<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 1999
REGISTRATION NO. 333-62785
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLOBAL MARKETS ACCESS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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<S> <C> <C>
BERMUDA 6351 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
<TABLE>
<S> <C>
CUMBERLAND HOUSE CT CORPORATION SYSTEM
1 VICTORIA STREET 1633 BROADWAY
HAMILTON, HM AX, BERMUDA NEW YORK, NEW YORK 10019
(441) 492-9702 (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. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains three forms of prospectus: one to be
used in connection with an underwritten offering of the Common Shares in the
United States and Canada (the "U.S. Prospectus"), a second to be used in
connection with a concurrent offering of the Common Shares outside the United
States and Canada (the "International Prospectus") and a third to be used in
connection with a concurrent direct offering of the Common Shares by the Company
to its directors and officers (the "Direct Sales Prospectus"). The three
prospectuses are identical in all respects except for the front cover page, the
Section entitled "Underwriting" ("Plan of Distribution" in the Direct Sales
Prospectus) and the back cover page. Pages included in the International
Prospectus and the Direct Sales Prospectus and not in the U.S. Prospectus are
marked "Alternate Page for the International Prospectus" and "Alternate Page for
the Direct Sales Prospectus," respectively.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED MARCH 19, 1999
PROSPECTUS
20,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
------------------------
All of the 20,000,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby are being sold by Global Markets Access Ltd. ("GMA").
Of the 20,000,000 Common Shares offered hereby, 17,000,000 Common Shares are
being offered for sale initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 3,000,000 Common Shares are being offered
for sale initially in a concurrent offering outside the United States and Canada
by the International Managers (the "International Offering" and, together with
the U.S. Offering, the "Offerings"). The initial public offering price and
underwriting discount per Common Share will be identical for both Offerings. The
initial public offering price will be $15.00 per Common Share. See
"Underwriting." Prior to the Offerings, GMA has not conducted any business and
there has been no public market for the Common Shares.
An application has been made to have the Common Shares approved for
quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "GMAL."
In connection with the formation of GMA and the establishment of a core
group of strategic investors, The PMI Group, Inc., High Ridge Capital Partners
Limited Partnership, Rolaco Holding S.A., Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund (collectively, the "Strategic Investors") have
severally agreed to purchase for investment directly from GMA an aggregate of
3,900,706 Common Shares and Class B Warrants to purchase an aggregate of 550,000
Common Shares. Such purchases will be consummated immediately prior to the
consummation of the Offerings for an aggregate purchase price for the Common
Shares and the Class B Warrants of approximately $55.0 million. The aggregate
purchase price to be paid by each Strategic Investor is based on a price of
$14.10 for (i) one Common Share and (ii) the right to purchase a specified
fraction of a Common Share under the Class B Warrants. The exercise price for
the Class B Warrants will be $15.00 per share. The closing of the U.S. Offering
made hereby is conditioned upon the closing of sales by GMA to the Strategic
Investors of Common Shares and related Class B Warrants with an aggregate
purchase price of at least $50.0 million.
GMA is also offering by a separate prospectus up to 305,500 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 $4.3 million. GMA has also contracted to
sell 90,000 Common Shares directly to certain individuals involved in the
formation of the Company at a purchase price of $14.10 per share, for an
aggregate purchase price of approximately $1.3 million. All such purchases are
expected to be consummated simultaneously with the consummation of the Offerings
and, together with the purchases by the Strategic Investors, are referred to in
this Prospectus as the "Direct Sales." Upon consummation of the Offerings and
the Direct Sales, the Strategic Investors, GMA's directors and officers and
certain other individuals involved in the formation of the Company are expected
to own collectively approximately 17.7% of the outstanding Common Shares. See
"Direct Sales."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except for The PMI Group, Inc. and as
otherwise described herein) generally prevent transfers to holders beneficially
owning 10% or more of the Common Shares, require divestiture of Common Shares to
reduce the beneficial ownership of any holder to less than 10% of the Common
Shares and reduce the voting power of any holder beneficially owning 10% or more
of the Common Shares to less than 10% of the total voting power of GMA's capital
stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO GMA(2)
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<S> <C> <C> <C>
Per Common Share................................ $ $ $
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Total(3)........................................ $ $ $ (4)
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(1) GMA has agreed to indemnify the several U.S. Underwriters and the
International Managers (collectively, the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting certain advisory fees and other expenses related to the
Offerings payable by GMA estimated to be $5,050,000. See "Use of Proceeds."
(3) GMA has granted the U.S. Underwriters and the International Managers
options, exercisable within 30 days after the date hereof, to purchase up to
2,550,000 and 450,000 additional Common Shares, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to GMA will be $ , $ and $ , respectively. See
"Underwriting."
(4) Assuming completion of all the Direct Sales, the total Proceeds to GMA will
be $ . If the Underwriters' over-allotment options described above
are exercised in full, the total Proceeds to GMA including the Direct Sales
will be $ . See "Direct Sales."
------------------------
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offers and to reject orders in whole or in part. It is expected that
delivery of the Common Shares will be made in New York, New York on or about
March , 1999.
------------------------
Joint Lead Managers and Joint Bookrunners
MERRILL LYNCH & CO. PRUDENTIAL SECURITIES
------------------------
BEAR, STEARNS & CO. INC.
ING BARING FURMAN SELZ LLC
SALOMON SMITH BARNEY
WARBURG DILLON READ LLC
March , 1999
<PAGE> 4
CONSENT UNDER THE EXCHANGE CONTROL ACT 1972 (AND REGULATIONS THEREUNDER)
HAS BEEN OBTAINED FROM THE BERMUDA MONETARY AUTHORITY FOR THE ISSUE AND TRANSFER
OF THE COMMON SHARES BEING OFFERED PURSUANT TO THIS OFFERING. IN ADDITION, A
COPY OF THIS DOCUMENT HAS BEEN DELIVERED TO THE REGISTRAR OF COMPANIES IN
BERMUDA FOR FILING PURSUANT TO THE COMPANIES ACT 1981 OF BERMUDA. IN GIVING SUCH
CONSENT AND IN ACCEPTING THIS PROSPECTUS FOR FILING, THE BERMUDA MONETARY
AUTHORITY AND THE REGISTRAR OF COMPANIES IN BERMUDA ACCEPT NO RESPONSIBILITY FOR
THE FINANCIAL SOUNDNESS OF ANY PROPOSAL OR FOR THE CORRECTNESS OF ANY OF THE
STATEMENTS MADE OR OPINIONS EXPRESSED HEREIN.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SUCH TRANSACTIONS MAY INCLUDE STABILIZATION, THE PURCHASE OF COMMON SHARES TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. SEE
"UNDERWRITING."
2
<PAGE> 5
ENFORCEABILITY OF CIVIL LIABILITIES
UNDER UNITED STATES FEDERAL SECURITIES LAWS
GMA and its wholly-owned subsidiaries, Global Markets Guaranty Ltd. and GMG
Marketing Ltd., through which GMA expects to conduct substantially all of its
operations, were each organized pursuant to the laws of Bermuda. In addition,
certain of the directors and officers of GMA, as well as certain of the experts
named herein, reside outside the United States, and all or a substantial portion
of their assets and the assets of GMA are or may be located in jurisdictions
outside the United States. Therefore, it may be difficult for investors to
effect service of process within the United States upon such persons or to
recover against GMA or such persons on judgments of courts in the United States,
including judgments predicated upon the civil liability provisions of the United
States federal securities laws. However, GMA may be served with process in the
United States with respect to actions against it arising out of or in connection
with violations of United States federal securities laws relating to offers and
sales of Common Shares in the U.S. Offering by serving CT Corporation System,
1633 Broadway, New York, New York 10019, its United States agent irrevocably
appointed for that purpose.
GMA has been advised by Conyers Dill & Pearman, its Bermuda counsel, that
there is doubt as to whether the courts of Bermuda would enforce (i) judgments
of United States courts obtained in actions against GMA or its directors and
officers, as well as the experts named herein, who reside outside the United
States predicated upon the civil liability provisions of the United States
federal securities laws, or (ii) original actions brought in Bermuda against GMA
or such persons predicated solely upon United States federal securities laws.
GMA has also been advised by Conyers Dill & Pearman that there is no treaty in
effect between the United States and Bermuda providing for such enforcement, and
there are grounds upon which Bermuda courts may not enforce judgments of United
States courts. Certain remedies available under the laws of United States
jurisdictions, including certain remedies available under the United States
federal securities laws, may not be allowed in Bermuda courts as contrary to
that nation's public policy.
3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, included elsewhere in this Prospectus. Unless the
context otherwise requires, references herein to the "Company" mean Global
Markets Access Ltd. ("GMA"), together with its wholly-owned subsidiaries, Global
Markets Guaranty Ltd. (the "Operating Company") and GMG Marketing Ltd. (the
"Marketing Company"), through which GMA expects to conduct substantially all of
its operations. GMA and the Operating Company were both incorporated in August
1998 in Bermuda and neither has any operating history. The Marketing Company was
incorporated in November 1998 in Bermuda and also does not have any operating
history. The Operating Company was licensed in Bermuda on August 28, 1998 as a
Class 3 insurer, which authorizes it to write, among other things, financial
guaranty insurance and reinsurance. See "Glossary of Selected Financial Guaranty
Insurance and Reinsurance Terms" for definitions of certain terms and financial
strength, claims-paying ability and credit ratings used in this Prospectus.
Unless otherwise noted, this Prospectus assumes that the Underwriters' over-
allotment options will not be exercised and that all Direct Sales have been
made. In this Prospectus, amounts are expressed in United States dollars unless
expressly indicated otherwise. The notation "BD$" refers to Bermuda dollars
which currently have a fixed exchange ratio with United States dollars of
1BD$ = 1US$. The financial statements contained herein have been prepared in
accordance with United States generally accepted accounting principles ("GAAP").
THE COMPANY
GMA and the Operating Company were both recently organized in Bermuda to
provide "A" rated financial guaranty insurance and reinsurance on financial
obligations, principally asset-backed and municipal securities, that are rated
"BB" or higher or that are unrated and have in the Company's opinion an
equivalent credit quality. The Company will seek to provide direct financial
guaranty insurance outside of the United States and financial guaranty
reinsurance on a worldwide basis. Upon consummation of the Offerings, the
Company expects to be the only publicly traded "A" rated financial guaranty
insurance company and the first publicly traded Bermuda-based company focused
principally on the financial guaranty industry.
According to Asset-Backed Alert, worldwide issuances of asset-backed
securities grew from approximately $291.7 billion during 1997 to approximately
$346.7 billion during 1998, representing an increase of approximately 18.9%. In
addition, Asset-Backed Alert reported that during 1998, approximately 20.6% of
asset-backed securities issued in public offerings were insured. According to
Securities Data Co., the issuance of municipal securities in the United States
grew from approximately $220.7 billion during 1997 to approximately $285.9
billion during 1998, representing an increase of approximately 29.5%. In
addition, Securities Data Co. reported that during 1998, approximately 50.8% of
municipal securities issued in public offerings were insured.
The Company expects to raise gross proceeds of $360.6 million and to have
an equity capitalization of approximately $333.0 million upon consummation of
the Offerings and the Direct Sales. Management believes that this level of
capitalization will demonstrate a strong financial position and a high level of
commitment to potential clients and is necessary to establish the Company as a
competitive financial guaranty insurer and reinsurer. As a newly formed entity,
the Company's capital is presently unencumbered by such issues as loss reserve
adequacy, unrealized losses in its investment portfolio and uncollectible
reinsurance. In addition, although the Company does expect that it may seek a
working capital line of credit to finance its operations, the Company does not
presently have or plan to have any indebtedness other than obtaining letters of
credit in connection with its reinsurance agreements. In part because of the
Company's expected capitalization following the Offerings and the Direct Sales,
Standard & Poor's Ratings Services ("Standard & Poor's") has assigned the
Operating Company a preliminary financial strength rating of "A", and Duff &
Phelps Credit Rating Co. ("Duff & Phelps") and Fitch IBCA, Inc. ("Fitch IBCA")
have each assigned the Operating Company a preliminary claims-paying ability
rating of "A+". The ratings are subject to the Company raising gross proceeds of
at least $350.0 million in the Offerings and the Direct Sales and to the initial
capitalization of the Operating Company exceeding $320.0 million upon
consummation of the Offerings and the Direct Sales.
4
<PAGE> 7
BUSINESS STRATEGY
The Company's objective is to capitalize on what it believes to be an
opportunity to provide innovative and cost-effective forms of third-party credit
enhancement. The Company will seek to achieve this objective through the
implementation of its business strategy, the principal components of which are:
- - Participate in the Development of the "A" Rated Financial Guaranty Market in
the United States
Historically, the United States financial guaranty insurance market has
generally been served by "AAA" rated financial guaranty insurance
companies. The Company will seek to capitalize on what it believes is a
growing market for "A" rated financial guaranty insurance and reinsurance
in the United States. ACA Financial Guaranty Corporation ("ACA"), one of
the Company's sponsors, has since the commencement of its operations in
October 1997 been developing the market for "A" rated financial guaranty
insurance by offering a lower rated alternative to "AAA" rated financial
guaranty insurance. The Company believes that "A" rated financial guaranty
insurance can, in many cases, reduce an issuer's overall cost of borrowing
and increase the liquidity of a financial obligation trading in the
secondary market while costing less than traditional "AAA" rated financial
guaranty insurance or other forms of third-party credit enhancement such as
letters of credit. In addition, the Company believes that "A" rated
financial guaranty insurance may be particularly attractive to issuers that
have previously had limited access to the financial markets and to holders
of financial obligations subject to risk-based capital requirements. The
Operating Company has entered into three reinsurance treaties with ACA that
will become effective upon consummation of the Offerings. Management
believes that the treaties pursuant to which the Operating Company provides
reinsurance to ACA will provide ACA with additional insurance capacity and
will permit ACA to develop further the market for "A" rated financial
guaranty insurance in the United States. See "-- Reinsurance Treaties with
ACA." The Company will also seek to reinsure obligations in circumstances
where the holders of such obligations, including financial institutions and
insurance companies, desire third-party credit enhancement for regulatory
or accounting purposes. The Company will seek to enter into similar
reinsurance arrangements with higher rated third-party credit enhancement
providers based in the United States.
- - Provide Credit Enhancement for Transactions Structured Outside the United
States
The Company believes that financial guaranty insurance has been
underutilized in transactions structured outside the United States,
particularly with respect to asset-backed securities, as issuers of such
financial obligations have instead principally relied on banks and other
financial institutions offering letters of credit and other guarantees for
credit enhancement. As a consequence, the Company believes that an
opportunity exists to provide "A" rated financial guaranty insurance as an
innovative and cost-effective alternative to existing forms of credit
enhancement for such transactions. Initially, an important international
focus for the Company will be to insure financial transactions involving
assets held by trusts or similar special purpose vehicles domiciled in
jurisdictions such as Bermuda, the Cayman Islands and the Island of Jersey.
Such assets are expected typically to originate in the United States or
certain European Union countries and be transferred to such off-shore
jurisdictions in connection with the structuring of such transactions. The
Company will also seek outside the United States to insure and reinsure
obligations in circumstances where the holders of such obligations,
including financial institutions and insurance companies, desire
third-party credit enhancement for regulatory and accounting purposes. The
Company will seek to capitalize on the relationships its management team
has developed with investment banks, commercial banks and other financial
services firms to generate referrals for issuing financial guaranty
insurance and reinsurance. The Company has also established the Marketing
Company to act solely as a marketing agent for the Company. The Marketing
Company will operate a branch office in London, which is a center for
banking and other financial service activities. The Company is not
currently licensed as a financial guaranty insurer or reinsurer in any
jurisdiction other than Bermuda, which will limit its ability to provide
financial guaranty insurance or reinsurance with respect to certain
transactions. As the Company's business develops, management will monitor
the need to obtain licenses in jurisdictions other than Bermuda in order to
comply with applicable law or to be able to
5
<PAGE> 8
engage in additional financial guaranty insurance related activities. See
"Risk Factors -- Regulation; Restrictions on Insurance and Reinsurance
Operations."
- - Utilize a Disciplined Underwriting Approach
The Company's underwriting strategy is to insure and reinsure financial
obligations which are expected to make full and timely payment of principal
and interest. Nevertheless, because the Company will be insuring and
reinsuring obligations rated "BB" or higher or that are unrated and have in
the Company's opinion an equivalent credit quality, the Company does
anticipate that its insurance portfolio as a whole may generate a certain
level of losses. Over time, the Company will seek to diversify the risks it
insures and reinsures by type of obligor, type of pledged assets,
geographic origination point of pledged assets, transaction size,
geographic location of the obligor, revenue sources and risk duration. Such
diversification is intended to mitigate the impact on the Company's
insurance portfolio if higher than expected losses arise in certain
segments of the Company's business. The Company will also seek a private or
"shadow" rating evaluation from one or more nationally recognized rating
agencies on all unrated financial obligations that the Company insures on a
direct basis.
- - Capitalize on Skill and Experience of Management and Board of Directors
The Company has assembled a senior management team of experienced
insurance, reinsurance and capital markets professionals to implement its
business strategy. The Company's President and Chief Executive Officer,
Donald J. Matthews, has over 24 years of experience in the insurance and
reinsurance industries and was President, Chief Operating Officer and a
director of ACA from its formation in October 1997 to August 1998 when he
resigned as an officer and director of ACA to join the Company. From 1985
to 1997, he served as a Senior Vice President and a Principal of Johnson &
Higgins (now Marsh & McLennan Companies, Inc.), where he was employed for
23 years. At Johnson & Higgins, Mr. Matthews most recently served as
Chairman of its Global Financial Group, where he oversaw the firm's
insurance and reinsurance relationships with financial services companies,
including commercial banks and investment banks, on a worldwide basis. Also
while at Johnson & Higgins, Mr. Matthews was instrumental in the formation
of Corporate Officers & Directors Assurance Ltd. (now part of ACE Limited)
and Executive Risk Inc. Mary Jane Robertson, Managing Principal, Chief
Financial Officer and Treasurer of the Company, has over 21 years
experience in the insurance industry. From 1993 to 1997, Ms. Robertson was
the Chief Financial Officer and a Senior Vice President of Capsure Holdings
Corp. (now part of CNA Surety Corp.), an insurance company focusing
principally on the surety and fidelity insurance business. From 1986 to
1996, Ms. Robertson also served as the Chief Financial Officer and an
Executive Vice President of United Capitol Insurance Company, a
property/casualty insurance company. Matthew J. Cooleen, Managing
Principal, Structured Products of the Company, has over 12 years experience
in the structured finance sector of the financial services industry. From
1997 to 1999, Mr. Cooleen worked at MBIA-Ambac International, a joint
venture between MBIA Insurance Corp. and Ambac Assurance Corporation, where
he was most recently a Managing Director in the International Structured
Finance Department. At MBIA-Ambac International, Mr. Cooleen focused on the
development of the global structured finance and asset-backed financial
guaranty market. From 1995 to 1997, he was a Vice President and Group Head
of the Global Securitization Group of Paribas Capital Markets, where he
founded the Global Securitization/Structured Finance Department. From 1991
to 1995, Mr. Cooleen was a Vice President in the Asset Backed Finance
Department of ING Barings. Bruce W. Bantz, Managing Principal, Marketing
and Business Development of GMA and the Marketing Company, has over 22
years experience in the investment and commercial banking industries,
specializing in structured finance and asset securitization. From 1997 to
1998, Mr. Bantz was a Director and Global Head of Asset-Backed Finance of
Dresdner Kleinwort Benson, the investment banking division of Dresdner Bank
A.G. From 1994 to 1997, Mr. Bantz served as a Director and Global Head of
Asset Securitization for NatWest Markets, the investment banking division
of NatWest Group PLC. James G. Jachym, Managing Principal, Credit of the
Company, has over 20 years of experience with capital markets and
commercial paper credits. From 1996 to 1999, Mr. Jachym was a Vice
President of BT Alex.Brown Incorporated, where he was responsible for
rating agency matters pertaining to such firm's clients. From 1979 to 1996,
he was employed by Lehman Brothers Inc., where he was a Senior
6
<PAGE> 9
Vice President and was responsible for review and commitment of all
asset-backed commercial paper programs. Lionel J. Marsland-Shaw, Managing
Principal, Risk Management of the Company, has over 28 years experience in
the credit analysis sector of the financial services industry. From 1995 to
1998, Mr. Marsland-Shaw served as General Manager and Chief Executive
Officer of Capital Intelligence, a credit rating and analysis company
specializing in emerging markets. From 1993 to 1995, Mr. Marsland-Shaw was
Director and Head of the London office of Standard & Poor's and was
responsible for its ratings business in the United Kingdom, Ireland and the
Netherlands. In addition, the Company's Board of Directors consists of
several individuals with extensive experience in the financial guaranty and
financial services industries. Management believes that the reputation and
expertise possessed by the Company's officers and directors should assist
the Company with its underwriting analysis and marketing efforts.
- - Maintain Low Cost Structure
Management believes that through controls on overhead expenses and with the
absence of a corporate level tax in Bermuda on the Company's profits and
income, the Company will have a low cost structure. 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
insurance and reinsurance markets.
The Company's principal executive office is located at Cumberland House, 1
Victoria Street, Hamilton, HM AX, Bermuda, and its telephone number is (441)
492-9702.
REINSURANCE TREATIES WITH ACA
The Operating Company has entered into three reinsurance treaties with ACA,
a sponsor of the Company, which will become effective upon consummation of the
Offerings. The first treaty is a quota share treaty pursuant to which the
Operating Company is required to provide, and ACA is required to purchase,
reinsurance on a fixed percentage of the risks associated with financial
guaranty insurance policies issued by ACA covering new issues of financial
obligations with a rating of "BB" or higher. The other two treaties are
facultative treaties under which the Operating Company and ACA are each
obligated to offer the other the opportunity to reinsure each financial
obligation the other insures on a direct or assumed basis. These facultative
treaties also set forth the principal terms under which the Operating Company
and ACA may purchase such reinsurance from the other on a case-by-case basis.
The Operating Company expects that pursuant to the facultative treaty under
which it provides reinsurance to ACA, the Operating Company may reinsure a
greater percentage of certain new issues of financial obligations insured by ACA
than the percentage specified under the quota share treaty. In addition, the
Operating Company expects that pursuant to such facultative treaty, it may
reinsure through one or more bulk reinsurance transactions certain risks insured
by ACA before the consummation of the Offerings as well as, on an ongoing basis,
certain risks insured by ACA with respect to obligations trading in the
secondary market, neither of which are covered by the quota share treaty.
Management anticipates that at least in the early stages of its business
development, the premiums the Operating Company receives under the treaties with
ACA will account for a substantial portion of the Company's total premium
income.
ACA commenced operations as an "A" rated financial guaranty insurer in
October 1997 and, to the Company's knowledge, is currently the only "A" rated
financial guaranty insurer operating in the United States. ACA is a
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 December 31, 1998, ACA
wrote financial guaranty insurance covering approximately 145 different
underlying credits representing approximately $2.2 billion in aggregate
principal amount for direct and assumed premiums written during that period
totaling approximately $35.7 million. A majority of the financial guaranty
insurance written by ACA has covered municipal
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obligations and obligations issued by other tax-exempt organizations, although
ACA has also insured asset-backed and corporate securities as well as other
financial obligations.
SPONSORS AND STRATEGIC INVESTORS
The Company has been established through the sponsorship of ACA and its
affiliate American Capital Access Service Corporation ("ACA Service") and
Inter-Atlantic Securities Corporation ("Inter-Atlantic" and, together with ACA
and ACA Service, the "Sponsors"). ACA Service currently provides management and
support services to ACA. Inter-Atlantic is a provider of investment banking
services to insurance companies and other financial services firms and was the
sponsor of Annuity and Life Re (Holdings), Ltd., the first publicly traded
Bermuda-based reinsurance company focusing principally on writing annuity and
life reinsurance. Inter-Atlantic has provided certain services to the Company in
connection with the Offerings, the sales to the Strategic Investors and the
development of the Company's operations, and ACA Service has acted as a
consultant 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 The PMI Group, Inc.
("PMI"), High Ridge Capital Partners Limited Partnership ("High Ridge"), Rolaco
Holding S.A. ("Rolaco"), Third Avenue Value Fund and Third Avenue Small-Cap
Value Fund (Third Avenue Value Fund and Third Avenue Small-Cap Value Fund are
hereinafter referred to as the "Third Avenue Funds" and, together with PMI, High
Ridge and Rolaco, the "Strategic Investors") for the purchase for investment
directly from the Company of an aggregate of 3,900,706 Common Shares and Class B
Warrants to purchase an aggregate of 550,000 Common Shares. Such purchases will
be consummated immediately prior to the consummation of the Offerings for an
aggregate purchase price for the Common Shares and the Class B Warrants of
approximately $55.0 million. The aggregate purchase price to be paid by each
Strategic Investor is based on a price of $14.10 for (i) one Common Share and
(ii) the right to purchase a specified fraction of a Common Share under the
Class B Warrants. The exercise price of the Class B Warrants will be $15.00 per
share. Each of the Strategic Investors has agreed not to sell or otherwise
transfer their Common Shares and Class B Warrants for a period of nine months
from the date of this Prospectus without the prior written consent of the Joint
Lead Managers and Joint Bookrunners of the U.S. Offering on behalf of the
Underwriters and, in certain cases, the prior written consent of the Company.
See "Shares Eligible for Future Sale" and "Direct Sales."
RISK FACTORS
Businesses such as that of the Company which are in their initial stages of
development present substantial business and financial risks and may suffer
significant losses for reasons not anticipated by management. In addition, the
Company's business strategy has not been tested and may not succeed. Investors
should consider carefully the risk factors involved in connection with an
investment in the Common Shares and the impact to investors from various
circumstances which could adversely affect the Company's business, results of
operations or financial condition. See "Risk Factors."
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THE OFFERINGS
Common Shares Offered in the
Offerings................... 20,000,000 shares
Common Shares Offered in the
Direct Sales(1)............... 4,296,206 shares
Common Shares to be
Outstanding after the
Offerings and the Direct
Sales(2).................... 24,296,206 shares
Use of Proceeds from the
Offerings and the Direct
Sales....................... The net proceeds of the Offerings and the
Direct Sales (after deducting underwriting
discounts and commissions, certain advisory
fees and other expenses, including payments to
Inter-Atlantic for its services and
reimbursement for certain expenses related to
the Offerings and the sales to the Strategic
Investors) will be approximately $277.0 million
and $60.5 million, respectively. Substantially
all of the net proceeds will be contributed to
the capital and surplus of the Operating
Company to support its financial guaranty
business. See "Use of Proceeds."
Dividend Policy............... The Company intends to pay a quarterly cash
dividend of $.04 per Common Share following the
end of the first full fiscal quarter following
the consummation of the Offerings.
Proposed Nasdaq National
Market Symbol................. GMAL
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(1) Unless otherwise noted, this Prospectus assumes that, upon consummation of
the Offerings, the sale of 3,900,706 Common Shares and Class B Warrants to
purchase 550,000 Common Shares to the Strategic Investors has been completed
and the 395,500 Common Shares offered by the Company to its directors and
officers and certain other individuals involved in the formation of the
Company have been purchased. Such directors, officers and other individuals
who have not contracted with the Company to make such purchases have
indicated their intention to purchase such Common Shares, but are not
obligated to do so.
(2) The Global Purpose Trust, a Bermuda trust (the "Purpose Trust"), owns 12,000
Common Shares, which constitute all of the Common Shares currently
outstanding. Upon consummation of the Offerings, the Purpose Trust has
agreed to sell such Common Shares to GMA for an aggregate price of $12,000
and such Common Shares will be cancelled. Common Shares to be outstanding
after the Offerings and the Direct Sales excludes the 12,000 Common Shares
currently held by the Purpose Trust, 3,053,184 Common Shares issuable upon
the exercise of outstanding Class A Warrants, 550,000 Common Shares issuable
upon the exercise of Class B Warrants to be included in the Direct Sales,
1,148,645 Common Shares issuable upon the exercise of options to be granted
prior to or upon consummation of the Offerings and 100,000 Common Shares
reserved for future issuance pursuant to the Company's Initial Stock Option
Plan (the "Stock Option Plan"). If the Underwriters' over-allotment options
are exercised in full, 27,296,206 Common Shares are expected to be
outstanding, the number of Common Shares issuable upon the exercise of
outstanding Class A Warrants will increase to 3,413,184 Common Shares and
the number of Common Shares issuable upon the exercise of options to be
granted prior to or upon consummation of the Offerings will increase to
1,313,645 Common Shares. The number of Common Shares issuable upon the
exercise of the Class B Warrants and the number of Common Shares reserved
for future issuance pursuant to the Stock Option Plan will not change if the
Underwriters' over-allotment options are exercised. The Class A Warrants,
Class B Warrants and options will not be exercisable upon consummation of
the Offerings. See "Management -- Stock Option Plan," "Description of
Capital Stock -- Warrants" and "Direct Sales."
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<PAGE> 12
RISK FACTORS
An investment in the Common Shares involves a high degree of risk.
Prospective investors should consider carefully the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the Common Shares.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "plan," "intend" and similar
expressions are intended to identify forward-looking statements regarding, among
other things, (i) the Company's business and growth strategies; (ii) trends in
the financial guaranty insurance and reinsurance industries; (iii) the Company's
relationship with clients and third-party service providers; (iv) the use of the
net proceeds of the Offerings and the Direct Sales; (v) government regulations;
(vi) trends affecting the Company's financial condition or results of
operations; and (vii) the declaration and payment of dividends. Prospective
investors are cautioned that such forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below and under the heading "Management's Discussion and Analysis of Financial
Condition and Plan of Operations" and elsewhere in this Prospectus.
START UP OPERATIONS. GMA and the Operating Company were both incorporated
in August 1998 and neither has any operating history. The Marketing Company was
incorporated in November 1998 and also does not have any operating history.
Businesses which are starting up or in their initial stages of development
present substantial business and financial risks and may suffer significant
losses. They must successfully develop business relationships, establish
operating procedures, hire staff and complete other tasks appropriate for the
conduct of their intended business activities. In particular, the Company's
ability to implement successfully its strategy to enter the financial guaranty
insurance and reinsurance market depends on, among other things, (i) the demand
(which is largely undeveloped) for "A" rated financial guaranty insurance and
reinsurance 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 insurance and reinsurance policies it
writes. Because the market for "A" rated financial guaranty insurance is in the
early stages of development, there can be no assurance that the demand for such
insurance will be sufficient to support the Company's planned level of
operations or that the Company will be able to capture a sufficient portion of
such market.
RELIANCE ON ACA. The Company anticipates that, at least during the early
stages of its business development, it will depend to a significant extent on
reinsurance sold to ACA, one of the Company's Sponsors, pursuant to the
reinsurance treaties between the Operating Company and ACA. To the Company's
knowledge, ACA is currently 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 the Operating Company receives under its
reinsurance treaties with ACA will account for all of the Company's total
premium income until such time as the Company successfully develops business
from other sources. At least during such period, the success of the Company will
depend on the performance of ACA and any adverse development affecting ACA would
adversely affect the Company. Because ACA was formed only in October 1997, it is
itself subject to the risks associated with a start up operation described
above, and there can be no assurance that its business will continue to develop
or that its demands for reinsurance will be sufficient to provide the Company
with a meaningful source of business. If the market for "A" rated financial
guaranty insurance fails to develop further, ACA would be adversely affected
and, consequently, its need for reinsurance would be limited. Furthermore, if
ACA's underwriting analysis fails to assess accurately the risks it assumes
under the financial guaranty insurance policies it writes, the Operating Company
may incur a greater level of losses than it anticipates under its reinsurance
treaties with ACA. ACA is also subject to certain limitations when doing
business with non-admitted reinsurers such as the Operating Company. Certain
states may limit the aggregate amount of reinsurance ACA may cede to the
Operating Company and to all non-admitted reinsurers in the aggregate,
regardless of the type or amount of security posted by the Operating Company and
any such other non-admitted reinsurers. Furthermore, the rating agencies that
have issued a financial strength or claims-paying ability rating on ACA may
limit the aggregate amount of reinsurance ACA
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may cede to any one reinsurer, including the Operating Company. There can be no
assurances that these limitations will not have a material adverse effect on the
Company. The reinsurance treaties between the Operating Company and ACA may be
terminated upon the happening of certain events, and the facultative treaties
between the Operating Company and ACA are terminable on 90 days' notice. If the
Operating Company's reinsurance treaties with ACA were to be terminated for any
reason, the Company would be adversely affected. See "Business -- Reinsurance
Treaties with ACA."
CONCENTRATION OF REINSURANCE CLIENTS. The Company anticipates that at
least during the early stages of its business development, it will rely more
heavily on writing financial guaranty reinsurance than insurance. Due to the
limited number of companies providing financial guaranty insurance, reinsurance
or other forms of third-party credit enhancement, management expects initially
to target a relatively small number of potential reinsurance clients.
Furthermore, management expects that a few of these potential clients will
account for a high percentage of the Company's revenues for the foreseeable
future. If the Company fails to attract or retain business from one or more of
these potential clients, the Company would be adversely affected.
REGULATION; RESTRICTIONS ON INSURANCE AND REINSURANCE OPERATIONS.
Bermuda. The Operating Company is a registered Bermuda insurance company
and is subject to regulation and supervision in Bermuda. Among other things, the
Bermuda statutes and regulations require the Operating Company to maintain
minimum levels of capital and surplus; prescribe minimum solvency and liquidity
standards, limit transfers of ownership of its capital shares; and provide for
certain periodic examinations of the Operating Company and its financial
condition. The Operating Company has received from the Bermuda Minister of
Finance an exemption from the minimum solvency requirement until the
consummation of the Offerings, when the Operating Company will meet such
requirements. The Bermuda statutes and regulations may also restrict the ability
of the Operating Company to write insurance and reinsurance policies and
distribute funds to GMA. Generally, the Bermuda statutes and regulations
applicable to the Operating Company are less restrictive than those that would
be applicable to the Operating Company were it subject to the insurance laws of
any state in the United States. See "Business -- Regulation -- Bermuda."
United States. Neither GMA nor its subsidiaries are currently licensed as
a financial guaranty insurer or reinsurer in any jurisdiction in the United
States. The insurance laws of each state in the United States regulate the sale
of insurance within its jurisdiction by insurers, such as the Operating Company,
which are not admitted to do business within such jurisdiction. With some
exceptions, the sale of insurance within a jurisdiction in the United States
where an insurer is not admitted to do business is prohibited. The sale of
reinsurance, however, is generally permitted within each state of the United
States and the District of Columbia by non-admitted reinsurers, provided that
certain requirements are satisfied, such as the need to obtain necessary
approvals from certain state insurance regulators in connection with a
particular reinsurance transaction and/or the need for the insurer to satisfy
applicable credit for reinsurance requirements.
The Operating Company has adopted Operating Guidelines pursuant to which it
intends to conduct its reinsurance business in the United States in a manner
that will comply with the requirements applicable to non-admitted reinsurers and
to conduct its insurance business with persons located in the United States in a
manner that will not subject the Operating Company to the insurance licensing
laws of any jurisdiction in the United States. There can be no assurance,
however, that challenges to the Operating Company's reinsurance and insurance
activities in the United States will not be raised in the future or that the
restrictions on the Operating Company's activities associated with its status as
a non-admitted reinsurer and its lack of any insurance licenses in the United
States will not place the Company at a competitive disadvantage or otherwise
adversely affect the Company. In addition, changes in the Company's business
strategy or in the applicable insurance laws in the United States may lead
management to conclude that the Operating Company should seek to become an
admitted reinsurer in, or to obtain insurance licenses from, one or more
jurisdictions in the United States. If such a conclusion were to be reached,
there can be no assurance that the Operating Company would be able to become an
admitted reinsurer or be able to obtain such licenses. Furthermore, the process
of obtaining such status or licenses is often costly and may take a long time,
which could adversely affect the Company and its objective of being a low-cost
insurance and reinsurance provider.
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Because many jurisdictions in the United States do not permit insurance
companies to take credit on their statutory financial statements for reinsurance
obtained from unlicensed or non-admitted reinsurers unless appropriate security
measures are in place, it is anticipated that the Operating Company's
reinsurance clients, including ACA, will require it to post a letter of credit
or enter into other security arrangements. If the Operating Company should
default under a letter of credit facility, it may be required to liquidate
prematurely all or a substantial portion of its investment portfolio and/or its
other assets which have been pledged as security for the letter of credit
facility or otherwise to secure its obligations to its reinsurance clients,
which would adversely affect the Company. The Operating Company does not
currently have a letter of credit facility established and if the Operating
Company is unable to obtain such a facility on commercially acceptable terms or
is unable to arrange for other types of security, the Operating Company's
ability to operate its reinsurance business may be severely limited.
The Operating Company's quota share and facultative treaties with ACA
require the Operating Company to take all steps necessary in order to permit ACA
to receive credit for such reinsurance in all applicable jurisdictions. The
Operating Company expects typically to post a letter of credit or other security
to enable ACA to obtain full credit for the reinsurance provided under the
treaties. If the Operating Company is unable to satisfy any requirement needed
in order for ACA to receive credit for the Operating Company's reinsurance, ACA
would have the right to terminate its reinsurance treaties with the Operating
Company, which would adversely affect the Company.
Outside the United States -- Insurance. Initially, an important
international focus for the Company will be to insure financial transactions
involving assets held by trusts or similar special purpose vehicles domiciled in
jurisdictions such as Bermuda, the Cayman Islands and the Island of Jersey. Such
assets are expected typically to originate in the United States and certain
European Union countries and be transferred to such off-shore jurisdictions in
connection with the structuring of such transactions. The Operating Company has
obtained the necessary licenses under Bermuda law to provide financial guaranty
insurance to certain special purpose vehicles located in Bermuda. The Company
believes that no insurance licenses are required under the laws of the Cayman
Islands to provide financial guaranty insurance to such entities located in the
Cayman Islands, provided that the Operating Company conducts the negotiation,
conclusion and execution of insurance contracts, administers insurance policies,
and solicits insurance business in respect of persons ordinarily resident or
property ordinarily based in the Cayman Islands, from outside the Cayman
Islands. Similarly, the Company believes that the Operating Company is permitted
under the laws of the Island of Jersey to provide financial guaranty insurance
to such entities located in the Island of Jersey without obtaining an insurance
permit, subject to certain restrictions, principally that the Operating Company
conduct marketing, negotiating, underwriting, contract execution, policy
administration and claims handling activities entirely outside the Island of
Jersey. In addition, in connection with these types of transactions, the
Operating Company, as a result of being licensed in Bermuda only, will
investigate risks and conduct post-closing surveillance activities from Bermuda,
rather than from the Cayman Islands, the Island of Jersey or the jurisdiction
from which the assets underlying such transactions originated, such as the
United States and certain European Union countries. The Operating Company
expects to perform its underwriting analysis on such transactions in Bermuda and
to obtain the information needed to conduct such analysis from the proposed
insured, persons acting as agent for the proposed insured and other third
parties. The Operating Company also expects to provide financial guaranty
insurance to financial institutions and insurance companies outside the United
States seeking to manage their regulatory risk-based capital requirements, where
it may do so without obtaining insurance licenses in jurisdictions other than
Bermuda.
The Company has adopted Operating Guidelines pursuant to which it intends
to operate its international insurance business in a manner that will comply
with applicable legal requirements and to conduct such insurance business in a
manner that will not subject it to the insurance licensing laws of any
jurisdiction other than Bermuda. There can be no assurance, however, that
challenges to the Operating Company's insurance activities in such jurisdictions
will not be raised or that the restrictions on the Operating Company's
activities associated with its lack of any insurance licenses in such
jurisdictions will not place the Company at a competitive disadvantage or
otherwise adversely affect the Company. In addition, changes in the Company's
business strategy, including a decision to target other jurisdictions that are
used as domiciles for structuring asset-backed transactions, or changes in
applicable insurance laws in the Cayman Islands, the Island of Jersey,
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<PAGE> 15
the United States or certain European Union countries may lead management to
conclude that the Operating Company should seek insurance licenses in
jurisdictions other than Bermuda. If such a conclusion were to be reached, there
can be no assurance that the Operating Company would be able to obtain such
licenses. Furthermore, the process of obtaining such licenses is often costly
and may take a long time, which could adversely affect the Company and its
objective of being a low-cost insurance provider.
The Company believes that the securities issued by trusts and other special
purpose vehicles that purchase financial guaranty insurance from the Operating
Company will likely be sold in many jurisdictions, principally including the
United States and the United Kingdom. In part because the Operating Company will
issue its financial guaranty insurance policies to such trusts and other special
purpose vehicles, the Company does not believe that the ownership of the
securities issued by such entities by an investor residing in a particular
jurisdiction would require the Operating Company to obtain an insurance license
in such jurisdiction. The Company has adopted Operating Guidelines pursuant to
which it intends to issue its financial guaranty insurance policies to such
trusts and other special purpose vehicles that issue securities in the United
States in a manner that will not subject the Operating Company to the insurance
licensing laws of any jurisdiction in the United States. These Operating
Guidelines provide that in such cases, among other things, (i) the Operating
Company will negotiate, issue and deliver its financial guaranty policy to an
insured located outside the United States; (ii) the Operating Company will
investigate risks and conduct post-closing surveillance from outside the United
States; (iii) the Operating Company will not solicit, advertise or otherwise
sell its policies in the United States; (iv) under the terms of the securities
that are subject to the financial guaranty insurance, principal and interest
will be due and payable to a trustee located outside the United States; and (v)
no policy, certificate of insurance, rider, endorsement or other evidence of
insurance will be delivered by the Operating Company to any securityholder,
excluding an issuer or trustee when not acting in the capacity of a
securityholder. The Operating Company has also adopted Operating Guidelines
pursuant to which it intends to issue its financial guaranty insurance policies
to trusts and other special purpose vehicles that issue securities in the United
Kingdom in a manner that will not subject the Operating Company to the insurance
licensing laws of the United Kingdom. These Operating Guidelines provide, among
other things, that the Operating Company will make underwriting decisions and
issue all policies exclusively from outside the United Kingdom and not otherwise
effect or carry out any contracts of insurance in the United Kingdom.
Because securities insured by the Operating Company may be held in many
jurisdictions, there can be no assurance that challenges will not be made by
regulatory authorities or others in a particular jurisdiction, including the
United States or the United Kingdom, where securities insured by the Operating
Company are held seeking to require the Operating Company to obtain an insurance
license in such jurisdiction. If any such challenge were to be successfully
asserted, there can be no assurance that the Operating Company would be able to
obtain the required licenses. Furthermore, the process of obtaining any such
license may be costly and may take a long time, which could adversely affect the
Company and its objective of being a low-cost insurance provider.
Outside the United States -- Reinsurance. The Company also expects to seek
reinsurance opportunities in Bermuda and certain European Union countries. The
Operating Company has obtained the necessary licenses under Bermuda law to
provide financial guaranty reinsurance to certain insurers domiciled in Bermuda,
and it intends to conduct its reinsurance business in the European Union in a
manner that will not subject the Operating Company to insurance licensing laws
in any European Union country. There can be no assurance, however, that
challenges to the Operating Company's reinsurance activities in European Union
countries will not be raised in the future or that the restrictions on the
Operating Company's reinsurance activities in European Union countries
associated with its lack of any insurance licenses in such countries will not
place the Company at a competitive disadvantage. In addition, changes in the
Company's business strategy or applicable insurance laws in particular European
Union countries may lead management to conclude that the Operating Company
should seek insurance licenses in one or more European Union countries. If such
a conclusion were to be reached, there can be no assurance that the Operating
Company would be able to obtain such licenses. Furthermore, the process of
obtaining such licenses is often costly and may take a long time, which could
adversely affect the Company and its objective of being a low-cost reinsurance
provider.
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Marketing Company. Neither GMA nor its subsidiaries are licensed as an
insurer in the United Kingdom. The insurance laws of the United Kingdom prohibit
the carrying on of insurance and reinsurance business in the United Kingdom by
any person other than an authorized or exempt insurer or reinsurer. The Company
believes that the Operating Company and the Marketing Company will not need to
be licensed as insurers in the United Kingdom, so long as the Operating Company
exclusively makes underwriting decisions and issues all policies from outside
the United Kingdom and does not otherwise effect or carry out any contracts of
insurance in the United Kingdom. In light of this, the Operating Company and the
Marketing Company have adopted Operating Guidelines that provide, among other
things, that the activities of the Marketing Company will be principally limited
to maintaining an office in the United Kingdom, meeting with prospective parties
to financial guaranty transactions and assisting them in originating proposals
to be presented to the Operating Company in Bermuda for its review and further
action; that the Operating Company will perform credit reviews, make
underwriting decisions, issue policies, collect premiums, settle claims and
perform all other policy servicing activities, including due diligence and
post-closing credit surveillance, outside the United Kingdom and will not carry
on any insurance-related activities in the United Kingdom; and that the
Marketing Company will not have, and will not hold itself out as having, the
authority to bind the Operating Company and will not participate in any
underwriting decisions, execute policies, collect premiums, settle claims or
otherwise effect or carry out insurance contracts in the United Kingdom. There
can be no assurance, however, that challenges to the activities of the Operating
Company and the Marketing Company in the United Kingdom will not be raised in
the future or that the restrictions on the activities of the Operating Company
and the Marketing Company in the United Kingdom associated with their lack of
any insurance licenses will not place the Company at a competitive disadvantage
or otherwise adversely affect the Company.
Other. Recently, the insurance and reinsurance regulatory framework has
become subject to increased scrutiny in many jurisdictions, including the United
States, various states within the United States, the United Kingdom and
elsewhere. For example, there have been Congressional and other initiatives in
the past in the United States regarding increased supervision and regulation of
the insurance industry, including proposals to supervise and regulate reinsurers
domiciled outside the United States to a greater extent than currently
regulated. In addition, in the United Kingdom there is an initiative to
consolidate the regulation of insurance, banking and other financial services
into a system supervised by a single regulator, the Financial Services
Authority. This initiative may subject certain types of insurance, including
financial guaranty insurance, or certain insurance-related activities, such as
the proposed activities of the Marketing Company, to more extensive regulation.
It is not possible to predict the future impact of changing law or regulation on
the operations of the Company. Such changes, if any, could have an adverse
effect on the Company.
The Operating Guidelines to be employed by the Company were developed
following consultation with counsel in certain jurisdictions in which the
Company expects to conduct its insurance and reinsurance business, in which the
securities issued by trusts and other special purpose vehicles that have
purchased insurance from the Operating Company are principally expected to be
issued, and from which the assets backing such securities are principally
expected to originate, in each case as noted above. However, in light of the
absence of controlling legal precedent with respect to many of the regulatory
issues noted above and the broad discretion accorded insurance regulators in
many jurisdictions in the administration of insurance laws, there can be no
assurance that if the Company conducts its business in accordance with such
Operating Guidelines, a court or insurance regulator would not interpret and
apply applicable insurance laws so as to require GMA, the Operating Company or
the Marketing Company to obtain an insurance license in a particular
jurisdiction. Any such action by a court or regulator would adversely affect the
Company. The insurance laws of most jurisdictions provide for civil and criminal
penalties for conducting an insurance business without the required licenses. In
addition, the insurance laws of some jurisdictions provide that insurance
policies entered into by an insurer conducting an insurance business without
required licenses will be unenforceable and that the insurer must return any
premiums received for such policies.
FINANCIAL RATINGS. In part because of the Company's expected
capitalization following the Offerings and the Direct Sales, the Operating
Company has been assigned a preliminary financial strength rating of "A" by
Standard & Poor's and a preliminary claims-paying ability rating of "A+" by each
of Duff & Phelps and Fitch IBCA. The ratings are subject to the Company raising
gross proceeds of at least $350.0 million in the
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Offerings and the Direct Sales and to the initial capitalization of the
Operating Company exceeding $320.0 million upon consummation of the Offerings
and the Direct Sales. These ratings are used by potential purchasers of
financial guaranty insurance and reinsurance as a means of assessing the
financial strength and quality of financial guaranty insurers and reinsurers. In
addition, the level of capital charge relief which the rating agencies provide
to a financial guaranty insurer that purchases reinsurance is directly dependent
on the rating of the reinsurer. Likewise, the decreased overall cost of
borrowing realized by an issuer of a financial obligation and the increase in
liquidity in the secondary market of a financial obligation that is subject to
financial guaranty insurance largely depend on the rating of the insurer. The
Operating Company's principal competitors are all more highly rated than the
Operating Company, which, in some respects, will put the Operating Company at a
competitive disadvantage. No assurance can be given that one or more of the
rating agencies will not downgrade or withdraw its rating of the Operating
Company in the future due to factors that may or may not be within the control
of the Company. A downgrade of any of the Operating Company's ratings below "A-"
or the withdrawal of any of the Operating Company's ratings would give ACA the
right to terminate its reinsurance treaties with the Company after a 90-day
period, which would adversely affect the Company. Any reinsurance treaty entered
into in the future by the Company is expected to contain a similar provision. As
a result, a downgrade or withdrawal of any of the Operating Company's ratings
would severely limit or prevent the Operating Company from writing any new
insurance or reinsurance policies and, consequently, would adversely affect the
Company. Similarly, a downgrade or withdrawal of any rating of ACA would have
adverse consequences to ACA which, in turn, would adversely affect the Company.
DEPENDENCE ON KEY EMPLOYEES. The Company will be substantially dependent
in the implementation of its business strategy on its executive officers and key
employees. If the Company experiences the unexpected loss of the services of one
of those individuals, particularly Donald J. Matthews, President and Chief
Executive Officer of the Company, Mary Jane Robertson, Managing Principal, Chief
Financial Officer and Treasurer of the Company, Matthew J. Cooleen, Managing
Principal, Structured Products of the Company, Bruce W. Bantz, Managing
Principal, Marketing and Business Development of GMA and the Marketing Company,
James G. Jachym, Managing Principal, Credit of the Company or Lionel J.
Marsland-Shaw, Managing Principal, Risk Management of the Company, the Company
would be adversely affected. Although the Company has employment agreements with
each of such individuals, no assurance can be given that the Company will be
able to retain their services. In addition, in order for the Company to assess
accurately the risks associated with the financial guaranty insurance and
reinsurance policies it writes, it will need to hire and retain additional
personnel with underwriting and credit analysis expertise. The Company currently
has only six employees, consisting of the individuals named above. The loss of
the services of such individuals, or the inability of the Company to hire and
retain other talented personnel, could delay or prevent the Company from fully
implementing its business strategy and could otherwise adversely affect the
Company. The Company does not carry key person life insurance policies for any
of its executive officers or key employees.
Under Bermuda law, non-Bermudians (other than spouses of Bermudians) may
not engage in any gainful occupation in Bermuda without an appropriate
governmental work permit. Such a work permit may be granted or extended upon
showing that, after proper public advertisement, no Bermudian (or spouse of a
Bermudian) is available who meets the minimum standards for the advertised
position. Messrs. Cooleen and Jachym have not yet applied for work permits. In
addition, the Company will need to obtain work permits for any other
non-Bermudian individuals it hires. While the Company is not currently aware of
any reason why the work permits for such individuals would not be issued, there
can be no assurance that such work permits will be issued prior to the
consummation of the Offerings or thereafter. The failure of these work permits
to be issued would adversely affect the Company.
UNDERWRITING RISK. Evaluating risk is central to the business of any
financial guaranty insurer or reinsurer, and will be particularly important in
the case of the Company, which will be insuring and reinsuring financial
obligations that have a credit quality of "BB" or higher or that are unrated and
have in the Company's opinion an equivalent credit quality. Financial guaranty
losses are inherently unpredictable, and the types of obligations insured by the
Company will tend to be subject to a higher risk of loss than financial
obligations that carry higher ratings. As the Company's insurance portfolio
develops, the Company expects that 10% to 25% of its insurance portfolio will
consist of financial obligations that at the time the Company
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insures such obligations are rated "BB" or are unrated and have in the Company's
opinion an equivalent credit quality. Such obligations are considered below
investment grade and are subject to a greater risk of default than obligations
that are rated investment grade. There can be no assurance that material losses
will not occur on the insurance risks underwritten by the Company.
The Company's success will depend on its ability to assess accurately the
risks associated with the financial obligations it insures or reinsures. With
respect to automatic treaty reinsurance, such as the quota share treaty with
ACA, the Company's underwriting and credit analysis will focus on the
underwriting policies, procedures and expertise possessed by the ceding company
(such as ACA), rather than the risks associated with particular obligations
covered under the treaty. See "-- Reliance on ACA." If the Company fails to
assess accurately the risks it assumes, the Company may fail to establish
appropriate premium rates, its reserves may 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 insures or reinsures. The inability of the Company to hire or retain such
individuals could delay or prevent the Company from fully implementing its
business strategy and could otherwise adversely affect the Company.
ADEQUACY OF LOSS RESERVES. The financial guarantees to be issued by the
Company will insure or reinsure the financial performance of obligations over an
extended period of time, in some cases over 30 years, under policies that the
Company cannot generally cancel. The Company's policy is to provide for loss and
loss adjustment expense ("LAE") reserves to cover losses that may be reasonably
estimated on the obligations insured by the Operating Company. The reserves for
losses and LAE at any balance sheet date will reflect the Company's estimate of
identified ("case basis") and unidentified ("unallocated") losses on the
obligations it has insured through such date. The establishment of an
appropriate level of loss reserves is an inherently uncertain process, made even
more so by the undeveloped nature of the "A" rated financial guaranty insurance
and reinsurance market, and there can be no assurance that claims made against
the Company will not exceed the Company's loss reserves. A significant event,
including a natural disaster or political instability, 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. Such losses could also impair the Operating
Company's ability to maintain its financial strength and claims-paying ability
ratings or to pay dividends to GMA.
MARKET FOR FINANCIAL GUARANTY INSURANCE AND REINSURANCE. The market for
financial guaranty insurance is currently 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 issuances of financial obligations and,
consequently, a decreased demand for financial guaranty insurance and
reinsurance. During periods of decreasing interest rates, issuers have a greater
incentive to enter the capital markets, but typically the interest rate spread
between insured and uninsured obligations becomes more narrow, resulting in a
decreased incentive to purchase financial guaranty insurance. A general economic
downturn or a downturn in the debt markets could also adversely affect the
market for financial guaranty insurance and reinsurance. Similarly, any material
change in the United States tax treatment of municipal securities, or the
imposition of a "flat tax" or a national sales tax in lieu of the current
federal income tax structure in the United States, could adversely affect the
market for municipal obligations and, consequently, the demand for financial
guaranty insurance and reinsurance of such obligations. The market for financial
guaranty reinsurance is largely dependent on the size and strength of the
primary financial guaranty insurance market, as well as the risk retention
limitations imposed on primary financial guaranty insurers and other third-party
credit enhancement providers by rating agencies and regulatory authorities,
which limitations are subject to change.
The market for financial guaranty insurance and reinsurance outside the
United States is substantially less developed than the market in the United
States, particularly with respect to "A" rated financial guaranty insurance. In
addition to the factors described above, the risks inherent in international
markets include confiscatory taxation, nationalization of assets, establishment
of exchange controls, political or social
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instability and fluctuation in foreign exchange rates. Each of these could
adversely affect the Company's performance in the financial guaranty insurance
and reinsurance market outside the United States. Instability of a country's
currency or political situation or a natural or other disaster could result in
widespread defaults on issues insured or reinsured by the Company in the country
experiencing such instability or backed by assets originating in such country,
which would adversely affect the Company. The Company's ability to enter the
market for financial guaranty insurance and reinsurance outside the United
States will be restricted in certain jurisdictions due to the Company's lack of
a license to write financial guaranty insurance in any jurisdiction other than
Bermuda. See "-- Regulation; Restrictions on Insurance and Reinsurance
Operations."
CONFIDENCE IN THE FINANCIAL GUARANTY INDUSTRY. Because the financial
guaranty industry is composed of a relatively small number of companies, if any
single major financial guaranty insurer were to suffer a downgrade of its
financial strength or claims-paying ability rating, investor confidence in the
market as a whole could suffer, causing a decrease in the demand for financial
guaranty insurance, which would adversely affect the Company. In particular, if
ACA's financial strength or claims-paying ability rating is downgraded, its
ability to develop further its business would be severely limited and, in turn,
the Company would be adversely affected.
COMPETITION. The traditional financial guaranty insurance and reinsurance
industry is highly competitive. The market for financial guaranty insurance and
reinsurance is dominated by a small number of companies that have greater
financial resources and are more established than the Company. A number of large
banks and other financial institutions, which also have greater financial
resources and are more established than the Company, also provide various forms
of third-party credit enhancement, such as letters of credit. 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 insurance or reinsurance or
comparable forms of credit enhancement. Furthermore, the Company's reinsurance
treaties with ACA do not prohibit ACA from competing directly with the Company.
If ACA, other financial guaranty insurers or other third-party credit
enhancement providers enter the Company's target markets, the Company could be
adversely affected. In addition, if ACA is adversely affected by competition in
its target markets, the Company would also be adversely affected. Under the
Company's quota share reinsurance treaty with ACA, the Company is not permitted
to write direct financial guaranty insurance within any state in the United
States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands so
long as such treaty remains in effect.
Competition in the financial guaranty insurance and reinsurance industry is
based on many factors, including premium charges, the general reputation and
perceived financial strength of the financial guaranty insurer, other terms and
conditions of products offered, and reputation and experience in the particular
line of financial guaranty to be written. The Company will also compete with
methods of credit enhancement that do not employ third-parties, such as
over-collateralization of a structured finance transaction. There can be no
assurance that the Company's strategy will permit it to compete effectively with
these alternative methods of credit enhancement. See "Business -- Competition."
INVESTMENT RISKS. The Operating Company's investment portfolio will
consist of investment grade fixed income securities and will be invested in an
effort to maximize total return subject to appropriate liquidity and capital
preservation considerations, diversification of risk and regulatory, rating
agency and credit agreement constraints (if any), as applicable. There can be no
assurance that the investment objectives of the Company will be achieved. The
success of any investment activity is affected by general economic conditions,
which may adversely affect the markets for interest-rate-sensitive securities,
including the extent and timing of investor participation in such markets, the
level and volatility of interest rates and, consequently, the value of such
fixed income securities. Volatility or illiquidity in the markets in which the
Operating Company directly or indirectly holds positions could adversely affect
the Company. See "Business -- Investment Strategy."
The Operating Company has retained Alliance Capital Management L.P., The
Prudential Investment Corporation and Merrill Lynch Asset Management, L.P.
(collectively, the "Investment Managers") to manage the Operating Company's
investment portfolio. Each Investment Manager will have discretionary authority
over the portion of the Operating Company's investment portfolio allocated to
it, subject to the investment guidelines adopted by the Operating Company (the
"Investment Guidelines"). The performance
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of the Operating Company's investment portfolio, therefore, will depend to a
great extent on the ability of the Investment Managers to select and manage
appropriate investments. There can be no assurance that the Investment Managers
will be successful in meeting the Company's investment objectives. The Operating
Company may retain additional or different firms to manage its investment
portfolio from time to time. See "Business -- Investment Managers."
The Investment Guidelines restrict the Operating Company from investing in
securities for which it has written financial guaranty insurance or reinsurance
and limit its investments in securities not insured or reinsured by the
Operating Company, but issued by issuers of securities the Operating Company has
insured or reinsured, to 5% of the Operating Company's total investment
portfolio. The Investment Guidelines also provide for the following procedures
that are intended to limit the Operating Company's exposure to concentrations of
risk: (a) investments in an industry sector are limited to 20% of the Operating
Company's total investment portfolio, with the exception of the United States
government and its agencies; (b) investments in a single issuer are limited to
5% of the Operating Company's total investment portfolio, with the exception of
the United States government and its agencies; and (c) investments in non-United
States dollar denominated securities are limited to 10% of the Operating
Company's total investment portfolio. There can be no assurance that such
limitations in the Investment Guidelines will sufficiently insulate the
Operating Company's investment portfolio from adverse developments affecting
particular issuers, sectors or industries. See "Business -- Investment
Strategy."
INCOME TAX RISKS
United States Taxation of GMA, the Operating Company and the Marketing
Company. GMA, the Operating Company and the Marketing Company are Bermuda
corporations and do not intend to file United States tax returns. GMA, the
Operating Company and the Marketing Company plan to operate in such a manner
that they will not be subject to United States tax (other than United States
excise tax on insurance and reinsurance premiums) because they do not intend to
engage in a trade or business in the United States. However, because definitive
identification of activities which constitute being engaged in a trade or
business in the United States is not provided by the Internal Revenue Code of
1986, as amended (the "Code"), or regulations or court decisions, there can be
no assurance that the Internal Revenue Service ("IRS") will not contend that
GMA, the Operating Company and/or the Marketing Company is engaged in a trade or
business in the United States. If GMA, the Operating Company or the Marketing
Company were considered to be engaged in a trade or business in the United
States (and, if such company were to qualify for benefits under the income tax
treaty between the United States and Bermuda, such business were attributable to
a "permanent establishment" in the United States), it would be subject to United
States tax at regular corporate rates on its taxable income that is effectively
connected with its United States business plus an additional 30% "branch
profits" tax on such income remaining after the regular tax, in which case there
would be a material adverse affect on the Company. See "Certain Tax
Considerations -- Taxation of GMA, the Operating Company and the Marketing
Company -- United States."
The United States currently imposes an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. In addition, the Company may be subject to
withholding tax on certain investment income from United States sources. There
can be no assurance that such taxes will not be increased or that other taxes
will not be imposed on the Company's business.
Controlled Foreign Corporation Rules. United States persons who may,
directly or through certain attribution rules, acquire 10% or more of the Common
Shares of GMA, should consider the possible application of the "controlled
foreign corporation" ("CFC") rules. (Such persons should also see
"-- Limitations on Ownership, Transfers and Voting Rights," below.) Each "United
States shareholder" of a CFC who owns shares in the CFC on the last day of the
CFC's taxable year generally must include in such shareholder's gross income for
United States federal income tax purposes the shareholder's pro-rata share of
the CFC's "subpart F income," even if the subpart F income has not been
distributed. For these purposes, any United States person who owns directly or
indirectly 10% or more of the voting stock of a foreign corporation will be
considered to be a "United States shareholder." In general, a foreign insurance
company such as the Operating Company is treated as a CFC only if such "United
States shareholders" collectively own more than
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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. It is anticipated
that PMI will be a "United States shareholder" of GMA and its subsidiaries due
to PMI's right to designate for nomination two of GMA's twelve board members.
However, because of the anticipated dispersion of GMA's share ownership
following the Offerings and because under GMA's Bye-Laws no single shareholder
other than PMI will be permitted to own or to exercise 10% or more of the total
combined voting power of GMA, shareholders of GMA other than PMI should not be
viewed as "United States shareholders" of a CFC for purposes of these rules.
There can be no assurance, however, that the IRS will not successfully assert a
contrary position. See "Certain Tax Considerations -- Taxation of Shareholders
- -- United States Taxation."
Related Person Insurance Income Risks. If the Operating Company's related
person insurance income ("RPII") determined on a gross basis were to equal or
exceed 20% of its gross insurance income in any taxable year and direct or
indirect insureds and persons related to such insureds were directly or
indirectly to own more than 20% of the voting power or value of the Operating
Company's capital stock, a United States person who owns Common Shares in GMA
directly or indirectly on the last day of the taxable year may be required to
include in the shareholder's income for United States federal income tax
purposes the shareholder's pro-rata share of the Operating Company's RPII for
the taxable year, determined as if such RPII were distributed proportionately to
such United States persons at that date. RPII is generally underwriting premium
and related investment income attributable to insurance or reinsurance policies
where the direct or indirect insureds are United States shareholders or are
"related" (as defined for purposes of the RPII provision) to United States
shareholders of the insurance or reinsurance company issuing such policies. The
Operating Company will not knowingly enter into any insurance or reinsurance
arrangements in which the direct or indirect insureds are, or are so related to,
owners of Common Shares, except that the Operating Company may enter into
reinsurance arrangements with PMI. See "Business -- Sponsors and Strategic
Investors." If the Operating Company does enter into reinsurance arrangements
with PMI, PMI will be treated, based on its right to designate for nomination
two of GMA's twelve board members, as owning approximately 16.7% of the voting
power of the stock of the Operating Company for purposes of the RPII provisions.
Nonetheless, GMA believes it is unlikely that the Operating Company will enter
into insurance or reinsurance arrangements in which, in the aggregate, the
direct or indirect insureds are, or are related to, owners of 20% or more of the
Common Shares. Moreover, the Operating Guidelines adopted by the Company's Board
of Directors limit the portion of the Operating Company's gross insurance income
attributable to insurance contracts with PMI in any taxable year to no more than
5% or, if the Board of Directors determines that there is no material risk that
any GMA shareholder will recognize RPII in any taxable year, to no more than
10%. Accordingly, GMA believes it is highly unlikely that RPII for any taxable
year, determined on a gross basis, will be greater than or equal to 20% of the
Operating Company's gross insurance income for that year. However, there can be
no assurances regarding either of these thresholds, particularly because the
Operating Company's direct or indirect insureds may be deemed to include the
owners of securities with respect to which the Operating Company issues
financial guaranty insurance or reinsurance, and many of these securities, as
well as the Common Shares, are expected to be publicly traded. Consequently,
there can be no assurance that a United States person will not be required to
include amounts in its income in respect of RPII in any taxable year.
Furthermore, no effort will be made by GMA or the Operating Company to identify
the extent to which owners of securities for which the Operating Company has
issued financial guaranty insurance or reinsurance are also shareholders of GMA.
Thus, GMA, the Operating Company and GMA's United States shareholders may not
know with certainty whether GMA's United States shareholders are subject to the
RPII rules, or how much RPII the Operating Company has earned in any taxable
year. See "Certain Tax Considerations -- Taxation of Shareholders -- United
States Taxation."
Even if the 20% thresholds described in the preceding paragraph are not
met, if a shareholder who is a United States person disposes of shares in a
foreign insurance corporation that has RPII and in which United States persons
own 25% or more of the voting power or value of the corporation's stock, any
gain from the disposition will generally be treated as ordinary income to the
extent of the shareholder's portion of the corporation's undistributed earnings
and profits that were accumulated during the period that the shareholder owned
the shares (potentially whether or not such earnings and profits are
attributable to RPII). In addition, such a shareholder will be required to
comply with certain reporting requirements, regardless of the amount of
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shares owned by the shareholder. These rules should not apply to dispositions of
Common Shares because GMA is not itself directly engaged in the insurance
business and because proposed United States Treasury regulations applicable to
this situation appear to apply only in the case of shares of corporations that
are directly engaged in the insurance business. There can be no assurance,
however, that the IRS will interpret the proposed regulations in this manner or
that the proposed regulations will not be promulgated in final form in a manner
that would cause these rules to apply to dispositions of Common Shares. See
"Certain Tax Considerations -- Taxation of Shareholders -- United States
Taxation."
Passive Foreign Investment Company Risks. To avoid significant potential
adverse United States federal income tax consequences for any United States
person who owns Common Shares, it is important that GMA not constitute a
"passive foreign investment company" (a "PFIC") in any year in which such person
is a shareholder. In general, a foreign corporation is a PFIC for a taxable year
if 75% or more of its income constitutes "passive income" or 50% or more of its
assets produce passive income. "Passive income" generally includes interest,
dividends and other investment income. However, "passive income" does not
include income "derived in the active conduct of an insurance business by a
corporation which is predominantly engaged in an insurance business." This
exception is intended to ensure that income derived by a bona fide insurance
company is not treated as passive income, except to the extent such income is
attributable to financial reserves in excess of the reasonable needs of the
insurance business. Because GMA, through the Operating Company, intends to be
predominantly engaged in an insurance business and does not intend to have
financial reserves in excess of the reasonable needs of its insurance business,
GMA does not expect to meet the requirements for a PFIC. There can be no
assurance, however, that the IRS or a court will concur in this view. See
"Certain Tax Considerations -- Taxation of Shareholders -- United States
Taxation."
Bermuda Taxes. Bermuda does not currently impose a corporate level tax on
the profits or income of the Company, although it may do so in the future. GMA,
the Operating Company and the Marketing Company have each received an assurance
from the Bermuda Minister of Finance under The Exempted Undertakings Tax
Protection Act 1966 of Bermuda to the effect that if there is enacted in Bermuda
any legislation imposing tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then such tax would not be applicable to GMA, the Operating
Company, the Marketing Company or to any of their operations or the shares,
debentures or other obligations of GMA, the Operating Company or the Marketing
Company until March 2016. There can be no assurance that after such date GMA,
the Operating Company or the Marketing Company would not be subject to any such
tax.
United Kingdom Taxes. Under current United Kingdom law, the measure of
corporate taxation resulting from the activities of the Marketing Company in the
United Kingdom would likely be the portion of the profits of the Marketing
Company attributable on an assumed arm's-length basis to its London branch
activities. Such profit would be measured in practice by comparison with the
compensation that the Marketing Company would need to pay to an independent
entity providing the same services as the Marketing Company's office in the
United Kingdom. The Marketing Company will seek to enter into an agreement with
the United Kingdom Inland Revenue under which an agreed profit margin will be
attributed to the Marketing Company's office in the United Kingdom under a
stated formula for purposes of calculating the amount of tax owed in the United
Kingdom by the Marketing Company. No assurance can be given that such an
agreement will be reached and, if reached, any such agreement would be
cancellable upon reasonable notice by the Marketing Company or United Kingdom
Inland Revenue. No assurance can be given that any such agreement will not be
cancelled by United Kingdom Inland Revenue. The United Kingdom also imposes an
insurance premium tax of 4% on insurance and reinsurance premiums paid with
respect to risks located in the United Kingdom. There can be no assurance that
certain financial guaranty insurance and reinsurance policies issued by the
Operating Company will not be subject to such tax.
Other Taxes. GMA, the Operating Company and the Marketing Company plan to
operate in such a manner that they will not generally be subject to any material
taxes in jurisdictions other than those noted above, except for withholding
taxes on certain kinds of investment income and excise or similar premium taxes
as described above. It is possible, however, that the Operating Company or the
Marketing Company may be held to be doing business in one or more jurisdictions
and therefore subject to tax on the profits of such business beyond that
contemplated above.
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LIMITATIONS ON OWNERSHIP, TRANSFERS AND VOTING RIGHTS. Except as described
below with respect to transfers of Common Shares executed on The Nasdaq National
Market, under GMA's Bye-Laws GMA's directors (or their designee) are required to
decline to register any transfer of shares of GMA, including Common Shares, if
they have any reason to believe that such transfer would result in a person
other than PMI (or any group of which such person is a member) beneficially
owning, directly or indirectly, 10% or more of any class of shares of GMA.
Similar restrictions apply to issuances and repurchases of shares by GMA. The
directors (or their designee) also may, in their absolute discretion, decline to
register the transfer of any shares if they have reason to believe that such
transfer may expose GMA, any subsidiary or shareholder thereof or any person
purchasing insurance or reinsurance from the Operating Company to adverse tax or
regulatory treatment in any jurisdiction or if they have reason to believe that
registration of such transfer under the Securities Act of 1933, as amended (the
"Securities Act"), or under any blue sky or other United States securities laws
or under the laws of any other jurisdiction is required and such registration
has not been duly effected. A transferor of Common Shares will be deemed to own
such shares for dividend, voting and reporting purposes until a transfer of such
Common Shares has been registered on the Register of Members of GMA. GMA is
authorized to request information from any holder or prospective acquiror of
Common Shares as necessary to effect registration of any such transaction, and
may decline to register any such transaction if complete and accurate
information is not received as requested.
GMA's directors will not decline to register any transfer of Common Shares
executed on The Nasdaq National Market for the reasons described above. However,
if any transfer results in the transferee other than PMI (or any group of which
such transferee is a member) beneficially owning, directly or indirectly, 10% or
more of any class of GMA's shares or causes GMA's directors (or their designee)
to have reason to believe that such transfer may expose GMA, any subsidiary or
shareholder thereof or any person purchasing insurance or reinsurance from the
Operating Company to adverse tax or regulatory treatment in any jurisdiction or
if they have reason to believe that registration of such transfer under the
Securities Act or under any blue sky or other United States securities laws or
under the laws of any other jurisdiction is required and such registration has
not been duly effected, under GMA's Bye-Laws the directors (or their designee)
may deliver a notice to the transferee to surrender to an agent designated by
the directors (the "Agent") certificates representing the shares and any
dividends or distributions that the transferee has received as a result of
owning the shares. A transferee who has resold the shares before receiving such
notice will be required to transfer to the Agent the proceeds of the sale, to
the extent such proceeds exceed the amount that the transferee paid for the
shares, together with any dividends or distributions that the transferee
received from GMA. As soon as practicable after receiving the shares and any
dividends or distributions that the transferee received, the Agent will use its
best efforts to sell such shares and any non-cash dividends or distributions in
an arm's-length transaction on The Nasdaq National Market. After applying the
proceeds from such sale toward reimbursing the transferee for the price paid for
the shares, the Agent will pay any remaining proceeds and any cash dividends and
distributions to organizations described in Section 501(c)(3) of the Code that
the directors designate. The proceeds of any such sale by the Agent or the
surrender of dividends or distributions will not inure to the benefit of the
Company or the Agent, but such amounts may be used to reimburse expenses
incurred by the Agent in performing its duties.
In addition, GMA's Bye-Laws generally provide that any person other than
PMI (or any group of which such person is a member) holding directly, or by
attribution, or otherwise beneficially owning voting shares of GMA carrying 10%
or more of the total voting rights attached to all of GMA's outstanding capital
shares, will have the voting rights attached to its voting shares reduced so
that it may not exercise more than approximately 9.9% of such total voting
rights. Because of the attribution provisions of the Code and the rules of the
Securities and Exchange Commission (the "Commission") regarding determination of
beneficial ownership, this requirement may have the effect of reducing the
voting rights of a shareholder whether or not such shareholder directly holds of
record 10% or more of the voting shares of GMA. Further, the directors (or their
designee) have the authority to request from any shareholder certain information
for the purpose of determining whether such shareholder's voting rights are to
be reduced. Failure to respond to such a notice, or submitting incomplete or
inaccurate information, gives the directors (or their designee) discretion to
disregard all votes attached to such shareholder's Common Shares. GMA's Bye-Laws
restrict PMI from owning shares of GMA that would represent more than sixteen
and two-thirds percent (16 2/3%) of the total combined voting
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rights attached to all of GMA's outstanding capital 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
insuring and reinsuring financial obligations issued outside the United States,
the Company expects that it will write a portion of its business and receive
premiums in currencies other than United States dollars. Furthermore, the
Operating Company may maintain up to 10% of its investment portfolio in
investments denominated in currencies other than United States dollars.
Consequently, the Company may experience exchange losses to the extent its
foreign currency exposure is not hedged or is not sufficiently hedged, which in
turn would adversely affect the Company. The Company will make determinations as
to whether to hedge its foreign currency exposure on a case-by-case basis,
although the Company does not expect typically to hedge against such foreign
currency exposure. If the Company does hedge its foreign currency exposure, the
Company may use forward foreign currency exchange contracts in an effort to
hedge against movements in the value of foreign currencies relative to the
United States dollar. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specified currency at a future date at a price
set at the time of the contract. Foreign currency exchange contracts will not
eliminate fluctuations in the value of the Company's assets and liabilities
denominated in foreign currencies but rather allow the Company to establish a
rate of exchange for a future point in time. If the Company does seek to hedge
its foreign currency exposure through the use of forward foreign currency
exchange contracts or currency swaps, it will be subject to the risk that the
counterparties to such arrangements fail to perform.
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of the Offerings and
the Direct Sales, GMA expects to have outstanding 24,296,206 Common Shares,
Class A Warrants to purchase an aggregate of 3,053,184 Common Shares, Class B
Warrants to purchase an aggregate of 550,000 Common Shares and options to
purchase an aggregate of 1,148,645 Common Shares. If the Underwriters'
over-allotment options are exercised in full, 27,296,206 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
3,413,184 Common Shares and the number of Common Shares issuable upon the
exercise of outstanding options will increase to an aggregate of 1,313,645
Common Shares. The number of Common Shares issuable upon the exercise of the
Class B Warrants will not change if the Underwriters' over-allotment options are
exercised. The Class A Warrants, Class B Warrants and options will not be
exercisable upon consummation of the Offerings. See "Management -- Stock Option
Plan," "Description of Capital Stock -- Warrants" and "Direct Sales." Except as
disclosed in "Description of Capital Stock -- Restrictions on Transfer" and as
discussed below with respect to the lock-up agreements, the Common Shares sold
in the Offerings and any Common Shares sold in the Direct Sales pursuant to the
separate prospectus to GMA's directors and officers will be freely transferable
without restriction or further registration under the Securities Act, except for
any of those Common Shares owned by an "affiliate" of the Company within the
meaning of Rule 144 under the Securities Act. The Common Shares to be sold to
the Strategic Investors, the Common Shares the Company has contracted to sell to
certain individuals involved in the formation of the Company and the Common
Shares underlying the Class A Warrants, the Class B Warrants and the options are
"restricted securities" as defined in Rule 144 under the Securities Act and may
not be resold in the absence of registration under the Securities Act or
pursuant to an exemption from registration. The Strategic Investors, the holders
of the Class A Warrants and the holders of the Class B Warrants have been
granted rights to require the Company to register under the Securities Act the
Common Shares purchased by the Strategic Investors in the Direct Sales and the
Common Shares underlying the Class A Warrants and the Class B Warrants, which
rights are not exercisable before the first anniversary of the consummation of
the Offerings. The Company has agreed not to permit the acceleration of the
exercisability of such rights without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch & Co.") and
Prudential Securities Incorporated ("Prudential Securities") on behalf of the
Underwriters. The Company does intend to register the resale of the Common
Shares underlying any outstanding options promptly following the first
anniversary of the consummation of the Offerings. The Company, its directors and
officers, the Strategic Investors, the holders of the Class A Warrants and
certain individuals involved in the formation of the Company have executed
agreements (the "lock-up agreements") under which they have agreed that they
will not, without the prior written consent of
22
<PAGE> 25
Merrill Lynch & Co. and Prudential Securities on behalf of the Underwriters and,
in the case of certain transfers by the Strategic Investors, without the prior
written consent of the Company, directly or indirectly offer, sell, offer to
sell, contract to sell, transfer, assign, pledge, hypothecate, grant any option
to purchase, or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, transfer, assignment, pledge, hypothecation, grant of
any option to purchase or other sale or disposition) of any Common Shares or
other capital stock of the Company or any other securities convertible into, or
exercisable or exchangeable for, any Common Shares or other capital stock of the
Company for a period of one year after the date of this Prospectus or, in the
case of the Strategic Investors, nine months after the date of this Prospectus.
Such agreements do not prevent the Company from granting options so long as such
options are not exercisable until one year from the date of this Prospectus.
Merrill Lynch & Co., Prudential Securities and, in the case of the Strategic
Investors, the Company may, in their discretion at any time and without notice,
jointly release all or any portion of the securities subject to such lock-up
agreements.
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of Common Shares for future sale, will have
on the market price of the Common Shares prevailing from time to time. Sales of
substantial amounts of Common Shares in the public market following the
Offerings, including sales by persons holding the Common Shares sold to the
Strategic Investors or certain individuals involved in the formation of the
Company or the Common Shares underlying the Class A Warrants, Class B Warrants
or options, or the perception that such sales could occur, could adversely
affect the market price of the Common Shares and may make it more difficult for
the Company to sell its equity securities in the future at a time and at a price
which it deems appropriate. See "Shares Eligible for Future Sale."
YEAR 2000 RISK. Many existing computer programs use only two digits to
identify a year in the date field. These programs, if not corrected, could fail
or create erroneous results by or at the year 2000. This "Year 2000" issue is
believed to affect virtually all companies and organizations. Because the
Company expects to purchase computer hardware and software that is either new or
less than two years old, the Company believes that its exposure with respect to
its own computer systems to Year 2000-related problems will not be significant.
However, the Company will be exposed to the risk that its third-party service
providers, reinsurance clients and issuers of financial obligations insured or
reinsured by the Company may be exposed to Year 2000-related problems. The
Company is in the process of assessing whether its third-party service providers
are or on a timely basis will be Year 2000 compliant. Similarly, the Company has
received assurances from ACA that its computer systems are expected to be Year
2000 compliant on a timely basis and the Company intends to seek similar
assurances from other future reinsurance clients. Furthermore, as part of the
Company's underwriting analysis, it will review the Year 2000 compliance efforts
of the issuers of financial obligations insured by the Company and, with respect
to the Company's reinsurance operations, will rely on the analysis performed by
the primary insurer. There can be no assurance, however, that the Company's
operations will not experience material disruptions due to the failure of the
Company's third-party service providers, reinsurance clients or the issuers of
financial obligations insured or reinsured by the Company to become fully Year
2000 compliant in a timely manner or that such failure will not otherwise have
an adverse effect on the Company. Furthermore, the Company's strategy to
penetrate the credit enhancement market outside of the United States may subject
the Company to additional Year 2000 risk as foreign entities have in general not
addressed Year 2000 compliance issues as comprehensively as their United States
counterparts. The Company will continue to monitor developments relating to this
issue, including the development of additional contingency plans to supplement
its current contingency plan, which provides for the replacement of existing
third-party service providers which are not Year 2000 compliant with comparable
third-party service providers which are Year 2000 compliant.
HOLDING COMPANY STRUCTURE. GMA is a holding company that will not conduct
significant operations of its own and, at least initially, will have no
significant operations or assets other than its ownership of the capital stock
of the Operating Company and the Marketing Company. Over time, dividends and
other permitted payments from the Operating Company are expected to be GMA's
principal source of funds to pay expenses and dividends, if any. The payment of
dividends by the Operating Company to GMA is limited under Bermuda law and
regulations, including Bermuda insurance law. Under the Insurance Act 1978 of
Bermuda, as amended, and the related regulations (the "Insurance Act"), the
Operating Company is prohibited from
23
<PAGE> 26
declaring or paying dividends that would result in the Operating Company failing
to comply with its solvency margin and liquidity ratio. In addition, under the
Bermuda Companies Act 1981, GMA and the Operating Company may only declare or
pay a dividend if there are reasonable grounds for believing that they are, and
would after the payment be, able to pay their respective liabilities as they
become due. Accordingly, there is no assurance that dividends will be declared
or paid by the Company in the future. See "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Plan of
Operations -- Liquidity and Capital Resources" and
"Business -- Regulation -- Bermuda."
FOREIGN CORPORATION, SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS. GMA,
the Operating Company and the Marketing Company are each organized pursuant to
the laws of Bermuda. In addition, certain of the directors and officers of GMA,
as well as certain of the experts named herein, reside outside the United
States, and all or a substantial portion of their assets and the assets of GMA
are or may be located in jurisdictions outside the United States. Although GMA
has appointed an agent in the City of New York to receive service of process
with respect to actions against it arising out of or in connection with
violations of United States federal securities laws relating to offers and sales
of Common Shares in the U.S. Offering, it may be difficult for investors to
effect service of process within the United States upon such persons or to
recover against them or GMA on judgments of United States courts, including
judgments predicated upon civil liability provisions of the United States
federal securities laws. See "Enforceability of Civil Liabilities Under United
States Federal Securities Laws."
NO PRIOR PUBLIC MARKET FOR THE COMMON SHARES. Before the Offerings there
has been no public market for the Common Shares. There can be no assurance that
an active trading market for the Common Shares will develop or be sustained
following the completion of the Offerings or that the market price of the Common
Shares will not decline from the initial public offering price. The initial
public offering price for the Common Shares offered hereby was established by
the Company and the representatives of the Underwriters and may not be
indicative of the market price of the Common Shares after the Offerings.
DILUTION. Purchasers of Common Shares in the Offerings will experience
immediate and substantial dilution of approximately $1.29 per share in the net
tangible book value of their Common Shares from the initial public offering
price. See "Dilution."
24
<PAGE> 27
USE OF PROCEEDS
The net proceeds from the sale of the 20,000,000 Common Shares in the
Offerings are estimated to be approximately $277.0 million (after deducting
underwriting discounts and commissions, certain advisory fees and other
estimated expenses, including payments to Inter-Atlantic for its services and
reimbursement for certain expenses related to the Offerings and the sales to the
Strategic Investors). See "Certain Relationships and Related Party
Transactions." The net proceeds from the Direct Sales are estimated to be
approximately $60.5 million. The purpose of the Offerings and the Direct Sales
is to enable the Company to implement its business plan to provide financial
guaranty insurance and reinsurance. Substantially all of the net proceeds of the
Offerings and the Direct Sales will be contributed to the capital and surplus of
the Operating Company to support its financial guaranty business and will be
invested in accordance with the Investment Guidelines. See
"Business -- Investment Strategy." Until so invested, such proceeds will be
invested in short-term, investment grade, interest-bearing securities.
25
<PAGE> 28
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1998, as adjusted for amounts payable upon
consummation of the Offerings and as adjusted to give effect to the Offerings
and the Direct Sales and the receipt of the estimated net proceeds therefrom.
See "Use of Proceeds."
<TABLE>
<CAPTION>
AS ADJUSTED FOR
AMOUNTS PAYABLE AS ADJUSTED FOR THE
UPON CONSUMMATION OFFERINGS AND THE
ACTUAL OF THE OFFERINGS DIRECT SALES(D)
------ ----------------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Preferred Shares, par value $1.00 per share
(50,000,000 shares authorized; no shares
outstanding; no shares outstanding as
adjusted)....................................... $ -- $ -- $ --
Common Shares, par value $1.00 per share
(100,000,000 shares authorized; 12,000 shares
outstanding; 24,296,206 shares outstanding as
adjusted for the Offerings and the Direct
Sales)(a)....................................... 12 12 24,296
Additional paid-in capital........................ 108 (4,942)(b) 313,338
Notes receivable from Common Share sales.......... -- -- (2,569)(e)
Accumulated deficit............................... (848) (2,048)(c) (2,048)
----- ------- --------
Total shareholders' equity (deficit)......... (728) (6,978) 333,017
----- ------- --------
Total capitalization.............................. $(728) $(6,978) $333,017
===== ======= ========
</TABLE>
- ---------------
(a) The Purpose Trust owns 12,000 Common Shares, which constitute all of the
Common Shares currently outstanding. Upon consummation of the Offerings, the
Purpose Trust has agreed to sell such Common Shares to GMA for an aggregate
price of $12,000 and such Common Shares will be cancelled. Common Shares
outstanding excludes 3,053,184 Common Shares issuable upon the exercise of
outstanding Class A Warrants, 550,000 Common Shares issuable upon the
exercise of the Class B Warrants to be included in the Direct Sales,
1,148,645 Common Shares issuable upon the exercise of options to be granted
prior to or upon consummation of the Offerings and 100,000 Common Shares
reserved for future issuance pursuant to the Stock Option Plan. If the
Underwriters' over-allotment options are exercised in full, 27,296,206
Common Shares are expected to be outstanding, the number of Common Shares
issuable upon the exercise of outstanding Class A Warrants will increase to
3,413,184 Common Shares and the number of Common Shares issuable upon the
exercise of options to be granted prior to or upon consummation of the
Offerings will increase to 1,313,645 Common Shares. The number of Common
Shares issuable upon the exercise of the Class B Warrants and the number of
Common Shares reserved for future issuance pursuant to the Stock Option Plan
will not change if the Underwriters' over-allotment options are exercised.
The Class A Warrants, Class B Warrants and options will not be exercisable
upon consummation of the Offerings. See "Management -- Stock Option Plan,"
"Description of Capital Stock -- Warrants" and "Direct Sales."
(b) Reflects amounts payable upon consummation of the Offerings of $3.0 million
to Inter-Atlantic for certain advisory services related directly to the
Offerings and the sales to the Strategic Investors; and approximately $2.1
million for estimated out-of-pocket expenses consisting of legal, accounting
and printing expenses as well as filing fees and other costs related
directly to the Offerings and the sales to the Strategic Investors.
(c) Reflects amounts payable upon consummation of the Offerings of $600,000 to
Inter-Atlantic for certain advisory services related to the development of
the Company's operations and approximately $1.4 million for estimated
out-of-pocket expenses consisting of recruiting, personnel and other
expenses related to the Company's operations.
(d) Reflects 24,296,206 Common Shares sold in the Offerings and the Direct Sales
and the receipt of the estimated net proceeds therefrom. Does not give
effect to any exercise of the Underwriters' over-allotment options and
excludes the 12,000 Common Shares currently held by the Purpose Trust.
(e) Reflects loans made to management to finance in part intended purchases by
management of Common Shares as part of the Direct Sales.
26
<PAGE> 29
DIVIDEND POLICY
GMA is a newly formed corporation and has not declared or paid any cash
dividends on its Common Shares. The Board of Directors of GMA intends to declare
and pay out of current and retained earnings a quarterly cash dividend of $.04
per Common Share following the first full fiscal quarter following the
consummation of the Offerings. It will be GMA's policy to retain all earnings in
excess of such quarterly dividends to support the growth of its business. If
GMA's current and retained earnings do not support the payment of such quarterly
dividends, future dividends may be reduced or eliminated. If GMA makes a payment
to shareholders in excess of its current and retained earnings, such payment
would be treated as a return of capital to holders of the Common Shares. The
declaration and payment of dividends by GMA will be at the discretion of its
Board of Directors and will depend upon GMA's results of operations and cash
flows, the financial position and capital requirements of the Operating Company,
general business conditions, legal, tax, regulatory and any contractual
restrictions on the payment of dividends and other factors the Board of
Directors of GMA deems relevant. GMA's ability to pay dividends depends on the
ability of the Operating Company to pay dividends to GMA. While GMA is not
itself subject to any significant legal prohibitions on the payment of dividends
on its Common Shares, the Operating Company is subject to Bermuda regulatory
constraints which affect its ability to pay dividends to GMA. Accordingly, there
is no assurance that dividends on the Common Shares will be declared or paid in
the future. In addition, GMA will not increase any quarterly cash dividend
unless the rating agencies that have issued a rating on the Operating Company
confirm that such increase will not adversely affect the Operating Company's
ratings. See "Management's Discussion and Analysis of Financial Condition and
Plan of Operations -- Liquidity and Capital Resources" and
"Business -- Regulation -- Bermuda."
27
<PAGE> 30
DILUTION
Purchasers of the Common Shares offered in the Offerings will experience an
immediate and substantial dilution in net tangible book value of their Common
Shares from the initial public offering price. After giving effect to the
Offerings and the Direct Sales, the pro forma net tangible book value of the
Common Shares (after deducting underwriting discounts and commissions, certain
advisory fees and other estimated expenses, including payments to Inter-Atlantic
for its services and reimbursement of certain expenses related to the Offerings
and the sales to the Strategic Investors) will be approximately $333.0 million,
or approximately $13.71 per outstanding Common Share. This represents an
immediate and substantial dilution in net tangible book value to investors
purchasing shares in the Offerings of approximately $1.29 per share, without
taking into account any Common Shares issuable upon the exercise of the Class A
Warrants, Class B Warrants and options. As of December 31, 1998, the net
tangible book value per outstanding Common Share before giving effect to the
Offerings and the Direct Sales was $(60.65). Pro forma "net tangible book value"
per outstanding share represents shareholders' equity divided by the number of
outstanding Common Shares, including the Common Shares issued in the Offerings
and the Direct Sales. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $15.00
Net tangible book value per outstanding share as of
December 31, 1998 before giving effect to the Offerings
and the Direct Sales................................... $(60.65)
Increase in net tangible book value per outstanding share
attributable to the sale of the Common Shares in the
Offerings and the Direct Sales......................... 74.36
-------
Pro forma net tangible book value per outstanding share upon
completion of the Offerings and the Direct Sales(1)....... 13.71
------
Dilution to new investors in the Offerings.................. $ 1.29
======
</TABLE>
- ---------------
(1) Does not include 3,053,184 Common Shares issuable upon the exercise of
outstanding Class A Warrants (3,413,184 Common Shares if the Underwriters'
over-allotment options are exercised in full), 550,000 Common Shares
issuable upon the exercise of Class B Warrants to be included in the Direct
Sales, 1,148,645 Common Shares issuable upon the exercise of options
expected to be granted prior to or upon consummation of the Offerings
(1,313,645 Common Shares if the Underwriters' over-allotment options are
exercised in full) and 100,000 Common Shares reserved for future issuance
under the Stock Option Plan. The number of Common Shares issuable upon the
exercise of the Class B Warrants and the number of Common Shares reserved
for future issuance under the Stock Option Plan will not change if the
Underwriters' over-allotment options are exercised. The Class A Warrants,
Class B Warrants and options will not be exercisable upon consummation of
the Offerings. The exercise of the Class A Warrants, Class B Warrants and
the options are not expected to be dilutive to purchasers of the Common
Shares in the Offerings because the exercise price per share of such
warrants and options is equal to the initial public offering price per
share. See "Management -- Stock Option Plan," "Description of Capital
Stock -- Warrants" and "Direct Sales."
28
<PAGE> 31
The following table summarizes the number of Common Shares issued by GMA,
the total consideration paid and the average price per share paid in the Direct
Sales and the Offerings:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
AMOUNT PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Direct Sales........................ 4,296,206 17.68% $ 60,576,505(a) 16.80% $14.10(b)
Offerings........................... 20,000,000 82.32 300,000,000 83.20 $15.00
---------- ------ ------------ ------
Total..................... 24,296,206 100.00% $360,576,505 100.00% $14.84
========== ====== ============ ======
</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.
29
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The following unaudited pro forma consolidated balance sheet is based on
the historical audited consolidated balance sheet of the Company as of December
31, 1998, and gives effect to the amounts payable upon consummation of the
Offerings and to the receipt of the estimated net proceeds of the Offerings and
the Direct Sales as if they were consummated on December 31, 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 financial statements and notes
thereto contained elsewhere in this Prospectus and the other information
contained herein.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AS ADJUSTED FOR THE
RECEIPT OF THE
AS ADJUSTED FOR AMOUNTS ESTIMATED NET
PAYABLE UPON PROCEEDS OF THE
HISTORICAL CONSUMMATION OFFERINGS AND THE
INFORMATION OF THE OFFERINGS DIRECT SALES
----------- ----------------------- -------------------
<S> <C> <C> <C>
ASSETS
Cash..................................... $ 122,256 $ 122,256 $335,065,005(d)
Deferred equity offering costs........... 1,355,000 -- --
----------- ----------- ------------
Total assets................... $ 1,477,256 $ 122,256 $335,065,005
=========== =========== ============
LIABILITIES
Accounts payable and accrued expenses.... $ 2,205,000 $ 7,100,000(a) $ 2,047,744(e)
----------- ----------- ------------
Total liabilities.............. 2,205,000 7,100,000 2,047,744
----------- ----------- ------------
SHAREHOLDERS' EQUITY
Preferred Shares (par value $1.00;
50,000,000 shares authorized; no shares
outstanding)........................... -- -- --
Common Shares (par value $1.00;
100,000,000 shares authorized; 12,000
shares outstanding; 24,296,206 shares
outstanding as adjusted for the receipt
of the estimated net proceeds of the
Offerings and the Direct Sales)........ 12,000 12,000 24,296,206(f)
Additional paid-in capital............... 108,000 (4,942,000)(b) 313,338,299(g)
Notes receivable from Common Share
sales.................................. -- -- (2,569,500)(h)
------------
Accumulated deficit...................... (847,744) (2,047,744)(c) (2,047,744)
----------- ----------- ------------
Total shareholders' equity
(deficit).................... (727,744) (6,977,744) 333,017,261
----------- ----------- ------------
Total liabilities and shareholders'
equity................................. $ 1,477,256 $ 122,256 $335,065,005
=========== =========== ============
</TABLE>
- ---------------
(a) Reflects amounts payable upon consummation of the Offerings of $3.6 million
to Inter-Atlantic for certain advisory services related to the Offerings,
the sales to the Strategic Investors and the development of the Company's
operations; and approximately $3.5 million for estimated out-of-pocket
expenses consisting of recruiting, personnel, legal, accounting and printing
expenses as well as filing fees and other costs related to the Offerings,
the sales to the Strategic Investors and the development of the Company's
operations. Of such fees and expenses, the Company has allocated
approximately $5.1 million as costs related directly to the Offerings and
the sales to the Strategic Investors, and approximately $2.0 million as
operating expenses. Inter-Atlantic has contracted with ACA Service to
provide consulting services to
30
<PAGE> 33
Inter-Atlantic in connection with the services that Inter-Atlantic has
agreed to provide to the Company. Pursuant to such arrangement,
Inter-Atlantic has agreed to pay $1.95 million to ACA Service upon
consummation of the Offerings.
(b) Reflects the estimated costs associated with the Offerings and the sales to
the Strategic Investors described in footnote (a).
(c) Reflects the estimated operating expenses described in footnote (a).
(d) Reflects the estimated net proceeds of the Offerings and the Direct Sales,
less $12,000 which will be paid to the Purpose Trust in exchange for the
Common Shares it currently holds, net of the estimated costs associated with
the Offerings and the sales to the Strategic Investors described in footnote
(a).
(e) Reflects payment of the estimated costs associated with the Offerings and
the sales to the Strategic Investors described in footnote (a).
(f) Reflects 24,296,206 Common Shares sold in the Offerings and the Direct
Sales, less the 12,000 Common Shares to be repurchased by the Company from
the Purpose Trust.
(g) Reflects additional paid-in capital received in the Offerings and the Direct
Sales, net of the estimated costs associated with the Offerings and the
sales to the Strategic Investors described in footnote (a).
(h) Reflects loans to management to finance in part intended purchases by
management of Common Shares as part of the Direct Sales.
31
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND PLAN OF OPERATIONS
GENERAL
GMA and the Operating Company were both incorporated in August 1998 in
Bermuda to provide "A" rated financial guaranty insurance and reinsurance upon
consummation of the Offerings and neither has any operating history. The
Marketing Company was incorporated in November 1998 in Bermuda and also does not
have any operating history. The Operating Company was licensed in Bermuda on
August 28, 1998 as a Class 3 insurer, which authorizes it to write, among other
things, financial guaranty insurance and reinsurance. The Operating Company is
not currently licensed or admitted as an insurer in any jurisdiction other than
Bermuda. The Company's fiscal year ends on December 31 and its financial
statements are prepared in accordance with GAAP.
For the period from August 28, 1998 to December 31, 1998, the Company
incurred costs of $850,000, which consisted primarily of costs related to the
organization of the Company and operating expenses including recruiting and
personnel, as well as professional and other fees. During such period, the
Company received interest income of $2,256, which consisted of interest earned
on the Company's cash on deposit. Through December 31, 1998, the Company
recorded a net loss of $847,744, which also represented the Company's
accumulated deficit at the end of such period. At December 31, 1998, the Company
had $122,256 cash on deposit.
LIQUIDITY AND CAPITAL RESOURCES
GMA will rely primarily on cash dividends and other permissible payments
from the Operating Company to pay its operating expenses and dividends on its
Common Shares. The Board of Directors of GMA intends to declare and pay out of
current and retained earnings a quarterly cash dividend of $.04 per Common Share
following the end of the first full fiscal quarter following the consummation of
the Offerings. It will be GMA's policy to retain all earnings in excess of such
quarterly dividends to support the growth of its business. If GMA's current and
retained earnings do not support the payment of such quarterly dividends, future
dividends may be reduced or eliminated. If GMA makes a payment to shareholders
in excess of its current and retained earnings, such payment would be treated as
a return of capital to holders of the Common Shares. The declaration and payment
of dividends by GMA will be at the discretion of its Board of Directors and will
depend upon GMA's results of operations and cash flows, the financial position
and capital requirements of the Operating Company, general business conditions,
legal, tax, regulatory and any contractual restrictions on the payment of
dividends and other factors the Board of Directors of GMA deems relevant. GMA's
ability to pay dividends depends on the ability of the Operating Company to pay
dividends to GMA. While GMA is not itself subject to any significant legal
prohibitions on the payment of dividends on its Common Shares, the Operating
Company is subject to Bermuda regulatory constraints which affect its ability to
pay dividends to GMA. Accordingly, there is no assurance that dividends on the
Common Shares will be declared or paid in the future. In addition, GMA will not
increase any quarterly cash dividend or initiate a share repurchase program
unless the rating agencies that have issued a financial strength or
claims-paying ability rating on the Operating Company confirm that such action
will not adversely affect the Operating Company's ratings. See "Dividend Policy"
and "Business -- Regulation -- Bermuda."
The principal sources of funds for the Operating Company's operations are
initially expected to be substantially all of the net proceeds of the Offerings
and the Direct Sales (after deducting underwriting discounts and commissions,
certain advisory fees and other expenses, including payments to Inter-Atlantic
for its services and reimbursement for certain expenses related to the Offerings
and the sales to the Strategic Investors), financial guaranty reinsurance
premiums, structuring fees and realized net investment income. These funds are
expected to be used primarily to pay operating expenses (including personnel
expenses), the cost of new computer equipment and software and, subject to
Bermuda law, to make dividend payments to GMA. The balance of the net proceeds
will be invested in accordance with the Investment Guidelines. The Company
believes that the net proceeds of the Offerings and the Direct Sales will be
sufficient to fund its planned growth and operating activities for the next
three to five years. Should the Company's growth so
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warrant, the Company may seek to enter into an excess of loss reinsurance
facility with a company rated "A" or higher in order to provide the Operating
Company with additional insurance and reinsurance capacity. There can be no
assurance that such a facility will be available to the Company at such time on
commercially acceptable terms.
The Company's underwriting strategy is to insure and reinsure financial
obligations which are expected to make full and timely payment of principal and
interest. Nevertheless, because the Company will be insuring and reinsuring
financial obligations that have a credit quality rated "BB" or higher or that
are unrated and have in the Company's opinion an equivalent credit quality, the
Company does anticipate that its insurance portfolio as a whole may generate a
certain level of losses. If the Company fails to assess accurately the risks it
assumes, the Company may fail to establish appropriate premium rates, its
reserves may be inadequate to cover losses and, consequently, the Company would
be adversely affected. The financial guarantees to be issued by the Company will
insure or reinsure the financial performance of obligations over an extended
period of time, in some cases over 30 years, under policies that the Company
cannot generally cancel. The Company's policy is to provide for loss and loss
adjustment expense ("LAE") reserves to cover losses that may be reasonably
estimated on the obligations insured by the Operating Company. The reserves for
losses and LAE at any balance sheet date will reflect the Company's estimate of
identified ("case basis") and unidentified ("unallocated") losses on the
obligations it has insured through such date. The establishment of an
appropriate level of loss reserves is an inherently uncertain process, made even
more so by the undeveloped nature of the "A" rated financial guaranty insurance
and reinsurance market, and there can be no assurance that claims made against
the Company will not exceed the Company's loss reserves. A significant event,
including a natural disaster or political instability, 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. Such losses could also impair the Operating
Company's ability to maintain its financial strength and claims-paying ability
ratings or to pay dividends to GMA. See "Business -- Reserves."
The Operating Company is a registered Bermuda insurance company and is
subject to regulation and supervision in Bermuda. Neither GMA nor its
subsidiaries are currently licensed as a financial guaranty insurer or reinsurer
in any jurisdiction in the United States. The insurance laws of each state in
the United States regulate the sale of insurance within their jurisdiction by
insurers, such as the Operating Company, which are not admitted to do business
within such jurisdiction. Because many jurisdictions in the United States do not
permit insurance companies to take credit on their statutory financial
statements for reinsurance obtained from unlicensed or non-admitted insurers
unless appropriate security measures are in place, it is anticipated that the
Operating Company's reinsurance clients will require it to post a letter of
credit or enter into other security arrangements. In the event that the
Operating Company should default under a letter of credit facility, it may be
required to liquidate prematurely all or a substantial portion of its investment
portfolio and/or its other assets which have been pledged as security for the
facility or otherwise secure its obligations to its reinsurance clients, which
would adversely affect the Company. The Operating Company does not currently
have a letter of credit facility established and if the Operating Company is
unable to obtain a letter of credit facility on commercially acceptable terms or
is unable to arrange for other types of security, the Operating Company's
ability to operate its business may be severely limited. The Operating Company's
quota share and facultative treaties with ACA contain a requirement that the
Operating Company must take all steps necessary in order to permit ACA to
receive credit for such reinsurance in all applicable jurisdictions.
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
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of the issuers of financial obligations insured by the Company and, with respect
to the Company's reinsurance operations, will rely on the analysis performed by
the primary insurer. There can be no assurance, however, that the Company's
operations will not experience material disruptions due to the failure of the
Company's third-party service providers, reinsurance clients or the issuers of
financial obligations insured or reinsured by the Company to become fully Year
2000 compliant in a timely manner or that such failure will not otherwise have
an adverse effect on the Company. Furthermore, the Company's strategy to
penetrate the credit enhancement market outside of the United States may subject
the Company to additional Year 2000 risk as foreign entities have in general not
addressed Year 2000 compliance issues as comprehensively as their United States
counterparts. The Company will continue to monitor developments relating to this
issue, including the development of additional contingency plans to supplement
its current contingency plan, which provides for the replacement of existing
third-party service providers which are not Year 2000 compliant with comparable
third-party service providers which are Year 2000 compliant.
Pursuant to an agreement between Inter-Atlantic and the Company,
Inter-Atlantic has agreed to provide certain services in connection with the
Offerings, the sales to the Strategic Investors and the development of the
Company's operations, including assistance in preparing the registration
statement for the Common Shares, selecting underwriters in connection with the
Offerings, identifying and negotiating with potential strategic investors and
such other services as the Company or Inter-Atlantic deems appropriate. Pursuant
to such Agreement, the Company has agreed to pay Inter-Atlantic a fee of $3.6
million upon consummation of the Offerings. Inter-Atlantic has in turn
contracted with ACA Service 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 upon consummation of the Offerings. The Company is also
obligated upon consummation of the Offerings to reimburse Inter-Atlantic for
reasonable expenses it incurs in connection with performing services under its
agreement with the Company. Such expense reimbursements will not include the fee
Inter-Atlantic is obligated to pay ACA Service, but will include expenses
incurred by ACA Service in connection with performing services under its
agreement with Inter-Atlantic for which Inter-Atlantic is obligated to reimburse
ACA Service. Upon consummation of the Offerings, certain of these incurred but
not currently payable expenses may be paid directly by the Company rather than
paid to Inter-Atlantic as reimbursement. At December 31, 1998, Inter-Atlantic
had incurred expenses on the Company's behalf in connection with the development
of the Company's operations of approximately $850,000 and expenses in connection
with the Offerings and the sales to the Strategic Investors of approximately
$1.4 million, including reimbursements it owed to ACA Service. Upon consummation
of the Offerings, expenses incurred by the Company, including expenses incurred
by Inter-Atlantic on the Company's behalf, are currently estimated to be
approximately $3.5 million, of which approximately $1.4 million is estimated to
relate to expenses in connection with the development of the Company's
operations and approximately $2.1 million is estimated to relate to expenses in
connection with the Offerings and the sales to the Strategic Investors,
including reimbursements Inter-Atlantic will owe to ACA Service.
The Company has retained Insurance Consulting Services Limited ("ICS"), a
Bermuda corporation licensed as an insurance broker, to provide risk management
services and other related financial services. Pursuant to such agreement, ICS
is entitled to receive an annual fee of $425,000, which is payable in quarterly
installments commencing on the consummation of the Offerings through the fifth
anniversary of the consummation of the Offerings. ICS is in its initial stages
of development and has a limited operating history or experience providing risk
management and other related financial services. ICS is owned by certain persons
affiliated with Inter-Atlantic, including Frederick S. Hammer and Robert M.
Lichten, who are directors of the Company. See "Certain Relationships and
Related Party Transactions."
PLAN OF OPERATION
The Company's plan of operation for 1999 is to begin full-scale
implementation of its business plan. The Company does not currently have any
material commitments for any capital expenditures over the next twelve months.
Its principal expenditures are expected to consist of operating expenses
(including personnel expenses), the cost of new computer equipment and software
and, subject to Bermuda law, the payment of
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dividends. By the end of 1999, the Company anticipates that it will hire
approximately twelve additional employees, which would bring the total number of
employees to approximately eighteen.
The Company expects that the net proceeds of the Offerings and Direct Sales
(after deducting underwriting discounts and commissions, certain advisory fees
and other expenses, including payments to Inter-Atlantic for its services and
reimbursement for certain expenses related to the Offerings and the sales to the
Strategic Investors) will be sufficient to satisfy its cash requirements and to
provide a level of capital sufficient to enable the Company to provide financial
guaranty insurance and reinsurance for the next three to five years and that, at
a minimum, the Company believes that it will not be necessary during the twelve
months immediately following the Offerings and the Direct Sales to raise
additional funds to meet the expenditures required to operate the Company's
business. Over time, internally generated funds from the Company's insurance
operations and investment portfolio plus a working capital line of credit and
the capital base established by the Offerings and Direct Sales are expected to
be sufficient to operate the Company's business, although no such working
capital line has yet been established and no assurance can be given that such a
facility will be obtained on terms acceptable to the Company. Consequently, the
Company does not presently anticipate that it will incur any material
indebtedness in the ordinary course of its business other than obtaining letters
of credit as security for its reinsurance agreements and a working capital line
of credit. However, there can be no assurance that the Company will not be
required to incur other indebtedness in order to implement its business
strategy.
CURRENCY
The Company's functional currency is the United States dollar. However,
because the Company's business strategy includes insuring and reinsuring
financial obligations issued outside the United States, the Company expects that
it will write a portion of its business and receive premiums in currencies other
than United States dollars. Furthermore, the Operating Company may maintain up
to 10% of its investment portfolio in investments denominated in currencies
other than United States dollars. Consequently, the Company may experience
exchange losses to the extent its foreign currency exposure is not hedged or is
not sufficiently hedged, which in turn would adversely affect the Company. The
Company will make determinations as to whether to hedge its foreign currency
exposure on a case-by-case basis, although the Company does not expect typically
to hedge against such foreign currency exposure. If the Company does hedge its
foreign currency exposure, the Company may use forward foreign currency exchange
contracts in an effort to hedge against movements in the value of foreign
currencies relative to the United States dollar. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specified
currency at a future date at a price set at the time of the contract. Foreign
currency exchange contracts will not eliminate fluctuations in the value of the
Company's assets and liabilities denominated in foreign currencies but rather
allow the Company to establish a rate of exchange for a future point in time. If
the Company does seek to hedge its foreign currency exposure through the use of
forward foreign currency exchange contracts or currency swaps, it will be
subject to the risk that the counterparties to such arrangements will fail to
perform.
TAXATION
Bermuda does not currently impose a corporate level tax on the profits or
income of the Company. GMA, the Operating Company and the Marketing Company have
each received an assurance from the Bermuda Minister of Finance under The
Exempted Undertakings Tax Protection Act 1966 of Bermuda to the effect that if
there is enacted in Bermuda any legislation imposing tax computed on profits or
income, or computed on any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance tax, then such tax would not be
applicable to GMA, the Operating Company, the Marketing Company or to any of
their operations or shares, debentures or other obligations of GMA, the
Operating Company or the Marketing Company until March 2016. There can be no
assurance that after such date GMA, the Operating Company or the Marketing
Company would not be subject to any such tax. See "Certain Tax
Considerations -- Taxation of GMA, the Operating Company and the Marketing
Company -- Bermuda."
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Because GMA, the Operating Company and the Marketing Company are not
expected to conduct business in the United States, and because they expect to
qualify for the benefits of the tax convention between the United States and
Bermuda, it is not expected that they will be subject to United States federal
income taxes or any other United States corporate level tax. The United States
currently imposes an excise tax on insurance and reinsurance premiums paid to
foreign insurers or reinsurers with respect to risks located in the United
States. The rate of tax applicable to reinsurance premiums to be paid to the
Operating Company is currently 1%. The rate of tax for any premiums for direct
issuance of financial guarantees is currently 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 -- Taxation of GMA, the Operating Company and the Marketing
Company -- United States."
Under current United Kingdom law, the measure of corporate taxation
resulting from the activities of the Marketing Company in the United Kingdom
would likely be the portion of the profits of the Marketing Company attributable
on an assumed arm's-length basis to its London branch activities. Such profit
would be measured in practice by comparison with the compensation that the
Marketing Company would need to pay to an independent entity providing the same
services as the Marketing Company's office in the United Kingdom. The Marketing
Company will seek to enter into an agreement with the United Kingdom Inland
Revenue under which an agreed profit margin will be attributed to the Marketing
Company's office in the United Kingdom under a stated formula for purposes of
calculating the amount of tax owed in the United Kingdom by the Marketing
Company. No assurance can be given that such an agreement will be reached and,
if reached, any such agreement would be cancellable upon reasonable notice by
the Marketing Company or United Kingdom Inland Revenue. No assurance can be
given that any such agreement will not be cancelled by United Kingdom Inland
Revenue. The United Kingdom also imposes an insurance premium tax of 4% on
insurance and reinsurance premiums paid with respect to risks located in the
United Kingdom. There can be no assurance that certain financial guaranty
insurance and reinsurance policies issued by the Operating Company will not be
subject to such tax.
GMA, the Operating Company and the Marketing Company plan to operate in
such a manner that they will not generally be subject to any material taxes in
jurisdictions other than those noted above, except for withholding taxes on
certain kinds of investment income and excise or similar premium taxes as
described above. It is possible, however, that the Operating Company or the
Marketing Company may be held to be doing business in one or more 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 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
included 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 its balance sheet and measure
those instruments at fair value. The statement also sets forth the criteria for
determining whether a derivative may be specifically designated as a hedge of a
particular exposure with the intent of measuring the effectiveness of that hedge
in the statement of operations. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management does not
believe that the adoption of this statement will have a material impact on the
Company's consolidated financial position, results of operations or cash flows
although the Company does expect that it may hold certain derivative instruments
that pursuant to SFAS No. 133 may have to be valued on the Company's balance
sheet at their fair value.
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BUSINESS
GMA and the Operating Company were both recently organized in Bermuda to
provide "A" rated financial guaranty insurance and reinsurance on financial
obligations, principally asset-backed and municipal securities, that are rated
"BB" or higher or that are unrated and have in the Company's opinion an
equivalent credit quality. The Company will seek to provide direct financial
guaranty insurance outside of the United States and financial guaranty
reinsurance on a worldwide basis. Upon consummation of the Offerings, the
Company expects to be the only publicly traded "A" rated financial guaranty
insurance company and the first publicly traded Bermuda-based company focused
principally on the financial guaranty industry.
According to Asset-Backed Alert, worldwide issuances of asset-backed
securities grew from approximately $291.7 billion during 1997 to approximately
$346.7 billion during 1998, representing an increase of approximately 18.9%. In
addition, Asset-Backed Alert reported that during 1998, approximately 20.6% of
asset-backed securities issued in public offerings were insured. According to
Securities Data Co., the issuance of municipal securities in the United States
grew from approximately $220.7 billion during 1997 to approximately $285.9
billion during 1998, representing an increase of approximately 29.5%. In
addition, Securities Data Co. reported that during 1998, approximately 50.8% of
municipal securities issued in public offerings were insured.
Financial guaranty insurance provides the holder of a financial obligation
with a guaranty against financial loss. Such insurance is principally used to
guarantee the payment of principal and interest on a financial obligation, and
is typically unconditional, irrevocable and, except in certain cases for
non-payment of premiums, non-cancellable. Financial guaranty insurance is often
offered as a credit enhancement to asset-backed securities and municipal bonds
and can be provided on an entire issue of securities at the time of original
issuance or to holders of all or a portion of an issue of uninsured obligations
at any time following issuance. Issuers of financial obligations generally
purchase financial guaranty insurance to raise the credit ratings of their
financial obligations and, consequently, to reduce their overall cost of
borrowing. Holders of financial obligations benefit from financial guaranty
insurance because the risk of loss associated with an issuer's default is
reduced and because an obligation that is insured is typically more liquid in
the secondary market than it would be without such insurance. In addition,
financial institutions subject to regulatory risk-based capital requirements may
increase their levels of available capital through insuring financial
obligations held by them. Under a financial guaranty reinsurance contract, the
reinsurer agrees to bear part or all of the loss the primary insurer may sustain
under a financial guaranty insurance policy it has written. In consideration for
this reinsurance, the primary insurer pays premiums to the reinsurer.
Reinsurance in the financial guaranty industry serves to (i) increase the
insurance capacity of a primary insurer; (ii) assist a primary insurer in
meeting applicable capital and other requirements imposed by rating agencies and
regulatory authorities; and (iii) manage the risk exposure of a primary insurer.
The Company expects to raise gross proceeds of $360.6 million and to have
an equity capitalization of approximately $333.0 million upon consummation of
the Offerings and the Direct Sales. Management believes that this level of
capitalization will demonstrate a strong financial position and a high level of
commitment to potential clients and is necessary to establish the Company as a
competitive financial guaranty insurer and reinsurer. As a newly formed entity,
the Company's capital is presently unencumbered by such issues as loss reserve
adequacy, unrealized losses in its investment portfolio and uncollectible
reinsurance. In addition, although the Company does expect that it may seek a
working capital line of credit to finance its operations, the Company does not
presently have or plan to have any indebtedness other than obtaining letters of
credit in connection with its reinsurance agreements. In part because of the
Company's expected capitalization following the Offerings and the Direct Sales,
Standard & Poor's has assigned the Operating Company a preliminary financial
strength rating of "A", and Duff & Phelps and Fitch IBCA have each assigned the
Operating Company a preliminary claims-paying ability rating of "A+". The
ratings are subject to the Company raising gross proceeds of at least $350.0
million in the Offerings and the Direct Sales and to the initial capitalization
of the Operating Company exceeding $320.0 million upon consummation of the
Offerings and the Direct Sales.
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BUSINESS STRATEGY
The Company's objective is to capitalize on what it believes to be an
opportunity to provide innovative and cost-effective forms of third-party credit
enhancement. The Company will seek to achieve this objective through the
implementation of its business strategy, the principal components of which are:
- - Participate in the Development of the "A" Rated Financial Guaranty Market in
the United States
Historically, the United States financial guaranty insurance market has
generally been served by "AAA" rated financial guaranty insurance
companies. The Company will seek to capitalize on what it believes is a
growing market for "A" rated financial guaranty insurance and reinsurance
in the United States. ACA, one of the Company's sponsors, has since the
commencement of its operations in October 1997 been developing the market
for "A" rated financial guaranty insurance by offering a lower rated
alternative to "AAA" rated financial guaranty insurance. The Company
believes that "A" rated financial guaranty insurance can, in many cases,
reduce an issuer's overall cost of borrowing and increase the liquidity of
a financial obligation trading in the secondary market while costing less
than traditional "AAA" rated financial guaranty insurance or other forms of
third-party credit enhancement such as letters of credit. In addition, the
Company believes that "A" rated financial guaranty insurance may be
particularly attractive to issuers that have previously had limited access
to the financial markets and to holders of financial obligations subject to
risk-based capital requirements. The Operating Company has entered into
three reinsurance treaties with ACA that will become effective upon
consummation of the Offering. Management believes that the treaties
pursuant to which the Operating Company provides reinsurance to ACA will
provide ACA with additional insurance capacity and will permit ACA to
develop further the market for "A" rated financial guaranty insurance in
the United States. See "-- Reinsurance Treaties with ACA." The Company will
also seek to reinsure obligations in circumstances where the holders of
such obligations, including financial institutions and insurance companies,
desire third-party credit enhancement for regulatory or accounting
purposes. The Company will also seek to enter into similar reinsurance
arrangements with higher rated third-party credit enhancement providers
based in the United States.
- - Provide Credit Enhancement for Transactions Structured Outside the United
States
The Company believes that financial guaranty insurance has been
underutilized in transactions structured outside the United States,
particularly with respect to asset-backed securities, as issuers of such
financial obligations have instead principally relied on banks and other
financial institutions offering letters of credit and other guarantees for
credit enhancement. As a consequence, the Company believes that an
opportunity exists to provide "A" rated financial guaranty insurance as an
innovative and cost-effective alternative to existing forms of credit
enhancement for such transactions. Initially, an important international
focus for the Company will be to insure financial transactions involving
assets held by trusts or similar special purpose vehicles domiciled in
jurisdictions such as Bermuda, the Cayman Islands and the Island of Jersey.
Such assets are expected typically to originate in the United States or
certain European Union countries and be transferred to such off-shore
jurisdictions in connection with the structuring of such transactions. The
Company will also seek outside the United States to insure and reinsure
obligations in circumstances where the holders of such obligations,
including financial institutions and insurance companies, desire
third-party credit enhancement for regulatory and accounting purposes. The
Company will seek to capitalize on the relationships its management team
has developed with investment banks, commercial banks and other financial
services firms to generate referrals for issuing financial guaranty
insurance and reinsurance. The Company has also established the Marketing
Company to act solely as a marketing agent for the Company. The Marketing
Company will operate a branch office in London, which is a center for
banking and other financial service activities. The Company is not
currently licensed as a financial guaranty insurer or reinsurer in any
jurisdiction other than Bermuda, which will limit its ability to provide
financial guaranty insurance or reinsurance with respect to certain
transactions. As the Company's business develops, management will monitor
the need to obtain licenses in jurisdictions other than Bermuda in order to
comply with applicable law or to be able to engage in additional financial
guaranty insurance related activities. See "Risk Factors -- Regulation;
Restrictions on Insurance and Reinsurance Operations."
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- - Utilize a Disciplined Underwriting Approach
The Company's underwriting strategy is to insure and reinsure financial
obligations which are expected to make full and timely payment of principal
and interest. Nevertheless, because the Company will be insuring and
reinsuring obligations rated "BB" or higher or that are unrated and have in
the Company's opinion an equivalent credit quality, the Company does
anticipate that its insurance portfolio as a whole may generate a certain
level of losses. Over time, the Company will seek to diversify the risks it
insures and reinsures by type of obligor, type of pledged assets,
geographic origination point of pledged assets, transaction size,
geographic location of the obligor, revenue sources and risk duration. Such
diversification is intended to mitigate the impact on the Company's
insurance portfolio if higher than expected losses arise in certain
segments of the Company's business. The Company will also seek a private or
"shadow" rating evaluation from one or more nationally recognized rating
agencies on all unrated financial obligations that the Company insures on a
direct basis.
- - Capitalize on Skill and Experience of Management and Board of Directors
The Company has assembled a senior management team of experienced
insurance, reinsurance and capital markets insurance professionals to
implement its business strategy. The Company's President and Chief
Executive Officer, Donald J. Matthews, has over 24 years of experience in
the insurance and reinsurance industries and was President, Chief Operating
Officer and a director of ACA from its formation in October 1997 to August
1998 when he resigned as an officer and director of ACA to join the
Company. From 1985 to 1997, he served as a Senior Vice President and a
Principal of Johnson & Higgins (now Marsh & McLennan Companies, Inc.),
where he was employed for 23 years. At Johnson & Higgins, Mr. Matthews most
recently served as Chairman of its Global Financial Group, where he oversaw
the firm's insurance and reinsurance relationships with financial services
companies, including commercial banks and investment banks, on a worldwide
basis. Also while at Johnson & Higgins, Mr. Matthews was instrumental in
the formation of Corporate Officers & Directors Assurance Ltd. (now part of
ACE Limited) and Executive Risk Inc. Mary Jane Robertson, Managing
Principal, Chief Financial Officer and Treasurer of the Company, has over
21 years experience in the insurance industry. From 1993 to 1997, Ms.
Robertson was the Chief Financial Officer and a Senior Vice President of
Capsure Holdings Corp. (now part of CNA Surety Corp.), an insurance company
focusing principally on the surety and fidelity insurance business. From
1986 to 1996, Ms. Robertson also served as the Chief Financial Officer and
an Executive Vice President of United Capitol Insurance Company, a
property/casualty insurance company. Matthew J. Cooleen, Managing
Principal, Structured Products of the Company, has over 12 years experience
in the structured finance sector of the financial services industry. From
1997 to 1999, Mr. Cooleen worked at MBIA-Ambac International, a joint
venture between MBIA Insurance Corp. and Ambac Assurance Corporation, where
he was most recently a Managing Director in the International Structured
Finance Department. At MBIA-Ambac International, Mr. Cooleen focused on the
development of the global structured finance and asset-backed financial
guaranty market. From 1995 to 1997, he was a Vice President and Group Head
of the Global Securitization Group of Paribas Capital Markets, where he
founded the Global Securitization/Structured Finance Department. From 1991
to 1995, Mr. Cooleen was a Vice President in the Asset Backed Finance
Department of ING Barings. Bruce W. Bantz, Managing Principal, Marketing
and Business Development of GMA and the Marketing Company, has over 22
years experience in the investment and commercial banking industries,
specializing in structured finance and asset securitization. From 1997 to
1998, Mr. Bantz was a Director and Global Head of Asset-Backed Finance of
Dresdner Kleinwort Benson, the investment banking division of Dresdner Bank
A.G. From 1994 to 1997, Mr. Bantz served as a Director and Global Head of
Asset Securitization for NatWest Markets, the investment banking division
of NatWest Group PLC. James G. Jachym, Managing Principal, Credit of the
Company, has over 20 years of experience with capital markets and
commercial paper credits. From 1996 to 1999, Mr. Jachym was a Vice
President of BT Alex.Brown Incorporated, where he was responsible for
rating agency matters pertaining to such firm's clients. From 1979 to 1996,
he was employed by Lehman Brothers Inc., where he was a Senior Vice
President and was responsible for review and commitment of all asset-backed
commercial paper programs. Lionel J. Marsland-Shaw, Managing Principal,
Risk Management of the Company, has over
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28 years experience in the credit analysis sector of the financial services
industry. From 1995 to 1998, Mr. Marsland-Shaw served as General Manager
and Chief Executive Officer of Capital Intelligence, a credit rating and
analysis company specializing in emerging markets. From 1993 to 1995, Mr.
Marsland-Shaw was Director and Head of the London office of Standard &
Poor's and was responsible for its ratings business in the United Kingdom,
Ireland and the Netherlands. In addition, the Company's Board of Directors
consists of several individuals with extensive experience in the financial
guaranty and financial services industries. Management believes that the
reputation and expertise possessed by the Company's officers and directors
should assist the Company with its underwriting analysis and marketing
efforts.
- - Maintain Low Cost Structure.
Management believes that through controls on overhead expenses and with the
absence of a corporate level tax in Bermuda on the Company's profits and
income, the Company will have a low cost structure. 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
insurance and reinsurance markets.
SPONSORS AND STRATEGIC INVESTORS
The Company has been established through the sponsorship of ACA and its
affiliate ACA Service and Inter-Atlantic. ACA Service currently provides
management and support services to ACA. Inter-Atlantic is a provider of
investment banking services to insurance companies and other financial services
firms and was the sponsor of Annuity and Life Re (Holdings), Ltd., the first
publicly traded Bermuda-based reinsurance company focusing principally on
writing annuity and life reinsurance. Inter-Atlantic has provided certain
services to the Company in connection with the Offerings, the sales to the
Strategic Investors and the development of the Company's operations, and ACA
Service has acted as a consultant 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 PMI, High Ridge, Rolaco,
Third Avenue Value Fund and Third Avenue Small-Cap Value Fund for the purchase
for investment directly from the Company of an aggregate of 3,900,706 Common
Shares and Class B Warrants to purchase an aggregate of 550,000 Common Shares.
Such purchases will be consummated immediately prior to the consummation of the
Offerings for an aggregate purchase price for the Common Shares and the Class B
Warrants of approximately $55.0 million. The aggregate purchase price to be paid
by each Strategic Investor is based on a price of $14.10 for (i) one Common
Share and (ii) the right to purchase a specified fraction of a Common Share
under the Class B Warrants. The exercise price of the Class B Warrants will be
$15.00 per share. Each of the Strategic Investors has agreed not to sell or
otherwise transfer their Common Shares and Class B Warrants for a period of nine
months from the date of this Prospectus without the prior written consent of
Merrill Lynch & Co. and Prudential Securities on behalf of the Underwriters and,
in certain cases, the prior written consent of the Company. See "Shares Eligible
for Future Sale" and "Direct Sales."
PMI is a provider of private mortgage insurance and other products for the
United States home mortgage industry. The Company has agreed with PMI, subject
to the Company's Operating Guidelines, to use reasonable efforts following the
consummation of the Offerings and the Direct Sales to explore mutually
beneficial business relationships, including through offering to PMI the
opportunity to assume reinsurance from, or cede reinsurance to, the Operating
Company and to participate in reinsurance transactions between the Operating
Company and third parties and by exploring opportunities for joint marketing
arrangements and mutual referrals of business.
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REINSURANCE TREATIES WITH ACA
The following description of the reinsurance treaties between the Operating
Company and ACA does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all of the provisions of such treaties. A copy
of each reinsurance treaty is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
The Operating Company has entered into three reinsurance treaties with ACA,
a Sponsor of the Company, which will become effective upon consummation of the
Offerings. The first treaty is a quota share treaty pursuant to which the
Operating Company is required to provide, and ACA is required to purchase,
reinsurance on a fixed percentage of the risks associated with financial
guaranty insurance policies issued by ACA covering new issues of financial
obligations with a rating of "BB" or higher. The other two treaties are
facultative treaties under which the Operating Company and ACA are each
obligated to offer the other the opportunity to reinsure each financial
obligation the other insures on a direct or assumed basis. These facultative
treaties also set forth the principal terms under which the Operating Company
and ACA may purchase such reinsurance from the other on a case-by-case basis.
The Operating Company expects that pursuant to the facultative treaty under
which it provides reinsurance to ACA, the Operating Company may reinsure a
greater percentage of certain new issues of financial obligations insured by ACA
than the percentage specified under the quota share treaty. In addition, the
Operating Company expects that pursuant to such facultative treaty, it may
reinsure through one or more bulk reinsurance transactions certain risks insured
by ACA before the consummation of the Offerings as well as, on an ongoing basis,
certain risks insured by ACA with respect to obligations trading in the
secondary market, neither of which are covered by the quota share treaty.
Management anticipates that at least in the early stages of its business
development, the premiums the Operating Company receives under the treaties with
ACA will account for a substantial portion of the Company's total premium
income. ACA currently has no meaningful source of reinsurance similar to that to
be provided by the Operating Company upon consummation of the Offerings.
Quota-Share Reinsurance Treaty
Under a quota-share reinsurance treaty, dated as of November 25, 1998 and
effective upon the consummation of the Offerings, between ACA as reinsured and
the Operating Company as reinsurer, ACA has agreed to cede and the Operating
Company has agreed to accept as reinsurance a pro rata share of the insurance
contracts and policies, surety bonds, indemnity contracts, financial guaranty
policies, binders, endorsements and other evidences of insurance actually
written or assumed by ACA during the term of the agreement. The business
reinsured by the Operating Company under the quota share treaty is limited to
insurance covering new issues of financial obligations with a rating of "BB" or
better and with respect to which the total premiums payable to ACA are estimated
to equal at least $100,000 during the calendar year in which the policy or
policies covering such risks are issued.
ACA will pay the Operating Company as premiums an amount equal to 22.5% of
all premiums actually received in respect of policies written during the term of
the agreement (the "Ceded Premium"), less a ceding commission equal to 35.0% of
the Ceded Premium. The premium for financial guarantee insurance is typically
payable by the issuer of the obligation either in full at the policy's
inception, as is generally the case with municipal debt obligations, or in
periodic installments, as is generally the case with asset-backed securities.
The Operating Company's share of premiums actually received by ACA in each month
is payable to the Operating Company in full 15 days following the close of each
month. For example, if ACA collects premiums in full at the time a municipal
debt obligation is originally issued, the Operating Company will be paid its pro
rata share of such full premium within 15 days of the end of the month in which
ACA collects such premium. Similarly, if ACA periodically collects premiums
during the term an asset-backed security is outstanding, the Operating Company
will be paid its pro rata share of such periodic premium payments within 15 days
of the end of each month in which ACA collect such premiums.
Reinsurers pay ceding commissions to primary insurers principally to
reimburse them for insurance policy acquisition costs. The Operating Company and
ACA negotiated the 35% ceding commission to be paid in connection with the quota
share treaty by considering, among other factors, the historical policy
acquisition
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cost ratio of ACA available at the time the treaty was negotiated. From January
1, 1998 to September 30, 1998, the policy acquisition cost ratio on a GAAP basis
of ACA as a percentage of its gross written premiums was 34.9%. In addition,
according to Best's Aggregates & Averages -- Property-Casualty, 1997 Edition,
ceding commissions as a percent of ceded premiums in the aggregate for 1996
ranged from 23.7% to 39.2% for all reporting financial guaranty companies and
averaged 36.0% for all reporting credit insurance companies. The Operating
Company believes that the ceding commission it negotiated with ACA is comparable
to the ceding commission it would have to pay to an unrelated third-party
insurer that had a cost structure comparable to ACA's. Under the quota-share
treaty, the Operating Company is not permitted to write direct financial
guaranty insurance within any state in the United States, the District of
Columbia, Puerto Rico, Guam and the Virgin Islands so long as such treaty
remains in effect.
Any risks not covered by the quota-share treaty may be ceded under the
master facultative treaty between the Operating Company and ACA as described
below. The Operating Company will have no obligation to accept any share of a
transaction or increase in the limits of liability thereunder to the extent such
acceptance would cause the Operating Company to exceed any applicable single- or
aggregate-risk limit established by law or by a nationally recognized rating
organization that has issued a rating on the Operating Company. In addition, the
Operating Company is required to take all steps necessary to enable ACA to
obtain full credit for the reinsurance provided under the quota share treaty,
provided, however, that the Operating Company will not be required to engage in
any activity that would require the Operating Company to operate a trade or
business or obtain any license or certification within the United States. The
Operating Company expects to post a letter of credit or other security to enable
ACA to obtain full credit for the reinsurance provided under the quota share
treaty.
The quota-share treaty expires on December 31, 1999 but will be
automatically renewed for successive one-year terms, unless the Operating
Company gives written notice at least 90 days prior to any December 31 of its
intent not to renew for the succeeding calendar year. In the event the Operating
Company gives such notice, the business reinsured under the quota-share treaty
will become fixed (i.e., no new business will be added to the business already
reinsured) as of such December 31. Subject to other rights and remedies provided
in the treaty, the business reinsured will also become fixed on the day that any
of the following events occurs: (i) either ACA or the Operating Company ceases
to have a financial strength rating or claims-paying ability rating from any of
Standard & Poor's, Fitch IBCA or Duff & Phelps that is at least "A-" and such
rating has not been restored within 90 days; (ii) either ACA or the Operating
Company becomes insolvent or has a final order of liquidation, rehabilitation,
conservatorship or receivership entered against it; (iii) the Operating Company,
in its sole discretion, determines that ACA has materially violated its
underwriting guidelines and delivers a notice to such effect to ACA; (iv) either
ACA or the Operating Company is in breach under the quota share treaty and such
breach is not cured within 60 days of notice to the breaching party by the other
party; (v) there is a change of control of either ACA or its parent, American
Capital Access Holdings, Inc.; (vi) ACA fails to pay the premiums owed to the
Operating Company and such failure is not remedied within ten business days of
notice thereof; or (vii) ACA reinsures, sells, assigns, transfers or conveys,
directly or indirectly, some or all the business reinsured under the quota share
treaty to another person or entity. In the event of termination, the Operating
Company will remain liable for the reinsurance liabilities ceded under the quota
share treaty until the earlier of (i) the date of settlement, natural expiration
or cancellation of such liabilities or (ii) the cut-off date, if any. The
cut-off date is any December 31 as to which ACA has given at least 90 days'
prior written notice and either (i) the business reinsured has become fixed as
described above (provided that such December 31 falls in the year 2000 or later)
or (ii) no net incurred losses have been paid by the Operating Company under the
quota-share treaty (provided that such December 31 falls in the year 2003 or
later). The Operating Company's liability under the quota share treaty will
terminate on such cut-off date, if any, and the Operating Company will return
all unearned premiums to ACA within 30 business days less the ceding commission
applicable thereto.
Master Facultative Reinsurance Treaties
The Operating Company has entered into two master facultative reinsurance
agreements. The first, pursuant to which the Operating Company reinsures certain
risks of ACA, is effective upon consummation of
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the Offerings. The second, pursuant to which ACA may reinsure certain risks of
the Operating Company, is also effective upon consummation of the Offerings.
Under these agreements, the Operating Company or ACA (as the case may be) as
reinsured will cede and the reinsurer will accept as reinsurance such share of
any risk insured by the reinsured as may be specified and agreed upon by the
parties from time to time. The reinsured under each master facultative treaty
will present to the reinsurer each of the risks the reinsured incepts or renews
during the term of such agreement, and the reinsurer will have the right, in its
sole discretion, to reject or accept any individual risk presented to it by the
reinsured.
Each reinsured will pay the reinsurer its share of the premium related to
each particular risk reinsured after first deducting a ceding commission and
other costs allowed by the reinsurer, as such premium and ceding commission are
agreed between the parties. The parties may also modify any of the terms,
conditions or coverage set forth in the related master facultative treaty. In
addition, each reinsurer will take all steps necessary to enable the reinsured
to obtain full credit for the reinsurance provided to it under the relevant
master facultative treaty, provided, however, that the Operating Company will
not be required to engage in any activity that would require it to operate a
trade or business or obtain any license or certification within the United
States. The Operating Company expects to post a letter of credit or other
security to enable ACA to obtain full credit for the reinsurance provided under
the relevant master facultative treaty.
Each master facultative treaty may be canceled at any time by mutual
consent of the parties or by either party by giving at least 90 days' prior
written notice. In either such event, the reinsurer will continue to be liable
with respect to policies ceded pursuant to such agreement until the natural
expiration or cancellation of such policies. Such agreements may also be
canceled at the discretion (in the case of the Operating Company) of the
Minister of Finance of Bermuda or (in the case of ACA) the Commissioner of
Insurance of the State of Maryland acting (in either case) as rehabilitator,
liquidator or receiver of the reinsured party.
In addition, the reinsured under each master facultative treaty will have
the right to terminate its participation in policies covered thereunder by
giving written notice thereof if: (i) the performance of such agreement is
prohibited or rendered impossible by any applicable law or regulation; (ii) such
reinsured fails to receive all or substantially all financial credit for the
reinsurance provided by such agreement in all applicable jurisdictions; (iii)
the state insurance regulator in the applicable jurisdiction directs such
reinsured to cancel its participation in such agreement; (iv) the reinsurer (a)
becomes insolvent, (b) fails to maintain the minimum capital and surplus
requirements required by the laws of its domicile, (c) is the subject of a
voluntary or involuntary filing of a petition in bankruptcy, (d) goes into
liquidation or rehabilitation, (e) has a receiver appointed, (f) allows its
surplus to policyholders to decline by 25% or more during any twelve-month
period as reported in any financial statement, (g) or fails to maintain the
approval of (in the case of the Company) the Minister of Finance of Bermuda or
(in the case of ACA) the Commissioner of Insurance of the State of Maryland; (v)
the reinsurer (a) is acquired or undergoes a change of control, provided that
the reinsured gives notice of its intention to terminate within fifteen days of
its receipt of notice of such occurrence, or (b) fails to cure in a timely
manner a breach of any of its respective covenants as set forth in the master
facultative treaty; or (vi) the reinsurer ceases to have a financial strength
rating or claims-paying ability rating from any of Standard & Poor's, Fitch IBCA
or Duff & Phelps that is at least "A-" and such rating has not been restored
within 90 days. Termination will be effective upon the reinsurer's receipt of
written notice thereof, except that termination in the case of clause (v) will
be effective 60 days after the reinsurer's receipt of written notice thereof.
ACA FINANCIAL GUARANTY CORPORATION
ACA commenced operations as an "A" rated financial guaranty insurer in
October 1997 and, to the Company's knowledge, is currently the only "A" rated
financial guaranty insurer operating in the United States. ACA is a
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
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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 a group of senior executives having extensive experience
in financial guaranty insurance, credit analysis and related areas, including H.
Russell Fraser, a director of the Company, and Donald J. Matthews, the President
and Chief Executive Officer of the Company. 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 December 31, 1998, ACA wrote financial guaranty
insurance covering approximately 145 different underlying credits representing
approximately $2.2 billion in aggregate principal amount for direct and assumed
premiums written during that period totaling approximately $35.7 million. A
majority of the financial guaranty insurance written by ACA has covered
municipal obligations and obligations issued by other tax-exempt organizations,
although ACA has also insured asset-backed and corporate securities as well as
other financial obligations. ACA's insured portfolio of municipal and other
tax-exempt securities as of December 31, 1998 consisted solely of financial
obligations of obligors located in the United States, Puerto Rico and the Virgin
Islands, and the portfolio was diversified across different states within the
United States. As of December 31, 1998, approximately 13% of the principal
amount insured in ACA's portfolio of municipal and other tax-exempt securities
net of amounts ceded to reinsurers was located in California, 11% was located in
New York, 10% was located in Florida, 7% was located in Pennsylvania, 6% was
located in Colorado, and less than 5% was located in each of 31 other
jurisdictions. Also as of December 31, 1998, net of amounts ceded to reinsurers,
approximately 33% of ACA's insured portfolio consisted of obligations issued by
obligors in the health care sector, approximately 21% consisted of obligations
issued by state and local municipal obligors, approximately 18% consisted of
asset-backed securities, approximately 8% consisted of obligations issued by
obligors in the education sector, approximately 6% consisted of obligations
issued by obligors in the long-term care sector, approximately 4% consisted of
corporate obligations, and approximately 3% consisted of obligations issued by
obligors in the transportation sector, constituting in the aggregate
approximately 93% of ACA's insured portfolio. Because ACA has only recently
commenced operations, the composition and diversification of its insured
portfolio is expected to change, and may change significantly, as its business
matures. There can be no assurance as to the future composition of ACA's insured
portfolio. As of December 31, 1998, ACA had admitted assets of $139.0 million,
total liabilities of $38.8 million, and total surplus as regards policyholders
of $100.2 million, as determined in accordance with statutory accounting
practices prescribed or permitted by the Maryland Insurance Administration.
The initial gross capital raised in October 1997 by American Capital Access
Holdings, L.LC., the ultimate parent of ACA, consisted of $126.25 million, of
which $120.0 million was contributed by five institutional investors and $6.25
million by ACA management and employees. Of the initial capital raised, $116.7
million was contributed to ACA. ACA has a soft capital facility with Zurich
Reinsurance (North America) Inc. with an aggregate limit of $50.0 million. ACA
also has reinsurance capacity in the form of an excess of loss facility with
Capital Credit Reinsurance Company Ltd. with an aggregate limit of $75.0
million. The reinsurance treaties between the Operating Company and ACA are
different from ACA's soft capital and excess of loss facilities in that the
Operating Company will be assuming a specified percentage of particular risks
insured by ACA. Consequently, the Company believes that the reinsurance provided
by the Operating Company will provide ACA with additional individual risk and
sector risk capacity, which the soft capital and excess of loss facilities do
not provide. ACA currently has no meaningful source of reinsurance similar to
that to be provided by the Operating Company upon consummation of the Offerings.
To evaluate the credit risk 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
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Counsel, is designed to utilize fully the experience and expertise of its staff
of eight underwriters and three attorneys. All transactions that ACA enters into
are reviewed by the rating agencies that have assigned financial strength or
claims-paying ability ratings to ACA. In addition, ACA has an experienced
surveillance staff that, with its legal department, monitors the performance of
all transactions. In the event a claim is made under a policy, ACA will
aggressively pursue its remedies to ensure maximum recoveries.
So as to maintain its "A" rating, ACA has advised the Company that its
policy is to adhere 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. Standard & Poor's 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 insure and reinsure financial
obligations which are expected to make full and timely payment of principal and
interest. The Company will not insure or reinsure any risk without an evaluation
of what it deems to be all pertinent risk and credit factors, with the exception
that, in the case of risks to be reinsured pursuant to an automatic treaty, such
as the quota share treaty between the Company and ACA, the Company will, in lieu
of an individual risk assessment, evaluate the underwriting guidelines and
credit analysis ability of the ceding company for compatibility with the
Company's underwriting guidelines and standards. As the Company's insurance
portfolio develops, the Company expects that 10% to 25% of its insurance
portfolio will consist of financial obligations that at the time the Company
insures such obligations are rated "BB" or are unrated and have in the Company's
opinion an equivalent credit quality. The Company will over time seek to
diversify the risks it insures and reinsures by type of obligor, type of pledged
assets, geographic origination point of the pledged assets, transaction size,
geographic location of the obligor, revenue sources and risk duration. Such
diversification is intended to mitigate the impact on the Company's insurance
portfolio if higher than expected losses arise in certain segments of the
Company's business.
The Company has hired James G. Jachym to act as its Managing Principal,
Credit and Lionel J. Marsland-Shaw to act as its Managing Principal, Risk
Management. All risks insured by the Company will be approved by its management
Credit Committee, which consists of Messrs. Jachym and Marsland-Shaw as well as
the Company's Chief Executive Officer and Chief Financial Officer. The Company
has developed underwriting guidelines based on requirements of the rating
agencies that have assigned preliminary financial strength and claims-paying
ability ratings to the Operating Company with the objective of controlling the
risks of the financial guaranty insurance and reinsurance policies written as
well as to determine appropriate pricing levels. Any deviation from the
Company's underwriting guidelines, as they may be amended from time to time,
will require the approval of the Company's Board of Directors or the
Underwriting Committee of the Board, as will the approval of certain categories
of contracts which may be established from time to time by the Company's Board
of Directors or the Underwriting Committee of the Board. The Company expects to
review regularly its underwriting guidelines in light of changing industry
conditions, market developments and changes in technology. The Company reserves
the right at all times to amend, modify or supplement its underwriting
guidelines in response to such factors or for other reasons.
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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 will also
seek a private or "shadow" rating evaluation from one or more nationally
recognized rating agencies on all unrated financial obligations that the Company
insures on a direct basis.
The Company will monitor each transaction on an ongoing basis. The
responsibility for monitoring completed transactions will rest primarily with
the Company's Managing Principal, Risk Management. If the Company's Managing
Principal, Risk Management identifies a transaction that is not performing
according to the Company's expectations, or an external event occurs which has
or may have an adverse effect on the transaction, his responsibilities include
recommending corrective action, if any, or special monitoring to the management
Credit Committee.
RESERVES
The Company's policy is to provide for loss and loss adjustment expense
("LAE") reserves to cover losses that may be reasonably estimated on the
obligations insured by the Operating Company. The reserves for losses and LAE at
any balance sheet date will reflect the Company's estimate of identified ("case
basis") and unidentified ("unallocated") losses on the obligations it has
insured through such date.
When a default occurs or is believed to be imminent with respect to a
particular insured obligation, a case basis reserve will be established in an
amount that is sufficient to cover the present value of the anticipated
defaulted debt service payments over the expected period of default and the
estimated expenses associated with settling relevant claims, less any estimated
recoveries under salvage or subrogation rights. Upon the establishment of a case
basis reserve, a corresponding reduction will be made in the unallocated
reserve. To the extent that case basis reserves, for any period, exceed the
available unallocated reserve, the excess will be charged against the Company's
earnings. The unallocated reserve will be calculated by applying a loss factor
to the net outstanding exposure of the Company's insured portfolio. This loss
factor will be a measure of reasonably estimable insured losses that have been
incurred as of the balance sheet date, will be established after consultation
with independent actuaries and will be based on historical industry loss
experience, the inherent risk characteristics of the Company's insured
portfolio, the loss experience of insurers ceding risks to the Company and, over
time, the Company's actual loss and LAE experience.
The Company's loss and LAE reserves will necessarily be based upon
estimates and as such are inherently uncertain, particularly given the
undeveloped nature of the "A" rated financial guaranty reinsurance and insurance
market. There can be no assurance that claims made against the Company and
related settlement costs will not exceed the Company's loss and LAE reserves.
Historically, insured losses in the financial guaranty insurance business
have occurred infrequently. When such losses occur, they have the potential to
be significant in amount. While the Company would be required to establish a
case basis reserve (as described above) equal to the present value of all
payments due under an insured obligation that goes into default, the Company is
only obligated to make payments of principal and interest as they would
otherwise become due under such obligation. A significant event, including a
natural disaster or political instability, 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. Such losses could also impair the Operating
Company's ability to maintain its financial strength and claims-paying ability
ratings or to pay dividends to GMA.
RETROCESSIONAL ARRANGEMENTS
The Company may reinsure, or retrocede, portions of certain risks for which
it has accepted liability, including through its master facultative reinsurance
agreement with ACA. Retrocessional arrangements will allow the Company greater
underwriting capacity while limiting its risk profile. There can be no assurance
that there will be companies other than ACA that are willing to reinsure risks
for which the Company has accepted liability.
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SALES AND MARKETING
The Company expects that the relationships developed by its experienced
management team with domestic and international firms will allow the Company to
develop business opportunities. With respect to the Company's reinsurance
operations, the Company will seek to capitalize on the relationships its
management team has developed with primary financial guaranty insurers,
particularly ACA, as well as other providers of third-party credit enhancement.
With respect to the Company's direct insurance operations, the Company will seek
to capitalize on the relationships its management team has developed with
investment banks, commercial banks and other financial services firms involved
in the distribution and structuring of financial obligations which are typically
in a position to refer business to the Company. Senior management of the Company
intends to take an active part in the sale and promotion of the Company's
products.
The Company has established the Marketing Company to act solely as a
marketing agent for the Company. The Marketing Company will operate a branch
office in London, which is a center for banking and other financial service
activities. The Marketing Company will not have, nor will it be held out as
having, authority to bind the Company in any transactions, and its activities
will be limited to identifying opportunities for the Company and assisting in
preliminary negotiations to the point where suitable terms may be presented to
the Operating Company in Bermuda for further action.
COMPETITION
The traditional financial guaranty insurance and reinsurance industry is
highly competitive. The market for financial guaranty insurance and reinsurance
is dominated by a small number of companies, including MBIA Insurance
Corporation, Financial Security Assurance, Inc., Ambac Assurance Corporation,
Financial Guaranty Insurance Co., Capital Reinsurance Co. and Enhance
Reinsurance Co. These companies have greater financial resources and are more
established than the Company. A number of large banks and other financial
institutions, which also have greater financial resources and are more
established than the Company, also provide various forms of third-party credit
enhancement, such as letters of credit. There can be no assurance that such
insurers, banks and financial institutions will not seek to duplicate the
Company's business strategy and compete directly with the Company by providing
lower-rated financial guaranty insurance or reinsurance or comparable forms of
credit enhancement. Furthermore, the Company's reinsurance treaties with ACA do
not prohibit ACA from competing directly with the Company. If ACA, other
financial guaranty insurers or other third-party credit enhancement providers
enter the Company's target markets, the Company could be adversely affected. If
ACA is adversely affected by competition in its target markets, the Company
would also be adversely affected. Under the Company's quota share reinsurance
treaty with ACA, the Company is not permitted to write direct financial guaranty
insurance within any state in the United States, the District of Columbia,
Puerto Rico, Guam and the Virgin Islands so long as such treaty remains in
effect.
Competition in the financial guaranty insurance and reinsurance industry is
based on many factors, including premium charges, the general reputation and
perceived financial strength of the financial guaranty insurer, other terms and
conditions of products offered, and reputation and experience in the particular
line of financial guaranty to be written. The Company will also compete with
methods of credit enhancement that do not employ third-parties, such as
over-collateralization of a structured finance transaction. There can be no
assurance that the Company's strategy will permit it to compete effectively with
these alternative methods of credit enhancement.
In part because of the Company's expected capitalization following the
Offerings and the Direct Sales, Standard & Poor's has assigned the Operating
Company a preliminary financial strength rating of "A", and Duff & Phelps and
Fitch IBCA have each assigned the Operating Company a preliminary claims-paying
ability rating of "A+". The ratings are subject to the Company raising gross
proceeds of at least $350.0 million in the Offerings and the Direct Sales and to
the initial capitalization of the Operating Company exceeding $320.0 million
upon consummation of the Offerings and the Direct Sales. These ratings are used
by potential purchasers of financial guaranty insurance and reinsurance as a
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
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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 largely depend on the rating of the insurer. The Operating
Company's principal competitors are all more highly rated than the Operating
Company, which, in some respects, will put the Operating Company at a
competitive disadvantage.
INVESTMENT STRATEGY
Investments made by the Operating Company will be governed by the
Investment Guidelines and by accounting regulations prescribed by Bermuda
insurance laws and regulations. The Operating Company's investment portfolio
will consist of investment grade fixed income securities and will be invested in
an effort to maximize total return subject to appropriate liquidity and capital
preservation considerations, diversification of risk and regulatory, rating
agency and credit agreement constraints (if any), as applicable. The Investment
Guidelines require the Operating Company's overall investment portfolio to
maintain a minimum weighted average credit quality rating of "A+." A fixed
income security rated "A+" by Standard & Poor's is somewhat susceptible to the
adverse effects of changes in circumstances and economic conditions, however,
the issuer's capacity to meet its financial commitment on the security is still
strong. The Operating Company will not invest in any securities in emerging
markets.
The Investment Guidelines restrict the Operating Company from investing in
securities for which it has written financial guaranty insurance or reinsurance
and limit its investments in securities not insured or reinsured by the
Operating Company, but issued by issuers of securities the Operating Company has
insured or reinsured, to 5% of the Operating Company's total investment
portfolio. The Investment Guidelines also provide for the following procedures
that are intended to limit the Operating Company's exposure to concentrations of
risk: (a) investments in an industry sector are limited to 20% of the Operating
Company's total investment portfolio, with the exception of the United States
government and its agencies; (b) investments in a single issuer are limited to
5% of the Operating Company's total investment portfolio, with the exception of
the United States government and its agencies; and (c) investments in non-United
States dollar denominated securities are limited to 10% of the Operating
Company's total investment portfolio.
The Investment Guidelines provide that the Operating Company may purchase,
among other things, securities issued by the United States government and its
agencies, securities issued by foreign governments if rated "A" or better by at
least one major rating agency, asset-backed securities, mortgage-backed
securities and corporate debt securities (including convertible debt
securities).
Furthermore, the Investment Guidelines prohibit investments in (i) common
equity securities; (ii) direct real estate; (iii) oil and gas limited
partnerships; (iv) commodities; (v) emerging market obligations; (vi) securities
unrated by major rating agencies; (vii) payment-in-kind corporate securities;
(viii) venture capital investments, including private equity or its equivalent,
and (ix) United States investments consisting of (a) partnership interests, (b)
residual interests in real estate mortgage investment conduits, (c) any "pass
through" certificates, unless all underlying debt was issued on or after July
18, 1984, (d) cash settlement options and forwards, if no United States exchange
traded future on the same property exists, (e) options and forwards on indices
which are not traded on United States exchanges, (f) collateralized mortgage
obligations, unless issued with an opinion of counsel stating that such
obligations will be considered debt for tax purposes, (g) real property
interests, including equity in and convertible debt obligations of real property
holding corporations the sale of which would be subject to United States tax,
(h) any tangible property, (i) any debt obligation or preferred stock the
interest on which does not qualify as "portfolio interest" or is otherwise
subject to United States withholding tax and (j) any investment that does not
qualify as a stock or security for purposes of Section 864(b)(2) of the Code. In
addition, the Investment Guidelines prohibit the Operating Company from entering
into the following types of transactions in the United States: (i) swap
agreements other than interest rate swaps or the equivalent used as hedges; and
(ii) loans.
The Operating Company will be exposed to two primary sources of investment
risk on its fixed income investments: credit risk, relating to the uncertainty
associated with the continued ability of a given obligor to make timely payments
of principal and interest, and interest rate risk, relating to the market price
and/or cash flow variability associated with changes in market interest rates.
The Operating Company will seek to manage
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credit risk through industry and issuer diversification and asset allocation.
The Operating Company will seek to manage interest rate risk by structuring the
duration of its investment portfolio to support the cash requirements of the
operations of the Operating Company and the satisfaction of longer term
liabilities of the Operating Company. The Investment Guidelines provide that the
investment portfolio may not be leveraged and that purchases of securities on
margin and short sales may not be made without approval from the Finance and
Investment Committee of the Company's Board of Directors.
The Finance and Investment Committee of the Company's Board of Directors
will periodically review the Operating Company's investment portfolio and the
performance of the Investment Managers. The Finance and Investment Committee can
approve exceptions to the Investment Guidelines. The Finance and Investment
Committee will also periodically review the Investment Guidelines in light of
prevailing market conditions. The Investment Managers and the Investment
Guidelines may change from time to time as a result of such reviews.
INVESTMENT MANAGERS
The Operating Company has entered into investment advisory agreements with
the Investment Managers, Alliance Capital Management L.P. ("Alliance"), The
Prudential Investment Corporation ("Prudential Investment") and Merrill Lynch
Asset Management, L.P. ("Merrill Lynch Asset Management"), which are anticipated
to manage initially approximately 50%, 25% and 25%, respectively, of the
Operating Company's investment portfolio. The Investment Managers were selected
primarily based on their expertise in managing fixed-income investments. Each
Investment Manager will have discretionary authority over the portion of the
Operating Company's investment portfolio allocated to it, subject to the
Investment Guidelines.
Alliance is a global investment management firm. According to information
supplied by Alliance, as of December 31, 1998, Alliance had aggregate fixed
income assets under management of approximately $111 billion, including
approximately $31 billion of assets managed for insurance companies. The
agreement with Alliance may be terminated by either party upon 30 days' prior
written notice. Alliance is entitled to receive a fee for its services at an
annual rate between 0.25% and 0.15% of the value of the assets it manages on
behalf of the Operating Company. The exact fee rate charged by Alliance is
dependent upon the amount of assets it manages on behalf of the Operating
Company.
Prudential Investment is a global investment management firm and is a
subsidiary of The Prudential Insurance Company of America. According to
information supplied by Prudential Investment, as of December 31, 1998,
Prudential Investment had approximately $183 billion of assets under management
(excluding certain private equity and other funds), of which $75 billion was
comprised of fixed income securities. The agreement with Prudential Investment
may be terminated by the Operating Company without advance notice and by
Prudential Investment upon 30 days' prior written notice. Prudential Investment
is entitled to receive a fee for its services at an annual rate of 0.175% of the
value of the first $100 million in assets it manages on behalf of the Operating
Company and 0.10% of the value of any additional assets it manages on behalf of
the Operating Company.
Merrill Lynch Asset Management is a global investment management firm and
is a subsidiary of Merrill Lynch & Co., Inc. According to information supplied
by Merrill Lynch Asset Management, as of December 31, 1998 it had approximately
$501 billion of assets under management, of which $255 billion is comprised of
fixed income securities. The agreement with Merrill Lynch Asset Management may
be terminated by the Operating Company without advance notice and by Merrill
Lynch Asset Management upon five days' prior written notice. Merrill Lynch Asset
Management is entitled to receive a fee for its services at an annual rate
between 0.125% and 0.10% of the value of the assets it manages on behalf of the
Operating Company. The exact fee rate charged by Merrill Lynch Asset Management
is dependent upon the amount of assets it manages on behalf of the Operating
Company.
THIRD-PARTY SERVICE PROVIDERS
The Company has entered into an agreement with Marsh & McLennan Management
Services (Bermuda) Limited ("Marsh & McLennan Services") to provide certain
management, administrative and
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consulting services to the Company. These services are anticipated initially to
include (i) maintenance of the Company's books and records, (ii) preparation of
periodic reports to the Company, (iii) maintenance of bank accounts, and (iv)
preparation of Bermuda governmental reports. The contract is subject to
termination by either party at any time upon 90 days' written notice or upon
shorter notice in specified circumstances including an uncured breach or
bankruptcy. Pursuant to the contract, Marsh & McLennan Services is entitled to
receive fees based on hourly rates with a $20,000 per year minimum. In addition,
the Company has agreed to indemnify Marsh & McLennan Services with regard to
certain liabilities to which Marsh & McLennan Services may become subject in
connection with performing services for the Company. As the Company's business
grows, management expects that it may become more cost effective to hire
employees to perform some of the functions that will initially be provided by
Marsh & McLennan Services. Management believes that the contractual relationship
with Marsh & McLennan Services will provide the Company with the flexibility
needed to add such additional employees in an orderly fashion.
The Company has retained ICS, a Bermuda corporation licensed as an
insurance broker, to provide risk management services and other related
financial services. Pursuant to such agreement, ICS is entitled to receive an
annual fee of $425,000, which is payable in quarterly installments commencing on
the consummation of the Offerings through the fifth anniversary of the
consummation of the Offerings. ICS is in its initial stages of development and
has a limited operating history or experience providing risk management and
other related financial services. ICS is owned by certain persons affiliated
with Inter-Atlantic, including Frederick S. Hammer and Robert M. Lichten, who
are directors of the Company. See "Certain Relationships and Related Party
Transactions."
PROPERTY
The Company has subleased its principal offices in Hamilton, Bermuda on a
month-to-month basis from Annuity and Life Reassurance, Ltd., a Bermuda
reinsurance company. The subleased office space consists of four offices and
three workstations. The Company has agreed to pay BD$5,200 plus utilities in
rent for the first month of the sublease. Thereafter, the sublease requires the
Company to pay BD$4,500 plus utilities in rent each month. Certain directors and
officers of the Company are also directors or officers of Annuity and Life
Reassurance, Ltd. See "Certain Relationships and Related Party Transactions."
LEGAL PROCEEDINGS
The Company has been threatened with litigation by an individual the
Company interviewed for a senior management position. The individual has claimed
that he left his position with his prior employer in reliance upon an offer to
be hired by the Company, which he claims to have accepted, and that he was
dismissed by the Company in a manner inconsistent with the terms of his
employment. The Company's position is that, among other things, the offer was
conditioned upon the individual being approved by certain proposed strategic
investors in the Company, which approval was not obtained. As a consequence, the
Company believes the alleged employment arrangement was never consummated. The
proposed terms of the employment arrangement discussed with such individual
included an annual salary of $300,000, an annual bonus of $300,000, options to
purchase 300,000 Common Shares, a monthly housing allowance of $10,000 (subject
to adjustment) and a signing bonus of $625,000 payable upon consummation of the
Offerings as compensation for a contractually guaranteed bonus such individual
allegedly would have received had he not left his position with his former
employer. The proposed employment arrangement would have been for three years,
and was subject to termination at any time prior to the consummation of the
Offerings upon 30 days' prior written notice. The individual has also threatened
to assert other claims against the Company that, if brought, could involve
claims for punitive damages. In light of the current status of this matter, the
Company cannot predict its ultimate resolution, including whether litigation
concerning this matter will be commenced.
The Company has no pending litigation. The Company anticipates that it may
become subject to litigation and arbitration in the ordinary course of its
business.
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REGULATION
Bermuda
The Insurance Act 1978, as amended, and Related Regulations. As a holding
company, GMA is not subject to Bermuda insurance regulations. The Insurance Act
1978, as amended (the "Insurance Act"), which regulates the insurance business
of the Operating Company, provides that no person may carry on an insurance
business in or from within Bermuda unless registered as an insurer under the
Insurance Act by the Minister of Finance (the "Minister"). The Minister, in
deciding whether to grant registration, has broad discretion to act as the
Minister thinks fit in the public interest. The Minister is required by the
Insurance Act to determine whether the applicant is a fit and proper body to be
engaged in the insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise. The registration of an
applicant as an insurer is subject to its complying with the terms of its
registration and such other conditions as the Minister may impose at any time.
An Insurance Advisory Committee appointed by the Minister advises the
Minister on matters connected with the discharge of the Minister's functions and
the subcommittees thereof supervise and review the law and practice of insurance
in Bermuda, including reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Certain significant aspects of the Bermuda insurance
regulatory framework are set forth below.
Classification of Insurers. The Insurance Act distinguishes between
insurers carrying on long-term business and insurers carrying on general
business. There are four classifications of insurers carrying on general
business, with Class 4 insurers subject to the strictest regulation. As the
Operating Company has been incorporated to provide insurance and reinsurance of
financial guaranty insurance-related risks, it has been registered as a Class 3
insurer in Bermuda and will be regulated as such under the Insurance Act.
Cancellation of Insurer's Registration. An insurer's registration may be
cancelled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with its obligations under the
Insurance Act or, in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the failure of the insurer to carry on business in
accordance with sound insurance principles.
Independent Approved Auditor. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, which
are required to be filed annually with the Registrar of Companies in Bermuda.
The independent auditor of the insurer must be approved by the Minister and may
be the same person or firm which audits the insurer's financial statements and
reports for presentation to its shareholders. The Operating Company's
independent auditor is KPMG Peat Marwick.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, a statement of capital and surplus and
notes thereto). The insurer is required to give detailed information and
analyses regarding premiums, claims, reinsurance and investments. The Statutory
Financial Statements are not prepared in accordance with United States GAAP and
are different from the financial statements prepared for presentation to the
insurer's shareholders under the Companies Act 1981 of Bermuda, which financial
statements may be prepared in accordance with United States GAAP. An insurer is
required to submit the annual Statutory Financial Statements as part of the
annual Statutory Financial Return.
Annual Statutory Financial Return. The Operating Company is required to
file with the Registrar of Companies in Bermuda a Statutory Financial Return no
later than four months after its financial year end (unless specifically
extended). The Statutory Financial Return includes, among other matters, a
report of the approved independent auditor on the Statutory Financial Statements
of the insurer, a solvency certificate, the Statutory Financial Statements
themselves and an opinion of the Operating Company's loss reserve specialist
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in respect of the Operating Company's loss and loss expense provisions. The
solvency certificate must be signed by the principal representative and at least
two directors of the insurer who are required to certify whether the minimum
solvency margin has been met, and the independent approved auditor is required
to state whether in its opinion it was reasonable for the directors to so
certify. Where an insurer's accounts have been audited for any purpose other
than compliance with the Insurance Act, a statement to that effect must be filed
with the Statutory Financial Return. The Operating Company's loss reserve
specialist is Christopher Harris of KPMG Peat Marwick.
Minimum Solvency Margin. The Insurance Act provides that the statutory
assets of an insurer must exceed its statutory liabilities by an amount greater
than the prescribed minimum solvency margin.
The Operating Company is registered as a Class 3 insurer under the
Insurance Act and, as such: (i) is required to maintain a minimum solvency
margin equal to the greatest of: (a) $1,000,000, (b) 20% of net premium written
up to $6,000,000 plus 15% of net premiums written over $6,000,000, and (c) 15%
of loss reserves; (ii) is prohibited from declaring or paying any dividends
during any financial year it is in breach of its minimum solvency margin or
minimum liquidity ratio or if the declaration or payment of such dividends would
cause it to fail to meet such margin or ratio (if it fails to meet its minimum
solvency margin or minimum liquidity ratio on the last day of any financial
year, the insurer will be prohibited from declaring or paying any dividends
during the next financial year, without the approval of the Minister); (iii) is
prohibited from reducing by 15% or more its total statutory capital, as set out
in its previous year's financial statements without the approval of the
Minister; and (iv) if it appears to the Minister that there is a risk of the
insurer becoming insolvent or that the insurer is in breach of the Insurance Act
or any conditions imposed upon its registration, the Minister may, in addition
to the restrictions specified above, direct the insurer not to declare or pay
any dividends or any other distributions or may restrict it from making such
payments to such extent as the Minister may think fit. The Operating Company has
received from the Bermuda Minister of Finance an exception from the minimum
solvency margin requirement until the consummation of the Offerings, when the
Operating Company will meet such requirement.
Minimum Liquidity Ratio. The Insurance Act provides a minimum liquidity
ratio for general business. An insurer engaged in general business is required
to maintain the value of its relevant assets at not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not qualify as relevant
assets, such as unquoted equity securities, investments in and advances to
affiliates and real estate and collateral loans. The relevant liabilities are
total general business insurance reserves and total other liabilities less
deferred income tax and sundry liabilities (by interpretation, those not
specifically defined).
Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to the Minister, the
Minister may direct an insurer to produce documents or information relating to
matters connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the Minister may, among other things, direct the
insurer (i) not to take on any new insurance business, (ii) not to vary any
insurance contract if the effect would be to increase the insurer's liabilities,
(iii) not to make certain investments, (iv) to realize certain investments, (v)
to maintain, or transfer to the custody of a specified bank, certain assets,
(vi) not to declare or pay any dividends or other distributions or to restrict
the making of such payments, and/or (vii) to limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of the Operating Company is at the
Company's offices in Hamilton, Bermuda, and Donald J. Matthews, the Company's
President and Chief Executive Officer, is the principal representative of the
Operating Company. An insurer
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may not terminate the appointment of its principal representative without a
reason acceptable to the Minister, 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.
Certain Bermuda Law Considerations. GMA and its subsidiaries have been
designated as non-resident for exchange control purposes by the Bermuda Monetary
Authority, whose permission has been obtained for the issue and transfer of the
Common Shares. This designation allows GMA and the Operating Company to engage
in transactions, or to pay dividends to non-residents of Bermuda who are holders
of the Common Shares, in currencies other than the Bermuda Dollar.
The transfer of the Common Shares between persons regarded as non-resident
in Bermuda for exchange control purposes and the issuance of the Common Shares
after the completion of the Offerings to such persons may be effected without
specific consent under the Exchange Control Act 1972 and regulations thereunder.
Issues and transfers of the Common Shares to any person regarded as resident in
Bermuda for exchange control purposes requires specific prior approval under the
Exchange Control Act 1972. The common shares of the Operating Company cannot be
transferred without the consent of the Bermuda Monetary Authority.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, GMA is not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. GMA will take no notice of any trust
applicable to any of its Common Shares whether or not it had notice of such
trust.
As "exempted companies," GMA and its subsidiaries 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 as required for their business and held by lease or tenancy for
terms of not more than 21 years) without the express authorization of the
Bermuda legislature, (ii) the taking of mortgages on land in Bermuda to secure
an amount in excess of $50,000 without the consent of the Minister, (iii) the
acquisition of any bonds or debentures secured by any land in Bermuda, other
than certain types of Bermuda government securities, or (iv) the carrying on of
business of any kind in Bermuda, including insuring domestic risks and the risks
of other Bermuda-exempted companies, except in furtherance of their business
carried on outside Bermuda, and, in the case of the Operating Company, except
for (a) reinsuring any risks undertaken by any company incorporated in Bermuda
and permitted to engage in the insurance and reinsurance business or (b)
providing financial guaranty insurance to any exempted undertaking in Bermuda
under the license granted to the Operating Company by the Minister on December
17, 1998.
United States
Neither GMA nor its subsidiaries are currently licensed as a financial
guaranty insurer or reinsurer in any jurisdiction in the United States. The
insurance laws of each state in the United States regulate the sale of insurance
within its jurisdiction by insurers, such as the Operating Company, which are
not admitted to do business within such jurisdiction. With some exceptions, the
sale of insurance within a jurisdiction in the United States where an insurer is
not admitted to do business is prohibited. The sale of reinsurance, however, is
generally permitted within each state of the United States and the District of
Columbia by non-admitted reinsurers, provided that certain requirements are
satisfied, such as the need to obtain necessary approvals from certain state
insurance regulators in connection with a particular reinsurance transaction
and/or the need for the insurer to satisfy applicable credit for reinsurance
requirements.
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The Operating Company has adopted Operating Guidelines pursuant to which it
intends to conduct its reinsurance business in the United States in a manner
that will comply with the requirements applicable to non-admitted reinsurers and
to conduct its insurance business with persons located in the United States in a
manner that will not subject the Operating Company to the insurance licensing
laws of any jurisdiction in the United States. There can be no assurance,
however, that challenges to the Operating Company's reinsurance and insurance
activities in the United States will not be raised in the future or that the
restrictions on the Operating Company's activities associated with its status as
a non-admitted reinsurer and its lack of any insurance licenses in the United
States will not place the Company at a competitive disadvantage or otherwise
adversely affect the Company. In addition, changes in the Company's business
strategy or in the applicable insurance laws in the United States may lead
management to conclude that the Operating Company should seek to become an
admitted reinsurer in, or to obtain insurance licenses from, one or more
jurisdictions in the United States. If such a conclusion were to be reached,
there can be no assurance that the Operating Company would be able to become an
admitted reinsurer or be able to obtain such licenses. Furthermore, the process
of obtaining such status or licenses is often costly and may take a long time,
which could adversely affect the Company and its objective of being a low-cost
insurance and reinsurance provider.
Because many jurisdictions in the United States do not permit insurance
companies to take credit on their statutory financial statements for reinsurance
obtained from unlicensed or non-admitted reinsurers unless appropriate security
measures are in place, it is anticipated that the Operating Company's
reinsurance clients, including ACA, will require it to post a letter of credit
or enter into other security arrangements. If the Operating Company should
default under a letter of credit facility, it may be required to liquidate
prematurely all or a substantial portion of its investment portfolio and/or its
other assets which have been pledged as security for the letter of credit
facility or otherwise to secure its obligations to its reinsurance clients,
which would adversely affect the Company. The Operating Company does not
currently have a letter of credit facility established and if the Operating
Company is unable to obtain such a facility on commercially acceptable terms or
is unable to arrange for other types of security, the Operating Company's
ability to operate its reinsurance business may be severely limited.
The Operating Company's quota share and facultative treaties with ACA
require the Operating Company to take all steps necessary in order to permit ACA
to receive credit for such reinsurance in all applicable jurisdictions. The
Operating Company expects typically to post a letter of credit or other security
to enable ACA to obtain full credit for the reinsurance provided under the
treaties. If the Operating Company is unable to satisfy any requirement needed
in order for ACA to receive credit for the Operating Company's reinsurance, ACA
would have the right to terminate its reinsurance treaties with the Operating
Company, which would adversely affect the Company.
Outside the United States -- Insurance
Initially, an important international focus for the Company will be to
insure financial transactions involving assets held by trusts or similar special
purpose vehicles domiciled in jurisdictions such as Bermuda, the Cayman Islands
and the Island of Jersey. Such assets are expected typically to originate in the
United States and certain European Union countries and be transferred to such
off-shore jurisdictions in connection with the structuring of such transactions.
The Operating Company has obtained the necessary licenses under Bermuda law to
provide financial guaranty insurance to certain special purpose vehicles located
in Bermuda. The Company believes that no insurance licenses are required under
the laws of the Cayman Islands to provide financial guaranty insurance to such
entities located in the Cayman Islands, provided that the Operating Company
conducts the negotiation, conclusion and execution of insurance contracts,
administers insurance policies, and solicits insurance business in respect of
persons ordinarily resident or property ordinarily based in the Cayman Islands,
from outside the Cayman Islands. Similarly, the Company believes that the
Operating Company is permitted under the laws of the Island of Jersey to provide
financial guaranty insurance to such entities located in the Island of Jersey
without obtaining an insurance permit, subject to certain restrictions,
principally including that the Operating Company conduct marketing, negotiating,
underwriting, contract execution, policy administration and claims handling
activities entirely outside the Island of Jersey. In addition, in connection
with these types of transactions, the Operating Company, as a
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result of being licensed in Bermuda only, will investigate risks and conduct
post-closing surveillance activities from Bermuda, rather than from the Cayman
Islands, the Island of Jersey, or the jurisdiction from which the assets
underlying such transactions originated, such as the United States and certain
European Union countries. The Operating Company expects to perform its
underwriting analysis on such transactions in Bermuda and to obtain the
information needed to conduct such analysis from the proposed insured, persons
acting as agent for the proposed insured and other third parties. The Operating
Company also expects to provide financial guaranty insurance to financial
institutions and insurance companies outside the United States seeking to manage
their regulatory risked-based capital requirements, where it may do so without
obtaining insurance licenses in jurisdictions other than Bermuda.
The Company has adopted Operating Guidelines pursuant to which it intends
to operate its international insurance business in a manner that will comply
with applicable legal requirements and to conduct such insurance business in a
manner that will not subject it to the insurance licensing laws of any
jurisdiction other than Bermuda. There can be no assurance, however, that
challenges to the Operating Company's insurance activities in such jurisdictions
will not be raised or that the restrictions on the Operating Company's
activities associated with its lack of any insurance licenses in such
jurisdictions will not place the Company at a competitive disadvantage or
otherwise adversely affect the Company. In addition, changes in the Company's
business strategy, including a decision to target other jurisdictions that are
used as domiciles for structuring asset-backed transactions, or changes in
applicable insurance laws in the Cayman Islands, the Island of Jersey, the
United States or certain European Union countries may lead management to
conclude that the Operating Company should seek insurance licenses in
jurisdictions other than Bermuda. If such a conclusion were to be reached, there
can be no assurance that the Operating Company would be able to obtain such
licenses. Furthermore, the process of obtaining such licenses is often costly
and may take a long time, which could adversely affect the Company and its
objective of being a low-cost insurance provider.
The Company believes that the securities issued by trusts and other special
purpose vehicles that purchase financial guaranty insurance from the Operating
Company will likely be sold in many jurisdictions, principally including the
United States and the United Kingdom. In part because the Operating Company will
issue its financial guaranty insurance policies to such trusts and other special
purpose vehicles, the Company does not believe that the ownership of the
securities issued by such entities by an investor residing in a particular
jurisdiction would require the Operating Company to obtain an insurance license
in such jurisdiction. The Company has adopted Operating Guidelines pursuant to
which it intends to issue its financial guaranty insurance policies to such
trusts and other special purpose vehicles that issue securities in the United
States in a manner that will not subject the Operating Company to the insurance
licensing laws of any jurisdiction in the United States. These Operating
Guidelines provide that in such cases, among other things, (i) the Operating
Company will negotiate, issue and deliver its financial guaranty policy to an
insured located outside the United States; (ii) the Operating Company will
investigate risks and conduct post-closing surveillance from outside the United
States; (iii) the Operating Company will not solicit, advertise or otherwise
sell its policies in the United States; (iv) under the terms of the securities
that are subject to the financial guaranty insurance, principal and interest
will be due and payable to a trustee located outside the United States; and (v)
no policy, certificate of insurance, rider, endorsement or other evidence of
insurance will be delivered by the Operating Company to any securityholder,
excluding an issuer or trustee when not acting in the capacity of a
securityholder. The Operating Company has also adopted Operating Guidelines
pursuant to which it intends to issue its financial guaranty insurance policies
to trusts and other special purpose vehicles that issue securities in the United
Kingdom in a manner that will not subject the Operating Company to the insurance
licensing laws of the United Kingdom. These Operating Guidelines provide, among
other things, that the Operating Company will make underwriting decisions and
issue all policies exclusively from outside the United Kingdom and not otherwise
effect or carry out any contracts of insurance in the United Kingdom.
Because securities insured by the Operating Company may be held in many
jurisdictions, there can be no assurance that challenges will not be made by
regulatory authorities or others in a particular jurisdiction, including the
United States or the United Kingdom, where securities insured by the Operating
Company are held seeking to require the Operating Company to obtain an insurance
license in such jurisdiction. If any such
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challenge were to be successfully asserted, there can be no assurance that the
Operating Company would be able to obtain the required licenses. Furthermore,
the process of obtaining any such license may be costly and may take a long
time, which could adversely affect the Company and its objective of being a
low-cost insurance provider.
Outside the United States -- Reinsurance
The Company also expects to seek reinsurance opportunities in Bermuda and
certain European Union countries. The Operating Company has obtained the
necessary licenses under Bermuda law to provide financial guaranty reinsurance
to certain insurers domiciled in Bermuda, and it intends to conduct its
reinsurance business in the European Union in a manner that will not subject the
Operating Company to insurance licensing laws in any European Union country.
There can be no assurance, however, that challenges to the Operating Company's
reinsurance activities in European Union countries will not be raised in the
future or that the restrictions on the Operating Company's reinsurance
activities in European Union countries associated with its lack of any insurance
licenses in such countries will not place the Company at a competitive
disadvantage. In addition, changes in the Company's business strategy or
applicable insurance laws in particular European Union countries may lead
management to conclude that the Operating Company should seek insurance licenses
in one or more European Union countries. If such a conclusion were to be
reached, there can be no assurance that the Operating Company would be able to
obtain such licenses. Furthermore, the process of obtaining such licenses is
often costly and may take a long time, which could adversely affect the Company
and its objective of being a low-cost reinsurance provider.
Marketing Company
Neither GMA nor its subsidiaries are licensed as an insurer in the United
Kingdom. The insurance laws of the United Kingdom prohibit the carrying on of
insurance and reinsurance business in the United Kingdom by any person other
than an authorized or exempt insurer or reinsurer. The Company believes that the
Operating Company and the Marketing Company will not need to be licensed as
insurers in the United Kingdom, so long as the Operating Company exclusively
makes underwriting decisions and issues all policies from outside the United
Kingdom and does not otherwise effect or carry out any contracts of insurance in
the United Kingdom. In light of this, the Operating Company and the Marketing
Company have adopted Operating Guidelines that provide, among other things, that
the activities of the Marketing Company will be principally limited to
maintaining an office in the United Kingdom, meeting with prospective parties to
financial guaranty transactions and assisting them in originating proposals to
be presented to the Operating Company in Bermuda for its review and further
action; that the Operating Company will perform credit reviews, make
underwriting decisions, issue policies, collect premiums, settle claims and
perform all other policy servicing activities, including due diligence and
post-closing credit surveillance, outside the United Kingdom and will not carry
on any insurance-related activities in the United Kingdom; and that the
Marketing Company will not have, and will not hold itself out as having, the
authority to bind the Operating Company and will not participate in any
underwriting decisions, execute policies, collect premiums, settle claims or
otherwise effect or carry out insurance contracts in the United Kingdom. There
can be no assurance, however, that challenges to the activities of the Operating
Company and the Marketing Company in the United Kingdom will not be raised in
the future or that the restrictions on the activities of the Operating Company
and the Marketing Company in the United Kingdom associated with their lack of
any insurance licenses will not place the Company at a competitive disadvantage
or otherwise adversely affect the Company.
Other
Recently, the insurance and reinsurance regulatory framework has become
subject to increased scrutiny in many jurisdictions, including the United
States, various states within the United States, the United Kingdom and
elsewhere. For example, there have been Congressional and other initiatives in
the past in the United States regarding increased supervision and regulation of
the insurance industry, including proposals to supervise and regulate reinsurers
domiciled outside the United States to a greater extent than currently
regulated. In addition, in the United Kingdom there is an initiative to
consolidate the regulation of insurance,
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banking and other financial services into a system supervised by a single
regulator, the Financial Services Authority. This initiative may subject certain
types of insurance, including financial guaranty insurance, or certain
insurance-related activities, such as the proposed activities of the Marketing
Company, to more extensive regulation. It is not possible to predict the future
impact of changing law or regulation on the operations of the Company. Such
changes, if any, could have an adverse effect on the Company.
The Operating Guidelines to be employed by the Company were developed
following consultation with counsel in certain jurisdictions in which the
Company expects to conduct its insurance and reinsurance business, in which the
securities issued by trusts and other special purpose vehicles that have
purchased insurance from the Operating Company are principally expected to be
issued, and from which the assets backing such securities are principally
expected to originate, in each case as noted above. However, in light of the
absence of controlling legal precedent with respect to many of the regulatory
issues noted above and the broad discretion accorded insurance regulators in
many jurisdictions in the administration of insurance laws, there can be no
assurance that if the Company conducts its business in accordance with such
Operating Guidelines, a court or insurance regulator would not interpret and
apply applicable insurance laws so as to require GMA, the Operating Company or
the Marketing Company to obtain an insurance license in a particular
jurisdiction. Any such action by a court or regulator would adversely affect the
Company. The insurance laws of most jurisdictions provide for civil and criminal
penalties for conducting an insurance business without the required licenses. In
addition, the insurance laws of some jurisdictions provide that insurance
policies entered into by an insurer conducting an insurance business without
required licenses will be unenforceable and that the insurer must return any
premiums received for such policies.
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OVERVIEW OF THE FINANCIAL GUARANTY INSURANCE AND REINSURANCE INDUSTRY
Financial guaranty insurance provides the holder of a financial obligation
with a guaranty against financial loss. Such insurance is principally used to
guarantee the payment of principal and interest on a financial obligation, and
is typically unconditional, irrevocable and, except in certain cases for
non-payment of premiums, non-cancellable. Financial guaranty insurance is
principally offered as a credit enhancement to asset-backed securities and
municipal bonds and can be provided on an entire issue of securities at the time
of original issuance or to holders of all or a portion of an issue of uninsured
obligations at any time following issuance. If an issuer defaults under an
insured financial obligation, the insurer is obligated to pay the principal of
and interest on the obligation based on the original payment schedule and the
holder cannot accelerate the balance if the insurer makes such payments on a
timely basis. The insurer then has recourse against the issuer and/or any
related collateral for any amount paid under the policy.
Financial guaranty insurance provides benefits for both issuers and
investors. Issuers of financial obligations generally purchase financial
guaranty insurance to raise the credit ratings of their financial obligations
and, consequently, to reduce their overall cost of borrowing. Holders of
financial obligations benefit from financial guaranty insurance because the risk
of loss associated with an issuer's default is reduced and because an obligation
that is insured is typically more liquid in the secondary market than it would
be without such insurance. In addition, financial institutions and insurance
companies subject to regulatory risk-based capital requirements may increase
their levels of available capital through insuring financial obligations held by
them.
The premium for financial guaranty insurance is typically non-refundable
and is payable by the issuer of the obligation either in periodic installments,
as is generally the case with asset-backed securities, or in full at the
policy's inception, as is generally the case with municipal debt obligations.
For financial reporting and statutory accounting purposes, insurers and
reinsurers recognize periodic installment premiums in the period that the
insurer receives them and recognize premiums that are paid at a policy's
inception over the term of the related insured obligation. Premium rates are
typically calculated as a percentage of the principal amount of the insured
obligation or the principal and interest scheduled to come due during the stated
term of the insured obligation. Premium rates reflect such factors as the credit
strength of the issuer, size and type of an issue, rating agency capital
charges, the issuer's sources of income, collateral pledged, restrictive
covenants, maturity, prevailing market spreads between insured and uninsured
obligations and competition from other insurers, other providers of credit
enhancements and alternatives to credit enhancement.
Asset-Backed Securities Market
Asset-backed securities are a form of structured financing distinguishable
from more traditional debt financing. In traditional debt financing, the issuer
of the debt retains ownership of its assets and the obligation to repay its
liabilities, even where collateral has been pledged to secure such liabilities.
Further, in a traditional debt financing, a bankruptcy or insolvency of the
issuer can delay scheduled payments to the debt holders even if the debt is
fully collateralized. Therefore, the creditworthiness of a traditional debt
financing is linked to that of the issuer of the debt in addition to any
collateral pledged. In contrast, an asset-backed security is generally issued by
a special purpose entity organized to hold a specific pool of assets that have
an ascertainable cash flow or market value and to issue the securities that are
secured by the assets or payable from the cash flow derived from the assets. The
special purpose entity created to issue asset-backed securities is typically
intended to be isolated from any bankruptcy of the entity providing the assets.
Because the assets supporting the asset-backed securities are intended to be
insulated from the credit risk of the company that originated or originally
acquired the assets, such asset-backed securities are rated independently from
the rating assigned to the company itself.
Most asset-backed securities are supported by diverse pools of fixed-income
financial assets and their related collateral, such as single- and multi-family
residential mortgage loans, home equity loans, time-share loans, automobile
loans, credit card receivables, student loans, commercial loans, equipment
leases, aircraft leases, trade receivables and export finance receivables. There
are also asset-backed securities supported by one or a few assets, such as
public utility mortgage bonds, project finance loans and capital equipment
loans.
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Asset-backed securities involve both asset risk and structural risk. Asset
risk relates to the amount and quality of asset coverage. In general, the amount
and quality of asset coverage is based on the historical cash flow performance
and projected future cash flow performance of the assets. Asset-backed
securities are often over-collateralized or secured by another form of credit
enhancement to protect against adverse asset performance. The ability of the
servicer of the assets to service properly and collect the cash flows generated
by the underlying assets can also be a factor in determining future asset
performance. Structural risk relates to the extent to which the transaction
structure protects the interests of investors. Asset-backed securities are
usually designed to protect investors from the bankruptcy or insolvency of the
entity that originated the underlying assets as well as from the bankruptcy or
insolvency of the servicer of those assets. In addition, because the cash flow
generated by the underlying assets is the primary source for the repayment of
the asset-backed obligations, the securities are structured to account for the
tax status of the issuing entity and the tax characterization of the
asset-backed obligations that are issued.
Both the United States and international securitization markets have
expanded recently, as measured both by the aggregate principal amount of
asset-backed obligations issued and the diversity of securitized assets.
According to Asset-Backed Alert, worldwide issuances of asset-backed securities
grew from approximately $291.7 billion during 1997 to approximately $346.7
billion during 1998, representing an increase of approximately 18.9%. In
addition, Asset-Backed Alert reported that during 1998, 20.6% of asset-backed
securities issued in public offerings were insured. While home mortgages and
home equity loans, credit card receivables and auto loans have historically
constituted the largest percentage of assets that support asset-backed
securities, the diversity of asset-backed obligations available to investors has
continued to expand as corporations, financial institutions and state and local
governments have sought to access the capital markets by securitizing their
respective assets and utilizing the techniques of structured finance.
Municipal Bond Market
Municipal bond insurance issued by financial guaranty insurance companies
provides a credit enhancement of debt obligations issued by or on behalf of
states or other political subdivisions (for example, counties, cities, towns and
villages, utility districts, public universities, hospitals and public housing
and transportation authorities) and other public and quasi-public entities
(including non-United States sovereigns and subdivisions thereof). Types of
insured municipal bonds include: general obligations, special tax and assessment
transactions, development districts, utilities (electric, water, sewer and gas),
housing (single and multi-family), transportation (airports, ports and mass
transit), toll facilities (highways, tunnels, parking facilities and bridges),
education (private and certain public universities and colleges, community
colleges, vocational and technical schools, elementary and high schools, special
education and research facilities), healthcare (acute, rehabilitation, assisted
living, nursing homes and congregate care), lease transactions and economic and
industrial development transactions. Municipal bonds are generally supported by
the issuer's taxing power in the case of general obligation or special
tax-supported bonds, or, in the case of most revenue bonds, by the issuer's
ability to impose and collect fees and charges for public services or specific
projects. Outside the United States, similar transactions center on obligations
involving infrastructure and infrastructure maintenance.
The United States municipal bond market has expanded recently, as measured
by the aggregate principal amount of municipal securities issued. According to
Securities Data Co., the issuance of municipal securities in the United States
grew from approximately $220.7 billion during 1997 to approximately $285.9
billion during 1998, representing an increase of approximately 29.5%. In
addition, Securities Data Co. reported that during the same time period,
approximately 50.8% of municipal securities issued in public offerings were
insured.
Financial Guaranty Reinsurance Market
Reinsurance is an arrangement under which a financial guaranty insurance
company (the "reinsurer") agrees to indemnify or assume the obligations of
another insurance company (the "ceding company" or "cedent") for all or a
portion of the insurance risks that the ceding company has underwritten in
exchange for a premium. Such arrangements are standard industry practice for
primary insurers. The reinsurer may pay a
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ceding commission to the cedent to compensate it for the costs of producing and
underwriting the insured risk. Reinsurers may also purchase reinsurance under
retrocessional agreements to cover all or a portion of their own exposure for
similar reasons as the primary insurer purchases reinsurance. Reinsurance does
not typically relieve the ceding company of its obligation to the insured party
if a reinsurer fails to perform.
The two principal kinds of reinsurance are automatic treaty reinsurance and
facultative reinsurance. Automatic treaty reinsurance requires the ceding
company automatically to cede and the reinsurer to assume specific classes of
risk that the ceding company has underwritten during the term of the treaty,
although the reinsurance risk extends for the term of the respective underlying
obligations. Facultative reinsurance is the reinsurance of all or part of one or
more insurance policies or specific risks, which is subject to separate
negotiation for each reinsurance placement. This option allows the reinsurer to
accept or reject individual submissions by a ceding company for reasons such as
credit risk, sector risk or country risk. Automatic treaty and facultative
reinsurance are typically written on either a proportional or non-proportional
basis. In proportional relationships, such as a quota share treaty, the ceding
company and the reinsurer share premiums, losses and expenses net of any ceding
commission of a single risk or group of risks at an agreed percentage.
Non-proportional reinsurance relationships are typically on an excess-of-loss
basis, which provides coverage to a ceding company up to a certain dollar limit
to the extent that its losses exceed a certain amount.
Reinsurance in the financial guaranty industry serves to (i) increase the
insurance capacity of a primary insurer, (ii) assist a primary insurer in
meeting applicable capital and other requirements imposed by rating agencies and
regulatory authorities; and (iii) manage the risk exposure of a primary insurer.
State insurance laws and regulations, as well as the rating agencies, establish
minimum capital requirements on financial guaranty insurance companies, which
limit the aggregate insurance amount that the insurer may write and the maximum
single-risk size that it may insure. Reinsurance enables the primary insurer to
write policies in amounts larger than the risks it is willing to retain for its
own account and allows the primary insurer to increase its capacity to write new
business by effectively reducing its gross liability on an aggregate and single-
risk basis. In addition, primary insurers manage the risk of their insured
portfolios based on internal underwriting criteria and portfolio management
guidelines. Reinsurance can be instrumental in enabling primary insurers to
achieve portfolio management goals.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the directors and
executive officers of GMA.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH GMA
- ---- --- -----------------
<S> <C> <C>
Donald J. Matthews................... 65 President, Chief Executive Officer and Director
Mary Jane Robertson.................. 45 Managing Principal, Chief Financial Officer and
Treasurer
Matthew J. Cooleen................... 33 Managing Principal, Structured Products
Bruce W. Bantz....................... 49 Managing Principal, Marketing and Business
Development
James G. Jachym...................... 53 Managing Principal, Credit
Lionel J. Marsland-Shaw.............. 46 Managing Principal, Risk Management
Robert M. Lichten.................... 58 Chairman of the Board and Director
Frederick S. Hammer.................. 62 Deputy Chairman of the Board and Director
Lawrence S. Doyle.................... 55 Director
H. Russell Fraser.................... 57 Director
William M. Goldstein................. 63 Director
Curtis R. Jensen..................... 36 Director
Willis T. King, Jr. ................. 54 Director
Claude J. Seaman..................... 52 Director
Bradley M. Shuster................... 44 Director
Paul T. Walker....................... 63 Director
James J. Zech........................ 41 Director
</TABLE>
Donald J. Matthews was elected Chief Executive Officer and a director of
GMA and the Operating Company upon their formation and was elected President of
GMA and the Operating Company on November 24, 1998. Mr. Matthews was President,
Chief Operating Officer and a director of ACA from its formation in October 1997
to August 1998 when he resigned as an officer and director of ACA to join the
Company. From 1985 to 1997, he served as Senior Vice President and a Principal
of Johnson & Higgins (now Marsh & McLennan Companies, Inc.), an international
insurance intermediary and employee benefits consulting firm, where he was
employed for 23 years. At Johnson & Higgins, Mr. Matthews most recently served
as Chairman of its Global Financial Group, where he oversaw the firm's insurance
and reinsurance relationships with financial services companies, including
commercial banks and investment banks, on a worldwide basis. Also while at
Johnson & Higgins, Mr. Matthews was instrumental in the formation of Corporate
Officers & Directors Assurance Ltd. (now part of ACE Limited) and Executive Risk
Inc. Prior to joining Johnson & Higgins, Mr. Matthews was Chairman of the Board
and President of Midland Insurance Company. Mr. Matthews is currently a director
of Annuity and Life Re (Holdings), Ltd., and from 1985 to 1988 served as a
director of AMBAC Indemnity Corporation (now Ambac Assurance Corporation).
Mary Jane Robertson became Managing Principal, Chief Financial Officer and
Treasurer of GMA and the Operating Company on October 15, 1998. From 1993 to
1997, Ms. Robertson was the Chief Financial Officer and a Senior Vice President
of Capsure Holdings Corp. (now part of CNA Surety Corp.), an insurance company
focusing principally on the surety and fidelity insurance business. From 1986 to
1996, Ms. Robertson also served as the Chief Financial Officer and an Executive
Vice President of United Capitol Insurance Company, a property/casualty
insurance company. Prior thereto, Ms. Robertson served as an Audit Manager of
Coopers & Lybrand from 1978 to 1986.
Matthew J. Cooleen became Managing Principal, Structured Products of GMA
and the Operating Company on February 19, 1999. From 1997 to 1999, Mr. Cooleen
worked at MBIA-Ambac International, a joint venture between MBIA Insurance Corp.
and Ambac Assurance Corporation, where he was most recently a Managing Director
in the International Structured Finance Department. At MBIA-Ambac International,
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Mr. Cooleen focused on the development of the global structured finance and
asset-backed financial guaranty market. From 1995 to 1997, he was a Vice
President and Group Head of the Global Securitization Group of Paribas Capital
Markets, an international investment and commercial bank, where he founded the
Global Securitization/Structured Finance Department. From 1991 to 1995, Mr.
Cooleen was a Vice President in the Asset Backed Department of ING Barings, an
international investment and commercial bank. Prior thereto, Mr. Cooleen served
as a Senior Associate in the Structured Finance Consulting Group of Arthur
Andersen, from 1987 to 1991.
Bruce W. Bantz became Managing Principal, Marketing and Business
Development of GMA and the Marketing Company on September 1, 1998. Mr. Bantz was
a Director and the Global Head of Asset-Backed Finance of Dresdner Kleinwort
Benson, the 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, the 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 asset-backed commercial paper
conduit.
James G. Jachym became Managing Principal, Credit of GMA and the Operating
Company on February 24, 1999. From 1996 to 1999, Mr. Jachym was a Vice President
of BT Alex.Brown Incorporated, where he was responsible for rating agency
matters pertaining to such firm's clients. From 1979 to 1996, he was employed by
Lehman Brothers Inc., where from 1985 to 1996 he was a Senior Vice President and
was responsible for review and commitment of all asset-backed commercial paper
programs.
Lionel J. Marsland-Shaw became Managing Principal, Risk Management of GMA
and the Operating Company on November 1, 1998. From 1995 to 1998, Mr.
Marsland-Shaw served as General Manager and Chief Executive Officer of Capital
Intelligence, a credit rating and analysis company specializing in emerging
markets. From 1993 to 1995, Mr. Marsland-Shaw was Director and Head of the
London office of Standard & Poor's Ratings Services and was responsible for its
ratings business in the United Kingdom, Ireland and the Netherlands. Prior
thereto, Mr. Marsland-Shaw headed Standard & Poor's European Structured Finance
and Securitization Analytic Group. Prior to joining Standard & Poor's in 1987,
he served as a Manager, Portfolio Administration and Deputy Credit Manager of
Manufacturers Hanover Finance Limited from 1984 to 1987.
Robert M. Lichten was elected a director of GMA and the Operating Company
upon their formation and was elected non-executive Chairman of the Board of GMA
and the Operating Company on November 25, 1998. Mr. Lichten has been Co-Chairman
of Inter-Atlantic Capital Partners, Inc. since 1998. He previously served as
Vice Chairman of Inter-Atlantic Capital Partners, Inc. from 1994 to 1998. He is
the non-executive Deputy Chairman of the Board of Annuity and Life Re
(Holdings), Ltd., a Bermuda-based reinsurance company. Mr. Lichten served as a
Managing Director of Smith Barney Inc. from 1990 to 1994 and as a Managing
Director of Lehman Brothers Inc. from 1988 to 1990. Prior thereto, he served as
an Executive Vice President of The Chase Manhattan Corporation, where he was
responsible for asset liability management and was President of The Chase
Investment Bank.
Frederick S. Hammer was elected a director of GMA and the Operating Company
upon their formation and was elected non-executive Deputy Chairman of the Board
of GMA and the Operating Company on November 25, 1998. Mr. Hammer has been
Co-Chairman of Inter-Atlantic Capital Partners, Inc. since 1998. He previously
served as Vice Chairman of Inter-Atlantic Capital Partners, Inc. from 1994 to
1998. He is the non-executive Chairman of the Board of Annuity and Life Re
(Holdings), Ltd., a Bermuda-based reinsurance company, and serves as a director
of 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.
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Lawrence S. Doyle was elected a director of GMA and the Operating Company
on November 25, 1998. Mr. Doyle has been the Chief Executive Officer, President
and a director of Annuity and Life Re (Holdings), Ltd., a Bermuda-based
reinsurance company, since December 1997. Mr. Doyle served as an Executive Vice
President of EXEL Limited, a Bermuda-based insurance company, in 1997. Mr. Doyle
was the President and Chief Executive Officer of GCR Holdings Limited, a
Bermuda-based reinsurer specializing in catastrophe risk, and its subsidiary
Global Capital Reinsurance Limited from 1993 until their acquisition by EXEL
Limited in 1997. Prior thereto, Mr. Doyle was Senior Vice President of the
Hartford Insurance Group in charge of international operations, where he was
employed for 27 years, the last six of which he was also the President of
Hartford Fire International.
H. Russell Fraser was elected a director of GMA and the Operating Company
on August 25, 1998. Mr. Fraser has been Chairman and Chief Executive Officer of
ACA since its formation in October 1997. From April 1989 to February 1995, he
served as Chairman and Chief Executive Officer of Fitch Investors Service, L.P.
(now Fitch IBCA, Inc.). Mr. Fraser also served as President and Chief Executive
Officer of AMBAC Indemnity Corporation (now Ambac Assurance Corporation), a
financial guaranty insurer, from 1980 to 1989.
William M. Goldstein was elected a director of GMA and the Operating
Company upon their formation. Mr. Goldstein is Chairman of the Tax Department
and former Chairman of the Managing Partners of the law firm of Drinker Biddle &
Reath LLP, the Company's United States counsel, where he has been a partner
since 1982. Mr. Goldstein served as Deputy Assistant Secretary for Tax Policy
with the United States Department of Treasury from 1975 to 1976.
Curtis R. Jensen was elected a director of GMA and the Operating Company on
November 25, 1998. Mr. Jensen has been a senior analyst for Third Avenue Value
Fund since 1995 and Co-Portfolio Manager of Third Avenue Small-Cap Value Fund
since 1997. Prior thereto, Mr. Jensen was a student at the Yale University
School of Management, from which he received a Masters, Business Administration.
Mr. Jensen served as Director of Operations of Ciao Bella Gelato Company, a food
manufacturer, from 1990 to 1993. He is a director of Repap Enterprises
Incorporated, a Canadian paper producer. Mr. Jensen is serving as a director of
GMA as the nominee of the Third Avenue Funds.
Willis T. King, Jr. was elected a director of GMA and the Operating Company
on November 25, 1998. Mr. King has been Vice Chairman of Guy Carpenter &
Company, Inc., the reinsurance brokerage subsidiary of Marsh & McLennan
Companies, Inc., since its merger with Johnson & Higgins, an international
insurance intermediary and employee benefits consulting firm, in 1997. He served
as a director of Johnson & Higgins from 1987 to 1997 and Chief Executive Officer
of its reinsurance brokerage subsidiary, Willcox Incorporated Reinsurance
Intermediaries, from 1985 to 1997. He is the non-executive Chairman of the Board
of Homeowners' Holdings, Inc. and its insurance company subsidiary, First
Protective Insurance Company. Mr. King is also a Director of SCPIE Holdings,
Inc.
Claude J. Seaman was elected a director of GMA and the Operating Company on
February 26, 1999. Mr. Seaman has been a Group Executive Vice President,
Strategic Investments of PMI since 1999. From 1994 to 1999, Mr. Seaman served as
an Executive Vice President for Insurance Operations of PMI. Mr. Seaman is
serving as a director of GMA as a nominee of PMI.
Bradley M. Shuster was elected a director of GMA and the Operating Company
on February 26, 1999. Mr. Shuster has been Executive Vice President in charge of
Corporate Development of PMI since 1999. Prior thereto, he served as the
Treasurer and Chief Investment Officer of PMI from 1995 to 1999. Mr. Shuster was
an audit partner with the accounting firm of Deloitte & Touche LLP from 1988 to
1995. Mr. Shuster is serving as a director of GMA as a nominee of PMI.
Paul T. Walker was elected a director of GMA and the Operating Company on
October 28, 1998. Mr. Walker has served as President of Walker, Truesdell &
Associates, a financial consulting firm, since its formation in 1996. From 1992
to 1996, Mr. Walker served as a Trustee of the DBL Liquidating Trust, which was
responsible for liquidating Drexel Burnham Lambert for investors. Prior thereto,
he was employed at The
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Chase Manhattan Bank, N.A. from 1957 to 1990, where he most recently served as
an Executive Vice President and the Senior Credit Policy Officer.
James L. Zech was elected a director of GMA and the Operating Company on
February 26, 1999. Since 1995, Mr. Zech has been President of High Ridge
Capital, LLC, an investment advisory firm that manages High Ridge Capital
Partners Limited Partnership, a private equity fund that invests in insurance
companies and related service businesses. He served as a Managing Director in
the Corporate Finance division of S.G. Warburg & Co., Inc. from 1992 to 1995.
Mr. Zech is a director of the Seibels Bruce Group, Inc. Mr. Zech is serving as a
director of GMA as the nominee of High Ridge.
PROVISIONS GOVERNING THE BOARD OF DIRECTORS
Number and Terms of Directors
GMA's Bye-Laws provide that the Board of Directors is divided into three
classes. The first class, whose initial term expires at the first annual meeting
of GMA's shareholders following completion of the Offerings, is comprised of
Messrs. Doyle, Hammer, Jensen and King; the second class, whose initial term
expires at the second annual meeting of GMA's shareholders following completion
of the Offerings, is comprised of Messrs. Fraser, Goldstein, Shuster and Zech;
and the third class, whose initial term expires at the third annual meeting of
GMA's shareholders following completion of the Offerings, is comprised of
Messrs. Matthews, Lichten, Seaman and Walker. Following their initial terms, all
classes of directors will be elected to three-year terms.
Committees of the Board
The Board of Directors has established Executive, Finance and Investment,
Audit, Compensation and Underwriting committees. Each committee reports to the
Board.
Executive Committee. The Board has established an Executive Committee to
exercise all of the authority of the Board between meetings of the full Board.
The Executive Committee does not, however, have authority to take any action on
matters committed or reserved by Bermuda law, GMA's Bye-Laws or resolution of
the Board of Directors to the full Board or another committee of the Board. The
Executive Committee presently consists of seven members (Messrs. Lichten
(Chairman), Fraser, Goldstein, Hammer, Matthews, Shuster and Walker).
Finance and Investment Committee. The Board has established a Finance and
Investment Committee to establish and monitor the Operating Company's investment
policies and the performance of the Investment Managers. The Finance and
Investment Committee presently consists of five members (Messrs. Shuster
(Chairman), Hammer, Jensen, Lichten and Zech).
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 four members (Messrs. Goldstein (Chairman), Doyle, Fraser
and Walker).
Compensation Committee. The Board has established a Compensation Committee
to review the performance of corporate officers and the Company's compensation
policies and procedures and to make recommendations to the Board with respect to
such policies and procedures. The Compensation Committee also administers the
Company's stock option plans and incentive compensation plans and recommends to
the Board persons to be nominated as directors and to fill committee
assignments. The Compensation Committee presently consists of three members
(Messrs. Hammer (Chairman), Goldstein and King).
Underwriting Committee. The Board has established an Underwriting
Committee to review and monitor the risks insured by the Company. The
Underwriting Committee presently consists of five members (Messrs. Walker
(Chairman), Doyle, King, Lichten and Seaman).
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<PAGE> 67
Compensation of Directors
Directors who are employees of the Company will not be paid any fees or
additional compensation for services as members of the Company's Board of
Directors or any committee thereof. Non-employee directors will receive cash in
the amount of $20,000 per annum and $1,000 per board or committee meeting
attended. The non-employee Chairman and Deputy Chairman of the Board and
non-employee Committee Chairmen will receive an additional $1,000 per annum. Mr.
Fraser will receive options to acquire 100,000 Common Shares and other
non-employee directors will each receive options to acquire 15,000 Common
Shares, in each case upon the later of (i) their election to the Company's Board
of Directors or (ii) the consummation of the Offerings. Robert M. Lichten, the
non-employee Chairman of the Board, will also be granted options to purchase a
number of Common Shares equal to the number of Common Shares remaining under the
Stock Option Plan after all of the other directors and officers of the Company
(including Mr. Matthews) who are entitled to receive options upon consummation
of the Offerings and the Direct Sales have been granted such options, minus
100,000 Common Shares. If the Underwriters' over-allotment options are not
exercised, Mr. Lichten will not receive any additional options. If the
Underwriters' over-allotment options are exercised in full, Mr. Lichten will
receive options to purchase 113,645 Common Shares. All such options become
exercisable in three equal annual installments commencing on the first
anniversary of the date of grant and will have an exercise price equal to the
fair market value of the Common Shares on the date of grant, except for any
options granted upon consummation of the Offerings, which will have an exercise
price equal to the initial public offering price per share. Such options may be
assigned by the directors without the consent of GMA. On the date of each annual
meeting of the Company's shareholders, each non-employee director whose term as
a director has not ended as of the date of such annual meeting will receive
options to acquire 2,000 Common Shares. Such options will be immediately
exercisable if granted on or after the first anniversary of the consummation of
the Offerings and will have an exercise price equal to the fair market value of
the Common Shares on the date of grant. If any such options are granted before
the first anniversary of the consummation of the Offerings, they will not become
exercisable until such first anniversary. All directors will be reimbursed for
travel and other expenses incurred in attending meetings of the Board or
committees thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or was an executive officer or
employee of the Company, nor has any executive officer of the Company served as
a director or a member of the compensation committee of any other company, one
of whose executive officers serves as a member of GMA's Board or Compensation
Committee, except that (i) Mr. Matthews, the Company's President and Chief
Executive Officer, previously served as a director of ACA, of which Mr. Fraser,
a director of the Company, is an executive officer, and (ii) Mr. Matthews serves
on the Compensation Committee of Annuity and Life Re (Holdings), Ltd., of which
Mr. Doyle, a director of the Company, is the President and Chief Executive
Officer.
Mr. Goldstein has expressed his non-binding intention to purchase 10,000
Common Shares directly from the Company as part of the Direct Sales for an
aggregate purchase price of $141,000. Mr. King has expressed his non-binding
intention to purchase 15,000 Common Shares directly from the Company as part of
the Direct Sales for an aggregate purchase price of $211,500. Mr. Hammer has
expressed his non-binding intention to purchase 12,500 Common Shares directly
from the Company as part of the Direct Sales for an aggregate purchase price of
$176,250. Mr. Hammer also purchased from the Company for $11,007 a Class A
Warrant to purchase an aggregate number of Common Shares equal to 1.37592% of
the sum of (i) the Common Shares outstanding immediately following the
consummation of the Offerings (including the Direct Sales, but excluding any
Common Shares held by the Purpose Trust) and (ii) the Common Shares issuable
upon exercise or conversion of any security outstanding immediately following
the consummation of the Offerings except for the Class A Warrants, the Class B
Warrants and any options granted by the Company under its Stock Option Plan. Mr.
Hammer also purchased from a third party a Class A Warrant to purchase 32,500
Common Shares. Mr. Hammer has transferred a portion of his Class A Warrants to
certain trusts that have been established for the benefit of certain family
members. Mr. Hammer is also an owner and officer of Inter-
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<PAGE> 68
Atlantic Capital Partners, Inc., the parent corporation of Inter-Atlantic, and
he is a shareholder of ICS. See "Certain Relationships and Related Party
Transactions."
EXECUTIVE COMPENSATION
Messrs. Bantz and Marsland-Shaw and Ms. Robertson have entered into
consulting agreements with ACA Service pursuant to which they were paid $75,000,
$22,000 and $30,000, respectively, during the fiscal year ended December 31,
1998. Such amounts, together with any additional amounts paid under such
consulting agreements prior to the consummation of the Offerings, will be
deducted from the unpaid salaries owed by the Company to such officers pursuant
to the terms of their respective employment agreements. Such consulting
agreements will be terminated prior to or upon consummation of the Offerings.
The Company did not pay any compensation to its officers during the fiscal year
ended December 31, 1998 but has agreed to reimburse ACA Service for payments
made by ACA Service to Messrs. Bantz and Marsland-Shaw and Ms. Robertson
pursuant to the consulting agreements.
EMPLOYMENT AGREEMENTS
GMA, the Operating Company and Mr. Matthews have entered into an Employment
Agreement under which Mr. Matthews has agreed to serve as President and Chief
Executive Officer of GMA and the Operating Company for an initial term ending on
the third anniversary of the consummation of the Offerings and for consecutive
one year terms thereafter, subject to three months' advance written notice by
either party of a decision not to renew the Employment Agreement. Pursuant to
the terms of his Employment Agreement, Mr. Matthews is entitled to receive an
annual salary of BD$360,000 as of September 1, 1998. Upon consummation of the
Offerings, Mr. Matthews will be eligible to participate in all employee benefit
programs maintained by the Company and will receive a monthly housing and travel
allowance of BD$13,000. Mr. Matthews' Employment Agreement provides that he will
be eligible for an annual cash bonus based on performance targets to be
established by the Compensation Committee of the Company's Board of Directors.
GMA, the Operating Company and Ms. Robertson have entered into an
Employment Agreement under which Ms. Robertson has agreed to serve as Managing
Principal, Chief Financial Officer and Treasurer of GMA and the Operating
Company for an initial term ending on the third anniversary of the consummation
of the Offerings and for consecutive one year terms thereafter, subject to three
months' advance notice by either party of a decision not to renew the Employment
Agreement. Pursuant to the terms of her Employment Agreement, Ms. Robertson is
entitled to receive an annual salary of BD$250,000 as of October 15, 1998. Upon
consummation of the Offerings, Ms. Robertson will be eligible to participate in
all employee benefit programs maintained by the Company and will receive a
monthly travel and housing allowance of BD$10,000. Ms. Robertson's Employment
Agreement provides that she will be eligible for an annual cash bonus based on
performance targets to be established by the Compensation Committee of the
Company's Board of Directors.
GMA, the Operating Company and Mr. Cooleen have entered into an Employment
Agreement under which Mr. Cooleen has agreed to serve as Managing Principal,
Structured Products, of GMA and the Operating Company for an initial term ending
on the third anniversary of the consummation of the Offerings and for
consecutive one year terms thereafter, subject to three months' advance notice
by either party of a decision not to renew the Employment Agreement. Pursuant to
the terms of his Employment Agreement, Mr. Cooleen is entitled to receive an
annual salary of BD$300,000 as of March 1, 1999. Upon consummation of the
Offerings, Mr. Cooleen will be eligible to participate in all employee benefit
programs maintained by the Company and will receive a monthly travel and housing
allowance of BD$10,000. Mr. Cooleen'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
and a one-time cash bonus of BD$300,000, payable within twelve months after the
consummation of the Offerings.
GMA, the Marketing Company and Mr. Bantz have entered into an Employment
Agreement under which Mr. Bantz has agreed to serve as Managing Principal,
Marketing and Business Development, of GMA and the Marketing Company for an
initial term ending on the third anniversary of the consummation of the
Offerings and for consecutive one year terms thereafter, subject to three
months' advance notice by either
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<PAGE> 69
party of a decision not to renew the Employment Agreement. Pursuant to the terms
of his Employment Agreement, Mr. Bantz is entitled to receive an annual salary
of BD$250,000 as of September 1, 1998. Upon consummation of the Offerings, Mr.
Bantz will be eligible to participate in all employee benefit programs
maintained by the Company and will receive a monthly housing allowance of
L7,200. Mr. Bantz's Employment Agreement provides that he will be eligible for
an annual cash bonus based on performance targets to be established by the
Compensation Committee of the Company's Board of Directors.
GMA, the Operating Company and Mr. Jachym have entered into an Employment
Agreement under which Mr. Jachym has agreed to serve as Managing Principal,
Credit, of GMA and the Operating Company for an initial term ending on the third
anniversary of the consummation of the Offerings and for consecutive one year
terms thereafter, subject to three months' advance notice by either party of a
decision not to renew the Employment Agreement. Pursuant to the terms of his
Employment Agreement, Mr. Jachym is entitled to receive an annual salary of
BD$300,000 as of March 1, 1999. Upon consummation of the Offerings, Mr. Jachym
will be eligible to participate in all employee benefit programs maintained by
the Company and will receive a monthly travel and housing allowance of
BD$10,000. Mr. Jachym's Employment Agreement provides that he will be eligible
for an annual cash bonus based on performance targets to be established by the
Compensation Committee of the Company's Board of Directors.
GMA, the Operating Company and Mr. Marsland-Shaw have entered into an
Employment Agreement under which Mr. Marsland-Shaw has agreed to serve as
Principal, Risk Management, of GMA and the Operating Company for an initial term
ending on the third anniversary of the consummation of the Offerings and for
consecutive one year terms thereafter, subject to three months' advance notice
by either party of a decision not to renew the Employment Agreement. Pursuant to
the terms of his Employment Agreement, Mr. Marsland-Shaw is entitled to receive
an annual salary of BD$180,000 as of November 1, 1998. Upon consummation of the
Offerings, Mr. Marsland-Shaw will be eligible to participate in all employee
benefit programs maintained by the Company and will receive a monthly travel and
housing allowance of BD$6,000. Mr. Marsland-Shaw's Employment Agreement provides
that he will be eligible for an annual cash bonus based on performance targets
to be established by the Compensation Committee of the Company's Board of
Directors.
The Employment Agreements of Messrs. Matthews, Cooleen, Bantz, Jachym and
Marsland-Shaw and of Ms. Robertson provide that each of them will receive,
subject to the consummation of the Offerings, options to purchase Common Shares
under the Stock Option Plan. Mr. Matthews will receive options to purchase
Common Shares equal to the lesser of: (i) 2.0% of the Company's Common Shares
outstanding immediately following the consummation of the Offerings and the
Direct Sales; (ii) the number of Common Shares remaining under the Stock Option
Plan after all of the other directors and officers of the Company who as of
February 26, 1999 are entitled to receive options upon consummation of the
Offerings and the Direct Sales have been granted such options (except the
additional options granted to Mr. Lichten as the Chairman of the Board), minus
100,000 Common Shares; or (iii) 500,000 Common Shares. Messrs. Cooleen, Bantz
and Jachym and Ms. Robertson will each receive options to purchase 100,000
Common Shares. Mr. Marsland-Shaw will receive options to purchase 50,000 Common
Shares. The exercise price of the options to be awarded under the Employment
Agreements will be equal to the initial public offering price per share. The
options become exercisable in three equal annual installments beginning on the
first anniversary of the consummation of the Offerings provided, however, that
upon a change in control of the Company, the options will become exercisable
immediately.
Each Employment Agreement provides that if the officer is terminated by the
Company for serious cause or resigns without good reason, the officer will
forfeit all bonus amounts for the then current fiscal year, and the Company will
be liable to the officer only for accrued but unpaid salary, accrued but unpaid
bonuses from a prior fiscal year and reimbursable business expenses incurred
prior to the date of termination. If the employment of an officer is terminated
by the Company without serious cause or by the officer with good reason, the
Operating Company will continue to pay the officer's base salary for a period of
18 months from such termination (or, if such termination occurs within the
period commencing on the date that a change of control is formally proposed to
the Company's Board of Directors and ending on the first anniversary of the date
on which such change of control occurs, a lump sum payment equal to two times
the officer's annual base
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<PAGE> 70
salary as of the date of termination plus an amount equal to any excise taxes
payable by reason of such payments occurring in connection with a change of
control). Additionally, the officer shall be entitled to any accrued but unpaid
salary, any accrued but unpaid bonuses from a prior fiscal year, reimbursable
business expenses incurred prior to the termination, travel and housing
allowances for twelve months after the date of termination and reasonable
relocation expenses.
Each Employment Agreement also provides that no officer will for a period
of one year following the termination of the officer's employment for any
reason, acquire any financial or beneficial interest (unless such interest is
less than one percent in a publicly traded corporation) in, provide consulting
or other services to, be employed by, or own, manage, operate or control any
entity engaged in any business similar to that of the Company at the time of the
termination of the officer's employment. Furthermore, the officers are
prohibited from directly or indirectly employing or seeking to employ any person
or entity employed by the Company at the time their employment is terminated or
enticing any such person or entity to leave such employment for a period of two
years following the termination of their employment. Each Employment Agreement
also provides that the officers will keep secret and retain in the strictest
confidence all confidential matters that relate to the Company or any affiliate
of the Company.
STOCK OPTION PLAN
The Global Markets Access Ltd. Initial Stock Option Plan was most recently
amended by the Company's Board of Directors on February 26, 1999 and was
subsequently approved, as amended, by a vote of the shareholder of the Company
on February 26, 1999. The Stock Option Plan is intended to attract and retain
selected key employees, non-employee directors and consultants (collectively,
the "Eligible Individuals") and to motivate them to exercise their best efforts
on behalf of GMA and any subsidiary or parent of GMA (a "Related Corporation").
Options granted under the Stock Option Plan may be "incentive stock options"
("ISOs") within the meaning of Section 422 of the Code, or may be options not
intended to be ISOs ("Non-Qualified Stock Options"). The aggregate maximum
number of Common Shares for which options may be granted under the Stock Option
Plan will be equal to the lesser of (i) 5.5% of the Common Shares outstanding
immediately following the consummation of the Offerings and the Direct Sales
minus 87,646 Common Shares or (ii) 2,000,000 Common Shares. No option may be
granted under the Stock Option Plan after October 28, 2008, although options
outstanding on that date may extend beyond that date. Because of the limited
number of Common Shares available for future stock option grants under the Stock
Option Plan, the Company anticipates that it may seek shareholder approval to
increase the number of Common Shares for which options may be granted under the
Stock Option Plan at the Company's first meeting of shareholders.
Administration. The Stock Option Plan is administered by the Compensation
Committee, whose members are designated by the Company's Board of Directors.
Under the terms of the Stock Option Plan, the Compensation Committee must
consist of at least two directors. It is intended (although not required) that
each member of the Compensation Committee administering the Plan be a
"non-employee" director within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and an "outside director"
within the meaning of Treasury Regulation Section 1.162-27(e)(3) or any
successor provision. If the Compensation Committee does not consist solely of
two or more non-employee directors (within the meaning of Rule 16b-3), each
option must be approved by the full Board. The Compensation Committee has the
authority to (i) select the Eligible Individuals to be granted ISOs and
Non-Qualified Stock Options under the Stock Option Plan, (ii) grant options on
behalf of the Company and (iii) set the date of grant and other terms of the
options, including the times and the price at which options may be exercised.
Except for annual grants of options to GMA's non-employee directors and except
as may be otherwise specified in a particular option agreement, options under
the Stock Option Plan are exercisable in three equal annual installments,
commencing with the first anniversary of the grant date. The Compensation
Committee may, in its discretion, accelerate the date on which an option may be
exercised.
Eligibility. Only employees of GMA and/or a Related Corporation are
eligible to receive ISOs under the Stock Option Plan. Non-Qualified Stock
Options may be granted to all Eligible Individuals. (An Eligible Individual who
receives an option grant is hereinafter referred to as an "Optionee.") As of
February 26, 1999,
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there were six employees of the Company eligible to receive ISOs and seventeen
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 the employment or service of an employee or consultant with GMA (or a
Related Corporation) is terminated prior to the expiration date fixed for his or
her option for any reason other than death or disability, the Optionee may
exercise such option to the extent of the number of Common Shares with respect
to which the Optionee could have exercised it on the date of such termination,
or to such other extent permitted by the Compensation Committee, at any time
prior to the earlier of the expiration date of such option or an accelerated
termination date determined by the Compensation Committee, which, unless
otherwise determined by the Compensation Committee, may not be later than three
months after the date of such termination of employment or service.
If the service of a non-employee director with GMA is terminated prior to
the expiration dated fixed for his or her option for any reason other than
death, disability or cause, the Optionee may exercise such option to the extent
of the number of Common Shares with respect to which the Optionee could have
exercised it on the date of such termination at any time prior to the earlier of
the expiration date of such option or three months after the date of such
termination of service as a non-employee director. If the service of a non-
employee director with GMA is terminated prior to the expiration date fixed for
his or her option for cause, such option will terminate immediately.
If an Optionee's employment or service with GMA (or a Related Corporation
in the case of an employee or consultant) is terminated by reason of death or
disability, or if an Optionee dies after termination of the Optionee's
employment or service but before expiration of the Optionee's option, the
Optionee or his or her representative may exercise such option to the extent of
the number of Common Shares with respect to which the Optionee could have
exercised it on the date of such termination or death, or in the case of an
employee or consultant, to such other extent permitted by the Compensation
Committee, at any time prior to the earlier of the expiration date of such
option or (i) in the case of a non-employee director, one year after the date of
such termination of service or death, and (ii) in the case of an employee or
consultant, an accelerated termination date determined by the Compensation
Committee, which, in the case of disability, unless otherwise
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determined by the Compensation Committee, may not be later than one year after
the termination of employment, and in the case of death, may not be later than
one year after the date of death.
In the event of a corporate transaction such as a merger, acquisition of
property or stock, separation, reorganization or liquidation, each outstanding
option will be assumed by the surviving corporation or by a parent or subsidiary
of such corporation if such corporation is the employer corporation; provided,
however, the Compensation Committee has the discretion to terminate all or a
portion of the outstanding options if it determines it is in the best interests
of the Company. Additionally, upon a "change in control" of the Company, all
outstanding options shall become fully vested and exercisable. In the event of a
change in control in which outstanding options are not assumed by the surviving
entity, the Compensation Committee will terminate all outstanding options on at
least seven days' notice.
Option Agreement; Restriction on Transferability. All options will be
evidenced by an option agreement containing provisions consistent with the Stock
Option Plan and such other provisions as the Compensation Committee deems
appropriate. Except with respect to the initial option grants to GMA's
non-employee directors and except as may be provided in an option agreement with
regard to other Non-Qualified Stock Options, no option granted under the Stock
Option Plan may be transferred, except by will or the laws of descent and
distribution. If the Optionee is married at the time of exercise and if the
Optionee requests at the time of exercise, the certificate for the Common Shares
will be registered in the name of the Optionee and his or her spouse, jointly,
with right of survivorship.
Amendments to Options and the Stock Option Plan; Discontinuance of the
Stock Option Plan. Subject to the provisions of the Stock Option Plan, the
Compensation Committee may not amend an option agreement without an Optionee's
consent if the amendment is unfavorable to the Optionee. The Board of Directors
may suspend or discontinue the Stock Option Plan or amend it in any respect
whatsoever, except that, without the approval of the holders of a majority of
the Common Shares present, in person or by proxy, and entitled to vote at a duly
called meeting, no such action may be taken, with respect to ISOs, to change the
class of employees eligible to participate in the Stock Option Plan, to increase
the maximum number of Common Shares with respect to which ISOs may be granted
under the Stock Option Plan (except as permitted under the Stock Option Plan
with respect to capital adjustments) or to extend the duration of the Stock
Option Plan. Shareholder approval is also required for any amendment that
requires shareholder approval to comply with Rule 16b-3 or any successor
thereto, if such compliance is intended.
Registration Statement on Form S-8. The Company intends to file with the
Commission a registration statement on Form S-8 covering the sale of the Common
Shares issuable upon exercise of options issued under the Stock Option Plan
promptly following the first anniversary of the consummation of the Offerings.
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Stock Option Grants. The following table sets forth information concerning
the outstanding options and options expected to be granted by the Company to its
executive officers upon consummation of the Offerings under the Stock Option
Plan.
INITIAL OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATE OF
COMMON COMMON SHARE PRICE
SHARES PERCENT OF APPRECIATION FOR OPTION
UNDERLYING OPTIONS EXERCISE TERM(2)
OPTIONS GRANTED TO PRICE PER EXPIRATION ------------------------
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Matthews(1)...... 448,645 49.92% $15.00 (3) $4,232,260 $10,725,377
Mary Jane Robertson........ 100,000 11.13% $15.00 (3) $ 943,342 $ 2,390,614
Matthew J. Cooleen......... 100,000 11.13% $15.00 (3) $ 943,342 $ 2,390,614
Bruce W. Bantz............. 100,000 11.13% $15.00 (3) $ 943,342 $ 2,390,614
James G. Jachym............ 100,000 11.13% $15.00 (3) $ 943,342 $ 2,390,614
Lionel J. Marsland-Shaw.... 50,000 5.56% $15.00 (3) $ 471,671 $ 1,195,307
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment options are exercised in full, the
number of Common Shares underlying Mr. Matthews' options will increase to
500,000 Common Shares.
(2) The assumed annual rates of Common Share price appreciation have been
provided for illustrative purposes only in accordance with the rules and
regulations of the Commission and should not be construed as projected
appreciation rates for the price of the Common Shares.
(3) The options expire on the tenth anniversary of the consummation of the
Offerings.
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PRINCIPAL STOCKHOLDERS
The table below sets forth the expected beneficial ownership of Common
Shares, after giving effect to the Offerings and the Direct Sales, by all
persons who are expected beneficially to own 5% or more of the Common Shares and
by each director and executive officer of GMA and by the directors and executive
officers of GMA as a group (assuming no exercise of the Underwriters'
over-allotment options). The directors and officers of GMA listed below 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 PMI Group, Inc.(2)...................................... 2,127,659 8.76%
High Ridge Capital Partners Limited Partnership(3).......... 709,219 2.92%
Third Avenue Value Fund(4)(5)............................... 322,109 1.33%
Third Avenue Small-Cap Value Fund(4)(6)..................... 32,500 *
Donald J. Matthews(7)....................................... 70,000 *
Mary Jane Robertson(8)...................................... 50,000 *
Matthew J. Cooleen(8)....................................... 45,000 *
Bruce W. Bantz(8)........................................... 30,000 *
James G. Jachym(8).......................................... 30,000 *
Lionel J. Marsland-Shaw(9).................................. 20,000 *
Willis T. King, Jr.(10)..................................... 15,000 *
Robert M. Lichten(11)....................................... 15,000 *
Frederick S. Hammer(12)..................................... 12,500 *
William M. Goldstein(10).................................... 10,000 *
Lawrence S. Doyle(10)....................................... 5,000 *
H. Russell Fraser(8)........................................ 2,000 *
Paul T. Walker(10).......................................... 1,000 *
Curtis R. Jensen(10)........................................ -- --
Claude J. Seaman(10)........................................ -- --
Bradley M. Shuster(10)...................................... -- --
James J. Zech(10)........................................... -- --
All directors and executive officers as a group (seventeen
persons).................................................. 305,500 1.26%
</TABLE>
- ---------------
* Less than 1%.
(1) The address for The PMI Group, Inc. is 601 Montgomery Street, San
Francisco, California 94111; the address for High Ridge Capital Partners
Limited Partnership is 20 Liberty Street, Chester, Connecticut 06412; and
the address for Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund is 767 Third Avenue, New York, New York 10017. The address for each
other beneficial owner is c/o Global Markets Access Ltd., Cumberland
House, 1 Victoria Street, Hamilton, HM AX, Bermuda.
(2) Does not include 300,000 Common Shares issuable upon the exercise of Class
B Warrants which will not be exercisable within 60 days following the
consummation of the Offerings. For so long as PMI owns at least 1,000,000
Common Shares, the Company has agreed to nominate for election as a
director of GMA two persons selected by PMI and for so long as PMI owns at
least 500,000 Common Shares, the Company has agreed to nominate for
election as a director of GMA one person selected by PMI. In exchange for
such right and for so long as any person selected by PMI is a director
(and during any period after such person's designation but before his or
her election), PMI will not vote or permit any of the Common Shares
beneficially owned by it to be voted for the election of any director of
GMA, other than the nominee(s) designated by PMI.
(3) Does not include 100,000 Common Shares issuable upon the exercise of Class
B Warrants which will not be exercisable within 60 days following the
consummation of the Offerings. For so long as High Ridge owns at least
500,000 Common Shares, the Company has agreed to nominate for election as
a director of GMA one person selected by High Ridge. In exchange for such
right and for so long as any person selected by High Ridge is a director
(and during any period after such person's designation but before his or
her election), High Ridge will not vote or permit any of the Common Shares
beneficially owned by it to be voted for the election of any director of
GMA, other than the nominee designated by High Ridge.
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<PAGE> 75
(4) The Third Avenue Value Fund and the Third Avenue Small-Cap Value Fund are
each a series of the Third Avenue Trust, which may be deemed to own
beneficially such Common Shares. For so long as Third Avenue Value Fund
and Third Avenue Small-Cap Value Fund collectively own at least 250,000
Common Shares, the Company has agreed to nominate for election as a
director of GMA one person jointly selected by Third Avenue Value Fund and
Third Avenue Small-Cap Value Fund. In exchange for such right and for so
long as any person selected by Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund is a director (and during any period after such
person's designation but before his or her election) Third Avenue Value
Fund and Third Avenue Small-Cap Value Fund will not vote or permit any of
the Common Shares beneficially owned by them to be voted for the election
of any director of GMA, other than the nominee designated by Third Avenue
Value Fund and Third Avenue Small-Cap Value Fund.
(5) Does not include 45,417 Common Shares issuable upon the exercise of Class
B Warrants which will not be exercisable within 60 days following the
consummation of the Offerings.
(6) Does not include 4,583 Common Shares issuable upon the exercise of Class B
Warrants which will not be exercisable within 60 days following the
consummation of the Offerings.
(7) Does not include 189,443 Common Shares (234,443 Common Shares if the
Underwriters' over-allotment options are exercised in full) issuable upon
the exercise of Class A Warrants which will not be exercisable within 60
days following the consummation of the Offerings, and 448,645 Common
Shares (500,000 Common Shares if the Underwriters' over-allotment options
are exercised in full) issuable upon the exercise of options which will
not be exercisable within 60 days following the consummation of the
Offerings. Also does not include 175,000 Common Shares issuable upon the
exercise of Class A Warrants initially acquired by Mr. Matthews and
subsequently transferred to a trust for the benefit of his family, as to
which he disclaims beneficial ownership. The trustees of such trusts have
executed lock-up agreements for a period of one year after the date of
this Prospectus. See "Underwriting."
(8) Does not include 100,000 Common Shares issuable upon the exercise of
options which will not be exercisable within 60 days following the
consummation of the Offerings.
(9) Does not include 50,000 Common Shares issuable upon the exercise of
options which will not be exercisable within 60 days following the
consummation of the Offerings.
(10) Does not include 15,000 Common Shares issuable upon the exercise of
options which will not be exercisable within 60 days following the
consummation of the Offerings.
(11) Does not include 266,798 Common Shares (308,076 Common Shares if the
Underwriters' over-allotment options are exercised in full) issuable upon
the exercise of Class A Warrants which will not be exercisable within 60
days following the consummation of the Offerings, and 15,000 Common
Shares (128,645 Common Shares if the Underwriters' over-allotment options
are exercised in full) issuable upon the exercise of options which will
not be exercisable within 60 days following the consummation of the
Offerings. Also does not include 100,000 Common Shares issuable upon the
exercise of Class A Warrants initially acquired by Mr. Lichten and
subsequently transferred to certain trusts for the benefit of his
children and grandchildren, as to which he disclaims beneficial
ownership. The trustees of such trusts have executed lock-up agreements
for a period of one year after the date of this Prospectus, See
"Underwriting."
(12) Does not include 266,798 Common Shares (308,076 Common Shares if the
Underwriters' over-allotment options are exercised in full) issuable upon
the exercise of Class A Warrants which will not be exercisable within 60
days following the consummation of the Offerings, and 15,000 Common Shares
issuable upon the exercise of options which will not be exercisable within
60 days following the consummation of the Offerings. Also does not include
100,000 Common Shares issuable upon the exercise of Class A Warrants
initially acquired by Mr. Hammer and subsequently transferred to certain
trusts for the benefit of his children and grandchildren, as to which he
disclaims beneficial ownership. The trustees of such trusts have executed
lock-up agreements for a period of one year after the date of this
Prospectus. See "Underwriting."
The Purpose Trust currently owns 12,000 Common Shares which constitute all
of the currently outstanding Common Shares. Upon consummation of the Offerings,
the Purpose Trust has agreed to sell such Common Shares to GMA for an aggregate
price of $12,000 and such Common Shares will be cancelled.
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<PAGE> 76
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following descriptions summarize certain relationships and the terms of
certain agreements to which the Company is a party. Such summaries of agreements
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the relevant agreements. A
copy of each such agreement is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
SPONSORS RELATIONSHIPS
Certain directors of the Company (Messrs. Hammer and Lichten) are owners,
directors and/or officers of Inter-Atlantic and/or its parent corporation,
Inter-Atlantic Capital Partners, Inc. Inter-Atlantic is a registered
broker-dealer which provides investment banking services for insurance companies
and other financial services firms. Pursuant to an agreement between
Inter-Atlantic and the Company, Inter-Atlantic has agreed to provide certain
services in connection with the Offerings, the sales to the Strategic Investors
and the development of the Company's operations, including assistance in
preparing the registration statement for the Common Shares, selecting
underwriters in connection with the Offerings, identifying and negotiating with
potential strategic investors and such other services as the Company or
Inter-Atlantic deems appropriate. Pursuant to this agreement, the Company has
agreed to pay Inter-Atlantic a fee of $3.6 million upon consummation of the
Offerings. The Company and Inter-Atlantic negotiated the $3.6 million fee at a
level of approximately 1.0% of the total gross proceeds raised by the Company
upon consummation of the Offerings and the Direct Sales. The Company believes
the fee is reasonable in light of the contingent nature of the fee and the
amount of work performed by Inter-Atlantic. In addition, the Company believes
the fee is comparable to the fee it otherwise would have paid to an unrelated
third-party service provider. Because Inter-Atlantic employs only eight people
and has limited resources, it has in turn contracted with ACA Service 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 upon consummation
of the Offerings. The Company is also obligated upon consummation of the
Offerings to reimburse Inter-Atlantic for reasonable expenses it incurs in
connection with performing services under its agreement with the Company. Such
expense reimbursements will not include the fees Inter-Atlantic is obligated to
pay ACA Service, but will include expenses incurred by ACA Service in connection
with performing services under their agreements with Inter-Atlantic for which
Inter-Atlantic is obligated to reimburse them. Upon consummation of the
Offerings, certain of these incurred but not currently payable expenses may be
paid directly by the Company rather than paid to Inter-Atlantic as
reimbursement. At December 31, 1998, Inter-Atlantic had incurred expenses on the
Company's behalf in connection with the development of the Company's operations
of approximately $850,000 and expenses in connection with the Offerings and the
sales to the Strategic Investors of approximately $1.4 million, including
reimbursements owed to ACA Service. Upon consummation of the Offerings, expenses
incurred by the Company, including expenses incurred by Inter-Atlantic on the
Company's behalf, are currently estimated to be approximately $3.5 million of
which approximately $1.4 million is estimated to relate to expenses in
connection with the Company's operations and approximately $2.1 million is
estimated to relate to expenses in connection with the Offerings and the sales
to the Strategic Investors, including expense reimbursements it will owe to ACA
Service.
In connection with the formation of the Company, ACA Holdings, Donald J.
Matthews, five individuals associated with Inter-Atlantic and/or its parent
corporation, Inter-Atlantic Capital Partners, Inc. (Messrs. Michael P. Esposito,
Jr., Frederick S. Hammer, Andrew S. Lerner, Robert M. Lichten and William S.
Ogden, Jr.), and two institutional investors purchased for $42,000, $12,000,
$11,007, $11,007, $6,300, $11,007, $2,679, $3,000 and $9,000, respectively,
Class A Warrants to purchase up to an aggregate number of Common Shares equal to
5.25%, 1.5%, 1.37593%, 1.37593%, 0.7875%, 1.37593%, 0.3347%, 0.375% and 1.125%,
respectively, of the sum of (i) the Common Shares outstanding immediately
following the consummation of the Offerings (including the Direct Sales, but
excluding any Common Shares held by the Purpose Trust) and (ii) the Common
Shares issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings other than the Class A
Warrants, the Class B Warrants and any options granted by the Company under its
Stock Option Plan (the "Class A Determination
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<PAGE> 77
Amount"). Subsequently, one institutional investor surrendered its Class A
Warrant to the Company and the other institutional investor transferred a
portion of its Class A Warrant to Messrs. Esposito, Hammer, Lerner and Lichten,
and then surrendered the balance to the Company The net result of these
transactions is that there remains outstanding Class A Warrants to purchase a
number of Common Shares equal to 12.0% of the Class A Determination Amount plus
137,646 Common Shares, of which ACA Holdings acquired a Class A Warrant for
5.25% of the Class A Determination Amount, Donald J. Matthews acquired a Class A
Warrant for 1.50% of the Class A Determination Amount, Michael P. Esposito, Jr.
acquired Class A Warrants for 1.37593% of the Class A Determination Amount plus
47,499 Common Shares, Frederick S. Hammer acquired Class A Warrants for 1.37593%
of the Class A Determination Amount plus 32,500 Common Shares, Robert M. Lichten
acquired Class A Warrants for 1.37593% of the Class A Determination Amount plus
32,500 Common Shares, Andrew S. Lerner acquired Class A Warrants for 0.7875% of
the Class A Determination Amount plus 25,147 Common Shares, and William S.
Ogden, Jr. acquired a Class A Warrant for 0.3347% of the Class A Determination
Amount. Messrs. Esposito, Hammer, Lichten and Matthews have each transferred a
portion of their Class A Warrants to certain family members or trusts that have
been established for the benefit of certain family members. The exercise price
of the Class A Warrants is equal to the initial public offering price per share,
subject to customary anti-dilution adjustments for certain future events,
including stock splits and the issuance of Common Shares at a price below the
exercise price or the market price of the Common Shares at the time of such
issuance. The Class A Warrants become exercisable in three equal annual
installments commencing on the first anniversary of the consummation of the
Offerings. In the event of a change of control of GMA, the Class A Warrants then
outstanding will become immediately exercisable. The Class A Warrants will
expire on September 30, 2008. The holders of the Class A Warrants have also been
granted rights to require the Company to register under the Securities Act the
Common Shares underlying the Class A Warrants, which rights become exercisable
on the first anniversary of the consummation of the Offerings. See "Description
of Capital Stock -- Warrants."
The Company has retained ICS, a Bermuda corporation licensed as an
insurance broker, to provide risk management and other related financial
services. Pursuant to such agreement, ICS is entitled to receive an annual fee
of $425,000, which is payable in quarterly installments commencing on the
consummation of the Offerings through the fifth anniversary of the consummation
of the Offerings. ICS is in its initial stages of development and has a limited
operating history or experience providing risk management and other related
financial services. ICS is owned by Messrs. Esposito, Hammer, Lerner and
Lichten, each of whom is affiliated with Inter-Atlantic. Mr. Lichten is the
non-executive Chairman of the Board of GMA and the Operating Company. Mr. Hammer
is the non-executive Deputy Chairman of the Board of GMA and the Operating
Company.
ICS has loaned $12,000 to the Purpose Trust which will be repaid upon
consummation of the Offerings.
The Company believes that the arrangements between the Company and the
Sponsors, ICS and certain individuals associated with the Sponsors or ICS
described above were entered into on an arm's-length basis and on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
OTHER ACA RELATIONSHIPS
Donald J. Matthews, the President and Chief Executive Officer and a
director of the Company, owns an option to purchase 0.49505% of ACA Holdings,
the parent corporation of ACA. H. Russell Fraser, a director of the Company, is
the Chairman of the Board and Chief Executive Officer of ACA and ACA Holdings.
The Operating Company has entered into three reinsurance treaties with ACA, a
Sponsor of the Company, which will become effective upon consummation of the
Offerings. The first treaty is a quota-share treaty pursuant to which the
Operating Company is required to provide, and ACA is required to purchase,
reinsurance on a fixed percentage of the risks associated with financial
guaranty insurance policies issued by ACA covering new issues of financial
obligations with a rating of "BB" or higher. The second and third treaties are
facultative treaties under which the Operating Company and ACA are each
obligated to offer the other the opportunity to reinsure each financial
obligation the other insures on a direct basis. Such facultative treaties also
set forth the basic terms under which the Operating Company and ACA may purchase
such reinsurance from the other on a case-by-case basis. See
"Business -- Reinsurance Treaties with ACA."
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<PAGE> 78
The Company believes that each of the reinsurance treaties with ACA
described above was entered into on an arm's-length basis 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 and Lerner subscribed to purchase from
the Company an aggregate of 90,000 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.
STRATEGIC INVESTOR RELATIONSHIPS
PMI has agreed to purchase Common Shares and Class B Warrants to purchase
Common Shares as part of the Direct Sales. See "Direct Sales." Claude J. Seaman,
a director of the Company, currently serves as a Group Executive Vice President,
Strategic Investments of PMI, and Bradley M. Shuster, a director of the Company,
currently serves as Executive Vice President in charge of Corporate Development
of PMI.
High Ridge has agreed to purchase Common Shares and Class B Warrants to
purchase Common Shares as part of the Direct Sales. See "Direct Sales." James L.
Zech, a director of the Company, is President of High Ridge Capital, LLC, an
investment advisory firm that manages High Ridge.
The Third Avenue Funds have agreed to purchase Common Shares and Class B
Warrants to purchase Common Shares as part of the Direct Sales. See "Direct
Sales." Curtis R. Jensen, a director of the Company, currently serves as a
senior analyst of Third Avenue Value Fund and as Co-Portfolio Manager of Third
Avenue Small-Cap Value Fund.
In connection with the Direct Sales to PMI, High Ridge and the Third Avenue
Funds, the Company has agreed to nominate for election as a director of GMA two
persons selected by PMI, one person selected by High Ridge and one person
selected by the Third Avenue Funds. PMI will have such right for so long as it
owns 1,000,000 Common Shares, and will have the right to designate one nominee
for election as a director of GMA for so long as it owns 500,000 Common Shares.
High Ridge will have such right for so long as it owns 500,000 Common Shares.
The Third Avenue Funds will have such right for so long as they collectively own
250,000 Common Shares. In exchange for such right, and, for so long as any
person selected by PMI, High Ridge and the Third Avenue Funds, respectively, is
a director (and during any period after such person's designation but before his
or her election), each Strategic Investor has agreed to not vote or permit any
of the Common Shares beneficially owned by it to be voted for the election of
any director of GMA, other than the nominee(s) selected by it. Each such
Strategic Investor is permitted to assign its right to select one or more
persons to be nominated for election as a director of GMA only upon the prior
written consent of the Company, which may not be unreasonably withheld. Claude
J. Seaman and Bradley M. Shuster are serving as directors of GMA as the nominees
of PMI, James L. Zech is serving as a director of GMA as the nominee of High
Ridge, and Curtis R. Jensen is serving as a director of GMA as the nominee of
the Third Avenue Funds.
MANAGEMENT RELATIONSHIPS
The Company's executive officers, Messrs. Matthews, Cooleen, Bantz, Jachym
and Marsland-Shaw and Ms. Robertson, have expressed their non-binding intention
to purchase approximately $987,000, $634,500, $423,000, $423,000, $282,000 and
$705,000 of Common Shares, respectively, directly from the Company as part of
the Direct Sales. Based on the initial public offering price of $15.00 per
share, the number of Common Shares that Messrs. Matthews, Cooleen, Bantz, Jachym
and Marsland-Shaw and Ms. Robertson are expected to purchase would be 70,000,
45,000, 30,000, 30,000, 20,000, and 50,000 Common Shares, respectively, and,
collectively, such purchases are expected to total 245,000 Common Shares.
Similarly, certain directors of the Company have expressed their intention to
purchase an aggregate of 60,500 Common Shares directly from the Company as part
of the Direct Sales. Because the Common Shares sold to the officers and
directors will not be
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<PAGE> 79
sold through the Underwriters as part of the Offerings, the purchase price per
share will be equal to the initial public offering price per share, less the per
share underwriting discounts and commissions. The Company intends to make loans
to Messrs. Matthews, Cooleen, Bantz, Jachym and Marsland-Shaw and Ms. Robertson
in the amounts of $740,250, $454,500, $317,250, $317,250, $211,500 and $528,750,
respectively, to partially finance such purchases in the event such purchases
are completed. Such loans will bear interest at 6.0% per annum and must be
repaid within five years of the consummation of the Direct Sales, except that
$246,750 of the loan made to Mr. Matthews, $137,250 of the loan made to Mr.
Cooleen, $105,750 of the loan made to Mr. Bantz, $105,750 of the loan made to
Mr. Jachym, $70,500 of the loan made to Mr. Marsland-Shaw and $176,250 of the
loan made to Ms. Robertson must be repaid within 14 months of the consummation
of the Direct Sales. Any such purchases will be completed simultaneously with
the consummation of the Offerings and the other Direct Sales.
OTHER RELATIONSHIPS
The Company has subleased its principal offices in Hamilton, Bermuda on a
month-to-month basis from Annuity and Life Reassurance, Ltd. The subleased
office space consists of four offices and three workstations. The Company has
agreed to pay BD$5,200 plus utilities in rent for the first month of the
sublease. Thereafter, the sublease requires the Company to pay BD$4,500 plus
utilities in rent each month. Lawrence S. Doyle, a director of the Company, is
the Chief Executive Officer, President and a director of Annuity and Life
Reassurance, Ltd., and its parent company, Annuity and Life Re (Holdings), Ltd.
Robert M. Lichten, the non-executive Chairman of the Board of the Company, is
the non-executive Deputy Chairman of the Board of Annuity and Life Re
(Holdings), Ltd. and Annuity and Life Reassurance, Ltd. Frederick S. Hammer, the
non-executive Deputy Chairman of the Board of the Company, is the non-executive
Chairman of the Board of Annuity and Life Re (Holdings), Ltd. and Annuity and
Life Reassurance Ltd. Donald J. Matthews, the President and Chief Executive
Officer of the Company, is a director of Annuity and Life Re (Holdings), Ltd.
and Annuity and Life Reassurance, Ltd. The Company believes the sublease was
entered into on an arm's length basis and on terms no less favorable to the
Company than could have been obtained from unaffiliated third parties.
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.
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<PAGE> 80
DESCRIPTION OF CAPITAL STOCK
The following description of GMA's capital stock summarizes certain
provisions of GMA's Memorandum of Association and Bye-Laws. Such summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of GMA's Memorandum of
Association and Bye-Laws. Copies of GMA's Memorandum of Association and Bye-Laws
are filed as exhibits to the Registration Statement of which this Prospectus is
a part.
GENERAL
GMA's authorized share capital upon consummation of the Offerings and the
Direct Sales will consist of: (i) 100,000,000 Common Shares, of which 24,296,206
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 3,053,184 Common Shares will be
issuable upon the exercise of outstanding Class A Warrants, an aggregate of
550,000 Common Shares will be issuable upon the exercise of Class B Warrants to
be included in the Direct Sales and an aggregate of 1,148,645 Common Shares will
be issuable upon the exercise of options to be granted upon consummation of the
Offerings, in each case, subject to adjustment as provided therein. If the
Underwriters' over-allotment options are exercised in full, 27,296,206 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
3,413,184 Common Shares and the number of Common Shares issuable upon the
exercise of options to be granted upon consummation of the Offerings will
increase to an aggregate of 1,313,645 Common Shares. The number of Common Shares
issuable upon the exercise of the Class B Warrants will not change if the
Underwriters' over-allotment options are exercised. The Class A Warrants, Class
B Warrants and options will not be exercisable upon consummation of the
Offerings. The Purpose Trust currently owns 12,000 Common Shares, which
constitutes all of the currently outstanding Common Shares. Upon consummation of
the Offerings, the Purpose Trust has agreed to sell such Common Shares to GMA
for an aggregate price of $12,000, and such Common Shares will be cancelled.
COMMON SHARES
Holders of the Common Shares have no pre-emptive, redemption, conversion or
sinking fund rights. The quorum required for a general meeting of shareholders
is two or more persons present in person and representing in person or by proxy
more than 50% of the outstanding Common Shares (without giving effect to the
limitation on voting rights described below). Subject to the limitation on
voting rights described below, holders of Common Shares are entitled to one vote
per share on all matters submitted to a vote of holders of Common Shares. Most
matters to be approved by holders of Common Shares require approval by a simple
majority of the votes cast at a meeting at which a quorum is present. However, a
resolution to remove GMA's auditor before the expiration of the auditor's term
of office must be approved by the holders of at least two-thirds of the Common
Shares present in person or by proxy and voting thereon (after giving effect to
the limitation on voting rights) at a meeting at which a quorum is present.
In the event of a liquidation, dissolution or winding-up of GMA, the
holders of Common Shares are entitled to share equally and ratably in the assets
of GMA, if any remain after the payment of all debts and liabilities of GMA and
the liquidation preference of any outstanding Preferred Shares.
Limitation on Voting Rights. Each Common Share has one vote on a poll of
the shareholders, except that if and for as long as the number of issued
Controlled Shares (as defined below) of any person other than PMI would
constitute 10% or more of the combined voting power of the issued voting shares
of GMA (after giving effect to any prior reduction in voting power as described
below), each such issued Controlled Share, regardless of the identity of the
registered holder thereof, will confer only a fraction of a vote as determined
by the following formula (the "Formula"):
(T - C) / (9.1 X C)
Where: "T" is the aggregate number of votes conferred by all the issued shares
immediately prior to the application of the Formula with respect to any
particular shareholder, adjusted to take into account any prior
reduction taken with respect to any other shareholder pursuant to the
"sequencing provision" described below; and
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<PAGE> 81
"C" is the number of issued Controlled Shares attributable to such
person. "Controlled Shares" of any person refers to all Common Shares or
voting Preferred Shares owned by such person, whether (i) directly, (ii)
with respect to persons who are United States persons, by application of
the attribution and constructive ownership rules of Sections 958(a) and
958(b) of the Code or (iii) beneficially, directly or indirectly, within
the meaning of Section 13(d)(3) of the Exchange Act, and the rules and
regulations thereunder.
The Formula will be applied successively as many times as may be necessary
to ensure that no person (except as excluded from the application of the Formula
above) will be a Controlling Shareholder (as defined below) at any time (the
"sequencing provision"). For the purposes of determining the votes exercisable
by shareholders as of any date, the Formula will be applied to the shares of
each shareholder in declining order based on the respective numbers of total
Controlled Shares attributable to each shareholder. Thus, the Formula will be
applied first to the votes of shares held by the shareholder to whom the largest
number of total Controlled Shares is attributable and thereafter sequentially
with respect to the shareholder with the next largest number of total Controlled
Shares. In each case, calculations are made on the basis of the aggregate number
of votes conferred by the issued voting shares as of such date, as reduced by
the application of the Formula to any issued voting shares of any shareholder
with a larger number of total Controlled Shares as of such date. "Controlling
Shareholder" means a person who owns, in aggregate, (i) directly, (ii) with
respect to persons who are United States persons, by application of the
attribution and constructive ownership rules of Sections 958(a) and 958(b) of
the Code or (iii) beneficially, directly or indirectly, within the meaning of
Section 13(d)(3) of the Exchange Act and the rules and regulations thereunder,
issued voting shares of GMA carrying 10% or more of the total combined voting
rights attaching to all issued shares.
The directors are empowered to require any shareholder to provide
information as to that shareholder's beneficial share ownership, the names of
persons having beneficial ownership of the shareholder's shares, relationships
with other shareholders or any other facts the directors may deem relevant to a
determination of the number of Controlled Shares attributable to any person. The
directors may disregard the votes attached to shares of any holder failing to
respond to such a request or submitting incomplete or untrue information.
The directors retain certain discretion to make such final adjustments to
the aggregate number of votes attaching to the voting shares of any shareholder
that they consider fair and reasonable in all the circumstances to ensure that
no person will be a Controlling Shareholder at any time.
Restrictions on Transfer. GMA's Bye-Laws contain several provisions
restricting the transferability of Common Shares. Except as described below with
respect to transfers of Common Shares executed on The Nasdaq National Market,
the directors (or their designee) are required to decline to register a transfer
of shares if they have reason to believe that the result of such transfer would
be to increase the number of total Controlled Shares of any person other than
PMI to 10% or more of a class of GMA's shares. Similarly, GMA is restricted from
issuing or repurchasing Common Shares if such issuance or repurchase would
increase the number of total Controlled Shares of any person other than PMI to
10% or more of a class of GMA's shares. GMA's Bye-Laws restrict PMI from owning
shares of GMA that would represent more than sixteen and two-thirds percent
(16 2/3%) of the total combined voting rights attached to all of GMA's
outstanding capital shares.
The directors (or their designee) also may, in their absolute discretion,
decline to register the transfer of any Common Shares, except for transfers
executed on The Nasdaq National Market, if they have reason to believe (i) that
such transfer may expose GMA, any subsidiary or shareholder thereof or any
person purchasing insurance or reinsurance from GMA or any subsidiary thereof to
adverse tax or regulatory treatment in any jurisdiction, or (ii) that
registration of such transfer under the Securities Act or under any United
States state securities laws or under the laws of any other jurisdiction is
required and such registration has not been duly effected.
GMA's directors will not decline to register any transfer of Common Shares
executed on The Nasdaq National Market for the reasons described above. However,
if any such transfer results in the transferee other than PMI (or any group of
which such transferee is a member) beneficially owning, directly or indirectly,
10% or more of any class of GMA's shares or causes GMA's directors (or their
designee) to have reason to believe
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that such transfer may expose GMA, any subsidiary or shareholder thereof or any
person purchasing insurance or reinsurance from GMA or any subsidiary thereof to
adverse tax or regulatory treatment in any jurisdiction or that registration of
such transfer under the Securities Act or under any United States state
securities laws or under the laws of any other jurisdiction is required and such
registration has not been duly effected, under GMA's Bye-Laws, the directors (or
their designee) are empowered to deliver a notice to the transferee demanding
that such transferee surrender to an agent designated by the directors (the
"Agent") certificates representing the shares and any dividends or distributions
that the transferee has received as a result of owning the shares. A transferee
who has resold the shares before receiving such notice will be required to
transfer to the Agent the proceeds of the sale, to the extent such proceeds
exceed the amount that the transferee paid for the shares, together with any
dividends or distributions that the transferee received from the Company. As
soon as practicable after receiving the shares and any dividends or
distributions that the transferee received, the Agent will use its best efforts
to sell such shares and any non-cash dividends or distributions in an arm's-
length transaction on The Nasdaq National Market. After applying the proceeds
from such sale toward reimbursing the transferee for the price paid for the
shares, the Agent will pay any remaining proceeds and any cash dividends and
distributions to organizations described in Section 501(c)(3) of the Code that
the directors designate. The proceeds of any such sale by the Agent or the
surrender of dividends or distributions will not inure to the benefit of GMA or
the Agent, but such amounts may be used to reimburse expenses incurred by the
Agent in performing its duties.
GMA is authorized to request information from any holder or prospective
acquiror of Common Shares as necessary to give effect to the transfer, issuance
and repurchase restrictions described above, and may decline to effect any such
transaction if complete and accurate information is not received as requested.
Conyers Dill & Pearman, Bermuda counsel to the Company, has advised the
Company that while the precise form of the restrictions on transfer contained in
GMA's Bye-Laws is untested, as a matter of general principle, restrictions on
transfers are enforceable under Bermuda law and are not uncommon. A proposed
transferee will be permitted to dispose of any Common Shares purchased that
violate the restrictions and as to the transfer of which registration is
refused. The transferor of such Common Shares will be deemed to own such Common
Shares for dividend, voting and reporting purposes until a transfer of such
Common Shares has been registered on the Register of Members of GMA.
If the directors refuse to register a transfer for any reason, they must
notify the proposed transferor and transferee within thirty days of such
refusal. GMA's Bye-Laws also provide that the Board may suspend the registration
of transfers at such time and for such periods as the Board may determine,
provided that they may not suspend the registration of transfers for more than
45 days in any period of 365 consecutive days.
The directors have designated the Company's Chief Executive Officer to
exercise their authority to decline to register transfers or to limit voting
rights as described above, or to take any other action, for as long as such
officer is also a director.
PREFERRED SHARES
Pursuant to GMA's Bye-Laws and Bermuda law, the Board by resolution may
establish one or more series of Preferred Shares having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences, powers and limitations as may be fixed by the Board without
any further shareholder approval, which, if any such Preferred Shares are
issued, will include restrictions on voting and transfer intended to avoid
having GMA constitute a "controlled foreign corporation" for United States
federal income tax purposes. Such rights, preferences, powers and limitations as
may be established could have the effect of discouraging an attempt to obtain
control of GMA. The issuance of Preferred Shares could also adversely affect the
voting power of the holders of Common Shares, deny shareholders the receipt of a
premium on their Common Shares in the event of a tender or other offer for the
Common Shares and have a depressive effect on the market price of the Common
Shares. The Company has no present plan to issue any Preferred Shares.
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WARRANTS
Class A Warrants. In connection with the formation of the Company, ACA
Holdings, Donald J. Matthews, five individuals associated with Inter-Atlantic
and/or its parent corporation, Inter-Atlantic Capital Partners, Inc. (Messrs.
Michael P. Esposito, Jr., Frederick S. Hammer, Andrew S. Lerner, Robert M.
Lichten and William S. Ogden, Jr.), and two institutional investors purchased
for $42,000, $12,000, $11,007, $11,007, $6,300, $11,007, $2,679, $3,000 and
$9,000, respectively, Class A Warrants to purchase up to an aggregate number of
Common Shares equal to 5.25%, 1.5%, 1.37593%, 1.37593%, 0.7875%, 1.37593%,
0.3347%, 0.375% and 1.125%, respectively, of the sum of (i) the Common Shares
outstanding immediately following the consummation of the Offerings (including
the Direct Sales, but excluding any Common Shares held by the Purpose Trust) and
(ii) the Common Shares issuable upon exercise or conversion of any security
outstanding immediately following the consummation of the Offerings other than
the Class A Warrants, the Class B Warrants and any options granted by the
Company under its Stock Option Plan (the "Class A Determination Amount").
Subsequently, one institutional investor surrendered its Class A Warrant to the
Company and the other institutional investor transferred a portion of its Class
A Warrant to Messrs. Esposito, Hammer, Lerner and Lichten, and then surrendered
the balance to the Company. The net result of these transactions is that there
remains outstanding Class A Warrants to purchase a number of Common Shares equal
to 12.0% of the Class A Determination Amount plus 137,646 Common Shares, of
which ACA Holdings acquired a Class A Warrant for 5.25% of the Class A
Determination Amount, Donald J. Matthews acquired a Class A Warrant for 1.50% of
the Class A Determination Amount, Michael P. Esposito, Jr. acquired Class A
Warrants for 1.37593% of the Class A Determination Amount plus 47,499 Common
Shares, Frederick S. Hammer acquired Class A Warrants for 1.37593% of the Class
A Determination Amount plus 32,500 Common Shares, Robert M. Lichten acquired
Class A Warrants for 1.37593% of the Class A Determination Amount plus 32,500
Common Shares, Andrew S. Lerner acquired Class A Warrants for 0.7875% of the
Class A Determination Amount plus 25,147 Common Shares, and William S Ogden, Jr.
acquired a Class A Warrant for 0.3347% of the Class A Determination Amount. The
exercise price of the Class A Warrants is equal to the initial public offering
price per share, subject to customary anti-dilution adjustments for certain
future events, including stock splits and the issuance of Common Shares at a
price below the exercise price or the market price of the Common Shares at the
time of such issuance. The Class A Warrants become exercisable in three equal
annual installments commencing on the first anniversary of the consummation of
the Offerings. In the event of a change of control of GMA, the Class A Warrants
then outstanding will become immediately exercisable. The Class A Warrants will
expire on September 30, 2008.
The holders of the Class A Warrants have also been granted rights to
require the Company to register under the Securities Act the Common Shares
underlying the Class A Warrants, which rights become exercisable on the first
anniversary of the consummation of the Offerings, and have entered into
agreements with the Underwriters under which they have agreed not to dispose of
such Common Shares or the Class A Warrants for a one-year period from the date
of this Prospectus without the prior written consent of Merrill Lynch & Co. and
Prudential Securities on behalf of the Underwriters. See "Shares Eligible for
Future Sale" and "Underwriting."
Class B Warrants. Upon consummation of the Offerings and the Direct Sales,
Class B Warrants to purchase an aggregate of 550,000 Common Shares, subject to
adjustment as provided in the warrants, will be outstanding. The exercise price
of the Class B Warrants is $15.00 per share, subject to customary anti-dilution
adjustments for certain events, including stock splits and the issuance of
Common Shares at a price below the exercise price for the Class B Warrants or
below the then current fair market value of the Common Shares. The Class B
Warrants become exercisable in three equal annual installments commencing on the
first anniversary of the consummation of the Direct Sales. In the event of a
change of control of GMA, the Class B Warrants then outstanding will become
immediately exercisable. The Class B Warrants will expire on the tenth
anniversary of the consummation of the Direct Sales.
The Class B Warrant holders have been granted certain registration rights
with respect to the sale of the Common Shares underlying the warrants, and have
entered into agreements with the Underwriters under which they have agreed not
to dispose of such Common Shares or the Class B Warrants for a nine month period
from the date of this Prospectus without the prior written consent of Merrill
Lynch & Co. and
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Prudential Securities on behalf of the Underwriters and the prior written
consent of the Company. See "Shares Eligible for Future Sale," "Direct Sales"
and "Underwriting."
OPTIONS
Upon consummation of the Offerings, there are expected to be 1,148,645
Common Shares issuable upon the exercise of outstanding options and 100,000
Common Shares reserved for future issuance pursuant to the Stock Option Plan. If
the Underwriters' over-allotment options are exercised in full, the number of
Common Shares issuable upon exercise of outstanding options will increase to
1,313,645 Common Shares and the number of Common Shares reserved for future
issuance pursuant to the Stock Option Plan will not change. See
"Management -- Stock Option Plan."
The Company intends to file with the Commission a registration statement on
Form S-8 covering the sale of the Common Shares issuable upon exercise of
options issued under the Stock Option Plan promptly following the first
anniversary of the consummation of the Offerings. The individuals who will be
granted options upon consummation of the Offerings have entered into agreements
with the Underwriters under which they have agreed not to dispose of such
options for a one-year period from the date of this Prospectus without the prior
written consent of Merrill Lynch & Co. and Prudential Securities on behalf of
the Underwriters. See "Shares Eligible for Future Sale" and "Underwriting."
BYE-LAWS
GMA's Bye-Laws provide for the corporate governance of GMA, including the
establishment of share rights, modification of such rights, issuance of share
certificates, imposition of a lien over shares in respect of unpaid amounts on
those shares and other debts or liabilities of a shareholder to GMA, calls on
shares which are not fully paid, the transfer of shares, alterations to capital,
the calling and conduct of general meetings, proxies, the appointment and
removal of directors, conduct and powers of directors, the payment of dividends,
the appointment of an auditor and the winding-up of GMA.
GMA's Bye-Laws provide that the Board shall be elected annually and shall
consist of three approximately equal classes, each class (after the initial
class) to be elected to serve for a three year term. Shareholders may only
remove a director prior to the expiration of such director's term at a special
meeting of shareholders at which a majority of the votes cast thereon is cast in
favor of such action. A special meeting of shareholders may be convened by the
Chairman or any two directors or any director and the Secretary or on the
request of shareholders holding not less than 10% of the paid-up share capital
of GMA that carries the right to vote at general shareholders' meetings.
GMA's Bye-Laws also provide that if the Board in its absolute discretion
determines that share ownership by any shareholder may result in adverse tax,
regulatory or legal consequences to GMA, any of its subsidiaries or any other
shareholder, then GMA will have the option, but not the obligation, to
repurchase all or part of the shares held by such shareholder to the extent the
Board determines it is necessary or advisable to avoid or cure such adverse or
potential adverse consequences. GMA will also be entitled to assign this
repurchase right to one or more third parties, including other shareholders. The
price to be paid for such Common Shares will be the fair market value of such
shares.
GMA's Bye-Laws provide that each director may appoint an alternate
director, who shall have the power to attend and vote at any meeting of the
Board at which such director is not personally present and generally to perform
at such meeting all the functions of such director. In addition, the Board may
delegate any of its powers to a committee appointed by the Board, which may
consist partly or entirely of non-directors.
TRANSFER AGENT
The Company's registrar and transfer agent for the Common Shares is
ChaseMellon Shareholder Services, L.L.C.
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DIFFERENCES IN CORPORATE LAW
The Companies Act 1981 of Bermuda (the "Act"), which applies to the
Company, differs in certain material respects from laws generally applicable to
United States corporations and their shareholders. Set forth below is a summary
of certain significant provisions of the Act (including modifications adopted
pursuant to GMA's Bye-Laws) applicable to the Company which differ in certain
respects from provisions of Delaware corporate law. The following statements are
summaries and do not purport to deal with all aspects of Bermuda law that may be
relevant to the Company and its shareholders.
Interested Directors. Bermuda law and GMA's Bye-Laws provide that any
transaction entered into by the Company in which a director has an interest is
not voidable by the Company nor can such director be liable to the Company for
any profit realized pursuant to such transaction provided the nature of the
interest is disclosed at the first opportunity at a meeting of directors, or in
writing to the directors. Under Delaware law such transaction would not be
voidable if (i) the material facts as to such interested director's relationship
or interests are disclosed or are known to the board of directors and the board
in good faith authorizes the transaction by the affirmative vote of a majority
of the disinterested directors, (ii) such material facts are disclosed or are
known to the stockholders entitled to vote on such transaction and the
transaction is specifically approved in good faith by vote of the stockholders
or (iii) the transaction is fair as to the corporation as of the time it is
authorized, approved or ratified. Under Delaware law, such interested director
could be held liable for a transaction in which such director derived an
improper personal benefit.
Mergers and Similar Arrangements. The Company may acquire the business of
another Bermuda exempted company or a company incorporated outside Bermuda when
such business is within its business purpose as set forth in its Memorandum of
Association. The Company may, with the approval of a majority of votes cast at a
general meeting of the shareholders at which a quorum is present, amalgamate
with another Bermuda company or with a body incorporated outside Bermuda. In the
case of an amalgamation, a shareholder may apply to a Bermuda court for a proper
valuation of such shareholder's shares if such shareholder is not satisfied that
fair value has been paid for such shares. The court ordinarily would not
disapprove the transaction on that ground absent evidence of fraud or bad faith.
Under Delaware law, with certain exceptions, a merger, consolidation or sale of
all or substantially all the assets of a corporation must be approved by the
board of directors and a majority of the outstanding shares entitled to vote
thereon. Under Delaware law, a stockholder of a corporation participating in
certain major corporate transactions may, under certain circumstances, be
entitled to appraisal rights pursuant to which such stockholder may receive cash
in the amount of the fair value of the shares held by such stockholder (as
determined by a court) in lieu of the consideration such stockholder would
otherwise receive in the transaction.
Takeovers. Bermuda law provides that where an offer is made for shares of
a company and, within four months of the offer, the holders of not less than 90%
of the shares which are the subject of the offer accept, the offeror may by
notice require the nontendering shareholders to transfer their shares on the
terms of the offer. Dissenting shareholders may apply to the court within one
month of the notice objecting to the transfer. The burden is on the dissenting
shareholders to show that the court should exercise its direction to enjoin the
required transfer, which the court will be unlikely to do unless there is
evidence of fraud or bad faith or collusion between the offeror and the holders
of the shares who have accepted the offer as a means of unfairly forcing out
minority shareholders. Delaware law provides that a parent corporation, by
resolution of its board of directors and without any shareholder vote, may merge
with any subsidiary of which it owns at least 90% of each class of capital
stock. Upon any such merger, dissenting stockholders of the subsidiary would
have appraisal rights.
Shareholder's Suit. The rights of shareholders under Bermuda law are not
as extensive as the rights of shareholders under legislation or judicial
precedent in many United States jurisdictions. Class actions and derivative
actions are generally not available to shareholders under the laws of Bermuda.
However, the Bermuda courts ordinarily would be expected to follow English case
law precedent, which would permit a shareholder to commence an action in the
name of the Company to remedy a wrong done to the Company where the act
complained of is alleged to be beyond the corporate power of the Company or is
illegal or would result in the violation of GMA's Memorandum of Association or
Bye-Laws. Furthermore, consideration would
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be given by the court to acts that are alleged to constitute a fraud against the
minority shareholders or where an act requires the approval of a greater
percentage of the Company's shareholders than actually approved it. The winning
party in such an action generally would be able to recover a portion of
attorneys' fees incurred in connection with such action. GMA's Bye-Laws provide
that shareholders waive all claims or rights of action that they might have,
individually or in the right of the Company, against any director or officer for
any act or failure to act in the performance of such director's or officer's
duties, except with respect to any fraud or dishonesty of such director or
officer. Class actions and derivative actions generally are available to
stockholders under Delaware law for, among other things, breach of fiduciary
duty, corporate waste and actions not taken in accordance with applicable law.
In such actions, the court has discretion to permit the winning party to recover
attorneys' fees incurred in connection with such action.
Indemnification of Directors. The Company may indemnify its directors or
officers in their capacity as such in respect of any loss arising or liability
attaching to them by virtue of any rule of law in respect of any negligence,
default, breach of duty or breach of trust of which a director or officer may be
guilty in relation to the Company other than in respect of his own fraud or
dishonesty. Under Delaware law, a corporation may indemnify a director or
officer of the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in defense of an action, suit or proceeding by reason of such position if (i)
such director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
(ii), with respect to any criminal action or proceeding, such director or
officer had no reasonable cause to believe his conduct was unlawful.
Inspection of Corporate Records. Members of the general public have the
right to inspect the public documents of the Company available at the office of
the Registrar of Companies in Bermuda, which will include the Memorandum of
Association (including its objects and powers) and any alteration to the
Memorandum of Association and documents relating to any increase or reduction of
authorized capital. The shareholders have the additional right to inspect the
Bye-Laws, minutes of general meetings and audited financial statements of the
Company, which must be presented to the annual general meeting of shareholders.
The register of shareholders of the Company is also open to inspection by
shareholders without charge, and to members of the public for a fee. The Company
is required to maintain its share register in Bermuda but may establish a branch
register outside Bermuda. The Company is required to keep at its registered
office a register of its directors and officers which is open for inspection by
members of the public without charge. Bermuda law does not, however, provide a
general right for shareholders to inspect or obtain copies of any other
corporate records. Delaware law permits any shareholder to inspect or obtain
copies of a corporation's shareholder list and its other books and records for
any purpose reasonably related to such person's interest as a shareholder.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offerings and the Direct Sales, GMA expects to
have outstanding 24,296,206 Common Shares, Class A Warrants to purchase an
aggregate of 3,053,184 Common Shares, Class B Warrants to purchase an aggregate
of 550,000 Common Shares and options to purchase an aggregate of 1,148,645
Common Shares. If the Underwriters' over-allotment options are exercised in
full, 27,296,206 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 3,413,184 Common Shares and the number of Common
Shares issuable upon the exercise of outstanding options will increase to an
aggregate of 1,313,645 Common Shares. The number of Common Shares issuable upon
exercise of the Class B Warrants will not change if the Underwriters'
over-allotment options are exercised. The Class A Warrants, Class B Warrants and
options will not be exercisable upon consummation of the Offerings. See
"Management -- Stock Option Plan," "Description of Capital Stock -- Warrants"
and "Direct Sales." Except as disclosed in "Description of Capital
Stock -- Restrictions on Transfer" and as discussed below with respect to the
lock-up agreements, the Common Shares sold in the Offerings and any Common
Shares sold in the Direct Sales pursuant to a separate prospectus to GMA's
directors and officers will be freely transferable without restriction or
further registration under the Securities Act, except for any of those Common
Shares owned by an "affiliate" of the Company within the meaning of Rule 144
under the Securities Act. The Common Shares to be sold to the Strategic
Investors in the Direct Sales, the Common Shares the Company has contracted to
sell to certain persons involved in the formation of the Company and the Common
Shares underlying the Class A Warrants, the Class B Warrants and the options are
"restricted securities" as defined in Rule 144 under the Securities Act and may
not be resold in the absence of registration under the Securities Act or
pursuant to an exemption from registration.
GMA, its directors and officers, the Strategic Investors, the holders of
the Class A Warrants and certain persons involved in the formation of the
Company have executed agreements (the "lock-up agreements") under which they
have agreed that they will not, without the prior written consent of Merrill
Lynch & Co. and Prudential Securities on behalf of the Underwriters and, in the
case of the Strategic Investors, the prior written consent of 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 certain transfers by the
Strategic Investors, for a period of nine months after the date of this
Prospectus. Such agreements do not prevent the Company from granting options
under the Stock Option Plan so long as such options are not exercisable until
one year from the date of this Prospectus. Merrill Lynch & Co., Prudential
Securities and, in the case of the Strategic Investors, the Company may, in
their discretion at any time and without notice, jointly release all or any
portion of the securities subject to such lock-up agreements.
The Strategic Investors, the holders of the Class A Warrants and the
holders of the Class B Warrants have been granted rights to require the Company
to register under the Securities Act the Common Shares purchased by the
Strategic Investors in the Direct Sales and the Common Shares underlying the
Class A Warrants and the Class B Warrants, which rights are not exercisable
before the first anniversary of the consummation of the Offerings. The Company
has agreed not to permit the acceleration of the vesting of such rights without
the prior written consent of Merrill Lynch & Co. and Prudential Securities on
behalf of the Underwriters.
The holders of the Class A Warrants have the right to require the
registration under the Securities Act of all or a portion of the Common Shares
underlying such warrants for sale in an underwritten public offering if, at any
time on or after the first anniversary of the consummation of the Offerings and
before the tenth anniversary thereof, holders of 10% or more of such Common
Shares give written notice to the Company requesting such registration. Holders
of Class A Warrants also have the right to require the registration under the
Securities Act of all or a portion of the Common Shares underlying such Warrants
for sale in open market transactions or negotiated block trades if, at any time
on or after the first anniversary of the consummation of
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the Offerings and before the tenth anniversary thereof, holders of 5% or more of
such Common Shares give written notice to the Company requesting such
registration. In addition, if the Company proposes, other than pursuant to the
two methods mentioned immediately above, to file a registration statement under
the Securities Act to register any of its Common Shares for public sale under
the Securities Act (including pursuant to requests of the holders of Class B
Warrants or the Common Shares sold to the Strategic Investors in the Direct
Sales) other than on Form S-4 or Form S-8 or in certain other circumstances
including mergers or acquisitions, the holders of the Class A Warrants have the
right to request the inclusion of all or a portion of their Common Shares
underlying the Class A Warrants in the registration statement, and the Company
is required to use commercially reasonable efforts to include such Common Shares
in the registration statement.
The holders of the Class B Warrants and the Common Shares sold to the
Strategic Investors in the Direct Sales and their permitted transferees each
have the right on up to two occasions to require the registration under the
Securities Act of all or a portion of the Common Shares underlying such warrants
or sold to the Strategic Investors in the Direct Sales for sale in an
underwritten public offering if, at any time on or after the first anniversary
of the consummation of the Direct Sales and before the tenth anniversary
thereof, such holder gives written notice to the Company requesting such
registration. Holders of Class B Warrants and the Common Shares sold to the
Strategic Investors in the Direct Sales and their permitted transferees also
each have the right to require the registration under the Securities Act of all
or a portion of the Common Shares underlying such warrants or sold to the
Strategic Investors in the Direct Sales for sale in open market transactions or
negotiated block trades if, at any time on or after the first anniversary of the
consummation of the Direct Sales and before the tenth anniversary thereof, such
holder gives written notice to the Company requesting such registration. In
addition, if the Company proposes, other than pursuant to the two methods
mentioned immediately above, to file a registration statement under the
Securities Act to register any of its Common Shares for public sale under the
Securities Act (including pursuant to requests of the holders of Class A
Warrants, other Class B Warrants or other Common Shares sold to the Strategic
Investors in the Direct Sales) other than on Form S-4 or Form S-8 or in certain
other circumstances including mergers or acquisitions, the holders of the Class
B Warrants and the Common Shares sold to the Strategic Investors in the Direct
Sales have the right to request the inclusion of all or a portion of the Common
Shares underlying the Class B Warrants or sold in the Direct Sales in the
registration statement, and the Company is required to use commercially
reasonable efforts to include such Common Shares in the registration statement.
The registration rights agreement entered into by the Company in connection
with the Class A Warrants provides that at any time when a registration
statement covering Common Shares sold to the Strategic Investors in the Direct
Sales and the Common Shares underlying the warrants is effective, if the Company
determines after a good faith inquiry that a sale of such Common Shares would
require disclosure of non-public material information, the disclosure of which
would have a material adverse effect on the Company, sales of such Common Shares
will be suspended until the earlier of (i) 120 days after the Company makes
notification of its good faith determination or (ii) such time as the Company
makes notification that the material information has been disclosed to the
public, or ceases to be material or that sales pursuant to the registration
statement can resume.
Each of the registration rights agreements entered into by the Company in
connection with the sales to the Strategic Investors provides that at any time
when a registration statement covering Common Shares sold to the Strategic
Investors in the Direct Sales and the Common Shares underlying the warrants is
effective, if the Company determines after a good faith inquiry that a sale of
such Common Shares would require disclosure of non-public material information,
the disclosure of which would have a material adverse effect on the Company,
sales of such Common Shares will be suspended until the earlier of (i) 20 days
after the Company makes notification of its good faith determination or (ii)
such time as the Company makes notification that the material information has
been disclosed to the public, or ceases to be material or that sales pursuant to
the registration statement can resume. The Company may not commence such a
suspension period within 90 days after the end of a prior period. In addition,
the Company will have the right on no more than two occasions in any 365-day
period to defer the filing or effectiveness of a Registration Statement relating
to any registration requested by the Strategic Investors (or their permitted
transferees) relating to an underwritten public offering for a reasonable period
of time not to exceed (1) 180 days if the Company is, at
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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) 60 days if the Company in good faith determines that any such filing
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.
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 sale of the Common Shares issuable upon
exercise of options issued under the Stock Option Plan promptly following the
first anniversary of the consummation of the Offerings. Because of the limited
number of Common Shares available for future stock option grants under the Stock
Option Plan, the Company anticipates that it may seek shareholder approval to
increase the number of Common Shares for which options may be granted under the
Stock Option Plan at the Company's first meeting of shareholders.
No prediction can be made as to the effect, if any, that future sales of
Common Shares, or the availability of Common Shares for future sale, will have
on the market price of the Common Shares prevailing from time to time. Sales of
substantial amounts of Common Shares in the public market following the
Offerings, including sales by persons holding the Common Shares sold to the
Strategic Investors or certain persons involved in the formation of the Company
or the Common Shares underlying the Class A Warrants, Class B Warrants or
options, or the perception that such sales could occur, could adversely affect
the market price of the Common Shares and may make it more difficult for the
Company to sell its equity securities in the future at a time and at a price
which it deems appropriate.
DIRECT SALES
The Company has entered into an agreement with each of the Strategic
Investors for the purchase of Common Shares and Class B Warrants as part of the
Direct Sales. PMI has agreed to purchase 2,127,659 Common Shares and Class B
Warrants to purchase an additional 300,000 Common Shares for an aggregate
purchase price of approximately $30.0 million. High Ridge and Rolaco have each
agreed to purchase 709,219 Common Shares and Class B Warrants to purchase an
additional 100,000 Common Shares for an aggregate purchase price of
approximately $10.0 million. The Third Avenue Value Fund and the Third Avenue
Small-Cap Value Fund have agreed to purchase 322,109 Common Shares and 32,500
Common Shares, respectively, and Class B Warrants to purchase an additional
45,417 Common Shares and an additional 4,583 Common Shares, respectively, for
aggregate purchase prices of approximately $4.5 million and $458,250,
respectively. The Company did not separately negotiate a price for the Common
Shares and the Class B Warrants issued to the Strategic Investors. The aggregate
purchase price to be paid by each Strategic Investor is based on a price of
$14.10 for (i) one Common Share and (ii) the right to purchase a specified
fraction of a Common Share under the Class B Warrants. The Class B Warrants will
be exercisable at $15.00 per share.
The issuance of the Common Shares and Class B Warrants in the Direct Sales
is subject to a number of conditions precedent customary in transactions of this
nature, including the accuracy of the parties' respective representations and
warranties, delivery of legal opinions and compliance with the parties'
respective covenants set forth in the securities purchase agreements. In
addition, such issuances to the Strategic Investors are further subject to the
satisfaction or waiver of the closing conditions contained in the Underwriting
Agreement with respect to the Offerings other than the condition that the sales
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 $300.0 million from the Offerings when they are consummated.
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In connection with the Direct Sales to PMI, High Ridge and the Third Avenue
Funds, the Company has agreed to nominate for election as a director of GMA two
persons selected by PMI, one person selected by High Ridge and one person
selected by the Third Avenue Funds. PMI will have such right for so long as it
owns 1,000,000 Common Shares, and will have the right to designate one nominee
for election as a director of GMA for so long as it owns 500,000 Common Shares.
High Ridge will have such right for so long as it owns 500,000 Common Shares.
The Third Avenue Funds will have such right for so long as they collectively own
250,000 Common Shares. In exchange for such right, and, for so long as any
person selected by PMI, High Ridge or the Third Avenue Funds, respectively, is a
director (and during any period after such person's designation but before his
or her election), each Strategic Investor has agreed to not vote or permit any
of the Common Shares beneficially owned by it to be voted for the election of
any director of GMA, other than the nominee(s) selected by it. Each such
Strategic Investor is permitted to assign its right to select one or more
persons to be nominated for election as a director of GMA only upon the prior
written consent of the Company, which may not be unreasonably withheld. Claude
J. Seaman and Bradley M. Shuster are serving as directors of GMA as the nominees
of PMI, James L. Zech is serving as a director of GMA as the nominee of High
Ridge, and Curtis R. Jensen is currently serving as a director of GMA as the
nominee of the Third Avenue Funds.
The Company has granted the Strategic Investors rights to require the
Company to register the Common Shares they purchase in the Direct Sales and the
Common Shares underlying the Class B Warrants issued in the Direct Sales. Such
rights become exercisable on the first anniversary of the consummation of the
Offerings. The Company has agreed not to permit the acceleration of the vesting
of such rights without the prior written consent of Merrill Lynch & Co. and
Prudential Securities on behalf of the Underwriters. See "Shares Eligible for
Future Sales" and "Underwriting."
In addition to the sales being made to the Strategic Investors, the Company
is offering by a separate prospectus up to 305,500 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 $4.3 million. All such purchases
are expected to be consummated simultaneously with the consummation of the
Offerings.
GMA has also contracted to sell 90,000 Common Shares directly to certain
individuals involved in the formation of the Company at a purchase price of
$14.10 per share, for an aggregate purchase price of approximately $1.3 million.
Such purchases of the Common Shares are subject to a number of conditions
precedent customary in transactions of this nature, including the accuracy of
the parties' respective representations and warranties and compliance with the
parties' respective covenants set forth in the purchase agreements. The
purchases are also subject to the condition that an initial public offering of
not less than 14,000,000 Common Shares shall have been consummated. All such
purchases are expected to be consummated simultaneously with the consummation of
the Offerings.
Each of the Strategic Investors and the individuals that are expected to
purchase Common Shares as part of the Direct Sales has executed an agreement
under which they have agreed that they will not, without the prior written
consent of Merrill Lynch & Co. and Prudential Securities on behalf of the
Underwriters and, in the case of certain transfers by the Strategic Investors,
the Company, directly or indirectly offer, sell, offer to sell, contract to
sell, transfer, assign, pledge, hypothecate, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, transfer, assignment, pledge, hypothecation, grant of any option to
purchase or other sale or disposition) of any Common Shares or other capital
stock of the Company or any other securities convertible into, or exercisable or
exchangeable for, any Common Shares or other capital stock of the Company for a
period of nine months after the date of this Prospectus in the case of the
Strategic Investors and one year after the date of this Prospectus in the case
of the other individuals that are expected to purchase Common Shares as part of
the Direct Sales. Merrill Lynch & Co., Prudential Securities and, in the case of
the Strategic Investors, the Company may, in their discretion at any time and
without notice, jointly release all or any portion of the securities subject to
such lock-up agreements.
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CERTAIN TAX CONSIDERATIONS
The following summary of the taxation of GMA, the Operating Company and the
Marketing Company and the taxation of GMA's shareholders is based upon current
law. Legislative, judicial or administrative changes may be forthcoming that
could affect this summary. The statements as to United States federal income tax
law set forth below represent the opinion of Drinker Biddle & Reath LLP, United
States counsel to the Company, subject to the qualifications and assumptions set
forth in such statements. The statements as to Bermuda tax law set forth below
represent the opinion of Conyers Dill & Pearman, Bermuda counsel to the Company,
subject to the qualifications and assumptions set forth in such statements. The
statements as to the Company's beliefs and intentions as to factual matters
represent the views of the Company's management and do not represent legal
opinions of its counsel.
TAXATION OF GMA, THE OPERATING COMPANY AND THE MARKETING COMPANY
Bermuda
Under current Bermuda law, there is no income tax or capital gains tax
payable by GMA, the Operating Company and the Marketing Company. GMA, the
Operating Company and the Marketing Company have each received an assurance from
the Bermuda Minister of Finance under The Exempted Undertakings Tax Protection
Act 1966 of Bermuda to the effect that if there is enacted in Bermuda any
legislation imposing tax computed on profits or income, or computed on any
capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then such tax would not be applicable to GMA, the Operating
Company or the Marketing Company or to any of their operations or the shares,
debentures or other obligations of GMA, the Operating Company or the Marketing
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 (GMA, the Operating Company and
the Marketing Company are not so currently designated) or to prevent the
application of any tax payable in accordance with the provisions of The Land Tax
Act 1967 of Bermuda or otherwise payable in relation to the property leased to
GMA, the Operating Company or the Marketing Company. GMA, the Operating Company
and the Marketing Company, under current rates, will pay annual Bermuda
government fees of approximately $15,900, $3,460 and $1,695, respectively, and
the Operating Company will pay annual insurance fees of approximately $2,500.
United States
GMA's Board of Directors has adopted operating guidelines, developed in
consultation with its United States counsel, that prescribe how GMA, the
Operating Company and the Marketing Company are to conduct their businesses in a
manner consistent with their intent not to be engaged in a trade or business
within the United States. Accordingly, GMA, and the Operating Company and the
Marketing Company do not currently plan to file United States income tax
returns. However, because definitive identification of activities that
constitute being engaged in a trade or business in the United States is not
provided by the Code or regulations or court decisions, there can be no
assurance that the IRS will not contend that GMA and/or the Operating Company
and/or the Marketing Company is engaged in a trade or business in the United
States. A foreign corporation deemed to be so engaged would be subject to United
States income tax, as well as branch profits tax, on its income that is treated
as effectively connected with the conduct of that trade or business unless the
corporation is entitled to relief under the permanent establishment provision of
a tax treaty, as discussed below. Section 842 of the Code requires that foreign
insurance companies carrying on an insurance business within the United States
have a certain minimum amount of effectively connected net investment income
even if they have no United States source investment income. Otherwise, the
income tax, if imposed, would be based on effectively connected income computed
in a manner generally analogous to that applied to the income of a domestic
corporation, except that a foreign corporation can anticipate an allowance of
deductions and credits only if it files a United States income tax return. Under
regulations, the foreign corporation would be entitled to deductions and credits
for the taxable year only if the return for that year is timely filed under
rules set forth therein. Penalties may be assessed for failure to file tax
returns. The federal income tax rates currently are a maximum of 35% for a
corporation's effectively connected income and 30%
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for branch profits tax. The branch profits tax is imposed on net income after
subtracting the regular corporate tax and making certain other adjustments.
Under the income tax convention between Bermuda and the United States (the
"Treaty"), provided that the predominant business activity of the Operating
Company is acting as an insurer or as a reinsurer of risks underwritten by other
insurance companies (together with the investing or reinvesting of assets held
in respect of insurance reserves, capital and surplus incident to the carrying
on of its insurance business), the Operating Company will be subject to United
States income tax (including branch profits tax) on any income found to be
effectively connected with a United States trade or business only if that trade
or business is conducted through a permanent establishment in the United States.
While there can be no assurance, the operating guidelines adopted by GMA's Board
of Directors and described in the preceding paragraph are similarly intended to
prescribe how the Operating Company will conduct its business without
establishing a permanent establishment in the United States. The Operating
Company would not be entitled to the benefits of the Treaty if (i) less than 50%
of the Operating Company's stock were beneficially owned, directly or
indirectly, by Bermuda residents or United States citizens or residents, or (ii)
the Operating Company's income were used in substantial part to make
disproportionate distributions to, or to meet certain liabilities to, persons
who are not Bermuda residents or United States citizens or residents. While
there can be no assurance, it is not expected that either of those factual
situations will exist after the sale of Common Shares offered hereby.
Foreign corporations not engaged in a trade or business in the United
States are nonetheless subject to United States income tax at a rate of 30% of
the gross amount of certain "fixed or determinable annual or periodical gains,
profits, and income" derived from sources within the United States as enumerated
in Section 881(a) of the Code (such as dividends and interest on certain
investments). The Operating Company will be subject to such taxes on dividends
from United States companies in which it makes portfolio investments.
The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located in
the United States. The rate of tax applicable to reinsurance premiums paid to
the Operating Company is currently 1%. The rate of tax for any premiums for
direct issuance of financial guarantees is currently 4%.
United Kingdom
Under current United Kingdom law, the measure of corporate taxation
resulting from the activities of the Marketing Company in the United Kingdom
would likely be the portion of the profits of the Marketing Company attributable
on an assumed arm's-length basis to its London branch activities. Such profit
would be measured in practice by comparison with the compensation that the
Marketing Company would need to pay to an independent entity providing the same
services as its office in the United Kingdom. The Marketing Company will seek to
enter into an agreement with the United Kingdom Inland Revenue under which an
agreed profit margin will be attributed to its office in the United Kingdom
under a stated formula for purposes of calculating the amount of tax owed in the
United Kingdom by the Marketing Company. No assurance can be given that such an
agreement will be reached and, if reached, any such agreement would be
cancellable upon reasonable notice by the Marketing Company or United Kingdom
Inland Revenue. The United Kingdom also imposes an insurance premium tax of 4%
on insurance and reinsurance premiums paid with respect to risks located in the
United Kingdom. There can be no assurance that certain financial guaranty
insurance and reinsurance that the Operating Company writes will not be subject
to such tax.
Other Countries
GMA, the Operating Company and the Marketing Company plan to operate in
such a manner that they will not generally be subject to any material taxes in
jurisdictions other than those noted above, except for withholding taxes on
certain kinds of investment income and excise or other similar premium taxes as
described above. It is possible, however, that the Operating Company or the
Marketing Company may be held to be doing business in one or more jurisdictions
and therefore subject to tax on the profits of such business beyond that
contemplated above.
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TAXATION OF SHAREHOLDERS
Bermuda Taxation
Currently, there is no Bermuda withholding tax on dividends paid by GMA or
its subsidiaries.
United States Taxation
UNITED STATES SHAREHOLDERS
General. The following discussion summarizes certain United States federal
income tax consequences relating to the acquisition, ownership and disposition
of Common Shares by a beneficial owner who is (i) a citizen or resident of the
United States, (ii) a United States domestic corporation or (iii) otherwise
subject to United States federal income taxation on a net income basis in
respect of the Common Shares. This summary deals only with Common Shares
acquired by purchasers in the Offering and held as capital assets and does not
deal with the tax consequences applicable to all categories of investors, some
of which (such as broker-dealers who hold Common Shares as part of hedging or
conversion transactions and investors whose functional currency is not the
United States dollar) may be subject to special rules. Prospective purchasers of
the Common Shares are advised to consult their own tax advisers with respect to
their particular circumstances and with respect to the effects of United States
federal, state, local or other laws to which they may be subject.
Dividends. Distributions with respect to the Common Shares will be treated
as ordinary dividend income to the extent of the Company's current or
accumulated earnings and profits as determined for United States federal income
tax purposes, subject to the discussion below relating to the potential
application of the "controlled foreign corporation" or "passive foreign
investment company" rules. Such dividends will not be eligible for the
dividends-received deduction allowed to United States corporations under Section
243 of the Code. The amount of any distribution in excess of the Company's
current and accumulated earnings and profits will first be applied to reduce the
holder's tax basis in the Common Shares, and any amount in excess of tax basis
will be treated as gain from the sale or exchange of the Common Shares.
Classification of GMA and the Operating Company as Controlled Foreign
Corporations. Under Section 951(a) of the Code, each "United States
shareholder" of a foreign corporation that is a "controlled foreign corporation"
(a "CFC") for an uninterrupted period of 30 days or more during a taxable year
who owns shares in the CFC directly or indirectly through foreign entities on
the last day during such taxable year on which the corporation is a CFC must
include in its gross income for United States federal income tax purposes his
pro-rata share of the CFC's Subpart F income, even if the Subpart F income is
not distributed. The Subpart F income includes, among other things, "insurance
income," which is generally defined as income (including premium and investment
income) attributable to the issuing (or reinsuring) of any insurance contract in
connection with risks located in, or liabilities arising out of, activities in
or lives or health of residents of a country other than the country under the
laws of which the insurance company is organized. Accordingly, it is anticipated
that substantially all of the income of the Company will be Subpart F income.
Under Section 951(b) of the Code, any United States corporation, citizen,
resident or other United States person who owns, directly or indirectly through
foreign entities, or is considered to own (by application of the rules of
constructive ownership set forth in Section 958(b) of the Code, generally
applying to family members, partnerships, estates, trusts, controlled
corporations or holders of certain options), 10% or more of the total combined
voting power of all classes of stock of the foreign corporation will be
considered to be a "United States shareholder." In general, a foreign insurance
company such as the Operating Company is treated as a CFC only if such "United
States shareholders" collectively own more than 25% of the total combined voting
power or total value of the corporation's stock. It is anticipated that PMI will
be a "United States shareholder" of GMA and its subsidiaries, due to PMI's right
to designate for nomination two of GMA's twelve board members. However, because
of the expected dispersion of GMA's share ownership following the Offerings and
the restrictions on transfer, issuance or repurchase of Common Shares, and
because GMA's Bye-Laws provide that no single shareholder other than PMI is
permitted to hold 10% or more of the total combined voting power of GMA,
shareholders of GMA other than PMI should not be viewed as United States
shareholders of a CFC for purposes of these rules. Accordingly, based on the
foregoing factual assumptions, in the opinion of
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Drinker Biddle & Reath LLP, neither GMA nor the Operating Company will be a CFC
following the Offerings. However, there can be no assurance that the IRS will
not successfully take a contrary position.
RPII Companies. Different definitions of "United States shareholder" and
"controlled foreign corporation" are applicable in the case of a foreign
corporation which earns "related person insurance income" ("RPII"). RPII is
defined in Section 953(c)(2) of the Code as any "insurance income" of a foreign
corporation attributable to policies of insurance or reinsurance with respect to
which the person (directly or indirectly) insured is a "United States
shareholder" of such corporation or a "related person" to such a shareholder. In
general, "insurance income" is income (including underwriting premium and
investment income) attributable to the issuing of any insurance or reinsurance
contract in connection with risks located in a country other than the country
under the laws of which the CFC is created or organized and which would be taxed
under the provisions of the Code relating to insurance companies if the income
were the income of a domestic insurance company.
Generally, the term "related person" for this purpose means someone who
controls or is controlled by the United States shareholder or someone who is
controlled by the same person or persons who control the United States
shareholder. "Control" is measured by either more than 50% in value or more than
50% in voting power of stock, applying constructive ownership principles similar
to the rules of Section 958 of the Code. For purposes of inclusion of the
Operating Company's RPII in the income of United States shareholders, unless an
exception applies, the term "United States shareholder" includes all United
States persons who own, directly or indirectly, any amount (rather than 10% or
more) of the Operating Company's stock. The Operating Company will be subject to
the CFC provisions for RPII purposes if such persons collectively own directly,
indirectly or constructively 25% or more of the stock of the Operating Company
by vote or value for an uninterrupted period of at least 30 days during any
taxable year. The Company anticipates that United States persons will own
directly, indirectly or constructively 25% or more of the stock of the Operating
Company by vote or value for the requisite period; accordingly, the RPII rules
of the Code will apply to the Operating Company unless one of several exceptions
(discussed below) applies to the Operating Company.
RPII Exceptions. The special RPII rules do not apply if (i) direct or
indirect insureds and persons related to such insureds, whether or not United
States persons, are treated at all times during the taxable year as owning less
than 20% of the voting power and less than 20% of the value of the stock of the
Operating Company, (ii) RPII, determined on a gross basis, is less than 20% of
the Operating Company's gross insurance income for the taxable year, (iii) the
Operating Company elects to be taxed on its RPII as if the RPII were effectively
connected with the conduct of a United States trade or business and to waive all
treaty benefits with respect to RPII or (iv) the Operating Company elects to be
treated as a United States corporation. The Operating Company does not intend to
make either of the described elections. Thus, only exceptions (i) and (ii) may
be available.
The Operating Company will not knowingly enter into any insurance or
reinsurance arrangements in which the direct or indirect insureds are, or are
"related" (as defined for purposes of the RPII provisions) to, owners of Common
Shares, except that the Operating Company may enter into reinsurance
arrangements with PMI. See "Business -- Sponsors and Strategic Investors." If
the Operating Company does enter into reinsurance arrangements with PMI, PMI
will be treated, based on its right to designate for nomination two of GMA's
twelve Board members, as owning approximately 16.7% of the voting power of the
stock of the Operating Company for purposes of the RPII provisions. Nonetheless,
GMA believes it is unlikely that the Operating Company will enter into insurance
or reinsurance arrangements in which, in the aggregate, the direct or indirect
insureds are, or are related to, owners of 20% or more of the Common Shares. If
this belief is correct, exception (i) above will apply. Moreover, the Operating
Guidelines adopted by the Company's Board of Directors limit the portion of the
Operating Company's gross insurance income attributable to insurance contracts
with PMI in any taxable year to no more than 5% or, if the Board of Directors
determines that there is no material risk that any GMA shareholder will
recognize RPII in any taxable year, to no more than 10%. Accordingly, GMA
believes it is highly unlikely that RPII for any taxable year, determined on a
gross basis, will be greater than or equal to 20% of the Operating Company's
gross insurance income for that year. If this belief is correct, exception (ii)
above will apply. On the assumption that GMA's beliefs as stated in this
paragraph are correct, in the opinion of Drinker Biddle & Reath LLP, United
States persons who own stock of
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GMA will not be taxable on RPII of the Operating Company following the
Offerings. There can be no assurance, however, that this will be the case.
Indeed, because the Operating Company's direct or indirect insureds are likely
to include the owners of publicly traded securities with respect to which the
Operating Company issues financial guaranty insurance, it may be difficult, if
not impossible, to determine with certainty whether either of these 20% tests is
or is not met as of any particular point in time. No effort will be made by GMA
or the Operating Company to identify the extent to which owners of securities
for which the Operating Company has issued financial guaranty insurance or
reinsurance are also shareholders of GMA or persons related thereto. Thus, GMA,
the Operating Company and GMA's United States shareholders may not know whether
GMA's United States shareholders are subject to the RPII rules, or how much RPII
the Operating Company has earned in any taxable year. If neither of these
exceptions were to apply, each United States person owning, directly or
indirectly, stock in GMA (and therefore, indirectly in the Operating Company) at
the end of any taxable year would generally be required to include in its gross
income for United States federal income tax purposes its share of the RPII for
the entire taxable year, determined as if such RPII were distributed
proportionately only to such United States shareholders at that date, but
limited to the Operating Company's current-year earnings and profits reduced by
the shareholder's pro-rata share, if any, of certain prior-year deficits in
earnings and profits.
Apportionment of RPII to United States Shareholders. If direct or indirect
insureds and persons related to such insureds were to own more than 20% of the
voting power or value of the Operating Company's common shares and the Operating
Company's RPII determined on a gross basis for a taxable year were to be 20% or
more of its gross insurance income, every United States person who owns directly
or indirectly Common Shares on the last day of that year would be required to
include in its gross income its share of the Operating Company's RPII for such
year, whether or not distributed. A United States person who owns Common Shares
during GMA's taxable year but not on the last day of the taxable year on which
the Operating Company is a controlled foreign corporation within the meaning of
the RPII provision of the Code, which would normally be December 31, would not
be required to include in its gross income any part of the Operating Company's
RPII. Correspondingly, a United States person who owns directly or indirectly,
Common Shares on the last day of the taxable year on which the Operating Company
is a controlled foreign corporation for purposes of those provisions would be
required to include in its income its share of the RPII for the entire year even
though such holder does not own the Common Shares for the entire year.
Uncertainty as to Application of RPII. Regulations interpreting the RPII
provisions of the Code exist only in proposed form. It is not certain whether
these regulations will be adopted in their proposed form or what changes might
ultimately be made thereto or whether any such changes, as well as any
interpretation or application of the RPII rules by the IRS, the courts or
otherwise, might have retroactive effect. The description of RPII herein is
therefore qualified. Accordingly, the meaning of the RPII provisions and the
application thereof to GMA and the Operating Company is uncertain. These
provisions include the grant of authority to the United States Treasury
Department to prescribe "such regulations as may be necessary to carry out the
purpose of this subsection including . . . regulations preventing the avoidance
of this subsection through cross insurance arrangements or otherwise." In
addition, there can be no assurance that the IRS will not challenge any
determinations by GMA or the Operating Company as to the amount, if any, of RPII
that should be includable in the income of a holder of Common Shares or that the
amounts of the RPII inclusions will not be subject to adjustment based upon
subsequent IRS examination. Each United States person who is considering an
investment in Common Shares should consult his tax advisor as to the effects of
these uncertainties.
Information Reporting. Each United States person who is a direct or
indirect shareholder of GMA on the last day of GMA's taxable year would be
required to attach to the income tax or information return such holder would
normally file for the period which includes that date a Form 5471 if the
Operating Company were a CFC for RPII purposes for any continuous thirty-day
period during its taxable year whether or not any net RPII income is required to
be reported. The Operating Company will not be considered to be a CFC for this
purpose and, therefore, Form 5471 will not be required, for any taxable year in
which (i) the Operating Company's gross RPII constitutes less than 20% of its
gross insurance income or (ii) less than 20% of the voting power or value of the
Operating Company's common shares is owned by direct or indirect insureds and
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persons related to such insureds. For any year in which GMA has information that
the Operating Company's gross RPII constitutes 20% or more of its gross
insurance income and its direct or indirect insureds and persons related to such
insureds own more than 20% of the voting power or value of the Operating
Company's common shares, GMA intends to provide Form 5471 to its direct or
indirect United States shareholders for attachment to the returns of
shareholders. However, no effort will be made by GMA or the Operating Company to
identify the extent to which owners of securities for which the Operating
Company has issued financial guaranty insurance or reinsurance are also
shareholders of GMA. Thus, GMA, the Operating Company and GMA's United States
shareholders may not know with certainty whether GMA's United States
shareholders are required to file Form 5471 with the IRS. The amounts of the
RPII inclusions may be subject to adjustment based upon subsequent IRS
examination. A tax-exempt organization would be required to 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 acquire 10% or more of the shares of GMA may have an independent obligation
to file certain information returns.
Tax-Exempt Shareholders. United States tax-exempt organizations would
generally be required to treat Subpart F insurance income, including RPII, that
is includable in income by the tax-exempt entity, as unrelated business taxable
income within the meaning of Section 512 of the Code.
Dividend; Basis; Exclusion of Dividends from Gross Income. A United States
shareholder's tax basis in his Common Shares would be increased by the amount of
any RPII that the shareholder includes in his income. The shareholder could
exclude from income the amount of any distribution by GMA to the extent of the
RPII included in such shareholder's income for the year in which the
distribution was paid or for any prior year. A shareholder's tax basis in his
Common Shares would be reduced by the amount of such distributions that are
excluded from his income. Although, in certain circumstances, a United States
shareholder might be able to exclude from his income distributions with respect
to RPII that a prior shareholder included in his income, that exclusion would
not generally be available to holders who purchase Common Shares in the public
trading markets and are therefore unable to identify the previous shareholder
and demonstrate that such shareholder had previously included the RPII in his
income.
Dispositions of Common Shares. Subject to the discussion below relating to
the potential application of Section 1248 of the Code or the passive foreign
investment company rules, a United States shareholder will, upon the sale or
exchange of any Common Shares, recognize a gain or loss for United States income
tax purposes equal to the difference between the amount realized upon such sale
or exchange and the shareholder's basis in the Common Shares. If the
shareholder's holding period for such Common Shares is more than twelve months,
any gain will be subject to tax at a current maximum marginal tax rate of 20%
for individuals and 35% for corporations.
Section 1248 of the Code provides that if a United States person disposes
of stock in a foreign corporation and such person owned directly, indirectly or
constructively 10% or more of the voting shares of the corporation at any time
during the five-year period ending on the date of disposition when the
corporation was a CFC, any gain from the sale or exchange of the shares may be
treated as ordinary income to the extent of the CFC's previously untaxed
earnings and profits during the period that the shareholder held the shares
(with certain adjustments). A 10% United States shareholder may in certain
circumstances be required to report a disposition of shares of a CFC by
attaching IRS Form 5471 to the United States income tax or information return
that the shareholder would normally file for the taxable year in which the
disposition occurs.
Section 953(c)(7) of the Code generally provides that Section 1248 will
also apply to any sale or exchange of shares in a foreign corporation that earns
RPII if the foreign corporation would be taxed as an insurance company if it
were a domestic corporation, regardless of whether the selling shareholder is or
was a 10% shareholder or whether RPII constitutes 20% or more of the
corporation's gross insurance income. Existing Treasury regulations do not
address whether Section 1248 of the Code and the requirement to file Form 5471
would apply if the foreign corporation is not a CFC but the foreign corporation
has a subsidiary that is a CFC or that would be taxed as an insurance company if
it were a domestic corporation (although, as discussed above, shareholders of
10% or more of the shares of GMA may have an independent obligation to file Form
5471).
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Section 1248 of the Code and the requirement to file Form 5471 should not
apply to dispositions of Common Shares because GMA does not intend to directly
engage in the insurance business and, under proposed regulations, these
provisions appear to be applicable only in the case of shares of corporations
that are directly engaged in the insurance business. There can be no assurance,
however, that the IRS will interpret the proposed regulations in this manner or
that the proposed regulations will not be amended or promulgated in final form
so as to provide that Section 1248 of the Code and the requirement to file Form
5471 will apply to dispositions of Common Shares. In that event, GMA would
notify shareholders that Section 1248 of the Code and the requirement to file
Form 5471 will apply to dispositions of Common Shares. Thereafter, GMA would
send a notice after the end of each calendar year to all persons who were
shareholders during the year notifying them that Section 1248 of the Code and
the requirement to file Form 5471 apply to dispositions of Common Shares. GMA
would attach to this notice a copy of Form 5471 completed with all GMA
information and instructions for completing the shareholder information.
Foreign Tax Credit. Because it is anticipated that United States persons
will own a majority of GMA's shares, only a portion of the current income
inclusions under the CFC, RPII and passive foreign investment company rules, if
any, and of dividends paid by GMA (including any gain from the sale of Common
Shares that is treated as a dividend under Section 1248 of the Code) will be
treated as foreign source income for purposes of computing a shareholder's
United States foreign tax credit limitations. GMA will consider providing
shareholders with information regarding the portion of such amounts constituting
foreign source income to the extent such information is reasonably available. It
is also likely that substantially all of the RPII and dividends that are foreign
source income will constitute either "passive" or "financial services" income
for foreign tax credit limitation purposes. Thus, it may not be possible for
most United States shareholders to utilize excess foreign tax credits to reduce
United States tax on such income.
Passive Foreign Investment Companies. Sections 1291 through 1298 of the
Code contain special rules applicable to foreign corporations that are "passive
foreign investment companies" ("PFICs"). In general, a foreign corporation will
be a PFIC if 75% or more of its income constitutes "passive income" or 50% or
more of its assets produce passive income. If GMA were to be characterized as a
PFIC, its United States shareholders would be subject to a penalty tax at the
time of their sale of, or receipt of an "excess distribution" with respect to,
their Common Shares, unless such shareholders (i) elected from the outset to be
taxed on their pro-rata share of GMA's earnings whether or not such earnings
were distributed or (ii) elected to mark their Common Shares to market as of the
end of each taxable year and to treat as ordinary income (or loss) the annual
appreciation (or depreciation) in the value of such shares. In general, a
shareholder receives an "excess distribution" if the amount of the distribution
is more than 125% of the average distribution with respect to the stock during
the three preceding taxable years (or shorter period during which the taxpayer
held the stock). In general, the penalty tax is computed by assuming that the
excess distribution or gain (in the case of a sale) with respect to the shares
was taxed in equal annual portions at the highest applicable ordinary income tax
rate throughout the holder's period of ownership, and that interest accrued on
each tax amount for each prior year from the due date of such prior year's
return. The interest charge is equal to the applicable rate imposed on
underpayments of United States federal income tax for such period.
For the above purposes, passive income is defined to include income of the
kind which would be foreign personal holding company income under Section 954(c)
of the Code, and generally includes interest, dividends, annuities and other
investment income. However, the PFIC statutory provisions contain an express
exception for income "derived in the active conduct of an insurance business by
a corporation which is predominantly engaged in an insurance business." This
exception is intended to ensure that income derived by a bona fide insurance
company is not treated as passive income, except to the extent such income is
attributable to financial reserves in excess of the reasonable needs of the
insurance business. The Operating Company expects to be exclusively engaged in
an insurance business and does not expect to have financial reserves in excess
of the reasonable needs of its insurance business. The PFIC statutory provisions
(unlike the RPII provisions of the Code) contain a look-through rule that states
that, for purposes of determining whether a foreign corporation is a PFIC, such
foreign corporation shall be treated as if it received "directly its
proportionate share of the income," and as if it "held its proportionate share
of the assets," of any other corporation in which it owns at least 25% by value
of the stock. While no explicit guidance is provided by the
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<PAGE> 98
statutory language, under the look-through rule GMA should be deemed to own the
assets and to have received the income of the Operating Company directly for
purposes of determining whether GMA qualifies for the aforementioned insurance
exception. This interpretation of the look-through rule is consistent with the
legislative intention generally to exclude bona fide insurance companies from
the application of PFIC provisions. On the assumption that the Operating Company
is exclusively engaged in an insurance business and does not have financial
reserves in excess of the reasonable needs of its insurance business, in the
opinion of Drinker Biddle & Reath LLP, neither GMA nor the Operating Company
will be a PFIC after the Offerings. There can be no assurance, however, as to
what positions the IRS or a court might take in the future on whether GMA or the
Operating Company is predominantly engaged in an insurance business and does not
have financial reserves in excess of the reasonable needs of such business.
United States persons who are considering an investment in Common Shares should
consult their tax advisors as to the effects of the PFIC rules.
Other. Information reporting to the IRS by paying agents and custodians
located in the United States will be required with respect to payments of
dividends on the Common Shares to United States persons. Thus, a holder of
Common Shares may be subject to backup withholding at the rate of 31% with
respect to dividends paid to such persons, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding and otherwise
complies with applicable requirements of the backup withholding rules. Backup
withholding is not an additional tax and may be credited against a holder's
regular federal income tax liability.
NON-UNITED STATES SHAREHOLDERS
Subject to certain exceptions, non-United States persons will be subject to
United States federal income tax on dividend distributions with respect to, and
gain realized from the sale or exchange of, Common Shares only if such dividends
or gains are effectively connected with the conduct of a trade or business
within the United States. Nonresident alien individuals will not be subject to
United States estate tax with respect to Common Shares of GMA.
* * *
The foregoing discussion is based upon current law. The tax treatment of an
owner of Common Shares, or a person treated as an owner of Common Shares for
United States federal income, state, local or non-United States tax purposes,
may vary depending on the owner's particular tax situation. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could be retroactive and could affect the tax consequences to owners of Common
Shares. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE FEDERAL, STATE, LOCAL AND NON-UNITED STATES TAX CONSEQUENCES OF OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated; Prudential Securities
Incorporated; Bear, Stearns & Co. Inc.; ING Baring Furman Selz LLC; Salomon
Smith Barney Inc.; and Warburg Dillon Read LLC are acting as representatives
(the "U.S. Representatives") of each of the Underwriters named below (the "U.S.
Underwriters"). Subject to the terms and conditions set forth in a U.S. purchase
agreement (the "U.S. Purchase Agreement") among the Company and the U.S.
Underwriters, and concurrently with the sale of Common Shares to the
International Managers (as defined below), the Company has agreed to sell to the
U.S. Underwriters, and each of the U.S. Underwriters severally and not jointly
has agreed to purchase from the Company, the number of Common Shares set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
- ---------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Prudential Securities Incorporated..........................
Bear, Stearns & Co. Inc. ...................................
ING Baring Furman Selz LLC..................................
Salomon Smith Barney Inc....................................
Warburg Dillon Read LLC.....................................
----------
Total.......................................... 17,000,000
==========
</TABLE>
GMA has also entered into an international purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International;
Prudential-Bache Securities (U.K.) Inc.; Bear, Stearns International Limited;
Baring Brothers Limited, as agent for ING Bank N.V.; Salomon Brothers
International Limited; and UBS AG, acting through its division Warburg Dillon
Read, are acting as lead managers (the "Lead Managers"). Subject to the terms
and conditions set forth in the International Purchase Agreement, and
concurrently with the sale of 17,000,000 Common Shares to the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, GMA has agreed to sell to the
International Managers, and the International Managers severally have agreed to
purchase from GMA, an aggregate of 3,000,000 Common Shares. The initial public
offering price per share and the total underwriting discount per Common Share
are identical under the U.S. Purchase Agreement and the International Purchase
Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Common Shares being sold pursuant to such
Purchase Agreement if any of the Common Shares being sold pursuant to such
Purchase Agreements are purchased. In certain circumstances under the Purchase
Agreements, the commitments of non-defaulting Underwriters may be increased. The
closings with respect to the sale of Common Shares to be purchased by the U.S.
Underwriters and the International Managers are conditioned upon one another and
upon the closing of sales to the Strategic Investors of Common Shares and
related Class B Warrants with an aggregate purchase price of at least $50.0
million.
The U.S. Representatives have advised GMA that the U.S. Underwriters
propose initially to offer the Common Shares to the public at the initial public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per Common Share.
The U.S. Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per Common Share on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
GMA has granted an option to the U.S. Underwriters, exercisable for 30 days
after the date of this Prospectus, to purchase up to an aggregate of 2,550,000
additional Common Shares at the initial public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and commissions.
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<PAGE> 100
The U.S. Underwriters may exercise this option solely to cover over-allotments,
if any, made on the sale of the Common Shares offered hereby. To the extent that
the U.S. Underwriters exercise this option, each U.S. Underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
Common Shares proportionate to such U.S. Underwriter's initial amount reflected
in the foregoing table. GMA has also granted an option to the International
Managers, exercisable for 30 days after the date of this Prospectus, to purchase
up to an aggregate of 450,000 additional Common Shares to cover over-allotments,
if any, on terms similar to those granted to the U.S. Underwriters.
At the request of GMA, the U.S. Underwriters have reserved for sale, at the
initial public offering price, up to 5% of the Common Shares offered hereby to
be sold to certain directors, officers, employees and other persons associated
with GMA or with any director, officer or employee of GMA. The number of Common
Shares available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of the Offerings
will be offered by the U.S. Underwriters to the general public on the same terms
as the other Common Shares offered by this Prospectus.
GMA, its directors and officers, the holders of the Class A Warrants and
the Strategic Investors have executed lock-up agreements pursuant to which they
have agreed, except for certain limited exceptions, that they will not directly
or indirectly, without the prior written consent of Merrill Lynch & Co. and
Prudential Securities on behalf of the Underwriters and, in addition, in the
case of certain transfers by the Strategic Investors, the prior written consent
of GMA, offer, sell, offer to sell, contract to sell, transfer, assign, pledge,
hypothecate, grant any option to purchase, or otherwise sell or dispose (or
announce any offer, sale, offer to sell, contract of sale, transfer, assignment,
pledge, hypothecation, grant of any option to purchase or other sale or
disposition) of any Common Shares or other capital stock of GMA or any other
securities convertible into, or exercisable or exchangeable for, any Common
Shares or other capital stock of GMA for a period of one year after the date of
this Prospectus or, in the case of the Strategic Investors, for a period of nine
months after the date of this Prospectus. Such agreements do not prevent GMA
from granting options so long as such options are not exercisable until one year
from the date of this Prospectus. Merrill Lynch & Co., Prudential Securities
and, in the case of the Strategic Investors, GMA may, in their discretion, at
any time and without notice, jointly release all or any portion of the
securities subject to such lock-up agreements. GMA also has agreed not to
accelerate the exercisability of the registration rights granted to the
Strategic Investors, the Class A Warrant holders and the Class B Warrant holders
and not to file any registration statement on Form S-8 with respect to, or
otherwise register for resale with the Commission, Common Shares underlying
stock options or warrants for a period of one year from the date of this
Prospectus, in each case, without the prior written consent of Merrill Lynch &
Co. and Prudential Securities on behalf of the Underwriters.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell Common
Shares to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell Common Shares will not offer to sell or sell Common Shares to persons
who are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any dealer to whom they sell Common Shares will not
offer to sell or sell Common Shares to U.S. persons or to Canadian persons or to
persons they believe intend to resell to U.S. persons or Canadian persons,
except in the case of transactions pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Common
Shares. The initial public offering price was determined by GMA and the U.S.
Representatives and the Lead Managers as an appropriate per share price in light
of the Company's desired capitalization. There can be no assurance that an
active trading market will develop for the Common Shares or that the Common
Shares will trade in the public market subsequent to the Offerings at or above
the initial public offering price.
The Operating Company has entered into an investment advisory agreement
with Merrill Lynch Asset Management, L.P., as one of the Investment Managers.
See "Business -- Investment Managers." Merrill
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<PAGE> 101
Lynch & Co., one of the Joint Lead Managers and Joint Bookrunners, and Merrill
Lynch Asset Management, L.P. are wholly owned subsidiaries of Merrill Lynch &
Co., Inc.
The Operating Company has entered into an investment advisory agreement
with The Prudential Investment Corporation, as one of the Investment Managers.
See "Business -- Investment Managers." Prudential Securities, one of the Joint
Lead Managers and Joint Bookrunners, and The Prudential Investment Corporation
are wholly owned subsidiaries of The Prudential Insurance Company of America.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Shares. As an exception to these
rules, the U.S. Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Shares. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offerings, i.e., if they sell more Common Shares than are
set forth on the cover pages of this Prospectus, the U.S. Representatives and
Lead Managers, respectively, may reduce that short position by purchasing Common
Shares in the open market. The U.S. Representatives and Lead Managers,
respectively, may also elect to reduce any short position by exercising all or
part of the over-allotment options described above.
The U.S. Representatives and Lead Managers, respectively, may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives or the Lead Managers purchase Common Shares in the
open market to reduce the Underwriters' short position or to stabilize the price
of the Common Shares, they may reclaim the amount of the selling concession from
the Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Shares to the extent that
it were to discourage resales of the Common Shares.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives or the Lead Managers will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The U.S. Underwriters and the International Managers have informed GMA that
they do not intend to confirm sales of the Common Shares offered hereby to any
accounts over which they exercise discretionary authority.
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LEGAL MATTERS
The validity of the Common Shares under Bermuda law will be passed upon for
the Company by Conyers Dill & Pearman, Hamilton, Bermuda. Certain matters as to
United States law in connection with the Offerings will be passed upon for the
Company by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania. Drinker
Biddle & Reath LLP, which serves as United States counsel to the Company, also
served as United States counsel to Inter-Atlantic Capital Partners, Inc. in
connection with the establishment of GMA and the Operating Company and
represents Inter-Atlantic Capital Partners, Inc. on an ongoing basis. William M.
Goldstein, a director of the Company, is a partner in such firm. Mr. Goldstein
will receive an option to purchase 15,000 Common Shares of the Company upon
consummation of the Offerings pursuant to the Stock Option Plan. Certain matters
as to United States law in connection with the Offerings will be passed upon for
the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1998 and August 28, 1998, and for the period from August 28, 1998 (date of
inception) to December 31, 1998, included in this Prospectus and in the
Registration Statement have been audited by KPMG Peat Marwick, independent
auditors, as indicated in their report with respect thereto, and is included
herein in reliance on the authority of said firm as experts in accounting and
auditing.
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ADDITIONAL INFORMATION
GMA has filed with the Commission a registration statement on Form S-1
(together with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act with respect to the Common Shares offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all the information set forth in the Registration Statement,
certain items of which are omitted as permitted by the rules and regulations of
the Commission. For further information with respect to GMA and the Common
Shares offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
Upon completion of the Offerings, GMA will be subject to the informational
reporting requirements of the Exchange Act and, in accordance therewith, will
file reports, proxy and information statements and other information with the
Commission. The Registration Statement, the exhibits and schedules forming a
part thereof, as well as such reports, proxy and information statements and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549-1004 and at the following regional offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the public reference section of the Commission at
its Washington address at prescribed rates. The Commission also maintains an
Internet web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers, such as GMA,
that file electronically with the Commission.
After giving effect to the Offerings, GMA will be treated as a domestic
corporation for purposes of certain requirements of the Exchange Act, including
the proxy rules. Pursuant to Rule 3b-4 under the Exchange Act, a "foreign
private issuer" is a non-United States issuer other than an issuer that meets
the following conditions: (1) more than 50% of the outstanding voting securities
of the issuer are held of record by residents of the United States and (2) any
of the following: (i) the majority of the executive officers or directors of the
issuer are United States citizens or residents, (ii) more than 50% of the assets
of the issuer are located in the United States or (iii) the business of the
issuer is administered principally in the United States. By virtue of (1) and
(2)(i), GMA does not expect that it will be a "foreign private issuer," although
there is no assurance of such. If GMA were to be treated as a "foreign private
issuer," it would be exempted from the proxy and short-swing profit rules under
Sections 14 and 16 of the Exchange Act and, for reporting purposes under the
Exchange Act, would be subject to rules applicable to "foreign private issuers."
GMA intends to furnish its shareholders with annual reports containing
financial statements audited by an independent accounting firm and quarterly
reports containing unaudited financial statements for the first three quarters
of each fiscal year.
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GLOSSARY OF SELECTED FINANCIAL GUARANTY
INSURANCE AND REINSURANCE 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 intended to
service the interest and principal payments on
the asset-backed debt obligation.
Automatic reinsurance......... Reinsurance of a specified type or category of
risk defined in a reinsurance agreement (often
called a "treaty") between a ceding company and
a reinsurer. Typically, in automatic
reinsurance the ceding company is obligated to
offer and the reinsurer is obligated to accept
a specified portion of all such type or
category of risks originally insured or
reinsured by the ceding company.
Cedent; Ceding company........ See "Reinsurance; Reinsurer."
Credit enhancement............ A form of financial guaranty whereby the credit
quality of a security is upgraded through the
use of an insurance policy or letter of credit.
Credit rating................. An alphabetic system used by major rating
agencies to categorize the creditworthiness of
an issuer of a specific obligation. A credit
rating of BBB- or Baa3 or better is considered
an investment grade rating, meaning the
securities have been analyzed and are regarded
as having adequate capacity to provide timely
payment of debt service. A credit below BBB- or
Baa3 is considered a speculative grade rating,
meaning there is a greater vulnerability to
default.
Duff & Phelps Credit Rating
Co. insurance claims-paying
ability ratings............. Duff & Phelps Credit Rating Co. insurance
claims-paying ability ratings provide a summary
opinion of an insurance company's ability to
meet its claim obligations. Duff & Phelps
Credit Rating Co. insurance claims-paying
ability ratings range from "AAA" to "DD." An
"A+" rating is assigned by Duff & Phelps Credit
Rating Co. to companies which, in its opinion,
have high claims-paying ability, average
protection factors and a variability to risk
over time due to economic and/or underwriting
conditions.
Duff & Phelps Credit Rating
Co. long-term ratings......... Duff & Phelps Credit Rating Co. long-term
ratings provide a summary opinion of an issue'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
102
<PAGE> 105
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.
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, or agreed to, on a case-by-case
basis.
Financial guaranty............ The promise to make payments to the holders of
a debt, loan or other similar financial
instrument in the event the borrower or
underlying obligor fails to do so.
Fitch IBCA international
insurance claims-paying
ability rating.............. Fitch IBCA international insurance
claims-paying ability ratings provide an
assessment of an insurance company's financial
strength and, therefore, its ability to pay
policy claims under the terms indicated. Fitch
IBCA international insurance claims-paying
ability ratings range from "AAA" to "D." Fitch
IBCA assigns an "A+" rating to insurers that
have a strong capacity to meet policyholder
obligations and provide policyholder benefits.
The impact of adverse business and economic
factors on such insurers' claims-paying
abilities is expected to be small.
Fitch IBCA international
long-term credit ratings...... Fitch IBCA credit ratings are an opinion on the
ability of an entity or of a securities issue
to meet financial commitments, such as
interest, preferred dividends, or repayments of
principal, on a timely basis. Fitch IBCA's
international long-term credit ratings range
from "AAA" to "D." Fitch IBCA assigns an "A"
rating to denote a low expectation of credit
risk and that the capacity for timely payment
of financial commitments is considered strong.
Fitch IBCA assigns a "BBB" rating to indicate
that there is currently a low expectation of
credit risk and that although the capacity for
timely payment of financial commitments is
considered adequate, adverse changes in
circumstances and in economic conditions are
more likely to impair this capacity than the
capacity of higher-rated entities or issues.
Fitch IBCA assigns a "BB" rating to indicate
that there is a possibility of credit risk
developing, particularly as the result of
adverse economic change over time; however,
business or financial alternatives may be
available to allow financial commitments to be
met.
United States generally
accepted accounting principles
("GAAP").................... United States accounting principles as set
forth in opinions of the Accounting Principles
Board of the American Institute of Certified
Public Accountants and/or statements of the
Financial Accounting Standards Board and/or
their respective successors and which are
applicable in the circumstances as of the date
in question.
Insurance in force or
exposure...................... Principal outstanding and interest to be paid
over the remaining life of a given obligation
in respect of obligations insured and reinsured
by the Company, net of refunded debt
obligations, retrocessions, redemptions and
repayments.
103
<PAGE> 106
Issuer........................ A municipality or corporation or other entity
that is the obligor on a debt or other security
issued in the capital markets.
Monoline financial guaranty
insurer....................... An insurer that only writes financial guaranty
insurance. The term "monoline financial
guaranty insurer" traditionally referred to a
writer of municipal bond insurance, but
currently includes, as well, insurers of
asset-backed securities.
Net premiums written.......... Total premiums for insurance written and
reinsurance assumed during a given period less
total premiums for insurance and reinsurance
ceded to others during such period.
Primary insurer............... An insurance company that contracts with a
customer (the insured) to provide insurance
coverage. Such primary insurer may then cede a
portion of its business to one or more
reinsurers.
Quota share reinsurance....... A term describing all forms of proportional
reinsurance in which the reinsurer receives a
pro-rata part of the premiums and pays a
pro-rata part of the losses arising in
connection with the policies reinsured
(sometimes known as "proportional" reinsurance,
"pro-rata" reinsurance or "participating"
reinsurance).
Reinsurance; Reinsurer........ An arrangement under which an insurance company
(the "reinsurer") agrees to indemnify or assume
the obligations of another insurance company
(the "ceding company" or "cedent") for all or a
portion of the insurance risks underwritten by
the ceding company.
Reserves...................... Liabilities established by insurers that
generally represent the discounted present
value of the estimated 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." An "A" rating is assigned by
Standard & Poor's to insurers which, 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.
104
<PAGE> 107
Standard & Poor's long-term
issuer credit rating.......... Standard & Poor's long-term issuer credit
rating is an opinion of an obligor's overall
financial capacity to pay its financial
obligations. Standard & Poor's long-term issuer
credit ratings range from "AAA" to "CC."
Standard & Poor's assigns an "A" rating to
obligors that have a strong capacity to meet
financial commitments, but are somewhat more
susceptible to the adverse effects of changes
in circumstances and economic conditions than
higher-rated obligors. It assigns a "BBB"
rating to obligors that have an adequate
capacity to meet financial commitments, but
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligors to meet
financial commitments. It assigns a "BB" rating
to obligors that face major ongoing
uncertainties and exposure to adverse business,
financial, or economic conditions, but are less
vulnerable in the near term than other
low-rated obligors.
Underwriting.................. The insurer's or reinsurer's process of
reviewing contracts submitted for insurance or
reinsurance coverage, deciding whether to
accept all or part of the coverage requested
and determining the applicable premiums.
Underwriting capacity......... The maximum amount of insurance that an
insurance or reinsurance company can
underwrite, which is limited by its existing
capital and surplus. Reinsurance serves to
increase an insurer's underwriting capacity by
reducing its exposure from particular risks and
thereby increasing available surplus.
Unearned premiums............. Premiums written but not yet earned, as they
are attributable to the unexpired portion of
the related insurance contract term.
105
<PAGE> 108
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of August 28 and December 31,
1998...................................................... F-3
Consolidated Statement of Operations and Accumulated Deficit
for the Period from August 28, 1998 (date of inception) to
December 31, 1998......................................... F-4
Consolidated Statement of Cash Flows for the Period from
August 28, 1998 (date of inception) to December 31,
1998...................................................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
F-1
<PAGE> 109
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Global Markets Access Ltd. (formerly GCA Ltd.)
We have audited the accompanying consolidated balance sheets of Global
Markets Access Ltd. (formerly GCA Ltd.) and subsidiaries as of December 31, 1998
and August 28, 1998 and the related consolidated statements of operations and
accumulated deficit and cash flows for the period from August 28, 1998 (date of
inception) to December 31, 1998. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Global
Markets Access Ltd. (formerly GCA Ltd.) and subsidiaries as of December 31, 1998
and August 28, 1998 and the results of their operations and their cash flows for
the period from August 28, 1998 (date of inception) to December 31, 1998, in
conformity with United States generally accepted accounting principles.
/s/ KPMG Peat Marwick
Chartered Accountants
Hamilton, Bermuda
February 26, 1999
F-2
<PAGE> 110
GLOBAL MARKETS ACCESS LTD.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
AUGUST 28, DECEMBER 31,
1998 1998
---------- ------------
<S> <C> <C>
ASSETS
Cash........................................................ $ 120,000 $ 122,256
Deferred equity offering costs.............................. -- 1,355,000
--------------- ---------
Total assets...................................... $ 120,000 $1,477,256
=============== =========
LIABILITIES
Accounts payable and accrued expenses....................... $ -- $2,205,000
--------------- ---------
Total liabilities................................. -- 2,205,000
--------------- ---------
SHAREHOLDERS' EQUITY
Preferred shares (par value $1.00; 50,000,000 shares
authorized;
no shares outstanding).................................... -- --
Common shares (par value $1.00; 100,000,000 shares
authorized;
12,000 shares outstanding)................................ 12,000 12,000
Additional paid-in capital.................................. 108,000 108,000
Accumulated deficit......................................... -- (847,744)
--------------- ---------
Total shareholders' equity (deficit).............. 120,000 (727,744)
--------------- ---------
Total liabilities and shareholders' equity.................. $ 120,000 $1,477,256
=============== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 111
GLOBAL MARKETS ACCESS LTD.
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE PERIOD FROM AUGUST 28, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
REVENUES
Interest.................................................... $ 2,256
EXPENSES
Recruiting and personnel.................................... 530,000
Professional and other fees................................. 257,000
Other....................................................... 63,000
-----------------
850,000
-----------------
Net loss for the period and accumulated deficit as of
December 31, 1998......................................... $ (847,744)
=================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 112
GLOBAL MARKETS ACCESS LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 28, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (847,744)
Adjustments to reconcile net loss to cash provided by
operating activities:
Change in:
Deferred equity offering costs.................... (1,355,000)
Accounts payable and accrued expenses............. 2,205,000
----------
Cash provided by operating activities....................... 2,256
Cash at beginning of period................................. 120,000
----------
Cash at end of period....................................... $ 122,256
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 113
GLOBAL MARKETS ACCESS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Global Markets Access Ltd. (formerly GCA Ltd.) ("GMA") was incorporated on
August 7, 1998 under the laws of Bermuda to provide financial guaranty
reinsurance and insurance. GMA will operate through its wholly-owned
subsidiaries, Global Markets Guaranty Ltd. (formerly Global Capital Access,
Ltd.) (the "Operating Company") and GMG Marketing Ltd. (the "Marketing Company"
and together with GMA and the Operating Company, the "Company"). The Operating
Company received a certificate of registration as a Class 3 insurer under the
insurance laws of Bermuda effective August 28, 1998. The Company's fiscal year
end is December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are 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 statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates. The following are the significant accounting policies adopted by the
Company.
(a) Premium Revenue Recognition
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. Deferred premium revenue and
prepaid reinsurance premiums represent the portion of premium that is applicable
to coverage of risk to be provided in the future on policies in force. When an
insured or reinsured issue is retired or defeased prior to the end of the
expected period of coverage, the remaining deferred premium revenue and prepaid
reinsurance premium, less any amount credited to a refunding issue insured by
the Company, are recognized.
(b) Losses and Loss Adjustment Expenses
The reserves for losses and loss adjustment expenses ("LAE") reflect the
Company's estimate of identified ("case basis") and unidentified ("unallocated")
losses on the obligations it has insured to the balance sheet date.
A case basis reserve for unpaid losses and LAE is recorded at the present
value of estimated loss when, in management's opinion, the likelihood of a
future loss is probable and determinable at the balance sheet date. The
estimated loss on a transaction is discounted using then-current risk-free
rates. Upon the establishment of a case basis reserve a corresponding reduction
will be made in the unallocated reserve.
The unallocated reserve is calculated by applying a loss factor to the net
outstanding exposure on the Company's insured portfolio. Such loss factor is a
measure of reasonably estimable insured losses that have been incurred as of the
balance sheet date, and is based on the historical industry loss experience, the
inherent risk characteristics of the Company's portfolio, the loss experience of
the ceding companies, and, over time, the Company's actual loss and LAE
experience.
Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the ultimate net cost of claims. The reserves are
necessary based on estimates, and there can be no assurance that the ultimate
liability will not
F-6
<PAGE> 114
GLOBAL MARKETS ACCESS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
differ from such estimates. The Company will, on an ongoing basis, monitor these
reserves and may periodically adjust such reserves based on the Company's actual
loss experience, its future mix of business and future economic conditions.
(c) Deferred Acquisition Costs
Deferred acquisition costs comprise those expenses that vary with and are
primarily related to the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium and excise taxes and
certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. Deferred acquisition costs and the cost of
acquired business are amortized over the period in which the related premiums
are earned. Recoverability of deferred acquisition costs is determined by
considering anticipated losses and loss adjustment expenses.
(d) Investments
The Company will classify its investments in fixed income and equity
securities as available for sale and, accordingly, such securities will be
carried at fair value. The cost of fixed income securities will be adjusted for
amortization of premiums and discounts. The cost of fixed income and equity
securities will be adjusted for declines in value that are considered other than
temporary.
Realized gains and losses on investments will be recognized in net income
using the specific identification method. Changes in fair values of securities
carried at fair value are reflected directly in shareholders' equity.
(e) Translation of Foreign Currencies
The Company's functional currency is the United States dollar. Premiums
written and receivable in foreign currencies will be recorded at exchange rates
prevailing on the date the contract attaches and liabilities for future benefits
payable in foreign currencies at the time such liabilities are first recorded.
Exchange gains or losses resulting from the periodic revaluation and settlement
of such assets and liabilities will be recorded in the Company's statement of
operations.
(f) Organizational Expenses
Organization expenses consist of legal, accounting and incorporation
expenses incurred in connection with the formation and organization of the
Company and include certain expense reimbursements to Inter-Atlantic Securities
Corporation ("Inter-Atlantic"). Such costs will be expensed as incurred.
Certain equity offering costs incurred in connection with the Company's
planned initial public offering (the "Offering"), including certain amounts
payable for investment banking and financial advisory services, will be deducted
from the gross proceeds of the Offering.
(g) Stock Compensation Plans
Under the Company's Initial Stock Option Plan (the "Stock Option Plan"),
awards are granted to eligible employees, directors and consultants of the
Company in the form of incentive stock options ("ISO's"), where they qualify
under the Internal Revenue Code, or non-qualified stock options ("NQSO's"). The
Company follows the intrinsic value based method of accounting for stock based
compensation as prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees." In accordance with SFAS 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.
F-7
<PAGE> 115
GLOBAL MARKETS ACCESS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Earnings per Common Share
The Company will calculate earnings per common share based upon the
guidance provided in Financial Accounting Standards Board Statement No. 128
"Earnings per Share." This statement requires the presentation of two amounts of
earnings per share when the Company has a complex capital structure. These
amounts are basic earnings per common share and earnings per common
share-assuming dilution.
Basic earnings per common share will be calculated by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period.
Diluted earnings per common share will be calculated by dividing the net
income attributable to common shareholders by the weighted average number of
common shares outstanding during the period, plus dilutive potential common
shares. Options and warrants issued by the Company will be considered dilutive
potential common shares and will be included in the calculation using the
treasury stock method.
3. AGREEMENTS WITH RELATED PARTIES
The Company has entered into an agreement with Inter-Atlantic, whereby
Inter-Atlantic has agreed to provide certain services in connection with the
Company's U.S. and international initial public offerings (the "Offerings"), the
sales to a core group of strategic investors (the "Strategic Investors") and the
development of the Company's operations, including assistance in preparing a
registration statement for the common shares, selecting underwriters in
connection with the Offerings, identifying and negotiating with potential
strategic investors and such other services as the Company or Inter-Atlantic
deems appropriate. Certain officers and directors of the Company are also
beneficial owners, directors or officers of Inter-Atlantic and/or its
affiliates.
Pursuant to such agreement, the Company has agreed to pay Inter-Atlantic a
fee of $3.6 million upon consummation of the Offerings. The Company and
Inter-Atlantic negotiated the $3.6 million fee at a level of approximately 1.0%
of the total gross proceeds to be raised by the Company upon consummation of the
Offerings and the Direct Sales. The Company believes the fee is reasonable and
customary in light of the contingent nature of the fee and the size of the sales
to Strategic Investors. In addition, the Company believes the fee is comparable
to the fee it otherwise would have paid to an unrelated third-party service
provider.
The Company has retained Insurance Consulting Services Limited ("ICS"), a
Bermuda corporation licensed as an insurance broker, to provide risk management
services and other related financial services. Pursuant to such agreement, ICS
is entitled to receive an annual fee of $425,000, which is payable in quarterly
installments commencing on the consummation of the Offerings through the fifth
anniversary of the consummation of the Offerings. ICS is in its initial stages
of development and has a limited operating history and limited experience
providing risk management and other related financial services. ICS is owned by
certain persons affiliated with Inter-Atlantic, including Frederick S. Hammer
and Robert M. Lichten who are also directors of the Company.
4. SHAREHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 50,000,000 preferred shares of par value
$1.00 each. At the balance sheet date there were no preferred shares issued or
outstanding.
Common Stock
The Company is authorized to issue 100,000,000 common shares of par value
$1.00 each. At the balance sheet date 12,000 common shares were outstanding, all
of which were held by the Global Purpose Trust (the "Purpose Trust"), a Bermuda
trust which was loaned $12,000 by ICS to acquire such shares.
F-8
<PAGE> 116
GLOBAL MARKETS ACCESS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants
In connection with its initial capitalization, the Company has issued 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 Offerings (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
"Class A Determination Amount"). The Class A Warrants were issued to American
Capital Access Holdings, L.L.C., Donald J. Matthews, Michael P. Esposito, Jr.,
Frederick S. Hammer, Robert M. Lichten, Andrew S. Lerner, William S. Ogden and
certain other founding investors. 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 Offerings. 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 Offerings and any Direct Sales minus 87,646
common shares 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 Offerings, options will be granted to
the Chief Executive Officer and other senior executives and directors of the
Company to purchase common shares. Pursuant to the Stock Option Plan, Mr. H.
Russell Fraser will receive options to acquire 100,000 common shares; and other
non-employee directors will each 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 Offerings are consummated.
The options will 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 Offerings, 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. Robert M. Lichten, the non-employee Chairman of the Board, will also be
granted options to purchase a number of common shares equal to the number of
common shares remaining under the Stock Option Plan after all of the other
directors and officers of the Company who are entitled to receive options upon
consummation of the Offerings and the Direct Sales have been granted such
options, minus 100,000 common shares. In addition, subject to certain
conditions, each non-employee director shall be granted an option to purchase
2,000 common shares at each
F-9
<PAGE> 117
GLOBAL MARKETS ACCESS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
successive annual general meeting after the consummation of the Offerings. Such
options will have an exercise price equal to the fair market value of the common
shares on the date the options are granted and will be immediately exercisable
if granted after the first anniversary of the consummation of the Offerings. If
any such options are granted prior to the first anniversary of the consummation
of the Offerings, they will not become exercisable until such anniversary. The
Stock Option Plan defines "fair market value" as: (i) the quoted closing price,
if there is a market for the common shares on a registered securities exchange
or in an over-the-counter market on the date of grant; (ii) the weighted average
of the quoted closing prices on the nearest date before and the nearest date
after the date of grant, if there are no sales on the date of grant but there
are sales on dates within a reasonable period both before and after the date of
grant; (iii) the mean between the bid and asked prices, as reported by the
National Quotation Bureau on the date of grant, if actual sales are not
available during a reasonable period beginning before and ending after the date
of grant; or (iv) another method that is authorized by the United States
Internal Revenue Code of 1986, as amended, and has been adopted by the
Compensation Committee of the Board of Directors.
In addition, directors will receive cash of $20,000 per annum plus $1,000
per board or committee meeting attended. The non-employee Chairman of the Board,
non-employee Deputy Chairman of the Board and non-employee Committee Chairmen
will receive an additional $1,000 per annum.
6. CONTINGENT LIABILITY
The Company has been threatened with litigation by an individual the
Company interviewed for a senior management position. The individual has claimed
that he left his position with his prior employer in reliance upon an offer to
be hired by the Company, which he claims to have accepted, and that he was
dismissed by the Company in a manner inconsistent with the terms of his
employment. The Company's position is that, among other things, the offer was
conditional upon the individual being approved by certain proposed investors,
and such approval was not obtained. As a consequence, the Company believes the
employment arrangement was never consummated and, on that basis, among others,
the Company has not recorded any provision for potential loss.
7. TAXATION
Under current Bermuda law neither GMA, the Operating Company nor the
Marketing Company is required to pay any taxes in Bermuda on either income or
capital gains. GMA, the Operating Company and the Marketing Company have each
received an assurance from the Bermuda Minister of Finance under The Exempted
Undertakings Tax Protection Act 1966 of Bermuda to the effect that if there is
enacted in Bermuda any legislation imposing tax computed on profits or income,
or computed on any capital asset, gain or appreciation, or any tax in the nature
of estate duty or inheritance tax, then the imposition of any such tax will not
be applicable to GMA, the Operating Company or the Marketing Company or to any
of their operations or the shares, debentures or other obligations of GMA, the
Operating Company or the Marketing Company until March 2016.
GMA, the Operating Company and the Marketing 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
and/or the Marketing Company may be held to be doing business in one or more
foreign jurisdictions and therefore subject to tax on the profits of such
business.
F-10
<PAGE> 118
GLOBAL MARKETS ACCESS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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 received from the Registrar of Companies an exception
to this requirement until the consummation of the Offerings.
GMA's ability to pay dividends depends on the ability of the Operating
Company to pay dividends to GMA. While GMA itself is not subject to any
significant legal prohibitions on the payment of dividends, the Operating
Company will be subject to Bermuda regulatory constraints which affect its
ability to pay dividends to GMA. The Operating Company will be prohibited from
declaring or paying a dividend if such payment would reduce its statutory
surplus below $1,000,000.
9. SUBSEQUENT EVENTS
On February 26, 1999, the Company entered into Securities Purchase
Agreements with five investors (the "Strategic Investors") under which the
Strategic Investors agreed to purchase an aggregate of 3,900,706 common shares
and Class B Warrants to purchase an aggregate of 550,000 common shares for an
aggregate purchase price of $55 million. The closing of these sales to the
Strategic Investors is contingent on the completion of the Offerings and is
subject to other customary closing conditions. The Company has agreed to use its
best efforts to cause to be nominated to its Board of Directors certain
individuals designated by certain of such Strategic Investors, so long as such
Strategic Investors hold certain levels of common shares. The Class B Warrants
are exercisable in equal amounts over a three year period commencing one year
after the closing of the sales to the Strategic Investors at an initial exercise
price of $15.00 per share, subject to adjustment for certain dilutive events.
The Class B Warrants expire ten years after issuance. Certain transfer
restrictions apply to the common shares purchased by the Strategic Investors or
issuable upon the exercise of the Class B Warrants.
On February 26, 1999, a Class A Warrant previously issued by the Company to
a third party was surrendered to the Company and was cancelled. On the same
date, a second Class A Warrant previously issued by the Company to a third party
was assigned in part to Messrs. Esposito, Lichter, Hammer and Lerner
(exercisable for 47,499, 32,500, 32,500, and 25,147 common shares,
respectively), and the balance was surrendered to the Company and was cancelled.
The net result of these transactions is that there remains outstanding Class A
Warrants to purchase a number of common shares equal to 12% of the Class A
Determination Amount plus 137,646.
F-11
<PAGE> 119
- ---------------------------------------------------------
- ---------------------------------------------------------
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 APRIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities under
United States Federal Securities Laws.... 3
Prospectus Summary......................... 4
Risk Factors............................... 10
Use of Proceeds............................ 25
Capitalization............................. 26
Dividend Policy............................ 27
Dilution................................... 28
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 30
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 32
Business................................... 37
Overview of the Financial Guaranty
Insurance and Reinsurance Industry....... 58
Management................................. 61
Principal Stockholders..................... 72
Certain Relationships and Related Party
Transactions............................. 74
Description of Capital Stock............... 78
Shares Eligible for Future Sale............ 85
Direct Sales............................... 87
Certain Tax Considerations................. 89
Underwriting............................... 97
Legal Matters.............................. 100
Experts.................................... 100
Additional Information..................... 101
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 102
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
20,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
Joint Lead Managers
and Joint Bookrunners
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
------------------------
BEAR, STEARNS & CO. INC.
ING BARING FURMAN SELZ LLC
SALOMON SMITH BARNEY
WARBURG DILLON READ LLC
March , 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 120
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION -- DATED MARCH 19, 1999
PROSPECTUS
20,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
------------------------
All of the 20,000,000 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby are being sold by Global Markets Access Ltd. ("GMA").
Of the 20,000,000 Common Shares offered hereby, 3,000,000 Common Shares are
being offered for sale initially outside the United States and Canada by the
International Managers (the "International Offering") and 17,000,000 Common
Shares are being offered for sale initially in a concurrent offering in the
United States and Canada by the U.S. Underwriters (the "U.S. Offering," and
together with the International Offering, the "Offerings"). The initial public
offering price and underwriting discount per Common Share will be identical for
both Offerings. The initial public offering price will be $15.00 per Common
Share. See "Underwriting." Prior to the Offerings, GMA has not conducted any
business and there has been no public market for the Common Shares.
An application has been made to have the Common Shares approved for
quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "GMAL."
In connection with the formation of GMA and the establishment of a core
group of strategic investors, The PMI Group, Inc., High Ridge Capital Partners
Limited Partnership, Rolaco Holding S.A., Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund (collectively, the "Strategic Investors") have
severally agreed to purchase for investment directly from GMA an aggregate of
3,900,706 Common Shares and Class B Warrants to purchase an aggregate of 550,000
Common Shares. Such purchases will be consummated immediately prior to the
consummation of the Offerings for an aggregate purchase price for the Common
Shares and the Class B Warrants of approximately $55.0 million. The aggregate
purchase price to be paid by each Strategic Investor is based on a price of
$14.10 for (i) one Common Share and (ii) the right to purchase a specified
fraction of a Common Share under the Class B Warrants. The exercise price for
the Class B Warrants will be $15.00 per share. The closing of the International
Offering made hereby is conditioned upon the closing of sales by GMA to the
Strategic Investors of Common Shares and related Class B Warrants with an
aggregate purchase price of at least $50.0 million.
GMA is also offering by a separate prospectus up to 305,500 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 $4.3 million. GMA has also contracted to
sell 90,000 Common Shares directly to certain individuals involved in the
formation of the Company at a purchase price of $14.10 per share, for an
aggregate purchase price of approximately $1.3 million. All such purchases are
expected to be consummated simultaneously with the consummation of the Offerings
and, together with the purchases by the Strategic Investors, are referred to in
this Prospectus as the "Direct Sales." Upon consummation of the Offerings and
the Direct Sales, the Strategic Investors, GMA's directors and officers and
certain other individuals involved in the formation of the Company are expected
to own collectively approximately 17.7% of the outstanding Common Shares. See
"Direct Sales."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except for The PMI Group, Inc. and as
otherwise described herein) generally prevent transfers to holders beneficially
owning 10% or more of the Common Shares, require divestiture of Common Shares to
reduce the beneficial ownership of any holder to less than 10% of the Common
Shares and reduce the voting power of any holder beneficially owning 10% or more
of the Common Shares to less than 10% of the total voting power of GMA's capital
stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO GMA(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share............................ $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $ (4)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) GMA has agreed to indemnify the several International Managers and the U.S.
Underwriters (collectively, the "Underwriters") against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting certain advisory fees and other expenses related to the
Offerings payable by GMA estimated to be $5,050,000. See "Use of Proceeds."
(3) GMA has granted the International Managers and the U.S. Underwriters
options, exercisable within 30 days after the date hereof, to purchase up to
450,000 and 2,550,000 additional Common Shares, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to GMA will be $ , $ and $ , respectively. See
"Underwriting."
(4) Assuming completion of all the Direct Sales, the total Proceeds to GMA will
be $ . If the Underwriters' over-allotment options described above
are exercised in full, the total Proceeds to GMA including the Direct Sales
will be $ . See "Direct Sales."
------------------------
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offers and to reject orders in whole or in part. It is expected that
delivery of the Common Shares will be made in New York, New York on or about
March , 1999.
------------------------
Joint Lead Managers and Joint Bookrunners
MERRILL LYNCH INTERNATIONAL
PRUDENTIAL-BACHE SECURITIES
------------------------
BEAR, STEARNS INTERNATIONAL LIMITED
ING BARINGS
SALOMON SMITH BARNEY INTERNATIONAL
WARBURG DILLON READ
March , 1999
<PAGE> 121
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International; Prudential-Bache Securities (U.K.) Inc.; Bear,
Stearns International Limited; Baring Brothers Limited, as agent for ING Bank
N.V.; Salomon Brothers International Limited; and UBS AG, acting through its
division Warburg Dillon Read, are acting as lead managers (the "Lead Managers")
of each of the underwriters named below (the "International Managers"). Subject
to the terms and conditions contained in the international purchase agreement
(the "International Purchase Agreement") among GMA and the International
Managers and concurrently with the sale of Common Shares to the U.S.
Underwriters (as defined below), GMA has agreed to sell to the International
Managers, and each of the International Managers severally and not jointly has
agreed to purchase from GMA, the number of Common Shares set forth opposite its
name below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
- --------------------- ---------
<S> <C>
Merrill Lynch International.................................
Prudential-Bache Securities (U.K.) Inc......................
Bear, Stearns International Limited.........................
Baring Brothers Limited, as agent for ING Bank N.V..........
Salomon Brothers International Limited......................
UBS AG, acting through its division Warburg Dillon Read.....
-------------
Total............................................. 3,000,000
=============
</TABLE>
GMA has also entered into a United States purchase agreement (the "U.S.
Purchase Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters (the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters") for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated; Prudential Securities Incorporated;
Bear, Stearns & Co. Inc.; ING Baring Furman Selz LLC; Salomon Smith Barney Inc.;
and Warburg Dillon Read LLC are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 3,000,000 Common Shares to
the International Managers, the Company has agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters severally have agreed to purchase from
the Company, an aggregate of 17,000,000 Common Shares. The initial public
offering price per share and the total underwriting discount per Common Share
are identical under the International Purchase Agreement and U.S. Purchase
Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the Common Shares being sold pursuant to such
Purchase Agreement if any of the Common Shares being sold pursuant to such
Purchase Agreements are purchased. In certain circumstances under the Purchase
Agreements, the commitments of non-defaulting Underwriters may be increased. The
closings with respect to the sale of Common Shares to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another and upon the closing of sales to the Strategic Investors of Common
Shares and related Class B Warrants with an aggregate purchase price of at least
$50.0 million.
The Lead Managers have advised GMA that the International Managers propose
initially to offer the Common Shares to the public at the initial public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per Common
Share. The International Managers may allow, and such dealers reallow, a
discount not in excess of $ per Common Share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
GMA has granted an option to the International Managers, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
450,000 additional Common Shares at the initial public offering price set forth
on the cover page of this Prospectus, less the underwriting discounts and
commissions. The International Managers may exercise this option solely to cover
over-allotments, if any, made on the sale of Common Shares offered hereby. To
the extent that the International Managers exercise this option, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional Common Shares proportionate to such
International Manager's initial amount reflected in the foregoing table. GMA has
also granted an option to the U.S. Underwriters, exercisable for 30 days after
the date of this Prospectus, to purchase up to an aggregate of 2,550,000
additional Common Shares to cover over-allotments, if any, on terms similar to
those granted to the International Managers.
97
<PAGE> 122
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
At the request of GMA, the U.S. Underwriters have reserved for sale, at the
initial public offering price, up to 5% of the shares offered hereby to be sold
to certain directors, officers, employees and other persons associated with GMA
or with any director, officer or employee of GMA. The number of Common Shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of the Offerings will be
offered by the U.S. Underwriters to the general public on the same terms as the
other shares offered by this Prospectus.
GMA, its directors and officers, the holders of the Class A Warrants and
the Strategic Investors have executed lock-up agreements pursuant to which they
have agreed, except for certain limited exceptions, that they will not directly
or indirectly, without the prior written consent of Merrill Lynch & Co. and
Prudential Securities on behalf of the Underwriters and, in addition, in the
case of certain transfers by the Strategic Investors, the prior written consent
of GMA, offer, sell, offer to sell, contract to sell, transfer, assign, pledge,
hypothecate, grant any option to purchase, or otherwise sell or dispose (or
announce any offer, sale, offer to sell, contract of sale, transfer, assignment,
pledge, hypothecation, grant of any option to purchase or other sale or
disposition) of any Common Shares or other capital stock of GMA or any other
securities convertible into, or exercisable or exchangeable for, any Common
Shares or other capital stock of GMA for a period of one year after the date of
this Prospectus or, in the case of the Strategic Investors, for a period of nine
months after the date of this Prospectus. Such agreements do not prevent GMA
from granting options so long as such options are not exercisable until one year
from the date of this Prospectus. Merrill Lynch & Co., Prudential Securities
and, in the case of the Strategic Investors, GMA may, in their discretion, at
any time and without notice, jointly release all or any portion of the
securities subject to such lock-up agreements. GMA also has agreed not to
accelerate the exercisability of the registration rights granted to the
Strategic Investors, the Class A Warrant holders and the Class B Warrant holders
and not to file any registration statement on Form S-8 with respect to, or
otherwise register for resale with the Commission, Common Shares underlying
stock options or warrants for a period of one year from the date of this
Prospectus, in each case, without the prior consent of Merrill Lynch & Co. and
Prudential Securities on behalf of the Underwriters.
The International Managers and U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell Common
Shares to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the International Managers and any dealer to
whom they sell Common Shares will not offer to sell or sell Common Shares to
U.S. persons or to Canadian persons or to persons they believe intend to resell
to U.S. or Canadian persons, and the U.S. Underwriters and any dealer to whom
they sell Common Shares will not offer to sell or sell Common Shares to persons
who are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to persons who are non-U.S. or non-Canadian persons, except in the case
of transactions pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Common
Shares. The initial public offering price was determined by GMA and the Lead
Managers and the U.S. Representatives as an appropriate per share price in light
of the Company's desired capitalization. There can be no assurance that an
active trading market will develop for the Common Shares or that the Common
Shares will trade in the public market subsequent to the Offerings at or above
the initial public offering price.
The Operating Company has entered into an investment advisory agreement
with Merrill Lynch Asset Management, L.P., as one of the Investment Managers.
See "Business -- Investment Mangers." Merrill Lynch International, one of the
Joint Lead Managers and Joint Bookrunners, and Merrill Lynch Asset Management,
L.P. are direct or indirect wholly owned subsidiaries of Merrill Lynch & Co.,
Inc.
The Operating Company has entered into an investment advisory agreement
with The Prudential Investment Corporation, as one of the Investment Managers.
See "Business -- Investment Managers." Prudential-Bache Securities (U.K.) Inc.,
one of the Joint Lead Managers and Joint Bookrunners, and The Prudential
Investment Corporation are wholly owned subsidiaries of The Prudential Insurance
Company of America.
98
<PAGE> 123
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Each of the International Managers has represented and agreed that (a) it
has not offered or sold and, prior to that date six months after the date of
this Prospectus, it will not offer or sell any Common Shares to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances which do not
constitute and will not constitute an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, (b) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Common
Shares in, from or otherwise involving the United Kingdom and (c) it has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the issue or sale of Common Shares to
a person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended, or is
a person to whom the document may otherwise lawfully be issued or passed on.
Until the distribution of the Common Shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Shares. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Shares. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offerings, i.e., if they sell more Common Shares than are
set forth on the cover pages of this Prospectus, the Lead Managers and U.S.
Representatives, respectively, may reduce that short position by purchasing
Common Shares in the open market. The Lead Managers and U.S. Representatives,
respectively, may also elect to reduce any short position by exercising all or
part of the over-allotment options described above.
The Lead Managers and U.S. Representatives, respectively, may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Lead Managers or the U.S. Representatives purchase Common Shares in the
open market to reduce the Underwriters' short position or to stabilize the price
of the Common Shares, they may reclaim the amount of the selling concession from
the Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Shares to the extent that
it were to discourage resales of the Common Shares.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the Lead
Managers or the U.S. Representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The International Managers and the U.S. Underwriters have informed GMA that
they do not intend to confirm sales of the Common Shares offered hereby to any
accounts over which they exercise discretionary authority.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the Common Shares or the
possession, circulation or distribution of this Prospectus or any other material
relating to the Company or Common Shares in any jurisdiction where action for
that purpose is required. Accordingly, the Common Shares may not be offered or
sold, directly or indirectly, and neither this Prospectus nor any other offering
material or advertisements in connection with the Common Shares may be
distributed or published, in or from any country or jurisdiction except in
compliance with any applicable rules and regulations of any such country or
jurisdiction.
Purchasers of the Common Shares offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the country
of purchase in addition to the offering price set forth on the cover page
hereof.
99
<PAGE> 124
[ALTERNATE PAGE FOR THE INTERNATIONAL PROSPECTUS]
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL APRIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities under
United States Federal Securities Laws.... 3
Prospectus Summary......................... 4
Risk Factors............................... 10
Use of Proceeds............................ 25
Capitalization............................. 26
Dividend Policy............................ 27
Dilution................................... 28
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 30
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 32
Business................................... 37
Overview of the Financial Guaranty
Insurance and Reinsurance Industry....... 58
Management................................. 61
Principal Stockholders..................... 72
Certain Relationships and Related Party
Transactions............................. 74
Description of Capital Stock............... 78
Shares Eligible for Future Sale............ 85
Direct Sales............................... 87
Certain Tax Considerations................. 89
Underwriting............................... 97
Legal Matters.............................. 100
Experts.................................... 100
Additional Information..................... 101
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 102
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
20,000,000 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
Joint Lead Managers
and Joint Bookrunners
MERRILL LYNCH INTERNATIONAL
PRUDENTIAL-BACHE SECURITIES
------------------------
BEAR, STEARNS INTERNATIONAL LIMITED
ING BARINGS
SALOMON SMITH BARNEY INTERNATIONAL
WARBURG DILLON READ
March , 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 125
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 MARCH 19, 1999
PROSPECTUS
305,500 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
------------------------
All of the 305,500 common shares, par value $1.00 per share (the "Common
Shares"), offered hereby are being sold by Global Markets Access Ltd. ("GMA").
GMA is offering such Common Shares directly to certain of its directors and
officers at a price per share equal to the initial public offering price per
share in the Offerings (as defined below), less the per share underwriting
discounts and commissions, for an aggregate purchase price if all such Common
Shares are purchased of approximately $4.3 million. GMA is also offering by
separate prospectuses up to 17,000,000 Common Shares in an offering in the
United States and Canada (the "U.S. Offering") and up to 3,000,000 Common Shares
in an offering outside the United States and Canada (the "International
Offering," and together with the U.S. Offering, the "Offerings"). This
Prospectus is identical to the prospectus used in connection with the U.S.
Offering (the "U.S. Prospectus") and the prospectus used in connection with the
International Offering (the "International Prospectus"), except for the front
and back cover pages and except that the section captioned "Plan of
Distribution" in this Prospectus is replaced with the section captioned
"Underwriting" in the U.S. Prospectus and the International Prospectus. The
offering made hereby will be consummated simultaneously with the consummation of
the Offerings. Prior to the Offerings, GMA has not conducted any business and
there has been no public market for the Common Shares.
An application has been made to have the Common Shares approved for
quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "GMAL."
In connection with the formation of GMA and the establishment of a core
group of strategic investors, The PMI Group, Inc., High Ridge Capital Partners
Limited Partnership, Rolaco Holding S.A., Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund (collectively, the "Strategic Investors") have
severally agreed to purchase for investment directly from GMA an aggregate of
3,900,706 Common Shares and Class B Warrants to purchase an aggregate of 550,000
Common Shares. Such purchases will be consummated immediately prior to the
consummation of the Offerings for an aggregate purchase price for the Common
Shares and the Class B Warrants of approximately $55.0 million. The aggregate
purchase price to be paid by each Strategic Investor is based on a price of
$14.10 for (i) one Common Share and (ii) the right to purchase a specified
fraction of a Common Share under the Class B Warrants. The exercise price for
the Class B Warrants will be $15.00 per share. GMA has also contracted to sell
90,000 Common Shares directly to certain individuals involved in the formation
of the Company at a price of $14.10 per Common Share, for an aggregate purchase
price of approximately $1.3 million. All such purchases are expected to be
consummated simultaneously with the consummation of the Offerings. The purchases
by such individuals involved in the formation of the Company and the Strategic
Investors, together with the Common Shares being offered hereby, are
collectively referred to in this Prospectus as the "Direct Sales." "See Direct
Sales."
The Common Shares offered hereby are subject to limitations on ownership,
transfers and voting rights which (except for The PMI Group, Inc. and as
otherwise described herein) generally prevent transfers to holders beneficially
owning 10% or more of the Common Shares, require divestiture of Common Shares to
reduce the beneficial ownership of any holder to less than 10% of the Common
Shares and reduce the voting power of any holder beneficially owning 10% or more
of the Common Shares to less than 10% of the total voting power of GMA's capital
stock. See "Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
March , 1999
<PAGE> 126
[ALTERNATE PAGE FOR THE DIRECT SALES PROSPECTUS]
PLAN OF DISTRIBUTION
The Company is offering directly the Common Shares offered hereby to
certain of its directors and officers at a per share price equal to the initial
public offering price per Common Share in the Offerings, less the per share
underwriting discounts and commissions. Such sales are to be consummated
simultaneously with the Offerings.
97
<PAGE> 127
[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 APRIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforceability of Civil Liabilities under
United States Federal Securities Laws.... 3
Prospectus Summary......................... 4
Risk Factors............................... 10
Use of Proceeds............................ 25
Capitalization............................. 26
Dividend Policy............................ 27
Dilution................................... 28
Unaudited Pro Forma Consolidated Balance
Sheet.................................... 30
Management's Discussion and Analysis of
Financial Condition and Plan of
Operations............................... 32
Business................................... 37
Overview of Financial Guaranty Insurance
and Reinsurance Industry................. 58
Management................................. 61
Principal Stockholders..................... 72
Certain Relationships and Related Party
Transactions............................. 74
Description of Capital Stock............... 78
Shares Eligible for Future Sale............ 85
Direct Sales............................... 87
Certain Tax Considerations................. 89
Plan of Distribution....................... 97
Legal Matters.............................. 98
Experts.................................... 98
Additional Information..................... 99
Glossary of Selected Financial Guaranty
Reinsurance and Insurance Terms.......... 100
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
305,500 SHARES
GLOBAL MARKETS ACCESS LTD.
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
March , 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 128
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 advisory
fee and 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................................................ $3,000,000
Fees and Expenses of Counsel (not including Blue Sky)....... 886,600
Printing Expenses........................................... 500,000
Reimbursement of other expenses to Inter-Atlantic Securities
Corporation............................................... 215,700
Fees and Expenses of Accountants............................ 105,000
Filing Fee -- Securities and Exchange Commission............ 102,122
Quotation Fees -- The Nasdaq National Market................ 95,000
Filing Fee -- National Association of Securities Dealers,
Inc. ..................................................... 30,500
Blue Sky Fees and Expenses.................................. 2,000
Miscellaneous Expenses...................................... 113,078
----------
Total............................................. 5,050,000
==========
</TABLE>
- ---------------
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.
The Registrant has obtained a Directors' and Officers' and Company
Reimbursement Policy bound by J&H Marsh & McLennan Inc. with Underwriters at
Lloyd's London that provides liability insurance for the Registrant's directors
and officers.
Reference is made to the form of U.S. Purchase Agreement and the form of
International Purchase Agreement filed as Exhibits 1.1 and 1.2, respectively,
hereto for provisions providing that the Underwriters are obligated, under
certain circumstances, to indemnify the directors, certain officers and the
controlling persons of the Registrant against certain liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
Reference is made to the Agreement 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> 129
Reference is made to the Registration Rights Agreements 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.
Reference is made to the Letter Agreement filed as Exhibit 10.25 hereto for
provisions providing that American Capital Access Holdings, L.L.C. and ACA
Financial Guaranty Corporation are obligated to indemnify the Registrant for
certain actions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its formation, the Registrant has issued the following securities
that were not registered under the Securities Act:
(a) On August 18, 1998, the Registrant sold 12,000 Common Shares to
the Global Purpose Trust, a Bermuda trust, for an aggregate price of
$12,000. The Registrant will repurchase these shares upon consummation of
the Offerings and such shares will be cancelled.
(b) On August 25, 1998, the Registrant sold Class A Warrants for an
aggregate price of $54,000 to Donald J. Matthews, Michael P. Esposito, Jr.,
Frederick S. Hammer, Robert M. Lichten, Andrew S. Lerner and William S.
Ogden, Jr. to purchase up to an aggregate number of Common Shares equal to
6.75% of the sum of (i) the Common Shares outstanding immediately following
the consummation of the Offerings (including the Direct Sales but excluding
any shares held by the Global Purpose Trust) and (ii) the Common Shares
issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings, except for the
Class A Warrants, the Class B Warrants and any options granted by the
Company under its Initial Stock Option Plan.
(c) On August 25, 1998, the Registrant sold Class A Warrants for an
aggregate price of $42,000 to American Capital Access Holdings, L.L.C. to
purchase up to an aggregate number of Common Shares equal to 5.25% of the
sum of (i) the Common Shares outstanding immediately following the
consummation of the Offerings (including the Direct Sales but excluding any
shares held by the Global Purpose Trust) and (ii) the Common Shares
issuable upon exercise or conversion of any security outstanding
immediately following the consummation of the Offerings, except for the
Class A Warrants, the Class B Warrants and any options granted by the
Company under its Initial Stock Option Plan.
(d) On August 25, 1998, the Registrant sold Class A Warrants for an
aggregate price of $12,000 to two institutional investors to purchase up to
an aggregate number of Common Shares equal to 1.50% of the sum of (i) the
Common Shares outstanding immediately following the consummation of the
Offerings (including the Direct Sales but excluding any shares held by the
Global Purpose Trust) and (ii) the Common Shares issuable upon exercise or
conversion of any security outstanding immediately following the
consummation of the Offerings, except for the Class A Warrants, the Class B
Warrants and any options granted by the Company under its Initial Stock
Option Plan.
(e) On February 26, 1999, the Registrant contracted to sell 2,127,659
Common Shares and Class B Warrants to purchase an additional 300,000 Common
Shares to The PMI Group, Inc. for an aggregate price of $30.0 million.
(f) On February 26, 1999, the Registrant contracted to sell 709,219
Common Shares and Class B Warrants to purchase an additional 100,000 Common
Shares to High Ridge Capital Partners Limited Partnership for an aggregate
price of $10.0 million.
(g) On February 26, 1999, the Registrant contracted to sell 709,219
Common Shares and Class B Warrants to purchase an additional 100,000 Common
Shares to Rolaco Holding S.A. for an aggregate price of $10.0 million.
(h) On February 26, 1999, the Registrant contracted to sell 322,109
Common Shares and Class B Warrants to purchase an additional 45,417 Common
Shares to Third Avenue Value Fund for an aggregate price of $4.5 million.
II-2
<PAGE> 130
(i) On February 26, 1999, the Registrant contracted to sell 32,500
Common Shares and Class B Warrants to purchase an additional 4,583 Common
Shares to Third Avenue Small Cap Value Fund for an aggregate price of
$458,250.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving a public offering. All of the foregoing securities are
deemed restricted securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
1.1* Form of U.S. Purchase Agreement and form of Letter Agreement
between the Registrant and Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
1.2* Form of International Purchase Agreement.
1.3* Form of Letter Agreement among American Capital Access
Holdings, L.L.C. and ACA Financial Guaranty Corporation, and
the U.S. Representatives of the U.S. Underwriters.
1.4* Form of Letter Agreement among American Capital Access
Holdings, L.L.C. and ACA Financial Guaranty Corporation, and
the Lead Managers of the International Managers.
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** Amended and Restated Employment Agreement, dated as of
February 26, 1999, between Donald J. Matthews and the
Registrant and the Operating Company.
10.2** Global Markets Access Ltd. Initial Stock Option Plan.
10.3** Amended and Restated Agreement, dated as of February 26,
1999, between Inter-Atlantic Securities Corporation and the
Registrant and the Operating Company.
10.4** Form of Class A Warrant Purchase Agreement.
10.5** Registration Rights Agreement, dated as of August 25, 1998,
between the Registrant and the holders of the Class A
Warrants.
10.6** Form of Securities Purchase Agreement entered into by The
PMI Group, Inc. and the Registrant, High Ridge Capital
Partners Limited Partnership and the Registrant, Rolaco
Holding S.A. and the Registrant, Third Avenue Value Fund and
the Registrant, and Third Avenue Small-Cap Value Fund and
the Registrant.
10.7** Form of Registration Rights Agreement to be entered into
between, The PMI Group, Inc. and the Registrant, High Ridge
Capital Partners Limited Partnership and the Registrant,
Rolaco Holding S.A. and the Registrant, Third Avenue Value
Fund and the Registrant, and Third Avenue Small-Cap Value
Fund and the Registrant.
10.8** Quota Share Reinsurance Treaty, dated as of November 25,
1998, between ACA Financial Guaranty Corporation and the
Operating Company.
10.9** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between ACA Financial Guaranty Corporation and the
Operating Company.
</TABLE>
II-3
<PAGE> 131
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -----------------------
<C> <S>
10.10** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between the Operating Company and ACA Financial
Guaranty Corporation.
10.11** Employment Agreement, dated as of September 1, 1998, between
Bruce W. Bantz and the Registrant and the Marketing Company.
10.12** Employment Agreement, dated as of October 15, 1998, between
Mary Jane Robertson and the Registrant and the Operating
Company.
10.13** Form of Common Share Purchase Agreement.
10.14** Agreement, dated as of November 1, 1998, between Insurance
Consulting Services Limited and the Registrant and the
Operating Company.
10.15** Employment Agreement, dated as of October 15, 1998, between
Lionel J. Marsland-Shaw and the Registrant and the Operating
Company.
10.16** Sublease Agreement, dated as of November 24, 1998, between
Annuity and Life Reassurance, Ltd. and the Registrant.
10.17** Employment Agreement, dated as of February 19, 1999, between
Matthew J. Cooleen, the Registrant and the Operating
Company.
10.18** Employment Agreement, dated as of February 24, 1999, between
James G. Jachym, the Registrant and the Operating Company.
10.19** Discretionary Investment Advisory Agreement, dated as of
November 25, 1998, between Alliance Capital Management L.P.
and the Operating Company.
10.20** Investment Management Agreement, dated as of November 25,
1998, between The Prudential Investment Corporation and the
Operating Company.
10.21** Letter Agreement, dated as of February 26, 1999, between The
PMI Group, Inc. and the Registrant.
10.22** Letter Agreement, dated as of February 26, 1999, between
High Ridge Capital Partners Limited Partnership and the
Registrant.
10.23** Letter Agreement, dated as of February 26, 1999, between
Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund and the Registrant.
10.24** Investment Advisory Contract, dated as of February 24, 1999,
between Merrill Lynch Asset Management, L.P. and the
Operating Company.
10.25* Letter Agreement, dated as of March 18, 1999, among the
Registrant, American Capital Access Holdings, L.L.C. and ACA
Financial Guaranty Corporation.
21.1** Subsidiaries of the Registrant.
23.1** Consent of Conyers Dill & Pearman (included in Exhibit 5.1).
23.2* Consent of Drinker Biddle & Reath LLP (included in Exhibit
8.2).
23.3** Consent of KPMG Peat Marwick.
24.1*** Powers of Attorney of Robert M. Lichten, Charles G. Collis,
Frederick S. Hammer, William M. Goldstein and Donald J.
Puglisi.
24.2** Powers of Attorney of Lawrence S. Doyle, Curtis R. Jensen,
Willis T. King, Jr. and Paul T. Walker.
99.1** Form F-N.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** Included on signature page to the Company's Registration Statement on Form
S-1 (333-62785) previously filed with the Securities and Exchange Commission
on September 2, 1998.
II-4
<PAGE> 132
(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-5
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the 19th day of March, 1999.
GLOBAL MARKETS ACCESS LTD.
By:/s/ DONALD J. MATTHEWS
------------------------------------
Donald J. Matthews
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DONALD J. MATTHEWS President, Chief Executive Officer and March 19, 1999
- --------------------------------------------- Director (Principal Executive Officer)
Donald J. Matthews
/s/ MARY JANE ROBERTSON Chief Financial Officer and Treasurer March 19, 1999
- --------------------------------------------- (Principal Financial and Accounting
Mary Jane Robertson Officer)
* Chairman of the Board March 19, 1999
- ---------------------------------------------
Robert M. Lichten
* Deputy Chairman of the Board March 19, 1999
- ---------------------------------------------
Frederick S. Hammer
* Director March 19, 1999
- ---------------------------------------------
Lawrence S. Doyle
Director March 19, 1999
- ---------------------------------------------
H. Russell Fraser
* Director March 19, 1999
- ---------------------------------------------
William M. Goldstein
* Director March 19, 1999
- ---------------------------------------------
Curtis R. Jensen
* Director March 19, 1999
- ---------------------------------------------
Willis T. King, Jr.
Director March 19, 1999
- ---------------------------------------------
Claude J. Seaman
</TABLE>
II-6
<PAGE> 134
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director March 19, 1999
- ---------------------------------------------
Bradley M. Shuster
* Director March 19, 1999
- ---------------------------------------------
Paul T. Walker
Director March 19, 1999
- ---------------------------------------------
James J. Zech
* Authorized Representative in the March 19, 1999
- --------------------------------------------- United States
Donald J. Puglisi
</TABLE>
* Donald J. Matthews, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and included in the signature page of the
initial filing of this Registration Statement or as an exhibit to Amendment
No. 1 of this Registration Statement or as an exhibit to Amendment No. 2 of
this Registration Statement, by signing his name hereto, does hereby sign and
execute this Registration Statement on behalf of each of the persons noted
above, in the capacities indicated, and does hereby sign and execute this
Registration Statement on his own behalf, in the capacities indicated.
/s/ DONALD J. MATTHEWS
--------------------------------------
Donald J. Matthews
II-7
<PAGE> 135
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 * Form of U.S. Purchase Agreement and form of Letter Agreement
between the Registrant and Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
1.2 * Form of International Purchase Agreement.
1.3 * Form of Letter Agreement among American Capital Access
Holdings, L.L.C. and ACA Financial Guaranty Corporation, and
the U.S. Representatives of the U.S. Underwriters.
1.4 * Form of Letter Agreement among American Capital Access
Holdings, L.L.C. and ACA Financial Guaranty Corporation, and
the Lead Managers of the International Managers.
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 ** Amended and Restated Employment Agreement, dated as of
February 26, 1999, between Donald J. Matthews and the
Registrant and the Operating Company.
10.2 ** Global Markets Access Ltd. Initial Stock Option Plan.
10.3 ** Amended and Restated Agreement, dated as of February 26,
1999, between Inter-Atlantic Securities Corporation and the
Registrant and the Operating Company.
10.4 ** Form of Class A Warrant Purchase Agreement.
10.5 ** Registration Rights Agreement, dated as of August 25, 1998,
between the Registrant and the holders of the Class A
Warrants.
10.6 ** Form of Securities Purchase Agreement entered into by The
PMI Group, Inc. and the Registrant, High Ridge Capital
Partners Limited Partnership and the Registrant, Rolaco
Holding S.A. and the Registrant, Third Avenue Value Fund and
the Registrant, and Third Avenue Small-Cap Value Fund and
the Registrant.
10.7 ** Form of Registration Rights Agreement to be entered into
between The PMI Group, Inc. and the Registrant, High Ridge
Capital Partners Limited Partnership and the Registrant,
Rolaco Holding S.A. and the Registrant, Third Avenue Value
Fund and the Registrant, and Third Avenue Small-Cap Value
Fund and the Registrant.
10.8 ** Quota Share Reinsurance Treaty, dated as of November 25,
1998, between ACA Financial Guaranty Corporation and the
Operating Company.
10.9 ** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between ACA Financial Guaranty Corporation and the
Operating Company.
10.10 ** Master Facultative Reinsurance Treaty, dated as of November
25, 1998, between the Operating Company and ACA Financial
Guaranty Corporation.
10.11 ** Employment Agreement, dated as of September 1, 1998, between
Bruce W. Bantz and the Registrant and the Marketing Company.
10.12 ** Employment Agreement, dated as of October 15, 1998, between
Mary Jane Robertson and the Registrant and the Operating
Company.
10.13 ** Form of Common Share Purchase Agreement.
</TABLE>
<PAGE> 136
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.14 ** Agreement, dated as of November 1, 1998, between Insurance
Consulting Services Limited and the Registrant and the
Operating Company.
10.15 ** Employment Agreement, dated as of October 15, 1998, between
Lionel J. Marsland-Shaw and the Registrant and the Operating
Company.
10.16 ** Sublease Agreement, dated as of November 24, 1998, between
Annuity and Life Reassurance, Ltd. and the Registrant.
10.17 ** Employment Agreement, dated as of February 19, 1999, between
Matthew J. Cooleen, the Registrant and the Operating
Company.
10.18 ** Employment Agreement, dated as of February 24, 1999, between
James G. Jachym, the Registrant and the Operating Company.
10.19 ** Discretionary Investment Advisory Agreement, dated as of
November 25, 1998, between Alliance Capital Management L.P.
and the Operating Company.
10.20 ** Investment Management Agreement, dated as of November 25,
1998, between The Prudential Investment Corporation and the
Operating Company.
10.21 ** Letter Agreement, dated as of February 26, 1999, between The
PMI Group, Inc. and the Registrant.
10.22 ** Letter Agreement, dated as of February 26, 1999, between
High Ridge Capital Partners Limited Partnership and the
Registrant.
10.23 ** Letter Agreement, dated as of February 26, 1999, between
Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund and the Registrant.
10.24 ** Investment Advisory Contract, dated as of February 24, 1999,
between Merrill Lynch Asset Management, L.P. and the
Operating Company.
10.25 * Letter Agreement, dated as of March 18, 1999, among the
Registrant, American Capital Access Holdings, L.L.C. and ACA
Financial Guaranty Corporation.
21.1 ** Subsidiaries of the Registrant.
23.1 ** Consent of Conyers Dill & Pearman (included in Exhibit 5.1).
23.2 * Consent of Drinker Biddle & Reath LLP (included in Exhibit
8.2).
23.3 ** Consent of KPMG Peat Marwick.
24.1 *** Powers of Attorney of Robert M. Lichten, Charles G. Collis,
Frederick S. Hammer, William M. Goldstein and Donald J.
Puglisi.
24.2 ** Powers of Attorney of Lawrence S. Doyle, Curtis R. Jensen,
Willis T. King, Jr. and Paul T. Walker.
99.1 ** Form F-N.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** Included on signature page to the Company's Registration Statement on Form
S-1 (333-62785) previously filed with the Securities and Exchange Commission
on September 2, 1998.
<PAGE> 1
Exhibit 1.1
GLOBAL MARKETS ACCESS LTD.
(a Bermuda corporation)
17,000,000 Common Shares
(Par Value $1.00 Per Share)
U.S. PURCHASE AGREEMENT
March __, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Prudential Securities Incorporated
as Joint Lead Managers and Joint Bookrunners
Bear, Stearns & Co. Inc.
ING Baring Furman Selz LLC
Salomon Smith Barney Inc.
Warburg Dillon Read LLC
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
250 Vesey Street
New York, NY 10281-1209
Ladies and Gentlemen:
Global Markets Access Ltd., a Bermuda corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Prudential Securities Incorporated, as
Joint Lead Managers and Joint Bookrunners, and each of the other U.S.
Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters",
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch, Prudential Securities
Incorporated, Bear, Stearns & Co. Inc., ING Baring Furman Selz LLC, Salomon
Smith Barney Inc. and Warburg Dillon Read LLC are acting as representatives (in
such capacity, the "U.S. Representatives"), with respect to the issue and sale
by the Company and the purchase by the
<PAGE> 2
U.S. Underwriters, acting severally and not jointly, of the respective numbers
of Common Shares, par value $1.00 per share, of the Company (the "Common
Shares") set forth in said Schedule A, and with respect to the grant by the
Company to the U.S. Underwriters, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part of 2,550,000
additional Common Shares to cover over-allotments, if any. The aforesaid
17,000,000 Common Shares (the "Firm U.S. Securities") to be purchased by the
U.S. Underwriters and all or any part of the 2,550,000 Common Shares subject to
the option described in Section 2(b) hereof (the "U.S. Option Securities") are
hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Underwriting Agreement")
providing for the offering by the Company of an aggregate of 3,000,000 Common
Shares (the "Firm International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International Managers")
for which Merrill Lynch International, Prudential-Bache Securities (U.K.) Inc.,
Bear, Stearns International Limited, Baring Brothers Limited, as agent for ING
Bank N.V., Salomon Brothers International Limited and UBS AG, acting through its
division Warburg Dillon Read, are acting as lead managers (the "Lead Managers")
and the grant by the Company to the International Managers, acting severally and
not jointly, of an option to purchase all or any part of the International
Managers' pro rata portion of up to 450,000 additional Common Shares solely to
cover over-allotments, if any (the "International Option Securities" and,
collectively with the U.S. Option Securities, the "Option Securities"). The Firm
International Securities and the International Option Securities are
collectively referred to herein as the "International Securities". It is
understood that the Company is not obligated to sell and the U.S. Underwriters
are not obligated to purchase, any Firm U.S. Securities unless all of the Firm
International Securities are contemporaneously purchased by the International
Managers.
The U.S. Underwriters and the International Managers are
collectively referred to herein as the "Underwriters", the Firm U.S. Securities
and the Firm International Securities are collectively referred to herein as the
"Firm Securities", and the U.S. Securities and the International Securities are
collectively referred to herein as the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch and Prudential Securities
Incorporated (in such capacity, the "Global Coordinators").
The Company understands that the U.S. Underwriters propose to make a
public offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
It is understood that the Company has agreed, immediately prior to
the issuance, offering and sale of the Securities to the Underwriters by the
Company pursuant to this Agreement and the International Underwriting Agreement,
to issue and sell directly to The PMI
2
<PAGE> 3
Group, Inc., High Ridge Capital Partners Limited Partnership, Rolaco Holding
S.A., Third Avenue Value Fund and Third Avenue Small-Cap Value Fund
(collectively, the "Strategic Investors") an aggregate of 3,900,706 Common
Shares (the "Strategic Securities") and Class B Warrants to purchase an
aggregate of 550,000 Common Shares (the "Class B Warrants") and to certain
individuals affiliated with Inter-Atlantic Capital Partners, Inc. (the
"Sponsor-Affiliated Purchasers", and collectively with the Strategic Investors,
the "Private Investors") an aggregate of 90,000 Common Shares (the
"Sponsor-Affiliated Securities", and collectively with the Strategic Securities
and the Class B Warrants, the "Private Securities") and to offer directly to
certain of its directors and officers (the "Affiliated Purchasers") an aggregate
of 305,500 Common Shares (the "Affiliated Securities", and collectively with the
Private Securities, the "Direct Securities") as described in the Prospectuses
(as hereinafter defined) or, if the Prospectuses are not in existence, the most
recent Preliminary Prospectuses (as hereinafter defined), under the caption
"Direct Sales".
Two forms of prospectus are to be used in connection with the
offering and sale of the Securities through the Underwriters: one relating to
the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the
International Securities (the "Form of International Prospectus"). The Form of
International Prospectus is identical to the Form of U.S. Prospectus, except for
the front cover and back cover pages and the information under the caption
"Underwriting". A third form of prospectus is to be used in connection with the
offering and sale of the Affiliated Securities (the "Form of Direct Sales
Prospectus"). The Form of Direct Sales Prospectus is identical to the Form of
U.S. Prospectus, except for the front cover and back cover pages and except that
the section under the caption "Underwriting" in the Form of U.S. Prospectus is
replaced by a section under the caption "Plan of Distribution" in the Form of
Direct Sales Prospectus. As used in this Agreement, the term "Original
Registration Statement" means the registration statement initially filed
relating to the Securities and the Affiliated Securities, as amended at the time
when it was or is declared effective, including all financial schedules and
exhibits thereto and including any information omitted therefrom at the time it
became effective but deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A under the
Securities Act of 1933, as amended (the "Act"), (the "Rule 430A Information") or
(b) pursuant to paragraph (d) of Rule 434 under the Act (the "Rule 434
Information") and included in the Prospectuses; the term "Rule 462(b)
Registration Statement" means any registration statement filed with the
Securities and Exchange Commission (the "Commission") pursuant to Rule 462(b)
under the Act (including the Registration Statement and any preliminary
prospectus or Prospectus incorporated therein at the time such Registration
Statement becomes effective); the term "Registration Statement" includes both
the Original Registration Statement and any Rule 462(b) Registration Statement;
the terms "U.S. Preliminary Prospectus", "International Preliminary Prospectus"
and "Direct Sales Preliminary Prospectus" (collectively, the "Preliminary
Prospectuses") mean, respectively, the Form of U.S. Prospectus, the Form of
International Prospectus and the Form of Direct Sales Prospectus contained in
Amendments No. 3 and No. 4 to the Original Registration Statement and used
before such Registration Statement became effective, and any Form of U.S.
Prospectus, Form of International Prospectus or Form of Direct Sales Prospectus
that omitted, as applicable, the Rule 430A Information or the Rule 434
Information, that was used after such effectiveness and prior to the
3
<PAGE> 4
execution and delivery of this Agreement; the terms "U.S. Prospectus",
"International Prospectus" and "Direct Sales Prospectus" (collectively, the
"Prospectuses") mean, respectively:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule 424(b)(7)
under the Act, together with the U.S. Preliminary Prospectus, the
International Preliminary Prospectus and the Direct Sales Preliminary
Prospectus identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the Form of
U.S. Prospectus, the Form of International Prospectus and the Form of
Direct Sales Prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the Form of U.S. Prospectus, the Form of International Prospectus and the
Form of Direct Sales Prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet. For purposes
of this Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus, the Direct Sales
Prospectus or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties by the Company. The
Company represents and warrants to, and agrees with, each of the several U.S.
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-62785) with
respect to the Securities, including the related Preliminary Prospectuses, has
been filed by the Company with the Commission under the Act, and amendments to
such registration statement have been so filed on October 30, 1998, December 23,
1998, March 1, 1999 and March 19, 1999. After the execution of this Agreement,
the Company will file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by the Commission to
be effective under the Act, either (A) if the Company relies on Rule 434 under
the Act, a Term Sheet relating to the Securities, that shall identify the
Preliminary Prospectuses that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act, prospectuses in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i) (A) or (i) (B)
of this sentence as have been provided to and approved by the Global
Coordinators and counsel to the U.S. Underwriters prior to the execution of this
Agreement, or (ii) if such registration statement, as it may have been amended,
has not been declared by the Commission to be effective under the Act, an
amendment
4
<PAGE> 5
to such registration statement, including the respective forms of prospectus, a
copy of which amendment has been furnished to and approved by the Global
Coordinators and counsel to the U.S. Underwriters prior to the execution of this
Agreement. The Company may also file a Rule 462(b) Registration Statement for
the purpose of registering certain additional Securities, which registration
shall be effective upon filing with the Commission.
(b) The Commission has not issued any order preventing or suspending
the use of any preliminary prospectus. When the Preliminary Prospectus was filed
with the Commission it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, including the Rule 430A Information and Rule 434
Information, it (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectuses or any Term Sheet that
is a part thereof or any amendment or supplement to the Prospectuses are filed
with the Commission pursuant to Rule 424(b) (or, if the Prospectuses or any Term
Sheet that is a part thereof or such amendment or supplement is not required to
be so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectuses was or is declared effective)
and on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectuses, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in the U.S. Preliminary Prospectus, the
Registration Statement or any amendment thereto or the U.S. Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any U.S. Underwriter through the U.S.
Representatives specifically for use therein.
Each U.S. Preliminary Prospectus, International Preliminary
Prospectus, U.S. Prospectus and International Prospectus delivered to the
Underwriters for use in connection with the offering of the Securities for sale
to the public and each Direct Sales Preliminary Prospectus and Direct Sales
Prospectus to be used in connection with the offering of the Affiliated
Securities for sale to the Affiliated Purchasers was identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
5
<PAGE> 6
(c) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (i) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(d) The issuance, offering and sale of the Private Securities to the
Private Investors and of the Company's Class A Warrants (the "Class A Warrants")
to the holders thereof (the "Class A Warrant Holders") by the Company, and the
issuance of the Common Shares issuable upon exercise of the Class A Warrants and
the Class B Warrants, in the manner described in the Registration Statement and
the Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses, were, are and will be exempt from the registration and
prospectus delivery requirements of the Act and any similar requirements under
any applicable securities, blue sky or insurance laws of any applicable
jurisdiction, subject to the accuracy of the representations made by the
purchasers thereof. Neither the Company nor any "affiliate" of the Company
within the meaning of Rule 501(b) under the Act or any person acting on behalf
of the Company or any such affiliate, directly or indirectly, (i) has made or
will make offers or sales of, or solicitations of offers to buy, the Private
Securities or the Class A Warrants (or any securities of the same or similar
respective classes) to any prospective purchaser under circumstances that would
require registration of the Private Securities or the Class A Warrants under the
Act or (ii) has engaged in any form of "general solicitation" or "general
advertising" within the meaning of Rule 502(c) under the Act with respect to the
Private Securities or the Class A Warrants.
(e) Each of the Company, Global Markets Guaranty Ltd., a Bermuda
corporation (the "Insurance Subsidiary"), and GMG Marketing Ltd., a Bermuda
corporation (the "Marketing Subsidiary", and, together with the Insurance
Subsidiary, the "Subsidiaries"), has been duly organized and is validly existing
as a corporation in good standing under the laws of Bermuda and is duly
qualified as a foreign corporation to transact business and is in good standing
under the laws of all other jurisdictions where the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or to be in good standing would not have a
material adverse effect on the Company and its Subsidiaries, taken as a whole.
(f) The Company has no subsidiaries other than the Insurance
Subsidiary and the Marketing Subsidiary.
(g) Except as disclosed in the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, each of the
Company and its Subsidiaries has full corporate power to own or lease its
properties and to conduct its business as described in the Registration
Statement and the Prospectuses or, if the Prospectuses are not in existence, the
most recent Preliminary Prospectuses; and the Company has full corporate power
to enter into
6
<PAGE> 7
this Agreement and the International Underwriting Agreement and to carry out all
the terms and provisions hereof and thereof to be carried out by it.
(h) Except as disclosed in the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, the issued
shares of capital stock of the Subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable and are owned beneficially by
the Company free and clear of any security interests, liens, encumbrances,
equities or claims.
(i) The Company has an authorized, issued and outstanding
capitalization as set forth on a historical basis in the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses. All
of the issued shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. The Firm Securities and
the Option Securities have been duly authorized and at the Firm Closing Date or
the related Option Closing Date (as the case may be), after payment therefor in
accordance herewith and with the International Underwriting Agreement, will be
validly issued, fully paid and nonassessable. The Private Securities and the
Affiliated Securities have been duly authorized and, after payment therefor in
accordance with the separate securities purchase agreements entered or
anticipated to be entered into by the Company with (i) each of the Private
Investors or (ii) each of the Affiliated Purchasers (such securities purchase
agreements, the "Direct Agreements"), will be validly issued, fully paid and
nonassessable. No holders of outstanding shares of capital stock of the Company
are entitled as such to any preemptive or other rights to subscribe for any of
the Securities or Direct Securities, and no holder of securities of the Company
has any right which has not been fully exercised or waived to require the
Company to register the offer or sale of any securities owned by such holder
under the Act in the public offering contemplated by this Agreement.
(j) The capital stock of the Company conforms to the description
thereof contained in the Prospectuses or, if the Prospectuses are not in
existence, the most recent Preliminary Prospectuses.
(k) Except as disclosed in the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, there are no
outstanding (A) securities or obligations of the Company or its Subsidiaries
convertible into or exchangeable for any capital stock of the Company or its
Subsidiaries, (B) warrants, rights or options to subscribe for or purchase from
the Company or its Subsidiaries any such capital stock or any such convertible
or exchangeable securities or obligations, or (C) obligations of the Company or
its Subsidiaries to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or options.
(l) The consolidated financial statements of the Company and its
Insurance Subsidiary included in the Registration Statement and the Prospectuses
or, if the Prospectuses are not in existence, the most recent Preliminary
Prospectuses, fairly presents the financial position of the Company and its
Insurance Subsidiary and the results of operations as of the dates and for
7
<PAGE> 8
the periods therein specified. Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein). The
unaudited pro forma consolidated balance sheet of the Company and its Insurance
Subsidiary included in the Registration Statement and the Prospectuses or, if
the Prospectuses are not in existence, the most recent Preliminary Prospectuses,
complies to the extent required in form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X and the pro
forma adjustments have been properly applied to the historical amounts in the
compilation of such balance sheet.
(m) KPMG Peat Marwick, who have certified the consolidated financial
statements of the Company and its Insurance Subsidiary and delivered their
report with respect to the audited consolidated financial statements included in
the Registration Statement and the Prospectuses or, if the Prospectuses are not
in existence, the most recent Preliminary Prospectuses, are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder.
(n) The execution and delivery of this Agreement and the
International Underwriting Agreement have been duly authorized by the Company
and this Agreement and the International Underwriting Agreement have been duly
executed and delivered by the Company, and are the valid and binding agreements
of the Company, enforceable against the Company in accordance with their terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally, and subject, as to enforceability, to public policy
or Federal or state securities law limitations on the indemnification and
contribution provisions contained herein and therein and to general principles
of equity (regardless of whether enforcement is sought in a proceeding in equity
or at law).
(o) No legal or governmental proceedings are pending to which the
Company or its Subsidiaries are parties or to which the property of the Company
or its Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectuses and are not described therein, or if
the Prospectuses are not in existence, in the most recent Preliminary
Prospectuses, and, to the best of the Company's knowledge, no such proceedings
have been threatened against the Company or its Subsidiaries or with respect to
any of their respective properties, except as described in the Registration
Statement or the Prospectuses, or if the Prospectuses are not in existence, the
most recent Preliminary Prospectuses; and no contract or other document is
required to be described in the Registration Statement or the Prospectuses or to
be filed as an exhibit to the Registration Statement that is not described
therein, or if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses, or filed as required.
(p) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and the International
Underwriting Agreement and of the Direct Securities to the Private Investors and
the Affiliated Purchasers by the Company pursuant to the Direct Agreements and
the issuance of Common Shares issuable upon the exercise of the Class A Warrants
and Class B Warrants, the compliance by the Company with the other provisions of
this Agreement, the International Underwriting Agreement, the Direct Agreements
8
<PAGE> 9
and the Class A Warrants and Class B Warrants and the consummation of the other
transactions herein and therein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the Registration
Statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement and the International
Underwriting Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or its Subsidiaries are parties or by which
the Company or its Subsidiaries or any of their respective properties are bound,
or the Memorandum of Association or Bye-Laws of the Company or its Subsidiaries,
or any statute or any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator applicable to the Company or
its Subsidiaries, except that enforcement of rights to indemnity and
contribution hereunder or thereunder may be limited by Federal or state
securities laws or principles of public policy.
(q) The Insurance Subsidiary has full corporate power to enter into
each of the Quota Share Reinsurance Treaty dated as of November 25, 1998 and the
respective Master Facultative Reinsurance Agreements each dated as of November
25, 1998 (collectively, the "Reinsurance Treaties") with ACA Financial Guaranty
Corporation ("ACA") and to carry out all the terms and provisions thereof to be
carried out by it; the execution and delivery of the Reinsurance Treaties have
been duly authorized by the Insurance Subsidiary, and the Reinsurance Treaties
have been duly executed and delivered by the Insurance Subsidiary and are the
valid and binding agreements of the Insurance Subsidiary, enforceable against
the Insurance Subsidiary in accordance with their terms, subject to any
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally, and subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law); the compliance by the Insurance Subsidiary with the provisions of the
Reinsurance Treaties and the consummation of the transactions contemplated
therein do not (i) require the Insurance Subsidiary to obtain the consent,
approval, authorization, registration or qualification of or with any
governmental authority, including without limitation, any insurance regulatory
authority of Bermuda, Maryland or New York, except such as have been obtained,
or (ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or its
Subsidiaries is a party or by which the Company or its Subsidiaries or any of
their respective properties are bound, or the Memorandum of Association or
Bye-Laws of the Company or its Subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Company or its Subsidiaries; the Reinsurance
Treaties are in full force and effect, and the Insurance Subsidiary is not in
violation of, or in default in the due performance, observance or fulfillment
of, any obligation, agreement, term, covenant or condition contained in the
Reinsurance Treaties; neither the Company nor either of its Subsidiaries has
received any notice from ACA or any of its affiliates or otherwise has any
knowledge that ACA intends not to perform its obligations under the Reinsurance
Treaties or will be unable to perform such obligations.
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(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, neither the
Company nor its Subsidiaries have sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding and there has not been any
material adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of operations of the Company or its
Subsidiaries, except in each case as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
(s) The Company has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company, except as
contemplated by this Agreement and the International Underwriting Agreement and,
in the case of clause (ii) hereof with respect to Inter-Atlantic Securities
Corporation, as described in or contemplated by the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses.
(t) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, (1) the Company
and its Subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business which is required to be disclosed in the
Prospectuses or the most recent Preliminary Prospectuses and is not so
disclosed; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
Subsidiaries, except in each case as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
(u) The Company and its Subsidiaries have good and marketable title
in fee simple to all items of real property and marketable title to all material
personal property owned by each of them, in each case free and clear of any
security interests, liens, encumbrances, equities, claims and other defects,
except such as do not materially and adversely affect the value of such property
and do not interfere in any material respect with the use made or proposed to be
made of such property by the Company or its Subsidiaries, and any real property
and buildings held under lease by the Company or its Subsidiaries are held under
valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere in any material respect with the use made or
proposed to be made of such property and buildings by the Company or its
Subsidiaries,
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in each case except as described in or contemplated by the Prospectuses or, if
the Prospectuses are not in existence, the most recent Preliminary Prospectuses.
(v) The Company's Subsidiaries are not currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on its capital stock, from repaying to the Company any
loans or advances to it from the Company or from transferring any of its
property or assets to the Company, except as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
(w) The Company and its Subsidiaries will conduct their respective
businesses in a manner that will not subject either of them to registration as
an investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and the transactions contemplated by this Agreement, the
International Underwriting Agreement, the Direct Agreements, the Class A
Warrants and the Class B Warrants will not cause the Company or either of its
Subsidiaries to become an investment company or an entity controlled by an
investment company subject to registration under the 1940 Act. The Insurance
Subsidiary is a "foreign insurance company" within the meaning of Rule 3a-6
under the 1940 Act. The Company has filed Form F-N with the Commission, and such
Form accurately sets forth all information required to be included therein and
complies in all material respects with the applicable requirements of the Act
and the rules and regulations of the Commission thereunder.
(x) Each certificate signed by any officer of the Company or its
Subsidiaries and delivered to the Global Coordinators, the U.S. Representatives
or counsel for the U.S. Underwriters shall be deemed to be a representation and
warranty by the Company to each U.S. Underwriter as to the matters covered
thereby.
(y) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) The Company has not distributed and, prior to the later of (i)
the Firm Closing Date or the Option Closing Date and (ii) the completion of the
distribution of the Securities, will not distribute any offering material in
connection with the offering and sale of the Securities other than the
Registration Statement or any amendment thereto, any preliminary
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<PAGE> 12
prospectus or the Prospectuses or any amendment or supplement thereto, or other
materials, if any, permitted by the Act.
(aa) Except as disclosed in the Prospectuses, or if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, neither the
Company nor its Subsidiaries are (i) in violation of its Memorandum of
Association or Bye-Laws or other organizational documents, (ii) in violation of
any law, ordinance, administrative or governmental rule or regulation applicable
to it or any of its properties, except where any such violation or violations in
the aggregate would not reasonably be expected to have a material adverse effect
on the condition (financial or otherwise), management, business prospects, net
worth or results of operations of the Company and its Subsidiaries, taken as a
whole, (iii) in violation of any judgment, injunction, order or decree of any
court, governmental agency or body (including, without limitation, any insurance
regulatory agency or body) or arbitrator having jurisdiction over it, except
where any such violation or violations in the aggregate would not reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of operations
of the Company and its Subsidiaries, taken as a whole. No default exists, and no
event has occurred which, with notice or lapse of time or both, would constitute
a default in the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or its Subsidiaries are parties or by which the
Company or its Subsidiaries or any of their respective properties is bound,
except where any such default or event or defaults or events in the aggregate
would not reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net worth or
results of operations of the Company and its Subsidiaries, taken as a whole.
(bb) The forms of certificate for the Securities conform to the
requirements of The Companies Act 1981 of Bermuda, and the Securities have been
approved for quotation on the Nasdaq Stock Market's National Market (the "Nasdaq
National Market"), subject to official notice of issuance.
(cc) No currency exchange control laws or withholding taxes of
Bermuda or elsewhere apply to the payment of dividends (i) on the Securities by
the Company or (ii) by the Subsidiaries to the Company, except in each case as
described in or contemplated by the Prospectuses or, if the Prospectuses are not
in existence, the most recent Preliminary Prospectuses.
(dd) The Insurance Subsidiary has been duly registered by the
Bermuda Minister of Finance as a Class 3 insurer under the Insurance Act 1978 of
Bermuda (the "Insurance Act") and is in compliance with the requirements of the
Insurance Act and any applicable rules and regulations thereunder and has filed
all statutory financial returns, reports, documents and other information
required to be filed thereunder, except where the failure to comply or to file
would not reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net worth,
or results of operations of the Company and its Subsidiaries, taken as a whole.
The Company is a holding
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<PAGE> 13
company and is not subject to Bermuda insurance regulations. The Company and its
Subsidiaries are in compliance with all other insurance laws and regulations of
the jurisdictions that apply to them, including laws that relate to companies
that control insurance companies, except where the failure to comply would not
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), management, business prospects, net worth, or results
of operations of the Company and its Subsidiaries, taken as a whole. Neither the
Company nor either of its Subsidiaries has received any notification from any
insurance authority, commission or other insurance regulatory body in Bermuda or
elsewhere to the effect that the Insurance Subsidiary is not in compliance with
any insurance law or regulation.
(ee) Each of the Company and its Subsidiaries possesses all
certificates, authorizations and permits issued by the appropriate Bermuda, U.S.
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor the Subsidiaries have
received any notice of proceedings relating to the revocation, modification or
nonrenewal of any such certificate, authorization or permit which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would reasonably be expected to result in a material adverse effect on the
condition (financial or otherwise), management, business prospects, net worth or
results of operations of the Company and the Subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses.
(ff) Neither the Company nor either of its Subsidiaries is required
to be licensed or admitted as an insurer or an insurance holding company, as
applicable, in, or to otherwise comply with the insurance laws and regulations
of, any jurisdiction other than Bermuda in order to conduct their respective
businesses as described in the Prospectuses or, if the Prospectuses are not in
existence, the most recent Preliminary Prospectuses.
(gg) No relationship, direct or indirect, exists between or among
the Company or its Subsidiaries on the one hand, and the directors, officers,
promoters, affiliates or shareholders of the Company or its Subsidiaries on the
other hand, that is required to be described in the Registration Statement or
the Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses, which is not so described.
(hh) None of the Underwriters or any purchaser from the Underwriters
of the Securities (other than purchasers resident in Bermuda for Bermuda
exchange control purposes) will be subject to any stamp duty, excise or similar
tax imposed in Bermuda solely as a consequence of the offering, sale or purchase
of the Securities.
(ii) To the knowledge of the Company and its Subsidiaries, no change
in any insurance law or regulation is pending that would reasonably be expected
to have, individually or in the aggregate, a material adverse effect on the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company and its Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectuses or, if the Prospectuses are not
in existence, the most recent Preliminary Prospectuses.
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(jj) Each of the Company and its Subsidiaries has received from the
Bermuda Minister of Finance an assurance under The Exempted Undertakings Tax
Protection Act 1966 of Bermuda to the effect set forth in the Prospectuses or,
if the Prospectuses are not in existence, the most recent Preliminary
Prospectuses, under the caption "Certain Tax Considerations--Taxation of GMA,
the Operating Company and the Marketing Company--Bermuda."
(kk) The Company has duly and irrevocably appointed CT Corporation
System, 1633 Broadway, New York, New York, as its agent to receive service of
process with respect to actions arising out of or in connection with violations
of United States federal securities laws relating to offers and sales of the
Securities.
(ll) The Bermuda Monetary Authority has designated the Company and
its Subsidiaries as nonresident for exchange control purposes and has granted
permission for the issue and transfer of the Securities. The Company and its
Subsidiaries are "exempted companies" under Bermuda law and have not (i)
acquired and do not hold any land in Bermuda, other than 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) taken
mortgages on land in Bermuda to secure an amount in excess of $50,000 without
the consent of the Bermuda Minister of Finance, (iii) acquired any bonds or
debentures secured by any land in Bermuda (other than certain types of Bermuda
government securities), or (iv) conducted their businesses in a manner that is
prohibited for "exempted companies" under Bermuda law. Neither the Company nor
its Subsidiaries have received notification from the Bermuda Monetary Authority
or any other Bermuda governmental authority of proceedings relating to the
modification or revocation of its designation as nonresident for exchange
control purposes, its permission to issue and transfer the Securities, or its
status as an "exempted company".
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing. (a) On
the basis of the representations, warranties, agreements and covenants herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to each of the U.S. Underwriters, and each of the U.S.
Underwriters, severally and not jointly, agrees to purchase from the Company, at
a purchase price of $____ per share, the number of Firm U.S. Securities set
forth opposite the name of such U.S. Underwriter in Schedule A hereto. One or
more certificates in definitive form for the Firm U.S. Securities that the
several U.S. Underwriters have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the U.S.
Representatives request upon written notice to the Company at least 48 hours
prior to the Firm Closing Date, shall be delivered by or on behalf of the
Company to the U.S. Representatives for the respective accounts of the U.S.
Underwriters, against payment by or on behalf of the U.S. Underwriters of the
purchase price therefor by wire transfer in same-day funds (the "Wired Funds")
to the account of the Company. Such delivery of and payment for the Firm U.S.
Securities shall be made at the offices of Cleary, Gottlieb, Steen & Hamilton,
One Liberty Plaza, New York, New York, at 9:00 A.M., New York time, on March __,
1999, or at such other place, time or date as the Global Coordinators and the
Company may agree upon or as the U.S. Representatives may determine pursuant to
Section 10 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date". The Company
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will make such certificate or certificates for the Firm U.S. Securities
available for checking and packaging by the U.S. Representatives at the offices
in New York, New York of the Company's transfer agent or registrar or of Merrill
Lynch at least 24 hours prior to the Firm Closing Date.
(b) For the purpose solely of covering any over-allotments in
connection with the distribution and sale of the Firm U.S. Securities as
contemplated by the U.S. Prospectus, the Company hereby grants to the several
U.S. Underwriters an option to purchase, severally and not jointly, the U.S.
Option Securities. The purchase price to be paid for any U.S. Option Securities
shall be the same price per share as the price per share for the Firm U.S.
Securities set forth above in paragraph (a) of this Section 2. The option
granted hereby may be exercised as to all or any part of the U.S. Option
Securities from time to time within thirty (30) days after the date of the U.S.
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The U.S. Underwriters shall not be under any obligation to purchase
any of the U.S. Option Securities prior to the exercise of such option. The
Global Coordinators may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the Company
setting forth the aggregate number of U.S. Option Securities as to which the
several U.S. Underwriters are then exercising the option and the date and time
for delivery of and payment for such U.S. Option Securities. Any such date of
delivery shall be determined by the Global Coordinators but shall not be earlier
than two business days or later than five business days after such exercise of
the option and, in any event, shall not be earlier than the Firm Closing Date.
The time and date set forth in such notice, or such other time or such other
date as the Global Coordinators and the Company may agree upon or as the U.S.
Representatives may determine pursuant to Section 10 hereof, is herein called
the "Option Closing Date" with respect to such U.S. Option Securities. Subject
to the terms and conditions herein set forth, upon exercise of the option as
provided herein, the Company shall become obligated to sell to each of the
several U.S. Underwriters, and each of the U.S. Underwriters, severally and not
jointly, shall become obligated to purchase from the Company, the same
percentage of the total number of the U.S. Option Securities as to which the
several U.S. Underwriters are then exercising the option as such U.S.
Underwriter is obligated to purchase of the aggregate number of Firm U.S.
Securities, as adjusted by the Global Coordinators in such manner as deemed
advisable to avoid fractional shares. If the option is exercised as to all or
any portion of the U.S. Option Securities, one or more certificates in
definitive form for such U.S. Option Securities, and payment therefor, shall be
delivered on the related Option Closing Date in the manner, and upon the terms
and conditions, set forth in paragraph (a) of this Section 2, except that
reference therein to the Firm U.S. Securities and the Firm Closing Date shall be
deemed, for purposes of this paragraph (b), to refer to such U.S. Option
Securities and Option Closing Date, respectively.
(c) The Company hereby acknowledges that the wire transfer by or on
behalf of the U.S. Underwriters of the purchase price for any of the U.S.
Securities does not constitute closing of a purchase and sale of the U.S.
Securities. Only execution and delivery of a receipt for the U.S. Securities by
the U.S. Underwriters indicates completion of the closing of a purchase of the
U.S. Securities from the Company. Furthermore, in the event that the U.S.
Underwriters wire funds to the Company prior to the completion of the closing of
a purchase of the U.S. Securities,
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the Company hereby acknowledges that until the U.S. Underwriters execute and
deliver a receipt for the U.S. Securities, by facsimile or otherwise, the
Company will not be entitled to the Wired Funds and shall return the Wired Funds
to the U.S. Underwriters as soon as practicable (by wire transfer of same-day
funds) upon demand. In the event that the closing of a purchase of the U.S.
Securities is not completed and the Wired Funds are not returned by the Company
to the U.S. Underwriters on the same day the Wired Funds were received by the
Company, the Company agrees to pay to the U.S. Underwriters in respect of each
day the Wired Funds are not returned by it, in same-day funds, interest on the
amount of such Wired Funds in an amount representing the U.S. Underwriters' cost
of financing as reasonably determined by Merrill Lynch.
(d) It is understood that each U.S. Underwriter has authorized the
U.S. Representatives, for its account, to accept delivery of, receipt for, and
make payment of the purchase price for, the Firm U.S. Securities and the U.S.
Option Securities, if any, which it has agreed to purchase. No such payment
shall relieve such U.S. Underwriter or U.S. Underwriters from any of its or
their obligations hereunder.
SECTION 3. Covenants of the Company. The Company covenants and
agrees with each of the U.S. Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement and the
International Underwriting Agreement, and any amendments thereto to become
effective as promptly as possible. If required, the Company will file the
Prospectuses or any Term Sheet that constitutes a part thereof and any amendment
or supplement thereto with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Act. During any time when a
prospectus relating to the Securities is required to be delivered under the Act,
the Company (i) will comply with all requirements imposed upon it by the Act and
the rules and regulations of the Commission thereunder to the extent necessary
to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions of this Agreement and the International
Underwriting Agreement and of the Prospectuses, as then amended or supplemented,
and (ii) will not file with the Commission the Prospectuses, Term Sheet or the
amendment referred to in the second sentence of Section 1(a) hereof, any
amendment or supplement to such Prospectuses, Term Sheet or any amendment to the
Registration Statement or any Rule 462(b) Registration Statement of which the
Global Coordinators previously have been advised and furnished with a copy for a
reasonable period of time prior to the proposed filing and as to which filing
the Global Coordinators or counsel for the U.S. Underwriters shall not have
given their consent (which consent will not be unreasonably withheld or
delayed). The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon the reasonable
request by the Global Coordinators or counsel for the U.S. Underwriters, any
amendments to the Registration Statement or amendments or supplements to the
Prospectuses that may be necessary or advisable in connection with the
distribution of the Securities by the several Underwriters, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Global Coordinators, promptly after receiving notice thereof, of the
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<PAGE> 17
time when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectuses or any amendment or supplement thereto
has been filed and will provide evidence satisfactory to the Global Coordinators
of each such filing or effectiveness.
(b) The Company will advise the Global Coordinators, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
preliminary prospectus or the Prospectuses or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for offering
or sale in any jurisdiction, (iii) the institution, threatening or contemplation
of any proceeding for any such purpose or (iv) any request made by the
Commission for amending the Original Registration Statement or any Rule 462(b)
Registration Statement, for amending or supplementing the Prospectuses or for
additional information. The Company will use its best efforts to prevent the
issuance of any such stop order and, if any such stop order is issued, to obtain
the withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the insurance and securities or blue sky laws of
such jurisdictions as the Global Coordinators may designate and will continue
such qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectuses, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectuses to comply with the Act or the
rules or regulations of the Commission thereunder, the Company will promptly
notify the Global Coordinators thereof and, subject to Section 3(a) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectuses
that corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the U.S.
Representatives and to counsel for the U.S. Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) (ii) to each other
U.S. Underwriter, a conformed copy of such registration statement or any Rule
462(b) Registration Statement and each amendment thereto (in each case without
exhibits thereto) and (iii) so long as a prospectus relating to the Securities
is required to be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectuses or any amendment or supplement thereto as the
U.S. Representatives may reasonably request; without limiting the application of
clause (iii) of this sentence, the Company, not later than (A)
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6:00 P.M., New York City time, on the date of determination of the public
offering price, if such determination occurred at or prior to 10:00 A.M., New
York City time, on such date or (B) 2:00 P.M., New York City time, on the
business day following the date of determination of the public offering price,
if such determination occurred after 10:00 A.M., New York City time, on such
date, will deliver to the U.S. Underwriters, without charge, as many copies of
the Prospectuses and any amendment or supplement thereto as the U.S.
Representatives may reasonably request for purposes of confirming orders that
are expected to settle on the Firm Closing Date. The copies of the Registration
Statement and each amendment thereto and the U.S. Preliminary Prospectuses, U.S.
Prospectuses and any amendments or supplements thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(f) The Company, as soon as practicable, will make generally
available to its securityholders and to the U.S. Representatives a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under the caption "Use of Proceeds" in the Prospectuses.
The Company and the Subsidiaries will comply with their respective operating,
investment and underwriting guidelines, as each are in effect from time to time.
(h) The Company will not, directly or indirectly, without the prior
written consent of Merrill Lynch and Prudential Securities Incorporated, on
behalf of the U.S. Underwriters, 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 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 hereof, except (i) pursuant to this Agreement and the
International Underwriting Agreement, (ii) pursuant to the Direct Agreements and
(iii) the issuance of options pursuant to the Global Markets Access Ltd. Initial
Stock Option Plan as may be amended from time to time, which options shall not
be exercisable until one year after the date hereof, except as otherwise
provided in such plan as of the date hereof upon the occurrence of certain
events. The Company will not accelerate the exercisability of the registration
rights granted to the Strategic Investors, the Class A Warrant Holders and the
Class B Warrant Holders and will not file any registration statement on Form S-8
with respect to, or otherwise register for resale with the Commission, the
Private Securities or the Common Shares underlying any options or warrants,
including, without limitation, the Class A Warrants or the Class B Warrants,
issued by the Company for a period of one year from the date hereof, in each
case, without the prior written consent of Merrill Lynch and Prudential
Securities Incorporated on behalf of the U.S. Underwriters.
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(i) The Company will not, directly or indirectly, (i) take any
action designed to cause or to result in, or which would reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or (ii) (A) sell,
bid for, purchase, or pay anyone any compensation for soliciting purchases of,
the Securities or (B) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company, except as
contemplated by this Agreement and the International Underwriting Agreement and,
in the case of clause (ii) hereof with respect to Inter-Atlantic Securities
Corporation, as described in or contemplated by the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses.
(j) The Company will obtain the agreements described in Section 5(h)
and Section 5(i) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company or its
Subsidiaries shall occur as a result of which in your reasonable opinion the
market price of the Common Shares has been or is likely to be materially
affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectuses), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (i) 10:00 P.M., Eastern time, on the
date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq National Market subject to official notice of issuance
prior to the Firm Closing Date. The Company will use its best efforts to ensure
that the Securities remain included for quotation on the Nasdaq National Market
or listed on a nationally recognized stock exchange for at least the first two
fiscal years following the Firm Closing Date.
SECTION 4. Payment of Expenses. The Company will pay all costs and
expenses incident to the performance of its obligations under this Agreement,
whether or not the transactions contemplated herein are consummated or this
Agreement is terminated pursuant to Section 9 hereof, including all costs and
expenses incident to (i) the printing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Rule 462(b) Registration Statement, any preliminary prospectus and
the Prospectuses and any amendment or supplement thereto, this Agreement and any
blue sky memoranda, (ii) all
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<PAGE> 20
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees and
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters and the
transfer of the Securities between the U.S. Underwriters and the International
Managers, (v) the qualification of the Securities under state or foreign
insurance or securities and blue sky laws, including filing fees and reasonable
fees and disbursements of counsel for the Underwriters relating thereto, (vi)
the filing fees of the Commission and the National Association of Securities
Dealers, Inc. (the "NASD") relating to the Securities, (vii) any quotation of
the Securities on the Nasdaq National Market, (viii) any meetings with
prospective investors in the Securities (other than as shall have been
specifically approved by the Global Coordinators to be paid for by the
Underwriters) and (ix) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Global Coordinators
to be paid for by the Underwriters). If the sale of the U.S. Securities provided
for herein is not consummated because any condition to the obligations of the
U.S. Underwriters set forth in Section 5 hereof is not satisfied, because this
Agreement is terminated pursuant to Section 9 hereof or because of any failure,
refusal or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder other
than by reason of a default by any of the U.S. Underwriters, the Company will
reimburse the U.S. Underwriters severally upon demand for all reasonable
out-of-pocket expenses (including counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale of
the U.S. Securities. The Company shall not in any event be liable to any of the
U.S. Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
SECTION 5. Conditions of the U.S. Underwriters' Obligations. The
obligations of the several U.S. Underwriters to purchase and pay for the Firm
U.S. Securities shall be subject, in the U.S. Representatives' sole discretion,
to the accuracy of the representations and warranties of the Company contained
herein as of the date hereof and as of the Firm Closing Date, as if made on and
as of the Firm Closing Date, to the accuracy of the statements of the Company's
officers made pursuant to the provisions hereof, to the performance by the
Company of its covenants and agreements hereunder and to the following
additional conditions:
(a) If the Original Registration Statement, as amended through the
Firm Closing Date, has not been declared effective as of the time of execution
hereof, the Registration Statement, as amended, and, if the Company has elected
to rely upon Rule 462(b), the Rule 462(b) Registration Statement, shall have
been declared effective not later than the earlier of (i) 11:00 A.M., New York
time, on the date on which the amendment to the registration statement
originally filed with respect to the Securities or to the Rule 462(b)
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Global Coordinators;
if required, the Prospectuses
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<PAGE> 21
and any amendment or supplement thereto shall have been filed with the
Commission, or shall have been filed at such later time and date as shall have
been consented to by the Global Coordinators; if required, the Prospectuses or
any Term Sheet that constitutes a part thereof and any amendment or supplement
thereto shall have been filed with the Commission in the manner and within the
time period required by Rules 434 and 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the Global
Coordinators, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectuses or otherwise).
(b) The U.S. Representatives shall have received an opinion, dated
the Firm Closing Date, of Drinker Biddle & Reath LLP, United States counsel for
the Company, substantially to the effect that:
(i) this Agreement and the International Underwriting Agreement have
been duly executed and delivered by the Company;
(ii) the form of certificates for the Securities conforms to the
requirements of the Nasdaq National Market;
(iii) all of the issued shares of capital stock of the Company have
been issued in compliance with all applicable United States federal
securities laws; and, to the best knowledge of such counsel, no
holders of securities of the Company are entitled to have such
securities registered under the Registration Statement;
(iv) the statements set forth in the Prospectuses under the
headings, "Risk Factors--Income Tax Risks", "Risk Factors--Shares
Eligible for Future Sale", "Management's Discussion and Analysis of
Financial Condition and Plan of Operations--Taxation",
"Business--Legal Proceedings", "Shares Eligible for Future Sale",
"Certain Tax Considerations--Taxation of GMA, the Operating Company
and the Marketing Company--United States" and "Certain Tax
Considerations--Taxation of Shareholders--United States Taxation",
insofar as such statements constitute a summary of provisions of
United States federal law and the legal or governmental proceedings
referred to therein, provide a fair summary of such legal matters
and proceedings;
(v) to the best knowledge of such counsel, (A) no legal or
governmental proceedings are pending in the United States to which
the Company or its Subsidiaries are parties or to which the property
of the Company or its Subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectuses and
are not described therein, and no such proceedings have been
threatened against the Company or its Subsidiaries or with respect
to any of their respective properties and (B) no contract or other
document
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<PAGE> 22
is required to be described in the Registration Statement or the
Prospectuses or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required;
(vi) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and the
International Underwriting Agreement and of the Direct Securities to
the Private Investors and the Affiliated Purchasers by the Company
pursuant to the Direct Agreements and the issuance of Common Shares
issuable upon the exercise of the Class A Warrants and Class B
Warrants, the compliance by the Company with the other provisions of
this Agreement, the International Underwriting Agreement, the Direct
Agreements and the Class A Warrants and Class B Warrants and the
consummation of the other transactions herein and therein
contemplated, and the compliance by the Insurance Subsidiary with
the provisions of the Reinsurance Treaties and the consummation of
the transactions contemplated therein do not (A) require the
consent, approval, authorization, registration or qualification of
or with any United States or Pennsylvania governmental authority,
except such as have been obtained, or (B) conflict with or result in
a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument, known to such counsel, to
which the Company or its Subsidiaries is a party or by which the
Company or its Subsidiaries or any of their respective properties
are bound, or any United States or Pennsylvania statute or any
judgment, decree, order, rule or regulation of any United States or
Pennsylvania court or other United States or Pennsylvania
governmental authority or any arbitrator known to such counsel and
applicable to the Company or its Subsidiaries, except that
enforcement of rights to indemnity and contribution thereunder may
be limited by Federal or state securities laws or principles of
public policy;
(vii) the Original Registration Statement, any Rule 462(b)
Registration Statement and the Prospectuses, each as of their
respective effective or issue dates (in each case, other than the
financial statements and the notes thereto and the schedules and
other financial information contained therein or omitted therefrom,
as to which such counsel need express no opinion), comply as to form
in all material respects with the applicable requirements of the Act
and the rules and regulations of the Commission thereunder;
(viii) no registration of the Private Securities or the Class A
Warrants under the Act is required for the offer and sale of the
Private Securities to the Private Investors or of the Class A
Warrants to the Class A Warrant Holders by the Company, in the
manner described in the Registration Statement and the Prospectuses;
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<PAGE> 23
(ix) neither the Company nor either of its Subsidiaries is required
to be licensed or admitted as an insurer or an insurance holding
company, as applicable, in the Commonwealth of Pennsylvania in order
to conduct their respective businesses as described in the
Prospectuses;
(x) no authorization of, and no filing with or notice to, any
governmental or regulatory authority of the Commonwealth of
Pennsylvania or the United States federal government, or any
self-regulatory organization or any court or other tribunal of the
Commonwealth of Pennsylvania or the United States federal government
is required by either the Company or the Subsidiaries to own, lease,
license and operate its properties or to conduct its business as
described in the Prospectuses;
(xi) each of the Company and its Subsidiaries has, to the fullest
extent permitted by law, validly and irrevocably submitted to the
jurisdiction of any federal or state court sitting in the City of
New York and waived any objections that it may have to the laying of
venue of any such suit, action or proceeding brought in any such
court based on or arising under this Agreement or any claims that
any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum, and has validly appointed CT
Corporation System as its authorized agent to receive service of
process in any such suit, action or proceeding; and the choice of
the law of New York as the governing law of this Agreement would be
recognized by a Pennsylvania court as a valid and effective choice
of law;
(xii) neither the Company nor its Subsidiaries are, nor will the
transactions contemplated by this Agreement or the International
Underwriting Agreement cause either the Company or its Subsidiaries
to be required to register as an investment company under the 1940
Act or to be controlled by an investment company subject to such
registration; the Insurance Subsidiary is a "foreign insurance
company" within the meaning of Rule 3a-6 under the 1940 Act, and the
conduct of the respective businesses of the Company and its
Subsidiaries as described in the Prospectuses will qualify the
Insurance Subsidiary as a "foreign insurance company" within the
meaning of such Rule; Form F-N has been filed with the Commission,
and such Form to the best of such counsel's knowledge accurately
sets forth all information required to be included therein and
complies as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the
Commission thereunder; and
(xiii) to the best knowledge of such counsel, no relationship,
direct or indirect, exists between or among the Company or its
Subsidiaries on the one hand, and the directors, officers,
promoters, affiliates or shareholders of the Company or its
Subsidiaries on the other hand, that is required to be described in
the Registration Statement or the Prospectuses which is not so
described.
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<PAGE> 24
Such counsel shall also state that, based solely upon a telephone
conversation with a member of the staff of the Commission, the Registration
Statement has become effective under the Act and no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued and no proceedings for that purpose are pending before or, to the best
knowledge of such counsel, are threatened or are contemplated by the Commission.
Such counsel shall also state that it has been notified that the
Securities have been included for trading on the Nasdaq National Market subject
to official notice of issuance.
Such counsel shall also state that any required filing of the
Prospectuses, or any Term Sheet that constitutes a part thereof, pursuant to
Rules 424(b) and 434 has been made in the manner and within the time periods
required by such Rules.
Such counsel shall also state that it has participated in the
preparation of the Registration Statement and the Prospectuses and in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company,
representatives of Conyers Dill & Pearman, Bermuda and Cayman Islands counsel
for the Company, representatives of Clifford Chance, United Kingdom counsel for
the Company, representatives of Crills Advocates, Jersey counsel for the
Company, and your representatives and your counsel at which the contents of the
Registration Statement, the Prospectuses and related matters were discussed and,
although such counsel has not passed upon or assumed any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectuses, and although such counsel has not
undertaken to verify independently the accuracy or completeness of the
statements in the Registration Statement and the Prospectuses and, therefore,
would not necessarily have become aware of any material misstatement of fact or
omission to state a material fact, on the basis of and subject to the foregoing,
such counsel does not believe that either the Registration Statement or the
Prospectuses (other than the financial statements and the notes or the schedules
thereto and other financial information and supplemental schedules included
therein or omitted therefrom, as to which such counsel need not express any
opinion) contained as of its date or contains as of the date of such opinion any
untrue statement of a material fact or omitted as of its date or omits as of the
date of such opinion to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deem proper, on the accuracy of the
representations and warranties made by the parties to this Agreement, the
International Underwriting Agreement and the Direct Agreements, certificates of
responsible officers of the Company and public officials and statements made to
such counsel in discussions with responsible officers of the Company.
References to the Registration Statement and the Prospectuses in
this paragraph (b) shall include any amendment or supplement thereto at the date
of such opinion.
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<PAGE> 25
(c) The U.S. Representatives shall have received an opinion, dated
the Firm Closing Date, of Conyers Dill & Pearman, Bermuda and Cayman Islands
counsel for the Company, substantially to the effect that:
(i) the Company and its Subsidiaries have been duly incorporated,
are validly existing and in good standing (meaning that they have
not failed to make any filing with any Bermuda governmental
authority or to pay any Bermuda government fee or tax which might
make them liable to be struck off the Register of Companies and
thereby cease to exist under the laws of Bermuda) under the laws of
Bermuda;
(ii) the Company has the necessary corporate power and authority,
pursuant to its Memorandum of Association, to own and hold the
issued shares in the Subsidiaries; the Insurance Subsidiary has the
necessary corporate power and authority, pursuant to its Memorandum
of Association, to carry on insurance and reinsurance business as
described in the Prospectuses, was registered as an insurer in terms
of the Insurance Act of 1978, effective August 28, 1998, and is
authorized to carry on business in that capacity as described in the
Prospectuses, subject to the provisions of the Insurance Act of 1978
and the regulations promulgated thereunder, and to the conditions
set out in Schedule I to the Certificate of Registration, issued by
the Bermuda Registrar of Companies to the Insurance Subsidiary,
dated October 5, 1998, a copy of which, together with the said
Schedule I, shall be attached to such counsel's opinion;
(iii) the authorized share capital of the Insurance Subsidiary
established under its Memorandum of Association is U.S.$120,000,
divided into 120,000 shares, par value U.S.$1.00 per share; based
solely on the review of the Register of Members, the Insurance
Subsidiary has issued 120,000 shares, par value U.S.$1.00 per share,
to the Company and all such shares have been duly authorized and
validly issued, are fully paid and nonassessable (meaning that no
further sums are payable with respect to the holding of shares now
or in the future) and are registered in the name of the Company; the
authorized share capital of the Marketing Subsidiary established
under its Memorandum of Association is U.S.$_____, divided into
_____ shares, par value U.S.$[1.00] per share; based solely on the
review of the Register of Members, the Marketing Subsidiary has
issued _____ shares, par value U.S.$[1.00] per share, to the Company
and all such shares have been duly authorized and validly issued,
are fully paid and nonassessable (meaning that no further sums are
payable with respect to the holding of shares now or in the future)
and are registered in the name of the Company;
(iv) the authorized share capital of the Company established under
its Memorandum of Association is U.S.$150,000,000, divided into
100,000,000 Common Shares, par value U.S.$1.00 per share, and
50,000,000 Preferred Shares, par value U.S.$1.00 per share; without
giving effect to the issuance of Common
25
<PAGE> 26
Shares contemplated by this Agreement, the International
Underwriting Agreement and the Direct Agreements and based solely on
the review of the Register of Members, the Company has issued 12,000
Common Shares, par value U.S.$1.00 per share, to Pembroke Company
Limited as nominee for Codan Trust Company Limited as trustee of the
Global Purpose Trust and all such Common Shares have been duly
authorized and validly issued, and are fully paid and nonassessable
(meaning that no further sums are payable with respect to the
holding of such Common Shares now or in the future);
(v) the Company has the necessary corporate power and authority to
enter into and perform its obligations under this Agreement, the
International Underwriting Agreement, the Direct Agreements, the
Class A Warrants and the Class B Warrants and to issue the
Securities, the Direct Securities and the Class A Warrants; the
execution and delivery of this Agreement, the International
Underwriting Agreement, the Direct Agreements, the Class A Warrants
and the Class B Warrants by the Company, and the performance of its
obligations thereunder, do not violate, and are not subject to
preemptive rights under, the Company's Memorandum of Association or
Bye-Laws or any applicable law, regulation, order or decree in
Bermuda;
(vi) the Company has taken all corporate action required to
authorize its execution, delivery and performance of this Agreement,
the International Underwriting Agreement, the Direct Agreements, the
Class A Warrants and the Class B Warrants; this Agreement, the
International Underwriting Agreement, the Direct Agreements, the
Class A Warrants and the Class B Warrants have been duly executed
and delivered by or on behalf of the Company and constitute the
valid and binding obligations of the Company in accordance with the
terms thereof;
(vii) the Securities and Direct Securities have been duly
authorized, and upon issue and payment for the Securities and Direct
Securities in accordance with this Agreement, the International
Underwriting Agreement and the Direct Agreements, as applicable, and
registration in the Register of Members of the Company, the
Securities and Direct Securities will be validly issued, fully paid
and nonassessable (meaning that no further sums are payable with
respect to the holding of such Securities or Direct Securities now
or in the future); upon issuance and payment for the Common Shares
issued pursuant to the Class A Warrants and the Class B Warrants,
such Common Shares will be validly issued, fully paid and
nonassessable (meaning that no further sums are payable with respect
to the holding of such Common Shares now or in the future); the
holders of Common Shares, including the Global Purpose Trust, are
not entitled to any preemptive or other rights to subscribe for
shares in the capital of the Company under the Memorandum of
Association or the Bye-Laws of the Company, this Agreement, the
International Underwriting Agreement, the Direct Agreements,
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<PAGE> 27
the Class A Warrants or the Class B Warrants, or any applicable law,
regulation, order or decree in Bermuda;
(viii) pursuant to Section 16 in the Companies Act 1981, the
Bye-Laws of the Company and its Subsidiaries have been duly adopted
by the directors and the members of the Company and its
Subsidiaries, respectively, and bind the Company and its
Subsidiaries and the members thereof to the same extent as if the
Bye-Laws had been signed and sealed by each said member, and
contained covenants on the part of each member to observe all the
provisions of the Bye-Laws;
(ix) no order, consent, approval, license, authorization or
validation of or exemption by any government or public body or
authority of Bermuda or any subdivision thereof is required to
authorize or is required in connection with the execution, delivery,
performance and enforcement of this Agreement, the International
Underwriting Agreement, the Direct Agreements, the Class A Warrants
and the Class B Warrants, except such as have been duly obtained in
accordance with Bermuda law;
(x) it is not necessary or desirable to ensure the enforceability in
Bermuda of this Agreement, the International Underwriting Agreement,
the Direct Agreements, the Class A Warrants or the Class B Warrants
that they be registered in any register kept by, or filed with, any
governmental authority or regulatory body in Bermuda;
(xi) there are no Bermuda stamp, transfer or similar taxes payable
in respect of the issuance and delivery of the Securities, the
Direct Securities or the Class A Warrants to the Underwriters, the
Private Investors, the Affiliated Purchasers or the Class A Warrant
Holders (assuming that such each such Underwriter, Private Investor,
Affiliated Purchaser or Class A Warrant Holder is not resident in
Bermuda for exchange control purposes) pursuant to this Agreement,
the International Underwriting Agreement, the Direct Agreements, the
Class A Warrants or the Class B Warrants, as the case may be; this
Agreement, the International Underwriting Agreement, the Direct
Agreements, the Class A Warrants and the Class B Warrants will not
be subject to ad valorem stamp duty in Bermuda, and no registration,
documentary, recording, transfer or other similar tax, fee or charge
by any Bermuda Government authority is payable in connection with
the execution, delivery, filing, registration or performance of this
Agreement, the International Underwriting Agreement, the Direct
Agreements, the Class A Warrants and the Class B Warrants;
(xii) the Company and its Subsidiaries have been designated as
nonresident for the purposes of the Exchange Control Act, 1972 and
as such are free to acquire, hold and sell foreign currency and
securities; no currency exchange control laws
27
<PAGE> 28
or withholding taxes of Bermuda or elsewhere apply to the payment of
dividends (a) on the Securities by the Company or (b) by the
Subsidiaries to the Company, except in each case as described in or
contemplated by the Prospectuses; and the Subsidiaries are not
currently prohibited by any Bermuda law or governmental authority,
directly or indirectly, from paying any dividends to the Company,
from making any other distributions on its capital stock, from
repaying to the Company any loans or advances to it from the Company
or from transferring any of its property or assets to the Company,
except as described or contemplated in the Prospectuses;
(xiii) the Insurance Subsidiary has the necessary corporate power
and authority to enter into and perform its obligations under the
Reinsurance Treaties with ACA; the Insurance Subsidiary has taken
all corporate action required to authorize its execution, delivery
and performance of the Reinsurance Treaties, and the Reinsurance
Treaties have been duly executed and delivered by the Insurance
Subsidiary and constitute the valid and binding obligations of the
Insurance Subsidiary in accordance with the terms thereof; the
compliance by the Insurance Subsidiary with the provisions of the
Reinsurance Treaties and the consummation of the transactions
contemplated therein do not (i) require the consent, approval,
authorization, registration or qualification of or with any Bermuda
governmental authority, except such as have been obtained, or (ii)
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to
which the Company or its Subsidiaries is a party or by which the
Company or its Subsidiaries or any of their respective properties
are bound, or the Memorandum of Association or Bye-Laws of the
Company or its Subsidiaries, or any Bermuda statute or any judgment,
decree, order, rule or regulation of any Bermuda court or other
governmental authority or any arbitrator applicable to the Company
or its Subsidiaries;
(xiv) at the date hereof, there is no Bermuda income, corporation or
profits tax, withholding tax, capital gains tax, capital transfer
tax, estate duty or inheritance tax payable by the Company and its
Subsidiaries or by any Underwriter, Private Investor, Affiliated
Purchaser or Class A Warrant Holder, except where such Underwriter,
Private Investor, Affiliated Purchaser or Class A Warrant Holder is
ordinarily resident in Bermuda for exchange control purposes; each
of the Company and its Subsidiaries has received, pursuant to the
Exempted Undertakings Tax Protection Act, 1966, an assurance from
the Minister of Finance of Bermuda that, in the event of there being
enacted in Bermuda any legislation imposing tax computed on profits
or income, or computed on any capital asset, gain or appreciation,
or any tax in the nature of estate duty or inheritance tax, such tax
shall not be applicable to it or to any of its operations or the
shares, debentures or other obligations of it except insofar as such
tax applies to persons ordinarily resident in Bermuda holding such
shares, debentures or other
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<PAGE> 29
obligations of it or any land leased or let to it, which assurance
shall be in effect and apply to it until March 28, 2016;
(xv) based solely on a search of the Register of Charges, maintained
by the Registrar of Companies pursuant to Section 55 of the
Companies Act 1981, conducted at 10:00 a.m. on ______, 1999, there
are no registered charges registered against the Company or its
Subsidiaries;
(xvi) based solely upon a search of the Cause Book of the Supreme
Court of Bermuda conducted at 10:00 a.m. on _____, 1999, there are
no judgments, nor legal or governmental proceedings pending in
Bermuda to which the Company or its Subsidiaries are parties;
(xvii) the Underwriters, Private Investors, Affiliated Purchasers
and Class A Warrant Holders will not be deemed to be resident
(including for exchange control purposes), domiciled or carrying on
business in Bermuda by reason only of the execution, performance and
enforcement of this Agreement, the International Underwriting
Agreement, the Direct Agreements, the Class A Warrants or the Class
B Warrants, as applicable;
(xviii) each of the Underwriters, Private Investors, Affiliated
Purchasers and Class A Warrant Holders has standing to bring an
action or proceedings before the appropriate courts in Bermuda for
the enforcement of this Agreement, the International Underwriting
Agreement, the Direct Agreements, the Class A Warrants or the Class
B Warrants, as applicable; it is not necessary or advisable in order
for any such Underwriter, Private Investor, Affiliated Purchaser or
Class A Warrant Holder to enforce its rights under this Agreement,
the International Underwriting Agreement, the Direct Agreements, the
Class A Warrants or the Class B Warrants, as applicable, including
the exercise of remedies thereunder, that it be licensed, qualified
or otherwise entitled to carry on business in Bermuda;
(xix) the statements set forth under the heading "Description of
Capital Stock" in the Prospectuses, insofar as such statements
purport to summarize certain provisions of the capital stock of the
Company, the Class A Warrants and the Class B Warrants provide a
fair summary of such provisions, and the statements set forth under
the headings "Enforceability of Civil Liabilities Under United
States Federal Securities Laws", "Risk Factors--Dependence on Key
Employees", "Risk Factors--Regulation; Restrictions on Insurance and
Reinsurance Operations--Bermuda", "Risk Factors--Income Tax
Risks--Bermuda Taxes", "Risk Factors--Limitations on Ownership,
Transfers and Voting Rights", "Risk Factors--Holding Company
Structure", "Risk Factors--Foreign Corporation, Service of Process
and Enforcement of Judgments", "Management's Discussion and Analysis
of Financial Condition and Plan of Operations--Taxation",
"Business--Regulation--Bermuda", "Description of Capital Stock",
"Certain Tax Considerations--Taxation of GMA, the Operating Company
and the Marketing Company--Bermuda" and "Certain Tax
29
<PAGE> 30
Considerations--Taxation of Shareholders--Bermuda Taxation" in the
Prospectuses, insofar as such statements constitute a summary of
provisions of Bermuda law or the Company's Memorandum of Association
and Bye-Laws, provide a fair summary of such legal matters or the
Memorandum of Association and Bye-Laws;
(xx) each of the Company and its Subsidiaries has validly and
irrevocably submitted to the nonexclusive jurisdiction of any
federal or state court sitting in the City of New York, has validly
and irrevocably waived, to the fullest extent permitted by law, any
objections that it may now or hereafter have to the laying of venue
of any such suit, action or proceeding brought in any such court
based on or arising under this Agreement or the International
Underwriting Agreement or any claims that any such suit, action or
proceeding brought in any such court has been brought in an
inconvenient forum, and has validly appointed CT Corporation System
as its authorized agent to receive service of process in any such
suit, action or proceeding; and the choice of the law of New York as
the governing law of this Agreement is a valid and effective choice
of law;
(xxi) the courts of Bermuda would recognize as a valid judgment, a
final and conclusive judgment in personam obtained in any federal or
state court sitting in the State of New York against the Company
based upon this Agreement, the International Underwriting Agreement,
the Direct Agreements, the Class A Warrants or the Class B Warrants
under which a sum of money is payable (other than a sum of money
payable in respect of multiple damages, taxes or other charges of a
like nature or in respect of a fine or other penalty) and would give
a judgment based thereon provided that (a) such courts had proper
jurisdiction over the parties subject to such judgment, (b) such
courts did not contravene the rules of natural justice of Bermuda,
(c) such judgment was not obtained by fraud, (d) the enforcement of
the judgment would not be contrary to the public policy of Bermuda,
(e) no new admissible evidence relevant to the action is submitted
prior to the rendering of the judgment by the courts of Bermuda and
(f) the due compliance with the correct procedures under the laws of
Bermuda; and
(xxii) the restrictions on transfer of the Common Shares and the
requirements for compulsory sale or surrender of the Common Shares
provided in the Company's Bye-Laws are valid and enforceable under
Bermuda law.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectuses in
this paragraph (c) shall include any amendment or supplement thereto at the date
of such opinion.
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(d) The U.S. Representatives shall have received an opinion, dated
the Firm Closing Date, of Kathleen G. Cully, General Counsel for American
Capital Access Holdings, L.L.C. ("ACA LLC") and ACA, substantially to the effect
that:
(i) ACA has full power (corporate and otherwise) to enter into the
Reinsurance Treaties with the Insurance Subsidiary and to carry out
all the terms and provisions thereof to be carried out by it;
(ii) the execution and delivery of the Reinsurance Treaties have
been duly authorized by ACA, and the Reinsurance Treaties have been
duly executed and delivered by ACA and are the valid and binding
agreements of ACA, enforceable against ACA in accordance with their
terms, subject to any applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally, and subject, as to
enforceability, to general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law);
(iii) the compliance by ACA with the provisions of the Reinsurance
Treaties and the consummation of the transactions contemplated
therein do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained, or (ii) conflict with or result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument to which ACA or any of its
affiliates is a party or by which ACA LLC, ACA or any of their
affiliates or any of their respective properties are bound, or the
Articles of Incorporation, By-Laws or similar organizational
documents of ACA LLC, ACA or any of their affiliates, or any statute
or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable to ACA
LLC, ACA or any of their affiliates;
(iv) each of ACA LLC and ACA has full power (corporate and
otherwise) to enter into the letter agreements of even date herewith
among ACA LLC, ACA and Merrill Lynch International and
Prudential-Bache Securities (U.K.) Inc., as Lead Managers and as
representatives of the International Managers, and among ACA LLC,
ACA, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Prudential Securities Incorporated, as U.S. Representatives and as
representatives of the U.S. Underwriters (collectively, the "ACA
Letter Agreements"), and to carry out all the respective terms and
provisions thereof to be carried out by it;
(v) the execution and delivery of the ACA Letter Agreements have
been duly authorized by ACA LLC and ACA, and the ACA Letter
Agreements have been duly executed and delivered by ACA LLC and ACA
and are the valid and binding agreements of ACA LLC and ACA,
enforceable against ACA LLC and ACA in accordance with their
respective terms, subject to any applicable bankruptcy, insolvency
and similar laws affecting creditors' rights generally, and subject,
as to
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enforceability, to general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law),
except that enforcement of rights to indemnity and contribution
thereunder may be limited by Federal or state securities laws or
principles of public policy; and
(vi) ACA is duly licensed or authorized as an insurer in all fifty
states of the United States, the District of Columbia and the
territories of Guam, the United States Virgin Islands and Puerto
Rico.
Such counsel shall also state that it has participated in the
preparation of the Registration Statement and the Prospectuses and in
conferences with officers and other representatives of the Company,
representatives of Conyers Dill & Pearman, Bermuda and Cayman Islands counsel
for the Company, representatives of Clifford Chance, United Kingdom counsel to
the Company, representatives of Crills Advocates, Jersey counsel for the
Company, representatives of the independent public accountants for the Company,
and your representatives and your counsel at which the contents of the
Registration Statement, the Prospectuses and related matters were discussed and,
although such counsel has not passed upon or assumed any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectuses, and although such counsel has not
undertaken to verify independently the accuracy or completeness of the
statements in the Registration Statement and the Prospectuses and, therefore,
would not necessarily have become aware of any material misstatement of fact or
omission to state a material fact, on the basis of and subject to the foregoing,
such counsel does not believe that the statements set forth with respect to ACA
LLC or ACA in either the Registration Statement or the Prospectuses under the
captions "Prospectus Summary--Reinsurance Treaties with ACA" (second paragraph
only), "Business--ACA Financial Guaranty Corporation" and, insofar as may relate
to the regulatory status or operations of ACA LLC or ACA, "Prospectus
Summary--Reinsurance Treaties with ACA" (first paragraph) and
"Business--Reinsurance Treaties with ACA" (other than the financial information
therein or omitted therefrom, as to which such counsel need not express any
opinion) contained as of its date or contains as of the date of such opinion any
untrue statement of a material fact or omitted as of its date or omits as of the
date of such opinion to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deem proper, on the accuracy of the
representations and warranties made by the parties to this Agreement and the
International Underwriting Agreement and certificates of responsible officers of
the Company, ACA LLC, ACA and public officials.
References to the Registration Statement and the Prospectuses in
this paragraph (d) shall include any amendment or supplement thereto at the date
of such opinion.
(e) The U.S. Representatives shall have received an opinion, dated
the Firm Closing Date, of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza,
New York, New York,
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counsel for the U.S. Underwriters, with respect to the issuance and sale of the
Securities, the Registration Statement and the Prospectuses, and such other
related matters as the U.S. Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such matters.
(f) The U.S. Representatives shall have received from KPMG Peat
Marwick a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the U.S. Representatives, to
the effect that:
(i) they are independent accountants with respect to the Company and
its Subsidiaries within the meaning of the Act and the applicable
rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial statements
examined by them and included in the Registration Statement and the
Prospectuses comply in form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations;
(iii) on the basis of a reading of the unaudited pro forma
consolidated balance sheet included in the Registration Statement
and the Prospectuses, carrying out certain specified procedures that
would not necessarily reveal matters of significance with respect to
the comments set forth in this paragraph (iii), inquiries of certain
officials of the Company and its Subsidiaries who have
responsibility for financial and accounting matters and proving the
arithmetic accuracy of the application of the pro forma adjustments
to the historical amounts in the unaudited pro forma consolidated
condensed financial statements, nothing came to their attention that
caused them to believe that the unaudited pro forma consolidated
balance sheet does not comply in form in all material respects with
the applicable accounting requirements of Rule 11-02 of Regulation
S-X or that the pro forma adjustments have not been properly applied
to the historical amounts in the compilation of such balance sheet;
(iv) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with
generally accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments set
forth in this paragraph (iv), a reading of the minute books of the
shareholders, the board of directors and any committees thereof of
the Company and its Subsidiaries, and inquiries of certain officials
of the Company and its Subsidiaries who have responsibility for
financial and accounting matters, nothing came to their attention
that caused them to believe that at a specific date not more than
five business days prior to the date of such letter, there were any
changes in the capital stock or long-term debt of the Company and
the Insurance Subsidiary or any decreases in net current assets or
stockholders' equity of the Company and
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<PAGE> 34
the Insurance Subsidiary, in each case compared with amounts shown
on the December 31, 1998 audited consolidated balance sheet included
in the Registration Statement and the Prospectuses, except in all
instances for changes, decreases or increases set forth in such
letter; and
(v) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information that are derived from the general
accounting records of the Company and its Subsidiaries and are
included in the Registration Statement and the Prospectuses under
the captions "Prospectus Summary", "Capitalization", "Risk Factors",
"Dilution", "Unaudited Pro Forma Consolidated Balance Sheet",
"Management", "Principal Stockholders", "Certain Relationships and
Related Party Transactions" and "Description of Capital Stock", and
have compared such amounts, percentages and financial information
with such records of the Company and its Subsidiaries and with
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the U.S. Underwriters that (A) such letters shall be accompanied
by a written explanation of the Company as to the significance thereof, unless
the U.S. Representatives deem such explanation unnecessary, and (B) such
changes, decreases or increases do not, in the sole judgment of the U.S.
Representatives, make it impractical or inadvisable to proceed with the purchase
and delivery of the U.S. Securities as contemplated by the Registration
Statement, as amended as of the date hereof.
References to the Registration Statement and the Prospectuses in
this paragraph (f) with respect to either letter referred to above shall include
any amendment or supplement thereto at the date of such letter.
(g) The U.S. Representatives shall have received a certificate,
dated the Firm Closing Date, of the Chief Executive Officer and the Chief
Financial Officer of the Company (in his or her capacity as an officer of the
Company and without personal liability) to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include 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 therein not misleading,
and the Prospectuses, as amended or supplemented as of the Firm
Closing Date, do not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading; and the Company has performed all
covenants and agreements and satisfied all conditions on its part
required by this
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<PAGE> 35
Agreement and the International Underwriting Agreement to be
performed or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or,
to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses, neither
the Company nor either of its Subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding, and there has not been any
material adverse change, or any development involving a prospective
material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth or results of operations
of the Company or its Subsidiaries, except in each case as described
in or contemplated by the Prospectuses (exclusive of any amendment
or supplement thereto).
(h) The U.S. Representatives shall have received from each of the
Sponsor-Affiliated Purchasers, each of the Affiliated Purchasers, each of the
Class A Warrant Holders and each person who is a director or officer of the
Company or who owns any outstanding Common Shares or any securities convertible
into, or exchangeable or exercisable for, any Common Shares, including, without
limitation, the Class A Warrants and the Class B Warrants, an agreement to the
effect that such person will not, directly or indirectly, without the prior
written consent of Merrill Lynch and Prudential Securities Incorporated, on
behalf of the U.S. Underwriters, 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 the
Company or any 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 Agreement.
(i) The U.S. Representatives shall have received from each of the
Strategic Investors that purchases Strategic Securities and Class B Warrants an
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of Merrill Lynch and Prudential Securities
Incorporated, on behalf of the U.S. Underwriters, and the Company, 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 the Company or any securities
convertible into, or exercisable or exchangeable for, any Common Shares or other
capital stock of the Company for a period of nine months after the date of this
Agreement.
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(j) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market
subject to official notice of issuance.
(k) The Strategic Investors shall have purchased Common Shares and
Class B Warrants pursuant to certain of the Direct Agreements with an aggregate
purchase price of at least $50.0 million.
(l) Contemporaneously with the purchase by the U.S. Underwriters of
the Firm U.S. Securities under this Agreement, the International Managers shall
have purchased the Firm International Securities under the International
Underwriting Agreement.
(m) The U.S. Representatives shall have received from
PricewaterhouseCoopers LLP a letter or letters dated, respectively, the date
hereof and the Firm Closing Date, in form and substance satisfactory to the U.S.
Representatives, to the effect that:
(i) they are independent accountants with respect to ACA LLC and its
consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) on the basis of a reading of the amounts for premiums, admitted
assets, total liabilities and total surplus as regards policyholders
as of and for the year ended December 31, 1998 included in the
Registration Statement and the Prospectuses and of the audited
consolidated financial statements of ACA LLC and its consolidated
subsidiaries as of and for the year ended December 31, 1998 from
which such amounts are derived, carrying out certain specified
procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would
not necessarily reveal matters of significance with respect to the
comments set forth in this paragraph (ii), a reading of the minute
books of the shareholders, the board of directors and any committees
thereof of ACA LLC and its consolidated subsidiaries, and inquiries
of certain officials of ACA LLC and its consolidated subsidiaries
who have responsibility for financial and accounting matters,
nothing came to their attention that caused them to believe that the
amounts for premiums, admitted assets, total liabilities and total
surplus as regards policyholders included in the Registration
Statement and the Prospectuses do not agree with the amounts set
forth in the audited consolidated financial statements as of and for
the year ended December 31, 1998 of ACA LLC and its consolidated
subsidiaries; and
(iii) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information that are derived from the general
accounting records of ACA LLC and its consolidated subsidiaries and
are included in the Registration Statement and the Prospectuses
under the captions "Prospectus Summary--Reinsurance Treaties with
ACA", "Business--Reinsurance Treaties with ACA" and "Business--ACA
Financial
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<PAGE> 37
Guaranty Corporation" and have compared such amounts, percentages
and financial information with such records of ACA LLC and its
consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any
questions of legal interpretation.
References to the Registration Statement and the Prospectuses in
this paragraph (m) with respect to either letter referred to above shall include
any amendment or supplement thereto at the date of such letter.
(n) The U.S. Representatives shall have received a certificate,
dated the Firm Closing Date, of the Chief Executive Officer and the Chief
Financial Officer of ACA LLC and ACA (in his or her capacity as an officer of
such entities and without personal liability) to the effect that:
(i) the representations and warranties of ACA LLC and ACA in the ACA
Letter Agreements are true and correct as if made on and as of the
Firm Closing Date; the statements set forth in the Registration
Statement, as amended as of the Firm Closing Date, under the
captions "Prospectus Summary--Reinsurance Treaties with ACA" (second
paragraph only), "Business--ACA Financial Guaranty Corporation" and,
insofar as may relate to the regulatory status or operations of ACA,
"Prospectus Summary--Reinsurance Treaties with ACA" (first
paragraph) and "Business--Reinsurance Treaties with ACA" do not
include 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 therein with respect to ACA LLC or ACA not misleading,
and the statements set forth in the Prospectuses, as amended or
supplemented as of the Firm Closing Date, under the captions
"Prospectus Summary--Reinsurance Treaties with ACA" (second
paragraph only), "Business--ACA Financial Guaranty Corporation" and,
insofar as may relate to the regulatory status or operations of ACA
LLC or ACA, "Prospectus Summary--Reinsurance Treaties with ACA"
(first paragraph) and "Business--Reinsurance Treaties with ACA" do
not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein
with respect to ACA LLC or ACA, in the light of the circumstances
under which they were made, not misleading; and each of ACA LLC and
ACA has performed all covenants and agreements on its part to be
performed at or prior to the Firm Closing Date pursuant to the ACA
Letter Agreements; and
(ii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses, neither
ACA LLC nor its subsidiaries, including ACA, has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding, and there has not been any
material
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adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise),
management, business prospects, net worth or results of operations
of ACA LLC or its subsidiaries, including ACA, except in each case
as described in or contemplated by the Prospectuses (exclusive of
any amendment or supplement thereto).
(o) ACA LLC and ACA shall have entered into the ACA Letter
Agreements with, respectively, each of the U.S. Representatives, as
representatives of the U.S. Underwriters, and the Lead Managers, as
representatives of the International Managers, and the representations and
warranties of ACA LLC and ACA contained in the ACA Letter Agreements and the
statements of ACA LLC's and ACA's officers made pursuant to the provisions
hereof shall be, as determined in the sole discretion of the U.S.
Representatives, accurate as of the date hereof and as of the Firm Closing Date,
as if made on and as of the Firm Closing Date, and each of ACA LLC and ACA shall
have performed, as determined in the sole discretion of the U.S.
Representatives, its covenants and agreements pursuant to the ACA Letter
Agreements.
(p) On or before the Firm Closing Date, the U.S. Representatives and
counsel for the U.S. Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the U.S. Representatives and
counsel for the U.S. Underwriters. The Company shall furnish to the U.S.
Representatives such conformed copies of such opinions, certificates, letters
and documents in such quantities as the U.S. Representatives and counsel for the
U.S. Underwriters shall reasonably request.
The respective obligations of the several U.S. Underwriters to
purchase and pay for any U.S. Option Securities shall be subject, in their
discretion, to each of the foregoing conditions to purchase the Firm U.S.
Securities, except that all references to the Firm U.S. Securities and the Firm
Closing Date shall be deemed to refer to such U.S. Option Securities and the
related Option Closing Date, respectively.
SECTION 6. Indemnification. (a) The Company agrees to indemnify and
hold harmless each U.S. Underwriter and each person, if any, who controls any
U.S. Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement made by the Company in Section 1 of this
Agreement;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable,
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or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or
supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of
any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company;
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch and
Prudential Securities Incorporated), reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement
or omission, to the extent that any such expense is not paid under
(i), (ii) or (iii) above; and
(v) any untrue statement or alleged untrue statement of any material
fact contained in any audio or visual materials based upon
information provided by the Company, ACA LLC or ACA used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films and tape recordings;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto); and
provided, further, that the Company will not be liable to any U.S. Underwriter
with respect to any preliminary prospectus to the extent that the Company shall
sustain the burden of proving that any such loss, liability, claim, damage or
expense resulted from the fact that such U.S. Underwriter, in contravention of a
requirement of this Agreement or applicable law, sold Securities to a person to
whom such U.S. Underwriter failed to send or give, at or prior to the Closing
Date, a copy of the Final Prospectus, as then amended or supplemented if: (i)
the Company has previously furnished copies thereof (sufficiently in advance of
the Closing Date to allow for distribution by the Closing Date) to the U.S.
Underwriter and the loss, liability, claim, damage or expense of such U.S.
Underwriter resulted from an untrue statement or omission of a material fact
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contained in or omitted from any preliminary prospectus which was corrected in
the Final Prospectus as, if applicable, amended or supplemented prior to the
Closing Date and such Final Prospectus was required by law to be delivered at or
prior to the written confirmation of sale to such person and (ii) the giving or
sending of such Final Prospectus by the Closing Date to the party or parties
asserting such loss, liability, claim, damage or expense would have constituted
the sole defense to the claim asserted by such person.
(b) Each U.S. Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section 6, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any Preliminary U.S. Prospectus or the U.S. Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to the Company by such U.S. Underwriter through the U.S.
Representatives expressly for use in the Registration Statement (or any
amendment thereto) or such Preliminary Prospectus or the U.S. Prospectus (or any
amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 6(a) above, counsel to the indemnified
parties shall be selected by Merrill Lynch and Prudential Securities
Incorporated and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii)
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does not include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(iii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
U.S. Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and
the U.S. Underwriters on the other hand in connection with the offering of the
U.S. Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or,
if Rule 434 is used, the corresponding location on the Term Sheet, bear to the
aggregate initial public offering price of the U.S. Securities as set forth on
such cover.
The relative fault of the Company on the one hand and the U.S.
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the U.S. Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the U.S. Underwriters were treated as one entity
for such purpose) or by any other method of
41
<PAGE> 42
allocation which does not take account of the equitable considerations referred
to above in this Section 7. The aggregate amount of losses, liabilities, claims,
damages and expenses incurred by an indemnified party and referred to above in
this Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon any
such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the U.S. Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such U.S. Underwriter has otherwise been required to pay by reason
of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Firm U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and the several
U.S. Underwriters set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, any U.S. Underwriter or any controlling person
referred to in Section 6 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 4, 6 and 7 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
SECTION 9. Termination of Agreement. (a) The U.S. Representatives
may terminate this Agreement, by notice to the Company, at any time at or prior
to the Firm Closing Date (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the U.S. Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
42
<PAGE> 43
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has been, since the
time of execution of this Agreement or since the respective dates as of which
information is given in the U.S. Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of ACA LLC and ACA considered as one enterprise, whether or
not arising in the ordinary course of business, or (iii) if there has occurred
any material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the U.S. Representatives, impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iv) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the NASD
or any other governmental authority, or (v) if a banking moratorium has been
declared by either Federal, New York or Bermuda authorities.
If this Agreement is terminated pursuant to this Section 9, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8
shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one
or more U.S. Underwriters default in their obligations to purchase Firm U.S.
Securities or U.S. Option Securities hereunder and the aggregate number of such
Securities that such defaulting U.S. Underwriter or U.S. Underwriters agreed but
failed to purchase is ten percent or less of the aggregate number of Firm U.S.
Securities or U.S. Option Securities to be purchased by all of the U.S.
Underwriters at such time hereunder, the other U.S. Underwriters may make
arrangements satisfactory to the U.S. Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
U.S. Underwriters, including the U.S. Representatives), but if no such
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other U.S. Underwriters shall be obligated
severally in proportion to their respective commitments hereunder to purchase
the Firm U.S. Securities or U.S. Option Securities that such defaulting U.S.
Underwriter or U.S. Underwriters agreed but failed to purchase. If one or more
U.S. Underwriters so default with respect to an aggregate number of Securities
that is more than ten percent of the aggregate number of Firm U.S. Securities or
U.S. Option Securities, as the case may be, to be purchased by all of the U.S.
Underwriters at such time hereunder, and if arrangements satisfactory to the
U.S. Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
U.S. Underwriters, including the U.S. Representatives) of the Securities with
respect to which such default occurs, this Agreement will terminate without
liability on the part of any non-defaulting U.S. Underwriter or the Company
other than
43
<PAGE> 44
as provided in Section 8 hereof. In the event of any default by one or more U.S.
Underwriters as described in this Section 10, the U.S. Representatives shall
have the right to postpone the Firm Closing Date or the Option Closing Date, as
the case may be, established as provided in Section 2 hereof for not more than
seven business days in order that any necessary changes may be made in the
arrangements or documents for the purchase and delivery of the Firm U.S.
Securities or U.S. Option Securities, as the case may be. As used in this
Agreement, the term "U.S. Underwriter" includes any person substituted for an
U.S. Underwriter under this Section 10. Nothing herein shall relieve any
defaulting U.S. Underwriter from liability for its default.
SECTION 11. Notices. All communications hereunder shall be in
writing and, if sent to any of the U.S. Underwriters, shall be delivered or sent
by mail, telex or facsimile transmission and confirmed in writing to Merrill
Lynch, Pierce, Fenner & Smith Incorporated, North Tower, World Financial Center,
250 Vesey Street, New York, New York 10281-1201, and Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company at
Cumberland House, 1 Victoria Street, Hamilton, HM AX, Bermuda.
SECTION 12. Information Supplied by the U.S. Underwriters. The
statements set forth in the last paragraph on the front cover page, the
stabilization legend on the inside cover page and under the heading
"Underwriting" (to the extent such statements relate to the U.S. Underwriters)
or under the heading "Business--Investment Managers" (to the extent such
statements describe the relationship between Merrill Lynch Asset Management,
L.P. and Merrill Lynch & Co., Inc., and between The Prudential Investment
Corporation and The Prudential Insurance Company of America) in any U.S.
Preliminary Prospectus or the U.S. Prospectus constitute the only information
furnished by any U.S. Underwriter through the U.S. Representatives to the
Company for the purposes of Sections 1(b), 6 and 7 hereof. The U.S. Underwriters
confirm that such statements (to such extent) are correct.
SECTION 13. Parties. This Agreement shall inure to the benefit of
and shall be binding upon the several U.S. Underwriters, the Company and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company contained in Sections 6 and 7 of this Agreement
shall also be for the benefit of any person or persons who control any U.S.
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnities of the U.S. Underwriters contained in
Sections 6 and 7 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No
purchaser of Securities from any U.S. Underwriter shall be deemed a successor
because of such purchase.
44
<PAGE> 45
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings
herein are for convenience only and shall not affect the construction hereof.
SECTION 16. Consent to Jurisdiction and Service of Process. All
judicial proceedings arising out of or relating to this Agreement may be brought
in any state or federal court of competent jurisdiction in the State of New
York, and by execution and delivery of this Agreement, the Company irrevocably
accepts for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
irrevocably waives any defense of forum non conveniens and irrevocably agrees to
be bound by any final judgment rendered thereby in connection with this
Agreement. The Company designates and appoints CT Corporation System, 1633
Broadway, New York, New York, and such other persons as may hereafter be
selected by the Company irrevocably agreeing in writing to so serve, as its
agent to receive on its behalf service of all process in any such proceedings in
any such court, such service being hereby acknowledged by the Company to be
effective and binding service in every respect. A copy of any such process so
served shall be mailed by registered mail to the Company at its address provided
in Section 11 hereof; provided, however, that, unless otherwise provided by
applicable law, any failure to mail such copy shall not affect the validity of
service of such process. If any agent appointed by the Company refuses to accept
service, the Company hereby agrees that service of process sufficient for
personal jurisdiction in any action against the Company in the State of New York
may be made by registered or certified mail, return receipt requested, to the
Company at its address provided in Section 11 hereof, and the Company hereby
acknowledges that such service shall be effective and binding in every respect.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of any U.S. Underwriter to bring
proceedings against the Company in the courts of any other jurisdiction.
45
<PAGE> 46
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the U.S. Underwriters and the Company in accordance with its terms.
Very truly yours,
GLOBAL MARKETS ACCESS LTD.
By
--------------------------------------
Donald J. Matthews
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
BEAR, STEARNS & CO. INC.
ING BARING FURMAN SELZ LLC
SALOMON SMITH BARNEY INC.
WARBURG DILLON READ LLC
By MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
---------------------------------------
Name: Antonio Ursano, Jr.
Title: Director
By PRUDENTIAL SECURITIES INCORPORATED
By
---------------------------------------
Name: Jean-Claude Canfin
Title: Managing Director
For themselves and as U.S. Representatives of the several
U.S. Underwriters named in Schedule A hereto.
<PAGE> 47
Draft of 3/18/99
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
U.S. Securities
to
Name of U.S. Underwriter Be Purchased
- ------------------------ ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........
Prudential Securities Incorporated..........
Bear, Stearns & Co. Inc.....................
ING Baring Furman Selz LLC..................
Salomon Smith Barney Inc....................
Warburg Dillon Read LLC.....................
--------
Total........................... ========
</TABLE>
<PAGE> 48
GLOBAL MARKETS ACCESS LTD. LETTERHEAD
March __, 1999
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch World Headquarters
World Financial Center, North Tower
New York, New York 10281-1301
Re: Global Markets Access Ltd. Reserved Share Program
Ladies and Gentlemen:
Reference is made to the U.S. Purchase Agreement dated March __,
1999 (the "Purchase Agreement") between Global Markets Access Ltd. (the
"Company") and the U.S. Underwriters listed in Schedule A to the Purchase
Agreement. All capitalized terms used but not otherwise defined herein shall
have the meanings given them in the Purchase Agreement.
As part of the offerings contemplated by the Purchase Agreement,
Merrill, Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") has agreed
to reserve out of the Common Shares, par value $1.00 per share, of the Company
(the "Common Shares") set forth opposite its name on Schedule A to the Purchase
Agreement, up to an aggregate of 1,000,000 Common Shares for sale to certain
directors, officers, employees and other persons associated with the Company or
with any director, officer or employee ("Invitees"), as set forth in the
Prospectus under the heading "Underwriting" (the "Reserved Share Program"). The
Common Shares to be sold by Merrill Lynch pursuant to the Reserved Share Program
(the "Reserved Shares") will be sold by Merrill Lynch pursuant to the Purchase
Agreement at the public offering price. Any Reserved Shares not orally confirmed
for purchase by such Invitees by the end of the first business day after the
date of the Purchase Agreement will be offered directly to the public by Merrill
Lynch as set forth in the Prospectus.
In order to induce Merrill Lynch to conduct the Reserved Share
Program, and in addition to and without limiting the representations,
warranties, covenants and agreements of the Company contained in the Purchase
Agreement, the Company hereby agrees with Merrill Lynch as follows:
1. The Company represents and warrants to Merrill Lynch that (i) the
Registration Statement, the Prospectus and the Preliminary Prospectus comply,
and any further amendments or supplements thereto or prospectus wrapper prepared
in connection therewith, at their respective times of issuance and on the Firm
Closing Date, complied or will comply, in all material respects with any
applicable laws or regulations of foreign
<PAGE> 49
jurisdictions in which the Registration Statement, Prospectus or Preliminary
Prospectus, as amended or supplemented, if applicable, have been authorized by
the Company to be distributed in connection with the Reserved Share Program, and
that (ii) no authorization, approval, consent, license, order, registration or
qualification of or with any government, governmental instrumentality or court,
other than such as have been obtained, is necessary under the securities laws
and regulations of foreign jurisdictions in which the Reserved Shares have been
authorized by the Company to be offered or sold outside the United States in
connection with the Reserved Share Program.
2. The Company covenants with Merrill Lynch that the Company will
comply with all applicable securities and other applicable laws, rules and
regulations in each foreign jurisdiction in which the Reserved Shares have been
authorized by the Company to be offered or sold in connection with the Reserved
Share Program.
3. In connection with the Reserved Share Program, the Company hereby
agrees that it will use its best efforts to ensure that purchasers of Reserved
Shares that are required to be restricted by the National Association of
Securities Dealers, Inc. (the "NASD") or the NASD rules will be so restricted
from the sale, transfer, assignment, pledge or hypothecation of the Reserved
Shares for a period of three months following the date of the Purchase
Agreement. Merrill Lynch will notify the Company in writing as to which persons
will need to be so restricted. Upon such notification, the Company will direct
the transfer agent to place a stop transfer restriction upon such Reserved
Shares held by such persons for the applicable period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Shares, the Company agrees to reimburse the U.S. Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
4. The Company will pay all costs and expenses of the U.S.
Underwriters, including the reasonable fees and expenses of Merrill Lynch's
counsel, in connection with matters related to the Reserved Share Program and
all stamp duties, similar taxes or duties or other taxes, if any, incurred by
the U.S. Underwriters in connection with the Reserved Share Program.
5. (a) In connection with the Reserved Share Program, the Company
agrees, promptly upon a request in writing in the case of (ii) below, to
indemnify and hold harmless each U.S. Underwriter and each person, if any, who
controls any U.S. Underwriter within the meaning of Section 15 of the Securities
Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934,
as amended, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement made by the Company in Section 1 of this
Agreement;
2
<PAGE> 50
(ii) from and against any and all losses, liabilities, claims,
damages and expenses incurred by them as a result of the failure of
those Invitees purchasing in the Reserved Share Program to pay for
and accept delivery of Reserved Shares which, by the end of the
first business day following the date of the Purchase Agreement,
were the subject of a properly confirmed oral agreement to purchase;
(iii) against any and all loss, liability, claim, damage,
fine, penalty and expense, whatsoever, as incurred, arising out of
(A) the violation of any applicable laws or regulations of foreign
jurisdictions or foreign regulatory bodies in connection with any
offer and/or sale of Reserved Shares and (B) any untrue statement or
alleged untrue statement of a material fact included in the
supplement or prospectus wrapper material distributed in foreign
jurisdictions in connection with the reservation and sale of the
Reserved Shares to certain directors, officers, employees and other
persons associated with the Company or with any director, officer or
employee or the omission or alleged omission therefrom of a material
fact necessary to make the statements therein, when considered in
conjunction with the Prospectuses or preliminary prospectuses, not
misleading;
(iv) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission or in connection with any violation of the nature referred
to in Section 5(a)(iii)(A) hereof; provided that (subject to Section
5(c) hereof) any such settlement is effected with the written
consent of the Company; and
(v) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 5(a)(iii)(A) hereof,
to the extent that any such expense is not paid under (i), (ii),
(iii) or (iv) above.
(b) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party
3
<PAGE> 51
from any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. Counsel to the
indemnified parties shall be selected by Merrill Lynch. An indemnifying party
may participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 5 or Section
6 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(c) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 5(a)(iv) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
6. If the indemnification provided for in Section 5 hereof is for
any reason unavailable to or insufficient to hold harmless an indemnified party
in respect of any losses, liabilities, claims, damages or expenses referred to
therein, then the parties hereto shall be bound by the terms and provisions of
"Section 7. Contribution" in the Purchase Agreement, as if such terms and
provisions related to such losses, liabilities, claims, damages and expenses,
but in addition to the statements and omissions or alleged statements and
omissions referred to in such Section 7 of the Purchase Agreement resulting in
such losses, liabilities, claims, damages or expenses, such terms and provisions
shall take into consideration any violation of the nature referred to in Section
5(a)(iii)(A) hereof resulting in such losses, liabilities, claims, damages or
expenses.
4
<PAGE> 52
7. This Agreement is for the benefit of Merrill Lynch and each of
the U.S. Underwriters and is enforceable to the same extent as if fully set
forth in the Purchase Agreement.
8. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED IN SAID STATE.
9. This Agreement may be executed in one or more counterparts and,
when a counterpart has been executed by each party, all such counterparts taken
together shall constitute one and the same agreement.
Very truly yours,
GLOBAL MARKETS ACCESS LTD.
By:
-----------------------------
Name:
Title:
Accepted as of the date hereof:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:
---------------------------------
Name:
Title:
5
<PAGE> 1
Exhibit 1.2
GLOBAL MARKETS ACCESS LTD.
(a Bermuda corporation)
3,000,000 Common Shares
(Par Value $1.00 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
March __, 1999
MERRILL LYNCH INTERNATIONAL
Prudential-Bache Securities (U.K.) Inc.
as Joint Lead Managers and Joint Bookrunners
Bear, Stearns International Limited
Baring Brothers Limited, as agent for ING Bank N.V.
Salomon Brothers International Limited
UBS AG, acting through its division Warburg Dillon Read
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Global Markets Access Ltd., a Bermuda corporation (the "Company"),
confirms its agreement with Merrill Lynch International ("Merrill Lynch"),
Prudential-Bache Securities (U.K.) Inc., as Joint Lead Managers and Joint
Bookrunners, and each of the other international underwriters named in Schedule
A hereto (collectively, the "International Managers", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Prudential-Bache Securities (U.K.) Inc., Bear,
Stearns International Limited, Baring Brothers Limited, as agent for ING Bank
N.V., Salomon Brothers International Limited and UBS AG, acting through its
division Warburg Dillon Read, are acting as representatives (in such capacity,
the "Lead Managers"), with respect to the issue and sale by the Company and the
purchase by the International Managers,
<PAGE> 2
acting severally and not jointly, of the respective numbers of Common Shares,
par value $1.00 per share, of the Company (the "Common Shares") set forth in
said Schedule A, and with respect to the grant by the Company to the
International Managers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 450,000
additional Common Shares to cover over-allotments, if any. The aforesaid
3,000,000 Common Shares (the "Firm International Securities") to be purchased by
the International Managers and all or any part of the 450,000 Common Shares
subject to the option described in Section 2(b) hereof (the "International
Option Securities") are hereinafter called, collectively, the "International
Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Underwriting Agreement") providing
for the offering by the Company of an aggregate of 17,000,000 Common Shares (the
"Firm U.S. Securities") through arrangements with certain underwriters in the
United States and Canada (the "U.S. Underwriters") for which Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Prudential Securities Incorporated, Bear,
Stearns & Co. Inc., ING Baring Furman Selz LLC, Salomon Smith Barney Inc. and
Warburg Dillon Read LLC are acting as representatives (the "U.S.
Representatives") and the grant by the Company to the U.S. Underwriters, acting
severally and not jointly, of an option to purchase all or any part of the U.S.
Underwriters' pro rata portion of up to 2,550,000 additional Common Shares
solely to cover over-allotments, if any (the "U.S. Option Securities" and,
collectively with the International Option Securities, the "Option Securities").
The Firm U.S. Securities and the U.S. Option Securities are collectively
referred to herein as the "U.S. Securities". It is understood that the Company
is not obligated to sell and the International Managers are not obligated to
purchase, any Firm International Securities unless all of the Firm U.S.
Securities are contemporaneously purchased by the U.S. Underwriters.
The International Managers and the U.S. Underwriters are
collectively referred to herein as the "Underwriters", the Firm International
Securities and the Firm U.S. Securities are collectively referred to herein as
the "Firm Securities", and the International Securities and the U.S. Securities
are collectively referred to herein as the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Prudential Securities Incorporated (in such capacity, the
"Global Coordinators").
The Company understands that the International Managers propose to
make a public offering of the International Securities as soon as the Lead
Managers deem advisable after this Agreement has been executed and delivered.
It is understood that the Company has agreed, immediately prior to
the issuance, offering and sale of the Securities to the Underwriters by the
Company pursuant to this Agreement and the U.S. Underwriting Agreement, to issue
and sell directly to The PMI Group, Inc., High Ridge Capital Partners Limited
Partnership, Rolaco Holding S.A., Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund (collectively, the "Strategic Investors") an aggregate of
3,900,706 Common Shares (the "Strategic Securities") and Class B Warrants to
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purchase an aggregate of 550,000 Common Shares (the "Class B Warrants") and to
certain individuals affiliated with Inter-Atlantic Capital Partners, Inc. (the
"Sponsor-Affiliated Purchasers", and collectively with the Strategic Investors,
the "Private Investors") an aggregate of 90,000 Common Shares (the
"Sponsor-Affiliated Securities", and collectively with the Strategic Securities
and the Class B Warrants, the "Private Securities") and to offer directly to
certain of its directors and officers (the "Affiliated Purchasers") an aggregate
of 305,500 Common Shares (the "Affiliated Securities", and collectively with the
Private Securities, the "Direct Securities") as described in the Prospectuses
(as hereinafter defined) or, if the Prospectuses are not in existence, the most
recent Preliminary Prospectuses (as hereinafter defined), under the caption
"Direct Sales".
Two forms of prospectus are to be used in connection with the
offering and sale of the Securities through the Underwriters: one relating to
the International Securities (the "Form of International Prospectus") and one
relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of
International Prospectus is identical to the Form of U.S. Prospectus, except for
the front cover and back cover pages and the information under the caption
"Underwriting". A third form of prospectus is to be used in connection with the
offering and sale of the Affiliated Securities (the "Form of Direct Sales
Prospectus"). The Form of Direct Sales Prospectus is identical to the Form of
U.S. Prospectus, except for the front cover and back cover pages and except that
the section under the caption "Underwriting" in the Form of U.S. Prospectus is
replaced by a section under the caption "Plan of Distribution" in the Form of
Direct Sales Prospectus. As used in this Agreement, the term "Original
Registration Statement" means the registration statement initially filed
relating to the Securities and the Affiliated Securities, as amended at the time
when it was or is declared effective, including all financial schedules and
exhibits thereto and including any information omitted therefrom at the time it
became effective but deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A under the
Securities Act of 1933, as amended (the "Act"), (the "Rule 430A Information") or
(b) pursuant to paragraph (d) of Rule 434 under the Act (the "Rule 434
Information") and included in the Prospectuses; the term "Rule 462(b)
Registration Statement" means any registration statement filed with the
Securities and Exchange Commission (the "Commission") pursuant to Rule 462(b)
under the Act (including the Registration Statement and any preliminary
prospectus or Prospectus incorporated therein at the time such Registration
Statement becomes effective); the term "Registration Statement" includes both
the Original Registration Statement and any Rule 462(b) Registration Statement;
the terms "International Preliminary Prospectus", "U.S. Preliminary Prospectus"
and "Direct Sales Preliminary Prospectus" (collectively, the "Preliminary
Prospectuses") mean, respectively, the Form of International Prospectus, the
Form of U.S. Prospectus and the Form of Direct Sales Prospectus contained in
Amendments No. 3 and No. 4 to the Original Registration Statement and used
before such Registration Statement became effective, and any Form of
International Prospectus, Form of U.S. Prospectus or Form of Direct Sales
Prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement; the terms "International Prospectus",
"U.S. Prospectus" and "Direct Sales Prospectus" (collectively, the
"Prospectuses") mean, respectively:
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(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule 424(b)(7)
under the Act, together with the International Preliminary Prospectus, the
U.S. Preliminary Prospectus and the Direct Sales Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the Form of
International Prospectus, the Form of U.S. Prospectus and the Form of
Direct Sales Prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the Form of International Prospectus, the Form of U.S. Prospectus and the
Form of Direct Sales Prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet. For purposes
of this Agreement, all references to the Registration Statement, any preliminary
prospectus, the International Prospectus, the U.S. Prospectus, the Direct Sales
Prospectus or any Term Sheet or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties by the Company. The
Company represents and warrants to, and agrees with, each of the several
International Managers that:
(a) A registration statement on Form S-1 (File No. 333-62785) with
respect to the Securities, including the related Preliminary Prospectuses, has
been filed by the Company with the Commission under the Act, and amendments to
such registration statement have been so filed on October 30, 1998, December 23,
1998, March 1, 1999 and March 19, 1999. After the execution of this Agreement,
the Company will file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by the Commission to
be effective under the Act, either (A) if the Company relies on Rule 434 under
the Act, a Term Sheet relating to the Securities, that shall identify the
Preliminary Prospectuses that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act, prospectuses in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i) (A) or (i) (B)
of this sentence as have been provided to and approved by the Global
Coordinators and counsel to the International Managers prior to the execution of
this Agreement, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under the Act,
an amendment to such registration statement, including the respective forms of
prospectus, a copy of which amendment has been furnished to and approved by the
Global Coordinators and counsel
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to the International Managers prior to the execution of this Agreement. The
Company may also file a Rule 462(b) Registration Statement for the purpose of
registering certain additional Securities, which registration shall be effective
upon filing with the Commission.
(b) The Commission has not issued any order preventing or suspending
the use of any preliminary prospectus. When the Preliminary Prospectus was filed
with the Commission it (i) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, including the Rule 430A Information and Rule 434
Information, it (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectuses or any Term Sheet that
is a part thereof or any amendment or supplement to the Prospectuses are filed
with the Commission pursuant to Rule 424(b) (or, if the Prospectuses or any Term
Sheet that is a part thereof or such amendment or supplement is not required to
be so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectuses was or is declared effective)
and on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectuses, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in the International Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
International Prospectus or any amendment or supplement thereto in reliance upon
and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers specifically for use therein.
Each International Preliminary Prospectus, U.S. Preliminary
Prospectus, International Prospectus and U.S. Prospectus delivered to the
Underwriters for use in connection with the offering of the Securities for sale
to the public and each Direct Sales Preliminary Prospectus and Direct Sales
Prospectus to be used in connection with the offering of the Affiliated
Securities for sale to the Affiliated Purchasers was identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(c) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (i) the Company
has filed a Rule 462(b)
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Registration Statement in compliance with and that is effective upon filing
pursuant to Rule 462(b) and has received confirmation of its receipt and (ii)
the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.
(d) The issuance, offering and sale of the Private Securities to the
Private Investors and of the Company's Class A Warrants (the "Class A Warrants")
to the holders thereof (the "Class A Warrant Holders") by the Company, and the
issuance of the Common Shares issuable upon exercise of the Class A Warrants and
the Class B Warrants, in the manner described in the Registration Statement and
the Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses, were, are and will be exempt from the registration and
prospectus delivery requirements of the Act and any similar requirements under
any applicable securities, blue sky or insurance laws of any applicable
jurisdiction, subject to the accuracy of the representations made by the
purchasers thereof. Neither the Company nor any "affiliate" of the Company
within the meaning of Rule 501(b) under the Act or any person acting on behalf
of the Company or any such affiliate, directly or indirectly, (i) has made or
will make offers or sales of, or solicitations of offers to buy, the Private
Securities or the Class A Warrants (or any securities of the same or similar
respective classes) to any prospective purchaser under circumstances that would
require registration of the Private Securities or the Class A Warrants under the
Act or (ii) has engaged in any form of "general solicitation" or "general
advertising" within the meaning of Rule 502(c) under the Act with respect to the
Private Securities or the Class A Warrants.
(e) Each of the Company, Global Markets Guaranty Ltd., a Bermuda
corporation (the "Insurance Subsidiary"), and GMG Marketing Ltd., a Bermuda
corporation (the "Marketing Subsidiary", and, together with the Insurance
Subsidiary, the "Subsidiaries"), has been duly organized and is validly existing
as a corporation in good standing under the laws of Bermuda and is duly
qualified as a foreign corporation to transact business and is in good standing
under the laws of all other jurisdictions where the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or to be in good standing would not have a
material adverse effect on the Company and its Subsidiaries, taken as a whole.
(f) The Company has no subsidiaries other than the Insurance
Subsidiary and the Marketing Subsidiary.
(g) Except as disclosed in the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, each of the
Company and its Subsidiaries has full corporate power to own or lease its
properties and to conduct its business as described in the Registration
Statement and the Prospectuses or, if the Prospectuses are not in existence, the
most recent Preliminary Prospectuses; and the Company has full corporate power
to enter into this Agreement and the U.S. Underwriting Agreement and to carry
out all the terms and provisions hereof and thereof to be carried out by it.
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(h) Except as disclosed in the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, the issued
shares of capital stock of the Subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable and are owned beneficially by
the Company free and clear of any security interests, liens, encumbrances,
equities or claims.
(i) The Company has an authorized, issued and outstanding
capitalization as set forth on a historical basis in the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses. All
of the issued shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. The Firm Securities and
the Option Securities have been duly authorized and at the Firm Closing Date or
the related Option Closing Date (as the case may be), after payment therefor in
accordance herewith and with the U.S. Underwriting Agreement, will be validly
issued, fully paid and nonassessable. The Private Securities and the Affiliated
Securities have been duly authorized and, after payment therefor in accordance
with the separate securities purchase agreements entered or anticipated to be
entered into by the Company with (i) each of the Private Investors or (ii) each
of the Affiliated Purchasers (such securities purchase agreements, the "Direct
Agreements"), will be validly issued, fully paid and nonassessable. No holders
of outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Securities or Direct
Securities, and no holder of securities of the Company has any right which has
not been fully exercised or waived to require the Company to register the offer
or sale of any securities owned by such holder under the Act in the public
offering contemplated by this Agreement.
(j) The capital stock of the Company conforms to the description
thereof contained in the Prospectuses or, if the Prospectuses are not in
existence, the most recent Preliminary Prospectuses.
(k) Except as disclosed in the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, there are no
outstanding (A) securities or obligations of the Company or its Subsidiaries
convertible into or exchangeable for any capital stock of the Company or its
Subsidiaries, (B) warrants, rights or options to subscribe for or purchase from
the Company or its Subsidiaries any such capital stock or any such convertible
or exchangeable securities or obligations, or (C) obligations of the Company or
its Subsidiaries to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or options.
(l) The consolidated financial statements of the Company and its
Insurance Subsidiary included in the Registration Statement and the Prospectuses
or, if the Prospectuses are not in existence, the most recent Preliminary
Prospectuses, fairly presents the financial position of the Company and its
Insurance Subsidiary and the results of operations as of the dates and for the
periods therein specified. Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein). The
unaudited pro forma consolidated balance sheet of the
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Company and its Insurance Subsidiary included in the Registration Statement and
the Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses, complies to the extent required in form in all
material respects with the applicable accounting requirements of Rule 11-02 of
Regulation S-X and the pro forma adjustments have been properly applied to the
historical amounts in the compilation of such balance sheet.
(m) KPMG Peat Marwick, who have certified the consolidated financial
statements of the Company and its Insurance Subsidiary and delivered their
report with respect to the audited consolidated financial statements included in
the Registration Statement and the Prospectuses or, if the Prospectuses are not
in existence, the most recent Preliminary Prospectuses, are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder.
(n) The execution and delivery of this Agreement and the U.S.
Underwriting Agreement have been duly authorized by the Company and this
Agreement and the U.S. Underwriting Agreement have been duly executed and
delivered by the Company, and are the valid and binding agreements of the
Company, enforceable against the Company in accordance with their terms, subject
to applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally, and subject, as to enforceability, to public policy or Federal
or state securities law limitations on the indemnification and contribution
provisions contained herein and therein and to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
(o) No legal or governmental proceedings are pending to which the
Company or its Subsidiaries are parties or to which the property of the Company
or its Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectuses and are not described therein, or if
the Prospectuses are not in existence, in the most recent Preliminary
Prospectuses, and, to the best of the Company's knowledge, no such proceedings
have been threatened against the Company or its Subsidiaries or with respect to
any of their respective properties, except as described in the Registration
Statement or the Prospectuses, or if the Prospectuses are not in existence, the
most recent Preliminary Prospectuses; and no contract or other document is
required to be described in the Registration Statement or the Prospectuses or to
be filed as an exhibit to the Registration Statement that is not described
therein, or if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses, or filed as required.
(p) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and the U.S. Underwriting
Agreement and of the Direct Securities to the Private Investors and the
Affiliated Purchasers by the Company pursuant to the Direct Agreements and the
issuance of Common Shares issuable upon the exercise of the Class A Warrants and
Class B Warrants, the compliance by the Company with the other provisions of
this Agreement, the U.S. Underwriting Agreement, the Direct Agreements and the
Class A Warrants and Class B Warrants and the consummation of the other
transactions herein and therein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as
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<PAGE> 9
may be required under state securities or blue sky laws and, if the Registration
Statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement and the U.S. Underwriting
Agreement) under the Act, or (ii) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, lease or other agreement or instrument
to which the Company or its Subsidiaries are parties or by which the Company or
its Subsidiaries or any of their respective properties are bound, or the
Memorandum of Association or Bye-Laws of the Company or its Subsidiaries, or any
statute or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or its
Subsidiaries, except that enforcement of rights to indemnity and contribution
hereunder or thereunder may be limited by Federal or state securities laws or
principles of public policy.
(q) The Insurance Subsidiary has full corporate power to enter into
each of the Quota Share Reinsurance Treaty dated as of November 25, 1998 and the
respective Master Facultative Reinsurance Agreements each dated as of November
25, 1998 (collectively, the "Reinsurance Treaties") with ACA Financial Guaranty
Corporation ("ACA") and to carry out all the terms and provisions thereof to be
carried out by it; the execution and delivery of the Reinsurance Treaties have
been duly authorized by the Insurance Subsidiary, and the Reinsurance Treaties
have been duly executed and delivered by the Insurance Subsidiary and are the
valid and binding agreements of the Insurance Subsidiary, enforceable against
the Insurance Subsidiary in accordance with their terms, subject to any
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally, and subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law); the compliance by the Insurance Subsidiary with the provisions of the
Reinsurance Treaties and the consummation of the transactions contemplated
therein do not (i) require the Insurance Subsidiary to obtain the consent,
approval, authorization, registration or qualification of or with any
governmental authority, including without limitation, any insurance regulatory
authority of Bermuda, Maryland or New York, except such as have been obtained,
or (ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or its
Subsidiaries is a party or by which the Company or its Subsidiaries or any of
their respective properties are bound, or the Memorandum of Association or
Bye-Laws of the Company or its Subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Company or its Subsidiaries; the Reinsurance
Treaties are in full force and effect, and the Insurance Subsidiary is not in
violation of, or in default in the due performance, observance or fulfillment
of, any obligation, agreement, term, covenant or condition contained in the
Reinsurance Treaties; neither the Company nor either of its Subsidiaries has
received any notice from ACA or any of its affiliates or otherwise has any
knowledge that ACA intends not to perform its obligations under the Reinsurance
Treaties or will be unable to perform such obligations.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses or, if the Prospectuses
are not in existence, the most
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recent Preliminary Prospectuses, neither the Company nor its Subsidiaries have
sustained any material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or governmental
proceeding and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the condition
(financial or otherwise), management, business prospects, net worth, or results
of operations of the Company or its Subsidiaries, except in each case as
described in or contemplated by the Prospectuses or, if the Prospectuses are not
in existence, the most recent Preliminary Prospectuses.
(s) The Company has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company, except as
contemplated by this Agreement and the U.S. Underwriting Agreement and, in the
case of clause (ii) hereof with respect to Inter-Atlantic Securities
Corporation, as described in or contemplated by the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses.
(t) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses or, if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, (1) the Company
and its Subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business which is required to be disclosed in the
Prospectuses or the most recent Preliminary Prospectuses and is not so
disclosed; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
Subsidiaries, except in each case as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
(u) The Company and its Subsidiaries have good and marketable title
in fee simple to all items of real property and marketable title to all material
personal property owned by each of them, in each case free and clear of any
security interests, liens, encumbrances, equities, claims and other defects,
except such as do not materially and adversely affect the value of such property
and do not interfere in any material respect with the use made or proposed to be
made of such property by the Company or its Subsidiaries, and any real property
and buildings held under lease by the Company or its Subsidiaries are held under
valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere in any material respect with the use made or
proposed to be made of such property and buildings by the Company or its
Subsidiaries, in each case except as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
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(v) The Company's Subsidiaries are not currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on its capital stock, from repaying to the Company any
loans or advances to it from the Company or from transferring any of its
property or assets to the Company, except as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
(w) The Company and its Subsidiaries will conduct their respective
businesses in a manner that will not subject either of them to registration as
an investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and the transactions contemplated by this Agreement, the U.S.
Underwriting Agreement, the Direct Agreements, the Class A Warrants and the
Class B Warrants will not cause the Company or either of its Subsidiaries to
become an investment company or an entity controlled by an investment company
subject to registration under the 1940 Act. The Company has filed Form
F-N with the Commission, and such Form accurately sets forth all information
required to be included therein and complies in all material respects with the
applicable requirements of the Act and the rules and regulations of the
Commission thereunder.
(x) Each certificate signed by any officer of the Company or its
Subsidiaries and delivered to the Global Coordinators, the Lead Managers or
counsel for the International Managers shall be deemed to be a representation
and warranty by the Company to each International Manager as to the matters
covered thereby.
(y) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) The Company has not distributed and, prior to the later of (i)
the Firm Closing Date or the Option Closing Date and (ii) the completion of the
distribution of the Securities, will not distribute any offering material in
connection with the offering and sale of the Securities other than the
Registration Statement or any amendment thereto, any preliminary prospectus or
the Prospectuses or any amendment or supplement thereto, or other materials, if
any, permitted by the Act.
(aa) Except as disclosed in the Prospectuses, or if the Prospectuses
are not in existence, the most recent Preliminary Prospectuses, neither the
Company nor its Subsidiaries are
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(i) in violation of its Memorandum of Association or Bye-Laws or other
organizational documents, (ii) in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to it or any of its
properties, except where any such violation or violations in the aggregate would
not reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), management, business prospects, net worth or results
of operations of the Company and its Subsidiaries, taken as a whole, (iii) in
violation of any judgment, injunction, order or decree of any court,
governmental agency or body (including, without limitation, any insurance
regulatory agency or body) or arbitrator having jurisdiction over it, except
where any such violation or violations in the aggregate would not reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of operations
of the Company and its Subsidiaries, taken as a whole. No default exists, and no
event has occurred which, with notice or lapse of time or both, would constitute
a default in the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or its Subsidiaries are parties or by which the
Company or its Subsidiaries or any of their respective properties is bound,
except where any such default or event or defaults or events in the aggregate
would not reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net worth or
results of operations of the Company and its Subsidiaries, taken as a whole.
(bb) The forms of certificate for the Securities conform to the
requirements of The Companies Act 1981 of Bermuda, and the Securities have been
approved for quotation on the Nasdaq Stock Market's National Market (the "Nasdaq
National Market"), subject to official notice of issuance.
(cc) No currency exchange control laws or withholding taxes of
Bermuda or elsewhere apply to the payment of dividends (i) on the Securities by
the Company or (ii) by the Subsidiaries to the Company, except in each case as
described in or contemplated by the Prospectuses or, if the Prospectuses are not
in existence, the most recent Preliminary Prospectuses.
(dd) The Insurance Subsidiary has been duly registered by the
Bermuda Minister of Finance as a Class 3 insurer under the Insurance Act 1978 of
Bermuda (the "Insurance Act") and is in compliance with the requirements of the
Insurance Act and any applicable rules and regulations thereunder and has filed
all statutory financial returns, reports, documents and other information
required to be filed thereunder, except where the failure to comply or to file
would not reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net worth,
or
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results of operations of the Company and its Subsidiaries, taken as a whole. The
Company is a holding company and is not subject to Bermuda insurance
regulations. The Company and its Subsidiaries are in compliance with all other
insurance laws and regulations of the jurisdictions that apply to them,
including laws that relate to companies that control insurance companies, except
where the failure to comply would not reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), management, business
prospects, net worth, or results of operations of the Company and its
Subsidiaries, taken as a whole. Neither the Company nor either of its
Subsidiaries has received any notification from any insurance authority,
commission or other insurance regulatory body in Bermuda or elsewhere to the
effect that the Insurance Subsidiary is not in compliance with any insurance law
or regulation.
(ee) Each of the Company and its Subsidiaries possesses all
certificates, authorizations and permits issued by the appropriate Bermuda, U.S.
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor the Subsidiaries have
received any notice of proceedings relating to the revocation, modification or
nonrenewal of any such certificate, authorization or permit which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would reasonably be expected to result in a material adverse effect on the
condition (financial or otherwise), management, business prospects, net worth or
results of operations of the Company and the Subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses.
(ff) Neither the Company nor either of its Subsidiaries is required
to be licensed or admitted as an insurer or an insurance holding company, as
applicable, in, or to otherwise comply with the insurance laws and regulations
of, any jurisdiction other than Bermuda in order to conduct their respective
businesses as described in the Prospectuses or, if the Prospectuses are not in
existence, the most recent Preliminary Prospectuses.
(gg) No relationship, direct or indirect, exists between or among
the Company or its Subsidiaries on the one hand, and the directors, officers,
promoters, affiliates or shareholders of the Company or its Subsidiaries on the
other hand, that is required to be described in the Registration Statement or
the Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses, which is not so described.
(hh) None of the Underwriters or any purchaser from the Underwriters
of the Securities (other than purchasers resident in Bermuda for Bermuda
exchange control purposes) will be subject to any stamp duty, excise or similar
tax imposed in Bermuda solely as a consequence of the offering, sale or purchase
of the Securities.
(ii) To the knowledge of the Company and its Subsidiaries, no change
in any insurance law or regulation is pending that would reasonably be expected
to have, individually or in the aggregate, a material adverse effect on the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company and its Subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectuses or, if the Prospectuses are not
in existence, the most recent Preliminary Prospectuses.
(jj) Each of the Company and its Subsidiaries has received from the
Bermuda Minister of Finance an assurance under The Exempted Undertakings Tax
Protection Act 1966 of Bermuda to the effect set forth in the Prospectuses or,
if the Prospectuses are not in existence, the most recent Preliminary
Prospectuses, under the caption "Certain Tax Considerations--Taxation of GMA,
the Operating Company and the Marketing Company--Bermuda."
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<PAGE> 14
(kk) The Company has duly and irrevocably appointed CT Corporation
System, 1633 Broadway, New York, New York, as its agent to receive service of
process with respect to actions arising out of or in connection with violations
of United States federal securities laws relating to offers and sales of the
Securities.
(ll) The Bermuda Monetary Authority has designated the Company and
its Subsidiaries as nonresident for exchange control purposes and has granted
permission for the issue and transfer of the Securities. The Company and its
Subsidiaries are "exempted companies" under Bermuda law and have not (i)
acquired and do not hold any land in Bermuda, other than 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) taken
mortgages on land in Bermuda to secure an amount in excess of $50,000 without
the consent of the Bermuda Minister of Finance, (iii) acquired any bonds or
debentures secured by any land in Bermuda (other than certain types of Bermuda
government securities), or (iv) conducted their businesses in a manner that is
prohibited for "exempted companies" under Bermuda law. Neither the Company nor
its Subsidiaries have received notification from the Bermuda Monetary Authority
or any other Bermuda governmental authority of proceedings relating to the
modification or revocation of its designation as nonresident for exchange
control purposes, its permission to issue and transfer the Securities, or its
status as an "exempted company".
SECTION 2. Sale and Delivery to the International Managers; Closing.
(a) On the basis of the representations, warranties, agreements and covenants
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to issue and sell to each of the International Managers, and each
of the International Managers, severally and not jointly, agrees to purchase
from the Company, at a purchase price of $_____ per share, the number of Firm
International Securities set forth opposite the name of such International
Manager in Schedule A hereto. One or more certificates in definitive form for
the Firm International Securities that the several International Underwriters
have agreed to purchase hereunder, and in such denomination or denominations and
registered in such name or names as the Lead Managers request upon written
notice to the Company at least 48 hours prior to the Firm Closing Date, shall be
delivered by or on behalf of the Company to the Lead Managers for the respective
accounts of the International Managers, against payment by or on behalf of the
International Managers of the purchase price therefor by wire transfer in
same-day funds (the "Wired Funds") to the account of the Company. Such delivery
of and payment for the Firm International Securities shall be made at the
offices of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New
York, at 9:00 A.M., New York time, on March __, 1999, or at such other place,
time or date as the Global Coordinators and the Company may agree upon or as the
Lead Managers may determine pursuant to Section 10 hereof, such time and date of
delivery against payment being herein referred to as the "Firm Closing Date".
The Company will make such certificate or certificates for the Firm
International Securities available for checking and packaging by the Lead
Managers at the offices in New York, New York of the Company's transfer agent or
registrar or of Merrill Lynch, Pierce, Fenner & Smith Incorporated at least 24
hours prior to the Firm Closing Date.
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<PAGE> 15
(b) For the purpose solely of covering any over-allotments in
connection with the distribution and sale of the Firm International Securities
as contemplated by the International Prospectus, the Company hereby grants to
the several International Managers an option to purchase, severally and not
jointly, the International Option Securities. The purchase price to be paid for
any International Option Securities shall be the same price per share as the
price per share for the Firm International Securities set forth above in
paragraph (a) of this Section 2. The option granted hereby may be exercised as
to all or any part of the International Option Securities from time to time
within thirty (30) days after the date of the International Prospectus (or, if
such 30th day shall be a Saturday or Sunday or a holiday, on the next business
day thereafter when the New York Stock Exchange is open for trading). The
International Managers shall not be under any obligation to purchase any of the
International Option Securities prior to the exercise of such option. The Global
Coordinators may from time to time exercise the option granted hereby by giving
notice in writing or by telephone (confirmed in writing) to the Company setting
forth the aggregate number of International Option Securities as to which the
several International Managers are then exercising the option and the date and
time for delivery of and payment for such International Option Securities. Any
such date of delivery shall be determined by the Global Coordinators but shall
not be earlier than two business days or later than five business days after
such exercise of the option and, in any event, shall not be earlier than the
Firm Closing Date. The time and date set forth in such notice, or such other
time or such other date as the Global Coordinators and the Company may agree
upon or as the Lead Managers may determine pursuant to Section 10 hereof, is
herein called the "Option Closing Date" with respect to such International
Option Securities. Subject to the terms and conditions herein set forth, upon
exercise of the option as provided herein, the Company shall become obligated to
sell to each of the several International Managers, and each of the
International Managers, severally and not jointly, shall become obligated to
purchase from the Company, the same percentage of the total number of the
International Option Securities as to which the several International Managers
are then exercising the option as such International Managers is obligated to
purchase of the aggregate number of Firm International Securities, as adjusted
by the Global Coordinators in such manner as deemed advisable to avoid
fractional shares. If the option is exercised as to all or any portion of the
International Option Securities, one or more certificates in definitive form for
such International Option Securities, and payment therefor, shall be delivered
on the related Option Closing Date in the manner, and upon the terms and
conditions, set forth in paragraph (a) of this Section 2, except that reference
therein to the Firm International Securities and the Firm Closing Date shall be
deemed, for purposes of this paragraph (b), to refer to such International
Option Securities and Option Closing Date, respectively.
(c) The Company hereby acknowledges that the wire transfer by or on
behalf of the International Managers of the purchase price for any of the
International Securities does not constitute closing of a purchase and sale of
the International Securities. Only execution and delivery of a receipt for the
International Securities by the International Managers indicates completion of
the closing of a purchase of the International Securities from the Company.
Furthermore, in the event that the International Managers wire funds to the
Company prior to the completion of the closing of a purchase of the
International Securities, the Company hereby acknowledges that until the
International Managers execute and deliver a receipt for the
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<PAGE> 16
International Securities, by facsimile or otherwise, the Company will not be
entitled to the Wired Funds and shall return the Wired Funds to the
International Managers as soon as practicable (by wire transfer of same-day
funds) upon demand. In the event that the closing of a purchase of the
International Securities is not completed and the Wired Funds are not returned
by the Company to the International Managers on the same day the Wired Funds
were received by the Company, the Company agrees to pay to the International
Managers in respect of each day the Wired Funds are not returned by it, in
same-day funds, interest on the amount of such Wired Funds in an amount
representing the International Managers' cost of financing as reasonably
determined by Merrill Lynch.
(d) It is understood that each International Manager has authorized
the Lead Managers, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Firm International Securities and the
International Option Securities, if any, which it has agreed to purchase. No
such payment shall relieve such International Manager or International Managers
from any of its or their obligations hereunder.
SECTION 3. Covenants of the Company. The Company covenants and
agrees with each of the International Managers that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement and the
U.S. Underwriting Agreement, and any amendments thereto to become effective as
promptly as possible. If required, the Company will file the Prospectuses or any
Term Sheet that constitutes a part thereof and any amendment or supplement
thereto with the Commission in the manner and within the time period required by
Rules 434 and 424(b) under the Act. During any time when a prospectus relating
to the Securities is required to be delivered under the Act, the Company (i)
will comply with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions of this Agreement and the U.S. Underwriting Agreement and of the
Prospectuses, as then amended or supplemented, and (ii) will not file with the
Commission the Prospectuses, Term Sheet or the amendment referred to in the
second sentence of Section 1(a) hereof, any amendment or supplement to such
Prospectuses, Term Sheet or any amendment to the Registration Statement or any
Rule 462(b) Registration Statement of which the Global Coordinators previously
have been advised and furnished with a copy for a reasonable period of time
prior to the proposed filing and as to which filing the Global Coordinators or
counsel for the International Managers shall not have given their consent (which
consent will not be unreasonably withheld or delayed). The Company will prepare
and file with the Commission, in accordance with the rules and regulations of
the Commission, promptly upon the reasonable request by the Global Coordinators
or counsel for the International Managers, any amendments to the Registration
Statement or amendments or supplements to the Prospectuses that may be necessary
or advisable in connection with the distribution of the Securities by the
several Underwriters, and will use its best efforts to cause any such amendment
to the Registration Statement to be declared effective by the Commission as
promptly as possible. The Company will advise the Global Coordinators, promptly
after receiving notice thereof, of the
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<PAGE> 17
time when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectuses or any amendment or supplement thereto
has been filed and will provide evidence satisfactory to the Global Coordinators
of each such filing or effectiveness.
(b) The Company will advise the Global Coordinators, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
preliminary prospectus or the Prospectuses or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for offering
or sale in any jurisdiction, (iii) the institution, threatening or contemplation
of any proceeding for any such purpose or (iv) any request made by the
Commission for amending the Original Registration Statement or any Rule 462(b)
Registration Statement, for amending or supplementing the Prospectuses or for
additional information. The Company will use its best efforts to prevent the
issuance of any such stop order and, if any such stop order is issued, to obtain
the withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the insurance and securities or blue sky laws of
such jurisdictions as the Global Coordinators may designate and will continue
such qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectuses, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectuses to comply with the Act or the
rules or regulations of the Commission thereunder, the Company will promptly
notify the Global Coordinators thereof and, subject to Section 3(a) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectuses
that corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the Lead
Managers and to counsel for the International Managers a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) (ii) to each other
International Manager, a conformed copy of such registration statement or any
Rule 462(b) Registration Statement and each amendment thereto (in each case
without exhibits thereto) and (iii) so long as a prospectus relating to the
Securities is required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectuses or any amendment or supplement
thereto as the Lead Managers may reasonably request; without limiting the
application of clause (iii) of this sentence, the Company, not later than (A)
6:00
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<PAGE> 18
P.M., New York City time, on the date of determination of the public offering
price, if such determination occurred at or prior to 10:00 A.M., New York City
time, on such date or (B) 2:00 P.M., New York City time, on the business day
following the date of determination of the public offering price, if such
determination occurred after 10:00 A.M., New York City time, on such date, will
deliver to the International Managers, without charge, as many copies of the
Prospectuses and any amendment or supplement thereto as the Lead Managers may
reasonably request for purposes of confirming orders that are expected to settle
on the Firm Closing Date. The copies of the Registration Statement and each
amendment thereto and the International Preliminary Prospectuses, International
Prospectuses and any amendments or supplements thereto furnished to the
International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(f) The Company, as soon as practicable, will make generally
available to its securityholders and to the Lead Managers a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under the caption "Use of Proceeds" in the Prospectuses.
The Company and the Subsidiaries will comply with their respective operating,
investment and underwriting guidelines, as each are in effect from time to time.
(h) The Company will not, directly or indirectly, without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Prudential Securities Incorporated, on behalf of the International Managers,
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 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 hereof, except (i) pursuant to this Agreement and the U.S.
Underwriting Agreement, (ii) pursuant to the Direct Agreements and (iii) the
issuance of options pursuant to the Global Markets Access Ltd. Initial Stock
Option Plan as may be amended from time to time, which options shall not be
exercisable until one year after the date hereof, except as otherwise provided
in such plan as of the date hereof upon the occurrence of certain events. The
Company will not accelerate the exercisability of the registration rights
granted to the Strategic Investors, the Class A Warrant Holders and the Class B
Warrant Holders and will not file any registration statement on Form S-8 with
respect to, or otherwise register for resale with the Commission, the Private
Securities or the Common Shares underlying any options or warrants, including,
without limitation, the Class A Warrants or the Class B Warrants, issued by the
Company for a period of one year from the date hereof, in each case, without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Prudential Securities Incorporated on behalf of the International Managers.
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(i) The Company will not, directly or indirectly, (i) take any
action designed to cause or to result in, or which would reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or (ii) (A) sell,
bid for, purchase, or pay anyone any compensation for soliciting purchases of,
the Securities or (B) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company, except as
contemplated by this Agreement and the U.S. Underwriting Agreement and, in the
case of clause (ii) hereof with respect to Inter-Atlantic Securities
Corporation, as described in or contemplated by the Prospectuses or, if the
Prospectuses are not in existence, the most recent Preliminary Prospectuses.
(j) The Company will obtain the agreements described in Section 5(h)
and Section 5(i) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company or its
Subsidiaries shall occur as a result of which in your reasonable opinion the
market price of the Common Shares has been or is likely to be materially
affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectuses), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (i) 10:00 P.M., Eastern time, on the
date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq National Market subject to official notice of issuance
prior to the Firm Closing Date. The Company will use its best efforts to ensure
that the Securities remain included for quotation on the Nasdaq National Market
or listed on a nationally recognized stock exchange for at least the first two
fiscal years following the Firm Closing Date.
SECTION 4. Payment of Expenses. The Company will pay all costs and
expenses incident to the performance of its obligations under this Agreement,
whether or not the transactions contemplated herein are consummated or this
Agreement is terminated pursuant to Section 9 hereof, including all costs and
expenses incident to (i) the printing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Rule 462(b) Registration Statement, any preliminary prospectus and
the Prospectuses and any amendment or supplement thereto, this Agreement and any
blue sky memoranda, (ii) all
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<PAGE> 20
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees and
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters and the
transfer of the Securities between the International Managers and the U.S.
Underwriters, (v) the qualification of the Securities under state or foreign
insurance or securities and blue sky laws, including filing fees and reasonable
fees and disbursements of counsel for the Underwriters relating thereto, (vi)
the filing fees of the Commission and the National Association of Securities
Dealers, Inc. (the "NASD") relating to the Securities, (vii) any quotation of
the Securities on the Nasdaq National Market, (viii) any meetings with
prospective investors in the Securities (other than as shall have been
specifically approved by the Global Coordinators to be paid for by the
Underwriters) and (ix) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Global Coordinators
to be paid for by the Underwriters). If the sale of the International Securities
provided for herein is not consummated because any condition to the obligations
of the International Managers set forth in Section 5 hereof is not satisfied,
because this Agreement is terminated pursuant to Section 9 hereof or because of
any failure, refusal or inability on the part of the Company to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder other than by reason of a default by any of the International
Managers, the Company will reimburse the International Managers severally upon
demand for all reasonable out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the International Securities. The Company shall
not in any event be liable to any of the International Managers for the loss of
anticipated profits from the transactions covered by this Agreement.
SECTION 5. Conditions of the International Managers' Obligations.
The obligations of the several International Managers to purchase and pay for
the Firm International Securities shall be subject, in the Lead Managers' sole
discretion, to the accuracy of the representations and warranties of the Company
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement, as amended through the
Firm Closing Date, has not been declared effective as of the time of execution
hereof, the Registration Statement, as amended, and, if the Company has elected
to rely upon Rule 462(b), the Rule 462(b) Registration Statement, shall have
been declared effective not later than the earlier of (i) 11:00 A.M., New York
time, on the date on which the amendment to the registration statement
originally filed with respect to the Securities or to the Rule 462(b)
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and
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date as shall have been consented to by the Global Coordinators; if required,
the Prospectuses and any amendment or supplement thereto shall have been filed
with the Commission, or shall have been filed at such later time and date as
shall have been consented to by the Global Coordinators; if required, the
Prospectuses or any Term Sheet that constitutes a part thereof and any amendment
or supplement thereto shall have been filed with the Commission in the manner
and within the time period required by Rules 434 and 424(b) under the Act; no
stop order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Global Coordinators, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectuses or
otherwise).
(b) The Lead Managers shall have received an opinion, dated the Firm
Closing Date, of Drinker Biddle & Reath LLP, United States counsel for the
Company, substantially to the effect that:
(i) this Agreement and the U.S. Underwriting Agreement have been
duly executed and delivered by the Company;
(ii) the form of certificates for the Securities conforms to the
requirements of the Nasdaq National Market;
(iii) all of the issued shares of capital stock of the Company have
been issued in compliance with all applicable United States federal
securities laws; and, to the best knowledge of such counsel, no
holders of securities of the Company are entitled to have such
securities registered under the Registration Statement;
(iv) the statements set forth in the Prospectuses under the
headings, "Risk Factors--Income Tax Risks", "Risk Factors--Shares
Eligible for Future Sale", "Management's Discussion and Analysis of
Financial Condition and Plan of Operations--Taxation",
"Business--Legal Proceedings", "Shares Eligible for Future Sale",
"Certain Tax Considerations--Taxation of GMA, the Operating Company
and the Marketing Company--United States", and "Certain Tax
Considerations--Taxation of Shareholders--United States Taxation",
insofar as such statements constitute a summary of provisions of
United States federal law and the legal or governmental proceedings
referred to therein, provide a fair summary of such legal matters
and proceedings;
(v) to the best knowledge of such counsel, (A) no legal or
governmental proceedings are pending in the United States to which
the Company or its Subsidiaries are parties or to which the property
of the Company or its Subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectuses and
are not described therein, and no such proceedings have been
threatened against the Company or its Subsidiaries or with
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respect to any of their respective properties and (B) no contract or
other document is required to be described in the Registration
Statement or the Prospectuses or to be filed as an exhibit to the
Registration Statement that is not described therein or filed as
required;
(vi) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement and the U.S.
Underwriting Agreement and of the Direct Securities to the Private
Investors and the Affiliated Purchasers by the Company pursuant to
the Direct Agreements and the issuance of Common Shares issuable
upon the exercise of the Class A Warrants and Class B Warrants, the
compliance by the Company with the other provisions of this
Agreement, the U.S. Underwriting Agreement, the Direct Agreements
and the Class A Warrants and Class B Warrants and the consummation
of the other transactions herein and therein contemplated, and the
compliance by the Insurance Subsidiary with the provisions of the
Reinsurance Treaties and the consummation of the transactions
contemplated therein do not (A) require the consent, approval,
authorization, registration or qualification of or with any United
States or Pennsylvania governmental authority, except such as have
been obtained, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument, known to such counsel, to which the
Company or its Subsidiaries is a party or by which the Company or
its Subsidiaries or any of their respective properties are bound, or
any United States or Pennsylvania statute or any judgment, decree,
order, rule or regulation of any United States or Pennsylvania court
or other United States or Pennsylvania governmental authority or any
arbitrator known to such counsel and applicable to the Company or
its Subsidiaries, except that enforcement of rights to indemnity and
contribution thereunder may be limited by Federal or state
securities laws or principles of public policy;
(vii) the Original Registration Statement, any Rule 462(b)
Registration Statement and the Prospectuses, each as of their
respective effective or issue dates (in each case, other than the
financial statements and the notes thereto and the schedules and
other financial information contained therein or omitted therefrom,
as to which such counsel need express no opinion), comply as to form
in all material respects with the applicable requirements of the Act
and the rules and regulations of the Commission thereunder;
(viii) no registration of the Private Securities or the Class A
Warrants under the Act is required for the offer and sale of the
Private Securities to the Private Investors or of the Class A
Warrants to the Class A Warrant Holders by the Company, in the
manner described in the Registration Statement and the Prospectuses;
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<PAGE> 23
(ix) neither the Company nor either of its Subsidiaries is required
to be licensed or admitted as an insurer or an insurance holding
company, as applicable, in the Commonwealth of Pennsylvania in order
to conduct their respective businesses as described in the
Prospectuses;
(x) no authorization of, and no filing with or notice to, any
governmental or regulatory authority of the Commonwealth of
Pennsylvania or the United States federal government, or any
self-regulatory organization or any court or other tribunal of the
Commonwealth of Pennsylvania or the United States federal government
is required by either the Company or the Subsidiaries to own, lease,
license and operate its properties or to conduct its business as
described in the Prospectuses;
(xi) each of the Company and its Subsidiaries has, to the fullest
extent permitted by law, validly and irrevocably submitted to the
jurisdiction of any federal or state court sitting in the City of
New York and waived any objections that it may have to the laying of
venue of any such suit, action or proceeding brought in any such
court based on or arising under this Agreement or any claims that
any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum, and has validly appointed CT
Corporation System as its authorized agent to receive service of
process in any such suit, action or proceeding; and the choice of
the law of New York as the governing law of this Agreement would be
recognized by a Pennsylvania court as a valid and effective choice
of law;
(xii) neither the Company nor its Subsidiaries are, nor will the
transactions contemplated by this Agreement or the U.S. Underwriting
Agreement cause either the Company or its Subsidiaries to be
required to register as an investment company under the 1940 Act or
to be controlled by an investment company subject to such
registration; the Insurance Subsidiary is a "foreign insurance
company" within the meaning of Rule 3a-6 under the 1940 Act, and the
conduct of the respective businesses of the Company and its
Subsidiaries as described in the Prospectuses will qualify the
Insurance Subsidiary as a "foreign insurance company" within the
meaning of such Rule; Form F-N has been filed with the Commission,
and such Form to the best of such counsel's knowledge accurately
sets forth all information required to be included therein and
complies as to form in all material respects with the applicable
requirements of the Act and the rules and regulations of the
Commission thereunder; and
(xiii) to the best knowledge of such counsel, no relationship,
direct or indirect, exists between or among the Company or its
Subsidiaries on the one hand, and the directors, officers,
promoters, affiliates or shareholders of the Company or its
Subsidiaries on the other hand, that is required to be described in
the Registration Statement or the Prospectuses which is not so
described.
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<PAGE> 24
Such counsel shall also state that, based solely upon a telephone
conversation with a member of the staff of the Commission, the Registration
Statement has become effective under the Act and no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued and no proceedings for that purpose are pending before or, to the best
knowledge of such counsel, are threatened or are contemplated by the Commission.
Such counsel shall also state that it has been notified that the
Securities have been included for trading on the Nasdaq National Market subject
to official notice of issuance.
Such counsel shall also state that any required filing of the
Prospectuses, or any Term Sheet that constitutes a part thereof, pursuant to
Rules 424(b) and 434 has been made in the manner and within the time periods
required by such Rules.
Such counsel shall also state that it has participated in the
preparation of the Registration Statement and the Prospectuses and in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company,
representatives of Conyers Dill & Pearman, Bermuda and Cayman Islands counsel
for the Company, representatives of Clifford Chance, United Kingdom counsel for
the Company, representatives of Crills Advocates, Jersey counsel for the
Company, and your representatives and your counsel at which the contents of the
Registration Statement, the Prospectuses and related matters were discussed and,
although such counsel has not passed upon or assumed any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectuses, and although such counsel has not
undertaken to verify independently the accuracy or completeness of the
statements in the Registration Statement and the Prospectuses and, therefore,
would not necessarily have become aware of any material misstatement of fact or
omission to state a material fact, on the basis of and subject to the foregoing,
such counsel does not believe that either the Registration Statement or the
Prospectuses (other than the financial statements and the notes or the schedules
thereto and other financial information and supplemental schedules included
therein or omitted therefrom, as to which such counsel need not express any
opinion) contained as of its date or contains as of the date of such opinion any
untrue statement of a material fact or omitted as of its date or omits as of the
date of such opinion to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deem proper, on the accuracy of the
representations and warranties made by the parties to this Agreement, the U.S.
Underwriting Agreement and the Direct Agreements, certificates of responsible
officers of the Company and public officials and statements made to such counsel
in discussions with responsible officers of the Company.
References to the Registration Statement and the Prospectuses in
this paragraph (b) shall include any amendment or supplement thereto at the date
of such opinion.
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<PAGE> 25
(c) The Lead Managers shall have received an opinion, dated the Firm
Closing Date, of Conyers Dill & Pearman, Bermuda and Cayman Islands counsel for
the Company, substantially to the effect that:
(i) the Company and its Subsidiaries have been duly incorporated,
are validly existing and in good standing (meaning that they have
not failed to make any filing with any Bermuda governmental
authority or to pay any Bermuda government fee or tax which might
make them liable to be struck off the Register of Companies and
thereby cease to exist under the laws of Bermuda) under the laws of
Bermuda;
(ii) the Company has the necessary corporate power and authority,
pursuant to its Memorandum of Association, to own and hold the
issued shares in the Subsidiaries; the Insurance Subsidiary has the
necessary corporate power and authority, pursuant to its Memorandum
of Association, to carry on insurance and reinsurance business as
described in the Prospectuses, was registered as an insurer in terms
of the Insurance Act of 1978, effective August 28, 1998, and is
authorized to carry on business in that capacity as described in the
Prospectuses, subject to the provisions of the Insurance Act of 1978
and the regulations promulgated thereunder, and to the conditions
set out in Schedule I to the Certificate of Registration, issued by
the Bermuda Registrar of Companies to the Insurance Subsidiary,
dated October 5, 1998, a copy of which, together with the said
Schedule I, shall be attached to such counsel's opinion;
(iii) the authorized share capital of the Insurance Subsidiary
established under its Memorandum of Association is U.S.$120,000,
divided into 120,000 shares, par value U.S.$1.00 per share; based
solely on the review of the Register of Members, the Insurance
Subsidiary has issued 120,000 shares, par value U.S.$1.00 per share,
to the Company and all such shares have been duly authorized and
validly issued, are fully paid and nonassessable (meaning that no
further sums are payable with respect to the holding of shares now
or in the future) and are registered in the name of the Company; the
authorized share capital of the Marketing Subsidiary established
under its Memorandum of Association is U.S.$_____, divided into
_____ shares, par value U.S.$[1.00] per share; based solely on the
review of the Register of Members, the Marketing Subsidiary has
issued _____ shares, par value U.S.$[1.00] per share, to the Company
and all such shares have been duly authorized and validly issued,
are fully paid and nonassessable (meaning that no further sums are
payable with respect to the holding of shares now or in the future)
and are registered in the name of the Company;
(iv) the authorized share capital of the Company established under
its Memorandum of Association is U.S.$150,000,000, divided into
100,000,000 Common Shares, par value U.S.$1.00 per share, and
50,000,000 Preferred Shares, par value U.S.$1.00 per share; without
giving effect to the issuance of Common
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<PAGE> 26
Shares contemplated by this Agreement, the U.S. Underwriting
Agreement and the Direct Agreements and based solely on the review
of the Register of Members, the Company has issued 12,000 Common
Shares, par value U.S.$1.00 per share, to Pembroke Company Limited
as nominee for Codan Trust Company Limited as trustee of the Global
Purpose Trust and all such Common Shares have been duly authorized
and validly issued, and are fully paid and nonassessable (meaning
that no further sums are payable with respect to the holding of such
Common Shares now or in the future);
(v) the Company has the necessary corporate power and authority to
enter into and perform its obligations under this Agreement, the
U.S. Underwriting Agreement, the Direct Agreements, the Class A
Warrants and the Class B Warrants and to issue the Securities, the
Direct Securities and the Class A Warrants; the execution and
delivery of this Agreement, the U.S. Underwriting Agreement, the
Direct Agreements, the Class A Warrants and the Class B Warrants by
the Company, and the performance of its obligations thereunder, do
not violate, and are not subject to preemptive rights under, the
Company's Memorandum of Association or Bye-Laws or any applicable
law, regulation, order or decree in Bermuda;
(vi) the Company has taken all corporate action required to
authorize its execution, delivery and performance of this Agreement,
the U.S. Underwriting Agreement, the Direct Agreements, the Class A
Warrants and the Class B Warrants; this Agreement, the U.S.
Underwriting Agreement, the Direct Agreements, the Class A Warrants
and the Class B Warrants have been duly executed and delivered by or
on behalf of the Company and constitute the valid and binding
obligations of the Company in accordance with the terms thereof;
(vii) the Securities and Direct Securities have been duly
authorized, and upon issue and payment for the Securities and Direct
Securities in accordance with this Agreement, the U.S. Underwriting
Agreement and the Direct Agreements, as applicable, and Registration
in the Register of Members of the Company, the Securities and Direct
Securities will be validly issued, fully paid and nonassessable
(meaning that no further sums are payable with respect to the
holding of such Securities or Direct Securities now or in the
future); upon issuance and payment for the Common Shares issued
pursuant to the Class A Warrants and the Class B Warrants, such
Common Shares will be validly issued, fully paid and nonassessable
(meaning that no further sums are payable with respect to the
holding of such Common Shares now or in the future); the holders of
Common Shares, including the Global Purpose Trust, are not entitled
to any preemptive or other rights to subscribe for shares in the
capital of the Company under the Memorandum of Association or the
Bye-Laws of the Company, this Agreement, the U.S. Underwriting
Agreement, the Direct Agreements, the Class
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A Warrants or the Class B Warrants, or any applicable law,
regulation, order or decree in Bermuda;
(viii) pursuant to Section 16 in the Companies Act 1981, the
Bye-Laws of the Company and its Subsidiaries have been duly adopted
by the directors and the members of the Company and its
Subsidiaries, respectively, and bind the Company and its
Subsidiaries and the members thereof to the same extent as if the
Bye-Laws had been signed and sealed by each said member, and
contained covenants on the part of each member to observe all the
provisions of the Bye-Laws;
(ix) no order, consent, approval, license, authorization or
validation of or exemption by any government or public body or
authority of Bermuda or any subdivision thereof is required to
authorize or is required in connection with the execution, delivery,
performance and enforcement of this Agreement, the U.S. Underwriting
Agreement, the Direct Agreements, the Class A Warrants and the Class
B Warrants, except such as have been duly obtained in accordance
with Bermuda law;
(x) it is not necessary or desirable to ensure the enforceability in
Bermuda of this Agreement, the U.S. Underwriting Agreement, the
Direct Agreements, the Class A Warrants or the Class B Warrants that
they be registered in any register kept by, or filed with, any
governmental authority or regulatory body in Bermuda;
(xi) there are no Bermuda stamp, transfer or similar taxes payable
in respect of the issuance and delivery of the Securities, the
Direct Securities or the Class A Warrants to the Underwriters, the
Private Investors, the Affiliated Purchasers or the Class A Warrant
Holders (assuming that such each such Underwriter, Private Investor,
Affiliated Purchaser or Class A Warrant Holder is not resident in
Bermuda for exchange control purposes) pursuant to this Agreement,
the U.S. Underwriting Agreement, the Direct Agreements, the Class A
Warrants or the Class B Warrants, as the case may be; this
Agreement, the U.S. Underwriting Agreement, the Direct Agreements,
the Class A Warrants and the Class B Warrants will not be subject to
ad valorem stamp duty in Bermuda, and no registration, documentary,
recording, transfer or other similar tax, fee or charge by any
Bermuda Government authority is payable in connection with the
execution, delivery, filing, registration or performance of this
Agreement, the U.S. Underwriting Agreement, the Direct Agreements,
the Class A Warrants and the Class B Warrants;
(xii) the Company and its Subsidiaries have been designated as
nonresident for the purposes of the Exchange Control Act, 1972 and
as such are free to acquire, hold and sell foreign currency and
securities; no currency exchange control laws or withholding taxes
of Bermuda or elsewhere apply to the payment of dividends
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<PAGE> 28
(a) on the Securities by the Company or (b) by the Subsidiaries to
the Company, except in each case as described in or contemplated by
the Prospectuses; and the Subsidiaries are not currently prohibited
by any Bermuda law or governmental authority, directly or
indirectly, from paying any dividends to the Company, from making
any other distributions on its capital stock, from repaying to the
Company any loans or advances to it from the Company or from
transferring any of its property or assets to the Company, except as
described or contemplated in the Prospectuses;
(xiii) the Insurance Subsidiary has the necessary corporate power
and authority to enter into and perform its obligations under the
Reinsurance Treaties with ACA; the Insurance Subsidiary has taken
all corporate action required to authorize its execution, delivery
and performance of the Reinsurance Treaties, and the Reinsurance
Treaties have been duly executed and delivered by the Insurance
Subsidiary and constitute the valid and binding obligations of the
Insurance Subsidiary in accordance with the terms thereof; the
compliance by the Insurance Subsidiary with the provisions of the
Reinsurance Treaties and the consummation of the transactions
contemplated therein do not (i) require the consent, approval,
authorization, registration or qualification of or with any Bermuda
governmental authority, except such as have been obtained, or (ii)
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to
which the Company or its Subsidiaries is a party or by which the
Company or its Subsidiaries or any of their respective properties
are bound, or the Memorandum of Association or Bye-Laws of the
Company or its Subsidiaries, or any Bermuda statute or any judgment,
decree, order, rule or regulation of any Bermuda court or other
governmental authority or any arbitrator applicable to the Company
or its Subsidiaries;
(xiv) at the date hereof, there is no Bermuda income, corporation or
profits tax, withholding tax, capital gains tax, capital transfer
tax, estate duty or inheritance tax payable by the Company and its
Subsidiaries or by any Underwriter, Private Investor, Affiliated
Purchaser or Class A Warrant Holder, except where such Underwriter,
Private Investor, Affiliated Purchaser or Class A Warrant Holder is
ordinarily resident in Bermuda for exchange control purposes; each
of the Company and its Subsidiaries has received, pursuant to the
Exempted Undertakings Tax Protection Act, 1966, an assurance from
the Minister of Finance of Bermuda that, in the event of there being
enacted in Bermuda any legislation imposing tax computed on profits
or income, or computed on any capital asset, gain or appreciation,
or any tax in the nature of estate duty or inheritance tax, such tax
shall not be applicable to it or to any of its operations or the
shares, debentures or other obligations of it except insofar as such
tax applies to persons ordinarily resident in Bermuda holding such
shares, debentures or other
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<PAGE> 29
obligations of it or any land leased or let to it, which assurance
shall be in effect and apply to it until March 28, 2016;
(xv) based solely on a search of the Register of Charges, maintained
by the Registrar of Companies pursuant to Section 55 of the
Companies Act 1981, conducted at 10:00 a.m. on ______, 1999, there
are no registered charges registered against the Company or its
Subsidiaries;
(xvi) based solely upon a search of the Cause Book of the Supreme
Court of Bermuda conducted at 10:00 a.m. on _____, 1999, there are
no judgments, nor legal or governmental proceedings pending in
Bermuda to which the Company or its Subsidiaries are parties;
(xvii) the Underwriters, Private Investors, Affiliated Purchasers
and Class A Warrant Holders will not be deemed to be resident
(including for exchange control purposes), domiciled or carrying on
business in Bermuda by reason only of the execution, performance and
enforcement of this Agreement, the U.S. Underwriting Agreement, the
Direct Agreements, the Class A Warrants or the Class B Warrants, as
applicable;
(xviii) each of the Underwriters, Private Investors, Affiliated
Purchasers and Class A Warrant Holders has standing to bring an
action or proceedings before the appropriate courts in Bermuda for
the enforcement of this Agreement, the U.S. Underwriting Agreement,
the Direct Agreements, the Class A Warrants or the Class B Warrants,
as applicable; it is not necessary or advisable in order for any
such Underwriter, Private Investor, Affiliated Purchaser or Class A
Warrant Holder to enforce its rights under this Agreement, the U.S.
Underwriting Agreement, the Direct Agreements, the Class A Warrants
or the Class B Warrants, as applicable, including the exercise of
remedies thereunder, that it be licensed, qualified or otherwise
entitled to carry on business in Bermuda;
(xix) the statements set forth under the heading "Description of
Capital Stock" in the Prospectuses, insofar as such statements
purport to summarize certain provisions of the capital stock of the
Company, the Class A Warrants and the Class B Warrants provide a
fair summary of such provisions, and the statements set forth under
the headings "Enforceability of Civil Liabilities Under United
States Federal Securities Laws", "Risk Factors -- Dependence on Key
Employees", "Risk Factors -- Regulation; Restrictions on Insurance
and Reinsurance Operations -- Bermuda", "Risk Factors -- Income Tax
Risks -- Bermuda Taxes", "Risk Factors -- Limitations on Ownership,
Transfers and Voting Rights", "Risk Factors -- Holding Company
Structure", "Risk Factors -- Foreign Corporation, Service of Process
and Enforcement of Judgments", "Management's Discussion and Analysis
of Financial Condition and Plan of Operations -- Taxation",
"Business -- Regulation -- Bermuda", "Description of
29
<PAGE> 30
Capital Stock", "Certain Tax Considerations -- Taxation of GMA, the
Operating Company and the Marketing Company -- Bermuda" and "Certain
Tax Considerations -- Taxation of Shareholders -- Bermuda Taxation"
in the Prospectuses, insofar as such statements constitute a summary
of provisions of Bermuda law or the Company's Memorandum of
Association and Bye-Laws, provide a fair summary of such legal
matters or the Memorandum of Association and Bye-Laws;
(xx) each of the Company and its Subsidiaries has validly and
irrevocably submitted to the nonexclusive jurisdiction of any
federal or state court sitting in the City of New York, has validly
and irrevocably waived, to the fullest extent permitted by law, any
objections that it may now or hereafter have to the laying of venue
of any such suit, action or proceeding brought in any such court
based on or arising under this Agreement or the U.S. Underwriting
Agreement or any claims that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum,
and has validly appointed CT Corporation System as its authorized
agent to receive service of process in any such suit, action or
proceeding; and the choice of the law of New York as the governing
law of this Agreement is a valid and effective choice of law;
(xxi) the courts of Bermuda would recognize as a valid judgment, a
final and conclusive judgment in personam obtained in any federal or
state court sitting in the State of New York against the Company
based upon this Agreement, the U.S. Underwriting Agreement, the
Direct Agreements, the Class A Warrants or the Class B Warrants
under which a sum of money is payable (other than a sum of money
payable in respect of multiple damages, taxes or other charges of a
like nature or in respect of a fine or other penalty) and would give
a judgment based thereon provided that (a) such courts had proper
jurisdiction over the parties subject to such judgment, (b) such
courts did not contravene the rules of natural justice of Bermuda,
(c) such judgment was not obtained by fraud, (d) the enforcement of
the judgment would not be contrary to the public policy of Bermuda,
(e) no new admissible evidence relevant to the action is submitted
prior to the rendering of the judgment by the courts of Bermuda and
(f) the due compliance with the correct procedures under the laws of
Bermuda; and
(xxii) the restrictions on transfer of the Common Shares and the
requirements for compulsory sale or surrender of the Common Shares
provided in the Company's Bye-Laws are valid and enforceable under
Bermuda law.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials.
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<PAGE> 31
References to the Registration Statement and the Prospectuses in
this paragraph (c) shall include any amendment or supplement thereto at the date
of such opinion.
(d) The Lead Managers shall have received an opinion, dated the Firm
Closing Date, of Kathleen G. Cully, General Counsel for American Capital Access
Holdings, L.L.C. ("ACA LLC") and ACA, substantially to the effect that:
(i) ACA has full power (corporate and otherwise) to enter into the
Reinsurance Treaties with the Insurance Subsidiary and to carry out
all the terms and provisions thereof to be carried out by it;
(ii) the execution and delivery of the Reinsurance Treaties have
been duly authorized by ACA, and the Reinsurance Treaties have been
duly executed and delivered by ACA and are the valid and binding
agreements of ACA, enforceable against ACA in accordance with their
terms, subject to any applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally, and subject, as to
enforceability, to general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at law);
(iii) the compliance by ACA with the provisions of the Reinsurance
Treaties and the consummation of the transactions contemplated
therein do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained, or (ii) conflict with or result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument to which ACA or any of its
affiliates is a party or by which ACA LLC, ACA or any of their
affiliates or any of their respective properties are bound, or the
Articles of Incorporation, By-Laws or similar organizational
documents of ACA LLC, ACA or any of their affiliates, or any statute
or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable to ACA
LLC, ACA or any of their affiliates;
(iv) each of ACA LLC and ACA has full power (corporate and
otherwise) to enter into the letter agreements of even date herewith
among ACA LLC, ACA and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Prudential Securities Incorporated, as U.S.
Representatives and as representatives of the U.S. Underwriters, and
among ACA LLC, ACA, and Merrill Lynch and Prudential-Bache
Securities (U.K.) Inc., as Lead Managers and as representatives of
the International Managers (collectively, the "ACA Letter
Agreements"), and to carry out all the respective terms and
provisions thereof to be carried out by it;
(v) the execution and delivery of the ACA Letter Agreements have
been duly authorized by ACA LLC and ACA, and the ACA Letter
Agreements have been duly executed and delivered by ACA LLC and ACA
and are the valid and binding agreements of ACA LLC and ACA,
enforceable against ACA LLC and ACA in
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<PAGE> 32
accordance with their respective terms, subject to any applicable
bankruptcy, insolvency and similar laws affecting creditors' rights
generally, and subject, as to enforceability, to general principles
of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law), except that enforcement of rights
to indemnity and contribution thereunder may be limited by Federal
or state securities laws or principles of public policy; and
(vi) ACA is duly licensed or authorized as an insurer in all fifty
states of the United States, the District of Columbia and the
territories of Guam, the United States Virgin Islands and Puerto
Rico.
Such counsel shall also state that it has participated in the
preparation of the Registration Statement and the Prospectuses and in
conferences with officers and other representatives of the Company,
representatives of Conyers Dill & Pearman, Bermuda and Cayman Islands counsel
for the Company, representatives of Clifford Chance, United Kingdom counsel to
the Company, representatives of Crills Advocates, Jersey counsel for the
Company, representatives of the independent public accountants for the Company,
and your representatives and your counsel at which the contents of the
Registration Statement, the Prospectuses and related matters were discussed and,
although such counsel has not passed upon or assumed any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectuses, and although such counsel has not
undertaken to verify independently the accuracy or completeness of the
statements in the Registration Statement and the Prospectuses and, therefore,
would not necessarily have become aware of any material misstatement of fact or
omission to state a material fact, on the basis of and subject to the foregoing,
such counsel does not believe that the statements set forth with respect to ACA
LLC or ACA in either the Registration Statement or the Prospectuses under the
captions "Prospectus Summary--Reinsurance Treaties with ACA" (second paragraph
only), "Business--ACA Financial Guaranty Corporation" and, insofar as may relate
to the regulatory status or operations of ACA LLC or ACA, "Prospectus
Summary--Reinsurance Treaties with ACA" (first paragraph) and
"Business--Reinsurance Treaties with ACA" (other than the financial information
therein or omitted therefrom, as to which such counsel need not express any
opinion) contained as of its date or contains as of the date of such opinion any
untrue statement of a material fact or omitted as of its date or omits as of the
date of such opinion to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters
of fact, to the extent such counsel deem proper, on the accuracy of the
representations and warranties made by the parties to this Agreement and the
International Underwriting Agreement and certificates of responsible officers of
the Company, ACA LLC, ACA and public officials.
References to the Registration Statement and the Prospectuses in
this paragraph (d) shall include any amendment or supplement thereto at the date
of such opinion.
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(e) The Lead Managers shall have received an opinion, dated the Firm
Closing Date, of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New
York, New York, counsel for the International Managers, with respect to the
issuance and sale of the Securities, the Registration Statement and the
Prospectuses, and such other related matters as the Lead Managers may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
(f) The Lead Managers shall have received from KPMG Peat Marwick a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Lead Managers, to the effect
that:
(i) they are independent accountants with respect to the Company and
its Subsidiaries within the meaning of the Act and the applicable
rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial statements
examined by them and included in the Registration Statement and the
Prospectuses comply in form in all material respects with the
applicable accounting requirements of the Act and the related
published rules and regulations;
(iii) on the basis of a reading of the unaudited pro forma
consolidated balance sheet included in the Registration Statement
and the Prospectuses, carrying out certain specified procedures that
would not necessarily reveal matters of significance with respect to
the comments set forth in this paragraph (iii), inquiries of certain
officials of the Company and its Subsidiaries who have
responsibility for financial and accounting matters and proving the
arithmetic accuracy of the application of the pro forma adjustments
to the historical amounts in the unaudited pro forma consolidated
condensed financial statements, nothing came to their attention that
caused them to believe that the unaudited pro forma consolidated
balance sheet does not comply in form in all material respects with
the applicable accounting requirements of Rule 11-02 of Regulation
S-X or that the pro forma adjustments have not been properly applied
to the historical amounts in the compilation of such balance sheet;
(iv) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with
generally accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments set
forth in this paragraph (iv), a reading of the minute books of the
shareholders, the board of directors and any committees thereof of
the Company and its Subsidiaries, and inquiries of certain officials
of the Company and its Subsidiaries who have responsibility for
financial and accounting matters, nothing came to their attention
that caused them to believe that at a specific date not more than
five business days prior to the date of such letter, there were any
changes in
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the capital stock or long-term debt of the Company and the Insurance
Subsidiary or any decreases in net current assets or stockholders'
equity of the Company and the Insurance Subsidiary, in each case
compared with amounts shown on the December 31, 1998 audited
consolidated balance sheet included in the Registration Statement
and the Prospectuses, except in all instances for changes, decreases
or increases set forth in such letter; and
(v) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information that are derived from the general
accounting records of the Company and its Subsidiaries and are
included in the Registration Statement and the Prospectuses under
the captions "Prospectus Summary", "Capitalization", "Risk Factors",
"Dilution", "Unaudited Pro Forma Consolidated Balance Sheet",
"Management", "Principal Stockholders", "Certain Relationships and
Related Party Transactions" and "Description of Capital Stock", and
have compared such amounts, percentages and financial information
with such records of the Company and its Subsidiaries and with
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the International Managers that (A) such letters shall be
accompanied by a written explanation of the Company as to the significance
thereof, unless the Lead Managers deem such explanation unnecessary, and (B)
such changes, decreases or increases do not, in the sole judgment of the Lead
Managers, make it impractical or inadvisable to proceed with the purchase and
delivery of the International Securities as contemplated by the Registration
Statement, as amended as of the date hereof.
References to the Registration Statement and the Prospectuses in
this paragraph (f) with respect to either letter referred to above shall include
any amendment or supplement thereto at the date of such letter.
(g) The Lead Managers shall have received a certificate, dated the
Firm Closing Date, of the Chief Executive Officer and the Chief Financial
Officer of the Company (in his or her capacity as an officer of the Company and
without personal liability) to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include 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 therein not misleading,
and the Prospectuses, as amended or supplemented as of the Firm
Closing Date, do not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading; and the Company has performed all
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<PAGE> 35
covenants and agreements and satisfied all conditions on its part
required by this Agreement and the U.S. Underwriting Agreement to be
performed or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or,
to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses, neither
the Company nor either of its Subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding, and there has not been any
material adverse change, or any development involving a prospective
material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth or results of operations
of the Company or its Subsidiaries, except in each case as described
in or contemplated by the Prospectuses (exclusive of any amendment
or supplement thereto).
(h) The Lead Managers shall have received from each of the
Sponsor-Affiliated Purchasers, each of the Affiliated Purchasers, each of the
Class A Warrant Holders and each person who is a director or officer of the
Company or who owns any outstanding Common Shares or any securities convertible
into, or exchangeable or exercisable for, any Common Shares, including, without
limitation, the Class A Warrants and the Class B Warrants, an agreement to the
effect that such person will not, directly or indirectly, without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Prudential Securities Incorporated, on behalf of the International Managers,
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 the Company or any
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 Agreement.
(i) The Lead Managers shall have received from each of the Strategic
Investors that purchases Strategic Securities and Class B Warrants an agreement
to the effect that such person will not, directly or indirectly, without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Prudential Securities Incorporated, on behalf of the International Managers, and
the Company, 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
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<PAGE> 36
Shares or other capital stock of the Company or any securities convertible into,
or exercisable or exchangeable for, any Common Shares or other capital stock of
the Company for a period of nine months after the date of this Agreement.
(j) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market
subject to official notice of issuance.
(k) The Strategic Investors shall have purchased Common Shares and
Class B Warrants pursuant to certain of the Direct Agreements with an aggregate
purchase price of at least $50.0 million.
(l) Contemporaneously with the purchase by the International
Managers of the Firm International Securities under this Agreement, the U.S.
Underwriters shall have purchased the Firm U.S. Securities under the U.S.
Underwriting Agreement.
(m) The Lead Managers shall have received from
PricewaterhouseCoopers LLP a letter or letters dated, respectively, the date
hereof and the Firm Closing Date, in form and substance satisfactory to the Lead
Managers, to the effect that:
(i) they are independent accountants with respect to ACA LLC and its
consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) on the basis of a reading of the amounts for premiums, admitted
assets, total liabilities and total surplus as regards policyholders
as of and for the year ended December 31, 1998 included in the
Registration Statement and the Prospectuses and of the audited
consolidated financial statements of ACA LLC and its consolidated
subsidiaries as of and for the year ended December 31, 1998 from
which such amounts are derived, carrying out certain specified
procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would
not necessarily reveal matters of significance with respect to the
comments set forth in this paragraph (ii), a reading of the minute
books of the shareholders, the board of directors and any committees
thereof of ACA LLC and its consolidated subsidiaries, and inquiries
of certain officials of ACA LLC and its consolidated subsidiaries
who have responsibility for financial and accounting matters,
nothing came to their attention that caused them to believe that the
amounts for premiums, admitted assets, total liabilities and total
surplus as regards policyholders included in the Registration
Statement and the Prospectuses do not agree with the amounts set
forth in the audited consolidated financial statements as of and for
the year ended December 31, 1998 of ACA LLC and its consolidated
subsidiaries; and
(iii) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information that
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<PAGE> 37
are derived from the general accounting records of ACA LLC and its
consolidated subsidiaries and are included in the Registration
Statement and the Prospectuses under the captions "Prospectus
Summary -- Reinsurance Treaties with ACA", "Business -- Reinsurance
Treaties with ACA" and "Business -- ACA Financial Guaranty
Corporation" and have compared such amounts, percentages and
financial information with such records of ACA LLC and its
consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any
questions of legal interpretation.
References to the Registration Statement and the Prospectuses in
this paragraph (m) with respect to either letter referred to above shall include
any amendment or supplement thereto at the date of such letter.
(n) The Lead Managers shall have received a certificate, dated the
Firm Closing Date, of the Chief Executive Officer and the Chief Financial
Officer of ACA LLC and ACA (in his or her capacity as an officer of such
entities and without personal liability) to the effect that:
(i) the representations and warranties of ACA LLC and ACA in the ACA
Letter Agreements are true and correct as if made on and as of the
Firm Closing Date; the statements set forth in the Registration
Statement, as amended as of the Firm Closing Date, under the
captions "Prospectus Summary--Reinsurance Treaties with ACA" (second
paragraph only), "Business--ACA Financial Guaranty Corporation" and,
insofar as may relate to the regulatory status or operations of ACA,
"Prospectus Summary--Reinsurance Treaties with ACA" (first
paragraph) and "Business--Reinsurance Treaties with ACA" do not
include 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 therein with respect to ACA LLC or ACA not misleading,
and the statements set forth in the Prospectuses, as amended or
supplemented as of the Firm Closing Date, under the captions
"Prospectus Summary--Reinsurance Treaties with ACA" (second
paragraph only), "Business--ACA Financial Guaranty Corporation" and,
insofar as may relate to the regulatory status or operations of ACA
LLC or ACA, "Prospectus Summary--Reinsurance Treaties with ACA"
(first paragraph) and "Business--Reinsurance Treaties with ACA" do
not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein
with respect to ACA LLC or ACA, in the light of the circumstances
under which they were made, not misleading; and each of ACA LLC and
ACA has performed all covenants and agreements on its part to be
performed at or prior to the Firm Closing Date pursuant to the ACA
Letter Agreements; and
(ii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses, neither
ACA LLC nor its subsidiaries, including ACA, has sustained any
material loss or interference with
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<PAGE> 38
their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any material adverse change, or
any development involving a prospective material adverse change, in
the condition (financial or otherwise), management, business
prospects, net worth or results of operations of ACA LLC or its
subsidiaries, including ACA, except in each case as described in or
contemplated by the Prospectuses (exclusive of any amendment or
supplement thereto).
(o) ACA LLC and ACA shall have entered into the ACA Letter
Agreements with, respectively, each of the Lead Managers, as representatives of
the International Managers, and the U.S. Representatives, as representatives of
the U.S. Underwriters, and the representations and warranties of ACA LLC and ACA
contained in the ACA Letter Agreements and the statements of ACA LLC's and ACA's
officers made pursuant to the provisions hereof shall be, as determined in the
sole discretion of the Lead Managers, accurate as of the date hereof and as of
the Firm Closing Date, as if made on and as of the Firm Closing Date, and each
of ACA LLC and ACA shall have performed, as determined in the sole discretion of
the Lead Managers, its covenants and agreements pursuant to the ACA Letter
Agreements.
(p) On or before the Firm Closing Date, the Lead Managers and
counsel for the International Managers shall have received such further
certificates, documents or other information as they may have reasonably
requested from the Company.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Lead Managers and
counsel for the International Managers. The Company shall furnish to the Lead
Managers such conformed copies of such opinions, certificates, letters and
documents in such quantities as the Lead Managers and counsel for the
International Managers shall reasonably request.
The respective obligations of the several International Managers to
purchase and pay for any International Option Securities shall be subject, in
their discretion, to each of the foregoing conditions to purchase the Firm
International Securities, except that all references to the Firm International
Securities and the Firm Closing Date shall be deemed to refer to such
International Option Securities and the related Option Closing Date,
respectively.
SECTION 6. Indemnification. (a) The Company agrees to indemnify and
hold harmless each International Manager and each person, if any, who controls
any International Manager within the meaning of Section 15 of the Act or Section
20 of the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement made by the Company in Section 1 of this
Agreement;
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(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable,
or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or
supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of
any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company;
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch and
Prudential-Bache Securities (U.K.) Inc.), reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement
or omission, to the extent that any such expense is not paid under
(i), (ii) or (iii) above; and
(v) any untrue statement or alleged untrue statement of any material
fact contained in any audio or visual materials based upon
information provided by the Company, ACA LLC or ACA used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films and tape recordings;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto); and provided, further, that the Company will not be liable to any
International Manager with respect to any preliminary prospectus to the extent
that the Company shall sustain the burden of proving that any such loss,
liability, claim, damage or expense resulted from the fact that such
International Manager, in contravention of a requirement of this Agreement or
applicable law, sold Securities to a person to whom such International Manager
failed to send or
[/R]
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give, at or prior to the Closing Date, a copy of the Final Prospectus, as then
amended or supplemented if: (i) the Company has previously furnished copies
thereof (sufficiently in advance of the Closing Date to allow for distribution
by the Closing Date) to the International Manager and the loss, liability,
claim, damage or expense of such International Manager resulted from an untrue
statement or omission of a material fact contained in or omitted from any
preliminary prospectus which was corrected in the Final Prospectus as, if
applicable, amended or supplemented prior to the Closing Date and such Final
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person and (ii) the giving or sending of such Final
Prospectus by the Closing Date to the party or parties asserting such loss,
liability, claim, damage or expense would have constituted the sole defense to
the claim asserted by such person.
(b) Each International Manager severally agrees to indemnify and
hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section 6, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any Preliminary International Prospectus or the International Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such International Manager
through the Lead Managers expressly for use in the Registration Statement (or
any amendment thereto) or such Preliminary Prospectus or the International
Prospectus (or any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 6(a) above, counsel to the indemnified
parties shall be selected by Merrill Lynch and Prudential-Bache Securities
(U.K.) Inc., and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties
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<PAGE> 41
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(iii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the International Managers on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the International Managers on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and
the International Managers on the other hand in connection with the offering of
the International Securities pursuant to this Agreement shall be deemed to be in
the same respective proportions as the total net proceeds from the offering of
the International Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the total underwriting discount received
by the International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location on
the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.
The relative fault of the Company on the one hand and the
International Managers on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or by the International Managers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
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<PAGE> 42
The Company and the International Managers agree that it would not
be just and equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Managers has otherwise been required to pay
by reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Managers within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Firm International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and the several
International Managers set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, any International Manager or any controlling
person referred to in Section 6 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 4, 6 and 7 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
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SECTION 9. Termination of Agreement. (a) The Lead Managers may
terminate this Agreement, by notice to the Company, at any time at or prior to
the Firm Closing Date (i) if there has been, since the time of execution of this
Agreement or since the respective dates as of which information is given in the
International Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its Subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the International Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of ACA LLC and ACA considered
as one enterprise, whether or not arising in the ordinary course of business, or
(iii) if there has occurred any material adverse change in the financial markets
in the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Lead Managers, impracticable to
market the Securities or to enforce contracts for the sale of the Securities, or
(iv) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the Nasdaq National Market, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or (v) if
a banking moratorium has been declared by either Federal, New York or Bermuda
authorities.
(b) If this Agreement is terminated pursuant to this Section 9, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8
shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the International Managers. If
one or more International Managers default in their obligations to purchase Firm
International Securities or International Option Securities hereunder and the
aggregate number of such Securities that such defaulting International Manager
or International Managers agreed but failed to purchase is ten percent or less
of the aggregate number of Firm International Securities or International Option
Securities to be purchased by all of the International Managers at such time
hereunder, the other International Managers may make arrangements satisfactory
to the Lead Managers for the purchase of such Securities by other persons (who
may include one or more of the non-defaulting International Managers, including
the Lead Managers), but if no such arrangements are made by the Firm Closing
Date or the related Option Closing Date, as the case may be, the other
International Managers shall be obligated severally in proportion to their
respective commitments hereunder to purchase the Firm International Securities
or International Option Securities that such defaulting International Manager or
International Managers agreed but failed to purchase. If one or more
International Managers so default with respect to an aggregate number of
Securities that is more than ten percent of the aggregate number of Firm
International
43
<PAGE> 44
Securities or International Option Securities, as the case may be, to be
purchased by all of the International Managers at such time hereunder, and if
arrangements satisfactory to the Lead Managers are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting International Managers, including the Lead Managers)
of the Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting International
Manager or the Company other than as provided in Section 8 hereof. In the event
of any default by one or more International Managers as described in this
Section 10, the Lead Managers shall have the right to postpone the Firm Closing
Date or the Option Closing Date, as the case may be, established as provided in
Section 2 hereof for not more than seven business days in order that any
necessary changes may be made in the arrangements or documents for the purchase
and delivery of the Firm International Securities or International Option
Securities, as the case may be. As used in this Agreement, the term
"International Manager" includes any person substituted for an International
Manager under this Section 10. Nothing herein shall relieve any defaulting
International Manager from liability for its default.
SECTION 11. Notices. All communications hereunder shall be in
writing and, if sent to any of the International Managers, shall be delivered or
sent by mail, telex or facsimile transmission and confirmed in writing to
Merrill Lynch, Pierce, Fenner & Smith Incorporated, North Tower, World Financial
Center, 250 Vesey Street, New York, New York 10281-1201 and Prudential
Securities Incorporated, One New York Plaza, New York, New York 10292,
Attention: Equity Transactions Group; and if sent to the Company, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at Cumberland House, 1 Victoria Street, Hamilton, HM AX,
Bermuda.
SECTION 12. Information Supplied by the International Managers. The
statements set forth in the last paragraph on the front cover page, the
stabilization legend on the inside cover page and under the heading
"Underwriting" (to the extent such statements relate to the International
Managers) or under the heading "Business--Investment Managers" (to the extent
such statements describe the relationship between Merrill Lynch Asset
Management, L.P. and Merrill Lynch & Co., Inc., and between The Prudential
Investment Corporation and The Prudential Insurance Company of America) in any
International Preliminary Prospectus or the International Prospectus constitute
the only information furnished by any International Manager through the Lead
Managers to the Company for the purposes of Sections 1(b), 6 and 7 hereof. The
International Managers confirm that such statements (to such extent) are
correct.
SECTION 13. Parties. This Agreement shall inure to the benefit of
and shall be binding upon the several International Managers, the Company and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company contained in Sections 6 and 7 of this Agreement
shall also be for the benefit of any
44
<PAGE> 45
person or persons who control any International Manager within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities
of the International Managers contained in Sections 6 and 7 of this Agreement
shall also be for the benefit of the directors of the Company, the officers of
the Company who have signed the Registration Statement and any person or persons
who control the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act. No purchaser of Securities from any International
Manager shall be deemed a successor because of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings
herein are for convenience only and shall not affect the construction hereof.
SECTION 16. Consent to Jurisdiction and Service of Process. All
judicial proceedings arising out of or relating to this Agreement may be brought
in any state or federal court of competent jurisdiction in the State of New
York, and by execution and delivery of this Agreement, the Company irrevocably
accepts for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
irrevocably waives any defense of forum non conveniens and irrevocably agrees to
be bound by any final judgment rendered thereby in connection with this
Agreement. The Company designates and appoints CT Corporation System, 1633
Broadway, New York, New York, and such other persons as may hereafter be
selected by the Company irrevocably agreeing in writing to so serve, as its
agent to receive on its behalf service of all process in any such proceedings in
any such court, such service being hereby acknowledged by the Company to be
effective and binding service in every respect. A copy of any such process so
served shall be mailed by registered mail to the Company at its address provided
in Section 11 hereof; provided, however, that, unless otherwise provided by
applicable law, any failure to mail such copy shall not affect the validity of
service of such process. If any agent appointed by the Company refuses to accept
service, the Company hereby agrees that service of process sufficient for
personal jurisdiction in any action against the Company in the State of New York
may be made by registered or certified mail, return receipt requested, to the
Company at its address provided in Section 11 hereof, and the Company hereby
acknowledges that such service shall be effective and binding in every respect.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of any International Manager to bring
proceedings against the Company in the courts of any other jurisdiction.
45
<PAGE> 46
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the International Managers and the Company in accordance with its terms.
Very truly yours,
GLOBAL MARKETS ACCESS LTD.
By
----------------------------------
Donald J. Matthews
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written.
MERRILL LYNCH INTERNATIONAL
PRUDENTIAL-BACHE SECURITIES (U.K.) INC.
BEAR, STEARNS INTERNATIONAL LIMITED
BARING BROTHERS LIMITED, as agent for ING BANK N.V.
SALOMON BROTHERS INTERNATIONAL LIMITED
UBS AG, acting through its division WARBURG DILLON READ
By MERRILL LYNCH INTERNATIONAL
By
---------------------------------------
Name:
Title:
By PRUDENTIAL-BACHE SECURITIES (U.K.) INC.
By
---------------------------------------
Name:
Title:
For themselves and as Lead Managers of the several
International Managers named in Schedule A hereto.
<PAGE> 47
Draft of 3/18/99
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
International
Securities to
Name of International Manager be Purchased
- --------------------------------------------------------------- --------------
<S> <C>
Merrill Lynch International.................................
Prudential-Bache Securities (U.K.) Inc. ....................
Bear, Stearns International Limited.........................
Baring Brothers Limited, as agent for ING Bank N.V..........
Salomon Brothers International Limited......................
UBS AG, acting through its division Warburg Dillon Read ....
............................................................
............................................................
............................................................
............................................................
............................................................
............................................................
............................................................
............................................................
............................................................
............................................................
............................................................
............................................................
--------
Total...........................
========
</TABLE>
<PAGE> 1
Exhibit 1.3
March __, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Prudential Securities Incorporated
as Joint Lead Managers and Joint Bookrunners
Bear, Stearns & Co. Inc.
ING Baring Furman Selz LLC
Salomon Smith Barney Inc.
Warburg Dillon Read LLC
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
250 Vesey Street
New York, New York 10281-1209
Ladies and Gentlemen:
American Capital Access Holdings, L.L.C., a Delaware limited
liability company ("ACA LLC"), and ACA Financial Guaranty Corporation, a
Maryland corporation ("ACA"), understand that Global Markets Access Ltd., a
Bermuda corporation (the "Company"), has filed a registration statement on Form
S-1, as amended, with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), relating to the
proposed initial public offering (the "Offering") of common shares, par value
$1.00 (the "Common Shares"), of the Company and proposes to enter into an U.S.
purchase agreement (the "U.S. Purchase Agreement") with the several U.S.
underwriters named in Schedule A thereto (the "U.S. Underwriters"), for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Prudential Securities
Incorporated, as Joint Lead Managers and Joint Bookrunners, Bear, Stearns & Co.
Inc., ING Baring Furman Selz LLC, Salomon Smith Barney Inc. and Warburg Dillon
Read LLC are acting as representatives (in such capacities, the "U.S.
Representatives"), and an international purchase agreement (the "International
Purchase Agreement") with the several underwriters named in Schedule A thereto
(the "International Managers", and collectively with the U.S. Underwriters, the
"Underwriters"), for whom Merrill Lynch International, Prudential-Bache
Securities (U.K.) Inc., Bear, Stearns International Limited, Baring Brothers
Limited, as agent for ING Bank N.V., Salomon Brothers International Limited and
UBS AG, acting through its division Warburg Dillon Read, are acting as lead
managers (in such capacities, the "Lead Managers"). In order to induce the
several U.S. Underwriters to enter into the U.S. Purchase
<PAGE> 2
Agreement and to proceed with the Offering, ACA LLC and ACA hereby confirm their
agreement with the several U.S. Underwriters as set forth below.
1. Definitions. Unless otherwise defined herein, all capitalized
terms used herein, including "U.S. Securities", "International Securities",
"Global Coordinators", "Securities", "Registration Statement", "Preliminary
Prospectuses", "Prospectuses", "Term Sheet", "Firm Closing Date", "Option
Closing Date", the "Reinsurance Treaties", "Insurance Subsidiary" and the
"Subsidiaries" have the meaning set forth in the U.S. Purchase Agreement and the
International Purchase Agreement.
2. Representations and Warranties of ACA LLC and ACA. ACA LLC and
ACA jointly and severally represent and warrant to, and agree with, each of the
several U.S. Underwriters that as of the date of this Agreement, as of the Firm
Closing Date, as if made on and as of the Firm Closing Date, and as of any
Option Closing Date, as if made on and as of such Option Closing Date:
(a) When the Preliminary Prospectuses contained in Amendment No. 3
and 4 to the Registration Statement (the "Preliminary Prospectuses") were filed
with the Commission they did not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein with respect to ACA LLC or ACA, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein with respect to ACA LLC or ACA not
misleading. When the Prospectuses or any Term Sheet that is a part thereof or
any amendment or supplement to the Prospectuses is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectuses or any Term Sheet that is a
part thereof or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectuses was or is declared effective) and on
the Firm Closing Date and any Option Closing Date, the Prospectuses, as amended
or supplemented at any such time, did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein with respect to ACA LLC or ACA, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this Section 2(a) do not apply to statements or
omissions made in the Preliminary Prospectuses, the Registration Statement or
any amendment thereto or the Prospectuses or any amendment or supplement thereto
other than those statements or omissions with respect to ACA LLC or ACA set
forth under the headings "Prospectus Summary - Reinsurance Treaties with ACA"
(second paragraph only), "Business - ACA Financial Guaranty Corporation" and,
insofar as may relate to the regulatory status or operations of ACA LLC or ACA,
"Prospectus Summary - Reinsurance Treaties with ACA" (first paragraph) and
"Business - Reinsurance Treaties with ACA."
(b) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses or, if the Prospectuses
are not in existence, the Preliminary Prospectuses, neither ACA LLC nor its
subsidiaries, including ACA, has sustained
2
<PAGE> 3
any material loss or interference with their respective businesses or properties
from fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental proceeding,
and there has not been any material adverse change, or any development involving
a prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth, or results of operations
of ACA LLC or its subsidiaries, including ACA, except in each case as described
in or contemplated by the Prospectuses or, if the Prospectuses are not in
existence, the most recent Preliminary Prospectuses.
(c) ACA has full power (corporate and otherwise) to enter into the
Reinsurance Treaties with the Insurance Subsidiary and to carry out all the
terms and provisions thereof to be carried out by it; the execution and delivery
of the Reinsurance Treaties have been duly authorized by ACA, and the
Reinsurance Treaties have been duly executed and delivered by ACA and are the
valid and binding agreements of ACA, enforceable against ACA in accordance with
their terms, subject to any applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law); the compliance by ACA with the provisions of
the Reinsurance Treaties and the consummation of the transactions contemplated
therein do not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, or (ii) conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which ACA LLC, ACA or
any of their affiliates is a party or by which ACA LLC, ACA or any of their
affiliates or any of their respective properties are bound, or the Articles of
Incorporation, By-Laws or similar organizational documents of ACA LLC, ACA or
any of their affiliates, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to ACA LLC, ACA or any of their affiliates; the Reinsurance Treaties
as they relate to ACA are in full force and effect, and ACA is not in violation
of, or in default in the due performance, observance or fulfillment of, any
obligation, agreement, term, covenant or condition contained therein.
(d) Each of ACA LLC and ACA has full power (corporate and otherwise)
to enter into this Agreement and to carry out all the respective terms and
provisions hereof to be carried out by it; the execution and delivery of this
Agreement have been duly authorized by each of ACA LLC and ACA, and this
Agreement has been duly executed and delivered by each of ACA LLC and ACA and is
the valid and binding agreement of each of ACA LLC and ACA, enforceable against
each of ACA LLC and ACA in accordance with its terms, subject to any applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally,
and subject, as to enforceability, to public policy or Federal or state
securities law limitations on the indemnification and contribution provisions
contained herein and to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(e) ACA is duly licensed or authorized as a financial guaranty
insurer in all fifty states of the United States, the District of Columbia and
the territories of Guam, the United
3
<PAGE> 4
States Virgin Islands and Puerto Rico; neither ACA LLC, ACA or any of their
affiliates has received any notification from any insurance authority,
commission or other insurance regulatory body of any proceedings relating to the
revocation, modification or nonrenewal of any such license or authorization.
(f) ACA LLC and ACA have obtained all authorizations of, and made
all filings with and provided all notices to, all applicable governmental or
regulatory authorities of all applicable jurisdictions (including, without
limitation, New York, Connecticut, California or Maryland), all applicable
self-regulatory organizations, and all applicable courts or other tribunals of
all applicable jurisdictions (including, without limitation, New York,
Connecticut, California or Maryland) necessary to conduct their respective
businesses with the Company and its Subsidiaries pursuant to the Reinsurance
Treaties.
(g) Each of ACA LLC and ACA has been duly organized and is validly
existing as a limited liability company or a corporation in good standing under
the laws of Delaware and Maryland, respectively, and is duly qualified to
transact business as a foreign corporation and is in good standing under the
laws of all other jurisdictions where the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
ability of either ACA LLC or ACA to perform their respective obligations under
this Agreement and the Reinsurance Treaties.
(h) Each of ACA LLC and ACA has full power (corporate and other) to
own or lease its properties and to conduct its business as described in the
Registration Statement and the Prospectuses.
(i) No legal or governmental proceedings are pending to which ACA
LLC or ACA is a party or to which the property of ACA LLC or ACA is subject that
would have a material adverse effect on the ability of either ACA LLC or ACA to
perform their respective obligations under this Agreement and the Reinsurance
Treaties, and, to the best knowledge of ACA LLC and ACA, no such proceedings
have been threatened against ACA LLC or ACA or with respect to any of their
respective properties.
(j) ACA LLC and ACA will conduct their respective businesses in a
manner that will not subject either of them to registration as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the transactions contemplated by this Agreement and the Reinsurance Treaties
will not cause ACA LLC or ACA to become an investment company or an entity
controlled by an investment company subject to registration under the 1940 Act.
(k) Each certificate signed by any officer of ACA LLC or ACA and
delivered to the Global Coordinators, the U.S. Representatives or counsel for
the U.S. Underwriters shall be deemed to be a representation and warranty by ACA
LLC and ACA to each U.S. Underwriter as to the matters covered thereby.
4
<PAGE> 5
(l) Neither ACA LLC nor ACA is (i) in violation of its Articles of
Incorporation or By-Laws or other organizational documents, (ii) in violation of
any law, ordinance, administrative or governmental rule or regulation applicable
to it or any of its properties, except where any such violation or violations in
the aggregate would not reasonably be expected to have a material adverse effect
on its ability to perform its obligations under this Agreement and the
Reinsurance Treaties, (iii) in violation of any judgment, injunction, order or
decree of any court, governmental agency or body (including, without limitation,
any insurance regulatory agency or body) or arbitrator having jurisdiction over
it, except where any such violation or violations in the aggregate would not
reasonably be expected to have a material adverse effect on its ability to
perform its obligations under this Agreement and the Reinsurance Treaties. No
default exists, and no event has occurred which, with notice or lapse of time or
both, would constitute a default in the due performance and observance of any
term, covenant or condition of any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which ACA LLC or ACA is a party or by which ACA
LLC or ACA or any of their respective properties is bound or may be affected,
except where any such default or event or defaults or events in the aggregate
would not reasonably be expected to have a material adverse effect on the
ability of either ACA LLC or ACA to perform their respective obligations under
this Agreement and the Reinsurance Treaties.
(m) Each of ACA LLC and ACA possess all certificates, authorizations
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, and neither ACA
LLC nor ACA has received any notice of proceedings relating to the revocation,
modification or nonrenewal of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would reasonably be expected to have a material adverse
effect on the ability of either ACA LLC or ACA to perform their respective
obligations under this Agreement and the Reinsurance Treaties.
(n) To the knowledge of ACA LLC and ACA, no change in any insurance
law or regulation is pending that would reasonably be expected to have a
material adverse effect on the ability of either ACA LLC or ACA to perform their
respective obligations under this Agreement and the Reinsurance Treaties.
3. Covenants of ACA LLC and ACA. ACA LLC and ACA jointly and
severally covenant and agree with each of the several U.S. Underwriters that if,
at any time prior to the later of (i) the final date when a prospectus relating
to the Securities is required to be delivered under the Act or (ii) the Option
Closing Date, any event occurs as a result of which the statements with respect
to ACA LLC or ACA set forth under the headings "Prospectus Summary - Reinsurance
Treaties with ACA", "Business - Reinsurance Treaties with ACA" and "Business -
ACA Financial Guaranty Corporation" (limited to the extent set forth in the last
sentence of Section 2(a) hereof) in the Preliminary Prospectuses or the
Prospectuses, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein with respect to ACA LLC or ACA, in the light of
the circumstances under which they were made, not misleading, ACA LLC or ACA
will
5
<PAGE> 6
promptly notify the U.S. Representatives, the Lead Managers and the Company
thereof and supply to the U.S. Representatives, the Lead Managers and the
Company all information necessary for the Company to prepare and file with the
Commission an amendment to the Registration Statement or an amendment or
supplement to the Prospectuses that corrects such statement or omission.
4. Indemnification. (a) ACA LLC and ACA jointly and severally agree
to indemnify and hold harmless each U.S. Underwriter and each person, if any,
who controls any U.S. Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement made by ACA LLC or ACA in Section 2 of this Agreement;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arising out of
any untrue statement or alleged untrue statement of a material fact
included in the Preliminary Prospectuses or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
4(c) below) any such settlement is effected with the written consent of
ACA LLC and ACA; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Prudential Securities Incorporated),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i), (ii)
or (iii) above;
6
<PAGE> 7
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in such
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or the Preliminary
Prospectus or the U.S. Prospectus (or any amendment or supplement thereto) other
than any untrue statement or omission or alleged untrue statement or omission
with respect to ACA LLC or ACA set forth or contained in the second paragraph
under the heading "Prospectus Summary - Reinsurance Treaties with ACA" or under
the heading "Business - ACA Financial Guaranty Corporation."
(b) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. Counsel to the
indemnified parties shall be selected by Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Prudential Securities Incorporated. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 4 or Section
5 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(c) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 4(a)(iii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying
7
<PAGE> 8
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
5. Contribution. If the indemnification provided for in Section 4
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, in such proportion as is
appropriate to reflect the relative fault of ACA LLC and ACA on the one hand and
the indemnified party on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative fault of ACA LLC and ACA on the one hand and the U.S.
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by ACA LLC or ACA or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
ACA LLC, ACA and the U.S. Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 5 were determined by
pro rata allocation (even if the U.S. Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 5. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 5 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
For purposes of this Section 5, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act shall have the same rights to contribution as such U.S.
Underwriter.
6. Survival. The representations, warranties, agreements, covenants,
indemnities and other statements of ACA LLC and ACA and their respective
officers set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of any U.S. Underwriter
or any controlling person referred to in Section 4 hereof and (ii) delivery of
and payment for the Securities. The indemnities and other statements set forth
in Sections 4 and 5 hereof shall remain in full force and effect, regardless of
any termination or cancellation of this Agreement or the U.S. Purchase
Agreement.
8
<PAGE> 9
7. Notices. All communications hereunder shall be in writing and, if
sent to any of the U.S. Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission and confirmed in writing to Merrill Lynch, Pierce,
Fenner & Smith Incorporated, North Tower, World Financial Center, 250 Vesey
Street, New York, New York 10281-1201 and Prudential Securities Incorporated,
One New York Plaza, New York, New York 10292, Attention: Equity Transactions
Group; and if sent to ACA LLC or ACA, shall be delivered or sent by mail, telex
or facsimile transmission and confirmed in writing to ACA Financial Guaranty
Corporation, One Liberty Plaza, 52d Floor, New York, New York 10006.
8. Successors. This Agreement shall inure to the benefit of and
shall be binding upon ACA LLC, ACA, the several U.S. Underwriters and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that the
indemnities of ACA LLC and ACA contained in Sections 4 and 5 of this Agreement
shall also be for the benefit of any person or persons who control any U.S.
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Securities from any U.S. Underwriter shall be
deemed a successor because of such purchase.
9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
10. Effect of Headings. The Article and Section headings herein are
for convenience only and shall not affect the construction hereof.
9
<PAGE> 10
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to ACA LLC and ACA a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the U.S. Underwriters, ACA LLC and ACA in accordance with its
terms.
Very truly yours,
AMERICAN CAPITAL ACCESS HOLDINGS,
L.L.C.
By
--------------------------------------
H. Russell Fraser
Chief Executive Officer
ACA FINANCIAL GUARANTY CORPORATION
By
--------------------------------------
H. Russell Fraser
Chief Executive Officer
10
<PAGE> 11
CONFIRMED AND ACCEPTED,
as of the date first above written.
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
BEAR, STEARNS & CO. INC.
ING BARING FURMAN SELZ LLC
SALOMON SMITH BARNEY INC.
WARBURG DILLON READ LLC
By MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-------------------------------------
Name: Antonio Ursano, Jr.
Title: Director
By PRUDENTIAL SECURITIES INCORPORATED
By
-------------------------------------
Name: Jean-Claude Canfin
Title: Managing Director
For themselves and as U.S. Representatives
of the several U.S. Underwriters.
11
<PAGE> 1
Exhibit 1.4
March __, 1999
MERRILL LYNCH INTERNATIONAL
Prudential-Bache Securities (U.K.) Inc.
as Joint Lead Managers and Joint Bookrunners
Bear, Stearns International Limited
Baring Brothers Limited, as agent for ING Bank N.V.
Salomon Brothers International Limited
UBS AG, acting through its division Warburg Dillon Read
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
American Capital Access Holdings, L.L.C., a Delaware limited
liability company ("ACA LLC"), and ACA Financial Guaranty Corporation, a
Maryland corporation ("ACA"), understand that Global Markets Access Ltd., a
Bermuda corporation (the "Company"), has filed a registration statement on Form
S-1, as amended, with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), relating to the
proposed initial public offering (the "Offering") of common shares, par value
$1.00 (the "Common Shares"), of the Company and proposes to enter into an
international purchase agreement (the "International Purchase Agreement") with
the several underwriters named in Schedule A thereto (the "International
Managers", and collectively with the U.S. Underwriters, the "Underwriters"), for
whom Merrill Lynch International, Prudential-Bache Securities (U.K.) Inc., Bear,
Stearns International Limited, Baring Brothers Limited, as agent for ING Bank
N.V., Salomon Brothers International Limited and UBS AG, acting through its
division Warburg Dillon Read, are acting as lead managers (in such capacities,
the "Lead Managers"), and an U.S. purchase agreement (the "U.S. Purchase
Agreement") with the several U.S. underwriters named in Schedule A thereto (the
"U.S. Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Prudential Securities Incorporated, Bear, Stearns & Co. Inc., ING
Baring Furman Selz LLC, Salomon Smith Barney Inc. and Warburg Dillon Read LLC
are acting as representatives (in such capacities, the "U.S. Representatives").
In order to induce the several International Managers to enter into the
International Purchase Agreement and to proceed with the Offering, ACA LLC and
ACA hereby confirm their agreement with the several International Managers as
set forth below.
<PAGE> 2
1. Definitions. Unless otherwise defined herein, all capitalized
terms used herein, including "International Securities", "Global Coordinators",
"Securities", "Registration Statement", "Preliminary Prospectuses",
"Prospectuses", "Term Sheet", "Firm Closing Date", "Option Closing Date", the
"Reinsurance Treaties", "Insurance Subsidiary" and the "Subsidiaries" have the
meaning set forth in the International Purchase Agreement and the U.S. Purchase
Agreement.
2. Representations and Warranties of ACA LLC and ACA. Unless
otherwise specified in this paragraph 2, as of the date of this Agreement, ACA
LLC and ACA jointly and severally represent and warrant to, and agree with, each
of the several International Managers that as of the date of this Agreement, as
of the Firm Closing Date, as if made on and as of the Firm Closing Date, and as
of any Option Closing Date, as if made on and as of such Option Closing Date:
(a) When the Preliminary Prospectuses contained in Amendment No. 3
and 4 to the Registration Statement (the "Preliminary Prospectuses") were filed
with the Commission they did not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein with respect to ACA LLC or ACA, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein with respect to ACA LLC or ACA not
misleading. When the Prospectuses or any Term Sheet that is a part thereof or
any amendment or supplement to the Prospectuses is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectuses or any Term Sheet that is a
part thereof or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectuses was or is declared effective) and on
the Firm Closing Date and any Option Closing Date, the Prospectuses, as amended
or supplemented at any such time, did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein with respect to ACA LLC or ACA, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this Section 2(a) do not apply to statements or
omissions made in the Preliminary Prospectuses, the Registration Statement or
any amendment thereto or the Prospectuses or any amendment or supplement thereto
other than those statements or omissions with respect to ACA LLC or ACA set
forth under the headings "Prospectus Summary - Reinsurance Treaties with ACA"
(second paragraph only), "Business - ACA Financial Guaranty Corporation" and,
insofar as may relate to the regulatory status or operations of ACA LLC or ACA,
"Prospectus Summary - Reinsurance Treaties with ACA" (first paragraph) and
"Business - Reinsurance Treaties with ACA."
(b) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses or, if the Prospectuses
are not in existence, the Preliminary Prospectuses, neither ACA LLC nor its
subsidiaries, including ACA, has sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor
2
<PAGE> 3
dispute or any legal or governmental proceeding, and there has not been any
material adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of operations of ACA LLC or its subsidiaries,
including ACA, except in each case as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
(c) ACA has full power (corporate and otherwise) to enter into the
Reinsurance Treaties with the Insurance Subsidiary and to carry out all the
terms and provisions thereof to be carried out by it; the execution and delivery
of the Reinsurance Treaties have been duly authorized by ACA, and the
Reinsurance Treaties have been duly executed and delivered by ACA and are the
valid and binding agreements of ACA, enforceable against ACA in accordance with
their terms, subject to any applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law); the compliance by ACA with the provisions of
the Reinsurance Treaties and the consummation of the transactions contemplated
therein do not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, or (ii) conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which ACA LLC, ACA or
any of their affiliates is a party or by which ACA LLC, ACA or any of their
affiliates or any of their respective properties are bound, or the Articles of
Incorporation, By-Laws or similar organizational documents of ACA LLC, ACA or
any of their affiliates, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to ACA LLC, ACA or any of their affiliates; the Reinsurance Treaties
as they relate to ACA are in full force and effect, and ACA is not in violation
of, or in default in the due performance, observance or fulfillment of, any
obligation, agreement, term, covenant or condition contained therein.
(d) Each of ACA LLC and ACA has full power (corporate and otherwise)
to enter into this Agreement and to carry out all the respective terms and
provisions hereof to be carried out by it; the execution and delivery of this
Agreement have been duly authorized by each of ACA LLC and ACA, and this
Agreement has been duly executed and delivered by each of ACA LLC and ACA and is
the valid and binding agreement of each of ACA LLC and ACA, enforceable against
each of ACA LLC and ACA in accordance with its terms, subject to any applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally,
and subject, as to enforceability, to public policy or Federal or state
securities law limitations on the indemnification and contribution provisions
contained herein and to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(e) ACA is duly licensed or authorized as a financial guaranty
insurer in all fifty states of the United States, the District of Columbia and
the territories of Guam, the United States Virgin Islands and Puerto Rico;
neither ACA LLC, ACA or any of their affiliates has received any notification
from any insurance authority, commission or other insurance regulatory
3
<PAGE> 4
body of any proceedings relating to the revocation, modification or nonrenewal
of any such license or authorization.
(f) ACA LLC and ACA have obtained all authorizations of, and made
all filings with and provided all notices to, all applicable governmental or
regulatory authorities of all applicable jurisdictions (including, without
limitation, New York, Connecticut, California or Maryland), all applicable
self-regulatory organizations, and all applicable courts or other tribunals of
all applicable jurisdictions (including, without limitation, New York,
Connecticut, California or Maryland) necessary to conduct their respective
businesses with the Company and its Subsidiaries pursuant to the Reinsurance
Treaties.
(g) Each of ACA LLC and ACA has been duly organized and is validly
existing as a limited liability company or a corporation in good standing under
the laws of Delaware and Maryland, respectively, and is duly qualified to
transact business as a foreign corporation and is in good standing under the
laws of all other jurisdictions where the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
ability of either ACA LLC or ACA to perform their respective obligations under
this Agreement and the Reinsurance Treaties.
(h) Each of ACA LLC and ACA has full power (corporate and other) to
own or lease its properties and to conduct its business as described in the
Registration Statement and the Prospectuses.
(i) No legal or governmental proceedings are pending to which ACA
LLC or ACA is a party or to which the property of ACA LLC or ACA is subject that
would have a material adverse effect on the ability of either ACA LLC or ACA to
perform their respective obligations under this Agreement and the Reinsurance
Treaties, and, to the best knowledge of ACA LLC and ACA, no such proceedings
have been threatened against ACA LLC or ACA or with respect to any of their
respective properties.
(j) ACA LLC and ACA will conduct their respective businesses in a
manner that will not subject either of them to registration as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the transactions contemplated by this Agreement and the Reinsurance Treaties
will not cause ACA LLC or ACA to become an investment company or an entity
controlled by an investment company subject to registration under the 1940 Act.
(k) Each certificate signed by any officer of ACA LLC or ACA and
delivered to the Global Coordinators, the Lead Managers or counsel for the
International Managers shall be deemed to be a representation and warranty by
ACA LLC and ACA to each International Manager as to the matters covered thereby.
(l) Neither ACA LLC nor ACA is (i) in violation of its Articles of
Incorporation or By-Laws or other organizational documents, (ii) in violation of
any law,
4
<PAGE> 5
ordinance, administrative or governmental rule or regulation applicable to it or
any of its properties, except where any such violation or violations in the
aggregate would not reasonably be expected to have a material adverse effect on
its ability to perform its obligations under this Agreement and the Reinsurance
Treaties, (iii) in violation of any judgment, injunction, order or decree of any
court, governmental agency or body (including, without limitation, any insurance
regulatory agency or body) or arbitrator having jurisdiction over it, except
where any such violation or violations in the aggregate would not reasonably be
expected to have a material adverse effect on its ability to perform its
obligations under this Agreement and the Reinsurance Treaties. No default
exists, and no event has occurred which, with notice or lapse of time or both,
would constitute a default in the due performance and observance of any term,
covenant or condition of any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which ACA LLC or ACA is a party or by which ACA LLC
or ACA or any of their respective properties is bound or may be affected, except
where any such default or event or defaults or events in the aggregate would not
reasonably be expected to have a material adverse effect on the ability of
either ACA LLC or ACA to perform their respective obligations under this
Agreement and the Reinsurance Treaties.
(m) Each of ACA LLC and ACA possess all certificates, authorizations
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, and neither ACA
LLC nor ACA has received any notice of proceedings relating to the revocation,
modification or nonrenewal of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would reasonably be expected to have a material adverse
effect on the ability of either ACA LLC or ACA to perform their respective
obligations under this Agreement and the Reinsurance Treaties.
(n) To the knowledge of ACA LLC and ACA, no change in any insurance
law or regulation is pending that would reasonably be expected to have a
material adverse effect on the ability of either ACA LLC or ACA to perform their
respective obligations under this Agreement and the Reinsurance Treaties.
3. Covenants of ACA LLC and ACA. ACA LLC and ACA jointly and
severally covenant and agree with each of the several International Managers
that if, at any time prior to the later of (i) the final date when a prospectus
relating to the Securities is required to be delivered under the Act or (ii) the
Option Closing Date, any event occurs as a result of which the statements with
respect to ACA LLC or ACA set forth under the headings "Prospectus Summary -
Reinsurance Treaties with ACA", "Business - Reinsurance Treaties with ACA" and
"Business - ACA Financial Guaranty Corporation" (limited to the extent set forth
in the last sentence of Section 2(a) hereof) in the Preliminary Prospectus or
the Prospectuses, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein with respect to ACA LLC or ACA, in the light of
the circumstances under which they were made, not misleading, ACA LLC or ACA
will promptly notify the Lead Managers, the U.S. Representatives and the Company
thereof and supply to the Lead Managers, the U.S. Representatives and the
Company all information
5
<PAGE> 6
necessary for the Company to prepare and file with the Commission an amendment
to the Registration Statement or an amendment or supplement to the Prospectuses
that corrects such statement or omission.
4. Indemnification. (a) ACA LLC and ACA jointly and severally agree
to indemnify and hold harmless each International Manager and each person, if
any, who controls any International Manager within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement made by ACA LLC or ACA in Section 2 of this Agreement;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arising out of
any untrue statement or alleged untrue statement of a material fact
included in the Preliminary Prospectuses or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
4(c) below) any such settlement is effected with the written consent of
ACA LLC and ACA; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch
International and Prudential-Bache Securities (U.K.) Inc.), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i), (ii)
or (iii) above;
6
<PAGE> 7
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in such
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or the Preliminary
Prospectus or the International Prospectus (or any amendment or supplement
thereto) other than any untrue statement or omission or alleged untrue statement
or omission with respect to ACA LLC or ACA set forth or contained in the second
paragraph under the heading "Prospectus Summary - Reinsurance Treaties with ACA"
or under the heading "Business - ACA Financial Guaranty Corporation."
(b) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. Counsel to the
indemnified parties shall be selected by Merrill Lynch International and
Prudential-Bache Securities (U.K.) Inc. An indemnifying party may participate at
its own expense in the defense of any such action; provided, however, that
counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 4 or Section 5 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(c) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 4(a)(iii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
7
<PAGE> 8
5. Contribution. If the indemnification provided for in Section 4
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, in such proportion as is
appropriate to reflect the relative fault of ACA LLC and ACA on the one hand and
the indemnified party on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative fault of ACA LLC and ACA on the one hand and the
International Managers on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by ACA LLC or ACA or by the International Managers and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
ACA LLC, ACA and the International Managers agree that it would not
be just and equitable if contribution pursuant to this Section 5 were determined
by pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
5. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 5 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
For purposes of this Section 5, each person, if any, who controls an
International Manager within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as such
International Manager.
6. Survival. The representations, warranties, agreements, covenants,
indemnities and other statements of ACA LLC and ACA and their respective
officers set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of any International
Manager or any controlling person referred to in Section 4 hereof and (ii)
delivery of and payment for the Securities. The indemnities and other statements
set forth in Sections 4 and 5 hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement or the
International Purchase Agreement.
7. Notices. All communications hereunder shall be in writing and, if
sent to any of the International Managers, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, North Tower, World Financial Center, 250
Vesey Street, New York, New York 10281-1201 and
8
<PAGE> 9
Prudential Securities Incorporated, One New York Plaza, New York, New York
10292, Attention: Equity Transactions Group; and if sent to ACA LLC or ACA,
shall be delivered or sent by mail, telex or facsimile transmission and
confirmed in writing to ACA Financial Guaranty Corporation, One Liberty Plaza,
52d Floor, New York, New York 10006.
8. Successors. This Agreement shall inure to the benefit of and
shall be binding upon ACA LLC, ACA, the several International Managers and their
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that the
indemnities of ACA LLC and ACA contained in Sections 4 and 5 of this Agreement
shall also be for the benefit of any person or persons who control any
International Manager within the meaning of Section 15 of the Act or Section 20
of the Exchange Act. No purchaser of Securities from any International Manager
shall be deemed a successor because of such purchase.
9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
10. Effect of Headings. The Article and Section headings herein are
for convenience only and shall not affect the construction hereof.
9
<PAGE> 10
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to ACA LLC and ACA a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the International Managers, ACA LLC and ACA in accordance with
its terms.
Very truly yours,
AMERICAN CAPITAL ACCESS HOLDINGS,
L.L.C.
By
-------------------------------------
H. Russell Fraser
Chief Executive Officer
ACA FINANCIAL GUARANTY CORPORATION
By
-------------------------------------
H. Russell Fraser
Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written.
MERRILL LYNCH INTERNATIONAL
PRUDENTIAL-BACHE SECURITIES (U.K.) INC.
BEAR, STEARNS INTERNATIONAL LIMITED
BARING BROTHERS LIMITED, as agent for ING BANK N.V.
SALOMON BROTHERS INTERNATIONAL LIMITED
UBS AG, acting through its division WARBURG DILLON READ
By MERRILL LYNCH INTERNATIONAL
By
---------------------------------------
Name:
Title:
By PRUDENTIAL-BACHE SECURITIES (U.K.) INC.
By
---------------------------------------
Name:
Title:
<PAGE> 11
For themselves and as Lead Managers
of the several International Managers.
11
<PAGE> 1
Exhibit 8.2
Opinion
March 19, 1999
Global Markets Access Ltd.
Victoria Hall, Victoria Street
P.O. Box HM1262
Hamilton, HM FX, Bermuda
RE: Global Markets Access Ltd.
Registration Statement on Form S-1
Gentlemen:
As your counsel, we have assisted in certain aspects of the preparation
and filing with the Securities and Exchange Commission (the "SEC"), under the
Securities Act of 1933, as amended (the "Act"), of the Registration Statement
on Form S-1 (No. 333-62785) (the "Registration Statement") of Global Markets
Access Ltd. (the "Company") and the Prospectus contained therein relating to
the proposed offering of 16,750,000 shares of the Company's Common Stock.
We have made such examinations as we have deemed relevant and necessary as
a basis for the opinion hereinafter expressed. In such examinations, we have
assumed the genuineness of all signatures and the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
documents submitted to us as conformed or photostatic copies.
Based on and subject to the assumptions and limitations contained herein,
we are of the opinion that the statements as to United States Federal income
tax law set forth under the headings "Risk Factors -- United States Federal
Income Tax Risks" and "Certain Tax Considerations" in the Registration
Statement are accurate in all material respects. This opinion is based upon
provisions of the Internal Revenue Code of 1986, as amended, applicable
Treasury Department regulations in effect as of the date hereof, current
published administrative positions of the Internal Revenue Service contained in
revenue rulings and procedures, and judicial decisions.
This opinion represents our best legal judgment, but has no binding effect
or official status of any kind, and no assurance can be given that contrary
positions may not be taken by the Internal Revenue Service or a court
concerning the issues. As noted in the Prospectus, the statements therein as to
the Company's beliefs and conclusions as to the application of such tax law to
the Company and its operations represent the views of the Company's management
as to the application of such law and do not represent our legal opinion. We
also express no opinion as to any tax consequences under any foreign, state or
local laws. In issuing our opinion, we have relied solely upon existing
provisions of the Code, existing proposed regulations thereunder, and current
administrative positions and judicial decision. Such laws, regulations,
administrative positions and judicial decisions are subject to change at any
time. Also, future changes in Federal income tax laws and the interpretation
thereof can have retroactive effect. Any such changes could affect the validity
of the opinion set forth above.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm in the Prospectus under
the headings "Risk Factors -- United States Federal Income Tax Risks," "Certain
Tax Considerations" and "Legal Matters." In giving this consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Actor under the rules and regulations of the SEC issued
thereunder.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
<PAGE> 1
Exhibit 10.25
March 18, 1999
Global Markets Access Ltd.
Cumberland House
1 Victoria Street
Hamilton, HM AX, Bermuda
Ladies and Gentlemen:
American Capital Access Holdings, L.L.C., a Delaware limited
liability company ("ACA LLC"), and ACA Financial Guaranty Corporation, a
Maryland corporation ("ACA"), understand that Global Markets Access Ltd., a
Bermuda corporation (the "Company"), has filed a registration statement on Form
S-1, as amended, with the United States Securities and Exchange Commission (the
"Commission") under the United States Securities Act of 1933, as amended (the
"Act"), relating to the proposed initial public offering (the "Offering") of
common shares, par value $1.00 (the "Common Shares"), of the Company and
proposes to enter into an U.S. purchase agreement (the "U.S. Purchase
Agreement") with the several U.S. underwriters named in Schedule A thereto (the
"U.S. Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Prudential Securities Incorporated, as Joint Lead Managers and
Joint Bookrunners, Bear, Stearns & Co. Inc., ING Baring Furman Selz LLC, Salomon
Smith Barney Inc. and Warburg Dillon Read LLC are acting as representatives (in
such capacities, the "U.S. Representatives"), and an international purchase
agreement (the "International Purchase Agreement") with the several underwriters
named in Schedule A thereto (the "International Managers", and collectively with
the U.S. Underwriters, the "Underwriters"), for whom Merrill Lynch
International, Prudential-Bache Securities (U.K.) Inc., Bear, Stearns
International Limited, Baring Brothers Limited, as agent for ING Bank N.V.,
Salomon Brothers International Limited and UBS AG, acting through its division
Warburg Dillon Read, are acting as lead managers (in such capacities, the "Lead
Managers"). Intending to be legally bound, ACA LLC and ACA hereby confirm their
agreement with the Company as set forth below.
1. Definitions. Unless otherwise defined herein, all capitalized
terms used herein have the meaning set forth in the U.S. Purchase Agreement and
the International Purchase Agreement.
2. Representations and Warranties of ACA LLC and ACA. ACA LLC and
ACA jointly and severally represent and warrant to, and agree with, the Company
that as of the date of this Agreement, as of the Firm Closing Date, as if made
on and as of the Firm Closing Date, and as of any Option Closing Date, as if
made on and as of such Option Closing Date:
<PAGE> 2
Global Markets Access Ltd.
March 18, 1999
Page 2
(a) When the Preliminary Prospectuses contained in Amendment No. 3
and 4 to the Registration Statement (the "Preliminary Prospectuses") were filed
with the Commission they did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein with respect to ACA LLC or ACA, in the light of the
circumstances under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it did not or
will not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein with respect to ACA LLC
or ACA not misleading. When the Prospectuses or any Term Sheet that is a part
thereof or any amendment or supplement to the Prospectuses is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectuses or any Term Sheet
that is a part thereof or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectuses was or is declared effective) and on
the Firm Closing Date and any Option Closing Date, the Prospectuses, as amended
or supplemented at any such time, did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein with respect to ACA LLC or ACA, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this Section 2(a) do not apply to statements or
omissions made in the Preliminary Prospectuses, the Registration Statement or
any amendment thereto or the Prospectuses or any amendment or supplement thereto
other than those statements or omissions with respect to ACA LLC or ACA set
forth under the headings "Prospectus Summary - Reinsurance Treaties with ACA"
(second paragraph only), "Business - Description of ACA Financial Guaranty
Corporation" and, insofar as may relate to the regulatory status or operations
of ACA, "Prospectus Summary - Reinsurance Treaties with ACA" (first paragraph)
and "Business - Reinsurance Treaties with ACA."
(b) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectuses or, if the Prospectuses
are not in existence, the Preliminary Prospectuses, neither ACA LLC nor its
subsidiaries, including ACA, has sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding, and there has not been
any material adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of operations of ACA LLC or its subsidiaries,
including ACA, except in each case as described in or contemplated by the
Prospectuses or, if the Prospectuses are not in existence, the most recent
Preliminary Prospectuses.
<PAGE> 3
Global Markets Access Ltd.
March 18, 1999
Page 3
(c) ACA has full power (corporate and otherwise) to enter into the
Reinsurance Treaties with the Insurance Subsidiary and to carry out all the
terms and provisions thereof to be carried out by it; the execution and delivery
of the Reinsurance Treaties have been duly authorized by ACA, and the
Reinsurance Treaties have been duly executed and delivered by ACA and are the
valid and binding agreements of ACA, enforceable against ACA in accordance with
their terms, subject to any applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally, and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law); the compliance by ACA with the provisions of
the Reinsurance Treaties and the consummation of the transactions contemplated
therein do not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, or (ii) conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which ACA LLC, ACA or
any of their affiliates is a party or by which ACA LLC, ACA or any of their
affiliates or any of their respective properties are bound, or the Articles of
Incorporation, By-Laws or similar organizational documents of ACA LLC, ACA or
any of their affiliates, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to ACA LLC, ACA or any of their affiliates; the Reinsurance Treaties
as they relate to ACA are in full force and effect, and ACA is not in violation
of, or in default in the due performance, observance or fulfillment of, any
obligation, agreement, term, covenant or condition contained therein.
(d) Each of ACA LLC and ACA has full power (corporate and otherwise)
to enter into this Agreement and to carry out all the respective terms and
provisions hereof to be carried out by it; the execution and delivery of this
Agreement have been duly authorized by each of ACA LLC and ACA, and this
Agreement has been duly executed and delivered by each of ACA LLC and ACA and is
the valid and binding agreement of each of ACA LLC and ACA, enforceable against
each of ACA LLC and ACA in accordance with its terms, subject to any applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally,
and subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law), except
that enforcement of rights to indemnity and contribution hereunder may be
limited by Federal or state securities laws or principles of public policy.
(e) ACA is duly licensed or authorized as a financial guaranty
insurer in all fifty states of the United States, the District of Columbia and
the territories of Guam, the United States Virgin Islands and Puerto Rico;
neither ACA LLC, ACA or any of their affiliates has received any notification
from any insurance authority, commission or other insurance regulatory
<PAGE> 4
Global Markets Access Ltd.
March 18, 1999
Page 4
body of any proceedings relating to the revocation, modification or nonrenewal
of any such license or authorization.
(f) ACA LLC and ACA have obtained all authorizations of, and made
all filings with and provided all notices to, all applicable governmental or
regulatory authorities of all applicable jurisdictions (including, without
limitation, New York, Connecticut, California or Maryland), all applicable
self-regulatory organizations, and all applicable courts or other tribunals of
all applicable jurisdictions (including, without limitation, New York,
Connecticut, California or Maryland) necessary to conduct their respective
businesses with the Company and its Subsidiaries pursuant to the Reinsurance
Treaties.
(g) Each of ACA LLC and ACA has been duly organized and is validly
existing as a limited liability company or a corporation in good standing under
the laws of Delaware and Maryland, respectively, and is duly qualified to
transact business as a foreign corporation and is in good standing under the
laws of all other jurisdictions where the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
ability of either ACA LLC or ACA to perform their respective obligations under
this Agreement and the Reinsurance Treaties.
(h) Each of ACA LLC and ACA has full power (corporate and other) to
own or lease its properties and to conduct its business as described in the
Registration Statement and the Prospectuses.
(i) No legal or governmental proceedings are pending to which ACA
LLC or ACA is a party or to which the property of ACA LLC or ACA is subject that
would have a material adverse effect on the ability of either ACA LLC or ACA to
perform their respective obligations under this Agreement and the Reinsurance
Treaties, and, to the best knowledge of ACA LLC and ACA, no such proceedings
have been threatened against ACA LLC or ACA or with respect to any of their
respective properties.
(j) ACA LLC and ACA will conduct their respective businesses in a
manner that will not subject either of them to registration as an investment
company under the United States Investment Company Act of 1940, as amended (the
"1940 Act"), and the transactions contemplated by this Agreement and the
Reinsurance Treaties will not cause ACA LLC or ACA to become an investment
company or an entity controlled by an investment company subject to registration
under the 1940 Act.
<PAGE> 5
Global Markets Access Ltd.
March 18, 1999
Page 5
(k) Neither ACA LLC nor ACA is (i) in violation of its Articles of
Incorporation or By-Laws or other organizational documents, (ii) in violation of
any law, ordinance, administrative or governmental rule or regulation applicable
to it or any of its properties, except where any such violation or violations in
the aggregate would not reasonably be expected to have a material adverse effect
on its ability to perform its obligations under this Agreement and the
Reinsurance Treaties, (iii) in violation of any judgment, injunction, order or
decree of any court, governmental agency or body (including, without limitation,
any insurance regulatory agency or body) or arbitrator having jurisdiction over
it, except where any such violation or violations in the aggregate would not
reasonably be expected to have a material adverse effect on its ability to
perform its obligations under this Agreement and the Reinsurance Treaties. No
default exists, and no event has occurred which, with notice or lapse of time or
both, would constitute a default in the due performance and observance of any
term, covenant or condition of any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which ACA LLC or ACA is a party or by which ACA
LLC or ACA or any of their respective properties is bound or may be affected,
except where any such default or event or defaults or events in the aggregate
would not reasonably be expected to have a material adverse effect on the
ability of either ACA LLC or ACA to perform their respective obligations under
this Agreement and the Reinsurance Treaties.
(l) Each of ACA LLC and ACA possess all certificates, authorizations
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, and neither ACA
LLC nor ACA has received any notice of proceedings relating to the revocation,
modification or nonrenewal of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would reasonably be expected to have a material adverse
effect on the ability of either ACA LLC or ACA to perform their respective
obligations under this Agreement and the Reinsurance Treaties.
(m) To the knowledge of ACA LLC and ACA, no change in any insurance
law or regulation is pending that would reasonably be expected to have a
material adverse effect on the ability of either ACA LLC or ACA to perform their
respective obligations under this Agreement and the Reinsurance Treaties.
3. Covenants of ACA LLC and ACA. ACA LLC and ACA jointly and
severally covenant and agree with the Company that if, at any time prior to the
later of (i) the final date when a prospectus relating to the Securities is
required to be delivered under the Act or (ii) the Option Closing Date, any
event occurs as a result of which the statements with respect to ACA LLC or ACA
set forth under the headings "Prospectus Summary - Reinsurance Treaties with
ACA", "Business - Reinsurance Treaties with ACA" and "Business - Description of
ACA
<PAGE> 6
Global Markets Access Ltd.
March 18, 1999
Page 6
Financial Guaranty Corporation" (limited to the extent set forth in the last
sentence of Section 2(a) hereof) in the Preliminary Prospectuses or the
Prospectuses, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein with respect to ACA LLC or ACA, in the light of
the circumstances under which they were made, not misleading, ACA LLC or ACA
will promptly notify the Company thereof and supply to the Company all
information necessary for the Company to prepare and file with the Commission an
amendment to the Registration Statement or an amendment or supplement to the
Prospectuses that corrects such statement or omission.
4. Indemnification. (a) ACA LLC and ACA jointly and severally agree
to indemnify and hold harmless the Company, its directors and officers and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 of the United States Securities Exchange Act of 1934 (the
"Exchange Act") as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement made by ACA LLC or ACA in Section 2 of this Agreement;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arising out of
any untrue statement or alleged untrue statement of a material fact
included in the Preliminary Prospectuses or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
4(d) below) any such settlement is effected with the written consent of
ACA LLC and ACA; and
<PAGE> 7
Global Markets Access Ltd.
March 18, 1999
Page 7
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by the Company), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i), (ii)
or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in such
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or the Preliminary
Prospectus or the U.S. Prospectus (or any amendment or supplement thereto) other
than any untrue statement or omission or alleged untrue statement or omission
with respect to ACA LLC or ACA set forth or contained in the second paragraph
under the heading "Prospectus Summary - Reinsurance Treaties with ACA" or under
the heading "Business - Description of ACA Financial Guaranty Corporation"; and
provided, further, however, that the ACA LLC and ACA shall not be liable to any
indemnified party with respect to any preliminary prospectus (or supplement
thereto) if the Prospectuses corrected any such untrue statement or omission.
(b) The Company agrees to indemnify and hold harmless ACA LLC, ACA
and each person, if any, who controls either of them within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arising out of
any untrue statement or alleged untrue statement of a material fact
included in the Preliminary Prospectuses or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to
<PAGE> 8
Global Markets Access Ltd.
March 18, 1999
Page 8
Section 4(d) below) any such settlement is effected with the written
consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by ACA LLC and ACA),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission with respect to
ACA LLC or ACA set forth under the headings "Prospectus Summary - Reinsurance
Treaties with ACA" (second paragraph only), "Business - Description of ACA
Financial Guaranty Corporation" and, insofar as may relate to the regulatory
status or operations of ACA, "Prospectus Summary - Reinsurance Treaties with
ACA" (first paragraph) and "Business - Reinsurance Treaties with ACA"; and
provided, further, however, that the Company shall not be liable to any
indemnified party with respect to any preliminary prospectus (or supplement
thereto) if the Prospectuses corrected any such untrue statement or omission.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. Counsel to the
indemnified parties shall be selected by the indemnified parties. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under
<PAGE> 9
Global Markets Access Ltd.
March 18, 1999
Page 9
this Section 4 or Section 5 hereof (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 4(a)(iii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement at
least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
5. Contribution. If the indemnification provided for in Section 4
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and the indemnified party on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative fault of ACA LLC and ACA on the one hand and the
Company on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by ACA LLC or ACA or by the Company and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
ACA LLC, ACA and the Company agree that it would not be just and
equitable if contribution pursuant to this Section 5 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 Section 5. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 5 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any
<PAGE> 10
Global Markets Access Ltd.
March 18, 1999
Page 10
governmental agency or body, commenced or threatened, or any claim whatsoever
based upon any such untrue or alleged untrue statement or omission or alleged
omission.
For purposes of this Section 5, the Company's directors and officers
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company.
For purposes of this Section 5, each person, if any, who controls
ACA LLC or ACA within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as ACA LLC and ACA.
6. Survival. The representations, warranties, agreements, covenants,
indemnities and other statements of ACA LLC and ACA and their respective
officers set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company or any
controlling person referred to in Section 4 hereof and (ii) delivery of and
payment for the Securities. The indemnities and other statements set forth in
Sections 4 and 5 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement or the U.S. Purchase Agreement.
7. Notices. All communications hereunder shall be in writing and, if
sent to the Company, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to Global Markets Access Ltd., Cumberland
House, 1 Victoria Street, Hamilton, HM AX, Bermuda, Attention: Chief Financial
Officer; and if sent to ACA LLC or ACA, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to ACA Financial
Guaranty Corporation, One Liberty Plaza, 52nd Floor, New York, New York 10006.
8. Successors. This Agreement shall inure to the benefit of and
shall be binding upon ACA LLC, ACA, the Company and their respective successors
and legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person except that the indemnities of
ACA LLC and ACA contained in Sections 4 and 5 of this Agreement shall also be
for the benefit of the Company's directors and officers and any person or
persons who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act.
9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 11
Global Markets Access Ltd.
March 18, 1999
Page 11
10. Effect of Headings. The Article and Section headings herein are
for convenience only and shall not affect the construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to ACA LLC and ACA a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Company, ACA LLC and ACA in accordance with its terms.
Very truly yours,
AMERICAN CAPITAL ACCESS HOLDINGS,
L.L.C.
By /s/ H. Russell Fraser
--------------------------------------
H. Russell Fraser
Chief Executive Officer
ACA FINANCIAL GUARANTY CORPORATION
By /s/ H. Russell Fraser
--------------------------------------
H. Russell Fraser
Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written.
GLOBAL MARKETS ACCESS LTD.
By /s/ Donald J. Matthews
--------------------------------------
Name: Donald J. Matthews
Title: Chief Executive Officer
