstanding shares entitled to vote
thereon. Under Delaware law, a stockholder of a corporation participating in
certain major corporate transactions may, under certain circumstances, be
entitled to appraisal rights pursuant to which such stockholder may receive cash
in the amount of the fair value of the shares held by such stockholder (as
determined by a court) in lieu of the consideration such stockholder would
otherwise receive in the transaction.
Takeovers. Bermuda law provides that where an offer is made for shares of
a company and, within four months of the offer, the holders of not less than 90%
of the shares which are the subject of the offer accept, the offeror may by
notice require the nontendering shareholders to transfer their shares on the
terms of the offer. Dissenting shareholders may apply to the court within one
month of the notice objecting to the transfer. The burden is on the dissenting
shareholders to show that the court should exercise its direction to enjoin the
required transfer, which the court will be unlikely to do unless there is
evidence of fraud or bad faith or collusion between the offeror and the holders
of the shares who have accepted the offer as a means of unfairly forcing out
minority shareholders. Delaware law provides that a parent corporation, by
resolution of its board of directors and without any shareholder vote, may merge
with any subsidiary of which it owns at least 90% of each class of capital
stock. Upon any such merger, dissenting stockholders of the subsidiary would
have appraisal rights.
Shareholder's Suit. The rights of shareholders under Bermuda law are not
as extensive as the rights of shareholders under legislation or judicial
precedent in many United States jurisdictions. Class actions and derivative
actions are generally not available to shareholders under the laws of Bermuda.
However, the Bermuda courts ordinarily would be expected to follow English case
law precedent, which would permit a shareholder to commence an action in the
name of the Company to remedy a wrong done to the Company where the act
complained of is alleged to be beyond the corporate power of the Company or is
illegal or would result in the violation of GMA's Memorandum of Association or
Bye-Laws. Furthermore, consideration would be given by the court to acts that
are alleged to constitute a fraud against the minority shareholders or where an
act requires the approval of a greater percentage of the Company's shareholders
than actually approved it. The winning party in such an action generally would
be able to recover a portion of attorneys' fees incurred in connection with such
action. GMA's Bye-Laws provide that shareholders waive all claims or rights of
action that they might have, individually or in the right of the Company,
against any director or officer for any act or failure to act in the performance
of such director's or officer's duties, except with respect to any fraud or
dishonesty of such director or officer. Class actions and derivative actions
generally are available to stockholders under Delaware law for, among other
things, breach of fiduciary duty, corporate waste and actions not taken in
accordance with applicable law. In such actions, the court has discretion to
permit the winning party to recover attorneys' fees incurred in connection with
such action.
Indemnification of Directors. The Company may indemnify its directors or
officers in their capacity as such in respect of any loss arising or liability
attaching to them by virtue of any rule of law in respect of any negligence,
default, breach of duty or breach of trust of which a director or officer may be
guilty in relation to the Company other than in respect of his own fraud or
dishonesty. Under Delaware law, a corporation may indemnify a director or
officer of the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in defense of an action, suit or proceeding by reason of such position if (i)
such director or officer acted in good faith and in a manner he reasonably
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believed to be in or not opposed to the best interests of the corporation and
(ii), with respect to any criminal action or proceeding, such director or
officer had no reasonable cause to believe his conduct was unlawful.
Inspection of Corporate Records. Members of the general public have the
right to inspect the public documents of the Company available at the office of
the Registrar of Companies in Bermuda, which will include the Memorandum of
Association (including its objects and powers) and any alteration to the
Memorandum of Association and documents relating to any increase or reduction of
authorized capital. The shareholders have the additional right to inspect the
Bye-Laws, minutes of general meetings and audited financial statements of the
Company, which must be presented to the annual general meeting of shareholders.
The register of shareholders of the Company is also open to inspection by
shareholders without charge, and to members of the public for a fee. The Company
is required to maintain its share register in Bermuda but may establish a branch
register outside Bermuda. The Company is required to keep at its registered
office a register of its directors and officers which is open for inspection by
members of the public without charge. Bermuda law does not, however, provide a
general right for shareholders to inspect or obtain copies of any other
corporate records. Delaware law permits any shareholder to inspect or obtain
copies of a corporation's shareholder list and its other books and records for
any purpose reasonably related to such person's interest as a shareholder.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offerings and the Direct Sales, GMA expects to
have outstanding 24,006,756 Common Shares, Class A Warrants to purchase an
aggregate of 3,240,907 Common Shares, Class B Warrants to purchase an aggregate
of 600,000 Common Shares and options to purchase an aggregate of 1,106,114
Common Shares. If the Underwriters' over-allotment options are exercised in
full, 26,706,756 Common Shares are expected to be outstanding, the number of
Common Shares issuable upon the exercise of outstanding Class A Warrants will
increase to an aggregate of 3,605,406 Common Shares and the number of Common
Shares issuable upon the exercise of outstanding options will increase to an
aggregate of 1,160,114 Common Shares. The number of Common Shares issuable upon
exercise of the Class B Warrants will not change if the Underwriters'
over-allotment options are exercised. The Class A Warrants, Class B Warrants and
options will not be exercisable upon consummation of the Offerings. See
"Management -- Stock Option Plan," "Description of Capital Stock -- Warrants"
and "Direct Sales." Except as disclosed in "Description of Capital
Stock -- Restrictions on Transfer" and as discussed below with respect to the
lock-up agreements, the Common Shares sold in the Offerings and any Common
Shares sold in the Direct Sales pursuant to a separate prospectus to GMA's
directors and officers will be freely transferable without restriction or
further registration under the Securities Act, except for any of those Common
Shares owned by an "affiliate" of the Company within the meaning of Rule 144
under the Securities Act (which sales will be subject to the volume limitations
and certain other restrictions). The Common Shares to be sold to the Strategic
Investors in the Direct Sales, the Common Shares the Company has contracted to
sell to certain persons involved in the formation of the Company and the Common
Shares underlying the Class A Warrants, the Class B Warrants and the options are
"restricted securities" as defined in Rule 144 under the Securities Act and may
not be resold in the absence of registration under the Securities Act or
pursuant to an exemption from registration.
GMA, its directors and officers, the Strategic Investors, the holders of
the Class A Warrants and certain persons involved in the formation of the
Company have executed agreements (the "lock-up agreements") under which they
have agreed that they will not, without the prior written consent of Merrill
Lynch & Co. and Prudential Securities Incorporated on behalf of the Underwriters
and, in the case of the Strategic Investors, the Company, directly or indirectly
offer, sell, offer to sell, contract to sell, transfer, assign, pledge,
hypothecate, grant any option to purchase, or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, transfer, assignment,
pledge, hypothecation, grant of any option to purchase or other sale or
disposition) of any Common Shares or other capital stock of the Company or any
other securities convertible into, or exercisable or exchangeable for, any
Common Shares or other capital stock of the Company for a period of one year
after the date of this Prospectus or, in the case of the Strategic Investors,
for a period of nine months after the date of this Prospectus. Such agreements
do not prevent the Company from granting options under the Stock Option Plan so
long as such options are not exercisable until one year from the date of this
Prospectus. Merrill Lynch & Co., Prudential Securities Incorporated and, in the
case of the Strategic Investors, the Company may, in their discretion at any
time and without notice, jointly release all or any portion of the securities
subject to such lock-up agreements.
The Strategic Investors, the holders of the Class A Warrants and the
holders of the Class B Warrants have been granted rights to require the Company
to register under the Securities Act the Common Shares purchased by the
Strategic Investors in the Direct Sales and the Common Shares underlying the
Class A Warrants and the Class B Warrants, which rights are not exercisable
before the first anniversary of the consummation of the Offerings. The Company
has agreed not to permit the acceleration of the vesting of such rights without
the prior written consent of Merrill Lynch & Co. and Prudential Securities
Incorporated on behalf of the Underwriters.
The holders of the Class A Warrants have the right to require the
registration under the Securities Act of all or a portion of the Common Shares
underlying such warrants for sale in an underwritten public offering if, at any
time on or after the first anniversary of the consummation of the Offerings and
before the tenth anniversary thereof, holders of 10% or more of such Common
Shares give written notice to the Company requesting such registration. Holders
of Class A Warrants also have the right to require the registration under the
Securities Act of all or a portion of the Common Shares underlying such Warrants
for sale in open market transactions or negotiated block trades if, at any time
on or after the first anniversary of the consummation of
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the Offerings and before the tenth anniversary thereof, holders of 5% or more of
such Common Shares give written notice to the Company requesting such
registration. In addition, if the Company proposes, other than pursuant to the
two methods mentioned immediately above, to file a registration statement under
the Securities Act to register any of its Common Shares for public sale under
the Securities Act (including pursuant to requests of the holders of Class B
Warrants or the Common Shares sold to the Strategic Investors in the Direct
Sales) other than on Form S-4 or Form S-8 or in certain other circumstances
including mergers or acquisitions, the holders of the Class A Warrants have the
right to request the inclusion of all or a portion of their Common Shares
underlying the Class A Warrants in the registration statement, and the Company
is required to use commercially reasonable efforts to include such Common Shares
in the registration statement.
The holders of the Class B Warrants and the Common Shares sold to the
Strategic Investors in the Direct Sales each have the right to require the
registration under the Securities Act of all or a portion of the Common Shares
underlying such warrants or sold to the Strategic Investors in the Direct Sales
for sale in an underwritten public offering if, at any time on or after the
first anniversary of the consummation of the Direct Sales and before the tenth
anniversary thereof, such holder gives written notice to the Company requesting
such registration. Holders of Class B Warrants and the Common Shares sold to the
Strategic Investors in the Direct Sales also each have the right to require the
registration under the Securities Act of all or a portion of the Common Shares
underlying such warrants or sold to the Strategic Investors in the Direct Sales
for sale in open market transactions or negotiated block trades if, at any time
on or after the first anniversary of the consummation of the Direct Sales and
before the tenth anniversary thereof, such holder gives written notice to the
Company requesting such registration. In addition, if the Company proposes,
other than pursuant to the two methods mentioned immediately above, to file a
registration statement under the Securities Act to register any of its Common
Shares for public sale under the Securities Act (including pursuant to requests
of the holders of Class A Warrants, other Class B Warrants or other Common
Shares sold to the Strategic Investors in the Direct Sales) other than on Form
S-4 or Form S-8 or in certain other circumstances including mergers or
acquisitions, the holders of the Class B Warrants and the Common Shares sold to
the Strategic Investors in the Direct Sales have the right to request the
inclusion of all or a portion of the Common Shares underlying the Class B
Warrants or sold in the Direct Sales in the registration statement, and the
Company is required to use commercially reasonable efforts to include such
Common Shares in the registration statement.
The registration rights agreement entered into by the Company in connection
with the Class A Warrants provides that at any time when a registration
statement covering Common Shares sold to the Strategic Investors in the Direct
Sales and the Common Shares underlying the warrants is effective, if the Company
determines after a good faith inquiry that a sale of such Common Shares would
require disclosure of non-public material information, the disclosure of which
would have a material adverse effect on the Company, sales of such Common Shares
will be suspended until the earlier of (i) 120 days after the Company makes
notification of its good faith determination or (ii) such time as the Company
makes notification that the material information has been disclosed to the
public, or ceases to be material or that sales pursuant to the registration
statement can resume.
Each of the registration rights agreements entered into by the Company in
connection with the Class B Warrants provides that at any time when a
registration statement covering Common Shares sold to the Strategic Investors in
the Direct Sales and the Common Shares underlying the warrants is effective, if
the Company determines after a good faith inquiry that a sale of such Common
Shares would require disclosure of non-public material information, the
disclosure of which would have a material adverse effect on the Company, sales
of such Common Shares will be suspended until the earlier of (i) 20 days after
the Company makes notification of its good faith determination or (ii) such time
as the Company makes notification that the material information has been
disclosed to the public, or ceases to be material or that sales pursuant to the
registration statement can resume. The Company may not commence such a
suspension period within 90 days after the end of a prior period.
In connection with such registrations, the Company is required to bear
certain legal, accounting, printing, filing fee and other expenses, including
underwriters' discounts and compensation, brokers' commissions and similar
selling expenses. The registration rights may be transferred to any assignee or
transferee of the
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Common Shares sold to the Strategic Investors in the Direct Sales, the Class A
Warrants, the Class B Warrants or the Common Shares underlying such warrants.
The Company also intends to file with the Commission a registration
statement on Form S-8 covering the resale of the Common Shares issuable upon
exercise of options issued under the Stock Option Plan promptly following the
first anniversary of the consummation of the Offerings.
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of Common Shares for future sale, will have
on the market price of the Common Shares prevailing from time to time. Sales of
substantial amounts of Common Shares in the public market following the
Offerings, including sales by persons holding the Common Shares sold to the
Strategic Investors or certain persons involved in the formation of the Company
or the Common Shares underlying the Class A Warrants, Class B Warrants or
options, or the perception that such sales could occur, could adversely affect
the market price of the Common Shares and may make it more difficult for the
Company to sell its equity securities in the future at a time and at a price
which it deems appropriate.
DIRECT SALES
The Company has entered into an agreement with each of the Strategic
Investors for the purchase of Common Shares and Class B Warrants as part of the
Direct Sales. Risk Capital has agreed to purchase 1,063,829 Common Shares and
Class B Warrants to purchase an additional 125,000 Common Shares for an
aggregate purchase price of approximately $15.0 million. Trident has agreed to
purchase 3,191,489 Common Shares and Class B Warrants to purchase an additional
375,000 Common Shares for an aggregate purchase price of approximately $45.0
million. Rolaco Holding S.A. has agreed to purchase 709,219 Common Shares and
Class B Warrants to purchase an additional 50,000 Common Shares for an aggregate
purchase price of approximately $10.0 million. The Third Avenue Value Fund and
the Third Avenue Small-Cap Value Fund have agreed to purchase 644,219 Common
Shares and 65,000 Common Shares, respectively, and Class B Warrants to purchase
an additional 45,417 Common Shares and an additional 4,583 Common Shares,
respectively, for aggregate purchase prices of approximately $9.1 million and
$900,000, respectively. The Company did not separately negotiate a price for the
Common Shares and the Class B Warrants issued to the Strategic Investors. The
aggregate purchase price to be paid by each Strategic Investor is based on a
price of $14.10 for (i) one Common Share and (ii) the right to purchase a
specified fraction of a Common Share under the Class B Warrants. The Class B
Warrants will be exercisable at $15.00 per share.
The issuance of the Common Shares and Class B Warrants in the Direct Sales
is subject to a number of conditions precedent customary in transactions of this
nature, including the accuracy of the parties' respective representations and
warranties, delivery of legal opinions and compliance with the parties'
respective covenants set forth in the securities purchase agreements. In
addition, such issuances to the Strategic Investors are further subject to the
satisfaction or waiver of the closing conditions contained in the Underwriting
Agreement with respect to the Offerings other than the condition that the sales
in excess of $70.0 million have been made to the Strategic Investors.
Furthermore, such issuances are subject to the condition that the Company will
receive net proceeds of not less than $150.0 million from the Offerings when
they are consummated.
In connection with the Direct Sales to Risk Capital, Trident and the Third
Avenue Funds, the Company has agreed to nominate for election as a director of
the Company one person selected by Risk Capital, one person selected by Trident
and one person selected by the Third Avenue Funds. Risk Capital, Trident and the
Third Avenue Funds will each have such right for so long as it owns 500,000
Common Shares. In exchange for such right, and, for so long as any person
selected by Risk Capital, Trident or the Third Avenue Funds, respectively, is a
director (and during any period after such person's designation but before his
or her election), each such Strategic Investor will not vote or permit any of
the Common Shares beneficially owned by it to be voted for the election of any
director of the Company, other than the nominee selected by it. Each such
Strategic Investor is permitted to assign its right to select one person to be
nominated for election as a director of the Company only upon the prior written
consent of the Company, which may not be unreasonably
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withheld. Mark D. Mosca, Charles A. Davis and Curtis R. Jensen are currently
serving as directors of the Company as the nominees of Risk Capital, Trident and
the Third Avenue Funds, respectively.
The Company has granted the Strategic Investors rights to require the
Company to register the Common Shares they purchase in the Direct Sales and the
Common Shares underlying the Class B Warrants issued in the Direct Sales. Such
rights become exercisable on the first anniversary of the consummation of the
Offerings. The Company has agreed not to permit the acceleration of the vesting
of such rights without the prior written consent of Merrill Lynch & Co. and
Prudential Securities Incorporated on behalf of the Underwriters. See "Shares
Eligible for Future Sales" and "Underwriting."
In addition to the sales being made to the Strategic Investors, the Company
is offering by a separate prospectus up to 218,000 Common Shares directly to its
directors and officers at a per share price equal to the initial public offering
price per share, less the per share underwriting discounts and commissions, for
an aggregate purchase price of approximately $3.1 million. All such purchases
are expected to be consummated simultaneously with the consummation of the
Offerings.
GMA has also contracted to sell 115,000 Common Shares directly to certain
of its directors and officers at a purchase price of $14.10 per share, for an
aggregate purchase price of approximately $1.6 million. Such purchases of the
Common Shares are subject to a number of conditions precedent customary in
transactions of this nature, including the accuracy of the parties' respective
representations and warranties and compliance with the parties' respective
covenants set forth in the purchase agreements. The purchases are also subject
to the condition that an initial public offering of not less than 14,000,000
Common Shares shall have been consummated. All such purchases are expected to be
consummated simultaneously with the consummation of the Offerings.
Each of the Strategic Investors and the individuals that are expected to
purchase Common Shares as part of the Direct Sales has executed an agreement
under which they have agreed that they will not, without the prior written
consent of Merrill Lynch & Co. and Prudential Securities Incorporated on behalf
of the Underwriters and, in the case of the Strategic Investors, the Company,
directly or indirectly offer, sell, offer to sell, contract to sell, transfer,
assign, pledge, hypothecate, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, transfer,
assignment, pledge, hypothecation, grant of any option to purchase or other sale
or disposition) of any Common Shares or other capital stock of the Company or
any other securities convertible into, or exercisable or exchangeable for, any
Common Shares or other capital stock of the Company for a period of nine months
after the date of this Prospectus in the case of the Strategic Investors and one
year after the date of this Prospectus in the case of the other individuals that
are expected to purchase Common Shares as part of the Direct Sales. Merrill
Lynch & Co., Prudential Securities Incorporated and, in the case of the
Strategic Investors, the Company may, in their discretion at any time and
without notice, jointly release all or any portion of the securities subject to
such lock-up agreements.
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CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of GMA, the Operating Company and the
Marketing Company and the taxation of GMA's shareholders is based upon current
law. Legislative, judicial or administrative changes may be forthcoming that
could affect this summary. The statements as to United States federal income tax
law set forth below represent the opinion of Drinker Biddle & Reath LLP, United
States counsel to the Company, subject to the qualifications and assumptions set
forth in such statements. The statements as to Bermuda tax law set forth below
represent the opinion of Conyers Dill & Pearman, Bermuda counsel to the Company,
subject to the qualifications and assumptions set forth in such statements. The
statements as to the Company's beliefs and intentions as to factual matters
represent the views of the Company's management and do not represent legal
opinions of its counsel.
TAXATION OF GMA, THE OPERATING COMPANY AND THE MARKETING COMPANY
Bermuda
Under current Bermuda law, there is no income tax or capital gains tax
payable by GMA, the Operating Company and the Marketing Company. GMA and the
Operating Company have each received an assurance from the Bermuda Minister of
Finance under The Exempted Undertakings Tax Protection Act 1966 of Bermuda to
the effect that if there is enacted in Bermuda any legislation imposing tax
computed on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, then
the imposition of any such tax shall not be applicable to GMA, the Operating
Company or to any of their operations or the shares, debentures or other
obligations of GMA or the Operating Company until March 2016. The Marketing
Company has applied to the Bermuda Minister of Finance for such an assurance.
These assurances are subject to the proviso that they are not construed so as to
prevent the application of any tax or duty to such persons as are ordinarily
resident in Bermuda (GMA, the Operating Company and the Marketing Company are
not so currently designated) or to 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 GMA, the Operating Company or the
Marketing Company. GMA, the Operating Company and the Marketing Company, under
current rates, will pay annual Bermuda government fees of $15,900, $3,460 and
$1,695, respectively, and the Operating Company will pay annual insurance fees
of $2,500.
United States
GMA's Board of Directors has adopted operating guidelines, developed in
consultation with its United States counsel, that prescribe how GMA, the
Operating Company and the Marketing Company are to conduct their businesses in a
manner consistent with their intent not to be engaged in a trade or business
within the United States. Accordingly, GMA, and the Marketing Company and the
Operating Company do not currently plan to file United States income tax
returns. However, because definitive identification of activities that
constitute being engaged in a trade or business in the United States is not
provided by the Code or regulations or court decisions, there can be no
assurance that the IRS will not contend that GMA and/or the Operating Company
and/or the Marketing Company is engaged in a trade or business in the United
States. A foreign corporation deemed to be so engaged would be subject to United
States income tax, as well as branch profits tax, on its income that is treated
as effectively connected with the conduct of that trade or business unless the
corporation is entitled to relief under the permanent establishment provision of
a tax treaty, as discussed below. Section 842 of the Code requires that foreign
insurance companies carrying on an insurance business within the United States
have a certain minimum amount of effectively connected net investment income
even if they have no United States source investment income. Otherwise, the
income tax, if imposed, would be based on effectively connected income computed
in a manner generally analogous to that applied to the income of a domestic
corporation, except that a foreign corporation can anticipate an allowance of
deductions and credits only if it files a United States income tax return. Under
regulations, the foreign corporation would be entitled to deductions and credits
for the taxable year only if the return for that year is timely filed under
rules set forth therein. Penalties may be assessed for failure to file tax
returns. The federal income tax rates currently are a maximum of 35% for a
corporation's effectively connected income and 30%
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for branch profits tax. The branch profits tax is imposed on net income after
subtracting the regular corporate tax and making certain other adjustments.
Under the income tax convention between Bermuda and the United States (the
"Treaty"), provided that the predominant business activity of the Operating
Company is acting as an insurer or as a reinsurer of risks underwritten by other
insurance companies (together with the investing or reinvesting of assets held
in respect of insurance reserves, capital and surplus incident to the carrying
on of its insurance business), the Operating Company will be subject to United
States income tax (including branch profits tax) on any income found to be
effectively connected with a United States trade or business only if that trade
or business is conducted through a permanent establishment in the United States.
While there can be no assurance, the operating guidelines adopted by GMA's Board
of Directors and described in the preceding paragraph are similarly intended to
prescribe how the Operating Company will conduct its business without
establishing a permanent establishment in the United States. The Operating
Company would not be entitled to the benefits of the Treaty if (i) less than 50%
of the Operating Company's stock were beneficially owned, directly or
indirectly, by Bermuda residents or United States citizens or residents, or (ii)
the Operating Company's income were used in substantial part to make
disproportionate distributions to, or to meet certain liabilities to, persons
who are not Bermuda residents or United States citizens or residents. While
there can be no assurance, it is not expected that either of those factual
situations will exist after the sale of Common Shares offered hereby.
Foreign corporations not engaged in a trade or business in the United
States are nonetheless subject to United States income tax at a rate of 30% of
the gross amount of certain "fixed or determinable annual or periodical gains,
profits, and income" derived from sources within the United States as enumerated
in Section 881(a) of the Code (such as dividends and interest on certain
investments). The Operating Company will be subject to such taxes on dividends
from United States companies in which it makes portfolio investments.
The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located in
the United States. The rate of tax applicable to reinsurance premiums paid to
the Operating Company is currently 1%. The rate of tax for any premiums for
direct issuance of financial guarantees would be 4%.
United Kingdom
Under current United Kingdom law, the measure of corporate taxation
resulting from the activities of the Marketing Company in the United Kingdom
would likely be the portion of the profits of the Marketing Company attributable
on an assumed arm's-length basis to its London branch activities. Such profit
would be measured in practice by comparison with the compensation that the
Marketing Company would need to pay to an independent entity providing the same
services as its office in the United Kingdom. The Marketing Company will seek to
enter into an agreement with the United Kingdom Inland Revenue under which an
agreed profit margin will be attributed to its office in the United Kingdom
under a stated formula for purposes of calculating the amount of tax owed in the
United Kingdom by the Marketing Company. No assurance can be given that such an
agreement will be reached and, if reached, any such agreement would be
cancellable upon reasonable notice by the Marketing Company or United Kingdom
Inland Revenue.
Other Countries
GMA, the Operating Company and the Marketing Company plan to operate in
such a manner that they will not generally be subject to any material taxes in
jurisdictions other than those noted above, except for withholding taxes on
certain kinds of investment income and excise or other similar premium taxes as
described above. It is possible, however, that the Operating Company or the
Marketing Company may be held to be doing business in one or more jurisdictions
and therefore subject to tax on the profits of such business beyond that
contemplated above.
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TAXATION OF SHAREHOLDERS
Bermuda Taxation
Currently, there is no Bermuda withholding tax on dividends paid by GMA or
the Operating Company.
United States Taxation
UNITED STATES SHAREHOLDERS
General. The following discussion summarizes certain United States federal
income tax consequences relating to the acquisition, ownership and disposition
of Common Shares by a beneficial owner who is (i) a citizen or resident of the
United States, (ii) a United States domestic corporation or (iii) otherwise
subject to United States federal income taxation on a net income basis in
respect of the Common Shares. This summary deals only with Common Shares
acquired by purchasers in the Offering and held as capital assets and does not
deal with the tax consequences applicable to all categories of investors, some
of which (such as broker-dealers who hold Common Shares as part of hedging or
conversion transactions and investors whose functional currency is not the
United States dollar) may be subject to special rules. Prospective purchasers of
the Common Shares are advised to consult their own tax advisers with respect to
their particular circumstances and with respect to the effects of United States
federal, state, local or other laws to which they may be subject.
Dividends. Distributions with respect to the Common Shares will be treated
as ordinary dividend income to the extent of the Company's current or
accumulated earnings and profits as determined for United States federal income
tax purposes, subject to the discussion below relating to the potential
application of the "controlled foreign corporation" or "passive foreign
investment company" rules. Such dividends will not be eligible for the
dividends-received deduction allowed to United States corporations under Section
243 of the Code. The amount of any distribution in excess of the Company's
current and accumulated earnings and profits will first be applied to reduce the
holder's tax basis in the Common Shares, and any amount in excess of tax basis
will be treated as gain from the sale or exchange of the Common Shares.
Classification of GMA and the Operating Company as Controlled Foreign
Corporations. Under Section 951(a) of the Code, each "United States
shareholder" of a foreign corporation that is a "controlled foreign corporation"
(a "CFC") for an uninterrupted period of 30 days or more during a taxable year
who owns shares in the CFC directly or indirectly through foreign entities on
the last day during such taxable year on which the corporation is a CFC must
include in its gross income for United States federal income tax purposes his
pro-rata share of the CFC's Subpart F income, even if the Subpart F income is
not distributed. The Subpart F income includes, among other things, "insurance
income," which is generally defined as income (including premium and investment
income) attributable to the issuing (or reinsuring) of any insurance contract in
connection with risks located in, or liabilities arising out of, activities in
or lives or health of residents of a country other than the country under the
laws of which the insurance company is organized. Accordingly, it is anticipated
that substantially all of the income of the Company will be Subpart F income.
Under Section 951(b) of the Code, any United States corporation, citizen,
resident or other United States person who owns, directly or indirectly through
foreign entities, or is considered to own (by application of the rules of
constructive ownership set forth in Section 958(b) of the Code, generally
applying to family members, partnerships, estates, trusts, controlled
corporations or holders of certain options), 10% or more of the total combined
voting power of all classes of stock of the foreign corporation will be
considered to be a "United States shareholder." In general, a foreign insurance
company such as the Operating Company is treated as a CFC only if such "United
States shareholders" collectively own more than 25% of the total combined voting
power or total value of the corporation's stock. Because of the expected
dispersion of GMA's share ownership following the Offerings and the restrictions
on transfer, issuance or repurchase of Common Shares, and because GMA's Bye-Laws
provide that no single shareholder other than Trident is permitted to hold 10%
or more of the total combined voting power of GMA, and because neither Trident
nor its general partner is a United States person and no direct or indirect
Trident partner who is a United States person will own a large enough interest
in Trident to own, by attribution, 10% or more of the vote or value of GMA
stock, shareholders of GMA should not be viewed as United States shareholders of
a CFC for purposes of these rules. Accordingly, based on the foregoing factual
assumptions, in the opinion of Drinker Biddle & Reath
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LLP, neither GMA nor the Operating Company will be a CFC following the
Offerings. However, there can be no assurance that the IRS will not successfully
take a contrary position.
RPII Companies. Different definitions of "United States shareholder" and
"controlled foreign corporation" are applicable in the case of a foreign
corporation which earns "related person insurance income" ("RPII"). RPII is
defined in Section 953(c)(2) of the Code as any "insurance income" of a foreign
corporation attributable to policies of insurance or reinsurance with respect to
which the person (directly or indirectly) insured is a "United States
shareholder" of such corporation or a "related person" to such a shareholder. In
general, "insurance income" is income (including underwriting premium and
investment income) attributable to the issuing of any insurance or reinsurance
contract in connection with risks located in a country other than the country
under the laws of which the CFC is created or organized and which would be taxed
under the provisions of the Code relating to insurance companies if the income
were the income of a domestic insurance company.
Generally, the term "related person" for this purpose means someone who
controls or is controlled by the United States shareholder or someone who is
controlled by the same person or persons who control the United States
shareholder. "Control" is measured by either more than 50% in value or more than
50% in voting power of stock, applying constructive ownership principles similar
to the rules of Section 958 of the Code. For purposes of inclusion of the
Operating Company's RPII in the income of United States shareholders, unless an
exception applies, the term "United States shareholder" includes all United
States persons who own, directly or indirectly, any amount (rather than 10% or
more) of the Operating Company's stock. The Operating Company will be subject to
the CFC provisions for RPII purposes if such persons collectively own directly,
indirectly or constructively 25% or more of the stock of the Operating Company
by vote or value for an uninterrupted period of at least 30 days during any
taxable year. The Company anticipates that United States persons will own
directly, indirectly or constructively 25% or more of the stock of the Operating
Company by vote or value for the requisite period; accordingly, the RPII rules
of the Code will apply to the Operating Company unless one of several exceptions
(discussed below) applies to the Operating Company.
RPII Exceptions. The special RPII rules do not apply if (i) direct or
indirect insureds and persons related to such insureds, whether or not United
States persons, are treated at all times during the taxable year as owning less
than 20% of the voting power and less than 20% of the value of the stock of the
Operating Company, (ii) RPII, determined on a gross basis, is less than 20% of
the Operating Company's gross insurance income for the taxable year, (iii) the
Operating Company elects to be taxed on its RPII as if the RPII were effectively
connected with the conduct of a United States trade or business and to waive all
treaty benefits with respect to RPII or (iv) the Operating Company elects to be
treated as a United States corporation. The Operating Company does not intend to
make either of the described elections. Thus, only exceptions (i) and (ii) may
be available.
The Operating Company will not knowingly enter into any insurance or
reinsurance arrangements in which the direct or indirect insureds are, or are
"related" (as defined for purposes of the RPII provisions) to, owners of Common
Shares. Moreover, GMA believes it is highly unlikely that the Operating Company
will enter into insurance or reinsurance arrangements in which, in the
aggregate, the direct or indirect insureds are, or are so related to, owners of
20% or more of the Common Shares. If this belief is correct, exception (i) will,
and exception (ii) may, apply to the Operating Company. On the assumption that
this belief is correct, therefore, in the opinion of Drinker Biddle & Reath LLP,
United States persons who own stock of GMA will not be taxable on RPII of the
Operating Company following the Offerings. There can be no assurance, however,
that this will be the case. Indeed, because the Operating Company's direct or
indirect insureds are likely to include the owners of publicly traded securities
with respect to which the Operating Company issues financial guaranty insurance,
it may be difficult, if not impossible, to determine with certainty whether
either of these 20% tests is or is not met as of any particular point in time.
No effort will be made by GMA or the Operating Company to identify the extent to
which owners of securities for which the Operating Company has issued financial
guaranty insurance or reinsurance are also shareholders of GMA or persons
related thereto. Thus, GMA, the Operating Company and GMA's United States
shareholders may not know whether GMA's United States shareholders are subject
to the RPII rules, or how much RPII the Operating Company has earned in any
taxable year. If neither of these exceptions were to apply, each United States
person owning,
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directly or indirectly, stock in GMA (and therefore, indirectly in the Operating
Company) at the end of any taxable year would generally be required to include
in its gross income for United States federal income tax purposes its share of
the RPII for the entire taxable year, determined as if such RPII were
distributed proportionately only to such United States shareholders at that
date, but limited to the Operating Company's current-year earnings and profits
reduced by the shareholder's pro-rata share, if any, of certain prior-year
deficits in earnings and profits.
Apportionment of RPII to United States Shareholders. If direct or indirect
insureds and persons related to such insureds were to own more than 20% of the
voting power or value of the Operating Company's common shares and the Operating
Company's RPII determined on a gross basis for a taxable year were to be 20% or
more of its gross insurance income, every United States person who owns directly
or indirectly Common Shares on the last day of that year would be required to
include in its gross income its share of the Operating Company's RPII for such
year, whether or not distributed. A United States person who owns Common Shares
during GMA's taxable year but not on the last day of the taxable year on which
the Operating Company is a controlled foreign corporation within the meaning of
the RPII provision of the Code, which would normally be December 31, would not
be required to include in its gross income any part of the Operating Company's
RPII. Correspondingly, a United States person who owns directly or indirectly,
Common Shares on the last day of the taxable year on which the Operating Company
is a controlled foreign corporation for purposes of those provisions would be
required to include in its income its share of the RPII for the entire year even
though such holder does not own the Common Shares for the entire year.
Uncertainty as to Application of RPII. Regulations interpreting the RPII
provisions of the Code exist only in proposed form. It is not certain whether
these regulations will be adopted in their proposed form or what changes might
ultimately be made thereto or whether any such changes, as well as any
interpretation or application of the RPII rules by the IRS, the courts or
otherwise, might have retroactive effect. The description of RPII herein is
therefore qualified. Accordingly, the meaning of the RPII provisions and the
application thereof to GMA and the Operating Company is uncertain. These
provisions include the grant of authority to the United States Treasury
Department to prescribe "such regulations as may be necessary to carry out the
purpose of this subsection including . . . regulations preventing the avoidance
of this subsection through cross insurance arrangements or otherwise." In
addition, there can be no assurance that the IRS will not challenge any
determinations by GMA or the Operating Company as to the amount, if any, of RPII
that should be includable in the income of a holder of Common Shares or that the
amounts of the RPII inclusions will not be subject to adjustment based upon
subsequent IRS examination. Each United States person who is considering an
investment in Common Shares should consult his tax advisor as to the effects of
these uncertainties.
Information Reporting. Each United States person who is a direct or
indirect shareholder of GMA on the last day of GMA's taxable year would be
required to attach to the income tax or information return such holder would
normally file for the period which includes that date a Form 5471 if the
Operating Company were a CFC for RPII purposes for any continuous thirty-day
period during its taxable year whether or not any net RPII income is required to
be reported. The Operating Company will not be considered to be a CFC for this
purpose and, therefore, Form 5471 will not be required, for any taxable year in
which (i) the Operating Company's gross RPII constitutes less than 20% of its
gross insurance income or (ii) less than 20% of the voting power or value of the
Operating Company's common shares is owned by direct or indirect insureds and
persons related to such insureds. For any year in which GMA has information that
the Operating Company's gross RPII constitutes 20% or more of its gross
insurance income and its direct or indirect insureds and persons related to such
insureds own more than 20% of the voting power or value of the Operating
Company's common shares, GMA intends to provide Form 5471 to its direct or
indirect United States shareholders for attachment to the returns of
shareholders. However, no effort will be made by GMA or the Operating Company to
identify the extent to which owners of securities for which the Operating
Company has issued financial guaranty insurance or reinsurance are also
shareholders of GMA. Thus, GMA, the Operating Company and GMA's United States
shareholders may not know with certainty whether GMA's United States
shareholders are required to file Form 5471 with the IRS. The amounts of the
RPII inclusions may be subject to adjustment based upon subsequent IRS
examination. A tax-exempt organization would be required to
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attach Form 5471 to its information return in the circumstances described above.
Failure to file Form 5471 may result in penalties. In addition, United States
persons who at any time own 10% or more of the shares of GMA may have an
independent obligation to file certain information returns.
Tax-Exempt Shareholders. United States tax-exempt organizations would
generally be required to treat Subpart F insurance income, including RPII, that
is includable in income by the tax-exempt entity, as unrelated business taxable
income within the meaning of Section 512 of the Code.
Dividend; Basis; Exclusion of Dividends from Gross Income. A United States
shareholder's tax basis in his Common Shares would be increased by the amount of
any RPII that the shareholder includes in his income. The shareholder could
exclude from income the amount of any distribution by GMA to the extent of the
RPII included in such shareholder's income for the year in which the
distribution was paid or for any prior year. A shareholder's tax basis in his
Common Shares would be reduced by the amount of such distributions that are
excluded from his income. Although, in certain circumstances, a United States
shareholder might be able to exclude from his income distributions with respect
to RPII that a prior shareholder included in his income, that exclusion would
not generally be available to holders who purchase Common Shares in the public
trading markets and are therefore unable to identify the previous shareholder
and demonstrate that such shareholder had previously included the RPII in his
income.
Dispositions of Common Shares. Subject to the discussion below relating to
the potential application of Section 1248 of the Code or the passive foreign
investment company rules, a United States shareholder will, upon the sale or
exchange of any Common Shares, recognize a gain or loss for United States income
tax purposes equal to the difference between the amount realized upon such sale
or exchange and the shareholder's basis in the Common Shares. If the
shareholder's holding period for such Common Shares is more than twelve months,
any gain will be subject to tax at a current maximum marginal tax rate of 20%
for individuals and 35% for corporations.
Section 1248 of the Code provides that if a United States person disposes
of stock in a foreign corporation and such person owned directly, indirectly or
constructively 10% or more of the voting shares of the corporation at any time
during the five-year period ending on the date of disposition when the
corporation was a CFC, any gain from the sale or exchange of the shares may be
treated as ordinary income to the extent of the CFC's previously untaxed
earnings and profits during the period that the shareholder held the shares
(with certain adjustments). A 10% United States shareholder may in certain
circumstances be required to report a disposition of shares of a CFC by
attaching IRS Form 5471 to the United States income tax or information return
that the shareholder would normally file for the taxable year in which the
disposition occurs.
Section 953(c)(7) of the Code generally provides that Section 1248 will
also apply to any sale or exchange of shares in a foreign corporation that earns
RPII if the foreign corporation would be taxed as an insurance company if it
were a domestic corporation, regardless of whether the selling shareholder is or
was a 10% shareholder or whether RPII constitutes 20% or more of the
corporation's gross insurance income. Existing Treasury regulations do not
address whether Section 1248 of the Code and the requirement to file Form 5471
would apply if the foreign corporation is not a CFC but the foreign corporation
has a subsidiary that is a CFC or that would be taxed as an insurance company if
it were a domestic corporation (although, as discussed above, shareholders of
10% or more of the shares of GMA may have an independent obligation to file Form
5471).
Section 1248 of the Code and the requirement to file Form 5471 should not
apply to dispositions of Common Shares because GMA does not intend to directly
engage in the insurance business and, under proposed regulations, these
provisions appear to be applicable only in the case of shares of corporations
that are directly engaged in the insurance business. There can be no assurance,
however, that the IRS will interpret the proposed regulations in this manner or
that the proposed regulations will not be amended or promulgated in final form
so as to provide that Section 1248 of the Code and the requirement to file Form
5471 will apply to dispositions of Common Shares. In that event, GMA would
notify shareholders that Section 1248 of the Code and the requirement to file
Form 5471 will apply to dispositions of Common Shares. Thereafter, GMA would
send a notice after the end of each calendar year to all persons who were
shareholders during the year notifying them that Section 1248 of the Code and
the requirement to file Form 5471 apply to dispositions of Common
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Shares. GMA would attach to this notice a copy of Form 5471 completed with all
GMA information and instructions for completing the shareholder information.
Foreign Tax Credit. Because it is anticipated that United States persons
will own a majority of GMA's shares, only a portion of the current income
inclusions under the CFC, RPII and passive foreign investment company rules, if
any, and of dividends paid by GMA (including any gain from the sale of Common
Shares that is treated as a dividend under Section 1248 of the Code) will be
treated as foreign source income for purposes of computing a shareholder's
United States foreign tax credit limitations. GMA will consider providing
shareholders with information regarding the portion of such amounts constituting
foreign source income to the extent such information is reasonably available. It
is also likely that substantially all of the RPII and dividends that are foreign
source income will constitute either "passive" or "financial services" income
for foreign tax credit limitation purposes. Thus, it may not be possible for
most United States shareholders to utilize excess foreign tax credits to reduce
United States tax on such income.
Passive Foreign Investment Companies. Sections 1291 through 1298 of the
Code contain special rules applicable to foreign corporations that are "passive
foreign investment companies" ("PFICs"). In general, a foreign corporation will
be a PFIC if 75% or more of its income constitutes "passive income" or 50% or
more of its assets produce passive income. If GMA were to be characterized as a
PFIC, its United States shareholders would be subject to a penalty tax at the
time of their sale of, or receipt of an "excess distribution" with respect to,
their Common Shares, unless such shareholders (i) elected from the outset to be
taxed on their pro-rata share of GMA's earnings whether or not such earnings
were distributed or (ii) elected to mark their Common Shares to market as of the
end of each taxable year and to treat as ordinary income (or loss) the annual
appreciation (or depreciation) in the value of such shares. In general, a
shareholder receives an "excess distribution" if the amount of the distribution
is more than 125% of the average distribution with respect to the stock during
the three preceding taxable years (or shorter period during which the taxpayer
held the stock). In general, the penalty tax is computed by assuming that the
excess distribution or gain (in the case of a sale) with respect to the shares
was taxed in equal annual portions at the highest applicable ordinary income tax
rate throughout the holder's period of ownership, and that interest accrued on
each tax amount for each prior year from the due date of such prior year's
return. The interest charge is equal to the applicable rate imposed on
underpayments of United States federal income tax for such period.
For the above purposes, passive income is defined to include income of the
kind which would be foreign personal holding company income under Section 954(c)
of the Code, and generally includes interest, dividends, annuities and other
investment income. However, the PFIC statutory provisions contain an express
exception 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 such income is
attributable to financial reserves in excess of the reasonable needs of the
insurance business. The Operating Company expects to be exclusively engaged in
an insurance business and does not expect to have financial reserves in excess
of the reasonable needs of its insurance business. The PFIC statutory provisions
(unlike the RPII provisions of the Code) contain a look-through rule that states
that, for purposes of determining whether a foreign corporation is a PFIC, such
foreign corporation shall be treated as if it received "directly its
proportionate share of the income," and as if it "held its proportionate share
of the assets," of any other corporation in which it owns at least 25% by value
of the stock. While no explicit guidance is provided by the statutory language,
under the look-through rule GMA should be deemed to own the assets and to have
received the income of the Operating Company directly for purposes of
determining whether GMA qualifies for the aforementioned insurance exception.
This interpretation of the look-through rule is consistent with the legislative
intention generally to exclude bona fide insurance companies from the
application of PFIC provisions. On the assumption that the Operating Company is
exclusively engaged in an insurance business and does not have financial
reserves in excess of the reasonable needs of its insurance business, in the
opinion of Drinker Biddle & Reath LLP, neither GMA nor the Operating Company
will be a PFIC after the Offerings. There can be no assurance, however, as to
what positions the IRS or a court might take in the future on whether GMA or the
Operating Company is predominantly engaged in an insurance business and does not
have financial reserves in excess of the reasonable needs of such business.
United States persons who
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are considering an investment in Common Shares should consult their tax advisors
as to the effects of the PFIC rules.
Other. Information reporting to the IRS by paying agents and custodians
located in the United States will be required with respect to payments of
dividends on the Common Shares to United States persons. Thus, a holder of
Common Shares may be subject to backup withholding at the rate of 31% with
respect to dividends paid to such persons, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax and may be credited against a holder's
regular federal income tax liability.
NON-UNITED STATES SHAREHOLDERS
Subject to certain exceptions, non-United States persons will be subject to
United States federal income tax on dividend distributions with respect to, and
gain realized from the sale or exchange of, Common Shares only if such dividends
or gains are effectively connected with the conduct of a trade or business
within the United States. Nonresident alien individuals will not be subject to
United States estate tax with respect to Common Shares of GMA.
* * *
The foregoing discussion is based upon current law. The tax treatment of an
owner of Common Shares, or a person treated as an owner of Common Shares for
United States federal income, state, local or non-United States tax purposes,
may vary depending on the owner's particular tax situation. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could be retroactive and could affect the tax consequences to owners of Common
Shares. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE FEDERAL, STATE, LOCAL AND NON-UNITED STATES TAX CONSEQUENCES OF OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch & Co.");
Prudential Securities Incorporated; Bear, Stearns & Co. Inc.; ING Baring Furman
Selz LLC; Salomon Smith Barney Inc.; and Warburg Dillon Read LLC are acting as
representatives (the "U.S. Representatives") of each of the Underwriters named
below (the "U.S. Underwriters"). Subject to the terms and conditions set forth
in a U.S. purchase agreement (the "U.S. Purchase Agreement") among the Company
and the U.S. Underwriters, and concurrently with the sale of Common Shares to
the International Managers (as defined below), the Company has agreed to sell to
the U.S. Underwriters, and each of the U.S. Underwriters severally and not
jointly has agreed to purchase from the Company, the number of Common Shares set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
- ---------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Prudential Securities Incorporated..........................
Bear, Stearns & Co. Inc. ...................................
ING Baring Furman Selz LLC..................................
Salomon Smith Barney Inc....................................
Warburg Dillon Read LLC.....................................
----------
Total..........................................
==========
</TABLE>
GMA has also entered into an international purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International;
Prudential-Bache Securities (U.K.) Inc.; Bear, Stearns International Limited;
ING Baring Furman Selz LLC; Salomon Brothers International Limited; and UBS AG,
acting through its division Warburg Dillon Read, are acting as lead managers
(the "Lead Managers"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of
Common Shares to the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
GMA has agreed to sell to the International Managers, and the International
Managers severally have agreed to purchase from GMA, an aggregate of
Common Shares. The initial public offering price per share and the total
underwriting discount per Common Share are identical under the U.S. Purchase
Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Common Shares being sold pursuant to such
Purchase Agreement if any of the Common Shares being sold pursuant to such
Purchase Agreements are purchased. In certain circumstances under the Purchase
Agreements, the commitments of non-defaulting Underwriters may be increased. The
closings with respect to the sale of Common Shares to be purchased by the U.S.
Underwriters and the International Managers are conditioned upon one another and
upon the closing of sales to the Strategic Investors of Common Shares and
related Class B Warrants with an aggregate purchase price of at least $70.0
million.
The U.S. Representatives have advised GMA that the U.S. Underwriters
propose initially to offer the Common Shares to the public at the initial public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per Common Share.
The U.S. Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per Common Share on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
GMA has granted an option to the U.S. Underwriters, exercisable for 30 days
after the date of this Prospectus, to purchase up to an aggregate of
additional Common Shares at the initial public
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offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. The U.S. Underwriters may exercise this
option solely to cover over-allotments, if any, made on the sale of the Common
Shares offered hereby. To the extent that the U.S. Underwriters exercise this
option, each U.S. Underwriter will be obligated, subject to certain conditions,
to purchase a number of additional Common Shares proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. GMA has also
granted an option to the International Managers, exercisable for 30 days after
the date of this Prospectus, to purchase up to an aggregate of
additional Common Shares to cover over-allotments, if any, on terms similar to
those granted to the U.S. Underwriters.
At the request of GMA, the U.S. Underwriters have reserved for sale, at the
initial public offering price, up to % of the Common Shares offered
hereby to be sold to certain directors, officers, employees and related persons
of GMA. The number of Common Shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of the Offerings will be offered by the U.S. Underwriters to the
general public on the same terms as the other Common Shares offered by this
Prospectus.
GMA, its directors and officers, the holders of the Class A Warrants and
the Strategic Investors have executed lock-up agreements pursuant to which they
have agreed, except for certain limited exceptions, that they will not directly
or indirectly, without the prior written consent of Merrill Lynch & Co. and
Prudential Securities Incorporated on behalf of the Underwriters and, in
addition, in the case of the Strategic Investors, GMA, offer, sell, offer to
sell, contract to sell, transfer, assign, pledge, hypothecate, grant any option
to purchase, or otherwise sell or dispose (or announce any offer, sale, offer to
sell, contract of sale, transfer, assignment, pledge, hypothecation, grant of
any option to purchase or other sale or disposition) of any Common Shares or
other capital stock of GMA or any other securities convertible into, or
exercisable or exchangeable for, any Common Shares or other capital stock of GMA
for a period of one year after the date of this Prospectus or, in the case of
the Strategic Investors, for a period of nine months after the date of this
Prospectus. Such agreements do not prevent GMA from granting options so long as
such options are not exercisable until one year from the date of this
Prospectus. Merrill Lynch & Co., Prudential Securities Incorporated and, in the
case of the Strategic Investors, GMA may, in their discretion, at any time and
without notice, jointly release all or any portion of the securities subject to
such lock-up agreements. GMA also has agreed not to accelerate the
exercisability of the registration rights granted to the Strategic Investors,
the Class A Warrant holders and the Class B Warrant holders and not to file any
registration statement on Form S-8 with respect to, or otherwise register for
resale with the Commission, Common Shares underlying stock options or warrants
for a period of one year from the date of this Prospectus, in each case, without
the prior written consent of Merrill Lynch & Co. and Prudential Securities
Incorporated on behalf of the Underwriters.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell Common
Shares to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell Common Shares will not offer to sell or sell Common Shares to persons
who are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any dealer to whom they sell Common Shares will not
offer to sell or sell Common Shares to U.S. persons or to Canadian persons or to
persons they believe intend to resell to U.S. persons or Canadian persons,
except in the case of transactions pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Common
Shares. The initial public offering price was determined by GMA and the U.S.
Representatives and the Lead Managers as an appropriate per share price in light
of the Company's desired capitalization. There can be no assurance that an
active trading market will develop for the Common Shares or that the Common
Shares will trade in the public market subsequent to the Offerings at or above
the initial public offering price.
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<PAGE> 98
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Shares. As an exception to these
rules, the U.S. Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Shares. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offerings, i.e., if they sell more Common Shares than are
set forth on the cover pages of this Prospectus, the U.S. Representatives and
Lead Managers, respectively, may reduce that short position by purchasing Common
Shares in the open market. The U.S. Representatives and Lead Managers,
respectively, may also elect to reduce any short position by exercising all or
part of the over-allotment options described above.
The U.S. Representatives and Lead Managers, respectively, may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives or the Lead Managers purchase Common Shares in the
open market to reduce the Underwriters' short position or to stabilize the price
of the Common Shares they may reclaim the amount of the selling concession from
the Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Shares to the extent that
it were to discourage resales of the Common Shares.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
GMA nor any of the Underwriters makes any representation that the U.S.
Representatives or the Lead Managers will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The U.S. Underwriters and the International Managers have informed GMA that
they do not intend to confirm sales of the Common Shares offered hereby to any
accounts over which they exercise discretionary authority.
The Company has entered into an investment advisory agreement with The
Prudential Investment Corporation, as one of the Investment Managers. See
"Business -- Investment Managers." Prudential Securities Incorporated, one of
the Joint Lead Managers and Joint Bookrunners, and The Prudential Investment
Corporation are wholly owned subsidiaries of The Prudential Insurance Company of
America.
96
<PAGE> 99
LEGAL MATTERS
The validity of the Common Shares under Bermuda law will be passed upon for
the Company by Conyers Dill & Pearman, Hamilton, Bermuda. Charles G. Collis, a
director of the Company, is a partner in such firm. Certain matters as to United
States law in connection with the Offerings will be passed upon for the Company
by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania. Drinker Biddle &
Reath LLP, which serves as United States counsel to the Company, also served as
United States counsel to Inter-Atlantic Capital Partners, Inc. in connection
with the establishment of GMA and the Operating Company and represents
Inter-Atlantic Capital Partners, Inc. on an ongoing basis. William M. Goldstein,
a director of the Company, is a partner in such firm. Mr. Goldstein will receive
an option to purchase 15,000 Common Shares of the Company upon consummation of
the Offerings pursuant to the Stock Option Plan. Certain matters as to United
States law in connection with the Offerings will be passed upon for the
Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The consolidated balance sheet of the Company as of August 28, 1998
included in this Prospectus and in the Registration Statement has been audited
by KPMG Peat Marwick, independent auditors, as indicated in their report with
respect thereto, and is included herein in reliance on the authority of said
firm as experts in accounting and auditing.
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<PAGE> 100
ADDITIONAL INFORMATION
GMA has filed with the Commission a registration statement on Form S-1
(together with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act with respect to the Common Shares offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all the information set forth in the Registration Statement,
certain items of which are omitted as permitted by the rules and regulations of
the Commission. For further information with respect to GMA and the Common
Shares offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
Upon completion of the Offerings, GMA will be subject to the informational
reporting requirements of the Exchange Act and, in accordance therewith, will
file reports, proxy and information statements and other information with the
Commission. The Registration Statement, the exhibits and schedules forming a
part thereof, as well as such reports, proxy and information statements and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549-1004 and at the following regional offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the public reference section of the Commission at
its Washington address at prescribed rates. The Commission also maintains an
Internet web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers, such as GMA,
that file electronically with the Commission.
After giving effect to the Offerings, GMA will be treated as a domestic
corporation for purposes of certain requirements of the Exchange Act, including
the proxy rules. Pursuant to Rule 3b-4 under the Exchange Act, a "foreign
private issuer" is a non-United States issuer other than an issuer that meets
the following conditions: (1) more than 50% of the outstanding voting securities
of the issuer are held of record by residents of the United States and (2) any
of the following: (i) the majority of the executive officers or directors of the
issuer are United States citizens or residents, (ii) more than 50% of the assets
of the issuer are located in the United States or (iii) the business of the
issuer is administered principally in the United States. By virtue of (1) and
(2)(i), GMA does not expect that it will be a "foreign private issuer," although
there is no assurance of such. If GMA were to be treated as a "foreign private
issuer," it would be exempted from the proxy and short-swing profit rules under
Sections 14 and 16 of the Exchange Act and, for reporting purposes under the
Exchange Act, would be subject to rules applicable to "foreign private issuers."
GMA intends to furnish its shareholders with annual reports containing
financial statements audited by an independent accounting firm and quarterly
reports containing unaudited financial statements for the first three quarters
of each fiscal year.
98
<PAGE> 101
GLOSSARY OF SELECTED FINANCIAL GUARANTY
REINSURANCE AND INSURANCE TERMS
Alien insurer or reinsurer.... An insurer or reinsurer organized under the
laws of a non-United States jurisdiction.
Asset-backed debt obligation
or asset-backed security...... A debt instrument that is supported by a pool
of assets, such as automobile loans or single
family mortgage loans. The payments on the
assets produce the revenue stream that services
the interest and principal on the asset-backed
debt obligation.
Automatic reinsurance......... Reinsurance of a specified type or category of
risk defined in a reinsurance agreement (often
called a "treaty") between a ceding company and
a reinsurer. Typically, in automatic
reinsurance the ceding company is obligated to
offer and the reinsurer is obligated to accept
a specified portion of all such type or
category of risks originally insured or
reinsured by the ceding company.
Cedent; Ceding company........ See "Reinsurance; Reinsurer."
Credit enhancement............ A form of financial guaranty whereby the credit
quality of a security is upgraded through the
use of an insurance policy or letter of credit.
Credit rating................. An alphabetic system used by major rating
agencies to categorize the creditworthiness of
an issuer of a specific obligation. A credit
rating of BBB- or Baa3 or better is considered
an investment grade rating, meaning the
securities have been analyzed and are regarded
as having adequate capacity to provide timely
payment of debt service. A credit below BBB- or
Baa3 is considered a speculative grade rating,
meaning there is a greater vulnerability to
default.
Duff & Phelps Credit Rating
Co. insurance claims-paying
ability ratings............. Duff & Phelps Credit Rating Co. insurance
claims-paying ability ratings provide a summary
opinion of an insurance company's ability to
meet its claim obligations. Duff & Phelps
Credit Rating Co. insurance claims-paying
ability ratings range from "AAA" to "DD." An
"A+" rating is assigned by Duff & Phelps Credit
Rating Co. to companies which, in its opinion,
have high claims-paying ability, average
protection factors and a variability to risk
over time due to economic and/or underwriting
conditions.
Duff & Phelps Credit Rating
Co. long-term ratings......... Duff & Phelps Credit Rating Co. long-term
ratings provide a summary opinion of an
issuer's long-term fundamental quality. Duff &
Phelps Credit Rating Co. long-term ratings
range from "AAA" to "DD." An "A" rating is
assigned by Duff & Phelps Credit Rating Co. to
issues which, in its opinion, have average but
adequate protection factors. However, risk
factors are more variable and greater in
periods of economic stress. A "BBB" rating is
assigned by Duff & Phelps Credit Rating Co. to
issues which, in its opinion, have
below-average protection factors that are
considered sufficient for prudent investment.
However, there is considerable variability in
risk during economic cycles. A "BB" rating is
assigned by Duff & Phelps Credit Rating Co. to
issues which, in its opinion, are below
investment grade but are deemed likely to meet
99
<PAGE> 102
obligations when due. However, present or
prospective financial protection factors
fluctuate according to industry conditions or
company fortunes.
Facultative reinsurance....... A type of reinsurance whereby the reinsurer is
not obligated automatically to accept all or a
portion of each risk originally insured by the
ceding company. Facultative risks are typically
underwritten on a case-by-case basis.
Financial guaranty............ The promise to make payments to the holders of
a debt, loan or other similar financial
instrument in the event the borrower or
underlying obligor fails to do so.
Fitch IBCA international
insurance claims-paying
ability rating.............. Fitch IBCA international insurance
claims-paying ability ratings provide an
assessment of an insurance company's financial
strength and, therefore, its ability to pay
policy claims under the terms indicated. Fitch
IBCA international insurance claims-paying
ability ratings range from "AAA" to "D." Fitch
IBCA assigns an "A+" rating to insurers that
have a strong capacity to meet policyholder
obligations and provide policyholder benefits.
The impact of adverse business and economic
factors on such insurers' claims-paying
abilities is expected to be small.
Fitch IBCA international
long-term credit ratings...... Fitch IBCA credit ratings are an opinion on the
ability of an entity or of a securities issue
to meet financial commitments, such as
interest, preferred dividends, or repayments of
principal, on a timely basis. Fitch IBCA's
international long-term credit ratings range
from "AAA" to "D." Fitch IBCA assigns an "A"
rating to denote a low expectation of credit
risk and that the capacity for timely payment
of financial commitments is considered strong.
Fitch IBCA assigns a "BBB" rating to indicate
that there is currently a low expectation of
credit risk and that although the capacity for
timely payment of financial commitments is
considered adequate, adverse changes in
circumstances and in economic conditions are
more likely to impair this capacity than the
capacity of higher-rated entities or issues.
Fitch IBCA assigns a "BB" rating to indicate
that there is a possibility of credit risk
developing, particularly as the result of
adverse economic change over time; however,
business or financial alternatives may be
available to allow financial commitments to be
met.
United States generally
accepted accounting principles
("GAAP").................... United States accounting principles as set
forth in opinions of the Accounting Principles
Board of the American Institute of Certified
Public Accountants and/or statements of the
Financial Accounting Standards Board and/or
their respective successors and which are
applicable in the circumstances as of the date
in question.
Insurance in force or
exposure...................... Principal outstanding and interest to be paid
over the remaining life of a given obligation
in respect of obligations insured and reinsured
by the Company, net of refunded debt
obligations, retrocessions, redemptions and
repayments.
Issuer........................ A municipality or corporation or other entity
that is the obligor on a debt issuance to the
capital markets.
100
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Monoline financial guaranty
insurer....................... An insurer that only writes financial guaranty
insurance. The term "monoline financial
guaranty insurer" traditionally referred to a
writer of municipal bond insurance, but
currently includes, as well, insurers of
asset-backed securities.
Net premiums written.......... Total premiums for insurance written and
reinsurance assumed during a given period less
total premiums for insurance and reinsurance
ceded to others during such period.
Primary insurer............... An insurance company that contracts with a
customer (the insured) to provide insurance
coverage. Such primary insurer may then cede a
portion of its business to one or more
reinsurers.
Quota share reinsurance....... A term describing all forms of proportional
reinsurance in which the reinsurer receives a
pro-rata part of the premiums and pays a
pro-rata part of the losses arising in
connection with the policies reinsured
(sometimes known as "proportional" reinsurance,
"pro-rata" reinsurance or "participating"
reinsurance).
Reinsurance; Reinsurer........ An arrangement under which an insurance company
(the "reinsurer") agrees to indemnify or assume
the obligations of another insurance company
(the "ceding company" or "cedent") for all or a
portion of the insurance risks underwritten by
the ceding company.
Reserves...................... Liabilities established by insurers that
generally represent the estimated discounted
present value of the net cost of claims,
repayments or contract liabilities and the
related expenses that the insurer will
ultimately be required to pay in respect of
insurance it has written.
Retention..................... The amount or portion of insurance risk that a
ceding company retains for its own account. In
quota share reinsurance, the retention may be a
percentage of the original policy's limit. In
excess of loss business, the retention
typically is a dollar amount of loss, a loss
ratio or a percentage above a predetermined
limit.
Retrocessional reinsurance;
Retrocessionaire............ An arrangement under which a reinsurer cedes to
another reinsurer (the "retrocessionaire") all
or a portion of the insurance risks reinsured
by the first reinsurer. Retrocessional
reinsurance generally does not legally
discharge the ceding reinsurer from its
liability with respect to its obligations to
the original ceding company.
Standard & Poor's insurer
financial strength rating..... Standard & Poor's insurer financial strength
rating is an opinion concerning the financial
security characteristics of an insurance
organization with respect to its ability to pay
under its insurance policies and contracts in
accordance with their terms. Standard & Poor's
insurer financial strength ratings range from
"AAA" to "CC." Standard & Poor's has assigned
an "A" rating to ACA. Such rating is assigned
to insurers that in its opinion have strong
financial security characteristics, but are
somewhat more likely to be affected by adverse
business conditions than are insurers with
higher ratings.
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<PAGE> 104
Standard & Poor's long-term
issuer credit rating.......... Standard & Poor's long-term issuer credit
rating is an opinion of an obligor's overall
financial capacity to pay its financial
obligations. Standard & Poor's long-term issuer
credit ratings range from "AAA" to "CC."
Standard & Poor's assigns an "A" rating to
obligors that have a strong capacity to meet
financial commitments, but are somewhat more
susceptible to the adverse effects of changes
in circumstances and economic conditions than
higher-rated obligors. It assigns a "BBB"
rating to obligors that have an adequate
capacity to meet financial commitments, but
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligors to meet
financial commitments. It assigns a "BB" rating
to obligors that face major ongoing
uncertainties and exposure to adverse business,
financial, or economic conditions, but are less
vulnerable in the near term than other
low-rated obligors.
Underwriting.................. The insurer's or reinsurer's process of
reviewing contracts submitted for insurance or
reinsurance coverage, deciding whether to
accept all or part of the coverage requested
and determining the applicable premiums.
Underwriting capacity......... The maximum amount of insurance that an
insurance or reinsurance company can
underwrite, which is limited by its existing
capital and surplus. Reinsurance serves to
increase an insurer's underwriting capacity by
reducing its exposure from particular risks and
thereby increasing available surplus.
Unearned premiums............. Premiums written but not yet earned, as they
are attributable to the unexpired portion of
the related insurance contract term.
102
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INDEX TO CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheet as of August 28, 1998............ F-3
Notes to Consolidated Balance Sheet......................... F-4
Consolidated Balance Sheets as of September 30 (unaudited)
and August 28, 1998....................................... F-10
Consolidated Statement of Operations and Accumulated Deficit
for the period from August 28, 1998 (date of inception)
through September 30, 1998 (unaudited).................... F-11
Notes to Consolidated Financial Statements (unaudited)...... F-12
</TABLE>
F-1
<PAGE> 106
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Global Markets Access Ltd. (formerly GCA Ltd.)
We have audited the accompanying consolidated balance sheet of Global
Markets Access Ltd. (formerly GCA Ltd.) as at August 28, 1998. This financial
statement is the responsibility of the company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of the company as at August 28,
1998 in conformity with United States generally accepted accounting principles.
KPMG PEAT MARWICK
Chartered Accountants
Hamilton, Bermuda
August 28, 1998, except for Note 8,
which is as of September 2, 1998
F-2
<PAGE> 107
GLOBAL MARKETS ACCESS LTD.
(FORMERLY GCA LTD.)
CONSOLIDATED BALANCE SHEET
AUGUST 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $120,000
--------
Total assets...................................... $120,000
========
LIABILITIES (NOTE 3)
Accounts payable............................................ $ --
--------
Total liabilities................................. --
--------
SHAREHOLDERS' EQUITY (NOTE 4)
Preferred shares (par value $1.00; 50,000,000 shares
authorized; no shares outstanding)........................ --
Common shares (par value $1.00; 100,000,000 shares
authorized; 12,000 shares outstanding).................... 12,000
Additional paid-in capital.................................. 108,000
Accumulated deficit......................................... --
--------
Total shareholders' equity........................ 120,000
--------
Total liabilities and shareholders' equity.................. $120,000
========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 108
GLOBAL MARKETS ACCESS LTD.
(FORMERLY GCA LTD.)
NOTES TO CONSOLIDATED BALANCE SHEET
1. ORGANIZATION
Global Markets Access Ltd. (formerly GCA Ltd.) ("GMA") was incorporated on
August 7, 1998 under the laws of Bermuda to provide financial guaranty
reinsurance and insurance. GMA will operate through a wholly-owned subsidiary,
Global Markets Guaranty Ltd. (formerly Global Capital Access, Ltd.) (the
"Operating Company" and, together with GMA, the "Company"). The Operating
Company has applied for a license under the insurance laws of Bermuda. The
Company's initial capitalization of $120,000, as reflected on the Balance Sheet,
was provided by American Capital Access Holdings, L.L.C., Risk Capital
Reinsurance Company ("Risk Capital"), The Trident Partnership, L.P. ("Trident"),
Donald J. Matthews, Michael P. Esposito, Jr., Frederick S. Hammer, Robert M.
Lichten, Andrew S. Lerner and William S. Ogden, Jr. (collectively, the "Class A
Warrant Holders") (see notes 3 and 4) and the Global Purpose Trust (the "Purpose
Trust"), which was lent $12,000 by Insurance Consulting Services Limited
("ICS"). See note 3. The Company's fiscal year end is December 31.
During the period from its inception date to the balance sheet date, the
Company did not incur any income or expenses that are required to be reported in
a statement of income or a statement of cash flows under United States generally
accepted accounting principles. Therefore, consolidated statements of income and
cash flows have not been presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statement is prepared in accordance with United
States generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement. Actual results could differ from those estimates. The
following are the significant accounting policies adopted by the Company.
(a) Premium Revenue Recognition
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. Deferred premium revenue and
prepaid reinsurance premiums represent the portion of premium that is applicable
to coverage of risk to be provided in the future on policies in force. When an
insured or reinsured issue is retired or defeased prior to the end of the
expected period of coverage, the remaining deferred premium revenue and prepaid
reinsurance premium, less any amount credited to a refunding issue insured by
the Company, are recognized.
(b) Losses and Loss Adjustment Expenses
The reserves for losses and loss adjustment expenses ("LAE") reflect the
Company's estimate of identified ("case basis") and unidentified ("unallocated")
losses on the obligations it has insured to the balance sheet date.
A case basis reserve for unpaid losses and LAE is recorded at the present
value of estimated loss when, in management's opinion, the likelihood of a
future loss is probable and determinable at the balance sheet date. The
estimated loss on a transaction is discounted using then-current risk-free
rates. Upon the establishment of a case basis reserve a corresponding reduction
will be made in the unallocated reserve.
The unallocated reserve is calculated by applying a loss factor to the net
outstanding exposure on the Company's insured portfolio. Such loss factor is a
measure of reasonably estimable insured losses that have been incurred as of the
balance sheet date, and is based on the historical industry loss experience, the
inherent risk characteristics of the Company's portfolio, the loss experience of
the ceding companies, and, over time, the Company's actual loss and LAE
experience.
F-4
<PAGE> 109
GLOBAL MARKETS ACCESS LTD.
(FORMERLY GCA LTD.)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the ultimate net cost of claims. The reserves are
necessary based on estimates, and there can be no assurance that the ultimate
liability will not differ from such estimates. The Company will, on an ongoing
basis, monitor these reserves and may periodically adjust such reserves based on
the Company's actual loss experience, its future mix of business and future
economic conditions.
(c) Deferred Acquisition Costs
Deferred acquisition costs comprise those expenses that vary with and are
primarily related to the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium and excise taxes and
certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. Deferred acquisition costs and the cost of
acquired business are amortized over the period in which the related premiums
are earned. Recoverability of deferred acquisition costs is determined by
considering anticipated losses and loss adjustment expenses.
(d) Investments
The Company will classify its investments in fixed income and equity
securities as available for sale and, accordingly, such securities will be
carried at fair value. The cost of fixed income securities will be adjusted for
amortization of premiums and discounts. The cost of fixed income and equity
securities will be adjusted for declines in value that are considered other than
temporary.
Realized gains and losses on investments will be recognized in net income
using the specific identification method. Changes in fair values of securities
carried at fair value are reflected directly in shareholders' equity.
(e) Translation of Foreign Currencies
The Company's functional currency is the United States dollar. Premiums
written and receivable in foreign currencies will be recorded at exchange rates
prevailing on the date the contract attaches and liabilities for future benefits
payable in foreign currencies at the time such liabilities are first recorded.
Exchange gains or losses resulting from the periodic revaluation and settlement
of such assets and liabilities will be recorded in the Company's statement of
operations.
(f) Organizational Expenses
Organization expenses consist of legal, accounting and incorporation
expenses incurred in connection with the formation and organization of the
Company and include certain expense reimbursements to Inter-Atlantic Securities
Corporation ("Inter-Atlantic"). Such costs will be expensed as incurred.
Certain equity offering costs incurred in connection with the Company's
planned initial public offering (the "Offering"), including certain amounts
payable for investment banking and financial advisory services, will be deducted
from the gross proceeds of the Offering.
(g) Stock Compensation Plans
Under the Company's Initial Stock Option Plan (the "Stock Option Plan"),
awards are granted to eligible employees, directors and consultants of the
Company in the form of incentive stock options ("ISO's"), where they qualify
under the Internal Revenue Code, or non-qualified stock options ("NQSO's"). The
Company follows the intrinsic value based method of accounting for stock based
compensation as prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In accordance with SFAS
F-5
<PAGE> 110
GLOBAL MARKETS ACCESS LTD.
(FORMERLY GCA LTD.)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
No. 123, "Accounting for Stock-Based Compensation," the Company will provide pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied.
(h) Earnings per Common Share
The Company will calculate earnings per common share based upon the
guidance provided in Financial Accounting Standards Board Statement No. 128
"Earnings per Share." This statement requires the presentation of two amounts of
earnings per share when the Company has a complex capital structure. These
amounts are basic earnings per common share and earnings per common
share-assuming dilution.
Basic earnings per common share will be calculated by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.
Diluted earnings per common share will be calculated by dividing the net
income attributable to common shareholders by the weighted average number of
common shares outstanding during the period, plus dilutive potential common
shares. Options and warrants issued by the Company will be considered dilutive
potential common shares and will be included in the calculation using the
treasury stock method.
3. AGREEMENTS WITH RELATED PARTIES
The Company has entered into an agreement with Inter-Atlantic whereby
Inter-Atlantic has agreed to provide certain services in connection with the
Offering and sales to a core group of strategic investors (the "Strategic
Investors"), including assistance in preparing a registration statement for the
common shares, retaining underwriters in connection with the Offering and such
other services as the Company or Inter-Atlantic deems appropriate. Certain
officers and directors of the Company are also beneficial owners, directors or
officers of Inter-Atlantic and/or its affiliates.
The Company will reimburse Inter-Atlantic for expenses incurred in
connection with the Offering provided that the Offering is successfully
consummated prior to March 31, 1999. Pursuant to such Agreement, the Company has
agreed to pay Inter-Atlantic a fee of $3.9 million upon consummation of the
Offering. If the Offering is not successfully consummated prior to March 31,
1999, such fees are not payable and no expense reimbursement is required.
In connection with its initial capitalization, the Company issued Class A
Warrants to the Class A Warrant Holders to purchase an aggregate number of
common shares equal to 13.5% of the sum of (i) the common shares outstanding
immediately following the consummation of the Offering (including any concurrent
private placements (the "Direct Sales"), but excluding any common shares held by
the Purpose Trust) and (ii) the common shares issuable upon exercise or
conversion of any security outstanding immediately following the consummation of
the Offering other than the Class A Warrants, any Class B Warrants and any
options granted by the Company under its Stock Option Plan.
On August 27, 1998, Messrs. Esposito, Lichten, Hammer and Lerner subscribed
to purchase from the Company an aggregate of 115,000 common shares at a purchase
price of $14.10 per share. The purchases of the common shares are subject to a
number of conditions precedent customary in transactions of this nature,
including the accuracy of the parties' respective representations and warranties
and compliance with the parties' respective covenants set forth in the purchase
agreements. The purchases are also subject to the condition that an initial
public offering of not less than 14,000,000 common shares of the Company shall
have been consummated.
F-6
<PAGE> 111
GLOBAL MARKETS ACCESS LTD.
(FORMERLY GCA LTD.)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
4. SHAREHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 50,000,000 preferred shares of par value
$1.00 each. At the balance sheet date there were no preferred shares issued or
outstanding.
Common Stock
The Company is authorized to issue 100,000,000 common shares of par value
$1.00 each. At the balance sheet date 12,000 common shares were outstanding.
Warrants
In connection with its initial capitalization, the Company has issued Class
A Warrants to the Class A Warrant Holders to purchase an aggregate number of
common shares equal to 13.5% of the sum of (i) the common shares outstanding
immediately following the consummation of the Offering (including any Direct
Sales, but excluding any common shares held by the Purpose Trust) and (ii) the
common shares issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offering other than the Class A
Warrants, any Class B Warrants and any options granted by the Company under its
Stock Option Plan. The consideration paid for these warrants of $108,000 has
been recorded as additional paid in capital. The exercise price of the warrants
is equal to the initial public offering price per share, subject to customary
anti-dilution adjustments for certain future events, including stock splits and
the issuance of common shares at a price below the exercise price or the market
price of the common shares at the time of such issuance. The Class A Warrants
become exercisable over three years commencing on the first anniversary of the
consummation of the Offering. The Class A Warrants will expire on September 30,
2008.
5. STOCK PLANS
Stock Option Plan
The Board of Directors has adopted the Stock Option Plan under which it may
grant, subject to certain restrictions, ISO's and NQSO's. The aggregate number
of common shares for which options may be granted under the Stock Option Plan is
limited to the lessor of (i) 5.5% of the common shares outstanding immediately
following the consummation of the Offering and any Direct Sales or (ii)
2,000,000 common shares. Only eligible employees of the Company are entitled to
ISO's, while NQSO's may be granted to eligible employees, non-employee directors
and consultants.
The plan will be administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has the authority to select the parties to
be granted ISO's and NQSO's and to set the date of grant and other terms of the
options granted under the Stock Option Plan.
The minimum exercise price of the ISO's will be equal to the fair market
value, as defined in the Stock Option Plan, of the Company's common shares at
the date of grant. The term of the ISO's is not more than ten years from the
date of grant. Unless otherwise provided in the option agreement, the ISO's
shall be exercisable in three equal annual installments, commencing on the first
anniversary of the grant date.
Subject to the consummation of the Offering, options will be granted to the
Chief Executive Officer and other senior executives and directors of the Company
to purchase common shares. The exercise price of such options will be equal to
the public offering price per share.
Pursuant to the Stock Option Plan, Mr. H. Russell Fraser will receive
options to acquire 100,000 common shares; Mr. Charles A. Davis will receive
options to acquire 75,000 Common Shares; Messrs. Hammer and Lichten will receive
options to acquire 33,333 common shares; the director to be designated by
F-7
<PAGE> 112
GLOBAL MARKETS ACCESS LTD.
(FORMERLY GCA LTD.)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Risk Capital will receive options to acquire 25,000 Common Shares; and other
non-employee directors (excluding Mr. Collis) will receive options to acquire
15,000 common shares, in each case upon the later of (i) the date he or she
becomes an eligible non-employee director or (ii) the date the Offering is
consummated. The options shall have an exercise price equal to the fair market
value of the common shares on the date the options are granted, except for any
options granted upon consummation of the Offering, which will have an exercise
price equal to the initial public offering price per share, and shall be
exercisable in three equal installments commencing with the first anniversary of
the grant date. In addition, subject to certain conditions, each non-employee
director shall be granted an option to purchase 2,000 common shares at each
successive annual general meeting after the consummation of the Offerings. Such
options shall have an exercise price equal to the fair market value of the
common shares on the date the options are granted and shall be immediately
exercisable if granted after the first anniversary of the consummation of the
Offering. If any such options are granted prior to the first anniversary of the
consummation of the Offering, they will not become exercisable until such
anniversary. The Stock Option Plan defines "fair market value" as: (i) the
quoted closing price, if there is a market for the Company's Common Shares on a
registered securities exchange or in an over the counter market, on the date of
grant; (ii) the weighted average of the quoted closing prices on the nearest
date before and the nearest date after the date of grant, if there are no sales
on the date of grant but there are sales on dates within a reasonable period
both before and after the date of grant; (iii) the mean between the bid and
asked prices, as reported by the National Quotation Bureau on the date of grant,
if actual sales are not available during a reasonable period beginning before
and ending after the date of grant; or (iv) another method that is authorized by
the United States Internal Revenue Code of 1986, as amended, and has been
adopted by the Compensation Committee of the Board of Directors.
In addition, directors shall receive cash of $20,000 per annum plus $1,000
per board or committee meeting attended. The non-employee Chairman of the Board,
non-employee Deputy Chairman of the Board and non-employee Committee Chairmen
shall receive an additional $1,000 per annum.
6. TAXATION
Under current Bermuda law neither GMA nor the Operating Company is required
to pay any taxes in Bermuda on either income or capital gains. GMA and the
Operating Company have each applied for an assurance from the Bermuda Minister
of Finance under The Exempted Undertakings Tax Protection Act 1966 of Bermuda to
the effect that if there is enacted in Bermuda any legislation imposing tax
computed on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, then
the imposition of any such tax shall not be applicable to GMA, the Operating
Company or to any of their operations or the shares, debentures or other
obligations of GMA or the Operating Company until March 2016.
GMA and the Operating Company plan to operate in such a manner that they
will not generally be subject to tax in other jurisdictions except for
withholding taxes on certain kinds of investment income, excise taxes and other
taxes attributable to marketing activities in certain jurisdictions. It is
possible, however, that the Operating Company may be held to be doing business
in one or more foreign jurisdictions and therefore subject to tax on the profits
of such business.
7. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
Under The Bermuda Insurance Act, 1978, and related regulations, the
Operating Company will be required to maintain certain levels of solvency and
liquidity. The minimum statutory capital and surplus required is $1,000,000;
however, the Company has applied to the Registrar of Companies to grant the
Company an exception to this requirement until the consummation of the Offering.
GMA's ability to pay dividends depends on the ability of the Operating
Company to pay dividends to GMA. While GMA itself is not subject to any
significant legal prohibitions on the payment of dividends, the
F-8
<PAGE> 113
GLOBAL MARKETS ACCESS LTD.
(FORMERLY GCA LTD.)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Operating Company will be subject to Bermuda regulatory constraints which affect
its ability to pay dividends to GMA. The Operating Company will be prohibited
from declaring or paying a dividend if such payment would reduce its statutory
surplus below $1,000,000.
8. SUBSEQUENT EVENTS
On September 2, 1998, the Company entered into a letter of intent with Risk
Capital and Trident for the purchase of common shares and Class B Warrants as
part of the Direct Sales. Pursuant to such letter of intent, Risk Capital has
agreed to purchase 1,063,829 common shares and Class B Warrants to purchase an
additional 125,000 common shares for an aggregate price of approximately $15.0
million, and Trident has agreed to purchase 3,191,489 common shares and Class B
Warrants to purchase an additional 375,000 common shares for an aggregate
purchase price of approximately $45.0 million.
The issuance of the common shares and Class B Warrants to Risk Capital and
Trident will be subject to a number of conditions precedent customary in
transactions of this nature, and a number of other conditions as set out in the
letter of intent. Furthermore, such issuances are subject to the condition that
the Company will receive net proceeds of at least $150.0 million from the
Offering when it is consummated.
F-9
<PAGE> 114
GLOBAL MARKETS ACCESS LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 30,
1998 1998
---------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash........................................................ $ 120,000 $ 120,000
Deferred equity offering costs.............................. -- 570,000
--------------- -----------------
Total assets...................................... $ 120,000 $ 690,000
=============== =================
LIABILITIES
Accounts payable and accrued expenses....................... $ -- $ 845,000
--------------- -----------------
Total liabilities................................. -- 845,000
--------------- -----------------
SHAREHOLDERS' EQUITY
Preferred shares (par value $1.00; 50,000,000 shares
authorized;
no shares outstanding).................................... -- --
Common shares (par value $1.00; 100,000,000 shares
authorized;
12,000 shares outstanding)................................ 12,000 12,000
Additional paid-in capital.................................. 108,000 108,000
Accumulated deficit......................................... -- (275,000)
--------------- -----------------
Total shareholders' equity (deficit).............. 120,000 (155,000)
--------------- -----------------
Total liabilities and shareholders' equity.................. $ 120,000 $ 690,000
=============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 115
GLOBAL MARKETS ACCESS LTD.
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT (UNAUDITED)
FOR THE PERIOD AUGUST 28, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
<S> <C>
REVENUES.................................................... $ --
-----------------
EXPENSES
Recruiting and personnel.................................... 198,000
Professional fees........................................... 65,000
Other....................................................... 12,000
-----------------
275,000
-----------------
Net loss for the period and accumulated deficit as of
September 30, 1998........................................ $ (275,000)
=================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 116
GLOBAL MARKETS ACCESS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
These unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and in accordance with the instructions of Article 10 of Regulation
S-X. Accordingly they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of the Company for
the interim period ended September 30, 1998. All such adjustments are, in the
opinion of management, of a normal, recurring nature. All significant
intercompany balances and transactions have been eliminated. Results of
operations for the period ended September 30, 1998 are not necessarily
indicative of results to be expected for the full year.
During the period from its inception date to the balance sheet date, the
Company did not have any cash payments or receipts that are required to be
reported in a statement of cash flows. Therefore, a consolidated statement of
cash flows has not been presented.
These unaudited financial statements and notes should be read in
conjunction with the audited balance sheet and notes of the Company at August
28, 1998 included in pages F-1 through F-9.
2. DEFERRED EQUITY OFFERING COSTS
Certain costs incurred in connection with the planned offerings of the
Company's common shares, including certain amounts payable for investment
banking and financial advisory services, will be deducted from the gross
proceeds of the offerings.
F-12
<PAGE> 117
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities under
United States Federal Securities Laws.... 3
Prospectus Summary......................... 4
Risk Factors............................... 10
Use of Proceeds............................ 23
Capitalization............................. 24
Dividend Policy............................ 25
Dilution................................... 26
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 28
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 30
Business................................... 35
Overview of the Financial Guaranty
Insurance and Reinsurance Industry....... 55
Management................................. 58
Principal Stockholders..................... 67
Certain Relationships and Related Party
Transactions............................. 70
Description of Capital Stock............... 74
Shares Eligible for Future Sale............ 81
Direct Sales............................... 83
Certain Tax Considerations................. 85
Underwriting............................... 93
Legal Matters.............................. 96
Experts.................................... 96
Additional Information..................... 97
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 98
Index to Consolidated Balance Sheet........ F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
18,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
Joint Lead Managers
and Joint Bookrunners
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
------------------------
BEAR STEARNS & CO. INC.
ING BARING FURMAN SELZ LLC
SALOMON SMITH BARNEY
WARBURG DILLON READ LLC
, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 118
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1998
PROSPECTUS
18,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
------------------------
All of the 18,000,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby are being sold by Global Markets Access Ltd. ("GMA").
Of the 18,000,000 Common Shares offered hereby, Common Shares are
being offered for sale initially outside the United States and Canada by the
International Managers (the "International Offering") and Common
Shares are being offered for sale initially in a concurrent offering in the
United States and Canada by the U.S. Underwriters (the "U.S. Offering," and
together with the International Offering, the "Offerings"). The initial public
offering price and underwriting discount per Common Share will be identical for
both Offerings. The initial public offering price will be $15.00 per Common
Share. See "Underwriting." Prior to the Offerings, GMA has not conducted any
business and there has been no public market for the Common Shares.
An application has been made to have the Common Shares approved for
quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "GMALF."
In connection with the formation of GMA and the establishment of a core
group of strategic investors, Risk Capital Reinsurance Company, The Trident
Partnership, L.P., Rolaco Holding S.A., Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund (collectively, the "Strategic Investors") have severally
agreed to purchase for investment directly from GMA an aggregate of 5,673,756
Common Shares and Class B Warrants to purchase an aggregate of 600,000 Common
Shares. Such purchases will be consummated immediately prior to the consummation
of the Offerings for an aggregate purchase price for the Common Shares and the
Class B Warrants of approximately $80.0 million. The aggregate purchase price to
be paid by each Strategic Investor is based on a price of $14.10 for (i) one
Common Share and (ii) the right to purchase a specified fraction of a Common
Share under the Class B Warrants. The exercise price for the Class B Warrants
will be $15.00 per share. The closing of the International Offering made hereby
is conditioned upon the closing of sales by GMA to the Strategic Investors of
Common Shares and related Class B Warrants with an aggregate purchase price of
at least $70.0 million.
GMA is also offering by a separate prospectus up to 218,000 Common Shares
directly to certain of its directors and officers at a price per share equal to
the initial public offering price per share, less the per share underwriting
discounts and commissions, for an aggregate purchase price if all such Common
Shares are purchased of approximately $3.1 million. GMA has also contracted to
sell 115,000 Common Shares directly to certain persons involved in the formation
of the Company at a purchase price of $14.10 per share, for an aggregate
purchase price of approximately $1.6 million. All such purchases are expected to
be consummated simultaneously with the consummation of the Offerings and,
together with the purchases by the Strategic Investors, are referred to in this
Prospectus as the "Direct Sales." Upon consummation of the Offerings and the
Direct Sales, the Strategic Investors, GMA's directors and officers and certain
other persons involved in the formation of the Company are expected to own
collectively approximately 25.0% of the outstanding Common Shares. See "Direct
Sales."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except with respect to The Trident
Partnership, L.P. and as otherwise described herein) generally prevent transfers
to holders beneficially owning 10% or more of the Common Shares, require
divestiture of Common Shares to reduce the beneficial ownership of any holder to
less than 10% of the Common Shares and reduce the voting power of any holder
beneficially owning 10% or more of the Common Shares to less than 10% of the
total voting power of GMA's capital stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO GMA(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share............................ $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $ (4)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) GMA has agreed to indemnify the several International Managers and the U.S.
Underwriters (collectively, the "Underwriters") against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting certain advisory fees and other expenses related to the
Offerings payable by GMA estimated to be $5,175,000. See "Use of Proceeds."
(3) GMA has granted the International Managers and the U.S. Underwriters
options, exercisable within 30 days after the date hereof, to purchase up to
and additional Common Shares, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to GMA will be $ , $ and $ , respectively. See
"Underwriting."
(4) Assuming completion of all the Direct Sales, the total Proceeds to GMA will
be $ . If the Underwriters' over-allotment options described above
are exercised in full, the total Proceeds to GMA including the Direct Sales
will be $ . See "Direct Sales."
------------------------
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offers and to reject orders in whole or in part. It is expected that
delivery of the Common Shares will be made in New York, New York on or about
, 1999.
------------------------
Joint Lead Managers and Joint Bookrunners
MERRILL LYNCH INTERNATIONAL PRUDENTIAL-BACHE SECURITIES
------------------------
BEAR, STEARNS INTERNATIONAL LIMITED
ING BARINGS
SALOMON SMITH BARNEY INTERNATIONAL
WARBURG DILLON READ
, 1999
<PAGE> 119
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International; Prudential-Bache Securities (U.K.) Inc.; Bear,
Stearns International Limited; ING Baring Furman Selz LLC; Salomon Brothers
International Limited; and UBS AG, acting through its division Warburg Dillon
Read, are acting as lead managers (the "Lead Managers") of each of the
underwriters named below (the "International Managers"). Subject to the terms
and conditions contained in the international purchase agreement (the
"International Purchase Agreement") among GMA and the International Managers and
concurrently with the sale of Common Shares to the U.S. Underwriters (as defined
below), GMA has agreed to sell to the International Managers, and each of the
International Managers severally and not jointly has agreed to purchase from
GMA, the number of Common Shares set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
- --------------------- ---------
<S> <C>
Merrill Lynch International.................................
Prudential-Bache Securities (U.K.) Inc......................
Bear, Stearns International Limited.........................
ING Baring Furman Selz LLC..................................
Salomon Brothers International Limited......................
UBS AG, acting through its division Warburg Dillon Read.....
-------------
Total.............................................
=============
</TABLE>
GMA has also entered into a United States purchase agreement (the "U.S.
Purchase Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters (the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters") for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch & Co."); Prudential
Securities Incorporated; Bear, Stearns & Co. Inc.; ING Baring Furman Selz LLC;
Salomon Smith Barney Inc.; and Warburg Dillon Read LLC are acting as
representatives (the "U.S. Representatives"). Subject to the terms and
conditions set forth in the U.S. Purchase Agreement, and concurrently with the
sale of Common Shares to the International Managers, the Company has
agreed to sell to the U.S. Underwriters, and the U.S. Underwriters severally
have agreed to purchase from the Company, an aggregate of Common
Shares. The initial public offering price per share and the total underwriting
discount per Common Share are identical under the International Purchase
Agreement and U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Common Shares being sold pursuant to such
Purchase Agreement if any of the Common Shares being sold pursuant to such
Purchase Agreements are purchased. In certain circumstances under the Purchase
Agreements, the commitments of non-defaulting Underwriters may be increased. The
closings with respect to the sale of Common Shares to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another and upon the closing of sales to the Strategic Investors of Common
Shares and related Class B Warrants with an aggregate purchase price of at least
$70.0 million.
The Lead Managers have advised GMA that the International Managers propose
initially to offer the Common Shares to the public at the initial public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per Common
Share. The International Managers may allow, and such dealers reallow, a
discount not in excess of $ per Common Share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
GMA has granted an option to the International Managers, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
additional Common Shares at the initial public offering price set
forth on the cover page of this Prospectus, less the underwriting discount. The
International Managers may exercise this option solely to cover over-allotments,
if any, made on the sale of Common Shares offered hereby. To the extent that the
International Managers exercise this option, each International Manager will be
obligated, subject to certain conditions, to purchase a number of additional
Common Shares
94
<PAGE> 120
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
proportionate to such International Manager's initial amount reflected in the
foregoing table. GMA has also granted an option to the U.S. Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of additional Common Shares to cover over-allotments, if
any, on terms similar to those granted to the International Managers.
At the request of the Company, the U.S. Underwriters have reserved for
sale, at the initial public offering price, up to % of the shares offered
hereby to be sold to certain directors, officers, employees and related persons
of GMA. The number of Common Shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of the Offerings will be offered by the Underwriters to the general
public on the same terms as the other shares offered by this Prospectus.
GMA, its directors and officers, the holders of the Class A Warrants and
the Strategic Investors have executed lock-up agreements pursuant to which they
have agreed, except for certain limited exceptions, that they will not directly
or indirectly, without the prior written consent of Merrill Lynch & Co. and
Prudential Securities Incorporated on behalf of the Underwriters and, in
addition, in the case of the Strategic Investors, GMA, offer, sell, offer to
sell, contract to sell, transfer, assign, pledge, hypothecate, grant any option
to purchase, or otherwise sell or dispose (or announce any offer, sale, offer to
sell, contract of sale, transfer, assignment, pledge, hypothecation, grant of
any option to purchase or other sale or disposition) of any Common Shares or
other capital stock of GMA or any other securities convertible into, or
exercisable or exchangeable for, any Common Shares or other capital stock of GMA
for a period of one year after the date of this Prospectus or, in the case of
the Strategic Investors, for a period of nine months after the date of this
Prospectus. Such agreements do not prevent GMA from granting options so long as
such options are not exercisable until one year from the date of this
Prospectus. Merrill Lynch & Co., Prudential Securities Incorporated and, in the
case of the Strategic Investors, GMA may, in their discretion, at any time and
without notice, jointly release all or any portion of the securities subject to
such lock-up agreements. GMA also has agreed not to accelerate the
exercisability of the registration rights granted to the Strategic Investors,
the Class A Warrant holders and the Class B Warrant holders and not to file any
registration statement on Form S-8 with respect to, or otherwise register for
resale with the Commission, Common Shares underlying stock options or warrants
for a period of one year from the date of this Prospectus, in each case, without
the prior consent of Merrill Lynch & Co. and Prudential Securities Incorporated
on behalf of the Underwriters.
The International Managers and U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell Common
Shares to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the International Managers and any dealer to
whom they sell Common Shares will not offer to sell or sell Common Shares to
U.S. persons or to Canadian persons or to persons they believe intend to resell
to U.S. or Canadian persons and the U.S. Underwriters and any dealer to whom
they sell Common Shares will not offer to sell or sell Common Shares to persons
who are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to persons who are non-U.S. or non-Canadian persons, except in the case
of transactions pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Common
Shares. The initial public offering price was determined by GMA and the Lead
Managers and the U.S. Representatives as an appropriate per share price in light
of the Company's desired capitalization. There can be no assurance that an
active trading market will develop for the Common Shares or that the Common
Shares will trade in the public market subsequent to the Offerings at or above
the initial public offering price.
GMA has agreed to indemnify the Underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the International Managers and U.S. Underwriters may be required to
make in respect thereof.
Each of the International Managers has represented and agreed that (a) it
has not offered or sold and, prior to that date six months after the date of
this Prospectus, it will not offer or sell any Common Shares to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise
95
<PAGE> 121
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
in circumstances which do not constitute and will not constitute an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (b) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Shares in, from or otherwise
involving the United Kingdom and (c) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issue or sale of Common Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, as amended, or is a person to whom the
document may otherwise lawfully be issued or passed on.
Until the distribution of the Common Shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Shares. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Shares. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offerings, i.e., if they sell more Common Shares than are
set forth on the cover pages of this Prospectus, the Lead Managers and U.S.
Representatives, respectively, may reduce that short position by purchasing
Common Shares in the open market. The Lead Managers and U.S. Representatives,
respectively, may also elect to reduce any short position by exercising all or
part of the over-allotment options described above.
The Lead Managers and U.S. Representatives, respectively, may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Lead Managers or the U.S. Representatives purchase Common Shares in the
open market to reduce the Underwriters' short position or to stabilize the price
of the Common Shares, they may reclaim the amount of the selling concession from
the Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Shares to the extent that
it were to discourage resale of the Common Shares.
Neither GMA nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
GMA nor any of the Underwriters makes any representation that the Lead Managers
or the U.S. Representatives will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The International Managers and the U.S. Underwriters have informed GMA that
they do not intend to confirm sales of the Common Shares offered hereby to any
accounts over which they exercise discretionary authority.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the Common Shares or the
possession, circulation or distribution of this Prospectus or any other material
relating to the Company or Common Shares in any jurisdiction where action for
that purpose is required. Accordingly, the Common Shares may not be offered or
sold, directly or indirectly, and neither this Prospectus nor any other offering
material or advertisements in connection with the Common Shares may be
distributed or published, in or from any country or jurisdiction except in
compliance with any applicable rules and regulations of any such country or
jurisdiction.
Purchasers of the Common Shares offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the country
of purchase in addition to the offering price set forth on the cover page
hereof.
The Company has entered into an investment advisory agreement with The
Prudential Investment Corporation, as one of the Investment Managers. See
"Business -- Investment Managers." Prudential-Bache Securities (U.K.) Inc., one
of the Joint Lead Managers and Joint Bookrunners, and The Prudential Investment
Corporation are wholly owned subsidiaries of The Prudential Insurance Company of
America.
96
<PAGE> 122
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities under
United States Federal Securities Laws.... 3
Prospectus Summary......................... 4
Risk Factors............................... 10
Use of Proceeds............................ 23
Capitalization............................. 24
Dividend Policy............................ 25
Dilution................................... 26
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 28
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 30
Business................................... 35
Overview of the Financial Guaranty
Insurance and Reinsurance Industry....... 55
Management................................. 58
Principal Stockholders..................... 67
Certain Relationships and Related Party
Transactions............................. 70
Description of Capital Stock............... 74
Shares Eligible for Future Sale............ 81
Direct Sales............................... 83
Certain Tax Considerations................. 85
Underwriting............................... 93
Legal Matters.............................. 96
Experts.................................... 96
Additional Information..................... 97
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 98
Index to Consolidated Balance Sheet........ F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
18,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
Joint Lead Managers
and Joint Bookrunners
MERRILL LYNCH INTERNATIONAL
PRUDENTIAL-BACHE SECURITIES
------------------------
BEAR, STEARNS INTERNATIONAL LIMITED
ING BARINGS
SALOMON SMITH BARNEY INTERNATIONAL
WARBURG DILLON READ
, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 123
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR THE DIRECT SALES PROSPECTUS]
SUBJECT TO COMPLETION -- DATED DECEMBER 23, 1998
PROSPECTUS
218,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
------------------------
All of the 218,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby are being sold by Global Markets Access Ltd. ("GMA").
GMA is offering such Common Shares directly to certain of its directors and
officers at a price per share equal to the initial public offering price per
share in the Offerings (as defined below), less the per share underwriting
discounts and commissions, for an aggregate purchase price if all such Common
Shares are purchased of approximately $3.1 million. GMA is also offering by
separate prospectuses up to Common Shares in an offering in the United
States and Canada (the "U.S. Offering") and up to Common Shares
outside the United States and Canada (the "International Offering," and together
with the U.S. Offering, the "Offerings"). This Prospectus is identical to the
prospectus used in connection with the U.S. Offering (the "U.S. Prospectus") and
the prospectus used in connection with the International Offering (the
"International Prospectus"), except for the front and back cover pages and
except that the section captioned "Plan of Distribution" in this Prospectus is
replaced with the section captioned "Underwriting" in the U.S. Prospectus and
the International Prospectus. The offering made hereby will be consummated
simultaneously with the consummation of the Offerings. Prior to the Offerings,
GMA has not conducted any business and there has been no public market for the
Common Shares.
An application has been made to have the Common Shares approved for
quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "GMALF."
In connection with the formation of GMA and the establishment of a core
group of strategic investors, Risk Capital Reinsurance Company, The Trident
Partnership, L.P., Rolaco Holding S.A., Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund (collectively, the "Strategic Investors") have severally
agreed to purchase for investment directly from GMA an aggregate of 5,673,756
Common Shares and Class B Warrants to purchase an aggregate of 600,000 Common
Shares. Such purchases will be consummated immediately prior to the consummation
of the Offerings for an aggregate purchase price for the Common Shares and the
Class B Warrants of approximately $80.0 million. The aggregate purchase price to
be paid by each Strategic Investor is based on a price of $14.10 for (i) one
Common Share and (ii) the right to purchase a specified fraction of a Common
Share under the Class B Warrants. The exercise price for the Class B Warrants
will be $15.00 per share. GMA has also contracted to sell 115,000 Common Shares
directly to certain persons involved in the formation of the Company at a price
of $14.10 per Common Share, for an aggregate purchase price of approximately
$1.6 million. All such purchases are expected to be consummated simultaneously
with the consummation of the Offerings. The purchases by such persons involved
in the formation of the Company and the Strategic Investors, together with the
Common Shares being offered hereby, are collectively referred to in this
Prospectus as the "Direct Sales." "See Direct Sales."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except with respect to The Trident
Partnership, L.P. and as otherwise described herein) generally prevent transfers
to holders beneficially owning 10% or more of the Common Shares, require
divestiture of Common Shares to reduce the beneficial ownership of any holder to
less than 10% of the Common Shares and reduce the voting power of any holder
beneficially owning 10% or more of the Common Shares to less than 10% of the
total voting power of GMA's capital stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1999
<PAGE> 124
[ALTERNATE PAGE FOR THE DIRECT SALES PROSPECTUS]
PLAN OF DISTRIBUTION
The Company is offering directly the Common Shares offered hereby to
certain of its directors and officers at a per share price equal to the initial
public offering price per Common Share in the Offerings, less the per share
underwriting discounts and commissions. Such sales are to be consummated
simultaneously with the Offerings.
93
<PAGE> 125
[ALTERNATE PAGE FOR THE DIRECT SALES PROSPECTUS]
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON
SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE COMMON SHARES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities under
United States Federal Securities Laws.... 3
Prospectus Summary......................... 4
Risk Factors............................... 10
Use of Proceeds............................ 23
Capitalization............................. 24
Dividend Policy............................ 25
Dilution................................... 26
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 28
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 30
Business................................... 35
Overview of Financial Guaranty Insurance
and Reinsurance Industry................. 55
Management................................. 58
Principal Stockholders..................... 67
Certain Relationships and Related Party
Transactions............................. 70
Description of Capital Stock............... 74
Shares Eligible for Future Sale............ 81
Direct Sales............................... 83
Certain Tax Considerations................. 85
Plan of Distribution....................... 93
Legal Matters.............................. 94
Experts.................................... 94
Additional Information..................... 95
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 96
Index to Consolidated Balance Sheet........ F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
218,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 126
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses payable by the Registrant in
connection with the issuance and distribution of the Common Shares being
registered hereby. All of such expenses are estimates, other than the filing and
quotation fees payable to the Securities and Exchange Commission, the National
Association of Securities Dealers, Inc. and The Nasdaq National Market.
<TABLE>
<S> <C>
Advisory Fee................................................ $3,300,000
Quotation Fees -- The Nasdaq National Market................ 95,000
Filing Fee -- Securities and Exchange Commission............ 92,166
Filing Fee -- National Association of Securities Dealers,
Inc. ..................................................... 29,544
Fees and Expenses of Counsel (not including Blue Sky)....... *
Printing Expenses........................................... *
Reimbursement of other expenses to Inter-Atlantic Securities
Corporation............................................... *
Fees and Expenses of Accountants............................ *
Blue Sky Fees and Expenses.................................. *
Miscellaneous Expenses...................................... *
----------
Total............................................. *
==========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 31 of the Registrant's Bye-Laws provides that: (a) the directors
and officers of the Registrant shall be indemnified from and against all
actions, costs, charges, losses, damages and expenses which they shall incur by
reason of any act done in connection with their duty as a director or officer of
the Registrant; (b) each director and officer of the Registrant shall be
indemnified out of the funds of the Registrant against all liabilities incurred
by him as such a director or officer of the Registrant in defending any
proceedings in which judgment is given in his favor or he is acquitted or
relieved from liability; and (c) funds shall be advanced to each director or
officer or the Registrant on his incurring liability prior to judgment provided
that should he be found guilty of a criminal or other offense for which he
cannot by law be indemnified he shall reimburse the Registrant for the funds
advanced.
Section 32 of the Registrant's Bye-Laws provides that each shareholder
agrees to waive any claim or right of action such shareholder might have against
any director or officer on account of any action taken by such director or
officer, or the failure of such director or officer to take any action in the
performance of his or her duties with or for the Registrant, provided that such
waiver does not extend to any matter in respect of any fraud or dishonesty that
may attach to such director or officer.
Reference is made to the form of U.S. Purchase Agreement and the form of
International Purchase Agreement to be filed as Exhibits 1.1 and 1.2,
respectively, hereto for provisions providing that the Underwriters are
obligated, under certain circumstances, to indemnify the directors, certain
officers and the controlling persons of the Registrant against certain
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
Reference is made to the Agreement to be filed as Exhibit 10.3 hereto for
provisions providing that the Registrant and Inter-Atlantic Securities
Corporation are each obligated to indemnify the other for certain actions.
II-1
<PAGE> 127
Reference is made to the Registration Rights Agreements to be filed as
Exhibits 10.5 and 10.7 hereto for provisions providing that the Registrant and
certain holders of Common Shares, Class A Warrants and/or Class B Warrants are
each obligated to indemnify the other for certain actions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its formation, the Registrant has issued the following securities
that were not registered under the Securities Act:
(a) On August 18, 1998, the Registrant sold 12,000 Common Shares to
the Global Purpose Trust, a Bermuda trust, for an aggregate price of
$12,000. The Registrant will repurchase these shares upon consummation of
the Offerings and such shares will be cancelled.
(b) On August 25, 1998, the Registrant sold Class A Warrants for an
aggregate price of $54,000 to Donald J. Matthews, Michael P. Esposito, Jr.,
Frederick S. Hammer, Robert M. Lichten, Andrew S. Lerner and William S.
Ogden, Jr. to purchase up to an aggregate number of Common Shares equal to
6.75% of the sum of (i) the Common Shares outstanding immediately following
the consummation of the Offerings (including the Direct Sales but excluding
any shares held by the Global Purpose Trust) and (ii) the Common Shares
issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings, except for the
Class A Warrants, the Class B Warrants and any options granted by the
Company under its Initial Stock Option Plan.
(c) On August 25, 1998, the Registrant sold Class A Warrants for an
aggregate price of $42,000 to American Capital Access Holdings, L.L.C. to
purchase up to an aggregate number of Common Shares equal to 5.25% of the
sum of (i) the Common Shares outstanding immediately following the
consummation of the Offerings (including the Direct Sales but excluding any
shares held by the Global Purpose Trust) and (ii) the Common Shares
issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings, except for the
Class A Warrants, the Class B Warrants and any options granted by the
Company under its Initial Stock Option Plan.
(d) On August 25, 1998, the Registrant sold Class A Warrants for an
aggregate price of $12,000 to Risk Capital Reinsurance Company and The
Trident Partnership, L.P. to purchase up to an aggregate number of Common
Shares equal to 1.50% of the sum of (i) the Common Shares outstanding
immediately following the consummation of the Offerings (including the
Direct Sales but excluding any shares held by the Global Purpose Trust) and
(ii) the Common Shares issuable upon exercise or conversion of any security
outstanding immediately following the consummation of the Offerings, except
for the Class A Warrants, the Class B Warrants and any options granted by
the Company under its Initial Stock Option Plan.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving a public offering. All of the foregoing securities are
deemed restricted securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
1.1* Form of U.S. Purchase Agreement.
1.2* Form of International Purchase Agreement.
3.1** Memorandum of Association.
3.2** Bye-Laws.
4.1*** Specimen Common Share Certificate.
4.2*** Form of Class A Warrant.
4.3* Form of Class B Warrant.
</TABLE>
II-2
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
5.1** Opinion of Conyers Dill & Pearman.
8.1** Opinion of Conyers Dill & Pearman (included in Exhibit 5.1).
8.2*** Opinion of Drinker Biddle & Reath LLP.
10.1*** Employment Agreement, dated as of September 1, 1998, between
Donald J. Matthews and the Registrant and the Operating
Company.
10.2*** Global Markets Access Ltd. Initial Stock Option Plan.
10.3** Agreement, dated as of August 28, 1998, between
Inter-Atlantic Securities Corporation and the Registrant and
the Operating Company.
10.4** Form of Class A Warrant Purchase Agreement.
10.5** Registration Rights Agreement, dated as of August 25, 1998,
between the Registrant and the holders of the Class A
Warrants.
10.6* Form of Securities Purchase Agreement to be entered into by
Risk Capital Reinsurance Company and the Registrant, The
Trident Partnership, L.P. and the Registrant, Rolaco Holding
S.A. and the Registrant, Third Avenue Value Fund and the
Registrant, and Third Avenue Small-Cap Value Fund and the
Registrant.
10.7* Form of Registration Rights Agreement to be entered into
between Risk Capital Reinsurance Company and the Registrant,
The Trident Partnership, L.P. and the Registrant, Rolaco
Holding S.A. and the Registrant, Third Avenue Value Fund and
the Registrant, and Third Avenue Small-Cap Value Fund and
the Registrant.
10.8*** Quota Share Reinsurance Treaty, dated as of November 25,
1998, between ACA Financial Guaranty Corporation and the
Operating Company.
10.9*** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between ACA Financial Guaranty Corporation and the
Operating Company.
10.10*** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between the Operating Company and ACA Financial
Guaranty Corporation.
10.11*** Employment Agreement, dated as of September 1, 1998, between
Bruce W. Bantz and the Registrant and the Marketing Company.
10.12*** Employment Agreement, dated as of October 15, 1998, between
Mary Jane Robertson and the Registrant and the Operating
Company.
10.13** Form of Common Share Purchase Agreement.
10.14*** Agreement, dated as of November 1, 1998, between Insurance
Consulting Services Limited and the Registrant and the
Operating Company.
10.15*** Employment Agreement, dated as of October 15, 1998, between
Lionel J. Marsland-Shaw and the Registrant and the Operating
Company.
10.16*** Sublease Agreement, dated as of November 24, 1998, between
Annuity and Life Reassurance, Ltd. and the Registrant.
10.17* Letter Agreement, dated as of December , 1998, between
Risk Capital Reinsurance Company and the Registrant.
10.18* Letter Agreement, dated as of December , 1998, between The
Trident Partnership, L.P. and the Registrant.
10.19*** Discretionary Investment Advisory Agreement, dated as of
November 25, 1998, between Alliance Capital Management L.P.
and the Operating Company.
10.20*** Investment Management Agreement, dated as of November 25,
1998, between The Prudential Investment Corporation and the
Operating Company.
10.21* Letter Agreement, dated as of December , 1998, between
Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund and the Registrant.
21.1*** Subsidiaries of the Registrant.
</TABLE>
II-3
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
23.1** Consent of Conyers Dill & Pearman (included in Exhibit 5.1).
23.2*** Consent of Drinker Biddle & Reath LLP (included in Exhibit
8.2).
23.3*** Consent of KPMG Peat Marwick.
24.1**** Powers of Attorney of Robert M. Lichten, Charles G. Collis,
Frederick S. Hammer, William M. Goldstein and Donald J.
Puglisi.
24.2*** Powers of Attorney of Lawrence S. Doyle, Curtis R. Jensen,
Willis T. King, Jr., Mark D. Mosca and Paul T. Walker.
99.1** Form F-N.
99.2** Consent of Charles A. Davis
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.
**** Included on signature page to the Company's Registration Statement on Form
S-1 (333-62785) previously filed with the Securities and Exchange
Commission on September 2, 1998.
(b) Financial Statement Schedules
All schedules of the Registrant for which provision is made in the
applicable accounting regulations of the Commission are not required, are
inapplicable, or have been disclosed in the notes to the consolidated financial
statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
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 Commission, such indemnification is
against public policy as expressed in the Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
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.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 22nd day of December, 1998.
GLOBAL MARKETS ACCESS LTD.
By:/s/ DONALD J. MATTHEWS
------------------------------------
Donald J. Matthews
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DONALD J. MATTHEWS President, Chief Executive Officer December 22, 1998
- ------------------------------------ and Director (Principal Executive
Donald J. Matthews Officer)
/s/ MARY JANE ROBERTSON Chief Financial Officer and December 22, 1998
- ------------------------------------ Treasurer (Principal Financial and
Mary Jane Robertson Accounting Officer)
* Chairman of the Board December 22, 1998
- ------------------------------------
Robert M. Lichten
* Deputy Chairman of the Board December 22, 1998
- ------------------------------------
Frederick S. Hammer
* Director and Secretary December 22, 1998
- ------------------------------------
Charles G. Collis
Director December 22, 1998
- ------------------------------------
Charles A. Davis
* Director December 22, 1998
- ------------------------------------
Lawrence S. Doyle
Director December 22, 1998
- ------------------------------------
H. Russell Fraser
* Director December 22, 1998
- ------------------------------------
William M. Goldstein
* Director December 22, 1998
- ------------------------------------
Curtis R. Jensen
</TABLE>
II-5
<PAGE> 131
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director December 22, 1998
- ------------------------------------
Willis T. King, Jr.
* Director December 22, 1998
- ------------------------------------
Mark D. Mosca
* Director December 22, 1998
- ------------------------------------
Paul T. Walker
* Authorized Representative in the December 22, 1998
- ------------------------------------ United States
Donald J. Puglisi
</TABLE>
* Donald J. Matthews, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and included in the signature page of the
initial filing of this Registration Statement or as an exhibit to Amendment
No. 1 of this Registration Statement or as an exhibit to this filing, by
signing his name hereto, does hereby sign and execute this Registration
Statement on behalf of each of the persons noted above, in the capacities
indicated, and does hereby sign and execute this Registration Statement on his
own behalf, in the capacities indicated.
/s/ DONALD J. MATTHEWS
--------------------------------------
Donald J. Matthews
II-6
<PAGE> 132
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 * Form of U.S. Purchase Agreement.
1.2 * Form of International Purchase Agreement.
3.1 ** Memorandum of Association.
3.2 ** Bye-Laws.
4.1 *** Specimen Common Share Certificate.
4.2 *** Form of Class A Warrant.
4.3 * Form of Class B Warrant.
5.1 ** Opinion of Conyers Dill & Pearman.
8.1 ** Opinion of Conyers Dill & Pearman (included in Exhibit 5.1).
8.2 *** Opinion of Drinker Biddle & Reath LLP.
10.1 *** Employment Agreement, dated as of September 1, 1998, between
Donald J. Matthews and the Registrant and the Operating
Company.
10.2 *** Global Markets Access Ltd. Initial Stock Option Plan.
10.3 ** Agreement, dated as of August 28, 1998, between
Inter-Atlantic Securities Corporation and the Registrant and
the Operating Company.
10.4 ** Form of Class A Warrant Purchase Agreement.
10.5 ** Registration Rights Agreement, dated as of August 25, 1998,
between the Registrant and the holders of the Class A
Warrants.
10.6 * Form of Securities Purchase Agreement to be entered into by
Risk Capital Reinsurance Company and the Registrant, The
Trident Partnership, L.P. and the Registrant, Rolaco Holding
S.A. and the Registrant, Third Avenue Value Fund and the
Registrant, and Third Avenue Small-Cap Value Fund and the
Registrant.
10.7 * Form of Registration Rights Agreement to be entered into
between Risk Capital Reinsurance Company and the Registrant,
The Trident Partnership, L.P. and the Registrant, Rolaco
Holding S.A. and the Registrant, Third Avenue Value Fund and
the Registrant, and Third Avenue Small-Cap Value Fund and
the Registrant.
10.8 *** Quota Share Reinsurance Treaty, dated as of November 25,
1998, between ACA Financial Guaranty Corporation and the
Operating Company.
10.9 *** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between ACA Financial Guaranty Corporation and the
Operating Company.
10.10 *** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between the Operating Company and ACA Financial
Guaranty Corporation.
10.11 *** Employment Agreement, dated as of September 1, 1998, between
Bruce W. Bantz and the Registrant and the Marketing Company.
10.12 *** Employment Agreement, dated as of October 15, 1998, between
Mary Jane Robertson and the Registrant and the Operating
Company.
10.13 ** Form of Common Share Purchase Agreement.
10.14 *** Agreement, dated as of November 1, 1998, between Insurance
Consulting Services Limited and the Registrant and the
Operating Company.
10.15 *** Employment Agreement, dated as of October 15, 1998, between
Lionel J. Marsland-Shaw and the Registrant and the Operating
Company.
10.16 *** Sublease Agreement, dated as of November 24, 1998, between
Annuity and Life Reassurance, Ltd. and the Registrant.
10.17 * Letter Agreement, dated as of December , 1998, between
Risk Capital Reinsurance Company and the Registrant.
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.18 * Letter Agreement, dated as of December , 1998, between The
Trident Partnership, L.P. and the Registrant.
10.19 *** Discretionary Investment Advisory Agreement, dated as of
November 25, 1998, between Alliance Capital Management L.P.
and the Operating Company.
10.20 *** Investment Management Agreement, dated as of November 25,
1998, between The Prudential Investment Corporation and the
Operating Company.
10.21 * Letter Agreement, dated as of December , 1998, between
Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund and the Registrant.
21.1 *** Subsidiaries of the Registrant.
23.1 ** Consent of Conyers Dill & Pearman (included in Exhibit 5.1).
23.2 *** Consent of Drinker Biddle & Reath LLP (included in Exhibit
8.2).
23.3 *** Consent of KPMG Peat Marwick.
24.1 **** Powers of Attorney of Robert M. Lichten, Charles G. Collis,
Frederick S. Hammer, William M. Goldstein and Donald J.
Puglisi.
24.2 *** Powers of Attorney of Lawrence S. Doyle, Curtis R. Jensen,
Willis T. King, Jr., Mark D. Mosca and Paul T. Walker.
99.1 ** Form F-N.
99.2 ** Consent of Charles A. Davis.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.
**** Included on signature page to the Company's Registration Statement on Form
S-1 (333-62785) previously filed with the Securities and Exchange
Commission on September 2, 1998.
<PAGE> 1
<TABLE>
<S> <C> <C>
EXHIBIT 4.1
NUMBER Global Markets Access Ltd. SHARES
INCORPORATED IN THE ISLANDS OF BERMUDA
- ------------- UNDER THE COMPANIES ACT 1981 ------------
COMMON SHARES CUSIP G37737 10 6
PAR VALUE OF SHARES U.S. $1.00 EACH SEE REVERSE FOR CERTAIN ABBREVIATIONS
This is to certify that
is the registered owner of
FULLY PAID AND NON-ASSESSABLE
COMMON SHARES IN THE ABOVE-NAMED COMPANY SUBJECT TO THE MEMORANDUM OF
ASSOCIATION AND THE BYE-LAWS OF THE COMPANY, TRANSFERABLE IN ACCORDANCE THEREWITH.
This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Company and the facsimile signatures of its duly authorized officers.
Dated:
[BY] [AUTHORIZED SIGNATURE]
/s/ Donald J. Matthews /s/ Charles G. Collis
Donald J. Matthews, President and Chief Executive Officer Charles G. Collis, Secretary
[COUNTERSIGNED AND REGISTERED;
CHASEMELLON SHAREHOLDERS SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR]
</TABLE>
<PAGE> 2
The following abbreviations, when used in the inscription on the face of this
certificate shall be construed as though they were written out in full according
to applicable laws of regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT_______ Custodian_______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as
tenants in common Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ___________________________________ hereby sells, assign
and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF TRANSFERRED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- shares
of the shares represented by the within Certificate, and does hereby constitute
and appoint _________________________________________________________ Attorney
to transfer the said shares registered on the register of members of the within
named Company with full power of substitution in the premises,
Dated ___________________________
-------------------------------------
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT,
OR ANY CHANGE WHATSOEVER.
In the presence of:
- ---------------------------------
(Witness)
In the presence of:
- --------------------------------- --------------------------------------
(Witness) (Transferee)
<PAGE> 1
Exhibit 4.2
Class A Warrants have been purchased by the following individuals and entities
in substantially the form attached hereto for a number of Common Shares equal
to the percentage set forth next to each name below of the sum of (i) the
Common Shares outstanding immediately following the consummation of the
Offering (including the Direct Sales, but excluding any Common Shares held by
the Global Purpose Trust) and (ii) the Common Shares issuable upon exercise or
conversion of any security outstanding immediately following the consummation
of the Offering other than the Class A Warrants, the Class B Warrants and any
options granted by the Company pursuant to its Initial Stock Option Plan:
<TABLE>
<CAPTION>
NAME APPLICABLE PERCENTAGE
- -------------------------------------- ---------------------
<S> <C>
Donald J. Matthews 1.50000%
Michael P. Esposito, Jr. 1.37593%
Frederick S. Hammer 1.37593%
Robert M. Lichten 1.37593%
Andrew S. Lerner 0.78750%
American Capital Access Holdings, L.L.C. 5.25000%
Risk Capital Reinsurance Company 0.37500%
William S. Ogden, Jr. 0.33470%
The Trident Partnership, L.P. 1.12500%
</TABLE>
<PAGE> 2
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAW, AND THEY MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH
APPLICABLE FEDERAL AND STATE SECURITIES LAWS AND THE
OTHER RESTRICTIONS ON TRANSFER SET FORTH HEREIN.
--------------------
Date: August 25, 1998
CLASS A WARRANT
TO PURCHASE COMMON SHARES OF
GCA LTD.
Void after 5:00 P.M. (Bermuda Time),
September 30, 2008, as provided herein.
THIS CERTIFIES that, for value received, _____________ (the
"Warrant Holder"), or registered assigns, is entitled to purchase from GCA Ltd.
(the "Company"), a Bermuda corporation, upon the satisfaction of the conditions
stated herein and during the period (subject to Section 2 hereof) from and after
the first anniversary of the consummation of the Company's initial public
offering (the "IPO") of its common shares, par value $1.00 per share (the
"Common Shares"), to 5:00 p.m. (Bemuda Time) on September 30, 2008, a number of
fully paid and nonassessable Common Shares equal to ___% of the sum of (i) the
Common Shares outstanding immediately following the consummation of the
Company's IPO (including all Common Shares issued and sold by the Company upon
exercise of any overallotment option granted to the underwriters of the IPO and
all Common Shares issued and sold by the Company in any private placement
consummated prior to or simultaneously with the IPO, but excluding any shares
held by the Global Purpose Trust) and (ii) the Common Shares issuable upon
exercise or conversion of any security outstanding immediately following the
consummation of the IPO, except for all Class A Warrants, Class B Warrants and
any options granted by the Company pursuant to its Initial Stock Option Plan,
subject to adjustment as provided herein, at a per share purchase price equal to
the sales price to the public of a Common Share in the IPO. The Company
acknowledges receipt from the initial Warrant Holder of ______ ($ )______ in
full payment for the issuance of this Warrant.
1. Definitions. For the purpose of this Warrant:
(a) "Capital Stock" shall mean the Company's Common Shares and any
other shares of any class, or series within a class, whether
now or hereafter authorized, which
<PAGE> 3
has the right to participate in the distribution of earnings
or assets of the Company without limit as to amount or
percentage.
(b) "Extraordinary Cash Dividend" shall mean, with respect to any
consecutive 12-month period, the amount, if any, by which the
aggregate amount of all cash and non-cash dividends or
distributions on any Capital Stock occurring in such 12-month
period (or, if such Capital Stock was not outstanding at the
commencement of such 12-month period, occurring in such
shorter period during which such Capital Stock was
outstanding) exceeds on a per share basis 5% of the average of
the daily Market Prices per share of such Capital Stock over
such 12-month period (or such shorter period during which such
Capital Stock was outstanding); provided that, for purposes of
the foregoing definition, the amount of cash and non-cash
dividends paid on a per share basis will be appropriately
adjusted to reflect the occurrence during such period of any
stock dividend or distribution of shares of capital stock of
the Company or any subdivision, split, combination or
reclassification of shares of such Capital Stock.
(c) "Market Price" shall mean, per Common Share on any date
specified herein: (i) the closing price per share of the
Common Shares on such date published in The Wall Street
Journal or, if no such closing price on such date is published
in The Wall Street Journal, the average of the closing bid and
asked prices on such date, as officially reported on the
principal national securities exchange on which the Common
Shares are then listed or admitted to trading; or (ii) if the
Common Shares are not then listed or admitted to trading on
any national securities exchange but are designated as a
national market system security by the NASD, the last trading
price of the Common Shares on such date; or (iii) if there
shall have been no trading on such date or if the Common
Shares are not so designated, the average of the reported
closing bid and asked prices of the Common Shares on such date
as shown by the Nasdaq National Market or other
over-the-counter market and reported by any member firm of the
New York Stock Exchange selected by the Company; or (iv) if
none of (i), (ii) or (iii) is applicable, a market price per
share determined in such reasonable manner as may be
prescribed by the Company's Board of Directors.
(d) "Pro Rata Repurchase" shall mean any purchase of Common Shares
by the Company or by any of its subsidiaries whether for cash,
shares of Capital Stock of the Company, other securities of
the Company, evidences of indebtedness of the Company or any
other person or any other property (including, without
limitation, shares of capital stock, other securities or
evidences of indebtedness of a subsidiary of the Company), or
any combination thereof, which purchase is subject to Section
13(e) of the Securities Exchange Act of 1934, as amended, or
is made pursuant to an offer made available to all holders of
Common Shares.
(e) "Warrants" shall mean the Class A Warrants to purchase Common
Shares of the Company issued by the Company pursuant to the
Class A Warrant Purchase Agreements and any and all Warrants
which are issued in exchange or substitution
- 2 -
<PAGE> 4
for any outstanding Class A Warrant pursuant to the terms of
the Class A Warrant.
(f) "Warrant Price" shall mean the price per share at which Common
Shares of the Company are purchasable hereunder, as such price
may be adjusted from time to time hereunder.
(g) "Warrant Shares" shall mean the Common Shares purchasable upon
exercise of Warrants.
(h) "Additional Shares of Capital Stock" shall mean all shares of
Capital Stock issued by the Company, except:
(i) Common Shares issuable upon exercise of the Warrant;
(ii) Common Shares outstanding on the date hereof,
including all Common Shares issued to the Warrant
Holder and certain other investors on the date
hereof;
(iii) Common Shares issued pursuant to the IPO and any
concurrent private placement by the Company and
Common Shares issuable upon the exercise of warrants
issued in such concurrent private placement;
(iv) Common Shares issuable upon the exercise of options
and warrants which are outstanding on the date
hereof; and
(v) Options to purchase Common Shares granted by the
Company as an incentive for performance to the
Company's officers, directors, employees and
consultants after the date hereof, the Common Shares
issuable upon the exercise of such options, and the
Common Shares awarded to such persons as share grants
by the Company as incentive for performance after the
date hereof.
(i) "Registration Rights Agreement" shall mean the agreement so
entitled, dated August 25, 1998, between the Company and the
Warrant Holder and the other holders of Class A Warrants
providing for the registration of the Warrant Shares in
certain events.
(j) "Base Price" shall mean the greater of (x) the Warrant Price,
as adjusted from time to time as provided herein, or (y) the
Market Price as of the trading day last prior to the date on
which the Base Price is determined for purposes of this
Warrant.
2. Exercise of Warrants.
(a) This Warrant may be exercised at any time or from time to time
on or after (i) the first anniversary of the consummation of
the IPO for up to one-third of the
- 3 -
<PAGE> 5
number of Warrant Shares provided for on page 1 hereof, (ii)
the second anniversary of the consummation of the IPO for up
to an additional one-third of the number of Warrant Shares
provided for on page 1 hereof, and (iii) the third anniversary
of the consummation of the IPO for up to an additional
one-third of the number of Warrant Shares provided for on page
1 hereof, in each case subject to adjustment as provided in
Section 6. Subject to the foregoing, this Warrant may be
exercised at any time or from time to time in whole or in part
(but not as to fractional shares) prior to 5:00 p.m. United
States Eastern Time on September 30, 2008, at which time this
Warrant and all of the Warrant Holder's rights hereunder shall
terminate, except as expressly provided herein.
Notwithstanding the foregoing, upon a Change in Control of the
Company (as defined below) this Warrant shall become
immediately exercisable for the full number of Warrant Shares
provided for on page 1 hereof. For purposes of this Section
2(a), a "Change in Control" of the Company shall be deemed to
have occurred if:
(i) Any person, including a group of persons acting in
concert, becomes the beneficial owner of shares of
the Company having 50 percent or more of the total
number of votes that may be cast for the election of
directors of the Company;
(ii) There occurs any cash tender or exchange offer for
shares of the Company, merger or other business
combination, or any combination of the foregoing
transactions, and as a result of or in connection
with any such event, persons who were directors of
the Company before the event shall cease to
constitute a majority of the board of directors of
the Company or any successor to the Company; or
(iii) The sale, conveyance or other disposition (other than
by way of merger or consolidation), in one or a
series of related transactions, of all or
substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have
occurred by reason of a change in beneficial ownership occurring in connection
with the IPO.
(b) This Warrant may be exercised at the time(s) or upon the occurrence of
the event(s) specified in Subsection 2(a) hereof by the surrender of
this Warrant, with the Purchase Agreement attached hereto as Rider A
properly completed and duly executed, at the principal office of the
Company at Victoria Hall, Victoria Street, P.O. Box HM1262, Hamilton,
HM FX, Bermuda, or such other location which shall at that time be the
principal office of the Company and of which the Company shall have
notified the Warrant Holder in writing (the "Principal Office"), or at
the office of its stock transfer agent, and upon payment to the Company
of the Warrant Price for the Warrant Shares to be purchased upon such
exercise. The person entitled to the Warrant Shares so purchased shall
be treated for all purposes as the holder of such shares as of the
close of business on the date of exercise and certificates for the
shares so purchased shall be delivered to the
- 4 -
<PAGE> 6
person so entitled within a reasonable time, not exceeding thirty (30)
days, after such exercise. Certificates representing the Warrant Shares
issued upon exercise of this Warrant shall bear the restrictive legend
set forth in Section 11 referring to the restrictions on transfer set
forth herein. Unless this Warrant has expired, a new Warrant of like
tenor and for such number of Common Shares as the holder of this
Warrant shall direct, representing in the aggregate the right to
purchase the number of Common Shares with respect to which this Warrant
shall not have been exercised, shall also be issued to the holder of
this Warrant within such time.
(c) The Warrant Price shall be payable (i) in cash or its equivalent, (ii)
in Common Shares newly acquired upon exercise of this Warrant, (iii) by
surrendering to the Company the right to purchase a number of Warrant
Shares equal to the product obtained by multiplying the number of
Warrant Shares to be purchased (including the Warrant Shares to be
surrendered) by a fraction, the numerator of which is the Warrant Price
and the denominator of which is the Market Price of the Common Shares,
or (iv) in any combination of (i), (ii) and (iii). In the event the
Warrant Price is paid, in whole or in part, with Common Shares, the
portion of the Warrant Price so paid shall be equal to the Market Price
of the Common Shares.
3. Exchange. This Warrant is exchangeable, upon its surrender by the
Warrant Holder to the Company at its Principal Office, or to the Company's stock
transfer agent at its office, for new Warrants of like tenor registered in the
Warrant Holder's name and representing in the aggregate the right to purchase
the same number of Common Shares purchasable hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
Common Shares as shall be designated by the Warrant Holder at the time of such
surrender.
4. Transfer. This Warrant is transferable, in whole or in part, by the
holder thereof at the Principal Office of the Company or at the office of its
stock transfer agent, in person or by duly authorized attorney, upon
presentation of this Warrant properly endorsed for transfer, the Assignment
attached hereto as Rider A duly executed, funds sufficient to pay any transfer
tax and an opinion of counsel satisfactory to the Company or no-action letters
from the Securities and Exchange Commission and any appropriate state regulatory
agencies prior to such transfer to the effect that registration under the 1933
Act and any applicable state securities law is not required in connection with
the transaction resulting in such transfer (the "Transfer Documents"); provided,
however, that no such opinion of counsel or no action letter shall be necessary
in order to effectuate a transfer in accordance with the provisions of Rule
144(k) promulgated under the 1933 Act. Each Warrant issued upon any transfer as
above provided shall bear the restrictive legend set forth in Section 11, except
that such restrictive legend shall not be required if the opinion of counsel
satisfactory to the Company or the no-action letters referred to above are to
the further effect that such legend is not required in order to establish
compliance with the provisions of the 1933 Act and any applicable state
securities law, or if the transfer is made in accordance with the provisions of
Rule 144(k) under the 1933 Act. The cost of obtaining any legal opinion or no
action letter required under this Section shall be borne by the Warrant Holder.
Within a reasonable time after receiving the Transfer Documents, not
- 5 -
<PAGE> 7
exceeding thirty (30) days, the Company shall execute and deliver a new Warrant
in the name of the assignee named in the Assignment and this Warrant shall be
cancelled.
5. Certain Covenants of the Company. The Company covenants and agrees
that all Common Shares which may be issued upon the exercise of this Warrant,
will, upon issuance, be duly and validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof.
The Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of issue upon exercise of
the purchase rights evidenced by this Warrant, a sufficient number of Common
Shares to provide for the exercise of the rights represented by this Warrant.
The Company will, at the time of each exercise of this Warrant, upon request of
the holder thereof, acknowledge in writing its continuing obligation to afford
such holder of all rights (including, without limitation, any rights to
registration under the Registration Rights Agreement) to which such holder shall
be entitled after the exercise hereof in accordance with the terms hereof, but
the failure to make any such request, or the failure of the Company to give such
acknowledgement, shall not affect the continuing obligations of the Company in
respect of such rights.
6. Adjustment of Purchase Price and Number of Shares. The number and
kind of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) Reclassification, Consolidation or Merger. At any time while
this Warrant remains outstanding and unexpired, in case of any
reclassification or change of outstanding securities of the
class issuable upon exercise of this Warrant (other than a
change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a
subdivision or combination of outstanding securities issuable
upon the exercise of this Warrant) or in case of any
consolidation or merger of the Company with or into another
corporation (other than a merger with another corporation in
which the Company is a continuing corporation and which does
not result in any reclassification or change, other than a
change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a
subdivision or combination of outstanding securities issuable
upon the exercise of this Warrant), the Company, or such
successor corporation, as the case may be, shall, without
payment of any additional consideration therefor, execute a
new Warrant providing that the Warrant Holder shall have the
right to exercise such new Warrant (upon terms not less
favorable to the Warrant Holder than those then applicable to
this Warrant) and to receive upon such exercise, in lieu of
each Common Share theretofore issuable upon exercise of this
Warrant, the kind and amount of shares of stock, other
securities, money or property receivable upon such
reclassification, change, consolidation or merger, by the
holder of one Common Share issuable upon exercise of this
Warrant had it been exercised immediately prior to such
reclassification, change, consolidation or merger. Such new
Warrant shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided
for in this Section 6. Notwithstanding the foregoing, in the
case of any transaction
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<PAGE> 8
which pursuant to this Section 6(a) would result in the
execution and delivery by the Company of a new Warrant to the
Warrant Holder, and in which the holders of Common Shares are
entitled only to receive money or other property exclusive of
securities, then in lieu of such new Warrant being exercisable
as provided above, the Warrant Holder shall have the right, at
its sole option, to require the Company to purchase this
Warrant (without prior exercise by the Warrant Holder) at its
fair value as of the day before such transaction became
publicly known, as determined by an unaffiliated
internationally recognized accounting firm or investment bank
selected by the Warrant Holder and reasonably acceptable to
the Company. Any purchase and sale of the Warrant pursuant to
the immediately preceding sentence shall be consummated as
provided in Section 2(b), mutatis mutandis. The provisions of
this Subsection 6(a) shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales and
transfers.
(b) Subdivision or Combination of Shares. If the Company at any
time while this Warrant remains outstanding and unexpired
shall subdivide or combine its Capital Stock, the Warrant
Price shall be proportionately reduced, in case of subdivision
of such shares, as of the effective date of such subdivision,
or, if the Company shall take a record of holders of its
Capital Stock for the purpose of so subdividing, as of such
record date, whichever is earlier, or shall be proportionately
increased, in the case of combination of such shares, as of
the effective date of such combination, or, if the Company
shall take a record of holders of its Capital Stock for the
purpose of so combining, as of such record date, whichever is
earlier.
(c) Certain Dividends, Distributions and Repurchases. If the
Company at any time while this Warrant remains outstanding and
unexpired shall:
(i) Stock Dividends. Pay a dividend in shares of, or make
other distribution of shares of, its Capital Stock,
then the Warrant Price shall be adjusted, as of the
date the Company shall take a record of the holders
of its Capital Stock for the purpose of receiving
such dividend or other distribution (or if no such
record is taken, as of the date of such payment or
other distribution), to that price determined by
multiplying the Warrant Price in effect immediately
prior to such payment or other distribution by a
fraction (A) the numerator of which shall be the
total number of shares of Capital Stock outstanding
immediately prior to such dividend or distribution,
and (B) the denominator of which shall be the total
number of shares of Capital Stock outstanding
immediately after such dividend or distribution; or
(ii) Liquidating Dividends, Etc. Pay or make an
Extraordinary Cash Dividend or make a distribution of
its assets to the holders of its Capital Stock as a
dividend in liquidation or by way of return of
capital or other than as a dividend payable out of
earnings or surplus legally available for dividends
under applicable law, the Warrant Holder shall be
entitled to receive upon
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<PAGE> 9
the exercise hereof, in addition to the number of
Common Shares receivable thereupon, and without
payment of any additional consideration therefor, a
sum equal to the amount of such assets or cash as
would have been payable to him as owner of that
number of Common Shares receivable by exercise of the
Warrant had he been the holder of record of such
Common Shares on the record date for such dividend or
distribution, or if no such record is taken, as of
the date of such dividend or distribution, and an
appropriate provision therefor shall be made a part
of any such dividend or distribution; or
(iii) Pro Rata Repurchases. In case the Company or any
subsidiary thereof shall, make a Pro Rata Repurchase,
the Warrant Price shall be adjusted by dividing the
Warrant Price in effect immediately prior to such
action by a fraction (which in no event shall be less
than one), the numerator of which shall be the
product of (A) the number of Common Shares
outstanding immediately before such Pro Rata
Repurchase minus the number of Common Shares
repurchased in such Pro Rata Repurchase and (B) the
Market Price as of the day immediately preceding the
first public announcement by the Company of the
intent to effect such Pro Rata Repurchase, and the
denominator of which shall be (A) the product of (x)
the number of Common Shares outstanding immediately
before such Pro Rata Repurchase and (y) the Market
Price as of the day immediately preceding the first
public announcement by the Company of the intent to
effect such Pro Rata Repurchase minus (B) the
aggregate purchase price of the Pro Rata Repurchase.
(d) Issuance of Additional Shares of Capital Stock. If the Company
at any time while the Warrant remains outstanding and
unexpired shall issue any Additional Shares of Capital Stock
(otherwise than as provided in the foregoing subsections (a)
through (c) above) at a price per share less, or for other
consideration lower, than the Base Price, or without
consideration, then upon such issuance the Warrant Price shall
be adjusted to that price determined by multiplying the
Warrant Price by a fraction (i) the numerator of which shall
be the number of shares of Capital Stock outstanding
immediately prior to the issuance of such Additional Shares of
Capital Stock plus the number of shares of Capital Stock which
the aggregate consideration for the total number of such
Additional Shares of Capital Stock so issued would purchase at
the Base Price, and (ii) the denominator of which shall be the
number of shares of Capital Stock outstanding immediately
prior to the issuance of such Additional Shares of Capital
Stock plus the number of such Additional Shares of Capital
Stock so issued. The provisions of this subsection 6(d) shall
not apply under any of the circumstances for which an
adjustment is provided in subsections 6(a), 6(b), or 6(c). No
adjustment of the Warrant Price shall be made under this
subsection 6(d) upon the issuance of any Additional Shares of
Capital Stock which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights or
pursuant to the exercise of any conversion or exchange rights
in any convertible securities if any such
- 8 -
<PAGE> 10
adjustments shall previously have been made upon the issuance
of any such warrants, options or other rights or upon the
issuance of any convertible securities (or upon the issuance
of any warrants, options or any rights therefor) pursuant to
subsections 6(e) or 6(f) hereof.
(e) Issuance of Warrants, Options or Other Rights. In case the
Company shall issue any warrants, options or other rights to
subscribe for or purchase any Additional Shares of Capital
Stock and the price per share for which Additional Shares of
Capital Stock may at any time thereafter be issuable pursuant
to such warrants, options or other rights shall be less than
the Base Price, then upon such issuance the Warrant Price
shall be adjusted as provided in subsection 6(d) hereof on the
basis that the aggregate consideration for the Additional
Shares of Capital Stock issuable pursuant to such warrants,
options or other rights, shall be deemed to be the
consideration received by the Company for the issuance of such
warrants, options, or other rights plus the minimum
consideration to be received by the Company for the issuance
of Additional Shares of Capital Stock pursuant to such
warrants, options, or other rights.
(f) Issuance of Convertible Securities. In case the Company shall
issue any convertible securities and the consideration per
share for which Additional Shares of Capital Stock may at any
time thereafter be issuable pursuant to the terms of such
convertible securities shall be less than the Base Price, then
upon such issuance the Warrant Price shall be adjusted as
provided in subsection 6(d) hereof on the basis that (i) the
maximum number of Additional Shares of Capital Stock necessary
to effect the conversion or exchange of all such convertible
securities shall be deemed to have been issued as of the date
of issuance of such convertible securities, and (ii) the
aggregate consideration for such maximum number of Additional
Shares of Capital Stock shall be deemed to be the minimum
consideration received by the Company for the issuance of such
Additional Shares of Capital Stock pursuant to the terms of
such convertible securities. No adjustment of the Warrant
Price shall be made under this subsection upon the issuance of
any convertible securities which are issued pursuant to the
exercise of any warrants or other subscription or purchase
rights therefor, if any such adjustment shall previously have
been made upon the issuance of such warrants or other rights
pursuant to subsection 6(e) hereof.
(g) Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price pursuant to any provision of this Section 6, the
number of Common Shares purchasable hereunder at the Warrant
Price shall be adjusted, to the nearest one hundredth of a
whole share, to the product obtained by multiplying such
number of Common Shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator
of which shall be the Warrant Price immediately prior to such
adjustment and the denominator of which shall be the Warrant
Price immediately thereafter.
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<PAGE> 11
(h) Other Provisions Applicable to Adjustments Under this Section.
The following provisions will be applicable to the making of
adjustments in the Warrant Price hereinabove provided in this
Section 6:
(i) Computation of Consideration. To the extent that any
Additional Shares of Capital Stock or any convertible
securities or any warrants, options or other rights
to subscribe for or purchase any Additional Shares of
Capital Stock or any convertible securities shall be
issued for a cash consideration, the consideration
received by the Company therefor shall be deemed to
be the amount of the cash received by the Company
therefor, or, if such Additional Shares of Capital
Stock or convertible securities are offered by the
Company for subscription, the subscription price, or,
if such Additional Shares of Capital Stock or
convertible securities are sold to underwriters or
dealers for public offering without a subscription
offering, or through underwriters or dealers for
public offering without a subscription offering, the
initial public offering price, in any such case
disregarding any amounts paid or incurred by the
Company for and in the underwriting of, or otherwise
in connection with the issue thereof. To the extent
that such issuance shall be for a consideration other
than cash, then, except as herein otherwise expressly
provided, the amount of such consideration shall be
deemed to be the fair value of such consideration at
the time of such issuance as determined in good faith
by the Company's Board of Directors. The
consideration for any Additional Shares of Capital
Stock issuable pursuant to any warrants, options or
other rights to subscribe for or purchase the same
shall be the consideration received by the Company
for issuing such warrants, options or other rights,
plus the additional consideration payable to the
Company upon the exercise of such warrants, options
or other rights. The consideration for any Additional
Shares of Capital Stock issuable pursuant to the
terms of any convertible securities shall be the
consideration paid or payable to the Company in
respect of the subscription for or purchase of such
convertible securities, plus the additional
consideration, if any, payable to the Company upon
the exercise of the right of conversion or exchange
in such convertible securities. In case of the
issuance at any time of any Additional Shares of
Capital Stock or convertible securities in payment or
satisfaction of any dividends in a fixed amount, the
Company shall be deemed to have received for such
Additional Shares of Capital Stock or convertible
securities a consideration equal to the amount of
such dividend so paid or satisfied.
(ii) Readjustment of Warrant Price. Upon the expiration of
the right to convert or exchange any convertible
securities, or upon the expiration of any rights,
options or warrants, the issuance of which
convertible securities, rights, options or warrants
effected an adjustment in the Warrant Price, if any
such convertible securities shall not have been
converted or exchanged, or if any such rights,
options or warrants shall not
- 10 -
<PAGE> 12
have been exercised, the number of shares of Capital
Stock deemed to be issued and outstanding by reason
of the fact that they were issuable upon conversion
or exchange of any such convertible securities or
upon exercise of any such rights, options, or
warrants shall no longer be computed as set forth
above, and the Warrant Price shall forthwith be
readjusted and thereafter be the price which it would
have been (but reflecting any other adjustments in
the Warrant Price made pursuant to the provisions of
this Section 6 after the issuance of such convertible
securities, rights, options or warrants) had the
adjustment of the Warrant Price made upon the
issuance or sale of such convertible securities or
issuance of rights, options or warrants been made on
the basis of the issuance only of the number of
Additional Shares of Capital Stock actually issued
upon conversion or exchange of such convertible
securities, or upon the exercise of such rights,
options or warrants, and thereupon only the number of
Additional Shares of Capital Stock actually so issued
shall be deemed to have been issued and only the
consideration actually received by the Company
(computed as in subsection (h)(i) hereof) shall be
deemed to have been received by the Company.
(iii) Treasury Shares. The number of shares of Capital
Stock at any time outstanding shall not include any
shares thereof then directly or indirectly owned or
held by or for the account of the Company or any
subsidiary of the Company.
(iv) Other Action Affecting Capital Stock. In case after
the date hereof the Company shall take any action
affecting the Capital Stock, other than an action
described in any of the foregoing subsection (a) to
(f) hereof, inclusive, which in the opinion of the
Company's Board of Directors would have a materially
adverse effect upon the rights of the holders of the
Warrant, the Warrant Price shall be adjusted in such
manner and at such time as the Board of Directors on
the advice of the Company's independent public
accountants may in good faith determine to be
equitable in the circumstances.
(v) Limitation or Adjustment of Warrant Price.
Notwithstanding any other provision of this Warrant,
no adjustment of the Warrant Price shall be made
which would reduce such Warrant Price below the par
value of the Warrant Shares.
(vi) No Impairment. The Company will not, by amendment of
its constitutive documents or through any
consolidation, merger, reorganization, transfer of
assets, dissolution, securities issuance or any other
action, avoid or seek to avoid the observance or
performance of the terms of this Warrant, or to
deprive the holder hereof of the intended benefits
hereof, and will at all times in good faith take such
actions (or refrain therefrom) as shall be necessary
or appropriate to effect the intended purposes and
benefits of
- 11 -
<PAGE> 13
this Warrant. Without limiting the generality of the
foregoing, the Company will not permit the par value
of the Warrant Shares to exceed the Warrant Price.
The Company will not amend any material term of any
outstanding security convertible into, or exercisable
or exchangeable for, Common Shares unless it also
offers to make substantially the same amendment to
the terms hereof.
7. Notice of Adjustments. Whenever the Warrant Price or the number of
Common Shares purchasable under the terms of this Warrant at that Warrant Price
shall be adjusted pursuant to Section 6 hereof, the Company shall prepare a
certificate signed by its President or a Vice President and by its Treasurer or
Assistant Treasurer or its Secretary or Assistant Secretary, setting forth in
reasonable detail the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated (including a
description of the basis on which the Company's Board of Directors made any
determination hereunder), and the Warrant Price and number of Common Shares
purchasable at that Warrant Price after giving effect to such adjustment, and
shall promptly cause copies of such certificate to be mailed (by first class and
postage prepaid) to the registered holder of this Warrant.
In the event the Company shall, at a time when this Warrant is
exercisable, take any action which pursuant to Section 6 may result in an
adjustment of any of the Warrant Price or the number of Common Shares
purchasable at that Warrant Price upon exercise of this Warrant, the Company
will give to the registered holder of this Warrant at such holder's last address
known to the Company written notice of such action ten (10) days in advance of
its effective date in order to afford to such holder of this Warrant an
opportunity to exercise this Warrant and to purchase Common Shares prior to such
action becoming effective.
8. Payment of Taxes. All Common Shares issued upon the exercise of this
Warrant shall be validly issued, fully paid and nonassessable, and the Company
shall pay all taxes and other governmental charges that may be imposed in
respect of the issue or delivery thereof. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for Common Shares in any name other
than that of the registered holder of the Warrant surrendered in connection with
the purchase of such shares, and in such case the Company shall not be required
to issue or deliver any share certificate until such tax or other charge has
been paid or it has been established to the Company's satisfaction that no tax
or other charge is due.
9. Fractional Shares. No fractional Common Shares will be issued in
connection with any purchase hereunder but in lieu of such fractional shares,
the Company shall make a cash refund therefor equal in amount to the product of
the applicable fraction multiplied by the Market Price as of the date of such
exercise.
10. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company
of evidence reasonably satisfactory to it that this Warrant has been mutilated,
destroyed, lost or stolen, and in the case of a destroyed, lost or stolen
Warrant, a bond of indemnity reasonably satisfactory to the Company, or in the
case of a mutilated Warrant, upon surrender and cancellation of this Warrant,
the Company will execute and deliver in the Warrant Holder's
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<PAGE> 14
name, in exchange and substitution for the Warrant so mutilated, destroyed, lost
or stolen, a new Warrant of like tenor substantially in the form hereof with
appropriate insertions and variations.
- 13 -
<PAGE> 15
11. Legend. The certificate representing any Warrant Shares acquired
upon exercise of this Warrant, and any Common Shares or other securities issued
in respect of such Warrant Shares upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event, shall be stamped or
otherwise imprinted with the following legend (unless such a legend is no longer
required under the 1933 Act):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
APPLICABLE STATE SECURITIES LAW AND MAY NOT BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH
APPLICABLE FEDERAL AND STATE SECURITIES LAWS. IN ADDITION, THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
ON TRANSFER AS SET FORTH IN A WARRANT OF THE COMPANY DATED AUGUST 25,
1998."
12. Headings. The descriptive headings of the several sections of this
Warrant are inserted for convenience only and do not constitute a part of this
Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Warrant.
GCA LTD.
By:_______________________________________________
Donald J. Matthews, Chief Executive Officer
Attest:__________________________________________
ACCEPTED, ACKNOWLEDGED
AND AGREED
By: ________________________________
[Name of Warrant Holder]
Attest: ____________________________
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<PAGE> 16
Rider A
PURCHASE AGREEMENT
Date: __________________________
TO:
The undersigned, pursuant to the provisions set forth in the
attached Warrant, hereby agrees to purchase _________________ Common Shares
covered by such Warrant, and makes payment herewith in full therefor at the
price per share provided by this Warrant.
Signature: ____________________
Address: _______________________
* * * *
ASSIGNMENT
For Value Received, ________________________________ hereby
sells, assigns and transfers all of the rights of the undersigned under the
within Warrant, with respect to the number of Common Shares covered by such
Warrant, to:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
Dated: _________________________ Signature: ______________________________
Address: ________________________________
<PAGE> 1
Exhibit 8.2
Opinion
November 25, 1998
Global Markets Access Ltd.
Victoria Hall, Victoria Street
P.O. Box HM1262
Hamilton, HM FX, Bermuda
RE: Global Markets Access Ltd.
Registration Statement on Form S-1
Gentlemen:
As your counsel, we have assisted in certain aspects of the preparation
and filing with the Securities and Exchange Commission (the "SEC"), under the
Securities Act of 1933, as amended (the "Act"), of the Registration Statement
on Form S-1 (No. 333-62785) (the "Registration Statement") of Global Markets
Access Ltd. (the "Company") and the Prospectus contained therein relating to
the proposed offering of 16,750,000 shares of the Company's Common Stock.
We have made such examinations as we have deemed relevant and necessary as
a basis for the opinion hereinafter expressed. In such examinations, we have
assumed the genuineness of all signatures and the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
documents submitted to us as conformed or photostatic copies.
Based on and subject to the assumptions and limitations contained herein,
we are of the opinion that the statements as to United States Federal income
tax law set forth under the headings "Risk Factors -- United States Federal
Income Tax Risks" and "Certain Tax Considerations" in the Registration
Statement are accurate in all material respects. This opinion is based upon
provisions of the Internal Revenue Code of 1986, as amended, applicable
Treasury Department regulations in effect as of the date hereof, current
published administrative positions of the Internal Revenue Service contained in
revenue rulings and procedures, and judicial decisions.
This opinion represents our best legal judgment, but has no binding effect
or official status of any kind, and no assurance can be given that contrary
positions may not be taken by the Internal Revenue Service or a court
concerning the issues. As noted in the Prospectus, the statements therein as to
the Company's beliefs and conclusions as to the application of such tax law to
the Company and its operations represent the views of the Company's management
as to the application of such law and do not represent our legal opinion. We
also express no opinion as to any tax consequences under any foreign, state or
local laws. In issuing our opinion, we have relied solely upon existing
provisions of the Code, existing proposed regulations thereunder, and current
administrative positions and judicial decision. Such laws, regulations,
administrative positions and judicial decisions are subject to change at any
time. Also, future changes in Federal income tax laws and the interpretation
thereof can have retroactive effect. Any such changes could affect the validity
of the opinion set forth above.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm in the Prospectus under
the headings "Risk Factors -- United States Federal Income Tax Risks," "Certain
Tax Considerations" and "Legal Matters." In consenting to such filing and to
such references to our firm, we have not certified any part of the Registration
Statement, and our consent does not establish that we come within the categories
of persons whose consent is required under Section 7 or under the rules and
regulations of the SEC issued thereunder.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made in Hamilton, Bermuda and is dated as of
September 1, 1998, by and between Global Markets Access Ltd., a Bermuda
corporation (the "Company"), Global Markets Guaranty Ltd., a wholly-owned
subsidiary of the Company organized under the laws of Bermuda to provide
financial guaranty insurance and reinsurance (the "Operating Company"), and
Donald J. Matthews (the "Employee").
W I T N E S S E T H
WHEREAS, the Company is contemplating an initial public offering
and/or a private placement of its common shares (the "IPO"); and
WHEREAS, the Company and the Operating Company desire that the
Employee serve as President and Chief Executive Officer of the Company and the
Operating Company and the Employee is willing to serve in such capacities.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the parties hereto agree as
follows:
Section 1. Employment.
Effective as of September 1, 1998, the Company and the Operating
Company will employ the Employee and the Employee will perform services for the
Company and the Operating Company on the terms and conditions set forth in this
Agreement and for the period ("Term of Employment") specified in Section 3
hereof.
Section 2. Duties.
The Employee, during the Term of Employment, shall serve the Company
as its President and Chief Executive Officer. The Employee shall also serve as
President and Chief Executive Officer of the Operating Company. The Employee
shall be based at the Operating Company's headquarters in Bermuda, other than
for periodic travel in the ordinary course of business. The Employee shall have
such duties and responsibilities as are assigned to him by the Boards of
Directors of the Company and the Operating Company commensurate with his
positions with the Company and the Operating Company, and shall perform such
duties and responsibilities in each case in such a manner that neither the
Company nor the Operating Company would be deemed to be conducting a trade or
business in the United States for purposes of the United States Internal Revenue
Code of 1986, as amended.
The Employee shall perform his duties hereunder faithfully and to
the best of his abilities and in furtherance of the business of the Company and
the Operating Company, and shall devote his full business time, energy,
attention and skill to the business of the Company and
<PAGE> 2
the Operating Company and to the promotion of their interests except as
otherwise agreed by the Company and the Operating Company.
The Employee warrants and represents that he is free to enter into
this Agreement and is not restricted by any prior or existing agreement and the
Company and the Operating Company may rely on such representation in entering
into this Agreement.
Section 3. Term of Employment.
The initial Term of Employment under this Agreement shall be the
period commencing on September 1, 1998 and ending on the third anniversary of
the IPO. At the end of the initial Term of Employment, and on each anniversary
thereof, the Term of Employment shall automatically be extended for one
additional year, unless the Company and the Operating Company, collectively, or
the Employee shall have given at least three months in advance written notice to
the other that it does not wish to extend this Agreement.
Section 4. Salary.
Commencing on September 1, 1998, the Employee shall receive, as
compensation for his duties and obligations to the Company and the Operating
Company, a salary at the annual rate of BD$360,000, payable by the Operating
Company in Bermuda in substantially equal installments in accordance with the
Operating Company's payroll practice; however, no salary shall become payable to
the Employee until consummation of the IPO. During the Term of Employment, all
salary or consulting payments paid to the Employee by ACA Financial Guaranty
Corporation or Inter-Atlantic Securities Corporation or their affiliates shall
be credited against salary due to the Employee under this Employment Agreement.
It is agreed between the parties that the Company shall review the Employee's
base annual salary annually and in light of such review may, in the discretion
of the Board of Directors of the Company, increase such base annual salary
taking into account any change in the Employee's responsibilities, increases in
the cost of living, performance by the Employee and other pertinent factors.
Section 5. Bonus.
During the Term of Employment, the Employee shall, subject to and
effective upon the consummation of the IPO, participate in the Company's
Incentive Compensation Plan, the terms of such Plan to be determined by the
Compensation Committee for approval by the Company's Board of Directors, and
shall be eligible for an annual cash bonus based on performance targets as
determined in accordance with the terms of any such plan.
Section 6. Options.
(a) Initial Options. The Company shall grant to the Employee,
subject to and effective as of the consummation of the IPO, options (the
"Initial Options") to purchase at a price per share equal to the price per share
in the IPO, a number of shares equal to two percent (2%) of the Company's common
shares issued in the IPO, but not more than 727,272 common shares (the "Common
Shares"). Thirty three and one-thirds percent (33 1/3%) of the Initial Options
shall become exercisable on the first anniversary of the IPO, 33 1/3% of the
Initial Options shall
-2-
<PAGE> 3
become exercisable on the second anniversary of the IPO, and an additional 33
1/3% of the Initial Options shall become exercisable on the third anniversary
thereof. The terms of the Initial Options shall be governed by the terms of the
Company's Initial Stock Option Plan.
(b) Other Options. During the Term of Employment, the Employee
shall, subject to the consummation of the IPO, be eligible to be granted options
(in addition to the Initial Options) to purchase Common Shares at such price and
subject to such terms as provided by the Company's Initial Stock Option Plan, in
the sole discretion of the Board of Directors of the Company.
Section 7. Employee Benefits.
During the Term of Employment, the Employee shall, effective upon
the consummation of the IPO, be entitled to participate in all employee benefit
programs of the Company and the Operating Company, as such programs may be in
effect from time to time, including without limitation, pension and other
retirement plans, profit sharing plans, group life insurance, accidental death
and dismemberment insurance, hospitalization, surgical and major medical
coverage, sick leave (including salary continuation arrangements), long term
disability, holidays and vacations.
Section 8. Business Expenses.
All reasonable travel and other expenses incidental to the rendering
of services by the Employee hereunder shall be paid by the Operating Company and
if expenses are paid in the first instance by the Employee, the Operating
Company will reimburse him therefor upon presentation of proper invoices;
subject in each case to compliance with the Operating Company's reimbursement
policies and procedures.
Section 9. Housing and Travel Expenses.
During the Term of Employment, the Operating Company shall,
effective upon consummation of the IPO, provide to the Employee the sum of
BD$12,000 monthly as an allowance to cover the expenses of housing in Bermuda
and for his personal travel to and from Bermuda.
Section 10. Vacations and Sick Leave.
During the Term of Employment, the Employee shall be entitled to
reasonable vacation and reasonable sick leave each year, in accordance with
policies of the Company and the Operating Company, as determined by their
respective Boards of Directors, provided, however, that the Employee shall be
entitled to a minimum of four weeks vacation per year.
Section 11. Termination.
(a) In the event of Serious Cause, as defined below, the Company and
the Operating Company may terminate the Employee's employment and the Term of
Employment
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<PAGE> 4
hereunder immediately upon written notice of such termination stating the
Serious Cause upon which the Company and the Operating Company are basing such
termination.
"Serious Cause" shall mean (i) the willful and continued failure by
the Employee to perform substantially his duties hereunder, other than by
reasons of health, for a period of more than 30 days after demand for
substantial performance has been delivered by the Company and the Operating
Company that identifies the manner in which the Company and the Operating
Company believe the Employee has not performed his duties, (ii) the Employee
shall have been indicted by any federal, state or local authority in any
jurisdiction for, or shall have pleaded guilty or nolo contendere to, an act
constituting a felony, (iii) the Employee shall have habitually abused any
substance (such as narcotics or alcohol), or (iv) the Employee shall have (A)
engaged in acts of fraud, material dishonesty or gross misconduct in connection
with the business of the Company and the Operating Company or (B) committed a
material breach of this Agreement.
(b) The Employee may terminate his employment and the Term of
Employment hereunder in the event of Good Reason, as defined below, upon 30
days' prior written notice of such termination stating the Good Reason upon
which the Employee is basing such termination.
"Good Reason" shall mean (i) a substantial reduction in the
Employee's salary, (ii) the demotion of the Employee, (iii) a material reduction
of the Employee's duties hereunder, or (iv) a material breach of this Agreement
by the Company and the Operating Company.
(c) In the event of termination of the Employee's employment and the
Term of Employment hereunder by the Company and the Operating Company for
Serious Cause or without Serious Cause or by the Employee without Good Reason,
the Employee shall forfeit all bonus amounts for the then current fiscal year,
and the Company and Operating Company shall be liable to the Employee only for
(i) any accrued but unpaid salary, (ii) any accrued but unpaid bonus from a
prior fiscal year, and (iii) reimbursement of business expenses incurred prior
to the date of termination.
(d) In the event of the death, retirement or disability of the
Employee, the Employee's employment and Term of Employment hereunder shall be
terminated as of the date of such death, retirement or disability and the
Operating Company shall pay the Employee, or the Employee's estate or legal
representative, as appropriate, (i) any accrued but unpaid salary, (ii) any
earned but unpaid bonus from a prior fiscal year, (iii) reimbursement of
business expenses incurred prior to the date of termination, (iv) travel and
housing allowances under Section 9 for six months after the date of termination,
and (v) reasonable relocation expenses from Bermuda to the United States. The
date of the Employee's disability shall be deemed to be the last day of the
sixth month period of time during which the Employee has been unable to carry
out his position as provided below.
"Disability" shall mean the Employee's inability, for reasons of
health, to carry out the functions of his position for a total of 6 months
during any 12 month period of this Agreement. "Retirement" shall mean retirement
from employment upon attaining age 70 or such earlier age agreed to by the
Company and the Operating Company.
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<PAGE> 5
In addition, in the event of the Employee's death, retirement or
disability, if the Company's Common Shares are not then publicly traded, the
Company shall, after giving written notice to the Employee, the Employee's
estate or legal representative, whichever is appropriate, have the right to
require the sale to the Company of any or all of the Common Shares of the
Company owned by the Employee within six (6) months of death, retirement or
disability; and the Employee, the Employee's estate or legal representative,
whichever is appropriate, shall have the right, after giving written notice to
the Company, to sell any or all of the Employee's Common Shares to the Company
within twelve (12) months after death or within six (6) months after retirement
or disability. The rights provided for in this paragraph shall be exercised by
serving written notice of the intention to buy or sell, as the case may be, to
the other party. The price at which any such transfer shall be effected shall be
equal to the appraised value of the Common Shares, in each case measured as of
the date of termination. The appraised value formula of evaluation will be
agreed upon by June 1, 1999 if the Company is not then publicly traded. Payment
for either such transaction shall occur no later than sixty (60) days after
effective notice is given pursuant to Section 20 of this Agreement, or, if
later, no more than thirty (30) days after the appraised value is finally
determined.
(e) If the Employee should terminate his employment and the Term of
Employment hereunder for Good Reason, the Operating Company shall continue to
pay the Employee his base salary for a period of 18 months from such
termination. In addition, the Employee shall be entitled to (i) any accrued but
unpaid salary, (ii) any earned but unpaid bonus from a prior fiscal year, (iii)
reimbursement of business expenses incurred prior to the date of termination,
(iv) travel and housing allowances under Section 9 for twelve months after the
date of termination, and (v) reasonable relocation expenses from Bermuda to the
United States.
(f) In the event of the liquidation of the Company or the Operating
Company or in the event that the Board of Directors elects to discontinue
permanently operating the Company or the Operating Company, the Employee's
employment and the Term of Employment hereunder shall be terminated as of the
date of such liquidation or discontinuance, and the Operating Company shall pay
the Employee within 30 days of the day liquidation or discontinuance is
determined (i) any accrued but unpaid salary, (ii) any earned but unpaid bonus
from a prior fiscal year, (iii) unreimbursed business expenses incurred prior to
the date of termination, (iv) travel and housing allowances under Section 9 for
two months after the date of termination, and (v) reasonable relocation expenses
from Bermuda to the United States. In addition, the Employee shall be entitled
to receive one year's base salary from the date on which the Employee's
employment is terminated.
(g) Notwithstanding any other provision of this Agreement, until the
IPO is consummated, either the Employee or the Company may terminate the
Employee's employment and the Term of Employment hereunder upon 30 days' written
notice to the other, in which event the Company shall be liable to the Employee
only for reimbursement of business expenses incurred prior to the date of
termination.
Section 12. Change of Control.
(a) Notwithstanding any other provision contained herein, the
Employee's Initial Options and other options issued under the Company's share
option plans that are not then
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<PAGE> 6
exercisable shall become exercisable (and be deemed to be vested) on the date on
which a Change of Control (as defined below) of the Company occurs. In addition,
restricted Common Shares granted under any other of the Company's share option
plans shall immediately vest upon a Change of Control of the Company.
(b) If (i) the employment of the Employee is terminated by the
Company (or any successor thereto) without Serious Cause or (ii) the Employee
terminates employment with the Company (or successor thereto) for Good Reason,
in each case within the period commencing on the date that a Change of Control
is formally proposed to the Company's Board of Directors and ending on the first
anniversary of the date on which such Change of Control occurs, then the
Employee shall be entitled to receive (in lieu of the benefits described in
Section 11): (1) any accrued but unpaid salary, (2) a lump sum payment equal to
two times such Employee's annual base salary as of the date of termination, (3)
any accrued but unpaid bonus from a prior fiscal year, (4) reimbursement of
business expenses incurred prior to the date of termination, (5) travel and
housing allowances under Section 9 for one year following the date of
termination, (6) reasonable relocation expenses from Bermuda to the United
States, together with (7) a gross up of any excise taxes payable by the Employee
by reason of such payments occurring in connection with a Change of Control.
The Employee shall not be entitled to any benefits or other
entitlements under this section unless a Change of Control actually occurs.
(c) A "Change of Control" of the Company shall be deemed to have
occurred if, following consummation of the IPO (i) any "person" as such term is
defined in Section 3(a)(9) and as used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), excluding the Company or
any of its subsidiaries, a trustee or any fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, an underwriter
temporarily holding securities pursuant to an offering of such securities or a
corporation owned, directly or indirectly, by shareholders of the Company in
substantially the same proportion as their ownership of the Company, is or
becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 40% or
more of the combined voting power of the Company's then outstanding securities
("Voting Securities"); (ii) during any period of not more than two years,
individuals who constitute the Board of Directors of the Company (the "Board")
as of the beginning of the period and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i) or (iii) of this sentence) whose
election by the Board or nomination for election by the Company's shareholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at such time or whose election or nomination
for election was previously so approved, cease for any reason to constitute a
majority thereof; (iii) the shareholders of the Company approve a merger,
consolidation or reorganization or a court of competent jurisdiction approves a
scheme of arrangement of the Company, other than a merger, consolidation,
reorganization or scheme of arrangement which would result in the Voting
Securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into Voting
Securities of the surviving entity) at least 40% of the combined voting power of
the Voting Securities of the Company or such
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<PAGE> 7
surviving entity outstanding immediately after such merger, consolidation,
reorganization or scheme of arrangement; or (iv) the shareholders of the Company
approve a plan of complete liquidation of the Company or any agreement for the
sale of substantially all of the Company's assets.
(d) The provisions of this Section 12 shall only apply following the
consummation of an IPO.
Section 13. Agreement Not to Compete.
(a) The Employee hereby covenants and agrees that at no time during
the Term of Employment nor for a period of one year immediately following the
termination of the Employee's employment for any reason, will he for himself or
on behalf of any other person, partnership, company or corporation, directly or
indirectly, acquire any financial or beneficial interest in (except as provided
in the next sentence), provide consulting or other services to, be employed by,
or own, manage, operate or control any entity engaged in the financial guaranty
insurance or reinsurance business similar to the business engaged in by the
Company or the Operating Company at the time of such termination of employment.
Notwithstanding the preceding sentence, the Employee shall not be prohibited
from owning less than one (1%) percent of any publicly traded corporation,
whether or not such corporation is in competition with the Company or the
Operating Company.
(b) The Employee hereby covenants and agrees that, at all times
during the Term of Employment and for a period of two years immediately
following the termination thereof, the Employee shall not directly or indirectly
employ or seek to employ any person or entity employed at that time by the
Company or any of its subsidiaries, or otherwise encourage or entice such person
or entity to leave such employment.
(c) This Section 13 shall be null and void if the Board of Directors
elects to discontinue permanently the Company's operations or if the IPO has not
been consummated by March 31, 1999.
Section 14. Confidential Information.
The Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to the Company or any affiliate
of the Company, including, without limitation, customer lists, client lists,
trade secrets, business plans, financial models, pricing policies and other
business affairs of the Company and any affiliate of the Company learned by him
from the Company or any such affiliate or otherwise before or after the date of
this Agreement, and not to disclose any such confidential matter to anyone
outside the Company or any of its affiliates, whether during or after his period
of service with the Company, except as may be required in the course of a legal
or governmental proceeding. Upon request by the Company, the Employee agrees to
deliver promptly to the Company upon termination of his services for the
Company, or at any time thereafter as the Company may request, all Company or
affiliate memoranda, notes, records, reports, manuals, drawings, designs,
computer files in any media and other documents (and all copies thereof)
relating to the Company's or any affiliate's
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<PAGE> 8
business and all property of the Company or any affiliate associated therewith,
which he may then possess or have under his control.
Section 15. Remedy.
(a) Should the Employee engage in or perform, either directly or
indirectly, any of the acts prohibited by Sections 13 or 14 hereof, it is agreed
that the Company shall be entitled to full injunctive relief, to be issued by
any competent court of equity, enjoining and restraining the Employee and each
and every other person, firm, organization, association, or corporation
concerned therein, from the continuance of such violative acts. The foregoing
remedy available to the Company shall not be deemed to limit or prevent the
exercise by the Company of any or all further rights and remedies which may be
available to the Company hereunder or at law or in equity.
(b) The Employee acknowledges and agrees that the covenants
contained in this Agreement are fair and reasonable in light of the
consideration paid hereunder, and the invalidity or unenforceability of any
particular provision, or part of any provision, of this Agreement shall not
affect the other provisions or parts hereof. If any provision hereof is
determined to be invalid or unenforceable by a court of competent jurisdiction,
the Employee shall negotiate in good faith to provide the Company with
protection as nearly equivalent to that found to be invalid or unenforceable and
if any such provision shall be so determined to be invalid or unenforceable by
reason of the duration or geographical scope of the covenants contained therein,
such duration or geographical scope, or both, shall be considered to be reduced
to a duration or geographical scope to the extent necessary to cure such
invalidity.
Section 16. Indemnification.
The Company and the Operating Company will indemnify the Employee
(and his legal representatives or other successors) to the fullest extent
permitted by the laws of the Islands of Bermuda and in accordance with the terms
of the Company's and the Operating Company's respective Bye-Laws, and the
Employee shall be entitled to the protection of any insurance policies the
Company or the Operating Company may elect to maintain generally for the benefit
of their directors and officers, against all costs, charges and expenses
whatsoever incurred or sustained by the Employee or his legal representatives in
connection with any action, suit or proceeding to which he (or his legal
representatives or other successors) may be made a party by reason of his being
or having been a director or officer of the Company or the Operating Company.
Section 17. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
Employee, his heirs, executors, administrators and beneficiaries, and the
Company, the Operating Company and their successors and assigns.
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<PAGE> 9
Section 18. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the Islands of Bermuda, without reference to rules
relating to conflicts of law.
Section 19. Entire Agreement.
This Agreement constitutes the full and complete understanding and
agreement of the parties and supersedes all prior understandings and agreements
as to employment of the Employee. This Agreement cannot be amended, changed,
modified or terminated without the written consent of the parties hereto.
Section 20. Waiver of Breach.
The waiver by either party of a breach of any term of this Agreement
shall not operate nor be construed as a waiver of any subsequent breach thereof.
Section 21. Notices.
Any notice, report, request or other communication given under this
Agreement shall be written and shall be effective upon delivery when delivered
personally, by Federal Express or by fax.
Unless otherwise notified by any of the parties, notices shall be
sent to the parties as follows:
To Employee: Donald J. Matthews
----------------
----------------
----------------
----------------
To the
Company: Global Markets Access Ltd.
Victoria Hall, Victoria Street
P.O. Box HM 1262
Hamilton, HM FX, Bermuda
Section 22. Severability.
If any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
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<PAGE> 10
Section 23. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as on the day and year first above written.
By: /s/ Donald J. Matthews
--------------------------------------
Donald J. Matthews
GLOBAL MARKETS ACCESS LTD.
By: /s/ Robert M. Lichten
--------------------------------------
Robert M. Lichten
Chairman
GLOBAL MARKETS GUARANTY LTD.
By: /s/ Robert M. Lichten
--------------------------------------
Robert M. Lichten
Chairman
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<PAGE> 1
Exhibit 10.2
GLOBAL MARKETS ACCESS LTD.
INITIAL STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
PAGE
PURPOSE .......................................................................1
SECTION 1 - Definitions.......................................................1
SECTION 2 - Administration....................................................4
SECTION 3 - Eligibility.......................................................4
SECTION 4 - Common Shares.....................................................4
SECTION 5 - Annual Limit......................................................5
SECTION 6 - Granting of Options to Key Employees and Consultants..............5
SECTION 7 - Terms and Conditions of Options to Key Employees and Consultants..6
SECTION 8 - Options for Non-Employee Directors...............................11
SECTION 9 - Option Agreements - Other Provisions.............................14
SECTION 10 - Capital Adjustments..............................................15
SECTION 11 - Amendment or Discontinuance of the Plan..........................15
SECTION 12 - Termination of Plan..............................................17
SECTION 13 - Shareholder Approval.............................................17
SECTION 14 - Miscellaneous....................................................17
SECTION 15 - Change in Control................................................18
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<PAGE> 3
GLOBAL MARKETS ACCESS LTD.
INITIAL STOCK OPTION PLAN
PURPOSE
This GLOBAL MARKETS ACCESS LTD. INITIAL STOCK OPTION PLAN is
intended to provide a means whereby Global Markets Access Ltd. may, through the
grant of Options to purchase Common Shares of the Company to Key Employees,
Non-Employee Directors, and Consultants attract and retain such individuals and
motivate them to exercise their best efforts on behalf of the Company and of any
Related Corporation.
SECTION 1 - DEFINITIONS
As used in the Plan the following words and terms shall have the
meaning hereinafter set forth unless the context clearly indicates otherwise:
(a) BOARD. The term "Board" shall mean the Board of Directors of the
Company.
(b) CODE. The term "Code" shall mean the Internal Revenue Code of
1986, as amended.
(c) COMMITTEE. The term "Committee" shall mean the Company's
Compensation Committee which shall consist of not less than two (2)
directors of the Company and who shall be appointed by, and shall serve at
the pleasure of, the Board. Each member of such Committee, while serving
as such, shall be deemed to be acting in his or her capacity as a director
of the Company. On and after the date the Company first registers equity
securities under Section 12 of the Exchange Act, it is intended that each
member of the Committee shall be a Rule 16b-3 Non-Employee Director.
Notwithstanding the foregoing, if the Committee does not consist solely of
two (2) or more Rule 16b-3 Non-Employee Directors, the full Board shall
serve as the Committee if it is intended that Options satisfy the advance
approval requirements of 17 CFR Section 240.16b-3.
(d) COMMON SHARES. The term "Common Shares" shall mean the common
shares of the Company, par value $1.00 per share.
(e) COMPANY. The term "Company" shall mean Global Markets Access
Ltd., a Bermuda corporation.
(f) CONSULTANT. The term "Consultant" shall mean a consultant or
advisor who is not an employee of the Company or a Related Corporation and
is not a Non-
<PAGE> 4
Employee Director, but may include directors, officers, employees and
partners of Inter-Atlantic Capital Partners, Inc. or its affiliates.
(g) EXCHANGE ACT. The term "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(h) FAIR MARKET VALUE. The term "Fair Market Value" shall mean the
fair market value of the optioned Common Shares arrived at by a good faith
determination of the Committee and shall be:
(1) The quoted closing price, if there is a market for the
Common Shares on a registered securities exchange or in an over the
counter market, on the date of grant;
(2) The weighted average of the quoted closing prices on the
nearest date before and the nearest date after the date of grant, if
there are no sales on the date of grant but there are sales on dates
within a reasonable period both before and after the date of grant;
(3) The mean between the bid and asked prices, as reported by
the National Quotation Bureau on the date of grant, if actual sales
are not available during a reasonable period beginning before and
ending after the date of grant; or
(4) Such other method of determining fair market value as
shall be authorized by the Code, or the rules or regulations
thereunder, and adopted by the Committee.
Where the fair market value of the optioned Common Shares is
determined under (2) above, the average of the quoted closing prices on
the nearest date before and the nearest date after the date of grant is to
be weighted inversely by the respective numbers of trading days between
the selling dates and the date of grant (i.e., the valuation date), in
accordance with Treas. Reg. Section 20.2031-2(b)(1).
(i) ISO. The term "ISO" shall mean an Option which, at the time such
Option is granted, qualifies as an incentive stock option within the
meaning of section 422 of the Code.
(j) KEY EMPLOYEE. The term "Key Employee" shall mean an officer or
and other key employee of the Company or of a Related Corporation.
(k) NON-EMPLOYEE DIRECTOR. The term "Non-Employee Director" shall
mean a director of the Company who is not an employee of the Company or a
Related Corporation.
(l) NQSO. The term "NQSO" shall mean an Option which is not an ISO,
and/or is designated as an NQSO in the Option Agreement.
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<PAGE> 5
(m) OPTION. The term "Option" shall mean any stock option granted to
a Key Employee, Non-Employee Director, or Consultant under Sections 7 and
8 hereof.
(n) OPTION AGREEMENT. The term "Option Agreement" shall mean a
written document evidencing the grant of an Option, as described in
Section 9.
(o) OPTIONEE. The term "Optionee" shall mean a Key Employee,
Non-Employee Director, or Consultant to whom an Option has been granted.
(p) PLAN. The term "Plan" shall mean the Global Markets Access Ltd.
Initial Stock Option Plan, as set forth herein and as amended from time to
time.
(q) RELATED CORPORATION. The term "Related Corporation" shall mean
either a corporate subsidiary of the Company, as defined in section 424(f)
of the Code, or the corporate parent of the Company, as defined in section
424(e) of the Code.
(r) RULE 16b-3 NON-EMPLOYEE DIRECTOR. The term "Rule 16b-3
Non-Employee Director" shall mean a director who:
(1) Is not currently an officer (as defined in 17
CFR Section 240.16a-1(f)) of, or otherwise currently employed by,
the Company or a parent or subsidiary of the Company within the
meaning of 17 CFR Section 240.16b-3(b)(3);
(2) Does not receive compensation, either directly or
indirectly, from the Company or a parent or subsidiary of the
Company within the meaning of 17 CFR Section 240.16b-3(b)(3) for
services rendered as a consultant or in any other capacity other
than as a director, except for an amount that does not exceed the
dollar amount for which disclosure would be required under 17
CFR Section 229.404(a);
(3) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to 17 CFR Section
229.404(a); and
(4) Is not engaged in a business relationship for which
disclosure would be required pursuant to 17 CFR Section 229.404(b).
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<PAGE> 6
SECTION 2 - ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall
have full authority, subject to the terms of the Plan, to select the Key
Employees and Consultants to be granted ISOs and/or NQSOs under the Plan, to
grant Options on behalf of the Company and to set the date of grant and the
other terms of such Options. Options granted to Non-Employee Directors shall be
granted pursuant to the formula set forth in Section 8(a) hereof.
The Committee may correct any defect, supply any omission and
reconcile any inconsistency in this Plan and in any Option granted hereunder in
the manner and to the extent it shall deem desirable. The Committee also shall
have the authority to establish such rules and regulations, not inconsistent
with the provisions of the Plan, for the proper administration of the Plan, and
to amend, modify or rescind any such rules and regulations, and to make such
determinations and interpretations under, or in connection with, the Plan, as it
deems necessary or advisable. All such rules, regulations, determinations and
interpretations shall be binding and conclusive upon the Company, its
shareholders and all employees, directors, and consultants, and upon their
respective legal representatives, beneficiaries, successors and assigns and upon
all other persons claiming under or through any of them.
No member of the Board or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under it.
SECTION 3 - ELIGIBILITY
Key Employees, Non-Employee Directors, and Consultants shall be
eligible to receive Options under the Plan. Key Employees shall be eligible to
receive ISOs and/or NQSOs. Non-Employee Directors and Consultants shall be
eligible to receive only NQSOs. More than one Option may be granted to a Key
Employee, Non-Employee Director, or Consultant under the Plan.
SECTION 4 - COMMON SHARES
Options may be granted under the Plan to purchase up to a maximum of
2,000,000 Common Shares, provided that, if prior to June 30, 1999 there has been
an initial public offering of the Common Shares, such maximum number of Common
Shares shall be automatically adjusted to equal the lesser of (a) five and
one-half percent (5.5%) of the Common Shares of the Company outstanding
immediately following such initial public offering (including any shares issued
pursuant to the overallotment options granted to the underwriters of such
offering) and any concurrent private placement of Common Shares or (b) 2,000,000
Common Shares, and provided further that such maximum number of Common Shares
shall be subject to further adjustment as
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<PAGE> 7
provided in Section 10 hereof. Shares issuable under the Plan may be authorized
but unissued shares or reacquired shares, and the Company may purchase shares
required for this purpose, from time to time, if it deems such purchase to be
advisable.
If any Option granted under the Plan expires or otherwise terminates
for any reason whatever (including, without limitation, the Optionee's surrender
thereof) without having been exercised, the shares subject to the unexercised
portion of such Option shall continue to be available for the granting of
Options under the Plan as fully as if such shares had never been subject to an
Option.
SECTION 5 - ANNUAL LIMIT
(a) ISOs. The aggregate Fair Market Value (determined as of the date
the ISO is granted) of the Common Shares with respect to which ISOs are
exercisable for the first time by a Key Employee during any calendar year
(under this Plan and any other ISO plan of the Company or a Related
Corporation) shall not exceed one hundred thousand dollars ($100,000).
(b) OPTIONS OVER ANNUAL LIMIT. If an Option intended as an ISO is
granted to a Key Employee and such Option may not be treated in whole or
in part as an ISO pursuant to the limitation in subsection (a) above, such
Option shall be treated as an ISO to the extent it may be so treated under
such limitation and as an NQSO as to the remainder, but shall continue to
be subject to the provisions of the Plan that apply to ISOs. For purposes
of determining whether an ISO would cause such limitation to be exceeded,
the Key Employee's incentive stock options shall be taken into account in
the order granted.
(c) NQSOs. The annual limit set forth above for ISOs shall not apply
to NQSOs.
SECTION 6 - GRANTING OF OPTIONS TO KEY EMPLOYEES AND CONSULTANTS
From time to time until the expiration or earlier suspension or
discontinuance of the Plan, the Committee may, on behalf of the Company, grant
to Key Employees and Consultants under the Plan such Options as it determines
are warranted; provided, however, that grants of ISOs and NQSOs shall be
separate and not in tandem. The granting of an Option under the Plan shall not
be deemed either to entitle the Key Employee or Consultant to, or to disqualify
the Key Employee or Consultant from, any participation in any other grant of
Options under the Plan. In making any determination as to whether a Key Employee
or Consultant shall be granted an Option and as to the number of shares to be
covered by such Option, the Committee shall take into account the duties of the
Key Employee or Consultant, his or her present and potential contributions to
the success of the Company or a Related Corporation, and such other factors as
the Committee shall deem relevant in accomplishing the purposes of the Plan.
Moreover, the Committee may provide in the Option that
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<PAGE> 8
said Option may be exercised only if certain conditions, as determined by the
Committee, are fulfilled.
SECTION 7 - TERMS AND CONDITIONS OF OPTIONS TO KEY EMPLOYEES AND CONSULTANTS
The Options granted pursuant to the Plan to Key Employees and
Consultants shall include expressly or by reference the following terms and
conditions, as well as such other provisions not inconsistent with the
provisions of this Plan and, for ISOs, the provisions of section 422(b) of the
Code, as the Committee shall deem desirable:
(a) NUMBER OF SHARES. A statement of the number of Common Shares to
which the Option pertains.
(b) PRICE. A statement of the Option exercise price, which shall be
determined and fixed by the Committee in its discretion but, in the case
of an ISO, shall not be less than the higher of one hundred percent (100%)
(one hundred ten percent (110%) in the case of more than ten percent (10%)
shareholders as discussed in Subsection (j) below) of the Fair Market
Value of the optioned Common Shares, or the par value thereof, on the date
the ISO is granted.
(c) TERM.
(1) ISOs. Subject to earlier termination as provided in
Subsections (e), (f) and (g) below and in Section 10 hereof, the
term of each ISO shall be not more than ten (10) years (five (5)
years in the case of more than ten percent (10%) shareholders as
discussed in (j) below) from the date of grant.
(2) NQSOs. Subject to earlier termination as provided in
Subsections (e), (f) and (g) below and in Section 10 hereof, the
term of each NQSO shall be not more than ten (10) years from the
date of grant.
(d) EXERCISE.
(1) GENERAL. Unless otherwise provided in the Option
Agreement, Options shall become exercisable in three (3) equal
annual installments, commencing with the first anniversary of the
grant date; provided that the Committee may accelerate the exercise
date of any outstanding Options, in its discretion, if it deems such
acceleration to be desirable.
Any Common Shares, the right to the purchase of which has
accrued under an Option, may be purchased at any time up to the
expiration or termination of the Option. Exercisable Options may be
exercised, in whole or in part, from time to time by giving written
notice of exercise to the Company at its principal office,
specifying the number of Common Shares to be purchased and
accompanied by payment in full of the aggregate Option exercise
price for such shares. Only full
<PAGE> 9
shares shall be issued under the Plan, and any fractional share
which might otherwise be issuable upon exercise of an Option granted
hereunder shall be forfeited.
(2) MANNER OF PAYMENT. The Option exercise price shall be
payable:
(A) In cash or its equivalent;
(B) If the Committee, in its discretion, so provides in
the Option Agreement (as hereinafter defined) or, in the case
of Options which are not ISOs, if the Committee, in its
discretion, so determines at or prior to the time of exercise,
in whole or in part, in Common Shares previously acquired by
the Optionee, provided that the Committee, in its discretion,
may require (i) if such Common Shares were acquired through
the exercise of an ISO and are used to pay the Option exercise
price of an ISO, such shares have been held by the Optionee
for a period of not less than the holding period described in
section 422(a)(1) of the Code on the date of exercise, or (ii)
if such Common Shares were acquired through exercise of an
NQSO or of an option under a similar plan or through exercise
of an ISO and are used to pay the Option exercise price of an
NQSO, such shares have been held by the Optionee for a period
of more than six (6) months on the date of exercise;
(C) If the Committee, in its discretion, so provides in
the Option Agreement or, in the case of Options which are not
ISOs, if the Committee, in its discretion, so determines at or
prior to the time of exercise, in whole or in part, in Common
Shares newly acquired by the Optionee upon exercise of such
Option (which shall constitute a disqualifying disposition in
the case of an Option which is an ISO);
(D) If the Committee, in its discretion, so provides in
the Option Agreement or, in the case of Options which are not
ISOs, if the Committee, in its discretion, so determines at or
prior to the time of exercise, in any combination of (A), (B)
and/or (C) above; or
(E) If the Committee, in its discretion, so provides in
the Option Agreement or, in the case of Options which are not
ISOs, if the Committee, in its discretion, so determines at or
prior to the time of exercise, by permitting the Optionee to
deliver a properly executed notice of exercise of the Option
to the Company and a broker, with irrevocable instructions to
the broker promptly to deliver to the Company the amount of
sale or loan proceeds necessary to pay the exercise price of
the Option.
In the event such Option exercise price is paid, in whole or in
part, with Common Shares, the portion of the Option exercise price so paid
shall be equal to
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<PAGE> 10
the Fair Market Value on the date of exercise of the Option of the Common
Shares surrendered in payment of such Option exercise price.
(e) TERMINATION OF EMPLOYMENT OR SERVICE.
(1) GENERAL. If an Optionee's employment or service with the
Company (and Related Corporations) is terminated by either party
prior to the expiration date fixed for his or her Option for any
reason other than death, disability, or Cause (as described in
paragraph (2) below), such Option may be exercised, to the extent of
the number of Common Shares with respect to which the Optionee could
have exercised it on the date of such termination, or to any greater
extent permitted by the Committee, by the Optionee at any time prior
to the earlier of:
(A) The expiration date fixed for such Option; or
(B) An accelerated termination date determined by the
Committee, in its discretion, except that, subject to Section
10 hereof, such accelerated termination date shall not be
earlier than the date of the Optionee's termination of
employment or service and, unless otherwise determined by the
Committee, in its discretion, shall not be later than three
(3) months after the date of such termination of employment.
(2) CAUSE. If an Optionee's employment or service with
the Company (and Related Corporations) is terminated by the
Company (or a Related Corporation) prior to the expiration
date fixed for his or a her Option for Cause (as described
below), such Option may be exercised, to the extent of the
number of Common Shares with respect to which the Optionee
could have exercised it on the date of such termination, or to
any greater extent permitted by the Committee, by the Optionee
at any time prior to the earlier of:
(A) The expiration date fixed for such Option; or
(B) An accelerated termination date determined by the
Committee, in its discretion, except that, subject to Section
10 hereof, such accelerated termination date shall not be
earlier than the date of the Optionee's termination of
employment or service and, unless otherwise determined by the
Committee, in its discretion, shall not be later than three
(3) months after the date of such termination of employment.
For purposes of this Plan, unless otherwise defined in an
Optionee's employment or service contract with the Company or a
Related Corporation, "Cause" shall include insubordination, gross
incompetence or misconduct in the performance of, or gross neglect
of, Optionee's duties, willful violation of any express direction or
of any rule or regulation applicable to such Optionee, any act of
fraud or intentional misrepresentation, or embezzlement,
misappropriation, or conversion of assets or opportunities of the
Company or a Related Corporation.
(f) EXERCISE UPON DISABILITY OF OPTIONEE. If an Optionee shall become
disabled (within the meaning of section 22(e)(3) of the Code) during his
or her employment or service and, prior to the expiration date fixed for
his or her Option, his or her employment or service is terminated as a
consequence of such disability, such Option may be exercised, to the
extent of the number of Common Shares with respect to which the Optionee
could have exercised it on the date of such termination, or to any greater
extent permitted by the Committee, by the Optionee at any time prior to
the earlier of:
(1) The expiration date fixed for the Option; or
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<PAGE> 11
(2) An accelerated termination date determined by the
Committee, in its discretion, except that, subject to Section 10
hereof, such accelerated termination date shall not be earlier than
the date of termination of employment or service by reason of
disability and, unless otherwise determined by the Committee, in its
discretion, shall not be later than one (1) year after the date of
such termination of employment.
In the event of the Optionee's legal disability, such Option may be so
exercised by the Optionee's legal representative.
(g) EXERCISE UPON DEATH OF OPTIONEE. If an Optionee shall die during
his or her employment or service and prior to the expiration date fixed
for his or her Option, or if an Optionee whose employment or service is
terminated for any reason shall die following his or her termination of
employment or service, but prior to the earlier of:
(1) The expiration date fixed for such Option; or
(2) The expiration of the period determined under Subsections
(e) and (f) above, if applicable;
such Option may be exercised, to the extent of the number of Common Shares
with respect to which the Optionee could have exercised it on the date of
his or her death, or to any greater extent permitted by the Committee, by
the Optionee's estate, personal representative or beneficiary who acquired
the right to exercise such Option by bequest or inheritance or by reason
of the death of the Optionee, at any time prior to the earlier of:
(A) The expiration date specified in such Option (which
may be the expiration date determined under Subsections (e)
and (f) above, if applicable); or
(B) An accelerated termination date determined by the
Committee, in its discretion except that, subject to Section
10 hereof, such accelerated termination date shall not be
later than one (1) year after the date of death.
(h) NON-TRANSFERABILITY.
(1) ISOs. No ISO shall be assignable or transferable by a Key
Employee otherwise than by will or by the laws of descent and
distribution, and during the lifetime of the Key Employee, the ISO
shall be exercisable only by him or by his or her guardian or legal
representative. If the Key Employee is married at the time of
exercise and if the Key Employee so requests at the time of
exercise, the certificate or certificates shall be registered in the
name of the Key Employee and the Key Employee's spouse, jointly,
with right of survivorship.
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<PAGE> 12
(2) NQSOs. Except as otherwise provided in any Option
Agreement, no NQSO shall be assignable or transferable by the
Optionee otherwise than by will or by the laws of descent and
distribution, and during the lifetime of the Optionee, the NQSO
shall be exercisable only by him or by his or her guardian or legal
representative. If the Optionee is married at the time of exercise
and if the Optionee so requests at the time of exercise, the
certificate or certificates shall be registered in the name of the
Optionee and his or her spouse, jointly, with right of survivorship.
(i) RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights as a
shareholder with respect to any shares covered by his or her Option until
the issuance of a share certificate to him or her for such shares.
(j) TEN PERCENT SHAREHOLDER. If a Key Employee owns more than ten
percent (10%) of the total combined voting power of all shares of stock of
the Company or of a Related Corporation at the time an ISO is granted to
such Key Employee, the Option exercise price for the ISO shall be not less
than one hundred ten percent (110%) of the Fair Market Value of the
optioned Common Shares on the date the ISO is granted, and such ISO, by
its terms, shall not be exercisable after the expiration of five (5) years
from the date the ISO is granted. The conditions set forth in this
Subsection (j) shall not apply to NQSOs.
(k) LISTING AND REGISTRATION OF SHARES. Each Option shall be subject
to the requirement that, if at any time the Committee shall determine, in
its discretion, that the listing, registration or qualification of the
shares covered thereby upon any securities exchange or under any
applicable law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with,
the granting of such Option or the purchase of shares thereunder, or that
action by the Company or by the Optionee should be taken in order to
obtain an exemption from any such requirement, no such Option may be
exercised, in whole or in part, unless and until such listing,
registration, qualification, consent, approval, or action shall have been
effected, obtained, or taken under conditions acceptable to the Committee.
Without limiting the generality of the foregoing, each Optionee or his or
her legal representative or beneficiary may also be required to give
satisfactory assurance that shares purchased upon exercise of an Option
are being purchased for investment and not with a view to distribution,
and certificates representing such shares may be legended accordingly.
(l) WITHHOLDING AND USE OF SHARES TO SATISFY TAX OBLIGATIONS. The
obligation of the Company to deliver Common Shares upon the exercise of
any Option shall be subject to applicable tax withholding requirements.
If the exercise of any Option is subject to the withholding
requirements of applicable tax laws, the Committee, in its discretion (and
subject to such withholding rules ("Withholding Rules") as shall be
adopted by the Committee), may permit the Optionee to satisfy the minimum
required withholding tax, in whole or in part, by electing to have the
Company withhold (or by returning to the Company) Common Shares, which
shares shall be valued, for this purpose, at their Fair Market Value on
the date of exercise of the Option
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<PAGE> 13
(or if later, the date on which the Optionee recognizes ordinary income
with respect to such exercise). An election to use Common Shares to
satisfy tax withholding requirements must be made in compliance with and
subject to the Withholding Rules. The Committee may not withhold shares in
excess of the number necessary to satisfy the minimum tax withholding
requirements.
SECTION 8 - OPTIONS FOR NON-EMPLOYEE DIRECTORS
(a) GRANTING OF OPTIONS TO OUTSIDE DIRECTORS.
(1) Each Non-Employee Director listed on Schedule A hereto
shall be granted an NQSO to purchase the number of Common Shares set
forth opposite his name on Schedule A hereto on the date of the
Company's initial public offering of its Common Shares.
(2) With the exception of the Non-Employee Directors that
receive NQSOs pursuant to Section 8(a)(1), each person who becomes a
Non-Employee Director shall be granted an NQSO to purchase 15,000
Common Shares on the later of (A) the date he or she becomes a
Non-Employee Director and (B) the date of the Company's initial
public offering of its Common Shares.
(3) In addition, with respect to the Company's first annual
shareholder's meeting after June 30, 1999 and each subsequent annual
shareholder's meeting of the Company, each Non-Employee Director
whose term as a director has not ended as of the date of such annual
shareholder's meeting shall be granted an NQSO to purchase 2,000
Common Shares as of the day of such annual shareholder's meeting.
(b) TERMS AND CONDITIONS OF OPTIONS. Options granted to Non-Employee
Directors shall expressly specify that they are NQSOs. In addition, such
Options shall include expressly or by reference the following terms and
conditions, as well as such other provisions not inconsistent with the
provisions of this Plan:
(1) NUMBER OF SHARES. A statement of the number of Common
Shares to which the Option pertains.
(2) PRICE. A statement of the Option exercise price, which
shall be (A) the initial public offering price of the Common Shares
for Options granted on the date of the Company's initial public
offering of its Common Shares, or (B) one hundred percent (100%) of
the Fair Market Value of the optioned Common Shares on the date the
Option is granted for all other Options.
(3) TERM. Subject to earlier termination as provided in
Subsections (5), (6) and (7) below, the term of each Option granted
under this Section 8 shall be 10 years from the date of grant.
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<PAGE> 14
(4) EXERCISE.
(A) GENERAL. Options granted under Sections 8(a)(1) and
8(a)(2) shall become exercisable in three (3) equal annual
installments, commencing with the first anniversary of the
grant date. Options granted under Section 8(a)(3) shall be
immediately exercisable as of the grant date, provided that if
such date is not at least one year after the date upon which
the Company's initial public offering of its Common Shares was
consummated, such Options shall become exercisable on the
first anniversary of the consummation of such initial public
offering. Any Common Shares, the right to the purchase of
which has accrued under an Option, may be purchased at any
time up to the expiration or termination of the Option.
Exercisable Options may be exercised, in whole or in part,
from time to time by giving written notice of exercise to the
Company at its principal office, specifying the number of
Common Shares to be purchased and accompanied by payment in
full of the aggregate Option exercise price for such shares.
Only full shares shall be issued under the Plan, and any
fractional share which might otherwise be issuable upon the
exercise of an Option granted hereunder shall be forfeited.
(B) MANNER OF PAYMENT. The Option exercise price shall
be payable:
(i) In cash or its equivalent;
(ii) Unless in the opinion of counsel to the
Company to do so may result in a possible violation of
law, in whole or in part through the transfer of Common
Shares previously acquired by the Non-Employee Director,
provided that if such Common Shares were acquired
through exercise of an NQSO or of an option under a
similar plan, such Common Shares so transferred shall
have been held by the Non-Employee Director for more
than six (6) months on the date of exercise;
(iii) Unless in the opinion of counsel to the
Company to do so may result in a possible violation of
law, in whole or in part, in Common Shares newly
acquired by the Non-Employee Director upon the exercise
of such Option; or
(iv) In any combination of (i), (ii), and/or (iii)
above.
In the event such Option exercise price is paid, in whole or
in part, with Common Shares, the portion of the Option exercise
price so paid shall equal the Fair Market Value on the date of
exercise of the Option of the Common Shares surrendered in payment
of such Option exercise price.
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<PAGE> 15
(5) EXPIRATION OF TERM OR REMOVAL AS DIRECTOR. If a
Non-Employee Director's service as a director of the Company
terminates prior to the expiration date fixed for his or her Option
for any reason (such as, without limitation, failure to be
re-elected by the Company's shareholders) other than by disability,
death, or Cause (as described in Section 7(e)(2) above), such Option
may be exercised, to the extent of the number of Common Shares with
respect to which the Non-Employee Director could have exercised it
on the date of such termination, by the Non-Employee Director at any
time prior to the earlier of:
(A) The expiration date fixed for such Option; or
(B) Three (3) months after the date of such termination
of service as a director.
If a Non-Employee Director's service as a director of the
Company terminates by reason of Cause prior to the expiration date
fixed for his or her Option, such Option shall terminate
immediately.
(6) EXERCISE UPON DISABILITY OF NON-EMPLOYEE DIRECTOR. If a
Non-Employee Director shall become disabled (within the meaning of
section 22(e)(3) of the Code) during his or her term as a director
of the Company and, prior to the expiration date fixed for his or
her Option, his or her term as a director is terminated as a
consequence of such disability, such Option may be exercised, to the
extent of the number of Common Shares with respect to which the
Non-Employee Director could have exercised it on the date of such
termination, by the Non-Employee Director at any time prior to the
earlier of:
(A) The expiration date fixed for such Option; or
(B) One year after the date of such termination of
service as a director.
In the event of the Non-Employee Director's legal disability,
such Option may be so exercised by his or her legal representative.
(7) EXERCISE UPON DEATH OF NON-EMPLOYEE DIRECTOR. If a
Non-Employee Director shall die during his or her term as a director
of the Company and prior to the expiration date fixed for his or her
Option, or if a Non-Employee Director whose term as a director has
been terminated for any reason shall die following his or her
termination as a director, but prior to the earlier of:
(A) The expiration date fixed for such Option; or
(B) The expiration of the period determined under
Subsections (5) and (6) above, if applicable;
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<PAGE> 16
such Option may be exercised, to the extent of the number of Common
Shares with respect to which the Non-Employee Director could have
exercised it on the date of his or her death, by the Non-Employee
Director's estate, personal representative or beneficiary who
acquired the right to exercise such Option by bequest or inheritance
or by reason of the death of the Non-Employee Director, at any time
prior to the earlier of:
(i) The expiration date specified in such Option
(which may be the expiration date determined under
Subsections (5) and (6) above, if applicable); or
(ii) One year after the date of death.
(8) RIGHTS AS A SHAREHOLDER. A Non-Employee Director shall
have no rights as a shareholder with respect to any shares covered
by his or her Option until the issuance of a share certificate to
him or her for such shares.
(9) LISTING AND REGISTRATION OF SHARES. Each Option shall be
subject to the requirement that, if at any time the Committee shall
determine, in its discretion, that the listing, registration or
qualification of the shares covered thereby upon any securities
exchange or under any applicable law, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such Option or
the purchase of shares thereunder, or that action by the Company or
by the Optionee should be taken in order to obtain an exemption from
any such requirement, no such Option may be exercised, in whole or
in part, unless and until such listing, registration, qualification,
consent, approval, or action shall have been effected, obtained, or
taken under conditions acceptable to the Committee. Without limiting
the generality of the foregoing, each Optionee or his or her legal
representative or beneficiary may also be required to give
satisfactory assurance that shares purchased upon exercise of an
Option are being purchased for investment and not with a view to
distribution, and certificates representing such shares may be
legended accordingly.
SECTION 9 - OPTION AGREEMENTS - OTHER PROVISIONS
Options granted under the Plan shall be evidenced by Option
Agreements in such form as the Committee shall, from time to time, approve,
which Option Agreements shall contain such provisions, not inconsistent with the
provisions of the Plan for NQSOs granted pursuant to the Plan, and such
conditions, not inconsistent with section 422(b) of the Code or the provisions
of the Plan for ISOs granted pursuant to the Plan, as the Committee shall deem
advisable, and which Option Agreements shall specify whether the Option is an
ISO or NQSO; provided, however, if the Option is not designated in the Option
Agreement as an ISO or NQSO, the Option shall constitute an ISO if it complies
with the terms of section 422 of the Code, and otherwise, it shall constitute an
NQSO. Each Optionee shall enter into, and be bound by, such Option Agreement.
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<PAGE> 17
SECTION 10 - CAPITAL ADJUSTMENTS
The number of shares which may be issued under the Plan, and the
maximum number of shares with respect to which options may be granted during a
specified period to any Key Employee, Non-Employee Director, or Consultant under
the Plan, as stated in Section 4 hereof, and the number of shares issuable upon
exercise of outstanding Options under the Plan (as well as the Option exercise
price per share under such outstanding Options), shall, subject to the
provisions of section 424(a) of the Code, be adjusted to reflect any stock
dividend, stock split, share combination, or similar change in the
capitalization of the Company.
In the event of a corporate transaction (as that term is described
in section 424(a) of the Code and the Treasury Regulations issued thereunder as,
for example, a merger, consolidation, acquisition of property or stock,
separation, reorganization, or liquidation), each outstanding Option shall be
assumed by the surviving or successor corporation or by a parent or subsidiary
of such corporation if such corporation is the employer corporation (as provided
in section 424(a) of the Code and the regulations thereunder); provided,
however, that, in the event of a proposed corporate transaction, the Committee
may terminate all or a portion of the outstanding Options to Key Employees and
Consultants if it determines that such termination is in the best interests of
the Company. If the Committee decides to terminate outstanding Options, the
Committee shall give each Key Employee and Consultant holding an Option to be
terminated not less than seven (7) days' notice prior to any such termination by
reason of such a corporate transaction, and any such Option which is to be so
terminated may be exercised (if and only to the extent that it is then
exercisable) up to, and including the date immediately preceding such
termination. Further, as provided in Section 7 hereof the Committee, in its
discretion, may accelerate, in whole or in part, the date on which any or all
Options granted to Key Employees and Consultants become exercisable.
The Committee also may, in its discretion, change the terms of any
outstanding Option to reflect any such corporate transaction, provided that, in
the case of ISOs, such change is excluded from the definition of a
"modification" under section 424(h) of the Code.
SECTION 11 - AMENDMENT OR DISCONTINUANCE OF THE PLAN
(a) GENERAL. The Board from time to time may suspend or discontinue
the Plan or amend it in any respect whatsoever, except that the following
amendments shall require shareholder approval (given in the manner set
forth in Section 11(b) below):
(1) With respect to ISOs, any amendment which would:
(A) Change the class of employees eligible to
participate in the Plan;
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<PAGE> 18
(B) Except as permitted under Sections 4 and 10
hereof, increase the maximum number of Common
Shares with respect to which ISOs may be granted
under the Plan; or
(C) Extend the duration of the Plan under Section 12
hereof with respect to any ISOs granted hereunder;
and
(2) Any amendment which would require shareholder approval
under 17 CFR Section 240.16b-3 in order for the Plan to continue to
constitute a "formula plan" with respect to Options granted to
Non-Employee Directors, unless (i) the Plan is amended in a manner
that takes advantage of another method of complying with 17
CFR Section 240.16b-3 with respect to Options granted to Non-
Employee Directors, or (ii) compliance with 17 CFR Section 240.16b-3
is not intended.
Notwithstanding the foregoing, no such suspension, discontinuance or
amendment shall materially impair the rights of any holder of an
outstanding Option without the consent of such holder.
(b) SHAREHOLDER APPROVAL REQUIREMENTS. Shareholder approval must
meet the following requirements:
(1) The approval of shareholders must be by a majority of the
votes cast at a meeting duly held in accordance with the applicable
laws of Bermuda; and
(2) The approval of shareholders must comply with all
applicable provisions of the corporate charter, bye-laws, and
applicable law prescribing the method and degree of shareholder
approval required for the issuance of corporate stock or options. If
the applicable law does not prescribe a method and degree of
shareholder approval in such case, the approval of shareholders must
be effected:
(A) By a method and in a degree that would be treated as
adequate under applicable law of Bermuda in the case of an
action requiring shareholder approval (i.e., an action on
which shareholders would be entitled to vote if the action
were taken at a duly held shareholders' meeting); or
(B) By a majority of the votes cast at a duly held
shareholders' meeting at which a quorum representing a
majority of all outstanding voting stock is, either in person
or by proxy, present and voting on the Plan.
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<PAGE> 19
SECTION 12 - TERMINATION OF PLAN
Unless earlier terminated as provided in the Plan, the Plan and all
authority granted hereunder shall terminate absolutely at 12:00 midnight on
October 28, 2008, which date is within ten (10) years after the date the Plan
was adopted by the Board (or the date the Plan was approved by the shareholders
of the Company, whichever is earlier), and no Options hereunder shall be granted
thereafter. Nothing contained in this Section 12, however, shall terminate or
affect the continued existence of rights created under Options issued hereunder
and outstanding on October 28, 2008, which by their terms extend beyond such
date.
SECTION 13 - SHAREHOLDER APPROVAL
This Plan shall become effective on October 28, 1998 (the date the
Plan was adopted by the Board); provided, however, that if the Plan is not
approved by the shareholders in the manner described in Section 11(b), within
twelve (12) months before or after said date, ISOs granted hereunder shall be
null and void and no additional ISOs shall be granted hereunder.
SECTION 14 - MISCELLANEOUS
(a) GOVERNING LAW. With respect to any ISOs granted pursuant to the
Plan and the Option Agreements thereunder, the Plan, such Option
Agreements and any ISOs granted pursuant thereto shall be governed by the
applicable Code provisions to the maximum extent possible. Otherwise, the
operation of, and the rights of Optionees under, the Plan, the Option
Agreements and any Options granted thereunder shall be governed by
applicable United States law and otherwise by the laws of Bermuda.
(b) RIGHTS. Neither the adoption of the Plan nor any action of the
Board or the Committee shall be deemed to give any individual any right to
be granted an Option, or any other right hereunder, unless and until the
Committee shall have granted such individual an Option, and then his or
her rights shall be only such as are provided by the Option Agreement.
Any Option under the Plan shall not entitle the holder thereof to
any rights as a shareholder of the Company prior to the exercise of such
Option and the issuance of the shares pursuant thereto. Further,
notwithstanding any provisions of the Plan or the Option Agreement with an
Optionee, the Company shall have the right, in its discretion, to retire a
Key Employee at any time pursuant to its retirement rules or otherwise to
terminate an Optionee's employment or service at any time for any reason
whatsoever.
(c) INDEMNIFICATION OF BOARD AND COMMITTEE. Without limiting any
other rights of indemnification which they may have from the Company and
any Related
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<PAGE> 20
Corporation, the members of the Board and the members of the Committee
shall be indemnified by the Company against all costs and expenses
reasonably incurred by them in connection with any claim, action, suit, or
proceeding to which they or any of them may be a party by reason of any
action taken or failure to act under, or in connection with, the Plan, or
any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in
any such action, suit, or proceeding, except a judgment based upon a
finding of willful misconduct or recklessness on their part. Upon the
making or institution of any such claim, action, suit, or proceeding, the
Board or Committee member shall notify the Company in writing, giving the
Company an opportunity, at its own expense, to handle and defend the same
before such Board or Committee member undertakes to handle it on his or
her own behalf.
(d) APPLICATION OF FUNDS. Any cash received in payment for Common
Shares upon exercise of an Option shall be added to the general funds of
the Company and shall be used for its corporate purposes. Any Common
Shares received in payment for Common Shares upon exercise of an Option
shall be cancelled.
(e) NO OBLIGATION TO EXERCISE OPTION. The granting of an Option
shall impose no obligation upon an Optionee to exercise such Option.
SECTION 15 - CHANGE IN CONTROL
(a) GENERAL. All outstanding Options shall become fully vested and
exercisable upon a Change in Control of the Company. In the event of a
Change in Control in which outstanding Options are not assumed by the
surviving entity, the Committee shall terminate all outstanding Options on
at least seven days' notice. Any such Option which is to be so terminated
may be exercised up to, and including the date immediately preceding such
termination. In any transaction to which both Section 10 and this Section
15 are applicable, only the provisions of this Section 15 shall apply.
(b) DEFINITION OF CHANGE IN CONTROL. For purposes of this Section
15, a "Change in Control" of the Company shall be deemed to have occurred
if:
(1) Any person, including a group of persons acting in
concert, becomes the beneficial owner of shares of the Company
having 50 percent or more of the total number of votes that may be
cast for the election of directors of the Company;
(2) There occurs any cash tender or exchange offer for shares
of the Company, merger or other business combination, or any
combination of the foregoing transactions, and as a result of or in
connection with any such event persons who were directors of the
Company before the event shall cease to
-18-
<PAGE> 21
constitute a majority of the board of directors of the Company or
any successor to the Company; or
(3) The sale, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the
Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
have occurred by reason of a change in beneficial ownership occurring in
connection with the initial public offering of the Common Shares.
(c) In the event of a Change in Control of the Company in which
holders of Common Shares are entitled only to receive money or other
property exclusive of securities, then in lieu of outstanding Options
being terminated or assumed by the Surviving Entity, each Optionee shall
have the right, at its sole option, to require the Company or such
surviving entity to purchase such Optionee's Options (without prior
exercise by Optionee) at its fair value as of the day before such
transaction became publicly known, as determined by an unaffiliated
internationally recognized accounting firm or investment bank selected by
the Company or such surviving entity and reasonably acceptable to all
electing Optionees.
IN WITNESS WHEREOF, Global Markets Access Ltd. has caused these
presents to be duly executed, under seal, as of this 28th day of October, 1998.
GLOBAL MARKETS ACCESS LTD.
By: /s/ Donald J. Matthews
----------------------------------
Donald J. Matthews,
Chief Executive Officer
-19-
<PAGE> 22
Schedule A
<TABLE>
<CAPTION>
Number of
Non-Employee Director Common Shares
- --------------------- -------------
<S> <C>
H. Russell Fraser 100,000
Charles A. Davis 15,000
Frederick S. Hammer 33,333
Robert M. Lichten 33,333
William M. Goldstein 15,000
</TABLE>
<PAGE> 1
EXHIBIT 10.8
QUOTA SHARE REINSURANCE TREATY
(hereafter the "Agreement")
BETWEEN
ACA FINANCIAL GUARANTY CORPORATION
(hereinafter called the "Reinsured")
and
GLOBAL MARKETS GUARANTY LTD.
(hereinafter called the "Reinsurer")
PREAMBLE
In consideration of the mutual terms, covenants, and conditions
hereinafter set forth, the Reinsurer does hereby reinsure the Reinsured as set
forth herein.
ARTICLE I
REINSURING CLAUSE
Section 1. Quota Share Reinsurance.
The Reinsured shall, subject to the terms, conditions and exclusions
of this Agreement, cede, and the Reinsurer hereby agrees to accept as
reinsurance, a pro rata share in the percentage set forth on Exhibit A hereto
(the "Quota Share Percentage") of the Reinsured's Policies (defined below) that
incept and/or are renewed during the Term hereof and which fall within the
definition of Business Reinsured.
Section 2. Definition of Business Reinsured.
Except as otherwise set forth on Exhibit A hereto, the Business
Reinsured consists of all surety bonds, insurance contracts and policies,
indemnity contracts, financial guaranty policies, binders, endorsements and
other evidences of insurance actually written or assumed by the Reinsured, that
incept or renew during the Term of this Agreement, and with respect to which the
Reinsurer has received premium due in accordance with the terms of such contract
and policies (all such bonds, contracts, policies and other such coverages that
comprise the Business Reinsured are collectively referred to herein as the
"Policies" and individually as a "Policy").
<PAGE> 2
Section 3. Original Conditions; Scope of Reinsurer's Obligation to Follow
Reinsured's Underwriting Fortunes; Rights and Settlements.
(a) The liability of the Reinsurer shall attach simultaneously with
that of the Reinsured and shall be subject in all respects, except as set forth
herein, to the same risks, terms, conditions, interpretations, waivers, and to
the same modifications, alterations, and cancellations as are contained in the
respective Policies of the Reinsured, and the Reinsurer shall, in all respects,
follow the underwriting fortunes of the Reinsured with respect to the Business
Reinsured. Any increase in limits of liability made in such original Policy or
Policies are automatically binding upon the Reinsurer from the date such
increase is effective, subject to the limits of this Agreement. During the term
hereof, the Reinsured shall provide Notice to the Reinsurer, in the event of any
increase in limits of liability under a Policy or Policies of the Reinsured and
pay to Reinsurer the Quota Share Percentage of the additional premium with
respect to such increase pursuant to the terms hereof.
(b) The liability of the Reinsurer hereunder shall include a
proportionate share of any Allocated Loss Adjustment Expenses, which term shall
mean, except as otherwise set forth herein, for purposes of this Agreement,
those expenses relating to the mitigation and adjustment of losses sustained and
actually paid by the Reinsured under the Business Reinsured, including court
costs, interest upon judgments as it accrues, and allocated investigation,
adjustment and legal expenses chargeable to the investigation, negotiation,
settlement or defense of a claim or loss or the protection and perfection of any
subrogation or salvage rights under the Business Reinsured.
(c) The Reinsured shall, in its reasonable discretion, determine what
constitutes a single risk, Policy, claim, loss, or the subject of insurance
within the Business Reinsured in accordance with applicable law. The Reinsurer
agrees to abide by the loss settlements of the Reinsured pursuant to a Policy.
ARTICLE II
COVER
Subject to Article I, the Reinsured will cede, and the Reinsurer
will accept as reinsurance, a pro rata share of each Policy written by the
Reinsured for which the total premium on a single risk, whether received by the
Reinsured in a single
2
<PAGE> 3
payment or in a series of payments, is estimated to equal at least $100,000
during the calendar year in which the Policy or Policies covering such risk are
issued. Notwithstanding the foregoing, the Reinsurer will have no obligation
under this Article to accept any share of a Policy or increase in the limits of
liability thereunder to the extent such acceptance would cause it to exceed any
applicable single-risk or aggregate risk limit established by law or by a
nationally recognized rating organization. In the event that the Reinsurer's
share of a Policy or increase hereunder would cause it to exceed any applicable
risk limit as set forth in the preceding sentence, the Reinsurer will provide
Notice to the Reinsured within 24 hours of its discovery of such condition. The
Reinsured shall retain net and unreinsured at least 50% of each single risk
ceded hereunder or such other percentage as the parties mutually agree.
ARTICLE III
NOTICE OF CLAIMS
The Reinsured agrees to provide Notice as defined under Article XXI
herein of all claims under any Policy in the Business Reinsured within two (2)
business days following the Reinsured's receipt of notice of a claim or claims.
Failure to provide such Notice shall not relieve the Reinsurer of its
obligations hereunder for any losses resulting from such claim unless the
Reinsurer has suffered material prejudice thereby. Any such failure to provide
Notice of a claim or claims to the Reinsurer shall be immediately corrected,
upon discovery thereof by the Reinsured, although such correction shall not be
deemed to limit or waive any right or remedy Reinsurer may have hereunder.
ARTICLE IV
TERM
Section 1. Term.
The initial term of this Agreement shall commence on the later of
January 1, 1999 at 12:00 a.m. Eastern Standard Time, or the date of closing of
that certain initial public offering of the common stock of the Reinsurer (the
"Effective Date") and terminate at 11:59 p.m. Eastern Standard Time on December
31, 1999; provided, however, that this Agreement shall not become effective if
the initial public offering does not close. This Agreement shall automatically
renew for a one-year period on 12:00 a.m. each January 1 commencing with January
1,
3
<PAGE> 4
2000, unless the Reinsurer gives at least 90 days' written notice prior to
the end of the then current Term to the Reinsured of its intent not to renew
(the "Notice of Non-Renewal"). As used herein, "Term" means the period
commencing on the Effective Date and terminating on the earlier of the Run-Off
Date and the Cut-Off Date.
Section 2. Run-Off Termination.
(a) In the event the Reinsurer delivers a Notice of Non-Renewal with
respect to any December 31, the Business Reinsured shall become fixed, with no
new Policies added to the Business Reinsured (a "Non-Renewal Run-Off
Termination"), as of 11:59 p.m. Eastern Standard Time on such December 31 (the
"Non-Renewal Run-Off Date"). In the event of a Non-Renewal Run-Off Termination,
the Reinsurer shall continue to be liable for the reinsurance liabilities ceded
hereunder prior to the Non-Renewal Run-Off Date until the earlier of (i) the
date of settlement, natural expiration or cancellation of such liabilities and
(ii) the Cut-Off Date, if any (the period from and including the Non-Renewal
Run-Off Date to but excluding such date is referred to herein as the
"Non-Renewal Run-Off Period"). During the Non-Renewal Run-Off Period, all of the
terms and conditions of this Agreement shall remain in full force and effect
with respect to the reinsurance liabilities ceded hereunder prior to the
Non-Renewal Run-Off Date.
(b) In the event of the occurrence of any of the events listed in the
following clauses (i) through (vii) inclusive, the Business Reinsured shall
become fixed, with no new Policies added to the Business Reinsured (an "Event
Run-Off Termination"), as of 11:59 p.m. Eastern Standard Time on the day such
event occurs (the "Event Run-Off Date"): (i) either the Reinsured or the
Reinsurer ceases to have a financial strength rating or claims-paying ability
rating from any of Standard & Poor's Ratings Services ("S&P"), Fitch IBCA, Inc.
("Fitch IBCA") or Duff & Phelps Credit Rating Co.("DCR") of "A-" or higher and
such rating of "A-" or higher is not restored within ninety (90) days; (ii)
either the Reinsured or the Reinsurer becomes insolvent or has a final order of
liquidation, rehabilitation, conservatorship or receivership entered against it;
(iii) the Reinsurer, in its sole discretion, determines that the Reinsured has
materially violated the Underwriting Guidelines, as defined below, or has made
material changes to the Underwriting Guidelines without complying with Article
X, Section 2, and delivers a notice to such effect; (iv) except as otherwise
provided herein, either the Reinsured or the Reinsurer
4
<PAGE> 5
materially breaches any of the terms and conditions of this Agreement and such
breach is not remedied within 60 days of notice of such breach delivered to the
breaching party by the other party; (v) there is a Change in Control, as defined
below; (vi) the Reinsured fails to pay the Premium in accordance with Article
VII hereof if such failure is not cured within ten business (10) days of notice
to the Reinsured by the Reinsurer; or (vii) the Reinsured reinsures, sells,
assigns, transfers or conveys, directly or indirectly, some or all the Business
Reinsured to another person or entity. Notwithstanding the foregoing, the either
party's failure to cure a default or event arising under any of the foregoing
clauses (i) through (vii) shall not cause an Event Run-Off Termination if, in
the sole discretion of the non-breaching party, the non-breaching party elects
to maintain this Agreement in force and effect while pursuing other remedies.
Each party will provide prompt notice to the other party of the occurrence of
any of the events described in clauses (i) through (vii) above. Subject to
rights and remedies of Reinsurer hereunder, in the event of an Event Run-Off
Termination, the Reinsurer shall continue to be liable for the reinsurance
liabilities ceded hereunder prior to the Event Run-Off Date until the earlier of
(i) the date of settlement, natural expiration or cancellation of such
liabilities and (ii) the Cut-Off Date, if any (the period from and including the
Event Run-Off Date to but excluding such date is referred to herein as the
"Event Run-Off Period"). Subject to rights and remedies of Reinsurer hereunder,
during the Event Run-Off Period, all of the terms and conditions of this
Agreement shall remain in full force and effect with respect to the reinsurance
liabilities ceded hereunder prior to the Event Run-Off Date.
(c) The Reinsurer and the Reinsured shall each give notice to S&P,
Fitch IBCA and DCR of any Non-Renewal Run-Off Termination or Event Run-Off
Termination.
Section 3. Cut-Off Termination.
Provided a Non-Renewal Run-Off Termination or an Event Run-Off
Termination arising on account of Reinsurer's failure to comply with Section
2(b) of this Article IV has previously occurred, the Reinsured may, by giving at
least 90 days' prior written notice, terminate this Agreement on a cut-off basis
(a "Cut-Off Termination") effective as of 11:59 p.m. Eastern Standard Time on
December 31, 2000 or any December 31 occurring thereafter. In addition, the
Reinsured may, by giving at least 90 days' prior written notice, effect a
Cut-Off Termination
5
<PAGE> 6
effective as of 11:59 p.m. Eastern Standard Time on December 31, 2003 or any
December 31 occurring thereafter, whether or not a Non-Renewal Run-Off
Termination or an Event Run-Off Termination has previously occurred, if no net
incurred losses have been paid by the Reinsurer hereunder. In the event of a
Cut-Off Termination, the Reinsurer's liability under this Agreement shall
terminate immediately and the Reinsurer shall return all unearned Premium less
the Ceding Commission applicable thereto paid to or due Reinsured within 30
business days of the Cut-Off Date. As used herein, "Cut-Off Date" means the date
a Cut-Off Termination is effective in accordance with the terms of this section.
Section 4. Definitions.
As used in this Article, the following terms shall have the meanings
assigned to them below:
(a) "Run-Off Date" means the earlier to occur of the Non Renewal
Run-Off Date and the Event Run-Off Date.
(b) "Run-Off Period" means the Non-Renewal Run-Off Period or the Event
Run-Off Period, as applicable.
(c) "Underwriting Guidelines" means the underwriting policies and
procedures of the Reinsured, as authorized by the Reinsured's Board of Directors
and Underwriting Committee and approved by the Reinsurer, a true and complete
copy of which is on file with the Reinsured.
(d) "Change in Control" means the acquisition of beneficial ownership
of 30% or more of the issued and outstanding voting securities (including,
without limitation, securities convertible into voting securities) of the
Reinsured or of American Capital Access Holdings, Inc., its parent ("Holdings"),
by one or more purchasers acting in concert in a single transaction or in a
series of related transactions; provided, however, that "Change of Control"
shall not include an initial public offering of the capital stock of the
Reinsured or of Holdings.
ARTICLE V
EXCLUSIONS
This Agreement only provides reinsurance for claims for contractual
benefits arising under the Policies, and excludes all other claims of any kind
or character, including,
6
<PAGE> 7
without limitation: (i) bad faith damages, punitive damages or other
extracontractual liability asserted against the Reinsured, its officers,
directors, employees or agents, (ii) office expenses of the Reinsured and
salaries of officials and employees of the Reinsured, (iii) any payment by the
Reinsured in excess of its express contractual obligations under a Policy (iv)
all liability of the Reinsured arising by contract, operation of law, or
otherwise from its participation or membership, whether voluntary or
involuntary, in any Insolvency Fund; (v) commissions and related costs of
writing the Business Reinsured (excluding the ceding commission described under
Article VII hereof); (vi) taxes of any kind, including, without limitation,
premium taxes (excluding any excise tax the Reinsured may be obligated to pay,
provided that the Reinsured (a) provide notice to the Reinsurer immediately upon
the Reinsured's receipt of notice of any excise tax, and (b) permit Reinsurer,
in the name of the Reinsured or otherwise, to contest such tax); (vii)
administrative expenses of the Reinsured; and (viii) any other charges, costs or
expenses of any kind or character. "Insolvency Fund" includes any guaranty fund,
insolvency fund, plan, pool, association, fund or other arrangement, howsoever
denominated, established or governed, which provides for any assessment of or
payment or assumption by the Reinsured of part or all of any claim, debt,
charge, fee or other obligation of an insurer, or its successors or assigns,
which has been declared by the competent authority to be insolvent, or which is
otherwise deemed unable to meet any claim, debt, charge, fee or other obligation
in whole or in part.
ARTICLE VI
TERRITORY
This Agreement will cover wherever the Reinsured's Policies cover.
ARTICLE VII
PREMIUM, CEDING COMMISSION, ACCOUNTS AND REMITTANCES
(a) The Reinsured will pay the Reinsurer an amount (the "Ceded
Premium") equal to the product of (1) the amount actually received by the
Reinsured of the Gross Net Written Premium Income, as defined herein, and (2)
the Quota Share Percentage (expressed as a decimal), less an amount (the "Ceding
Commission") equal to the product of (1) the Ceded Premium and (2) the Ceding
Commission Rate (expressed as a decimal) as set forth in Exhibit A hereto.
7
<PAGE> 8
(b) Within fifteen (15) days following the end of each month, the
Reinsured shall provide to the Reinsurer the following:
(1) An account current setting forth in the aggregate for the
month:
(i) Gross Net Written Premium Income;
(ii) Subject Gross Net Written Premium Income (defined
below);
(iii) Ceded Premium;
(iv) The Reinsurer's share of Recoveries (defined under
Article X);
(v) Ceding Commission;
(vi) Any excise tax due by Reinsurer pursuant to Article
V;
(vii) Net amount due Reinsurer(the sum of (iii) and (iv),
less (v) and (vi));
(viii) Reinsurer's share of subject deferred premium revenue
as of the end of the month;
(ix) Reinsurer's share of subject case basis reserves
established by the Reinsured as of the end of the
month; and
(x) Reinsurer's share of subject contingency reserves
established by the Reinsured as of the end of the
month.
(2) A premium bordereau report setting forth for each
Policy the name and location of each issuer, a
description of the issue insured including par amount
insured, maturity dates, underlying rating (if
available), the effective date of coverage, sector,
total premium, premium rate, premium and par amounts
subject to this Agreement and such other information
as the Reinsurer and Reinsured may agree with respect
to the bordereau report;
(3) A Recoveries bordereau setting forth for each Policy
paid claims, amount of
8
<PAGE> 9
Recoveries, and such other information as Reinsurer
may reasonably require;
(4) Payment of the net amount due the Reinsurer as set
forth in (b)(1)(vii) above. In the event that a net
balance is due the Reinsured by the Reinsurer, such
amount will be paid by the Reinsurer within fifteen
(15)days after the reports are furnished to the
Reinsurer; provided, however, that if the Reinsurer
objects to all or any portion of the amount due by
the Reinsurer based on its good faith belief that
such amount is incorrect, then the Reinsurer shall
not be obligated to pay the disputed amount until the
parties have resolved the dispute to their mutual
satisfaction.
(c) Within thirty (30) days after the end of each calendar quarter, the
Reinsured will provide to the Reinsurer any other information regarding the
Policies that the Reinsurer may require that is reasonably available to the
Reinsured.
(d) As used herein, the term "Gross Net Written Premium Income" shall
mean all premium actually received or due in respect of Policies (whether direct
or assumed) written during the Term. The term "Subject Gross Net Written Premium
Income" shall mean the portion of the Gross Net Written Premium Income of each
policy that is subject to this Agreement.
(e) At the option and upon the demand of the Reinsured, the Reinsured
shall be paid by special remittance within three (3) business days upon receipt
of a special account, which shall be prepared by the Reinsured and shall contain
all relevant details in connection with the Loss or Loss Expense. When the
Reinsured has determined with a reasonable degree of certainty that a payment
under a Policy will occur, the Reinsured, at its option, may present such
special account to the Reinsurer prior to the date of such payment by the
Reinsured. Provided that the Reinsurer receives such special account at least
three Business Days prior to the date of such policy payment by the Reinsured,
the Reinsurer shall make payment to the Reinsured by 12:00 p.m., Eastern
Standard time, on the business day prior to such scheduled date of such policy
payment by wire transfer in immediately available funds. If for any reason the
Reinsured shall not make such policy payment on the scheduled date and no such
policy payment is anticipated
9
<PAGE> 10
within two (2) business days, or if such policy payment was anticipated but two
(2) business days have expired without making such policy payment, the Reinsured
shall return to the Reinsurer within two (2) business days the amount paid to
the Reinsured by the Reinsurer for such policy payment to the extent not used
therefor, plus interest payable at the same rate as the first six-month U.S.
Treasury Bill issued during that quarter.
ARTICLE VIII
RESERVES
The Reinsurer shall maintain reserves with respect to its
proportionate share of outstanding and incurred but not reported loss, unearned
premium and contingency reserves, as appropriate and required based on statutory
accounting and actuarial principles consistently applied.
ARTICLE IX
STATUTORY FINANCIAL CREDIT
The Reinsurer shall take all steps necessary to enable the Reinsured
to obtain full credit for the reinsurance provided by this Agreement in all
applicable jurisdictions, including compliance with the Insurance Act 1978 of
Bermuda and regulations promulgated thereunder; provided, however, that the
Reinsurer shall not be required to engage in any activity that would require the
Reinsurer to operate a trade or business or obtain any license or certification
within the United States. The obligations of the Reinsurer under this Article IX
shall include providing security or entering into appropriate security devices
in the amount required by law (collectively, the "Security") to permit the
Reinsured to obtain full reinsurance credit. When two or more types of Security
are permitted under applicable law, the Reinsurer may, in its sole discretion,
select the Security it will establish or provide and substitute other Security
after initial Security has been established or provided. The Reinsured and
Reinsurer agree that, if possible, any Security provided to Reinsured will be
held in a manner so as to allow the Reinsured to take financial credit for the
reinsurance provided by this Agreement and also allow, if possible, the
Reinsurer to treat such Security as an admitted asset in accordance with
applicable law.
When required by applicable law in order for the Reinsured to take
financial credit for the reinsurance provided by this Agreement, the Reinsured
shall be entitled to withhold from the Reinsurer as security for the payment of
the latter's
10
<PAGE> 11
obligations, an amount herein called the "Deposit." The Deposit shall equal the
Reinsurer's share of Allocated Loss Adjustment Expenses (as defined in Article
I) paid by the Reinsured but not recovered from the Reinsurer and outstanding,
and incurred but not reported loss, unearned premium and contingency reserves.
The Reinsured shall hold the deposit in a segregated account for the sole and
exclusive benefit of Reinsurer and only use such funds as provided hereunder. In
the event the Reinsured becomes insolvent, any assets of the Reinsurer held by
the Reinsured, including but not limited to the deposit, shall be deemed to be
held in trust for the sole and exclusive benefit of the Reinsurer.
The Deposit shall be adjusted quarterly to equal losses and
Allocated Loss Adjustment Expenses (as defined in Article I) paid by the
Reinsured but not recovered from the Reinsurer and the unearned premium,
contingency and outstanding and incurred but not reported loss reserves,
calculated on the basis of the requirements of applicable law, corresponding to
the Reinsurer's proportionate share of risks reinsured hereunder.
At any time after default by the Reinsurer of payments owing to the
Reinsured under this Agreement, the Reinsured may use so much of the Deposit as
may be required to eliminate the default. Until the Deposit has been utilized in
such manner, interest thereon shall be credited to the Reinsurer quarterly at
the lesser of the prime rate or the same interest rate payable on the first
six-month U.S. Treasury Bill issued during each quarter.
Upon termination of this Agreement, if the Reinsured and the
Reinsurer agree that the Reinsured will withdraw the Business Reinsured from the
Reinsurer, the Reinsured shall credit and pay to the Reinsurer the balance of
any funds of the Reinsurer in the possession of the Reinsured, including,
without limitation, any funds withheld by the Reinsured as Security, and return
any Security in the possession of the Reinsured. If the cessions in force are
allowed to run to their normal expiry, then any funds withheld by or other
Security in the possession of the Reinsured shall be adjusted quarterly.
If the Reinsurer elects to use a Letter of Credit as Security, the
following provisions shall apply to the Reinsurer:
(a) The Reinsurer shall provide to the Reinsured a letter of credit in
form and amount required by applicable law.
11
<PAGE> 12
If the issuing or confirming bank shall cease to meet applicable legal
requirements during the term of the letter of credit, the Reinsurer shall
replace such letter of credit with a complying one upon the earlier of the
stated expiration, next extension or renewal date, or modification or amendment
of the letter of credit. Within thirty (30) day of the Reinsurer's receipt of
the quarterly reports required by Article VII of this Agreement:
(1) if the Reinsurer's share of the obligations under this Agreement
shall exceed the then existing balance of the letter of credit
made available, the Reinsurer shall, if required by applicable
law, secure delivery to the Reinsured of an amendment to the
letter of credit increasing the amount of the letter of credit
available by the amount required under applicable law; or
(2) if the Reinsurer's share of the obligations under this Agreement
shall be less than the balance of the letter of credit available
on the accounting date, the Reinsured shall release such excess
credit by agreeing to an amendment to the letter of credit
reducing the amount of the letter of credit available by the
amount of such excess credit.
(b) Except as may otherwise be required under applicable law, the
Reinsurer and the Reinsured agree that a letter of credit provided by the
Reinsurer pursuant to this Agreement may be drawn upon at any time by the
Reinsured or its successors in interest only for one or more of the following:
(1) to reimburse the Reinsured for the Reinsurer's share of premiums
(adjusted for return to the Reinsurer of the pro rata portion of
the Ceding Commission paid to the Reinsured) returned to the
owners of Policies reinsured under this Agreement on account of
cancellations of such Policies; and
(2) to reimburse the Reinsured for the Reinsurer's share of losses
under the Business Reinsured and Allocated Loss Adjustment
Expenses paid by the Reinsured
12
<PAGE> 13
pursuant to the provisions of the Policies reinsured by this
Agreement.
When the Reinsured has received notification of the non-renewal of
the letter of credit and when the Reinsurer's obligations under this Agreement
with respect to risks and obligations covered by letter of credit remain
unliquidated and undischarged ten (10) days prior to such expiration date, the
Reinsurer shall supply to the Reinsured substitute Security meeting the
requirements of this Article.
All of the foregoing shall be applicable without diminution because
of insolvency on the part of the Reinsured or the Reinsurer.
ARTICLE X
COVENANTS, REPRESENTATIONS AND WARRANTIES
Section 1. Dividends.
The Reinsured shall not, in any fiscal year, pay dividends on its
common shares in an aggregate amount greater than 50% of its net income after
deduction for contingency reserves, for such fiscal year. Net income and
contingency reserves shall be determined in accordance with statutory accounting
principles prescribed or permitted by the Commissioner of Insurance of the State
of Maryland ("SAP"). In addition, the Reinsured shall not pay any dividends at
any time unless its SAP unassigned funds as shown on line 26C, page 3 of the
Reinsured's statutory financial statement as filed with the Maryland Insurance
Department are positive at such time.
Section 2. Underwriting Guidelines.
The Reinsured shall not make any material changes to the
Underwriting Guidelines without (1) providing written notice to the Reinsurer at
least thirty (30) days (or such shorter period as Reinsurer may agree to in
writing) prior to making any such material change, and (2) obtaining the
Reinsurer's prior written consent.
Section 3. Recoveries.
Except as otherwise provided herein, the Reinsured shall not sell,
pledge, hypothecate, assign or otherwise dispose of any Recoveries. As used
herein, "Recoveries" shall mean
13
<PAGE> 14
salvage and subrogation to the extent realized into cash or the equivalent or
booked in accordance with SAP.
Section 4. Non-Competition.
The Reinsurer shall not write direct financial guaranty insurance
within the 50 United States, the District of Columbia, Puerto Rico, Guam and the
Virgin Islands for so long as this Agreement remains in effect.
Section 5. Reinsured's Representations and Warranties.
The Reinsured hereby represents and warrants: (i) that the Reinsured
is duly qualified and holds all licenses and permits necessary to conduct its
business in all jurisdictions where the Reinsured issues insurance policies or
otherwise engages in business; (ii) that the Reinsured is in good standing in
all such jurisdictions, (iii) that the Reinsured, when conducting its business
as presently conducted, falls within the exception to the definition of an
investment company under Section 3(c)(3) of the Investment Company Act of 1940
and attendant regulations (collectively, the "40 Act Exception"); (iv) that
each Policy that is part of the Business Reinsured falls within the definition
of an exempt security under Section 3(a)(8) of the Securities Act of 1933 and
attendant regulations (collectively, the "33 Act Exception"); and the Reinsured
does not directly or indirectly own (within the meaning of Section 958(a) of
the U.S. Internal Revenue Code (the "IRC")) any stock of the Reinsurer and is
not a related person (within the meaning of Section 953(c)(6) of the IRC) to
any person who so owns such stock.
Section 6. Securities Laws Covenants.
The Reinsured hereby agrees that at all times during the term hereof
and during any run-off period hereunder, that the Reinsured (i) shall not
reinsure hereunder any Policy that does not fall within the 33 Act Exception,
(ii) shall fall within the 40 Act Exception, and (iii) shall not directly or
indirectly own (within the meaning of Section 958(a) of the IRC) any stock of
the Reinsurer or be a related person (within the meaning of Section 953(c)(6)
of the IRC) to any person who so owns such stock.
Section 7. Excessive Concentration.
In the event either party hereto receives notice from S&P, Fitch
IBCA or DCR providing that such party's financial strength rating or
claims-paying ability rating may be downgraded on account of excessive
concentration of reinsurance with the other party pursuant to this Agreement,
then the parties agree to negotiate in good faith to modify the Quota Share
Percentage or otherwise restructure reinsurance hereunder in order to permit the
party receiving notice to maintain its then current ratings without such
downgrade.
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ARTICLE XI
DUE DILIGENCE RESPONSIBILITIES OF THE REINSURED
In accordance with customary and reasonable practices within the
financial guaranty insurance industry, the Reinsured will be responsible for
performing due diligence with respect to all obligations to be ceded to and
reinsured by the Reinsurer pursuant to this Agreement, as may be necessary to
identify and evaluate the credit risks attendant thereto. Such evaluation and
analysis shall comport with the Underwriting Guidelines of the Reinsured, as
defined in Article IV. The Reinsured will provide copies of credit reports,
financial statements, environmental impact reports, market research and
feasibility studies, appraisals and other documentation obtained or generated by
the Reinsured with respect to the Business Reinsured, at the request of the
Reinsurer. In addition, the Reinsured will perform surveillance with respect to
the obligations reinsured hereunder, in order to avoid or mitigate claims
through early warning and remedial management. The surveillance function shall
include the responsibility: (i) to monitor compliance with covenants, changes in
the status, credit ratings or credit profile of reinsured obligations, (ii) to
maintain a watch list, (iii) where necessary, to engage in the re-structuring
and re-financing of troubled credits, and (iv) to provide monthly watch list
reports to the Reinsurer.
ARTICLE XII
ACCESS TO RECORDS
The Reinsurer or its authorized representative shall be permitted to
inspect and copy (at the Reinsurer's expense) the books and records of the
Reinsured at all reasonable times for the purpose of obtaining information
concerning this Agreement or its subject matter. This access shall include,
without limitation, all papers in possession of the Reinsured in connection with
claims, the adjustment of claims and underwriting determinations and practices.
The Reinsured or its authorized representatives shall be permitted to inspect
and copy (at the Reinsured's expense) the books and records of the Reinsurer
relating to this Agreement, where required by a governmental or regulatory
authority.
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ARTICLE XIII
SALVAGE AND SUBROGATION
Section 1. Credit for Recoveries.
To the extent of payments made under this Agreement, the Reinsurer
shall have the right to the product of (a) the Quota Share Percentage (expressed
as a decimal), and (b) the Recoveries with respect to the Business Reinsured,
subject to the rights of the Reinsured's other reinsurer(s), if any, providing
reinsurance.
Section 2. Expenses.
In the event there are any recoveries, salvages or reimbursements
recovered subsequent to settlement of a loss, it is agreed that, if the expenses
incurred in obtaining salvage or other recoveries are less than the amount
recovered, if any, such expenses shall be borne by each party in the proportion
that each party benefits from the recoveries or, otherwise, the amount recovered
shall first be applied to the reimbursement of the expense of recovery and then
in proportion to the liability of each party for the loss before such recovery
had been obtained. Expenses hereunder shall be limited to those directly related
to obtaining Recoveries, and shall exclude all other expenses, including,
without limitation, all office expenses and salaries of officials and employees
of the Reinsured.
Section 3. Control of Remedies.
The Reinsurer shall be bound by the reasonable judgment of the
Reinsured concerning the salvage and subrogation rights and remedies of the
Reinsured under any Policies.
ARTICLE XIV
SERVICE OF PROCESS, JURISDICTION AND VENUE
Subject to the parties hereto first complying with the provisions of
Article XVII hereof, the Reinsurer hereby irrevocably submits to the
non-exclusive jurisdiction of any Federal or New York State court sitting in New
York City over any suit, action or proceeding arising out of or relating to this
Agreement. The Reinsurer irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the venue
of any such suit, action or proceeding brought in such court and any claim that
any such suit, action or proceeding brought in such a court was
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brought in an inconvenient forum. The Reinsurer agrees that a final judgment,
not subject to any further appeal, in any such suit, action or proceeding
brought in such a court shall be conclusive and binding upon it and will be
given effect in the country of domicile of the Reinsurer to the fullest extent
permitted by applicable law and may be enforced in any Federal or New York State
court sitting in New York City (or any other courts to the jurisdiction of which
the Reinsurer is or may be subject) by a suit upon such judgment, provided that
service of process is effected upon it as specified in this Article or as
otherwise permitted by law. Nothing herein shall be deemed to limit or waive the
Reinsurer's right to remove a suit, action or proceeding to a federal court of
the United States.
Pursuant to any statute of any state, territory or district of the
United States that makes provisions therefor, the Reinsurer hereby designates
the Superintendent, Commissioner or Director of Insurance or other officer
specified for the purpose in the statute, or his successor or successors in
office, as its true and lawful attorney, upon whom may be served any lawful
process in any action, suit or proceeding arising hereunder that may be
instituted by or on behalf of the Reinsured or any beneficiary under this
Agreement, and hereby designates the person named in Article XXI hereof as the
person to whom such officer is authorized to mail such process or a true copy
thereof.
The Reinsurer hereby consents to process being served in any suit,
action or proceeding of the nature referred to above in any Federal or New York
State court sitting in New York City by service of process as set forth above,
provided that, to the extent lawful and possible, written notice of said service
upon such agent shall be mailed by registered or certified air mail, postage
prepaid, return receipt requested, to the Reinsurer at its address specified
Article XXI hereof or to any other address which the Reinsurer shall have
designated in accordance with Article XXI. The Reinsurer irrevocably waives, to
the fullest extent permitted by law, all claim of error by reason of any such
service (although the Reinsurer does not waives claims that service of process
was not actually received by the Reinsurer) and agrees that such service shall
be deemed to be effective service of process upon the Reinsurer in any such
suit, action or proceeding and shall, to the fullest extent permitted by law, be
held to be valid and personal service upon the Reinsurer, unless the service of
process was not actually received by the Reinsurer.
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<PAGE> 18
Nothing in this Article shall affect the right of the Reinsurer to
receive service of process in any other manner permitted by law or limit the
right of the Reinsurer to bring proceedings against the Reinsured in any court
having jurisdiction over the Reinsured and such proceedings. Nothing in this
Article shall limit the provisions of Article XVI of this Agreement.
ARTICLE XV
CURRENCY
All premium and losses arising with respect to the Business
Reinsured, accounts, reports, deposits, arbitration awards and/or court
judgments arising out of this Agreement shall be in United States currency.
Premiums paid to the Reinsured for Policies covered by this
Agreement in other than United States currency shall be paid by the Reinsured to
the Reinsurer in United States currency at the rate of exchange on which the
original accounts were settled or, if not converted at such time, at the rate of
exchange used by the Reinsured in its own books of account at the time of the
settlement or in accordance with any subsequent adjustment to such account.
The amounts recoverable by the Reinsured from the Reinsurer for its
proportional share of losses under the Business Reinsured in other than United
States currency shall be converted into United States currency at the same rate
of exchange as were applied in the settlement of the original losses or, if not
converted at such time, at the rate of exchange used by the Reinsured in its own
books of account at the time of the settlement or in accordance with any
subsequent adjustment to such account.
The Reinsurer shall bear the currency risk for its proportionate
share in the event that (i) an insured obligation is denominated in a foreign
currency, (ii) the Reinsurer's limit of liability is denominated in United
States currency and (iii) the amount insured is such that the Reinsurer's
applicable limit of liability for the cession is applicable using the currency
exchange rate in effect on the Policy effective date. The Reinsurer's percentage
participation shall be calculated by converting the Reinsurer's limit of
liability using the currency exchange rate in effect on the Policy effective
date, and the Reinsurer shall be entitled to its proportionate share of premiums
and liable for its proportionate share of Policy
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Payments based on such percentage, notwithstanding any later change in currency
exchange rates which result in the Reinsurer's limit of liability being
exceeded.
ARTICLE XVI
INSOLVENCY
In the event of the insolvency of the Reinsured, the amounts owing
by the Reinsurer under this Agreement shall be immediately payable directly to
the Reinsured, or to its liquidator, receiver, conservator or statutory
successor on the basis of the liability of the Reinsured without diminution
because of the insolvency of the Reinsured or because the liquidator, receiver,
conservator or statutory successor of the Reinsured has failed to pay all or a
portion of any claim. It is agreed, however, that the liquidator, receiver,
conservator or statutory successor of the Reinsured shall give written notice to
the Reinsurer of the pendency of a claim against the Reinsured indicating the
policy or bond reinsured which claim would involve a possible liability on the
part of the Reinsurer, within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership and that, during
the pendency of such claim, the Reinsurer may investigate such claim and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the Reinsured
or its liquidator, receiver, conservator or statutory successor. The expense
thus incurred by the Reinsurer shall be chargeable, subject to the approval of
the court, against the Reinsured as part of the expense of conservation or
liquidation to the extent of a pro rata share of the benefit which may accrue to
the Reinsured solely as a result of the defense undertaken by the Reinsurer.
The reinsurance shall be payable by the Reinsurer to the Reinsured
or to its liquidator, receiver, conservator or statutory successor, except (a)
where the Agreement specifically provides another payee of such reinsurance in
the event of insolvency of the Reinsured and (b) where the Reinsurer with the
consent of the direct insured or insureds has assumed such Policy obligations of
the Reinsured as direct obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the Reinsured to such
payees, provided that any such assumption shall be subject to the approval of
the Maryland Insurance Commissioner.
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<PAGE> 20
ARTICLE XVII
ARBITRATION
All disputes arising from this Agreement shall first be adjudicated
by a Board of Arbitration (the "Board") consisting of three arbitrators, all of
whom shall be active or retired executive officers of insurance or reinsurance
companies having no direct or indirect financial interest in either party or its
affiliates. Each of the parties hereto shall select one arbitrator. A third
arbitrator will be chosen by the two arbitrators selected by the parties. A
party shall initiate arbitration ("Petitioner") by providing the other party
with Notice, demanding arbitration and identifying its selected arbitrator. The
other party ("Respondent") will have thirty (30) days from its receipt of a
demand for arbitration within which to identify an arbitrator. In the event that
Respondent fails to identify an arbitrator within such thirty (30) day period,
Petitioner shall have the right to identify a second arbitrator, and Respondent
will not be deemed aggrieved thereby. The arbitrators will jointly select a
third arbitrator within thirty (30) days after both arbitrators have been
selected. If the two arbitrators do not agree on the selection of a third
arbitrator within such thirty (30) day period, the third arbitrator shall be
designated by the American Arbitration Association.
The Board shall interpret this Agreement as an honorable engagement
and will make its award with a view to effecting the purpose and intent of this
Agreement in a reasonable manner, rather than in accordance with the technical
interpretation of this Agreement. The Board will be relieved from judicial
formalities. The decision of a majority of the Board will be final and binding
upon the parties.
The parties shall equally bear the fees and costs of the Board of
Arbitrators. The remaining costs of the arbitration shall be paid as the Board
shall direct.
The arbitration shall take place in the City and State of New York,
unless the Board designates another location with the mutual consent of the
parties. The rules and procedures for pre-hearing investigations shall be
established by the Board and the investigation shall be completed within ninety
(90) days of the appointment of the third arbitrator. Petitioner shall deliver a
written arbitration brief to the Board and to the Respondent within thirty (30)
days of completion of the pre-hearing investigations. Respondent shall deliver a
written response to the Board and the Petitioner within thirty (30) days
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<PAGE> 21
of its receipt of Petitioner's brief. A hearing shall be held within thirty (30)
days of submission of Respondent's response. The Board shall render its decision
within sixty (60) days after completion of the hearing unless the Board requests
and the parties consent to an extension of time.
The Board may alter the time periods set forth in this Article for
good cause shown.
This Article shall survive the termination of this Agreement.
ARTICLE XVIII
APPLICABLE LAW
This Agreement shall be interpreted in accordance with the laws of
the State of New York, without giving effect to the conflict of law rules
thereof.
ARTICLE XIX
SET-OFF
The Reinsured and the Reinsurer have the right to set-off amounts
due from one to the other. The party asserting the right of set-off may exercise
such right at any time whether the amount(s) due constitute payment of premiums,
losses or otherwise. In the event of the insolvency of a party hereto, setoff
shall only be allowed in accordance with applicable law.
ARTICLE XX
CONFIDENTIALITY
The Reinsurer agrees to maintain the confidentiality of the
Policies, the reinsurance of the Policies and the underlying transactions and
documents (the "Information"), except:
(a) to employees, officers, directors and legal counsel with a need to
know the Information,
(b) to reinsurers, bankers, governmental agencies that regulate the
Reinsurer and the rating agencies that rate the Reinsurer with a need to know
the Information,
(c) in response to a subpoena or other legal process calling for
production of the Information, or
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(d) to any other person as to whom the Reinsured has given its prior
written consent to each such disclosure, which consent shall not be unreasonably
withheld or delayed.
In the case of subparagraphs (a) and (b) above, no disclosure of the
Information shall be permitted if any such entity or individual is affiliated
with a financial guaranty insurer in competition with the Reinsured unless the
Reinsured consents to the disclosure in writing. In the case of subparagraph (c)
above, the Reinsurer shall promptly notify the Reinsured of such subpoena and
shall at the Reinsured's direction and expense contest production of the
Information thereunder.
The foregoing requirements of confidentiality shall not apply to
those portions of the Information that (a) are generally available to the public
other than as a result of a disclosure by the Reinsurer or its representatives
or (b) become available to the Reinsurer from a source that is not bound by an
obligation of confidentiality to the Reinsured. If required by a participant in
a transaction insured or to be insured by a Policy, the Reinsurer shall execute
a separate confidentiality agreement containing the foregoing obligations of
confidentiality with respect to such transaction. Nothing contained in this
Article XX shall expand or limit the non-compete obligation contained under
Section 4, Article X hereof.
ARTICLE XXI
ADDRESSES FOR NOTICES
All notices and other communications required by this Agreement
(each a "Notice") shall be sent to the parties at the following addresses,
respectively, unless a party designates another address in writing:
Global Markets Guaranty Ltd. ACA Financial Guaranty Corporation
Victoria Hall, Victoria St. One Liberty Plaza 52nd Floor
P.O. Box HM1262 New York, New York 10006 U.S.A.
Hamilton, HM FX Bermuda
Fax No.: 441- Fax No.: 212-766-4034
Attn: Chief Executive Officer Attn: Reinsurance Officer
ARTICLE XXII
SEVERABILITY
Any provision of this Agreement that is held to be inoperative,
unenforceable, voidable or invalid in any jurisdiction shall, as to that
jurisdiction, be inoperable,
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unenforceable, void or invalid without affecting the remaining provisions in
that jurisdiction or the operation, enforceability, or validity of that
provision in any other jurisdiction, and to this end, the provisions of this
Agreement are declared to be severable. Should any part or provision of this
Agreement be held inoperative, unenforceable, voidable or invalid in any
jurisdiction, such part or provision shall, as to that jurisdiction, be replaced
with a provision that accomplishes, to the extent possible and lawful, the
original business purpose and economic intent of such part or provision in a
valid and enforceable manner, and the remainder of this Agreement shall remain
effective and binding upon the parties hereto.
IN WITNESS WHEREOF, the parties, by their duly authorized representatives,
have executed this Agreement as of the 25th day of November, 1998.
REINSURER: REINSURED:
GLOBAL MARKETS GUARANTY LTD. ACA FINANCIAL GUARANTY CORPORATION
By: /s/ Donald J. Matthews By: /s/ H. Russell Fraser
_________________________ __________________________
Donald J. Matthews H. Russell Fraser
President and C.E.O. Chairman and C.E.O.
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EXHIBIT A
QUOTA SHARE PERCENTAGE
CEDING COMMISSION RATE
BUSINESS REINSURED
1. The Quota Share Percentage reinsured by Reinsurer under the Agreement shall
equal:
22.5%
2. The Ceding Commission Rate payable by the Reinsurer shall equal:
35%
3. The Business Reinsured shall be limited to Policies covering new issues with
a rating of "BB" or better.
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<PAGE> 1
Exhibit 10.9
MASTER FACULTATIVE REINSURANCE AGREEMENT
BETWEEN
ACA FINANCIAL GUARANTY CORPORATION
AND
GLOBAL MARKETS GUARANTY LTD.
In consideration of the mutual covenants and upon the terms and
conditions set forth in this Master Facultative Reinsurance Agreement, ACA
Financial Guaranty Corporation, a Maryland stock insurance corporation (the
"Reinsured") and Global Markets Guaranty Ltd., a Bermuda corporation (the
"Reinsurer"), hereby agree as follows:
ARTICLE I
BUSINESS REINSURED
The Reinsured shall cede as reinsurance to the Reinsurer and the
Reinsurer shall accept as reinsurance from the Reinsured the share of a risk
insured by the Reinsured, as specified and agreed to by the parties in a
reinsurance memorandum in substantially the same form of Exhibit A annexed to
this Agreement (the "Reinsurance Memorandum"). All Policies (defined below) that
are reinsured hereunder are sometimes collectively referred to as the "Business
Reinsured."
The Reinsured shall first offer to the Reinsurer each of the risks
of the Reinsured which incepts or renews after the effective date of this
Agreement, and the Reinsurer shall have the right, in its sole discretion, to
reject or accept any individual risk presented to the Reinsurer by the Reinsured
pursuant to a duly completed Reinsurance Memorandum. The Reinsurer shall not be
bound hereunder on any individual risk unless it first has given its approval by
providing the Reinsured with a copy of the Reinsurance Memorandum for that
particular risk signed by a duly authorized representative of the Reinsurer. The
Reinsurer shall either return the signed Reinsurance Memorandum or notify the
Reinsured of its decision not to assume a particular risk as soon as
practicable. In the event that the Reinsured has not received the signed
Reinsurance Memorandum or other notice of the decision of the Reinsurer as to an
individual risk within 15 days of the date of a Reinsurance Memorandum in
respect thereof, the Reinsured shall be free to offer such risk to third parties
on terms which are not less favorable to the Reinsured.
Once the Reinsurer has provided the Reinsured with such signed
Reinsurance Memorandum, the Reinsurer shall be bound to provide coverage under
this Agreement in accordance with the terms and conditions of the Reinsured's
underlying policy covering the risk (the "Policy" or "Policies"), unless the
terms and conditions of coverage with respect to the particular risk are
modified in the Reinsurance Memorandum pertaining to that risk. The Reinsurer's
liability shall attach as of the effective date of the Policy, unless the
Reinsurance Memorandum provides for a different date. Unless otherwise provided
by the Reinsurance Memorandum, the Reinsurer shall assume the designated portion
or amount of principal or other obligation insured under the Policy, any
interest or premium on such amount assumed and a pro rata share of Loss Expenses
(as defined in Article III hereof).
The share of the Reinsurer in the interests and liabilities of the
Policies covered by this
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Agreement shall be separate and apart from the shares of any other reinsurers
assuming such risks. The Reinsurer's obligation pursuant to this Agreement shall
not be joint with any such other reinsurer and in no event shall the Reinsurer
participate in the interests and liabilities of such other reinsurers.
ARTICLE II
TERM AND CANCELLATION
This Agreement shall be effective as of 12:00 a.m., Eastern
Standard Time, December 15, 1998, and shall be a continuous contract until
canceled. This Agreement shall not become effective if the public offering of
the stock of the Reinsurer does not close. Either the Reinsured or the Reinsurer
has the right to cancel this Agreement by giving at least ninety (90) days'
prior Notice (as defined below). This Agreement may be canceled by either party
effective immediately upon mutual consent. In the event of cancellation either
by 90 days' notice or mutual consent, the Reinsurer shall continue to be liable
for claims whenever made under all Policies ceded pursuant to this Agreement
until the natural expiration of such Policies, except to the extent that the
Reinsured and the Reinsurer agree to a withdrawal of the reinsured risks from
the Reinsurer and return or payment by the Reinsurer of an amount equal to the
Reinsurer's share of incurred Loss and Loss Expenses (i.e. Loss and Loss Expense
payments and reserves) (as defined in Article III hereof) and unearned premiums
(less the corresponding ceding commission).
Upon the occurrence of any of following events and in the time
periods set forth, the Reinsured shall have the right to terminate the
Reinsurer's participation in Policies covered by this Agreement by giving Notice
of termination to the Reinsurer:
(1) (a) The performance of the Agreement is prohibited or rendered
impossible by any applicable law or regulation, (b) the Reinsured fails
to receive all or substantially all financial credit for the
reinsurance in all applicable jurisdictions, or (c) the state insurance
regulator in the applicable jurisdiction directs the Reinsured to
cancel the Reinsurer's participation in this Agreement. The Reinsurer
shall have the time allowed by the state insurance regulator in the
applicable jurisdiction to comply with such applicable law or
regulation. Termination of the Reinsurer's participation in this
Agreement pursuant to this paragraph shall be effective upon the
Reinsurer's receipt of Notice of termination.
(2) In the event that the Reinsurer: (a) becomes insolvent, (b) fails to
maintain the minimum capital and surplus requirements required by the
laws of the Reinsurer's domicile, (c) is the subject of a voluntary or
involuntary filing of a petition in bankruptcy, (d) goes into
liquidation or rehabilitation, (e) has a receiver appointed, (f) allows
its surplus to policyholders to decline by twenty-five percent (25%) or
more during any twelve month period as reported in any financial
statement, or (g) fails, within a reasonable time following the
Reinsurer's receipt of a written request by the Reinsured, to receive
and maintain any required approval of the Maryland Commissioner of
Insurance. Termination pursuant to this paragraph shall be effective
upon the Reinsurer's receipt of Notice of termination.
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<PAGE> 3
(3) The Reinsurer (i) is acquired or undergoes a change of control,
provided that the Reinsured gives Notice of its intention to terminate
within fifteen (15) days of its receipt of Notice of such occurrence
from the Reinsurer which the Reinsurer shall be required to provide
within a reasonable time or (ii) breaches any of its covenants set
forth herein. Termination pursuant to this paragraph shall be effective
sixty (60) days after the Reinsurer's receipt of the Notice of
termination, if cure is not previously effected. "Change of Control"
means the acquisition of beneficial ownership of 30% or more of the
issued and outstanding voting securities (including, without
limitation, securities convertible into voting securities) of the
Reinsurer or of Global Markets Access Ltd., its parent ("GMA") by one
or more purchasers acting in concert in a single transaction or in a
series of related transactions; provided, however, that "Change of
Control" shall not included a public offering of the capital stock of
the Reinsured or GMA.
(4) In the event that the Reinsurer ceases to have a financial strength
rating or claims-paying ability rating from any of Standard & Poor's
Ratings Services, Fitch IBCA, Inc. or Duff & Phelps Credit Rating Co.
of "A-" or higher, the Reinsurer will have ninety (90) days from the
date of downgrading to restore such rating to at least "A-". If the
Reinsurer is unsuccessful within the aforesaid 90-day period,
termination pursuant to this paragraph shall be effective upon the
Reinsurer's receipt of Notice of termination.
Upon termination pursuant to paragraphs (1), (2), (3) or (4) above,
the Reinsurer shall continue to cover all Policies written by the Reinsured
prior to such termination and coming within the scope of this Agreement until
the natural expiration of such Policies.
This Agreement may be canceled with respect to the Reinsurer at the
discretion of the Commissioner of Insurance of the State of Maryland acting as
rehabilitator, liquidator or receiver of the Reinsured.
As used in this Agreement, "Notice" shall mean written notice (i)
sent by facsimile to the party concerned to the facsimile number set forth in
this Agreement or previously designated in writing by the party, provided that a
copy is also promptly mailed or delivered or (ii) addressed to the party
concerned at its address set forth in this Agreement or previously designated by
that party in writing and sent by certified or express mail return receipt
requested, or by courier or hand delivery. Notice shall be deemed effective (i)
if sent by facsimile, the date sent, (ii) if sent by mail, the date received or
(iii) if delivered by courier or by hand, the date delivered.
ARTICLE III
LOSS AND LOSS EXPENSES
The Reinsurer shall pay its share up to any applicable limit of
liability of Losses under Policies covered by this Agreement. Except as provided
in Articles V and XIV, "Loss" and "Losses" shall mean only such amounts that are
actually paid by the Reinsured in settlement of claims under Policies or in
satisfaction of judgments involving Policies. If such settlement involves the
refinancing of the obligations insured under a new Policy (the "Refinanced
Obligations") by the issuance of new obligations that are insured by the
Reinsured (the
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<PAGE> 4
"Refinancing Obligations"), each reinsurer shall assume under this Agreement the
same proportionate share of the Refinancing Obligations as the Reinsurer assumed
of the Refinanced Obligations.
The Reinsurer shall be liable for its proportionate share of "Loss
Expenses" unless the Reinsurance Memorandum provides otherwise. "Loss Expenses"
shall mean court costs, interest upon judgments, and allocated investigation,
adjustment and legal expenses, including expenses related to the workout of a
potential loss or the protection and perfection of any subrogation or salvage
rights or security interest under a Policy. Losses and Loss Expenses
(collectively "Policy Payments") shall not include (a) salaries paid to
employees of the Reinsured, (b) awards or judgments against the Reinsured
occasioned by failure of the Reinsured to settle a claim or make payment under
its policy, when such failure arises from bad faith, negligence or misconduct on
the part of the Reinsured or any agent or employee of the Reinsured or (c)
liability of the Reinsured, arising by contract, operation of law or otherwise,
from its participation or membership, whether voluntary or involuntary, in any
insolvency fund, including any guaranty fund, association, pool, plan or other
facility that provides for the assessment of, payment by or assumption by the
Reinsured of a part or the whole of any claim, debt, charge, fee or other
obligation of any insurer, or its successor or assigns, that has been declared
insolvent by any authority having jurisdiction, or which is otherwise unable to
meet any claim, debt, charge, fee or other obligation in whole or in part. Loss
Expenses shall include expenses paid by the Reinsured to American Capital Access
Service Corporation, an affiliate of the Reinsured ("ACASC"); provided that such
expenses are allocated to the Policy on a cost basis and that such expenses do
not included any portion of ACASC' employee salaries or general office expenses.
Loss Expenses shall not be included in calculating the Reinsurer's limit of
liability, except to the extent that the respective Reinsurance Memorandum
otherwise provides.
The Reinsured agrees to keep the Reinsurer informed as to any
default or potential default of any non-payment(s) of amounts due under
obligations covered by Policies reinsured by this Agreement. In any event,
Notice (as defined in Article II) of a default shall be given to the Reinsurer
within fifteen (15) days of notification to the Reinsured of such default.
Failure to provide such Notice shall not relieve the Reinsurer of its obligation
for any Loss resulting from such claim except to the extent that it has suffered
undue prejudice.
The Reinsurer agrees to abide by the Loss settlements of the
Reinsured. The Reinsured shall determine in its sole discretion (i) what shall
constitute a claim or Loss covered under the Reinsured's insurance policies,
(ii) the Reinsured's liability thereunder and (iii) the correct amount or
amounts, if any, that the Reinsured shall pay thereunder. The Reinsurer shall be
bound by the determination of the Reinsured concerning the salvage and
subrogation rights and remedies of the Reinsured under the Policies, and the
Reinsured shall have complete and sole control of the direction of all claims
and salvage and subrogation remedies.
Salvage and subrogation recoveries (after the Reinsured and the
Reinsurer have recovered their expenses) (the "Recoveries") will be credited to
Reinsurer in accordance with the Reinsurance Memorandum. In the event that such
Recoveries exceeds all Policy Payments during the term of a Policy, such excess
shall be treated as additional premium and apportioned between the Reinsured and
the Reinsurer in the same proportion that premiums for the Policy
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<PAGE> 5
were apportioned.
ARTICLE IV
PREMIUMS AND COMMISSIONS
The Reinsured shall pay to the Reinsurer its share of the premium
after first deducting a ceding commission and other costs allowed by the
Reinsurer (the commission and other costs collectively, the "ceding
commission"), as such premium and commission are set forth in the Reinsurance
Memorandum for each particular risk reinsured under this Agreement.
If obligations covered by a Policy are refunded in advance of
maturity and a credit is allowed to the premium charged for insuring the
refunding obligations, the Reinsurer shall receive its pro rata share of such
credit and shall refund its pro rata share of any unearned premium debited to
the refunded obligations net of the ceding commission applicable thereto,
provided that the Reinsurer is offered the same pro rata share of the refunding
transaction.
ARTICLE V
REPORTS AND REMITTANCES
Within fifteen (15) days following the end of each month, the
Reinsured shall provide to the Reinsurer the following:
(1) An account current setting forth in the aggregate for the month:
(a) Gross Net Written Premium Income;
(b) Facultative Premium Ceded;
(c) Reinsurer's share of Recoveries;
(d) Ceding Commission;
(e) Any excise tax due by Reinsurer pursuant to Article XII;
(f) Net amount due Reinsurer (the sum of (c) and (d), less (e) and
(f));
(g) Reinsurer's share of subject deferred premium revenue;
(h) Reinsurer's share of subject case basis reserves established
by the Reinsured; and
(i) Reinsurer's share of subject contingency reserves established
by the Reinsured.
(2) A premium bordereau report setting forth for each Policy the name and
location of each issuer, a description of the issue insured including
par amount insured, maturity dates, underlying rating (if available),
the effective date of coverage, sector, total premium, premium rate,
premium and par amounts subject to this Agreement and such other
information as the Reinsurer and Reinsured may agree with respect to
the bordereau report;
(3) A Recoveries bordereau setting forth for each Policy paid claims,
amount of Recoveries, and such other information as Reinsurer may
reasonably require;
(4) Payment of the net amount due the Reinsurer as set forth in (1)(f)
above. In the event that a net balance is due the Reinsured by the
Reinsurer, such amount will be paid by the
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<PAGE> 6
Reinsurer within fifteen (15) days after the reports are furnished to
the Reinsurer; provided, however, that if the Reinsurer objects to all
or any portion of the amount due by the Reinsurer based on its good
faith belief that such amount is incorrect, then the Reinsurer shall
not be obligated to pay the disputed amount until the parties have
resolved the dispute to their mutual satisfaction.
(5) Within thirty (30) days after the end of each calendar quarter, the
Reinsured will provide to the Reinsurer any other information regarding
the Policies that the Reinsurer may require that is reasonably
available to the Reinsured.
(6) As used herein, the term "Gross Net Written Premium Income" shall mean
all premium actually received or due in respect of Policies (whether
direct or assumed) written during the Term.
Notwithstanding the foregoing, at the option and upon the demand of
the Reinsured, the Reinsured shall be paid by special remittance within three
(3) Business Days (as defined below) upon receipt of a special account, which
shall be prepared by the Reinsured and shall contain all relevant details in
connection with the Loss or Loss Expense. When the Reinsured has determined with
a reasonable degree of certainty that a Policy Payment will occur, the
Reinsured, at its option, may present such special account to the Reinsurer
prior to the date of the Policy Payment by the Reinsured. Provided that the
Reinsurer receives such special account at least three Business Days prior to
the date of Policy Payment by the Reinsured, the Reinsurer shall make payment to
the Reinsured by 12:00 p.m., Eastern Standard time, on the Business Day prior to
such scheduled date of Policy Payment by wire transfer in immediately available
funds. If for any reason the Reinsured shall not make such Policy Payment on the
scheduled date and no such Policy Payment is anticipated within two (2) Business
Days, or if such Policy Payment was anticipated but two (2) Business Days have
expired without making such policy payment, the Reinsured shall return to the
Reinsurer within two (2) Business Days the amount paid to the Reinsured by the
Reinsurer for such Policy Payment to the extent not used therefor, plus interest
payable at the same rate as the first six-month U.S. Treasury Bill issued during
that quarter. As used herein, "Business Day" shall mean any day other than a
Saturday, Sunday or holiday on which the Reinsured is not open for business.
The Reinsurer shall provide the Reinsured with its annual financial
statement and, to the extent available, quarterly or semi-annual financial
statements, in English, promptly after such statements become available for
distribution.
ARTICLE VI
RESERVES
The Reinsurer shall maintain reserves with respect to its
proportionate share of outstanding and incurred but not reported loss, unearned
premium and contingency reserves as appropriate and required based on statutory
accounting and actuarial principles consistently applied, and comply with all
other requirements, as required by applicable law.
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<PAGE> 7
ARTICLE VII
STATUTORY FINANCIAL CREDIT
The Reinsurer shall take all steps necessary to enable the
Reinsured to obtain full credit for the reinsurance provided by this Agreement
in all applicable jurisdictions, including compliance with Maryland law and
regulations; provided, however, that the Reinsurer shall not be required to
engage in any activity that would require the Reinsurer to operate a trade or
business or obtain any license or certification within the United States. The
obligations of the Reinsurer under this Article VII shall include providing
security or entering into appropriate security devices in the amount required by
law (collectively, the "Security") to permit the Reinsured to obtain full
reinsurance credit. When two or more types of Security are permitted under
applicable law, the Reinsurer may, in its sole discretion, select the Security
it will establish or provide and substitute other Security after initial
Security has been established or provided. The Reinsured and Reinsurer agree
that, if possible, any Security provided to Reinsured will be held in a manner
so as to allow the Reinsured to take financial credit for the reinsurance
provided by this Agreement and also allow, if possible, the Reinsurer to treat
such Security as an admitted asset in accordance with applicable law.
When required by applicable law in order for the Reinsured to take
financial credit for the reinsurance provided by this Agreement, the Reinsured
shall be entitled to withhold from the Reinsurer as security for the payment of
the latter's obligations, an amount herein called the "Deposit." The Deposit
shall equal the Reinsurer's share of Losses and Loss Expenses paid by the
Reinsured but not recovered from the Reinsurer and outstanding, and incurred but
not reported loss, unearned premium and contingency reserves. The Reinsured
shall hold the deposit in a segregated account for the sole and exclusive
benefit of Reinsurer and only use such funds as provided hereunder. In the event
the Reinsured becomes insolvent, any assets of the Reinsurer held by the
Reinsured, including but not limited to the deposit, shall be deemed to be held
in trust for the sole and exclusive benefit of the Reinsurer.
The Deposit shall be adjusted quarterly to equal Losses and Loss
Expenses paid by the Reinsured but not recovered from the Reinsurer and the
unearned premium, contingency and outstanding and incurred but not reported loss
reserves, calculated on the basis of the requirements of applicable law,
corresponding to the Reinsurer's proportionate share of risks reinsured
hereunder.
At any time after default by the Reinsurer of payments owing to
the Reinsured under this Agreement, the Reinsured may use so much of the Deposit
as may be required to eliminate the default. Until the Deposit has been utilized
in such manner, interest thereon shall be credited to the Reinsurer quarterly at
the lesser of the prime rate or the same interest rate payable on the first
six-month U.S. Treasury Bill issued during each quarter.
Upon termination of this Agreement, if the Reinsured and the
Reinsurer agree that the Reinsured will withdraw the Business Reinsured from the
Reinsurer, the Reinsured shall credit and pay to the Reinsurer the balance of
any funds of the Reinsurer in the possession of the Reinsured, including,
without limitation, any funds withheld by the Reinsured as Security, and return
any Security in the possession of the Reinsured. If the cessions in force are
allowed to run
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<PAGE> 8
to their normal expiry, then any funds withheld by or other Security in the
possession of the Reinsured shall be adjusted quarterly.
If the Reinsurer elects to use a Letter of Credit as Security, the
following provisions shall apply to the Reinsurer:
(1) The Reinsurer shall provide to the Reinsured a letter of credit in form
and amount required by applicable law. If the issuing or confirming
bank shall cease to meet applicable legal requirements during the term
of the letter of credit, the Reinsurer shall replace such letter of
credit with a complying one upon the earlier of the stated expiration,
next extension or renewal date, or modification or amendment of the
letter of credit. Within thirty (30) day of the Reinsurer's receipt of
the quarterly report required by Article V of this Agreement:
(a) if the Reinsurer's share of the obligations under this
Agreement shall exceed the then existing balance of the letter
of credit made available, the Reinsurer shall, if required by
applicable law, secure delivery to the Reinsured of an
amendment to the letter of credit increasing the amount of the
letter of credit available by the amount required under
applicable law; or
(b) if the Reinsurer's share of the obligations under this
Agreement shall be less than the balance of the letter of
credit available on the accounting date, the Reinsured shall
release such excess credit by agreeing to an amendment to the
letter of credit reducing the amount of the letter of credit
available by the amount of such excess credit.
(2) Except as may otherwise be required under applicable law, the Reinsurer
and the Reinsured agree that a letter of credit provided by the
Reinsurer pursuant to this Agreement may be drawn upon at any time by
the Reinsured or its successors in interest only for one or more of the
following:
(a) to reimburse the Reinsured for the Reinsurer's share of
premiums (adjusted for return to the Reinsurer of the pro rata
portion of the Ceding Commission paid to the Reinsured)
returned to the owners of Policies reinsured under this
Agreement on account of cancellations of such Policies; and
(b) to reimburse the Reinsured for the Reinsurer's share of Losses
and Loss Expenses paid by the Reinsured pursuant to the
provisions of the Policies reinsured by this Agreement.
When the Reinsured has received notification of the non-renewal of
the letter of credit and when the Reinsurer's obligations under this Agreement
with respect to risks and obligations covered by letter of credit remain
unliquidated and undischarged ten (10) days prior to such expiration date, the
Reinsurer shall supply to the Reinsured substitute Security meeting the
requirements of this Article.
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<PAGE> 9
All of the foregoing shall be applicable without diminution
because of insolvency on the part of the Reinsured or the Reinsurer.
ARTICLE VIII
DUE DILIGENCE RESPONSIBILITIES OF THE REINSURED
In accordance with customary practice in the financial guaranty
insurance industry, the Reinsured will be responsible for performing due
diligence with respect to all obligations to be ceded to and reinsured by the
Reinsurer pursuant to this Agreement, as may be necessary to identify and
evaluate the credit risks attendant thereto. Such evaluation and analysis shall
comport with the written underwriting criteria, standards and guidelines of the
Reinsured. The Reinsured will provide copies of credit reports, financial
statements, environmental impact reports, market research and feasibility
studies, appraisals and other related documentation to the Reinsurer at the time
that the Reinsurance Memorandum described in Article I is presented to the
Reinsurer. In addition, the Reinsured will perform surveillance with respect to
the obligations reinsured hereunder, in order to avoid or mitigate claims
through early warning and remedial management. The surveillance function shall
include the responsibility: (i) to monitor compliance with covenants, changes in
the status, credit ratings or credit profile of reinsured obligations, (ii) to
maintain a watch list and, (iii) where necessary, to engage in the
re-structuring and re-financing of troubled credits.
ARTICLE IX
ACCESS TO RECORDS
The Reinsurer or its authorized representative shall have access to
the books and records of the Reinsured at all reasonable times for the purpose
of obtaining information concerning this Agreement or its subject matter. This
access shall include all papers in possession of the Reinsured in connection
with claims and the adjustment of claims. The Reinsured or its authorized
representatives shall have access to the books and records of the Reinsurer,
where required by a governmental or regulatory authority.
ARTICLE X
REINSURANCE FOLLOWS ORIGINAL POLICIES
All reinsurance for which the Reinsurer shall be liable by
subscribing to this Agreement shall be subject in all respects to the same
rates, terms, conditions, interpretations, waivers, the exact proportion of
premiums paid to the Reinsured and to the same modification, alterations and
cancellations as the respective Policies of the Reinsured to which such
reinsurance relate, the true intent of this Agreement being that the Reinsurer
shall, in every case to which this Agreement applies and in the proportion
specified in the Reinsurance Memoranda, follow the fortunes of the Reinsured.
This Agreement shall be construed as an honorable undertaking between the
parties hereto and shall not be defeated by technical legal constructions.
However, except as provided in Article XV, nothing in this Agreement shall be
construed to expand the liability of the Reinsurer beyond what is specifically
assumed under this Agreement by creating rights of any third party, including
any insured of the Reinsured, in any rights under this Agreement.
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<PAGE> 10
ARTICLE XI
TAXES
The Reinsured shall be liable for premium and Federal excise taxes
on premiums reported to the Reinsurer hereunder. The Reinsured may deduct any
Federal excise tax from the premium to be paid to the Reinsurer.
ARTICLE XII
SERVICE OF PROCESS, JURISDICTION AND VENUE
Subject to the parties hereto first complying with the provisions
of Article XVI hereof, the Reinsurer hereby irrevocably submits to the
non-exclusive jurisdiction of any Federal or New York State court sitting in New
York City over any suit, action or proceeding arising out of or relating to this
Agreement. The Reinsurer irrevocably waives, to the fullest extent permitted by
law, any objection which it may now or hereafter have to the laying of the venue
of any such suit, action or proceeding brought in such court and any claim that
any such suit, action or proceeding brought in such a court was brought in an
inconvenient forum. The Reinsurer agrees that a final judgment, not subject to
any further appeal, in any such suit, action or proceeding brought in such a
court shall be conclusive and binding upon it and will be given effect in the
country of domicile of the Reinsurer to the fullest extent permitted by
applicable law and may be enforced in any Federal or New York State court
sitting in New York City (or any other courts to the jurisdiction of which the
Reinsurer is or may be subject) by a suit upon such judgment, provided that
service of process is effected upon it as specified in this Article or as
otherwise permitted by law. Nothing herein shall be deemed to limit or waive the
Reinsurer's right to remove a suit, action or proceeding to a federal court of
the United States.
Pursuant to any statute of any state, territory or district of the
United States that makes provisions therefor, the Reinsurer hereby designates
the Superintendent, Commissioner or Director of Insurance or other officer
specified for the purpose in the statute, or his successor or successors in
office, as its true and lawful attorney, upon whom may be served any lawful
process in any action, suit or proceeding arising hereunder that may be
instituted by or on behalf of the Reinsured or any beneficiary under this
Agreement, and hereby designates the person named in Article XX hereof as the
person to whom such officer is authorized to mail such process or a true copy
thereof.
The Reinsurer hereby consents to process being served in any suit,
action or proceeding of the nature referred to above in any Federal or New York
State court sitting in New York City by service of process as set forth above,
provided that, to the extent lawful and possible, written notice of said service
upon such agent shall be mailed by registered or certified air mail, postage
prepaid, return receipt requested, to the Reinsurer at its address specified
Article XX hereof or to any other address which the Reinsurer shall have
designated in accordance with Article XX. The Reinsurer irrevocably waives, to
the fullest extent permitted by law, all claim of error by reason of any such
service (although the Reinsurer does not waives claims that service of process
was not actually received by the Reinsurer) and agrees that such service shall
be deemed to be effective service of process upon the Reinsurer in any such
suit,
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action or proceeding and shall, to the fullest extent permitted by law, be held
to be valid and personal service upon the Reinsurer, unless the service of
process was not actually received by the Reinsurer.
Nothing in this Article shall affect the right of the Reinsurer to
receive service of process in any other manner permitted by law or limit the
right of the Reinsurer to bring proceedings against the Reinsured in any court
having jurisdiction over the Reinsured and such proceedings. Nothing in this
Article shall limit the provisions of Article XV of this Agreement.
ARTICLE XIII
CURRENCY
All premium and losses arising with respect to the Business
Reinsured, accounts, reports, deposits, arbitration awards and/or court
judgments arising out of this Agreement shall be in United States currency.
Premiums paid to the Reinsured for Policies covered by this
Agreement in other than United States currency shall be paid by the Reinsured to
the Reinsurer in United States currency at the rate of exchange on which the
original accounts were settled or, if not converted at such time, at the rate of
exchange used by the Reinsured in its own books of account at the time of the
settlement or in accordance with any subsequent adjustment to such account.
The amounts recoverable by the Reinsured from the Reinsurer for
its proportional share of losses under the Business Reinsured in other than
United States currency shall be converted into United States currency at the
same rate of exchange as were applied in the settlement of the original losses
or, if not converted at such time, at the rate of exchange used by the Reinsured
in its own books of account at the time of the settlement or in accordance with
any subsequent adjustment to such account.
The Reinsurer shall bear the currency risk for its proportionate
share in the event that (i) an insured obligation is denominated in a foreign
currency, (ii) the Reinsurer's limit of liability is denominated in United
States currency and (iii) the amount insured is such that the Reinsurer's
applicable limit of liability for the cession is applicable using the currency
exchange rate in effect on the Policy effective date. The Reinsurer's percentage
participation shall be calculated by converting the Reinsurer's limit of
liability using the currency exchange rate in effect on the Policy effective
date, and the Reinsurer shall be entitled to its proportionate share of premiums
and liable for its proportionate share of Policy Payments based on such
percentage, notwithstanding any later change in currency exchange rates which
result in the Reinsurer's limit of liability being exceeded.
ARTICLE XIV
INSOLVENCY
In the event of the insolvency of the Reinsured, the amounts owing
by the Reinsurer under this Agreement shall be immediately payable directly to
the Reinsured, or to its liquidator, receiver, conservator or statutory
successor on the basis of the liability of the Reinsured without
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<PAGE> 12
diminution because of the insolvency of the Reinsured or because the liquidator,
receiver, conservator or statutory successor of the Reinsured has failed to pay
all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Reinsured shall give written
notice to the Reinsurer of the pendency of a claim against the Reinsured
indicating the policy or bond reinsured which claim would involve a possible
liability on the part of the Reinsurer, within a reasonable time after such
claim is filed in the conservation or liquidation proceeding or in the
receivership and that, during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses that it may deem
available to the Reinsured or its liquidator, receiver, conservator or statutory
successor. The expense thus incurred by the Reinsurer shall be chargeable,
subject to the approval of the court, against the Reinsured as part of the
expense of conservation or liquidation to the extent of a pro rata share of the
benefit which may accrue to the Reinsured solely as a result of the defense
undertaken by the Reinsurer.
The reinsurance shall be payable by the Reinsurer to the Reinsured
or to its liquidator, receiver, conservator or statutory successor, except (a)
where the Agreement specifically provides another payee of such reinsurance in
the event of insolvency of the Reinsured and (b) where the Reinsurer with the
consent of the direct insured or insureds has assumed such Policy obligations of
the Reinsured as direct obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the Reinsured to such
payees, provided that any such assumption shall be subject to the approval of
the Maryland Insurance Commissioner of a certificate of assumption.
ARTICLE XV
ARBITRATION
All disputes arising from this Agreement shall first be
adjudicated by a Board of Arbitration (the "Board") consisting of three
arbitrators, all of whom shall be active or retired executive officers of
insurance or reinsurance companies having no direct or indirect financial
interest in either party or its affiliates. Each of the parties hereto shall
select one arbitrator. A third arbitrator will be chosen by the two arbitrators
selected by the parties. A party shall initiate arbitration ("Petitioner") by
providing the other party with Notice, demanding arbitration and identifying its
selected arbitrator. The other party ("Respondent") will have thirty (30) days
from its receipt of a demand for arbitration within which to identify an
arbitrator. In the event that Respondent fails to identify an arbitrator within
such thirty (30) day period, Petitioner shall have the right to identify a
second arbitrator, and Respondent will not be deemed aggrieved thereby. The
arbitrators will jointly select a third arbitrator within thirty (30) days after
both arbitrators have been selected. If the two arbitrators do not agree on the
selection of a third arbitrator within such thirty (30) day period, the third
arbitrator shall be designated by the American Arbitration Association.
The Board shall interpret this Agreement as an honorable
engagement and will make its award with a view to effecting the purpose and
intent of this Agreement in a reasonable manner, rather than in accordance with
the technical interpretation of this Agreement. The Board
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<PAGE> 13
will be relieved from judicial formalities. The decision of a majority of the
Board will be final and binding upon the parties.
The parties shall equally bear the fees and costs of the Board of
Arbitrators. The remaining costs of the arbitration shall be paid as the Board
shall direct.
The arbitration shall take place in the City and State of New
York, unless the Board designates another location with the mutual consent of
the parties. The rules and procedures for pre-hearing investigations shall be
established by the Board and the investigation shall be completed within ninety
(90) days of the appointment of the third arbitrator. Petitioner shall deliver a
written arbitration brief to the Board and to the Respondent within thirty (30)
days of completion of the pre-hearing investigations. Respondent shall deliver a
written response to the Board and the Petitioner within thirty (30) days of its
receipt of Petitioner's brief. A hearing shall be held within thirty (30) days
of submission of Respondent's response. The Board shall render its decision
within sixty (60) days after completion of the hearing unless the Board requests
and the parties consent to an extension of time.
The Board may alter the time periods set forth in this Article for
good cause shown.
This Article shall survive the termination of this Agreement.
ARTICLE XVI
APPLICABLE LAW
This Agreement shall be interpreted in accordance with the laws of
the State of New York, without giving effect to the conflict of law rules
thereof.
ARTICLE XVII
SET OFF
The Reinsured and the Reinsurer have the right to set off amounts
due from one to the other. The party asserting the right of set off may exercise
such right at any time whether the amount(s) due constitute payment of premiums,
losses or otherwise. In the event of the insolvency of a party hereto, set off
shall only be allowed in accordance with applicable law.
ARTICLE XVIII
CONFIDENTIALITY
The Reinsurer agrees to maintain the confidentiality of the
Policies, the reinsurance of the Policies and the underlying transactions and
documents (the "Information"), except
(i) to employees, officers, directors and legal counsel with a
need to know the Information,
(ii) to reinsurers, bankers, governmental agencies that
regulate the Reinsurer
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<PAGE> 14
and the rating agencies that rate the Reinsurer with a need to
know the Information,
(iii) in response to a subpoena calling for production of the
Information, or
(iv) to any other person as to whom the Reinsured has given
its prior written consent to each such disclosure, which
consent shall not be unreasonably withheld or delayed.
In the case of subparagraphs (i) and (ii) above, no disclosure of
the Information shall be permitted if any such entity or individual is
affiliated with a financial guaranty insurer in competition with the Reinsured.
In the case of subparagraph (iii) above, the Reinsurer shall promptly notify the
Reinsured of such subpoena and shall at the Reinsured's direction and expense
contest production of the Information thereunder.
The foregoing requirements of confidentiality shall not apply to
those portions of the Information that (a) are generally available to the public
other than as a result of a disclosure by the Reinsurer or its representatives
or (b) become available to the Reinsurer from a source that is not bound by an
obligation of confidentiality to the Reinsured. If required by a participant in
a transaction insured or to be insured by a Policy, the Reinsurer shall execute
a separate confidentiality agreement containing the foregoing obligations of
confidentiality with respect to such transaction. Nothing contained herein shall
be deemed to expand or limit the non-competition obligation contained under
Section 4, Article X of that certain Quota Share Reinsurance Agreement, between
the parties hereto, effective on the later of January 1, 1999 or the closing of
that certain public offering of the Reinsurer's stock.
ARTICLE XIX
ADDRESSES FOR NOTICES
All notices and other communications required by this
Agreement (each a "Notice") shall be sent to the parties at the following
addresses, respectively, unless a party designates another address in writing:
Global Markets Guaranty Ltd. ACA Financial Guaranty Corporation
Victoria Hall, Victoria St. One Liberty Plaza 52nd Floor
P.O. Box HM1262 New York, New York 10006 U.S.A.
Hamilton, HM FX Bermuda
Fax No.: 441- Fax No.: 212-766-4034
Attn: Chief Exec. Officer Attn: Reinsurance Officer
IN WITNESS WHEREOF, the parties, by their duly authorized
representatives, have executed this Master Facultative Reinsurance Agreement as
of the 25th day of November, 1998.
REINSURED: REINSURER:
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GLOBAL MARKETS GUARANTY LTD. ACA FINANCIAL GUARANTY CORPORATION
By: /s/ Donald J. Matthews By: /s/ H. Russell Fraser
------------------------------ ---------------------------------
Donald J. Matthews H. Russell Fraser
President and C.E.O. Chairman and C.E.O.
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<PAGE> 16
EXHIBIT A
TO
MASTER FACULTATIVE REINSURANCE AGREEMENT
BETWEEN
ACA FINANCIAL GUARANTY CORPORATION
AND
GLOBAL MARKETS GUARANTY LTD.
REINSURANCE MEMORANDUM
INDIVIDUAL RISK UNDER
MASTER FACULTATIVE REINSURANCE AGREEMENT
REINSURANCE MEMORANDUM NO. _____________________________________________________
ISSUER: ________________________________________________________________________
ISSUE: ________________________________________________________________________
ACA POLICY NUMBER: _____________________________________________________________
POLICY EFFECTIVE DATE: _________________________________________________________
TOTAL PRINCIPAL INSURED BY COMPANY: ____________________________________________
TOTAL PRINCIPAL CEDED TO REINSURER: ____________________________________________
FORM OF REINSURANCE:
________________________________________________________________________________
________________________________________________________________________________
METHOD FOR ALLOCATING SUBROGATION RECOVERIES:
________________________________________________________________________________
________________________________________________________________________________
SPECIFIC MATURITIES CEDED TO REINSURER (IF OTHER THAN PROPORTIONATE SHARE OF
ENTIRE ISSUE IS CEDED):
________________________________________________________________________________
________________________________________________________________________________
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<PAGE> 17
REINSURANCE MEMORANDUM NO.
EFFECTIVE DATE OF REINSURANCE (IF DIFFERENT FROM POLICY EFFECTIVE DATE):
________________________________________________________________________________
________________________________________________________________________________
DEVIATIONS FROM COVER PROVIDED BY COMPANY'S ORIGINAL POLICY:
________________________________________________________________________________
________________________________________________________________________________
GROSS FACULTATIVE PREMIUM CEDED
RATE: ________________________________________________________
AMOUNT: ______________________________________________________
CEDING COMMISSION AND OTHER COSTS
RATE: ________________________________________________________
AMOUNT: ______________________________________________________
OTHER COSTS: _________________________________________________
NET FACULTATIVE PREMIUM CEDED: _________________________________________________
The cession evidenced by this Reinsurance Memorandum shall be subject
to all the terms and conditions contained in that certain Master Facultative
Reinsurance Agreement between the undersigned, dated as of , 1998.
SUBMITTED BY: ACCEPTED BY:
ACA FINANCIAL GUARANTY GLOBAL MARKETS GUARANTY LTD.
CORPORATION
BY: __________________________________ BY: __________________________________
NAME: _______________________________ NAME: ________________________________
TITLE: _______________________________ TITLE: _______________________________
DATE: ______________________________ DATE: _________________________________
17
<PAGE> 1
Exhibit 10.10
MASTER FACULTATIVE REINSURANCE AGREEMENT
BETWEEN
GLOBAL MARKETS GUARANTY LTD.
AND
ACA FINANCIAL GUARANTY CORPORATION
In consideration of the mutual covenants and upon the terms and
conditions set forth in this Master Facultative Reinsurance Agreement, Global
Markets Guaranty Ltd., a Bermuda corporation (the "Reinsured") and ACA Financial
Guaranty Corporation, a Maryland stock insurance corporation (the "Reinsurer"),
hereby agree as follows:
ARTICLE I
BUSINESS REINSURED
The Reinsured shall cede as reinsurance to the Reinsurer and the
Reinsurer shall accept as reinsurance from the Reinsured the share of a risk
insured by the Reinsured as specified and agreed to by the parties in a
reinsurance memorandum in substantially the same form of Exhibit A annexed to
this Agreement (the "Reinsurance Memorandum"). All Policies (defined below) that
are reinsured hereunder are sometimes collectively referred to as the "Business
Reinsured."
The Reinsured shall first offer to the Reinsurer each of the risks of
the Reinsured which incepts or renews after the effective date of this
Agreement, and the Reinsurer shall have the right, in its sole discretion, to
reject or accept any individual risk presented to the Reinsurer by the Reinsured
pursuant to a duly completed Reinsurance Memorandum. The Reinsurer shall not be
bound hereunder on any individual risk unless it first has given its approval by
providing the Reinsured with a copy of the Reinsurance Memorandum for that
particular risk signed by a duly authorized representative of the Reinsurer. The
Reinsurer shall either return the signed Reinsurance Memorandum or notify the
Reinsured of its decision not to assume a particular risk as soon as
practicable. In the event that the Reinsured has not received the signed
Reinsurance Memorandum or other notice of the decision of the Reinsurer as to an
individual risk within 15 days of the date of a Reinsurance Memorandum in
respect thereof, the Reinsured shall be free to offer such risk to third parties
on terms which are not less favorable to the Reinsured.
Once the Reinsurer has provided the Reinsured with such signed
Reinsurance Memorandum, the Reinsurer shall be bound to provide coverage under
this Agreement in accordance with the terms and conditions of the Reinsured's
underlying policy covering the risk (the "Policy" or "Policies"), unless the
terms and conditions of coverage with respect to the particular risk are
modified in the Reinsurance Memorandum pertaining to that risk. The Reinsurer's
liability shall attach as of the effective date of the Policy, unless the
Reinsurance Memorandum provides for a different date. Unless otherwise provided
by the Reinsurance Memorandum, the Reinsurer shall assume the designated portion
or amount of principal or other obligation insured under the Policy, any
interest or premium on such amount assumed and a pro rata share of Loss Expenses
(as defined in Article III hereof).
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The share of the Reinsurer in the interests and liabilities of the
Policies covered by this Agreement shall be separate and apart from the shares
of any other reinsurers assuming such risks. The Reinsurer's obligation pursuant
to this Agreement shall not be joint with any such other reinsurer and in no
event shall the Reinsurer participate in the interests and liabilities of such
other reinsurers.
ARTICLE II
TERM AND CANCELLATION
This Agreement shall be effective as of 12:00 a.m., Eastern Standard
Time, December 15, 1998, and shall be a continuous contract until canceled. This
Agreement shall not become effective if the public offering of the stock of
Reinsured does not close. Either the Reinsured or the Reinsurer has the right to
cancel this Agreement by giving at least ninety (90) days' prior Notice (as
defined below). This Agreement may be canceled by either party effective
immediately upon mutual consent. In the event of cancellation either by 90 days'
notice or mutual consent, the Reinsurer shall continue to be liable for claims
whenever made under all Policies ceded pursuant to this Agreement until the
natural expiration of such Policies, except to the extent that the Reinsured and
the Reinsurer agree to a withdrawal of the reinsured risks from the Reinsurer
and return or payment by the Reinsurer of an amount equal to the Reinsurer's
share of incurred Loss and Loss Expenses (i.e. Loss and Loss Expense payments
and reserves) (as defined in Article III hereof) and unearned premiums (less the
corresponding ceding commission).
Upon the occurrence of any of following events and in the time periods
set forth, the Reinsured shall have the right to terminate the Reinsurer's
participation in Policies covered by this Agreement by giving Notice of
termination to the Reinsurer:
(1) (a) The performance of the Agreement is prohibited or rendered
impossible by any applicable law or regulation, (b) the Reinsured fails
to receive all or substantially all financial credit for the
reinsurance in all applicable jurisdictions, or (c) the insurance
regulator in the applicable jurisdiction directs the Reinsured to
cancel the Reinsurer's participation in this Agreement. The Reinsurer
shall have the time allowed by the insurance regulator in the
applicable jurisdiction to comply with such applicable law or
regulation. Termination of the Reinsurer's participation in this
Agreement pursuant to this paragraph shall be effective upon the
Reinsurer's receipt of Notice of termination
(2) In the event that the Reinsurer: (a) becomes insolvent, (b) fails to
maintain the minimum capital and surplus requirements required by the
laws of the Reinsurer's domicile, (c) is the subject of a voluntary or
involuntary filing of a petition in bankruptcy, (d) goes into
liquidation or rehabilitation, (e) has a receiver appointed, (f) allows
its surplus to policyholders to decline by twenty-five percent (25%) or
more during any twelve month period as reported in any financial
statement, or (g) fails, within a reasonable time following the
Reinsurer's receipt of a written request by the Reinsured, to receive
and maintain any required approval of the Minister of Finance of
Bermuda. Termination
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pursuant to this paragraph shall be effective upon the Reinsurer's
receipt of Notice of termination.
(3) The Reinsurer (i) is acquired or undergoes a change of control,
provided that the Reinsured gives Notice of its intention to terminate
within fifteen (15) days of its receipt of Notice of such occurrence
from the Reinsurer which the Reinsurer shall be required to provide
within a reasonable time or (ii) breaches any of its covenants set
forth herein. Termination pursuant to this paragraph shall be effective
sixty (60) days after the Reinsurer's receipt of the Notice of
termination, if cure is not previously effected. "Change of Control"
means the acquisition of beneficial ownership of 30% or more of the
issued and outstanding voting securities (including, without
limitation, securities convertible into voting securities) of the
Reinsurer or of American Capital Access Holdings, Inc., its parent
("Holdings"), by one or more purchasers acting in concert in a single
transaction or in a series of related transactions; provided, however,
that "Change of Control" shall not include an initial public offering
of the capital stock of the Reinsured or of Holdings.
(4) In the event that the Reinsurer ceases to have a financial strength
rating or claims-paying ability rating from any of Standard & Poor's
Ratings Services, Fitch IBCA, Inc. or Duff & Phelps Credit Rating Co.
of "A-" or higher, the Reinsurer will have ninety (90) days from the
date of downgrading to restore such rating to at least "A-". If the
Reinsurer is unsuccessful within the aforesaid 90-day period,
termination pursuant to this paragraph shall be effective upon the
Reinsurer's receipt of Notice of termination.
Upon termination pursuant to paragraphs (1), (2), (3) or (4) above, the
Reinsurer shall continue to cover all Policies written by the Reinsured prior to
such termination and coming within the scope of this Agreement until the natural
expiration of such Policies.
This Agreement may be canceled with respect to the Reinsurer at the
discretion of the Minister of Finance of Bermuda, acting as rehabilitator,
liquidator or receiver of the Reinsured.
As used in this Agreement, "Notice" shall mean written notice (i) sent
by facsimile to the party concerned to the facsimile number set forth in this
Agreement or previously designated in writing by the party, provided that a copy
is also promptly mailed or delivered or (ii) addressed to the party concerned at
its address set forth in this Agreement or previously designated by that party
in writing and sent by certified or express mail return receipt requested, or by
courier or hand delivery. Notice shall be deemed effective (i) if sent by
facsimile, the date sent, (ii) if sent by mail, the date received or (iii) if
delivered by courier or by hand, the date delivered.
ARTICLE III
LOSS AND LOSS EXPENSES
The Reinsurer shall pay its share up to any applicable limit of
liability of Losses under Policies covered by this Agreement. Except as provided
in Articles V and XIV, "Loss" and "Losses" shall mean only such amounts that are
actually paid by the Reinsured in settlement of
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claims under Policies or in satisfaction of judgments involving Policies. If
such settlement involves the refinancing of the obligations insured under a new
Policy (the "Refinanced Obligations") by the issuance of new obligations that
are insured by the Reinsured (the "Refinancing Obligations"), each reinsurer
shall assume under this Agreement the same proportionate share of the
Refinancing Obligations as the Reinsurer assumed of the Refinanced Obligations.
The Reinsurer shall be liable for its proportionate share of "Loss
Expenses" unless the Reinsurance Memorandum provides otherwise. "Loss Expenses"
shall mean court costs, interest upon judgments, and allocated investigation,
adjustment and legal expenses, including expenses related to the workout of a
potential loss or the protection and perfection of any subrogation or salvage
rights or security interest under a Policy. Losses and Loss Expenses
(collectively "Policy Payments") shall not include (a) salaries paid to
employees of the Reinsured, (b) awards or judgments against the Reinsured
occasioned by failure of the Reinsured to settle a claim or make payment under
its policy, when such failure arises from bad faith, negligence or misconduct on
the part of the Reinsured or any agent or employee of the Reinsured or (c)
liability of the Reinsured, arising by contract, operation of law or otherwise,
from its participation or membership, whether voluntary or involuntary, in any
insolvency fund, including any guaranty fund, association, pool, plan or other
facility that provides for the assessment of, payment by or assumption by the
Reinsured of a part or the whole of any claim, debt, charge, fee or other
obligation of any insurer, or its successor or assigns, that has been declared
insolvent by any authority having jurisdiction, or which is otherwise unable to
meet any claim, debt, charge, fee or other obligation in whole or in part. Loss
Expenses shall not be included in calculating the Reinsurer's limit of
liability, except to the extent that the respective Reinsurance Memorandum
otherwise provides.
The Reinsured agrees to keep the Reinsurer informed as to any default
or potential default of any non-payment(s) of amounts due under obligations
covered by Policies reinsured by this Agreement. In any event, Notice (as
defined in Article II) of a default shall be given to the Reinsurer within
fifteen (15) days of notification to the Reinsured of such default. Failure to
provide such Notice shall not relieve the Reinsurer of its obligation for any
Loss resulting from such claim except to the extent that it has suffered undue
prejudice.
The Reinsurer agrees to abide by the Loss settlements of the Reinsured.
The Reinsured shall determine in its sole discretion (i) what shall constitute a
claim or Loss covered under the Reinsured's insurance policies, (ii) the
Reinsured's liability thereunder and (iii) the correct amount or amounts, if
any, that the Reinsured shall pay thereunder. The Reinsurer shall be bound by
the determination of the Reinsured concerning the salvage and subrogation rights
and remedies of the Reinsured under the Policies, and the Reinsured shall have
complete and sole control of the direction of all claims and salvage and
subrogation remedies.
Salvage and subrogation recoveries (after the Reinsured and the
Reinsurer have recovered their expenses) (the "Recoveries") will be credited to
Reinsurer in accordance with the Reinsurance Memorandum. In the event that such
Recoveries exceeds all Policy Payments during the term of a Policy, such excess
shall be treated as additional premium and apportioned
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between the Reinsured and the Reinsurer in the same proportion that premiums for
the Policy were apportioned.
ARTICLE IV
PREMIUMS AND COMMISSIONS
The Reinsured shall pay to the Reinsurer its share of the premium after
first deducting a ceding commission and other costs allowed by the Reinsurer
(the commission and other costs collectively, the "ceding commission"), as such
premium and commission are set forth in the Reinsurance Memorandum for each
particular risk reinsured under this Agreement.
If obligations covered by a Policy are refunded in advance of maturity
and a credit is allowed to the premium charged for insuring the refunding
obligations, the Reinsurer shall receive its pro rata share of such credit and
shall refund its pro rata share of any unearned premium debited to the refunded
obligations net of the ceding commission applicable thereto, provided that the
Reinsurer is offered the same pro rata share of the refunding transaction.
ARTICLE V
REPORTS AND REMITTANCES
Within fifteen (15) days following the end of each month, the
Reinsured shall provide to the Reinsurer the following:
(1) An account current setting forth in the aggregate for the month:
(a) Gross Net Written Premium Income;
(b) Facultative Premium Ceded;
(c) Reinsurer's share of Recoveries;
(d) Ceding Commission;
(e) Any excise tax due by Reinsurer pursuant to Article XII;
(f) Net amount due Reinsurer (the sum of (c) and (d), less (e)
and (f));
(g) Reinsurer's share of subject deferred premium revenue;
(h) Reinsurer's share of subject case basis reserves
established by the Reinsured; and
(i) Reinsurer's share of subject contingency reserves
established by the Reinsured.
(2) A premium bordereau report setting forth for each Policy the name
and location of each issuer, a description of the issue insured including par
amount insured, maturity dates, underlying rating (if available), the effective
date of coverage, sector, total premium, premium rate, premium and par amounts
subject to this Agreement and such other information as the Reinsurer and
Reinsured may agree with respect to the bordereau report;
(3) A Recoveries bordereau setting forth for each Policy paid claims,
amount of Recoveries, and such other information as Reinsurer may reasonably
require;
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(4) Payment of the net amount due the Reinsurer as set forth in (1)(f)
above. In the event that a net balance is due the Reinsured by the Reinsurer,
such amount will be paid by the Reinsurer within fifteen (15)days after the
reports are furnished to the Reinsurer; provided, however, that if the Reinsurer
objects to all or any portion of the amount due by the Reinsurer based on its
good faith belief that such amount is incorrect, then the Reinsurer shall not be
obligated to pay the disputed amount until the parties have resolved the dispute
to their mutual satisfaction.
(5) Within thirty (30) days after the end of each calendar quarter, the
Reinsured will provide to the Reinsurer any other information regarding the
Policies that the Reinsurer may require that is reasonably available to the
Reinsured.
(6) As used herein, the term "Gross Net Written Premium Income" shall
mean all premium actually received or due in respect of Policies (whether direct
or assumed) written during the Term.
Notwithstanding the foregoing, at the option and upon the demand of
the Reinsured, the Reinsured shall be paid by special remittance within three
(3) Business Days (as defined below) upon receipt of a special account, which
shall be prepared by the Reinsured and shall contain all relevant details in
connection with the Loss or Loss Expense. When the Reinsured has determined with
a reasonable degree of certainty that a Policy Payment will occur, the
Reinsured, at its option, may present such special account to the Reinsurer
prior to the date of the Policy Payment by the Reinsured. Provided that the
Reinsurer receives such special account at least three Business Days prior to
the date of Policy Payment by the Reinsured, the Reinsurer shall make payment to
the Reinsured by 12:00 p.m., Eastern Standard time, on the Business Day prior to
such scheduled date of Policy Payment by wire transfer in immediately available
funds. If for any reason the Reinsured shall not make such Policy Payment on the
scheduled date and no such Policy Payment is anticipated within two (2) Business
Days, or if such Policy Payment was anticipated but two (2) Business Days have
expired without making such policy payment, the Reinsured shall return to the
Reinsurer within two (2) Business Days the amount paid to the Reinsured by the
Reinsurer for such Policy Payment to the extent not used therefor, plus interest
payable at the same rate as the first six-month U.S. Treasury Bill issued during
that quarter. As used herein, "Business Day" shall mean any day other than a
Saturday, Sunday or holiday on which the Reinsured is not open for business.
The Reinsurer shall provide the Reinsured with its annual financial
statement and, to the extent available, quarterly or semi-annual financial
statements, in English, promptly after such statements become available for
distribution.
ARTICLE VI
RESERVES
The Reinsurer shall maintain reserves with respect to its proportionate
share of outstanding and incurred but not reported loss, unearned premium and
contingency reserves as
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appropriate and required based on statutory accounting and actuarial principles
consistently applied, and comply with all other requirements, as required by
applicable law.
ARTICLE VII
STATUTORY FINANCIAL CREDIT
The Reinsurer shall take all steps necessary to enable the
Reinsured to obtain full credit for the reinsurance provided by this Agreement
in all applicable jurisdictions, including compliance with the Insurance Act
1978 of Bermuda and regulations promulgated thereunder. The obligations of the
Reinsurer under this Article VII shall include providing security or entering
into appropriate security devices in the amount required by law (collectively,
the "Security") to permit the Reinsured to obtain full reinsurance credit. When
two or more types of Security are permitted under applicable law, the Reinsurer
may, in its sole discretion, select the Security it will establish or provide
and substitute other Security after initial Security has been established or
provided. The Reinsured and Reinsurer agree that, if possible, any Security
provided to Reinsured will be held in a manner so as to allow the Reinsured to
take financial credit for the reinsurance provided by this Agreement and also
allow, if possible, the Reinsurer to treat such Security as an admitted asset in
accordance with applicable law.
When required by applicable law in order for the Reinsured to take
financial credit for the reinsurance provided by this Agreement, the Reinsured
shall be entitled to withhold from the Reinsurer as security for the payment of
the latter's obligations, an amount herein called the "Deposit." The Deposit
shall equal the Reinsurer's share of Losses and Loss Expenses paid by the
Reinsured but not recovered from the Reinsurer and outstanding, and incurred but
not reported loss, unearned premium and contingency reserves. The Reinsured
shall hold the deposit in a segregated account for the sole and exclusive
benefit of Reinsurer and only use such funds as provided hereunder. In the event
the Reinsured becomes insolvent, any assets of the Reinsurer held by the
Reinsured, including but not limited to the deposit, shall be deemed to be held
in trust for the sole and exclusive benefit of the Reinsurer.
The Deposit shall be adjusted quarterly to equal Losses and Loss
Expenses paid by the Reinsured but not recovered from the Reinsurer and the
unearned premium, contingency and outstanding and incurred but not reported loss
reserves, calculated on the basis of the requirements of applicable law,
corresponding to the Reinsurer's proportionate share of risks reinsured
hereunder.
At any time after default by the Reinsurer of payments owing to
the Reinsured under this Agreement, the Reinsured may use so much of the Deposit
as may be required to eliminate the default. Until the Deposit has been utilized
in such manner, interest thereon shall be credited to the Reinsurer quarterly at
the lesser of the prime rate or the same interest rate payable on the first
six-month U.S. Treasury Bill issued during each quarter.
Upon termination of this Agreement, if the Reinsured and the
Reinsurer agree that the Reinsured will withdraw the Business Reinsured from the
Reinsurer, the Reinsured shall credit and pay to the Reinsurer the balance of
any funds of the Reinsurer in the possession of the
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Reinsured, including, without limitation, any funds withheld by the Reinsured as
Security, and return any Security in the possession of the Reinsured. If the
cessions in force are allowed to run to their normal expiry, then any funds
withheld by or other Security in the possession of the Reinsured shall be
adjusted quarterly.
If the Reinsurer elects to use a Letter of Credit as Security, the
following provisions shall apply to the Reinsurer:
(1) The Reinsurer shall provide to the Reinsured a letter of credit in
form and amount required by applicable law. If the issuing or confirming bank
shall cease to meet applicable legal requirements during the term of the letter
of credit, the Reinsurer shall replace such letter of credit with a complying
one upon the earlier of the stated expiration, next extension or renewal date,
or modification or amendment of the letter of credit. Within thirty (30) day of
the Reinsurer's receipt of the quarterly report required by Article V of this
Agreement:
(a) if the Reinsurer's share of the obligations under this
Agreement shall exceed the then existing balance of the letter of credit made
available, the Reinsurer shall, if required by applicable law, secure delivery
to the Reinsured of an amendment to the letter of credit increasing the amount
of the letter of credit available by the amount required under applicable law;
or
(b) if the Reinsurer's share of the obligations under this
Agreement shall be less than the balance of the letter of credit available on
the accounting date, the Reinsured shall release such excess credit by agreeing
to an amendment to the letter of credit reducing the amount of the letter of
credit available by the amount of such excess credit.
(2) Except as may otherwise be required under applicable law, the
Reinsurer and the Reinsured agree that a letter of credit provided by the
Reinsurer pursuant to this Agreement may be drawn upon at any time by the
Reinsured or its successors in interest only for one or more of the following:
(a) to reimburse the Reinsured for the Reinsurer's share of
premiums (adjusted for return to the Reinsurer of the pro rata portion of the
Ceding Commission paid to the Reinsured) returned to the owners of Policies
reinsured under this Agreement on account of cancellations of such Policies; and
(b) to reimburse the Reinsured for the Reinsurer's share of
Losses and Loss Expenses paid by the Reinsured pursuant to the provisions of the
Policies reinsured by this Agreement.
When the Reinsured has received notification of the non-renewal of
the letter of credit and when the Reinsurer's obligations under this Agreement
with respect to risks and obligations covered by letter of credit remain
unliquidated and undischarged ten (10) days prior to such expiration date, the
Reinsurer shall supply to the Reinsured substitute Security meeting the
requirements of this Article.
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All of the foregoing shall be applicable without diminution
because of insolvency on the part of the Reinsured or the Reinsurer.
ARTICLE VIII
DUE DILIGENCE RESPONSIBILITIES OF THE REINSURED
In accordance with customary practice in the financial guaranty
insurance industry, the Reinsured will be responsible for performing due
diligence with respect to all obligations to be ceded to and reinsured by the
Reinsurer pursuant to this Agreement, as may be necessary to identify and
evaluate the credit risks attendant thereto. Such evaluation and analysis shall
comport with the written underwriting criteria, standards and guidelines of the
Reinsured. The Reinsured will provide copies of credit reports, financial
statements, environmental impact reports, market research and feasibility
studies, appraisals and other related documentation to the Reinsurer at the time
that the Reinsurance Memorandum described in Article I is presented to the
Reinsurer. In addition, the Reinsured will perform surveillance with respect to
the obligations reinsured hereunder, in order to avoid or mitigate claims
through early warning and remedial management. The surveillance function shall
include the responsibility: (i) to monitor compliance with covenants, changes in
the status, credit ratings or credit profile of reinsured obligations, (ii) to
maintain a watch list and, (iii) where necessary, to engage in the
re-structuring and re-financing of troubled credits.
ARTICLE IX
ACCESS TO RECORDS
The Reinsurer or its authorized representative shall have access to the
books and records of the Reinsured at all reasonable times for the purpose of
obtaining information concerning this Agreement or its subject matter. This
access shall include all papers in possession of the Reinsured in connection
with claims and the adjustment of claims. The Reinsured or its authorized
representatives shall have access to the books and records of the Reinsurer,
where required by a governmental or regulatory authority.
ARTICLE X
REINSURANCE FOLLOWS ORIGINAL POLICIES
All reinsurance for which the Reinsurer shall be liable by subscribing
to this Agreement shall be subject in all respects to the same rates, terms,
conditions, interpretations, waivers, the exact proportion of premiums paid to
the Reinsured and to the same modification, alterations and cancellations as the
respective Policies of the Reinsured to which such reinsurance relate, the true
intent of this Agreement being that the Reinsurer shall, in every case to which
this Agreement applies and in the proportion specified in the Reinsurance
Memoranda, follow the fortunes of the Reinsured. This Agreement shall be
construed as an honorable undertaking between the parties hereto and shall not
be defeated by technical legal constructions. However, except as provided in
Article XV, nothing in this Agreement shall be construed to expand the liability
of the Reinsurer beyond what is specifically assumed under this Agreement by
creating rights of any third party,
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including any insured of the Reinsured, in any rights under this Agreement.
ARTICLE XI
TAXES
The Reinsured shall be liable for premium and excise taxes on premiums
reported to the Reinsurer hereunder. The Reinsured may deduct any excise tax
from the premium to be paid to the Reinsurer.
ARTICLE XII
SERVICE OF PROCESS, JURISDICTION AND VENUE
Subject to the parties hereto first complying with the provisions
of Article XVI hereof, the Reinsurer hereby irrevocably submits to the
non-exclusive jurisdiction of any court sitting in Hamilton, Bermuda over any
suit, action or proceeding arising out of or relating to this Agreement. The
Reinsurer irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such suit, action or proceeding brought in such court and any claim that any
such suit, action or proceeding brought in such a court was brought in an
inconvenient forum. The Reinsurer agrees that a final judgment, not subject to
any further appeal, in any such suit, action or proceeding brought in such a
court shall be conclusive and binding upon it and will be given effect in the
country of domicile of the Reinsurer to the fullest extent permitted by
applicable law and may be enforced in any court sitting in Hamilton, Bermuda (or
any other courts to the jurisdiction of which the Reinsurer is or may be
subject) by a suit upon such judgment, provided that service of process is
effected upon it as specified in this Article or as otherwise permitted by law.
Nothing herein shall be deemed to limit or waive the Reinsurer's right to remove
a suit, action or proceeding to a federal court of the United States.
Pursuant to any statute or regulation of Bermuda that makes
provisions therefor, the Reinsurer hereby designates the Minister of Finance or
other officer specified for the purpose in the statute, or his successor or
successors in office, as its true and lawful attorney, upon whom may be served
any lawful process in any action, suit or proceeding arising hereunder that may
be instituted by or on behalf of the Reinsured or any beneficiary under this
Agreement, and hereby designates the person named in Article XX hereof as the
person to whom such officer is authorized to mail such process or a true copy
thereof.
The Reinsurer hereby consents to process being served in any suit,
action or proceeding of the nature referred to above in any court sitting in
Hamilton, Bermuda by service of process as set forth above, provided that, to
the extent lawful and possible, written notice of said service upon such agent
shall be mailed by registered or certified air mail, postage prepaid, return
receipt requested, to the Reinsurer at its address specified Article XX hereof
or to any other address which the Reinsurer shall have designated in accordance
with Article XX. The Reinsurer irrevocably waives, to the fullest extent
permitted by law, all claim of error by reason of any such service (although the
Reinsurer does not waives claims that service of process was not actually
received by the Reinsurer) and agrees that such service shall be deemed to be
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effective service of process upon the Reinsurer in any such suit, action or
proceeding and shall, to the fullest extent permitted by law, be held to be
valid and personal service upon the Reinsurer, unless the service of process was
not actually received by the Reinsurer.
Nothing in this Article shall affect the right of the Reinsurer to
receive service of process in any other manner permitted by law or limit the
right of the Reinsurer to bring proceedings against the Reinsured in any court
having jurisdiction over the Reinsured and such proceedings. Nothing in this
Article shall limit the provisions of Article XV of this Agreement.
ARTICLE XIII
CURRENCY
All premium and losses arising with respect to the Business
Reinsured, accounts, reports, deposits, arbitration awards and/or court
judgments arising out of this Agreement shall be in United States currency.
Premiums paid to the Reinsured for Policies covered by this
Agreement in other than United States currency shall be paid by the Reinsured to
the Reinsurer in United States currency at the rate of exchange on which the
original accounts were settled or, if not converted at such time, at the rate of
exchange used by the Reinsured in its own books of account at the time of the
settlement or in accordance with any subsequent adjustment to such account.
The amounts recoverable by the Reinsured from the Reinsurer for
its proportional share of losses under the Business Reinsured in other than
United States currency shall be converted into United States currency at the
same rate of exchange as were applied in the settlement of the original losses
or, if not converted at such time, at the rate of exchange used by the Reinsured
in its own books of account at the time of the settlement or in accordance with
any subsequent adjustment to such account.
The Reinsurer shall bear the currency risk for its proportionate
share in the event that (i) an insured obligation is denominated in a foreign
currency, (ii) the Reinsurer's limit of liability is denominated in United
States currency and (iii) the amount insured is such that the Reinsurer's
applicable limit of liability for the cession is applicable using the currency
exchange rate in effect on the Policy effective date. The Reinsurer's percentage
participation shall be calculated by converting the Reinsurer's limit of
liability using the currency exchange rate in effect on the Policy effective
date, and the Reinsurer shall be entitled to its proportionate share of premiums
and liable for its proportionate share of Policy Payments based on such
percentage, notwithstanding any later change in currency exchange rates which
result in the Reinsurer's limit of liability being exceeded.
ARTICLE XIV
INSOLVENCY
In the event of the insolvency of the Reinsured, the amounts owing
by the Reinsurer under this Agreement shall be immediately payable directly to
the Reinsured, or to its liquidator, receiver, conservator or statutory
successor on the basis of the liability of the Reinsured without
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diminution because of the insolvency of the Reinsured or because the liquidator,
receiver, conservator or statutory successor of the Reinsured has failed to pay
all or a portion of any claim. It is agreed, however, that the liquidator,
receiver, conservator or statutory successor of the Reinsured shall give written
notice to the Reinsurer of the pendency of a claim against the Reinsured
indicating the policy or bond reinsured which claim would involve a possible
liability on the part of the Reinsurer, within a reasonable time after such
claim is filed in the conservation or liquidation proceeding or in the
receivership and that, during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses that it may deem
available to the Reinsured or its liquidator, receiver, conservator or statutory
successor. The expense thus incurred by the Reinsurer shall be chargeable,
subject to the approval of the court, against the Reinsured as part of the
expense of conservation or liquidation to the extent of a pro rata share of the
benefit which may accrue to the Reinsured solely as a result of the defense
undertaken by the Reinsurer.
The reinsurance shall be payable by the Reinsurer to the Reinsured or
to its liquidator, receiver, conservator or statutory successor, except (a)
where the Agreement specifically provides another payee of such reinsurance in
the event of insolvency of the Reinsured and (b) where the Reinsurer with the
consent of the direct insured or insureds has assumed such Policy obligations of
the Reinsured as direct obligations of the Reinsurer to the payees under such
policies and in substitution for the obligations of the Reinsured to such
payees, provided that any such assumption shall be subject to the approval of
the Minister of Finance of Bermuda of a certificate of assumption.
ARTICLE XV
ARBITRATION
All disputes arising from this Agreement shall first be
adjudicated by a Board of Arbitration (the "Board") consisting of three
arbitrators, all of whom shall be active or retired executive officers of
insurance or reinsurance companies having no direct or indirect financial
interest in either party or its affiliates. Each of the parties hereto shall
select one arbitrator. A third arbitrator will be chosen by the two arbitrators
selected by the parties. A party shall initiate arbitration ("Petitioner") by
providing the other party with Notice, demanding arbitration and identifying its
selected arbitrator. The other party ("Respondent") will have thirty (30) days
from its receipt of a demand for arbitration within which to identify an
arbitrator. In the event that Respondent fails to identify an arbitrator within
such thirty (30) day period, Petitioner shall have the right to identify a
second arbitrator, and Respondent will not be deemed aggrieved thereby. The
arbitrators will jointly select a third arbitrator within thirty (30) days after
both arbitrators have been selected. If the two arbitrators do not agree on the
selection of a third arbitrator within such thirty (30) day period, the third
arbitrator shall be designated by the American Arbitration Association.
The Board shall interpret this Agreement as an honorable
engagement and will make its award with a view to effecting the purpose and
intent of this Agreement in a reasonable manner, rather than in accordance with
the technical interpretation of this Agreement. The Board
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<PAGE> 13
will be relieved from judicial formalities. The decision of a majority of the
Board will be final and binding upon the parties.
The parties shall equally bear the fees and costs of the Board of
Arbitrators. The remaining costs of the arbitration shall be paid as the Board
shall direct.
The arbitration shall take place in Hamilton, Bermuda, unless the
Board designates another location with the mutual consent of the parties. The
rules and procedures for pre-hearing investigations shall be established by the
Board and the investigation shall be completed within ninety (90) days of the
appointment of the third arbitrator. Petitioner shall deliver a written
arbitration brief to the Board and to the Respondent within thirty (30) days of
completion of the pre-hearing investigations. Respondent shall deliver a written
response to the Board and the Petitioner within thirty (30) days of its receipt
of Petitioner's brief. A hearing shall be held within thirty (30) days of
submission of Respondent's response. The Board shall render its decision within
sixty (60) days after completion of the hearing unless the Board requests and
the parties consent to an extension of time.
The Board may alter the time periods set forth in this Article for
good cause shown.
This Article shall survive the termination of this Agreement.
ARTICLE XVI
APPLICABLE LAW
This Agreement shall be interpreted in accordance with the laws of
Bermuda, without giving effect to the conflict of law rules thereof.
ARTICLE XVII
SET-OFF
The Reinsured and the Reinsurer have the right to set-off amounts due
from one to the other. The party asserting the right of set-off may exercise
such right at any time whether the amount(s) due constitute payment of premiums,
losses or otherwise. In the event of the insolvency of a party hereto, set off
shall only be allowed in accordance with applicable law.
ARTICLE XVIII
CONFIDENTIALITY
The Reinsurer agrees to maintain the confidentiality of the Policies,
the reinsurance of the Policies and the underlying transactions and documents
(the "Information"), except
(i) to employees, officers, directors and legal counsel
with a need to know the Information,
(ii) to reinsurers, bankers, governmental agencies that
regulate the Reinsurer
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<PAGE> 14
and the rating agencies that rate the Reinsurer with
a need to know the Information,
(iii) in response to a subpoena calling for production of
the Information, or
(iv) to any other person as to whom the Reinsured has
given its prior written consent to each such
disclosure, which consent shall not be unreasonably
withheld or delayed.
In the case of subparagraphs (i) and (ii) above, no disclosure of the
Information shall be permitted if any such entity or individual is affiliated
with a financial guaranty insurer in competition with the Reinsured. In the case
of subparagraph (iii) above, the Reinsurer shall promptly notify the Reinsured
of such subpoena and shall at the Reinsured's direction and expense contest
production of the Information thereunder.
The foregoing requirements of confidentiality shall not apply to those
portions of the Information that (a) are generally available to the public other
than as a result of a disclosure by the Reinsurer or its representatives or (b)
become available to the Reinsurer from a source that is not bound by an
obligation of confidentiality to the Reinsured. If required by a participant in
a transaction insured or to be insured by a Policy, the Reinsurer shall execute
a separate confidentiality agreement containing the foregoing obligations of
confidentiality with respect to such transaction.
ARTICLE XIX
ADDRESSES FOR NOTICES
All notices and other communications required by this Agreement
(each a "Notice") shall be sent to the parties at the following addresses,
respectively, unless a party designates another address in writing:
Global Markets Guaranty Ltd. ACA Financial Guaranty Corporation
Victoria Hall, Victoria St. One Liberty Plaza 52nd Floor
P.O. Box HM1262 New York, New York 10006 U.S.A.
Hamilton, HM FX Bermuda
Fax No.: 441- Fax No.: 212-766-4034
Attn: Chief Exec. Officer Attn: Reinsurance Officer
IN WITNESS WHEREOF, the parties, by their duly authorized
representatives, have executed this Master Facultative Reinsurance Agreement as
of the 25th day of November, 1998.
REINSURED: REINSURER:
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<PAGE> 15
GLOBAL MARKETS GUARANTY LTD. ACA FINANCIAL GUARANTY CORPORATION
By: /s/ Donald J. Matthews By: /s/ H. Russell Fraser
____________________________ _______________________________________
Donald J. Matthews H. Russell Fraser
President and C.E.O. Chairman and C.E.O.
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<PAGE> 16
EXHIBIT A
TO
MASTER FACULTATIVE REINSURANCE AGREEMENT
BETWEEN
GLOBAL MARKETS GUARANTY LTD.
AND
ACA FINANCIAL GUARANTY CORPORATION
REINSURANCE MEMORANDUM
INDIVIDUAL RISK UNDER
MASTER FACULTATIVE REINSURANCE AGREEMENT
REINSURANCE MEMORANDUM NO. _____________________________________________________
ISSUER: ________________________________________________________________________
ISSUE: _________________________________________________________________________
ACA POLICY NUMBER: _____________________________________________________________
POLICY EFFECTIVE DATE: _________________________________________________________
TOTAL PRINCIPAL INSURED BY COMPANY: ____________________________________________
TOTAL PRINCIPAL CEDED TO REINSURER: ____________________________________________
FORM OF REINSURANCE:
________________________________________________________________________________
________________________________________________________________________________
METHOD FOR ALLOCATING SUBROGATION RECOVERIES:
________________________________________________________________________________
________________________________________________________________________________
SPECIFIC MATURITIES CEDED TO REINSURER (IF OTHER THAN PROPORTIONATE SHARE OF
ENTIRE ISSUE IS CEDED):
________________________________________________________________________________
________________________________________________________________________________
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<PAGE> 17
REINSURANCE MEMORANDUM NO.
EFFECTIVE DATE OF REINSURANCE (IF DIFFERENT FROM POLICY EFFECTIVE DATE):
________________________________________________________________________________
________________________________________________________________________________
DEVIATIONS FROM COVER PROVIDED BY COMPANY'S ORIGINAL POLICY:
________________________________________________________________________________
________________________________________________________________________________
GROSS FACULTATIVE PREMIUM CEDED
RATE: ________________________________________________________
AMOUNT: _____________________________________________________
CEDING COMMISSION AND OTHER COSTS
RATE: ________________________________________________________________
AMOUNT: ______________________________________________________________
OTHER COSTS: _________________________________________________________
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<PAGE> 18
NET FACULTATIVE PREMIUM CEDED: ________________________________________________
The cession evidenced by this Reinsurance Memorandum shall be subject
to all the terms and conditions contained in that certain Master Facultative
Reinsurance Agreement between the undersigned, dated as of , 1998.
SUBMITTED BY: ACCEPTED BY:
ACA FINANCIAL GUARANTY GLOBAL MARKETS GUARANTY LTD.
CORPORATION
BY: _________________________________ BY: ___________________________________
NAME: _______________________________ NAME: __________________________________
TITLE: ______________________________ TITLE: _________________________________
DATE: _______________________________ DATE: __________________________________
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<PAGE> 1
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made in Hamilton, Bermuda and is dated as of
September 1, 1998, by and between Global Markets Access Ltd., a Bermuda
corporation (the "Company"), GMG Marketing Ltd., a wholly-owned subsidiary of
the Company organized under the laws of Bermuda (the "Marketing Company"), and
Bruce W. Bantz (the "Employee").
W I T N E S S E T H
WHEREAS, the Company is contemplating an initial public offering
and/or a private placement of its common shares (the "IPO"); and
WHEREAS, the Company and the Marketing Company desire that the
Employee serve as Managing Principal, Marketing and Business Development of the
Company and the Marketing Company and the Employee is willing to serve in such
capacities.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the parties hereto agree as
follows:
Section 1. Employment.
Effective as of September 1, 1998, the Company and the Marketing
Company will employ the Employee and the Employee will perform services for the
Company and the Marketing Company on the terms and conditions set forth in this
Agreement and for the period ("Term of Employment") specified in Section 3
hereof.
Section 2. Duties.
The Employee, during the Term of Employment, shall serve the Company
as its Managing Principal, Marketing and Business Development. The Employee
shall also serve as Managing Principal, Marketing and Business Development of
the Marketing Company. The Employee shall be based in London, England, other
than for periodic travel in the ordinary course of business. The Employee shall
have such duties and responsibilities as are assigned to him by the Boards of
Directors of the Company and the Marketing Company commensurate with his
positions with the Company and the Marketing Company, and shall perform such
duties and responsibilities in each case in such a manner that neither the
Company nor the Marketing Company would be deemed to be conducting a trade or
business in the United States for purposes of the United States Internal Revenue
Code of 1986, as amended.
The Employee shall perform his duties hereunder faithfully and to
the best of his abilities and in furtherance of the business of the Company and
the Marketing Company, and shall devote his full business time, energy,
attention and skill to the business of the Company and the Marketing Company and
to the promotion of their interests except as otherwise agreed by the Company
and the Marketing Company.
<PAGE> 2
The Employee warrants and represents that he is free to enter into
this Agreement and is not restricted by any prior or existing agreement and the
Company and the Marketing Company may rely on such representation in entering
into this Agreement.
Section 3. Term of Employment.
The initial Term of Employment under this Agreement shall be the
period commencing on September 1, 1998 and ending on the third anniversary of
the IPO. At the end of the initial Term of Employment, and on each anniversary
thereof, the Term of Employment shall automatically be extended for one
additional year, unless the Company and the Marketing Company, collectively, or
the Employee shall have given at least three months in advance written notice to
the other that it does not wish to extend this Agreement.
Section 4. Salary.
The Employee shall receive, as compensation for his duties and
obligations to the Company and the Marketing Company, a salary at the annual
rate of BD$250,000, payable by the Marketing Company in substantially equal
installments in accordance with the Marketing Company's payroll practice in
sterling at the exchange rate in effect at the time each such installment is
paid; however, no salary shall become payable to the Employee until consummation
of the IPO. During the Term of Employment, all salary or consulting payments
paid to the Employee by ACA Financial Guaranty Corporation or Inter-Atlantic
Securities Corporation or their affiliates shall be credited against salary due
to the Employee under this Employment Agreement. It is agreed between the
parties that the Company shall review the Employee's base annual salary annually
and in light of such review may, in the discretion of the Board of Directors of
the Company, increase such base annual salary taking into account any change in
the Employee's responsibilities, increases in the cost of living, performance by
the Employee and other pertinent factors.
Section 5. Bonus.
During the Term of Employment, the Employee shall, subject to and
effective upon the consummation of the IPO, participate in the Company's
Incentive Compensation Plan, the terms of such Plan to be determined by the
Compensation Committee for approval by the Company's Board of Directors, and
shall be eligible for an annual cash bonus based on performance targets as
determined in accordance with the terms of any such plan.
Section 6. Options.
(a) Initial Options. The Company shall grant to the Employee,
subject to and effective as of the consummation of the IPO, options (the
"Initial Options") to purchase at a price per share equal to the price per share
in the IPO, 100,000 common shares of the Company (the "Common Shares"). Thirty
three and one-thirds percent (33 1/3%) of the Initial Options shall become
exercisable on the first anniversary of the IPO, 33 1/3% of the Initial Options
shall become exercisable on the second anniversary of the IPO, and an additional
33 1/3% of the
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<PAGE> 3
Initial Options shall become exercisable on the third anniversary thereof. The
terms of the Initial Options shall be governed by the terms of the Company's
Initial Stock Option Plan.
(b) Other Options. During the Term of Employment, the Employee
shall, subject to the consummation of the IPO, be eligible to be granted options
(in addition to the Initial Options) to purchase Common Shares at such price and
subject to such terms as provided by the Company's Initial Stock Option Plan, in
the sole discretion of the Board of Directors of the Company.
Section 7. Employee Benefits.
During the Term of Employment, the Employee shall, effective upon
the consummation of the IPO, be entitled to participate in all employee benefit
programs of the Company and the Marketing Company, as such programs may be in
effect from time to time, including without limitation, pension and other
retirement plans, profit sharing plans, group life insurance, accidental death
and dismemberment insurance, hospitalization, surgical and major medical
coverage, sick leave (including salary continuation arrangements), long term
disability, holidays and vacations.
Section 8. Business Expenses.
All reasonable travel and other expenses incidental to the rendering
of services by the Employee hereunder shall be paid by the Marketing Company and
if expenses are paid in the first instance by the Employee, the Marketing
Company will reimburse him therefor upon presentation of proper invoices;
subject in each case to compliance with the Marketing Company's reimbursement
policies and procedures.
Section 9. Housing and Travel Expenses.
During the Term of Employment, the Marketing Company shall,
effective upon consummation of the IPO, provide to the Employee the sum of pound
sterling 7,200 monthly as an allowance to cover the expenses of housing in
England and for his personal travel.
Section 10. Vacations and Sick Leave.
During the Term of Employment, the Employee shall be entitled to
reasonable vacation and reasonable sick leave each year, in accordance with
policies of the Company and the Marketing Company, as determined by their
respective Boards of Directors, provided, however, that the Employee shall be
entitled to a minimum of four weeks vacation per year.
Section 11. Termination.
(a) In the event of Serious Cause, as defined below, the Company and the
Marketing Company may terminate the Employee's employment and the Term of
Employment hereunder immediately upon written notice of such termination stating
the Serious Cause upon which the Company and the Marketing Company are basing
such termination.
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<PAGE> 4
"Serious Cause" shall mean (i) the willful and continued failure by
the Employee to perform substantially his duties hereunder, other than by
reasons of health, for a period of more than 30 days after demand for
substantial performance has been delivered by the Company and the Marketing
Company that identifies the manner in which the Company and the Marketing
Company believe the Employee has not performed his duties, (ii) the Employee
shall have been indicted by any federal, state or local authority in any
jurisdiction for, or shall have pleaded guilty or nolo contendere to, an act
constituting a felony, (iii) the Employee shall have habitually abused any
substance (such as narcotics or alcohol), or (iv) the Employee shall have (A)
engaged in acts of fraud, material dishonesty or gross misconduct in connection
with the business of the Company and the Marketing Company or (B) committed a
material breach of this Agreement.
(b) The Employee may terminate his employment and the Term of
Employment hereunder in the event of Good Reason, as defined below, upon 30
days' prior written notice of such termination stating the Good Reason upon
which the Employee is basing such termination.
"Good Reason" shall mean (i) a substantial reduction in the
Employee's salary, (ii) the demotion of the Employee, (iii) a material reduction
of the Employee's duties hereunder, or (iv) a material breach of this Agreement
by the Company and the Marketing Company.
(c) In the event of termination of the Employee's employment and the
Term of Employment hereunder by the Company and the Marketing Company for
Serious Cause or by the Employee without Good Reason, the Employee shall forfeit
all bonus amounts for the then current fiscal year, and the Marketing Company
shall be liable to the Employee only for (i) any accrued but unpaid salary, (ii)
any accrued but unpaid bonus from a prior fiscal year, and (iii) reimbursement
of business expenses incurred prior to the date of termination.
(d) In the event of the death, retirement or disability of the
Employee, the Employee's employment and Term of Employment hereunder shall be
terminated as of the date of such death, retirement or disability and the
Marketing Company shall pay the Employee, or the Employee's estate or legal
representative, as appropriate, (i) any accrued but unpaid salary, (ii) any
earned but unpaid bonus from a prior fiscal year, (iii) reimbursement of
business expenses incurred prior to the date of termination, (iv) travel and
housing allowances under Section 9 for six months after the date of termination,
and (v) reasonable relocation expenses from England to the United States. The
date of the Employee's disability shall be deemed to be the last day of the
sixth month period of time during which the Employee has been unable to carry
out his position as provided below.
"Disability" shall mean the Employee's inability, for reasons of
health, to carry out the functions of his position for a total of 6 months
during any 12 month period of this Agreement. "Retirement" shall mean retirement
from employment upon attaining age 65 or such earlier age agreed to by the
Company and the Marketing Company.
In addition, in the event of the Employee's death, retirement or
disability, if the Company's Common Shares are not then publicly traded, the
Company shall, after giving written notice to the Employee, the Employee's
estate or legal representative, whichever is appropriate,
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<PAGE> 5
have the right to require the sale to the Company of any or all of the Common
Shares of the Company owned by the Employee within six (6) months of death,
retirement or disability; and the Employee, the Employee's estate or legal
representative, whichever is appropriate, shall have the right to, after giving
written notice to the Company, sell any or all of the Employee's Common Shares
to the Company within twelve (12) months after death or within six (6) months
after retirement or disability. The rights provided for in this paragraph shall
be exercised by serving written notice of the intention to buy or sell, as the
case may be, to the other party. The price at which any such transfer shall be
effected shall be equal to the appraised value of the Common Shares, in each
case measured as of the date of termination. The appraised value formula of
evaluation will be agreed upon by June 1, 1999 if the Company is not then
publicly traded. Payment for either such transaction shall occur no later than
sixty (60) days after effective notice is given pursuant to Section 20 of this
Agreement, or, if later, no more than thirty (30) days after the appraised value
is finally determined.
(e) If the Company and the Marketing Company should terminate the
Employee's employment and the Term of Employment hereunder without Serious Cause
or if the Employee should terminate and his employment and the Term of
Employment hereunder for Good Reason, the Marketing Company shall continue to
pay the Employee his base salary for a period of 18 months from such
termination. In addition, the Employee shall be entitled to (i) any accrued but
unpaid salary, (ii) any earned but unpaid bonus from a prior fiscal year, (iii)
reimbursement of business expenses incurred prior to the date of termination,
(iv) travel and housing allowances under Section 9 for six months after the date
of termination, and (v) reasonable relocation expenses from England to the
United States.
(f) In the event of the liquidation of the Company or the Marketing
Company or in the event that the Board of Directors elects to discontinue
permanently operating the Company or the Marketing Company, the Employee's
employment and the Term of Employment hereunder shall be terminated as of the
date of such liquidation or discontinuance, and the Marketing Company shall pay
the Employee within 30 days of the day liquidation or discontinuance is
determined (i) any accrued but unpaid salary, (ii) any earned but unpaid bonus
from a prior fiscal year, (iii) unreimbursed business expenses incurred prior to
the date of termination, (iv) travel and housing allowances under Section 9 for
two months after the date of termination, and (v) reasonable relocation expenses
from England to the United States. In addition, the Employee shall be entitled
to receive one year's base salary from the date on which the Employee's
employment is terminated.
(g) Notwithstanding any other provision of this Agreement, until the
IPO is consummated, either the Employee or the Company may terminate the
Employee's employment and the Term of Employment hereunder upon 30 days' written
notice to the other, in which event the Company shall be liable to the Employee
only for reimbursement of business expenses incurred prior to the date of
termination.
Section 12. Change of Control.
(a) Notwithstanding any other provision contained herein, the
Employee's Initial Options and other options issued under the Company's share
option plans that are not then exercisable shall become exercisable (and be
deemed to be vested) on the date on which a
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<PAGE> 6
Change of Control (as defined below) of the Company occurs. In addition,
restricted Common Shares granted under any other of the Company's share option
plans shall immediately vest upon a Change of Control of the Company.
(b) If (i) the employment of the Employee is terminated by the
Company (or successor thereto) without Serious Cause or (ii) the Employee
terminates employment with the Company (or successor thereto) for Good Reason,
in each case within the period commencing on the date that a Change of Control
is formally proposed to the Company's Board of Directors and ending on the first
anniversary of the date on which such Change of Control occurs, then the
Employee shall be entitled to receive (in lieu of the benefits described in
Section 11): (1) any accrued but unpaid salary, (2) a lump sum payment equal to
two times such Employee's annual base salary as of the date of termination, (3)
any accrued but unpaid bonus from a prior fiscal year, (4) reimbursement of
business expenses incurred prior to the date of termination, (5) travel and
housing allowances under Section 9 for one year following the date of
termination, (6) reasonable relocation expenses from England to the United
States, together with (7) a gross up of any excise taxes payable by the Employee
by reason of such payments occurring in connection with a Change of Control.
The Employee shall not be entitled to any benefits or other
entitlements under this section unless a Change of Control actually occurs.
(c) A "Change of Control" of the Company shall be deemed to have
occurred if, following consummation of the IPO (i) any "person" as such term is
defined in Section 3(a)(9) and as used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), excluding the Company or
any of its subsidiaries, a trustee or any fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, an underwriter
temporarily holding securities pursuant to an offering of such securities or a
corporation owned, directly or indirectly, by shareholders of the Company in
substantially the same proportion as their ownership of the Company, is or
becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 40% or
more of the combined voting power of the Company's then outstanding securities
("Voting Securities"); (ii) during any period of not more than two years,
individuals who constitute the Board of Directors of the Company (the "Board")
as of the beginning of the period and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i) or (iii) of this sentence) whose
election by the Board or nomination for election by the Company's shareholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at such time or whose election or nomination
for election was previously so approved, cease for any reason to constitute a
majority thereof; (iii) the shareholders of the Company approve a merger,
consolidation or reorganization or a court of competent jurisdiction approves a
scheme of arrangement of the Company, other than a merger, consolidation,
reorganization or scheme of arrangement which would result in the Voting
Securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into Voting
Securities of the surviving entity) at least 40% of the combined voting power of
the Voting Securities of the Company or such surviving entity outstanding
immediately after such merger, consolidation, reorganization or
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<PAGE> 7
scheme of arrangement; or (iv) the shareholders of the Company approve a plan of
complete liquidation of the Company or any agreement for the sale of
substantially all of the Company's assets.
(d) The provisions of this Section 12 shall only apply following the
consummation of an IPO.
Section 13. Agreement Not to Compete.
(a) The Employee hereby covenants and agrees that at no time during
the Term of Employment nor for a period of one year immediately following the
termination of the Employee's employment for any reason, will he for himself or
on behalf of any other person, partnership, company or corporation, directly or
indirectly, acquire any financial or beneficial interest in (except as provided
in the next sentence), provide consulting or other services to, be employed by,
or own, manage, operate or control any entity engaged in the financial guaranty
insurance or reinsurance business similar to the business engaged in by the
Company or the Marketing Company at the time of such termination of employment.
Notwithstanding the preceding sentence, the Employee shall not be prohibited
from owning less than one (1%) percent of any publicly traded corporation,
whether or not such corporation is in competition with the Company or the
Marketing Company.
(b) The Employee hereby covenants and agrees that, at all times
during the Term of Employment and for a period of two years immediately
following the termination thereof, the Employee shall not directly or indirectly
employ or seek to employ any person or entity employed at that time by the
Company or any of its subsidiaries, or otherwise encourage or entice such person
or entity to leave such employment.
(c) This Section 13 shall be null and void if the Board of Directors
elects to discontinue permanently the Company's operations or if the IPO has not
been consummated by March 31, 1999.
Section 14. Confidential Information.
The Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to the Company or any affiliate
of the Company, including, without limitation, customer lists, client lists,
trade secrets, business plans, financial models, pricing policies and other
business affairs of the Company and any affiliate of the Company learned by him
from the Company or any such affiliate or otherwise before or after the date of
this Agreement, and not to disclose any such confidential matter to anyone
outside the Company or any of its affiliates, whether during or after his period
of service with the Company, except as may be required in the course of a legal
or governmental proceeding. Upon request by the Company, the Employee agrees to
deliver promptly to the Company upon termination of his services for the
Company, or at any time thereafter as the Company may request, all Company or
affiliate memoranda, notes, records, reports, manuals, drawings, designs,
computer files in any media and other documents (and all copies thereof)
relating to the Company's or any affiliate's business and all property of the
Company or any affiliate associated therewith, which he may then possess or have
under his control.
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<PAGE> 8
Section 15. Remedy.
(a) Should the Employee engage in or perform, either directly or
indirectly, any of the acts prohibited by Sections 13 or 14 hereof, it is agreed
that the Company shall be entitled to full injunctive relief, to be issued by
any competent court of equity, enjoining and restraining the Employee and each
and every other person, firm, organization, association, or corporation
concerned therein, from the continuance of such violative acts. The foregoing
remedy available to the Company shall not be deemed to limit or prevent the
exercise by the Company of any or all further rights and remedies which may be
available to the Company hereunder or at law or in equity.
(b) The Employee acknowledges and agrees that the covenants
contained in this Agreement are fair and reasonable in light of the
consideration paid hereunder, and the invalidity or unenforceability of any
particular provision, or part of any provision, of this Agreement shall not
affect the other provisions or parts hereof. If any provision hereof is
determined to be invalid or unenforceable by a court of competent jurisdiction,
the Employee shall negotiate in good faith to provide the Company with
protection as nearly equivalent to that found to be invalid or unenforceable and
if any such provision shall be so determined to be invalid or unenforceable by
reason of the duration or geographical scope of the covenants contained therein,
such duration or geographical scope, or both, shall be considered to be reduced
to a duration or geographical scope to the extent necessary to cure such
invalidity.
Section 16. Indemnification.
The Company and the Operating Company will indemnify the Employee
(and his legal representatives or other successors) to the fullest extent
permitted by the laws of the Islands of Bermuda and in accordance with the terms
of the Company's and the Operating Company's respective Bye-Laws, and the
Employee shall be entitled to the protection of any insurance policies the
Company or the Operating Company may elect to maintain generally for the benefit
of their directors and officers, against all costs, charges and expenses
whatsoever incurred or sustained by the Employee or his legal representatives in
connection with any action, suit or proceeding to which he (or his legal
representatives or other successors) may be made a party by reason of his being
or having been a director or officer of the Company or the Operating Company.
Section 17. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
Employee, his heirs, executors, administrators and beneficiaries, and the
Company, the Marketing Company and their successors and assigns.
Section 18. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the United Kingdom, without reference to rules
relating to conflicts of law.
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<PAGE> 9
Section 19. Entire Agreement.
This Agreement constitutes the full and complete understanding and
agreement of the parties and supersedes all prior understandings and agreements
as to employment of the Employee. This Agreement cannot be amended, changed,
modified or terminated without the written consent of the parties hereto.
Section 20. Waiver of Breach.
The waiver by either party of a breach of any term of this Agreement
shall not operate nor be construed as a waiver of any subsequent breach thereof.
Section 21. Notices.
Any notice, report, request or other communication given under this
Agreement shall be written and shall be effective upon delivery when delivered
personally, by Federal Express or by fax.
Unless otherwise notified by any of the parties, notices shall be
sent to the parties as follows:
To Employee: Bruce W. Bantz
The Waltons
23 Cranley Road
Walton-on-Thames
Surrey KT12 BT England
To the
Company: Global Markets Access Ltd.
Victoria Hall, Victoria Street
P.O. Box HM 1262
Hamilton, HM FX, Bermuda
Section 22. Severability.
If any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
Section 23. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as on the day and year first above written.
By: /s/ Bruce W. Bantz
-------------------------------
Bruce W. Bantz
GLOBAL MARKETS ACCESS LTD.
By: /s/ Donald J. Matthews
-------------------------------
Donald J. Matthews
Chief Executive Officer
GMG MARKETING LTD.
By: /s/ Donald J. Matthews
-------------------------------
Donald J. Matthews
Chief Executive Officer
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<PAGE> 1
Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made in Hamilton, Bermuda and is dated as of
October 15, 1998, by and between Global Markets Access Ltd., a Bermuda
corporation (the "Company"), Global Markets Guaranty Ltd., a wholly-owned
subsidiary of the Company organized under the laws of Bermuda to provide
financial guaranty insurance and reinsurance (the "Operating Company"), and Mary
Jane Robertson (the "Employee").
W I T N E S S E T H
WHEREAS, the Company is contemplating an initial public offering
and/or a private placement of its common shares (the "IPO"); and
WHEREAS, the Company and the Operating Company desire that the
Employee serve as Managing Principal, Chief Financial Officer and Treasurer of
the Company and the Operating Company and the Employee is willing to serve in
such capacities.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the parties hereto agree as
follows:
Section 1. Employment.
Effective as of October 15, 1998, the Company and the Operating
Company will employ the Employee and the Employee will perform services for the
Company and the Operating Company on the terms and conditions set forth in this
Agreement and for the period ("Term of Employment") specified in Section 3
hereof.
Section 2. Duties.
The Employee, during the Term of Employment, shall serve the Company
as its Managing Principal, Chief Financial Officer and Treasurer. The Employee
shall also serve as Managing Principal, Chief Financial Officer and Treasurer of
the Operating Company. The Employee shall be based at the Operating Company's
headquarters in Bermuda, other than for periodic travel in the ordinary course
of business. The Employee shall have such duties and responsibilities as are
assigned to her by the Boards of Directors of the Company and the Operating
Company commensurate with her positions with the Company and the Operating
Company, and shall perform such duties and responsibilities in each case in such
a manner that neither the Company nor the Operating Company would be deemed to
be conducting trade or business in the United States for purposes of the United
States Internal Revenue Code of 1986, as amended.
The Employee shall perform her duties hereunder faithfully and to
the best of her abilities and in furtherance of the business of the Company and
the Operating Company, and shall devote her full business time, energy,
attention and skill to the business of the Company
<PAGE> 2
and the Operating Company and to the promotion of its interests except as
otherwise agreed by the Company and the Operating Company.
The Employee warrants and represents that she is free to enter into
this Agreement and is not restricted by any prior or existing agreement and the
Company and the Operating Company may rely on such representation in entering
into this Agreement.
Section 3. Term of Employment.
The initial Term of Employment under this Agreement shall be the
period commencing on October 15, 1998 and ending on the third anniversary of the
IPO. At the end of the initial Term of Employment, and on each anniversary
thereof, the Term of Employment shall automatically be extended for one
additional year, unless the Company and the Operating Company, collectively, or
the Employee shall have given at least three months advance written notice to
the other that it does not wish to extend this Agreement.
Section 4. Salary.
The Employee shall receive, as compensation for her duties and
obligations to the Company and the Operating Company, a salary at the annual
rate of BD$250,000, payable by the Operating Company in substantially equal
installments in accordance with the Operating Company's payroll practice;
however, no salary shall become payable to the Employee until consummation of
the IPO. During the Term of Employment, all salary or consulting payments paid
to the Employee by ACA Financial Guaranty Corporation or Inter-Atlantic
Securities Corporation or their affiliates shall be credited against salary due
to the Employee under this Employment Agreement. It is agreed between the
parties that the Company shall review the Employee's base annual salary annually
and in light of such review may, in the discretion of the Board of Directors of
the Company, increase such base annual salary taking into account any change in
the Employee's responsibilities, increases in the cost of living, performance by
the Employee and other pertinent factors.
Section 5. Bonus.
During the Term of Employment, the Employee shall, subject to and
effective upon the consummation of the IPO, participate in the Company's
Incentive Compensation Plan, the terms of such Plan to be determined by the
Compensation Committee for approval by the Company's Board of Directors, and
shall be eligible for an annual cash bonus based on performance targets as
determined in accordance with the terms of any such plan.
Section 6. Options.
(a) Initial Options. The Company shall grant to the Employee,
subject to and effective as of the consummation of the IPO, options (the
"Initial Options") to purchase at a price per share equal to the price per share
in the IPO, 100,000 common shares of the Company (the "Common Shares"). Thirty
three and one-thirds percent (33 1/3%) of the Initial Options shall become
exercisable on the first anniversary of the IPO, 33 1/3% of the Initial Options
shall become exercisable on the second anniversary of the IPO, and an additional
33 1/3% of the
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<PAGE> 3
Initial Options shall become exercisable on the third anniversary thereof. The
terms of the Initial Options shall be governed by the terms of the Company's
Initial Stock Option Plan.
(b) Other Options. During the Term of Employment, the Employee
shall, subject to the consummation of the IPO, be eligible to be granted options
(in addition to the Initial Options) to purchase Common Shares at such price and
subject to such terms as provided by the Company's Initial Stock Option Plan, in
the sole discretion of the Board of Directors of the Company.
Section 7. Employee Benefits.
During the Term of Employment, the Employee shall, effective upon
the consummation of the IPO, be entitled to participate in all employee benefit
programs of the Company and the Operating Company, as such programs may be in
effect from time to time, including without limitation, pension and other
retirement plans, profit sharing plans, group life insurance, accidental death
and dismemberment insurance, hospitalization, surgical and major medical
coverage, sick leave (including salary continuation arrangements), long term
disability, holidays and vacations.
Section 8. Business Expenses.
All reasonable travel and other expenses incidental to the rendering
of services by the Employee hereunder shall be paid by the Operating Company and
if expenses are paid in the first instance by the Employee, the Operating
Company will reimburse her therefor upon presentation of proper invoices;
subject in each case to compliance with the Operating Company's reimbursement
policies and procedures.
Section 9. Housing and Travel Expenses.
During the Term of Employment, the Operating Company shall,
effective upon consummation of the IPO, provide to the Employee the sum of
BD$10,000 monthly as an allowance to cover the expenses of housing in Bermuda
and for her personal travel to and from Bermuda.
Section 10. Vacations and Sick Leave.
During the Term of Employment, the Employee shall be entitled to
reasonable vacation and reasonable sick leave each year, in accordance with
policies of the Company and the Operating Company, as determined by their
respective Boards of Directors, provided, however, that the Employee shall be
entitled to a minimum of four weeks vacation per year.
Section 11. Termination.
(a) In the event of Serious Cause, as defined below, the Company and the
Operating Company may terminate the Employee's employment and the Term of
Employment
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<PAGE> 4
hereunder immediately upon written notice of such termination stating the
Serious Cause upon which the Company and the Operating Company are basing such
termination.
"Serious Cause" shall mean (i) the willful and continued failure by
the Employee to perform substantially her duties hereunder, other than by
reasons of health, for a period of more than 30 days after demand for
substantial performance has been delivered by the Company and the Operating
Company that identifies the manner in which the Company and the Operating
Company believe the Employee has not performed her duties, (ii) the Employee
shall have been indicted by any federal, state or local authority in any
jurisdiction for, or shall have pleaded guilty or nolo contendere to, an act
constituting a felony, (iii) the Employee shall have habitually abused any
substance (such as narcotics or alcohol), or (iv) the Employee shall have (A)
engaged in acts of fraud, material dishonesty or gross misconduct in connection
with the business of the Company and the Operating Company or (B) committed a
material breach of this Agreement.
(b) The Employee may terminate her employment and the Term of
Employment hereunder in the event of Good Reason, as defined below, upon 30
days' prior written notice of such termination stating the Good Reason upon
which the Employee is basing such termination.
"Good Reason" shall mean (i) a substantial reduction in the
Employee's salary, (ii) the demotion of the Employee, (iii) a material reduction
of the Employee's duties hereunder, or (iv) a material breach of this Agreement
by the Company and the Operating Company.
(c) In the event of termination of the Employee's employment and the
Term of Employment hereunder by the Company and the Operating Company for
Serious Cause or by the Employee without Good Reason, the Employee shall forfeit
all bonus amounts for the then current fiscal year, and the Operating Company
shall be liable to the Employee only for (i) any accrued but unpaid salary, (ii)
any accrued but unpaid bonus from a prior fiscal year, and (iii) reimbursement
of business expenses incurred prior to the date of termination.
(d) In the event of the death, retirement or disability of the
Employee, the Employee's employment and Term of Employment hereunder shall be
terminated as of the date of such death, retirement or disability and the
Operating Company shall pay the Employee, or the Employee's estate or legal
representative, as appropriate, (i) any accrued but unpaid salary, (ii) any
earned but unpaid bonus from a prior fiscal year, (iii) reimbursement of
business expenses incurred prior to the date of termination, (iv) travel and
housing allowances under Section 9 for six months after the date of termination,
and (v) reasonable relocation expenses from Bermuda to the United States. The
date of the Employee's disability shall be deemed to be the last day of the
sixth month period of time during which the Employee has been unable to carry
out her position as provided below.
"Disability" shall mean the Employee's inability, for reasons of
health, to carry out the functions of her position for a total of 6 months
during any 12 month period of this Agreement. "Retirement" shall mean retirement
from employment upon attaining age 65 or such earlier age agreed to by the
Company and the Operating Company.
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<PAGE> 5
In addition, in the event of the Employee's death, retirement or
disability, if the Company's Common Shares are not then publicly traded, the
Company shall, after giving written notice to the Employee, the Employee's
estate or legal representative, whichever is appropriate, have the right to
require the sale to the Company of any or all of the Common Shares of the
Company owned by the Employee within six (6) months of death, retirement or
disability; and the Employee, the Employee's estate or legal representative,
whichever is appropriate, shall have the right to, after giving written notice
to the Company, sell any or all of the Employee's Common Shares to the Company
within twelve (12) months after death or within six (6) months after retirement
or disability. The rights provided for in this paragraph shall be exercised by
serving written notice of the intention to buy or sell, as the case may be, to
the other party. The price at which any such transfer shall be effected shall be
equal to the appraised value of the Common Shares, in each case measured as of
the date of termination. The appraised value formula of evaluation will be
agreed upon by June 1, 1999 if the Company is not then publicly traded. Payment
for either such transaction shall occur no later than sixty (60) days after
effective notice is given pursuant to Section 20 of this Agreement, or, if
later, no more than thirty (30) days after the appraised value is finally
determined.
(e) If the Company and the Operating Company should terminate the
Employee's employment and the Term of Employment hereunder without Serious Cause
or if the Employee should terminate her employment and the Term of Employment
hereunder for Good Reason, the Operating Company shall continue to pay the
Employee her base salary for a period of 18 months from such termination. In
addition, the Employee shall be entitled to (i) any accrued but unpaid salary,
(ii) any earned but unpaid bonus from a prior fiscal year, (iii) reimbursement
of business expenses incurred prior to the date of termination, (iv) travel and
housing allowances under Section 9 for six months after the date of termination,
and (v) reasonable relocation expenses from Bermuda to the United States.
(f) In the event of the liquidation of the Company or the Operating
Company or in the event that the Board of Directors elects to discontinue
permanently operating the Company or the Operating Company, the Employee's
employment and the Term of Employment hereunder shall be terminated as of the
date of such liquidation or discontinuance, and the Operating Company shall pay
the Employee within 30 days of the day liquidation or discontinuance is
determined (i) any accrued but unpaid salary, (ii) any earned but unpaid bonus
from a prior fiscal year, (iii) unreimbursed business expenses incurred prior to
the date of termination, (iv) travel and housing allowances under Section 9 for
two months after the date of termination, and (v) reasonable relocation expenses
from Bermuda to the United States. In addition, the Employee shall be entitled
to receive one year's base salary from the date on which the Employee's
employment is terminated.
(g) Notwithstanding any other provision of this Agreement, until the
IPO is consummated, either the Employee or the Company may terminate the
Employee's employment and the Term of Employment hereunder upon 30 days' written
notice to the other, in which event the Company shall be liable to the Employee
only for reimbursement of business expenses incurred prior to the date of
termination.
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<PAGE> 6
Section 12. Change of Control.
(a) Notwithstanding any other provision contained herein, the
Employee's Initial Options and other options issued under the Company's share
option plans that are not then exercisable shall become exercisable (and be
deemed to be vested) on the date on which a Change of Control (as defined below)
of the Company occurs. In addition, restricted Common Shares granted under any
other of the Company's share option plans shall immediately vest upon a Change
of Control of the Company.
(b) If (i) the employment of the Employee is terminated by the
Company (or successor thereto) without Serious Cause or (ii) the Employee
terminates employment with the Company (or successor thereto) for Good Reason,
in each case within the period commencing on the date that a Change of Control
is formally proposed to the Company's Board of Directors and ending on the first
anniversary of the date on which such Change of Control occurs, then the
Employee shall be entitled to receive (in lieu of the benefits described in
Section 11): (1) any accrued but unpaid salary, (2) a lump sum payment equal to
two times such Employee's annual base salary as of the date of termination, (3)
any accrued but unpaid bonus from a prior fiscal year, (4) reimbursement of
business expenses incurred prior to the date of termination, (5) travel and
housing allowances under Section 9 for one year following the date of
termination, (6) reasonable relocation expenses from Bermuda to the United
States, together with (7) a gross up of any excise taxes payable by the Employee
by reason of such payments occurring in connection with a Change of Control.
The Employee shall not be entitled to any benefits or other
entitlements under this section unless a Change of Control actually occurs.
(c) A "Change of Control" of the Company shall be deemed to have
occurred if, following consummation of the IPO (i) any "person" as such term is
defined in Section 3(a)(9) and as used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), excluding the Company or
any of its subsidiaries, a trustee or any fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, an underwriter
temporarily holding securities pursuant to an offering of such securities or a
corporation owned, directly or indirectly, by shareholders of the Company in
substantially the same proportion as their ownership of the Company, is or
becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 40% or
more of the combined voting power of the Company's then outstanding securities
("Voting Securities"); (ii) during any period of not more than two years,
individuals who constitute the Board of Directors of the Company (the "Board")
as of the beginning of the period and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i) or (iii) of this sentence) whose
election by the Board or nomination for election by the Company's shareholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at such time or whose election or nomination
for election was previously so approved, cease for any reason to constitute a
majority thereof; (iii) the shareholders of the Company approve a merger,
consolidation or reorganization or a court of competent jurisdiction approves a
scheme of arrangement of the Company, other than a merger, consolidation,
reorganization or scheme of arrangement which would result in the Voting
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<PAGE> 7
Securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into Voting
Securities of the surviving entity) at least 40% of the combined voting power of
the Voting Securities of the Company or such surviving entity outstanding
immediately after such merger, consolidation, reorganization or scheme of
arrangement; or (iv) the shareholders of the Company approve a plan of complete
liquidation of the Company or any agreement for the sale of substantially all of
the Company's assets.
(d) The provisions of this Section 12 shall only apply following the
consummation of an IPO.
Section 13. Agreement Not to Compete.
(a) The Employee hereby covenants and agrees that at no time during
the Term of Employment nor for a period of one year immediately following the
termination of the Employee's employment for any reason, will she for herself or
on behalf of any other person, partnership, company or corporation, directly or
indirectly, acquire any financial or beneficial interest in (except as provided
in the next sentence), provide consulting or other services to, be employed by,
or own, manage, operate or control any entity engaged in the financial guaranty
insurance or reinsurance business similar to the business engaged in by the
Company or the Operating Company at the time of such termination of employment.
Notwithstanding the preceding sentence, the Employee shall not be prohibited
from owning less than one (1%) percent of any publicly traded corporation,
whether or not such corporation is in competition with the Company or the
Operating Company.
(b) The Employee hereby covenants and agrees that, at all times
during the Term of Employment and for a period of two years immediately
following the termination thereof, the Employee shall not directly or indirectly
employ or seek to employ any person or entity employed at that time by the
Company or any of its subsidiaries, or otherwise encourage or entice such person
or entity to leave such employment.
(c) This Section 13 shall be null and void if the Board of Directors
elects to discontinue permanently the Company's operations or if the IPO has not
been consummated by March 31, 1999.
Section 14. Confidential Information.
The Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to the Company or any affiliate
of the Company, including, without limitation, customer lists, client lists,
trade secrets, business plans, financial models, pricing policies and other
business affairs of the Company and any affiliate of the Company learned by her
from the Company or any such affiliate or otherwise before or after the date of
this Agreement, and not to disclose any such confidential matter to anyone
outside the Company or any of its affiliates, whether during or after her period
of service with the Company, except as may be required in the course of a legal
or governmental proceeding. Upon request by the Company, the Employee agrees to
deliver promptly to the Company upon termination of her services for the
Company, or at any time thereafter as the Company may request, all Company or
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<PAGE> 8
affiliate memoranda, notes, records, reports, manuals, drawings, designs,
computer files in any media and other documents (and all copies thereof)
relating to the Company's or any affiliate's business and all property of the
Company or any affiliate associated therewith, which she may then possess or
have under her control.
Section 15. Remedy.
(a) Should the Employee engage in or perform, either directly or
indirectly, any of the acts prohibited by Sections 13 or 14 hereof, it is agreed
that the Company shall be entitled to full injunctive relief, to be issued by
any competent court of equity, enjoining and restraining the Employee and each
and every other person, firm, organization, association, or corporation
concerned therein, from the continuance of such violative acts. The foregoing
remedy available to the Company shall not be deemed to limit or prevent the
exercise by the Company of any or all further rights and remedies which may be
available to the Company hereunder or at law or in equity.
(b) The Employee acknowledges and agrees that the covenants
contained in this Agreement are fair and reasonable in light of the
consideration paid hereunder, and the invalidity or unenforceability of any
particular provision, or part of any provision, of this Agreement shall not
affect the other provisions or parts hereof. If any provision hereof is
determined to be invalid or unenforceable by a court of competent jurisdiction,
the Employee shall negotiate in good faith to provide the Company with
protection as nearly equivalent to that found to be invalid or unenforceable and
if any such provision shall be so determined to be invalid or unenforceable by
reason of the duration or geographical scope of the covenants contained therein,
such duration or geographical scope, or both, shall be considered to be reduced
to a duration or geographical scope to the extent necessary to cure such
invalidity.
Section 16. Indemnification.
The Company and the Operating Company will indemnify the Employee
(and her legal representatives or other successors) to the fullest extent
permitted by the laws of the Islands of Bermuda and in accordance with the terms
of the Company's and the Operating Company's respective Bye-Laws, and the
Employee shall be entitled to the protection of any insurance policies the
Company or the Operating Company may elect to maintain generally for the benefit
of their directors and officers, against all costs, charges and expenses
whatsoever incurred or sustained by the Employee or her legal representatives in
connection with any action, suit or proceeding to which she (or her legal
representatives or other successors) may be made a party by reason of his being
or having been a director or officer of the Company or the Operating Company.
Section 17. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
Employee, her heirs, executors, administrators and beneficiaries, and the
Company, the Operating Company and their successors and assigns.
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<PAGE> 9
Section 18. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the Islands of Bermuda, without reference to rules
relating to conflicts of law.
Section 19. Entire Agreement.
This Agreement constitutes the full and complete understanding and
agreement of the parties and supersedes all prior understandings and agreements
as to employment of the Employee. This Agreement cannot be amended, changed,
modified or terminated without the written consent of the parties hereto.
Section 20. Waiver of Breach.
The waiver by either party of a breach of any term of this Agreement
shall not operate nor be construed as a waiver of any subsequent breach thereof.
Section 21. Notices.
Any notice, report, request or other communication given under this
Agreement shall be written and shall be effective upon delivery when delivered
personally, by Federal Express or by fax.
Unless otherwise notified by any of the parties, notices shall be
sent to the parties as follows:
To Employee: Mary Jane Robertson
_________________________________
_________________________________
_________________________________
To the
Company: Global Markets Access Ltd.
Victoria Hall, Victoria Street
P.O. Box HM 1262
Hamilton, HM FX, Bermuda
Section 22. Severability.
If any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
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<PAGE> 10
Section 23. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as on the day and year first above written.
By: /s/ Mary Jane Robertson
--------------------------------
Mary Jane Robertson
GLOBAL MARKETS ACCESS LTD.
By: /s/ Donald J. Matthews
-------------------------------
Donald J. Matthews
Chief Executive Officer
GLOBAL MARKETS GUARANTY LTD.
By: /s/ Donald J. Matthews
-------------------------------
Donald J. Matthews
Chief Executive Officer
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<PAGE> 1
Exhibit 10.14
AGREEMENT
This AGREEMENT is made as of November 1, 1998 by and among INSURANCE
CONSULTING SERVICES LIMITED, a Bermuda corporation ("ICS"), GLOBAL MARKETS
ACCESS LTD., a Bermuda corporation (the "Company"), and GLOBAL MARKETS GUARANTY
LTD., a Bermuda corporation (the "Operating Company").
BACKGROUND
The Company and its wholly-owned subsidiary, the Operating Company,
were both incorporated in August 1998 in Bermuda, and neither has any operating
history. The Company intends to engage in the business of providing financial
guaranty insurance and reinsurance on financial obligations through the
Operating Company.
ICS is willing to provide certain services to the Company and the
Operating Company after the consummation of the proposed initial public offering
of common shares of the Company (the "IPO"), subject to the terms of this
Agreement. The Company and the Operating Company desire to engage ICS to provide
such services, subject to the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements herein contained, the parties hereto, intending
to be legally bound, hereby agree as follows:
SECTION 1. ENGAGEMENT OF ICS.
(a) The Company and the Operating Company hereby engage ICS to provide the
services set forth in Section 1(b) of this Agreement. ICS hereby accepts such
engagement on the terms and conditions hereinafter set forth.
(b) ICS shall perform or supervise the performance by others of the
following services after the consummation of the IPO:
(1) assist the Company and the Operating Company with regard to risk
management and related financial services; and
(2) provide such other related services as may be requested from
time to time.
(c) The performance of the services set forth in Section 1(b) of this
Agreement by ICS shall be at the direction of, and subject to the supervision
of, the Company's Board of Directors.
SECTION 2. FEE.
(a) Annual Fee. The Operating Company shall pay to ICS a fee at the rate
of US$425,000 per annum, payable quarterly in advance following the consummation
of the IPO through the end of the term of the Agreement.
<PAGE> 2
SECTION 3. TERM.
The term of this Agreement shall extend from the date hereof until
the fifth anniversary of the consummation of the IPO.
SECTION 4. LIMITATION OF LIABILITY OF ICS.
ICS shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any act or omission in carrying out its duties
hereunder, except a loss resulting solely from ICS's willful misfeasance or
gross negligence.
SECTION 5. INDEMNITY.
(a) The Company and the Operating Company shall indemnify, defend and hold
harmless ICS and its officers, directors, shareholders, employees, agents,
representatives and affiliates ("ICS Indemnities") against and in respect of any
and all losses, costs, expenses (including, without limitation, costs of
investigation and defense and reasonable attorneys' fees), claims, damages,
obligations and liabilities (collectively, "Damages") arising out of, based upon
or otherwise in respect of the operation by the Company and the Operating
Company of their businesses, or related to this Agreement or ICS's performance
thereof, except to the extent that any such Damages result solely from the
willful misfeasance or gross negligence of one or more ICS Indemnities.
(b) ICS shall indemnify, defend and hold harmless the Company and the
Operating Company and their officers, directors, shareholders, employees,
agents, representatives and affiliates against and in respect of any and all
Damages to the extent solely arising out of, based upon or otherwise in respect
of ICS's willful misfeasance or gross negligence in connection with ICS's
performance of this Agreement.
(c) This Section 5 shall survive the termination of this Agreement.
SECTION 6. MISCELLANEOUS.
(a) Notices. All notices, waivers and other communications under this
Agreement must be in writing and will be deemed to have been duly given (i) when
delivered by hand (with written confirmation of receipt), (ii) when sent by
telecopier (with written confirmation of successful transmission), provided that
a copy is mailed by certified or registered mail, postage prepaid, return
receipt requested or (iii) two business days following deposit thereof (with all
postage and other fees paid) with a nationally recognized overnight delivery
service, in each case to the appropriate addresses and telecopier numbers, as
applicable, set forth below (or to such other addresses and telecopier numbers
as a party may designate by notice to the other parties):
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<PAGE> 3
To ICS:
Insurance Consulting Services Limited
c/o Conyers Dill & Pearman
Clarendon House
2 Church Street, P.O. Box HM666
Hamilton, Bermuda HM CX
Attn: Charles G. Collis, Esquire
(441) 295-1422
(441) 292-4720 Telecopy Number
To the Company:
Global Markets Access Ltd.
Victoria Hall, Victoria Street
P.O. Box HM1262
Hamilton, HM FX, Bermuda
Attn.: Donald J. Matthews, President and
Chief Executive Officer
To Operating Company:
Global Markets Guaranty Ltd.
Victoria Hall, Victoria Street
P.O. Box HM1262
Hamilton, HM FX, Bermuda
Attn.: Donald J. Matthews, President and
Chief Executive Officer
(b) Assignment and Benefit. This Agreement or any rights hereunder may not
be assigned by the Company or the Operating Company, nor may the Company or the
Operating Company delegate any obligations hereunder, without the prior written
consent of ICS. This Agreement or any rights hereunder may not be assigned by
ICS, nor may ICS delegate any obligations hereunder, without the prior written
consent of the Company and the Operating Company. Subject to the foregoing, this
Agreement and the rights and obligations contained herein shall inure to the
benefit of, and be binding upon, the parties hereto and each of their respective
successors and assigns. This Agreement shall not be construed as giving any
person, other than the parties hereto and their successors and assigns, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any of the provisions herein contained, this Agreement and all provisions and
conditions hereof being intended to be, and being, for the sole and exclusive
benefit of such parties, successors and assigns and for the benefit of no other
person or entity.
(c) Amendment and Waiver. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
Neither the failure nor any delay by any party in exercising any right, power or
privilege under this Agreement will
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<PAGE> 4
operate as a waiver of such right, power or privilege, and no single or partial
exercise of any such right, power or privilege will preclude any other or
further exercise of such right, power or privilege or the exercise of any other
right, power or privilege. To the maximum extent permitted by applicable law, no
claim or right arising out of this Agreement can be waived by a party, in whole
or in part, except in a writing signed by such party. The waiver by a party of
any breach of any provision of this Agreement shall not constitute or operate as
a waiver of any other breach of such provision or of any other provision hereof,
nor shall any failure to enforce any provision hereof operate as a waiver of
such provision or of any other provision hereof.
(d) Governing Law. This Agreement is made pursuant to, and shall be
construed and enforced in accordance with, the laws of the Islands of Bermuda,
without giving effect to otherwise applicable principles of conflicts of law.
(e) Severability. The invalidity or unenforceability of any particular
provision, or part of any provision, of this Agreement shall not affect the
other provisions or parts hereof, and this Agreement shall be construed in all
respects as if such invalid or unenforceable provisions or parts were omitted.
(f) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original; and any person may
become a party hereto by executing a counterpart hereof, but all of such
counterparts together shall be deemed to be one and the same instrument. It
shall not be necessary in making proof of this Agreement or any counterpart
hereof to produce or account for any of the other counterparts.
(g) Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter of this Agreement
and supersedes all prior agreements and understandings with respect to the
subject matter hereof.
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<PAGE> 5
IN WITNESS WHEREOF, each of the parties hereto has caused its duly
authorized representatives to execute this Agreement, all as of the date first
above written.
INSURANCE CONSULTING SERVICES LIMITED
By: /s/ Robert M. Lichten
-------------------------------
Name: Robert M. Lichten
Title: President
GLOBAL MARKETS ACCESS LTD.
By: /s/ Donald J. Matthews
-------------------------------
Name: Donald J. Matthews
Title: President and Chief Executive Officer
GLOBAL MARKETS GUARANTY LTD.
By: /s/ Donald J. Matthews
-------------------------------
Name: Donald J. Matthews
Title: President and Chief Executive Officer
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<PAGE> 1
Exhibit 10.15
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made in Hamilton, Bermuda, and is dated as of
November 1, 1998, by and between Global Markets Access Ltd., a Bermuda
corporation (the "Company"), Global Markets Guaranty Ltd., a wholly-owned
subsidiary of the Company organized under the laws of Bermuda to provide
financial guaranty insurance and reinsurance (the "Operating Company"), and
Lionel J. Marsland-Shaw (the "Employee").
W I T N E S S E T H
WHEREAS, the Company is contemplating an initial public offering
and/or a private placement of its common shares (the "IPO"); and
WHEREAS, the Company and the Operating Company desire that the
Employee serve as Principal, Risk Management of the Company and the Operating
Company and the Employee is willing to serve in such capacities.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration, the parties hereto agree as
follows:
Section 1. Employment.
Effective as of November 1, 1998, the Company and the Operating
Company will employ the Employee and the Employee will perform services for the
Company and the Operating Company on the terms and conditions set forth in this
Agreement and for the period ("Term of Employment") specified in Section 3
hereof.
Section 2. Duties.
The Employee, during the Term of Employment, shall serve the Company
as its Principal, Risk Management. The Employee shall also serve as Principal,
Risk Management. The Employee shall be based at the Operating Company's
headquarters in Bermuda, other than for periodic travel in the ordinary course
of business. The Employee shall have such duties and responsibilities as are
assigned to him by the Boards of Directors of the Company and the Operating
Company commensurate with his positions with the Company and the Operating
Company, and shall perform such duties and responsibilities in each case in such
a manner that neither the Company nor the Operating Company would be deemed to
be conducting a trade or business in the United States for purposes of the
United States Internal Revenue Code of 1986, as amended.
The Employee shall perform his duties hereunder faithfully and to
the best of his abilities and in furtherance of the business of the Company and
the Operating Company, and shall devote his full business time, energy,
attention and skill to the business of the Company and the Operating Company and
to the promotion of their interests except as otherwise agreed by the Company
and the Operating Company.
<PAGE> 2
The Employee warrants and represents that he is free to enter into
this Agreement and is not restricted by any prior or existing agreement and the
Company and the Operating Company may rely on such representation in entering
into this Agreement.
Section 3. Term of Employment.
The initial Term of Employment of this Agreement shall be the period
commencing on November 1, 1998 and ending on the third anniversary of the IPO.
At the end of the initial Term of Employment, and on each anniversary thereof,
the Term of Employment shall automatically be extended for one additional year,
unless the Company and the Operating Company, collectively, or the Employee
shall have given at least three months in advance written notice to the other
that it does not wish to extend this Agreement. The Company shall be liable to
the Employee for reasonable relocation expenses for a period of six months after
the termination of the Term of Employment if the Company and the Operating
Company do not extend this Agreement, and the Employee is no longer employed by
the Company and the Operating Company in any capacity.
Section 4. Salary.
The Employee shall receive, as compensation for his duties and
obligations to the Company and the Operating Company, a salary at the annual
rate of BD$180,000, payable by the Operating Company in substantially equal
installments in accordance with the Operating Company's payroll practice;
however, no salary shall become payable to the Employee until consummation of
the IPO. During the Term of Employment, all salary or consulting payments paid
to the Employee by ACA Financial Guaranty Corporation or Inter-Atlantic
Securities Corporation or their affiliates shall be credited against salary due
to the Employee under this Employment Agreement. It is agreed between the
parties that the Company shall review the Employee's base annual salary annually
and in light of such review may, in the discretion of the Board of Directors of
the Company, increase such base annual salary taking into account any change in
the Employee's responsibilities, increases in the cost of living, performance by
the Employee and other pertinent factors.
Section 5. Bonus.
During the Term of Employment, the Employee shall, subject to and
effective upon the consummation of the IPO, participate in the Company's
Incentive Compensation Plan, the terms of such Plan to be determined by the
Compensation Committee for approval by the Company's Board of Directors, and
shall be eligible for an annual cash bonus based on performance targets as
determined in accordance with the terms of any such plan.
Section 6. Options.
(a) Initial Options. The Company shall grant to the Employee,
subject to and effective as of the consummation of the IPO, options (the
"Initial Options") to purchase at a price per share equal to the price per share
in the IPO, 33,333 common shares of the Company (the "Common Shares"). Thirty
three and one-thirds percent (33 1/3%) of the Initial Options shall become
exercisable on the first anniversary of the IPO, 33 1/3% of the Initial Options
shall
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<PAGE> 3
become exercisable on the second anniversary of the IPO, and an additional 33
1/3% of the Initial Options shall become exercisable on the third anniversary
thereof. The terms of the Initial Options shall be governed by the terms of the
Company's Initial Stock Option Plan.
(b) Other Options. During the Term of Employment, the Employee
shall, subject to the consummation of the IPO, be eligible to be granted options
(in addition to the Initial Options) to purchase Common Shares at such price and
subject to such terms as provided by the Company's Initial Stock Option Plan, in
the sole discretion of the Board of Directors of the Company.
Section 7. Employee Benefits.
During the Term of Employment, the Employee shall, effective upon
the consummation of the IPO, be entitled to participate in all employee benefit
programs of the Company and the Operating Company, as such programs may be in
effect from time to time, including without limitation, pension and other
retirement plans, profit sharing plans, group life insurance, accidental death
and dismemberment insurance, hospitalization, surgical and major medical
coverage, sick leave (including salary continuation arrangements), long term
disability, holidays and vacations.
Section 8. Business Expenses.
All reasonable travel and other expenses incidental to the rendering
of services by the Employee hereunder shall be paid by the Operating Company and
if expenses are paid in the first instance by the Employee, the Operating
Company will reimburse him therefor upon presentation of proper invoices;
subject in each case to compliance with the Operating Company's reimbursement
policies and procedures.
Section 9. Housing and Travel Expenses.
During the Term of Employment, the Operating Company shall,
effective upon consummation of the IPO, provide to the Employee the sum of
BD$6,000 monthly as an allowance to cover the expenses of housing in Bermuda and
for his personal travel to and from Bermuda.
Section 10. Vacations and Sick Leave.
During the Term of Employment, the Employee shall be entitled to
reasonable vacation and reasonable sick leave each year, in accordance with
policies of the Company and the Operating Company, as determined by their
respective Boards of Directors, provided, however, that the Employee shall be
entitled to a minimum of four weeks vacation per year.
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<PAGE> 4
Section 11. Termination.
(a) In the event of Serious Cause, as defined below, the Company and
the Operating Company may terminate the Employee's employment and the Term of
Employment hereunder immediately upon written notice of such termination stating
the Serious Cause upon which the Company and the Operating Company are basing
such termination.
"Serious Cause" shall mean (i) the willful and continued failure by
the Employee to perform substantially his duties hereunder, other than by
reasons of health, for a period of more than 30 days after demand for
substantial performance has been delivered by the Company and the Operating
Company that identifies the manner in which the Company and the Operating
Company believe the Employee has not performed his duties, (ii) the Employee
shall have been indicted by any federal, state or local authority in any
jurisdiction for, or shall have pleaded guilty or nolo contendere to, an act
constituting a felony, (iii) the Employee shall have habitually abused any
substance (such as narcotics or alcohol), or (iv) the Employee shall have (A)
engaged in acts of fraud, material dishonesty or gross misconduct in connection
with the business of the Company and the Operating Company or (B) committed a
material breach of this Agreement.
(b) The Employee may terminate his employment and the Term of
Employment hereunder in the event of Good Reason, as defined below, upon 30
days' prior written notice of such termination stating the Good Reason upon
which the Employee is basing such termination.
"Good Reason" shall mean (i) a substantial reduction in the
Employee's salary, (ii) the demotion of the Employee, (iii) a material reduction
of the Employee's duties hereunder, or (iv) a material breach of this Agreement
by the Company and the Operating Company.
(c) In the event of termination of the Employee's employment and the
Term of Employment hereunder by the Company and the Operating Company for
Serious Cause or by the Employee without Good Reason, the Employee shall forfeit
all bonus amounts for the then current fiscal year, and the Operating Company
shall be liable to the Employee only for (i) any accrued but unpaid salary, (ii)
any accrued but unpaid bonus from a prior fiscal year, and (iii) reimbursement
of business expenses incurred prior to the date of termination.
(d) In the event of the death, retirement or disability of the
Employee, the Employee's employment and Term of Employment hereunder shall be
terminated as of the date of such death, retirement or disability and the
Operating Company shall pay the Employee, or the Employee's estate or legal
representative, as appropriate, (i) any accrued but unpaid salary, (ii) any
earned but unpaid bonus from a prior fiscal year, (iii) reimbursement of
business expenses incurred prior to the date of termination, (iv) travel and
housing allowances under Section 9 for six months after the date of termination,
and (v) reasonable relocation expenses from Bermuda to the United Kingdom. The
date of the Employee's disability shall be deemed to be the last day of the
sixth month period of time during which the Employee has been unable to carry
out his position as provided below.
"Disability" shall mean the Employee's inability, for reasons of
health, to carry out the functions of his position for a total of 6 months
during any 12 month period of this
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<PAGE> 5
Agreement. "Retirement" shall mean retirement from employment upon attaining age
65 or such earlier age agreed to by the Company and the Operating Company.
In addition, in the event of the Employee's death, retirement or
disability, if the Company's Common Shares are not then publicly traded, the
Company shall, after giving written notice to the Employee, the Employee's
estate or legal representative, whichever is appropriate, have the right to
require the sale to the Company of any or all of the Common Shares of the
Company owned by the Employee within six (6) months of death, retirement or
disability; and the Employee, the Employee's estate or legal representative,
whichever is appropriate, shall have the right to, after giving written notice
to the Company, sell any or all of the Employee's Common Shares to the Company
within twelve (12) months after death or within six (6) months after retirement
or disability. The rights provided for in this paragraph shall be exercised by
serving written notice of the intention to buy or sell, as the case may be, to
the other party. The price at which any such transfer shall be effected shall be
equal to the appraised value of the Common Shares, in each case measured as of
the date of termination. The appraised value formula of evaluation will be
agreed upon by June 1, 1999 if the Company is not then publicly traded. Payment
for either such transaction shall occur no later than sixty (60) days after
effective notice is given pursuant to Section 20 of this Agreement, or, if
later, no more than thirty (30) days after the appraised value is finally
determined.
(e) If the Company and the Operating Company should terminate the
Employee's employment and the Term of Employment hereunder without Serious Cause
or if the Employee should terminate his employment and the Term of Employment
hereunder for Good Reason, the Operating Company shall continue to pay the
Employee his base salary for a period of 18 months from such termination. In
addition, the Employee shall be entitled to (i) any accrued but unpaid salary,
(ii) any earned but unpaid bonus from a prior fiscal year, (iii) reimbursement
of business expenses incurred prior to the date of termination, (iv) travel and
housing allowances under Section 9 for six months after the date of termination,
and (v) reasonable relocation expenses from Bermuda to the United Kingdom.
(f) In the event of the liquidation of the Company or the Operating
Company or in the event that the Board of Directors elects to discontinue
permanently operating the Company or the Operating Company, the Employee's
employment and the Term of Employment hereunder shall be terminated as of the
date of such liquidation or discontinuance, and the Operating Company shall pay
the Employee within 30 days of the day liquidation or discontinuance is
determined (i) any accrued but unpaid salary, (ii) any earned but unpaid bonus
from a prior fiscal year, (iii) unreimbursed business expenses incurred prior to
the date of termination, (iv) travel and housing allowances under Section 9 for
two months after the date of termination, and (v) reasonable relocation expenses
from Bermuda to the United Kingdom. In addition, the Employee shall be entitled
to receive one year's base salary from the date on which the Employee's
employment is terminated.
(g) Notwithstanding any other provision of this Agreement, until the
IPO is consummated, either the Employee or the Company may terminate the
Employee's employment and the Term of Employment hereunder upon 30 days' written
notice to the other, in which event
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<PAGE> 6
the Company shall be liable to the Employee only for reimbursement of business
expenses incurred prior to the date of termination.
Section 12. Change of Control.
(a) Notwithstanding any other provision contained herein, the
Employee's Initial Options and other options issued under the Company's share
option plans that are not then exercisable shall become exercisable (and be
deemed to be vested) on the date on which a Change of Control (as defined below)
of the Company occurs. In addition, restricted Common Shares granted under any
other of the Company's share option plans shall immediately vest upon a Change
of Control of the Company.
(b) If (i) the employment of the Employee is terminated by the
Company (or successor thereto) without Serious Cause or (ii) the Employee
terminates employment with the Company (or successor thereto) for Good Reason,
in each case within the period commencing on the date that a Change of Control
is formally proposed to the Company's Board of Directors and ending on the first
anniversary of the date on which such Change of Control occurs, then the
Employee shall be entitled to receive (in lieu of the benefits described in
Section 11): (1) any accrued but unpaid salary, (2) a lump sum payment equal to
two times such Employee's annual base salary as of the date of termination, (3)
any accrued but unpaid bonus from a prior fiscal year, (4) reimbursement of
business expenses incurred prior to the date of termination, (5) travel and
housing allowances under Section 9 for one year following the date of
termination, (6) reasonable relocation expenses from Bermuda to the United
Kingdom, together with (7) a gross up of any excise taxes payable by the
Employee by reason of such payments occurring in connection with a Change of
Control.
The Employee shall not be entitled to any benefits or other
entitlements under this section unless a Change of Control actually occurs.
(c) A "Change of Control" of the Company shall be deemed to have
occurred if, following consummation of the IPO (i) any "person" as such term is
defined in Section 3(a)(9) and as used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), excluding the Company or
any of its subsidiaries, a trustee or any fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, an underwriter
temporarily holding securities pursuant to an offering of such securities or a
corporation owned, directly or indirectly, by shareholders of the Company in
substantially the same proportion as their ownership of the Company, is or
becomes the "beneficial owner" (as defined in rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 40% or
more of the combined voting power of the Company's then outstanding securities
("Voting Securities"); (ii) during any period of not more than two years,
individuals who constitute the Board of Directors of the Company (the "Board")
as of the beginning of the period and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i) or (iii) of this sentence) whose
election by the Board or nomination for election by the Company's shareholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at such time or whose election or nomination
for election was previously so approved, cease for any reason to constitute a
majority thereof; (iii) the
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<PAGE> 7
shareholders of the Company approve a merger, consolidation or reorganization or
a court of competent jurisdiction approves a scheme of arrangement of the
Company, other than a merger, consolidation, reorganization or scheme of
arrangement which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 40% of the combined voting power of the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger, consolidation, reorganization or scheme of arrangement; or (iv) the
shareholders of the Company approve a plan of complete liquidation of the
Company or any agreement for the sale of substantially all of the Company's
assets.
(d) The provisions of this Section 12 shall only apply following the
consummation of an IPO.
Section 13. Agreement Not to Compete.
(a) The Employee hereby covenants and agrees that at no time during
the Term of Employment nor for a period of one year immediately following the
termination of the Employee's employment for any reason, will he for himself or
on behalf of any other person, partnership, company or corporation, directly or
indirectly, acquire any financial or beneficial interest in (except as provided
in the next sentence), provide consulting or other services to, be employed by,
or own, manage, operate or control any entity engaged in the financial guaranty
insurance or reinsurance business similar to the business engaged in by the
Company or the Operating Company at the time of such termination of employment.
Notwithstanding the preceding sentence, the Employee shall not be prohibited
from owning less than one (1%) percent of any publicly traded corporation,
whether or not such corporation is in competition with the Company or the
Operating Company.
(b) The Employee hereby covenants and agrees that, at all times
during the Term of Employment and for a period of two years immediately
following the termination thereof, the Employee shall not directly or indirectly
employ or seek to employ any person or entity employed at that time by the
Company or any of its subsidiaries, or otherwise encourage or entice such person
or entity to leave such employment.
(c) This Section 13 shall be null and void if the Board of Directors
elects to discontinue permanently the Company's operations or if the IPO has not
been consummated by March 31, 1999.
Section 14. Confidential Information.
The Employee agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to the Company or any affiliate
of the Company, including, without limitation, customer lists, client lists,
trade secrets, business plans, financial models, pricing policies and other
business affairs of the Company and any affiliate of the Company learned by him
from the Company or any such affiliate or otherwise before or after the date of
this Agreement, and not to disclose any such confidential matter to anyone
outside the Company or any of its affiliates, whether during or after his period
of service with the Company, except as
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may be required in the course of a legal or governmental proceeding. Upon
request by the Company, the Employee agrees to deliver promptly to the Company
upon termination of his services for the Company, or at any time thereafter as
the Company may request, all Company or affiliate memoranda, notes, records,
reports, manuals, drawings, designs, computer files in any media and other
documents (and all copies thereof) relating to the Company's or any affiliate's
business and all property of the Company or any affiliate associated therewith,
which he may then possess or have under his control.
Section 15. Remedy.
(a) Should the Employee engage in or perform, either directly or
indirectly, any of the acts prohibited by Sections 13 or 14 hereof, it is agreed
that the Company shall be entitled to full injunctive relief, to be issued by
any competent court of equity, enjoining and restraining the Employee and each
and every other person, firm, organization, association, or corporation
concerned therein, from the continuance of such violative acts. The foregoing
remedy available to the Company shall not be deemed to limit or prevent the
exercise by the Company of any or all further rights and remedies which may be
available to the Company hereunder or at law or in equity.
(b) The Employee acknowledges and agrees that the covenants
contained in this Agreement are fair and reasonable in light of the
consideration paid hereunder, and the invalidity or unenforceability of any
particular provision, or part of any provision, of this Agreement shall not
affect the other provisions or parts hereof. If any provision hereof is
determined to be invalid or unenforceable by a court of competent jurisdiction,
the Employee shall negotiate in good faith to provide the Company with
protection as nearly equivalent to that found to be invalid or unenforceable and
if any such provision shall be so determined to be invalid or unenforceable by
reason of the duration or geographical scope of the covenants contained therein,
such duration or geographical scope, or both, shall be considered to be reduced
to a duration or geographical scope to the extent necessary to cure such
invalidity.
Section 16. Indemnification.
The Company and the Operating Company will indemnify the Employee
(and his legal representatives or other successors) to the fullest extent
permitted by the laws of the Islands of Bermuda and in accordance with the terms
of the Company's and the Operating Company's respective Bye-Laws, and the
Employee shall be entitled to the protection of any insurance policies the
Company or the Operating Company may elect to maintain generally for the benefit
of their directors and officers, against all costs, charges and expenses
whatsoever incurred or sustained by the Employee or his legal representatives in
connection with any action, suit or proceeding to which he (or his legal
representatives or other successors) may be made a party by reason of his being
or having been a director or officer of the Company or the Operating Company.
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<PAGE> 9
Section 17. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of the
Employee, his heirs, executors, administrators and beneficiaries, and the
Company, the Operating Company and their successors and assigns.
Section 18. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the Islands of Bermuda, without reference to rules
relating to conflicts of law.
Section 19. Entire Agreement.
This Agreement constitutes the full and complete understanding and
agreement of the parties and supersedes all prior understandings and agreements
as to employment of the Employee. This Agreement cannot be amended, changed,
modified or terminated without the written consent of the parties hereto.
Section 20. Waiver of Breach.
The waiver by either party of a breach of any term of this Agreement
shall not operate nor be construed as a waiver of any subsequent breach thereof.
Section 21. Notices.
Any notice, report, request or other communication given under this
Agreement shall be written and shall be effective upon delivery when delivered
personally, by Federal Express or by fax.
Unless otherwise notified by any of the parties, notices shall be
sent to the parties as follows:
To Employee: Lionel J. Marsland-Shaw
---------------------------------
---------------------------------
---------------------------------
To the
Company: Global Markets Access Ltd.
Victoria Hall, Victoria Street
P.O. Box HM 1262
Hamilton, HM FX, Bermuda
Section 22. Severability.
If any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and
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<PAGE> 10
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
Section 23. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as on the day and year first above written.
By: /s/ Lionel J. Marsland-Shaw
----------------------------------------------
Lionel J. Marsland-Shaw
GLOBAL MARKETS ACCESS LTD.
By: /s/ Donald J. Matthews
----------------------------------------------
Donald J. Matthews
Chief Executive Officer
GLOBAL MARKETS GUARANTY LTD.
By: /s/ Donald J. Matthews
----------------------------------------------
Donald J. Matthews
Chief Executive Officer
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<PAGE> 1
Exhibit 10.16
Sublease Agreement
This underlease is dated the 25th day of November 1998 and is made between
Annuity and Life Reassurance Ltd. having its office at Cumberland House, 1
Victoria St., Hamilton, Bermuda the lessor and Global Markets Access Ltd.
"Lessee".
Leasehold
Subject to the terms and conditions set forth herein, Lessor subleases to
Lessee, and Lessee subleases from Lessor, that certain office space located at
Cumberland House, 1 Victoria Street, Hamilton HM AX, Bermuda. This space shall
consist of 4 offices and 3 workstations. Each office and workstation shall have
no less than one 1 functional phone.
Term
The initial term on this sublease shall be from Wednesday, November 25, 1998,
until Thursday December 31, 1998. At any time before December 31, 1998, this
sublease may be renewed on a month-to-month basis by the consent of both Lessor
and Lessee.
Rent
Initial term: Lessee shall pay Lessor as rent, for the possession and use of
the Premises, the sum BD$5,200 plus utilities for the initial term as described
above. This rent shall be paid in full on or before December 31, 1998. Rent is
payable at the address of Lessor at Cumberland House, 1 Victoria Street,
Hamilton HM AX, Bermuda.
Month-to-month: Should this sublease continue on a month-to-month basis, Lessee
shall pay Lessor as rent, for the possession and use of the Premises, the sum
of BD$4,500 per month plus utilities in advance. Rent is payable at the address
of Lessor at Cumberland House 1 Victoria Street, Hamilton HM AX, Bermuda.
Use of Premises
Use and Restrictions on Use: Lessor shall use the premises for general office
purposes only, and for no other use. Lessee shall not use or allow the Premises
to be used for a purpose or in a manner that is unlawful, illegal, or likely to
cause damage to the Premises, to adjourning property, or would cause a nuisance
to any member of the public or to any other Lessee of the building.
This sublease is executed on this 25th day of November, 1998, in the City of
Hamilton, Bermuda.
/s/ Lawrence S. Doyle
- ---------------------------------------
Lawrence S. Doyle
President and Chief Executive Officer
Annuity and Life Reassurance, Ltd.
/s/ Donald J. Matthews
- ---------------------------------------
Donald J. Matthews
President and Chief Executive Officer
Global Markets Access Ltd.
<PAGE> 1
Exhibit 10.19
-1-
ALLIANCE CAPITAL MANAGEMENT L.P.
Discretionary Investment Advisory Agreement
with
Global Markets Guaranty Ltd.
- --------------------------------------------------------------------------------
(Name of Client)
Dated , 19
----------- --
(Effective Date)
Alliance Capital Management L.P. (the "Adviser") and the undersigned
(the "Client") hereby agree as of the above date that the Adviser shall act as
discretionary investment manager with respect to assets of the Client described
below (the "Investment Account") on the following terms and conditions:
1. The Investment Account
The Investment Account shall initially consist of cash, cash
equivalents, stocks, bonds, and other securities or assets the Client places in
the Investment Account or which shall become part of the Investment Account as
a result of transactions.
The Client may make additions to and withdrawals from the Investment
Account at any time. All cash, securities and other assets in the Investment
Account shall be held by such other party as the Client shall designate as
trustee or custodian (the "Custodian"). The Adviser shall not be responsible for
any custodial arrangements involving any assets of the Investment Account or for
the payment of any custodial charges and fees, nor shall the Adviser have
possession or custody of any such assets. All payments, distributions and other
transactions in cash, securities or other assets in respect of the Investment
Account shall be made directly to or from the Custodian, and the Adviser shall
have no responsibility or liability with respect to transmittal or safekeeping
of such cash, securities or other assets of the Investment Account, or the acts
or omissions of the Custodian or others with respect thereto. The Client shall
direct the Custodian to furnish to the Adviser from time to time such reports
concerning assets, receipts and disbursements with respect to the Investment
Account as the Adviser shall reasonably request.
2. Services of Adviser
By execution of this Agreement, the Adviser accepts appointment as
investment manager for the Investment Account with full discretion and agrees
to supervise and direct the
<PAGE> 2
-2-
investments of the Investment Account in accordance with the written investment
objectives, policies and restrictions of the Client previously furnished to the
Adviser as the same may be amended by the Client from time to time. In the
performance of its services, the Adviser will not be liable for any error in
judgment or any acts or omissions to act except those resulting from the
Adviser's negligence, wilful misconduct or malfeasance. Nothing herein shall in
any way constitute a waiver or limitation of any right of any person under the
Federal Securities Laws or any State Securities Laws.
The Adviser will render to the Client a monthly report and inventory
of the investments in the Investment Account. It is agreed that the Adviser, in
the maintenance of its records, does not assume responsibility for the accuracy
of information furnished by the Client or any other person.
3. Funding Policy
The Client shall from time to time inform the Adviser in writing of
the funding policy applicable with respect to the Client and of its cash
disbursement requirements. The Adviser shall make its investment decisions for
the Investment Account in accordance with such funding policy and requirements.
4. Investment Objectives, Policies and Restrictions
It will be the Client's responsibility to notify the Adviser in
writing of the investment objectives and policies of the Investment Account, and
of any modifications therein, as well as any specific investment restrictions
applicable thereto and to give the Adviser prompt written notice if the Client
deems any investments made for the Investment Account to be inconsistent with
such objectives, policies or restrictions. The Client is also required to notify
the Adviser in writing of specific restrictions governing the Investment Account
under the current or future laws of any jurisdiction or by virtue of the terms
of any other contract or instrument purporting to bind the Client or Adviser.
5. Delivery of Client Documentation
No later than the date of this Agreement, the Client will provide the
Adviser with copies of all documents relevant to the Adviser's management of the
Investment Account, (i.e. trust agreement, pension plan documents, by-laws, etc.
but only to the extent such documents are relevant to the Adviser's management
of the Investment Account), including the written statement of the Client's
investment objectives, policies and restrictions referred to above. The Client
further agrees to promptly deliver to the Adviser true and complete copies of
all amendments or supplements to such documents. The Adviser will be indemnified
and held harmless against any and all losses, costs, claims and liabilities
which it may suffer or incur arising out of any failure by the Client to provide
to the Adviser the documents required to be furnished in accordance with the
above provisions.
<PAGE> 3
-3-
6. Discretionary Authority
The Adviser, whenever it deems appropriate and without prior
consultation with the Client, may (i) buy, sell, exchange, convert, liquidate or
otherwise trade in any stock, bonds and other securities (including money market
instruments) and (ii), subject to the provisions of paragraph 7 hereof, place
orders for the execution of such transactions with or through such brokers,
dealers or issuers as the Adviser in its absolute discretion may select.
It is understood that, to the extent permitted by the written
statement of investment objectives, policies and restrictions referred to above,
the Adviser may also effect transactions for the Investment Account in options
and financial futures, stock market index futures and other commodity contracts.
In such event, the Client will execute any additional documentation which the
Adviser deems necessary to enable it to engage in such transactions on behalf of
the Investment Account.
7. Allocation of Brokerage
When placing orders for the execution of transactions for the
Investment Account, the Adviser may, unless the Client otherwise directs,
allocate such transactions to such broker-dealers, for execution on such
markets, at such prices and at such commission rates, as in the good faith
judgement of the Adviser will be in the best interests of the Client. In the
selection of such broker-dealers, the Adviser will take into consideration not
only the available prices and rates of brokerage commissions, but also other
relevant factors (such as, without limitation, execution capabilities, research
and other services provided by such broker-dealers which are expected to enhance
the general portfolio management capabilities of the Adviser, and the value of
an ongoing relationship of the Adviser with such broker-dealers) without having
to demonstrate that such factors are of a direct benefit to the Investment
Account. As a result, the commissions charged the Investment Account with
respect to a particular transaction may be somewhat higher than those another
broker-dealer might charge for the same transaction. The Adviser will exercise
good faith in negotiating the commissions paid by the Investment Account and
will seek to obtain the best price and execution for each transaction for the
Investment Account, taking into consideration the value of any brokerage and
research services provided by the broker-dealer effecting the transaction. As
set forth in Part II of the Adviser's Form ADV Registration Statement on file
with the Securities and Exchange Commission ("Form ADV"), the Adviser will not
implement other arrangements governing the use of selection of affiliated
broker-dealers or their correspondents to effect transactions for the Investment
Account without first obtaining express written consent or direction from the
Client, which consent or direction will constitute a modification to this
Agreement.
8. Aggregation of Transactions
The Client authorizes the Adviser in its discretion to aggregate
purchases and sales of securities for the Investment Account with purchases and
sales of securities and the same issuer for
<PAGE> 4
-4-
other clients of the Adviser occurring on the same day. When transactions are so
aggregated, the actual prices applicable to the aggregated transactions will be
averaged, and the Investment Account and the accounts of other participating
clients of the Adviser will be deemed to have purchased or sold their
proportionate share of the securities involved at the average price so obtained.
9. Transaction Procedures
All transactions will be settled by payment to, or delivery by, the
Custodian of all cash, securities or other assets due to or from the Investment
Account. The Adviser may issue such instructions to the Custodian as may be
appropriate in connection with the settlement of transactions initiated by the
Adviser. Instructions of the Adviser to the Custodian shall be transmitted in
writing or, at the option of the Adviser, orally and confirmed in writing as
soon as practical thereafter. The Adviser will take reasonable measures to
insure that broker-dealers and issuers selected by the Adviser perform their
obligations with respect to the Investment Account.
10. Fees
The compensation of the Adviser for its services under this Agreement
shall be calculated and paid in accordance with the attached Fee Schedule, as
the same may be amended from time to time by mutual agreement between the Client
and the Adviser. It is understood that, in the event that such fees are to be
billed to and paid by the Custodian, the Client will provide written
authorization to the Custodian to pay the fees of the Adviser directly from the
Investment Account.
11. Confidential Relationship
All information provided by the Client or the Custodian to the Adviser
shall be held as confidential by the Adviser; provided, however, as is necessary
to carry out the purposes of this Agreement or as may be required by law, the
Adviser shall be permitted to disclose or communicate to a proper party any
information received from the Client or the Custodian or developed by the
Adviser under the terms of this Agreement. All recommendations, advice and other
work product of the Adviser developed under the terms of this Agreement and
disclosed to the Client or the Custodian shall be held as confidential, except
as required by law to be disclosed to other persons.
12. Services to Other Clients
It is understood that the Adviser performs investment advisory services
for various clients including investment companies. The Client agrees that the
Adviser may give advice and take action with respect to any of its other clients
which may differ from advice given, or the timing or nature of action taken,
with respect to the Investment Account, so long as it is the Adviser's policy,
to the extent practical, to allocate investment opportunities to the Investment
Account over a period of time on a fair and equitable basis relative to other
clients.
<PAGE> 5
-5-
Nothing in this Agreement shall limit or restrict the Adviser or any of
its directors, officers, affiliates or employees from buying, selling or
trading in any securities or other assets for its or their own account or
accounts, and the Client acknowledges that the Adviser, its directors,
officers, affiliates and employees, and other clients of the Adviser, may at
any time have, acquire, increase, decrease or dispose of positions in
investments which are at the same time being acquired, held or disposed of for
the Investment Account.
The Adviser will not have any obligation to initiate the purchase or sale,
or to recommend for purchase or sale, for the Investment Account any security
or other asset which the Adviser, its directors, officers, affiliates or
employees may purchase, hold or sell for its or their own accounts or for the
accounts of any other clients of the Adviser.
13. Information Required by Adviser
The Client agrees to provide or instruct the Custodian to provide to the
Adviser such information as the Adviser may reasonably request as being
necessary or appropriate to the performance of the Adviser's responsibilities
to the Client under this Agreement.
14. Non-Public Information
The Adviser will have no obligation to purchase or sell for the Investment
Account the securities of any issuer on the basis of any material non-public
information as may come into its possession.
15. Proxies
Unless otherwise directed by the Client in writing, the Adviser will not
be required to take any action or render any advice with respect to the voting
of proxies solicited by or with respect to the issuers of securities in which
assets of the Investment Account may be invested from time to time.
16. Representations by Client
The Client represents and warrants that the employment of the Adviser is
authorized by the governing documents relating to the Investment Account and
that the terms of this Agreement do not violate any obligation by which the
Client is bound, whether arising by contract, operation of law or otherwise and,
if the Client is a person other than a natural person, that (i) this Agreement
has been duly authorized by appropriate action and when executed and delivered
will be binding upon the Client in accordance with its terms and (ii) the Client
will deliver to the Adviser such evidence of such authority as the Adviser may
reasonably require, whether by way of a certified resolution or otherwise.
<PAGE> 6
-6-
17. Representations by Adviser
The Adviser represents that it is registered as an investment
adviser under the Investment Advisers Act of 1940.
18. Indemnification
The Client and the Adviser agree to indemnify and hold each other
harmless from any and all expenses, damages, costs and fees, including
reasonable attorney's fees, which may be incurred by reason of the gross
negligence, willful misconduct or malfeasance on the part of the offending
party.
19. Valuation
In computing the market value of any security held in the Investment
Account which is listed on a national securities exchange, such security shall
be valued at the last quoted sale price on the valuation date on the principal
exchange on which the security is traded. Any other security or asset shall be
valued in a manner determined in good faith by the Adviser to reflect its fair
market value.
20. Receipt of Disclosure Statement
The Client acknowledges receipt of Part II of the Adviser's Form ADV
in compliance with Rule 204-3(b) under the Investment Advisers Act of 1940, as
amended ("Advisers Act") more than 48 hours prior to the date of execution of
this Agreement.
21. Notices
Unless otherwise specified herein, all notices, instructions and
advices with respect to security transactions or any other matters contemplated
by this Agreement shall be deemed duly given when received by the Adviser, the
Client and the Custodian, as applicable, at their respective addresses
appearing below. The Adviser may rely upon any notice (written or oral) from
any person which the Adviser reasonably believes to be an authorized
representative of the Client.
22. Specimen Signatures
The Adviser will forward from time to time to the Client and the
Custodian a list of names and specimen signatures of persons authorized to act
on behalf of the Adviser. The Client will forward to the Adviser a list of
names and specimen signatures of persons authorized to act on Client's behalf
and shall cause the Custodian to forward a like list and specimen signatures to
the Adviser.
<PAGE> 7
-7-
23. Invalid Provisions
If any provision of this Agreement is held to be illegal, invalid or
unenforceable under present or future law, such provision shall be fully
severable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part of this
Agreement, and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or its severance from this Agreement.
24. Termination; Assignment; Amendment
This Agreement may be terminated at any time by either party giving to the
other at least thirty (30) days' prior written notice of such termination. Fees
paid in advance of the effectiveness of the termination will be prorated to the
date of termination specified in the notice of termination, and any unearned
portion thereof will be refunded to the Client. No assignment, as that term is
defined in the Advisers Act, shall be made by the Adviser without the written
consent of the Client. No assignment shall be deemed to result from changes in
the directors, officers or employees of the Adviser except as may be provided
in the Advisers Act. The Adviser agrees that it will notify the Client of any
change in the membership of the general partners of the Adviser within a
reasonable time after such change. This Agreement may be amended or modified at
any time by mutual agreement in writing.
25. Counterparts
This Agreement may be executed in two or more counterparts, each one of
which shall be deemed to be an original.
26. Governing Law
To the extent Federal law does not apply, this Agreement shall be
construed in accordance with and governed by the laws of the State of New York.
27. Entire Agreement
This Agreement constitutes the entire agreement of the parties with
respect to management of the Investment Account.
<PAGE> 8
-8-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective representatives as of the date first above written.
NAME OF CLIENT: Global Markets Guaranty Ltd.
----------------------------
/s/ Donald J. Matthews
BY: ----------------------------
President and
Chief Executive Officer
----------------------------
(Print Name and Title)
ADDRESS:
ALLIANCE CAPITAL MANAGEMENT L.P.
BY: ALLIANCE CAPITAL MANAGEMENT
CORPORATION, ITS GENERAL PARTNER
BY: /s/ Mark R. Manley
------------------------------
Mark R. Manley
Assistant Secretary
ADDRESS: 1345 Avenue of the Americas
New York, NY 10105
<PAGE> 9
GLOBAL MARKETS GUARANTY LTD.
FEE SCHEDULE
INVESTMENT GRADE FIXED INCOME
Investment Grade
<TABLE>
<CAPTION>
Asset Amount Standard Fee
- ------------ ------------
<S> <C>
On first $10 million 0.40%
On next $20 million 0.25%
</TABLE>
If the Investment Grade account size is greater than $30 million, the following
revised fee schedule will apply on Investment Grade Fixed Income:
Investment Grade
<TABLE>
<CAPTION>
Account Size Revised Fee Schedule
- ------------ --------------------
<S> <C>
$30-49 million 0.25% on total assets
$50-99 million 0.19% " " "
Over $100 million 0.17% " " "
Over $150 million 0.15% " " "
</TABLE>
FEE SCHEDULE
HIGH YIELD FIXED INCOME
High Yield
<TABLE>
<CAPTION>
Asset Amount Revised Fee Schedule
- ------------ --------------------
<S> <C>
On first $10 million 0.60%
On next $20 million 0.45%
On next $20 million 0.35%
On the balance 0.30%
</TABLE>
<PAGE> 1
Exhibit 10.20
Investment Management Agreement
This Investment Management Agreement (the "Agreement") between Global
Markets Guaranty Ltd. (the "Client) and The Prudential Investment
Corporation, a New Jersey corporation (the "Investment Manager"), is made this
_____________________________.
WHEREAS, the Client desires to appoint the Investment Manager to manage
certain of its assets in account(s) established by the Client ("Investment
Manager Accounts"); and
WHEREAS, the Investment Manager is willing to accept the duties and
responsibilities of an investment manager with respect to the investment
Manager Accounts;
NOW, THEREFORE, in consideration of the promises and mutual considerations
provided herein, and intending to be legally bound hereby, the Client and the
Investment Manager agree as follows:
1. Appointment. The Investment Manager will act as an investment manager
with respect to the Investment Manager Accounts.
2. Fees. The Client will pay the Investment Manager, as compensation for
its services under this Agreement, a fee determined in accordance with Schedule
A to this Agreement. Such fee may be changed by the Investment Manager upon
45-days' written notice to the client.
3. Authority of Investment Manager. Subject to Section 4 of this
Agreement the Investment Manager shall have the discretionary authority to
manage and control assets of the Client that are segregated in an Investment
Manger Account, including the power to acquire and dispose of assets in each
Investment Manager. In the exercise of that power the Investment Manger may
invest and reinvest the assets, without distinction between principal and
income, in investments described by the Client's investment management
guidelines.
When exercising its authority under this Section 3, the Investment Manager
shall be under no obligation to consult with or obtain the consent of the
Client.
The assets initially segregated into each Investment Manager Account shall
be cash. Assets other that cash may be segregated into an Investment Manager
Account with the consent of the Investment Manager. The client may remove
assets from any Investment Manager Account at any time without the consent of
the Investment Manger.
<PAGE> 2
Upon segregating assets of the Client into an Investment Manager
Account, the Client shall promptly inform the Investment Manager of all assets
segregated into the Investment Manager Account. The Client shall also establish
reporting and accounting arrangements so that the Investment Manager will be
fully informed at all times as to the assets segregated into any Investment
Manager Account.
4. Investment Limitations and Guidelines. The client may, from time to
time, communicate in writing general investment guidelines to the Investment
Manager. Such communication shall be effective no more than five days
subsequent to its receipt by Investment Manager.
5. Brokerage. Subject to any guidelines annexed hereto, the Investment
Manager shall use its best efforts to obtain best execution of orders at the
most favorable prices reasonably obtainable. When determining the most
favorable prices reasonably obtainable, the Investment Manager may consider, in
accordance with section 28(e) of the Securities Exchange Act of 1934, the value
of the receipt by the Investment Manager of service that affect securities
transactions and incidental functions, such as clearance and settlement
services, and advice as to the value of securities, the advisability of
investing in securities, the availability of securities or purchasers or buyers
of securities and analyses and reports concerning issues, industries,
securities, economic factors, trends portfolio strategy, and the performance of
accounts. Commissions charged by brokers who provide these services may be
somewhat higher than the commissions charged by brokers who do not provide
these services.
With respect to the Investment Manager Accounts, the Investment
Manager may cause securities transactions to be executed concurrently with
authorizations to purchase or sell the same securities for other accounts
managed by the Investment Manager, including proprietary accounts or accounts
of affiliates, in these instances, the executions of purchases or sales, where
possible, shall be allocated equitably among the various accounts (including
the Investment Manager Accounts).
6. Other Activities of the Investment Manager. In addition to the
investment management services performed under this Agreement, the Investment
Manager or any of its affiliates may engage in any other business and may
render investment advisory services to any other person. The Investment Manager
or any of its affiliates may render investment advisory services to any other
person, even if the investment Manager, its affiliates, or other person has
investment policies similar to those followed by the Investment Manager for the
Investment Manager Accounts. The Investment Manager may, at anytime, buy or
sell, or may direct or recommend that another person buy or sell, securities of
the same kind or class that are purchased or sold for any Investment Manager
Account, at a price which may or may not differ from the price of the
securities purchased or sold for the Investment Manager Account.
<PAGE> 3
7. Reports. The Investment Manager shall provide to the Client such
reports and information that the client may reasonably request.
8. Investment Manager Covenant. The Investment Manager covenants
that it is a registered investment adviser under the Investment Advisers Act of
1940, as amended (the "Adviser Act"). The Investment Manager shall immediately
notify the Client of any changing its status as such.
9. Proxies. [If voting: The Investment Manager will follow the
policies and procedures for the voting of proxies set forth in [the guidelines
contained in Schedule B][Schedule C]. -N.B. May apply to convertible debt
instruments].[If not voting: The Investment Manager will not be required to
take any action or render any advice with respect to the voting of proxies for
securities held in any Investment Manager Account, nor will it be obligated to
render advice or take any action on behalf of the Client with respect to
securities presently or formerly held in any Investment Manager Account which
become the subject of any legal proceedings, including bankruptcies.]
10. Termination. The Investment Manager may terminate this Agreement
on 30-days' written notice to the Client. The Client may terminate the
Investment Manager's appointment as an investment manager without advance
notice. Upon termination of this agreement, The Investment Manager shall be
under no obligation to recommend any action with regard to, or liquidate the
securities or other investments in, The Investment Manager Accounts; provided,
however, that upon such termination, the Client may direct the Investment
Manager to remove assets from the Investment Manager Accounts in accordance
with Section 3.
11. No Assignment. Neither party may assign this Agreement without
the prior written consent of the other.
12. Change in Control of Investment Manager. The Investment Manager
shall immediately notify the Client of any material change in the control or
ownership of the Investment Manager.
13. Communication. To the extent reasonable and practical,
communications from the Client to the Investment Manager, or vice versa, shall
be made in writing or in another reasonable manner and promptly confirmed in
writing. Notice shall be deemed effective if made to the parties as follows:
<PAGE> 4
If to the Client: If to the Investment Manager:
Global Markets Guaranty Ltd. Prudential Investments
_ Victoria Hall, Victory Street 2 Gateway Center
_ P.O. Box HM 1262 3RD Floor
_ Hamilton, HM FX, Bermuda Newark, NJ 07102
_Attention: Ms Mary Jane Robertson Attention: Mr. Kerry Otterby
14. Disclosure Statement. The Client hereby acknowledges that not less than
48 hours before the date it has executed this Agreement it received
from the Investment Manager a copy of the disclosure statement required
by Rule 204-(3) of the Advisors Act.
15. Liability. The Investment Manager undertakes to manage the Investment
Manager Accounts in accordance with the guidelines set forth herein and in a
professional and responsible manner. The Investment Manager will not be liable
for any loss or liability incurred by reason of any investment decision made or
other action taken or omitted in what the Investment Manager believes in good
faith to be the proper performance of its duties hereunder, and the Investment
Manager shall not, in any event, be liable for any loss or liability incurred by
any reason as a result of any willful or negligent failure to act on the part of
any broker or custodian, with respect to the Investment Manager Accounts;
provided, however, that this provision shall not constitute a waiver of any
right the Client may have under federal securities law.
16. Confidential Relationship. Each party shall use its best efforts to
treat all information and advise furnished by the other party to it as
confidential and to avoid disclosing same to third parties (other than
associates of the Investment Manager) except as otherwise agreed to in writing
by both parties as required by law.
<PAGE> 5
17. Entire Agreement; Amendments; Serverability. This Agreement constitutes
the entire agreement between the parties with respect to the investment Manager
Accounts, and supersedes any prior oral or written agreements with respect to
the Investment Manager Accounts. This Agreement may not be amended except by a
writing signed by the parties. If any provision of this agreement shall be held
or made invalid by a statute, rule, regulation, decision of a tribunal or
otherwise, the remainder of this Agreement shall not be affected thereby.
18. Governing Laws. This Agreement shall be construed in accordance with
the laws of the State of New Jersey (without regard to the legislative or
judicial conflict of laws or rules of any state), except to the extent
superseded by federal law.
<PAGE> 6
IN WITNESS WHEREOF, the Client and the Investment Manger have executed
this Agreement as of the day and year written above.
(Client)
By: /s/ Donald J. Matthews
------------------------------------
Title: President and C.E.O.
(Investment Manager)
By: /s/ Kerry W Otterly
------------------------------------
Title: Vice President
Prudential Investment Corporation
<PAGE> 7
Schedule A
TO THE
INVESTMENT MANAGEMENT AGREEMENT
BETWEEN
Global Markets Guaranty Ltd.
And
Prudential Investment Corporation
The fee payable to the Investment Manager under Section 2 of the Agreement
shall be payable at an annual rate as follows:
First $100 million 0.175%
Thereafter 0.10%
The fee determined herein will be computed by applying the above schedule
to the market value of the assets in the Investment Manager Account(s) on the
last business day of each calendar quarter, and dividing such resulting amount
by four. Bills will be rendered by the Investment Manager quarterly, and shall
become payable by the Client upon receipt thereof. {In certain cases as agreed
by the Client and the Investment Manager, the fee may be paid directly to the
Investment Management Account(s).}
If the Agreement is terminated other than on the last day of a month, the
fee for the quarter in which such termination occurred shall be based on the
average assets under management (i) on the last day of each month during such
quarter and (ii) on the day the Agreement is terminated, prorated to reflect
the partial month in which the termination occurred.
<PAGE> 1
Exhibit 21.1
The Registrant has two subsidiaries:
1. Global Markets Guaranty Ltd.
2. GMG Marketing Ltd.
<PAGE> 1
Exhibit 23.3
The Board of Directors and Shareholders
Global Markets Access Ltd.
We consent to the use of our report included herein and to the reference to our
firm in the prospectus, under the heading "Experts".
/s/ KPMG Peat Marwick
Chartered Accountants
Hamilton, Bermuda
December 22, 1998
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Donald J. Matthews as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to the Registration Statement on Form S-1 of Global Markets
Access Ltd. (the "Company"), or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with all exhibits thereto and
other documents in connection therewith, or in connection with the registration
of the Common Shares of the Company under the Securities Exchange Act of 1934,
as amended, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters, as
fully and to all intents and purposes as he might or could do in person, and
hereby ratifying and confirming all that said attorney-in-fact and agent or his
substitutes may do or cause to be done by virtue hereof.
/s/ LAWRENCE S. DOYLE
----------------------------------------
Lawrence S. Doyle
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Donald J. Matthews as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to the Registration Statement on Form S-1 of Global Markets
Access Ltd. (the "Company"), or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with all exhibits thereto and
other documents in connection therewith, or in connection with the registration
of the Common Shares of the Company under the Securities Exchange Act of 1934,
as amended, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters, as
fully and to all intents and purposes as he might or could do in person, and
hereby ratifying and confirming all that said attorney-in-fact and agent or his
substitutes may do or cause to be done by virtue hereof.
/s/ CURTIS R. JENSEN
----------------------------------------
Curtis R. Jensen
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Donald J. Matthews as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to the Registration Statement on Form S-1 of Global Markets
Access Ltd. (the "Company"), or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with all exhibits thereto and
other documents in connection therewith, or in connection with the registration
of the Common Shares of the Company under the Securities Exchange Act of 1934,
as amended, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters, as
fully and to all intents and purposes as he might or could do in person, and
hereby ratifying and confirming all that said attorney-in-fact and agent or his
substitutes may do or cause to be done by virtue hereof.
/s/ WILLIS T. KING, JR.
----------------------------------------
Willis T. King, Jr.
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Donald J. Matthews as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to the Registration Statement on Form S-1 of Global Markets
Access Ltd. (the "Company"), or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with all exhibits thereto and
other documents in connection therewith, or in connection with the registration
of the Common Shares of the Company under the Securities Exchange Act of 1934,
as amended, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters, as
fully and to all intents and purposes as he might or could do in person, and
hereby ratifying and confirming all that said attorney-in-fact and agent or his
substitutes may do or cause to be done by virtue hereof.
/s/ MARK D. MOSCA
----------------------------------------
Mark D. Mosca
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears
below hereby constitutes and appoints Donald J. Matthews as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to the Registration Statement on Form S-1 of Global Markets
Access Ltd. (the "Company"), or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with all exhibits thereto and
other documents in connection therewith, or in connection with the registration
of the Common Shares of the Company under the Securities Exchange Act of 1934,
as amended, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters, as
fully and to all intents and purposes as he might or could do in person, and
hereby ratifying and confirming all that said attorney-in-fact and agent or his
substitutes may do or cause to be done by virtue hereof.
/s/ PAUL T. WALKER
----------------------------------------
Paul T. Walker
