-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QOQKWtaqyuBWUOoCGTAVIzpFBQCfxGGnTeHJGeandIm6N0A/XjokXosaEKAyNB8Y YRTs3TSwu5Q3xQ7YRkq1Pg== 0000898080-07-000263.txt : 20070814 0000898080-07-000263.hdr.sgml : 20070814 20070814172739 ACCESSION NUMBER: 0000898080-07-000263 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070814 DATE AS OF CHANGE: 20070814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCOTTISH RE GROUP LTD CENTRAL INDEX KEY: 0001064122 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 000000000 STATE OF INCORPORATION: E9 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16855 FILM NUMBER: 071057120 BUSINESS ADDRESS: STREET 1: GRAND PAVILION COMMERCIAL CENTRE STREET 2: 802 WEST BAY RD GEORGE TOWN GRAND CAYMAN CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459492800 MAIL ADDRESS: STREET 1: P O BOX HM 2939 CITY: HAMILTON STATE: D0 ZIP: HM MX FORMER COMPANY: FORMER CONFORMED NAME: SCOTTISH LIFE HOLDINGS LTD DATE OF NAME CHANGE: 19980615 10-Q 1 scottish10q.txt SCOTTISH RE GROUP LIMITED ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 1O-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2007 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _____ to _____ Commission File Number: 001-16855 SCOTTISH RE GROUP LIMITED (Exact Name of Registrant as Specified in Its Charter) Cayman Islands 98-0362785 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) P.O. Box HM 2939 Crown House, Second Floor 4 Par-la-Ville Road Hamilton HM08 Bermuda (Address of Principal Executive Offices) Not Applicable (Zip Code) (441) 295-4451 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by checkmark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer /X/ Accelerated filer / / Non-accelerated filer / / Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of August 13, 2007, the Registrant had 68,383,370 ordinary shares outstanding. ================================================================================ Table of Contents PART I. FINANCIAL INFORMATION...............................................2 Item 1 Financial Statements................................................2 Consolidated Balance Sheets - June 30, 2007 (Unaudited) and December 31, 2006 (Audited).................................2 Consolidated Statements Of Income (Loss) - Three and six months ended June 30, 2007 and 2006 (Unaudited).................3 Consolidated Statements Of Comprehensive Income (Loss) - Three and six months ended June 30, 2007 and 2006 (Unaudited).....................................................4 Consolidated Statements Of Shareholders' Equity - Six months ended June 30, 2007 and 2006 (Unaudited).............5 Consolidated Statements Of Cash Flows - Six months ended June 30, 2007 and 2006 (Unaudited)........................7 Notes To Consolidated Financial Statements (Unaudited)..............8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................20 Item 3 Quantitative and Qualitative Disclosures about Market Risk.........48 Item 4 Controls and Procedures............................................48 PART II. OTHER INFORMATION..................................................49 Item 1 Legal Proceedings..................................................49 Item 1A. Risk Factors.......................................................49 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds........49 Item 3 Defaults upon Senior Securities....................................49 Item 4 Submission of Matters to a Vote of Security Holders................49 Item 5 Other Information..................................................49 Item 6 Exhibits...........................................................50 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements SCOTTISH RE GROUP LIMITED CONSOLIDATED BALANCE SHEETS (Expressed in Thousands of United States dollars, except share data)
June 30, December 31, 2007 2006 (Unaudited) (Audited) --------------- ------------------ ASSETS Fixed maturity investments, available for sale, at fair value (Amortized cost $8,116,425; 2006 - $8,103,743)................................ $ 7,977,603 $ 8,065,524 Preferred stock, available for sale, at fair value (Cost $108,749; 2006 - $119,721).............................................. 104,771 $ 116,933 Cash and cash equivalents....................................................... 1,110,585 622,756 Other investments............................................................... 65,685 65,448 Funds withheld at interest...................................................... 1,747,573 1,942,079 --------------- --------------- Total investments............................................................. 11,006,217 10,812,740 Accrued interest receivable..................................................... 58,749 57,538 Reinsurance balances and risk fees receivable................................... 472,594 481,908 Deferred acquisition costs...................................................... 627,114 618,737 Amount recoverable from reinsurers.............................................. 552,822 554,589 Present value of in-force business.............................................. 47,282 48,779 Other assets.................................................................... 124,770 178,311 Deferred tax asset.............................................................. 7,283 - Segregated assets............................................................... 725,716 683,470 --------------- --------------- Total assets.................................................................. $ 13,622,547 $ 13,436,072 =============== =============== LIABILITIES Reserves for future policy benefits............................................. $ 4,018,420 $ 3,919,901 Interest sensitive contract liabilities......................................... 2,905,150 3,399,410 Collateral finance facilities................................................... 3,800,603 3,757,435 Accounts payable and other liabilities.......................................... 160,612 69,949 Reinsurance balances payable.................................................... 147,830 97,615 Current income tax payable...................................................... 6,476 48 Deferred tax liability.......................................................... - 169,977 Long term debt.................................................................. 129,500 129,500 Segregated liabilities.......................................................... 725,716 683,470 --------------- --------------- Total liabilities............................................................. 11,894,307 12,227,305 --------------- --------------- MINORITY INTEREST............................................................... 7,388 7,910 MEZZANINE EQUITY Convertible cumulative participating preferred shares, (liquidation preference, $606.5 million)...................................... 556,049 - Hybrid capital units............................................................ - 143,665 --------------- --------------- Total mezzanine equity........................................................ 556,049 143,665 --------------- --------------- SHAREHOLDERS' EQUITY Ordinary shares, par value $0.01: Issued 68,383,370 shares (2006 - 60,554,104)................................. 684 606 Non-cumulative perpetual preferred shares, par value $0.01: Issued: 5,000,000 shares (2006 - 5,000,000).................................. 125,000 125,000 Additional paid-in capital...................................................... 1,204,629 1,050,860 Accumulated other comprehensive income (loss)................................... (78,272) 340 Retained deficit................................................................ (87,238) (119,614) --------------- --------------- Total shareholders' equity.................................................... 1,164,803 1,057,192 --------------- --------------- Total liabilities, minority interest, mezzanine equity and shareholders' equity........................................................ $ 13,622,547 $ 13,436,072 =============== ===============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 2 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) (Expressed in Thousands of United States dollars, except share data)
Three months ended Six months ended ---------------------------------- ----------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 --------------- --------------- --------------- --------------- Revenues Premiums earned, net................................. $ 446,296 $ 444,942 $ 904,510 $ 893,963 Investment income, net............................... 160,879 147,977 302,476 276,999 Fee and other income................................. 4,234 4,639 8,864 8,372 Net realized losses.................................. (2,055) (11,298) (6,344) (24,899) Change in value of embedded derivatives, net......... 3,299 7,366 8,891 17,512 --------------- --------------- --------------- --------------- Total revenues..................................... 612,653 593,626 1,218,397 1,171,947 --------------- --------------- --------------- --------------- Benefits and expenses Claims and other policy benefits..................... 388,248 372,101 771,831 746,564 Interest credited to interest sensitive contract liabilities........................................ 36,420 55,399 71,722 98,100 Acquisition costs and other insurance expenses, net 96,501 104,872 191,608 192,403 Operating expenses................................... 59,802 39,365 94,382 70,457 Collateral finance facilities expense................ 75,285 47,236 148,980 78,323 Interest expense..................................... 8,034 7,066 11,610 11,959 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 664,290 626,039 1,290,133 1,197,806 --------------- --------------- --------------- --------------- Loss before income taxes and minority interest....... (51,637) (32,413) (71,736) (25,859) Income tax benefit (expense)......................... 154,321 (89,043) 140,940 (81,586) --------------- --------------- --------------- --------------- Income (loss) before minority interest............... 102,684 (121,456) 69,204 (107,445) Minority interest.................................... 6 (134) 274 (296) --------------- --------------- --------------- --------------- Net income (loss)................................... 102,690 (121,590) 69,478 (107,741) Dividend declared on non-cumulative perpetual preferred shares................................... (2,265) (2,265) (4,531) (4,531) Imputed dividend on prepaid variable share forward contract........................................... - (72) - (72) Amount allocated to convertible cumulative participating preferred shares (Note 5)............ (882) - (297) - --------------- --------------- --------------- --------------- Net income (loss) available to ordinary shareholders $ 99,543 $ (123,927) $ 64,650 $ (112,344) =============== =============== =============== =============== Income (loss) per ordinary share - Basic ........... $ 1.46 $ (2.31) $ 0.98 $ (2.10) =============== =============== =============== =============== Income (loss) per ordinary share - Diluted.......... $ 0.63 $ (2.31) $ 0.58 $ (2.10) =============== =============== =============== =============== Dividends declared per ordinary share................ $ - $ 0.05 $ - $ 0.10 =============== =============== =============== =============== Weighted average number of ordinary shares outstanding Basic.............................................. 68,195,614 53,720,242 66,204,855 53,578,152 =============== =============== =============== =============== Diluted............................................ 158,854,955 53,720,242 111,784,966 53,578,152 =============== =============== =============== ===============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 3 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (Expressed in Thousands of United States dollars)
Three months ended Six months ended ---------------------------------- ----------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 --------------- --------------- --------------- --------------- Net income (loss).................................... $ 102,690 $ (121,590) $ 69,478 $ (107,741) --------------- --------------- --------------- --------------- Other comprehensive loss, net of tax: Unrealized depreciation on investments............... (67,361) (56,635) (76,320) (105,714) Add: reclassification adjustment for net realized gains (losses) included in net loss...................... (2,813) 7,050 (5,682) 11,002 --------------- --------------- --------------- --------------- Net unrealized depreciation on investments net of income tax benefit (expense) and deferred acquisition costs of $17,837, $25,888, $20,053, and $59,696.... (70,174) (49,585) (82,002) (94,712) Cumulative translation adjustment.................... 2,850 9,172 3,390 8,904 --------------- --------------- --------------- --------------- Other comprehensive loss............................. (67,324) (40,413) (78,612) (85,808) --------------- --------------- --------------- --------------- Comprehensive income (loss).......................... $ 35,366 $ (162,003) $ (9,134) $ (193,549) =============== =============== =============== ===============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 4 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (Expressed in Thousands of United States dollars, except share data)
Six months ended ----------------------------------- June 30, June 30, 2007 2006 --------------- --------------- Ordinary shares: Beginning of period........................................................... 60,554,104 53,391,939 Issuance to employees on exercise of options and awards....................... 475 353,217 Issuance to holders of HyCUs on conversion of purchase contracts.............. 7,440,478 - Issuance to holders of restricted stock awards ............................... 388,313 - --------------- --------------- End of period................................................................. 68,383,370 53,745,156 =============== =============== Non-cumulative perpetual preferred shares: Beginning and end of period................................................... 5,000,000 5,000,000 --------------- --------------- Share capital: Ordinary shares: Beginning of period........................................................... $ 606 $ 534 Issuance to employees on exercise of options.................................. - 3 Issuance to holders of HyCUs on conversion of purchase contracts.............. 74 - Issuance to holders of restricted stock awards ............................... 4 - --------------- --------------- End of period................................................................. 684 537 --------------- --------------- Non cumulative perpetual preferred shares: Beginning and end of period.................................................. 125,000 125,000 --------------- --------------- Additional paid-in capital: Beginning of period........................................................... 1,050,860 893,767 Issuance to employees on exercise of options.................................. - 5,010 Option and restricted stock unit expense...................................... 10,051 4,645 Issuance to holders of HyCUs on conversions of purchase contracts............. 143,675 - Beneficial conversion feature related to convertible cumulative participating preferred shares.............................................. 120,750 - Accretion of beneficial conversion feature related to convertible cumulative participating preferred shares................................... (120,750) - Other......................................................................... 43 - --------------- --------------- End of period................................................................. 1,204,629 903,422 --------------- --------------- Prepaid variable share forward contract: Beginning of period .......................................................... - - Prepayment on variable share forward contract................................. - 110,031 --------------- --------------- End of period................................................................. - 110,031 --------------- --------------- Accumulated other comprehensive loss: Unrealized depreciation on investments Beginning of period........................................................... (19,624) (17,879) Change in period (net of tax and deferred acquisition costs).................. (82,002) (94,712) --------------- --------------- End of period................................................................. (101,626) (112,591) --------------- --------------- Cumulative translation adjustment Beginning of period........................................................... 22,826 7,888 Change in period (net of tax)................................................. 3,390 8,904 --------------- --------------- End of period................................................................. 26,216 16,792 --------------- --------------- Effect of adoption of FAS 158 Beginning and end of period................................................... (2,862) - --------------- --------------- Total accumulated other comprehensive loss...................................... (78,272) (95,799) --------------- --------------- Retained earnings (deficit): Beginning of period........................................................... (119,614) 262,402 Adoption of FIN 48 on January 1, 2007......................................... (32,571) - Net income (loss)............................................................ 69,478 (107,741)
5 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (UNAUDITED) (Expressed in Thousands of United States dollars, except share data) Six months ended ----------------------------------- June 30, June 30, 2007 2006 --------------- --------------- Dividends declared on ordinary shares......................................... - (5,359) Dividends declared on non-cumulative perpetual preferred shares............... (4,531) (4,531) Imputed dividend on prepaid variable share forward contract .................. - (72) --------------- --------------- End of period................................................................. (87,238) 144,699 --------------- --------------- Total shareholders' equity...................................................... $ 1,164,803 $ 1,187,890 =============== ===============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 6 SCOTTISH RE GROUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Expressed in Thousands of United States dollars)
Six months ended ---------------------------------- June 30, June 30, 2007 2006 -------------- -------------- Operating activities Net income (loss)............................................................... $ 69,478 $ (107,741) Adjustments to reconcile net loss to net cash provided by operating activities: Net realized losses........................................................... 6,344 24,899 Change in value of embedded derivatives, net.................................. (8,891) (17,512) Amortization of discount on investments....................................... 6,085 8,169 Amortization of deferred acquisition costs.................................... 41,642 48,149 Amortization of present value of in-force business............................ 1,497 1,819 Changes in assets and liabilities: Accrued interest receivable................................................. (1,173) (26,759) Reinsurance balances and risk fees receivable............................... 52,999 151,394 Deferred acquisition costs.................................................. (43,171) (78,642) Deferred tax asset and liability............................................ (163,188) 92,454 Other assets................................................................ 60,050 (13,571) Current income tax receivable and payable................................... 6,476 (6,043) Reserves for future policy benefits, net of amounts recoverable from reinsurers........................................................... 85,196 551,647 Interest sensitive contract liabilities, net of funds withheld at interest............................................................... 56,749 484,732 Accounts payable and other liabilities...................................... 57,976 (26,962) Other....................................................................... 13,467 6,763 --------------- --------------- Net cash provided by operating activities..................................... 241,536 1,092,796 --------------- --------------- Investing activities Purchase of fixed maturity investments.......................................... (455,019) (3,724,315) Proceeds from sales of fixed maturity investments............................... 125,157 510,211 Proceeds from maturity of fixed maturity investments............................ 304,533 222,620 Purchase of preferred stock investments......................................... (1,574) (7,368) Proceeds from sales and maturity of preferred stock investments................. 9,982 8,498 Purchase of and proceeds from other investments................................. 1,203 (10,436) Other........................................................................... 2,723 (5,391) --------------- --------------- Net cash used in investing activities......................................... (12,995) (3,006,181) --------------- --------------- Financing activities Deposits to interest sensitive contract liabilities............................. 5,628 278,298 Withdrawals from interest sensitive contract liabilities........................ (65,809) (131,195) Net proceeds from issuance of convertible cumulative participating preferred shares.............................................................. 556,049 - Proceeds from issuance to holders of HyCUs on conversion of purchase contracts............................................................ 7,338 - Redemption of convertible preferred shares...................................... (7,338) - Dividends paid on redemption of convertible preferred shares.................... (222) - Proceeds from collateral finance facility liabilities........................... 43,169 1,739,480 Repayment of funds drawn down on Stingray ...................................... (275,000) - Dividends paid on non-cumulative perpetual preferred shares..................... (4,531) - Proceeds from issuance of ordinary shares....................................... 4 5,013 Proceeds from prepaid variable share forward contract........................... - 109,959 Proceeds from reverse repurchase agreement...................................... - 64,856 Dividends paid on ordinary shares............................................... - (9,890) --------------- --------------- Net cash provided by financing activities..................................... 259,288 2,056,521 --------------- --------------- Net change in cash and cash equivalents......................................... 487,829 143,136 Cash and cash equivalents, beginning of period.................................. 622,756 1,420,205 --------------- --------------- Cash and cash equivalents, end of period........................................ $ 1,110,585 $ 1,563,341 =============== ===============
See Accompanying Notes to Consolidated Financial Statements (unaudited) 7 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2007 (UNAUDITED) 1. Organization On May 7, 2007, we completed the $600.0 million equity investment transaction by MassMutual Capital Partners LLC, ("MassMutual Capital"), a member of the MassMutual Financial Group, and SRGL Acquisition, LDC ("SRGL LDC"), an affiliate of Cerberus Capital Management, L.P. ("Cerberus"), announced by us on November 27, 2006 (the "Transaction"). We incurred $44.0 million in closing costs which resulted in aggregate net proceeds of $556.0 million. Pursuant to the Transaction, MassMutual Capital and Cerberus each invested $300.0 million in us in exchange for 500,000 (1,000,000 in the aggregate) newly issued Convertible Cumulative Participating Preferred Shares (see Note 7), which are convertible into 150,000,000 ordinary shares in the aggregate at any time. On the ninth anniversary of issue, the Convertible Cumulative Participating Preferred Shares will automatically convert into an aggregate of 150,000,000 ordinary shares if not previously converted. Pursuant to Assignment and Assumption Agreements dated as of June 5, 2007 between MassMutual Capital and each of Benton Street Partners I, L.P., Benton Street Partners II, L.P. and Benton Street Partners III, L.P (collectively, the "Funds"), MassMutual Capital assigned its Convertible Cumulative Participating Preferred Shares to the Funds. The sole general partner of each of the Funds is Benton Street Advisors, Inc., an indirect wholly-owned subsidiary of Massachusetts Mutual Life Insurance Company. Also on June 5, 2007, MassMutual Capital, SRGL LDC and Benton Street Advisors, Inc. entered into an Amended and Restated Investors Agreement (the "Amended and Restated Investors Agreement"), in order to reallocate voting and governance rights and obligations of MassMutual Capital to and among the Funds. Pursuant to the Amended and Restated Investors Agreement, MassMutual Capital, SRGL LDC and the Funds agreed, among other things, to: (i) certain restrictions on the transfer of the Convertible Cumulative Participating Preferred Shares, (ii) certain voting provisions with respect to the Company's ordinary shares, (iii) the election of a certain number of directors to the Company's Board and (iv) a third party sale process. Because of the Amended and Restated Investors Agreement, for the purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, Massachusetts Mutual Life Insurance Company and the Funds are deemed to be members of a group with SRGL LDC and, therefore, the beneficial owners of the securities of the Company beneficially owned by SRGL LDC. On June 5, 2007, SRGL LDC subscribed for and purchased limited partnership interests in Benton Street Partners III, L.P., pursuant to a Subscription Agreement dated as of June 5, 2007 by and between Benton Street Partners III, L.P. and SRGL LDC. Benton Street Partners III, L.P. holds 134,667 Convertible Cumulative Participating Preferred Shares. Pursuant to an Amended and Restated Limited Partnership Agreement dated as of June 5, 2007 by and among Benton Street Advisors, Inc., MassMutual Capital and SRGL LDC, SRGL LDC shares certain rights over the voting and disposition of securities of the Company held by Benton Street Partners III, L.P. Because SRGL LDC directly holds 500,000 Convertible Cumulative Participating Preferred Shares and exercises certain rights over the voting and disposition of the 134,667 Convertible Cumulative Participating Preferred Shares held by Benton Street Partners III, L.P., which Convertible Cumulative Participating Preferred Shares, in the aggregate, may be converted into 95,200,050 ordinary shares, Cerberus is deemed to beneficially own 95,200,050 ordinary shares, or 43.6% of the ordinary shares deemed issued and outstanding as of June 30, 2007. In addition, because of the Amended and Restated Investors Agreement, Cerberus is deemed to beneficially own the 365,333 Convertible Cumulative Participating Preferred Shares, which may be converted into 54,799,950 ordinary shares, beneficially owned by Massachusetts Mutual Life Insurance Company. As of June 30, 2007, MassMutual Capital and Cerberus hold approximately 68.7% of our equity voting power, along with the right to designate two-thirds of the members of the Board of Directors. 2. Basis of presentation Accounting Principles -- The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal 8 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 2. Basis of presentation (continued) recurring accruals) considered necessary for a fair presentation have been included. The results for the interim period are not necessarily indicative of the results to be expected for the full year ending December 31, 2007. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2006 Annual Report on Form 10-K for the year ended December 31, 2006 ("2006 Annual Report"). Consolidation -- We consolidate the results of all of our subsidiaries and all variable interest entities for which we are the primary beneficiary. All significant intercompany transactions and balances have been eliminated on consolidation. Estimates, Risks and Uncertainties -- The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions used by management. Our most significant assumptions are for assumed reinsurance liabilities, premiums receivable, deferred acquisition costs, realization of deferred tax assets and valuation of investment impairments. We review and revise these estimates as appropriate. Any adjustments made to these estimates are reflected in the period the estimates are revised. All tabular amounts are reported in thousands of United States dollars, except share and per share data, or as otherwise noted. Certain prior period amounts have been reclassified to conform to the current period presentation. 3. New accounting pronouncements FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". Tax positions must meet a "more likely than not" recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. On January 1, 2007, we adopted FIN 48. See Note 6. 9 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 3. New accounting pronouncements (continued) FASB Statement No. 157, Fair Value Measurements In September 2006, the FASB issued Statement No. 157 ("SFAS No. 157"), "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. We are required to adopt SFAS No. 157 on January 1, 2008 and are currently evaluating the implications of SFAS No. 157 on our results of operations and financial position. FASB Statement No. 159, Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued Statement No. 159 ("SFAS No. 159"), "Fair Value Option for Financial Assets and Financial Liabilities", which permits entities to choose to measure many financial instruments and certain other items at fair value. A company must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied on an instrument by instrument basis, with a few exceptions. The fair value option is irrevocable (unless a new election date occurs) and the fair value option may be applied only to entire instruments and not to portions of instruments. SFAS 159 will be effective for interim and annual financial statements issued after January 1, 2008. We are currently evaluating the implications of SFAS No. 159 on our results of operations and financial position. 4. Business segments We measure segment performance primarily based on income or loss before income taxes and minority interest. Our reportable segments are strategic business units that are primarily segregated by geographic region. We report segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Our segments are Life Reinsurance North America, Life Reinsurance International and Corporate and Other. The segment reporting is as follows:
Three months ended June 30, 2007 ------------------------------------------------------------------------- Life Reinsurance ---------------------------------- Corporate North America International & Other Total --------------- --------------- --------------- --------------- Premiums earned, net................................. $ 430,282 $ 16,014 $ - $ 446,296 Investment income, net............................... 153,449 3,037 4,393 160,879 Fee and other income................................. 2,711 753 770 4,234 Net realized gains (losses).......................... (2,593) (10) 548 (2,055) Change in value of embedded derivatives net.......... 3,299 - - 3,299 --------------- --------------- --------------- --------------- Total revenues..................................... 587,148 19,794 5,711 612,653 --------------- --------------- --------------- --------------- Claims and other policy benefits..................... 375,634 12,614 - 388,248 Interest credited to interest sensitive contract liabilities........................................ 36,420 - - 36,420 Acquisition costs and other insurance expenses, net.. 89,657 5,237 1,607 96,501 Operating expenses................................... 13,161 11,455 35,186 59,802 Collateral finance facilities expense................ 69,085 - 6,200 75,285 Interest expense..................................... 3,233 - 4,801 8,034 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 587,190 29,306 47,794 664,290 --------------- --------------- --------------- --------------- Loss before income taxes and minority interest....... $ (42) $ (9,512) $ (42,083) $ (51,637) =============== =============== =============== ===============
10 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 4. Business segments (continued)
Three months ended June 30, 2006 ------------------------------------------------------------------------- Life Reinsurance ---------------------------------- Corporate North America International & Other Total --------------- --------------- --------------- --------------- Premiums earned, net................................. $ 407,549 $ 37,393 $ - $ 444,942 Investment income, net............................... 136,763 8,971 2,243 147,977 Fee and other income................................. 3,879 - 760 4,639 Net realized gains (losses).......................... (5,479) (6,908) 1,089 (11,298) Change in value of embedded derivatives net.......... 7,366 - - 7,366 --------------- --------------- --------------- --------------- Total revenues..................................... 550,078 39,456 4,092 593,626 --------------- --------------- --------------- --------------- Claims and other policy benefits..................... 338,626 33,475 - 372,101 Interest credited to interest sensitive contract liabilities........................................ 55,399 - - 55,399 Acquisition costs and other insurance expenses, net.. 97,280 6,185 1,407 104,872 Operating expenses................................... 14,538 7,874 16,953 39,365 Collateral finance facilities expense................ 45,891 - 1,345 47,236 Interest expense..................................... 3,038 - 4,028 7,066 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 554,772 47,534 23,733 626,039 --------------- --------------- --------------- --------------- Loss before income taxes and minority interest....... $ (4,694) $ (8,078) $ (19,641) $ (32,413) =============== =============== =============== ===============
Six months ended June 30, 2007 ------------------------------------------------------------------------- Life Reinsurance ---------------------------------- Corporate North America International & Other Total --------------- --------------- --------------- --------------- Premiums earned, net................................. $ 853,653 $ 50,857 $ - $ 904,510 Investment income, net............................... 291,368 6,080 5,028 302,476 Fee and other income................................. 6,627 753 1,484 8,864 Net realized losses.................................. (4,998) (635) (711) (6,344) Change in value of embedded derivatives net.......... 8,891 - - 8,891 --------------- --------------- --------------- --------------- Total revenues..................................... 1,155,541 57,055 5,801 1,218,397 --------------- --------------- --------------- --------------- Claims and other policy benefits..................... 733,568 38,263 - 771,831 Interest credited to interest sensitive contract liabilities........................................ 71,722 - - 71,722 Acquisition costs and other insurance expenses, net.. 176,880 11,158 3,570 191,608 Operating expenses................................... 25,419 21,267 47,696 94,382 Collateral finance facilities expense................ 137,941 - 11,039 148,980 Interest expense..................................... 6,288 - 5,322 11,610 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 1,151,818 70,688 67,627 1,290,133 --------------- --------------- --------------- --------------- Income (loss) before income taxes and minority interest $ 3,723 $ (13,633) $ (61,826) $ (71,736) =============== =============== =============== ===============
11 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 4. Business segments (continued)
Six months ended June 30, 2006 ------------------------------------------------------------------------- Life Reinsurance ---------------------------------- Corporate North America International & Other Total --------------- --------------- --------------- --------------- Premiums earned, net................................. $ 836,467 $ 57,496 $ - $ 893,963 Investment income, net............................... 260,704 11,960 4,335 276,999 Fee and other income................................. 6,896 - 1,476 8,372 Net realized gains (losses).......................... (19,398) (8,046) 2,545 (24,899) Change in value of embedded derivatives net.......... 17,512 - - 17,512 --------------- --------------- --------------- --------------- Total revenues..................................... 1,102,181 61,410 8,356 1,171,947 --------------- --------------- --------------- --------------- Claims and other policy benefits..................... 685,906 60,658 - 746,564 Interest credited to interest sensitive contract liabilities........................................ 98,100 - - 98,100 Acquisition costs and other insurance expenses, net.. 181,688 9,002 1,713 192,403 Operating expenses................................... 29,130 13,651 27,676 70,457 Collateral finance facilities expense................ 76,434 - 1,889 78,323 Interest expense..................................... 5,600 - 6,359 11,959 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 1,076,858 83,311 37,637 1,197,806 --------------- --------------- --------------- --------------- Income (loss) before income taxes and minority interest $ 25,323 $ (21,901) $ (29,281) $ (25,859) =============== =============== =============== ===============
June 30, December 31, 2007 2006 --------------- --------------- Assets Life Reinsurance North America............................................................................. $ 12,115,062 $ 12,194,291 International............................................................................. 452,060 431,222 -------------- -------------- Total Life Reinsurance...................................................................... 12,567,122 12,625,513 Corporate & Other........................................................................... 1,055,425 810,559 -------------- -------------- Total....................................................................................... $ 13,622,547 $ 13,436,072 ============== ==============
12 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 5. Earnings per ordinary share The following table sets forth the computation of basic and diluted earnings per ordinary share under the two-class method and the if converted method, respectively, as required under SFAS Statement No. 128 ("SFAS No. 128"), "Earnings Per Share" and EITF No. 03-06, "Participating Securities and the Two-Class Method under FASB Statement No. 128." Basic earnings per share is computed based on the weighted average number of ordinary shares outstanding and assumes an allocation of net income to Convertible Cumulative Participating Preferred Shares for the period or portion of the period that this security is outstanding. Under the provisions of SFAS No. 128, basic earnings per share are computed by dividing the net income available to ordinary shareholders by the weighted average number of shares of our ordinary shares outstanding for the period. Diluted earnings per share is calculated based on the weighted average number of shares of ordinary shares outstanding plus the diluted effect of potential ordinary shares in accordance with the if converted method.
Three months ended Six months ended ---------------------------------- ----------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 --------------- --------------- --------------- --------------- Numerator: Net income (loss).................................... $ 102,690 $ (121,590) $ 69,478 $ (107,741) Dividend declared on non-cumulative perpetual preferred shares............................................. (2,265) (2,265) (4,531) (4,531) Imputed dividend on prepaid variable share forward contract .......................................... - (72) - (72) Amount allocated to convertible cumulative participating preferred shareholders............... (882) - (297) - --------------- --------------- --------------- --------------- Net income (loss) applicable to ordinary shareholders $ 99,543 $ (123,927) $ 64,650 $ (112,344) =============== =============== =============== =============== Denominator: Denominator for basic income (loss) per ordinary share - weighted average number of ordinary shares.................................... 68,195,614 53,720,242 66,204,855 53,578,152 Effect of dilutive securities: - Convertible cumulative participating preferred shares........................................... 90,659,341 - 45,580,111 - --------------- --------------- --------------- --------------- Denominator for dilutive income (loss) per ordinary share.............................................. 158,854,955 53,720,242 111,784,966 53,578,152 =============== =============== =============== =============== Basic income (loss) per ordinary share............... $ 1.46 $ (2.31) $ 0.98 $ (2.10) =============== =============== =============== =============== Diluted income (loss) per ordinary share............. $ 0.63 $ (2.31) $ 0.58 $ (2.10) =============== =============== =============== ===============
In accordance with SFAS No. 128, the exercise of options and warrants or conversion of convertible securities is not assumed unless it would reduce earnings per share or increase loss per share. 6. Income taxes Income tax benefit for the three months ended June 30, 2007 was $154.3 million compared to income tax expense of $89.0 million in the same period in 2006. Income tax benefit for the six months ended June 30, 2007 was $140.9 million compared to income tax expense of $81.6 million in the same period in 2006. The change in our effective tax rate in the second quarter ended June 30, 2007 compared to the same period in 2006 is primarily related to a net release of our valuation allowance which was established in previous periods on deferred tax assets. As discussed in Note 12 to the consolidated financial statements in the 2006 Annual Report, at December 31, 2006 we had a valuation allowance of $304.9 million established against our deferred tax assets. We currently provide a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all, of 13 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 6. Income taxes (continued) our deferred tax assets, will not be realized. Our valuation allowance decreased by approximately $27.3 million during the three months ended March 31, 2007 to $277.6 million, including the impact of first quarter activity, the impact from applying FIN 48 and other adjustments. In the second quarter, our valuation allowance decreased by approximately $203.6 million to $74.0 million. A majority of the valuation release is attributable to the expected utilization of net operating loss carryforwards at the U.S. consolidated tax life group to offset significant current year taxable income generated from the redomestication of Orkney Re, Inc. from South Carolina to Delaware, which occurred in May 2007. We redomesticated Orkney Re, Inc. to Delaware to, among other considerations, take advantage of the synergies created by having both Orkney Re, Inc. and our principal U.S. operating subsidiary, Scottish Re (U.S.), Inc., subject to a single regulator with a more comprehensive understanding of the overall combined business and statutory considerations. The net operating loss carryforwards which were previously written off via a valuation allowance could now be used as an offsetting valuation allowance release. Other significant activity which offsets the valuation allowance release includes: the write-down of a portion of the U.S. non-life tax group's deferred tax asset in conjunction with the provision of Section 382, as discussed below; and a valuation allowance recorded on the U.K. and Singapore deferred taxes. As of the end of the second quarter of 2007, the majority of our deferred tax assets of the U.S. consolidated tax life group are no longer net operating losses, which in previous periods were subject to a restricted carryforward period. The remaining gross deferred tax asset is supported principally by the reversal of deferred tax liabilities, and, to a much lesser extent, tax planning strategies for which management believes that it is more likely than not that the deferred tax assets will be utilized in subsequent periods, although there is a risk that we will need to establish additional valuation allowances in future quarters. Due to the negative evidence that still exists at June 30, 2007 and our inability to rely on future taxable income tax projections we have maintained a full valuation allowance against our remaining net deferred tax asset in the U.S., U.K., Ireland and Singapore. Section 382 event The investments made by MassMutual Capital and Cerberus on May 7, 2007 qualify as a change in ownership under Section 382 of the Internal Revenue Code. Section 382 operates to limit the future deduction of net operating losses that were in existence as of the change in ownership. As a result of this limitation, the Company has written off $130.9 million of net operating losses that it will be unable to utilize with respect to its U.S. entities, prior to expiration. Because the Company had with respect to its U.S. entities previously established a valuation allowance against these net operating losses, there is not a significant tax expense associated with Section 382 limitations. FIN 48 adoption On January 1, 2007, we adopted FIN 48. As a result of the implementation of FIN 48, we recorded a net decrease to our beginning retained earnings of $32.6 million representing a total FIN 48 liability of $78.0 million (excluding previously recognized liabilities of $6.5 million and including interest and penalties of $11.1 million) reduced by a $45.4 million reduction of our existing valuation allowance. We had total unrecognized tax benefits (excluding interest and penalties) of $73.4 million at January 1, 2007, the recognition of which would result in a $28.0 million benefit to the effective tax rate. At June 30, 2007 we had total unrecognized tax benefits (excluding interest and penalties) of $167.2 million, the recognition of which would result in a $60.3 million benefit to the effective tax rate. Our policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense (on a going forward basis excluding the initial amount noted above). We do not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months. 14 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 6. Income taxes (continued) We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. As of June 30, 2007, we remained subject to examination in the following major tax jurisdictions for the years indicated below: Major Tax Jurisdictions Open Years ----------------------- ---------- U.S. Life Group.................................. 2001 through 2006 Non-Life Group.............................. 2005 through 2006 Ireland....................................... 2002 through 2006 U.K........................................... 2001 through 2006 7. Mezzanine equity Convertible cumulative participating preferred shares On May 7, 2007, in connection with the Transaction with MassMutual Capital and Cerberus, we issued in a private offering 1,000,000 Convertible Cumulative Participating Preferred Shares. The gross proceeds were $600.0 million less $44.0 million in closing costs, which resulted in aggregate net proceeds of $556.0 million. Each Convertible Cumulative Participating Preferred Share has a par value of $0.01 per share with a liquidation preference of $600 per share, as adjusted for dividends or distributions as described further below. The Convertible Cumulative Participating Preferred Shares are convertible at the option of the holder, at any time, into an aggregate of 150,000,000 ordinary shares of the Company. On the ninth anniversary of issue, the Convertible Cumulative Participating Preferred Shares will automatically convert into an aggregate of 150,000,000 ordinary shares if not previously converted. We are not required at any time to redeem the Convertible Cumulative Participating Preferred Shares for cash, except in the event of a liquidation or a change-in-control event. We have accounted for the Convertible Cumulative Participating Preferred Shares in accordance with EITF D-98: Classification and Measurement of Redeemable Securities. Dividends on the Convertible Cumulative Participating Preferred Shares are cumulative and accrete daily on a non-compounding basis at a rate of 7.25% per annum on the stated value of $600.0 million, and shall be accrued but not paid at such time. Dividends will only be paid in a liquidation preference scenario upon liquidation or change-in-control of the Company prior to the ninth anniversary. There have been no dividends accrued in the period as this scenario is not deemed probable at this time. As of June 30, 2007, the amount of dividends not accrued pursuant to the terms of the Convertible Cumulative Participating Preferred Shares is $6.5 million. To the extent that the Convertible Cumulative Participating Preferred Shares participate on an as-converted basis in dividends paid on ordinary shares, a corresponding reduction will be made to the liquidation preference for the Convertible Cumulative Participating Preferred Shares. The Convertible Cumulative Participating Preferred Shares have a liquidation preference equal to their stated value, as adjusted for (x) the accretion of dividends and (y) any cash payment or payment in property of dividends or distributions. The holders of Convertible Cumulative Participating Preferred Shares may, among other things, require us to redeem the Convertible Cumulative Participating Preferred Shares upon a change-in-control. Upon a change-in-control, the redemption price is an amount equal to the greater of (i) the stated value of the outstanding Convertible Cumulative Participating Preferred Shares, plus an amount equal to the sum of all accrued dividends through the earlier of (A) the date of payment of the consideration payable upon a change-in-control, or (B) the fifth anniversary of the issue date of the Convertible Cumulative Participating Preferred Shares, or (ii) the amount that the holder of the Convertible Cumulative Participating Preferred Shares would have been entitled to receive with respect to such change-in-control if it had exercised its right to convert all or such portion of its Convertible Cumulative Participating Preferred Shares for ordinary shares immediately prior to the date of such change-in-control. The liquidation preference of the Convertible Cumulative Participating Preferred Shares is not applicable once the Convertible Cumulative Participating Preferred Shares have been converted into ordinary shares, as described above. 15 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 7. Mezzanine equity (continued) The Convertible Cumulative Participating Preferred Shares conversion price ($4.00 per ordinary share) was lower than the trading value of $4.66 of our ordinary shares on the date of issue. This discount has been accounted for as an embedded beneficial conversion feature in accordance with EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. Accordingly the Company recognized a $120.8 million embedded beneficial conversion feature, which reduced the Convertible Cumulative Participating Preferred Share issue amount shown in Mezzanine Equity and increased the amount of additional paid in capital. Under the accounting guidance above, the Company had the choice to accrete the full intrinsic value of the embedded beneficial conversion feature out of retained earnings over the nine year term of the shares or immediately due to the ability of the holders to convert at their option at any time. Given the ability of the holders to convert at any time, the Company has elected to accrete the full intrinsic value of the embedded beneficial conversion feature on the date of issue. As the Company did not have any retained earnings on the date of issue, this has resulted in the $120.8 million beneficial conversion feature being accreted out of additional paid in capital and back into Mezzanine Equity. Hybrid capital units On December 17, 2003 and December 22, 2003, we issued in a public offering a total of 5,750,000 Hybrid Capital Units ("HyCUs"). The aggregate net proceeds were $141.9 million. Each HyCU consisted of (i) a purchase contract ("purchase contract") to which the holder was obligated to purchase from us, on February 15, 2007, an agreed upon number of ordinary shares for a price of $25.00 and (b) a convertible preferred share with a liquidation preference of $25.00 ("Convertible Preferred Share"). Holders of the HyCUs had the option to allow the Convertible Preferred Shares to be included in the remarketing process and use the proceeds of the remarketing to settle the purchase contract or elect not to participate in the remarketing by either delivering the requisite amount of cash to settle the purchase contract or surrendering the Convertible Preferred Shares. On January 25, 2007, we gave notice to holders of the HyCUs that we were unable to satisfy certain conditions precedent to the remarketing that were contained in the Remarketing Agreement and, therefore, the remarketing of the Convertible Preferred Shares had failed. Accordingly, holders of the HyCUs only had the option to settle the purchase contracts in cash or surrender the Convertible Preferred Shares. On February 15, 2007, we received cash proceeds of $7.3 million to settle purchase contracts, in exchange for 293,500 of our ordinary shares. We also released to the settling holder 293,500 Convertible Preferred Shares which were previously held as collateral against the holder's obligation under the purchase contracts. Also on February 15, 2007, we issued 7,146,978 of our ordinary shares to the holders of our HyCUs who did not settle in cash, and who had elected to surrender their Convertible Preferred Shares. On February 22, 2007, we exercised our right to foreclose on the 5,456,500 Convertible Preferred Shares held as collateral for the 5,456,500 purchase contracts that were not settled in cash. In aggregate, we issued 7,440,478 of our ordinary shares on February 15, 2007. We redeemed the 293,500 Convertible Preferred Shares for an aggregate of $7.3 million plus accrued dividends on May 21, 2007. Following their redemption on May 21, 2007, there were no Convertible Preferred Shares outstanding. 8. Contingencies Mediation On June 16, 2005, we requested mediation from Employers Reinsurance Corporation ("ERC") pursuant to the stock purchase agreement transferring a 95% interest in Scottish Re Life Corporation (formerly ERC Life Corporation) to Scottish Holdings, Inc. We assert that ERC breached certain representations and warranties under 16 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 8. Contingencies (continued) the agreement. Any negative outcome from this mediation will not have a material adverse impact on our financial position because the asserted breaches have already been fully reflected in our financial position at June 30, 2007. The parties have held two mediation sessions, but have been unable to resolve the dispute. No date has been scheduled for a future mediation session. Class action lawsuit On August 2, 2006, a putative class action lawsuit was filed against us and certain of our current and former officers and directors in the U.S. District Court for the Southern District of New York on behalf of a putative class consisting of investors who purchased our publicly traded securities between December 16, 2005 and July 28, 2006. Between August 7, 2006 and October 3, 2006, seven additional related class action lawsuits were filed against us, certain of our current and former officers and directors, and certain third parties. Two of the complaints were filed on August 7, 2006, and the remaining five complaints were filed on August 14, 2006, August 22, 2006, August 23, 2006, September 15, 2006, and October 3, 2006, respectively. Each of the class actions filed seeks an unspecified amount of damages, as well as other forms of relief. On October 12, 2006, all of the class actions were consolidated. On December 4, 2006, a consolidated class action complaint was filed. The complaint names us; Dean E. Miller, our former Chief Financial Officer; Scott E. Willkomm, our former Chief Executive Officer; Elizabeth Murphy, our former Chief Financial Officer; our former Board members Michael Austin, Bill Caulfeild-Browne, Robert Chmely, Michael French, Lord Norman Lamont, Hazel O'Leary, and Glenn Schafer; and certain third parties, including Goldman Sachs and Bear Stearns in their capacities as underwriters in various securities offerings by us and Ernst & Young LLP in their capacity as independent registered public accounting firm. The complaint is brought on behalf of a putative class consisting of investors who purchased our securities between February 17, 2005 and July 31, 2006. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5, and Sections 11, 12(a)(2), and 15 of the Securities Act. The complaint seeks an unspecified amount of damages, as well as other forms of relief. On March 7, 2007 we filed a motion to dismiss the putative class action lawsuit. This motion has been fully briefed and is pending before the Court. Shareholder derivative lawsuit In addition, on October 20, 2006, a shareholder derivative lawsuit was filed against certain of our current and former directors in the U.S. District Court for the Southern District of New York. The derivative lawsuit alleges, among other things, that defendants improperly permitted us to make false and misleading statements to investors concerning our business and operations, thereby exposing us to liability from class action suits alleging violations of the U.S. securities laws. The derivative lawsuit asserts claims against defendants for breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, and unjust enrichment. On January 8, 2007 we filed a motion to dismiss the derivative lawsuit. On May 7, 2007, our motion was granted and the lawsuit was dismissed without prejudice. The plaintiff declined to submit an amended complaint and, on May 30, 2007, the court dismissed the case with prejudice. 9. Stock based compensation Stock options Upon closing of the Transaction on May 7, 2007, all unvested options issued under our five stock option plans (the "1998 Plan", the "1999 Plan", the "Harbourton Plan", the "2001 Plan" and the "2004 Plan", collectively the "Option Plans") vested immediately. Under the terms of the Option Plans, the Transaction qualified as a change-in-control (as defined therein), and, accordingly, all previously unrecognized compensation expense, totaling $2.0 million, was recognized immediately. Compensation expense for stock options for the three and six months ended June 30, 2007 was $2.0 million and $2.5 million, respectively. The exercisable options will expire at the end of their respective original terms of either seven or ten years, with such term length based on the date of grant. Option activity under the Option Plans for the three and six months ended June 30, 2007 is as follows: 17 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 9. Stock based compensation (continued)
Three months ended Six months ended June 30, 2007 June 30, 2007 ----------------------- ----------------------- Outstanding, beginning of period.......... 1,637,919 1,717,519 Cancelled................................. (146,100) (225,700) ----------------------- ----------------------- Outstanding, end of period................ 1,491,819 1,491,819 ======================= ======================= Options exercisable, end of period........ 1,491,819 1,491,819 ======================= =======================
Restricted share awards The Company has three restricted share award tranches based on the year of grant and service and performance period related to them: "2004-2006 Grants", "2005-2007 Grants" and "2006-2008 Grants", with each such grant made pursuant to the Company's 2004 Equity Incentive Compensation Plan (as referenced above, the "2004 Plan") and related Award Grant Guidelines. "2005-2007 Grants" and "2006-2008 Grants" are comprised of two components - restricted stock units and performance shares. The "2004-2006 Grants" tranche is comprised of performance shares only. During the quarter ended September 30, 2006, we concluded that the performance targets for the performance shares in all the tranches were no longer likely of being achieved and, as a result, we reversed $4.1 million of compensation expense relating to these performance shares. The "2004-2006 Grants" vested on December 31, 2006 and, as the performance targets for such awards were not met, these restricted share awards were cancelled. Upon the closing of the Transaction on May 7, 2007, all restricted stock units and 50% of the performance shares of the "2005-2007 Grants" and "2006-2008 Grants" vested immediately. Under the terms of the 2004 Plan, the Transaction qualified as a change-in-control (as defined therein) and, accordingly, previously unrecognized compensation expense relating to all the restricted stock units totaling $1.6 million and 50% of the performance shares totaling $5.7 million were recognized immediately. Compensation expense for restricted stock units and 50% of the performance shares for the three and six months ended June 30, 2007 was $7.3 million and $7.6 million, respectively. Holders of restricted share awards received ordinary shares of the Company equivalent to the amount of restricted stock units and performance shares they were entitled to less any shares withheld to satisfy tax withholding liabilities and including any dividends earned on the restricted share awards during the period from grant date to the date of the Transaction. On May 14, 2007, we issued 388,313 ordinary shares to the holders of the restricted share awards. Restricted share award activity under the 2004 ECP Plan for the three and six months ended June 30, 2007 is as follows:
Three months ended Six months ended June 30, 2007 June 30, 2007 ----------------------- ----------------------- Outstanding, beginning of period.......... 626,726 634,002 Granted for dividends earned.............. 4,425 4,425 Exercised................................. - (775) Cancelled................................. (242,838) (249,339) ----------------------- ----------------------- Outstanding, May 7, 2007................. 388,313 388,313 Ordinary shares issued, May 14, 2007...... 388,313 388,313 ======================= ======================= Outstanding, end of period................ - - ======================= =======================
18 SCOTTISH RE GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2007 (UNAUDITED) 10. Subsequent event 2007 Stock Option Plan On July 18, 2007, the shareholders of the Company approved and adopted the Scottish Re Group Limited 2007 Stock Option Plan ("2007 Plan"). The 2007 Plan provides for the granting of stock options to eligible employees, directors and consultants of the Company. The total number of our shares reserved and available for issuance under the 2007 Plan is 18,000,000. The exercise price of stock options granted under the 2007 Plan shall be the fair market value of our ordinary shares on the date of grant and such options expire ten years after the date of grant, or such shorter period as determined by the Compensation Committee (unless earlier exercised or terminated pursuant to its terms). On July 18, 2007, we issued 2,250,000 options to directors and 8,380,000 options to eligible employees. Options issued under the 2007 Plan vest as follows: o 50% of an option grant to an employee or consultant vests based on the recipient's continued employment with the Company ("Time-Based Options"). 20% of the Time-Based Options vest on the grant date and an additional 20% vest in four equal installments on each of the first, second, third and fourth anniversary of the grant date, based on continued employment. The Time-Based Options are exercisable upon vesting. o 50% of an option grant to an employee or consultant vests based on the achievement of certain performance targets as established by the Board with respect to each relevant fiscal year ("Performance-Based Options"). 10% of the Performance-Based Options vest following the close of each of the five fiscal years following the grant date, subject to the Company's attainment of the performance targets established by the board with respect to the relevant fiscal year. 10% of the Performance-Based Options vest following the close of each of the five fiscal years following the grant date, subject to the recipient's respective division's or segment's attainment of the performance targets established by the Board with respect to the relevant fiscal year. Although the Performance-Based Options may vest, they shall not become exercisable until the end of the fifth fiscal year following May 7, 2007; provided, however, that if the Company achieves an A- rating or better from Standard & Poor's or AM Best within eighteen (18) months following the closing of the Transaction, all Performance-Based Options with regard to fiscal years 2007 and 2008 will fully vest and become exercisable. o 100% of options granted to directors vest on the grant date and are exercisable. Upon a change of control (as defined in the 2007 Plan), to the extent not previously cancelled or forfeited, all Time-Based Options and Performance-Based Options shall become 100% vested and exercisable. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Forward-Looking Statements Some of the statements contained in this report are not historical facts and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from the forward-looking statements. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", "may", "will", "continue", "project", and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include: o uncertainties relating to the ratings accorded to us and our insurance subsidiaries; o uncertainties in our ability to raise equity capital or other sources of funding to support ongoing capital and liquidity needs; o uncertainties relating to future actions that may be taken by creditors, regulators and ceding insurers relating to our ratings and financial condition; o the risk that our risk analysis and underwriting may be inadequate; o changes in expectations regarding future realization of gross deferred tax assets; o exposure to mortality experience which differs from our assumptions; o risks related to recent negative developments in the residential mortgage market, especially in the subprime sector, and our exposure to such market; o risks arising from our investment strategy, including risks related to the market value of our investments, fluctuations in interest rates and our need for liquidity; o uncertainties arising from control of our invested assets by third parties; o developments in global financial markets that could affect our investment portfolio and fee and other income; o changes in the rate of policyholder withdrawals or recapture of reinsurance treaties, whether caused by ratings pressures or general market conditions; o the impact of adjustments to previous financial estimates arising from our process improvement program under which, among other things, we enhance the automation of our reporting, valuation and administrative tools (cedant and retrocession accounting); o the risk that our retrocessionaires may not honor their obligations to us; o terrorist attacks on the United States and the impact of such attacks on the economy in general and on our business in particular; o political and economic risks in developing countries; o the impact of acquisitions, including our ability to successfully integrate acquired businesses, the competing demands for our capital and the risk of undisclosed liabilities; o the risk that an ownership change will result in a limitation on our ability to fully utilize tax net operating losses; o loss of the services of any of our key employees; o losses due to foreign currency exchange rate fluctuations; 20 o uncertainties relating to government and regulatory policies (such as subjecting us to insurance regulation or taxation in additional jurisdictions); o risks relating to recent class action litigations; o the competitive environment in which we operate and associated pricing pressures; and o changes in accounting principles. The effects of these factors are difficult to predict. New factors emerge from time to time and we cannot assess the financial impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date of this report and we do not undertake any obligation, other than as may be required under the Federal securities laws, to update any forward looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited Consolidated Financial Statements and Notes thereto, presented under Item 7 and Item 8, respectively, of our 2006 Annual Report. Overview See the introduction to "Management's Discussion & Analysis of Financial Condition and Results of Operations contained in our 2006 Annual Report. Status of Financial Strength and Credit Ratings As of August 13, 2007, our insurer financial strength and credit ratings are as follows:
Moody's A.M. Best Fitch Investors Standard Company (1) Ratings (1) Service (2) & Poor's (3) ----------- ----------------- ----------- ------------ Insurer Financial Strength Ratings: - ---------------------------------- Scottish Annuity & Life Insurance Company (Cayman) Ltd.................. B+ BBB- Baa3 BB+ Scottish Re (U.S.), Inc................. B+ BBB- Baa3 BB+ Scottish Re Limited..................... B+ BBB- - BB+ Scottish Re Life Corporation............ B+ - - BB+ Scottish Re Group Limited Credit Ratings: - ---------------------------------------- Senior unsecured........................ bb- BB- Ba3 B+ Preferred stock......................... B B B2 CCC+ - ---------------------------------- 1 Stable outlook 2 Ratings under review, direction uncertain 3 Developing outlook
The ability to write reinsurance partially depends on an insurer's financial condition and its financial strength ratings. These ratings are based on an insurance company's ability to pay policyholder obligations and are not directed toward the protection of investors. Our ability to raise capital for our business and the cost of this capital is influenced by our credit ratings. A security rating is not a recommendation to buy, sell or hold securities. It is subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Critical Accounting Policies See the discussion of our Critical Accounting Policies in Item 7 of our 2006 Annual Report. 21 Results of Operations All amounts are reported in thousands of United States dollars, except share amounts. Consolidated results of operations
Three months ended Six months ended ---------------------------------- ----------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 --------------- --------------- -------------- --------------- Premiums earned, net................................. $ 446,296 $ 444,942 $ 904,510 $ 893,963 Investment income, net............................... 160,879 147,977 302,476 276,999 Fee and other income................................. 4,234 4,639 8,864 8,372 Net realized losses.................................. (2,055) (11,298) (6,344) (24,899) Change in value of embedded derivatives, net......... 3,299 7,366 8,891 17,512 --------------- --------------- -------------- --------------- Total revenues..................................... 612,653 593,626 1,218,397 1,171,947 --------------- --------------- -------------- --------------- Claims and other policy benefits..................... 388,248 372,101 771,831 746,564 Interest credited to interest sensitive contract liabilities........................................ 36,420 55,399 71,722 98,100 Acquisition costs and other insurance expenses, net.. 96,501 104,872 191,608 192,403 Operating expenses................................... 59,802 39,365 94,382 70,457 Collateral finance facilities expense................ 75,285 47,236 148,980 78,323 Interest expense..................................... 8,034 7,066 11,610 11,959 --------------- --------------- -------------- --------------- Total benefits and expenses........................ 664,290 626,039 1,290,133 1,197,806 --------------- --------------- -------------- --------------- Loss before income taxes and minority interest....... (51,637) (32,413) (71,736) (25,859) Income tax benefit (expense)......................... 154,321 (89,043) 140,940 (81,586) --------------- --------------- -------------- --------------- Income (loss) before minority interest............... 102,684 (121,456) 69,204 (107,445) Minority interest.................................... 6 (134) 274 (296) --------------- --------------- -------------- --------------- Net income (loss) ................................... 102,690 (121,590) 69,478 (107,741) Dividend declared on non-cumulative perpetual preferred shares............................................. (2,265) (2,265) (4,531) (4,531) Imputed dividend on prepaid variable share forward contract........................................... - (72) - (72) Amount allocated to convertible cumulative participating preferred shareholders (882) - (297) - --------------- --------------- -------------- --------------- Net income (loss) available to ordinary shareholders. $ 99,543 $ (123,927) $ 64,650 $ (112,344) =============== =============== =============== ===============
Revenues Premiums earned increased by less than 1% to $446.3 million in the three months ended June 30, 2007 compared to $444.9 million in the same period in 2006. This increase is a result of a $22.7 million increase in earned premium in the Life Reinsurance North America Segment offset by a $21.4 million decrease in the Life Reinsurance International Segment. In the Life Reinsurance North America Segment, the increase is due to an increase in new business volume on existing treaties offset by lower negative revisions reported by cedants than the prior year quarter. In the Life Reinsurance International Segment, the decrease was primarily driven by one-off transactions related to the retrocession of our Middle Eastern business (see Life Reinsurance International for details) and adjustments to premium accruals on treaties in runoff. Investment income increased by 9% to $160.9 million in the three months ended June 30, 2007 compared to $148.0 million in the same period in 2006. The increase is principally due to higher interest rates and the level of our average invested assets, including the equity investment net proceeds of $556.0 million received in connection with the closing of the Transaction with MassMutual Capital Partners LLC ("MassMutual Capital"), a member of the MassMutual Financial Group, and affiliates of Cerberus Capital Management, L.P. ("Cerberus"), (the "Transaction"). In the prior year, our invested assets increased due to the closing of the Ballantyne Re securitization in May 2006 which contributed $1.7 billion in invested assets and the closing of a $560.0 million annuity contract, which was subsequently recaptured in the third quarter of 2006. Premiums earned increased by 1% to $904.5 million in the six months ended June 30, 2007 compared to $894.0 million in the same period in 2006. The increase is a result of a $17.2 million increase in earned premium in the Life Reinsurance North 22 America Segment offset by a $6.6 million decrease in the Life Reinsurance International segment. In the Life Reinsurance North America Segment, the increase is due to new business volume on existing treaties and revisions reported by our clients together with lower cedants reported revisions against the prior year period. Higher execess retrocession premiums offset some of this growth. In the Life Reinsurance International Segment, the decrease was primarily driven by one-time transactions related to the retrocession of our Middle Eastern business and adjustments to premium accruals on treaties in runoff. Investment income increased by 9% to $302.5 million in the six months ended June 30, 2007 compared to $277.0 million in the same period in 2006. The increase is principally due to the level of our average invested assets, including the receipt of the net proceeds in May 2007 on the issuance of the Convertible Cumulative Participating Preferred Shares, and as a result of higher interest rates in comparison to the prior year period. In the prior year, our invested assets increased due to the closing of the Ballantyne Re securitization in May 2006, which contributed $1.7 billion in invested assets. In addition, we closed a $560.0 million annuity contract, which was subsequently recaptured in the third quarter of 2006. These positive variances are partially offset by the effect of the termination of four funding agreements and by a continued decline in account values on some Life Reinsurance North America Segment annuity treaties due to higher lapse rates. Expenses Claims and other policy benefits increased by 4% to $388.2 million in the three months ended June 30, 2007 from $372.1 million in the same period in 2006. The increase is primarily attributable to a $37.0 million increase in the Life Reinsurance North America Segment, which is consistent with expectations for a growing block of early duration mortality risk business for which the increase in year over year mortality rates exceeds the underlying rate of lapsation. This was partially offset by a $20.9 million decrease in the Life Reinsurance International Segment due primarily to our Middle Eastern business retrocession transaction along with the absence of annuity claims as a result of the recapture of an annuity contract as described above, which occurred in the third quarter of 2006. Interest credited to interest sensitive contract liabilities decreased by 34% to $36.4 million in the three months ended June 30, 2007 compared to $55.4 million in the same period in 2006. This decrease is due to the termination of four funding agreements in the third quarter of 2006 along with a continued decline in account values on some Life Reinsurance North America Segment annuity treaties due to higher surrender levels that began in mid-2006. Acquisition costs and other insurance expenses decreased by 8% to $96.5 million in the three months ended June 30, 2007 from $104.9 million in the same period in 2006. In the prior year quarter in the Life Reinsurance North America Segment, we recognized a $12.8 million unfavorable fluctuation from a DAC unlocking offset by a $6.2 million refund of letter of credit fees. Operating expenses increased by 52% to $59.8 million in the three months ended June 30, 2007 from $39.4 million in the same period in 2006. This increase is primarily due to payments triggered by the change-in-control in May 2007 including employee bonuses relating to the completion of the Transaction, change-in-control costs related to employees, severance payments and the recognition of all previously unrecognized compensation expense for the stock options and restricted share awards. Collateral finance facilities expense increased by 59% to $75.3 million in the three months ended June 30, 2007 from $47.2 million in the same period in 2006. This increase is due to the Ballantyne Re securitization that was closed late in the prior year quarter, higher guarantor fees related to our ratings downgrades, full utilization of the Stingray financing facility during most of the current quarter and an additional forbearance fee relating to the HSBC facilities that was incurred on the change-in-control in May 2007. Interest expense increased by 14% to $8.0 million in the three months ended June 30, 2007 from $7.1 million in the same period in 2006. The increase is primarily due to $4.7 million of expenses incurred relating to an interim term loan facility put in place by MassMutual Capital and an affiliate of Cerberus between shareholder approval of the Transaction and the closing of the Transaction. Of the incremental expenses, $2.6 million of these expenses incurred were paid to an affiliate of Cerberus in connection with the interim term loan facility. Such loan facility was terminated in connection with closing the Transaction. This is offset by a reduction in costs related to facilities no longer in use in the current quarter, including the unsecured credit facility, interest on the 4.5% Convertible Note, the reverse repurchase security agreement, and the dividend payable on the Convertible Preferred Shares. 23 Claims and other policy benefits increased by 3% to $771.8 million in the six months ended June 30, 2007 from $746.6 million in the same period in 2006. The increase is primarily attributable to a $47.7 million increase in the Life Reinsurance North America Segment which is consistent with expectations for a growing block of early duration mortality risk business for which the increase in year over year mortality rates exceeds the underlying rate of lapsation. This was partially offset by a $22.4 million decrease in the Life Reinsurance International Segment due primarily to our Middle Eastern business retrocession transaction along with the absence of the annuity claims due to recapture of an annuity contract, which occurred in the third quarter of 2006. Interest credited to interest sensitive contract liabilities decreased by 27% to $71.7 million in the six months ended June 30, 2007 from $98.1 million in the same period in 2006. This decrease is due to the termination of four funding agreements in the third quarter of 2006 along with a continued decline in account values on some Life Reinsurance North America Segment annuity treaties due to higher surrender levels that began in mid-2006. Acquisition costs and other insurance expenses decreased by less than 1% to $191.6 million in the six months ended June 30, 2007 from $192.4 million in the same period in 2006. In the Life Reinsurance International Segment acquisition costs and other insurance expenses have increased by $2.2 million due to a shift in business mix towards long term protection business which carries a higher average commission rate than the remainder of the business. In the Life Reinsurance North America Segment, we recognized a $12.8 million unfavorable fluctuation from a DAC unlocking offset by a $6.2 million refund of letter of credit fees in the prior year. Operating expenses increased by 34% to $94.4 million in the six months ended June 30, 2007 from $70.5 million in the same period in 2006. This increase is due to payments triggered by the change-in-control in May 2007, including employee bonuses relating to the completion of the Transaction, change-in-control costs related to employees, severance payments and the recognition of all previously unrecognized compensation expense for the stock options and restricted share awards. Collateral finance facilities expense increased by 90% to $149.0 million for the six months ended June 30, 2007 from $78.3 million in the same period in 2006. This increase is due to the Ballantyne Re securitization that was closed late in the prior year, higher guarantor fees related to our ratings downgrades, full utilization of the Stingray financing facility during most of the current year period and an additional forbearance fee relating to the HSBC facilities incurred on the change-in-control in May 2007. Interest expense decreased by 3% to $11.6 million for the six months ended June 30, 2007 from $12.0 million in the same period in 2006. The decrease is effectively the difference between the current year expense relating to an interim term loan facility compared to the costs associated with prior year facilities no longer available or in use in the current year period. 24 Segment Operating Results Life Reinsurance North America
Three months ended Six months ended ---------------------------------- ----------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 --------------- --------------- --------------- --------------- Premiums earned, net................................. $ 430,282 $ 407,549 $ 853,653 $ 836,467 Investment income, net............................... 153,449 136,763 291,368 260,704 Fee and other income................................. 2,711 3,879 6,627 6,896 Net realized losses.................................. (2,593) (5,479) (4,998) (19,398) Change in value of embedded derivatives, net......... 3,299 7,366 8,891 17,512 --------------- --------------- --------------- --------------- Total revenues..................................... 587,148 550,078 1,155,541 1,102,181 --------------- --------------- --------------- --------------- Claims and other policy benefits..................... 375,634 338,626 733,568 685,906 Interest credited to interest sensitive contract liabilities........................................ 36,420 55,399 71,722 98,100 Acquisition costs and other insurance expenses, net.. 89,657 97,280 176,880 181,688 Operating expenses................................... 13,161 14,538 25,419 29,130 Collateral finance facilities expense................ 69,085 45,891 137,941 76,434 Interest expense..................................... 3,233 3,038 6,288 5,600 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 587,190 554,772 1,151,818 1,076,858 --------------- --------------- --------------- --------------- Income (loss) before income taxes and minority interest.................................. $ (42) $ (4,694) $ 3,723 $ 25,323 =============== =============== =============== ===============
Revenues Total revenues increased by 7% to $587.1 million in the three months ended June 30, 2007 from $550.1 million in the same period in 2006. Net premiums earned increased by 6% in the three months ended June 30, 2007 to $430.3 million from $407.5 million in the same period in 2006. Contributing to the increased premium level were revised estimates of $8.0 million in the second quarter of 2006 related to prior period premium accruals that resulted in lower premiums for that period. Additionally, new business volume on existing treaties amounted to $5.1 million in first year premiums in the current quarter. These factors combined with strong business persistency were the primary contributors to the increase in premiums compared to the prior year's quarter. Higher excess retrocession premiums in the current year offset the impact of a $13.0 million unfavorable retrocession adjustment in the second quarter of 2006. Net investment income increased by 12% to $153.4 million in the three months ended June 30, 2007 from $136.8 million in the same period in 2006. The increase is principally due to the growth in average invested assets, but also results from higher interest rates. Our total invested assets have increased significantly due to the proceeds of our Regulation XXX transaction that closed in May 2006. The Ballantyne Re securitization contributed approximately $1.7 billion of additional invested assets. As a result, investment income from the non-annuity-related portfolios was $22.8 million higher than the prior year quarter. Also contributing to the favorable variance is $9.5 million higher investment income on a significant equity-indexed annuity treaty. This treaty's large variance in investment income is substantially offset by fluctuations in reserves, interest credited and net acquisition costs. Partially offsetting these favorable variances are a $9.6 million reduction due to the third quarter 2006 termination of four funding agreements, and a $5.5 million reduction driven primarily by declining account values for certain significant annuity treaties due to higher surrender levels beginning in mid-2006. Yields on the portfolio managed by our external investment managers relating to fixed rate assets were 5.37% and 5.33% at June 30, 2007 and 2006, respectively. Yields on floating rate assets are indexed to LIBOR and increased to 5.80% at June 30, 2007 from 5.78% at June 30, 2006. Fee and other income decreased by 30% to $2.7 million in the three months ended June 30, 2007 from $3.9 million in the same period in 2006. The primary driver of this decrease was the reversal of $0.8 million of income from a new reinsurance treaty recognized in the second quarter of 2006 which was recaptured in the third quarter of 2006 because of the Company's ratings downgrades. The net realized loss decreased by 53% to $2.6 million in the three months ended June 30, 2007 from a $5.5 million loss in the same period in 2006. 25 The change in value of the embedded derivatives arises from the application of Derivatives Implementation Group Issue No. B36 "Embedded Derivatives: Bifurcation of a Debt Instrument that Incorporates Both Interest Rate and Credit Rate Risk Exposures that are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of that Instrument" ("DIG B36") which addresses whether SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires bifurcation of a debt instrument into a debt host contract and an embedded derivative if the debt instrument incorporates both interest rate risk and credit risk exposures that are unrelated or only partially related to the creditworthiness of the issuer of that instrument. Under DIG B36, modified coinsurance and coinsurance funds withheld reinsurance agreements where interest is determined by reference to a pool of fixed maturity assets are arrangements containing embedded derivatives requiring bifurcation. In addition, reinsurance contracts with experience refunds are also considered to be arrangements containing embedded derivatives requiring bifurcation. The change in the value of embedded derivatives increased revenues by $3.3 million in the three months ended June 30, 2007 compared to a $7.4 million increase in the same period in 2006. The primary reason for the larger increase in the prior year is the increase in the swap curve used to value the change in the derivative. Total revenues increased by 5% to $1,155.5 million in the six months ended June 30, 2007 from $1,102.2 million in the same period in 2006. Net premiums earned increased by 2% to $853.7 million in the six months ended June 30, 2007 from $836.5 million in the same period in 2006. Contributing to the increased premium level were revised estimates of $8.0 million in the second quarter of 2006 related to prior period premium accruals that resulted in lower premiums for the second quarter of 2006. Additionally, new business volume on previously existing treaties amounted to $14.3 million in first year premiums in the current year. Also contributing to the favorable variance were revisions reported to us by our clients during the first quarter of 2007, combined with normal premium accrual fluctuations resulting in a favorable impact of $8.8 million during that period. $5.2 million favorable experience refunds compared to the prior year were more than offset by growth in excess retrocession premiums of approximately $17.5 million. This growth in excess premiums compared to the prior year resulted from both the 2006 implementation of our retrocession administration system that drove higher subsequent excess retro premiums, and a shift in underlying business mix that also resulted in a higher premium trend. Net investment income increased by 12% to $291.4 million in the six months ended June 30, 2007 from $260.7 million in the same period in 2006. The increase is principally due to the growth in our average invested assets. Our total invested assets have increased significantly due to the proceeds of the Ballantyne Re securitization that closed in May 2006, which contributed approximately $1.7 billion of additional invested assets. This securitization was the primary driver of $60.8 million higher investment income in the six months ended June 30, 2007 as compared to the same period in 2006. Partially offsetting the favorable variance was a $17.1 million reduction due to the termination of four funding agreements in the third quarter of 2006 as a result of ratings downgrades and $10.6 million of reduced investment income on annuity business due to declining account values resulting from higher lapses. Fee and other income 2007 decreased by 4% to $6.6 million for the six months ended June 30, from $6.9 million in the same period in 2006. A significant driver of the decrease was the reversal of $0.8 million of income from a new reinsurance treaty recognized in the second quarter of 2006 which was recaptured in the third quarter of 2006 because of the Company's ratings downgrades. Higher fee and other income from surplus relief treaties partially offset this variance. The net realized loss decreased by 74% to $5.0 million in the six months ended June 30, 2007 from a $19.4 million loss in the same period in 2006. The net realized loss for the prior year includes losses related to selling investments in the first quarter of 2006 in preparation of funding the Ballantyne Re securitization. The change in the value of embedded derivatives increased revenues by $8.9 million in the six months ended June 30, 2007 from a $17.5 million increase in the same period in 2006. The primary reason for the larger increase in the prior year was the realization of losses on certain securities held under a modified coinsurance arrangement that were sold in the first quarter of 2006 in order to provide funding for the Ballantyne Re securitization. These prior year gains largely offset the aforementioned prior year realized securities losses. Expenses Claims and other policy benefits increased by 11% to $375.6 million for the three months ended June 30, 2007 from $338.6 million in the same period in 2006. This increase is consistent with expectations for a growing block of early duration mortality risk business for which the increase in year over year mortality rates exceeds the underlying rate of lapsation. For the quarter, total net mortality was $4.5 million favorable to expectations (99%) which was offset by reserve fluctuations attributable to the aforementioned equity-indexed annuity treaty and to a change in emerging lapse patterns for the ING business. 26 Interest credited to interest sensitive contract liabilities decreased by 34% to $36.4 million in the three months ended June 30, 2007 from $55.4 million in the same period in 2006. The decrease is principally due to the impact of the aforementioned termination of four funding agreements in the third quarter of 2006 that results in a $8.8 million favorable variance. Also contributing to the favorable variance is $7.7 million lower interest credited due to the significant annuity treaties' decline in account values beginning in mid-2006. Interest sensitive contract liabilities amounted to $2.9 billion at June 30, 2007 and $4.1 billion at June 30, 2006. Acquisition costs and other insurance expenses decreased by 8% to $89.7 million in the three months ended June 30, 2007 from $97.3 million in the same quarter in 2006. The primary contributor to this decrease is the second quarter 2006 recognition of $12.8 million unfavorable fluctuation in DAC unlocking that resulted primarily from actual and projected increased surrenders for the annuity treaties. Partially offsetting this favorable variance was the $6.2 million second quarter 2006 refund of LOC fees received from ING as a result of the Ballantyne Re securitization. As a percentage of net premiums earned, acquisition and other insurance expenses were 20.8% and 23.9% for the three months ended June 30, 2007 and 2006, respectively. Operating expenses decreased by 9% to $13.2 million for the three months ended June 30, 2007 from $14.5 million in the same period in 2006. Operating expenses as a percentage of operating revenues (total revenues excluding realized gains and losses and changes in the value of embedded derivatives) were 2.2% and 2.7% for the 2007 and 2006 periods, respectively. The overall decrease in operating expenses relates primarily to $1.1 million in executive severance paid out in the second quarter of 2006. Collateral finance facilities expense increased by 51% to $69.1 million in the three months ended June 30, 2007 from $45.9 million in the same period of 2006. The increase is due to the impacts of both a full quarter of fees in 2007 for the May 2006 Ballantyne Re securitization combined with 2006 ratings downgrades that resulted in higher guarantor fees. Claims and other policy benefits increased by 7% to $733.6 million in the six months ended June 30, 2007 from $685.9 million in the same period in 2006. The increase is primarily driven by an increase in claims consistent with expectations for a growing block of early duration mortality risk business for which the increase in year over year mortality rates exceeds the underlying rate of lapsation. Total net mortality for the six months ended June 30, 2007 is 97% of expectations representing a favorable variance of $18.0 million. Interest credited to interest sensitive contract liabilities decreased by 27% to $71.7 million in the six months ended June 30, 2007 from $98.1 million in the same period in 2006. A principal driver of this variance is the impact of the termination of four funding agreements in the third quarter of 2006 for which the first quarter of 2006 contained $14.9 million of interest credited. Also impacting the decline was lower annuity business due to higher lapses in the second half of 2006 which drove a reduction of $11.7 million for the six months ended June 30, 2007. Acquisition costs and other insurance expenses decreased by 3% to $176.9 million in the six months ended June 30, 2007 from $181.7 million in the same period in 2006. As a percentage of net premiums earned, acquisition and other insurance expenses were 20.7% and 21.7% for the six months ended June 30, 2007 and 2006, respectively. The primary contributor to this decrease is the second quarter 2006 recognition of $12.8 million unfavorable fluctuation in DAC unlocking that resulted primarily from actual and projected increased surrenders for the annuity treaties. Partially offsetting this favorable variance was the $6.2 million second quarter 2006 refund of LOC fees received from ING as a result of the Ballantyne Re securitization. Operating expenses decreased by 13% to $25.4 million in the six months ended June 30, 2007 from $29.1 million in the same period in 2006. Operating expenses as a percentage of operating revenues (total revenues excluding realized gains and losses and changes in the value of embedded derivatives) were 2.2% and 2.6% for the 2007 and 2006 periods, respectively. The overall decrease in operating expenses relates primarily to the first quarter 2007 receipt of a $2.6 million indemnification settlement related to the acquisition of the ERC business. This settlement was based on a provision in the purchase agreement regarding the level of statutory unauthorized reinsurance liabilities required for certain reinsurers. This indemnification settlement is not related to the ERC mediation described in Note 8 to the Consolidated Financial Statements. Also contributing to the expense reduction is $1.1 million executive severance paid out in the second quarter of 2006. Collateral finance facilities expense increased by 80% to $137.9 million in the six months ended June 30, 2007 from $76.4 million in the same period of 2006. The increase is due to the impact of the Ballantyne Re securitization which closed in May 2006 along with higher financial guarantor costs resulting from our credit rating downgrades. 27 Life Reinsurance International
Three months ended Six months ended ---------------------------------- ----------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 --------------- --------------- --------------- --------------- Premiums earned, net................................. $ 16,014 $ 37,393 $ 50,857 $ 57,496 Investment income, net............................... 3,037 8,971 6,080 11,960 Fee and other income................................. 753 - 753 - Net realized losses.................................. (10) (6,908) (635) (8,046) --------------- --------------- --------------- --------------- Total revenues..................................... 19,794 39,456 57,055 61,410 --------------- --------------- --------------- --------------- Claims and other policy benefits..................... 12,614 33,475 38,263 60,658 Acquisition costs and other insurance expenses, net. 5,237 6,185 11,158 9,002 Operating expenses................................... 11,455 7,874 21,267 13,651 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 29,306 47,534 70,688 83,311 --------------- --------------- --------------- --------------- Loss before income taxes and minority interest....... $ (9,512) $ (8,078) $ (13,633) $ (21,901) =============== =============== =============== ===============
Revenues Total revenues decreased by 50% to $19.8 million in the three months ended June 30, 2007 from $39.5 million in the same period in 2006. Net premiums earned decreased 57% to $16.0 million in the three months ended June 30, 2007 from $37.4 million in the same period in 2006. Excluding the impact of one time items described below in both 2007 and 2006, underlying premiums remained stable. However, there was also a change in the mix of business: U.K. protection treaties won in 2005 and 2006 contributed $9.5 million of growth, which was offset by reduced premium of $10.0 million on other cancelled business mainly related to Latin America, U.S. lives business and other run-off treaties. One time impacts in the second quarter of 2007 contributed to a reduction of $15.8 million in net premium earned. A significant one-off item was the impact of retroceded premiums of $11.9 million of our Middle Eastern business to Arab Insurance Group ("ARIG") offset by the compensation received of $1.6 million for the half year's underwriting profit. Further review of premium accruals as part of the Company's runoff management initiative resulted in a premium reduction of $6.3 million. In addition, net earned premium for the three months ended June 30, 2006 was increased by $5.1 million as a result of the catch up of claim entries due to late client reporting and the impact of a recapture of business transaction. During the quarter, the Life Reinsurance International Segment retroceded a block of treaties within our Middle Eastern business to ARIG. The retrocession became effective January 1, 2007 and a transfer of reserves as of that date took place. The Life Reinsurance International Segment now only has residual exposures to Middle Eastern risks and the remaining treaties are in runoff. In addition, ARIG has the right to approach our clients with a view to assigning/ novating the treaties subject to the retrocession. As part of the transaction, ARIG paid a consideration of $4.9 million for the future profits on this business. After closing costs of $1.9 million, the net gain resulting is $3.0 million which has been deferred and will be amortized over the remaining settlement periods. Finally, certain employees were also transferred as part of the transaction. Investment income decreased by 66% to $3.0 million in the three months ended June 30, 2007 from $9.0 million in the same period in 2006. The reduction was due to the loss of income of $6.2 million from an annuity contract in place in the quarter ended June 30, 2006, which was subsequently recaptured in the third quarter of 2006. Fee and other income during the quarter ended June 30, 2007 was $0.8 million due to settled litigation. Net realized losses decreased by 100% to $0.01 million in the three months ended June 30, 2007 from $6.9 million in the same period of 2006. Losses in 2006 were $7.2 million in relation to an annuity contract, which was subsequently recaptured in the third quarter of 2006. Total revenues decreased by 7% to $57.1 million in the six months ended June 30, 2007 from $61.4 million in the same period in 2006. Net premiums earned decreased by 12% to $50.9 million in the six months ended June 30, 2007 from $57.5 million in the same period in 2006. Underlying premiums earned for the six months ended June 30, 2007 increased by $3.1 million. The increase was due primarily to the impact of new business on U.K. protection treaties won in 2005 and 2006 of 28 $19.6 million. However, this was offset by reduced premium on cancelled business of $16.5 million related to Latin America, U.S. lives business and other run off business. The one time impacts in 2007 resulted in a reduction of $14.2 million in net earned premium during the six months ended June 30, 2007. A significant one time item in the second quarter of 2007 was the impact of retroceded premiums of $11.9 million of Middle Eastern business to ARIG, offset by the compensation received of $1.6 million for the half years' underwriting profit. Further review of premium accruals as part of the Company's run off management initiative resulted in a premium reduction of $6.3 million. This offset the impact of increased premium of $2.4 million, principally from late reported client information in the first quarter of 2007. In addition, the following items totaling $4.5 million in the prior year period in 2006 caused a reduction in earned premiums: the clean up activities in the loss of license/Personal Accident Block and data true-ups, offset by premium backlog reporting by a number of cedants, and a recapture of business transaction. Investment income decreased by 49% to $6.1 million in the six months ended June 30, 2007 from $12.0 million in the same period in 2006. The decrease is mainly due to an annuity contract which provided $6.2 million of investment in 2006, which was subsequently recaptured in the third quarter of 2006. Net realized losses decreased by 92% to $0.6 million in the six months ended June 30, 2007 from $8.0 million in the same period of 2006. The net realized loss in the prior year period included a $7.2 million loss related to the rebalancing of the annuity contract assets into higher yielding investments. Expenses Claims and other policy benefits decreased by 62% to $12.6 million in the three months ended June 30, 2007 from $33.5 million in the same period in 2006. Claims cost for the second quarter of 2007 was significantly impacted due to the transaction with ARIG. The underlying claims cost for the quarter ended June 30, 2006 was $22.9 million after removal of annuity contract claims of $5.5 million and $5.1 million of further one time items, including catch up of claims entries due to late client reporting and the recapture of certain business. As described above, the retrospective retrocession of ARIG business further reduced claims by $10.7 million against the prior period, inclusive of the reversal of first quarter 2007 claims previously reported. In addition, there were additional one time impacts in 2007 on other parts of the business. These principally related to poor claims experience on the segment's loss of license business of $2.5 million, inclusive of $1.0 million on a non-proportioned contract which will not be renewed and a $6.6 million impact arising from a review which has been completed of redundancy assumptions within the segment's loss of license reserves. This business is reserved in full for claims reported and then an allowance is made of claims not likely to be paid due to claimants returning to work. The remainder of the movement related to reduced claims of $2.8 million due to claims reserve releases on our U.S. lives business, and claims reversals on the premium accruals adjustment of $5.6 million. Acquisition costs and other insurance expenses decreased by 15% to $5.2 million in the three months ended June 30, 2007 from $6.2 million in the same period in 2006. The business as a whole has moved more towards direct rather than intermediary relationships with cedants since 2006. In addition, the impact of lower premiums, particularly in loss of license business, has also served to reduce commissions further, totaling $3.3 million. This has, however, been offset in 2007 by increased commission expense on new business through new protection treaties entered into in 2005 and 2006, which increased $2.3 million for the period. Such treaties carry higher commission levels than those experienced in the existing book. Operating expenses increased by 45% to $11.5 million in the three months ended June 30, 2007 from $7.9 million in the same period in 2006. The main driver of the expense increase was $2.0 million of additional provision for future rental shortfall on the Life Reinsurance International Segment's Windsor property, with no sub tenant having been found. In addition, there have been additional expenditures in respect of Transaction costs of $0.4 million, stock option costs of $1.2 million and other costs of $0.4 million. Claims and other policy benefits decreased by 37% to $38.3 million in the six months ended June 30, 2007 from $60.7 million in the same period in 2006. The underlying claims cost for the six months ended June 30, 2006 were $45.0 million, after removal of annuity contract claims of $5.5 million and other adjustments, namely adverse mortality and updated cedant reporting of $6.4 million and reduction of estimated retrocession recoveries of $3.8 million. There was a significant number of one time impacts in the claims cost for the six months ended June 30, 2007. The retrospective retrocession of ARIG business reduced 2007 claims by $10.4 million from 2006 levels. In addition there was 29 poor claims experience on our loss of license business of $2.5 million and a $6.6 million impact arising from a review which was completed of redundancy assumptions on the loss of license business, which was partly offset by claims reserve releases of $2.8 million on the U.S. lives business and claims reversals on the premium accruals adjustment of $5.6 million. The residual growth in claims cost of $3.0 million relates principally to the underlying premium growth described above. Acquisition costs and other insurance expenses increased by 24% to $11.2 million in the six months ended June 30, 2007 from $9.0 million in the same period in 2006. Acquisition costs and other insurance expenses have increased due to a shift in business mix towards long term protection business which carries a higher average commission rate than the remainder of the business. Operating expenses increased by 56% to $21.3 million in the six months ended June 30, 2007 from $13.7 million in the same period in 2006. An increase in personnel costs in response to the anticipated growth in the Life Reinsurance International Segment, in addition to severance costs, were offset by reductions primarily in various professional services costs and adjustments related to non-commission deferred acquisition costs. The main drivers of the increase are the provision for the Windsor leasehold property of $2.0 million, an increased irrecoverable VAT charge of $1.2 million, $1.5 million in employee bonuses relating to the completion of the Transaction and stock option costs through June 30, 2007 of $1.3 million. The remainder of the increase was made up of additional costs of London rent of $0.4 million, additional depreciation on fixed assets of $0.6 million and other costs of $0.3 million. Corporate & Other
Three months ended Six months ended ---------------------------------- ----------------------------------- June 30, June 30, June 30, June 30, 2007 2006 2007 2006 --------------- --------------- --------------- --------------- Investment income, net............................... $ 4,393 $ 2,243 $ 5,028 $ 4,335 Fee and other income................................. 770 760 1,484 1,476 Net realized gains (losses) ......................... 548 1,089 (711) 2,545 --------------- --------------- --------------- --------------- Total revenues..................................... 5,711 4,092 5,801 8,356 --------------- --------------- --------------- --------------- Acquisition costs and other insurance expenses, net. 1,607 1,407 3,570 1,713 Operating expenses................................... 35,186 16,953 47,696 27,676 Collateral finance facilities expense................ 6,200 1,345 11,039 1,889 Interest expense..................................... 4,801 4,028 5,322 6,359 --------------- --------------- --------------- --------------- Total benefits and expenses........................ 47,794 23,733 67,627 37,637 --------------- --------------- --------------- --------------- Loss before income taxes............................. $ (42,083) $ (19,641) $ (61,826) $ (29,281) =============== =============== =============== ===============
Revenues Investment income increased by 96% to $4.4 million in the three months ended June 30, 2007 from $2.2 million in the same period in 2006. Investment income arises in the Corporate & Other Segment due to capital not specifically allocated to the Life Reinsurance North America or Life Reinsurance International Segments. Investment income will increase or decrease as capital is raised and deployed to the operating segments. This increase in investment income is specifically due to the net proceeds of $556.0 million received in connection with the closing of the Transaction on May 7, 2007. Net realized gains decreased by 50% to $0.5 million in the three months ended June 30, 2007 from $1.1 million in the same period in 2006. The current quarter gain is primarily a result of a $1.0 million foreign exchange gain offset by a $0.5 million realized loss relating to other than temporary impairments on the Company's investment portfolio. The prior year quarter gain is primarily comprised of a $1.0 million gain on a duration hedge. Investment income increased by 16% to $5.0 million in the six months ended June 30, 2007 from $4.3 million in the same period in 2006. This increase is primarily due to the net proceeds of $556.0 million received in connection with the closing of the Transaction on May 7, 2007. The prior year period investment income was primarily driven by a draw down on a line of credit facility, the Non-Cumulative Perpetual Preferred Share offering and an increased level of cash received from the repayment of intercompany advances. Net realized losses decreased by 128% to $0.7 million in the six months ended June 30, 2007 from a net realized gain of $2.5 million in the same period in 2006. The 2007 balance is primarily comprised of foreign exchange and investment gains 30 of $0.3 million offset by other than temporary investment losses of $0.7 million and losses relating to the sale of company jet leases of $0.3 million. The 2006 balance was primarily comprised of a $2.4 million realized gain on an interest rate swap. Expenses Acquisition costs and other insurance expenses increased by 14% to $1.6 million in the three months ended June 30, 2007 from $1.4 million in the same period in 2006. The increase during the quarter is primarily due to the costs incurred on the Tartan Capital Limited ("Tartan") catastrophe bond which was issued in May 2006. This increase is partially offset by lower letter of credit fees resulting from their cancellation and lower non-commission DAC expense due to write-offs taken in the fourth quarter of 2006 related to our Wealth Management business. Operating expenses increased by 108% to $35.2 million in the three months ended June 30, 2007 compared to $17.0 million in the same period in 2006. The majority of this increase relates to expenses triggered by the change-in-control in May 2007 including a $3.7 million increase to restricted stock and stock option expense, $8.5 million increase in severance, $7.5 million in change-in-control costs related to employees and $0.9 million in employee bonuses relating to the completion of the Transaction. $1.6 million of the severance and change-in-control costs related to employees were paid as of June 30, 2007. The remainder is expected to be paid during the third and fourth quarters of 2007. These increases are partially offset by lower general and administrative expenses for the quarter. Collateral finance facilities expense increased by 361% to $6.2 million in the three months ended June 30, 2007 from $1.3 million in the same period in 2006. The increase is primarily due to the borrowing cost on the Stingray financing facility, which was fully drawn down during the third quarter of 2006 and was not repaid until June 2007. In addition, a one-time $2.0 million HSBC forbearance fee was incurred as part of the change-in-control in May 2007. Interest expense increased by 19% to $4.8 million in the three months ended June 30, 2007 from $4.0 million in the same period in 2007. The increase is primarily due to a $4.7 million of expenses incurred relating to an interim term loan facility put in place by MassMutual Capital and an affiliate of Cerberus between shareholder approval of the Transaction and closing of the Transaction. Of the incremental expenses, $2.6 million of these expenses incurred were paid to an affiliate of Cerberus in connection with the interim term loan facility. Such loan facility was terminated in connection with closing the Transaction. The prior year quarter interest relates to facilities no longer in use in the current year, including the unsecured credit facility, the 4.5% Senior Convertible Note, a reverse repurchase security agreement and the 1% dividend payable on the Convertible Preferred Shares. Acquisition costs and other insurance expenses increased by 108% to $3.6 million in the six months ended June 30, 2007 from $1.7 million in the same period in 2006. The increase is primarily due to the Tartan catastrophe bond, which was issued in May 2006. Operating expenses increased by 72% to $47.7 million in the six months ended June 30, 2007 from $27.7 million in the same period in 2006. The majority of this increase relates to expenses that were triggered by the change-in-control which include a $2.9 million increase to restricted stock and stock option expense, $8.6 million in severance payments, $8.1 million in change-in-control costs related to employees and $0.9 million in employee bonuses relating to the completion of the Transaction. $1.6 million of the severance and change-in-control costs related to employees were paid as of June 30, 2007. The remainder is expected to be paid during the third and fourth quarters of 2007. In addition, there was an increase in professional fees, non-recoverable input VAT related to the treatment of inter-group cost charges, offset by lower general and administrative expenses. Collateral finance facilities expense increased by 484% to $11.0 million in the six months ended June 30, 2007 from $1.9 million in the same period in 2006. The collateral finance facilities expense consists of the interest charges and put premium on the Stingray financing facility along with other collateral facility costs not associated with the operating segments. Costs increased $7.1 million during the current period due to the draw down of the full Stingray financing facility in the third quarter of 2006, which remained outstanding until June 2007, along with a one-time $2.0 million HSBC forbearance fee incurred as part of the change-in-control. Interest expense decreased by 16% to $5.3 million in the six months ended June 30, 2007 from $6.4 million in the same period in 2007. This decrease is primarily due to $4.7 million of expenses incurred relating to an interim term loan facility put in place MassMutual Capital and an affiliate of Cerberus between shareholder approval of the Transaction and closing of the Transaction. Of the incremental expenses, $2.6 million of these expenses incurred were paid to an affiliate of Cerberus in connection with the interim term loan facility. Such loan facility was terminated in connection with closing the Transaction. The remaining balance of the 2007 expense is due to final settlement amounts incurred on the HyCUs, which total $0.6 31 million. The prior year balance is comprised of expenses related to facilities no longer in use in the current year, including the unsecured credit facility, a reverse repurchase security agreement, the 4.5% Senior Convertible Notes and the 1.0% dividend payable on the Convertible Preferred Shares. Realized gains (losses) During the three months ended June 30, 2007, consolidated net realized losses amounted to $2.1 million in comparison with $11.3 million in the same period in 2006. During the three months ended June 30, 2007 and 2006, there were losses of $3.6 million and $0.7 million, respectively, in respect of other than temporary impairments and adjustments required under Statement No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity Securities". During the six months ended June 30, 2007, consolidated net realized losses amounted to $6.3 million in comparison with $24.9 million in the same period in 2006. During the six months ended June 30, 2007 and 2006, there were losses of $7.9 million and $0.7 million, respectively, in respect of other than temporary impairments and SFAS No. 115 adjustments. Income Taxes Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). In accordance with SFAS No. 109, for all years presented we use the asset and liability method to record deferred income taxes. Accordingly, deferred income tax assets and liabilities recognized reflect the net tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates. Such temporary differences are primarily due to tax basis of reserves for future policy benefits, deferred acquisition costs, and net operating loss carry forwards. A valuation allowance is applied to deferred tax assets if it is more likely than not that all, or some portion, of the benefits related to the deferred tax assets will not be realized. Our effective tax rate in each reporting period is determined by dividing the net tax benefit (expense) by our pre-tax income or loss. The change in our effective tax rate is due primarily to the amount in any reporting period of pre-tax earnings attributable to different subsidiaries (which changes from time to time), each of which is subject to different statutory tax rates, as well as any adjustment to the deferred tax asset valuation allowance. Pre-tax earnings of certain subsidiaries in any period may be impacted by the amount of various inter-company charges, including but not limited to net worth maintenance fees and other management fees paid to Scottish Annuity & Life Insurance Company (Cayman) Ltd. and to the parent holding company. These fees are charged in accordance with our inter-company charging policy and may be adjusted periodically within limits prescribed by applicable transfer pricing regulations. We generate deferred tax assets principally due to net operating losses, reserves and unrealized losses on investment securities. In accordance with GAAP, we must conclude whether the future realization of our deferred tax asset is "more likely than not" to occur. The evaluation regarding realizability of deferred tax assets is made on a gross as opposed to a net basis. Sources of support for the gross deferred tax asset are the reversal of deferred tax liabilities within the carry forward period (which in the United States is 15 years), projected future taxable income and tax planning strategies. Pursuant to the guidance under SFAS No. 109, we are currently unable to rely on projections of future taxable income. Future quarterly tax amounts will continue to be dependent upon the relationship between pre-tax GAAP profits and statutory profits and will also be impacted by the size and timing of certain statutory related deferred tax liabilities. Moreover, management will continue to assess and determine the need for the amount of the valuation allowance in subsequent periods in accordance with the requirements of SFAS No. 109 or in accordance with FIN 48. Income tax benefit in the three months ended June 30, 2007 was $154.3 million compared to income tax expense of $89.0 million in the same period in 2006. The change in our effective tax rate in the three months ended June 30, 2007 compared to the same period in 2006 is primarily related to the release of a $203.6 million net valuation allowance in the second quarter of 2007 on deferred tax assets. The release of valuation allowance principally relates to significant current year taxable income generated from the redomestication of Orkney Re, Inc. from South Carolina to Delaware, which occurred in May 2007. Income tax benefit in the six months ended June 30, 2007 was $140.9 million compared to income tax expense of $81.6 million in the same period in 2006. The change in our effective tax rate in the six months ended June 30, 2007 compared to the same period in 2006 is primarily related to the release of an $230.8 million valuation allowance primarily related to the valuation allowance movement during the second quarter of 2007 and the impact on the valuation allowance during the first quarter related to the implementation of FIN 48. 32 Financial Condition Investments At June 30, 2007, the portfolio controlled by us consisted of fixed income securities, preferred stock and cash amounting to $9.0 billion. The portfolio controlled by us excludes the assets held by ceding insurers under modified coinsurance and funds withheld coinsurance arrangements. The majority of these assets are publicly traded securities; however, at June 30, 2007, $492.9 million of this amount represents investments in private securities. Of the total portfolio controlled by us, $8.1 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $0.9 billion represented other cash balances. At December 31, 2006, the portfolio controlled by us consisted of fixed income securities, preferred stock and cash was $8.7 million. The majority of these assets were publicly traded; however, at December 31, 2006, $532.9 million represented investments in private securities. Of the total portfolio controlled by us, $8.2 billion represented the fixed income and preferred stock portfolios managed by external investment managers and $0.5 billion represented other cash balances. At June 30, 2007, the average Standard & Poor's rating of our portfolio was "AA", the average effective duration was 2.8 years and the average book yield was 5.5%, as compared with an average rating of "AA", an average effective duration of 2.9 years and an average book yield of 5.5% at December 31, 2006. At June 30, 2007, the unrealized depreciation on investments, net of tax and deferred acquisition costs, was $142.8 million as compared with unrealized depreciation on investments, net of tax and deferred acquisition costs, of $41.0 million at December 31, 2006. The unrealized depreciation on investments is included in our consolidated balance sheet as part of shareholders' equity. The table below sets forth the total returns earned by our portfolio for the quarter ended June 30, 2007, compared to the returns earned by three indices: the Lehman Brothers Global Bond Index, the S&P 500, and a customized index that we developed to take into account our investment guidelines and the risk characteristics of the underlying liabilities. We believe that this customized index is the most relevant benchmark for our portfolio's performance. Quarter ended June 30, 2007 ------------------ Portfolio performance.............................. 0.40% Customized index................................... 0.27% Lehman Brothers Global Bond Index.................. -0.89% S&P 500............................................ 6.28% The following table presents the fixed income investment portfolio credit exposure by Standard & Poor's ratings, where available, and otherwise by ratings provided by other agencies.
June 30, 2007 December 31, 2006 ----------------------------- ---------------------------- Ratings $ in millions % $ in millions % - ------- ---------------- ------ ---------------- ------ AAA....................................... $ 3,726.7 41.2% $ 3,350.5 38.5% AA........................................ 2,441.4 27.0 2,353.1 27.0 A 2,019.8 22.3 2,050.9 23.6 BBB....................................... 830.8 9.2 918.5 10.6 BB or below............................... 22.6 0.3 24.9 0.3 ---------------- ------ ---------------- ------ Total..................................... $ 9,041.3 100.0% $ 8,697.9 100.0% ================ ====== ================ ======
33 The following table illustrates the fixed income investment portfolio sector exposure.
June 30, 2007 December 31, 2006 ----------------------------- ---------------------------- Sector $ in millions % $ in millions % - ------ ---------------- ------ ---------------- ------ U.S. Treasury securities and U.S. government agency obligations........... $ 63.1 0.7% $ 68.0 0.8% Corporate securities...................... 2,683.8 29.7 2,700.5 31.1 Municipal bonds........................... 51.1 0.6 52.2 0.6 Mortgage and asset backed securities...... 5,179.6 57.3 5,244.8 60.3 Preferred stock........................... 104.8 1.1 116.9 1.3 ---------------- ------ ---------------- ------ 8,082.4 89.4 8,182.4 94.1 Cash...................................... 958.9 10.6 515.5 5.9 ---------------- ------ ---------------- ------ Total..................................... $ 9,041.3 100.0% $ 8,697.9 100.0% - ------- ================ ====== ================ ======
Management reviews securities with material unrealized losses and tests for other than temporary impairments on a quarterly basis. Factors involved in the determination of potential impairment include fair value as compared to cost, length of time the value has been below cost, credit worthiness of the issuer, forecasted financial performance of the issuer, position of the security in the issuer's capital structure, the presence and estimated value of collateral or other credit enhancement, length of time to maturity, interest rates and our intent and ability to hold the security until the market value recovers. When a decline is considered to be other than temporary, the cost basis of the impaired asset is adjusted to its fair value and a corresponding realized investment loss is recognized in the consolidated statements of income (loss). The actual value at which such financial instruments could actually be sold or settled with a willing buyer may differ from such estimated fair values. The following tables present the estimated fair values and gross unrealized losses for the fixed maturity investments and preferred stock that have estimated fair values below amortized cost or cost as of June 30, 2007 and December 31, 2006. These investments are presented by class and grade of security, as well as the length of time the related market value has remained below amortized cost or cost.
June 30, 2007 ($ in thousands) --------------------------------------------------------------------------------------------- Equal to or greater Less than 12 months than 12 months Total ----------------------------- ------------------------------ ------------------------------ Estimated Unrealized Estimated Unrealized Estimated Unrealized fair value loss fair value loss fair value loss ------------- -------------- ------------- -------------- ------------- -------------- Investment grade securities: - --------------------------- CMO............................. $ 514,010 $ (5,924) $ 288,345 $ (10,207) $ 802,355 $ (16,131) Corporates...................... 1,048,005 (38,146) 946,976 (47,116) 1,994,981 (85,262) Governments..................... 32,959 (1,474) 27,640 (1,636) 60,599 (3,110) MBS............................. 36,262 (993) 131,506 (6,143) 167,768 (7,136) Municipals...................... 14,444 (345) 27,242 (1,083) 41,686 (1,428) Other structured securities..... 1,713,677 (19,759) 650,033 (16,898) 2,363,710 (36,657) Preferred stocks................ 20,343 (768) 86,927 (3,806) 107,270 (4,574) ------------- -------------- ------------- -------------- ------------- -------------- Total Investment grade securities 3,379,700 (67,409) 2,158,669 (86,889) 5,538,369 (154,298) ------------- -------------- ------------- -------------- ------------- -------------- Below investment grade securities: - --------------------------------- Corporates...................... 515 (5) 13,565 (548) 14,080 (553) Other structured securities..... 1,059 (834) 166 (114) 1,225 (948) Preferred stock................. 324 (1) 952 (69) 1,276 (70) ------------- -------------- ------------- -------------- ------------- -------------- Total below investment grade securities.................... 1,898 (840) 14,683 (731) 16,581 (1,571) ------------- -------------- ------------- -------------- ------------- -------------- Total........................... $ 3,381,598 $ (68,249) $ 2,173,352 $ (87,620) $ 5,554,950 $ (155,869) ============= ============== ============= ============== ============= ==============
34
December 31, 2006 ($ in thousands) --------------------------------------------------------------------------------------------- Equal to or greater Less than 12 months than 12 months Total ----------------------------- ------------------------------ ------------------------------ Estimated Unrealized Estimated Unrealized Estimated Unrealized fair value loss fair value loss fair value loss ------------- -------------- ------------- -------------- ------------- -------------- Investment grade securities: - --------------------------- Investment grade securities: CMO.............................. $ 369,457 $ (2,365) $ 252,252 $ (6,327) $ 621,709 $ (8,692) Corporates....................... 750,806 (15,690) 864,053 (29,078) 1,614,859 (44,768) Governments...................... 35,805 (615) 21,072 (752) 56,877 (1,367) MBS.............................. 12,116 (136) 138,992 (4,674) 151,108 (4,810) Municipal........................ 19,865 (187) 18,013 (640) 37,878 (827) Other structured securities...... 415,596 (2,511) 613,974 (11,735) 1,029,570 (14,246) Preferred stock.................. 12,246 (295) 95,646 (3,181) 107,892 (3,476) ------------- -------------- ------------- -------------- ------------- -------------- Total investment grade securities..................... $ 1,615,891 $ (21,799) $ 2,004,002 $ (56,387) $ 3,619,893 $ (78,186) ------------- -------------- ------------- -------------- ------------- -------------- Below investment grade securities: - ---------------------------------- Corporates....................... $ 3,416 $ (58) $ 14,975 $ (570) $ 18,391 $ (628) Other structured securities...... 1,405 (421) 1,256 (662) 2,661 (1,083) Preferred stock.................. - - 664 (33) 664 (33) ------------- -------------- ------------- -------------- ------------- -------------- Total below investment grade securities..................... 4,821 (479) 16,895 (1,265) 21,716 (1,744) ------------- -------------- ------------- -------------- ------------- -------------- Total............................ $ 1,620,712 $ (22,278) $ 2,020,897 $ (57,652) $ 3,641,609 $ (79,930) ============= ============== ============= ============== ============= ==============
At June 30, 2007, our fixed income portfolio had 2,985 securities and $155.9 million of gross unrealized losses. No single position had an unrealized loss greater than $1.7 million. There were $13.1 million of unrealized gains on the remainder of the portfolio. There were 139 private securities in an unrealized loss position totaling $8.6 million. At December 31, 2006, our fixed income portfolio had 2,967 securities and $79.9 million of gross unrealized losses. No single position had an unrealized loss greater than $1.3 million. There were $41.6 million of unrealized gains on the remainder of the portfolio. There were 128 private securities in an unrealized loss position totaling $5.1 million. Based on our analysis of each security whose price has been below market for greater than twelve months, we believe that the financial strength, liquidity, leverage, future outlook, and our ability and intent to hold the security until recovery support the view that the security was not other than temporarily impaired as of June 30, 2007. The unrealized losses on fixed maturity securities are primarily a result of rising interest rates, changes in credit spreads and the long-dated maturities of the securities. Additionally, as of June 30, 2007, approximately 99% of the gross unrealized losses are associated with investment grade securities. Unrealized losses on securities that have been in an unrealized loss position for periods greater than two years amounted to $16.6 million at June 30, 2007 and $7.8 million at December 31, 2006. Unrealized losses on non-investment grade securities amounted to $1.6 million and $1.7 million at June 30, 2007 and December 31, 2006, respectively. Of these amounts, non-investment grade securities with unrealized losses of $0.7 million at June 30, 2007 and $1.3 million at December 31, 2006 had been in an unrealized loss position for a period greater than one year. 35 The following tables illustrate analysis of the unrealized losses at June 30, 2007 and December 31, 2006 by industry:
June 30, 2007 ($ in thousands) --------------------------------------------------------------------------------------------- Amortized Estimated Fair Unrealized Cost % Value % Loss % -------------- ------ -------------- ------ --------------- ------ Industry - -------- Mortgage and asset backed securities $ 3,395,931 59.4% $ 3,335,059 60.0% $ (60,872) 39.1% Banking.......................... 376,544 6.6 363,548 6.5 (12,996) 8.3 Communications................... 216,208 3.8 204,748 3.7 (11,460) 7.3 Consumer non-cyclical............ 186,443 3.3 176,061 3.2 (10,382) 6.7 Brokerage........................ 176,818 3.1 169,651 3.1 (7,167) 4.6 Insurance........................ 167,447 2.9 161,692 2.9 (5,755) 3.7 Consumer cyclical................ 164,301 2.9 157,189 2.8 (7,112) 4.6 Finance Companies................ 164,384 2.9 157,035 2.8 (7,349) 4.7 Electric......................... 136,357 2.4 131,563 2.4 (4,794) 3.1 Other*........................... 726,386 12.7 698,404 12.6 (27,982) 17.9 -------------- ------ -------------- ------ --------------- ------ Total............................ $ 5,710,819 100.0% $ 5,554,950 100.0% $ (155,869) 100.0% ============== ====== ============== ====== =============== ======
December 31, 2006 --------------------------------------------------------------------------------------------- ($ in thousands) --------------------------------------------------------------------------------------------- Amortized Estimated Fair Unrealized Cost % Value % Loss % -------------- ------ -------------- ------ --------------- ------ Industry - -------- Mortgage and asset backed securities $ 1,833,878 49.3% $ 1,805,047 49.6% $ (28,831) 36.1% Banking.......................... 302,782 8.1 296,225 8.1 (6,557) 8.2 Communications................... 204,320 5.5 196,181 5.4 (8,139) 10.2 Consumer non-cyclical............ 153,941 4.1 148,277 4.1 (5,664) 7.1 Insurance........................ 137,378 3.7 134,516 3.7 (2,862) 3.6 Financial companies.............. 126,646 3.4 124,233 3.4 (2,413) 3.0 Consumer cyclical................ 127,643 3.5 123,455 3.4 (4,188) 5.2 Other*........................... 834,951 22.4 813,675 22.3 (21,276) 26.6 -------------- ------ -------------- ------ --------------- ------ Total............................ $ 3,721,539 100.0% $ 3,641,609 100.0% $ (79,930) 100.0% ============== ====== ============== ====== =============== ====== * Other industries represent less than 3% of the estimated fair value.
The expected maturity dates of our fixed maturity investments that have an unrealized loss at June 30, 2007 and December 31, 2006 are presented in the tables below. 36
June 30, 2007 ($ in thousands) --------------------------------------------------------------------------------------------- Amortized Estimated Fair Unrealized Cost % Value % Loss % -------------- ------ -------------- ------ --------------- ------ Maturity - -------- Due in one year or less.......... $ 474,343 8.3% $ 467,557 8.4% $ (6,786) 4.4% Due in one through five years.... 2,718,053 47.6 2,678,427 48.2 (39,626) 25.4 Due in five through ten years.... 1,433,850 25.1 1,385,793 25.0 (48,057) 30.8 Due after ten years.............. 1,084,573 19.0 1,023,173 18.4 (61,400) 39.4 -------------- ------ -------------- ------ --------------- ------ Total............................ $ 5,710,819 100.0% $ 5,554,950 100.0% $ (155,869) 100.0% ============== ====== ============== ====== =============== ======
December 31, 2006 --------------------------------------------------------------------------------------------- ($ in thousands) --------------------------------------------------------------------------------------------- Amortized Estimated Fair Unrealized Cost % Value % Loss % -------------- ------ -------------- ------ --------------- ------ Maturity - -------- Due in one year or less.......... $ 337,455 9.1% $ 334,582 9.2% $ (2,873) 3.6% Due in one through five years.... 1,401,180 37.6 1,377,519 37.8 (23,661) 29.6 Due in five through ten years.... 1,206,367 32.4 1,179,292 32.4 (27,075) 33.9 Due after ten years.............. 776,537 20.9 750,216 20.6 (26,321) 32.9 -------------- ------ -------------- ------ --------------- ------ Total............................ $ 3,721,539 100.0% $ 3,641,609 100.0% $ (79,930) 100.0% ============== ====== ============== ====== =============== ======
At June 30, 2007, there were 2,275 securities with unrealized loss positions, with eight securities having an unrealized loss greater than $1.0 million. At December 31, 2006, there were 1,796 securities with unrealized loss, with two securities having an unrealized loss greater than $1.0 million. The increase in the number of securities with unrealized losses is primarily attributable to increases in interest rates. At June 30, 2007, there were five securities with a fair value that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on these securities amounted to $1.1 million. At December 31, 2006, there were three securities with a fair value that traded continuously at less than 80% of amortized cost for at least six months or 90% of amortized cost for at least 12 months. The total unrealized loss on this security amounted to $0.8 million. The following tables provide details of the sales proceeds, realized loss, length of time the security had been in an unrealized loss position and reason for sale for securities sold with a realized loss during the periods June 30, 2007 and 2006.
Three months ended June 30, 2007 ($ in thousands) -------------------------------------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total --------------------------- --------------------------- --------------------------- --------------------------- Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Days - ---- 0-90.............. $ 2,447 $ (28) $ 1,209 $ (50) $ 93,829 $ (76) $ 97,485 $ (154) 91-180............ - - 939 (55) 147 (2) 1,086 (57) 181-270........... 2,374 (33) - - 501 (2) 2,875 (35) Greater than 270.. 7,064 (163) - - 5,159 (223) 12,223 (386) ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Total............. $ 11,885 $ (224) $ 2,148 $ (105) $ 99,636 $ (303) $ 113,669 $ (632) ============ ============= ============ ============= ============ ============= ============ =============
37
Three months ended June 30, 2006 ($ in thousands) -------------------------------------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total --------------------------- --------------------------- --------------------------- --------------------------- Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Days - ---- 0-90.............. $ 5,077 $ (803) $ 141,095 $ (3,886) $ 28,259 $ (207) $ 174,431 $ (4,896) 91-180............ 1,375 (22) 1,056 (50) 10,016 (244) 12,447 (316) 181-270........... 1,948 (120) 844 (15) 3,899 (126) 6,691 (261) Greater than 270.. 1,239 (38) 960 (56) 3,834 (215) 6,033 (309) ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Total............. $ 9,639 $ (983) $ 143,955 $ (4,007) $ 46,008 $ (792) $ 199,602 $ (5,782) ============ ============= ============ ============= ============ ============= ============ =============
Six months ended June 30, 2007 ($ in thousands) -------------------------------------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total --------------------------- --------------------------- --------------------------- --------------------------- Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Days - ---- 0-90.............. $ 3,666 $ (64) $ 1,209 $ (50) $ 167,265 $ (147) $ 172,140 $ (261) 91-180............ - - 1,639 (72) 1,300 (20) 2,939 (92) 181-270........... 2,374 (33) - - 1,314 (7) 3,688 (40) Greater than 270.. 10,121 (374) 3,278 (34) 10,362 (248) 23,761 (656) ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Total............. $ 16,161 $ (471) $ 6,126 $ (156) $ 180,241 $ (422) $ 202,528 $ (1,049) ============ ============= ============ ============= ============ ============= ============ =============
Six months ended June 30, 2006 ($ in thousands) -------------------------------------------------------------------------------------------------------------- Credit Concern Relative Value Tactical Total --------------------------- --------------------------- --------------------------- --------------------------- Proceeds Loss Proceeds Loss Proceeds Loss Proceeds Loss ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Days - ---- 0-90.............. $ 7,897 $ (822) $ 193,774 $ (3,907) $ 69,781 $ (378) $ 271,452 $ (5,107) 91-180............ 4,105 (81) 10,692 (316) 23,648 (619) 38,445 (1,016) 181-270........... 8,072 (798) 2,099 (34) 4,755 (173) 14,926 (1,005) Greater than 270.. 3,539 (352) 15,012 (360) 13,586 (391) 32,137 (1,103) ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- Total............. $ 23,613 $ (2,053) $ 221,577 $ (4,617) $ 111,770 $ (1,561) $ 356,960 $ (8,231) ============ ============= ============ ============= ============ ============= ============ =============
Funds withheld at interest Funds withheld at interest arise on contracts written under modified coinsurance agreements and funds withheld coinsurance agreements. In substance, these agreements are identical to coinsurance treaties except that the ceding company retains control of and title to the assets. The deposits paid to the ceding company by the underlying policyholders are held in a segregated portfolio and managed by the ceding company or by investment managers appointed by the ceding company. These treaties transfer a quota share of the risks. The funds withheld at interest represent our share of the ceding companies' statutory reserves. The cash flows exchanged with each monthly settlement are netted and include, among other items, our quota share of investment income on our proportionate share of the portfolio, realized losses, realized gains (amortized to reflect the statutory rules relating to interest maintenance reserve), interest credited and expense allowances. At June 30, 2007, funds withheld at interest totaled $1.7 billion with an average rating of "A", an average effective duration of 4.9 years and an average book yield of 5.9%, as compared to $1.9 billion with an average rating of "A", an average effective duration of 5.0 years and an average book yield of 5.9% at December 31, 2006. These are fixed income investments and include marketable securities, commercial mortgages, private placements and cash. The market value of the funds withheld amounted to $1.7 billion at June 30, 2007 and $1.9 billion at December 31, 2006. At June 30, 2007 and December 31, 2006, funds withheld at interest were in respect of seven contracts with five ceding companies, respectively. At June 30, 2007, we had three contracts with Lincoln National Life Insurance Company that accounted for $725.7 million or 42% of the funds withheld balances. Additionally, we had one contract with Security Life of Denver International Limited that accounted for $360.4 million or 21% of the funds withheld balances and one contract with Fidelity & Guaranty Life that accounted for $610.9 million or 35% of the funds withheld balances. The remaining contracts 38 were with Illinois Mutual Insurance Company and American Founders Life Insurance Company. Lincoln National Life Insurance Company has financial strength ratings of "A+" from AM. Best, "AA" from Standard & Poor's, "Aa3" from Moody's and "AA" from Fitch. In the event of insolvency of the ceding companies on these arrangements, we would need to exert a claim on the assets supporting the contract liabilities. However, the risk of loss is mitigated by our ability to offset amounts owed to the ceding company with the amounts owed to us by the ceding company. Reserves for future policy benefits and interest sensitive contract liabilities relating to these contracts amounted to $1.7 billion and $1.9 billion at June 30, 2007 and December 31, 2006, respectively. The investment objectives for these arrangements are included in the modified coinsurance and funds withheld coinsurance agreements. The primary objective is to maximize current income, consistent with the long-term preservation of capital. The overall investment strategy is executed within the context of prudent asset/liability management. The investment guidelines permit investments in fixed maturity securities, and include marketable securities, commercial mortgages, private placements and cash. The maximum percentage of below investment grade securities is 10%, and other guidelines limit risk, ensure issuer and industry diversification, and maintain liquidity and overall portfolio credit quality. According to data provided by our ceding companies, the following table reflects the market value of assets including cash backing the funds withheld at interest portfolio using the lowest rating assigned by the three major rating agencies.
June 30, 2007 December 31, 2006 ----------------------------- ---------------------------- Ratings $ in millions % $ in millions % - ------- ---------------- ------ ---------------- ------ AAA....................................... $ 412.2 24.2% $ 427.5 22.1% AA........................................ 168.4 9.9 166.6 8.6 A 463.8 27.3 561.1 29.0 BBB....................................... 509.1 29.9 605.6 31.3 BB or below............................... 57.8 3.4 75.1 3.9 ---------------- ------ ---------------- ------ 1,611.3 94.7 1,835.9 94.9 Commercial mortgage loans................. 90.0 5.3 98.8 5.1 ---------------- ------ ---------------- ------ Total..................................... $ 1,701.3 100.0% $ 1,934.7 100.0% ================ ====== ================ ======
According to data provided by our ceding companies, the following table reflects the market value of assets backing the funds withheld at interest portfolio by sector.
June 30, 2007 December 31, 2006 ----------------------------- ---------------------------- Sector $ in millions % $ in millions % - ------- ---------------- ------ ---------------- ------ U.S. Treasury securities and U.S. government agency obligations........... $ 38.4 2.3% $ 58.8 3.0% Corporate securities...................... 1,128.9 66.4 1,321.1 68.3 Municipal bonds........................... 29.1 1.7 29.9 1.6 Mortgage and asset backed securities...... 441.2 25.9 463.4 24.0 Commercial mortgage loans................. 90.1 5.3 98.9 5.1 Preferred stock........................... 2.6 0.1 2.6 0.1 ---------------- ------ ---------------- ------ 1,730.3 101.7 1,974.7 102.1 Cash...................................... (29.0) (1.7) (40.0) (2.1) ---------------- ------ ---------------- ------ Total..................................... $ 1,701.3 100.0% $ 1,934.7 100.0% ================ ====== ================ ======
Exposure to Subprime ABS and Alt-A RMBS At June 30, 2007, our total investment portfolio including controlled assets and funds withheld at interest, had an amortized cost of $11.0 billion, and an estimated fair value of $10.8 billion. Of the amortized cost, $2.1 billion, or 19.1%, were asset-backed securities (ABS) backed by subprime residential mortgage loans and $1.0 billion, or 9.3%, were residential mortgage-backed securities (RMBS) backed by Alt-A mortgage loans. These include bonds held in portfolios in our securitizations, in portfolios of our subsidiaries and by ceding companies in Funds Withheld at Interest. Our exposure to collateralized debt obligations backed by similar ABS and RMBS was approximately $31,250. 39 Subprime Exposure Of our $2.1 billion in subprime residential ABS holdings, o $456.2 million (22%) were rated AAA/Aaa; o $1.5 billion (74%) were rated AA-/Aa3 or above; o $2.0 billion (98%) were rated A-/A3 or above; o $56.5 million (2.7%) were in higher rated tranches of pools that have had at least one downgrade of lower rated tranches; and o $1.6 billion (79%) reside in our securitizations. As part of our second quarter impairment process, we marked down subprime bonds with a book value of $13.5 million, realizing losses of $3.3 million. The unrealized loss of our subprime holdings was $14.6 million, or 0.7% of the amortized cost of our subprime holdings at June 30, 2007. As a result of market value reductions from June 30, 2007 to July 31, 2007, we estimate that unrealized losses increased to approximately $111.0 million, or 5.4% of book value of our subprime holdings and is 1.0% of our investment portfolio. As subprime loan peformance has deteriorated, the market has become increasingly illiquid and unbalanced, with an absence of buyers, causing prices to be well below what we and our third party investment managers regard as the true fundamental value. The following table shows the amortized costs of our sub-prime exposure by rating and vintage:
As at June 30, 2007 ($ in millions) ------------------------------------------------------------------------------------------------- Vintage ------------------------------------------------------------------------------------------------- Years ended December Year Six months Six months Six months 31, 1997 to ended ended ended ended % of December December June December June Investment Rating 31, 2004 31, 2005 30, 2006 31, 2006 30, 2007 Total Portfolio - ------------------- -------------- ------------ ----------- ----------- ---------- ----------- ---------- AAA................ $ 69.9 $ 87.8 $ 133.8 $ 146.3 $ 18.5 $ 456.3 4.2% AA................. 129.4 198.8 478.5 240.8 29.9 1,077.4 9.8% A+................. 3.9 122.4 19.4 14.1 19.3 179.1 1.6% A.................. 37.2 15.0 75.3 123.5 13.4 264.4 2.4% A-................. 25.3 6.0 5.6 7.0 - 43.9 0.4% BBB+ and lower..... 32.2 3.5 6.4 - - 42.1 0.4% -------------- ------------ ----------- ----------- ---------- ----------- ---------- Total.............. $ 297.9 $ 433.5 $ 719.0 $ 531.7 $ 81.1 $ 2,063.2 18.8% ============== ============ =========== =========== ========== =========== ========== % of investment portfolio....... 2.7% 3.9% 6.5% 4.8% 0.7% 18.8 % -------------- ------------ ----------- ----------- ---------- -----------
Alt-A RMBS Exposure Of our $1.0 billion of Alt-A RMBS holdings, o $233.0 million (23%) were rated AAA/Aaa; o $891.3 million (87%) were rated AA-/Aa3 or above; o $1.0 billion (98%) were rated A-/A3 or above; o $17.0 million (1.7%) were in higher rated tranches in pools that have had at least one downgrade of lower rated tranches; and o $750.3 million (74%) reside in our securitizations. As part of our second quarter impairment process, we marked down Alt-A bonds with a book value of $1.4 million, realizing losses of $50,000. The unrealized loss of our Alt-A holdings was $12.4 million, or 1.2% of book value of our Alt-A holdings at June 30, 2007. As a result of market value reductions from June 30, 2007 to July 31, 2007, we estimate that 40 unrealized losses increased to approximately $12.6 million, or 1.2% of book value of our Alt-A holdings and 0.1% of our investment portfolio. The market for Alt-A bonds has become increasingly illiquid and unbalanced, with an absence of buyers, causing prices to be well below what we and our third party investment managers regard as the true fundamental value. The following table shows the amortized costs of our Alt-A RMBS exposure by rating and vintage:
As at June 30, 2007 ($ in millions) ------------------------------------------------------------------------------------------------- Vintage ------------------------------------------------------------------------------------------------- Years ended December Year Six months Six months Six months 31, 1997 to ended ended ended ended % of December December June December June Investment Rating 31, 2004 31, 2005 30, 2006 31, 2006 30, 2007 Total Portfolio - ------------------- -------------- ------------ ----------- ----------- ---------- ----------- ---------- AAA................ $ 52.5 $ 77.4 $ 66.9 $ 36.2 $ - $ 233.0 2.1% AA................. 65.8 70.9 258.8 261.4 1.4 658.3 6.0% A+................. 1.7 0.9 1.1 36.7 - 40.4 0.4% A.................. 14.4 5.8 24.8 25.3 - 70.3 0.6% A-................. - 2.2 - - - 2.2 0.0% BBB+ and lower..... 5.3 11.8 - - - 17.1 0.2% - ------------------- -------------- ------------ ------------ ----------- ---------- ----------- ---------- Total.............. $ 139.7 $ 169.0 $ 351.6 $ 359.6 $ 1.4 $ 1,021.3 9.3% - ------------------- ============== ============ ============ =========== ========== =========== ========== % of investment portfolio....... 1.3% 1.5% 3.2% 3.3% 0% 9.3% -------------- ------------ ------------ ----------- ---------- -----------
Liquidity and Capital Resources Liquidity Cash flow Net cash provided by operating activities amounted to $241.5 million in the six months ended June 30, 2007 compared to net cash provided by operating activities of $1,092.8 million in the same period in 2006. Operating cash flow includes cash inflows from premiums, fees and investment income, and cash outflows for benefits and expenses paid. In periods of growth of new business, our operating cash flow may decrease due to first year commissions paid on new business generated. For income recognition purposes these commissions are deferred and amortized over the life of the business. The decrease in net cash provided by operating activities principally relates to activity in the prior year period where $442.3 million of funds withheld were released as a result of the Ballantyne Re securitization. The remaining cash provided by operating activities in the prior year was mainly due to the increase in reserves for future policy benefits related to a new annuity contract written by the Life Reinsurance International Segment, which was subsequently recaptured. We believe cash flows from operations will be positive over time. However, they may be positive or negative in any one period depending on the amount of new life reinsurance business written, the level of ceding commissions paid in connection with writing that business, the level of renewal premiums earned in the period and the timing of receipt of reinsurance receivables and settlement of reinsurance payables. Net cash used in investing activities was $13.0 million in the six months ended June 30, 2007 compared to net cash used in investing activities of $3,006.2 million in the same period in 2006. The decrease in net cash used in investing activities principally relates to the purchases of fixed maturity securities in the first quarter of 2006. Net cash provided by financing activities was $259.3 million in the six months ended June 30, 2007 compared to $2,056.5 million in the same period in 2006. The decrease in net cash provided by financing activities principally relates to prior year financings of $1,739.5 million mainly raised in the Ballantyne Re securitization, $278.3 million related to deposits on interest sensitive contracts and $110.0 million from proceeds from a prepaid variable share forward contract. The current year financings include $556.0 million in net proceeds from the issuance of Convertible Cumulative Participating Preferred Shares offset by $275.0 million repayment of funds drawn down on the Stingray financing facility. 41 The Holding Company We are a holding company whose primary uses of liquidity include, but are not limited to, operating expenses, the immediate capital and collateral needs of our operating companies, dividends paid to our shareholders and interest payments on our indebtedness. The primary sources of our liquidity include proceeds from our capital raising efforts and interest income on corporate investments. The holding company also receives funding from its subsidiaries through transfer pricing reflecting services performed by the holding company on behalf of its subsidiaries. We will continue to be dependent upon these sources of liquidity. Our liquidity position was greatly improved by the closing of the Transaction, which provided net proceeds of $556.0 million (see Note 7 to the Consolidated Financial Statements). The capital provided in the Transaction allowed us to repay the $275.0 million previously drawn on the Stingray financing facility and pay the closing costs of the Transaction. The remaining proceeds from the Transaction remain in our holding company and Scottish Annuity & Life Insurance Company (Cayman) Ltd., which will be used to fund the uses of liquidity as described above. The amounts that we repaid under the Stingray financing facility remain available as an additional source of liquidity to us should we determine that it is needed. Capital and Long-Term Debt Total capitalization at June 30, 2007 and December 31, 2006 is as follows:
June 30, December 31, 2007 2006 -------------- -------------- Shareholders' equity....................................... $ 1,164,803 $ 1,057,192 Mezzanine equity........................................... 556,049 143,665 Long-term debt............................................. 129,500 129,500 -------------- -------------- Total...................................................... $ 1,850,352 $ 1,330,357 ============== ==============
The increase in shareholders' equity at June 30, 2007 as compared to December 31, 2006 was due to the net income available to ordinary shareholders of $64.7 million for the six months ended June 30, 2007, the effect of the adoption of FIN 48 which reduced beginning retained earnings by $32.6 million (see Note 6 to the Consolidated Financial Statements) and the decrease in accumulated other comprehensive loss of $78.3 million offset by the issuance to holder of HyCUs on conversion of purchase contracts of $143.7 million. Shareholder dividends On July 28, 2006, the Board of Directors suspended the dividend on our ordinary shares. All future payments of dividends are at the discretion of our Board of Directors and will depend on our income, capital requirements, insurance regulatory conditions, operating conditions and such other factors as the Board of Directors may deem relevant. In accordance with the forbearance agreement with HSBC (see Collateral section below), we are prohibited from declaring any cash dividend, exclusive of the Non-Cumulative Perpetual Preferred Shares, during the forbearance period from November 26, 2006 until December 31, 2008, unless at the time of declaration and payment of cash dividend, Scottish Annuity & Life Insurance Company (Cayman) Ltd. has an insurer financial strength rating of at least A- for Standard & Poor's and A3 for Moody's Investors Service. Collateral We must have sufficient assets available for use as collateral to support our borrowings, letters of credit and certain reinsurance transactions. With reinsurance transactions, the need for collateral or letters of credit arises in the following ways: o When Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re (Dublin) Limited or Scottish Re Limited enter into a reinsurance treaty with a U.S. customer, they must contribute assets into a qualifying reserve credit trust and/or provide a letter of credit to enable the U.S. ceding company to obtain a reserve credit for the reinsurance transaction since these companies are not licensed or accredited U.S. reinsurers. 42 o When Scottish Re (U.S.), Inc. enters into a reinsurance transaction, it typically incurs a need for additional statutory capital to cover strain from acquisition costs and increases in required risk-based capital. To the degree its own surplus is not sufficient to meet this need, we can make an additional capital contribution into Scottish Re (U.S.), Inc. or Scottish Re (U.S.), Inc. can cede a portion of the transaction to another company within the group or to an unrelated reinsurance company. If that reinsurer is not a licensed or accredited U.S. reinsurer, it must contribute assets to a qualifying reserve credit trust and/or provide a letter of credit in order for Scottish Re (U.S.), Inc. to obtain reserve credit. Scottish Re (U.S.), Inc. has ceded significant amounts of business to Scottish Re (Dublin) Limited, relieving Scottish Annuity & Life Insurance Company (Cayman) Ltd. of the need to contribute substantial amounts of capital to Scottish Re (U.S.), Inc. in connection with such cessions by Scottish Re (U.S.), Inc. to Scottish Re (Dublin) Limited. Scottish Re (Dublin) Limited must contribute eligible assets to qualifying reserve credit trusts and/or provide letters of credit to provide Scottish Re (U.S.), Inc. with reserve credit. o Scottish Re (U.S.), Inc. and Scottish Re Life Corporation are licensed, accredited, approved or authorized to write reinsurance in 50 states and the District of Columbia. As a result, they generally are not required to provide collateral in order for their U.S. customers to receive reserve credit; however, Scottish Re (U.S.), Inc. may agree to provide a reserve credit trust, security trust, or letter of credit to mitigate the counter-party risk from the customer's perspective, thereby enabling transactions that otherwise would be unavailable or would be available only on significantly less attractive terms. ING Collateral Arrangement Pursuant to the terms of our acquisition of the individual life reinsurance business of ING, ING is obligated to maintain collateral for the Regulation XXX and AXXX statutory reserve requirements of the acquired business for the duration of such requirements. We pay ING a fee based on the face amount of the collateral provided until satisfactory alternative collateral arrangements are made. In 2005 and 2006, we completed three transactions that collectively provided approximately $3.7 billion in collateral arrangements to fund peak Regulation XXX statutory reserve requirements that were assumed in connection with the acquisition of ING's individual life reinsurance business. As of June 30, 2007, ING is primarily providing collateral support for our AXXX business. HSBC I In 2004, we entered into a collateral finance facility with HSBC ("HSBC I"). This facility originally provided up to $200.0 million and as of June 30, 2007, provided up to $188.5 million of which the full amount was being utilized for the purpose of collateralizing reinsurance obligations under inter-company reinsurance agreements. Simultaneously, we entered into a total return swap with HSBC under which we are entitled to the total return of the investment portfolio of the trust established for this facility. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46R "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51 ("FIN 46R"), the trust is considered to be a variable interest entity and we are deemed to hold the primary beneficial interest in the trust. As a result, the trust has been consolidated in our financial statements. The assets of the trust have been recorded as fixed maturity investments. Our consolidated statements of income (loss) show the investment return of the trust as investment income and the cost of the facility is reflected in collateral finance facilities expense. The creditors of the trust have no recourse against our general assets. Due to the rating agency downgrades after our announcement of earnings for the second quarter of 2006, HSBC requested additional collateral under the total return swap agreements related to both HSBC I. $65.0 million of additional collateral was provided to HSBC in 2006. On November 26, 2006, we entered into an amended and restated forbearance agreement with HSBC, pursuant to which HSBC has agreed not to make demands for additional collateral under our collateral finance facilities with HSBC so long as certain conditions are met during the forbearance period which ends on December 31, 2008. Following the closing of the Transaction on May 10, 2007, $40.0 million of the additional collateral noted above was returned to us. The remaining amount will be returned upon the attainment of an A- credit rating. Orkney Re, Inc. On February 11, 2005, Orkney Holdings, LLC, a Delaware limited liability company ("Orkney I"), issued and sold in a private offering an aggregate of $850.0 million Series A Floating Rate Insured Notes due February 11, 2035 (the "Orkney Notes"). Orkney I was organized for the limited purpose of holding the stock of Orkney Re, Inc., a special purpose captive insurance company, and issuing the Orkney Notes. During May 2007, we redomesticated Orkney Re, Inc. to Delaware to, among other considerations, take advantage of the synergies created by having both Orkney Re, Inc. and our principal U.S. operating subsidiary, Scottish Re (U.S.), Inc., subject to a single regulator with a more comprehensive understanding of the overall combined business and statutory considerations. Scottish Re (U.S.), Inc. holds all of the limited liability company interest in Orkney I, and has contributed capital 43 to Orkney I in the amount of $268.5 million. Proceeds from this offering were used to fund the Regulation XXX reserve requirements for a defined block of level premium term life insurance policies issued between January 1, 2000 and December 31, 2003 reinsured by Scottish Re (U.S.), Inc. to Orkney Re, Inc. Proceeds from the Orkney Notes have been deposited into a series of trusts that collateralize the notes. The holders of the Orkney Notes cannot require repayment from us or any of our subsidiaries, other than Orkney I. The timely payment of interest and ultimate payment of principal for the Orkney Notes are guaranteed by MBIA Insurance Corporation. Interest on the principal amount of the Orkney Notes is payable quarterly at a rate equivalent to three month LIBOR plus 0.53%. At June 30, 2007, the interest rate was 5.88%. Any payment of principal, including by redemption, or interest on the Orkney Notes is sourced from dividends from Orkney Re, Inc. and the balances available in a series of trust accounts. Dividends may only be made with the prior approval of the Director of Insurance in accordance with the terms of its licensing orders and in accordance with applicable law. The Orkney Notes also contain a customary limitation on lien provisions and customary events of default provisions, which, if breached, could result in the accelerated maturity of the Orkney Notes. Orkney I has the option to redeem all or a portion of the Orkney Notes on or after February 11, 2010, subject to certain call premiums. In accordance with FIN 46R, Orkney I is considered to be a variable interest entity and we are considered to hold the primary beneficial interest. As a result, Orkney I has been consolidated in our financial statements. The assets of Orkney I have been recorded as fixed maturity investments and cash and cash equivalents. Our consolidated statements of income (loss) show the investment return of Orkney I as investment income and the cost of the facility is reflected in collateral finance facilities expense. Orkney Re II plc On December 21, 2005, Orkney Re II plc, an orphan special purpose vehicle incorporated under the laws of Ireland ("Orkney II"), whose issued ordinary shares are held by a share trustee and its nominees in trust for charitable purposes, issued in a private offering $450.0 million of debt to external investors. The debt consisted of $382.5 million Series A-1 Floating Rate Guaranteed Notes (the "Series A-1 Notes"), $42.5 million in aggregate principal amount of Series A-2 Floating Rate Notes (the "Series A-2 Notes"), and $25.0 million Series B Floating Rate Notes (the "Series B Notes"), all due December 31, 2035 (collectively, the "Orkney II Notes"). The Orkney II Notes are listed on the Irish Stock Exchange. Proceeds from this offering were used to fund the Regulation XXX reserve requirements for a defined block of level premium term life insurance policies issued between January 1, 2004 and December 31, 2004 reinsured by Scottish Re (U.S.), Inc. to Orkney II. Proceeds from the Orkney II Notes have been deposited into a series of trusts that collateralize the notes. The holders of the Orkney II Notes cannot require repayment from us or any of our subsidiaries, other than Orkney II. Assured Guaranty (UK) Ltd. has guaranteed the timely payment of the scheduled interest payments and the principal on the maturity date, December 21, 2035, of the Series A-1 Notes. The debt issued to Scottish Annuity & Life Insurance Company (Cayman) Ltd. consisted of $30.0 million of Series C Floating Rate Notes due December 21, 2036. These notes accrue interest only. Payment of interest does not occur until the Orkney II Notes are fully repaid. The Company owns $0.5 million Series D Convertible Notes due December 21, 2036 and 76,190,000 Preference Shares of $1.00 each in capital. Interest on the principal amount of the Orkney II Notes is payable quarterly at a rate equivalent to three-month LIBOR plus 0.425% for the Series A-1 Notes, three-month LIBOR plus 0.73% for the Series A-2 Notes, and three-month LIBOR plus 3.0% for the Series B Notes. At June 30, 2007, the interest rate on the Series A-1 Notes was 5.78%, Series A-2 Notes was 6.09%, and Series B Notes was 8.35%. The Orkney II Notes also contain a customary limitation on lien provisions and customary events of default provisions, which, if breached, could result in the accelerated maturity of the Orkney II Notes. Orkney II has the option to redeem all or a portion of the Orkney II Notes after February 11, 2007, subject to certain call premiums. In accordance with FIN 46R, Orkney II is considered to be a variable interest entity and we are considered to hold the primary beneficial interest. As a result, Orkney II has been consolidated in our financial statements. The assets of Orkney II have been recorded as fixed maturity investments and cash and cash equivalents. Our consolidated statements of income (loss) show the investment return of Orkney II as investment income and the cost of the facility is reflected in collateral finance facilities expense. 44 HSBC II On December 22, 2005, we entered into a second collateral finance facility with HSBC ("HSBC II"). This facility is a 20 year collateral finance facility that provides up to $1.0 billion of Regulation XXX collateral support for the business acquired from ING and can be used to collateralize reinsurance obligations under inter-company reinsurance agreements. Simultaneously, we entered into a total return swap with HSBC under which we are entitled to the total return of the investment portfolio of the trust established for this facility. In accordance with FIN 46R, the trust is considered to be a variable interest entity and we are deemed to hold the primary beneficial interest in the trust. As a result, the trust has been consolidated in our financial statements. The assets of the trust have been recorded as fixed maturity investments, cash and cash equivalents. Our consolidated statements of income (loss) show the investment return of the trust as investment income and the cost of the facility is reflected in collateral finance facilities expense. The creditors of the trust have no recourse against our general assets. As at June 30, 2007, $572.6 million of this facility was being utilized. Reinsurance Facility On December 22, 2005, we entered into a long term reinsurance facility ("Reinsurance Facility"), with a third-party Bermuda-domiciled reinsurer that provides up to $1.0 billion of Regulation XXX collateral support for the business acquired from ING. The Bermuda reinsurer provides security in the form of letters of credit in trust equal to the statutory reserves. All risks and returns arising out of the underlying book of business are retained by us. Ballantyne Re plc On May 2, 2006, Ballantyne Re plc, an orphan special purpose vehicle incorporated under the laws of Ireland issued in a private offering $1.74 billion of debt to external investors and $178.0 million of debt to Scottish Annuity & Life Insurance Company (Cayman) Ltd. The total debt issued to external investors (collectively, the "Notes") consisted of: o $250.0 million of Class A-1 Floating Rate Notes, o $500.0 million of Class A-2 Floating Rate Guaranteed Notes Series A, o $500.0 million of Class A-2 Floating Rate Guaranteed Notes Series B, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series A, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series B, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series C, o $100.0 million of Class A-3 Floating Rate Guaranteed Notes Series D, o $10.0 million of Class B-1 7.51244% Subordinated Notes, o $40.0 million of Class B-2 Subordinated Floating Rate Notes, and o $42.0 million of Class C-1 Subordinated Variable Interest Rate Notes. The debt issued to Scottish Annuity & Life Insurance Company (Cayman) Ltd. consisted of $8.0 million of Class C-1 Subordinated Variable Interest Rate Notes and $170.0 million Class C-2 Subordinated Variable Interest Rate Notes, which Scottish Annuity & Life Insurance Company (Cayman) Ltd. intends to hold (collectively, the "SALIC Notes", and together with the Notes, the "Ballantyne Notes"). Concurrently with its offering of the Ballantyne Notes, Ballantyne Re issued (i) $500,000 of Class D Convertible Notes, which were purchased by the Company, (ii) 163.0 million Redeemable Preference Shares of U.S. $1.00 par value per share which were purchased by Scottish Annuity & Life Insurance Company (Cayman) Ltd., and (iii) 18.2 million Non-Redeemable Preference Shares of U.S. $1.00 par value per share which were also purchased by Scottish Annuity & Life Insurance Company (Cayman) Ltd. Interest on the principal amount of the Ballantyne Notes is payable in intervals ranging from every 28 days to monthly to annually, depending on the note, initially at a rate equivalent to one-month LIBOR plus 0.61% for the Class A-1 Floating Rate Notes (and after May 2, 2022, one-month LIBOR plus 1.22%), one-month LIBOR plus 0.31% for the Class A-2 Floating Rate 45 Guaranteed Notes Series A (and after May 2, 2027, one-month LIBOR plus 0.62%), one-month LIBOR plus 0.36% for the Class A-2 Floating Rate Guaranteed Notes Series B (and after May 2, 2027, one-month LIBOR plus 0.72%), 4.99%, 4.99%, 5.00% and 5.01% for Series A, Series B, Series C, and Series D of the Class A-3 Notes, respectively (with the rate on the Class A-3 Notes to reset every 28 days), 7.51% for the Class B-1 Subordinated Notes, one-month LIBOR plus 2.00% for the Class B-2 Subordinated Floating Rate Notes, and a variable rate based on performance of the underlying block of business for the Class C-1 Subordinated Variable Interest Rate Notes and the Class C-2 Subordinated Variable Interest Rate Notes. Proceeds from this offering were used to fund the Regulation XXX reserve requirements for the business acquired from ING. $1.65 billion of the proceeds from the Ballantyne Notes have been deposited into a series of accounts that collateralize the reserve obligations of Scottish Re (U.S.), Inc. The holders of the Ballantyne Notes cannot require repayment from us or any of our subsidiaries other than Ballantyne Re. The timely payment of the scheduled interest payments and the principal on the maturity date of Series A of the Class A-2 Notes and Series A, Series B, Series C, Series D and, if issued, Series E of the Class A-3 Notes has been guaranteed by Ambac Assurance UK Limited. The timely payment of the scheduled interest payments and the principal on the maturity date of Series B of the Class A-2 Notes and, if issued, Series F of the Class A-3 Notes has been guaranteed by Assured Guaranty (UK) Ltd. In accordance with FIN 46R, Ballantyne Re is considered to be a variable interest entity and we are considered to hold the primary beneficial interest. As a result, Ballantyne Re is consolidated in our financial statements beginning in the second quarter of 2006. The assets of Ballantyne Re are recorded as fixed maturity investments and cash and cash equivalents. Our consolidated statements of income (loss) include the investment return of Ballantyne Re as investment income and the cost of the facility is reflected in collateral finance facilities expense. Stingray On January 12, 2005, we entered into a put agreement with Stingray Investor Trust ("Stingray") for an aggregate value of $325.0 million. Under the terms of the put agreement, we acquired an irrevocable put option to issue funding agreements to Stingray in return for the assets in a portfolio of 30 day commercial paper. This put option may be exercised at any time. In addition, we may be required to issue funding agreements to Stingray under certain circumstances, including, but not limited to, the non-payment of the put option premium and a non-payment of interest under any outstanding funding agreements under the put agreement. The facility matures on January 12, 2015. This transaction may also provide collateral for Scottish Re (U.S.), Inc. for reinsurance obligations under inter-company reinsurance agreements. At June 30, 2007, $50.0 million was in use for this purpose. We drew down most of the funds available under the facility, in the amount of $265.0 million, during 2006 and $10.0 million in the first quarter of 2007 and repaid the funds drawn down of $275.0 million on June 10, 2007. The put premium and interest costs incurred during the three months ended June 30, 2007 and 2006 amounted to $4.1 million and $1.2 million, respectively, and is included in collateral finance facilities expense in the consolidated statements of income (loss). The put premium and interest costs incurred during the six months ended June 30, 2007 and 2006 amounted to $8.8 million and $2.4 million, respectively. In accordance with FIN 46R, we are not considered to be the primary beneficiary of Stingray and, as a result, we are not required to consolidate Stingray. We are not responsible for any losses incurred by the Stingray Pass Through Trust. Collateral Summary At June 30, 2007, we had $3.8 billion of collateral finance facility obligations relating to the HSBC I, HSBC II, Orkney I, Orkney II and Ballantyne Re transactions. In connection with these transactions, we have assets in trust of approximately $5.8 billion that represent assets supporting the economic reserves, excess reserves, additional funding amounts and surplus in the transactions. The assets in trust are managed in accordance with predefined investment guidelines as to permitted investments, portfolio quality, diversification and duration. During the first quarter of 2007, we entered into a $100 million term loan facility with MassMutual Capital and Cerberus to provide a source of liquidity between the shareholder vote of the Transaction and the closing of the Transaction, if needed. No amounts were drawn on this facility and it was terminated upon the closing of the Transaction on May 7, 2007. 46 Regulatory & Other Capital Requirements Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re (U.S.), Inc. that it will (1) cause Scottish Re (U.S.), Inc. to maintain capital and surplus equal to the greater of $20.0 million or such amount necessary to prevent the occurrence of a Company Action Level Event under the risk-based capital laws of the State of Delaware and (2) provide Scottish Re (U.S.), Inc. with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. has agreed with Scottish Re Life Corporation that it will (1) cause Scottish Re Life Corporation to maintain capital and surplus equal to at least 175% of Company Action Level RBC, as defined under the laws of the State of Delaware and (2) provide Scottish Re Life Corporation with enough liquidity to meet its obligations in a timely manner. Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Scottish Re Group Limited have agreed with Scottish Re Limited that in the event Scottish Re Limited is unable to meet its obligations under its insurance or reinsurance agreements, Scottish Annuity & Life Insurance Company (Cayman) Ltd. or if Scottish Annuity & Life Insurance Company (Cayman) Ltd. cannot fulfill such obligations, then Scottish Re Group Limited will assume all of Scottish Re Limited's obligations under such agreements. Scottish Re Group Limited and Scottish Annuity & Life Insurance Company (Cayman) Ltd. have executed similar agreements for Scottish Re (Dublin) Limited and Scottish Re Life (Bermuda) Limited and may, from time to time, execute additional agreements guaranteeing the performance and/or obligations of their subsidiaries. All of our regulated insurance entities are in excess of their minimum regulatory capital requirements as of June 30, 2007 and we expect them to remain as such. Off Balance Sheet Arrangements We have no obligations, assets or liabilities other than those disclosed in the financial statements; no trading activities involving non-exchange traded contracts accounted for at fair value; and no relationships and transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties. New Accounting Standards FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with SFAS No. 109. Tax positions must meet a "more likely than not" recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. (See Note 6 to the Consolidated Financial Statements.) FASB Statement No. 157, Fair Value Measurements In September 2006, the FASB issued Statement No. 157 ("SFAS No. 157"), "Fair Value Measurements", which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. We are required to adopt SFAS No. 157 on January 1, 2008 and are evaluating the implications of SFAS No. 157 on our results of operations and financial position. FASB Statement No. 159, Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued Statement No. 159 ("SFAS No. 159"), "Fair Value Option for Financial Assets and Financial Liabilities", which permits entities to choose to measure many financial instruments and certain other items at fair value. A company must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied on an instrument by instrument basis, with a few exceptions. The fair value option is irrevocable (unless a new election date occurs) and the fair value option may be applied only to entire instruments and not to portions of instruments. SFAS 159 will be effective for interim and annual financial statements issued after January 1, 2008. We are evaluating the implications of SFAS No. 159 on our results of operations and financial position. 47 Item 3. Quantitative and Qualitative Disclosures about Market Risk Please refer to Part II "Item 1A: Risk Factors" and "Item 7A: Quantitative and Qualitative Disclosures about Market Risk" in our 2006 Annual Report. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Our Chief Executive Officer and Chief Accounting Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that our disclosure controls and procedures were effective as of June 30, 2007 to ensure that information required to be disclosed by us in the reports filed and submitted by us under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Changes in internal controls There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated by the SEC under the Securities Exchange Act of 1934) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 48 PART II. OTHER INFORMATION Item 1. Legal Proceedings On August 2, 2006, a putative class action lawsuit was filed against us and certain of our current and former officers and directors in the U.S. District Court for the Southern District of New York on behalf of a putative class consisting of investors who purchased our publicly traded securities between December 16, 2005 and July 28, 2006. Between August 7, 2006 and October 3, 2006, seven additional related class action lawsuits were filed against us, certain of our current and former officers and directors, and certain third parties. Two of the complaints were filed on August 7, 2006, and the remaining five complaints were filed on August 14, 2006, August 22, 2006, August 23, 2006, September 15, 2006, and October 3, 2006, respectively. Each of the class actions filed seeks an unspecified amount of damages, as well as other forms of relief. On October 12, 2006, all of the class actions were consolidated. On December 4, 2006, a consolidated class action complaint was filed. The complaint names us; Dean E. Miller, our former Chief Financial Officer; Scott E. Willkomm, our former Chief Executive Officer; Elizabeth Murphy, our former Chief Financial Officer; our former Board members Michael Austin, Bill Caulfeild-Browne, Robert Chmely, Michael French, Lord Norman Lamont, Hazel O'Leary, and Glenn Schafer; and certain third parties, including Goldman Sachs and Bear Stearns in their capacities as underwriters in various securities offerings by us and Ernst & Young LLP in their capacity as independent registered public accounting firm. The complaint is brought on behalf of a putative class consisting of investors who purchased our securities between February 17, 2005 and July 31, 2006. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5, and Sections 11, 12(a)(2), and 15 of the Securities Act. The complaint seeks an unspecified amount of damages, as well as other forms of relief. On March 7, 2007 we filed a motion to dismiss the putative class action lawsuit. This motion has been fully briefed and is still pending before the Court. In addition, on or about October 20, 2006, a shareholder derivative lawsuit was filed against certain of our current and former directors in the U.S. District Court for the Southern District of New York. The derivative lawsuit alleges, among other things, that defendants improperly permitted us to make false and misleading statements to investors concerning our business and operations, thereby exposing us to liability from class action suits alleging violations of the U.S. securities laws. The derivative lawsuit asserts claims against defendants for breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, and unjust enrichment. On January 8, 2007 we filed a motion to dismiss the derivative lawsuit. On May 7, 2007, our motion was granted and the lawsuit was dismissed without prejudice. The Plaintiff declined to submit an amended complaint and, on May 30, 2007, the court dismissed the case with prejudice. Item 1A. Risk Factors As a result of the closing of the Transaction, certain risks set forth in our 2006 Annual Report relating to whether the Transaction would be completed are no longer applicable. However, the other risks identified in our 2006 Annual Report and set forth below could materially affect our business, results of operations or financial condition. Recent developments in the residential mortgage market, especially in the nonprime sector, may adversely affect our financial condition. Recently, the residential mortgage market in the United States has experienced a variety of difficulties and changed economic conditions. We have exposure to the subprime market as a result of securities held in our investment portfolio, as described in more detail under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Exposure to Subprime ABS and Alt-A RMBS." Due to these recent developments, especially in the nonprime sector, we believe the value of these securities has declined, although valuations in the market have not been available at this time. Declines in the value of these investments may adversely affect our financial condition. Process Improvement Risk We are implementing a process improvement program under which, among other things, we intend to enhance the automation of our reporting, valuation and administrative tools. The results of such program may require adjustments to our previous financial estimates, which could adversely affect our results of operations. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. 49 Item 6. Exhibits Except as otherwise indicated, the following Exhibits are filed herewith and made a part hereof: 3.1 Memorandum of Association of Scottish Re Group Limited. 3.2 Articles of Association of Scottish Re Group Limited. 4.1 Specimen Ordinary Share Certificate (incorporated herein by reference to Exhibit 4.1 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.2 Form of Amended and Restated Class A Warrant (incorporated herein by reference to Exhibit 4.2 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.3 Form of Securities Purchase Agreement for the Class A Warrants (incorporated herein by reference to Exhibit 4.4 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.4 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Shareholder Investors (incorporated herein by reference to Exhibit 4.10 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.5 Form of Securities Purchase Agreement between Scottish Re Group Limited and the Non-Shareholder Investors (incorporated herein by reference to Exhibit 4.12 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 4.6 Certificate of Designations of Convertible Preferred Shares of Scottish Re Group Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (10) 4.7 Certificate of Designations of Scottish Re Group Limited's Non-Cumulative Perpetual Preferred Shares, dated June 28, 2005 (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 4.8 Specimen Stock Certificate for the Company's Non-Cumulative Perpetual Preferred Shares (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 10.1 Second Amended and Restated 1998 Stock Option Plan effective October 22, 1998 (incorporated herein by reference to Exhibit 10.3 to Scottish Re Group Limited's Registration Statement on Form S-1). (1)(24) 10.2 Form of Stock Option Agreement in connection with 1998 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to Scottish Re Group Limited's Registration Statement on Form S-1). (1)(24) 10.3 Investment Management Agreement dated October 22, 1998 between Scottish Re Group Limited and General Re-New England Asset Management, Inc. (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 50 10.4 Form of Omnibus Registration Rights Agreement (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's Registration Statement on Form S-1). (1) 10.5 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.14 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K). (2)(24) 10.6 Form of Stock Options Agreement in connection with 1999 Stock Option Plan (incorporated herein by reference to Exhibit 10.15 to Scottish Re Group Limited's 1999 Annual Report on Form 10-K). (2)(24) 10.7 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(24) 10.8 Form of Nonqualified Stock Option Agreement in connection with 2001 Stock Option Plan (incorporated herein by reference to Exhibit 10.17 to Scottish Re Group Limited's 2001 Annual Report on Form 10-K). (4)(24) 10.9 Form of Indemnification Agreement between Scottish Re Group Limited and each of its directors and officers (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 10.10 Employment Agreement dated July 1, 2002 between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Thomas A. McAvity, Jr. (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 10.11 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Paul Goldean (incorporated herein by reference to Scottish Re Group Limited's Quarterly Report on Form 10-Q for the period ended March 31, 2004). (14)(24) 10.12 Employment Agreement dated June 1, 2002 between Scottish Re Group Limited and Clifford J. Wagner (incorporated by reference to Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2002). (8)(24) 51 10.13 Amended Employment Agreement dated February 10, 2003 between Scottish Re Group Limited and Thomas A. McAvity (incorporated herein by reference to Scottish Re Group Limited's 2002 Annual Report on Form 10-K). (12)(24) 10.14 Indenture, dated November 22, 2002, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.15 Registration Rights Agreement, dated November 22, 2002, by and among Scottish Re Group Limited and Bear Stearns & Co. and Putnam Lovell Securities Inc. (incorporated herein by reference to Scottish Re Group Limited's Registration Statement on Form S-3). (9) 10.16 Stock Purchase Agreement, dated as of October 24, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (11) 10.17 Tax Matters Agreement, dated as of January 22, 2003, by and among Scottish Re Group Limited, Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (11) 10.18 Transition Services Agreement, dated as of January 22, 2003, by and among Scottish Holdings, Inc. and Employers Reinsurance Corporation (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (11) 10.19 Asset Purchase Agreement, dated as of October 17, 2004, by and among Security Life of Denver Insurance Company, Security Life of Denver International Limited, ING America Insurance Holdings, Inc. (for purposes of Section 11.11), Scottish Re Group Limited, Scottish Re (U.S.), Inc., Scottish Annuity & Life Insurance Company (Cayman) Ltd. (for purposes of Section 5.26) and Scottish Re Life Corporation (for purposes of Section 5.24) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.20 Securities Purchase Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (including form of Subordinated Note, Class C Warrant, Shareholders' Agreement and Amendments to Articles of Association) (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.21 Form of Voting Agreement, by and among Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P., Scottish Re Group Limited and, respectively, each director and each officer of Scottish Re Group Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.22 Voting Agreement, dated as of October 15, 2004, by and among Scottish Re Group Limited, Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. and Pacific Life Insurance Company (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 52 10.23 Letter Agreement, dated as of October 17, 2004, by and among Scottish Re Group Limited and Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant Banking II-A C.V., 55th Street Partners II (Cayman) L.P. and Cypress Side-by-Side (Cayman) L.P. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (15) 10.24 First Supplemental Indenture, dated as of October 26, 2004, between Scottish Re Group Limited and The Bank of New York (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K, filed with the SEC on October 29, 2004). 10.25 Administrative Services Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company and Security Life of Denver International Limited and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.26 Coinsurance Agreement dated December 31, 2004 between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.27 Coinsurance/Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.28 Retrocession Agreement, dated December 31, 2004, between Scottish Re (U.S.), Inc. and Security Life of Denver Insurance Company (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.29 Retrocession Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited and Security Life of Denver Insurance Company (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 53 10.30 Reserve Trust Agreement, dated as of December 31, 2004, between Scottish Re (U.S.) Inc., as Grantor, and Security Life of Denver Insurance Company, as Beneficiary, and The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.31 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re (U.S.), Inc., as Grantor, Security Life of Denver Insurance Company, as Beneficiary, The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.32 Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.33 Coinsurance/Modified Coinsurance Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.34 Coinsurance Funds Withheld Agreement, dated December 31, 2004, between Security Life of Denver International Limited and Scottish Re Life (Bermuda) Limited (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.35 Reserve Trust Agreement, dated December 31, 2004, between Scottish Re Life (Bermuda) Limited, as Grantor, and Security Life of Denver International Limited, as Beneficiary. The Bank of New York, as Trustee, and The Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.36 Security Trust Agreement, dated as of December 31, 2004, by and among Scottish Re Life (Bermuda) Limited, as Grantor, Security Life of Denver International Limited, as Beneficiary, The Bank of New York, as Trustee, and the Bank of New York, as Securities Intermediary (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.37 Technology Transfer and License Agreement, dated as of December 31, 2004, between Security Life of Denver Insurance Company, ING North America Insurance Corporation and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's 2004 Annual Report on Form 10-K). (20) 10.38 Transition and Integration Services Agreement, dated December 31, 2004, between Security Life of Denver Insurance Company and Scottish Re (U.S.), Inc. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (19) 10.39 Form of Remarketing Agreement, between the Company and Lehman Brothers, Inc., as Remarketing Agent (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (16) 10.40 Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Proxy Statement filed with the SEC on April 1, 2004). 10.41 Amendment No. 1 to Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (22)10.63 Amendment No. 2 to Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (22) 10.64 Form of Management Stock Option Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (24) 54 10.42 Form of Management Performance Share Unit Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (24) 10.43 Form of Management Restricted Share Unit Agreement under the Scottish Re Group Limited 2004 Equity Incentive Compensation Plan (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (18) (24) 10.44 Letter of Credit Agreement, dated as of August 18, 2005, among Scottish Re (Dublin) Limited, as Borrower, Scottish Annuity & Life Insurance Company (Cayman) Ltd., as Guarantor, Bank of America, N.A., as Administrative Agent and L/C Issuer, and the Other Lenders Party Hereto, and Bank of America Securities LLC, as Sole Lead Arranger and Sole Book Manager (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (21) 10.45 Amendment to Employment Agreement, dated as of October 29, 2006, between Scottish Re Group Limited and Paul Goldean (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K which was filed with the SEC on November 2, 2006). (24) 10.46 Securities Purchase Agreement, dated as of November 26, 2006, by and among Scottish Re Group Limited, MassMutual Capital Partners LLC and SRGL Acquisition, LLC (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.47 Form of Registration Rights and Shareholders Agreement (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.48 Voting Agreement, dated as of November 26, 2006, by and among Scottish Re Group Limited, MassMutual Capital Partners LLC, SRGL Acquisition, LLC, Cypress Merchant B Partners II (Cayman) L.P., Cypress Merchant B II-A C.V., Cypress Side-By-Side (Cayman) L.P. and 55th Street Partners II (Cayman) L.P. (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.49 First Amendment to Asset Purchase Agreement, dated as of November 26, 2006, by and among Scottish Re (U.S.), Inc., Scottish Re Life (Bermuda) Limited, Security Life of Denver Insurance Company and Security Life of Denver International Limited (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (22) 10.50 Letter Agreement, dated as of November 30, 2006, by and among Scottish Annuity & Life Insurance Company (Cayman) Ltd., Scottish Re Limited and Comerica Bank (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (23) 10.51 Standby Letter of Credit Application and Agreement, dated as of November 30, 2006, by and between Scottish Annuity & Life Insurance Company (Cayman) Ltd. and Comerica Bank (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (23) 10.52 Standby Letter of Credit Application and Agreement, dated as of November 30, 2006, by and between Scottish Re Limited and Comerica Bank (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K). (23) 10.53 Amendment No. 2 to Securities Purchase Agreement, dated as of February 20, 2007, by and among Scottish Re Group Limited, MassMutual Capital Partners LLC and SRGL Acquisition, LDC (incorporated herein by reference to Scottish Re Group Limited's Current Report on Form 8-K which was filed with the SEC on February 21, 2007). 10.54 Amendment Three to the 2004 Equity Incentive Compensation Plan. (24) 10.55 Scottish Re Group Limited 2007 Stock Option Plan (incorporated herein by reference to Scottish Re Group Limited's Proxy Statement filed with the SEC on June 22, 2007). (24) 10.56 Employment Agreement dated May 30, 2006 between Scottish Re Holdings Limited and Duncan Hayward. (24) 10.57 Employment Agreement dated June 28, 2007 between Scottish Holdings, Inc. and Jeffrey M. Delle Fave. (24) 10.58 Employment Agreement dated July 18, 2007 between Scottish Re Group Limited and George R. Zippel. (24) 10.59 Employment Agreement dated July 25, 2007 between Scottish Holdings, Inc. and Michael Baumstein. (24) 10.60 Employment Agreement dated July 26, 2007 between Scottish Re (U.S.), Inc. and Meredith Ratajczak. (24) 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 55 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1) Scottish Re Group Limited's Registration Statement on Form S-1 was filed with the SEC on June 19, 1998, as amended. (2) Scottish Re Group Limited's 1999 Annual Report on Form 10-K was filed with the SEC on April 3, 2000. (3) Scottish Re Group Limited's 2000 Annual Report on Form 10-K was filed with the SEC on March 30, 2001. (4) Scottish Re Group Limited's 2001 Annual Report on Form 10-K was filed with the SEC on March 5, 2002. (5) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 31, 2001. (6) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on June 2, 2005. (7) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 9, 2001. (8) Scottish Re Group Limited's Amended Quarterly Report on Form 10-Q/A was filed with the SEC on August 8, 2002. (9) Scottish Re Group Limited's Registration Statement on Form S-3 was filed with the SEC on January 31, 2003, as amended. (10) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 17, 2003. (11) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on January 6, 2004. (12) Scottish Re Group Limited's 2002 Annual Report on Form 10-K was filed with the SEC on March 31, 2003. (13) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on August 12, 2003. (14) Scottish Re Group Limited's Quarterly Report on Form 10-Q was filed with the SEC on May 10, 2004. (15) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on October 21, 2004. (16) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on July 1, 2005. (17) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on July 18, 2005. (18) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 8, 2005. (19) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 4, 2005. (20) Scottish Re Group Limited's 2004 Annual Report on Form 10-K was filed with the SEC on March 18, 2005. (21) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on August 22, 2005. (22) Scottish Re Group Limited's Current Report on Form 8-K as filed with the SEC on November 29, 2006. (23) Scottish Re Group Limited's Current Report on Form 8-K was filed with the SEC on December 1, 2006. (24) This exhibit is a management contract or compensatory plan or arrangement. 56 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOTTISH RE GROUP LIMITED Date: August 14, 2007 By: /s/ Paul Goldean -------------------- Paul Goldean President and Chief Executive Officer Date: August 14, 2007 By: /s/ Duncan Hayward ---------------------- Duncan Hayward Chief Accounting Officer 57 EX-3.1 2 ex3-1.txt AMENDED AND RESTATED MEMORANDUM OF ASSOCIATION THE COMPANIES LAW (2003 REVISION) --------------------------------- COMPANY LIMITED BY SHARES ------------------------- AMENDED AND RESTATED MEMORANDUM OF ASSOCIATION OF SCOTTISH RE GROUP LIMITED (Amended and Restated by Special Resolutions passed on 2nd March, 2007) 1. The name of the Company is Scottish Re Group Limited. 2. The Registered Office of the Company shall be at the offices of Maples and Calder, Attorneys-at-Law, Ugland House, PO Box 309, 113 South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies or at such other place as the Directors may from time to time decide. 3. The objects for which the Company is established are, subject to section (i) of this Clause 3, unrestricted and shall include, but without limitation, the following: (i) (a) To own, hold, purchase or otherwise acquire equity or debt securities in companies, firms or other persons engaged in all or any forms of insurance or reinsurance business and to promote the establishment of such entities. 4. Except as prohibited or limited by the Companies Law (2003 Revision), the Company shall have full power and authority to carry out any object and shall have and be capable of, from time to time and at all times, exercising any and all of the powers at any time or from time to time exercisable by a natural person or body corporate in doing in any part of the world whether as principal, agent, contractor or otherwise whatever may be considered by it necessary for the attainment of its objects and whatever else may be considered by it as incidental 2 or conducive thereto or consequential thereon, including, but without in any way restricting the generality of the foregoing, the power to make any alterations or amendments to this Memorandum of Association and the Articles of Association of the Company considered necessary or convenient in the manner set out in the Articles of Association of the Company, and the power to do any of the following acts or things, viz: to pay all expenses of and incidental to the promotion, formation and incorporation of the Company; to register the Company to do business in any other jurisdiction; to sell, lease or dispose of any property of the Company; to draw, make, accept, endorse, discount, execute and issue promissory notes, debentures, bills of exchange, bills of lading, warrants and other negotiable or transferable instruments; to lend money or other assets and to acts as guarantors; to borrow or raise money on the security of the undertaking or transferable instruments; to lend money or other assets and to act as guarantors; to borrow or raise money on the security of the undertaking or on all or any of the assets of the Company including uncalled capital or without security; to invest monies of the Company in such manner as the Directors determine; to promote other companies; to sell the undertaking of the Company for cash or any other consideration; to distribute assets in specie to Members of the Company; to make charitable or benevolent donations; to pay pensions or gratuities or provide other benefits in cash or kind to Directors, officers, employees, past or present and their families; to purchase Directors and officers liability insurance and to carry on any trade or business and generally to do all acts and things which, in the opinion of the Company or the Directors, may be conveniently or profitably or usefully acquired and dealt with, carried on, executed or done by the Company in connection with the business aforesaid. 3 5. The liability of each Member is limited to the amount from time to time unpaid on such Member's shares. 6. The share capital of the Company is US$6,400,000 divided into 590,000,000 Ordinary Shares of a nominal or par value of US$0.01 each and 50,000,000 Preferred Shares of a nominal or par value of US$0.01 each with power for the Company insofar as is permitted by law, to redeem or purchase any of its shares and to increase or reduce the said capital subject to the provisions of the Companies Law (2004 Revision) and the Articles of Association and to issue any part of its capital in series or of different classes, whether original, redeemed or increased with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions and so that unless the conditions of issue shall otherwise expressly declare every issue of shares whether declared to be preference or otherwise shall be subject to the powers hereinbefore contained. 7. If the Company is registered as exempted, its operations will be carried on subject to the provisions of Section 193 of the Companies Law (2003 Revision) and, subject to the provisions of the Companies Law (2003 Revision) and the Articles of Association, it shall have the power to register by way of continuation as a body corporate limited by shares under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands. EX-3.2 3 ex3-2.txt AMENDED AND RESTATED ARTICLES OF ASSOCIATION THE COMPANIES LAW (2003 REVISION) --------------------------------- COMPANY LIMITED BY SHARES ------------------------- AMENDED AND RESTATED ARTICLES OF ASSOCIATION OF SCOTTISH RE GROUP LIMITED (Amended and Restated by Special Resolutions passed on 2nd March, 2007 1. In these Articles Table A in the Schedule to the Statute does not apply and, unless there be something in the subject or context inconsistent therewith, "Affiliate" has the meaning ascribed thereto in Rule 144 promulgated under the Securities Act. "Articles" means these Articles as originally framed or as from time to time altered by Special Resolution. "Auditors" means the persons for the time being performing the duties of auditors of the Company. "Business Day" means any day, other than a Saturday, a Sunday or any day in which banks in George Town, Cayman Islands or the city of New York,United States are authorised or obligated by law or executive order to close. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time, or any federal statute from time to time in effect that has replaced such statute, and any reference in these Articles to a provision of the Code or a rule or regulation promulgated thereunder means such provision, rule or regulation as amended from time to time or any provision of a federal law, or any federal rule or regulation, from time to time in effect that has replaced such provision, rule or regulation. "Company" means the above-named Company. "Controlled Shares" in reference to any person means: 2 (a) all shares of the Company directly, indirectly or constructively owned by such person within the meaning of Section 958 of the Code; or (b) all shares of the Company directly, indirectly or beneficially owned by such person within the meaning of Section 13(d) of the Exchange Act (including any shares beneficially owned by any group of persons as so defined and including any shares that would otherwise be excluded by the provisions of Section 13(d)(6) thereof) and the rules and regulations thereunder, as amended from time to time (including any shares that would otherwise be excluded by the provisions of Rule 13d-4 thereof). Notwithstanding anything contained in these Articles to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, the definition of Controlled Shares contained in this Article 1. "debenture" means debenture stock, mortgages, bonds and any other such securities of the Company whether constituting a charge on the assets of the Company or not. "Directors" means the directors for the time being of the Company. "dividend" includes bonus. "Exchange Act" means the United States Securities Exchange Act of 1934 as amended from time to time or any federal statute from time to time in effect that has replaced such statute, and any reference in these Articles to a provision of the Exchange Act or a rule or regulation promulgated thereunder means such provision, rule or regulation as amended from time to time or any provision of a federal law, or any federal rule or regulation, from time to time in effect that has replaced such provision, rule or regulation. "Fair Market Value" means, with respect to a repurchase of any shares of the Company in accordance with these Articles, (i) if such shares are listed on a securities exchange (or quoted in a securities quotation system), the average closing sale price of such shares on such exchange (or in such quotation system), or, if such shares are listed on (or quoted in) more than one exchange (or quotation system), the average closing sale price of the shares on the principal securities exchange 3 (or quotation system) on which such shares are then traded, or, if such shares are not then listed on a securities exchange (or quotation system) but are traded in the over-the-counter market, the average of the latest bid and asked quotations for such shares in such market, in each case for the last five trading days immediately preceding the day on which notice of the repurchase of such shares is sent pursuant to these Articles or (ii) if no such closing sales prices or quotations are available because such shares are not publicly traded or otherwise, the fair value of such shares as determined by one independent nationally recognized investment banking firm chosen by the Company and reasonably satisfactory to the Member whose shares are to be so repurchased by the Company, provided that the calculation of the Fair Market Value of the shares made by such appointed investment banking firm (i) shall not include any discount relating to the absence of a public trading market for, or any transfer restrictions on, such shares, and (ii) such calculation shall be final and the fees and expenses stemming from such calculation shall be borne by the Company or its assignee, as the case may be. "Member" shall bear the meaning as ascribed to it in the Statute. "month" means calendar month. "Ordinary Share" means the ordinary shares of US$0.01 par value each in the authorised capital of the Company issued subject to and in accordance with the provisions of the Statute and of these Articles and having the rights provided for under these Articles. "Person" means any individual, company, corporation, firm, partnership, trust or any other business, entity or person, whether or not recognized as constituting a separate legal entity. "Preferred Share" means the preferred shares of US$0.01 par value each in the authorised capital of the Company issued subject to and in accordance with the provisions of the Statute and of these Articles and having the rights provided for under these Articles. "paid-up" means paid-up and/or credited as paid-up. "registered office" means the registered office for the time being of the Company. "Seal" means the common seal of the Company and includes every duplicate seal. 4 "Secretary" includes an Assistant Secretary and any person appointed to perform the duties of Secretary of the Company. "Securities Act" means the United States Securities Act of 1933 as amended from time to time or any federal statute from time to time in effect which has replaced such statute, and any reference in these Articles to a provision of the Securities Act or a rule or regulation promulgated thereunder means such provision, rule or regulation as amended from time to time or any provision of a federal law, or any federal rule or regulation, from time to time in effect that has replaced such provision, rule or regulation. "share" includes any Ordinary Share or Preferred Share and any fraction of a share. "Special Resolution" has the same meaning as in the Statute and includes a resolution approved in writing as described therein. "Statute" means the Companies Law of the Cayman Islands as amended and every statutory modification or re-enactment thereof for the time being in force. "subsidiary" with respect to any Person, means a company, more than fifty percent (50%) (or, in the case of a wholly owned subsidiary, one hundred percent (100%)) of the outstanding Voting Shares of which are owned, directly or indirectly, by such Person or by one or more other subsidiaries of such Person, or any such Person and one or more other subsidiaries. "10% Shareholder" means a Person who owns, in the aggregate, (i) directly, indirectly or constructively within the meaning of Section 958 of the Code or (ii) directly, indirectly or beneficially within the meaning of Section 13(d) of the Exchange Act (including any shares beneficially owned by any group of persons as so defined and including any shares that would otherwise be excluded by the provisions of Section 13(d)(6) thereof) and the rules and regulations thereunder, as amended from time to time (including any shares that would otherwise be excluded by the provisions of Rule 13d-4 thereof) issued shares of the Company representing ten percent (10%) or more of the total combined voting rights attaching to the issued shares of the Company. 5 "Unadjusted Basis" when used with respect to the aggregate voting rights held by any Member, refers to the determination of such rights without reference to the provisions relating to the adjustment of voting rights contained in Article 47. "United States" means the United States of America and dependent territories or any part thereof. "United States Person" means (i) an individual who is a citizen or resident of the United States, (ii) a corporation or partnership that is, as to the United States, a domestic corporation or partnership and (iii) and an estate or trust that is subject to United States Federal income tax on its income regardless of its source. "Voting Share" of any Person means any share in such Person conferring voting rights on the holder thereof (other than such voting rights as would exist solely in relation to a proposal to alter or vary the rights attaching to such shares solely upon the future occurrence of a contingency or voting rights attaching solely by virtue of the provisions of the Statute). "written" and "in writing" include all modes of representing or reproducing words in visible form. Words importing the singular number only include the plural number and vice-versa. Words importing the masculine gender only include the feminine gender. 2. The business of the Company may be commenced as soon after incorporation as the Directors shall see fit, notwithstanding that only part of the shares may have been allotted. 3. The Directors may pay, out of the capital or any other monies of the Company, all expenses incurred in or about the formation and establishment of the Company including the expenses of registration. CERTIFICATES FOR SHARES ----------------------- 4. Certificates representing shares of the Company shall be in such form as shall be determined by the Directors. Such certificates may be under Seal. All certificates for shares shall be consecutively numbered or otherwise identified and shall specify the shares to which they relate. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered in the register of Members of the Company. All certificates surrendered to the Company for transfer shall be cancelled and no new 6 certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled. The Directors may authorise certificates to be issued with the seal and authorised signature(s) affixed by some method or system of mechanical process. 5. Notwithstanding Article 4 of these Articles, if a share certificate be defaced, lost or destroyed, it may be renewed on payment of a fee of one dollar (US$l.00) or such less sum and on such terms (if any) as to evidence and indemnity and the payment of the expenses incurred by the Company in investigating evidence, as the Directors may prescribe. ISSUE OF SHARES --------------- 6. (a) Subject to the provisions, if any, in that behalf in the Memorandum of Association and in these Articles, including Article 6(b) and to any direction that may be given by the Company in general meeting and without prejudice to any special rights previously conferred on the holders of existing shares, the Directors may allot, issue, grant options over or otherwise dispose of shares (including without limitation Preferred Shares) of the Company (including fractions of a share) with or without preferred, deferred or other special rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper. Unless otherwise determined by the Directors the authorised share capital shall be represented by Ordinary Shares with respective rights as set forth in sub-paragraph (c) below, and other classes or series of shares with respective rights to be determined upon the creation thereof by action of the Directors from time to time as set forth in sub-paragraph (d) below. (b) Notwithstanding Article 6(a) of these Articles, the Company shall not issue any shares in a manner that the Board of Directors of the Company believes would cause, by reason of such issuance, the total Controlled Shares of any Person to equal or exceed 10% of a class of the Company's shares; provided, however, that this provision shall not apply to: (i) any issuance of shares to a person acting as an underwriter in the ordinary course of its business, purchasing such shares pursuant to a purchase agreement to which the Company is a party, for resale; and / or (ii) any issuance of shares contemplated by or pursuant to the provisions of the Securities Purchase Agreement dated November 26, 2006 by and among the Company, MassMutual Capital Partners LLC and SRGL Acquisition, LLC (the "Share Purchase Agreement"), or pursuant to the terms of any Convertible Shares (as defined in the Share Purchase Agreement) issued pursuant thereto and the Company may issue such Convertible Shares and any Ordinary Shares on the conversion thereof as contemplated thereby. (c) Unless otherwise determined by the Directors the Ordinary Shares shall have the following rights: (i) Dividends. The holders of Ordinary Shares shall be entitled to receive 7 dividends declared in accordance with these Articles. (ii) Liquidation. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, after there shall have been paid or set aside for payment to creditors and to the holders of any outstanding shares ranking senior to the Ordinary Shares as to distribution on liquidation, distribution or winding up, the full amounts to which they shall be entitled, the holders of the then outstanding Ordinary Shares shall be entitled to receive, pro rata according to the number of Ordinary Shares registered in the names of such Members, any remaining assets of the Company available for distribution to its Members; provided, if, at such time, the holder of Ordinary Shares has any outstanding debts, liabilities or engagements to or with the Company (whether presently payable or not), either alone or jointly with any other person, whether a Member or not, (including, without limitation, any liability associated with the unpaid purchase price of such Ordinary Shares), the liquidator appointed to oversee the liquidation of the Company shall deduct from the amount payable in respect of such Ordinary Shares the aggregate amount of such debts, liabilities and engagements and apply such amount to any of such holder's debts, liabilities or engagements to or with the Company (whether presently payable or not). The liquidator may distribute, in kind, to the holders of the Ordinary Shares remaining assets of the Company or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any other corporation, trust or entity and receive payment therefor in cash, shares or obligations of such other corporation, trust or entity or any combination thereof, and may sell all or any part of the consideration so received, and may distribute the consideration received or any balance or proceeds thereof to holders of the Ordinary Shares. (iii) Voting. Each outstanding Ordinary Share of the Company shall be entitled to one vote per share (subject to Article 47) and the holder thereof shall be entitled to notice of, to attend, and to vote at, General Meetings of the Company in accordance with these Articles. (iv) Reservation of Ordinary Shares. Such numbers of Ordinary Shares as may from time to time be required for such purpose shall be reserved for issuance upon exercise of any options or warrants to purchase Ordinary Shares. (v) Preemptive Rights. No holder of Ordinary Shares of the Company shall, by reason of such holding, have any preemptive right to subscribe to any additional issue of shares of any class or series nor to any security convertible, exercisable or exchangeable into such shares. (vi) Redemption. Any issued and outstanding Ordinary Shares shall be redeemable in such circumstances and on such terms as shall be agreed by the Directors and the holder thereof, subject always to the laws of the Cayman 8 Islands, and the Directors may deduct from the redemption price for such shares the aggregate amount of any outstanding debts, liabilities and engagements to or with the Company (whether presently payable or not) by the holder of such shares, either alone or jointly with any other person, whether a Member or not. Without limiting the foregoing, the Company may, from time to time, purchase or redeem all or part of the Ordinary Shares of any Member, whether or not the Company has made a similar offer to all or any of the other Members; notwithstanding the foregoing, the Company shall not redeem or purchase any Ordinary Shares in a manner that the Board of Directors believes would cause, by reason of such redemption or purchase, the total Controlled Shares of any Person to equal or exceed 10% of a class of the Company's shares. (d) The Directors are authorized, without obtaining any vote or consent of the holders of any class or series of shares of the Company unless expressly provided by the terms of issue of such class or series, subject to any limitations prescribed by law, to provide from time to time for the issuance of other classes or series of shares, and in accordance with applicable procedures of the Statute, to establish the characteristics of each class or series including, without limitation, the following: (i) the number of shares of that class or series, which may subsequently be increased or decreased (but not below the number of shares of that class or series then outstanding) by resolution of the Directors, and the distinctive designation thereof; (ii) the voting powers (subject to Article 47), full or limited, if any, of the shares of that class or series; (iii) the rights in respect of dividends on the shares of that class or series, whether dividends shall be cumulative and, if so, from which date or dates and the relative rights or priority, if any, of payment of dividends on shares of that class or series and any limitations, restrictions or conditions on the payment of dividends; (iv) the relative amounts, and the relative rights or priority, if any, of payment in respect of shares of that class or series, which the holders of the shares of that class or series shall be entitled to receive upon any liquidation, dissolution or winding up of the Company; (v) the terms and conditions (including the price or prices, which may vary under different conditions and at different redemption dates), if any, upon which all or any part of the shares of that class or series may be redeemed or purchased and any limitations, restrictions or conditions on such redemption; provided that any provision for redemption of any class or series of shares issued pursuant to this Article 6(d) shall be restricted by 9 the condition that the Company shall not redeem or purchase any shares of any such class or series in a manner that the Board of Directors believes would cause, by reason of such redemption or purchase, the total Controlled Shares of any Person other than (a) the Persons acquiring Convertible Shares pursuant to the Share Purchase Agreement or any Affiliate of such Person (together, the "Investors" and each an "Investors") of (b) any person who, indirectly through or by attribution from the Investors is treated as controlling the Preferred Shares or any Ordinary Shares into which the Preferred Shares are convertible (each, an "Attributed Investor") to equal or exceed 10% of a class of the Company's shares. For purposes of the immediately preceding sentence, the term "Affiliate", with respect to any Person, shall include funds under common management with such Person and their respective members, limited partners and affiliates; (vi) the terms, if any, of any purchase, retirement or sinking fund to be provided for the shares of that class or series; (vii) the terms, if any, upon which the shares of that class or series shall be convertible into or exercisable or exchangeable for shares of any other class, classes or series, or other securities, whether or not issued by the Company; (viii) the restrictions, limitations and conditions, if any, upon issuance of indebtedness of the Company so long as any shares of that class or series are outstanding; (ix) restrictions on the issuance of shares of the same series or any other series; and (x) any other preferences and relative, participating, optional or other rights and limitations not inconsistent with applicable law or the provisions of this Article 6. (e) In the event of any conflict, the provisions of this Article 6 shall override the provisions of any other Article of these presents. (f) Unless otherwise specified by the Board of Directors, any shares which have been called, redeemed or otherwise repurchased by the Company shall have the status of authorised but unissued shares and may be subsequently issued for valid consideration. (g) The Directors shall have the fullest powers permitted by law to pay all or any redemption monies in respect of any shares out of the Company's share capital and share premium accounts. 10 (h) To the extent required to comply with Section 32(1) of the Companies Law, the Company shall not issue bearer shares, certificates or coupons. 7. The Company shall maintain a register of its Members and every person whose name is entered as a Member in the register of Members shall be entitled without payment to receive within two months after allotment or lodgement of transfer (or within such other period as the conditions of issue shall provide) one certificate for all his shares or several certificates each for one or more of his shares upon payment of fifty cents (US$0.50) for every certificate after the first or such less sum as the Directors shall from time to time determine provided that in respect of a share or shares held jointly by several persons the Company shall not be bound to issue more than one certificate and delivery of a certificate for a share to one of the several joint holders shall be sufficient delivery to all such holders. TRANSFER OF SHARES ------------------ 8. The instrument of transfer of any share shall be in writing and shall be executed by or on behalf of the transferor (and, in the case of a partly paid share, by the transferee) and the transferor shall be deemed to remain the holder of a share until the name of the transferee is entered in the register in respect thereof. 9. (a) Subject to the Statute, this Article 9 and such other of the restrictions contained in these Articles and elsewhere as may be applicable, and except, in the case of any shares other than the Ordinary Shares, as may otherwise by provided by the terms of issuance thereof, any Member may sell, assign, transfer or otherwise dispose of shares of the Company at the time owned by it and, upon receipt of a duly executed form of transfer in writing, the Directors shall procure the timely registration of the same. If the Directors refuse to register a transfer for any reason, they shall notify the proposed transferor and transferee within thirty days of such refusal. (b) Except with respect to transfers of the Company's shares executed on any recognized securities exchange or inter-dealer quotation system, including without limitation the New York Stock Exchange and the Nasdaq National Market, the Directors shall decline to register a transfer of shares if the Directors have reason to believe that the effect of such transfer would be to increase the number of total Controlled Shares of any Person to ten percent (10%) or any higher percentage of a class of the Company's shares on an Unadjusted Basis; provided that this restriction shall not apply to any shares transferred or to be transferred to an Investor or an Attributed Investor or in respect of any shares in the Company that are Controlled Shares of an Investor or an Attributed Investor or any transfer contemplated by an Investor to any Acquiring Entity (as defined in the certificate of designations in respect of the Convertible Shares pursuant to the Share Purchase Agreement). (c) Except with respect to transfers of the Company's shares executed on any recognized securities exchange or inter-dealer quotation system, including without limitation the New York Stock Exchange and the Nasdaq National Market, the Directors may, in their absolute and unfettered discretion, decline to register the transfer of any shares if the Directors have reason to believe (i) that such transfer may expose the Company, any subsidiary thereof, any 11 Member or any Person insured or reinsured or proposing to be insured or reinsured by the Company or any such subsidiary to adverse tax or regulatory treatment in any jurisdiction or (ii) that registration of such transfer under the Securities Act or under any blue sky or other United States state securities laws or under the laws of any other jurisdiction is required and such registration has not been duly effected (provided, however, that in this case (ii) the Directors shall be entitled to request and rely on an opinion of counsel to the transferor or the transferee, in form and substance satisfactory to the Directors, that no such approval or consent is required and no such violation would occur, and the Directors shall not be obligated to register any transfer absent the receipt of such an opinion). (d) Without limiting the foregoing, the Board shall decline to approve or register a transfer of shares unless all applicable consents, authorizations, permissions or approvals of any governmental body or agency in the Cayman Islands, the United States or any other applicable jurisdiction required to be obtained prior to such transfer shall have been obtained. (e) The Directors may require any Member, or any Person proposing to acquire shares of the Company, to certify or otherwise provide information in writing as to such matters as the Directors may require for the purpose of giving effect to Articles 6(b), 6(c)(vi), 9(b), 9(c), 9(d), 9(f), 9(g), 89(a) and 89(b), including as to such Person's status as a United States Person, its Controlled Shares and other matters of the kind contemplated by Article 47. Such request shall be made by written notice and the certification or other information required shall be provided to such place and within such period (not less than ten (10) Business Days after such notice is given unless the Directors and such Member or proposed acquiror otherwise agree) as the Directors may designate in such request. If any Member or proposed acquiror does not respond to any such request by the Directors as requested, or if the Directors have reason to believe that any certification or other information provided pursuant to any such request is inaccurate or incomplete, the Directors may decline to register any transfer or to effect any issuance or purchase of shares to which such request relates. (f) With respect to a transfer of the Company's shares executed on any recognized securities exchange or inter-dealer quotation system, including without limitation the New York Stock Exchange and the Nasdaq National Market, if the Directors have reason to believe that the effect of such transfer would be to increase the total number of Controlled Shares of any Person to ten percent (10%) or any higher percentage of a class of the Company's shares on an Unadjusted Basis, the Directors may, in their absolute and unfettered discretion, within ten (10) Business Days of learning of such transfer, cause a notice to be delivered to such Person demanding that such Person surrender to an agent designated by the Directors certificates representing the shares and any dividends or distributions that the Person has received as a result of owning the shares. Such a Person 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 to the extent tradable as marketable securities in an arm's-length transaction on any recognized securities exchange or 12 inter-dealer quotation system, including without limitation the New York Stock Exchange and 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. (g) With respect to a transfer of the Company's shares executed on any recognized securities exchange or inter-dealer quotation system, including without limitation the New York Stock Exchange and the Nasdaq National Market, if the Directors have reason to believe that such transfer may expose the Company, any subsidiary thereof, any Member or any Person insured or reinsured or proposing to be insured or reinsured by to the Company or any such subsidiary to adverse tax or regulatory treatment in any jurisdiction, the Directors may, in their absolute and unfettered discretion, within ten (10) Business Days of learning of such transfer, cause a notice to be delivered to such person demanding that such Person surrender to an agent designated by the Directors certificates representing the shares and any dividends or distributions that the Person has received as a result of owning the shares. A Person 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 Person paid for the shares, together with any dividends or distributions that the Person received from the Company. As soon as practicable after receiving the shares and any dividends or distributions that the Person received, the agent will use its best efforts to sell such shares and any non-cash dividends or distributions to the extent tradable as marketable securities in an arm's-length transaction on any recognized securities exchange or inter-dealer quotation system, including without limitation the New York Stock Exchange and the Nasdaq National Market. After applying the proceeds from such sale toward reimbursing the Person 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. (h) Notwithstanding anything contained in these Articles to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote, voting together as a single class, shall be required to pass validly a Special Resolution to amend or repeal, or adopt any provision inconsistent with, this Article 9. 10. The registration of transfers may be suspended at such time and for such periods as the Directors may from time to time determine, provided always that such registration shall not be suspended for more than forty-five days in any year. 13 REDEEMABLE SHARES ----------------- 11. (a) Subject to the provisions of the Statute, the Memorandum of Association and these Articles (including Articles 6(c)(vi) and 6(d)(v)), shares may be issued on the terms that they are, or at the option of the Company or the holder are, to be redeemed on such terms and in such manner as the Company, before the issue of the shares, may by Special Resolution determine. (b) Subject to the provisions of the Statute, the Memorandum of Association, and these Articles (including Articles 6(c)(vi) and 6(d)(v)), the Company may purchase its own shares (including fractions of a share), including any redeemable shares, provided that the manner of purchase has first been authorised by the Company in general meeting and may make payment therefor in any manner authorised by the Statute, including out of capital. VARIATION OF RIGHTS OF SHARES ----------------------------- 12. (a) If at any time the share capital of the Company is divided into different classes or series of shares, the rights attached to any class or series (unless otherwise provided by the terms of issue of the shares of that class or series) may, whether or not the Company is being wound-up, be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or series, or with the sanction of a Special Resolution passed at a general meeting of the holders of the shares of that class or series provided that no such Special Resolution shall be effective unless the holders of at least a majority of the issued shares of the class or series vote in favour of such Special Resolution. (b) The provisions of these Articles relating to general meetings shall apply to every such general meeting of the holders of one class or series of shares except that the necessary quorum shall be one person holding or representing by proxy at least a majority of the issued shares of the class or series and that any holder of shares of the class or series present in person or by proxy may demand a poll. (c) Class or series meetings and class or series votes may only be called at the direction of the Directors. Nothing in this Article 12 gives any Member or group of Members the right to call a class or series meeting or demand a class or series vote. 13. The rights conferred upon the holders of the shares of any class or series issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class or series, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. The rights of the holders of Ordinary Shares shall not be deemed to be varied by the creation or issue of shares with preferred or other rights, which may be effected by the Directors as provided in these Articles without any vote or consent of the holders of Ordinary Shares. 14 COMMISSION ON SALE OF SHARES ---------------------------- 14. The Company may in so far as the Statute from time to time permits pay a commission to any person in consideration of his subscribing or agreeing to subscribe whether absolutely or conditionally for any shares of the Company. Such commissions may be satisfied by the payment of cash or the lodgement of fully or partly paid-up shares or partly in one way and partly in the other. The Company may also on any issue of shares pay such brokerage as may be lawful. NON-RECOGNITION OF TRUSTS ------------------------- 15. No person shall be recognised by the Company as holding any share upon any trust and the Company shall not be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future, or partial interest in any share, or any interest in any fractional part of a share, or (except only as is otherwise provided by these Articles or the Statute) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder. LIEN ON SHARES -------------- 16. The Company shall have a first and paramount lien and charge on all shares (whether fully paid-up or not) registered in the name of a Member (whether solely or jointly with others) for all debts, liabilities or engagements to or with the Company (whether presently payable or not) by such Member or his estate, either alone or jointly with any other person, whether a Member or not, but the Directors may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The registration of a transfer of any such share shall operate as a waiver of the Company's lien (if any) thereon. The Company's lien (if any) on a share shall extend to all dividends, redemptions or other monies payable in respect thereof. 17. The Company may sell, in such manner as the Directors think fit, any shares on which the Company has a lien, but no sale shall be made unless a sum in respect of which the lien exists is presently payable, nor until the expiration of fourteen days after a notice in writing stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder or holders for the time being of the share, or the person, of which the Company has notice, entitled thereto by reason of his death or bankruptcy. Effective upon such sale, any certificate representing such shares prior to such sale shall be cancelled, whether or not it was actually delivered to the Company. 18. To give effect to any such sale the Directors may authorise some person to transfer the shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the shares comprised in any such transfer, and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale. 15 19. The proceeds of such sale shall be received by the Company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable and the residue, if any, shall (subject to a like lien for sums not presently payable as existed upon the shares before the sale) be paid to the person entitled to the shares at the date of the sale. CALL ON SHARES -------------- 20. (a) The Directors may from time to time make calls upon the Members in respect of any monies unpaid on their shares (whether on account of the nominal value of the shares or by way of premium or otherwise) and not by the conditions of allotment thereof made payable at fixed terms, provided that no call shall be payable at less than one month from the date fixed for the payment of the last preceding call, and each Member shall (subject to receiving at least fourteen days notice specifying the time or times of payment) pay to the Company at the time or times so specified the amount called on the shares. A call may be revoked or postponed as the Directors may determine. A call may be made payable by instalments. (b) A call shall be deemed to have been made at the time when the resolution of the Directors authorising such call was passed. (c) The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof. 21. If a sum called in respect of a share is not paid before or on a day appointed for payment thereof, the persons from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate not exceeding ten per cent per annum as the Directors may determine, but the Directors shall be at liberty to waive payment of such interest either wholly or in part. 22. Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium or otherwise, shall for the purposes of these Articles be deemed to be a call duly made, notified and payable on the date on which by the terms of issue the same becomes payable, and in the case of non-payment all the relevant provisions of these Articles as to payment of interest, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified. 23. The Directors may, on the issue of shares, differentiate between the holders as to the amount of calls or interest to be paid and the times of payment. 24. (a) The Directors may, if they think fit, receive from any Member willing to advance the same, all or any part of the monies uncalled and unpaid upon any shares held by him, and upon all or any of the monies so advanced may (until the same would but for such advances, become payable) pay interest at such rate not exceeding (unless the Company in general meeting shall otherwise direct) seven per cent per annum, as may be agreed upon between the Directors and the Member paying such sum in advance. 16 (b) No such sum paid in advance of calls shall entitle the Member paying such sum to any portion of a dividend declared in respect of any period prior to the date upon which such sum would, but for such payment, become presently payable. FORFEITURE OF SHARES -------------------- 25. (a) If a Member fails to pay any call or instalment of a call or to make any payment required by the terms of issue on the day appointed for payment thereof, the Directors may, at any time thereafter during such time as any part of the call, instalment or payment remains unpaid, give notice requiring payment of so much of the call, instalment or payment as is unpaid, together with any interest which may have accrued and all expenses that have been incurred by the Company by reason of such non-payment. Such notice shall name a day (not earlier than the expiration of fourteen days from the date of giving of the notice) on or before which the payment required by the notice is to be made, and shall state that, in the event of non-payment at or before the time appointed the shares in respect of which such notice was given will be liable to be forfeited. (b) If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Directors to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited share and not actually paid before the forfeiture. (c) A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Directors think fit and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the Directors think fit. 26. A person whose shares have been forfeited shall cease to be a Member in respect of the forfeited shares, but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture were payable by him to the Company in respect of the shares together with interest thereon, but his liability shall cease if and when the Company shall have received payment in full of all monies whenever payable in respect of the shares. 27. A certificate in writing under the hand of one Director or the Secretary of the Company that a share in the Company has been duly forfeited on a date stated in the declaration shall be conclusive evidence of the fact therein stated as against all persons claiming to be entitled to the share. The Company may receive the consideration given for the share on any sale or disposition thereof and may execute a transfer of the share in favour of the person to whom the share is sold or disposed of and he shall thereupon be registered as the holder of the share and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share. 17 28. The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the nominal value of the share or by way of premium as if the same had been payable by virtue of a call duly made and notified. REGISTRATION OF EMPOWERING INSTRUMENTS -------------------------------------- 29. The Company shall be entitled to charge a fee not exceeding one dollar (US$l.00) on the registration of every probate, letters of administration, certificate of death or marriage, power of attorney, notice in lieu of distringas, or other instrument. TRANSMISSION OF SHARES ---------------------- 30. In case of the death of a Member, the survivor or survivors where the deceased was a joint holder, and the legal personal representatives of the deceased where he was a sole holder, shall be the only persons recognised by the Company as having any title to his interest in the shares, but nothing herein contained shall release the estate of any such deceased holder from any liability in respect of any shares which had been held by him solely or jointly with other persons. 31. (a) Any person becoming entitled to a share in consequence of the death or bankruptcy or liquidation or dissolution of a Member (or in any other way than by transfer) may, upon such evidence being produced as may from time to time be required by the Directors and subject as hereinafter provided, elect either to be registered himself as holder of the share or to make such transfer of the share to such other person nominated by him as the deceased or bankrupt person could have made and to have such person registered as the transferee thereof, but the Directors shall, in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the share by that Member before his death or bankruptcy as the case may be. (b) If the person so becoming entitled shall elect to be registered himself as holder he shall deliver or send to the Company a notice in writing signed by him stating that he so elects. 32. A person becoming entitled to a share by reason of the death or bankruptcy or liquidation or dissolution of a Member (or in any other case than by transfer) shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a Member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the Company PROVIDED HOWEVER that the Directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the share and if the notice is not complied with within ninety days the Directors may thereafter withhold payment of all dividends, bonuses or other monies payable in respect of the share until the requirements of the notice have been complied with. 18 AMENDMENT OF MEMORANDUM OF ASSOCIATION, CHANGE OF ------------------------------------------------- LOCATION OF REGISTERED OFFICE & ALTERATION OF CAPITAL ----------------------------------------------------- 33. (a) Subject to and in so far as permitted by the provisions of the Statute, the Company may from time to time by Special Resolution alter or amend its Memorandum of Association and may, without restricting the generality of the foregoing: (i) increase the share capital by such sum to be divided into shares of such amount or without nominal or par value as the resolution shall prescribe and with such rights, priorities and privileges annexed thereto, as the Company in general meeting may determine; (ii) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (iii) by subdivision of its existing shares or any of them divide the whole or any part of its share capital into shares of smaller amount than is fixed by the Memorandum of Association or into shares without nominal or par value; (iv) cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person. (b) All new shares created hereunder shall be subject to the same provisions with reference to the payment of calls, liens, transfer, transmission, forfeiture and otherwise as the shares in the original share capital. (c) Subject to the provisions of the Statute, the Company may by Special Resolution change its name or alter its objects. (d) Without prejudice to Article 11 hereof and subject to the provisions of the Statute, the Company may by Special Resolution reduce its share capital and any capital redemption reserve fund. (e) Subject to the provisions of the Statute, the Company may by resolution of the Directors change the location of its registered office. CLOSING REGISTER OF MEMBERS OR FIXING RECORD DATE ------------------------------------------------- 34. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Members entitled to receive payment of any dividend, or in order to make a determination of Members for any other proper purpose, the Directors of the Company may provide that the register of Members shall be closed for transfers for a stated period but not to exceed in any case forty days. If the register of Members shall be so closed for the purpose of determining Members entitled to notice of or to vote at a meeting of Members such register shall be so closed for at least ten days immediately preceding such 19 meeting and the record date for such determination shall be the date of the closure of the register of Members. 35. In lieu of or apart from closing the register of Members, the Directors may fix in advance a date as the record date for any such determination of Members entitled to notice of or to vote at a meeting of the Members and for the purpose of determining the Members entitled to receive payment of any dividend the Directors may, at or within 90 days prior to the date of declaration of such dividend fix a subsequent date as the record date for such determination. 36. If the register of Members is not so closed and no record date is fixed for the determination of Members entitled to notice of or to vote at a meeting of Members or Members entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of Members. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this section, such determination shall apply to any adjournment thereof. GENERAL MEETING --------------- 37. (a) Subject to paragraph (c) hereof, the Company shall within one year of its incorporation and in each year of its existence thereafter hold a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it. The annual general meeting shall be held at such time and place as the Directors shall appoint and if no other time and place is prescribed by them, it shall be held at the registered office on the second Wednesday in May of each year at ten o'clock in the morning. (b) At these meetings the report of the Directors (if any) shall be presented. (c) If the Company is exempted as defined in the Statute it may but shall not be obliged to hold an annual general meeting. 38. (a) Except as otherwise required by law, and subject to the terms of any class or series of shares issued by the Company having a preference over the Ordinary Shares as to dividends or upon liquidation to elect directors in specified circumstances, extraordinary general meetings of the Members of the Company may be called only by (i) a majority of the Directors or (ii) at the request in writing of Members owning at least fifty percent (50%) of the outstanding shares generally entitled to vote, subject, in the case of clause (ii), to the following: (i) The requisition must state the objects of the meeting and must be signed by the requisitionists and deposited at the registered office of the Company and may consist of several documents in like form each signed by one or more requisitionists. (ii) If the Directors do not within twenty-one days from the date of the deposit of the requisition duly proceed to convene a general meeting, the requisitionists, or any 20 of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three months after the expiration of the said twenty-one days. (iii) A general meeting convened as aforesaid by requisitionists shall be convened in the same manner as nearly as possible as that in which general meetings are to be convened by Directors. (b) Any action required or permitted to be taken by the Members of the Company must be taken at a duly called annual or extraordinary general meeting of the Members of the Company and may not be taken by consent in writing or otherwise. (c) Notwithstanding anything contained in these Articles to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares generally entitled to vote, voting together as a single class, shall be required to pass validly a Special Resolution to amend or repeal, or adopt any provision inconsistent with, this Article 38. NOTICE OF GENERAL MEETINGS -------------------------- 39. Not less than ten (10) days nor more than sixty (60) days written notice shall be given of an annual general meeting or any other general meeting. Every notice shall be exclusive of the day on which it is given or deemed to be given and of the day for which it is given and shall specify the place, the day and the hour of the meeting and the general nature of the business and shall be given in the manner hereinafter mentioned or in such other manner if any as may be prescribed by the Company PROVIDED that a general meeting of the Company shall, whether or not the notice specified in this regulation has been given and whether or not the provisions of Article 38 have been complied with, be deemed to have been duly convened if it is so agreed: (a) in the case of a general meeting called as an annual general meeting by all the Members entitled to attend and vote thereat or their proxies; and (b) in the case of any other general meeting by a majority in number of the Members having a right to attend and vote at the meeting, being a majority together holding not less than seventy-five per cent in nominal value or in the case of shares without nominal or par value seventy-five per cent of the shares in issue, or their proxies. 40. The accidental omission to give notice of a general meeting to, or the non-receipt of notice of a meeting by any person entitled to receive notice shall not invalidate the proceedings of that meeting. 21 PROCEEDINGS AT GENERAL MEETINGS ------------------------------- 41. (a) No business shall be transacted at any general meeting unless a quorum of Members is present at the time when the meeting proceeds to business; the quorum required for a general meeting of the Members is the presence in person or by proxy of Members holding at least 50% of the issued and outstanding shares entitled to vote at such meeting provided, however, that no quorum shall exist for the purpose of considering or passing any Special Resolution unless the Members present in person or by proxy shall hold at least sixty-six and two-thirds percent (66-2/3%) of the issued and outstanding shares of the Company entitled to vote at such meeting. (b) If a Member desires to submit a proposal for consideration at an annual general meeting or extraordinary general meeting, or to nominate persons for election as Directors at any general meeting duly called for the election of Directors, written notice of such Member's intent to make such a proposal or nomination must be given and received by the Secretary of the Company at the principal executive offices of the Company not later than (i) with respect to an annual general meeting of Members, sixty (60) days prior to the anniversary date of the immediately preceding annual general meeting, and (ii) with respect to an extraordinary general meeting, the close of business on the tenth (10th) day following the date on which notice of such meeting is first sent or given to Members. Each notice shall describe the proposal or nomination in sufficient detail for a proposal or nomination to be summarized on the agenda for the meeting and shall set forth (i) the name and address, as it appears on the books of the Company, of the Member who intends to make the proposal or nomination; (ii) a representation that the Member is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present such proposal or nomination; and (iii) the class and number of shares of the Company which are beneficially owned by the Member. In addition, in the case of a Member's proposal, the notice shall set forth the reasons for conducting such proposed business at the meeting and any material interest of the Member in such business. (c) In the case of a nomination of any person for election as a Director, the notice shall set forth: (i) the name and address of any person to be nominated; (ii) a description of all arrangements or understandings between the Member and each nominee and any other person or persons (naming such person or persons pursuant to which the nomination or nominations are to be made by the Member); (iii) such other information regarding such nominee proposed by such Member as would be required to be included in a proxy statement filed pursuant to Regulation 14A under the Exchange Act, whether or not the Company is then subject to such Regulation; and (iv) the consent of each nominee to serve as a Director of the Company, if so elected. The Chairman of the annual general meeting or extraordinary general meeting shall, if the facts warrant, refuse to acknowledge a proposal or nomination not made in compliance with the foregoing procedure, and any such proposal or nomination not properly brought before the meeting shall not be considered. (d) Notwithstanding anything contained in these Articles to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote, voting together as a single class, shall be required to pass 22 validly a Special Resolution to amend or repeal, or adopt any provision inconsistent with, this Article 41. (e) An Ordinary Resolution shall require the vote of a majority of such shares as, being entitled to do so, vote in person or by proxy at any general meeting at which the required quorum is present in person or by proxy, voting together as a single class. 42. If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of Members, shall be dissolved and in any other case it shall stand adjourned to the same day in the next week at the same time and place or to such other time or such other place as the Directors may determine and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting the Members present shall be a quorum. 43 The Chairman, if any, of the Board of Directors shall preside as Chairman at every general meeting of the Company, or if there is no such Chairman, or if he shall not be present within fifteen minutes after the time appointed for the holding of the meeting, or is unwilling to act, the Directors present shall elect one of their number to be Chairman of the meeting. 44. If at any general meeting no Director is willing to act as Chairman or if no Director is present within fifteen minutes after the time appointed for holding the meeting, the Members present shall choose one of their number to be Chairman of the meeting. 45. The Chairman may, with the consent of any general meeting duly constituted hereunder, and shall if so directed by the meeting, adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a general meeting is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting; save as aforesaid it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned general meeting. 46. A vote demanded on the election of a Chairman or on a question of adjournment shall be taken forthwith. A vote demanded on any other question shall be taken at such time as the Chairman of the general meeting directs and any business other than that upon which a vote has been demanded or is contingent thereon may be proceeded with pending the taking of the vote. VOTES OF MEMBERS ---------------- 47. (a)(i) Subject to Article 6, every Member of record present in person or by proxy shall have one vote for each issued and outstanding Ordinary Share registered in his name in the register; PROVIDED THAT, subject to the following provisions of this Article 47, if and for so long as the number of Controlled Shares of any Person other than an Investor or an Attributed Investor would constitute 10% or more of the total combined voting rights attaching to the issued shares of the Company (calculated after giving effect to any prior reductions in voting rights 23 attaching to Controlled Shares of other persons as provided in this Article 47), each such issued Controlled Share, regardless of the identity of the registered holder thereof, shall confer only a fraction of a vote as determined by the following formula (the "Formula"): (T-C)/(XxC) Where: "T" is the aggregate number of votes conferred by all the issued shares immediately prior to that application of the Formula adjusted to take into account any prior reduction taken with respect to any other Member pursuant to Article 47(d) as at the same date; "C" is the number of issued Controlled Shares attributable to such Person; "X" is 9.1. (b) The Directors may, by notice in writing, require any Member to provide within not less than ten Business Days, complete and accurate information to the registered office or such other place as the Directors may designate in respect of any or all of the following matters: (i) the number of shares in which such Member is legally or beneficially interested; (ii) the Persons who are beneficially interested in shares in respect of which such Member is the registered holder; (iii) the relationship, association or affiliation with such Member with any other Member or Person whether by means of common control or ownership or otherwise; or (iv) any other facts or matters which the Directors may consider relevant to the determination of the number of Controlled Shares attributable to any Person. (c) If any Member does not respond to any notice given pursuant to Article 47(b) above within the time specified therein or the Directors shall have reason to believe that any information provided in relation thereto is incomplete or inaccurate, the Directors may determine that the votes attaching to any Controlled Shares of such Member shall be disregarded for all purposes until such time as a response (or additional response) to such notice reasonably satisfactory to the Directors has been received as specified therein. (d) The Formula shall be applied successively as many times as may be necessary to ensure that no Person other than an Investor or an Attributed Investor shall be a 10% Shareholder at any time. For the purposes of determining the votes exercisable by Members as at any date, the Formula shall be applied first to the votes of Controlled Shares attributable to the Person to whom the greatest number of Controlled Shares are attributed and successively to the Controlled Shares attributable to them, in each case calculations being made on the basis of the aggregate number of votes conferred by the issued shares as at such date as reduced by the application of the Formula to any larger number of Controlled Shares as at such date. 24 (e) Notwithstanding the provisions of Articles 47(a) and (d) above, having applied the provisions thereof as best as they consider reasonably practicable, the Directors may make such final adjustments to the aggregate number of votes attaching to the shares of any Member that they consider fair and reasonable in all the circumstances to ensure that no Person other than an Investor or an Attributed Investor shall be a 10% Shareholder at any time. (f) Notwithstanding anything contained in these Articles to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote, voting together as a single class, shall be required to pass validly a Special Resolution to amend or repeal, or adopt any provision inconsistent with, this Article 47. 48. In the case of joint holders of record the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of Members. 49. No Member shall be entitled to vote at any general meeting unless he is registered as a shareholder of the Company on the record date for such meeting nor unless all calls or other sums presently payable by him in respect of shares in the Company have been paid. 50. A Member of unsound mind, or in respect of whom an order has been made by any court, having jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee, receiver, curator bonis, or other person in the nature of a committee, receiver or curator bonis appointed by that court, and any such committee, receiver, curator bonis or other persons may vote by proxy. 51. No objection shall be raised to the qualification of any voter except at the general meeting or adjourned general meeting at which the vote objected to is given or tendered and every vote not disallowed at such general meeting shall be valid for all purposes. Any such objection made in due time shall be referred to the Chairman of the general meeting whose decision shall be final and conclusive. 52. Votes may be given either personally or by proxy. PROXIES ------- 53. The instrument appointing a proxy shall be in writing and shall be executed under the hand of the appointor or of his attorney duly authorised in writing, or, if the appointor is a corporation under the hand of an officer or attorney duly authorised in that behalf. A proxy need not be a Member of the Company. 54. The instrument appointing a proxy shall be deposited at the registered office of the Company or at such other place as is specified for that purpose in the notice convening the meeting no later than the time for holding the meeting, or adjourned meeting provided that the 25 Chairman of the Meeting may at his discretion direct that an instrument of proxy shall be deemed to have been duly deposited upon receipt of telex, cable or telecopy confirmation from the appointor that the instrument of proxy duly signed is in the course of transmission to the Company. 55. The instrument appointing a proxy may be in any usual or common form and may be expressed to be for a particular meeting or any adjournment thereof or generally until revoked. 56. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the share in respect of which the proxy is given provided that no intimation in writing of such death, insanity, revocation or transfer as aforesaid shall have been received by the Company at the registered office before the commencement of the general meeting, or adjourned meeting at which it is sought to use the proxy. 57. Any corporation which is a Member of record of the Company may in accordance with its Articles or in the absence of such provision by resolution of its Directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of Members of the Company, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as the corporation could exercise if it were an individual Member of record of the Company. 58. Shares of its own capital belonging to the Company or held by it in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the total number of outstanding shares at any given time. DIRECTORS --------- 59. (a) There shall be a Board of Directors consisting of not less than one or more than twelve persons (exclusive of alternate Directors) PROVIDED HOWEVER that the Company may from time to time by ordinary resolution increase or reduce the limits in the number of Directors. The first Directors of the Company shall be determined in writing by, or appointed by a resolution of, the subscribers of the Memorandum of Association or a majority of them. Thereafter, the Directors shall have the exclusive power and right to set the exact number of Directors within that range from time to time by resolution adopted by the vote of a majority of the Directors present at a meeting at which a quorum is present, or by unanimous written consent. The Directors shall be divided into three classes, as nearly equal as possible, designated by Class I, Class II and Class III. Initially, Class I Directors shall be elected for a term expiring at the 1999 annual general meeting of Members, Class II Directors for a term expiring at the 2000 annual general meeting of Members and Class III Directors for a term expiring at the 2001 annual general meeting of Members. At each succeeding annual general meeting of Members, successors to Directors whose terms expire at that annual general meeting shall be of the same class as the Directors they succeed and shall be elected for three-year terms. If the number of 26 Directors is decreased by resolution of the Board of Directors pursuant to this Article 59, in no case shall that decrease shorten the term of any incumbent Director. (b) A Director shall hold office until the annual general meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement or removal from office. Any newly created directorship resulting from an increase in the number of Directors and any other vacancy on the Board of Directors, however caused, may be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director. Any Director elected by one or more Directors to fill a newly created directorship or other vacancy shall, without regard to the class in which the vacancy occurred, hold office until the next succeeding annual general meeting of Members and until his or her successor shall have been elected and qualified. The term of a Director elected by Members to fill a newly created directorship or other vacancy shall expire at the same time as the terms of the other Directors of the same class. (c) One or more or all of the Directors of the Company may be removed but only with cause and only by Special Resolution. (d) Advance notice of nominations for the election of Directors, other than nominations by the Board of Directors or a committee thereof, shall be given to the Company in the manner provided in Article 41 of these Articles. (e) (i) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of shares issued by the Company shall have the right, voting separately by class or series, to elect Directors at an annual general meeting or extraordinary general meeting of Members, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the provisions of these Articles. Directors so elected shall not be divided into classes and shall be elected by such holders annually unless expressly provided otherwise by those provisions or resolutions or the certificate of designations in respect of the Convertible Shares, and, during the prescribed terms of office of those Directors, the Board of Directors shall consist of a number of Directors equal to the number of those Directors plus the number of Directors determined as provided in the first paragraph of this Article 59. (ii) Notwithstanding the foregoing, for so long as the Controlled Shares of the Investors in the aggregate amount to at least 51% of the shares entitled to have notice of, attend and vote at general meetings of the Company on a fully diluted basis (the "Threshold Amount"), the Investors shall be entitled to designate for election to the Board of Directors the number of individuals equal to two-thirds of the authorized number of Directors of the Board, rounded to the nearest whole number. Such designated individuals shall be elected as members of the Board. To the extent that the Controlled Shares of the Investors in the aggregate amount to less than 27 the Threshold Amount, they shall continue to have the foregoing rights for a period of 12 months following the date that the aggregate amount of their Controlled Shares falls below the Threshold Amount. For so long as the Investors have continuously held shares less than the Threshold Amount for greater that 12 months, they shall be entitled to designate the number of individuals for election to the Board of Directors in proportion to their aggregate beneficial ownership of shares entitled to have notice of, attend and vote at general meetings of the Company to the total of such shares, and such individuals shall be elected to the Board of Directors; provided that, for so long as the Controlled Shares of the Investors in the aggregate amount to 5% of the shares entitled to have notice of, attend and vote at general meetings of the Company on a fully diluted basis, the Investors together shall be entitled to designate at least one individual for election to the Board of Directors and such individual shall be elected to the Board of Directors. The Investors, acting together, shall have the sole right to remove from the Board, with or without cause, any directors so designated by the Investors and if a vacancy occurs on the Board arising from the removal, resignation, death or incapacity of a director so designated by the Investors, the Investors, acting together, shall have the sole right to designate a director to fill such vacancy. (iii) Notwithstanding the foregoing, for so long as the Controlled Shares of the Cypress Entities in the aggregate amount to at least 2.5% of the shares entitled to have notice of, attend and vote at general meetings of the Company on a fully diluted basis, the Cypress Entities shall be entitled to designate one individual for election to the Board of Directors. Such designated individual shall be elected as a member of the Board. The Cypress Entities, acting together, shall have the sole right to remove from the Board, with or without cause, any director so designated by the Cypress Entities and if a vacancy occurs on the Board arising from the removal, resignation, death or incapacity of a director so designated by the Cypress Entities, the Cypress Entities, acting together, shall have the sole right to designate a director to fill such vacancy. (f) Notwithstanding anything contained in these Articles to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares generally entitled to vote, voting together as a single class, shall be required to pass validly a Special Resolution to amend or repeal, or adopt any provision inconsistent with, this Article 59. 60. The remuneration to be paid to the Directors shall be such remuneration as the Directors shall determine. Such remuneration shall be deemed to accrue from day to day. The Directors shall also be entitled to be paid their travelling, hotel and other expenses properly incurred by them in going to, attending and returning from meetings of the Directors, or any committee of the Directors, or general meetings of the Company, or otherwise in connection with 28 the business of the Company, or to receive a fixed allowance in respect thereof as may be determined by the Directors from time to time, or a combination partly of one such method and partly the other. 61. The Directors may by resolution award special remuneration to any Director of the Company undertaking any special work or services for, or undertaking any special mission on behalf of, the Company other than his ordinary routine work as a Director. Any fees paid to a Director who is also counsel or solicitor to the Company, or otherwise serves it in a professional capacity shall be in addition to his remuneration as a Director. 62. A Director or alternate Director may hold any other office or place of profit under the Company (other than the office of Auditor) in conjunction with his office of Director for such period and on such terms as to remuneration and otherwise as the Directors may determine. 63. A Director or alternate Director may act by himself or his firm in a professional capacity for the Company and he or his firm shall be entitled to remuneration for professional services as if he were not a Director or alternate Director. 64. A shareholding qualification for Directors may be fixed by the Company in general meeting, but unless and until so fixed no qualification shall be required. 65. A Director or alternate Director of the Company may be or become a director or other officer of or otherwise interested in any company promoted by the Company or in which the Company may be interested as shareholder or otherwise and no such Director or alternate Director shall be accountable to the Company for any remuneration or other benefits received by him as a director or officer of, or from his interest in, such other company. 66. No person shall be disqualified from the office of Director or alternate Director or prevented by such office from contracting with the Company, either as vendor, purchaser or otherwise, nor shall any such contract or any contract or transaction entered into by or on behalf of the Company in which any Director or alternate Director shall be in any way interested be or be liable to be avoided, nor shall any Director or alternate Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or transaction by reason of such Director holding office or of the fiduciary relation thereby established. A Director (or his alternate Director in his absence) shall be at liberty to vote in respect of any contract or transaction in which he is so interested as aforesaid PROVIDED HOWEVER that the nature of the interest of any Director or alternate Director in any such contract or transaction shall be disclosed by him or the alternate Director appointed by him at or prior to its consideration and any vote thereon. 67. A general notice that a Director or alternate Director is a shareholder of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure under Article 66 and after such general notice it shall not be necessary to give special notice relating to any particular transaction. 29 ALTERNATE DIRECTORS ------------------- 68. Subject to the exception contained in Article 76, a Director who expects to be unable to attend Directors' Meetings because of absence, illness or otherwise may appoint any person to be an alternate Director to act in his stead and such appointee whilst he holds office as an alternate Director shall, in the event of absence therefrom of his appointor, be entitled to attend meetings of the Directors and to vote thereat and to do, in the place and stead of his appointor, any other act or thing which his appointor is permitted or required to do by virtue of his being a Director as if the alternate Director were the appointor, other than appointment of an alternate to himself, and he shall ipso facto vacate office if and when his appointor ceases to be a Director or removes the appointee from office. Any appointment or removal under this Article shall be effected by notice in writing under the hand of the Director making the same. POWERS AND DUTIES OF DIRECTORS ------------------------------ 69. (a) The business of the Company shall be managed by the Directors (or a sole Director if only one is appointed) who may pay all expenses incurred in promoting, registering and setting up the Company, and may exercise all such powers of the Company as are not, from time to time by the Statute, or by these Articles, required to be exercised by the Company in general meeting subject nevertheless to any of these regulations, to the provisions of the Statute and to such regulations being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the Company in general meeting PROVIDED HOWEVER that no regulations made by the Company in general meeting shall invalidate any prior act of the Directors which would have been valid if that regulation had not been made. (b) In addition to any approval by Members required by the Statute or any other law of the Cayman Islands, the approval of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote, voting together as a single class, at a meeting called for such purpose, shall be required in order for the Company: (i) to merge, consolidate or amalgamate with another company; (ii) to reorganize or reconstruct itself pursuant to a plan sanctioned by the Cayman Islands courts; or (iii) to sell, lease or exchange all or substantially all of the assets of the Company; provided that the foregoing approval by Members shall not apply to any such transaction of the Company with any entity which the Company, directly or indirectly, controls, as defined in Rule 405 under the Securities Act. (c) Notwithstanding anything contained in these Articles to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares entitled to vote, voting together as a single class, shall be required to pass 30 validly a Special Resolution to amend or repeal, or adopt any provision inconsistent with, this Article 69. 70. The Directors may from time to time and at any time by powers of attorney appoint any company, firm, person or body of persons, whether nominated directly or indirectly by the Directors, to be the attorney or attorneys of the Company for such purpose and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such powers of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorneys as the Directors may think fit and may also authorise any such attorney to delegate all or any of the powers, authorities and discretions vested in him. 71. All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for monies paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed as the case may be in such manner as the Directors shall from time to time by resolution determine. 72. The Directors shall cause minutes to be made in books provided for the purpose: (a) of all appointments of officers made by the Directors; (b) of the names of the Directors (including those represented thereat by an alternate or by proxy) present at each meeting of the Directors and of any committee of the Directors; (c) of all resolutions and proceedings at all meetings of the Company and of the Directors and of committees of Directors. 73. The Directors on behalf of the Company may pay a gratuity or pension or allowance on retirement to any Director who has held any other salaried office or place of profit with the Company or to his widow or dependents and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance. 74. The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof and to issue debentures, debenture stock and other securities whether outright or as security for any debt, liability or obligation of the Company or of any third party. MANAGEMENT ---------- 75. (a) The Directors may from time to time provide for the management of the affairs of the Company in such manner as they shall think fit and the provisions contained in the three next following paragraphs shall be without prejudice to the general powers conferred by this paragraph. 31 (b) The Directors from time to time and at any time may establish any committees, local boards or agencies (which may consist of one or more persons) for managing any of the affairs of the Company and may appoint any persons to be members of such committees or local boards or any managers or agents and may fix their remuneration. (c) The Directors from time to time and at any time may delegate to any such committee, local board, manager or agent any of the powers, authorities and discretions for the time being vested in the Directors and may authorise the members for the time being of any such local board, or any of them to fill up any vacancies therein and to act notwithstanding vacancies and any such appointment or delegation may be made on such terms and subject to such conditions as the Directors may think fit and the Directors may at any time remove any person so appointed and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby. (d) Any such delegates as aforesaid may be authorised by the Directors to subdelegate all or any of the powers, authorities, and discretions for the time being vested in them. MANAGING DIRECTORS ------------------ 76. The Directors may, from time to time, appoint one or more of their body (but not an alternate Director) to the office of Managing Director for such term and at such remuneration (whether by way of salary, or commission, or participation in profits, or partly in one way and partly in another) as they may think fit but his appointment shall be subject to termination ipso facto if he ceases from any cause to be a Director and no alternate Director appointed by him can act in his stead as a Director or Managing Director. 77. The Directors may entrust to and confer upon a Managing Director any of the powers exercisable by them upon such terms and conditions and with such restrictions as they may think fit and either collaterally with or to the exclusion of their own powers and may from time to time revoke, withdraw, alter or vary all or any of such powers. PROCEEDINGS OF DIRECTORS ------------------------ 78. Except as otherwise provided by these Articles, the Directors shall meet together for the despatch of business, convening, adjourning and otherwise regulating their meetings as they think fit. Questions arising at any meeting shall be decided by a majority of votes of the Directors and alternate Directors present at a meeting at which there is a quorum, the vote of an alternate Director not being counted if his appointor be present at such meeting. In case of an equality of votes, the Chairman shall have a second or casting vote. 79. A Director or alternate Director may, and the Secretary on the requisition of a Director or alternate Director shall, at any time summon a meeting of the Directors by at least two days' notice in writing to every Director and alternate Director which notice shall set forth the general nature of the business to be considered unless notice is waived by all the Directors (or their alternates) either at, before or after the meeting is held and PROVIDED FURTHER if 32 notice is given in person, by cable, telex or telecopy the same shall be deemed to have been given on the day it is delivered to the Directors or transmitting organisation as the case may be. The provisions of Article 40 shall apply mutatis mutandis with respect to notices of meetings of Directors. 80. The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors and unless so fixed shall be two, a Director and his appointed alternate Director being considered only one person for this purpose, PROVIDED ALWAYS that if there shall at any time be only a sole Director the quorum shall be one. For the purposes of this Article an alternate Director or proxy appointed by a Director shall be counted in a quorum at a meeting at which the Director appointing him is not present. 81. The continuing Directors may act notwithstanding any vacancy in their body, but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors the continuing Directors or Director may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose. 82. The Directors may elect a Chairman of their Board and determine the period for which he is to hold office; but if no such Chairman is elected, or if at any meeting the Chairman is not present within five minutes after the time appointed for holding the same, the Directors present may choose one of their number to be Chairman of the meeting. 83. The Directors may delegate any of their powers to committees consisting of such member or members of the Board of Directors (including Alternate Directors in the absence of their appointors) as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Directors. 84. A committee may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the members present, and in the case of an equality of votes the Chairman shall have a second or casting vote. 85. All acts done by any meeting of the Directors or of a committee of Directors (including any person acting as an alternate Director) shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any Director or alternate Director, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and qualified to be a Director or alternate Director as the case may be. 86. Members of the Board of Directors or of any committee thereof may participate in a meeting of the Board or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. A resolution in writing (in one or more counterparts), signed by all the Directors for the time being or all the members of a committee of Directors (an alternate Director being entitled to sign such resolution on behalf of his appointor) shall be as valid and effectual as 33 if it had been passed at a meeting of the Directors or committee as the case may be duly convened and held. 87. (a) A Director may be represented at any meetings of the Board of Directors by a proxy appointed by him in which event the presence or vote of the proxy shall for all purposes be deemed to be that of the Director. (b) The provisions of Articles 53-56 shall mutatis mutandis apply to the appointment of proxies by Directors. VACATION OF OFFICE OF DIRECTOR ------------------------------ 88. The office of a Director shall be vacated: (a) if he gives notice in writing to the Company that he resigns the office of Director; (b) if he absents himself (without being represented by proxy or an alternate Director appointed by him) from three consecutive meetings of the Board of Directors without special leave of absence from the Directors, and they pass a resolution that he has by reason of such absence vacated office; (c) if he dies, becomes bankrupt or makes any arrangement or composition with his creditors generally; (d) if he is found a lunatic or becomes of unsound mind; and (e) if removed in accordance with Article 59. UNILATERAL REPURCHASE RIGHT --------------------------- 89. (a) Subject to the Statute, if the Board in its absolute and unfettered discretion, on behalf of the Company, determines that share ownership by any Member may result in adverse tax, regulatory or legal consequences to the Company, any of its subsidiaries or any of the Members or any Person insured or reinsured or proposing to be insured or reinsured by the Company or any of its subsidiaries, the Company will have the option, but not the obligation, to repurchase all or part of the shares held by such Member (to the extent the Board, in the reasonable exercise of its discretion, determines it is necessary to avoid or cure such adverse consequences) for immediately available funds in an amount equal to the Fair Market Value of such shares (the "Repurchase Price"); on the date the Company sends the Repurchase Notice referred to below; provided, that the Board will use reasonable efforts to exercise this option equally among similarly situated Members (to the extent possible under the circumstances). In that event, the Company will also be entitled to direct the Member mandatorily to sell and transfer his shares to a third party or parties (including one or more of the other Members) for an amount equal to the Repurchase Price. Each Member shall be bound by the determination, by the Company to repurchase or direct the sale and transfer of such Member's shares and, if so required 34 by the Company, shall sell and transfer the number of shares that the Company requires it to sell and transfer. In the event that the Company determines to repurchase or direct the sale and transfer of any such shares, the Company shall provide each Member concerned with written notice of such determination (a "Repurchase Notice") at least seven (7) calendar days prior to such repurchase or sale and transfer or such shorter period as each such Member may authorize, specifying the date on which any such shares are to be repurchased or sold and the Repurchase Price. The Company may revoke the Repurchase Notice at any time before it (or its assignee(s)) pays for the shares. Neither the Company nor its assignee(s) shall be obliged to give general notice to the Members of any intention to purchase or the conclusion of any purchase of shares. Payment of the Repurchase Price by the Company or its designee(s) shall be by wire transfer or certified check and made at a closing to be held no less than seven (7) calendar days after receipt of the Repurchase Notice by the Member. (b) If the Company redeems or purchases shares or directs the sale and transfer of such shares (other than pursuant to a conversion of the Convertible Shares) pursuant to this Article 89, it shall do so only in a manner the Board believes would not result, upon consummation of such redemption or purchase, in the total number of Controlled Shares of any Person other than an Investor or an Attributed Investor, increasing to ten percent (10%) or any higher percentage of a class of the Company's shares on an Unadjusted Basis. PRESUMPTION OF ASSENT --------------------- 90. A Director of the Company who is present at a meeting of the Board of Directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the Minutes of the meeting or unless he shall file his written dissent from such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to such person immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favour of such action. SEAL ---- 91. (a) The Company may, if the Directors so determine, have a Seal which shall, subject to paragraph (c) hereof, only be used by the authority of the Directors or of a committee of the Directors authorised by the Directors in that behalf and every instrument to which the Seal has been affixed shall be signed by one person who shall be either a Director or the Secretary or Secretary-Treasurer or some person appointed by the Directors for the purpose. (b) The Company may have for use in any place or places outside the Cayman Islands a duplicate Seal or Seals each of which shall be a facsimile of the Common Seal of the Company and, if the Directors so determine, with the addition on its face of the name of every place where it is to be used. 35 (c) A Director, Secretary or other officer or representative or attorney may without further authority of the Directors affix the Seal of the Company over his signature alone to any document of the Company required to be authenticated by him under Seal or to be filed with the Registrar of Companies in the Cayman Islands or elsewhere wheresoever. OFFICERS -------- 92. The Company may have a President, a Secretary or Secretary-Treasurer appointed by the Directors who may also from time to time appoint such other officers as they consider necessary, all for such terms, at such remuneration and to perform such duties, and subject to such provisions as to disqualification and removal as the Directors from time to time prescribe. DIVIDENDS, DISTRIBUTIONS AND RESERVE ------------------------------------ 93. Subject to the Statute, the Directors may from time to time declare dividends (including interim dividends) and distributions on shares of the Company outstanding and authorise payment of the same out of the funds of the Company lawfully available therefor. 94. The Directors may, before declaring any dividends or distributions, set aside such sums as they think proper as a reserve or reserves which shall at the discretion of the Directors, be applicable for any purpose of the Company and pending such application may, at the like discretion, be employed in the business of the Company. 95. No dividend or distribution shall be payable except out of the profits of the Company, realised or unrealised, or out of the share premium account or as otherwise permitted by the Statute. 96. Subject to the rights of persons, if any, entitled to shares with special rights as to dividends or distributions, if dividends or distributions are to be declared on a class of shares they shall be declared and paid according to the amounts paid or credited as paid on the shares of such class outstanding on the record date for such dividend or distribution as determined in accordance with these Articles but no amount paid or credited as paid on a share in advance of calls shall be treated for the purpose of this Article as paid on the share. 97. The Directors may deduct from any dividend or distribution payable to any Member all sums of money (if any) presently payable by him to the Company on account of calls or otherwise. 98. The Directors may declare that any dividend or distribution be paid wholly or partly by the distribution of specific assets and in particular of paid up shares, debentures, or debenture stock of any other company or in any one or more of such ways and where any difficulty arises in regard to such distribution, the Directors may settle the same as they think expedient and in particular may issue fractional certificates and fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to 36 any Members upon the footing of the value so fixed in order to adjust the rights of all Members and may vest any such specific assets in trustees as may seem expedient to the Directors. 99. Any dividend, distribution, interest or other monies payable in cash in respect of shares may be paid by cheque or warrant sent through the post directed to the registered address of the holder or, in the case of joint holders, to the holder who is first named on the register of Members or to such person and to such address as such holder or joint holders may in writing direct. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent. Any one of two or more joint holders may give effectual receipts for any dividends, bonuses, or other monies payable in respect of the share held by them as joint holders. 100. No dividend or distribution shall bear interest against the Company. CAPITALISATION -------------- 101. The Company may upon the recommendation of the Directors by ordinary resolution authorize the Directors to capitalize any sum standing to the credit of any of the Company's reserve accounts (including share premium account and capital redemption reserve fund) or any sum standing to the credit of profit and loss account or otherwise available for distribution and to appropriate such sum to Members in the proportions in which such sum would have been divisible amongst them had the same been a distribution of profits by way of dividend and to apply such sum on their behalf in paying up in full unissued shares for allotment and distribution credited as fully paid up to and amongst them in the proportion aforesaid; provided that the Directors may issue at any time Ordinary Shares to the holder of a Convertible Share (as defined in the Share Purchase Agreement) or to the holder of any other convertible share or instrument issued by the Company from time to time without any such ordinary resolution. In such event the Directors shall do all acts and things required to give effect to such capitalization, with full power to the Directors to make such provisions as they think fit for the case of shares becoming distributable in fractions (including provisions whereby the benefit of fractional entitlements accrue to the Company rather than to the Members concerned). The Directors may authorize any person to enter on behalf of all of the Members interested into an agreement with the Company providing for such capitalization and matters incidental thereto and any agreement made under such authority shall be effective and binding on all concerned. BOOKS OF ACCOUNT ---------------- 102. The Directors shall cause proper books of account to be kept with respect to: (a) all sums of money received and expended by the Company and the matters in respect of which the receipt or expenditure takes place; (b) all sales and purchases of goods by the Company; (c) the assets and liabilities of the Company. 37 Proper books shall not be deemed to be kept if there are not kept such books of account as are necessary to give a true and fair view of the state of the Company's affairs and to explain its transactions. 103. The Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of Members not being Directors and no Member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by Statute or authorised by the Directors or by the Company in general meeting. 104. The Directors may from time to time cause to be prepared and to be laid before the Company in general meeting profit and loss accounts, balance sheets, group accounts (if any) and such other reports and accounts as may be required by law. AUDIT ----- 105. The Company may at any annual general meeting appoint an Auditor or Auditors of the Company who shall hold office until the next annual general meeting and may fix his or their remuneration. 106. The Directors may before the first annual general meeting appoint an Auditor or Auditors of the Company who shall hold office until the first annual general meeting unless previously removed by an ordinary resolution of the Members in general meeting in which case the Members at that meeting may appoint Auditors. The Directors may fill any casual vacancy in the office of Auditor but while any such vacancy continues the surviving or continuing Auditor or Auditors, if any, may act. The remuneration of any Auditor appointed by the Directors under this Article may be fixed by the Directors. 107. Every Auditor of the Company shall have a right of access at all times to the books and accounts and vouchers of the Company and shall be entitled to require from the Directors and Officers of the Company such information and explanation as may be necessary for the performance of the duties of the auditors. 108. Auditors shall at the next annual general meeting following their appointment and at any other time during their term of office, upon request of the Directors or any general meeting of the Members, make a report on the accounts of the Company in general meeting during their tenure of office. NOTICES ------- 109. Notices shall be in writing and may be given by the Company to any Member either personally or by sending it by post, cable, telex or telecopy to him or to his address as shown in the register of Members, such notice, if mailed, to be forwarded airmail if the address be outside the Cayman Islands. 38 110. (a) Where a notice is sent by post, service of the notice shall be deemed to be effected by properly addressing, pre-paying and posting a letter containing the notice, and to have been effected at the expiration of sixty hours after the letter containing the same is posted as aforesaid. (b) Where a notice is sent by cable, telex, or telecopy, service of the notice shall be deemed to be effected by properly addressing, and sending such notice through a transmitting organisation and to have been effected on the day the same is sent as aforesaid. 111. A notice may be given by the Company to the joint holders of record of a share by giving the notice to the joint holder first named on the register of Members in respect of the share. 112. A notice may be given by the Company to the person or persons which the Company has been advised are entitled to a share or shares in consequence of the death or bankruptcy of a Member by sending it through the post as aforesaid in a pre-paid letter addressed to them by name, or by the title of representatives of the deceased, or trustee of the bankrupt, or by any like description at the address supplied for that purpose by the persons claiming to be so entitled, or at the option of the Company by giving the notice in any manner in which the same might have been given if the death or bankruptcy had not occurred. 113. Notice of every general meeting shall be given in any manner hereinbefore authorised to: (a) every person shown as a Member in the register of Members as of the record date for such meeting except that in the case of joint holders the notice shall be sufficient if given to the joint holder first named in the register of Members; (b) every person upon whom the ownership of a share devolves by reason of his being a legal personal representative or a trustee in bankruptcy of a Member of record where the Member of record but for his death or bankruptcy would be entitled to receive notice of the meeting; and No other person shall be entitled to receive notices of general meetings. WINDING UP ---------- 114. If the Company shall be wound up the liquidator may, with the sanction of a Special Resolution of the Company and any other sanction required by the Statute, divide amongst the Members in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Members or different classes of Members. The liquidator may with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction, shall think 39 fit, but so that no Member shall be compelled to accept any shares or other securities whereon there is any liability. 115. If the Company shall be wound up, and the assets available for distribution amongst the Members as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the Members in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. And if in a winding up the assets available for distribution amongst the Members shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed amongst the Members in proportion to the capital paid up at the commencement of the winding up on the shares held by them respectively. This Article is to be without prejudice to the rights of the holders of shares issued upon special terms and conditions. INDEMNITY --------- 116. (a) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent authorized by applicable law as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines or penalties and amounts paid or to be paid in settlement) reasonably incurred by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in paragraph (b) of this Article 116 with respect to proceedings seeking to enforce rights to indemnification, the Company shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) initiated by such person was authorized by the Board of Directors of the Company. (b) If a claim under paragraph (a) of this Article 116 is not paid in full by the Company within thirty days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant also shall be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its 40 final disposition where the required undertaking, if any is required, has been tendered to the Company) that the claimant has not met the standard of conduct which make it permissible under applicable law for the Company to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel or Members) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth under applicable law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or Members) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Following any "change of control" of the Company of the type required to be reported under Item 1 of Form 8-K promulgated under the Exchange Act, any determination as to entitlement to indemnification shall be made by independent legal counsel selected by the claimant which independent legal counsel shall be retained by the Board of Directors on behalf of the Company. (d) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article 116 shall not be exclusive of any other right which any person may have or hereafter acquire under the Statute, the Articles of Association, the Memorandum of Association, agreement, vote of Members or disinterested directors or otherwise. (e) The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under applicable law. (f) The Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Company the expenses incurred in defending any proceeding in advance of its final disposition, to any agent of the Company to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors, officers and employees of the Company. (g) The right to indemnification conferred in this Article 116 shall be a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if applicable law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, with limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Company of an undertaking by or on behalf of such director or officer, to repay all amounts so 41 advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article 116 or otherwise. (h) Any amendment or repeal of this Article 116 shall not adversely affect any right or protection existing hereunder in respect of any act or omission occurring prior to such amendment or repeal. (i) Directors of the Company shall have no personal liability to the Company or its Members for monetary damages for breach of fiduciary or other duties as a director, except (i) for any breach of a director's duty of loyalty to the Company or its Members, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) a payment of a dividend on stock of the Company or a purchase or redemption of stock of the Company in violation of law, or (iv) for any transaction from which a director derived an improper personal benefit. FINANCIAL YEAR -------------- 117. Unless the Directors otherwise prescribe, the financial year of the Company shall end on 31st December in each year and, following the year of incorporation, shall begin on 1st January in each year. AMENDMENTS OF ARTICLES ---------------------- 118. Subject to the Statute, the Company may at any time and from time to time by Special Resolution alter or amend these Articles in whole or in part. TRANSFER BY WAY OF CONTINUATION ------------------------------- 119. If the Company is exempted as defined in the Statute, it shall, subject to the provisions of the Statute and with the approval of a Special Resolution, have the power to register by way of continuation as a body corporate under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands. EX-10.56 4 ex10-56.txt EMPLOYMENT AGREEMENT - DUNCAN HAYWARD CONTRACT OF EMPLOYMENT CONTRACT OF EMPLOYMENT PARTIES: (1) Scottish Re Holdings Limited (the "Company") (2) Duncan Hayward ("you") DATE: 30 May 2006 The terms and conditions of your employment with the Company are in accordance with and subject to this Contract of Employment (the "Agreement"). The Company policies and procedures are available from the HR Department and it reserves the right to amend these from time to time. The policies and procedures that have contractual effect expressly state that they form part of your terms and conditions of employment. 1. COMMENCEMENT 1.1 Your employment date with the Company will begin on August 1, 2006. 1.2 Your period of continuous employment with the Company will begin on August 1, 2006 and no employment with any previous employer counts as part of your continuous employment. 2. JOB TITLE AND DUTIES 2.1 The Company employs you as a Chief Financial Officer. You will be expected: o to perform all such acts and duties as may be required of you; o to comply with all reasonable directions given to you; o to observe all the policies, procedures and rules from time to time, laid down by the Company. 2.2 The Company operates a policy of job flexibility and the Company may, at its discretion, require you to perform additional or other duties not within the scope of your normal duties. You will not be required to perform duties, which are not reasonably within your capabilities. -2- 3. PROBATIONARY PERIOD This position is not subject to a probationary period. 4. LOCATION You will be based at the Company's premises at London. The Company reserves the right to change your place of work to an alternative location within a reasonable daily travelling distance from your home. 5. SALARY 5.1 Your salary will be (pound)175,000 per annum, less income tax and national insurance contributions. You will be paid in monthly instalments on or about the 18th of each month by credit transfer directly into a bank/building society account nominated by you. 5.2 Your salary will be reviewed annually by the Company and you will be notified in writing of the outcome of the review. Your salary will not necessarily increase as a result of the review. 5.3 The Company reserves the right to deduct from your salary at any time during your employment and/or on its termination, any sums which you may owe to the Company and/or for which you are liable to the Company such as any overpayments, loans or advances made to you by the Company. 6. HOURS OF WORK Your hours of work will be 9.00 am to 5.00 pm, Monday to Friday, with a break for lunch of 1 hour. You will also work such additional hours as may reasonably be required for the proper performance of your duties and/or as the needs of the business dictate. There is no automatic payment for additional hours worked by you outside your normal hours of work. -3- 7. RESTRICTIONS You shall not undertake any work or employment, other than for the Company, during your hours of work for the Company. Outside your hours of work for the Company, you may not, without the prior written consent of your line manager, undertake any work or employment for, or be interested or concerned either directly or indirectly in, any other business or concern. In the event of consent being given, the Company reserves the right to withdraw such consent, at its discretion, at any time. 8. HOLIDAYS 8.1 The Company's holiday year runs from 1st January to 31st December. In addition to the 8 public and bank holidays, you are entitled to 28 days holiday in each holiday year. 8.2 Without prejudice to your statutory entitlements holiday entitlement does not accrue during periods of absence for any reason (except properly taken holiday absence). Subject to the Working Time Regulations, during your first and last year of employment, your holiday entitlement will be calculated pro rata to the completed weeks of service. 8.3 Holidays may only be taken at times convenient to the Company and by prior arrangement. Holidays must be agreed in advance with your line manager. 8.4 A maximum of 6 working days may be carried forward at the end of a calendar year, subject to the written consent of your line manager. No payment in lieu of unused holiday will be made, save as provided in sub-clause 8.5 below. 8.5 On the termination of your employment, you may be paid for any outstanding holiday accrued and not taken. Alternatively, the Company can require you to take any outstanding holiday entitlement during your notice period. If you have taken holiday in excess of your entitlement, a sum equivalent to wages for the excess holiday will be deducted from your final salary. A day's holiday pay for these purposes will be 1/261 of your annual basic pay. -4- 8.6 For the purposes of the Working Time Regulations, it will be deemed that the holidays stipulated by those regulations are taken and exhausted first as part of your contractual holiday entitlement. 9. SICKNESS 9.1 If you are absent from work owing to sickness or injury, you shall inform your line manager or a member of the HR department by 10.00 am on the first working day of absence and shall provide, so far as is possible, an indication of the likely period of absence. Throughout any period of absence, you are required to keep your line manager or a member of the HR department regularly informed of the situation. 9.2 On return to work you must complete a Self Certification Sickness Form for periods of absence of up to 7 days. If the absence lasts for more than 7 calendar days, you must provide the Company with a doctor's medical certificate on the eighth day of absence. You are required to continue to provide doctor's certificates regularly to cover the whole period of your absence. 9.3 If you are absent from work due to sickness or injury, the Company does not have to pay you your contractual salary or provide benefits. Provided that you comply with the requirements in Clause 9.1 and 9.2, the Company will pay you any Statutory Sick Pay to which you are entitled. Subject to you complying with the notification and certification requirements set out above, you may be paid Company sick pay in any sick pay year according the following scale. Company sick pay may be suspended, discontinued or increased, either Company wide, or on an individual basis, at senior management discretion. Length of Service Full Pay In Days Per Rolling Year During probationary period 0 Completion of probation to 2 years 20 2 years to 5 years 40 5 years plus 40 days full pay, 90 days 2/3rds pay 9.4 Company sick pay is inclusive of any Statutory Sick Pay (SSP) to which you may be entitled in accordance with the legislation applying from time to time. -5- 9.5 The Company reserves the right at any time to require you to undergo, at its expense, a medical examination by your doctor and/or a doctor or specialist selected by the Company. 10. INSURANCE BENEFITS 10.1 For so long as the Company maintains such schemes for its staff, subject to the rules of the relevant scheme from time to time in force and provided you have completed any relevant administration form and are accepted for the relevant scheme, you are entitled to cover under the following schemes, in place from time to time, from the end of the probationary period: o group private medical insurance scheme; o group income protection scheme; o death in service scheme; 10.2 The Company may withdraw or amend any of the benefits provided for in Clause 10.1 at any time. The Company has no obligation to make any payment to you in connection with any such scheme. Further non-contractual details of these schemes can be obtained from HR Department. 11. CONFIDENTIALITY You shall not, either during your employment (except in the proper performance of your duties) or after the termination of your employment, make use of, divulge and/or disclose to any person or organisation, any confidential information of or relating to the Company and/or any Associated Company, including but not limited to: o information relating to current, past and proposed business developments, plans, projects and/or dealings; o management information, corporate strategy and/or maturing new business opportunities; o financial information (including budgets, management accounts, financial accounts, financial reports, trading statement and/or service costs); o business methods and processes, products and services; -6- o business contacts and/or mailing lists; o marketing programmes, strategies, specifications, reports, policies, surveys and/or plans; o information on employees, including but not limited to, the terms of their employment; o technical information and know-how which is not available to the public generally; o contact names and identities of clients, customers and/or suppliers (both existing or prospective); o terms of business with clients, customers and/or suppliers; o client, customer, supplier lists and/or specification and/or databases; o product development, plans and/or reports; o pricing methodologies, models and policies; and/or o any information in respect of which the Company and/or any Associated Company is bound by the duty of confidence to a third party. You will also use your best endeavours to prevent the unauthorised use, publication and/or disclosure of any such information. The obligations contained in this clause 11 will not apply to any information in the public domain (other than as a result of your breach of this clause 11) or to information ordered to be disclosed by you by a court. 12. RESTRICTIVE COVENANTS 12.1 You agree that you shall not for the period of 6 months immediately after the termination of your employment, whether as principal, agent, director, manager, partner, shareholder, employee, adviser, consultant or otherwise, and whether on your own behalf and/or for any other person, firm, company or organisation, directly or indirectly: o in competition with the Company and/or any Associated Company, canvass or solicit business from, endeavour to entice business from and/or deal with: o any person, firm, company or organisation who is or was a customer, client or agent of, or supplier to, or who had regular business dealings with, the Company and/or any Associated Company at any time during the period of 6 months immediately preceding the termination of your -7- employment and with whom you had direct dealings or personal contact during that period; and/or o any person, firm, company or organisation with whom you had contact and/or dealings with at any time during the period of 6 months preceding the termination of your employment and who or which at any time during the period of 6 months preceding the termination of your employment was negotiating with and/or contemplating doing business with the Company and/or any Associated Company; o solicit or endeavour to entice away from the Company and/or any Associated Company, for the purpose of being employed in or engaged by, or interested in or concerned with, a business or concern (or part thereof) which competes with the business of the Company and/or any Associated Company in which you were involved during the last 6 months of your employment with the Company: o any senior sales employee of the Company and/or Associated Company; and/or o any senior technical employee of the Company and/or Associated Company; and/or o any employee of the Company and/or any Associated Company involved in research and development; and/or o any director, employed by the Company and/or any Associated Company, at the date of termination of your employment or within the period of 6 months immediately preceding that date, and with whom you had personal contact and dealings during that period, whether or not such person would commit a breach of contract by reason of leaving such employment. 12.2 While the restrictions contained in this clause 12 are considered by the parties to be reasonable in all the circumstances, it is agreed that if any such restrictions, by themselves or taken together, shall be adjudged to go beyond what is reasonable in all the circumstances for the protection of the legitimate interests of the Company and/or any Associated Company, but would be adjudged reasonable if part or parts of the wording thereof were deleted or amended or qualified or the periods thereof were reduced or the area dealt with reduced in scope, it is agreed that the relevant -8- restriction or restrictions shall apply with such modification or modifications as may be necessary to make it or them valid and effective. 12.3 You agree that on the termination of your employment you will draw the provisions of this clause 12 to the attention of any third party who may, at any time, either before or after the termination of your employment, offer employment or work to you. 13. COMPANY PROPERTY Property of the Company must not be removed from the Company's premises, except in the proper performance of your duties. You agree that you shall, whenever requested by the Company and in any event on the termination of your employment, immediately return to the Company all Company property in your possession, custody or control. 14. PENSION AND NORMAL RETIREMENT AGE 14.1 On joining the Company you will be eligible to become a member of the Scottish Re Holdings Ltd Stakeholder Pension Plan and to make personal contributions to the Plan. Company contributions will commence on joining Scottish Re. Membership is subject to the governing documentation of the Plan, as amended from time to time. Further details of the scheme can be obtained from HR Department. 14.2 Upon reaching the Company's normal retirement age of 65 years, your employment will terminate on the first of the following month, if not previously terminated under any other provision of this Agreement, and shall automatically terminate without compensation, damages or notice being given to you unless otherwise agreed in writing with the Company. 15. NOTICE PERIOD 15.1 Your employment may be terminated by written notice. Save as otherwise provided in this Agreement, the length of notice that you are required to give or are entitled to receive to terminate your employment is as follows: -9- (a) if served by you on the Company: 6 months (b) if served by the Company on you: 6 months 15.2 The Company may at its entire discretion pay you salary in lieu of notice. Salary paid in lieu of notice will be subject to tax and National Insurance. 15.3 The Company reserves the right to terminate your employment without notice or salary in lieu of notice in appropriate circumstances. Appropriate circumstances include, but are not limited to, situations of gross misconduct, gross incompetence and/or gross negligence. 15.4 The Company also reserves the right to require you to serve all or part of your notice at home. During the period of notice, whether served in the office or at home, the Company may vary your duties and responsibilities or assign them to another employee, and shall be under no obligation to provide any work for you. 16. DISCIPLINARY AND DISMISSAL PROCEDURES 16.1 In the event of your employment being confirmed at the end of your probationary period, the Company's Disciplinary Procedure will be applicable to your employment, It does not form part of the terms and conditions of your employment. A copy of the disciplinary procedure can be found in the Disciplinary and Dismissal Policy and can be obtained from the HR Department. 16.2 The Company reserves the right to suspend you on full pay in appropriate circumstances, including but not limited to, circumstances where the Company wishes to investigate whether disciplinary action against you is necessary and during any disciplinary process. The Company has the right to impose any of the following disciplinary penalties should it deem them appropriate: suspension with or without pay for up to one calendar month, transfer, demotion, loss of seniority, loss of increment, a reduction in pay, dismissal with or without notice or without pay in lieu of notice. 16.3 In the event that the Company is contemplating terminating your employment for a reason in respect of which the disciplinary procedure does not apply, for instance on -10- the grounds of redundancy, early retirement or non-renewal of a fixed term contract, the Company will comply with the minimum statutory dismissal procedure. The applicable dismissal procedure is confirmed in the Company's Disciplinary and Dismissal Procedure which can be obtained from the HR Department and which do not form part of your terms and conditions of employment. 17. GRIEVANCE PROCDURES 17.1 The Company's Grievance Procedure applicable to your employment is set out in the Company's Grievance Policy. It does not form part of the terms and conditions of your employment. A copy of the Grievance Procedure can be obtained from the HR Department.. 18. DATA PROTECTION 18.1 During your employment and for as long a period as is necessary following the termination of your employment, the Company: o will obtain, keep, use and produce personal data about you for management purposes in connection with your recruitment, employment and remuneration, both in personnel files and on the Company's computer system; o will obtain, keep, use and produce certain sensitive personal data about you; o may need to disclose information about you to third parties; o will transfer some or all of the information in the Company's records about you to any Associated Company, companies in which the Company and/or any Associated Company has a shareholding and/or companies or firms processing data on behalf of the Company. 18.2 In signing this Agreement, you consent to the Company carrying out the processing of personal data and sensitive personal data described in this clause 18. -11- 19. DISCRIMINATION In order to enable the Company to maintain a positive work environment, you are not to engage in or knowingly permit any fellow worker to engage in any harassment or discrimination on the grounds of sex, sexual orientation, marital status, religion or belief, race, disability, age, or on any other unlawful ground against any person (whether or not an employee of the Company) in the course of your duties. Such conduct will be treated very seriously as a disciplinary matter. 20. DEFINITION For the purposes of this Agreement, "Associated Company" means a company which for the time being is a holding company (as defined by section 736 of the Companies Act 1985) of the Company; or a subsidiary (as so defined) of the Company or of any holding company of the Company; or a company over which the Company or any holding company of the Company has control within the meaning of Section 840 of the Income and Corporation Taxes Act 1988, or a subsidiary undertaking as defined by Section 258 of the Companies Act 1985. 21. FURTHER PARTICULARS 21.1 There are no terms applying to this Agreement which relate to the following: o The period for which the employment is intended to continue or the date when it is to end; o Any collective agreements which directly affect the terms and conditions of employment; o Work outside the United Kingdom. 21.2 No person who is not a party to this Agreement has or shall have any rights under no consent of any third party shall be required under that Act to any cancellations or variations of this Agreement. -12- 21.3 The terms and conditions contained in this Agreement, and any subsequent revisions, shall be governed by and construed in accordance with the laws of England and Wales. SIGNED by: /s/ David Howell David Howell - Chief Executive Officer For and on behalf of Scottish Re Holdings Limited SIGNED by: /s/ Duncan Hayward Duncan Hayward -13- EX-10.57 5 ex10-57.txt EMPLOYMENT AGREEMENT - JEFFREY M. DELLE FAVE Execution Copy EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") dated as of June 28, 2007 between Scottish Holdings, Inc. (the "Company") and Jeffrey M. Delle Fave (the "Employee") (together, the "Parties"). WHEREAS, the Employee and the Company are parties to an employment dated August 15, 2005, as amended September 1, 2006 (the "2005 Employment Agreement"); WHEREAS, the Parties wish to establish the terms of Employee's continued employment with the Company upon the terms and conditions set forth herein which supersede the terms of 2005 Employment Agreement, and all other agreements with respect to the subject matter hereof; Accordingly, the Parties agree as follows: 1. Employment and Acceptance. The Company shall employ the Employee, and Employee shall accept employment, subject to the terms of this Agreement, effective as of May 7, 2007 (the "Effective Date"). 2. Term. Subject to Section 5 of this Agreement, the Employee's employment with the Company shall be "at will." As used in this Agreement, the "Term" shall refer to the period beginning on the Effective Date and ending on the date the Employee's employment terminates in accordance with Section 5. In the event of the Employee's termination of employment during the Term, the Company's obligation to continue to pay all base salary, as adjusted, bonus and other benefits then accrued shall terminate except as may be provided for in Section 5 of this Agreement. 3. Duties and Title. 3.1 Title. The Company shall employ the Employee to render exclusive and full-time services to the Company and its subsidiaries. The Employee shall serve in the capacity of Executive Vice President, Tax, and shall report solely and directly to the Chief Financial Officer of Scottish Re Group Limited. The Employee shall also serve during the Term in executive positions for one or more of the Company's subsidiaries and affiliates for no additional consideration. 3.2 Duties. The Employee will have such authority and responsibilities and will perform such executive duties as are customarily performed by an Executive Vice President, Tax of a company in similar lines of business as the Company and its subsidiaries or as may be assigned to Employee by the Chief Financial Officer of Scottish Re Group Limited. The Employee will devote all his full working-time and attention to the performance of such duties and to the promotion of the business and interests of the Company and its subsidiaries. 3.3 Location. The Employee shall perform his full-time services to the Company and its subsidiaries in the Company's Charlotte, NC office; provided that the Employee shall be required to travel as necessary to perform his duties hereunder. 4. Compensation and Benefits by the Company. As compensation for all services rendered pursuant to this Agreement, the Company shall provide the Employee the following during the Term: 4.1 Base Salary. During the Term, the Company will pay to the Employee an annual base salary of $375,000, payable in accordance with the customary payroll practices of the Company. The Company agrees to review such compensation not less frequently than annually during the Term. The Base Salary as increased from time to time shall be referred to herein as "Base Salary." 4.2 Bonuses. During the Term, the Employee shall be eligible to receive an annual bonus ("Bonus") under a plan established by the Company in the amount determined by the Board of Directors of the Company (the "Board") based upon achievement of performance measures established by the Company and approved by the Board. The Employee's target bonus shall be 75% of Base Salary (the "Target Bonus"). Notwithstanding the foregoing, (x) for the calendar year ending on December 31, 2007, Employee shall receive a Bonus of not less than $325,000 (the "2007 Bonus") and (y) for the calendar year ending on December 31, 2008, Employee shall receive a Bonus of not less than fifty percent (50%) of his then current Base Salary (the "2008 Bonus"). The Employee's Bonus shall be payable at such times and in the manner consistent with the Company's policies regarding compensation of executive employees. The Bonus with respect to any calendar year shall be paid no earlier than January 1 and no later than June 30 of the following calendar year. 4.3 Participation in Employee Benefit Plans. The Employee shall be entitled during the Term, if and to the extent eligible, to participate in all of the applicable benefit plans of the Company, which may be available to other senior executives of the Company. The Company may at any time or from time to time amend, modify, suspend or terminate any employee benefit plan, program or arrangement for any reason without the Employee's consent if such amendment, modification, suspension or termination is consistent with the amendment, modification, suspension or termination for other executives of the Company. Notwithstanding the foregoing, the Employee will continue to participate in the Company's Exec-U-Care plan (or other comparable benefit plan or plans sponsored by the Company) through the second anniversary of the Effective Date, subject to the terms of such plan and applicable law. 4.4 Equity Compensation. The Company will grant the Employee stock options to purchase 225,000 ordinary shares of an affiliate of the Company at an exercise price equal to fair market value (the "Stock Options") pursuant to the terms and conditions set forth in the equity incentive compensation plan established by the Company or an affiliate of the Company (the "Equity Incentive Plan"). The Stock Options will be subject to the terms of the Equity Incentive Plan and any applicable agreements thereunder as determined from time to time by the Board. 4.5 Retention Bonus. The Company shall pay the Employee a retention bonus in an aggregate amount of $1,485,000 (the "Retention Bonus"), payable as follows: (x) by June 30, 2007, a lump sum payment equal to fifty percent (50%) of the Retention Bonus; (y) by September 30, 2007, a lump sum payment equal to twenty-five percent (25%) of the Retention Bonus; and (z) by December 31, 2007, a lump sum payment equal to the final twenty-five percent (25%) of the Retention Bonus. The Company's obligations to pay the - 2 - Retention Bonus are not subject to the Employee's continued employment with the Company through such payment dates. 4.6 Expense Reimbursement. During the Term, the Employee shall be entitled to receive reimbursement for all appropriate business expenses incurred by him in connection with his duties under this Agreement in accordance with the policies of the Company as in effect from time to time. 4.7 Club Dues and Expenses. The Company hereby agrees to reimburse Employee for club dues and expenses up to $6,000 per calendar year in accordance with the Company's policy regarding substantiation of expenses. 4.8 Vacation and Holidays. Employee shall be entitled to four (4) weeks of paid vacation per annum, in accordance with the Company's vacation policy. 4.9 Indemnification. The Holdings' Indemnification Agreement (the "Indemnification Agreement") attached as Exhibit A to the 2005 Employment Agreement will continue in full force and effect in accordance with the terms of the Indemnification Agreement. 4.10 Legal Fees. (a) The Company shall pay or reimburse the Employee for all reasonable attorneys' fees and costs (not to exceed $15,000) incurred by the Employee in connection with advice pertaining to and negotiation of this Agreement upon presentation to the Company of bills for such services and such other supporting information as the Company may reasonably require. (b) If it should appear to Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Employee the benefits provided or intended to be provided to Employee hereunder, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice at the expense of the Company as hereafter provided, to advise and represent Employee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Employee's entering into an attorney-client relationship with such counsel, and in that connection the Company and Employee agree that a confidential relationship shall exist between Employee and such counsel. Without respect to whether Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys, and related fees and expenses incurred by Employee in connection with any of the foregoing; provided that, in regard to such matters, the Employee has not acted in bad faith or with no colorable claim of success. Such payments shall be made within five (5) business days after delivery of Employee's written requests for payment, accompanied by such evidence of fees and expenses incurred as the Company may reasonably require. Notwithstanding the foregoing - 3 - provisions of this Section 4.10(b), the obligations of the Company under this Section 4.10(b) shall not exceed, in the aggregate, $50,000. 5. Termination of Employment. 5.1 Termination of Employment other than for Cause. Upon a termination of this Agreement and the Employee's employment with the Company for any reason other than by the Company for Cause (as defined below), the Employee shall be entitled to receive the following (the "Accrued Benefits"): (a) the Employee's accrued but unpaid Base Salary and benefits set forth in Sections 4.1 and 4.3, if any, to the date of termination; (b) the unpaid portion of the Bonus, if any, relating to the calendar year prior to the calendar year of the Employee's termination; (c) if such termination of employment occurs during either of the calendar years ending on December 31, 2007 and December 31, 2008, a pro-rata portion of the 2007 Bonus or 2008 Bonus, as applicable, through the date the Employee's employment terminates, payable in accordance with Section 4.2; (d) a lump sum payment equal to the unpaid portion of the Retention Bonus, if any; and (e) expenses reimbursable under Section 4.6 incurred but not yet reimbursed to the Employee to the date of termination. Notwithstanding the foregoing, if the Employee is a "specified employee," as such term is defined in Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (the "Code") payments to be made pursuant to Sections 5.1(c) and (d) shall be made no earlier than six (6) months following the date the Employee's employment terminates. 5.2 Termination of Employment By The Company For Cause. Upon a termination by the Company for Cause (as defined below), the Employee shall be entitled to receive all of the Accrued Benefits set forth in Paragraph 5.1, except that Employee will not be entitled to receive a pro-rata portion of the Bonus set forth in to Section 5.1(c), above. For the purposes of this Agreement, "Cause" as determined by the Board (or its designee), with respect to conduct during the Employee's employment with the Company, whether or not committed during the Term, (i) commission of a felony by Employee; (ii) acts of dishonesty by Employee resulting or intending to result in personal financial gain or enrichment at the expense of the Company or its subsidiaries; (iii) Employee's material breach of his obligations under this Agreement; (iv) conduct by Employee in connection with his material duties hereunder that is fraudulent, unlawful or grossly negligent; (v) engaging in personal conduct by Employee (including but not limited to employee harassment or discrimination, the use or possession at work of any illegal controlled substance) which seriously discredits or damages the Company or its subsidiaries; (vi) contravention of specific, reasonable, lawful, material direction from the person or entity to whom the Employee reports or continuing failure to adequately - 4 - perform the material duties to be performed by Employee under the terms of Section 3.2 of this Agreement or (vii) breach of the Employee's covenants set forth in Section 7 below before termination of employment; provided, that, the Employee shall have fifteen (15) days after notice from the Company to cure the deficiency leading to the Cause determination (except with respect to (i) above), if curable. A termination for "Cause" shall be effective immediately (or on such other date set forth by the Company). 5.3 No Mitigation; No Offset. The Employee shall be under no obligation to seek other employment after his termination of employment with the Company and the obligations of the Company to the Employee which arise upon the termination of his employment pursuant to this Section 5 shall not be subject to mitigation or offset. 5.4 Removal from any Boards and Position. If the Employee's employment is terminated for any reason under this Agreement, he shall be deemed to resign (i) if a member, from the Board or board of directors of any subsidiary of the Company or any other board to which he has been appointed or nominated by or on behalf of the Company and (ii) from any position with the Company or any subsidiary of the Company, including, but not limited to, as an officer of the Company and any of its subsidiaries. 6. Certain Additional Payments by the Company. 6.1 Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment (other than the Gross-Up payments provided for in this Section 6) or distribution by the Company, Holdings or any of their affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code by reason of being considered "contingent on a change in ownership or control" of the Company or Holdings, within the meaning of Section 280G of the Code, or any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. For purposes of determining the amount of the Gross-Up Payment, the Employee will be considered to pay (x) federal income taxes at the highest rate in effect in the year in which the Gross-Up Payment will be made and (y) state and local income taxes at the highest rate in effect in the state or locality in which the Gross-Up Payment would be subject to state or local tax, net of the maximum reduction in federal income tax that could be obtained from deduction of such state and local taxes. 6.2 Subject to the provisions of Section 6.6, all determinations required to be made under this Section 6, including whether an Excise Tax is payable by the Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be - 5 - paid by the Company to the Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Employee in his sole discretion. The Employee shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Employee within thirty (30) calendar days after the Date of Termination, if applicable, and any such other time or times as may be requested by the Company or the Employee. If the Accounting Firm determines that any Excise Tax is payable by the Employee, the Company shall pay the required Gross-Up Payment to the Employee within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Employee or to the Internal Revenue Service on the Employee's behalf. If the Accounting Firm determines that no Excise Tax is payable by the Employee with respect to any material benefit or amount (or portion thereof), it shall, at the same time as it makes such determination, furnish the Company and the Employee an opinion that the Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 6.6 and the Employee thereafter is required to make a payment of any Excise Tax, the Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Employee within five (5) business days after receipt of such determination and calculations. 6.3 The Company and the Employee shall each provide the Accounting Firm access to and copies of any books, record and documents in the possession of the Company or the Employee, as the case may be, reasonably requested by the Accounting Firm, and-otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 6.2. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Employee. 6.4 The federal, state and local income or other tax returns filed by the Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Employee. The Employee shall report and make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Employee shall within five (5) business days pay to the Company the amount of such reduction. 6.5 The fees and expenses of Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6.2 shall be borne by the Company. If such fees and expenses are initially paid by the Employee, the Company - 6 - shall reimburse the Employee the full amount of such fees and expenses within five (5) business days after receipt from the Employee of a statement therefor and reasonable evidence of his payment thereof. 6.6 The Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after the Employee actually receives notice of such claim and the Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Employee). The Employee shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notified the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (a) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (c) cooperate with the Company in good faith in order effectively to contest such claim; and (d) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Employee, on an after-tax basis, for and against any Excise Tax or income or other tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 6.6, the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 6.6 and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Employee may participate therein at his own cost and expense) and may, at its option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be - 7 - limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6.7 If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 6.6, the Employee receives any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 6.6) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 6.6, a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial or refund prior to the expiration of ten (10) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Employee pursuant to this Section 6. 6.8 Notwithstanding any provision of this Agreement to the contrary, but giving effect to any redetermination of the amount of Gross-Up payments otherwise required by this Section 6, if (i) but for this sentence, the Company would be obligated to make a Gross-Up Payment to the Employee and (ii) the aggregate "present value" of the "parachute payments" to be paid or provided to the Employee under this Agreement or otherwise does not exceed three times the Employee's "base amount" by more than $50,000, then the payments and benefits to be paid or provided under this Agreement will be reduced (or repaid to the Company, if previously paid or provided) to the minimum extent necessary so that no portion of any payment or benefit to the Employee, as so reduced or repaid, constitutes an "excess parachute payment." For purposes of this Section 6.8, the terms "excess parachute payment," "present value," "parachute payment," and "base amount" will have the meanings assigned to them by Section 280G of the Code. The determination of whether any reduction in or repayment of such payments or benefits to be provided under this Agreement is required pursuant to this Section 6.8 will be made at the expense of the Company, if requested by the Employee or the Company, by the Accounting Firm. Appropriate adjustments shall be made to amounts previously paid to Employee, or to amounts not paid pursuant to this Section 6.8, as the case may be, to reflect properly a subsequent determination that the Employee owes more or less Excise Tax than the amount previously determined to be due. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced or repaid pursuant to this Section 6.8, the Employee shall be entitled to designate the payments and/or benefits to be so reduced or repaid in order to give effect to this Section 6.8. The Company shall provide the Employee with all information reasonably requested by the Employee to permit the Employee to make such designation. In the event that the Employee fails to make such designation within 10 business days prior to the Date of Termination or other due date, the Company may effect such reduction or repayment in any manner it deems appropriate. 7. Restrictions and Obligations of the Employee. 7.1 Confidentiality. (a) During the course of the Employee's employment by the Company (prior to and during the Term), the Employee has had and will have access to certain trade secrets and confidential information relating to the Company and its subsidiaries (the "Protected Parties") which is not readily available from sources outside the - 8 - Company. The confidential and proprietary information and, in any material respect, trade secrets of the Protected Parties are among their most valuable assets, including but not limited to, their customer, supplier and vendor lists, databases, competitive strategies, computer programs, frameworks, or models, their marketing programs, their sales, financial, marketing, training and technical information, their product development (and proprietary product data) and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Protected Parties create, develop, acquire or maintain their products and marketing plans, target their potential customers and operate their retail and other businesses. The Protected Parties invested, and continue to invest, considerable amounts of time and money in their process, technology, know-how, obtaining and developing the goodwill of their customers, their other external relationships, their data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Protected Parties. The Employee acknowledges that such Confidential Information constitutes valuable, highly confidential, special and unique property of the Protected Parties. The Employee shall hold in a fiduciary capacity for the benefit of the Protected Parties all Confidential Information relating to the Protected Parties and their businesses, which shall have been obtained by the Employee during the Employee's employment by the Company or its subsidiaries and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). Except as required by law or an order of a court or governmental agency with jurisdiction, the Employee shall not, during the period the Employee is employed by the Company or its subsidiaries or at any time thereafter, disclose any Confidential Information, directly or indirectly, to any person or entity for any reason or purpose whatsoever, nor shall the Employee use it in any way, except in the course of the Employee's employment with, and for the benefit of, the Protected Parties or to enforce any rights or defend any claims hereunder or under any other agreement to which the Employee is a party, provided that such disclosure is relevant to the enforcement of such rights or defense of such claims and is only disclosed in the formal proceedings related thereto. The Employee shall take all reasonable steps to safeguard the Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. The Employee understands and agrees that the Employee shall acquire no rights to any such Confidential Information. (b) All files, records, documents, drawings, specifications, data, computer programs, evaluation mechanisms and analytics and similar items relating thereto or to the Business (for the purposes of this Agreement, "Business" shall be as defined in Section 6.3 hereof), as well as all customer lists, specific customer information, compilations of product research and marketing techniques of the Company and its subsidiaries, whether prepared by the Employee or otherwise coming into the Employee's possession in connection with or relating to his employment with the Company, shall remain the exclusive property of the Company and its subsidiaries, and the Employee shall not remove any such items from the premises of the Company and its subsidiaries, except in furtherance of the Employee's duties under any employment agreement. (c) It is understood that while employed by the Company or its subsidiaries, the Employee will promptly disclose to it, and assign to it the Employee's interest in any invention, improvement or discovery made or conceived by the Employee, either alone or jointly with others, which arises out of the Employee's employment. At the Company's request - 9 - and expense, the Employee will assist the Company and its subsidiaries during the period of the Employee's employment by the Company or its subsidiaries and thereafter in connection with any controversy or legal proceeding relating to such invention, improvement or discovery and in obtaining domestic and foreign patent or other protection covering the same. (d) As requested by the Company and at the Company's expense, from time to time and upon the termination of the Employee's employment with the Company for any reason, the Employee will promptly deliver to the Company and its subsidiaries all copies and embodiments, in whatever form, of all Confidential Information in the Employee's possession or within his control (including, but not limited to, memoranda, records, notes, plans, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information) irrespective of the location or form of such material. If requested by the Company, the Employee will provide the Company with written confirmation that all such materials have been delivered to the Company as provided herein. 7.2 Non-Solicitation or Hire. During the Term and for a period of twenty-four (24) months following the termination of the Employee's employment for any reason, the Employee shall not directly or indirectly solicit or attempt to solicit or induce, directly or indirectly, (a) any party who is a customer of the Company or its subsidiaries, or who was a customer of the Company or its subsidiaries at any time during the twelve (12) month period immediately prior to the date the Employee's employment terminates, for the purpose of marketing, selling or providing to any such party any services or products offered by or available from the Company or its subsidiaries, (b) any supplier to or customer or client of the Company or any subsidiary to terminate, reduce or alter negatively its relationship with the Company or any subsidiary or in any manner interfere with any agreement or contract between the Company or any subsidiary and such supplier, customer or client or (c) any employee of the Company or any of its subsidiaries or any person who was an employee of the Company or any of its subsidiaries during the twelve (12) month period immediately prior to the date the Employee's employment terminates to terminate such employee's employment relationship with the Protected Parties in order, in either case, to enter into a similar relationship with the Employee, or any other person or any entity in competition with the Business of the Company or any of its subsidiaries; provided that if the Employee intends to solicit any such party referenced in this Section 7.2 (a), (b) or (c) for any other purpose, he shall notify the Company of such intention and receive prior written approval from the Company, which shall not be unreasonably withheld. 7.3 Non-Competition. During the Term and for a period of twenty-four (24) months following the termination of Employee's employment by the Company (for any reason), the Employee shall not, whether individually, as a director, manager, member, stockholder, partner, owner, employee, consultant or agent of any business, or in any other capacity, other than on behalf of the Company or a subsidiary, organize, establish, own, operate, manage, control, engage in, participate in, invest in, permit his name to be used by, act as a consultant or advisor to, render services for (alone or in association with any person, firm, corporation or business organization), or otherwise assist any person or entity that engages in or owns, invests in, operates, manages or controls any venture or enterprise which engages or proposes to engage in any business conducted by the Company or any of its subsidiaries on the date of the Employee's termination of employment or within twelve (12) months of the Employee's termination of employment in the geographic locations where the Company and its subsidiaries engage or propose to engage in such business (the "Business"). Notwithstanding the - 10 - foregoing, nothing in this Agreement shall prevent (i) the Employee from owning for passive investment purposes not intended to circumvent this Agreement, less than five percent (5%) of the publicly traded common equity securities of any company engaged in the Business (so long as the Employee has no power to manage, operate, advise, consult with or control the competing enterprise and no power, alone or in conjunction with other affiliated parties, to select a director, manager, general partner, or similar governing official of the competing enterprise other than in connection with the normal and customary voting powers afforded the Employee in connection with any permissible equity ownership, or (ii) Employee's employment with Ernst & Young or any other public accounting firm. 7.4 Property. The Employee acknowledges that all originals and copies of materials, records and documents generated by him or coming into his possession during his employment by the Company or its subsidiaries are the sole property of the Company and its subsidiaries ("Company Property"). During the Term, and at all times thereafter, the Employee shall not remove, or cause to be removed, from the premises of the Company or its subsidiaries, copies of any record, file, memorandum, document, computer related information or equipment, or any other item relating to the business of the Company or its subsidiaries, except in furtherance of his duties under the Agreement. When the Employee's employment with the Company terminates, or upon request of the Company at any time, the Employee shall promptly deliver to the Company all copies of Company Property in his possession or control. 8. Remedies; Specific Performance. The Parties acknowledge and agree that the Employee's breach or threatened breach of any of the restrictions set forth in Section 7 will result in irreparable and continuing damage to the Protected Parties for which there may be no adequate remedy at law and that the Protected Parties shall be entitled to equitable relief, including specific performance and injunctive relief as remedies for any such breach or threatened or attempted breach. The Employee hereby consents to the grant of an injunction (temporary or otherwise) against the Employee or the entry of any other court order against the Employee prohibiting and enjoining him from violating, or directing him to comply with any provision of Section 7. The Employee also agrees that such remedies shall be in addition to any and all remedies, including damages, available to the Protected Parties against him for such breaches or threatened or attempted breaches. In addition, without limiting the Protected Parties' remedies for any breach of any restriction on the Employee set forth in Section 7, except as required by law and other than $100,000 of the 2007 Bonus, the Employee shall not be entitled to any payments set forth in Section 5.1(c) hereof if the Employee has breached the covenants applicable to the Employee contained in Section 7, the Employee will immediately return to the Protected Parties any such payments previously received under Section 5.1(c) upon such a breach, and, in the event of such breach, the Protected Parties will have no obligation to pay any of the amounts that remain payable by the Company under Section 5.1(c). 9. Other Provisions. 9.1 Notices. Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid or overnight mail and shall be deemed given when so delivered personally, telegraphed, telexed, or sent by facsimile transmission or, if mailed, four (4) days after the date of mailing or one (1) day after overnight mail, as follows: - 11 - (a) If the Company, to: 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel Telephone: Fax: With copies to: Cerberus Capital Management, L.P. 299 Park Avenue New York, New York 10171 Attention: Mark Neporent Telephone: (212) 891-2100 Fax: (212) 891-1540 and Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Attention: Marc Weingarten Telephone: (212) 756-2000 Fax: (212) 593-5955 and Mass Mutual Capital 1500 Main Street, TS28 P.O. Box 15189 Springfield, MA 01115-5189 Attention: Susan Moore Telephone: (413) 226-1200 Fax: (b) If the Employee, to the Employee's home address reflected in the Company's records. 9.2 Entire Agreement. This Agreement and any award agreement granted to the Employee under the Equity Incentive Plan with respect to the Stock Options contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto, including, without limitation the 2005 Employment Agreement, except as specifically referenced herein. 9.3 Representations and Warranties by Employee. The Employee represents and warrants that he is not a party to or subject to any restrictive covenants, legal restrictions or other agreements in favor of any entity or person which would in any way - 12 - preclude, inhibit, impair or limit the Employee's ability to perform his obligations under this Agreement, including, but not limited to, non-competition agreements, non-solicitation agreements or confidentiality agreements. 9.4 Waiver and Amendments. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the Parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 9.5 Governing Law, Dispute Resolution and Venue. (a) This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and not to be performed entirely within such state, without regard to conflicts of laws principles. (b) The parties agree irrevocably to submit to the exclusive jurisdiction of the federal courts or, if no federal jurisdiction exists, the state courts, located in the City of New York, Borough of Manhattan, for the purposes of any suit, action or other proceeding brought by any party arising out of any breach of any of the provisions of this Agreement and hereby waive, and agree not to assert by way of motion, as a defense or otherwise, in any such suit, action, or proceeding, any claim that it is not personally subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper, or that the provisions of this Agreement may not be enforced in or by such courts. In addition, the parties agree to waive trial by jury. 9.6 Assignability by the Company and the Employee. This Agreement, and the rights and obligations hereunder, may not be assigned by the Company or the Employee without written consent signed by the other party; provided that the Company may assign the Agreement to any successor that continues the business of the Company. 9.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 9.8 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. 9.9 Severability. If any term, provision, covenant or restriction of this Agreement, or any part thereof, is held by a court of competent jurisdiction of any foreign, federal, state, county or local government or any other governmental, regulatory or administrative agency or authority to be invalid, void, unenforceable or against public policy for any reason, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected or impaired or invalidated. - 13 - The Employee acknowledges that the restrictive covenants contained in Section 6 are a condition of this Agreement and are reasonable and valid in temporal scope and in all other respects. 9.10 Judicial Modification. If any court determines that any of the covenants in Section 6, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. 9.11 Tax Withholding. The Company or other payor is authorized to withhold from any benefit provided or payment due hereunder, the amount of withholding taxes due any federal, state or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Board to satisfy all obligations for the payment of such withholding taxes. - 14 - IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have executed this Agreement as of the day and year first above mentioned. EMPLOYEE /s/ Jeffry M. Delle Fave ---------------------------------------- Jeffrey M. Delle Fave SCOTTISH HOLDINGS, INC. By: /s/ Paul Goldean ----------------------------------- Name: Paul Goldean Title: Director EX-10.58 6 ex10-58.txt EMPLOYMENT AGREEMENT - GEORGE R. ZIPPEL Execution Copy EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") dated as of July 18, 2007 between Scottish Re Group Limited (the "Company") and George R. Zippel (the "Employee") (together, the "Parties"). WHEREAS, the Parties wish to establish the terms of Employee's employment with the Company upon the terms and conditions set forth herein, and all other agreements with respect to the subject matter hereof; Accordingly, the Parties agree as follows: 1. Employment and Acceptance. The Company shall employ the Employee, and Employee shall accept employment, subject to the terms of this Agreement, on July 30, 2007 (the "Effective Date"). 2. Term. Subject to earlier termination pursuant to Section 5 of the Agreement, this Agreement and the employment relationship hereunder shall continue from the Effective Date until the second (2nd) anniversary of the Effective Date and shall automatically renew for successive one (1) year intervals thereafter unless either party shall have given at least sixty (60) days advance written notice to the other that it does not wish to extend the Term. As used in this Agreement, the "Term" shall refer to the period beginning on the Effective Date and ending on the date the Employee's employment terminates in accordance with this Section 2 or Section 5. In the event of the Employee's termination of employment during the Term, the Company's obligation to continue to pay all base salary, as adjusted, bonus and other benefits then accrued shall terminate except as may be provided for in Section 5 of this Agreement, or as otherwise required by law. 3. Duties and Positions. 3.1 Positions. During the Term, the Employee shall serve as President and Global Chief Executive Officer of the Company and shall report solely and directly to the Board of Directors of the Company (the "Board"). The Employee shall also serve during the Term in executive positions for one or more of the Company's subsidiaries and affiliates for no additional consideration. As of the Effective Date, the Company shall use its best efforts to cause the Employee to be nominated for election to the Board. 3.2 Duties. The Employee will have such authority and responsibilities and will perform such executive duties as are customarily performed by a President and Global Chief Executive Officer of a public company of similar size in similar lines of business as the Company and its subsidiaries as may be assigned to Employee by the Board. The Employee will devote all his full working-time and attention to the performance of such duties and to the promotion of the business and interests of the Company and its subsidiaries. Nothing in this Agreement shall prevent the Employee from (i) devoting reasonable time to charitable, community, industry or professional activities, or (ii) participating in, or serving on, the governing body of any civic, community or charitable organization with which the Employee may currently be or hereafter become involved, provided such activities (A) do not materially interfere with and are not inconsistent with Employee's performance of his duties and obligations under this Agreement, (B) cannot reasonably be expected to cause injury or harm to the business or reputation of the Company or any of its subsidiaries and affiliates and (C) do not violate any provision of this Agreement. 3.3 Location. The Employee shall perform his full-time services to the Company and its subsidiaries in the Company's Bermuda office; provided that the Employee shall be required to travel as reasonably necessary to perform his duties hereunder. The Employee shall establish residence in Bermuda as soon as practicable following the Effective Date. 4. Compensation and Benefits by the Company. As compensation for all services rendered pursuant to this Agreement, the Company shall provide the Employee the following during the Term and thereafter as applicable: 4.1 Base Salary. During the Term, the Company will pay to the Employee an annual base salary of $900,000, payable in accordance with the customary payroll practices of the Company ("Base Salary"). The Employee's Base Salary shall be subject to review and may be increased (but not decreased) to an amount determined at the discretion of the Board, or the compensation committee thereof (which, thereafter, shall be his "Base Salary") after taking into consideration the Employee's performance, the Company's performance, increases in the cost of living and such other factors as the Board or the compensation committee thereof in good faith deems relevant. Such review shall be conducted no less frequently than once during each calendar year at the same time the Company conducts its review of the compensation of the Company's other senior executive officers. 4.2 Bonuses. During the Term, the Employee shall be eligible to receive an annual cash bonus ("Bonus") under a plan established by the Company in the amount determined by the Board (or the compensation committee thereof) based upon achievement of performance measures established by the Company, after reasonable consultation with the Employee, and approved by the Board in its sole discretion. The Employee's target bonus shall be seventy five percent (75%) of Base Salary (the "Target Bonus"). Notwithstanding the foregoing, the Company shall pay to the Employee a cash bonus with respect to the 2007 calendar year in an amount equal to no less than the product of (i) $675,000 and (ii) the ratio of (A) the number of days the Employee is employed during calendar year 2007 to (B) 365 (the "2007 Bonus"). The Employee's Bonus (including the 2007 Bonus) shall be payable at such times and in the manner consistent with the Company's policies regarding compensation of executive employees. The Bonus with respect to any calendar year shall be paid no earlier than January 1 and no later than June 30 of the following calendar year. 4.3 Participation in Employee Benefit Plans. The Employee shall be entitled during the Term, if and to the extent eligible, to participate in all of the applicable pension and welfare benefit plans and fringe benefits of the Company, which may be available to other senior executives of the Company. These plans shall include, without limitation, medical, prescription drug, dental, vision, disability, life and accidental death insurance plans and programs and a 401(k) plan to the extent, and on terms at least as favorable as, such plans and programs are available to other senior executives of the Company. The Company may at any time or from time to time amend, modify, suspend or terminate any employee benefit plan, program or arrangement for any reason without the Employee's consent if such amendment, modification, suspension or termination is consistent with the amendment, modification, suspension or termination for other executives of the Company. In each calendar year prior to 2 the date the Employee's employment terminates due to Disability (as defined below), the Employee shall be entitled to receive up to ninety (90) days of full salary continuation in the event he is unable to perform his duties hereunder without reasonable accommodation due to a physical or mental illness or injury. 4.4 Equity Compensation. During the Term, the Employee shall be eligible to participate in the 2007 Scottish Re Group Limited Stock Option Plan, an equity incentive compensation plan established by the Company (the "Equity Incentive Plan"), pursuant to the terms of the Equity Incentive Plan and any applicable agreements thereunder as determined from time to time by the Board. The Employee shall receive an initial grant of the option to purchase 1,250,000 ordinary shares of the Company (the "Initial Grant") pursuant to the terms of the Equity Incentive Plan and any applicable agreements thereunder. Notwithstanding the foregoing or the terms of the equity Incentive Plan, the Employee's award agreement with respect to the Initial Grant shall provide that if the Employee's employment is terminated by the Company without "Cause" (as defined below), the Employee terminates his employment with "Good Reason" (as defined below) or the Employee's employment with the Company terminates in connection with the Company's determination not to extend or renew the Term pursuant to Section 2, to the extent not previously forfeited, the unvested portion of the Initial Grant, if any, shall become vested and exercisable, and shall remain exercisable for a period of ninety (90) days following the date of such termination of employment. 4.5 Relocation. The Company shall provide the Employee (on a fully grossed up tax neutral basis), directly or through reimbursement (as determined in the Company's reasonable discretion) the following relocation, housing and transportation benefits: (a) a suitable apartment or comparable residence in Bermuda and other reasonable costs associated with such residence, including local ground transportation, during the Term; (b) through the end of the 2008 calendar year, a suitable apartment or comparable residence for the Employee in the Charlotte, NC area when the Employee is required to perform services for the Company in its Charlotte, NC location; (c) through the end of the 2008 calendar year, pursuant to the Company's normal travel expense policy, weekly air travel between the Employee's home in Lynchburg, VA and the Company locations, and (d) all reasonable costs associated with relocating Employee and his family and transporting Employee's household goods to either Bermuda or Charlotte, NC. Any such reimbursements and the tax gross-up payments for any reimbursement or in-kind benefit shall be made no later than thirty (30) business days following presentation to the Company of the bill or invoice for any such benefit. In no event will any reimbursement or in-kind benefit in any calendar year affect any reimbursement or in-kind benefit made in any subsequent calendar year In no event will any tax gross-up payment be made later than the Employee's taxable year next following the taxable year in which the Employee remits the related taxes. 4.6 Retention Bonus. Subject to the Employee's continued employment with the Company through the date such payment is made, in the event of a Change in Control (as defined below), the Company shall pay the Employee a lump-sum payment equal to (x) the Employee's then current Base Salary plus (y) the Employee's Target Bonus for the year in which the Change in Control occurs (the "Retention Bonus"), payable within ten (10) days following the first anniversary of the Change in Control. "Change of Control" shall mean (1) any person, other than Cerberus Capital Management, L.P. ("Cerberus") or Mass Mutual Capital Partners LLC ("Mass Mutual") or their 3 respective affiliates, becomes the beneficial owner, directly or indirectly, of fifty percent (50%) or more of the combined voting power of the then issued and outstanding equity securities of the Company, or (2) the sale, transfer or other disposition of all or substantially all of the business and assets of the Company, whether by sale of assets, merger or otherwise (determined on a consolidated basis) to another person other than a transaction in which the survivor or transferee is a person controlled, directly or indirectly, by Cerberus or Mass Mutual Capital or their affiliates. 4.7 Expense Reimbursement. During the Term, the Employee shall be entitled to receive reimbursement for all appropriate business expenses incurred by him in connection with his duties under this Agreement in accordance with the policies of the Company applicable to other executive employees as in effect from time to time. 4.8 Professional Fees. The Company shall pay or reimburse the Employee (on a fully grossed up tax neutral basis) for the Employee's reasonable attorneys' fees and costs (not to exceed $10,000) incurred during 2007 in connection with advice pertaining to and negotiation of this Agreement upon presentation to the Company of bills or invoices for such services and such other supporting information as the Company may reasonably require. Such payment or reimbursement and the corresponding gross-up payment shall be made no later than fifteen (15) business days following presentation to the Company of the bill or invoice for such services. In no event will the payment or reimbursement affect any other reimbursement or in-kind benefit made in any subsequent calendar year or be made later than December 31, 2007. In no event will the tax gross-up payment be made later than the Employee's taxable year next following the taxable year in which the Employee remits the related taxes. 5. Termination of Employment. 5.1 By the Company for Cause or by the Employee Without Good Reason. If: (i) the Company terminates the Employee's employment with the Company for Cause (as defined below); or (ii) the Employee terminates his employment without Good Reason (as defined below), provided that the Employee shall be required to give the Company at least forty-five (45) days prior written notice of such termination, the Employee or the Employee's legal representatives (as appropriate), shall be entitled to receive the following (the "Accrued Benefits"): (a) the Employee's accrued but unpaid Base Salary and benefits set forth in Sections 4.1 and 4.3, if any, to the date of termination; (b) the unpaid portion of the Bonus, if any, relating to the calendar year prior to the calendar year of the Employee's death, Disability, termination by the Company for Cause or by the Employee without Good Reason, payable in accordance with Section 4.2; (c) in accordance with the Company's policies, any accrued but unused vacation time or paid time off; and (d) expenses reimbursable under Section 4.7 incurred but not yet reimbursed to the Employee to the date of termination. 4 For the purposes of this Agreement, "Cause" means, as determined by a majority of the Board, in the Board's reasonable business judgment acting in good faith and engaging in fair dealing with the Employee, with respect to conduct during the Employee's employment with the Company, whether or not committed during the Term, (i) commission of a felony by Employee; (ii) intentional acts of dishonesty by Employee resulting or intending to result in personal gain or enrichment at the expense of the Company or its subsidiaries; (iii) Employee's breach of his material obligations under this Agreement; (iv) conduct by Employee in connection with his duties hereunder that is fraudulent or grossly negligent or that the Employee knew or reasonably should have known to be unlawful, provided that any action taken by the Employee on the advice of the Company's General Counsel (or his designee) shall not be treated a unlawful for purposes of this clause (iv); (v) engaging in personal conduct by Employee (including but not limited to employee harassment or discrimination, the use or possession at work of any illegal controlled substance) which seriously discredits or damages the Company or its subsidiaries; (vi) contravention of specific lawful direction of the Board or continuing inattention to or continuing failure to attempt, in good faith, to perform the duties to be performed by Employee under the terms of Section 3.2 of this Agreement or (vii) breach of the Employee's covenants set forth in Section 6 below before termination of employment; provided, that, the Employee shall have fifteen (15) days after notice from the Company, which notice shall set forth in reasonable detail a description of the deficiency determined by the Board to constitute Cause, to cure the deficiency leading to the Cause determination (except with respect to (i) above), if curable. A termination for "Cause" shall be effective immediately (or on such other date set forth by the Company), following the Employee's failure to timely cure such conduct, if curable. For the purposes of this Agreement, "Good Reason" means, without the Employee's consent, (i) a material adverse reduction in Employee's authority, responsibilities or duties; (ii) a reduction in the Employee's Base Salary or bonus opportunity; provided that, the Company may at any time or from time to time amend, modify, suspend or terminate any bonus, incentive compensation or other benefit plan or program provided to the Employee for any reason and without the Employee's consent if such modification, suspension or termination (x) is a result of the underperformance of the Employee or the Company under its business plan, and (y) is consistent with an "across the board" reduction for all similar employees of the Company, and, in each case, is undertaken in the Board's reasonable business judgment acting in good faith and engaging in fair dealing with the Employee; or (iii) the Company's material breach of the Agreement; provided that a suspension of the Employee and the requirement that the Employee not report to work shall not constitute "Good Reason" if the Employee continues to receive the compensation and benefits required by this Agreement. The Company shall have thirty (30) days after receipt of notice from the Employee in writing specifying the deficiency to cure the deficiency that would result in Good Reason. 5.2 By the Company Without Cause; by the Employee with Good Reason; or Following the Company's Decision Not to Renew the Term. If, (1) during the Term: (i) the Company terminates Employee's employment without Cause (which may be done at any time without prior notice) or (ii) the Employee terminates his employment for Good Reason (within ninety (90) days following the initial condition giving rise to such Good Reason), upon at least thirty (30) days prior written notice, or (2) the Employee's employment with the Company terminates in connection with the Company's determination not to extend or renew the Term pursuant to Section 2, upon execution without revocation of a valid release agreement in a form 5 reasonably acceptable to the Parties and not in violation of any applicable laws (the "Release"), the Employee shall be entitled to receive: (a) the Accrued Benefits; (b) an amount equal to (x) the Employee's annual Base Salary as of the date of termination plus (y) the Employee's Target Bonus for the year of termination (the "Severance Amount"), payable in a lump sum, less standard income and payroll tax withholding and other authorized deductions within fifteen (15) days following the effective date of the Release; (c) continued payment of the Employee's Base Salary for the remainder of the Term, payable in accordance with the customary payroll practices of the Company, provided that each payroll payment shall be treated as a separate payment for purposes of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (the "Code"); (d) if the Employee elects continuing group coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), reimbursement of the cost of such continuation coverage(on a fully grossed up tax neutral basis) for the earlier of (x) twelve (12) months or (y) such earlier date that the Employee is covered under another group health plan, subject to the terms of the plans and applicable law; (e) if such termination of employment occurs prior to the first (1st) anniversary of a Change in Control, an amount equal to the Retention Bonus, payable pursuant to Section 4.6 above; and (f) the Company shall pay or reimburse the Employee (in either case, on a fully grossed up tax neutral basis in accordance with the terms of Section 4.5) for the Employee's reasonable costs (not to exceed $50,000) associated with relocating the Employee and his family and transporting the Employee's household goods from Bermuda or Charlotte, NC to the Employee's future principal residence. The Company shall have no obligation to provide the benefits set forth above in the event that Employee breaches the provisions of Section 6. 5.3 Due to Death or Disability. If: (i) the Employee's employment terminates due to his death; or (ii) the Company terminates the Employee's employment with the Company due to the Employee's Disability (as defined below), in addition to Accrued Benefits, the Employee or the Employee's spouse, dependents or legal representatives (as appropriate), shall be entitled to receive (A) a lump-sum equal to the prorated portion of the Employee's Target Bonus for the year of the Employee's death or termination of employment due to Disability, less standard income and payroll tax withholding and other authorized deductions, payable within thirty (30) days following the date the Employee's employment terminates, and (B) if the Employee, or his spouse or dependants (as appropriate) elects continuing group coverage pursuant to COBRA, reimbursement of the cost of such continuation coverage (on a fully grossed up tax neutral basis) for the earlier of (x) twelve (12) months or (y) such earlier 6 date that the Employee, his spouse or dependents, as the case may be, is covered under another group health plan, subject in all cases to the terms of the plans and applicable law. For the purposes of this Agreement, "Disability" means a determination by the Company in accordance with applicable law that as a result of a physical or mental injury or illness, the Employee is unable to perform the essential functions of his job with or without reasonable accommodation for a period of (i) ninety (90) consecutive days; or (ii) one hundred eighty (180) days in any one (1) year period. 5.4 No Mitigation; No Offset. The Employee shall be under no obligation to seek other employment after his termination of employment with the Company and the obligations of the Company to the Employee which arise upon the termination of his employment pursuant to this Section 5 shall not be subject to mitigation or offset. 5.5 Removal from any Boards and Position. If the Employee's employment is terminated for any reason under this Agreement, he shall be deemed to resign (i) if a member, from the Board or board of directors of any subsidiary of the Company or any other board to which he has been appointed or nominated by or on behalf of the Company and (ii) from any position with the Company or any subsidiary of the Company, including, but not limited to, as an officer of the Company and any of its subsidiaries. 5.6 Nondisparagement. The Employee agrees that he will not at any time (whether during or after the Term) publish or communicate to any person or entity any Disparaging (as defined below) remarks, comments or statements concerning the Company, Cerberus, Mass Mutual their parents, subsidiaries and affiliates, and their respective present and former members, partners, directors, officers, shareholders, employees, agents, attorneys, successors and assigns. "Disparaging" remarks, comments or statements are those that impugn the character, honesty, integrity or morality or business acumen or abilities in connection with any aspect of the operation of business of the individual or entity being disparaged. 5.7 Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to, or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5.7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 7 (b) Notwithstanding the foregoing provisions of Section 5.7(a), if the Parachute Value (as defined below) of all Payments does not exceed 110% of the Employee's Safe Harbor Amount (as defined below), then the Company shall not pay the Employee a Gross-Up Payment, and the Payments due under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount; provided, that if even after all Payments due under this Agreement are reduced to zero, the Parachute Value of all Payments would still exceed the Safe Harbor Amount, then no reduction of any Payments shall be made and the Gross -Up Payment shall be made. The reduction of the Payments due hereunder, if applicable, shall be made as designated by the Employee, and in any event shall be made in such a manner as to maximize the economic present value of all Payments actually made to the Employee, determined by the Accounting Firm (as defined in Section 5.7(c) below) as of the date of the change of control for purposes of Section 280G of the Code using the discount rate required by Section 280G(d)(4) of the Code. For purposes of this Section 5.7, the "Parachute Value" of a Payment means the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a "parachute payment" under Section 280G(b)(2) of the Code, as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment. For purposes of this Section 5.7, Executive's "Safe Harbor Amount" means one dollar less than three times the Employee's "base amount" within the meaning of Section 280G(b)(3) of the Code. (c) All determinations required to be made under this Section 5.7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be used in arriving at such determination, shall be made by the Company's independent auditing firm or such other certified public accounting firm as may be designated by the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within fifteen (15) business days after the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Employee may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5.7, shall-be paid by the Company to the Employee or to the Internal Revenue Service on the Employee's behalf within five (5) business days after the receipt of the Accounting Firm's determination, but in no event later than December 31 of the year after the year in which the Employee remits the Excise Tax to the relevant taxing authorities. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Employee thereafter is required to make a payment of any Excise 8 Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee, but no later than December 31 of the year after the year in which the Employee remits the Excise Tax to the relevant taxing authorities. 6. Restrictions and Obligations of the Employee. 6.1 Confidentiality. (a) During the course of the Employee's employment by the Company, the Employee has had and will have access to certain trade secrets and confidential information relating to the Company and its subsidiaries (the "Protected Parties") which is not readily available from sources outside the Company. The confidential and proprietary information and, in any material respect, trade secrets of the Protected Parties are among their most valuable assets, including but not limited to, their customer, supplier and vendor lists, databases, competitive strategies, computer programs, frameworks, or models, their marketing programs, their sales, financial, marketing, training and technical information, their product development (and proprietary product data) and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Protected Parties create, develop, acquire or maintain their products and marketing plans, target their potential customers and operate their retail and other businesses. The Protected Parties invested, and continue to invest, considerable amounts of time and money in their process, technology, know-how, obtaining and developing the goodwill of their customers, their other external relationships, their data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Protected Parties. The Employee acknowledges that such Confidential Information constitutes valuable, highly confidential, special and unique property of the Protected Parties. The Employee shall hold in a fiduciary capacity for the benefit of the Protected Parties all Confidential Information relating to the Protected Parties and their businesses, which shall have been obtained by the Employee during the Employee's employment by the Company or its subsidiaries and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). Except as required by law (including, but not limited to, pursuant to a lawful subpoena) or an order of a court or governmental agency with jurisdiction, the Employee shall not, during the period the Employee is employed by the Company or its subsidiaries or at any time thereafter, disclose any Confidential Information, directly or indirectly, to any person or entity for any reason or purpose whatsoever, nor shall the Employee use it in any way, except in the course of the Employee's employment with, and for the benefit of, the Protected Parties or to enforce any rights or defend any claims hereunder or under any other agreement to which the Employee is a party, provided that such disclosure is relevant to the enforcement of such rights or defense of such claims and is only disclosed in the formal proceedings related thereto. The Employee shall take all reasonable steps to safeguard the Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. The Employee understands and agrees that the Employee shall acquire no rights to any such Confidential Information. (b) All Company files, records, documents, drawings, specifications, data, computer programs, evaluation mechanisms and analytics and similar items relating thereto or to the Business (for the purposes of this Agreement, "Business" shall be as defined in Section 6.3 hereof), as well as all customer lists, specific customer information, compilations of product research and marketing techniques of the Company and its subsidiaries, whether prepared by the 9 Employee or otherwise coming into the Employee's possession, shall remain the exclusive property of the Company and its subsidiaries, and the Employee shall not remove any such items from the premises of the Company and its subsidiaries, except in furtherance of the Employee's duties under this Agreement. (c) It is understood that while employed by the Company or its subsidiaries, the Employee will promptly disclose to it, and assign to it the Employee's interest in any invention, improvement or discovery made or conceived by the Employee, either alone or jointly with others, which arises out of the Employee's employment. At the Company's request and expense, the Employee will assist the Company and its subsidiaries during the period of the Employee's employment by the Company or its subsidiaries and thereafter in connection with any controversy or legal proceeding relating to such invention, improvement or discovery and in obtaining domestic and foreign patent or other protection covering the same. (d) As requested by the Company and at the Company's expense, from time to time and upon the termination of the Employee's employment with the Company for any reason, the Employee will promptly deliver to the Company and its subsidiaries all copies and embodiments, in whatever form, of all Confidential Information in the Employee's possession or within his control (including, but not limited to, memoranda, records, notes, plans, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information) irrespective of the location or form of such material. If requested by the Company, the Employee will provide the Company with written confirmation that all such materials have been delivered to the Company as provided herein. 6.2 Non-Solicitation or Hire. During the Term and for a period of eighteen months (18) months following the termination of the Employee's employment for any reason, the Employee shall not directly or indirectly solicit or attempt to solicit or induce, directly or indirectly, (a) any party who is a customer of the Company or its subsidiaries, or who was a customer of the Company or its subsidiaries at any time during the twelve (12) month period immediately prior to the date the Employee's employment terminates, for the purpose of marketing, selling or providing to any such party any services or products offered by or available from the Company or its subsidiaries (provided that if the Employee intends to solicit any such party for any other purpose, he shall notify the Company of such intention and receive prior written approval from the Company, which approval shall not unreasonably be withheld), (b) any supplier to or customer or client of the Company or any subsidiary to terminate, reduce or alter negatively its relationship with the Company or any subsidiary or in any manner interfere with any agreement or contract between the Company or any subsidiary and such supplier, customer or client or (c) any employee of the Company or any of its subsidiaries or any person who was an employee of the Company or any of its subsidiaries during the twelve (12) month period immediately prior to the date the Employee's employment terminates to terminate such employee's employment relationship with the Protected Parties in order, in either case, to enter into a similar relationship with the Employee, or any other person or any entity in competition with the Business of the Company or any of its subsidiaries. 6.3 Non-Competition. During the Term and for a period of eighteen (18) months following the termination of Employee's employment for any reason, the Employee shall not, whether individually, as a director, manager, member, stockholder, partner, owner, employee, consultant or agent of any business, or in any other capacity, other than on 10 behalf of the Company or a subsidiary, organize, establish, own, operate, manage, control, engage in, participate in, invest in, permit his name to be used by, act as a consultant or advisor to, render services for (alone or in association with any person, firm, corporation or business organization), or otherwise assist any person or entity that engages in or owns, invests in, operates, manages or controls any venture or enterprise which engages or proposes to engage in any business conducted by the Company or any of its subsidiaries on the date of the Employee's termination of employment or within twelve (12) months of the Employee's termination of employment in the geographic locations where the Company and its subsidiaries engage or propose to engage in such business (the "Business"). Notwithstanding the foregoing, nothing in this Agreement shall prevent the Employee from owning for passive investment purposes not intended to circumvent this Agreement, less than five percent (5%) of the publicly traded common equity securities of any company engaged in the Business (so long as the Employee has no power to manage, operate, advise, consult with or control the competing enterprise and no power, alone or in conjunction with other affiliated parties, to select a director, manager, general partner, or similar governing official of the competing enterprise other than in connection with the normal and customary voting powers afforded the Employee in connection with any permissible equity ownership). 6.4 Property. The Employee acknowledges that all originals and copies of materials, records and documents generated by him or coming into his possession during his employment by the Company or its subsidiaries are the sole property of the Company and its subsidiaries ("Company Property"). During the Term, and at all times thereafter, the Employee shall not remove, or cause to be removed, from the premises of the Company or its subsidiaries, copies of any record, file, memorandum, document, computer related information or equipment, or any other item relating to the business of the Company or its subsidiaries, except in furtherance of his duties under the Agreement. When the Employee's employment with the Company terminates, or upon request of the Company at any time, the Employee shall promptly deliver to the Company all copies of Company Property in his possession or control. 7. Remedies; Specific Performance. The Parties acknowledge and agree that the Employee's breach or threatened breach of any of the restrictions set forth in Section 6 will result in irreparable and continuing damage to the Protected Parties for which there may be no adequate remedy at law and that the Protected Parties shall be entitled to equitable relief, including specific performance and injunctive relief as remedies for any such breach or threatened or attempted breach. The Employee hereby consents to the grant of an injunction (temporary or otherwise) against the Employee or the entry of any other court order against the Employee prohibiting and enjoining him from violating, or directing him to comply with any provision of Section 6. The Employee also agrees that such remedies shall be in addition to any and all remedies, including damages, available to the Protected Parties against him for such breaches or threatened or attempted breaches. In addition, without limiting the Protected Parties' remedies for any breach of any restriction on the Employee set forth in Section 6, except as required by law, the Employee shall not be entitled to any payments set forth in Section 5.2 hereof if the Employee has breached the covenants applicable to the Employee contained in Section 6, the Employee will immediately return to the Protected Parties any such payments previously received under Section 5.2 upon such a breach, and, in the event of such breach, the Protected Parties will have no obligation to pay any of the amounts that remain payable by the Company under Section 5.2. 11 8. Indemnification. The Company shall indemnify the Employee from and against any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by, or in the right of the Company) brought to impose a liability or penalty on the Employee in his capacity of director, officer, employee or agent of the Company or of any other corporation or entity which he serves as such at the request of the Company, against judgments, fines, amounts paid in settlement and expenses, including attorneys' fees actually and reasonably incurred as a result of such action, suit or proceeding, or any appeal thereof, and provide for the coverage of the Employee under any applicable directors and officers liability insurance policy maintained by the Company, to the same extent and on the same terms that the Company provides such indemnification to officers and directors of the Company with respect to occurrences while Employee is or was an officer or director of the Company, to the maximum extent permitted by applicable law. 9. Other Provisions. 9.1 Notices. Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid or overnight mail and shall be deemed given when so delivered personally, telegraphed, telexed, or sent by facsimile transmission or, if mailed, four (4) days after the date of mailing or one (1) day after overnight mail, as follows: (a) If the Company, to: 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 Attention: General Counsel Telephone: Fax: (b) If the Employee, to the Employee's home address reflected in the Company's records. 9.2 Entire Agreement. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. 9.3 Representations and Warranties. (a) The Employee represents and warrants that he is not a party to or subject to any restrictive covenants, legal restrictions or other agreements in favor of any entity or person which would in any way preclude, inhibit, impair or limit the Employee's ability to perform his obligations under this Agreement, including, but not limited to, non-competition agreements, non-solicitation agreements or confidentiality agreements. (b) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 12 9.4 Waiver and Amendments. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the Parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 9.5 Governing Law, Dispute Resolution and Venue. (a) This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and not to be performed entirely within such state, without regard to conflicts of laws principles. (b) The parties agree irrevocably to submit to the exclusive jurisdiction of the federal courts or, if no federal jurisdiction exists, the state courts, located in the City of New York, Borough of Manhattan, for the purposes of any suit, action or other proceeding brought by any party arising out of any breach of any of the provisions of this Agreement and hereby waive, and agree not to assert by way of motion, as a defense or otherwise, in any such suit, action, or proceeding, any claim that it is not personally subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper, or that the provisions of this Agreement may not be enforced in or by such courts. In addition, the parties agree to waive trial by jury. 9.6 Assignability by the Company and the Employee. This Agreement, and the rights and obligations hereunder, may not be assigned by the Company or the Employee without written consent signed by the other party; provided that this Agreement shall be binding upon any successor that continues the business of the Company, and that the Company shall require any such successor shall assume this agreement, whether expressly or by operation of law. 9.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 9.8 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. 9.9 Severability. If any term, provision, covenant or restriction of this Agreement, or any part thereof, is held by a court of competent jurisdiction of any foreign, federal, state, county or local government or any other governmental, regulatory or administrative agency or authority to be invalid, void, unenforceable or against public policy for any reason, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected or impaired or invalidated. The Employee acknowledges that the restrictive covenants contained in Section 6 are a condition of this Agreement and are reasonable and valid in temporal scope and in all other respects. 13 9.10 Judicial Modification. If any court determines that any of the covenants in Section 6, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. 9.11 Tax Withholding. The Company or other payor is authorized to withhold from any benefit provided or payment due hereunder, the amount of withholding taxes due any federal, state or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Board to satisfy all obligations for the payment of such withholding taxes. 9.12 Compliance with Law. (a) This Agreement is intended to comply with the requirements of Section 409A of the Code. To the extent that any provision in this Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such a manner so that all payments under Section 5 shall comply with Section 409A. The Company shall make reasonable best efforts to make all payments hereunder in compliance with this Agreement and Section 409A of the Code and to minimize any adverse consequences of any such payments to the Employee as a result of Section 409A of the Code. (b) Notwithstanding anything in this Agreement to the contrary, if any amount or benefit that would constitute non-exempt "deferred compensation" for purposes of Section 409A of the "Code would otherwise be payable or distributable under this Agreement by reason of the Employee's separation from service during a period in which he is a Specified Employee (as defined below), then, subject to any permissible acceleration of payment by the Company under Treas. Reg. Section 1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes): (i) if the payment or distribution is payable in a lump sum, the maximum amount that can be paid to the Employee without becoming subject to or violating Section 409A of the Code shall be paid to the Employee and the Employee's right to receive payment or distribution of any additional non-exempt deferred compensation will be delayed until the earlier of the Employee's death or the first day of the seventh month following the Employee's separation from service; and (ii) if the payment or distribution is payable over time, the amount of such non-exempt deferred compensation that would otherwise be payable during the six-month period immediately following the Employee's separation from service will be accumulated and the Employee's right to receive payment or distribution of such accumulated amount will be delayed until the earlier of the Employee's death or the first day of the seventh month following the Employee's separation from service, whereupon the accumulated amount will be paid or distributed to the Employee and the normal payment or distribution schedule for any remaining payments or distributions will resume. 14 (iii) in the case of any such delayed payment, the Company shall pay interest on the deferred amount at 100% of the short-term applicable federal rate as in effect for the month in which the termination of employment occurred. For purposes of this Agreement, the term "Specified Employee" has the meaning given such term in Section 409A of the Code, provided, however, that, the Company's Specified Employees and its application of the six-month delay rule shall be determined in accordance with rules adopted by the Board of Directors, which shall be applied consistently with respect to all nonqualified deferred compensation arrangements of the Company, including this Agreement. 15 IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have executed this Agreement as of the day and year first above mentioned. EMPLOYEE /s/ Geroge R. Zippel ------------------------------------------- George R. Zippel SCOTTISH RE GROUP LIMITED By: /s/ Paul Goldean --------------------------------------- Name: Paul Goldean Title: President & CEO 16 EX-10.59 7 ex10-59.txt EMPLOYMENT AGREEMENT - MICHAEL BAUMSTEIN Execution Copy EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") dated as of July 25, 2007 between Scottish Holdings, Inc. (the "Company") and Michael Baumstein (the "Employee") (together, the "Parties"). WHEREAS, the Employee and the Company are parties to an employment agreement dated March 15, 2004 (the "2004 Employment Agreement"); WHEREAS, the Parties wish to establish the terms of Employee's continued employment with the Company upon the terms and conditions set forth herein which supersede the terms of the 2004 Employment Agreement, and all other agreements with respect to the subject matter hereof; Accordingly, the Parties agree as follows: 1. Employment and Acceptance. The Company shall employ the Employee, and Employee shall accept employment, subject to the terms of this Agreement, effective as of May 7, 2007 (the "Effective Date"). 2. Term. Subject to earlier termination pursuant to Section 5 of this Agreement, this Agreement and the employment relationship hereunder shall continue from the Effective Date until the second anniversary of the Effective Date (the "Initial Term") and shall renew for one (1) year intervals thereafter (each, a "Renewal Term") unless either party shall have given at least sixty (60) days advanced written notice to the other that it does not wish to extend the Term. As used in this Agreement, the "Term" shall refer to the Initial Term and any Renewal Term and shall, in all cases, terminate on the date the Employee's employment terminates in accordance with this Section 2 or Section 5. In the event of the Employee's termination of employment during the Term, the Company's obligation to continue to pay all base salary, as adjusted, bonus and other benefits then accrued shall terminate except as may be provided for in Section 5 of this Agreement. 3. Duties and Title. 3.1 Title. The Company shall employ the Employee to render exclusive and full-time services to the Company and its subsidiaries. The Employee shall serve in the capacity of Executive Vice President, Head of Capital Markets and Group Treasurer, and shall report to the Chief Financial Officer of Scottish Re Group Limited. The Employee shall also serve during the Term in executive positions for one or more of the Company's subsidiaries and affiliates for no additional consideration. 3.2 Duties. The Employee will have such authority and responsibilities and will perform such executive duties as are customarily performed by an Executive Vice President, Head of Capital Markets and Group Treasurer of a company in similar lines of business as the Company and its subsidiaries or as may be assigned to Employee by the Chief Financial Officer of Scottish Re Group Limited. The Employee will devote all his full working-time and attention to the performance of such duties and to the promotion of the business and interests of the Company and its subsidiaries. 3.3 Location. The Employee shall perform his full-time services to the Company and its subsidiaries in the Company's Charlotte, NC office (the "Location"); provided that the Employee shall be required to travel as necessary to perform his duties hereunder. 4. Compensation and Benefits by the Company. As compensation for all services rendered pursuant to this Agreement, the Company shall provide the Employee the following during the Term: 4.1 Base Salary. During the Term, the Company will pay to the Employee an annual base salary of $400,000, payable in accordance with the customary payroll practices of the Company. The Employee's annual base salary may be increased by the Company at its discretion and the Company agrees to review such compensation not less frequently than annually during the Term. The Base Salary as increased from time to time shall be referred to herein as "Base Salary". 4.2 Bonuses. During the Term, the Employee shall be eligible to receive an annual bonus ("Bonus") under a plan established by the Company in the amount determined by the Board of Directors of the Company (the "Board") based upon achievement of performance measures established by the Company and approved by the Board. The employee's target bonus shall be 75% of Base Salary. Notwithstanding the foregoing, for the calendar years ending on December 31, 2007 and December 31, 2008, the Employee shall receive a Bonus of not less than fifty percent (50%) of the Base Salary. The Employee's Bonus shall be payable at such times and in the manner consistent with the Company's policies regarding compensation of executive employees. In addition, the Company may pay such additional bonuses as it may establish within its direction. 4.3 Signing Bonus. As soon as practicable following the date hereof, the Company will pay to the Employee a one-time, lump-sum payment in the amount of $70,000 (the "Signing Bonus"). 4.4 Participation in Employee Benefit Plans. The Employee shall be entitled during the Term, if and to the extent eligible, to participate in all of the applicable benefit plans of the Company, which may be available to other senior executives of the Company. The Company may at any time or from time to time amend, modify, suspend or terminate any employee benefit plan, program or arrangement for any reason without the Employee's consent if such amendment, modification, suspension or termination is consistent with the amendment, modification, suspension or termination for other executives of the Company. Notwithstanding the foregoing, the Employee will continue to participate in and/or receive benefits under (x) the Company's Exec-U-Care plan (the "Exec-U-Care Plan") and (y) the Scottish Holdings, Inc. Deferred Compensation Plan (the "Deferred Compensation Plan") (or other comparable benefit plans sponsored by the Company or an affiliate of the Company) to the same extent that the Employee participated in or received benefits under such plans prior to the Effective Date through the Term, subject to the terms of such plans and applicable law. In the event the Company modifies, amends or terminates the Deferred Compensation Plan or the Exec-U-Care Plan prior to the expiration of the Term in a way that adversely affects the Employee's benefits under either plan, the Company will pay the Employee compensation or provide the Employee with benefits (as determined in the Company's discretion) through the - 2 - expiration of the Term comparable to the Employee's benefits and compensation under such plans as of the Effective Date. 4.5 Equity Compensation. The Company will grant Employee stock options to purchase 225,000 ordinary shares of an affiliate of the Company pursuant to the 2007 Scottish Re Group Limited Stock Option Plan, an equity incentive compensation plan established by an affiliate of the Company (the "Equity Incentive Plan"), pursuant to the terms of the Equity Incentive Plan and any applicable agreements thereunder as determined from time to time by the Board. 4.6 Expense Reimbursement. During the Term, the Employee shall be entitled to receive reimbursement for all appropriate business expenses incurred by him in connection with his duties under this Agreement in accordance with the policies of the Company as in effect from time to time. 4.7 Club Dues and Expenses. During the Term, the Company hereby agrees to reimburse Employee for club dues and expenses not to exceed $5,000 per calendar year in accordance with the Company's policy regarding substantiation of expenses. 4.8 Vacation and Holidays. Employee shall be entitled to four (4) weeks of paid vacation per annum, in accordance with the Company's vacation policy. 4.9 Legal Fees. (a) The Company shall pay or reimburse the Employee for all reasonable attorneys' fees and costs (not to exceed $10,000) incurred by the Employee in connection with advice pertaining to and negotiation of this Agreement upon presentation to the Company of bills for such services and such other supporting information as the Company may reasonably require. (b) If it should appear to Employee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Employee the benefits provided or intended to be provided to Employee hereunder, the Company irrevocably authorizes Employee from time to time to retain counsel of Employee's choice at the expense of the Company as hereafter provided, to advise and represent Employee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Employee's entering into an attorney-client relationship with such counsel, and in that connection the Company and Employee agree that a confidential relationship shall exist between Employee and such counsel. Without respect to whether Employee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys, and related fees and expenses incurred by Employee in connection with any of the foregoing; provided that, in regard to such matters, the Employee has not acted in bad faith or with no colorable claim of success. Such payments shall be made within five (5) business days after - 3 - delivery of Employee's written requests for payment, accompanied by such evidence of fees and expenses incurred as the Company may reasonably require. Notwithstanding the foregoing provisions of this Section 4.9(b), the obligations of the Company under this Section 4.9(b) shall not exceed, in the aggregate, $50,000. 4.10 Indemnification. The Holdings' Indemnification Agreement (the "Indemnification Agreement") attached as Exhibit A to the 2004 Employment Agreement will continue in full force and effect in accordance with the terms of the Indemnification Agreement. 5. Termination of Employment. 5.1 By the Company for Cause or by the Employee Without Good Reason or Due to Death or Disability. If: (i) the Employee's employment terminates due to his death; (ii) the Company terminates the Employee's employment with the Company for Cause (as defined below); (iii) the Company terminates the Employee's employment with the Company due to the Employee's Disability (as defined below); or (iv) Employee terminates his employment without Good Reason (as defined below), provided that the Employee shall be required to give the Company at least thirty (30) days prior written notice of such termination, the Employee or the Employee's legal representatives (as appropriate), shall be entitled to receive the following (the "Accrued Benefits"): (a) the Employee's accrued but unpaid Base Salary and benefits set forth in Section 4.4, if any, to the date of termination; (b) the unpaid portion of the Bonus, if any, relating to the calendar year prior to the calendar year of the Employee's death, Disability, termination by the Company for Cause or by the Employee without Good Reason, payable in accordance with Section 4.2; (c) expenses reimbursable under Section 4.6 incurred but not yet reimbursed to the Employee to the date of termination; and (d) in accordance with the Company's policies, any accrued but unused vacation time or paid time off. For the purposes of this Agreement, "Disability" means a determination by the Company in accordance with applicable law that as a result of a physical or mental injury or illness, the Employee is unable to perform the essential functions of his job with or without reasonable accommodation for a period of (i) ninety (90) consecutive days; or (ii) one hundred eighty (180) days in any one (1) year period. For the purposes of this Agreement, "Cause" means, as determined by the Board (or its designee), with respect to conduct during the Employee's employment with the Company, whether or not committed during the Term, (i) commission of a felony by Employee; (ii) acts of dishonesty by Employee resulting or intending to result in personal gain or enrichment at the expense of the Company or its subsidiaries; (iii) Employee's material breach of his obligations under this Agreement; (iv) conduct by Employee in connection with his duties hereunder that is fraudulent, unlawful or grossly negligent; (v) engaging in personal conduct by - 4 - Employee (including but not limited to employee harassment or discrimination, the use or possession at work of any illegal controlled substance) which seriously discredits or damages the Company or its subsidiaries; (vi) contravention of specific reasonable lawful material direction from the person or entity to whom the Employee reports or continuing inattention to or continuing failure to adequately perform the material duties to be performed by Employee under the terms of Section 3.2 of this Agreement or (vii) breach of the Employee's covenants set forth in Section 7 below before termination of employment; provided, that, the Employee shall have fifteen (15) days after notice from the Company to cure the deficiency leading to the Cause determination (except with respect to (i) above), if curable. A termination for "Cause" shall be effective immediately (or on such other date set forth by the Company). For the purposes of this Agreement, "Good Reason" means, without the Employee's consent, (i) a material adverse reduction in Employee's responsibilities or duties; (ii) a reduction in the Employee's Base Salary or bonus opportunity; provided that, the Company may at any time or from time to time amend, modify, suspend or terminate any bonus, incentive compensation or other benefit plan or program provided to the Employee for any reason and without the Employee's consent if such modification, suspension or termination (x) is a result of the underperformance of the Employee or the Company under its business plan, or (y) is consistent with an "across the board" reduction for all similar level executive employees of the Company, and, in each case, is undertaken in the Board's reasonable business judgment acting in good faith and engaging in fair dealing with the Employee; (iii) without the Employee's prior written consent, relocation of the Employee's Location of work to any location that is in excess of 50 miles from the Location thereof on the Effective Date; or (iv) the Company's material breach of the Agreement; provided that a suspension of the Employee and the requirement that the Employee not report to work shall not constitute "Good Reason" if the Employee continues to receive the compensation and benefits required by this Agreement. The Employee shall provide the Company written notice specifying such event or deficiency constituting Good Reason within sixty (60) days following the Employee's knowledge of the occurrence of such event and the Company shall have thirty (30) days after receipt of such notice to cure the event or deficiency that would result in Good Reason. 5.2 By the Company Without Cause or By the Employee for Good Reason. If during the Term the Company terminates Employee's employment without Cause (which may be done at any time without prior notice) or Employee terminates his employment for Good Reason, upon at least thirty (30) days prior written notice, upon execution without revocation of a valid release agreement in a form reasonably acceptable to the Company and the Employee and not in violation of any applicable laws (the "Release"), the Employee shall be entitled to receive: (a) the Accrued Benefits; (b) the pro-rata portion of the Bonus up to the date of termination relating to the calendar year of the Employee's termination, payable in accordance with Section 4.2; (c) (i) if prior to the expiration of the Initial Term, an amount equal to two (2) times the sum of (x) the highest Base Salary received by the Employee with respect to any calendar year during the previous two (2) calendar years of the Term, and (y) the highest Bonus amount received by the Employee with respect to any calendar year during the - 5 - previous two (2) calendar years of the Term and (ii) if during any Renewal Term, an amount equal to the sum of (x) the highest Base Salary received by the Employee with respect to any calendar year during the previous two (2) calendar years of the Term, and (y) the highest Bonus amount received by the Employee with respect to any calendar year during the previous two (2) calendar years of the Term, in each case payable in twelve (12) equal monthly installments, less standard income and payroll tax withholding and other authorized deductions; and (d) if the Employee elects continuing group coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), reimbursement of the cost of such continuation coverage for the earlier of (x) nine (9) months or (y) such earlier date that the Employee is covered under another group health plan, subject to the terms of the plans and applicable law. The Company shall have no obligation to provide the benefits set forth above in the event that Employee breaches the provisions of Section 6. For purposes of clarity, the Company's failure to renew the Term pursuant to Section 2 hereof, shall not constitute a termination of the Employee's employment without Cause. 5.3 Following the Company's Determination Not to Renew the Term. Should the Employee's employment with the Company terminate following the Company's determination not to renew the Term pursuant to Section 2, upon execution without revocation of the Release, the Employee shall be entitled to receive: (a) Accrued Benefits; and (b) an amount equal to the sum of (x) the Employee's Base Salary, and (y) the highest Bonus amount received by the Employee with respect to any calendar year during the previous two (2) calendar years of the Term, payable in a lump sum within thirty (30) days following the effective date of the Release, less standard income and payroll tax withholding and other authorized deductions. The Company shall have no obligation to provide the benefits set forth above in the event that Employee breaches the provisions of Section 6. 5.4 No Mitigation; No Offset. The Employee shall be under no obligation to seek other employment after his termination of employment with the Company and the obligations of the Company to the Employee which arise upon the termination of his employment pursuant to this Section 5 shall not be subject to mitigation or offset. 5.5 Removal from any Boards and Position. If the Employee's employment is terminated for any reason under this Agreement, he shall be deemed to resign (i) if a member, from the Board or board of directors of any subsidiary of the Company or any other board to which he has been appointed or nominated by or on behalf of the Company and (ii) from any position with the Company or any subsidiary of the Company, including, but not limited to, as an officer of the Company and any of its subsidiaries. 5.6 Continued Employment Beyond the Expiration of the Term. Unless the parties otherwise agree in writing, continuation of the Employee's employment with the Company beyond the expiration of the Term or following non-renewal of this Agreement by - 6 - either party shall be deemed an employment at-will and shall not be deemed to extend any of the provisions of this Agreement, and the Employee's employment may thereafter be terminated at will by either the Employee or the Company; provided that the provisions of Sections 5.3, 6, 7, 8.5 and 8.10 of this Agreement shall survive any termination of this Agreement or the termination of the Employee's employment hereunder. 6. Certain Additional Payments by the Company. 6.1 Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment (other than the Gross-Up payments provided for in this Section 6) or distribution by the Company or its affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the "Code") by reason of being considered "contingent on a change in ownership or control" of the Company within the meaning of Section 280G of the Code, or any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. For purposes of determining the amount of the Gross-Up Payment, the Employee will be considered to pay (x) federal income taxes at the highest rate in effect in the year in which the Gross-Up Payment will be made and (y) state and local income taxes at the highest rate in effect in the state or locality in which the Gross-Up Payment would be subject to state or local tax, net of the maximum reduction in federal income tax that could be obtained from deduction of such state and local taxes. 6.2 Subject to the provisions of Section 6.6, all determinations required to be made under this Section 6, including whether an Excise Tax is payable by the Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Employee in his sole discretion. The Employee shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Employee within thirty (30) calendar days after the Date of Termination, if applicable, and any such other time or times as may be requested by the Company or the Employee. If the Accounting Firm determines that any Excise Tax is payable by the Employee, the Company shall pay the required Gross-Up Payment to the Employee within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Employee or to the Internal Revenue Service on the Employee's behalf. If the Accounting Firm determines that no Excise Tax is payable by the Employee with respect to any material benefit or amount (or portion thereof), it shall, at the same time as it makes such determination, furnish the Company and the - 7 - Employee an opinion that the Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 6.6 and the Employee thereafter is required to make a payment of any Excise Tax, the Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of, the Employee within five (5) business days after receipt of such determination and calculations. 6.3 The Company and the Employee shall each provide the Accounting Firm access to and copies of any books, record and documents in the possession of the Company or the Employee, as the case may be, reasonably requested by the Accounting Firm, and-otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 6.2. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Employee. 6.4 The federal, state and local income or other tax returns filed by the Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Employee. The Employee shall report and make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Employee shall within five (5) business days pay to the Company the amount of such reduction. 6.5 The fees and expenses of Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6.2 shall be borne by the Company. If such fees and expenses are initially paid by the Employee, the Company shall reimburse the Employee the full amount of such fees and expenses within five (5) business days after receipt from the Employee of a statement therefor and reasonable evidence of his payment thereof. 6.6 The Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after the Employee actually receives notice of such claim and the Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Employee). The Employee shall not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice - 8 - to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notified the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (a) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (c) cooperate with the Company in good faith in order effectively to contest such claim; and (d) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Employee, on an after-tax basis, for and against any Excise Tax or income or other tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 6.6, the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 6.6 and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Employee may participate therein at his own cost and expense) and may, at its option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 6.7 If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 6.6, the Employee receives any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 6.6) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 6.6, a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial or refund prior to the - 9 - expiration of ten (10) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Employee pursuant to this Section 6. 6.8 Notwithstanding any provision of this Agreement to the contrary, but giving effect to any redetermination of the amount of Gross-Up payments otherwise required by this Section 6, if (i) but for this sentence, the Company would be obligated to make a Gross-Up Payment to the Employee and (ii) the aggregate "present value" of the "parachute payments" to be paid or provided to the Employee under this Agreement or otherwise does not exceed three times the Employee's "base amount" by more than $50,000, then the payments and benefits to be paid or provided under this Agreement will be reduced (or repaid to the Company, if previously paid or provided) to the minimum extent necessary so that no portion of any payment or benefit to the Employee, as so reduced or repaid, constitutes an "excess parachute payment." For purposes of this Section 6.8, the terms "excess parachute payment," "present value," "parachute payment," and "base amount" will have the meanings assigned to them by Section 280G of the Code. The determination of whether any reduction in or repayment of such payments or benefits to be provided under this Agreement is required pursuant to this Section 6.8 will be made at the expense of the Company, if requested by the Employee or the Company, by the Accounting Firm. Appropriate adjustments shall be made to amounts previously paid to Employee, or to amounts not paid pursuant to this Section 6.8, as the case may be, to reflect properly a subsequent determination that the Employee owes more or less Excise Tax than the amount previously determined to be due. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced or repaid pursuant to this Section 6.8, the Employee shall be entitled to designate the payments and/or benefits to be so reduced or repaid in order to give effect to this Section 6.8. The Company shall provide the Employee with all information reasonably requested by the Employee to permit the Employee to make such designation. In the event that the Employee fails to make such designation within 10 business days prior to the Date of Termination or other due date, the Company may effect such reduction or repayment in any manner it deems appropriate. 7. Restrictions and Obligations of the Employee. 7.1 Confidentiality. (a) During the course of the Employee's employment by the Company (prior to and during the Term), the Employee has had and will have access to certain trade secrets and confidential information relating to the Company and its subsidiaries (the "Protected Parties") which is not readily available from sources outside the Company. The confidential and proprietary information and, in any material respect, trade secrets of the Protected Parties are among their most valuable assets, including but not limited to, their customer, supplier and vendor lists, databases, competitive strategies, computer programs, frameworks, or models, their marketing programs, their sales, financial, marketing, training and technical information, their product development (and proprietary product data) and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Protected Parties create, develop, acquire or maintain their products and marketing plans, target their potential customers and operate their retail and other businesses. The Protected Parties invested, and continue to invest, considerable amounts of time and money in their process, technology, know-how, obtaining and developing the goodwill of their customers, their other external relationships, their data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), - 10 - and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Protected Parties. The Employee acknowledges that such Confidential Information constitutes valuable, highly confidential, special and unique property of the Protected Parties. The Employee shall hold in a fiduciary capacity for the benefit of the Protected Parties all Confidential Information relating to the Protected Parties and their businesses, which shall have been obtained by the Employee during the Employee's employment by the Company or its subsidiaries and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). Except as required by law or an order of a court or governmental agency with jurisdiction, the Employee shall not, during the period the Employee is employed by the Company or its subsidiaries or at any time thereafter, disclose any Confidential Information, directly or indirectly, to any person or entity for any reason or purpose whatsoever, nor shall the Employee use it in any way, except in the course of the Employee's employment with, and for the benefit of, the Protected Parties or to enforce any rights or defend any claims hereunder or under any other agreement to which the Employee is a party, provided that such disclosure is relevant to the enforcement of such rights or defense of such claims and is only disclosed in the formal proceedings related thereto. The Employee shall take all reasonable steps to safeguard the Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. The Employee understands and agrees that the Employee shall acquire no rights to any such Confidential Information. (b) All files, records, documents, drawings, specifications, data, computer programs, evaluation mechanisms and analytics and similar items relating thereto or to the Business (for the purposes of this Agreement, "Business" shall be as defined in Section 6.3 hereof), as well as all customer lists, specific customer information, compilations of product research and marketing techniques of the Company and its subsidiaries, whether prepared by the Employee or otherwise coming into the Employee's possession in connection with or relating to his employment with the Company, shall remain the exclusive property of the Company and its subsidiaries, and the Employee shall not remove any such items from the premises of the Company and its subsidiaries, except in furtherance of the Employee's duties under any employment agreement. (c) It is understood that while employed by the Company or its subsidiaries, the Employee will promptly disclose to it, and assign to it the Employee's interest in any invention, improvement or discovery made or conceived by the Employee, either alone or jointly with others, which arises out of the Employee's employment. At the Company's request and expense, the Employee will assist the Company and its subsidiaries during the period of the Employee's employment by the Company or its subsidiaries and thereafter in connection with any controversy or legal proceeding relating to such invention, improvement or discovery and in obtaining domestic and foreign patent or other protection covering the same. (d) As requested by the Company and at the Company's expense, from time to time and upon the termination of the Employee's employment with the Company for any reason, the Employee will promptly deliver to the Company and its subsidiaries all copies and embodiments, in whatever form, of all Confidential Information in the Employee's possession or within his control (including, but not limited to, memoranda, records, notes, plans, photographs, manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information) irrespective of the location or form of such material. If requested by the Company, - 11 - the Employee will provide the Company with written confirmation that all such materials have been delivered to the Company as provided herein. 7.2 Non-Solicitation or Hire. During the Term and for a period of twelve (12) months following the termination of the Employee's employment for any reason, the Employee shall not directly or indirectly solicit or attempt to solicit or induce, directly or indirectly, (a) any party who is a customer of the Company or its subsidiaries, or who was a customer of the Company or its subsidiaries at any time during the twelve (12) month period immediately prior to the date the Employee's employment terminates, for the purpose of marketing, selling or providing to any such party any services or products offered by or available from the Company or its subsidiaries, (b) any supplier to or customer or client of the Company or any subsidiary to terminate, reduce or alter negatively its relationship with the Company or any subsidiary or in any manner interfere with any agreement or contract between the Company or any subsidiary and such supplier, customer or client or (c) any employee of the Company or any of its subsidiaries or any person who was an employee of the Company or any of its subsidiaries during the twelve (12) month period immediately prior to the date the Employee's employment terminates to terminate such employee's employment relationship with the Protected Parties in order, in either case, to enter into a similar relationship with the Employee, or any other person or any entity in competition with the Business of the Company or any of its subsidiaries, provided that if the Employee intends to solicit any such party referenced in this Section 7.2 (a), (b) or (c) for any other purpose, he shall notify the Company of such intention and receive prior written approval from the Company, which shall not be unreasonably withheld. 7.3 Non-Competition. During the Term and for a period of twelve (12) months following the termination of Employee's employment by the Company (for any reason) the Employee shall not, whether individually, as a director, manager, member, stockholder, partner, owner, employee, consultant or agent of any business, or in any other capacity, other than on behalf of the Company or a subsidiary, organize, establish, own, operate, manage, control, engage in, participate in, invest in, permit his name to be used by, act as a consultant or advisor to, render services for (alone or in association with any person, firm, corporation or business organization), or otherwise assist any person or entity that engages in or owns, invests in, operates, manages or controls any venture or enterprise which engages or proposes to engage in the reinsurance business or any other business conducted by the Company or any of its subsidiaries on the date of the Employee's termination of employment or within twelve (12) months of the Employee's termination of employment for which the Employee has performed services, in each case, in the geographic locations where the Company and its subsidiaries engage or propose to engage in such business(es) (the "Business"). Notwithstanding the foregoing, nothing in this Agreement shall prevent the Employee from (a) owning for passive investment purposes not intended to circumvent this Agreement, less than five percent (5%) of the publicly traded common equity securities of any company engaged in the Business (so long as the Employee has no power to manage, operate, advise, consult with or control the competing enterprise and no power, alone or in conjunction with other affiliated parties, to select a director, manager, general partner, or similar governing official of the competing enterprise other than in connection with the normal and customary voting powers afforded the Employee in connection with any permissible equity ownership), and (b) serving as an employee, consultant or advisor (or other similar capacity) to an entity engaged in the Business for a unit, division, affiliate or department of such entity that does not engage in the Business in any material respect, so long as - 12 - the Employee is not directly or indirectly involved in the Business activities performed by such entity. 7.4 Property. The Employee acknowledges that all originals and copies of materials, records and documents generated by him or coming into his possession during his employment by the Company or its subsidiaries are the sole property of the Company and its subsidiaries ("Company Property"). During the Term, and at all times thereafter, the Employee shall not remove, or cause to be removed, from the premises of the Company or its subsidiaries, copies of any record, file, memorandum, document, computer related information or equipment, or any other item relating to the business of the Company or its subsidiaries, except in furtherance of his duties under the Agreement. When the Employee's employment with the Company terminates, or upon request of the Company at any time, the Employee shall promptly deliver to the Company all copies of Company Property in his possession or control. 8. Remedies; Specific Performance. The Parties acknowledge and agree that the Employee's breach or threatened breach of any of the restrictions set forth in Section 7 will result in irreparable and continuing damage to the Protected Parties for which there may be no adequate remedy at law and that the Protected Parties shall be entitled to equitable relief, including specific performance and injunctive relief as remedies for any such breach or threatened or attempted breach. The Employee hereby consents to the grant of an injunction (temporary or otherwise) against the Employee or the entry of any other court order against the Employee prohibiting and enjoining him from violating, or directing him to comply with any provision of Section 7. The Employee also agrees that such remedies shall be in addition to any and all remedies, including damages, available to the Protected Parties against him for such breaches or threatened or attempted breaches. In addition, without limiting the Protected Parties' remedies for any breach of any restriction on the Employee set forth in Section 7, except as required by law, the Employee shall not be entitled to any payments set forth in Section 5.2 hereof if the Employee has breached the covenants applicable to the Employee contained in Section 7, the Employee will immediately return to the Protected Parties any such payments previously received under Section 5.2 upon such a breach, and, in the event of such breach, the Protected Parties will have no obligation to pay any of the amounts that remain payable by the Company under Section 5.2. 9. Other Provisions. 9.1 Notices. Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid or overnight mail and shall be deemed given when so delivered personally, telegraphed, telexed, or sent by facsimile transmission or, if mailed, four (4) days after the date of mailing or one (1) day after overnight mail, as follows: (a) If the Company, to: 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 - 13 - Attention: General Counsel Telephone: Fax: (b) If the Employee, to the Employee's home address reflected in the Company's records. 9.2 Entire Agreement. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto, including, without limitation, the 2004 Employment Agreement, except as specifically referenced herein. 9.3 Representations and Warranties by Employee. The Employee represents and warrants that he is not a party to or subject to any restrictive covenants, legal restrictions or other agreements in favor of any entity or person which would in any way preclude, inhibit, impair or limit the Employee's ability to perform his obligations under this Agreement, including, but not limited to, non-competition agreements, non-solicitation agreements or confidentiality agreements. 9.4 Waiver and Amendments. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the Parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 9.5 Governing Law, Dispute Resolution and Venue. (a) This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and not to be performed entirely within such state, without regard to conflicts of laws principles. (b) The parties agree irrevocably to submit to the exclusive jurisdiction of the federal courts or, if no federal jurisdiction exists, the state courts, located in Charlotte, North Carolina, for the purposes of any suit, action or other proceeding brought by any party arising out of any breach of any of the provisions of this Agreement and hereby waive, and agree not to assert by way of motion, as a defense or otherwise, in any such suit, action, or proceeding, any claim that it is not personally subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper, or that the provisions of this Agreement may not be enforced in or by such courts. IN ADDITION, THE PARTIES AGREE TO WAIVE TRIAL BY JURY. 9.6 Assignability by the Company and the Employee. This Agreement, and the rights and obligations hereunder, may not be assigned by the Company or the Employee without written consent signed by the other party; provided that the Company may assign the Agreement to any successor that continues the business of the Company. - 14 - 9.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 9.8 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. 9.9 Severability. If any term, provision, covenant or restriction of this Agreement, or any part thereof, is held by a court of competent jurisdiction of any foreign, federal, state, county or local government or any other governmental, regulatory or administrative agency or authority to be invalid, void, unenforceable or against public policy for any reason, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected or impaired or invalidated. The Employee acknowledges that the restrictive covenants contained in Section 7 are a condition of this Agreement and are reasonable and valid in temporal scope and in all other respects. 9.10 Judicial Modification. If any court determines that any of the covenants in Section 7, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. 9.11 Tax Withholding. The Company or other payor is authorized to withhold from any benefit provided or payment due hereunder, the amount of withholding taxes due any federal, state or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Board to satisfy all obligations for the payment of such withholding taxes. 9.12 Compliance with Law. This Agreement is intended to comply with the requirements of Section 409A of the Code. To the extent that any provision in this Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such a manner so that all payments under Section 5 shall comply with Section 409A. Notwithstanding the foregoing, in the event that the Employee becomes subject to the additional 20% income tax as a result any payment or benefit becoming subject to and/or violating Section 409A of the Code due to any provision of this Agreement, the Company shall make a 409A tax gross-up payment to the Employee so that the Employee's net after tax benefit or payment with respect to such payment is not less than the net after tax benefit or payment the Employee would have received if the 20% additional tax under 409A had not been imposed. The 409A tax gross-up payment shall be made as soon as practicable following the determination of the liability for such 409A additional tax but in no event will the 409A tax gross-up payment be made later than the Employee's taxable year next following the taxable year in which the Employee remits the related taxes. - 15 - IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have executed this Agreement as of the day and year first above mentioned. EMPLOYEE /s/ Michael Baumstein --------------------------------------- Michael Baumstein SCOTTISH HOLDINGS, INC. By: /s/ Paul Goldean ----------------------------------- Name: Paul Goldean Title: Director - 16 - EX-10.60 8 ex10-60.txt EMPLOYMENT AGREEMENT - MEREDITH RATAJCZAK Execution Copy EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") dated as of July 26, 2007 between Scottish Re (U.S.), Inc. (the "Company") and Meredith Ratajczak (the "Employee") (together, the "Parties"). WHEREAS, the Parties wish to establish the terms of Employee's continued employment with the Company. Accordingly, the Parties agree as follows: 1. Employment and Acceptance. The Company shall employ the Employee, and Employee shall accept employment, subject to the terms of this Agreement, on May 7, 2007 (the "Effective Date"). 2. Term. Subject to earlier termination pursuant to Section 5 of this Agreement, this Agreement and the employment relationship hereunder shall continue from the Effective Date until the second anniversary of the Effective Date and shall renew for two (2) year intervals thereafter unless either party shall have given at least sixty (60) days advanced written notice to the other that it does not wish to extend the Term. As used in this Agreement, the "Term" shall refer to the period beginning on the Effective Date and ending on the date the Employee's employment terminates in accordance with this Section 2 or Section 5, including all renewal intervals. In the event of the Employee's termination of employment during the Term, the Company's obligation to continue to pay all base salary, as adjusted, bonus and other benefits then accrued shall terminate except as may be provided for in Section 5 of this Agreement. 2.1 Change of Control. In the event of a Change of Control of the Company (as defined below) during the Term, the Term shall renew for a two (2) year period following the date of the Change of Control, and subsequent renewal periods shall begin (unless notice of non-renewal is provided) from the second anniversary of such Change of Control. For purposes of this sub-paragraph, "Change of Control" means: (a) The acquisition by any person, or group of related persons for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, of beneficial ownership of more than fifty percent (50%) of the then outstanding shares of voting stock of the Company; (b) Consummation of a reorganization, merger, consolidation or sale, or other disposition of all or substantially all of the Company's assets, not including transactions where the previous owners of fifty percent (50%) or more of the Company's voting stock continue to own a majority of the voting securities of the surviving entity or assets of the Company; or (c) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Duties and Title. 3.1 Title. The Company shall employ the Employee to render exclusive and full-time services to the Company and its subsidiaries. The Employee shall serve in the capacity of Executive Vice President, Chief Actuary, and shall report directly to the Chief Executive Officer of North American Operations of the Company. The Employee shall also serve during the Term in executive positions for one or more of the Company's subsidiaries and affiliates for no additional consideration. 3.2 Duties. The Employee will have such authority and responsibilities and will perform such executive duties as are customarily performed by an Executive Vice President, Chief Actuary of a company in similar lines of business as the Company and its subsidiaries or as may be assigned to Employee by the Global Chief Executive Officer, the Chief executive Officer of North American Operations or the Board of Directors of the Company (the "Board"). The Employee will devote all her full working-time and attention to the performance of such duties and to the promotion of the business and interests of the Company and its subsidiaries. 3.3 Location. The Employee shall perform her full-time services to the Company and its subsidiaries in the Company's Charlotte, NC office; provided that the Employee shall be required to travel as necessary to perform her duties hereunder. 4. Compensation and Benefits by the Company. As compensation for all services rendered pursuant to this Agreement, the Company shall provide the Employee the following during the Term: 4.1 Base Salary. During the first year of the Term, the Company agrees to pay to the Employee an annual base salary of $375,000, payable in accordance with the customary payroll practices of the Company ("Base Salary"). For the second year of the initial two year Term and in each renewal year, at the Company's discretion, Employee may receive an increase in Base Salary. 4.2 Bonuses. During the Term, the Employee shall be eligible to receive an annual bonus ("Bonus") under a plan established by the Company in the amount determined by the Board based upon achievement of performance measures established by the Company and approved by the Board. The Employee's target bonus shall be seventy five percent (75%) of Base Salary. Notwithstanding the foregoing, for each of the calendar years ending on December 31, 2007 and December 31, 2008, Employee shall receive a Bonus of not less than fifty percent (50%) of her then current Base Salary. The Employee's Bonus shall be payable at such times and in the manner consistent with the Company's policies regarding compensation of executive employees. In addition, the Company may pay the Employee such other bonuses as it may establish within its sole discretion. 4.3 Signing Bonus. Prior to the date hereof, the Company has paid to the Employee a one-time, lump-sum payment in the amount of $137,500 (the "Signing Bonus"). If the Employee's employment with the Company is terminated (x) by the Company for Cause or (y) by the Employee without Good Reason within one (1) year of the Effective Date, the Employee agrees to return the entire amount of the Signing Bonus to the Company. 2 4.4 Participation in Employee Benefit Plans. The Employee shall be entitled during the Term, if and to the extent eligible, to participate in all of the applicable benefit plans of the Company, which may be available to other senior executives of the Company, including, but not limited to any supplemental health insurance program offered to other senior executives of the Company. The Company may at any time or from time to time amend, modify, suspend or terminate any employee benefit plan, program or arrangement for any reason without the Employee's consent if such amendment, modification, suspension or termination is consistent with the amendment, modification, suspension or termination for other executives of the Company. 4.5 Equity Compensation. During the Term, the Employee shall be eligible to participate in the 2007 Scottish Re Group Limited Stock Option Plan, an equity incentive compensation plan established by an affiliate of the Company (the "Equity Incentive Plan"), pursuant to the terms of the Equity Incentive Plan and any applicable agreements thereunder as determined from time to time by the Board. The Employee shall receive an initial grant of the option to purchase 225,000 ordinary shares of an affiliate of the Company (the "Initial Grant") pursuant to the terms of the Equity Incentive Plan and any applicable agreements thereunder. 4.6 Expense Reimbursement. During the Term, the Employee shall be entitled to receive reimbursement for all appropriate business expenses incurred by her in connection with her duties under this Agreement in accordance with the policies of the Company as in effect from time to time. 4.7 Legal Fees. The Company shall pay or reimburse the Employee for all reasonable attorneys' fees and costs (not to exceed $10,000) incurred by the Employee in connection with advice pertaining to and the negotiation of this Agreement, upon presentation to the Company of bills for such services and such other supporting information as the Company may reasonably require. 5. Termination of Employment. 5.1 By the Company for Cause or by the Employee Without Good Reason or Due to Death or Disability. If: (i) the Employee's employment terminates due to her death; (ii) the Company terminates the Employee's employment with the Company for Cause (as defined below); (iii) the Company terminates the Employee's employment with the Company due to the Employee's Disability (as defined below); or (iv) Employee terminates her employment without Good Reason (as defined below), provided that the Employee shall be required to give the Company at least sixty (60) days prior written notice of such termination, the Employee or the Employee's legal representatives (as appropriate), shall be entitled to receive the following (the "Accrued Benefits"): (a) the Employee's accrued but unpaid Base Salary and benefits set forth in Sections 4.1 and 4.4, if any, to the date of termination; (b) the unpaid portion of the Bonus, if any, relating to the calendar year prior to the calendar year of the Employee's death, Disability, termination by the Company for Cause or by the Employee without Good Reason, payable in accordance with Section 4.2; 3 (c) in accordance with the Company's policies, any accrued but unused vacation time or paid time off; and (d) expenses reimbursable under Section 4.6 incurred but not yet reimbursed to the Employee to the date of termination. For the purposes of this Agreement, "Disability" means a determination by the Company in accordance with applicable law that as a result of a physical or mental injury or illness, the Employee is unable to perform the essential functions of her job with or without reasonable accommodation for a period of (i) ninety (90) consecutive days; or (ii) one hundred eighty (180) days in any one (1) year period. For the purposes of this Agreement, "Cause" means, as determined by the Board (or its designee), with respect to conduct during the Employee's employment with the Company, whether or not committed during the Term, (i) commission of a felony by Employee; (ii) acts of dishonesty by Employee resulting or intending to result in personal gain or enrichment at the expense of the Company or its subsidiaries; (iii) Employee's material breach of her obligations under this Agreement; (iv) conduct by Employee in connection with her duties hereunder that is fraudulent, unlawful or grossly negligent; (v) engaging in personal conduct by Employee (including but not limited to employee harassment or discrimination, the use or possession at work of any illegal controlled substance) which materially discredits or damages the Company or its subsidiaries; (vi) contravention of specific lawful direction from the person or entity to whom the Employee reports or continuing inattention to or continuing failure to adequately perform the duties to be performed by Employee under the terms of Section 3.2 of this Agreement or (vii) breach of the Employee's covenants set forth in Section 6 below before termination of employment; provided, that, the Employee shall have fifteen (15) days after notice from the Company to cure the deficiency leading to the Cause determination (except with respect to (i) above), if curable. A termination for "Cause" shall be effective immediately (or on such other date set forth by the Company). For the purposes of this Agreement, "Good Reason" means, without the Employee's consent, (i) a material adverse reduction in Employee's responsibilities or duties; (ii) a reduction in the Employee's Base Salary or bonus opportunity; provided that, the Company may at any time or from time to time amend, modify, suspend or terminate any bonus, incentive compensation or other benefit plan or program provided to the Employee for any reason and without the Employee's consent if such modification, suspension or termination (x) is a result of the underperformance of the Employee or the Company under its business plan, or (y) is consistent with an "across the board" reduction for all similar level executive employees of the Company, and, in each case, is undertaken in the Board's reasonable business judgment acting in good faith and engaging in fair dealing with the Employee; (iii) a requirement that (A) the Employee relocate her personal residence from the Charlotte, N.C. area or (B) the Employee regularly commute to a principal place of business outside the Charlotte, N.C. area (excluding ordinary travel pursuant to Section 3.3), or (iv) the Company's material breach of the Agreement; provided that a suspension of the Employee and the requirement that the Employee not report to work shall not constitute "Good Reason" if the Employee continues to receive the compensation and benefits required by this Agreement. The Company shall have thirty (30) days after receipt of notice from the Employee in writing specifying the deficiency to cure the deficiency that would result in Good Reason. 4 5.2 By the Company Without Cause or By the Employee for Good Reason. If during the Term the Company terminates Employee's employment without Cause (which may be done at any time without prior notice) or Employee terminates her employment for Good Reason, upon at least thirty (30) days prior written notice, upon execution without revocation of a valid release agreement in a form reasonably acceptable to the Company and not in violation of any applicable laws (the "Release"), the Employee shall be entitled to receive: (a) the Accrued Benefits; (b) an amount equal to two (2) times the sum of (x) the highest Base Salary received by the Employee with respect to any calendar year during the previous two (2) calendar years of the Term, and (y) the highest Bonus amount received by the Employee with respect to any calendar year during the previous two (2) calendar years of the Term (the "Severance Amount"), payable in twelve (12) equal monthly installments, less standard income and payroll tax withholding and other authorized deductions. Notwithstanding the foregoing, if the Employee is a "specified employee," as such term is defined in Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (the "Code"), (x) one-half (1/2) of the Severance Amount shall be payable six (6) months following the date the Employee's employment terminates and (y) the remainder of the Severance Amount shall be payable in six (6) equal monthly installments thereafter; and (c) if the Employee elects continuing group coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), reimbursement of the cost of such continuation coverage for the earlier of (x) nine (9) months or (y) such earlier date that the Employee is covered under another group health plan, subject to the terms of the plans and applicable law. The Company shall have no obligation to provide the benefits set forth above in the event that Employee breaches the provisions of Section 6. For purposes of clarity, the Company's failure to renew the Term pursuant to Section 2 hereof, shall not constitute a termination of the Employee's employment without Cause. 5.3 Following the Company's Determination Not to Renew the Term. Should the Employee's employment with the Company terminate following the Company's determination not to renew the Term pursuant to Section 2, upon execution without revocation of the Release, the Employee shall be entitled to receive: (a) Accrued Benefits; and (b) an amount equal to the sum of (x) the Employee's Base Salary, and (y) the highest Bonus amount received by the Employee with respect to any calendar year during the previous two (2) calendar years of the Term, payable in a lump sum within thirty (30) days following the effective date of the Release, less standard income and payroll tax withholding and other authorized deductions. Notwithstanding the foregoing, if the Employee is a "specified employee," as such term is defined in Section 409A of the Code, such amount shall be payable no earlier than six (6) months following the date the Employee's employment terminates. 5 (c) if the Employee elects continuing group coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), reimbursement of the cost of such continuation coverage for the earlier of (x) nine (9) months or (y) such earlier date that the Employee is covered under another group health plan, subject to the terms of the plans and applicable law. The Company shall have no obligation to provide the benefits set forth above in the event that Employee breaches the provisions of Section 6. 5.4 No Mitigation; No Offset. The Employee shall be under no obligation to seek other employment after her termination of employment with the Company and the obligations of the Company to the Employee which arise upon the termination of her employment pursuant to this Section 5 shall not be subject to mitigation or offset. 5.5 Removal from any Boards and Position. If the Employee's employment is terminated for any reason under this Agreement, she shall be deemed to resign (i) if a member, from the Board or board of directors of any subsidiary of the Company or any other board to which she has been appointed or nominated by or on behalf of the Company and (ii) from any position with the Company or any subsidiary of the Company, including, but not limited to, as an officer of the Company and any of its subsidiaries. 5.6 Continued Employment Beyond the Expiration of the Term. Unless the parties otherwise agree in writing, continuation of the Employee's employment with the Company beyond the expiration of the Term or following non-renewal of this Agreement by either party shall be deemed an employment at-will and shall not be deemed to extend any of the provisions of this Agreement, and the Employee's employment may thereafter be terminated at will by either the Employee or the Company; provided that the provisions of Sections 6, 7, 8.5 and 8.10 of this Agreement shall survive any termination of this Agreement or the termination of the Employee's employment hereunder. 6. Restrictions and Obligations of the Employee. 6.1 Confidentiality. (a) During the course of the Employee's employment by the Company (prior to and during the Term), the Employee has had and will have access to certain trade secrets and confidential information relating to the Company and its subsidiaries (the "Protected Parties") which is not readily available from sources outside the Company. The confidential and proprietary information and, in any material respect, trade secrets of the Protected Parties are among their most valuable assets, including but not limited to, their customer, supplier and vendor lists, databases, competitive strategies, computer programs, frameworks, or models, their marketing programs, their sales, financial, marketing, training and technical information, their product development (and proprietary product data) and any other information, whether communicated orally, electronically, in writing or in other tangible forms concerning how the Protected Parties create, develop, acquire or maintain their products and marketing plans, target their potential customers and operate their retail and other businesses. The Protected Parties invested, and continue to invest, considerable amounts of time and money in their process, technology, know-how, obtaining and developing the goodwill of their customers, their other external relationships, their data systems and data bases, and all the information described above (hereinafter collectively referred to as "Confidential Information"), 6 and any misappropriation or unauthorized disclosure of Confidential Information in any form would irreparably harm the Protected Parties. "Confidential Information" shall not include information which has been published or disclosed to, or is otherwise generally known to the public (other than through acts of the Employee or representatives of the Employee in violation of this Agreement). The Employee acknowledges that such Confidential Information constitutes valuable, highly confidential, special and unique property of the Protected Parties. The Employee shall hold in a fiduciary capacity for the benefit of the Protected Parties all Confidential Information relating to the Protected Parties and their businesses, which shall have been obtained by the Employee during the Employee's employment by the Company or its subsidiaries and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). Except as required by law (including, but not limited to, pursuant to a lawful subpoena) or an order of a court or governmental agency with jurisdiction, the Employee shall not, during the period the Employee is employed by the Company or its subsidiaries or at any time thereafter, disclose any Confidential Information, directly or indirectly, to any person or entity for any reason or purpose whatsoever, nor shall the Employee use it in any way, except in the course of the Employee's employment with, and for the benefit of, the Protected Parties or to enforce any rights or defend any claims hereunder or under any other agreement to which the Employee is a party, provided that such disclosure is relevant to the enforcement of such rights or defense of such claims and is only disclosed in the formal proceedings related thereto. The Employee shall take all reasonable steps to safeguard the Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. The Employee understands and agrees that the Employee shall acquire no rights to any such Confidential Information. (b) All Company files, records, documents, drawings, specifications, data, computer programs, evaluation mechanisms and analytics and similar items relating thereto or to the Business (for the purposes of this Agreement, "Business" shall be as defined in Section 6.3 hereof), as well as all customer lists, specific customer information, compilations of product research and marketing techniques of the Company and its subsidiaries, whether prepared by the Employee or otherwise coming into the Employee's possession, shall remain the exclusive property of the Company and its subsidiaries, and the Employee shall not remove any such items from the premises of the Company and its subsidiaries, except in furtherance of the Employee's duties under any employment agreement. (c) It is understood that while employed by the Company or its subsidiaries, the Employee will promptly disclose to it, and assign to it the Employee's interest in any invention, improvement or discovery made or conceived by the Employee, either alone or jointly with others, which arises out of the Employee's employment. At the Company's request and expense, the Employee will assist the Company and its subsidiaries during the period of the Employee's employment by the Company or its subsidiaries and thereafter in connection with any controversy or legal proceeding relating to such invention, improvement or discovery and in obtaining domestic and foreign patent or other protection covering the same. (d) As requested by the Company and at the Company's expense, from time to time and upon the termination of the Employee's employment with the Company for any reason, the Employee will promptly deliver to the Company and its subsidiaries all copies and embodiments, in whatever form, of all Confidential Information in the Employee's possession or within her control (including, but not limited to, memoranda, records, notes, plans, photographs, 7 manuals, notebooks, documentation, program listings, flow charts, magnetic media, disks, diskettes, tapes and all other materials containing any Confidential Information) irrespective of the location or form of such material. If requested by the Company, the Employee will provide the Company with written confirmation that all such materials have been delivered to the Company as provided herein. 6.2 Non-Solicitation or Hire. During the Term and for a period of twelve (12) months following the termination of the Employee's employment for any reason, the Employee shall not directly or indirectly willfully solicit or attempt to solicit or induce, directly or indirectly, (a) any party who is a customer of the Company or its subsidiaries, that was known to the Employee, or who was a customer of the Company or its subsidiaries, that was known to the Employee, at any time during the twelve (12) month period immediately prior to the date the Employee's employment terminates, for the purpose of marketing, selling or providing to any such party any services or products offered by or available from the Company or its subsidiaries, (b) any supplier to or customer or client of the Company or any subsidiary, that was known to the Employee, to terminate, reduce or alter negatively its relationship with the Company or any subsidiary and such supplier, customer or client, or (c) any employee of the Company or any of its subsidiaries or any person who was an employee of the Company or any of its subsidiaries during the twelve (12) month period immediately prior to the date the Employee's employment terminates to terminate such employee's employment relationship with the Protected Parties in order, in either case, to enter into a similar relationship with the Employee, or any other person or any entity in competition with the Business of the Company or any of its subsidiaries. 6.3 Non-Competition. During the Term and for a period of twelve (12) months following the termination of Employee's employment by the Company (for any reason), the Employee shall not, whether individually, as a director, manager, member, stockholder, partner, owner, employee, consultant or agent of any business, or in any other capacity, other than on behalf of the Company or a subsidiary, organize, establish, own, operate, manage, control, engage in, participate in, invest in, permit her name to be used by, act as a consultant or advisor to, render services for (alone or in association with any person, firm, corporation or business organization), or otherwise assist any person or entity that engages in or owns, invests in, operates, manages or controls any venture or enterprise which engages or proposes to engage in the reinsurance business or any other business conducted by the Company or any of its subsidiaries on the date of the Employee's termination of employment or within twelve (12) months of the Employee's termination of employment for which the Employee has performed services, in each case, in the geographic locations where the Company and its subsidiaries engage or propose to engage in such business(es) (the "Business"). Notwithstanding the foregoing, nothing in this Agreement shall prevent the Employee from (a) owning for passive investment purposes not intended to circumvent this Agreement, less than five percent (5%) of the publicly traded common equity securities of any company engaged in the Business (so long as the Employee has no power to manage, operate, advise, consult with or control the competing enterprise and no power, alone or in conjunction with other affiliated parties, to select a director, manager, general partner, or similar governing official of the competing enterprise other than in connection with the normal and customary voting powers afforded the Employee in connection with any permissible equity ownership), and (b) serving as an employee, consultant or advisor (or other similar capacity) to an entity engaged in the Business for a unit, division, affiliate or department of such entity that does not engage in the Business in any material respect, so long as 8 the Employee is not directly or indirectly involved in the Business activities performed by such entity. 6.4 Property. The Employee acknowledges that all originals and copies of materials, records and documents generated by her or coming into her possession during her employment by the Company or its subsidiaries are the sole property of the Company and its subsidiaries ("Company Property"). During the Term, and at all times thereafter, the Employee shall not remove, or cause to be removed, from the premises of the Company or its subsidiaries, copies of any record, file, memorandum, document, computer related information or equipment, or any other item relating to the business of the Company or its subsidiaries, except in furtherance of her duties under the Agreement. When the Employee's employment with the Company terminates, or upon request of the Company at any time, the Employee shall promptly deliver to the Company all copies of Company Property in her possession or control. 7. Remedies; Specific Performance. The Parties acknowledge and agree that the Employee's breach or threatened breach of any of the restrictions set forth in Section 6 will result in irreparable and continuing damage to the Protected Parties for which there may be no adequate remedy at law and that the Protected Parties shall be entitled to equitable relief, including specific performance and injunctive relief as remedies for any such breach or threatened or attempted breach. The Employee hereby consents to the grant of an injunction (temporary or otherwise) against the Employee or the entry of any other court order against the Employee prohibiting and enjoining her from violating, or directing her to comply with any provision of Section 6. The Employee also agrees that such remedies shall be in addition to any and all remedies, including damages, available to the Protected Parties against her for such breaches or threatened or attempted breaches. In addition, without limiting the Protected Parties' remedies for any breach of any restriction on the Employee set forth in Section 6, except as required by law, the Employee shall not be entitled to any payments set forth in Sections 5.2 and 5.3 hereof if the Employee has breached the covenants applicable to the Employee contained in Section 6, the Employee will immediately return to the Protected Parties any such payments previously received under Sections 5.2 and 5.3 upon such a breach, and, in the event of such breach, the Protected Parties will have no obligation to pay any of the amounts that remain payable by the Company under Section 5.2 and 5.3. 8. Other Provisions. 8.1 Notices. Any notice or other communication required or which may be given hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid or overnight mail and shall be deemed given when so delivered personally, telegraphed, telexed, or sent by facsimile transmission or, if mailed, four (4) days after the date of mailing or one (1) day after overnight mail, as follows: (a) If the Company, to: 13840 Ballantyne Corporate Place, Suite 500 Charlotte, NC 28277 9 Attention: General Counsel Telephone: Fax: (b) If the Employee, to the Employee's home address reflected in the Company's records. 8.2 Entire Agreement. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto, including, without limitation, any prior employment agreement between the Employee and the Company and its subsidiaries and affiliates. 8.3 Representations and Warranties by Employee. The Employee represents and warrants that she is not a party to or subject to any restrictive covenants, legal restrictions or other agreements in favor of any entity or person which would in any way preclude, inhibit, impair or limit the Employee's ability to perform her obligations under this Agreement, including, but not limited to, non-competition agreements, non-solicitation agreements or confidentiality agreements. 8.4 Waiver and Amendments. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the Parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any right, power or privilege hereunder, nor any single or partial exercise of any right, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 8.5 Governing Law, Dispute Resolution and Venue. (a) This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and not to be performed entirely within such state, without regard to conflicts of laws principles. (b) The parties agree irrevocably to submit to the exclusive jurisdiction of the federal courts or, if no federal jurisdiction exists, the state courts, located in the City of New York, Borough of Manhattan, for the purposes of any suit, action or other proceeding brought by any party arising out of any breach of any of the provisions of this Agreement and hereby waive, and agree not to assert by way of motion, as a defense or otherwise, in any such suit, action, or proceeding, any claim that it is not personally subject to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper, or that the provisions of this Agreement may not be enforced in or by such courts. In addition, the parties agree to waive trial by jury. 8.6 Assignability by the Company and the Employee. This Agreement, and the rights and obligations hereunder, may not be assigned by the Company or 10 the Employee without written consent signed by the other party; provided that the Company may assign the Agreement to any successor that continues the business of the Company. The rights and obligations of the Company under this Agreement shall be binding on any successor entity. The Company agrees that in the event of a Change of Control, any such transaction shall be conditioned upon such successor affirmatively acknowledging its continuing obligations to the Employee under this Agreement. 8.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 8.8 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. 8.9 Severability. If any term, provision, covenant or restriction of this Agreement, or any part thereof, is held by a court of competent jurisdiction of any foreign, federal, state, county or local government or any other governmental, regulatory or administrative agency or authority to be invalid, void, unenforceable or against public policy for any reason, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected or impaired or invalidated. The Employee acknowledges that the restrictive covenants contained in Section 6 are a condition of this Agreement and are reasonable and valid in temporal scope and in all other respects. 8.10 Judicial Modification. If any court determines that any of the covenants in Section 6, or any part of any of them, is invalid or unenforceable, the remainder of such covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court determines that any of such covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court shall reduce such scope to the minimum extent necessary to make such covenants valid and enforceable. 8.11 Tax Withholding. The Company or other payor is authorized to withhold from any benefit provided or payment due hereunder, the amount of withholding taxes due any federal, state or local authority in respect of such benefit or payment and to take such other action as may be necessary in the opinion of the Board to satisfy all obligations for the payment of such withholding taxes. 11 IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have executed this Agreement as of the day and year first above mentioned. EMPLOYEE /s/ Meredith Ratajczak ------------------------------------------ Meredith Ratajczak SCOTTISH RE (U.S.), Inc. By: /s/ Paul Goldean -------------------------------------- Name: Paul Goldean Title: Director EX-31 9 ex31_1.txt EXHIBIT 31.1 CERTIFICATION OF PAUL GOLDEAN Exhibit 31.1 CERTIFICATION I, Paul Goldean, President and Chief Executive Officer of Scottish Re Group Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2007 /s/ Paul Goldean ---------------- Paul Goldean President and Chief Executive Officer EX-31 10 ex31_2.txt EXHIBIT 31.2 CERTIFICATION OF DUNCAN HAYWARD Exhibit 31.2 CERTIFICATION I, Duncan Hayward, Chief Accounting Officer of Scottish Re Group Limited, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Scottish Re Group Limited (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. designed such internal control over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2007 /s/ Duncan Hayward ------------------ Duncan Hayward Chief Accounting Officer EX-32 11 ex32_1.txt EXHIBIT 32.1 CERTIFICATION OF PAUL GOLDEAN Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-Q for the quarterly period ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul Goldean, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Paul Goldean - ---------------- Paul Goldean President and Chief Executive Officer August 14, 2007 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 12 ex32_2.txt EXHIBIT 32.2 CERTIFICATION OF DUNCAN HAYWARD Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Scottish Re Group Limited (the "Company") on Form 10-Q for the quarterly period ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Duncan Hayward, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Duncan Hayward - ------------------ Duncan Hayward Chief Accounting Officer August 14, 2007 A signed original of this written statement required by Section 906 has been provided to Scottish Re Group Limited and will be retained by Scottish Re Group Limited and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----