<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 2, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GCA LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<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>
VICTORIA HALL, VICTORIA STREET CT CORPORATION SYSTEM
P.O. BOX HM1262 1633 BROADWAY
HAMILTON, HM FX, 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>
<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
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares................. 19,362,500 $15.00 $290,437,500 $85,680
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 2,512,500 Common Shares that may be sold pursuant to the
Underwriters' over-allotment option.
(2) Estimate solely for the purpose of calculating 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus, one to be
used in connection with the underwritten offering of the Common Shares (the
"Underwritten Offering Prospectus") and a second to be used in connection with
the direct offering of Common Shares by the Company to its directors and
officers (the "Direct Sales Prospectus"). The two prospectuses are identical
except for the front and back cover pages and except that the section captioned
"Underwriting" in the Underwritten Offering Prospectus is replaced by the
section captioned "Plan of Distribution" in the Direct Sales Prospectus.
Alternative pages for use in the Direct Sales Prospectus are designated as such
and are set forth immediately following the form of the Underwritten Offering
Prospectus contained herein.
<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 SEPTEMBER 2, 1998
PROSPECTUS
16,750,000 SHARES
GCA LTD.
COMMON SHARES
------------------------
All of the 16,750,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby (the "Offering") are being sold by GCA Ltd. ("GCA").
Prior to the Offering, GCA has not conducted any business and there has been no
public market for the Common Shares. The initial public offering price will be
$15.00 per Common Share.
In connection with the formation of GCA and the establishment of a core
group of strategic investors, Risk Capital Reinsurance Company, The Trident
Partnership, L.P. and (collectively, the "Strategic Investors")
have severally agreed to purchase for investment directly from GCA an aggregate
of 7,092,197 Common Shares and Class B Warrants to purchase an aggregate of
700,000 Common Shares. Such purchases will be consummated immediately prior to
the consummation of the Offering for an aggregate purchase price for the Common
Shares and the Class B Warrants of approximately $100.0 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 Offering made
hereby is conditioned upon the closing of sales by GCA to the Strategic
Investors of Common Shares and related Class B Warrants with an aggregate
purchase price of at least $ million.
GCA is also offering by a separate prospectus up to 100,000 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 $1.4 million. GCA 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. All such purchases by GCA's directors and officers
are expected to be consummated simultaneously with the consummation of the
Offering and, together with the purchases by the Strategic Investors, are
referred to in this Prospectus as the "Direct Sales." Upon consummation of the
Offering and the Direct Sales, the Strategic Investors and GCA's directors and
officers are expected to own collectively approximately % of the outstanding
Common Shares. See "Direct Sales."
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 "GCALF."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except with respect to certain exempted
holders 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 GCA's capital stock. See "Description of Capital Stock."
SEE "RISK FACTORS" ON PAGES 10 TO 20 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN 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 GCA(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share............................ $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $ (4)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) GCA has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting certain advisory fees and other Offering expenses payable
by GCA estimated to be $ . See "Use of Proceeds."
(3) GCA has granted the several Underwriters a 30-day over-allotment option to
purchase up to 2,512,500 additional Common Shares on the same terms and
conditions as set forth above. If all such additional Common Shares are
purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ and the
total Proceeds to GCA will be $ . See "Underwriting."
(4) Assuming completion of all the Direct Sales, the total Proceeds to GCA will
be $ . If the Underwriters' over-allotment option described above is
exercised in full, the total Proceeds to GCA including the Direct Sales will
be $ . See "Direct Sales."
------------------------
The Common Shares are offered by the several Underwriters subject to
delivery by GCA and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the Common Shares to the Underwriters is expected to be made through the
facilities of The Depository Trust Company, New York, New York, on or about
, 1998.
------------------------
Joint Lead Managers and Joint Bookrunners
MERRILL LYNCH & CO. PRUDENTIAL SECURITIES INCORPORATED
------------------------
, 1998
<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 OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES TO STABILIZE THEIR MARKET PRICE,
PURCHASES OF THE COMMON SHARES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON SHARES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 5
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER UNITED STATES FEDERAL SECURITIES LAWS
GCA and Global Capital Access, Ltd., a wholly-owned subsidiary of GCA
through which GCA expects to conduct substantially all of its operations, are
both organized pursuant to the laws of Bermuda. In addition, certain of the
directors and officers of GCA, 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 GCA 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 GCA 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, GCA 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 made hereby by serving CT Corporation System, 1633 Broadway,
New York, New York 10019, its United States agent irrevocably appointed for that
purpose.
GCA 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 GCA 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 GCA
or such persons predicated solely upon United States federal securities laws.
GCA 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 GCA Ltd.
("GCA"), together with its wholly-owned subsidiary, Global Capital Access, Ltd.
(the "Operating Company"), through which GCA expects to conduct substantially
all of its operations. GCA and the Operating Company were both incorporated in
August 1998 in Bermuda and neither has any operating history. The Operating
Company was licensed in Bermuda on , 1998 as a Class 3 insurer,
which license 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 option 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
GCA and the Operating Company were both recently organized in Bermuda to
provide "A" rated financial guaranty reinsurance and insurance on financial
obligations, principally municipal and asset-backed securities and other
structured finance obligations, that are rated from "A-" to "BB" 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 Offering, 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.
The Company expects to have an equity capitalization of approximately
$333.9 million upon consummation of the Offering 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 itself as a competitive financial guaranty reinsurer and
insurer. As a newly formed entity, the Company's capital is presently
unencumbered by such issues as insured portfolio leverage, 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 Offering and the Direct Sales,
the Operating Company has been assigned a preliminary financial strength rating
of "A" by , and a preliminary claims-paying ability rating of "A"
by and . Such ratings have been granted subject to
the Company raising gross proceeds of $ million in the Offering and the
Direct Sales.
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"), an
affiliate of one of the Company's sponsors, has since the
4
<PAGE> 7
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, which it believes
may be particularly attractive to issuers that have previously had limited
access to the financial markets. The Company believes that in many cases
"A" rated financial guaranty insurance can 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. The Company has entered into four reinsurance treaties with
ACA that will become effective upon consummation of the Offering. The
Company believes that such treaties will provide ACA with additional
insurance capacity and will permit ACA to develop further the market for
"A" rated financial guaranty insurance. See "-- Reinsurance Treaties with
ACA". In addition, the Company will also seek in the United States to enter
into reinsurance arrangements with higher rated financial guaranty insurers
and reinsurers as well as other providers of third-party credit
enhancement. Such arrangements would be structured so that the Company
would assume a portion of the risk guaranteed by an insurer or other
third-party credit enhancement provider on a basis that would result in the
rating agencies and regulatory bodies treating the underlying obligation as
"A" rated, thereby providing such insurers or other third-party credit
enhancement providers capital relief and other benefits.
- - Penetrate the International Credit Enhancement Market
Traditionally, issuers and holders of financial obligations outside the
United States have relied on banks and other financial institutions
offering letters of credit and other guaranties rather than financial
guaranty insurance. The Company believes that, as is the case in the United
States, an opportunity exists to provide "A" rated financial guaranty
insurance as an innovative and cost-effective alternative to existing forms
of credit enhancement. The Company will initially focus its efforts on
developing opportunities in the European, Canadian and Latin American
asset-backed and structured finance markets. The Company is not currently
licensed as a financial guaranty insurer in such target markets because it
believes that it can effectively enter such markets while operating from
Bermuda. As the Company's business develops, management will monitor the
need to obtain licenses in such markets in order to comply with applicable
law or to be able to engage in additional insurance related activities.
- - 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 from "A-" to "BB" 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. The Company will over time seek to diversify the risks it
reinsures and insures by type of obligor, type 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 on most unrated financial obligations
insured by the Company 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 Chairman of the Board 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 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
5
<PAGE> 8
instrumental in the formation of Corporate Officers & Directors Assurance
Ltd. ("CODA") and Executive Risk Inc. , a Senior Vice
President and the Chief Underwriter of the Company, has over
years of experience in the financial guaranty insurance and
reinsurance industries and was formerly . ,
the Chief Financial Officer and Treasurer of the Company, has over years
experience in the financial guaranty insurance and reinsurance industries
and was formerly . 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 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 Victoria Hall,
Victoria Street, P.O. Box HM1262, Hamilton, HM FX, Bermuda, and its telephone
number is (441) 295-3278.
REINSURANCE TREATIES WITH ACA
The Company has entered into four reinsurance treaties with ACA which will
become effective upon consummation of the Offering. The first treaty is a "quota
share" treaty pursuant to which the Company is required to provide, and ACA is
required to purchase, reinsurance on a fixed percentage of certain risks insured
by ACA. The second treaty is an "excess of loss" treaty pursuant to which the
Company has agreed to reinsure up to $75.0 million of the aggregate losses
incurred by ACA on its financial guaranty insurance in excess of $150.0 million
and the coverage provided by ACA's $50.0 million excess of loss reinsurance
agreement with Zurich Reinsurance (North America) Inc. The third and fourth
treaties are "facultative" treaties under which the Company and ACA each have
the right of first refusal to reinsure each financial obligation the other
insures on a direct basis. Such treaties also set forth the basic terms on which
the Company and ACA may purchase such reinsurance from the other on a
case-by-case basis after individual underwriting decisions have been made. 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 was established 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
, 1998, ACA wrote financial guaranty insurance covering
different underlying credits representing $ billion in aggregate principal
amount for premiums totaling approximately $ 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 corporate and asset-backed securities.
6
<PAGE> 9
SPONSORS AND STRATEGIC INVESTORS
The Company has been established through the sponsorship of 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
Service, Inter-Atlantic and Risk Capital, the "Sponsors"). ACA Service is an
affiliate of ACA and 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. Risk Capital provides reinsurance
and other forms of capital to insurance companies with capital needs. Trident is
a private investment partnership 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 Offering and the sales to the Strategic
Investors, 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
and (collectively, the "Strategic Investors") for the purchase for
investment directly from the Company of an aggregate of 7,092,197 Common Shares
and Class B Warrants to purchase an aggregate of 700,000 Common Shares. Such
purchases will be consummated immediately prior to the consummation of the
Offering for an aggregate purchase price for the Common Shares and the Class B
Warrants of approximately $100.0 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
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."
7
<PAGE> 10
THE OFFERING
Common Shares Offered in the
Offering.................... 16,750,000 shares
Direct Sales(1)............... 7,307,197 shares
Common Shares to be
Outstanding after the Offering
and the Direct Sales(2)..... 24,057,197 shares
Use of Proceeds from the
Offering and the Direct
Sales....................... The net proceeds of the Offering 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 Offering and the sales to the Strategic
Investors) will be approximately $230.8 million
and $103.0 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 $. per Common Share following
the end of the first full fiscal quarter
following the consummation of the Offering.
Proposed Nasdaq National
Market Symbol................. GCALF
- ---------------
(1) Unless otherwise noted, this Prospectus assumes that upon consummation of
the Offering the sale of 7,092,197 Common Shares and Class B Warrants to
purchase 700,000 Common Shares to the Strategic Investors has been completed
and the 215,000 Common Shares offered by the Company to its directors and
officers have been purchased. Such directors and officers 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 constitutes all of the Common Shares currently
outstanding. Upon consummation of the Offering, the Purpose Trust has agreed
to sell such Common Shares to GCA for an aggregate price of $12,000 and such
Common Shares will be cancelled. Common Shares to be outstanding after the
Offering and the Direct Sales excludes the 12,000 Common Shares currently
held by the Purpose Trust, 3,247,715 Common Shares issuable upon the
exercise of outstanding Class A Warrants, 700,000 Common Shares issuable
upon the exercise of Class B Warrants to be included in the Direct Sales,
913,789 Common Shares issuable upon the exercise of options to be granted to
directors and officers of the Company upon consummation of the Offering and
409,357 Common Shares reserved for future issuance pursuant to the Company's
Initial Stock Option Plan (the "Stock Option Plan"). If the Underwriters'
over-allotment option is exercised in full, 26,569,697 Common Shares are
expected to be outstanding, the number of Common Shares issuable upon the
exercise of outstanding Class A Warrants will increase to 3,586,903 Common
Shares, the number of Common Shares issuable upon the exercise of options to
be granted to directors and officers of the Company upon consummation of the
Offering will increase to 964,039 Common Shares and the number of Common
Shares reserved for future issuance pursuant to the Stock Option Plan will
increase to 497,294 Common Shares. The number of Common Shares issuable upon
the exercise of the Class B Warrants will not change if the Underwriters'
over-allotment option is exercised. The Class A Warrants, Class B Warrants
and options will not be exercisable upon consummation of the Offering. See
"Management -- Stock Option Plan," "Description of Capital
Stock -- Warrants" and "Direct Sales."
8
<PAGE> 11
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 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."
9
<PAGE> 12
RISK FACTORS
An investment in the Common Shares involves a high degree of risk.
Prospective investors should carefully consider 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 Offering 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. GCA and the Operating Company were both formed in
August 1998 and neither has 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 is
dependent 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 its 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 to attain or maintain profitability.
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 pursuant to the reinsurance treaties between the 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 Company anticipates that the premiums it 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, a greater level of
losses than anticipated by the Company may be incurred under ACA's reinsurance
treaties with the Company. If the Company's reinsurance treaties with ACA were
to be terminated for any reason, the Company would be adversely affected.
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 direct primary 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
10
<PAGE> 13
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 significant
potential clients it would be adversely affected.
ABILITY TO OPERATE BUSINESS FROM BERMUDA. The Operating Company, through
which GCA expects to conduct substantially all of its operations, is a
registered Bermuda insurance company. Neither GCA nor the Operating Company is
currently licensed as a financial guaranty insurer or reinsurer in any other
jurisdiction. The insurance laws of each state in the United States and of many
other jurisdictions regulate the sale of insurance and reinsurance within their
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 where an insurer is not admitted to do business
is prohibited. The Company expects to conduct its business through its Bermuda
office and will not conduct any activities which may constitute the transaction
of the business of insurance in any jurisdiction in which the Company is not
licensed or otherwise authorized to engage in such activities. However, there
can be no assurance that inquiries or challenges to the Company's insurance
activities in such jurisdictions will not be raised in the future or that the
Company's location, regulatory status or restrictions on its activities
resulting therefrom will not adversely affect the Company.
The Company may be at a competitive disadvantage in jurisdictions where it
is not licensed relative to companies that are licensed in such jurisdictions.
As the Company's business develops, management will monitor the need to obtain
licenses in jurisdictions other than Bermuda in order to comply with applicable
law or to be able to engage in additional insurance related activities. Should
management determine that any such licenses should be obtained, there can be no
assurance that the Company will be able to obtain such licenses. Furthermore,
the process of obtaining such licenses is often costly and may take a long time.
Because many jurisdictions 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 it
to post a letter of credit or enter into other security arrangements. The
Company's quota share and facultative treaties with ACA contain a requirement
that the Company must satisfy all regulatory requirements in order to permit ACA
to receive credit for such reinsurance. 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
to secure its obligations to its reinsureds, which would adversely affect the
Company. 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.
See "Business -- Regulation -- United States and 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 ("alien reinsurers") 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.
FINANCIAL RATINGS. The Operating Company has been assigned a preliminary
financial strength rating of "A" by , and a preliminary
claims-paying ability rating of "A" by and . Such
ratings have been granted subject to the Company raising gross proceeds of
$ million in the Offering 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
11
<PAGE> 14
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, 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, 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 at least during the early stages of its
business development.
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 unexpected loss of the services of one
of those individuals, particularly Donald J. Matthews, the Chairman of the Board
and Chief Executive Officer of the Company, , a Senior Vice
President and the Chief Underwriter of the Company, or , the
Chief Financial Officer and Treasurer 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 employees, including its Chief Executive Officer, Chief
Underwriter and Chief Financial Officer. The loss of the services of the
individuals identified above, 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. and have not yet been issued
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 to that effect. 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 engaged in reinsuring and insuring
financial obligations that have a credit quality ranging from "A-" to "BB" 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. The Company expects
that up to % 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, which is
the maximum percentage currently permitted by ,
and in order for the Company to maintain its "A" rating. In
addition, a substantial portion of the Company's insurance portfolio will
consist of policies that cover unrated financial obligations that in the
Company's opinion have credit quality equivalent to investment grade
obligations. There can be no assurance that material losses will not occur on
the insurance risks underwritten by the Company.
The Company's success will be dependent on its ability to assess accurately
the risks associated with the financial obligations it reinsures or insures. If
the Company fails to assess accurately the risks it assumes, the
12
<PAGE> 15
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.
The financial guarantees 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 intends to establish a general loss reserve of 15% of earned premium
income. However, the establishment of an appropriate level of loss reserves is
an inherently uncertain process, made even more so by the immature 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 GCA.
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. 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. 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. In addition, a general economic downturn or a
downturn in the debt markets could adversely affect the market for financial
guaranty insurance and reinsurance. 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 providers of
third-party credit enhancement products by rating agencies and regulatory
authorities, which limitations are subject to change.
The market for international financial guaranty insurance and reinsurance
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
international financial guaranty reinsurance and insurance market. Instability
of a country's currency or political situation could result in widespread
defaults on issues reinsured or insured by the Company in the country
experiencing such instability, which would adversely affect the Company.
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 United States market for financial guaranty
reinsurance is dominated by a small number of
13
<PAGE> 16
companies that have greater financial resources and are more established than
the Company. Similarly, the international market for third-party credit
enhancement products is dominated by a number of large banks and other financial
institutions, which also have greater financial resources and are more
established than the Company. 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-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. 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 in the United States 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 to achieve the
desired rating. 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."
REGULATION. The Operating Company, through which GCA expects to conduct
substantially all of its operations, 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 that it must meet; 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, in effect, restrict the ability of the Operating Company to write
reinsurance and insurance policies and distribute funds to GCA. Generally the
Bermudian 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. 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. See "Business -- Regulation."
Neither GCA nor the Operating Company is currently licensed as a financial
guaranty insurer or reinsurer in any jurisdiction other than Bermuda. The
Company expects to conduct its business through its Bermuda office and will not
conduct any activities which may constitute the transaction of the business of
insurance in any jurisdiction in which the Company is not licensed or otherwise
authorized to engage in such activities. However, there can be no assurance that
inquiries or challenges to the Company's insurance activities in such
jurisdictions will not be raised in the future or that the Company's location,
regulatory status or restrictions on its activities resulting therefrom will not
adversely affect the Company. The Company may be at a competitive disadvantage
in jurisdictions where it is not licensed relative to companies that are
licensed in such jurisdictions. As the Company's business develops, management
will monitor the need to obtain licenses in jurisdictions other than Bermuda in
order to comply with applicable law or to be able to engage in additional
insurance related activities. Should management determine that any such licenses
should be obtained, there can be no assurance that the Company will be able to
obtain such licenses. Furthermore, the process of obtaining such licenses is
often costly and may take a long time.
INVESTMENT RISKS. The investment guidelines adopted by the Operating
Company (the "Investment Guidelines") permit up to 10% of the Operating
Company's investment portfolio to be invested in below investment grade
securities. These below investment grade securities may take the form of fixed
income securities, floating rate securities or preferred securities. While any
investment carries some risk, the risks associated with lower-rated securities
are greater than the risks associated with higher-rated securities. The risk of
loss of principal or interest through default is greater because lower-rated
securities are usually unsecured and are often subordinated to an issuer's other
obligations. Additionally, the issuers of these
14
<PAGE> 17
securities frequently have high debt levels and are thus more sensitive to
adverse economic and financial conditions as well as particular developments
affecting the issuer. Consequently, the market price of these securities may be
quite volatile, and the risk of loss is greater.
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 Insurance Consulting Services Limited
("ICS") to oversee its investment operations. The Operating Company has also
retained , and (collectively, the
"Investment Managers") to manage the Operating Company's investment portfolio.
ICS will monitor the performance and asset allocation of the Investment Managers
as well as analyze the sensitivity of their portion of the Operating Company's
investment portfolio to external economic factors and will report periodically
to the Finance and Investment Committee of the Operating Company's Board of
Directors on such matters. ICS is a newly-formed Bermuda entity and the
Operating Company is its first client. ICS's lack of experience and status as a
start up operation could adversely affect the Company. ICS is owned by
and and by Messrs. Michael P. Esposito, Jr.,
Frederick S. Hammer, Robert M. Lichten and Andrew S. Lerner, each of whom is
affiliated with Inter-Atlantic, one of the Company's Sponsors, and, with the
exception of Mr. Lerner, each of whom is a director of GCA and the Operating
Company. See "Certain Relationships and Related Party Transactions."
INCOME TAX RISKS
United States Taxation of GCA and the Operating Company. GCA and the
Operating Company are Bermuda corporations and neither intends to file United
States tax returns. GCA and the Operating 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 and withholding tax on certain
investment income from United States sources) 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 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 GCA
and/or the Operating Company is engaged in a trade or business in the United
States. If GCA or the Operating 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 could be an adverse affect on the Company. See
"Certain Tax Considerations."
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 GCA, 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 his 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 has not been distributed. For these purposes, any
United States person who owns directly or
15
<PAGE> 18
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. The Company believes that, because of the
anticipated dispersion of GCA's share ownership among holders and because of the
restrictions in GCA's Bye-Laws on transfer, issuance or repurchase of the voting
shares of GCA, shareholders who acquire Common Shares in the Offering will not
be subject to treatment as "United States shareholders" of a CFC. In addition,
because under the Bye-Laws no single shareholder (other than Trident and ACA and
all persons to whom Controlled Shares (as defined in GCA's Bye-laws) of GCA are
attributed under Section 958 of the Code (the "ACA Affiliates")) will be
permitted to exercise 10% or more of the total combined voting power of GCA, and
because Trident is not a United States person and ACA and the ACA Affiliates
will own less than 25% of the total combined voting power or total value of
GCA's stock, shareholders of GCA should not be viewed as "United States
shareholders" of a CFC for purposes of these rules. There can be no assurance,
however, that these rules will not apply to shareholders of GCA. See "Certain
Tax Considerations."
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 GCA
directly or indirectly on the last day of the taxable year may be required to
include in 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 to
United States shareholders of the insurance or reinsurance company issuing such
policies. The Operating Company does not expect that it will enter into
reinsurance agreements in which, in the aggregate, the direct or indirect
insureds are, or are related to, owners of 20% or more of the Common Shares.
Furthermore, the Operating Company does not currently believe that the 20% gross
insurance income test will be met in 1998 and subsequent years. However, there
can be no assurances regarding either of these thresholds, particularly because
public trading is expected both in the Common Shares and in many of the
securities as to which the Operating Company will issue financial guaranty
insurance or reinsurance. 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. See "Certain Tax Considerations."
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 shares, 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 GCA 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."
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 of GCA, it is important that GCA 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
16
<PAGE> 19
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
GCA, 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, GCA 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."
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. GCA
and the Operating Company have applied to the Bermuda Minister of Finance for an
undertaking 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 GCA, the Operating
Company or to any of their operations or the shares, debentures or other
obligations of GCA or the Operating Company until March 2016. There can be no
assurance that after such date GCA or the Operating Company would not be subject
to any such tax.
Other Taxes. GCA 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
as described above 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 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 GCA's Bye-Laws, GCA's directors (or their designee) are required to
decline to register any transfer of shares of GCA, 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, in the case of ACA and the ACA
Affiliates, collective ownership of 17%) or more of any class of shares of GCA.
Similar restrictions apply to issuances and repurchases of shares by GCA. 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 GCA, 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 GCA. GCA 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.
GCA'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, in the case of ACA and the ACA Affiliates, collective ownership of 17%)
or more of any class of GCA's shares or causes GCA's directors (or their
designee) to have reason to believe that such transfer may expose GCA, 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
17
<PAGE> 20
effected, under GCA'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 GCA. 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 the
Company or the Agent, but such amounts may be used to reimburse expenses
incurred by the Agent in performing its duties.
In addition, the 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 GCA carrying 10%
(or, in the case of ACA and the ACA Affiliates, collective ownership of 17%) or
more of the total voting rights attached to all of GCA'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% (or, in the case of ACA
and the ACA Affiliates, collective ownership of 16.9%) 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, in the case of ACA and the ACA Affiliates, collective ownership
of 17%) or more of the voting shares of GCA. 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 a small portion 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 properly hedged, which in turn would adversely
affect the Company. 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.
The Company will make determinations as to whether to hedge its foreign currency
exposure on a case-by-case basis. Given the contingent and long-term nature of
the Company's expected foreign currency exposure, it may not be feasible in all
instances to hedge effectively such exposure. 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 Offering and the
Direct Sales, GCA expects to have outstanding 24,057,197 Common Shares, Class A
Warrants to purchase an aggregate of 3,247,715 Common Shares, Class B Warrants
to purchase an aggregate of 700,000 Common Shares and options to purchase an
aggregate of 913,789 Common Shares. If the Underwriters' over-allotment option
is exercised in full, 26,569,697 Common Shares are expected to be outstanding,
the number of Common Shares
18
<PAGE> 21
issuable upon the exercise of outstanding Class A Warrants will increase to an
aggregate of 3,586,903 Common Shares and the number of Common Shares issuable
upon the exercise of outstanding options will increase to an aggregate of
964,039 Common Shares. The number of Common Shares issuable upon the exercise of
the Class B Warrants will not change if the Underwriters' over-allotment option
is exercised. The Class A Warrants, Class B Warrants and options will not be
exercisable upon consummation of the Offering. 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 Offering and any Common Shares sold in the Direct Sales to GCA'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 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 its directors and officers in the Direct Sales 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 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
Offering. 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 Offering. The Company, its directors and officers, the Strategic
Investors and the holders of the Class A Warrants 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, 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. 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 Offering, including sales by persons
holding the Common Shares sold to the Strategic Investors in the Direct Sales or
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
19
<PAGE> 22
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 reinsured or insured by 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 international financial guaranty reinsurance and insurance markets 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. In the event the Company's plans with
respect to its Year 2000 readiness fail to protect its operations from
disruptions, the Company has no contingency plan other than 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. GCA 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. Dividends and other permitted payments from the
Operating Company are expected to be GCA's sole source of funds to pay expenses
and dividends, if any. The payment of dividends by the Operating Company to GCA
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, GCA 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. GCA
and the Operating Company are both organized pursuant to the laws of Bermuda. In
addition, certain of the directors and officers of GCA, 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 GCA are or may be located
in jurisdictions outside the United States. Although GCA 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
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 GCA 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. Before the Offering 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 Offering 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 Offering.
DILUTION. Purchasers of Common Shares in the Offering will experience
immediate and substantial dilution of approximately $1.12 per share in the net
tangible book value of their Common Shares from the initial public offering
price. See "Dilution."
20
<PAGE> 23
USE OF PROCEEDS
The net proceeds from the sale of the 16,750,000 Common Shares in the
Offering are estimated to be approximately $230.8 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 Offering 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 $103.0 million. The purpose of the Offering and the Direct Sales
is to enable the Company to implement its business plan to provide financial
guaranty reinsurance and insurance. Substantially all of the net proceeds of the
Offering and the Direct Sales will be contributed to the capital and surplus of
the Operating Company to support its financial guaranty business and will be
invested in accordance with the Investment Guidelines. See
"Business -- Investment Strategy." Until so invested, such proceeds will be
invested in short-term, investment grade, interest-bearing securities.
21
<PAGE> 24
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of August 28, 1998, as adjusted for amounts payable upon consummation
of the Offering and as adjusted to give effect to the Offering and the Direct
Sales and the receipt of the proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS ADJUSTED FOR
AMOUNTS PAYABLE AS ADJUSTED FOR THE
UPON CONSUMMATION OFFERING AND THE
ACTUAL OF THE OFFERING DIRECT SALES(D)
-------- ----------------- -------------------
($ 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; 24,057,197 shares outstanding as
adjusted for the Offering and the Direct
Sales)(a).................................... 12,000
Additional paid-in capital..................... 108,000 (b)
Accumulated deficit............................ -- --(c) --
-------- -------- --------
Total shareholders' equity................ $120,000 $ $
-------- -------- --------
Total capitalization........................... $120,000 $ $
======== ======== ========
</TABLE>
- ---------------
(a) The Purpose Trust owns 12,000 Common Shares, which constitute all of the
Common Shares currently outstanding. Upon consummation of the Offering, the
Purpose Trust has agreed to sell such Common Shares to GCA for an aggregate
price of $12,000 and such Common Shares will be cancelled. Common Shares
outstanding excludes 3,247,715 Common Shares issuable upon the exercise of
outstanding Class A Warrants, 700,000 Common Shares issuable upon the
exercise of the Class B Warrants to be included in the Direct Sales, 913,789
Common Shares issuable upon the exercise of options to be granted to
directors and officers of the Company upon consummation of the Offering and
409,357 Common Shares reserved for future issuance pursuant to the Stock
Option Plan. If the Underwriters' over-allotment option is exercised in
full, 26,569,697 Common Shares are expected to be outstanding, the number of
Common Shares issuable upon the exercise of outstanding Class A Warrants
will increase to 3,586,903 Common Shares, the number of Common Shares
issuable upon the exercise of options to be granted to directors and
officers of the Company upon consummation of the Offering will increase to
964,039 Common Shares and the number of Common Shares reserved for future
issuance pursuant to the Stock Option Plan will increase to 497,294 Common
Shares. The number of Common Shares issuable upon the exercise of the Class
B Warrants will not change if the Underwriters' over-allotment option is
exercised. The Class A Warrants, Class B Warrants and options will not be
exercisable upon consummation of the Offering. See "Management -- Stock
Option Plan," "Description of Capital Stock -- Warrants" and "Direct Sales."
(b) Reflects amounts payable upon consummation of the Offering of $3.9 million
to Inter-Atlantic for certain advisory services related to the Offering and
the sales to the Strategic Investors; and $ million for estimated
out-of-pocket expenses consisting of legal, accounting and printing expenses
as well as filing fees and other costs related to the Offering and the sales
to the Strategic Investors. Inter-Atlantic has 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 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 Offering.
(c) Reflects estimated expenses incurred by Inter-Atlantic in connection with
the Company's operations in the period subsequent to August 28, 1998 for
which Inter-Atlantic is entitled to be reimbursed by the Company upon
consummation of the Offering.
(d) Reflects 24,057,197 Common Shares sold in the Offering and the Direct Sales
and the receipt of the proceeds therefrom. Does not give effect to any
exercise of the Underwriters' over-allotment option and excludes the 12,000
Common Shares currently held by the Purpose Trust.
22
<PAGE> 25
DIVIDEND POLICY
GCA is a newly formed corporation and has not declared or paid any cash
dividends on its Common Shares. The Board of Directors of GCA intends to declare
and pay out of current and retained earnings a quarterly cash dividend of
$. per Common Share following the first full fiscal quarter following the
consummation of the Offering. It will be GCA's policy to retain all earnings in
excess of such quarterly dividends to support the growth of its business. If
GCA's current and retained earnings do not support the payment of such quarterly
dividends, future dividends may be reduced or eliminated. If GCA 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 GCA will be at the discretion of its
Board of Directors and will depend upon GCA'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 GCA deems relevant. GCA's ability to pay dividends depends on the
ability of the Operating Company to pay dividends to GCA. While GCA 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 GCA. 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."
23
<PAGE> 26
DILUTION
Purchasers of the Common Shares offered in the Offering 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
Offering 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 Offering
and the sales to the Strategic Investors) will be approximately $333.9 million,
or approximately $13.88 per outstanding Common Share. This represents an
immediate and substantial dilution in net tangible book value to investors
purchasing shares in the Offering of approximately $1.12 per share, without
taking into account any Common Shares issuable upon the exercise of Class A
Warrants, Class B Warrants and options. 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 Offering
and the Direct Sales. The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Initial public offering price............................... $15.00
Pro forma net tangible book value per outstanding share upon
completion of the Offering and the Direct Sales(1)........ 13.88
------
Dilution to new investors in the Offering................... $ 1.12
======
</TABLE>
- ---------------
(1) Does not include 3,247,715 Common Shares issuable upon the exercise of
outstanding Class A Warrants (3,586,903 Common Shares if the Underwriters'
over-allotment option is exercised in full), 700,000 Common Shares issuable
upon the exercise of Class B Warrants to be included in the Direct Sales,
913,789 Common Shares issuable upon the exercise of options expected to be
granted to directors and officers of the Company upon consummation of the
Offering (964,039 Common Shares if the Underwriters' over-allotment option
is exercised in full) and 409,357 Common Shares reserved for future issuance
under the Stock Option Plan (497,294 Common Shares if the Underwriters'
over-allotment option is 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 option is exercised. The Class A Warrants,
Class B Warrants and options will not be exercisable upon consummation of
the Offering. 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 Offering 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."
The following table summarizes the number of Common Shares issued by GCA,
the total consideration paid and the average price per share paid in the Direct
Sales and the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
AMOUNT PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Direct Sales........................ 7,307,197 30.37% $103,031,478(a) 29.08% $14.10(b)
Offering............................ 16,750,000 69.63% $251,250,000 70.92% $15.00
---------- ------ ------------ ------ ------
Total..................... 24,057,197 100.00% $354,281,478 100.00% $14.73
========== ====== ============ ====== ======
</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.
24
<PAGE> 27
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The following unaudited pro forma consolidated balance sheet has been based
on the historical consolidated balance sheet of the Company as of August 28,
1998, and gives effect to the amounts payable upon consummation of the Offering
and to the receipt of the net proceeds of the Offering and the Direct Sales as
if they were consummated on August 28, 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. As the Company had no operations on or prior to
August 28, 1998, pro forma consolidated statements of income and cash flows are
not presented.
PRO FORMA CONSOLIDATED BALANCE SHEET
AUGUST 28, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AS ADJUSTED FOR THE
AS ADJUSTED FOR AMOUNTS RECEIPT OF THE NET
PAYABLE UPON PROCEEDS OF THE
HISTORICAL CONSUMMATION OFFERING AND THE
INFORMATION OF THE OFFERING DIRECT SALES
----------- ----------------------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash....................................... $120,000
--------
Total Assets..................... $120,000
========
LIABILITIES
Accounts payable........................... $ --
--------
Total Liabilities................ $ --
========
STOCKHOLDERS' EQUITY
Preferred Shares (par value $1.00;
50,00,000 shares authorized; no shares
outstanding)............................. $ --
Common Shares (par value $1.00; 100,000,000
shares authorized; 12,000 shares
outstanding; 24,057,197 shares
outstanding as adjusted for the receipt
of the net proceeds of the Offering and
the Direct Sales)........................ 12,000
Additional paid-in capital................. 108,000
Accumulated deficit........................ --
--------
Total stockholders' equity....... $120,000
========
Total liabilities and stockholders'
equity................................... $120,000
========
</TABLE>
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
GENERAL
GCA and the Operating Company were both incorporated in August 1998 in
Bermuda and neither has any operating history. The Operating Company was
licensed in Bermuda on , 1998 as a Class 3 insurer, which license
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.
LIQUIDITY AND CAPITAL RESOURCES
GCA 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 GCA intends to declare and pay out of
current and retained earnings a quarterly cash dividend of $. per Common
Share following the end of the first full fiscal quarter following the
consummation of the Offering. It will be GCA's policy to retain all earnings in
excess of such quarterly dividends to support the growth of its business. If
GCA's current and retained earnings do not support the payment of such quarterly
dividends, future dividends may be reduced or eliminated. If GCA 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 GCA will be at the discretion of its
Board of Directors and will depend upon GCA'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 GCA deems relevant. GCA's ability to pay dividends depends on the
ability of the Operating Company to pay dividends to GCA. While GCA 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 GCA. 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 Offering
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 Offering
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 GCA. The balance of the net proceeds will be invested in
accordance with the Investment Guidelines. The Company believes that the net
proceeds of the Offering and the Direct Sales will be sufficient to fund its
planned growth and operating activities for the next several years.
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 from "A-" to "BB" 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, and its reserves may prove to be
inadequate to cover losses. The financial guarantees 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 intends to establish a general loss reserve
of 15% of earned premium income. However, the establishment of an appropriate
level of loss reserves is an inherently uncertain process, made even more so by
the immature 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
26
<PAGE> 29
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 GCA.
The Operating Company, through which GCA expects to conduct substantially
all of its operations, is a registered Bermuda insurance company. Neither GCA
nor the Operating Company is currently licensed as a financial guaranty insurer
or reinsurer in any other jurisdiction. The insurance laws of each state in the
United States and of many other jurisdictions regulate the sale of insurance and
reinsurance within their jurisdiction by insurers, such as the Operating
Company, which are not admitted to do business within such jurisdiction. Because
many jurisdictions 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 it to post a
letter of credit or enter into other security arrangements. The Company's quota
share and facultative treaties with ACA contain a requirement that the Company
must satisfy all regulatory requirements in order to permit ACA to receive
credit for such reinsurance. 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. 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.
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 reinsured
or insured by 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 international financial
guaranty reinsurance and insurance markets 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. In the event the Company's plans with respect to its Year 2000
readiness fail to protect its operations from disruptions, the Company has no
contingency plan other than 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
Offering and the sales to 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. Pursuant to such Agreement, the Company has
agreed to pay Inter-Atlantic a fee of $3.9 million upon consummation of the
Offering. 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
Offering. The Company is also obligated upon consummation of the Offering to
reimburse Inter-Atlantic for expenses it incurs in connection with performing
services under its agreement with the Company. Such expense reimbursements will
not
27
<PAGE> 30
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 Offering. At ,
1998, Inter-Atlantic had incurred expenses in connection with the Offering and
the sales to the Strategic Investors of approximately $ , including
reimbursements it owed to ACA Service, Risk Capital and Trident. Upon
consummation of the Offering, expenses incurred by Inter-Atlantic are currently
estimated to be approximately $ , including reimbursements it will owe
to ACA Service, Risk Capital and Trident.
PLAN OF OPERATION
The Company's plan of operation for the remainder of fiscal 1998 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, to make dividends to GCA.
Over the next six to nine months, the Company anticipates that it will hire
additional underwriting staff as well as one or two additional administrative
staff.
The Company expects that the net proceeds of the Offering 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 Offering and the sales to the
Strategic Investors) will be sufficient to satisfy its cash requirements for the
next several years and that, at a minimum, it will not be necessary during the
six months immediately following the Offering and the Direct Sales to raise
additional funds to meet the expenditures required to operate the Company's
business. Over time, internally generated funds plus a working capital line of
credit and the capital base established by the Offering 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 a
small portion 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
properly hedged, which in turn would adversely affect the Company. 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. The Company will make
determinations as to whether to hedge its foreign currency exposure on a
case-by-case basis. Given the contingent and long-term nature of the Company's
expected foreign currency exposure, it may not be feasible in all instances to
hedge effectively such exposure. 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 fail to perform.
28
<PAGE> 31
TAXATION
Bermuda does not currently impose a corporate level tax on the profits or
income of the Company. GCA and the Operating Company have applied to the Bermuda
Minister of Finance for an undertaking 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
GCA, the Operating Company or to any of their operations or shares, debentures
or other obligations of GCA or the Operating Company until March 2016. There can
be no assurance that after such date GCA or the Operating Company would not be
subject to any such tax. See "Certain Tax Considerations -- Taxation of GCA and
the Operating Company -- Bermuda."
Because GCA and the Operating Company are not expected to conduct business
in the United States, and because GCA and the Operating Company expect to
qualify for the benefits of the tax convention between the United States and
Bermuda, it is not expected that GCA or the Operating Company will be subject to
United States federal income taxes or any other 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."
GCA 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 as
described above 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 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 to 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.
29
<PAGE> 32
BUSINESS
GCA and the Operating Company were both recently organized in Bermuda to
provide "A" rated financial guaranty reinsurance and insurance on financial
obligations, principally municipal and asset-backed securities and other
structured finance obligations, that are rated from "A-" to "BB" 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 Offering, 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.
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 debt security, and is
typically unconditional, irrevocable and, except for non-payment of premiums,
non-cancelable. Financial guaranty insurance is primarily offered as a credit
enhancement to municipal and asset-backed securities, and can be provided at the
time of the original issuance of financial obligations or to holders of such
obligations in connection with secondary market transactions. 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 have an equity capitalization of approximately
$333.9 million upon consummation of the Offering 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 itself as a competitive financial guaranty reinsurer and
insurer. As a newly formed entity, the Company's capital is presently
unencumbered by such issues as insured portfolio leverage, 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 Offering and the Direct Sales,
the Operating Company has been assigned a preliminary financial strength rating
of "A" by , and a preliminary claims-paying ability rating of "A"
by and . Such ratings have been granted subject to
the Company raising gross proceeds of $ million in the Offering and the
Direct Sales.
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, an affiliate of 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, which it believes may be particularly attractive
30
<PAGE> 33
to issuers that have previously had limited access to the financial
markets. The Company believes that in many cases "A" rated financial
guaranty insurance can 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. The Company has
entered into four reinsurance treaties with ACA that will become effective
upon consummation of the Offering. The Company believes that such treaties
will provide ACA with additional insurance capacity and will permit ACA to
develop further the market for "A" rated financial guaranty insurance. See
"-- Reinsurance Treaties with ACA." In addition, the Company will also seek
in the United States to enter into reinsurance arrangements with higher
rated financial guaranty insurers and reinsurers as well as other providers
of third-party credit enhancement. Such arrangements would be structured so
that the Company would assume a portion of the risk guaranteed by an
insurer or other third-party credit enhancement provider on a basis that
would result in the rating agencies and regulatory bodies treating the
underlying obligation as "A" rated, thereby providing such insurers or
other third-party credit enhancement providers capital relief and other
benefits.
- - Penetrate the International Credit Enhancement Market
Traditionally, issuers and holders of financial obligations outside the
United States have relied on banks and other financial institutions
offering letters of credit and other guaranties rather than financial
guaranty insurance. The Company believes that, as is the case in the United
States, an opportunity exists to provide "A" rated financial guaranty
insurance as an innovative and cost-effective alternative to existing forms
of credit enhancement. The Company will initially focus its efforts on
developing opportunities in the European, Canadian and Latin American
asset-backed and structured finance markets. The Company is not currently
licensed as a financial guaranty insurer in such target markets because it
believes that it can effectively enter such markets while operating from
Bermuda. As the Company's business develops, management will monitor the
need to obtain licenses in such markets in order to comply with applicable
law or be able to engage in additional insurance related activities.
- - 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 from "A-" to "BB" 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. The Company will over time seek to diversify the risks it
reinsures and insures by type of obligor, type 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 on most unrated financial obligations
insured by the Company 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 Chairman of the Board 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 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. ("CODA") and Executive Risk
Inc., , a Senior Vice President and the Chief Underwriter of
the Company, has over years of experience in the financial guaranty
insurance and reinsurance industries and was
31
<PAGE> 34
formerly . , the Chief Financial Officer and
Treasurer of the Company, has over years experience in the financial
guaranty insurance and reinsurance industries and was formerly
. 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 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 Victoria Hall,
Victoria Street, P.O. Box HM1262, Hamilton, HM FX, Bermuda, and its telephone
number is (441) 295-3278.
REINSURANCE TREATIES WITH ACA
The following description of the reinsurance treaties between the 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 Company has entered into four reinsurance treaties with ACA which will
become effective upon consummation of the Offering. The first treaty is a "quota
share" treaty pursuant to which the Company is required to provide, and ACA is
required to purchase, reinsurance on a fixed percentage of certain risks insured
by ACA. The second treaty is an "excess of loss" treaty pursuant to which the
Company has agreed to reinsure up to $75.0 million of the aggregate losses
incurred by ACA on its financial guaranty insurance in excess of $150.0 million
and the coverage provided by ACA's $50.0 million excess of loss reinsurance
agreement with Zurich Reinsurance (North America) Inc. The third and fourth
treaties are "facultative" treaties under which the Company and ACA each have
the right of first refusal to reinsure each financial obligation the other
insures on a direct basis. Such treaties also set forth the basic terms on which
the Company and ACA may purchase such reinsurance from the other on a
case-by-case basis after individual underwriting decisions have been made. 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.
Quota-Share Reinsurance Treaty
Under a quota share reinsurance treaty, dated , 1998 and
effective as of the closing of the Offering, between ACA as reinsured and the
Company as reinsurer, ACA has agreed to cede and the Company has agreed to
accept as reinsurance a pro rata share of the insurance policies, surety bonds,
indemnity contracts, financial guaranties and other evidences of insurance
(including contracts, agreements, binders and endorsements) actually written by
ACA during the term of the agreement. ACA will pay the Company a quarterly
premium in arrears, equal to the gross net written premium income less a 35%
ceding commission. Under the quota share treaty, the Company is not permitted to
write direct financial guaranty insurance in the United States so long as such
treaty remains in effect.
The Company's pro rata share will be equal to 22.5% of each transaction for
which the total premium is estimated to equal at least $100,000; however, the
quota-share treaty will not apply to any portion of a transaction that would
cause the risk retained by ACA to exceed any single-risk limit applicable to ACA
assessed by any rating agency or regulatory authority or by ACA's internal
guidelines. Any risks not covered by the quota-share treaty may be ceded under
the master facultative treaty between the Company and ACA as described below.
The Company will have no obligation to accept any share of a transaction to the
extent such acceptance would cause the Company to exceed any applicable single-
or aggregate-risk limit established
32
<PAGE> 35
by law or by a nationally recognized rating agency. In addition, the Company
will not be required to accept a share of a transaction that would cause the
Company to violate its internal underwriting guidelines, provided that such
guidelines are not made more restrictive in the future. In the event that the
Company is obligated to accept a share of a transaction that would cause the
Company to violate its internal underwriting guidelines, the Company will seek
to reinsure such exposure. There can be no assurance that the Company will be
able to obtain such reinsurance.
The quota-share treaty expires on December 31, 1999 but is automatically
renewed for successive one-year terms, unless the 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 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 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 one month (a "Ratings Event"); (ii) either ACA or the
Company becomes insolvent or has a final order of liquidation, rehabilitation,
conservatorship or receivership entered against it; (iii) the 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
Company breaches certain covenants set forth in the quota share treaty and such
breach is not cured within 60 days of notice to the breaching party by the other
party; or (v) ACA fails to pay the premiums owed to the Company and such failure
is not remedied within ten days of notice thereof. In the event of termination,
the Company will remain liable for the reinsurance liabilities ceded thereunder
until the earlier of (i) the 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 Company under the quota-share treaty (provided that
such December 31 falls in the year 2003 or later). The Company's liability
thereunder will terminate on such cut-off date, if any, and the Company will
return all unearned premiums to ACA within 30 business days.
Excess of Loss Reinsurance Treaty
Under the excess of loss reinsurance treaty, dated , 1998 and
effective as of the closing of the Offering between ACA as reinsured and certain
subscribing companies (including the Company as lead reinsurer) as reinsurers
(each a "Subscribing Reinsurer"), ACA has agreed to cede and the Subscribing
Reinsurers have agreed to accept as reinsurance 100% of net incurred losses that
arise during the term of the agreement and any run-off period in excess of $150
million and any amounts recovered by ACA under its $50 million excess of loss
reinsurance agreement with Zurich Reinsurance (North America) Inc. The total
liability of the Subscribing Reinsurers under the excess of loss treaty is
limited to $75 million, of which the Company's pro rata share is %. In the
event any Subscribing Reinsurer fails to pay its share of any net incurred
losses pursuant to the excess of loss treaty, the Company will become
responsible for payment of such amount. To the extent ACA is entitled to take
regulatory credit in the State of Maryland for reserves ceded to the Subscribing
Reinsurers, each of the Subscribing Reinsurers will be obligated to make
payments to ACA only to reimburse it for its respective pro rata share of net
incurred losses actually paid by ACA or to advance ACA funds for such payments.
ACA will pay the Subscribing Reinsurers an annual premium equal to 2.70%
paid quarterly in advance of their respective limits of liability. For each
calendar year commencing in 2001, the Subscribing Reinsurers will pay ACA a
profit commission equal to 50% of the premium paid by ACA through (i) in the
case of 2001, the period ending December 31, 1998 and (ii) each year thereafter,
the 12-month period commencing three years prior to December 31 of such year, if
in each case (i) no net incurred losses have been paid by the Subscribing
Reinsurers under the excess of loss treaty and (ii) the ratio of net incurred
losses for the immediately preceding three-year period to net premiums earned by
the Subscribing Reinsurers during such three-year period with respect to
policies included in the covered portfolio is less than 50%.
33
<PAGE> 36
Any policies written by ACA that exceed certain single-risk limits will be
included in the covered portfolio on a quota-share basis so as to not exceed
such single-risk limits. Such single-risk limits are defined in the excess of
loss treaty as those applied to ACA by any of Standard & Poor's, Duff & Phelps
or Fitch IBCA, as modified from time to time.
The excess of loss treaty expires on December 31, 1999 but is automatically
renewed for successive one-year terms, unless the 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 Company gives such notice, the
business reinsured under the excess of loss treaty will become fixed as of such
December 31. The business reinsured will also become fixed on the day that any
of the following events occurs: (i) a Ratings Event occurs with respect to
either ACA or the Company; (ii) either ACA or the Company becomes insolvent or
has a final order of liquidation, rehabilitation, conservatorship or
receivership entered against it; (iii) the 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 Company breaches
certain covenants set forth in the excess of loss treaty and such breach is not
cured within 60 days of notice to the breaching party by the other party; or (v)
ACA fails to pay the premiums owed to the Company and such failure is not
remedied within ten days of notice thereof. In the event of termination, the
Company will remain liable for the reinsurance liabilities ceded thereunder
until the earliest of (i) the settlement, natural expiration or cancellation of
such liabilities, (ii) the date that is eight years from such December 31, and
(iii) 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 Company under the excess of loss agreement (provided that such December
31 falls in the year 2003 or later). The Company's liability thereunder will
terminate on such cut-off date, if any, and the Company will return all unearned
premiums to ACA within 30 business days thereof.
Master Facultative Reinsurance Treaties
Under reciprocal master facultative reinsurance agreements, each dated
, 1998 and effective as of the closing of the Offering between (in
the case of one of such agreements) ACA as reinsured and the Company as
reinsurer and (in the case of the other such agreement) the Company as reinsured
and ACA as reinsurer, the 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. Such arrangements are equivalent to a right of first refusal of the
Company and ACA with respect to all business originated by the other.
Each reinsured will pay the related reinsurer its share of the premium
related to any policy after first deducting a ceding commission 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.
Each master facultative treaty will be a continuous contract until
canceled. It may be canceled at any time by mutual consent, 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,
except to the extent that both parties agree to a withdrawal of the reinsured
risks from the reinsurer and return or payment by the reinsurer of an amount
equal to its share of incurred loss and loss expenses and of unearned premiums
(less the corresponding ceding commission). Such agreement may also be canceled
at the discretion (in the case of the 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.
34
<PAGE> 37
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 any of: (i) the performance of such agreement
is prohibited or rendered impossible by any applicable law or regulation, such
reinsured fails to receive all or substantially all financial credit for the
reinsurance provided by such agreement in all applicable jurisdictions, or the
insurance regulator in the applicable jurisdiction directs such reinsured to
cancel its participation in such agreement; (ii) the related reinsurer becomes
insolvent, fails to maintain (in the case of the Company) the minimum capital
and surplus or surplus to policyholders requirements required by the laws of its
domicile or (in the case of ACA) by certain applicable sections of the New York
Insurance Law, is the subject of a voluntary or involuntary filing of a petition
in bankruptcy, goes into liquidation or rehabilitation, has a receiver
appointed, allows its surplus to policyholders to decline by 25% during any
twelve-month period as reported in any financial statement 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 comes under the control of any other
insurance company or organization, 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 timely cure a breach of any of its respective
covenants as set forth in the master facultative treaty; or (iv) a Ratings Event
occurs with respect to such reinsurer. 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. Upon any such termination, the reinsurer will
return the reinsured risks to the reinsured and pay to such reinsured an amount
equal to such reinsurer's share of incurred loss and loss expenses and of
statutory unearned premiums (less the corresponding ceding commission), unless
such reinsurer's notice of termination provides that it will continue to cover
all policies written by such reinsured prior to such termination and coming
within the scope of such master facultative treaty until the natural expiration
or cancellation of such policies.
DESCRIPTION OF ACA
ACA was established 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 Chairman 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 , 1998, ACA wrote financial guaranty
insurance covering different underlying credits representing
$ billion in aggregate principal amount for premiums totaling approximately
$ 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 corporate and asset-backed
securities. ACA has begun to target more actively the asset-backed segment of
the market. As of , 1998, ACA had admitted assets of $ ,
total liabilities of $ , and total capital and surplus of $ ,
as determined in accordance with statutory accounting practices prescribed or
permitted by United States insurance regulatory authorities.
35
<PAGE> 38
ACA's initial paid-in capital 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. ACA also has $125.0 million of reinsurance capacity in
the form of two excess of loss facilities, one for $50.0 million with Zurich
Reinsurance (North America) Inc. and the other for $75.0 million with Capital
Credit Reinsurance Company. ACA intends to replace its arrangements with Capital
Credit Reinsurance Company with the excess of loss treaty with the Company
described herein. After giving effect to such replacement, ACA's excess of loss
arrangements will be substantially similar to those currently in effect. For a
description of the proposed reinsurance treaties between ACA and the Company,
see "-- Reinsurance Treaties with ACA."
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 ensure the full utilization of 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.
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. Nevertheless, given that the Company will be reinsuring and insuring
obligations rated from "A-" to "BB" 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. The
Company will over time seek to diversify the risks it reinsures and insures by
type of obligor, type 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. In addition, the Company intends to limit its risk exposure
to the single-risk limits and non-investment grade limits prescribed by its
rating agencies and the Company's internal underwriting guidelines. Such
limitation is intended to help mitigate the financial effect upon the Company of
a catastrophic event affecting any single issuer.
36
<PAGE> 39
The Company has hired to act as its Chief Underwriter. 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 Credit Committee, which consists of Mr.
as well as the Company's Chief Executive Officer and Chief Financial Officer.
Each risk insured by the Company must comply with the underwriting guidelines
the Company has established in consultation with the rating agencies that have
assigned preliminary financial strength and claims-paying ratings to the
Operating Company, unless an exception to the guidelines is specifically
approved by the Company's Board of Directors. The Company's underwriting
guidelines will regularly be reviewed and modified when necessary to conform to
changing market, economic and legal conditions.
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 on
most unrated financial obligations insured by the Company on a direct basis.
RESERVES
Policy claims are expected to comprise the majority of the Company's
financial obligations, and reserves therefor will be maintained on both a
Bermuda regulatory and GAAP basis. The insurance policies written 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 intends to establish a general loss
reserve of 15% of earned premium income. However, the establishment of an
appropriate level of loss reserves is an inherently uncertain process, made even
more so by the immature 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. In addition, case basis
reserves for unpaid losses and loss adjustment expenses will be recorded at the
present value of the estimated loss when, in management's opinion, the
likelihood of a future loss is probable and determinable. The estimated loss on
a transaction will be discounted using then-current risk-free rates. 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 GCA.
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 in the markets
the Company has targeted 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. It is expected that such entities will seek the
Company's direct insurance products in circumstances in which an "A" rated
financial guaranty would serve to facilitate in a material way the offering or
placement of the underlying financial obligation. Senior management of the
Company intends to take an active part in the sale and promotion of the
Company's products.
37
<PAGE> 40
COMPETITION
The traditional financial guaranty insurance and reinsurance industry is
highly competitive. The United States market for financial guaranty reinsurance
is dominated by a small number of companies that have greater financial
resources and are more established than the Company. Similarly, the
international market for third-party credit enhancement products is dominated by
a number of large banks and other financial institutions, which also have
greater financial resources and are more established than the Company. 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-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. 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 in the United States 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 financial guaranty providers, 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 financial transaction to achieve the
desired rating. There can be no assurance that the Company's strategy will
permit it to compete effectively with these alternative methods of credit
enhancement.
The Operating Company has been assigned a preliminary financial strength
rating of "A" by , and a preliminary claims-paying ability rate
of "A" by and . Such ratings have been granted
subject to the Company raising gross proceeds of $ million in the Offering
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 may 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 principally consist of investment grade fixed income securities and will be
invested in an effort to maximize total return while providing for
diversification of risk. Up to 10% of the Operating Company's investment
portfolio may be invested in below investment grade securities. These below
investment grade securities may take the form of fixed income securities,
floating rate securities or preferred securities. While any investment carries
some risk, the risks associated with lower-rated securities are greater than the
risks associated with higher-rated securities. The risk of loss of principal or
interest through default is greater because lower-rated securities are usually
unsecured and are often subordinated to an issuer's other obligations.
Additionally, the issuers of these securities frequently have high debt levels
and are thus more sensitive to adverse economic and financial conditions as well
as particular developments affecting the issuer. Consequently, the market price
of these securities may be quite volatile and the risk of loss is greater. The
Investment Guidelines require the Operating Company's overall investment
portfolio to maintain a minimum weighted average 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
38
<PAGE> 41
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 also provide that the Operating Company may
purchase, among other things, securities issued by the United States government
and its agencies and instrumentalities, securities issued by foreign governments
if rated "A" or better by at least one major rating agency, asset-backed
securities, preferred stocks, mortgage-backed securities and corporate debt
securities (including convertible debt securities), but may not include
payment-in-kind securities.
Furthermore, the Investment Guidelines prohibit investments in (i) direct
real estate; (ii) oil and gas limited partnerships; (iii) commodities; (iv)
venture capital investments, including private equity or its equivalent; (v)
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 tax, (h) any tangible property, (i) any debt
obligation 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.
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 rate.
The Operating Company will seek to manage credit risk through industry and
issuer diversification. The Operating Company will seek to manage interest rate
risk by monitoring the duration of its investment portfolio relative to current
market conditions. 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 and will 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.
THE INVESTMENT MANAGERS AND ICS
The Operating Company has retained ICS, a Bermuda corporation, to oversee
its investment operations. ICS will interview potential investment managers and
make recommendations to the Finance and Investment Committee of the Operating
Company's Board of Directors regarding which firms the Operating Company should
retain. ICS will monitor the performance and asset allocation of the Investment
Managers as well as analyze the sensitivity of their portion of the Operating
Company's investment portfolio to external economic factors and will report
periodically to the Finance and Investment Committee of the Operating Company's
Board of Directors on such matters. Before recommending that the Board of
Directors retain the Investment Managers, ICS conducted extensive interviews
with several investment management firms. The Operating Company may also retain
other investment advisers from time to time based on recommendations made by
ICS. The initial term of the contract between the Company and ICS expires on the
third anniversary of the consummation of the Offering, and the contract
automatically renews for successive one-year terms thereafter unless either
party provides 90 days notice of its decision to cancel the contract. The
contract is subject to termination by either party for cause at any time, and
the Operating Company has an option to cancel the contract, for or absent cause,
after two years. Pursuant to the contract, ICS is entitled to receive a fee
equal to 0.10% of the average daily net asset value of the Operating Company's
investment portfolio on the first $300
39
<PAGE> 42
million of such portfolio, 0.075% of the average daily net asset value of the
Operating Company's investment portfolio on the next $100 million of such
portfolio, if any, 0.05% of the average daily net asset value of the Operating
Company's investment portfolio on the next $600 million of such portfolio, if
any, and 0.035% of the average daily net asset value of the Operating Company's
investment portfolio in excess of $1.0 billion.
At the recommendation of ICS, the Operating Company has retained 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 by ICS, subject to the
Investment Guidelines. Based on the expected allocation of the Operating
Company's investment portfolio, the Investment Managers will in the aggregate
receive a fee equal to % of the average daily net asset value of the
Operating Company's investment portfolio.
ICS is owned by and and by Messrs. Michael P.
Esposito, Jr., Frederick S. Hammer, Robert M. Lichten and Andrew S. Lerner, each
of whom is affiliated with Inter-Atlantic, and, with the exception of Mr.
Lerner, each of whom is a director of GCA and the Operating Company. The
Company's agreement with ICS was approved by the members of the Company's Board
of Directors that are unaffiliated with Inter-Atlantic. ICS is a newly-formed
Bermuda entity and the Operating Company is its first client. ICS's lack of
experience and status as a start up operation could adversely affect the
Company.
ADMINISTRATION
The Company has entered into an agreement with J&H Marsh & McLennan
Management (Bermuda) Ltd. ("Marsh & McLennan") 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)
administration of payroll and employee benefits, (iv) maintenance of bank
accounts, and (v) 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 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 with regard to certain
liabilities to which Marsh & McLennan 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. Management believes that the contractual relationship with Marsh &
McLennan will provide the Company with the flexibility needed to add such
additional employees in an orderly fashion.
PROPERTY
The Company has leased office space in Hamilton, Bermuda from
at which the principal offices of GCA and the Operating Company
are located. The leased office space consists of offices and work stations for
employees. The $ monthly rent payable to
includes utilities and certain office furnishings and equipment. The lease is
scheduled to expire on .
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.
REGULATION
Bermuda
The Insurance Act 1978, as amended, and Related Regulations. As a holding
company, GCA 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
40
<PAGE> 43
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, if in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, which
are required to be filed annually with the Registrar of Companies 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 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 Andre Perez.
41
<PAGE> 44
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, without the approval of the Minister, from
declaring or paying any dividends during the next financial year); (iii) is
prohibited, without the approval of the Minister, from reducing by 15% or more
its total statutory capital, as set out in its previous year's financial
statements; and (iv) 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, 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, account 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 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 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.
42
<PAGE> 45
Certain Bermuda Law Considerations. GCA 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 GCA 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 Offering 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, GCA is not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. GCA 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," GCA 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, 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 and Other
The insurance laws of each state in the United States and of many other
jurisdictions regulate the sale of insurance and reinsurance within their
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 where an insurer is not admitted to do business
is prohibited. The Company expects to conduct its business through its Bermuda
office and will not conduct any activities which may constitute the transaction
of the business of insurance in any jurisdiction in which the Company is not
licensed or otherwise authorized to engage in such activities. However, there
can be no assurance that inquiries or challenges to the Company's insurance
activities in such jurisdictions will not be raised in the future or that the
Company's location, regulatory status or restrictions on its activities
resulting therefrom will not adversely affect the Company.
Because many jurisdictions 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 in certain instances that the Company's reinsurance
clients will require it to post a letter of credit or enter into other security
arrangements. The Company's quota share and facultative treaties with ACA
contain a requirement that the Company must satisfy all regulatory requirements
in order to permit ACA to receive credit for such reinsurance. 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 to secure its obligations to its reinsureds, which would
adversely affect the Company. 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.
43
<PAGE> 46
OVERVIEW OF THE FINANCIAL GUARANTY INDUSTRY
Financial guaranty insurance provides the holder of a financial obligation
with a guaranty against financial loss. Such insurance is principally used to
guaranty the payment of principal and interest on a debt security, and is
typically unconditional, irrevocable and, except for non-payment of premiums,
non-cancelable. Financial guaranty insurance is primarily offered as a credit
enhancement to municipal and asset-backed securities, and can be provided at the
time of the original issuance of financial obligations or to holders of such
obligations in connection with secondary market transactions. 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 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.
Financial guaranty insurers write secondary market insurance on financial
obligations that were issued on an uninsured basis. Secondary market financial
guaranty insurance and reinsurance has been issued to holders of municipal
bonds, asset-backed securities and, to a lesser extent, corporate obligations.
The premium for financial guaranty insurance is generally paid by the
issuer of the obligation either in periodic installments, as is generally the
case with asset-backed securities, or, with respect to municipal debt
obligations, in full at the inception of the policy. Financial guaranty premiums
are non-refundable and those paid in full at the inception of the policy are
earned over the term of the related insured obligation. Because many obligations
insured by financial guaranty insurers have long maturities, the portion of
premiums earned on a policy in any year represents a relatively small percentage
of the initial premium received. 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, 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.
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 (counties,
cities, towns and villages, utility districts, public universities, hospitals,
public housing and transportation authorities) and other public and quasi-public
entities (including non-United States sovereigns and subdivisions thereof).
Municipal bonds insured include, among others, the following types: general
obligations, special tax and assessment transactions, development districts,
utilities (electric, water, sewer and gas), housing (local agency, taxable,
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 by its ability to impose and collect fees and charges
for public services or specific projects in the case of most revenue bonds.
44
<PAGE> 47
Asset-Backed Securities Market. Asset-backed securities are payable
primarily from the payments on and proceeds of a specific financial asset or
pool of financial assets. In contrast to secured financing, in which an
operating company retains ownership of the pledged collateral, the assets of
asset-backed securities are insulated from the credit risk of any operating
company. As a result, asset-backed securities may be, and typically are, rated
independently of the rating of the company that originated the assets. While
non-agency residential mortgages, home equity loans, credit card receivables,
auto loans and student loans constitute the largest percentage of assets backing
asset-backed securities, the variety of asset-backed obligations available to
investors has continued to expand to include different types of assets. In
recent years, "hybrid" asset-backed structures have been developed in which the
rating of the securities is more or less loosely linked to (rather than
dependent on) the rating of an operating company. Such structures include, for
example, "future flow" transactions in which payment of the securities depends
on the generation and payment of future receivables and, as a result, on the
continued operation of the company originating the receivables. Because
companies frequently continue to operate even when in default on their financial
obligations, such companies' operating risk is significantly lower than their
credit risk.
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 underwritten
by the ceding company. It is standard industry practice for primary insurers to
reinsure portions of their insurance risks with other insurance companies
(reinsurers) under indemnity reinsurance agreements. Such practice permits
primary insurers to write policies in amounts larger than the risks they are
willing to retain for their own account.
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 underwritten by the ceding company over a period of time. Facultative
reinsurance is the reinsurance of part or all of one or more insurance policies
or specific risks which is subject to separate negotiation for each reinsurance
placement. It offers the option of accepting or rejecting individual submissions
by a ceding company as distinguished from the obligation to automatically accept
specified classes of risk as an automatic treaty 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.
State insurance laws and regulations, as well as the rating agencies, impose
minimum capital requirements on financial guaranty insurance companies, limiting
the aggregate amount of insurance which may be written and the maximum size of
any single risk which may be insured. Reinsurance enables the reinsured to
increase its capacity to write new business by effectively reducing the
reinsured's gross liability on an aggregate and single-risk basis. Furthermore,
primary insurers manage the risk of their insured portfolios based on internal
underwriting criteria and portfolio management guidelines. Reinsurance is
instrumental in achieving those portfolio management goals. The reinsurer
sometimes pays a ceding commission to the primary insurer to compensate the
insurer for its costs of producing and underwriting the insured risk.
45
<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the directors and
executive officers of GCA and the Operating Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GCA AND THE OPERATING COMPANY
- ---- --- -------------------------------------------
<S> <C> <C>
Donald J. Matthews................... 64 Chairman of the Board, Chief Executive Officer and
Director
Bruce W. Bantz....................... 48 Managing Principal, Marketing and Business
Development
Andrew S. Lerner..................... 33 Interim Chief Financial Officer and Interim Treasurer
Charles G. Collis*................... 36 Director and Secretary
Charles A. Davis..................... 49 Director
Michael P. Esposito, Jr.............. 58 Director
H. Russell Fraser.................... 57 Director
William M. Goldstein................. 63 Director
Frederick S. Hammer.................. 63 Director
Robert M. Lichten.................... 58 Deputy Chairman of the Board and Director
</TABLE>
- ---------------
* Mr. Collis has indicated his intention to resign as a director of GCA and the
Operating Company upon consummation of the Offering.
Donald J. Matthews was elected Chairman of the Board, Chief Executive
Officer and a director of GCA and the Operating Company upon their formation.
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. ("CODA") 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).
Bruce W. Bantz became Managing Principal, Marketing and Business Department
of GCA and the Operating Company on , 1998. Mr. Bantz was a
Director and the Global Head of Asset Securitization for 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 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.
Charles G. Collis was elected a director of GCA 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 GCA and the Operating Company on
, 1998. Mr. Davis has been the President and Chief Operating
Officer of Marsh & McLennan Risk Capital Corp. 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 1994 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.
46
<PAGE> 49
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.
Michael P. Esposito, Jr. was elected a director of GCA and the Operating
Company upon their formation. Mr. Esposito has been Vice Chairman of
Inter-Atlantic Capital Partners, Inc. since 1995. He has been non-executive
Chairman of the Board of EXEL Limited, an insurance and reinsurance company,
since 1995 and a director since 1986. He also serves as a director of Annuity
and Life Re (Holdings), Ltd., Risk Capital Holdings, Inc., and Forest City
Enterprises, Inc. Mr. Esposito served as Executive Vice President and Chief
Corporate Compliance, Control and Administration Officer of The Chase Manhattan
Corporation from 1992 to 1995, having previously served as Executive Vice
President and Chief Financial Officer from 1987 to 1992.
H. Russell Fraser was elected a director of GCA 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). 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 GCA 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. He also serves as a director of National Media Corporation. Mr.
Goldstein served as Deputy Assistant Secretary for Tax Policy with the United
States Department of Treasury from 1975 to 1976.
Frederick S. Hammer was elected a director of GCA and the Operating Company
upon their formation. Mr. Hammer has been Vice Chairman of Inter-Atlantic
Capital Partners, Inc. since 1994. He is the non-executive Chairman of the Board
of Annuity and Life Re (Holdings), Ltd., a Bermuda-based reinsurance company,
and National Media Corporation, a transactional programming company, and serves
as a director of IKON Office Solutions, Inc., Provident American Corporation, an
insurance company, 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.
Robert M. Lichten was elected a director of GCA and the Operating Company
upon their formation. Mr. Lichten has been Vice Chairman of Inter-Atlantic
Capital Partners, Inc. since 1994. 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.
PROVISIONS GOVERNING THE BOARD OF DIRECTORS
Number and Terms of Directors
GCA'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 GCA's shareholders following completion of the Offering, is comprised
of Messrs. Collis and Esposito; the second class, whose initial term expires at
the second annual meeting of GCA's shareholders following completion of the
Offering, is comprised of Messrs. Davis, Hammer and Goldstein; and the third
class, whose initial term expires at the third annual meeting of GCA's
shareholders following completion of the Offering, is comprised of Messrs.
Matthews, Fraser and Lichten. Following their initial terms, all classes of
directors will be elected to three-year terms.
47
<PAGE> 50
Committees of the Board
The Board of Directors has established Executive, Finance and Investment,
Audit and Compensation 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, GCA'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 four members (presently Messrs.
Matthews (Chairman), Esposito, Hammer and Lichten).
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 ICS and the Investment Managers. The Finance and
Investment Committee presently consists of two members (presently Messrs.
Matthews (Chairman) and Goldstein).
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 two members (presently Messrs. Hammer (Chairman) and
Goldstein).
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 two members (presently Messrs. Esposito
(Chairman) and Hammer).
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 BD$20,000 per annum and BD$1,000 per board or committee meeting
attended. The non-employee Deputy Chairman of the Board and non-employee
Committee Chairmen will receive an additional BD$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. Esposito, Hammer and Lichten
will receive options to acquire 33,333 Common Shares; the director to be
designated by 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) their election
to the Company's Board of Directors or (ii) the consummation of the Offering.
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 Offering,
which will have an exercise price equal to the initial public offering price per
share. On the date of each annual 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 Offering 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
Offering, 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 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 GCA's Board or Compensation Committee.
48
<PAGE> 51
Messrs. Esposito and Hammer have contracted with GCA to purchase 85,000
Common Shares and 12,500 Common Shares, respectively, directly from the Company
as part of the Direct Sales at a price of $14.10 per share. Such purchases are
expected to be consummated simultaneously with the consummation of the Offering.
Messrs. Esposito and Hammer also each 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 Offering (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 Offering except for the Class A Warrants, the Class B
Warrants and any options granted by the Company under its Stock Option Plan.
Messrs. Esposito and Hammer 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. Messrs. Esposito and Hammer are also owners,
directors and/or officers of Inter-Atlantic Capital Partners, Inc., the parent
corporation of Inter-Atlantic, and 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 and
are currently receiving compensation from the Company pursuant to
the terms of their respective employment agreements.
EMPLOYMENT AGREEMENTS
GCA, the Operating Company and Mr. Matthews have entered into an Employment
Agreement under which Mr. Matthews has agreed to serve as Chairman of the Board
and Chief Executive Officer of GCA and the Operating Company for an initial term
ending on the third anniversary of the consummation of the Offering 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. Matthews will begin receiving an
annual salary of BD$360,000 on September 1, 1998. Upon consummation of the
Offering, 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.
Mr. Matthews' Employment Agreement provides that he will receive, subject
to the consummation of the Offering, options to purchase Common Shares under the
Stock Option Plan in an amount equal to 2.0% of the Company's Common Shares
outstanding immediately following the consummation of the Offering and the
Direct Sales, provided, however, that such amount shall not exceed 727,272
Common Shares. The exercise price of such options 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 Offering provided, however, that upon a change in control of the Company,
such options will become exercisable immediately.
Mr. Matthews' Employment Agreement also provides that if he is terminated
by the Company for serious cause or he resigns without good reason, he will
forfeit all bonus amounts for the then current fiscal year, and the Operating
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. If the employment of Mr. Matthews is
terminated by the Company without serious cause or by Mr. Matthews with good
reason, the Operating Company will continue to pay Mr. Matthews' 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 Mr. Matthews' annual base salary as of the date of termination).
Additionally, Mr. Matthews 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 (or, if such termination occurs
within the period commencing on the date that a change of control
49
<PAGE> 52
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, for one year
after the date of termination), reasonable relocation expenses from Bermuda to
the United States and, if such termination occurs within the period commencing
on the date that a change in 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 gross-up of any income taxes payable by Mr. Matthews
by reason of payments made to him in connection with a change of control.
Mr. Matthews' Employment Agreement provides that he will not, for a period
of (i) one year following the termination of his employment by the Company
without serious cause or by him for good reason or (ii) two years following the
termination of his employment with the Company for any other 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 his
employment. Furthermore, Mr. Matthews is prohibited from directly or indirectly
employing or seeking to employ any person or entity employed by the Company at
the time Mr. Matthews' employment is terminated or enticing any such person or
entity to leave such employment for a period of two years following the
termination of Mr. Matthews' employment.
The Employment Agreement of Mr. Matthews also provides that he will keep
secret and retain in the strictest confidence all confidential matters that
relate to the Company or any affiliate of the Company.
GCA, the Operating 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 GCA and the Operating Company for an
initial term ending on the third anniversary of the consummation of the Offering
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 will begin
receiving an annual salary of BD$250,000 upon consummation of the Offering. Upon
consummation of the Offering, 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.
Mr. Bantz's Employment Agreement provides that he will receive, subject to
the consummation of the Offering, options to purchase 100,000 Common Shares
under the Stock Option Plan. The exercise price of such options 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 Offering provided, however, that upon a change in control of
the Company, such options will become exercisable immediately.
STOCK OPTION PLAN
The Company's Board of Directors adopted the GCA Ltd. Initial Stock Option
Plan on August 25, 1998. The Stock Option Plan is intended to attract and retain
selected employees, directors and consultants (collectively, the "Eligible
Individuals") and to motivate them to exercise their best efforts on behalf of
GCA and any subsidiary or parent of GCA (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 Offering and the Direct Sales or (ii)
2,000,000 Common Shares. No option may be granted under the Stock Option Plan
after August 25, 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
50
<PAGE> 53
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 GCA'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 GCA 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
October , 1998, there were employees of the Company eligible to receive
ISOs and Eligible Individuals (including employees) eligible to receive
Non-Qualified Stock Options.
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 an Optionee's employment or service with GCA (or a Related Corporation
in the case of an employee or consultant) is terminated prior to the expiration
date 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, 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 director,
three months after the date of such termination of service as a director, and
(ii) in the case of an employee or consultant, 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 an Optionee's employment or service with GCA (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 may exercise such option to the extent of the number of Common Shares
with respect to which the Optionee could have
51
<PAGE> 54
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 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, consolidation,
acquisition of property or stock, separation, reorganization or liquidation,
each outstanding option will be assumed by the surviving corporation or by a
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 a written option agreement containing provisions consistent with
the Stock Option Plan and such other provisions as the Compensation Committee
deems appropriate. Except as may be provided in an option agreement with regard
to 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
Offering.
52
<PAGE> 55
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 Offering 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(1) EMPLOYEES SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Matthews.... 481,143 80.35% $15.00 (3) $4,538,824 $11,502,270
Bruce W. Bantz........ 100,000 16.70% $15.00 (3) $ 943,342 $ 2,390,614
Andrew S. Lerner...... 17,647 2.95% $15.00 (3) $ 166,472 $ 421,872
% $15.00 (3) $ $
% $15.00 (3) $ $
% $15.00 (3) $ $
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the number
of Common Shares underlying Mr. Matthews' options will increase to 531,393
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
Offering.
53
<PAGE> 56
PRINCIPAL STOCKHOLDERS
The table below sets forth the expected beneficial ownership of Common
Shares, after giving effect to the Offering 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 GCA and by the directors and executive
officers of GCA as a group (assuming no exercise of the Underwriters'
over-allotment option). Certain directors and officers of GCA 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 13.27%
Risk Capital Reinsurance Company(3)......................... 1,063,829 4.42%
Donald J. Matthews(4).......................................
Michael P. Esposito, Jr.(5)................................. 85,000 *
Robert M. Lichten(6)........................................ 12,500 *
Frederick S. Hammer(7)...................................... 12,500 *
H. Russell Fraser(8)........................................
Charles A. Davis(9).........................................
William M. Goldstein(10)....................................
Bruce W. Bantz(8)...........................................
Charles G. Collis........................................... -- --
All directors and executive officers as a group (seven
persons).................................................. 110,000 *
</TABLE>
- ---------------
* Less than 1%.
(1) The address for Trident is . The address for Risk
Capital is 20 Horseneck Lane, Greenwich, Connecticut 06830. The address for
each other beneficial owner is c/o GCA Ltd., Victoria Hall, Victoria
Street, P.O. Box HM1262, Hamilton, HM FX, Bermuda.
(2) Does not include 270,643 Common Shares (298,909 Common Shares if the
Underwriters' over-allotment option is 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.
(3) Does not include 90,214 Common Shares (99,636 Common Shares if the
Underwriters' over-allotment option is 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 which
are not currently exercisable.
(4) Does not include Common Shares ( Common Shares if the
Underwriters' over-allotment option is exercised in full) issuable upon the
exercise of Class A Warrants which are not currently exercisable, and
481,143 Common Shares (531,393 Common Shares if the Underwriters' over-
allotment option is exercised in full) issuable upon the exercise of
options which are not currently exercisable. Also does not include
Common Shares issuable upon the exercise of Class A Warrants initially
acquired by Mr. Matthews 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."
(5) Does not include Common Shares ( Common Shares if the
Underwriters' over-allotment option is 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 Common Shares
issuable upon the exercise of Class A Warrants initially acquired by Mr.
Esposito and subsequently transferred to his three sons, as to which he
disclaims beneficial ownership. Each of Mr. Esposito's sons have executed
lock-up agreements for a period of one year after the date of this
Prospectus. See "Underwriting."
54
<PAGE> 57
(6) Does not include Common Shares ( Common Shares if the
Underwriters' over-allotment option is 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 Common Shares
( Common Shares if the Underwriters' over-allotment option is
exercised in full) issuable upon the exercise of Class A Warrants initially
acquired by Mr. Lichten 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."
(7) Does not include Common Shares ( Common Shares if the
Underwriters' over-allotment option is 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 Common Shares
( Common Shares if the Underwriters' over-allotment option is
exercised in full) 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."
(8) Does not include 100,000 Common Shares issuable upon the exercise of
options which are not currently exercisable.
(9) Does not include 75,000 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.
The Purpose Trust currently owns 12,000 Common Shares which constitute all
of the currently outstanding Common Shares. Upon consummation of the Offering,
the Purpose Trust has agreed to sell such Common Shares to GCA for an aggregate
price of $12,000 and such Common Shares will be cancelled.
55
<PAGE> 58
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. Esposito, 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 Offering and the sales to 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. Pursuant to
such Agreement, the Company has agreed to pay Inter-Atlantic a fee of
$3.9 million upon consummation of the Offering. 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 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 Offering. The Company is also
obligated upon consummation of the Offering to reimburse Inter-Atlantic for
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. At , 1998, Inter-Atlantic had incurred expenses in
connection with the Offering and the sales to the Strategic Investors of
approximately $ , including reimbursements it owed to ACA Service, Risk
Capital and Trident. Upon consummation of the Offering, expenses incurred by
Inter-Atlantic are currently estimated to be approximately $ ,
including reimbursements it will owe to ACA Service, Risk Capital and Trident.
In connection with the formation of the Company, American Capital Access
Holdings, L.L.C. ("ACA Holdings") an affiliate of ACA, Donald J. Matthews, five
individuals associated with Inter-Atlantic and/or its parent corporation,
Inter-Atlantic Capital Partners, Inc. (Messrs. Esposito, Hammer, Lerner, Lichten
and William S. Ogden, Jr.), Risk Capital and Trident purchased 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 Offering (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 Offering 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 and Lichten 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
Offering. In the event of a change of control of GCA, 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 Offering. See "Description
of Capital Stock -- Warrants."
The Company believes that the arrangements between the Company and the
Sponsors and certain individuals associated with the Sponsors described above
was entered into on an arm's-length basis in the
56
<PAGE> 59
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 Company has entered into four reinsurance treaties with ACA which will
become effective upon consummation of the Offering. The first treaty is a "quota
share" treaty pursuant to which the Company is required to provide, and ACA is
required to purchase, reinsurance on a fixed percentage of certain risks insured
by ACA. The second treaty is an "excess of loss" treaty pursuant to which the
Company has agreed to reinsure up to $75.0 million of the aggregate losses
incurred by ACA on its financial guaranty insurance in excess of $150.0 million
and the coverage provided by ACA's $50.0 million excess of loss reinsurance
agreement with Zurich Reinsurance (North America) Inc. The third and fourth
treaties are "facultative" treaties under which the Company and ACA each have
the right of first refusal to reinsure each financial obligation the other
insures on a direct basis. Such treaties also set forth the basic terms on which
the Company and ACA may purchase such reinsurance from the other on a
case-by-case basis after individual underwriting decisions have been made. 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, 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 shall have been
consummated.
ICS RELATIONSHIP
The Operating Company has retained ICS, a Bermuda corporation, to oversee
its investment operations. ICS will interview potential investment managers and
make recommendations to the Finance and Investment Committee of the Operating
Company's Board of Directors regarding which firms the Operating Company should
retain. ICS will monitor the performance and asset allocation of the Investment
Managers as well as analyze the sensitivity of their portion of the Operating
Company's investment portfolio to external economic factors and will report to
the Operating Company's Board of Directors on such matters. The initial term of
the contract between the Company and ICS expires on the third anniversary of the
consummation of the Offering, and the contract automatically renews for
successive one-year terms thereafter unless either party provides 90 days notice
of its decision to cancel the contract. The contract is subject to termination
by either party for cause at any time, and the Operating Company has an option
to cancel the contract, for or absent cause, after two years. Pursuant to the
contract, ICS is entitled to receive a fee equal to 0.10% of the average daily
net asset value of the Operating Company's investment portfolio on the first
$300 million of such portfolio, 0.075% of the average daily net asset value of
the Operating Company's investment portfolio on the next $100 million of such
portfolio, if any, 0.05% of the average daily net asset value of the Operating
Company's investment portfolio on the next $600 million of such portfolio, if
any, and 0.035% of the average daily net asset value of the Operating Company's
investment portfolio in excess of $1.0 billion. ICS is owned by
and and by Messrs. Esposito, Hammer, Lichten and Lerner, each of
whom is affiliated with Inter-Atlantic, and, with the exception of Mr. Lerner,
each of whom is a director of GCA and the Operating Company.
The Company believes that the agreement between the Company and ICS 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
57
<PAGE> 60
than could be obtained from an unaffiliated third party. The services to be
performed by ICS are similar to those that would otherwise be performed by a
Chief Investment Officer of the Company at a comparable expense to the Company.
ICS has also loaned $12,000 to the Purpose Trust which will be repaid upon
consummation of the Offering.
STRATEGIC INVESTOR RELATIONSHIPS
Risk Capital has agreed to purchase Common Shares and Class B Warrants to
purchase Common Shares as part of the Direct Sales. See "Direct Sales." Michael
P. Esposito, Jr., a director of the Company, is a director of Risk Capital and
Risk Capital Holdings, Inc., the parent company of Risk Capital. Charles A.
Davis, a director of the Company, currently serves as the President and Chief
Operating Officer of Marsh & McLennan Risk Capital Corp., an affiliate of Risk
Capital and Marsh & McLennan. The Company has contracted with Marsh & McLennan
to provide certain administrative services. See "Business -- Administration."
In connection with the Direct Sales to Risk Capital and Trident, the
Company has agreed to nominate for election as a director of the Company one
person selected by Risk Capital and one person selected by Trident. Risk Capital
and Trident will each have such right for so long as they own
Common Shares. In exchange for such right, and, for so long as any person
selected by Risk Capital or Trident, 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. is serving as a
director of the Company as the nominee of Risk Capital and Charles A. Davis is
serving as a director of the Company as the nominee of Trident.
MANAGEMENT RELATIONSHIPS
The Company's executive officers, Messrs. Matthews, Bantz and ,
have expressed their non-binding intention to purchase approximately
$ , $ and $ 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 are expected to purchase would be ,
and Common Shares, respectively, and, collectively, such
purchases are expected to total 100,000 Common Shares. Similarly, certain
directors of the Company have expressed their intention to purchase an aggregate
of Common Shares directly from the Company as part of the Direct
Sales. Because such Common Shares will not be sold through the Underwriters as
part of the Offering, 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
in the amounts of $ , $ and $ ,
respectively, to partially finance such purchases in the event such purchases
are completed. Such loans will bear interest at % per annum and must be repaid
within five years of the consummation of the Direct Sales. Any such purchases
will be completed simultaneously with the consummation of the Offering and the
other Direct Sales.
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.
58
<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
The following description of GCA's capital stock summarizes certain
provisions of GCA'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 GCA's Memorandum of
Association and Bye-Laws. A copy of GCA's Memorandum of Association and Bye-Laws
are filed as exhibits to the Registration Statement of which this Prospectus is
a part.
GENERAL
GCA's authorized share capital upon consummation of the Offering and the
Direct Sales will consist of: (i) 100,000,000 Common Shares, of which 24,057,197
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 3,247,715 Common Shares will be
issuable upon the exercise of outstanding Class A Warrants, an aggregate of
700,000 Common Shares will be issuable upon the exercise of Class B Warrants to
be included in the Direct Sales and an aggregate of 913,789 Common Shares will
be issuable upon the exercise of options to be granted to directors and officers
of the Company upon consummation of the Offering, in each case, subject to
adjustment as provided therein. If the Underwriters' over-allotment option is
exercised in full, 26,569,697 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 3,586,903 Common Shares and the number of Common
Shares issuable upon the exercise of options to be granted to directors and
officers of the Company upon consummation of the Offering will increase to an
aggregate of 964,039 Common Shares. The number of Common Shares issuable upon
the exercise of the Class B Warrants will not change if the Underwriters'
over-allotment option is exercised. The Class A Warrants, Class B Warrants and
options will not be exercisable upon consummation of the Offering. The Purpose
Trust currently owns 12,000 Common Shares, which constitutes all of the
currently outstanding Common Shares. Upon consummation of the Offering, the
Purpose Trust has agreed to sell such Common Shares to GCA 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 GCA'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 GCA, the
holders of Common Shares are entitled to share equally and ratably in the assets
of GCA, if any remain after the payment of all debts and liabilities of GCA 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% (except for ACA and the ACA Affiliates, which, collectively, are
limited to 17%) or more of the combined voting power of the issued voting shares
of GCA (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
59
<PAGE> 62
formula (the "Formula"), provided, however, that in the case of ACA and the ACA
Affiliates, the fraction of vote conferred will be determined by multiplying the
Formula by 1.7:
(T - C) / (9.1 X C)
Where: "T" is the aggregate number of votes conferred by all the issued shares
immediately prior to that 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
"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, issued voting shares of GCA carrying 10%
(or, in the case of ACA and the ACA Affiliates, 17%) 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. GCA'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, in the case of ACA and the ACA Affiliates, 17%) or more of a
class of GCA's shares. Similarly, GCA 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, in the case of
ACA and the ACA Affiliates, 17%) or more of a class of GCA'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 GCA, any subsidiary or shareholder thereof or any
person purchasing insurance or reinsurance from GCA or any subsidiary thereof to
adverse tax or regulatory
60
<PAGE> 63
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.
GCA'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, in the case of ACA and the ACA Affiliates, collective
ownership of 17%) or more of any class of GCA's shares or causes GCA's directors
(or their designee) to have reason to believe that such transfer may expose GCA,
any subsidiary or shareholder thereof or any person purchasing insurance or
reinsurance from GCA or any subsidiary thereof to adverse tax or regulatory
treatment in any 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 GCA'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 GCA or the Agent, but such
amounts may be used to reimburse expenses incurred by the Agent in performing
its duties.
GCA 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, have advised the
Company that while the precise form of the restrictions on transfer contained in
GCA'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 GCA.
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. GCA'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 GCA'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 GCA constitute a "controlled foreign corporation" for United States
61
<PAGE> 64
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 GCA. 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. Upon consummation of the Offering and the Direct Sales,
Class A Warrants 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 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, the Class B
Warrants and any options granted by the Company under its Stock Option Plan will
be outstanding. 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 Offering. In the event of a change of
control of GCA, 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 Offering, 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 Offering and the Direct Sales,
Class B Warrants to purchase an aggregate of 700,000 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 GCA, 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 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 Offering, there will be 913,789 Common Shares
issuable upon the exercise of outstanding options and 409,357 Common Shares
reserved for future issuance pursuant to the Stock Option Plan. If the
Underwriters' over-allotment option is exercised in full, the number of Common
Shares issuable upon exercise of outstanding options will increase to 964,039
Common Shares and the number of Common
62
<PAGE> 65
Shares reserved for future issuance pursuant to the Stock Option Plan will
increase to 497,294 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 Offering. The individuals who will be
granted options upon consummation of the Offering 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 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
GCA's Bye-Laws provide for the corporate governance of GCA, 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 GCA, 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 GCA.
GCA'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 GCA that carries the right to vote
at general shareholders' meetings.
GCA'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 GCA, any of its subsidiaries or any other
shareholder, then GCA 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. GCA 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.
GCA'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 GCA'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 GCA'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
63
<PAGE> 66
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
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 GCA'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. GCA'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.
64
<PAGE> 67
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
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.
65
<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering and the Direct Sales, GCA expects to have
outstanding 24,057,197 Common Shares, Class A Warrants to purchase an aggregate
of 3,247,715 Common Shares, Class B Warrants to purchase an aggregate of 700,000
Common Shares and options to purchase an aggregate of 913,789 Common Shares. If
the Underwriters' over-allotment option is exercised in full, 26,569,697 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
3,586,903 Common Shares and the number of Common Shares issuable upon the
exercise of outstanding options will increase to an aggregate of 964,039 Common
Shares. The number of Common Shares issuable upon exercise of the Class B
Warrants will not change if the Underwriters' over-allotment option is
exercised. The Class A Warrants, Class B Warrants and options will not be
exercisable upon consummation of the Offering. 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 Offering and any Common Shares sold in the Direct Sales to GCA'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 its directors and officers in the Direct Sales 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.
GCA, its directors and officers, the Strategic Investors and the holders of
Class A Warrants 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 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 Offering. 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 Offering 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 the Offering and before
the tenth anniversary thereof, holders of 5% or more of such Common Shares give
66
<PAGE> 69
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, holders of 30% or more of such Common Shares give 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,
holders of 30% 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 A 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.
Each of the registration rights agreements entered into by the Company
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.
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 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 Offering.
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
Offering, including sales by persons holding the Common Shares sold to the
Strategic Investors in the Direct Sales or 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.
67
<PAGE> 70
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. has agreed to purchase Common Shares and
Class B Warrants to purchase an additional Common Shares for an
aggregate purchase price of approximately $ million. 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 Offering other than the condition that the sales
in excess of $ 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 Offering when it
is consummated. The issuances to Risk Capital and Trident are each further
subject to the completion of mutually acceptable definitive purchase agreements
and other documentation and approval by Risk Capital's and Trident's respective
Boards of Directors. Risk Capital and Trident also have the right not to
consummate their investments if they are not satisfied with the terms of the
Company's reinsurance treaties with ACA, including the non-compete provision
contained in the quota share treaty. If the Offering is not consummated prior to
November 30, 1998, Risk Capital and Trident will not be obligated to complete
their purchases of Common Shares and Class B Warrants, unless the Underwriters
have advised the Company that the Offering should be delayed past such date due
to market conditions, provided that such delay may not extend for more than 90
days. If the issuance of Common Shares and Class B Warrants to Risk Capital or
Trident is not consummated prior to the consummation of the Offering, the
Company will have the option to purchase Risk Capital's and Trident's Class A
Warrants in exchange for the original purchase price therefor.
STRATEGIC INVESTOR RELATIONSHIPS
Risk Capital has agreed to purchase Common Shares and Class B Warrants to
purchase Common Shares as part of the Direct Sales. See "Direct Sales." Michael
P. Esposito, Jr., a director of the Company, is a director of Risk Capital and
Risk Capital Holdings, Inc., the parent company of Risk Capital. Charles A.
Davis, a director of the Company, currently serves as the President and Chief
Operating Officer of Marsh & McLennan Risk Capital Corp., an affiliate of Risk
Capital and Marsh & McLennan. The Company has contracted with Marsh & McLennan
to provide certain administrative services. See "Business -- Administration."
In connection with the Direct Sales to Risk Capital and Trident, the
Company has agreed to nominate for election as a director of the Company one
person selected by Risk Capital and one person selected by Trident. Risk Capital
and Trident will each have such right for so long as they own Common
Shares. In exchange for such right, and, for so long as any person selected by
Risk Capital or Trident, 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. is serving as a director of the Company
as the nominee of Risk Capital and Charles A. Davis is serving as a director of
the Company as the nominee of Trident.
68
<PAGE> 71
The Company has also agreed with Risk Capital and Trident that such parties
will mutually agree on the number of directors that will compose the Company's
Board of Directors and that Risk Capital and Trident shall assist the Company in
jointly attracting additional nominees for the Company's Board of Directors,
which nominees must be satisfactory to Risk Capital and Trident. Similarly, Risk
Capital and Trident have the right to assist the Company in jointly attracting
additional members of the Company's management team, which members must be
satisfactory to Risk Capital and Trident. The Company has also granted Risk
Capital and Trident the right to participate in the discussions held between the
Pricing Committee of the Company's Board of Directors and the Underwriters
concerning the initial public offering price per Common Share.
In addition to the sales being made to the Strategic Investors, the Company
is offering by a separate prospectus up to 100,000 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 $1.4 million. All such purchases
are expected to be consummated simultaneously with the consummation of the
Offering.
GCA 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 Offering.
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
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.
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
Offering. 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."
69
<PAGE> 72
CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of GCA and the Operating Company and
the taxation of GCA'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 GCA AND THE OPERATING COMPANY
Bermuda
Under current Bermuda law, there is no income tax or capital gains tax
payable by GCA or the Operating Company. GCA 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 GCA, the Operating Company or to any of their operations or the
shares, debentures or other obligations of GCA or the Operating Company until
March 2016. 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 (GCA and the Operating 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 GCA or the Operating Company. GCA
and the Operating Company, under current rates, will pay annual Bermuda
government fees of $15,900 and $3,460, respectively, and the Operating Company
will pay annual insurance fees of $2,500.
United States
GCA's Board of Directors has adopted operating guidelines, developed in
consultation with its United States counsel, that prescribe how GCA and the
Operating 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, GCA 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 GCA and/or the Operating
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% 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
70
<PAGE> 73
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 GCA'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%.
Other Countries
GCA 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 as
described above 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 beyond that contemplated above.
TAXATION OF SHAREHOLDERS
Bermuda Taxation
Currently, there is no Bermuda withholding tax on dividends paid by GCA 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
71
<PAGE> 74
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 GCA 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 GCA's share ownership following the Offering and the restrictions
on transfer, issuance or repurchase of Common Shares, and because GCA's Bye-Laws
provide that no single shareholder other than Trident is permitted to hold 10%
(except for ACA and the ACA Affiliates, which, collectively, are limited to 17%)
or more of the total combined voting power of GCA, and because Trident is not a
United States person and ACA and the ACA Affiliates will own less than 25% of
the total combined voting power or total value of GCA's stock, shareholders of
GCA should not be viewed as United States shareholders of a CFC for purposes of
these rules. 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.
72
<PAGE> 75
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.
GCA does not expect that the Operating Company will enter into insurance or
reinsurance arrangements in which, in the aggregate, the direct or indirect
insureds are, or are related to, owners of 20% or more of the Common Shares. If
this expectation is correct, exception (i) will, and exception (ii) may, apply
to the Operating Company. 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 whether either of these 20% tests is
or is not met as of any particular point in time. If neither of these exceptions
were to apply, each United States person owning, directly or indirectly, stock
in GCA (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 GCA'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 GCA 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 GCA 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 GCA on the last day of GCA's taxable year would be
required to attach to the income tax or information return such
73
<PAGE> 76
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 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, GCA intends to provide Form 5471 to its direct or indirect United States
shareholders for attachment to the returns of shareholders. The amounts of the
RPII inclusions may be subject to adjustment based upon subsequent IRS
examination. A tax-exempt organization would be required to 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 GCA 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 GCA 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
74
<PAGE> 77
discussed above, shareholders of 10% or more of the shares of GCA 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 GCA 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, GCA would
notify shareholders that Section 1248 of the Code and the requirement to file
Form 5471 will apply to dispositions of Common Shares. Thereafter, GCA 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 Shares. GCA
would attach to this notice a copy of Form 5471 completed with all GCA
information and instructions for completing the shareholder information.
Foreign Tax Credit. Because it is anticipated that United States persons
will own a majority of GCA'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 GCA (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. GCA 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 GCA 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 GCA'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
75
<PAGE> 78
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 GCA should be deemed to own the assets and to have
received the income of the Operating Company directly for purposes of
determining whether GCA 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. There can be no assurance, however, as to what
positions the IRS or a court might take in the future on whether GCA 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 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 GCA.
* * *
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.
76
<PAGE> 79
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Prudential Securities Incorporated and
are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
underwriting agreement (the "Underwriting Agreement"), to purchase from GCA the
number of Common Shares set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Prudential Securities Incorporated..........................
----------
Total.......................................... 16,750,000
==========
</TABLE>
GCA is obligated to sell, and the Underwriters are obligated to purchase,
all of the Common Shares set forth above if any are purchased. The closing of
the Offering made hereby is conditioned upon the simultaneous closing of sales
by GCA to the Strategic Investors in the Direct Sales of Common Shares and
related Class B Warrants with an aggregate purchase price of at least
$ million.
The Underwriters, through the Representatives, have advised GCA that they
propose to offer the Common Shares set forth above initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share; and
that such dealers may reallow a concession of $ per share to certain other
dealers. After the Offering, the initial public offering price and the
concessions may be changed by the Representatives.
GCA has granted to the Underwriters an over-allotment option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 2,512,500
additional Common Shares at the initial public offering price per share, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering any over-allotments incurred in the sale of the Common Shares offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional Common Shares as the number set forth next to such
Underwriter's name in the preceding table bears to 16,750,000.
GCA, 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, GCA, 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 GCA or any other securities convertible into, or
exercisable or exchangeable for, any Common Shares or other capital stock of GCA
for a period of one year after the date of this Prospectus or, in the case of
the Strategic Investors, for a period of after the date of this
77
<PAGE> 80
Prospectus. Such agreements do not prevent GCA 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, GCA 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. GCA 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.
GCA has agreed to indemnify the several Underwriters and contribute to
losses arising out of certain liabilities, including liabilities under the
Securities Act.
The Representatives have informed GCA that the Underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Common
Shares. The initial public offering price was determined by GCA and the
Representatives as an appropriate per share price in light of the Company's
desired capitalization.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Shares.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Shares for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Shares in connection with the Offering than
they are committed to purchase from GCA, and in such case may purchase Common
Shares in the open market following completion of the Offering to cover all or a
portion of such short position. The Underwriters may also cover all or a portion
of such short position, up to 2,512,500 Common Shares, by exercising the
Underwriters' over-allotment option referred to above. In addition, Merrill
Lynch & Co. and Prudential Securities Incorporated on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby they may reclaim from an Underwriter (or any selling group
member participating in the Offering) for the account of the other Underwriters,
the selling concession with respect to Common Shares that are distributed in the
Offering but subsequently purchased by Merrill Lynch & Co. for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Shares at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required and, if they are
undertaken, they may be discontinued at any time.
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 Offering 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 GCA and the Operating Company in 1998 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 Offering pursuant to the Stock Option Plan. See "Management -- Provisions
Governing the Board of Directors." Certain matters as to United States law in
connection with the Offering will be passed upon for the Underwriters by Cleary,
Gottlieb, Steen & Hamilton, New York, New York.
78
<PAGE> 81
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.
ADDITIONAL INFORMATION
GCA 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 GCA 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 Offering, GCA 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 GCA,
that file electronically with the Commission.
After giving effect to the Offering, GCA 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), GCA does not expect that it will be a "foreign private issuer," although
there is no assurance of such. If GCA 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."
GCA 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.
79
<PAGE> 82
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.
Assumption reinsurance........ An arrangement under which an insurance company
(the reinsurer) agrees to assume the
obligations of another insurance company (the
"ceding company" or "cedent") for all defined
insurance risks underwritten by the ceding
company. Assumption reinsurance written
effectively transfers the ceding company's
obligations to the reinsurer and, in most
cases, eliminates the ceding company's further
liability to the insured.
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.
Capacity...................... The measure of an insurer's financial ability
to issue contracts of insurance, usually
determined by the largest amount acceptable on
a given risk or, in certain other situations,
by the maximum volume of business it is
prepared to accept.
Cedent; Ceding company........ See "Reinsurance; Reinsurer."
Coinsurance................... A form of proportional reinsurance with respect
to which the risk generally is reinsured on the
same plan as that of the original policy. The
reinsurer receives the gross premium charged to
the policyholder, less a proportionate amount
of expenses. The reinsurer maintains policy
reserves and is liable for its proportionate
share of policy benefits.
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 Rat-
80
<PAGE> 83
ing 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
obligations when due. However, present or
prospective financial protection factors
fluctuate according to industry conditions or
company fortunes.
Duration...................... A measure, expressed in years, of the price
sensitivity of a financial instrument to
changes in interest rates.
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
81
<PAGE> 84
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.
Indemnity reinsurance......... An arrangement under which an insurance company
(the reinsurer) agrees to indemnify another
insurance company (the "ceding company" or
"cedent") for all or a portion of the insurance
risks underwritten by the ceding company.
Reinsurance written on an indemnity basis does
not legally discharge the ceding insurer from
its liability with respect to its obligations
to the insured.
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.
Leverage ratio................ The ratio of insurance in force to qualified
statutory capital.
Loss ratio.................... The quotient derived by dividing losses and
loss adjustment expenses incurred by net
premiums earned on a GAAP basis.
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).
82
<PAGE> 85
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 assigns an "A"
rating 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.
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.
Statutory capital and
surplus....................... The sum of capital and surplus required by
statute or regulation.
Treaty reinsurance............ See "Automatic reinsurance."
83
<PAGE> 86
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.
Underwriting expenses......... The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
Unearned premiums............. Premiums written but not yet earned, as they
are attributable to the unexpired portion of
the related insurance contract term.
84
<PAGE> 87
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
</TABLE>
F-1
<PAGE> 88
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
GCA Ltd.
We have audited the accompanying consolidated balance sheet of 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> 89
GCA LTD.
CONSOLIDATED BALANCE SHEET
AUGUST 28, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA(A)
------------
<S> <C> <C>
ASSETS
Cash........................................................ $120,000 $ --
-------- --------
Total Assets...................................... $120,000
========
LIABILITIES (NOTE 3)
Accounts payable............................................ $ -- $ --
======== ========
Total Liabilities................................. $ $
======== ========
STOCKHOLDERS' 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 --(b)
Accumulated deficit......................................... -- $ --(c)
-------- --------
Total stockholders' equity........................ $120,000 $ --
======== ========
Total liabilities and stockholders' equity.................. $120,000 $ --
======== ========
</TABLE>
- ---------------
(a) A pro forma balance sheet has been presented for information purposes only
and does not form part of the audited consolidated balance sheet. The pro
forma gives effect to the amounts payable to Inter-Atlantic Securities
Corporation ("Inter-Atlantic") and other expenses associated with the
proposed initial public offering of the Company's common shares (the
"Offering") and the proposed private placement of the Company's common
shares to certain institutional investors (the "Strategic Investors") that
will be paid out of the proceeds of such offerings, as if they had taken
place on August 28, 1998. The pro forma does not give effect to the proceeds
that would be received from the Offering and the sales to the Strategic
Investors.
(b) Reflects amounts payable upon consummation of the Offering of $3.9 million
to Inter-Atlantic for certain advisory services related to the Offering and
the sales to the Strategic Investors; and $ million for estimated
out-of-pocket expenses consisting of legal, accounting and printing expenses
as well as filing fees and other costs related to the Offering and the sales
to the Strategic Investors.
(c) Reflects estimated expenses incurred by Inter-Atlantic in connection with
the Company's operations in the period subsequent to August 28, 1998 for
which Inter-Atlantic is entitled to be reimbursed by the Company upon
consummation of the Offering.
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 90
GCA LTD.
NOTES TO CONSOLIDATED BALANCE SHEET
1. ORGANIZATION
GCA Ltd. ("GCA") was incorporated on August 7, 1998 under the laws of
Bermuda to provide financial guaranty reinsurance and insurance. GCA will
operate through a wholly-owned subsidiary, Global Capital Access, Ltd. (the
"Operating Company" and, together with GCA, 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
A case basis reserve for unpaid losses and loss adjustment expenses is
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. The estimated loss on a transaction is discounted using
then-current risk-free rates.
The Company intends to establish a general reserve by applying a loss
factor to earned premium income. The loss factor used for this purpose has been
determined based upon an independent rating agency study of bond defaults. The
general reserve is available to be applied against future additions or
accretions to existing case basis reserves or to new case basis reserves to be
established in the future.
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
necessarily 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.
F-4
<PAGE> 91
GCA LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(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 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
F-5
<PAGE> 92
GCA LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
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.
The Operating Company has retained ICS to oversee its investment
operations. ICS will monitor the performance of the investment managers retained
by the Operating Company to manage its investment portfolio and report to the
Operating Company's Board of Directors on their performance. ICS is entitled to
receive a fee equal to 0.10% of the average daily net asset value of the
Operating Company's investment portfolio on the first $300 million of such
portfolio, 0.075% of the average daily net asset value of the Operating
Company's investment portfolio on the next $100 million of such portfolio, if
any, 0.05% of the average daily net asset value of the Operating Company's
investment portfolio on the next $600 million of such portfolio, if any, and
0.035% of the average daily net asset value of the Operating Company's
investment portfolio in excess of $1.0 billion. ICS is owned by Messrs.
Esposito, Hammer, Lichten and Lerner, each of whom is affiliated with
Inter-Atlantic, and, with the exception of Mr. Lerner, each of whom is a
director of GCA and the Operating Company.
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
F-6
<PAGE> 93
GCA LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
condition that an initial public offering of not less than 18,000,000 common
shares of the Company shall have been consummated.
4. STOCKHOLDERS' 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.
F-7
<PAGE> 94
GCA LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
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 purchase 75,000 Common Shares; Messrs. Esposito, Hammer and Lichten
will receive options to acquire 33,333 common shares; the director to be
designated by 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 December 31, 1998. 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.
In addition, directors shall receive cash of BD$20,000 per annum plus
BD$1,000 per board or committee meeting attended. The non-employee Deputy
Chairman of the Board and non-employee Committee Chairmen shall receive an
additional BD$1,000 per annum.
6. TAXATION
Under current Bermuda law neither GCA nor the Operating Company is required
to pay any taxes in Bermuda on either income or capital gains. GCA 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 GCA, the Operating
Company or to any of their operations or the shares, debentures or other
obligations of GCA or the Operating Company until March 2016.
GCA 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.
GCA's ability to pay dividends depends on the ability of the Operating
Company to pay dividends to GCA. While GCA itself is not subject to any
significant legal prohibitions on the payment of dividends, the Operating
Company will be subject to Bermuda regulatory constraints which affect its
ability to pay dividends to GCA. The Operating Company will be prohibited from
declaring or paying a dividend if such payment would reduce its statutory
surplus below $1,000,000.
F-8
<PAGE> 95
GCA LTD.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
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 $150.0 million from the Offering when
it is consummated.
F-9
<PAGE> 96
- ---------------------------------------------------------
- ---------------------------------------------------------
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............................ 21
Capitalization............................. 22
Dividend Policy............................ 23
Dilution................................... 24
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 25
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 26
Business................................... 30
Overview of the Financial Guaranty
Industry................................. 44
Management................................. 46
Principal Stockholders..................... 54
Certain Relationships and Related Party
Transactions............................. 56
Description of Capital Stock............... 59
Shares Eligible for Future Sale............ 66
Direct Sales............................... 68
Certain Tax Considerations................. 70
Underwriting............................... 77
Legal Matters.............................. 78
Experts.................................... 79
Additional Information..................... 79
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 80
Index to Consolidated Balance Sheet........ F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
16,750,000 SHARES
GCA LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
Joint Lead Managers
and Joint Bookrunners
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
, 1998
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 97
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 SEPTEMBER 2, 1998
PROSPECTUS
100,000 SHARES
GCA LTD.
COMMON SHARES
------------------------
All of the 100,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby are being sold by GCA Ltd. ("GCA"). GCA 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 Offering
(as defined below), less the per share underwriting discounts and commissions
therein, for an aggregate purchase price if all such Common Shares are sold of
approximately $1.4 million. GCA is also offering by a separate prospectus up to
16,750,000 Common Shares in an underwritten initial public offering, at an
initial public offering price of $15.00 per Common Share, and unless the context
otherwise requires, references herein to the "Offering" are to such underwritten
offering. This Prospectus is identical to the prospectus used in connection with
the Offering (the "Offering 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 Offering
Prospectus. The offering made hereby will be consummated simultaneously with the
consummation of the Offering. Prior to the Offering, GCA has not conducted any
business and there has been no public market for the Common Shares.
In connection with the formation of GCA and the establishment of a core
group of strategic investors, Risk Capital Reinsurance Company, The Trident
Partnership, L.P. and (collectively, the "Strategic Investors")
have severally agreed to purchase for investment directly from GCA an aggregate
of 7,092,197 Common Shares and Class B Warrants to purchase an aggregate of
700,000 Common Shares. Such purchases will be consummated immediately prior to
the consummation of the Offering for an aggregate purchase price for the Common
Shares and the Class B Warrants of approximately $100.0 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. GCA has also contracted to sell
115,000 Common Shares directly to certain of its directors and officers at a
price of $14.10 per Common Share, for an aggregate purchase price of
approximately $1.6 million. All such purchases will be consummated
simultaneously with the consummation of the Offering. Such purchases by such
directors and officers, 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."
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 "GCALF."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except with respect to certain exempted
holders 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 GCA's capital stock. See "Description of Capital Stock."
SEE "RISK FACTORS" ON PAGES 10 TO 20 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN 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.
, 1998
<PAGE> 98
[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 Offering, less the per share
underwriting discounts and commissions. Such sales are to be consummated
simultaneously with the Offering.
<PAGE> 99
[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 , 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............................ 21
Capitalization............................. 22
Dividend Policy............................ 23
Dilution................................... 24
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 25
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 26
Business................................... 30
Overview of Financial Guaranty Industry.... 44
Management................................. 46
Principal Stockholders..................... 54
Certain Relationships and Related Party
Transactions............................. 56
Description of Capital Stock............... 59
Shares Eligible for Future Sale............ 66
Direct Sales............................... 68
Certain Tax Considerations................. 70
Legal Matters.............................. 78
Experts.................................... 79
Additional Information..................... 79
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 80
Index to Consolidated Balance Sheet........ F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
100,000 SHARES
GCA LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
, 1998
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 100
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................................................ $3,900,000
Quotation Fees -- The Nasdaq National Market................ 95,000
Filing Fee -- Securities and Exchange Commission............ 85,680
Filing Fee -- National Association of Securities Dealers,
Inc. ..................................................... 29,544
Fees and Expenses of Counsel................................ *
Printing Expenses........................................... *
Reimbursement of other expenses to Inter-Atlantic Securities
Corporation............................................... *
Fees and Expenses of Accountants............................ *
Miscellaneous Expenses...................................... *
Blue Sky Fees and 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 Underwriting Agreement to be filed as
Exhibit 1.1 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> 101
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 Offering 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 Offering (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 Offering, 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 Offering (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 Offering, 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 Offering (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 Offering, 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.
II-2
<PAGE> 102
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting 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 August , 1998, between
Donald J. Matthews and the Registrant and the Operating
Company.
10.2* GCA Ltd. Initial Stock Option Plan.
10.3* Agreement, dated as of August , 1998, between
Inter-Atlantic Securities Corporation and the Registrant.
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, and
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, and
and the Registrant.
10.8* Quota Share Reinsurance Treaty, dated as of August , 1998,
between ACA Financial Guaranty Corporation and Global
Capital Access, Ltd.
10.9* Excess of Loss Reinsurance Treaty, dated as of August ,
1998, between ACA Financial Guaranty Corporation and Global
Capital Access, Ltd.
10.10* Master Facultative Reinsurance Treaty, dated as of August
, 1998, between ACA Financial Guaranty Corporation and
Global Capital Access, Ltd.
10.11* Master Facultative Reinsurance Treaty, dated as of August
, 1998, between Global Capital Access, Ltd. and ACA
Financial Guaranty Corporation.
10.12* Employment Agreement, dated as of August , 1998, between
Bruce W. Bantz and the Registrant and the Operating Company.
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).
23.4** Consent of KPMG Peat Marwick.
99.1** Form F-N.
99.2** Consent of Charles A. Davis.
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
II-3
<PAGE> 103
(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> 104
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 Hamilton,
Bermuda, the City of Philadelphia, Commonwealth of Pennsylvania, the City of
Newark, State of Delaware and the City of New York, State of New York, on the
31st day of August, 1998.
GCA LTD.
By:/s/ DONALD J. MATTHEWS
------------------------------------
Donald J. Matthews
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each 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 this Registration Statement, 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 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.
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 Chairman of the Board and Chief August 31, 1998
- ------------------------------------- Executive Officer (Principal
Donald J. Matthews Executive Officer)
/s/ ANDREW S. LERNER Interim Chief Financial Officer and August 31, 1998
- ------------------------------------- Interim Treasurer (Principal
Andrew S. Lerner Financial and Accounting Officer)
/s/ ROBERT M. LICHTEN Deputy Chairman of the Board August 31, 1998
- -------------------------------------
Robert M. Lichten
/s/ CHARLES G. COLLIS Director and Secretary August 31, 1998
- -------------------------------------
Charles G. Collis
/s/ MICHAEL P. ESPOSITO, JR. Director August 31, 1998
- -------------------------------------
Michael P. Esposito, Jr.
</TABLE>
II-5
<PAGE> 105
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director August 31, 1998
- -------------------------------------
H. Russell Fraser
/s/ FREDERICK S. HAMMER Director August 31, 1998
- -------------------------------------
Frederick S. Hammer
/s/ WILLIAM M. GOLDSTEIN Director August 31, 1998
- -------------------------------------
William M. Goldstein
/s/ DONALD J. PUGLISI Authorized Representative in the August 31, 1998
- ------------------------------------- United States
Donald J. Puglisi
</TABLE>
II-6
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting 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 August , 1998, between
Donald J. Matthews and the Registrant and the Operating
Company.
10.2* GCA Ltd. Initial Stock Option Plan.
10.3* Agreement, dated as of August , 1998, between
Inter-Atlantic Securities Corporation and the Registrant.
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, and
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, and
and the Registrant.
10.8* Quota Share Reinsurance Treaty, dated as of August , 1998,
between ACA Financial Guaranty Corporation and Global
Capital Access, Ltd.
10.9* Excess of Loss Reinsurance Treaty, dated as of August ,
1998, between ACA Financial Guaranty Corporation and Global
Capital Access, Ltd.
10.10* Master Facultative Reinsurance Treaty, dated as of August
, 1998, between ACA Financial Guaranty Corporation and
Global Capital Access, Ltd.
10.11* Master Facultative Reinsurance Treaty, dated as of August
, 1998, between Global Capital Access, Ltd. and ACA
Financial Guaranty Corporation.
10.12* Employment Agreement, dated as of August , 1998, between
Bruce W. Bantz and the Registrant and the Operating Company.
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).
23.4** Consent of KPMG Peat Marwick.
99.1** Form F-N.
99.2** Consent of Charles A. Davis.
</TABLE>
- ---------------
* To be filed by amendment.
** Filed herewith.
<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%
Inter-Atlantic Capital Partners, Inc. 1.50000%
William S. Ogden, Jr. 0.33470%
</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
- 6 -
<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
- 7 -
<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.
- 9 -
<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
- 12 -
<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: ____________________________
- 14 -
<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 10.4
GCA LTD.
-------------------------------------------------------------
CLASS A WARRANT PURCHASE AGREEMENT
-------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
PAGE
1. PURCHASE AND SALE OF CLASS A WARRANTS.............................1
1.1 Issue of Class A Warrants................................1
2. CLOSING DATE; DELIVERY............................................2
2.1 Closing..................................................2
2.2 Delivery.................................................2
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................2
3.1 Organization.............................................2
3.2 Capitalization...........................................2
3.3 Authority................................................2
3.4 Issuance of Shares.......................................3
3.5 No Conflict with Law or Documents........................3
3.6 Consents, Approvals and Private Offering.................3
3.7 Litigation...............................................3
3.8 Conformity with Legal Requirements.......................3
3.9 Contracts and Commitments................................3
3.10 Registration Rights......................................4
3.11 No Brokers or Finders....................................4
3.12 Disclosures..............................................4
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS..................4
4.1 Legal Power..............................................4
4.2 Due Execution............................................4
4.3 Investment Representations...............................5
5. COVENANTS OF THE COMPANY..........................................7
5.1 Information..............................................7
6. TRANSFER RIGHTS AND RESTRICTIONS..................................8
6.1 Right of First Refusal...................................8
7. CONDITIONS TO CLOSING............................................10
7.1 Conditions to Obligations of the Purchaser..............10
7.2 Conditions to Obligations of the Company................11
8. MISCELLANEOUS....................................................11
8.1 Governing Law...........................................11
8.2 Survival................................................11
8.3 Successors and Assigns..................................11
8.4 Entire Agreement........................................11
8.5 Separability............................................11
8.6 Amendment and Waiver....................................12
-i-
<PAGE> 3
8.7 Notices.................................................12
8.8 Fees and Expenses.......................................12
8.9 Titles and Subtitles....................................12
8.10 Counterparts............................................12
-ii-
<PAGE> 4
GCA LTD.
CLASS A WARRANT PURCHASE AGREEMENT
This Class A Warrant Purchase Agreement (this "Agreement") is made as
of August 25, 1998 by and among GCA Ltd., a Bermuda corporation (the "Company"),
and each of the purchasers who are signatories hereto (individually, a
"Purchaser" and collectively, the "Purchasers").
In consideration of the mutual promises, representations, warranties
and conditions set forth in this Agreement, the Company and each Purchaser
(severally and not jointly), intending to be legally bound, agree as follows:
1. PURCHASE AND SALE OF CLASS A WARRANTS.
1.1 Issue of Class A Warrants.
(a) The Company has authorized the issuance and sale of Class
A Warrants, in the form set forth as Exhibit A hereto (the "Warrants"), to
purchase up to an aggregate number of its Common Shares, par value $1.00 per
share, (the "Common Shares") equal to 13.5% of the sum of (i) the Common Shares
outstanding immediately following the consummation of the Company's initial
public offering of its Common Shares (the "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.
(b) In reliance upon each Purchaser's representations and
warranties contained in Section 4 hereof and subject to the terms and conditions
set forth herein, the Company hereby agrees to sell to each Purchaser Warrants
to purchase the number of Common Shares set forth below such Purchaser's
signature on the signature page bearing such Purchaser's name at the purchase
price set forth on such signature page.
(c) In reliance upon the representations and warranties of the
Company contained in Section 3 hereof, and subject to the terms and conditions
set forth herein, each Purchaser hereby agrees to purchase the Warrants set
forth on the signature page bearing such Purchaser's name. Each Purchaser shall
severally, and not jointly, be liable for only the purchase of the Warrants that
appear on the signature page hereof that relates to such Purchaser.
(d) The Company's agreement with each of the Purchasers is a
separate agreement, and the sale of the Warrants to each of the Purchasers is a
separate sale.
<PAGE> 5
2. CLOSING DATE; DELIVERY.
2.1 Closing. The closing of the sale and purchase of the Warrants under
this Agreement (the "Closing"), shall be held at 10:00 a.m. (Bermuda Time) at
the offices of the Company on the date hereof, or at such other time or on such
other date as the Purchasers and the Company may mutually agree (the "Closing
Date").
2.2 Delivery. At the Closing, subject to the terms and conditions
hereof, the Company shall deliver to each Purchaser Warrants, registered in the
name of each Purchaser or its nominee, representing the Warrants to be purchased
by each such Purchaser from the Company, dated as of the Closing Date, against
payment of the purchase price therefor by wire transfer, unless other means of
payment shall have been agreed upon by such Purchaser and the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each Purchaser as of the
date hereof as follows:
3.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of Bermuda. The Company has all
requisite power and authority to own and lease its properties and to conduct its
business as now conducted.
3.2 Capitalization. On the date hereof, the authorized capital stock of
the Company consists of 100,000,000 Common Shares, and 50,000,000 Preferred
Shares, par value $1.00 per share, of which 12,000 Common Shares and no
Preferred Shares are issued and outstanding. All of the issued and outstanding
Common Shares have been duly authorized, validly issued and are fully paid and
nonassessable. Except as set forth on Schedule 3.2, there are no existing
subscriptions, options, warrants, calls, commitments, agreements, conversion or
other rights of any character (contingent or otherwise) to purchase or otherwise
acquire from the Company at any time, or upon the happening of any stated event,
any shares of the capital stock of the Company. The Company has reserved a
sufficient number of Common Shares to issue upon exercise of all of the
Warrants.
3.3 Authority. The Company has all requisite power and authority to
enter into this Agreement and the Registration Rights Agreement (as described in
Section 7.1(c) herein), and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the Registration
Rights Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on the
part of the Company and, upon their execution and delivery by the Company, such
documents will constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, except as the
indemnification and contribution
-2-
<PAGE> 6
provisions of the Registration Rights Agreement may be limited by principles of
public policy, and, as to enforceability, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or affecting
creditor's rights from time to time in effect and subject to general equity
principles.
3.4 Issuance of Shares. The Warrants, when issued against payment
therefor pursuant to the terms of this Agreement, and the Common Shares issuable
upon exercise of the Warrants (the "Warrant Shares"), when issued against
payment therefor pursuant to the terms of the Warrants, will be duly and validly
authorized and issued, fully paid and nonassessable, and shall have been issued
in compliance with all applicable laws.
3.5 No Conflict with Law or Documents. The execution, delivery and
consummation of this Agreement and the Registration Rights Agreement and the
transactions contemplated hereby and thereby will not (a) conflict with any
provisions of the Memorandum of Association or Bylaws of the Company; or (b)
result in any violation of or default or loss of a benefit under, or permit the
acceleration of any obligation under (in each case, upon the giving of notice,
the passage of time, or both) any mortgage, indenture, lease, agreement or other
instrument, permit, franchise, license, judgment, order, decree, law, ordinance,
rule or regulation applicable to the Company.
3.6 Consents, Approvals and Private Offering. Except for any filings
required under applicable securities laws, all of which shall have been made as
of the Closing Date to the extent required as of such time, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any governmental authority is required to be made or obtained by the
Company in connection with the execution and delivery of this Agreement and the
Registration Rights Agreement and the consummation of the transactions
contemplated hereby and thereby.
3.7 Litigation. There are no actions, suits, notices, hearings,
inquiries, proceedings or investigations pending or, to the Company's knowledge
threatened, against or affecting the Company that in the aggregate could
reasonably be anticipated to result in any material adverse effect on the
Company. Neither the Company nor, to the Company's knowledge, any of its
officers or directors, is subject to any order, writ, injunction or decree of
any court or of any federal, state, municipal or other domestic or foreign
governmental department, commission, board, bureau, agency or instrumentality.
3.8 Conformity with Legal Requirements. The operations of the Company
as now conducted are not in violation of, nor is the Company in default under,
any applicable law, statute, standard, ordinance, code, consent, registration,
order, rule, regulation, or judgement of any court, arbitrator, tribunal or
governmental authority (collectively, "Laws") presently in effect, except for
violations and defaults as do not and could not reasonably be expected to, in
the aggregate, have a material adverse effect on the Company.
3.9 Contracts and Commitments. Except as set forth on Schedule 3.9
attached hereto, the Company does not have any contract, obligation or
commitment which is or involves a potential material commitment or any stock
redemption or stock purchase agreement, financing
-3-
<PAGE> 7
agreement, license, lease, or stock option plan. For purposes of this Section
3.9, a contract, obligation or commitment shall be deemed material if it
requires future expenditures by the Company in excess of $100,000 or may
reasonably be expected to result in payments to the Company in excess of
$100,000.
3.10 Registration Rights. The Company has not granted any rights
relating to registration of its capital stock under the Securities Act of 1933,
as amended (the "Act") or state securities laws other than those contained in
the Registration Rights Agreement.
3.11 No Brokers or Finders. No person has or will have, as a result of
the transactions contemplated by this Agreement, any right, interest or claim
against or upon the Company for any commission, fee or other compensation as a
finder or broker because of any act or omission by the Company.
3.12 Disclosures. Neither this Agreement, any Schedule nor any Exhibit
to this Agreement contains any untrue statement of material fact or omits to
state any material fact necessary to make the statements contained herein or
therein not misleading.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser hereby severally represents and warrants to,
and covenants with the Company as follows:
4.1 Legal Power. If such Purchaser is a corporation, partnership or
trust, it has the requisite corporate, partnership, trust or fiduciary power, as
appropriate, and is authorized, to enter into this Agreement and the
Registration Rights Agreement, to purchase the Warrants hereunder, and the
Warrant Shares for which such Warrants may be exercised, and to carry out and
perform its obligations under the terms of this Agreement and the Registration
Rights Agreement. If such Purchaser is an individual, it has full legal right,
power and authority to enter into this Agreement and the Registration Rights
Agreement, to purchase the Warrants hereunder, and the Warrant Shares for which
such Warrants may be exercised, and to carry out and perform its obligations
under the terms of this Agreement and the Registration Rights Agreement.
4.2 Due Execution. Each of this Agreement and the Registration Rights
Agreement has been duly authorized (and, if such Purchaser is a corporation,
partnership, trust or fiduciary, executed and delivered) by such Purchaser, and,
upon due execution and delivery by the Company, this Agreement and the
Registration Rights Agreement will be valid and binding agreements of such
Purchaser, enforceable against such Purchaser in accordance with their terms,
except as the indemnification and contribution provisions of the Registration
Rights Agreement may be limited by principles of public policy, and, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
relating to or affecting creditor's rights from time to time in effect and
subject to general equity principles.
-4-
<PAGE> 8
4.3 Investment Representations. Each Purchaser acknowledges that:
(a) the availability of the exemption from registration under
the Act relied upon by the Company in issuing the Warrants is dependent, in
part, upon the truth of the representations made herein;
(b) such Purchaser is thoroughly familiar with the proposed
business of the Company and has made all investigations thereof which such
Purchaser deems necessary or desirable;
(c) such Purchaser has such knowledge and experience in
financial, tax, and business matters in general, and investments and securities
in particular, as to enable such Purchaser to evaluate the merits and risks of
an investment in the Warrants and to make an informed investment decision with
respect thereto;
(d) such Purchaser is familiar with the business, lack of past
performance, and prospects of the Company, including the risks associated
therewith;
(e) such Purchaser: (1) has had the opportunity to obtain all
information requested by him for any purpose related to this Agreement and the
transactions contemplated hereby; and (2) has had the opportunity to meet with
representatives of the Company and to have them answer any questions and provide
such additional information regarding the terms and conditions of the
transactions contemplated hereby and the business and prospects of the Company,
as deemed relevant by such Purchaser, all of which questions have been answered
and all of such requested information has been provided to the full satisfaction
of such Purchaser. Such Purchaser is aware that an investment in the Warrants is
speculative and involves significant risks, including, among other things, the
risk of the loss of such Purchaser's entire investment in the Warrants and the
Warrant Shares;
(f) such Purchaser is an "accredited investor" as such term is
defined in Rule 501 of the Act and was not formed for the specific purpose of
acquiring the Warrants. The definition of accredited investor appears as Exhibit
B to this Agreement;
(g) neither the Securities and Exchange Commission (the "SEC")
nor any state securities commission has approved the Warrants or the Warrant
Shares to be received by such Purchaser or passed upon or endorsed the merits of
an investment therein or confirmed the accuracy or adequacy of any information
provided by the Company to such Purchaser;
-5-
<PAGE> 9
(h) neither the Warrants nor the Warrant Shares are registered
under the Act or under any applicable state securities law and must be held
indefinitely unless they are subsequently so registered or unless an exemption
from such registration is available;
(i) except as provided in the Registration Rights Agreement,
the Company is under no obligation to register the Warrants or the Warrant
Shares under any circumstances or to attempt to make available any exemption
from registration under the Act or any applicable state securities law, at such
Purchaser's expense or otherwise;
(j) such Purchaser recognizes that he must bear the
substantial economic risks of his investment in the Warrants and the Warrant
Shares and that such Warrants and Warrant Shares may not be sold, transferred,
hypothecated or otherwise disposed of unless they are subsequently registered
under the Act pursuant to the filing of an effective registration statement and
under applicable state securities laws or exemption from such registration is
available and there is provided to the Company by such Purchaser an opinion of
counsel satisfactory to the Company or no-action letters from the SEC and any
appropriate state regulatory agencies to the effect that registration under the
Act and any applicable state securities law is not required in connection with
the transaction. Each of the Warrants and each certificate representing Warrant
Shares 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 will bear the following legend, or one similar
thereto, drawing attention to the restrictions on its transferability:
"THE SECURITIES EVIDENCED 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.
(k) if, at a time when registration is required, it is legally
permissible for the Purchaser to sell the Warrants or Warrant Shares privately
without registration, the Warrants and Warrant Shares so sold will be restricted
in the hands of the purchaser. In the event that there is a public market for
the Warrants or Warrant Shares at that time, such purchaser may only be willing
to pay a price less than the price for unrestricted securities; and
(l) such Purchaser (1) is aware that any routine sales under
Rule 144 of the SEC under the Act of the Warrants and the Warrant Shares may be
made only in limited amounts
-6-
<PAGE> 10
and in accordance with the terms and conditions of that Rule and that in such
cases where the Rule is not applicable, compliance with some other registration
exemption will be required; and (2) is aware that Rule 144 is not presently
available for use by the Purchaser for resale of such Warrants and Warrant
Shares; and
(m) such Purchaser's principal residence is set forth next to
such Purchaser's name on the signature page to this Agreement.
5. COVENANTS OF THE COMPANY
5.1 Information.
(a) If the Company becomes subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to Sections 13 or 15(d), the Company shall deliver to each
holder of Warrants all annual, quarterly or other reports to the extent
furnished to its public security holders.
(b) If the Company is not subject to the requirements of
Sections 13 or 15(d) of the Exchange Act, the Company shall cause to be
furnished promptly to each holder of Warrants, so long as such holder owns
Warrants to acquire at least 5,000 Warrant Shares, (i) as soon as available, and
in any event within 150 days after the end of each fiscal year of the Company, a
consolidated balance sheet of the Company and its consolidated subsidiaries, if
any, as of the end of such fiscal year and the related consolidated statements
of income, stockholders' equity and cash flows for such fiscal year, setting
forth in each case in comparative form the figures for the previous fiscal year,
all prepared in accordance with generally accepted accounting principles and
reported on by independent certified public accountants; and (ii) as soon as
available, and in any event within 45 days after the end of each of the first
three fiscal quarters of each fiscal year of the Company, a consolidated balance
sheet of the Company and its consolidated subsidiaries, if any, as of the end of
such quarter and the related consolidated statements of income and stockholder's
equity (together with any other quarterly financial statements being prepared by
the Company at such time), setting forth in each case in comparative form the
figures for the corresponding quarter and the corresponding portion of the
Company's previous fiscal year.
(c) At any reasonable time during normal business hours and
from time to time, the Company will permit any Purchaser who then owns Warrants
to acquire at least 5,000 Warrant Shares, or any agent or representative of such
Purchaser, to examine the books and records and visit the properties of the
Company and to discuss the Company's affairs, finances and accounts with any of
its officers or directors; provided that any such Purchaser exercising its
rights hereunder shall (i) use all reasonable efforts to ensure that any such
examination or visit results in a minimum of disruption to the operations of the
Company and (ii) agree in writing to keep any and all proprietary information of
the Company disclosed to such Purchaser in the
-7-
<PAGE> 11
course of such examination or visit confidential and not use such proprietary
information for any purpose.
6. TRANSFER RIGHTS AND RESTRICTIONS.
6.1 Right of First Refusal.
(a) Company's Right of First Refusal. If any Purchaser (the
"Selling Shareholder") wishes to sell any of the Warrants or Warrant Shares
(collectively, the "Offered Shares") pursuant to a bona fide offer from a third
party to purchase the Offered Shares (a "Bona Fide Offer"), such Purchaser shall
first give written notice of his intention to sell ("Notice of Sale") to the
Company. A Notice of Sale shall name the proposed transferee and specify the
number of Offered Shares, the price per Offered Share and the terms of payment
and shall have attached thereto a copy of the Bona Fide Offer. The Company shall
have the right to purchase all or (if the Non-Selling Shareholders (as defined
in Section 6.2(b)) elect to purchase all of the Offered Shares not purchased by
the Company) any part of the Offered Shares, at the price and on the terms of
the Bona Fide Offer. The Company shall exercise such right by giving notice of
exercise to the Selling Shareholder by the close of business on the 60th day
after Notice of Sale was given to the Company, setting forth the Company's
acceptance of the offer, the number of Offered Shares to be purchased, and
identifying the Non-Selling Shareholders, if any, who will purchase Offered
Shares, and fixing a time and place of closing (the "Closing").
(b) Purchasers' Right of First Refusal. If the Company does
not elect to purchase any of the Offered Shares, or elects to purchase less than
all of the Offered Shares, the Company shall so notify each other Purchaser (the
"Non-Selling Shareholders") not later than the 20th day after the date the
Notice of Sale was given to the Company. The Non-Selling Shareholders
collectively shall have the right to purchase all, but not less than all, of the
Offered Shares not purchased by the Company at the price and on the terms of the
Bona Fide Offer and shall exercise such right as follows:
(i) Any Non-Selling Shareholder desiring
to acquire any of the Offered Shares shall give the Secretary of the Company
written notice of election to purchase a specified number of the Offered Shares
by the close of business on the 15th day after the Company gave notice to the
Non-Selling Shareholders.
(ii) If the Non-Selling Shareholders have
given to the Company elections to purchase aggregating the exact number of
Offered Shares offered to them, the Company shall give such Purchasers the
notice provided for in subparagraph (iv).
(iii) If elections to purchase by the
Non-Selling Shareholders aggregate more than the number of Offered Shares
available to the Non-Selling Shareholders, the Company shall allocate the
Offered Shares among the Non-Selling Shareholders electing to purchase as
follows: Each such Non-Selling Shareholder shall be allocated such proportion of
-8-
<PAGE> 12
the Offered Shares as the number of Shares then owned by him bears to the total
number of Shares owned by all Non-Selling Shareholders who elected to purchase
any of the Offered Shares, up to the number of Offered Shares specified in his
election. Any Offered Shares not so allocated shall be allocated as aforesaid in
one or more successive allocations to each Non-Selling Shareholder whose
election specified a number of Offered Shares greater than the number which had
then been allocated to such Non-Selling Shareholder, until all of the Offered
Shares have been allocated. Thereupon, the Company shall give each such
Purchasers the notice provided for in subparagraph (iv).
(iv) Not later than 10 days after the date
on which the notice is required to be delivered under subparagraph (i) above,
the Company shall notify each Non-Selling Shareholder who had elected to
purchase any Offered Shares of the number of Offered Shares which have been
allocated to him, and of the time and place of the Closing, whereupon each such
Non-Selling Shareholder shall become legally obligated to purchase such Shares
at the price and on the terms of the Bona Fide Offer. Promptly thereafter, but
not later than the close of business on the 60th day after the Company was given
the Notice of Sale, the Company shall notify the Selling Shareholder of the
exercise by the Company and/or the Non-Selling Shareholders of their right to
purchase all of the Offered Shares specifying the number of Shares being
purchased by the Company and by each named Non-Selling Shareholder. Neither the
Company nor any Non-Selling Shareholder shall have the right to purchase any of
the Offered Shares unless collectively all of the Offered Shares shall be
purchased.
(v) If (A) elections to purchase less
than all of the Offered Shares are received within the time period specified,
the Secretary shall promptly so notify the Selling Shareholder, or (B) if the
Selling Shareholder is not notified that all of the Offered Shares will be
purchased by the close of business on the 60th day after Notice of Sale was
given, the Selling Shareholder may, for a period of 60 days thereafter sell the
Offered Shares to the person named in the Bona Fide Offer on the terms provided
therein, provided however that as a condition to any such transfer the
transferee must agree to be bound by the provisions of this Section 6.2 in a
written agreement satisfactory in form to the Company.
(c) Deviation from Bona Fide Offers. Where the consideration
constituting all or a part of the consideration under the Bona Fide Offer is not
readily available to the Company or the Non-Selling Shareholders (e.g., real
estate or securities for which there is no established trading market) or
otherwise cannot be precisely duplicated by the Company or a Non-Selling
Shareholder, a purchase by the Company or a Non-Selling Shareholder shall be
made for a consideration and upon terms which constitute the reasonable economic
equivalent of the price and terms of the Bona Fide Offer. For these purposes,
the promissory note of any Non-Selling Shareholder or the Company shall be
considered the reasonable economic equivalent of the promissory note of the
proposed transferee, notwithstanding any differences in financial condition.
(d) Closing. The Closing of any purchase and sale of Offered
Shares shall take place at the principal office of the Company (or such other
location as may be fixed by the Company) at a time specified by the Company in
the notice provided for in Section 6.2(b)(iv),
-9-
<PAGE> 13
which shall be not later than the close of business on the 15th day after the
Company shall have given to the Selling Shareholder notice of the exercise of
the right to purchase all of the Offered Shares. At Closing, the Selling
Shareholder shall deliver certificates representing the Offered Shares, duly
endorsed for transfer, free and clear of any liens, restrictions or encumbrances
(except those arising from this Agreement), and (if required by the Company)
with signature guaranteed, and accompanied by all documents necessary to effect
such transfer and the purchaser or purchasers shall deliver the agreed upon
consideration therefor.
(e) Transfers to Affiliates. Any Purchaser may,
notwithstanding Sections 6.1(a) and (b), transfer Warrants or Warrant Shares to
a spouse, family member, public charity, or any trust, corporation or other
entity which is controlled by, under common control with, or operated for the
benefit of such Purchaser or any of the foregoing.
(f) Termination of Provisions upon Public Offering. The
provisions of this Section 6.1 shall terminate upon the effectiveness of a
registration statement filed with the SEC registering Common Shares in an
initial public offering.
7. CONDITIONS TO CLOSING.
7.1 Conditions to Obligations of the Purchaser. Each Purchaser's
obligation to purchase the Warrants at the Closing is subject to the
fulfillment, at or prior to the Closing, of all of the following conditions:
(a) Representations and Warranties True; Performance of
Obligations. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects and the Company shall
have performed in all material respects all obligations and conditions herein
required to be performed by it on or prior to the Closing Date.
(b) Qualifications, Legal Investment. All authorizations,
approvals, or permits, if any, of any applicable governmental authority or
regulatory body that are required in connection with the lawful sale and
issuance of the Warrants pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closing Date. No stop order or
other order enjoining the sale of the Warrants shall have been issued and no
proceedings for such purpose shall be pending or, to the knowledge of the
Company, threatened by the SEC, or any commissioner of corporations or similar
officer of any state having jurisdiction over this transaction. At the time of
the Closing, the sale and issuance of the Warrants shall be legally permitted by
all laws and regulations to which each Purchaser and the Company are subject.
(c) Registration Rights Agreement. The Company shall have
entered into the Registration Rights Agreement in the form attached as Exhibit C
hereto.
-10-
<PAGE> 14
7.2 Conditions to Obligations of the Company. The Company's obligation
to issue and sell the Warrants at the Closing is subject to the fulfillment to
the Company's satisfaction, on or prior to the Closing, of the following
conditions:
(a) Representations and Warranties True; Performance of
Obligations. The representations and warranties made by the Purchasers in
Section 4 hereof shall be true and correct in all material respects and the
Purchasers shall have performed all obligations and conditions herein required
to be performed by them on or prior to the Closing Date.
(b) Qualifications, Legal Investment. All authorizations,
approvals, or permits, if any, of any applicable governmental authority or
regulatory body that are required in connection with the lawful sale and
issuance of the Warrants pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closing Date. No stop order or
other order enjoining the sale of the Warrants shall have been issued and no
proceedings for such purpose shall be pending or, to the knowledge of the
Company, threatened by the SEC, or any commissioner of corporations or similar
officer of any state having jurisdiction over this transaction.
(c) Lock-up Agreement. The Purchaser shall have entered into a
lock-up agreement in substantially the form attached as Exhibit D hereto.
8. MISCELLANEOUS.
8.1 Governing Law. This Agreement shall be governed by and construed
under the laws of Bermuda without regard to principles of conflict of laws.
8.2 Survival. The representations and warranties made by the parties in
this Agreement shall survive the consummation of the transactions herein
contemplated until the expiration of the statute of limitations with respect to
claims arising under Section 10(b) of the Exchange Act.
8.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto.
8.4 Entire Agreement. This Agreement and the Exhibits and Schedules
hereto, and the other documents delivered pursuant hereto, constitute the full
and entire understanding and agreement among the parties with regard to the
subjects hereof and no party shall be liable or bound to any other party in any
manner by any representations, warranties, covenants, or agreements except as
specifically set forth herein.
8.5 Separability. In case any provision of this Agreement shall be
invalid, illegal, or unenforceable, it shall to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable the intent of the parties, and the validity,
-11-
<PAGE> 15
legality, and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
8.6 Amendment and Waiver. Except as otherwise provided herein, any term
of this Agreement may be amended, and the observance of any term of this
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively, and either for a specified period of time or
indefinitely), with the written consent of the Company and the Purchaser. Any
amendment or waiver effected in accordance with this section shall be binding
upon each future holder of any security purchased under this Agreement
(including securities into which such securities have been converted) and the
Company.
8.7 Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery, on the first business day following mailing by overnight
courier, delivery charges prepaid, or on the fifth day following mailing by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the Company and the Purchaser at the respective addresses included
herein, or at such other address, notice of which is given in accordance with
the provisions of this Section 8.7.
8.8 Fees and Expenses. The Company and the Purchasers shall bear their
own expenses and legal fees incurred on its behalf with respect to this
Agreement and the transactions contemplated hereby.
8.9 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
8.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
-12-
<PAGE> 16
GCA LTD.
CLASS A WARRANT PURCHASE AGREEMENT
- -------------------------------------- --------------------------------------
Purchaser's Name - Please Print Nominee Name (if appropriate)
- -------------------------------------- --------------------------------------
Social Security/Tax I.D. Number Telephone Number
- -------------------------------------- --------------------------------------
Address City, State and Zip Code
- -------------------------------------- --------------------------------------
Signature Date
==============================================================================
Class A Warrant to Aggregate
purchase Common Shares Purchase Price
$
- -------------------------- -------------
Enclose check payable to: GCA LTD. or
FUNDS SHOULD BE WIRED TO:
==============================================================================
AGREED TO AND ACCEPTED:
GCA LTD.
By: Date:
----------------------------------- ---------------------------------
BE\252429\6
<PAGE> 17
SCHEDULE 3.2
None, except for options that may be granted by the Company pursuant to its
Initial Stock Option Plan, as may be amended from time to time.
<PAGE> 18
SCHEDULE 3.9
None.
<PAGE> 1
Exhibit 10.5
CLASS A WARRANT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated August 25, 1998, among GCA LTD., a
Bermuda corporation (the "Company"), and the Persons executing this Agreement as
Holders (such persons and their permitted successors and assigns, the
"Holders").
The Company has issued Class A Warrants to the Holders to
purchase the Company's Common Shares (the "Warrants"). Pursuant to the Warrants,
the Company has agreed to register such shares for sale under the Securities Act
of 1933, as amended.
NOW, THEREFORE, in consideration of the completion of the
transactions contemplated by the Warrants and of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows,
intending to be legally bound.
Section 1. Definitions. As used in this Agreement, the
following terms have the following meanings:
"Business Day": any day on which the Company's Common Shares
are available for trading on the principal stock exchange or market upon which
they are traded.
"Closing Date": the date on which is consummated the initial
public offering of the Common Shares pursuant to the Securities Act.
"Common Shares": the Company's Common Shares, par value
US$1.00 per share.
"Exchange Act": the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder, all as the same
shall be in effect at the relevant time.
"Holder": each Person (other than the Company) executing this
Agreement and each permitted successor or assignee of a Holder, for so long as
(and to the extent that) such Person owns or has the right to acquire any
Registrable Securities.
"Person": an individual, a partnership (general or limited),
corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
<PAGE> 2
"Registrable Securities": (1) the Common Shares issued or
issuable pursuant to the Warrants and (2) any additional Common Shares or other
equity securities of the Company issued or issuable in respect of such Common
Shares (or other equity securities issued in respect thereof) by way of a stock
dividend or stock split, in connection with a combination, exchange,
reorganization, recapitalization or reclassification of Company securities, or
pursuant to a merger, division, consolidation or other similar business
transaction or combination involving the Company; provided that as to any
particular Registrable Securities, such securities shall cease to constitute
Registrable Securities (a) when a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of thereunder, (b) when such securities
shall have been disposed of pursuant to Rule 144 (or any successor provision to
such Rule) under the Securities Act, or (c) when such securities shall have
ceased to be outstanding.
"Registration Expenses": all expenses incident to the
Company's performance of or compliance with the registration requirements set
forth in this Agreement including, without limitation, the following: (a) the
fees, disbursements and expenses of the Company's counsel, accountants and
experts in connection with the registration under the Securities Act of
Registrable Securities; (b) all expenses in connection with the preparation,
printing and filing of the registration statement, any preliminary prospectus or
final prospectus, any other offering document and amendments and supplements
thereto, and the mailing and delivering of copies thereof to underwriters and
dealers, if any; (c) the cost of printing or producing any agreement(s) among
underwriters, underwriting agreement(s) and blue sky or legal investment
memoranda, any selling agreements, and any other documents in connection with
the offering, sale or delivery of Registrable Securities to be disposed of; (d)
the fees and expenses incurred in connection with the listing of Registrable
Securities on each securities exchange on which Company securities of the same
class are then listed or with the Nasdaq National Market System; (e) the fees
and expenses, not to exceed $25,000, of a single counsel retained by any and all
Holders participating in a registration pursuant to this Agreement, (f) any
underwriters' discounts or compensation, brokers' commissions or similar selling
expenses attributable to the sale of Registrable Securities; (g) any SEC or blue
sky registration or filing fees attributable to Registrable Securities or
transfer taxes applicable to Registrable Securities, (h) any other expenses in
connection with the qualification of Registrable Securities for offer and sale
under state securities laws, including the fees and disbursements of counsel for
the underwriters in connection with such qualification and in connection with
any blue sky and legal investment surveys; and (i) the filing fees incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of the sale of Registrable Securities to be disposed of.
"Registration Statement": a registration statement under the
Securities Act filed by the Company pursuant to this Agreement, including all
amendments thereto, all preliminary and final prospectuses included therein and
all exhibits thereto.
"SEC": the United States Securities and Exchange Commission,
or such other federal agency at the time having the principal responsibility for
administering the Securities Act.
- 2 -
<PAGE> 3
"Securities Act": the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the relevant time.
"Warrants": the Class A Warrants of the Company.
Section 2. Underwritten Demand Registration.
(a) At any time on or after the first anniversary of the
Closing Date, and before the tenth anniversary of the Closing Date the Holder or
Holders of ten (10) percent or more of the Registrable Securities issued or
issuable pursuant to the Warrants may (by written notice delivered to the
Company) require registration of all or any portion of such Registrable
Securities for sale in an underwritten public offering. In each such case, such
notice shall specify the number of Registrable Securities for which such
underwritten offering is to be made. Within ten Business Days after its receipt
of any such notice, the Company shall give written notice of such request to all
other Holders, and all such Holders shall have the right to have any or all
Registrable Securities owned by them included in the requested underwritten
offering as they shall specify in a written notice received by the Company
within ten Business Days after the Company's notice is given. Within ten
Business Days after the expiration of such ten Business Day period, the Company
shall notify all Holders requesting inclusion of Registrable Securities in the
proposed underwriting of (1) the aggregate number of Registrable Securities
proposed to be included by all Holders in the offering, and (2) the proposed
commencement date of the offering, which shall be a date not more than ninety
days after the Company gives such notice. The managing underwriter for such
offering shall be chosen by the Holders of a majority of the Registrable
Securities being included therein and shall be satisfactory to the Company.
(b) If any request for a registration shall have been made
pursuant to subsection (a), the Company shall, at the request of the managing
underwriter for such offering, prepare and file a Registration Statement with
the SEC as promptly as reasonably practicable, but in any event within sixty
days after the managing underwriter's request therefor.
(c) The Company shall not have any obligation to permit or
participate in more than two underwritten public offerings pursuant to this
Section, or to file a Registration Statement pursuant to this Section with
respect to less than ten (10) percent of the Registrable Securities issued or
issuable pursuant to the Warrants.
(d) The Company shall have the right to defer the filing or
effectiveness of a Registration Statement relating to any registration requested
under this Section for a reasonable period of time not to exceed 180 days if (1)
the Company is, at such time, working on an underwritten public offering of its
securities for the account of the Company and is advised by its managing
underwriter that such offering would in its opinion be materially adversely
affected by such filing; or (2) the Company in good faith determines that any
such filing or the offering of any Registrable Securities would (A) materially
impede, delay or interfere with any proposed financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving the Company or (B) require the disclosure of material
non-public information, the disclosure of which would materially and adversely
affect the Company.
- 3 -
<PAGE> 4
(e) The Company shall have no obligation to file a
Registration Statement pursuant to this Section earlier than 360 days after the
effective date of a prior registration statement of the Company covering an
underwritten public offering for the account of the Company the effective date
of which is after the first anniversary of the Closing Date if (1) the Company
shall have offered pursuant to Section 4 to include the Holders' Registrable
Securities in such Registration Statement; (2) the Holders shall not have
elected to include in such Registration Statement at least ten (10) percent of
the Registrable Securities issued or issuable pursuant to the Warrants; and (3)
no Registrable Securities requested to be included in such registration
statement shall have been excluded therefrom pursuant to Section 4(c).
(f) The Holders of a majority of Registrable Securities
requested to be included in any offering pursuant to this Section may elect by
written notice to the Company not to proceed with the offering, in which case
the Company shall not be obligated to proceed with such offering. If they do so,
the Holders that shall have requested Registrable Securities to be included in
the offering shall pay all Registration Expenses incurred by the Company in
connection with such offering prior to receipt of such notice.
(g) Neither the Company nor any other Person shall be entitled
to include any securities held by it in any underwritten offering pursuant to
this Section, unless all Registrable Securities for which inclusion has been
requested are also included.
(h) No registration of Registrable Securities under this
Section shall relieve the Company of its obligation to effect registrations of
Registrable Securities pursuant to Sections 3 and 4.
Section 3. Shelf Registrations.
(a) At any time on or after the first anniversary of the
Closing Date, and before the tenth anniversary of the Closing Date, and before
the tenth anniversary of the Closing Date, the Holder or Holders of five (5)
percent or more of the Registrable Securities issued or issuable pursuant to the
Warrants may (by written notice to the Company) require registration of all or
any portion of such Registrable Securities for sale in open market transactions
or negotiated block trades. Within ten Business Days after its receipt of such
notice, the Company shall give written notice of such request to all other
Holders, and all such Holders shall have the right to have any or all
Registrable Securities owned by them included in the requested registration as
they shall specify in a written notice received by the Company within ten
Business Days after the Company's notice is given. Within ten Business Days
after the expiration of such ten Business Day period, the Company shall notify
all Holders requesting inclusion of Registrable Securities in the requested
registration of the aggregate number of Registrable Securities proposed to be
included by all Holders in this registration.
(b) If any request for registration shall have been made
pursuant to subsection (a), the Company shall prepare and file a Registration
Statement with the SEC as
- 4 -
<PAGE> 5
promptly as reasonably practicable, but in any event within 45 days after the
expiration of the ten Business Day period within which Holders may request
inclusion in the registration.
(c) The Company shall have no obligation to file a
Registration Statement pursuant to this Section earlier than 180 days after the
effective date of any earlier Registration Statement filed pursuant to this
Section.
(d) The Holders of a majority of Registrable Securities
requested to be included in any registration pursuant to this Section may elect
by written notice to the Company not to proceed with such registration, in which
case the Company will not be obligated to proceed therewith. If they do so, the
Holders that shall have requested Registrable Securities to be included in the
registration shall pay all Registration Expenses incurred by the Company in
connection with such registration price to receipt of such notice.
(e) No registration of Registrable Securities under this
Section shall relieve the Company of its obligation to effect registrations of
Registrable Securities under Sections 2 and 4.
Section 4. Incidental Registration.
(a) From and after the first anniversary of the Closing Date,
and before the tenth anniversary of the Closing Date, if the Company proposes,
other than pursuant to Section 2 or 3, to file a Registration Statement under
the Securities Act to register any of its Common Shares for public sale under
the Securities Act (whether proposed to be offered for sale by the Company or by
any other Person), other than on Form S-4 or Form S-8 or any successor to such
forms promulgated by the SEC, it will give prompt written notice (which notice
shall specify the intended method or methods of disposition) to the Holders of
its intention to do so, and upon the written request of any Holder delivered to
the Company within ten Business Days after any such notice (which request shall
specify the number of Registrable Securities intended to be disposed of by such
Holder), the Company will use commercially reasonable efforts to include in such
Registration Statement all Registrable Securities which the Company has been so
requested to register by Holders.
(b) If at any time prior to the effective date of any
Registration Statement described in subsection (a), the Company shall determine
for any reason not to proceed with such registration, the Company may, at its
election, give written notice of such determination to the Holders requesting
registration and thereupon the Company shall be relieved of its obligation to
register such Registrable Securities in connection with such registration.
(c) The Company will not be required to effect any
registration of Registrable Securities pursuant to this Section in connection
with an offering of securities solely for the account of the Company if the
Company shall have been advised in writing (with a copy to the Holders
requesting registration) by a nationally recognized investment banking firm
(which may be the managing underwriter for the offering) selected by the Company
that, in such firm's opinion, registration of Registrable Securities and of any
other securities requested to be
- 5 -
<PAGE> 6
included in such registration by Persons having rights to include securities
therein at that time may interfere with an orderly sale and distribution of the
securities being sold by the Company in such offering or adversely affect the
price of such securities; but if an offering of less than all of the Registrable
Securities requested to be registered by the Holders and other securities
requested to be included in such registration by such other Persons would not,
in the opinion of such firm, adversely affect the distribution or price of the
securities to be sold by the Company in the offering, the aggregate number of
Registrable Securities requested to be included in such offering by the Holders
shall be reduced pro rata in accordance with the proportion that the number of
shares proposed to be included in such registration by each of the Holders bears
to the number of shares proposed to be included in such registration by Holders
and all other such Persons.
(d) The Company shall not be required to give notice of, or
effect any registration of Registrable Securities under this Section incidental
to, the registration of any of its securities in connection with mergers,
consolidations, acquisitions, exchange offers, subscription offers, dividend
reinvestment plans or stock options or other employee benefit or compensation
plans.
(e) No registration of Registrable Securities effected under
this Section shall relieve the Company of its obligations to effect
registrations of Registrable Securities pursuant to Sections 2 and 3.
Section 5. Holdbacks and Other Transfer Restrictions.
(a) No Holder shall, if requested by the managing underwriter
in an underwritten offering: (1) that includes such Holder's Registrable
Securities, effect any public sale or distribution of securities of the Company
of the same class as the securities included in such Registration Statement (or
convertible into such class), including a sale pursuant to Rule 144(k) under the
Securities Act (except as part of such underwritten registration) during the ten
day period prior to, and during the 180-day period beginning on the closing date
of each underwritten offering made pursuant to such registration statement, to
the extent timely notified in writing by the Company or the managing
underwriter; and (2) in the event of an offering for the account of the Company,
to the extent such Holder does not elect (or is not permitted under Section
4(c)) to sell such securities in connection with such offering, during the
period of distribution of the Company's securities in such offering and during
the period in which the underwriting syndicate, if any, participates in the
aftermarket. In any such case the Company shall require the managing underwriter
to notify the Company and the Company, in turn, shall notify all Holders of
Registrable Securities included in the offering promptly after such
participation ceases. If the Company or such managing underwriter so requests,
each Holder shall enter into an agreement reflecting such restrictions.
(b) No Holder shall, during any period in which any of its
Registrable Securities are included in any effective Registration Statement, (1)
effect any stabilization transactions or engage in any stabilization activity in
connection with the Common Shares or other equity securities of the Company in
contravention of Regulation M under the Exchange
- 6 -
<PAGE> 7
Act; (2) permit any Affiliated Purchaser (as that term is defined in Rule 100(b)
of Regulation M under the Exchange Act) to bid for or purchase for any account
in which such Holder has a beneficial interest, or attempt to induce any other
person to purchase, any shares of Common Stock or Registrable Securities in
contravention of Regulation M under the Exchange Act; or (3) offer or agree to
pay, directly or indirectly, to anyone any compensation for soliciting another
to purchase, or for purchasing (other than for such Holder's own account), any
securities of the Company on a national securities exchange in contravention of
Regulation M under the Exchange Act.
(c) Each Holder shall, in the case of a registration including
Registrable Securities to be offered by it for sale through brokers
transactions, furnish each broker through whom such Holder offers Registrable
Securities such number of copies of the prospectus as the broker may require and
otherwise comply with the prospectus delivery requirements under the Securities
Act.
Section 6. Registration Procedures. If and whenever the
Company is required by the provisions of this Agreement to effect a registration
of Registrable Securities:
(a) The Company will use commercially reasonable efforts to
prepare and file with the SEC, within the time periods specified herein, a
Registration Statement on Form S-3 or its equivalent (or on such other
registration form available to the Company that permits the greatest extent of
incorporation by reference of materials filed by the Company, under the Exchange
Act), and will use commercially reasonable efforts to cause such registration
statement to become effective as promptly as practicable thereafter and to
remain effective under the Securities Act until (1) the earlier of such time as
all securities covered thereby have been disposed of pursuant to such
Registration Statement or 180 days after such Registration Statement becomes
effective, in the case of registrations pursuant to Section 2, or (2) 90 days
after such Registration Statement becomes effective, in the case of
registrations pursuant to Section 3, in every case as any such period may be
extended pursuant to subsection (h) or Section 8.
(b) The Company will prepare and file with the SEC such
amendments, post-effective amendments and supplements to such Registration
Statement and the prospectus used in connection therewith as may be necessary to
keep such Registration Statement effective for such period of time required by
subsection (a), as such period may be extended pursuant to subsection (h) or
Section 8.
(c) The Company will comply in all material respects with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the period during which
any such Registration Statement is required to be effective.
(d) The Company will furnish to any Holder and any underwriter
of Registrable Securities (1) such number of copies (including manually executed
and conformed
- 7 -
<PAGE> 8
copies) of such Registration Statement and of each amendment thereof and
supplement thereto (including all annexes, appendices, schedules and exhibits),
(2) such number of copies of the prospectus used in connection with such
Registration Statement (including each preliminary prospectus, any summary
prospectus and the final prospectus and including prospectus supplements), and
(3) such number of copies of other documents, in each case as such Holder or
such underwriter may reasonably request.
(e) The Company will use commercially reasonable efforts to
register or qualify all Registrable Securities covered by such Registration
Statement under the securities or "blue sky" laws of states of the United States
and any other jurisdiction as any Holder or any underwriter shall reasonably
request, and do any and all other acts and things which may be reasonably
requested by such Holder or such underwriter to consummate the offering and
disposition of Registrable Securities in such jurisdictions; but the Company
shall not be required to qualify generally to do business as a foreign
corporation or as a dealer in securities, subject itself to taxation, or consent
to general service of process in any jurisdiction wherein it is not then so
qualified or subject.
(f) The Company will use, as soon as practicable after the
effectiveness of the Registration Statement, commercially reasonable efforts to
cause the Registrable Securities covered by such Registration Statement to be
registered with, or approved by, such other United States and Bermuda public,
governmental or regulatory authorities, if any, as may be required in connection
with the disposition of such Registrable Securities.
(g) The Company will use commercially reasonable efforts to
list the Registrable Securities covered by such Registration Statement on any
securities exchange (or if applicable, the Nasdaq National Market System) on
which any securities of the Company are then listed, if the listing of such
Registrable Securities is then permitted under the applicable rules of such
exchange (or if applicable, the Nasdaq National Market System).
(h) The Company will notify each Holder as promptly as
practicable and, if requested by any Holder, confirm such notification in
writing, (1) when a prospectus or any prospectus supplement has been filed with
the SEC, and when a Registration Statement or any post-effective amendment
thereto has been filed with and declared effective by the SEC, (2) of the
issuance by the SEC of any stop order or the coming to its knowledge of the
initiation of any proceedings for that purpose, (3) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of any of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, (4) of the
occurrence of any event which requires the making of any changes to a
Registration Statement or related prospectus so that such documents will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
- 8 -
<PAGE> 9
therein, in light of the circumstances under which they were made, not
misleading (and the Company shall promptly prepare and furnish to each Holder a
reasonable number of copies of a supplemented or amended prospectus such that,
as thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading), and (5) of the Company's determination that the filing of a
post-effective amendment to a Registration Statement shall be necessary or
appropriate. Upon the receipt of any notice from the Company of the occurrence
of any event of the kind described in clause (4), the Holders shall forthwith
discontinue any offer and disposition of Registrable Securities pursuant to the
Registration Statement covering such Registrable Securities until all Holders
shall have received copies of a supplemented or amended prospectus which is no
longer defective and, if so directed by the Company, shall deliver to the
Company all copies (other than permanent file copies) of the defective
prospectus covering such Registrable Securities which are then in the Holders'
possession. If the Company shall provide any notice of the type referred to in
the preceding sentence, the period during which the Registration Statement is
required by subsection (a) to be effective shall be extended by the number of
days from and including the date such notice is provided, to and including the
date when Holders shall have received copies of the corrected prospectus.
(i) The Company will enter into such agreements and take such
other appropriate actions as are customary and reasonably necessary to expedite
or facilitate the disposition of such Registrable Securities, and in that
regard, will deliver to the Holders such documents and certificates as may be
reasonably requested by the Holders of a majority of the Registrable Securities
being sold or, as applicable, the managing underwriters, to evidence the
Company's compliance with this Agreement, including, in the case of any
underwritten offering, using commercially reasonable efforts to cause its
independent accountants to deliver to the managing underwriters an accountants'
comfort letter substantially similar to that in scope delivered in an
underwritten public offering and covering audited and interim financial
statements included in the registration statement, or if such letter can not be
obtained through the exercise of commercially reasonable efforts, cause its
independent accountants to deliver to the managing underwriters a comfort letter
based on negotiated procedures providing comfort with respect to the Company's
financial statements included or incorporated by reference in the registration
statement at the highest level permitted to be given by such accountants under
the then applicable standards of the American Institute of Certified Public
Accountants with respect to such Registration Statement.
Section 7. Underwriting.
(a) If requested by the underwriters for any underwritten
offering of Registrable Securities pursuant to a registration under Section 2,
the Company will enter into and perform its obligations under an underwriting
agreement with the underwriters for such offering, such agreement to contain
such representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, customary provisions
relating to indemnities and contribution and the provision of opinions of
counsel and accountants' comfort letters. If Registrable Securities are to be
distributed by such underwriters on behalf of any Holder, such Holder shall also
be a party to any such underwriting agreement.
- 9 -
<PAGE> 10
(b) If any registration pursuant to Section 4 shall involve an
underwritten offering, the Company may require Registrable Securities requested
to be registered pursuant to Section 4 to be included in such underwriting on
the same terms and conditions as shall be applicable to the securities being
sold through underwriters under such registration. In such case, each Holder
requesting registration shall be a party to any such underwriting agreement.
Such agreement shall contain such representations and warranties by the Holders
requesting registration and such other terms and provisions as are customarily
contained in underwriting agreements with respect to secondary distributions,
including, without limitation, provisions relating to indemnities and
contribution.
(c) In any offering of Registrable Securities pursuant to a
registration hereunder, each Holder requesting registration shall also enter
into such additional or other agreements as may be customary in such
transactions, which agreements may contain, among other provisions, such
representations and warranties as the Company or the underwriters of such
offering may reasonably request (including, without limitation, those concerning
such Holder, its Registrable Securities, such Holder's intended plan of
distribution and any other information supplied by it to the Company for use in
such registration statement), and customary provisions relating to indemnities
and contribution.
Section 8. Information Blackout.
(a) At any time when a Registration Statement is effective,
upon written notice from the Company to the Holders that the Company has
determined in good faith that sale of Registrable Securities pursuant to the
Registration Statement would require disclosure of non-public material
information, the disclosure of which would have a material adverse effect on the
Company, all Holders shall suspend sales of Registrable Securities pursuant to
such Registration Statement until the earlier of (1) 120 days after the Company
notifies the Holders of such good faith determination, and (2) such time as the
Company notifies the Holders that such material information has been disclosed
to the public or has ceased to be material or that sales pursuant to such
Registration Statement may otherwise be resumed (the number of days from such
suspension of sales by the Holders until the day when such sales may be resumed
hereunder is hereinafter called a "Sales Blackout Period").
(b) The time period set forth in Section 6(a)(1) or (2) shall
be extended for a number of days equal to the number of days in the Sales
Blackout Period.
Section 9. Rule 144. The Company shall take all actions
reasonably necessary to comply with the filing requirements described in Rule
144(c)(1) under the Securities Act so as to enable the Holders to sell
Registrable Securities without registration under the Securities Act. Upon the
written request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with the filing requirements under such
Rule 144(c)(1).
- 10 -
<PAGE> 11
Section 10. Preparation; Reasonable Investigation;
Information. In connection with the preparation and filing of each Registration
Statement registering Registrable Securities under the Securities Act, (a) the
Company will give the Holders and the underwriters, if any, and their respective
counsel and accountants, drafts of such registration statement for their review
and comment prior to filing and (during normal business hours and subject to
such reasonable limitations as the Company may impose to prevent disruption of
its business) such reasonable and customary access to its books and records and
such opportunities to discuss the business of the Company with its officers and
the independent public accountants who have certified its financial statements
as shall be necessary, in the reasonable opinion of the Holders of a majority of
the Registrable Securities being registered and such underwriters or their
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act and (b) as a condition precedent to including any Registrable
Securities of any Holder in any such registration, the Company may require such
Holder to furnish the Company such information regarding such Holder and the
distribution of such securities as the Company may from time to time reasonably
request in writing or as shall be required by law or the SEC in connection with
any registration.
Section 11. Indemnification and Contribution.
(a) In the case of each offering of Registrable Securities
made pursuant to this Agreement, the Company shall indemnify and hold harmless
each Holder, its officers and directors, each underwriter of Registrable
Securities so offered and each Person, if any, who controls any of the foregoing
persons within the meaning of the Securities Act ("Holder Indemnitees"), from
and against any and all claims, liabilities, losses, damages, expenses and
judgments, joint or several, to which they or any of them may become subject,
including any amount paid in settlement of any litigation commenced or
threatened, and shall promptly reimburse them, as and when incurred, for any
legal or other expenses incurred by them in connection with investigating any
claims and defending any actions, insofar as such losses, claims, damages,
liabilities or actions shall arise out of, or shall be based upon, any violation
or alleged violation by the Company of the Securities Act, any blue sky laws,
securities laws or other applicable laws of any state or country in which the
Registrable Securities are offered, and relating to action taken or action or
inaction required of the Company in connection with such offering, or shall
arise out of, or shall be based upon, any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or in any
preliminary or final prospectus included therein) relating to the offering and
sale of such Registrable Securities, or any amendment thereof or supplement
thereto, or in any document incorporated by reference therein, or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; but the
Company shall not be liable to any Holder Indemnitee in any such case to the
extent that any such loss, claim, damage, liability or action arises out of, or
is based upon, any untrue statement or alleged untrue statement, or any omission
or alleged omission, if such statement or omission shall have been made in
reliance upon and in conformity with information furnished to the Company in
writing by or on behalf of such Holder specifically for use in the preparation
of the Registration Statement (or in any preliminary or final prospectus
included therein), or any amendment thereof
- 11 -
<PAGE> 12
or supplement thereto. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of any Holder and shall
survive the transfer of such securities. The foregoing indemnity agreement is in
addition to any liability which the Company may otherwise have to any Holder
Indemnitee.
(b) In the case of each offering of Registrable Securities
made pursuant to this Agreement, each Holder shall indemnify and hold harmless
the Company, its officers and directors and each person, if any, who controls
any of the foregoing within the meaning of the Securities Act (the "Company
Indemnitees"), from and against any and all claims, liabilities, losses,
damages, expenses and judgments, joint or several, to which they or any of them
may become subject, including any amount paid in settlement of any litigation
commenced or threatened, and shall promptly reimburse them, as and when
incurred, for any legal or other expenses incurred by them in connection with
investigating any claims and defending any actions, insofar as any such losses,
claims, damages, liabilities or actions shall arise out of, or shall be based
upon, any violation by such Holder of the Securities Act, any blue sky laws,
securities laws or other applicable laws of any state or country in which the
Registrable Securities are offered and relating to action taken or action or
inaction required of such Holder in connection with such offering, or shall
arise out of, or shall be based upon, any untrue statement of a material fact
contained in the Registration Statement (or in any preliminary or final
prospectus included therein) relating to the offering and sale of such
Registrable Securities or any amendment thereof or supplement thereto, or any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but in each case only
to the extent that such untrue statement is contained in, or such fact is
omitted from, information furnished in writing to the Company by or on behalf of
such Holder specifically for use in the preparation of such Registration
Statement (or in any preliminary or final prospectus included therein). Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of any Company Indemnitee. In no event shall the liability
of a Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by it upon the sale of Registrable Securities pursuant to such
offering. The foregoing indemnity is in addition to any liability which Holder
may otherwise have to any Company Indemnitee.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 11, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing, but the failure
to give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party. In case any such
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party
and shall pay as incurred the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred the fees and
- 12 -
<PAGE> 13
expenses of the counsel retained by the indemnified party in the event (1) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (2) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by the Holders of a majority of the
Registrable Securities disposed under the applicable Registration Statements in
the case of Holder Indemnitees and by the Company in the case of Company
Indemnitees. The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgement for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 11 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) in respect of any losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) referred to therein, or if the
indemnified party failed to give the notice required under subsection (c), then
each indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect not only both the relative benefits received by such party (as
compared to the benefits received by all other parties) from the offering in
respect of which indemnity is sought, but also the relative fault of all parties
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by a party shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by it bear
to the total amounts received by each other party. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The parties agree that it would not be just
and equitable if contributions pursuant to this subsection (d) were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this subsection
(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
- 13 -
<PAGE> 14
(e) The indemnity provided for hereunder shall not inure to
the benefit of any indemnified party to the extent that such indemnified party
failed to comply with the applicable prospectus delivery requirements of the
Securities Act as then applicable to the person asserting the loss, claim,
damage or liability for which indemnity is sought.
Section 12. Expenses. In connection with any registration
under this Agreement, the Company shall pay, subject to and to the extent
permitted by the Bermuda Companies Act 1981, all Registration Expenses (to the
extent not borne by underwriters or others), except as provided in Section 2(f)
or 3(d), and except that each Holder requesting registration of its Registrable
Securities shall pay its pro rata share of the items described in clause (i) of
the definition of "Registration Expenses" in Section 1.
Section 13. Notices. Except as otherwise provided below,
whenever it is provided in this Agreement that any notice, demand, request,
consent, approval, declaration or other communication shall or may be given to
or served upon any of the parties hereto, or whenever any of the parties hereto,
wishes to provide to or serve upon the other party any other communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be delivered in
person or sent by telecopy, as follows: (a) if to a Holder, at the most current
address given by such Holder to the Company by means of a notice given in
accordance with the provisions of this Section 13, which address initially is,
with respect to the Holders who have executed this agreement, the addresses set
forth in Schedule A and with respect to all other holders is as set forth in the
register for the Registrable Securities; and (b) if to the Company, initially at
the Company's principal address and thereafter at such other address, notice of
which is given in accordance with the provisions of this Section 13. The
furnishing of any notice required hereunder may be waived in writing by the
party entitled to receive such notice. Every notice, demand, request, consent,
approval, declaration or other communication hereunder shall be deemed to have
been duly furnished or served on the party to which it is addressed, in the case
of delivery in person or by telecopy, on the date when sent (with receipt
personally acknowledged in the case of telecopied notice), and in all other
cases, five business days after it is sent. Failure or delay in delivering
copies of any notice, demand, request, consent, approval, declaration or other
communication to the persons designated above to receive copies shall in no way
adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration or other communication.
Section 14. Entire Agreement. This Agreement represents the
entire agreement and understanding among the parties hereto with respect to the
subject matter hereof and supersedes any and all prior oral and written
agreements, arrangements and understandings among the parties hereto with
respect to such subject matter; and this Agreement can be amended, supplemented
or changed, and any provision hereof can be waived or a departure from any
provision hereof can be consented to, only by a written instrument making
specific reference to this Agreement signed by the Company and the Holders of a
majority of the Registrable Securities then outstanding, but if by less than all
Holders, then only to the extent such
- 14 -
<PAGE> 15
amendment, supplement or change does not adversely affect the rights of any
Holder which is not a party thereto.
Section 15. Headings. The section headings contained in this
Agreement are for general reference purposes only and shall not affect in any
manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement.
Section 16. Applicable Law. This Agreement shall be governed
by, construed and enforced in accordance with the laws of the State of New York
applicable to contracts to be made, executed, delivered and performed wholly
within such state and, in any case, without regard to the conflicts of law
principles of such state.
Section 17. Severability. If any provision of this Agreement
shall be held by any court of competent jurisdiction to be illegal, void or
unenforceable, such provision shall be of no force and effect, but the
illegality or unenforceability of such provision shall have no effect upon and
shall not impair the enforceability of any other provision of this Agreement.
Section 18. No Waiver. The failure of any party at any time or
times to require performance of any provision hereof shall not affect the right
at a later time to enforce the same. No waiver by any party of any condition,
and no breach of any provision, term, covenant, representation or warranty
contained in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be construed as a further or continuing waiver of
any such condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 19. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same original instrument. Not
all parties need sign the same counterpart. Delivery by facsimile of a signature
page to this Agreement shall have the same effect or delivery of an original
executed counterpart.
Section 20. Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors, assigns and transferees of
each of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders; but nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Securities
in violation of applicable law. If any Holder shall acquire Registrable
Securities, in any manner, whether by operation of law or otherwise, such
Registrable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities such Holder
shall be conclusively deemed to have agreed to be bound by
- 15 -
<PAGE> 16
and to perform all of the terms and provisions of this Agreement, including the
restrictions on resale set forth in this Agreement, and such Holder shall be
entitled to receive the benefits hereof.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered as of the date first above written.
GCA LTD.
By: /s/ Donald J. Matthews
----------------------------------------
Donald J. Matthews,
Chief Executive Officer
HOLDERS
/s/ Donald J. Matthews
--------------------------------------------
Donald J. Matthews
/s/ Michael P. Esposito, Jr.
--------------------------------------------
Michael P. Esposito, Jr.
/s/ Frederick S. Hammer
--------------------------------------------
Frederick S. Hammer
/s/ Robert M. Lichten
--------------------------------------------
Robert M. Lichten
/s/ Andrew S. Lerner
--------------------------------------------
Andrew S. Lerner
/s/ Kathleen G. Cully
--------------------------------------------
American Capital Access Holdings, L.L.C.
/s/ Andrew S. Lerner
--------------------------------------------
Inter-Atlantic Capital Partners, Inc.
/s/ William S. Ogden, Jr.
--------------------------------------------
William S. Ogden, Jr.
- 16 -
<PAGE> 1
Exhibit 21.1
Global Capital Access, Ltd. is the sole subsidiary of the Registrant.
<PAGE> 1
Exhibit 23.4
The Board of Directors and Shareholders
GCA 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
September 2, 1998
<PAGE> 1
Exhibit 99.1
FORM F-N
[Adopted in Release No. IC-18381 (P. 84,846),
effective November 4, 1991, 56 F.R.56294]
U.S. Securities and Exchange Commission Washington, D.C. 20549
Form F-N
APPOINTMENT OF AGENT FOR SERVICE OF PROCESS BY FOREIGN
BANKS AND FOREIGN INSURANCE COMPANIES AND CERTAIN OF
THEIR HOLDING COMPANIES AND FINANCE SUBSIDIARIES MAKING
PUBLIC OFFERINGS OF SECURITIES IN THE UNITED STATES
GENERAL INSTRUCTIONS
I. Form F-N shall be filed with the Commission in connection with the filing of
a registration statement under the Securities Act of 1933 by:
1. a foreign issuer that is a foreign bank or foreign insurance company
excepted from the definition of an investment company by rule 3a-6 [17 CFR
270.3a-6] under the Investment Company Act of 1940 (the "1940 Act");
2. a foreign issuer that is a finance subsidiary of a foreign bank or
foreign insurance company, as those terms are defined in rule 3a-6 under the
1940 Act, if such finance subsidiary is excepted from the definition of
investment company by rule 3a-5 [17 CFR 270.3a-5] under the 1940 Act; or
3. a foreign issuer that is excepted from the definition of investment
company by rule 3a-1 [17 CFR 270.3a-1] under the 1940 Act because some or all of
its majority owned subsidiaries are foreign banks or foreign insurance companies
excepted from the definition of investment company by rule 3a-6 under the 1940
Act.
II. Notwithstanding paragraph (I), the following foreign issuers are not
required to file Form F-N:
1. a foreign issuer that has filed form F-X [17 CFR 239.42] under the
Securities Act of 1933 with the Commission with respect to the securities being
offered; and
2. a foreign issuer filing a registration statement to debt securities
or non-voting preferred stock that has on file with the Commission a currently
accurate Form N-6C9 [17 CFR 274.304, rescinded] under the 1940 Act.
III. Six copies of the Form F-N, one of which shall be manually signed, shall be
filed with the Commission at its principal office. A form F-N filed in
connection with any other Commission form should not be bound together with or
be included only as an exhibit to, such other form.
A. Name of issuer or person filing ("Filer"):
GCA Ltd.
-----------------------------------------------------------------------------
B. This is (select one);
|X| an original filing for the Filer | | an amended filing for the Filer
<PAGE> 2
C. Identify the filing in conjunction with which this Form is being
filed: Name of registrant
GCA Ltd.
Form type
Registration Statement on Form S-1
File Number (if known)
Filed by
GCA Ltd.
Date Filed (if filed concurrently, so indicate)
August 28, 1998. (Filed concurrently with Registration Statement
on Form S-1.)
D. The filer is incorporated or organized under the Laws of (Name of
the jurisdiction under whose Laws the filer is organized or incorporated)
Bermuda.
and has its principal place of business at (Address in full and telephone
number)
Victoria Hall, Victoria Street
P.O. Box HM1262
Hamilton, HM FX, Bermuda
(441) 295-3278
E. The Filer designates and appoints (Name of United States person serving as
agent) CT Corporation System ("Agent") Located at (Address in full in the United
States and telephone number) 1633 Broadway, New York, New York 10019; (212)
664-1666
as the agent of the filer upon whom may be served any process;
pleadings, subpoenas, or other papers in:
(a) any investigation or administrative proceeding conducted by the
Commission, and
(b) any civil suit or action brought against the Filer or to which the
Filer has been joined as defendant or respondent, in any appropriate court in
any place subject to the jurisdiction of any state or of the United States or
any of its territories or possessions or of the District of Columbia, arising
out of or based on any offering made or purported to be made in connection with
the securities registered by the filer on form (Name of Form) S-1 filed on
August 28, 1998 or any purchases or sales of any security in connection
therewith. The Filer stipulates and agrees that any such civil suit or action or
administrative proceeding may be commenced by the service of process upon, and
that service of an administrative subpoena shall be effected by service upon,
such agent for service of process, and that the service as aforesaid shall be
taken and held in all courts and administrative tribunals to be valid and
binding as if personal service thereof had been made.
F. Each person filing this Form stipulates and agrees to appoint a
successor agent for service of process and file an amended form F-N if the Filer
discharges the Agent or the Agent is unwilling or unable to accept service on
behalf of the Filer at any time until six years have elapsed from the date of
the Filer's last registration statement or report, or amendment to any such
registration statement or report, filed with the Commission under the Securities
Act of 1933 or Securities Exchange Act of 1934. Filer further undertakes to
advise the Commission promptly of any change to the Agent's name or address
during the applicable period by amendment of this Form referencing the file
number of the relevant registration form in conjunction with which the amendment
is being filed.
G. Each person filing this form undertakes to make available, in person
or by telephone, representatives to respond to inquiries made by the Commission
staff, and to furnish promptly when requested to do so by the Commission staff
information relating to the securities registered pursuant to the form
referenced in paragraph E or transactions in said securities.
- 2 -
<PAGE> 3
The Filer certifies that it has duly caused this
power to attorney, consent, stipulation and agree-
ment to be signed on its behalf by the under-
signed, thereunto duly authorized, in the
City of New York
by (Signature and Title):
/s/ Andrew S. Lerner
Andrew S. Lerner
Interim Chief Financial Officer
Country of United States
this 28th
day of August 1998 A.D.
Filer: GCA Ltd.
This statement has been signed by the following persons in the capacities and on
the dates indicated.
(Signature) /s/ Kim Gilbertson (Kim Gilbertson)
(Title) CT Corporation System
(Date) August 28, 1998
Instructions
1. The power of attorney, consent, stipulation and agreement shall be
signed by the Filer and its authorized Agent in the United States.
2. The name of each person who signs Form F-N shall be typed or printed
beneath his signature. Where any name is signed pursuant to a board resolution,
a certified copy of the resolution shall be filed with each copy of the Form. If
any name is signed pursuant to a power of attorney, a manually signed copy of
each power of attorney shall be filed with each copy of the Form.
- 3 -
<PAGE> 1
Exhibit 99.2
CONSENT
The undersigned hereby consents to being named in the Registration
Statement on Form S-1 of GCA Ltd., a Bermuda corporation (the "Company"), filed
with the Securities and Exchange Commission on September 2, 1998 (the
"Registration Statement"), and any amendments or supplements thereto
(including post-effective amendments), as a person about to become a director
of the Company, as set forth in the Registration Statement under the caption
"Management -- Executive Officers and Directors."
/s/ Charles A. Davis
---------------------------
Charles A. Davis
